The Fiscal Challenges of Federalism

July 13, 2018

Good Morning! In this morning’s eBlog, we consider the legal, governing, and judicial challenges to Puerto Rico’s fiscal recovery, before turning to the very different kinds of fiscal recovery challenges confronting Wilkes-Barre, Pennsylvania.

Who Is Preempting Whose Power & Authority? Yesterday, the PROMESA Oversight  Board requested dismissal of Gov. Ricardo Rosselló Nevares’ suit in which he is charging that the Oversight Board has usurped his power and authority, with the Board asking the federal court to issue an injunction to prevent such action, noting in its filing: “Although PROMESA relies in the sole discretion of the Board, two major policy instruments that exist, the fiscal plan and the budget, and the law expressly empowers the Board to formulate and certify them…the Governor questions whether PROMESA preserves to the government the political powers and of government to make policy decisions.”  In response, the Board asserted that the Governor’s claim lacks merit, asserting that the law provides that the Board has the final say with regard to budget and tax issues, writing: “The provisions to which the Governor objects are not recommendations in the sense of §205 of PROMESA,” with that response coming just minutes after the U.S. requested—for a second time—its insistence on the “Constitutionality of the PROMESA statute. In a motion filed Wednesday, U.S. Justice Department Assistant Attorney General Thomas Ward advised Judge Laura Taylor Swain that two recent decisions upon which Puerto Rico had relied were not pertinent to the legal issues at hand. Promise law.

In a motion filed Wednesday, Assistant U.S. Attorney General Thomas G. Ward and Jean Lin of the Justice Department asserted before Judge Taylor Swain that two recent U.S. Supreme Court decisions presented by the Aurelius Management Investment Fund were not relevant to the critical issues at hand, after, earlier this week, the Fund had provided the Judge with two U.S. Supreme Court decisions which, it asserted, affirm its perception of the statute, as it continues to argue before the federal court that the actions of the PROMESA Board are null and void, because the members of the Board without the consent of the Senate as required by the U.S. Constitution, referencing two recent U.S. Supreme Court decisions, Lucia v. SEC and Ortiz v. United States, where, in the former case, the court, last month, determined that a higher ranking SEC official should have been appointed to his position based on the Appointments Clause of the US Constitution, while, in the Ortiz decision, the Supreme Court held that it has jurisdiction to review decisions of the Armed Forces’ appellate courts—claims which the Justice Department described as incorrect, since such decisions only support his argument that the appointment clause of the U.S. Constitution does not apply to members of the PROMESA Oversight Board—or, as the Justice Department brief put it: “A finding that the clause applies to territorial officials would not only face this historic practice, but would also challenge the current governance structures of the territories and the District of Columbia that have been in place for decades,” adding to that Congress has full authority over its territories—authority which is not subject to the “complex” distribution of the powers of the government provided by the U.S. Constitution.

Last week, Gov. Rosselló had charged that the PROMESA Oversight Board has been trying to make policy decisions that the PROMESA law does not grant it authority to make, as he had petitioned Judge Swain to mandate that the Board to answer the complaint or motion to dismiss by yesterday. His attorneys stated: “The court should expedite resolution of this case to address the injury to the Commonwealth and its people occurring every day due to the Board’s attempt to seize day-to-day control of Puerto Rico’s government.” Even though the PROMESA Board asked for more time, Judge Swain ruled in favor of the Governor’s request—so, the complex federalism sessions are scheduled to resume on the 25th, when the quasi bankruptcy court will entertain oral arguments, possibly including participation by Puerto Rico Senate President Thomas Rivera Schatz and House President Carlos Méndez Núñez, who filed a similar suit against the board on July 9th, asserting that the PROMESA Board was preempting the legislature’s rightful powers. Thus, even the Board and the Governor have generally been in agreement this year in their fiscal plans, the Board has insisted its policies must be followed—with its proposed quasi plan of debt adjustment showing a surplus of $6.5 billion from this fiscal year through fiscal year 2023.

In the suit, Gov. Rosselló quotes from Judge Swain’s opinion of last November and order denying the PROMESA Board’s motion to replace the then-chief executive of the Puerto Rico Electric Power Authority with the board’s own appointee, with the opinion noting: “Congress did not grant the [Oversight Board] the power to supplant, bypass, or replace the Commonwealth’s elected leaders and their appointees in the exercise of their managerial duties whenever the Oversight Board might deem such a change expedient.”

Mayor of Wilkes-Barre Asks State for Financial Assistance. Mayor Tony George, whose city is confronting a $3.5 million deficit in the upcoming fiscal year, is seeking financial assistance under Pennsylvania’s program for distressed communities, the Financially Distressed Municipalities Act, approval of which request would mean the municipality would be eligible for loans and grants through the state Department of Community and Economic Development. The move came as Standard & Poor’s placed the city’s “BBB-” rating on CreditWatch with negative implications, in the wake of Mayor George’s petition to the Pennsylvania Department of Community and Economic Development, with the Mayor warning the city faces an estimated $3.5 million deficit next year and in the coming years despite efforts to place Wilkes-Barre on sound financial footing with its participation in Pennsylvania’s Early Intervention Program. The credit rating agency added it will gather more information before making a determination that could make it more expensive for the city to borrow money at higher interest rates, noting: “We expect to resolve the CreditWatch status within 30 days. We could lower the rating if we believe that the city’s credit quality is no longer commensurate with the rating. However, if we believe it does remain commensurate with the current rating, we could affirm the rating and remove it from CreditWatch.” Should the credit rating be downgraded, it would be the second time during Mayor George’s administration, after, a year ago last May, S&P lowered the rating to “BBB-” from “A-” because the city’s cash flow was constrained and was relying on borrowing to make ends meet. City officials are tentatively scheduled to hold a conference call with S&P on August 7th—by which time the state is expected to have made its decision on declaring the city distressed.

Under that state statute, municipalities may also restructure debt. If the Mayor’s request is granted, the state will appoint a financial adviser to design a financial recovery plan for the city—one of the nation’s oldest, having been inhabited first by the Shawanese and Delaware Indian and (Lenape) tribes, so that it was in 1769 that John Durkee led the first recorded Europeans to the area, where they established a frontier settlement named Wilkes-Barre after John Wilkes and Isaac Barre, two British members of Parliament who supported colonial America. At the time, these settlers were aligned with colonial Connecticut, which had a claim on the land that rivaled Pennsylvania’s. Indeed, armed Pennsylvanians twice attempted to evict the residents of Wilkes-Barre in what came to be known as the Pennamite-Yankee Wars, so that it was not until after the American Revolution, in the 1780s, that a settlement was reached granting the disputed land to Pennsylvania. A century later, the city’s population exploded in the wake of the discovery of anthracite coal, an explosion so powerful that the city was nicknamed “The Diamond City:” hundreds of thousands of immigrants flocked to the city. By 1806, it was incorporated as a borough; it became a city in 1871—as it gradually became a major U.S. coal center, and an early home to Woolworth’s, Sterling Hotels, Planter’s Peanuts, Miner’s Bank, Bell Telephone, HBO, Luzerne National Bank, and Stegmaier. But the coal which once contributed so much to the city’s growth, subsequently let it down: not only were there terrible mine disasters, but also the country began to switch to other energy sources. So, the city where Babe Ruth knocked one of his longest ever homes runs is, today, at risk of striking out at the plate.  The city, which a dozen years ago celebrated its 200th anniversary, is now seeking assistance via the state’s Act 47, with the Mayor citing—as additional factors, the lack of cooperation with area unions and his own City Council. He appears to be of the view that there was no other alternative to help stabilize the city’s finances other than filing for status under Pennsylvania’s Act 47 for Distressed Municipalities, noting: “My goal is to bring the city forward, and we’re stifled.”

In Pennsylvania there are four general methods of oversight used to aid local governments: Intergovernmental Cooperation Authorities, which are used with Philadelphia and Pittsburgh; ƒ School district assistance, which can come in the form of technical assistance, or schools which can be deemed in Financial Watch Status or in Financial Recovery Status; Early intervention program for municipalities before Act 475; and Act 47, or Pennsylvania’s Municipalities Financial Recovery Act of 1987.  What Is Pennsylvania’s Act 47? We will go into more depth about Act 47 because that is the program for which Wilkes-Barre recently applied. We also touch on the special consideration taken for Pittsburgh and Philadelphia as it relates to Act 47 as we close this commentary. The Pennsylvania Municipalities Financial Recovery Act of 1987, or Act 47 as it is commonly called, is an assistance program to help Pennsylvania municipalities after they file and are officially designated as “distressed.” Many states, such as the commonwealth of Pennsylvania, generally believe that the status of one of its municipalities can affect others throughout the state. This is even set forth in writing in PA’s Act 47, which states: “Policy—It is hereby declared to be a public policy of the Commonwealth to foster fiscal integrity of municipalities so that they provide for the health, safety and welfare of their citizens; pay principal and interest on their debt obligations when due; meet financial obligations to their employees, vendors and suppliers; and provide for proper financial accounting procedures, budgeting and taxing practices. The failure of a municipality to do so is hereby determined to affect adversely the health, safety and welfare not only of the citizens of the municipality but also of other citizens in this Commonwealth.”

How Does a Pennsylvania Municipality Become Part of Act 47? The Municipalities Financial Recovery Act authorizes Pennsylvania’s Department of Community and Economic Development (DCED) to validate municipalities as financially distressed. According to Act 47’s criteria, a municipality could be deemed financially distressed if it meets at least one of the following criteria: The municipality has maintained a deficit over a three-year period, with a deficit of 1% or more in each of the previous fiscal years. The municipality’s expenditures have exceeded revenues for a period of three years or more. The municipality has defaulted in payment of principal or interest on any of its bonds or notes or in payment of rentals due any authority. The municipality has missed a payroll for 30 days. The municipality has failed to make required payments to judgment creditors for 30 days beyond the date of the recording of the judgment. The municipality, for a period of at least 30 days beyond the due date, has failed to forward taxes withheld on the income of employees or has failed to transfer employer or employee contributions for Social Security; it has accumulated and has operated for each of two successive years a deficit equal to 5% or more of its revenues; and it has failed to make the budgeted payment of its minimum municipal obligation as required by §§302, 303, or 602 of the act of December 18, 1984 (P.L. 1005, No. 205), per the Municipal Pension Plan Funding Standard and Recovery Act, with respect to a pension fund during the fiscal year for which the payment was budgeted and has failed to take action within that time period to make required payments.

Pennsylvania’s Municipalities Financial Recovery Act authorizes Pennsylvania’s Department of Community and Economic Development to validate municipalities as financially distressed. Key criteria include: A municipality has sought to negotiate resolution or adjustment of a claim in excess of 30% against a fund or budget and has failed to reach an agreement with creditors; a municipality has filed for chapter 9 municipal bankruptcy; a municipality has experienced a decrease in a quantified level of municipal service from the preceding fiscal year, which has resulted from the municipality reaching its legal limit in levying real estate taxes for general purposes.  Act 47 offers aid to the commonwealth’s second class cities (defined as those with a population of 250,000 to 999,999) and below which are negatively affected by forces such as short-term swings in the business cycle, or those burdened by more harmful longer-term negative macro-economic shifts: state support or assistance is available in several forms in order to ensure municipalities can provide essential services without interruption.

Over the long-term, Act 47 is focused on balancing ongoing revenues with ongoing expenditures—and investing in the municipality so that growth occurs and, as in a chapter 9 plan of debt adjustment, a municipality can recover. The act provides state-sponsored emergency no-interest loans and grants in order to ensure distressed municipalities can continue meeting debt payments and creditor obligations. The Department appoints a recovery coordinator who creates and then leads in helping to implement a recovery plan. Unlike an emergency manager, the plan provides for a recovery coordinator, who may act as an intermediary between the Mayor and City Council–the recovery plan is similar to a plan of debt adjustment in that it details how the available assistance and other modifications will help the municipality regain its fiscal stability, including via commonwealth economic and community development programs, assistance while negotiating new collective bargaining contracts; and enhanced tax or revenue authority—a key of which is authority to levy a nonresident wage tax.  

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Restoring Power–and Recovering Governing Authority

July 10, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Who Is in Fiscal Command?

June 29, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing challenge of governance in the U.S. territory of Puerto Rico: is it a federal judge, a duly elected Governor and legislature, or a board imposed by Congress and the Administration?

Who Is In Fiscal Charge? With the new fiscal year beginning Sunday, the Puerto Rico Legislature is set to approve a budget less than that which was presented to the PROMESA Board. The initial version, approved by the House of Representatives of $8.782 billion provided for an increase of $33.2 million over the amount approved by the PROMESA Board. The Legislative Assembly is, today, expected to approve an FY2019 budget of $8.7 billion. Senator Migdalia Padilla Alvelo of Maraquitas, a small town founded in 1803, who has served in the Senate for nearly two decades, and is the current Finance Commission Chair, yesterday announced that, as part of the legislative discussion, they have managed to identify several items which will adjust the budget without touching the allocations included by the House of Representatives to meet the reductions imposed by the PROMESA Board to the umbrella of the Department of Public Security and tax agencies, such as the Office of Government Ethics and the Office of the Comptroller. Those modifications cleared the path to revert some $50 million for the operation of the Government Central Accounting System (Prifas). Concurrently, the budget was modified to adjust reserves down from $75 to $35 million, with the Senator explaining: “was reduced from $ 75 million to $ 35 million: We reduced the $8,749 billion which the Board had set for expenses to $8.709 billion: “we are below what the PROMESA Board originally set.” House Finance Committee Chair Antonio Soto also confirmed there would be approval of the budget today, explaining that the negotiations with the Senate team had been aimed at reducing the budget to the level proposed by the Board without touching the expense items that had been added, noting: “We understand that we are going to be able to maintain it…in the same level that they established, but including the expense items that are necessary.”

Meanwhile, in a press release, Senate President Thomas Rivera Schatz reported that a Conference Committee had been formed to address the amendments introduced on his side, adding: “We had planned to approve the budget today. In the House, the discussion of the measure has been delayed a little, but the House President Carlos Méndez Núñez yesterday told me that that body will approve it today.”

With the action, the PROMESA Oversight Board cancelled its scheduled public meeting set for today—where it had intended to act on the Puerto Rico budget, to await today’s actions by the legislature, and then act tomorrow to approve the U.S. territory’s budget, as well as those of several authorities, with the Board noting the delay would provide more time to “complete required technical and macroeconomic changes to the Commonwealth Fiscal Plan with updated information.” The board still expects to approve a budget by the end of the fiscal year—with the PROMESA Board apparently primed to preempt Puerto Rico’s authority and impose its own fiscal dictates, including a repeal of Law 80 and the establishment of at-will employment, per its preemption demand to Gov. Ricardo Rosselló last month—a demand the Puerto Rico Senate declined to act upon.

The Board preemption yesterday came in the wake of, earlier this week, of its issuance of notices of violation with regard to government-proposed budgets for the Puerto Rico Highways and Transportation Authority and University of Puerto Rico—with, in each instance, the unelected Board notifying the Puerto Rico Fiscal Agency and Financial Advisory Authority that the Board required “substantial revisions and additional information” before it could approve the budgets. Some believe the PROMESA Board’s actions could signal a likely rejection of Puerto Rico’s budget tomorrow. PROMESA Board Director Natalie Jaresko said that if Puerto Rico’s elected leaders did not repeal Law 80, the Board would eliminate several accommodations it made to the Governor, including the retention of Christmas bonuses for government employees and a multiyear $345 million economic development and reform implementation initiatives fund.

It appears that, irrespective of the final actions taken by the Legislature, Governor Ricardo Rosselló Nevares recognizes the authority under the PROMESA statute granted to the Board. Thus, with the clear expectation that Law 80 (the Law Against Unjustified Dismissal) will be repealed,  the Governor appears to seeking to ensure he will play a key role in the process of restructuring the debt in federal court, and that he will be a player in constructing the quasi chapter 9 plan of debt adjustment which is anticipated to be settled by next week.

Another key issue pending relates to Chamber 1662, on Puerto Rico public pensions, which the Gov. yesterday endorsed—likely to arm himself to oppose the Oversight Board’s proposed average 10% cut in Puerto Rico pension benefits—cuts the Board wishes to trigger in the new fiscal year.

In response to a press question yesterday with regard to whether the Governor would go to court if, as expected, the PROMESA Board preempts Puerto Rico’s law and eliminates the Christmas bonus and current provisions for sick leave and vacations of public employees, the Governor was clear he would, noting:Yes, I’ve always said it. The unfortunate thing is that we will be spending $20 to $25 million a month in litigation processes that we are not sure of how we are going to finish. Second,  the process of restructuring the debt is not started and, instead of having a visibility to finish this in a year and a half, two years, we are talking about years. Possibly eight years, a decade in which this can be resolved, because the Oversight Board is the only entity authorized to submit a plan of debt adjustment. We have been working with them, with certain differences on that adjustment plan. But this is very clear, if you have an agreement, the only difference is pensions where we can sit or go to court for a single component…The content of this adjustment plan will depend not only on the restructuring of the debt, but also on whether the island will continue to be protected against appropriations of its government funds.”

Hurricane Recovery. On the critical issue of recovery from Hurricane Maria, where Puerto Rico received thrown paper towels compared to Houston, estimates are that recovery costs could be as high as $94 billion—Puerto Rico has, to date, received about $6 billion. Nevertheless, Gov. Rosselló appears optimistic, noting the island is in its recovery phase: “I think we’re on the way. Certainly FEMA’s disbursement has been slow, but now a new phase is entering that is important for people to know, which is includes HUD housing and CDBG funds—funds from which Puerto Rico has already begun drawing down: he added: “We hope that by the beginning of January or the end of December we can already have access to the bank of the $18.5 billion.”  

Will Congress Grant Puerto Rico Statehood?

June 27, 2018

Good Morning! In this morning’s eBlog, we consider statehood issues for Puerto Rico.

Un Estado? Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting representative in Congress is introducing legislation, H.R.6246 to modify the Jones-Shafroth Act and make the U.S. territory a state by 2021—an effort she is making with the key support of House Natural Resources Committee Chair Rob Bishop (R-Utah). As of yesterday, Commissioner Jenniffer Gonzalez reported she had 20 Republican and 14 Democratic co-sponsors, noting: “This is the first step to open a serious discussion regarding the ultimate status for the island.” In addition to Chairman Bishop, another key co-sponsor is Indian and Insular Affairs Subcommittee Chair Doug Lamalfa (R-Ca.). As proposed, the bill calls for the creation of a bipartisan, nine-member task force which would submit a report to Congress and to the President identifying laws which would need to be amended or repealed in order for Puerto Rico to be granted statehood. In response, Gov. Ricardo Rosselló Nevares noted: “In the past, this issue has been very hard to move forward…No longer do we want ambiguity. We want clarity. Either here in Congress you are with us or you are against the people of Puerto Rico.”

Under the proposed legislation, Puerto Rico would immediately become an incorporated territory; Congress would establish a Working Group with the promise of studying how the U.S. territory could become a state in January of 2021—the bill does guarantee the direct admission to statehood, nor does it propose a new referendum. The effort, however, faces a short timetable in the remaining few months of this Congress and little sense of White House support. Its chances depend upon the efforts of a bicameral, bipartisan Working Group  of nine members, eight appointed by the legislative leadership (four from the House and four from the Senate), which must be submitted within a period of 13 months, along with a report to Congress on how laws which do not apply to the U.S. territory of Puerto Rico or are enforced in the territory differently from the states would have to be “amended or eliminated” in order to provide for a transition to equal treatment of Puerto Rico, with the states, effective January 1, 2021. The effort will also have to address a transition—e.g., incorporate “flexibility in the entry of federal programs” and the development of the territorial economy through “incentives, tax arrangements, and other measures.”

As proposed, the legislation also requires proposing rules and dates for elections to federal positions in the territory, as well as studying the effect of perhaps adding as five new Members of Congress—a potential conundrum, as it would increase the number of seats in the U.S. House of Representatives to 440—effectively diluting the strength of other state delegations. Indeed, bearing in mind that one Congress cannot tie the hands of another, the bill provides that the ratification of the legislation would imply “the intention of the Congress to approve legislation based on of the final report of the Working Group.”

In reaction, Gov. Ricardo Rosselló Nevares noted; “This is the moment. The catastrophe left by the hurricanes Irma and María stripped bare the reality of the unequal treatment of the American citizens living in Puerto Rico, the Executive having to approve waivers, and the Congress to make exceptions in the laws so that we could receive help.” He added: “This is a matter of equality, justice and civil rights.” It would also be a taxing matter: statehood, were it granted, would subject Puerto Ricans to federal income taxes without the political rights of statehood, and the US Constitution would have full force.

Chairman Bishop noted that one of the obstacles to statehood would be the current PROMESA statute—which created the current PROMESA Board to oversee (along with a federal court) Puerto Rico’s quasi plan of debt adjustment—a panel of which eight of the nine named committee members were appointed by the Congressional leadership, with the Chair appointed by the Speaker of the House, who would designate the Chairman of the committee. Subcommittee Chair LaMalfa noted that the proposed legislation provides that once the Working Group presents its report to Congress, “We will make a decision” with regard to Puerto Rico’s statehood.

Puerto Rico Senate President Thomas Rivera Schatz, at an event with Gov. Rosselló Nevares yesterday, noted: “This is the common front that Puerto Rico wanted to see a long time ago.” Other Members expressing support included Reps. Don Young (R-Alaska), Don Bacon (R-Neb.) Peter King (R-N.Y.) and Delegate Amata Coleman Radewagen (Samoa). For her part, Rep. Nydia Velázquez (D-NY), who is Puerto Rican and a member of the House Natural Resources Committee, emphasized that attention by Congress must be focused on the “reconstruction of Puerto Rico,” adding: “I do not know how statehood for Puerto Rico will solve the problems of Puerto Rico,” and Rep. Tom McClintock (R-Ca.) warned: “What you are going to do is cause additional problems. The fiscal mismanagement in Puerto Rico does not make them eligible for admission to the United States.” Chair Bishop noted the process towards statehood would proceed “one step at a time.”

In Puerto Rico, the possibility of statehood finds a mixed reaction, with the Popular Democratic Party and Independence Party perceiving pro-statehood legislation by Congress as futile. The Puerto Rican Independence Party (PIP),  which boycotted the 2017 referendum, saw the new pro-statehood legislation as a futile and contradictory process. Puerto Rico’s Popular Democratic Party President Héctor Ferrer worries proposed changes could “lead Puerto Rico to the worst of the relationship through assuming all the responsibilities of the state, without receiving the supposed benefits of being a state.” He also noted there remain only 32 legislative days before November’s elections.

Nevertheless, Puerto Rico’s fiscal situation, as the new hurricane season is underway, is on the upswing: the May General Fund revenues were $217.7 million or 32% higher than budgeted, marking a recovery from the physical and fiscal devastation of last September’s Hurricane Maria; the territory’s budget has experienced a surge, leaving its revenues $78.9 million or 1% ahead of budget projections for the first 11 months of the fiscal year. In a non-April Fool’s report, that month’s revenues were 20.2% ahead of projections, with Puerto Rico Secretary of the Treasury Raúl Maldonado Gautier reporting that increased economic activity connected to rebuilding from the hurricanes had helped tax collections—a finding that could affect the PROMESA Board’s decision with regard to when and how Puerto Rico should resume making interst payments on its outstanding municipal bonds—or, as Puerto Rico Secretary of the Treasury Raúl Maldonado Gautier put it, the fact that revenues are now ahead of budget “is a favorable fact in view of the fiscal challenges faced by public finances since before the hurricanes collections were favorable but after the hurricanes for several months the revenues were low.” According to Secretary Maldonado Gautier, much of the increase was due to temporary economic activity of companies engaged in recovery tasks and to the flow of money from insurance payments, both in response to the two hurricanes that hit Puerto Rico in September. Key revenue changes included non-resident withholding ($63.1 million), sales and use tax revenues ($40.9 million), and the individual income tax ($25.8 million). Over the first 11 months, the tax categories deviating the most from projections in dollar terms were the corporate income tax, which came in $197.4 million ahead of budget, and the Law 154 foreign corporate profit tax, which arrived $151.2 million short. Secretary Maldonado Gautier noted he was confident that once June’s revenues are included, FY2018’s revenues will come in ahead of projections.

“Who’s on First? Who’s in Charge–elected or imposed leaders?

June 22, 2018

Good Morning! In this morning’s eBlog, we consider the physical, fiscal, and mixed governance challenges which must be overcome in Puerto Rico.

Will There Be Luz? Gov. Ricardo Rosselló has signed into law a bill to partially privatize the Puerto Rico Electric Power Authority, potentially affecting the authority’s $8.9 billion in outstanding debt. The new law is intended to provide for the sale of the public utility’s power generation units and make a concession of its transmission and distribution system, according to a statement by the Governor—a concession which could involve a lease arrangement, as was done for Puerto Rico’s main airport. Under the proposed privatization, revenues realized could be utilized to address PREPA’s debt. purchasers would not assume PREPA’s debt; instead the public utility would use proceeds from any sale of a power plant to pay off a portion of the debt, or, as the Governor put it on Wednesday, the money raised could be used, at least in part, to contribute to PREPA’s underfunded public pension system. The new legislation comes in the wake of, last April, the PROMESA Oversight Board’s certification of a fiscal plan which assumed PREPA privatization—but which did not impose assumptions with regard to how the proceeds would be used. Puerto Rico Senate Minority Leader Eduardo Bhatia, an attorney-at-law and the former 15th President of the Puerto Rico Senate—as well as a former Fulbright scholar, noted: “The bill that Governor Rosselló signed today essentially authorizes the Governor to proceed with a ‘market sound[ing]’ and identify any and all potential private sector interest in the development of a new energy system in Puerto Rico,” adding: “Notable is that the bill does not authorize any sale before the Puerto Rico Legislature prepares, within 180 days, a statement of public policy specifically mandating what the new system will look like in 30 years.” Gov. Rosselló noted that Puerto Rico’s Public-Private Partnerships Authority would oversee the potential leasing of the transmission and distribution grid—a process expected to occur over the next year and a half. From a governance perspective, the Governor, PROMESA Oversight Board, and advisory teams plan to form a working group to steer the process.

Quein Es Encargado II? Meanwhile, the seemingly unending governance question with regard to who is in charge appears to be escalating. In putting an end, yesterday, to Puerto Rico’s debate on Law 80-1976, the Law on Unjustified Dismissal, the Puerto Rico Senate not only opened the door to annul the agreement reached by the Executive and the Oversight Board around the budget, but also appeared to intensify the power struggle between Senate President Thomas Rivera Schatz; Governor Ricardo Rosselló Nevares, and the PROMESA Oversight Board. Upon learning the Puerto Rico Senate did not support the repeal of the statute—as demanded by the PROMESA Board, the Governor accused Senate President Schatz of acting to the detriment of Puerto Rico, for political reasons, even as PROMESA Board Chair José Carrión, who, like the Senate President, was in Washington, D.C. yesterday, warned that keeping the labor statute in force would imply reversing the certified tax plan, which includes cuts in vacation leave, days of sickness, and the Christmas bonus, stating: “There is a certified plan. If not (repeal it), we revert to the fiscal plan,” in the wake of his participation at forum sponsored by the Heritage Foundation.

Chair Carrión warned that reversion to the certified fiscal plan would mean at least $300 million in additional budget cuts over the next five years. He noted that the proposed structural reforms seek to “generate economic growth: We have limited powers (to make decisions that boost economic growth), but one of them is the labor area.”

The Board is scheduled to meet a week from today to discuss the upcoming fiscal year budget—scheduled to take effect at the end of next week.

In criticizing the actions of Senate President Rivera Schatz, Gov. Rosselló Nevares said that the upper House leader had opted to “hinder” his administration, and held him responsible for the millions of dollars in cuts that may wreak fiscal harm to the island’s municipios, as well as other governmental entities, noting, in a written statement: “Puerto Rico has just seen how politics is made and not how a future government should be made in times of challenges and difficulties, with this regrettable decision by the President of the Senate. We will follow the path of change and transformation that we have forged; however, this was the time to unite and together to get out of the shameful past we inherited. He chose to hinder, chose to follow the tricks of the past that have put us in this situation: the risk of the loss of billions of dollars for Puerto Rico as a result of restructuring the debt falls on this action. Likewise, the loss of millions of dollars in appropriations for the municipal governments that we had achieved also falls on the President of the Senate. Sen. Rivera Schatz added that he anticipated he would appear before a judicial forum to challenge the powers of the unelected PROMESA Oversight Board to alter Puerto Rico’s budget, noting: “The Senate ends the matter of Law 80. It is not going to repeal Law 80. If it were up to us to go to court to litigate against the Board, I advance that I already talked with lawyers to do so.” (The repeal of Law 80 was a specific condition presented by the Board in exchange for disbursing additional financial aid to municipios, the University of Puerto Rico, and guaranteeing holiday leave and sick days for private sector employees.)

At the same time, during the meeting of the majority caucus of the New Progressive Party, a proposal by Sen. Miguel Romero to ascribe to the Law against discrimination in employment (Law 100-1959) by adding some amendments to Law 80 was defeated  15 -5, with the prevailing majority choosing to defer consideration of the issue during the current session—which ends Monday. Sen. Romero proposed creating a system of fixed payments for dismissals that violate only the Anti-Discrimination Law 100, but insisted on repealing Law 80, which deals with another area of ​​labor law by providing remedies for severance without just cause.

Not unlike in the U.S. Congress, the Puerto Rico House and Senate do not always see ojo to ojo (eye to eye). The House intends to address Puerto Rico’s relationship with the Oversight Board differently, with House President Carlos “Johnny” Méndez stating, yesterday, that he has to study what is the probability of prevailing in a lawsuit with the Oversight Board defense of budget items, adding that he considers the controversy over Law 80 to be over. In response to a question whether the House would join a lawsuit initiated by the Senate to combat the cuts applied by the Board, Senate President Méndez replied: “We have to sit down to see what the arguments are and make a decision: the Promise law has supremacy over everything. It does not even allow us to sue the Oversight Board. We have to see what the arguments are, the legal basis for making a decision. It is not going to be a futile exercise. If we have more than a 50% chance of prevailing, of course we will be there.” He added that, if he opts for litigation, he would challenge the authority and ability of the unelected Oversight Board to establish public policy.

What about Manana? Even as the question of governance proceeded, two PROMESA Board members yesterday concurred with a panel of other experts that an overhaul Puerto Rico’s local labor laws is a key for the territory’s future growth. At a session in Washington, D.C. at the Heritage Foundation, PROMESA Chair Jose Carrion joined Anne Krueger, economics Professor at Johns Hopkins School for Advanced International Studies, and fellow Board Member Andrew Biggs—with their discussion coming on some of the same issues. With Puerto Rico’s elected leaders considering instituting the same at-will employment statutes used in many states, as well as adding more restrictive rules for receiving food stamps and instituting an earned income tax credit to encourage work, the panelists described Puerto Rico’s labor laws as more restrictive than any state—a factor, perhaps, that could help explain the exodus from Puerto Rico of so many better economic opportunities on the mainland. The panelists noted the challenge will be to convince the people of Puerto Rico that a more competitive labor market will produce more jobs, with PROMESA Board member Andrew Biggs, noting that economists predict there would be an additional one percentage point of annual economic growth if the reforms were adopted. PROMESA Board Chair Jose Carrión noted he, as an employer in Puerto Rico, is only too well aware of how “onerous” the labor laws are, adding: “[I]t does not make Puerto Rico competitive with places to where we are losing our population such as Florida.” Employers in Puerto Rico, for instance, are required to give workers 24 hours off after they work 8 hours, said Professor Anne Krueger of Johns Hopkins School for Advanced International Studies, noting that the labor force participation rate is only 38% on Puerto Rico compared to 63% on the mainland, she said. In the end, the PROMESA Board appeared to reach an agreement with the Governor on proposed labor law changes. Now, warns Chair Carrión, if the legislature does not agree, the PROMESA Board will govern in place of Puerto Rico’s elected leaders.

Municipal Fiscal Distress & State Oversight.

June 18, 2018

Good Morning! In this morning’s eBlog, we consider a new study assessing the potential role of property tax assessments in Detroit’s historic chapter 9 municipal bankruptcy; then we observe, without gambling on the odds, the slow, but steady progress back to self-governance in Atlantic City, and weaning off of state fiscal oversight; before, finally noting the parallel efforts to exit state oversight in Flint, Michigan—where the proximate cause of the city’s fiscal and physical collapse occurred under a quasi-state takeover.

Foreclosing or Creating a City’s Fiscal Recovery? One in 10 Detroit tax foreclosures between 2011 and 2015 were caused by the city’s admittedly inflated property assessments, a study by two Chicago professors has concluded. Over-assessments causing foreclosure were concentrated in the city’s lowest valued homes, those selling for less than $8,000, and resulted in thousands of Detroit homeowners losing their properties, according to the study: “Taxed Out: Illegal property tax assessments and the epidemic of tax foreclosures in Detroit,” which was written by  Bernadette Atuahene and Christopher Berry. Chicago-Kent Law School Professor Atuahene noted: “The very population that most needs the city to get the assessments right, the poorest of the poor, are being most detrimentally affected by the city getting it wrong: “There is a narrative of blaming the poor that focuses on individual responsibility instead of structural injustice. We are trying to change the focus to this structural injustice.” (Professor Atuahene is also a member of the Coalition to End Unconstitutional Tax Foreclosures.) Their study came as the Wayne County Treasurer has foreclosed on about 100,000 Detroit properties for unpaid property taxes for the period from 2011 through 2015, about a quarter of all parcels, as the Motor City suffered the after-effects of population decline, the housing market crash, and the Great Recession.

Professors Atuahene and Berry acknowledged many factors can trigger tax foreclosure, estimating that the number of foreclosures was triggered by over-assessments, in part by calculating the foreclosure rate if all properties were properly assessed. The study also controlled for properties various purchase prices, neighborhoods and sale dates.

Detroit Mayor Mike Duggan has, as we have noted, acknowledged such over assessments; yet he has made clear accuracy has improved with double-digit reductions over the last four years—and completed the first comprehensive such assessment two years ago for the first time in more than half a century. The city’s Deputy Chief Financial Officer, Alvin Horhn, last week stated he had not reviewed the study; however, he noted that “most of their assumptions rely on data that does not meet the standards of the State Tax Commission and would not be applicable under Michigan law,” a position challenged by Professor Atuahene, who had previously stated the data does comply with the law, noting: “We believe the citywide reappraisal has been an important part of the major reduction in the number of foreclosures occurring in the city, which continue a steady decline and will provide a solid foundation for future growth: The number of foreclosures of owner occupied homes, specifically, has gone down by nearly 90% over the past few years.”

The city’s authority to foreclose, something which became a vital tool to address both property tax revenues and crime in the wake of the city’s chapter 9 municipal bankruptcy, was enabled under former Gov. John Engler 29 years ago under a statewide rewrite of Michigan’s property tax code: changes made in an effort to render it faster and easier to return delinquent properties to productive use. On a related issue, the Motor City is currently facing a lawsuit by the American Civil Liberties Union of Michigan—a suit which maintains the city’s poverty tax exemption, which erases property taxes for low-income owners, violated homeowner’s due process rights because of its convoluted application process, arguing that the practice violates the federal Fair Housing Act by disproportionately foreclosing on black homeowners. However, the Michigan Court of Appeals has upheld a ruling by Wayne County Judge Robert Colombo, dismissing Wayne County from the lawsuit, ruling the suit should have been brought in front of the Michigan Tax Tribunal. 

Pole, Pole. In Bush Gbaepo Grebo Konweaken, Liberia, a key Gbaepo expression was “pole, pole” (pronounced poleh, poleh), which roughly translated into ‘slowly, but surely’—or haste makes waste. It might be an apt expression for Atlantic City Mayor Frank Gilliam as the boardwalk city has resumed control back from the state to forge its own fiscal destiny—presumably with less gambling on its fiscal future. In his new $225 million budget, the Mayor has proposed to keep property taxes flat for the second consecutive year, and is continuing, according to the state’s Department of Community Affairs, charged with the municipality’s fiscal oversight and providing transitional assistance, to note that the Mayor and Council President Marty Small’s announcement demonstrated that “an understanding of the issues that Atlantic City faces, and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Under Mayor Frank Gilliam’s proposed $225 million budget, property taxes would remain flat for a second straight year, there would be some budget cuts, as well as savings realized from municipal bond sales to finance pension and healthcare obligations from 2015. The Mayor also was seeking support for capital improvements, additional library funding, and one-time $500 stipends for full-time municipal employees with salaries below $40,000. The ongoing fiscal recovery is also benefitting from state aid: the state Department of Community Affairs reported the state is providing $3.9 million in transitional aid, a drop from the $13 million awarded to the City of Trenton in 2017 and $26.2 million from 2016. Last year Atlantic City adopted a $222 million budget, which lowered taxes for the first time in more than a decade. The Department’s spokesperson, Lisa Ryan, noted: “Yesterday’s announcement by Mayor Gilliam and Council President [Marty] Small demonstrates city officials are showing an understanding of the issues that Atlantic City faces and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Gov. Phil Murphy scaled back New Jersey’s intervention efforts in April with the removal of Jeffrey Chiesa’s role as state designee for Atlantic City. Mr. Chiesa, a former U.S. Senator and New Jersey Attorney General, was appointed to the role by former Gov. Chris Christie after the state takeover took effect.

Not in Like Flint. The Flint City Council was unable last week to override Mayor Karen Weaver’s veto of its amendments to her proposed budget: the Council’s counter proposal had included eight amendments to the Mayor’s $56 million proposed budget for 2018-2019—all of which Mayor Weaver vetoed in the wake of CFO Hughey Newsome’s concerns. The situation is similar to Atlantic City’s, in that this was Flint’s first budget to be considered and adopted in the wake of exiting state oversight. Mayor Weaver advised her colleagues: “This is a crucial time for the City of Flint: this is the first budget we are responsible for since regaining control…I am proud of the budget that I submitted, and I have full faith in the City’s Chief Financial Officer. Just as I have the right to veto the budget, the City Council has the right to override that veto. It is my hope that they would strongly consider my reasons for vetoing and that the Council and I can work together to create a budget that can sustain the City for years to come.” Her veto means the budget will be before the Council for a final vote in order to have it in place for the new fiscal year beginning on the first of next month.

Among the Council proposals the Mayor rejected was employee benefits, including a proposed pay raise for the City Clerk of $20,000, the creation of a new deputy clerk position, a new parliamentarian position, and full health benefits for part-time employees. Or, as CFO Newsome noted: “The risk these added costs could pose on the city’s budget is not in the best interest of the city nor the citizens of Flint,”  as he expressed disappointment over the time wasted on arguing over what amounted to $55,000 in the Mayor’s budget, especially when the city was currently tackling bigger fiscal challenges, such as its $271 million unfunded pension liability and keeping the city’s water fund out of red ink, noting: “These are things that we are looking at, and during all of these [budget] proceedings so little attention was paid to that.”

That is to note that while sliding into chapter 9 municipal bankruptcy, or, as in Atlantic City, state oversight, can be easy; the process of extricating one’s city is great: there is added debt. Indeed, Flint remains in a precarious fiscal position, confronted by serious fiscal challenges in the wake of its exit from state financial receivership the month before last. Key among those challenges are: employee retirement funding and the aging, corroded pipes (with a projected price tag of $600 million) which led to the city’s drinking water crisis and state takeover.

On the public pension front, in the wake of state enactment of public pension reforms at the end of 2017 which mandate that municipalities report underfunded retirement benefits, Flint reported a pension system funded at only 37% and zero percent funding of other post-employment retirement benefits, which, according to the state Treasury report, Flint does not prefund.

The proposed budget assumes FY2019 general fund revenues of approximately $55.8 million, of which $4.7 million is expected to come from property taxes. This would be an increase of about $120,000; Flint’s critical water fund will have a $4 million surplus at the end of FY2018; however, CFO Newsome warned the fund will fall into the red within the next five years if it fails to bring in more money.

Municipal Finance Transparency

June 13, 2018

Good Morning! In this morning’s eBlog, we consider efforts in a  Puerto Rican municipality to focus on municipal finance transparency.

Toa Baja, a municipio of just under 90,000 in Puerto Rico, was first settled around 1511—long, long before Lexington and Concord. It was officially organized as a town in 1745, when it was dedicated to Nuestra Señora de la Concepción. By the dawn of U.S. independence in 1776, it was a town of some six cattle ranches and 12 sugar cane estates, but a town at risk of flooding because of the confluence of surrounding rivers. In 1902, in the wake of the U.S. invasion, the town became part of a consolidated region when the Legislative Assembly of Puerto Rico approved the consolidation of a number of municipalities—before a 1905 statute annulled the statute and Toa Baja regained its status as an independent town. This municipio of around 90,000 divided into seven barrios or neighborhoods has not been a stranger to floods: nine years ago, former Governor Luis G. Fortuño ordered a shut off essential services, such as water and electricity, to Villas del Sol, a village within the municipality of Toa Baja, and FEMA actually purchased homes in the municipality from the Puerto Rican Government in order to ensure public safety.  What had been a farming-based economy, mostly sugar, turned increasingly to fishing, cattle, and then, by the 1950’s, manufacturing began to replace replacing agriculture, so that, today, it is a center for the manufacture of metal, plastic, concrete, textile, electrical, electronic machinery, and rum. The city’s leader, Mayor Anibel Vega Borges, was first elected in 2004; he has since been re-elected twice (2008 and 2012)—and by wide margins.

Now the city or ciudad is set to be a leader in fiscal transparency: it will be the first Puerto Rico municipality to publish its accounts, in the wake of signing an agreement with the Statistics Institute after Institute President Mario Marazzi urged all public agencies, including municipalities and public corporations, to make use of the Institute’s transparencyfinanciera.pr platform. Ergo, Alcalde or Mayor Bernardo “Betito” Márquez García will disclose, beginning with the fiscal year next month, all its transactions, evaluations of income, costs and benefits in order to ensure the public has access to inspect all its fiscal and financial actions—or, as Mayor Garcia put it:I understand that it is the right step. I think that the responsibility to administer the municipalities is shared with the people, and the people have to have the information to be an oversight of what is done with their resources.”

President Marazzi noted that his offer, made available in 2015, had, so far, only attracted two previous takers: the Institute of Statistics, and the Institute of Puerto Rican Culture, noting: “(Toa Baja) is the first municipality to take the step forward to provide extremely detailed information on their finances…Toa Baja is truly opening its books, here it is going to be done because the platform demands it: The platform requires a level of disclosure that definitely has to be someone with courage, who has nothing to hide,” as he urged all Puerto Rican agencies, public corporations, and municipalities to make use of the platform, stressing that, in times of fiscal crisis, the tool becomes even more useful to record how public funds are being used at the central and municipal levels, and also to recover the credibility of Puerto Rico before the financial markets, and—as he described it: “Give it a good goodbye to the [PROMESA] Board of Fiscal Supervision: All we need is that in our country, we have the political will to implement what already exists technologically.”

His initiative comes even as the Legislature is set to debate Senate Bill 236, the “Open Data Law of the Government of Puerto Rico.”

Mr. Marazzi described his effort by noting that “Lack of transparency is the best breeding ground for corruption, and sunlight–or transparency–is the best disinfectant,” adding that his Institute will also train municipal personnel in the use of the electronic platform, and in the handling and sending of the necessary information, at the same time that it will offer assistance, advice, and collaboration in the preparation of a work plan for the implementation of the project, Open Government, in Toa Baja, noting: “Governments do not have the resources to audit all the information. This will allow external auditors to help us find flaws in our data, (to identify) corruption.” Audit reports (from the Office of the Comptroller), he noted, take so much time that by the time they are made available, the proverbial cow is often already outside the barn.  

In turn, the Fundación Agenda Ciudadana will join the effort to educate the Tobajeña citizenship with the necessary skills to control the available information and use it in the democratic exercise. Mayor Márquez García emphasized this educational process, and indicated that a second phase of the project would be the search for participatory budgeting: “In my personal character, I think we had to work on this type of initiative for a long time … This will allow Mayors to be forced to render collective accounts … Here there must be active citizen participation. The responsibility is shared.”