What Are the Challenges of Governance Takeovers?

Good Morning! In this a.m.’s eBlog, we consider the evolving state takeover of Atlantic City, with the appointment by the state of what Mayor Don Guardian deemed the “occupation force.” We consider the role of the state and mechanisms for a state takeover—as well as the options for the municipality. Then we look far south to a seemingly comparable federal takeover of a quasi-state, as the Puerto Rico Oversight Board created under the new PROMESA law preps for its first meeting at the end of this week in Puerto Rico—a meeting that will come during transition periods of administrations both in the federal and Puerto Rican governments—adding still greater challenges to the U.S. territory’s transition.

State Preemption of a Municipality? The twilight period during which Atlantic City has awaited its state takeover now appears to be over, or, as Mayor Don Guardian posed it, the “occupation force” of a “governor we don’t like” has been named. Last night, New Jersey tasked Jeffrey Chiesa, a longtime ally and associate of Gov. Chris Christie—indeed, an associate the Governor once named to fill in as one of the state’s U.S. Senators in the wake of the death of former U.S. Sen. Frank Lautenberg, and who also served as New Jersey’s Attorney General, to serve as the “director’s designee” to execute the state takeover of Atlantic City, from which position he will report to New Jersey’s Department of Community Affairs, under the leadership of Tim Cunningham, the Director of New Jersey’s Local Finance Board. In this new capacity, Mr. Chiesa will have far-reaching powers, including the authority to unilaterally hire, fire, eliminate departments and authorities, sell assets, terminate union contracts, and veto any action by City Council, according to the state’s Municipal Stabilization and Recovery Act. In its release, the New Jersey Department of Community Affairs said Mr. Chiesa would use his authority “judiciously.”

In the statement, Mr. Chiesa said: “It is my hope to work together with firm conviction and not disrupt the democratic process…I am committed to improving essential government and community services for the people of the Atlantic City…I will listen to the people and work hand in hand with local stakeholders to create solutions that will prevent waste and relieve generations of taxpayers from the burden of long-term debt. We will put Atlantic City back on a path to fiscal stability.”

With regard to governance, the Department said Atlantic City Mayor and City Council will “maintain day-to-day municipal functions.”  Mr. Chiesa’s role will be to oversee “fiscal recovery efforts,” with the release from the Department noting his immediate steps would include entering into PILOT (payment in lieu of taxes) agreements with casinos, ensuring that debt service and county and school payments are made on time, in addition to exploring “right-sizing the City’s work force.”

What Atlantic City’s elected government leaders will do—and what they may do could now be the outcome of the third branch of the state’s government: the courts, especially in the wake of Mayor Guardian’s making clear yesterday that the city was poised to go to court to block any actions by the state that it regards as civil rights violations. Early yesterday, Mayor Guardian said the city would go to court if the state takes actions “we see as unconstitutional.”

The road ahead promises to be steep: the state takeover comes with the Governor potentially leaving to join the new Trump Administration; Atlantic City has a roughly $100 million annual budget deficit and about $500 million in total debt. The city’s ratable base has declined from $20 billion in 2010 to $6 billion today as the casino municipality faced more competition in neighboring states: five of the city’s famed boardwalk casinos have closed since 2014—with significant implications for unemployment, per capita income, and assessed property values.

State Preemption. In the wake of last week’s state Local Finance Board vote to usurp major decision-making powers from Atlantic City’s elected leaders week, Local Government Services Director Timothy Cunningham noted: “The simple fact is Atlantic City cannot afford to function the way it has in the past…I look forward to meeting with Mayor Guardian and members of the City Council and starting the process of bringing this great city back to financial stability. It is my hope to work together with firm conviction and not disrupt the democratic process.”

As we have previously noted, the Board’s vote for the takeover came in the wake of the state Department of Community Affairs Commissioner Charles Richman rejecting the city’s fiscal-recovery plan last week—a plan which the Department criticized, because it failed to balance the city’s 2017 budget, ran a five-year shortfall of $106 million, and did not accurately estimate cost and revenue projections. In addition, the Department expressed concerns over the Bader (airport) Field sale, calling the water authority’s plan to issue $126 million in low-interest, long-term bonds to pay for the land “dubious at best.”

Federal Preemption. The Puerto Rico Oversight Board has scheduled its first session in Puerto Rico for this Friday, with the meeting set outside of Fajardo, Puerto Rico. While the session will be by invitation only, it is scheduled to be streamed online at www.oversightboard.pr.gov, and to be followed by a press conference. It follows two earlier meetings convened in New York City. At this week’s session, the agenda includes a presentation by Conway MacKenzie Inc. on the government’s liquidity; a presentation by the Puerto Rico Aqueduct and Sewer Authority; public testimony on Puerto Rico’s proposed fiscal plan; and the creation of procedures to approve transactions of the board’s “covered entities.”

The timing of the meeting comes during both U.S. mainland and Puerto Rican transition periods—where the position of the incoming Trump administration vis-à-vis Puerto Rico remains to be developed—albeit a spokesperson for the U.S. Treasury noted: “We all have a role to play in the coming months: the current and future governor, the oversight board, local legislature, Congress, and the current and future administrations in Washington…At Treasury, this is a top priority and we are committed to ensuring a smooth transition to the next administration.” The bar is high: Puerto Rico is facing some $70 billion in debt and at least $46 billion in unfunded pension liabilities: the U.S. territory’s public pension systems currently have more than 330,000 members and serve as the primary source of income for more than 150,000 retirees, according to the Treasury.

For his part, Puerto Rico Governor-elect Ricardo Rosselló faces the awkward position of being a newly elected U.S. governor—but one whose power and authority is circumscribed by the new federal law, so that he will have to work with the new seven-member oversight board, imposed by the PROMESA law to address some hybrid form of governance: that board has the power to require balanced budgets and fiscal plans from commonwealth leaders, as well as to file debt restructuring petitions on behalf of Puerto Rico and its entities in federal district court as a last resort, if voluntary negotiations with creditors fail. It comes as the PROMESA Board is reviewing the fiscal plan submitted by outgoing Puerto Rico Gov. Alejandro García Padilla last October. In this ‘feeling out’ process of governance—all parties have a narrow window in which to govern even during the respective U.S. and Puerto Rican governance transitions: the new federal law, PROMESA, includes an automatic stay on debt-related litigation until February 15th, a stay intended to provide time to address what a Treasury official deemed “the most urgent aspects of the problems facing the island,” even though acknowledging the federal government and new PROMESA law lack key tools to prevent another crisis when, for example, federal healthcare funding is exhausted. The U.S. territory currently receives $1.5 billion in funding under the Affordable Care Act—funds scheduled to expire next year absent additional federal action—funding in an island wracked by Zika and other serious health care challenges where expiration could impact about 900,000 Puerto Ricans, according to the Treasury.

Thus, in the transition process between now and January 20th, the Treasury is looking to the eight-member Congressional Task Force on Economic Growth in Puerto Rico to help address urgent healthcare and tax solutions on the federal level. The task force, made up of equal numbers of Republicans and Democrats, has been tasked with identifying federal laws and programs that impede Puerto Rico’s growth and recommending changes that could spur economic growth—changes which could be incorporated as part of a potential year-end omnibus bill designed to keep the government open and operating.