The Governance Responsibility to Protect a City’s Children

October 10, 2018

Good Morning! In this morning’s eBlog, we report on the physical and fiscal challenges of the Detroit Public Schools, before zooming south to assess whether the complex municipal financing in Puerto Rico’s recovery has perhaps exacerbated the U.S. territory’s debt challenges.

Protecting a City’s Children. A key challenge in Detroit’s plan of debt adjustment from the nation’s largest chapter 9 municipal bankruptcy was restoring trust in its public schools—a critical step if families with kids were going to move from the suburbs into the emptied city. That, of course, required making the schools not just trustworthy places for learning, but also safe—and not just safe from a gang perspective, but especially here from water contamination—Flint, not so far away, after all, is on many parents’ minds. Thus, the school district is developing plans to make drinking water safe inside its buildings, especially after a review of testing data shows one school had more than 54 times the allowable amount of lead under federal law, while another exceeded the regulated copper level by nearly 30 times. The Detroit News reviewed hundreds of pages of water reports for 57 buildings which tested for elevated levels of lead and/or copper in the water to provide a detailed look how excessive the metal levels were in the most elevated sources.

The News effort comes as Detroit Public School Superintendent Nikolai Vitti noted: “‎We discontinued the use of drinking water when concerns were identified without any legal requirement to do so, and hydration stations will ensure there is no lead or copper in all water consumed by students and staff, with the Superintendent yesterday reported the system expects to spend nearly $3.8 million enacting a long-term solution to widespread lead and copper contamination in students’ drinking water, with the cost including $741,939 to install 818 hydration stations and filters, $750,000 for water coolers until completed installation of the stations in the summer of 2019, $539,880 for environmental remediation costs, $1.2 million for maintenance services, and $282,000 for facilities maintenance—a tab unanimously approved yesterday by the Detroit Community Schools Board, with long-term plan to get drinking water flowing again inside the 106 Detroit schools after faucets were turned off ahead of the school year. The announcement followed Monday’s by Supt. Vitti, when he reported that he and the school board will reveal corporate funders for some $2 million in hydration stations he wants to install across the district.

The need, as the survey revealed, is urgent: among the elevated levels reported by the Detroit Public School District includes a kitchen faucet inside Mason Elementary-Middle School which had more than 54 times the amount of lead permitted the Safe Drinking Water Act; a drinking fountain inside Mark Twain School for Scholars was tested at more than 53 times the federal threshold; a drinking fountain on the first floor near the kitchen of Bethune Elementary-Middle School that had copper levels at nearly 30 times the permissible level—even as DPS officials still await the test results of 17 more buildings. Nevertheless, from the results so far, there is a failing grade: more than half of the 106 schools inside Michigan’s largest school district have contaminated water. Indeed, with EPA recommending lead limits of 15 micrograms per liter or 15 part per billion, water samples at Mason found extreme elevations of lead at Mason, Twain, Davis Aerospace Technical, and Bagley, and extreme levels of copper at Bethune Academy of the Americas elementary-middle school and Western International. Unsurprisingly, public health and water safety experts report that schools should use a tougher standard for lead levels, and nationally recognized Virginia Tech water expert Marc Edwards said: “Those are not good. There is no doubt there are worrisome lead levels: Whenever you take hundreds of thousands of samples in a school, you are going to get some results that are shockingly high.” At a Board of Education meeting last month, Superintendent Vitti said the most practical, long-term, and safest solution for water quality problems inside the schools would be to provide water hydration stations in every building—systems currently used in public school districts, including in Flint, Royal Oak, and Birmingham, as well as Baltimore: these stations, in addition to cooling water, more importantly remove copper, lead, and other contaminants.

Drinking water screening reports demonstrate that water was collected at some schools in April and others in August, with school district officials reporting sampling began in the district in the spring and continued through last August. In September, Superintendent Vitti said that DPS, through its environmental consulting firm, ATC Group, is following EPA protocol for collecting water samples, adding: “If testing occurred at a school after the regular school year, then it was done during summer school, where nearly 80 of our schools were offering classes,” adding that many of the schools with high levels had already identified for concern two years ago—and that those were the first group of schools to move to water coolers. Supt. Vitti initiated water testing of the 106 school buildings in May and August after initial tests results found that 16 schools showed high levels of copper and/or lead. Another eight tested for elevated levels in the spring after they were identified with concerns in 2016. Last month, the DPS District received more test results, which found an 33 additional schools with elevated contaminant levels, bringing the total number of schools with tainted water to 57 in a District already overwhelmed by some $500 million in building repair needs; moreover, the bad gnus could worsen: the total number of schools with high levels could increase as school officials await more test results on another 17 schools.

Dr. Mona Hanna-Attisha, noted for her expertise in Flint, who is a pediatrician and public health expert, concurred that Detroit’s policymakers need to set a much more aggressive limit on allowable amounts of lead in schools. In addition, Michigan Department of Environmental Quality’s school sampling guidance recommends that schools address fixtures which measure above 5 micrograms per liter, the same EPA standard as bottled water, according to Dr. Hanna-Attisha; the American Academy of Pediatrics recommends an action level of just 1 microgram per liter for drinking water in child care facilities and schools. Thus, as Dr. Hanna-Attisha warns: “This should be the District’s action level,” in a letter she co-authored with Elin Betanzo, founder of Safe Water Engineering, a consulting firm—a letter with which Superintendent Vitti said he agrees.

Dr. Hanna-Attisha, who witnessed lead levels in some Flint homes reach 22,000 micrograms per liter, said U.S. EPA school sampling guidance encourages schools to sample every drinking water tap a single time unless lead is detected at greater than 20 micrograms per liter, noting: “One low single tap sample is not sufficient to clear a tap as a potential source of lead, because lead release is sporadic.” Her words come with the benefit of her experience and practice as an associate Professor of Pediatrics at the Michigan State University College of Human Medicine, as well as Director of the MSU-Hurley Children’s Hospital Pediatric Public Health Initiative. She adds: “It is not appropriate to use a single low sample that was taken as a follow-up to a high sample to conclude that a drinking tap is ‘safe to drink,’ although this is how many schools have interpreted sampling data.” Dr. Joneigh Khaldun, the Director and Health Officer for the Detroit Health Department, said she recommends parents of children 6 and younger be tested for blood lead levels, because of the Motor City’s history of elevated levels for children, which has been primarily due to lead paint in homes, adding that the elevated rates in the tests were concerning: “I think, broadly speaking, I support Dr. Vitti in testing every water source in every school…For any school that comes back with elevated lead levels, the actual reasons for that school is not clear. It can be the infrastructure or the drinking fountain. Providing bottled water and other sources is the right thing to do.”

According to Michigan health officials, children are at higher risk of harm from lead, because their developing brains and nervous systems are more sensitive. Lead can cause health problems for children, including learning problems, behavior problems including hyperactivity, a lower IQ, slowed growth and development and hearing and speech problems. That risk is not just physical, but also fiscal: A key part of Detroit’s chapter 9 plan of debt adjustment approved by the U.S. Judge Steven Rhodes was its focus on the importance of provisions to give incentives for families to move back to the Motor City‒a difficult parental choice in the wake of, four years ago, the Detroit News investigation which reported that nearly 500 Detroit children had died in homicides since 2000.

Notwithstanding the terrible health tragedy in Flint, Michigan has no rules mandating the state’s school districts to test for lead in their water supply, according to the Michigan Department of Environmental Quality. According to the GAO, at least eight states require schools to test for lead, and many others assist with voluntary testing. Dr. Khaldun said she supports creating a state law to mandate testing of water sources inside schools—a proposal which would entail substantial costs, creating the query: who will pay—and how?

According to Tiffany Brown, a spokesperson for the Michigan Department of Environmental Quality, the Department supports any schools which wish to test, and the Department can offer technical assistance and general information on sampling, result interpretation, and recommended remedial actions in the event of elevated lead and/or copper results, adding that there are fiscal resources “available through the Michigan Department of Education,” and that the Michigan Department of Environmental Quality is providing information and guidance on best management practices for drinking water in schools to protect the health of students and staff.” In the meantime, the Detroit Public School District is spending $200,000 on bottled water and water coolers for the next several months, with the cost to have stations in every school, one for every 100 students, projected to be $2 million, with Dr. Vitti noting the goal is to deliver clean water, not replace the pipes, or as he put it: “We are not looking to replace the plumbing. The stations address the issue of older plumbing along with weekly flushing.”  

Unequal Treatment? The Financial Oversight and Management Board in Puerto Rico reports that over reliance on outside consultants with conflicts of interest and the failure to invest in a competent workforce have imposed huge costs on and severely weakened the Puerto Rico Electric Power Authority (PREPA) and other Puerto Rico government agencies, with the report including an entire chapter just on interest rate swap agreements, a complicated and high risk investment which, it estimates, has cost Puerto Rican government entities nearly $1.1 billion when they repeatedly bet the wrong way on interest rate movements—meaning that, instead of these investments reducing Puerto Rico’s debt, government entities, including PREPA, had to take on more debt to pay for the losses. It appears that the swaps, a novel means of transactions to Puerto Rico’s Government Development Bank (GDB), where officials made these interest rate bets, or, as the report found, many of the GDB Board members who were required to approve the swap transactions, “were not familiar with the mechanics and risks associated with swaps. Many told us outright they could not describe how a swap worked. Instead, the GDB Board members told us they relied on the advice presented to them by the swap advisor.” That appears to denote that the GDB board members effectively ceded control over their investments in these very risky financial instruments to a third-party swap advisor—an advisor  that earned, and will garner fees for as long as the government of Puerto Rico continued to invest in the swaps, regardless of the outcome—an outcome in this case which entailed enormous losses. Moreover, the report demonstrated that, more generally, as the financial condition of Puerto Rico deteriorated, the deals became more complex and less transparent. An example of the utility PREPA’s overreliance on an outside restructuring advisor, AlixPartners, to lead PREPA’s debt restructuring negotiations with its municipal bondholders, as well as developing PREPA’s business plan and savings initiatives, revealed that PREPA paid Alix Partners $45 million in fees for a debt restructuring deal which was ultimately rejected by the PROMESA Oversight Board, which found the proposed financial agreement called for PREPA to pay more debt than the economy of Puerto Rico could support, and as the Puerto Rico Energy Commission found that the review lacked appropriate due diligence over the ongoing fees for legal counsel, financial advisors, and underwriters that would have accrued had the PREPA restructuring deal moved forward: the Commission specifically noted that the restructuring team charged with ensuring the reasonableness of advisor fees “includes the very advisors whose fees are in question…that is not the arm’s-length relationship necessary to protect consumers from excess fees.”

Investment in Good Governance. For elected state and local leaders, over reliance on consultants can go hand-in-hand with a failure to invest in the technical capacity and expertise of government staff. As noted by a Kobre & Kim report prepared on the evolving fiscal situation in Puerto Rico, PREPA has suffered over the years from a high degree of political interference, including the appointment of hundreds of political appointees to managerial and technical positions without regard for qualifications—appointments which appear to have not only cost considerably from a fiscal perspective, but also weakened the managerial competence of the agency. However, instead of recognizing this reality and implementing labor reforms designed to sharply curtail the influence of political appointees within the agency, the PROMESA Board has instead sought an across-the-board salary freeze and benefit cuts, even as the Board recognizes that PREPA has lost 30% of its workforce since 2012 and has severe shortages of skilled workers in key areas—and that it has developed no plan for workforce training and development, effectively seeming to force PREPA to continue to depend on consultants, rather than build its own expertise.

The Challenging Transition in the Wake of a State Takeover

September 25, 2018

Good Morning! In this morning’s eBlog, we report on the likely extension of the Garden State takeover of Atlantic City, because, as one of our most respected and insightful fiscal experts there, Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, put it: it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period. That is, Mr. Pfeiffer believes continued state oversight will be a positive for Atlantic City municipal bondholders, because it assures more fiscal discipline will be in place—or, in his own words: “You are going to have ongoing stability while the state is involved…The city will have to show that it can stand on its own.”

The Steep Road to Municipal Fiscal Recovery. In the wake of a release of a new state report, “Atlantic City, Building a Foundation for a Shared Prosperity,” [64-page report]  released by New Jersey Gov. Phil Murphy’s administration, a report recommending continuation of the almost two-year-old state takeover of Atlantic City’s finances, that state governance now appears likely to last a full five years, due to “longstanding challenges” to New Jersey officials, as recommended by the Governor’s office. While the Governor, in his campaign, had, as part of his platform, a commitment to terminate the state takeover of Atlantic City, now, three-quarters of a year after taking office, the Governor appears likely to leave the state takeover in place—indeed, possibly for an additional three years.

The Murphy Administration has released a plan to assist the city to get back on its fiscal feet, a plan which benefited from input from numerous study groups, task forces, and committees, as well as a redirection of some state government funds to youth programs, and a training program for municipal department heads; that plan does not end the takeover; rather the report recommends keeping the takeover in place for the full five years called for under the 2016 law, unless signal fiscal and financial improvement is put in place before then, including the significant reduction or total elimination of Atlantic City’s reliance on state aid—or, as Gov. Murphy put it: “We had a pretty clear-eyed sense of what the challenge was…That doesn’t mean Atlantic City doesn’t need the state, that the state won’t continue to stay the course and be a partner. We’re not going away; we’re going to go out and executive this plan.”

Under New Jersey’s state takeover law gave the state broad powers, including the right to overturn decisions of the city council, override or even abolish city agencies and seize and sell assets, including Atlantic City’s much-coveted water utility. The statue empowers state overseers, in addition, to hire or fire workers, break union contracts, and restructure Atlantic City’s debt, most of which was done to varying degrees, although no major assets have been sold off.

What Is the City’s Perspective? Atlantic City Mayor Frank Gilliam has conceded the uncomfortable governance challenge under the takeover, which was initiated in November of 2016 by former Governor Chris Christie, but he notes that Gov. Murphy’s administration has been willing to listen to concerns and work with city officials, even as it has retained the final governing say-so.

How Can a State Transition Governance Back to a City? Unlike under a chapter 9 municipal bankruptcy, where a federal bankruptcy court has the final say in approving (or not) a plan of debt adjustment under which governance authority reverts back to a municipality’s elected leaders, a state takeover lacks a Betty Crocker cookbook set of instructions. Gov. Murphy’s quasi-emergency manager, Jim Johnson, whom the Governor named to review Atlantic City’s transition back to local control, said the state administration should remain in place for an additional three years, unless Atlantic City’s reliance on state aid has been “substantially reduced or eliminated” and that its municipal workforce is on “solid footing.”  Under the provisions of the state takeover, enacted shortly after Atlantic City nearly defaulted on its municipal bond debt, the state was empowered to alter outstanding debt and municipal contracts—or, as Mr. Johnson wrote: “Atlantic City has a set of fiscal, operational, economic and social challenges that will only be resolved with significant direction from, and partnership with the State.”

Focus on the Fiscal Future. Mr. Pfeiffer said it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period, adding that the continued state oversight will be a positive for Atlantic City municipal bondholders, because it will assure greater fiscal discipline will be in place, or, as he put it: “You are going to have ongoing stability while the state is involved: The city will have to show that it can stand on its own.”

The report outlines a series of recommendations such, as:

  • the importance of diversifying Atlantic City’s economy beyond casinos,
  • providing increased training for senior municipal workers, and
  • purchasing data that can better track city services.

Mr. Johnson also urged Atlantic City to redirect Casino Reinvestment Development Authority funds into new development projects and toward providing increased financial support for youth programming.

Transitioning Back to Local Control. Atlantic City Mayor Frank Gilliam noted: “The citizens of Atlantic City deserve to have their local elected officials control their destiny…I am very optimistic that this is a huge step in the right direction for Atlantic City and its future.” Mr. Johnson, who was a primary challenger to the Gov. two years ago, was named after that election as a special counsel to review the state’s oversight of Atlantic City—and he came somewhat prepared thanks to his previous service as a U.S. Treasury Undersecretary for enforcement under former President Bill Clinton.

Gov. Murphy, who had been critical of the state takeover during his gubernatorial campaign, and who had criticized former Gov. Chris Christie’s administration for implementing it without support from former Mayor Donald Guardian, noted: “This is a community that needs the state’s help as a partner, not as a big-footing jamming down, taking away—you know, taxation without representation,” adding: “That doesn’t mean that Atlantic City doesn’t need the state, that the state isn’t going to stay the course and be a partner.” The Governor, soon after assuming office, had removed former Gov. Christie’s designated takeover manager Jeffrey Chiesa as the state designee to oversee the state role in Atlantic City. It should be noted, as we have previously, that Mr. Chiesa forged a number of settlements on owed casino property tax appeals and effected a $56 million reduction in Atlantic City’s FY2017 budget. All of which brings us back to the wary fiscal trepidation of Mr. Pfeiffer, because Atlantic City’s debt is still in the high risk range so favored by some casino players in the city: a CCC-plus from S&P Global Ratings and Caa3 from Moody’s Investors Service.

Post Municipal Bankruptcy Futures

September 21, 2018

Good Morning! In this morning’s eBlog, we report on the unsafe conditions of Detroit’s public schools, and dismissal by the Trump administration for self-government in Puerto Rico, and, a year after Hurricane Maria’s devastating strike on Puerto Rico and underwhelming federal response, the U.S. territory’s continued inequitable status.  Unlike in corporate bankruptcies, in municipal bankruptcies, the challenge is not how to walk away from accumulated debts, but rather how to fiscally resolve them.  

Detroit’s Future? In Detroit, where, last week, organizations gathered at the Marygrove College campus to announce a new cradle-to-career educational partnership, including a state-of-the-art early childhood education center, a new K-12 school, and the introduction of an innovative teacher education training modeled after hospital residency programs; Superintendent Nikolai Vitti has announced the closure of thirty-three more schools because of high levels of copper and/or lead, bringing the total number of schools with tainted water to 57 buildings. The Superintendent’s warning noted: “Of the results just received, 33 of 52 schools have one or more water sources with elevated levels of copper and/or lead…This means that 57 of 86 schools where test results have been provided have one or more water sources with elevated levels of copper and/or lead (this does not include the previous 10 Di-Hydro schools where copper and/or lead was detected).” He added the results were incomplete: the district is still awaiting results for 17 schools. He noted: “As you know, drinking water in these schools was discontinued as we await water test results for all schools. Although the kitchen water has only been turned off in schools where levels were determined high, we have been using bottled water to clean food in all schools: As a reminder, we have not used water to cook food in our kitchens for some time and instead have delivered pre-cooked meals to students. We plan to install filters for kitchen sinks to remedy challenges in kitchens.” Last week, the Superintendent, in a state hyper aware of the physical and fiscal threats of contaminated or unsafe water, that a $2 million water station system would address water quality issues, and School Board Member Deborah Hunter-Harvill confirmed, in the wake of the tests: “We completed our community meeting, and we’ve taken down recommendations and suggestions to make certain our kids are safe.” But who will finance the corrections is unclear: School Board member LaMar Lemmons said he supports spending $2 million to fix the water problems, and he continues to blame the state for neglecting school buildings during a decade of state control, which ended in 2017: “Under the $2 billion (spent) for new school construction and renovation, they did a terrible job. There is no excuse for these schools to not have been maintained.” Supt. Vitti said the most practical, long-term, safest solution for water quality problems inside the schools would be water hydration stations in every building, system currently in use in Flint, Royal Oak, Birmingham and in Baltimore, he noted, adding, in an email earlier this week: “Moving forward, we will continue to use water coolers district-wide and are actively working through the bid processes to make a recommendation to the board for the use of hydration stations. This will occur within the next couple of weeks. The hydration stations would be installed in all schools by next school year and replace the need for water coolers.”

The health apprehension came in the wake of, just days before the first day of class at the beginning of this month, the Superintendents’ decision to shut off drinking water inside all 106 school buildings after finding, in an initial check at 6 schools, high levels of copper and/or lead. The checks themselves are costly: they require stations in every school, one per every 100 students, with a resulting tab of $2 million, after taking into account stations in faculty rooms and gymnasiums, according to Supt. Vitti, who stated he intends to provide information to the Detroit School Board to consider next month, noting that, if the funds are approved, the system could be installed in the next school year. The delay comes at a physical and fiscal cost: the school district is spending $200,000 on bottled water and water coolers for the next several months, with Supt. Vitti reporting the cause of the water contamination is likely the result of the aging of the system’s public infrastructure, as well as older plumbing systems, warning that lower usage of water due to smaller enrollment sizes can lead to copper and lead buildup. Because DPS’ schools were built for use by thousands of students, the sharp decline in attendance has adverse effects, and, as the Superintendent noted: “The reality is our schools are vastly different: some are new, some are old. Some have outdated systems, some have outdated sinks and plumbing,” adding he had consulted with the Governor’s office, the Michigan Departments of Environmental Health, as well as Dr. Mona Hanna-Attisha, whose critical leadership exposed the Flint lead water crisis, noting: “They have provided lessons on Flint. They gave the recommendation for me to think about piping in general and a long-term solution.”

Despite the tragedy and ongoing Flint related litigation, Michigan has no rules mandating that public school districts test for lead in their water supply. That means, according to the Superintendent, that there are even newer schools built within the last decade which have water-quality issues, noting these problems could be blamed on inadequate piping or non-code compliant piping, adding he had i initiated water testing of DPS’ 106 school buildings last spring, with the testing evaluating all water sources, from sinks to drinking fountains—but learning that the actual source of the contamination remains uncertain—albeit the school system’s widespread infrastructure problems are likely causes: last June, a district report said it would cost $500 million to repair its buildings. The district has said it needs $29.86 million to repair or replace plumbing, according to the facilities report, not related to the current water problems.

Physical & Fiscal Recoveries. Maria was the worst storm to hit Puerto Rico in nearly a century: nearly 3,000 Americans lost their lives, according to a study commissioned by the Puerto Rican government. The storm devastated the economy: thousands of small businesses have been shuttered; some big businesses are leaving, and, in a demographic omen, the exodus of the young, productive population has accelerated. Over the last year, the island’s economy has contracted by 7.6%, according to the latest fiscal plan prepared for PROMESA Board. 

American Inequality. Puerto Rico Gov. Ricardo Rosselló this week asked President Trump to recognize that “Puerto Rico’s territorial status is discriminatory and allows for the unequal treatment of natural-born U.S. citizens.” In his letter to the President, coming one year in the wake of the devastating fiscal and physical impact of Hurricane Maria, the Governor wrote that Puerto Rico’s territorial status had negatively affected post-Maria recovery efforts, noting: “As we revisit all that we have been through in the last year, one thing has not changed and remains the biggest impediment for Puerto Rico’s full and prosperous recovery: the inequalities Puerto Rico faces as the oldest, most populous colony in the world.”

Gov. Rosselló, who campaigned on the promise of promoting statehood for Puerto Rico, added in his letter that FEMA’s bureaucratic processes—processes in which Puerto Rico has no say—had worked to delay disaster recovery, writing: “The ongoing and historic inequalities resulting from Puerto Rico’s territorial status have been exacerbated by a series of decisions by the federal government that have slowed our post-disaster recovery, compared to what has happened in other jurisdictions stateside.” He requested that the President reconsider a State Department request to dismiss a case in the Inter-American Commission on Human Rights with regard to the U.S.’ international responsibility regarding Puerto Rico’s status—a case in which the Commission is investigating complaints that the United States is violating the human rights of its citizens in Puerto Rico, because they lack the same political rights as other U.S. citizens, including the right to vote for President unless they relocate to one of the states or the District of Columbia, and, because they have no voting representation in the Congress. The Governor added he felt “compelled to respectfully address the most egregious errors in a [State Department] missive,” which sought to dismiss Puerto Rico’s concerns, noting, especially, the Department’s reference to Puerto Rico as a “self-governing territory,” rather than what the Governor believes is really a “territorial colony,” noting that defining Puerto Rico as self-governing “ignores that Congress often uses its plenary powers over the territory to impose a multitude of federal laws without the Commonwealth’s residents having any voting representation in the U.S. Senate and only a single Resident Commissioner in the U.S. House of Representatives, who cannot vote on the floor of that chamber.” He also disputed the State Department’s assertion that Puerto Ricans are not “banned” from voting for President, writing: “[T]he only way for U.S. citizens from Puerto Rico to vote in such an election and be counted is to leave Puerto Rico. If that is not a ban, then what is?” He further wrote that the current governance upholds an “inherently racist logic that deem the people of Puerto Rico as inferior and unable to fully participate in the institutions of democratic governance.”

The letter also touches on two referenda which statehood supporters have won in Puerto Rico, but that have not been deemed official results by the Department of Justice. The most recent, in 2017, was boycotted by local opposition parties, and the ballot never received final DOJ approval.  While that referendum only had a 23% participation rate, the pro statehood vote was an overwhelming 97%.

Gov. Rosselló added his apprehension in the wake of the U.S. Justice Department’s non-approval of Puerto Rico’s 2017 referendum, noting that “after the legislature even amended the format of the vote to meet the recommendations of the U.S. Justice Department,” the Trump administration had nevertheless “failed” to certify the ballot. Thus, he noted that asking an international body to dismiss its complaint was tantamount to asking it to “turn a blind eye to an inconvenient truth, that Puerto Rico remains the unfinished business of American democracy.” Finally, Gov. Rosselló ended his letter with an appeal to President Trump’s leadership, asking him to “work together to abolish this century old territorial-colonialism once and for all: Statehood for Puerto Rico is not only about realizing Puerto Rico’s full potential. It is about America living up to its most noble values by creating a more perfect Union.” (The Trump Administration has advised the Inter-American Commission on Human Rights (IACHR) that if Puerto Ricans want to vote for President, nothing prevents the government of Puerto Rico from calling for a referendum to determine the position of its residents regarding candidates for the U.S. Presidency—a referendum which, however, would be symbolic.)

The apparent position of the Trump Administration reflects its views that Puerto Ricans, in addition to being able to participate in Presidential primary elections, they may also, according to Kevin Sullivan, the U.S. Deputy Representative to the Organization of American States (OAS), organize and vote in presidential elections. Thus the U.S. representative asked the inter-American tribunal to dismiss the independent complaints filed by lawyer Gregorio Igartua and former governor Pedro Rossello alleging that the lack of participation of Puerto Rico’s residents in Presidential and Congressional elections represents a violation of their human and civil rights. Secretary Sullivan, who asserted that the government of Puerto Rico maintains a “broad” self-government, in a recently disclosed communication from the end of last June, maintained that within the colonial relationship with the U.S. territory, there are some electoral processes related to the federal government. Within this group of electoral processes, he thus sought to highlight as significant the ability for Puerto Ricans to vote in those for presidential primaries, as well as for its non-voting delegate in the U.S. House of Representatives.  Nevertheless, Secretary Sullivan recognized Puerto Ricans’ first vote in favor of statehood via the June 2017 plebiscite, describing that vote as having launched a process of requesting statehood before Congress, which outcome the “United States cannot predict.”

Puerto Rico Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Member of Congress, said she would have preferred the recognition of the undemocratic nature of the territorial status, and that statehood remains as “the only viable political status with a relationship with the United States, not territorial and not colonial.”

Puerto Rico Progressive Party representative Jose Aponte noted that it seemed unfortunate “at this point” that the federal government intends to develop some theory with regard to Puerto Rico’s self-government, especially in the wake of enacting the PROMESA law, thereby imposing the PROMESA Board, likening it to colonialism, and emphasizing what he views as Secretary Sullivan’s specious claim in which he advises Puerto Rican leaders that Puerto Ricans, “if they wish…are also free to move to any state,” noting: “It is hypocritical to hide the fact that they have a regime in which we cannot govern with the faculties and minimum rights that any human being deserves.”

Promising Good Gnus? Even if perceived by many Puerto Ricans as colonial overseers, the PROMESA Board, acting in a quasi-Emergency Manager role, such as Kevyn Orr did in putting together and managing the plan of debt adjustment for Detroit, is offering some hope for fiscal promise, as the Board is poised to lift its fiscal forecast and predicting a budget surplus in the wake of the recovery from the devastating Hurricane Maria, predicting a cumulative surplus, prior to debt payments, of in excess of $20 billion through 2058, or 500% greater than its quasi plan of debt adjustment certified by the PROMESA Board last June. PROMESA Board Executive Director has indicated that plan will be certified “in the coming weeks,” adding: “The changes in the fiscal plan will come from new data in actual FY18 revenue and expense figures, budget to actuals, and disaster spending.” Earlier last summer, the PROMESA Board, in certifying the most recent fiscal plan, had estimated that Puerto Rico would have a cumulative surplus of about $4 billion over the next four decades; the new projection, incorporating higher than expected disaster aid and tax receipts, would lift that projection to more than $20 billion.

From the Ashes of Municipal Bankruptcy

September 17, 2018

Good Morning! In this morning’s eBlog, we report, again, on the remarkable fiscal and neighborhood recovery of Detroit—a demonstration of how chapter 9 municipal bankruptcy can lay the foundation for extraordinary fiscal and physical recovery. Then we look south to consider a new strategic plan for Puerto Rico—a U.S. territory surely on notice that it cannot count on FEMA in a major, life-threatening disaster.  

The Phoenix of American Cities? Detroit, the once and mayhap future automobile capital of the U.S. and one-time Motown music capital, filed for the nation’s largest ever chapter 9 municipal bankruptcy five years and two months ago in the wake of a loss of more than a million residents, cuts in state aid, and collapsing real estate values—forcing the city to borrow to meet its operating costs. It came in the wake of the city experiencing periodic episodes of corruption and mismanagement for years—a critical consequence of this former great American industrial city’s dysfunction had been its erosion as a core for jobs: employment had fled the urban core, at a time it was rising in the metropolitan area—even as other cities were seeing something of a city-center revival. The Motor City’s ability to borrow in the municipal markets was exhausted after years of issuing long-term debt to pay its operating bills: the city had listed liabilities in excess of $17 billion—equal to $25,000 for every remaining resident. In his report, the city’s Emergency Manager, Kevyn Orr, described the city as “dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption.” For residents, escaping these debts and physical deterioration accompanied by high violent crime rates and unperforming schools meant moving to the suburbs: of the 264,209 households in Detroit, only 9.2% were married couple families with children under 18; another 78,438 households, or nearly 30%, were families headed by women.

Now, as the ever insightful Daniel Howes of the Detroit News has written, the city’s neighborhoods are in play: he wrote: “Three months after Ford Motor Co. confirmed plans to convert Corktown’s dilapidated Michigan Central Depot into its center for mobility and self-driving vehicle development, a consortium backed by $50 million from the Kresge Foundation is planning a cradle-to-career educational complex on the campus of Marygrove College at Wyoming and McNichols.” He was referring to the city’s historic district near downtown, one of the city’s oldest neighborhoods—and one listed on the National Register of Historic Places. It is not just an old part of the city, but one which gained its heritage in the middle of the last century when, in the wake of the Great Irish Potato Famine in the 1840’s, the great Irish migration to the U.S. made Detroit the city with the largest new home—with many Irish settling on the west side of the city; they were primarily from County Cork, and thus the neighborhood came to be known as Corktown. Kresge’s CEO, Rip Rapson, at the end of last week answered “unequivocally ‘yes.’ The time for the pivot to the neighborhoods is now,” in what he deemed an “an unprecedented model of neighborhood revitalization.”

A critical element to this revitalization could come from the physically and fiscally depleted Detroit Public Schools—so physically dangerous and unperforming that they served to discourage families with children from wanting to live in the city; yet, now, as Mr. Howes wrote: “The symbolism is striking. The Detroit Public Schools Community District board, burdened with a legacy of underperforming schools and labor troubles, is wagering it can create a new model for traditional public education by partnering with the University of Michigan’s School of Education, Starfish Family Services, and Marygrove to teach local students and teach their teachers…Borrowing from the residency programs used in medical education, the Ann Arbor university founded 201 years ago in Detroit would leverage its reputation and expertise in what University President Mark Schlissel calls “teamwork in service to the public.” That is, the effort is to anchor community redevelopment, as Chicago did, by education: the Detroit Public School District would operate a K-8 school and a high school carved from the former Bates Academy on the east edge of campus, while the University of Michigan would operate an undergraduate “residency” program for aspiring teachers.

Mr. Howes went on to write that, even as Detroit’s downtown and Midtown attract billions in private investment, especially from mortgage mogul Dan Gilbert and the Ilitch family to big corporate relocations and small business investment, neighborhood residents and the civic groups representing them have continued to ask: ‘what about us?’ The answer, it seems, is driving in: the Ford Motor Co. reports it will invest $740 million to build out the Corktown campus. Kresge is spearheading numerous community initiatives. A JPMorgan Chase program continues to invest in small-business creation.

On the elected front, Mayor Mike Duggan, seeking re-election, has made neighborhood revitalization a key issue in his campaign for, as Mr. Howe noted, two reasons: “It’s politically potent in a city that struggled for decades to provide basic services, and, second, it’s the next obvious step in the city’s revitalization: Reinvesting in downtown and Midtown, essentially the spine of Detroit, helps bolster tax base, fuel economic activity, and create tax-paying jobs. Reinvesting in neighborhoods and improving traditional public education strengthens community and gives Detroiters a reason to stay, to reap the benefits of rising property values.”

Kresge CEO Rip Rapson, a critical player in Detroit’s physical and fiscal recovery, notes: “What this town needs to be shown again and again is you can take big ideas and make them real…So many people are waiting to see efforts like this fail.” The heart, as Mr. Howes noted, of the so-called “P-20 Partnership” is Detroit’s reconstituted public school district, a campaign backed by Kresge’s contributions, the University of Michigan’s commitment to train teachers to teach Detroit’s youth— and the courage of its leadership to develop a new model for educating the city’s kids, right in the heart of a neighborhood.”

A new Strategic Plan for Puerto Rico? While FEMA has approved a new document for emergency response for Puerto Rico, it is a plan with a critical MIA: municipios—and this with time uncertain, as Hurricane Isaac is lurking in the Caribbean and FEMA is caught in a quagmire over the President’s assertion that fewer than 50 lives were lost in Puerto Rico from Hurricane Maria. FEMA’s Deputy Federal Coordinating Officer in Puerto Rico, Justo “Tito” Hernández has asserted that the “The Strategic Plan was revised. And we are already doing exercises based on the plan. That is already finished,”in an interview with El Nuevo Día, claiming the changes are intended to correct errors which were made before, during, and after the hurricane. In addition, the document already required amendments, in line with federal regulations. (As a rule, the Strategic Plan is modified every five years; the current one was created in October of 2014 and revised after Hurricane Maria.) Yet, even though this plan for the Commonwealth is ready, the Emergency Management Plan for each municipio has yet to be certified by the Puerto Rico State Agency for Emergency and Disaster Management or FEMA, according to Commissioner Carlos Acevedo, who noted: “The plans, I am waiting for the company (hired to develop them) to deliver them to me. And they should be handing me the plans tomorrow (today).” However, both Governor Ricardo Rosselló Nevares and Commissioner Acevedo have pointed out, in separate interviews, that the government is prepared to face the challenges of the new hurricane season. Gov. Rosselló Nevares stated that now the “people” have an emergency plan, noting there have been workshops “throughout Puerto Rico on how to develop those personal emergency plans,” that changes were made at federal, state, and municipal levels regarding the distribution of food and medication, and that another “public health response” will be implemented. Nevertheless, Gov. Rosselló Nevares recognized that the island’s infrastructure, including the homes of thousands of families that still have blue tarps on their roofs and the power grid, remain vulnerable, stating: “It is no less true that, although there are parts that are more robust, it is a somewhat more fragile (power) grid. Therefore, we want to change and transform it,” he added, referring to the process he has begun to privatize PREPA, the Electric Power Authority: “There are significant improvements, particularly in the area of preparation, but without a doubt, Puerto Rico remains vulnerable, particularly in the infrastructure area.” The Governor added that this scenario will require quick action to transform the power grid and “a bit of luck that an event like María or even a lower-category one, does not impact Puerto Rico, again, and further collapse areas that are already vulnerable.” In addition, he noted, that already, unlike last year, when the government contacted the American Public Power Association with a month of delay after the cyclone, agreements with energy companies have been reached, albeit noting that other initiatives “take time, but are being executed,” and that 64 people are being trained to exercise “very particular functions” amid any new emergency.

With regard to addressing the dysfunction of the government during Maria, the Governor said that “people have been trained based on these new protocols.” Even so, emergency management experts have indicated that unsettled issues in critical areas with regard to the Commonwealth’s role in future emergencies remain: the preparation that the government claims has been questioned by the former executive Director of the former State Office for Emergency and Disaster Management, Epifanio Jiménez, who reiterated that the problem after Maria was the lack of implementation of the existing plans—or, as he put it: “They’re using Maria’s category 5 as a pretext—which is true, it’s a precedent—but they use it as an excuse to justify the collapse of agencies and agency leaders because, when Hurricane Georges hit, the leaders knew their work and the island recovered after 32 days.”

A simple look at the 2014 Strategic Hurricane Plan, which experts say was not followed, reveals that the Health, Family, Emergency Management Agency, and General Services Administration (SGA) departments, among other government agencies, failed in their respective functions before, during, and after the hurricane; moreover, if all of these agencies had fulfilled their responsibilities, fatalities estimated today at 2,975 (except by the White House) would have been avoided, according to the study by the Milken Institute of the George Washington University.

The Strategic Plan is governed by the National Incident Management System (NIMS), which establishes and defines the entire procedure for emergency management. It is backed by Presidential orders. FEMA develops the plan, theoretically in partnership with state authorities—clearly part of the challenge, as Puerto Rico is in a quasi-twilight zone between being a state or a municipality. This matters, because such a plan is intended to detail the function of what is called the Emergency Support Function, which is nothing more than the function that each agency will have before, during, and after an emergency.

Some of the Changes. The NMEAD Commissioner (Negotiator for the Management of Emergencies and Administrator for Disasters) Carlos Acevedo, said that now the Department of Family Affairs has a list of vulnerable groups. He added that the emergency management center integrated the private sector, and even had training. However, according to Mr. Jiménez:  “That is nonsense,” recalling that the private sector was already integrated into emergencies, because there must be agreements with agencies. To avoid the collapse of communications, Commissioner Acevedo said they now have a voice and data satellite system. The Telecommunications Regulatory Board and the NMEAD have a list of radio amateurs to use analog communication, if necessary, he added, albeit noting: “That has to be refined, and the JRT has to make sure that the private sector responds.” Moreover, Commissioner Acevedo said the services of cell phone companies, which also collapsed in the wake of the hurricane, is an issue that remains in the hands of the private sector. Finally, he noted he has also held meetings with the directors of hospitals and dialysis centers on the island, stressing that each party has increased its capacity to provide services.

Motor City Comeback

September 14, 2018

Good Morning! In this morning’s eBlog, we report Congressional agreement to avert a shutdown, and we report on the remarkable cash purchases of homes in the Motor City, marking mayhap the most dramatic mark yet of Detroit’s Phoenix-like recovery from the nation’s largest ever municipal bankruptcy.  

Keeping the Federal Government Open. The House and Senate yesterday reached agreement to avert a federal government shutdown by passing a large package of appropriations bills, as well as a continuing resolution which will, if signed by the President, fund the rest of the federal government through Pearl Harbor Day, December 7th. The package would keep the government funded past Oct. 1, the deadline for Congress to act. House Appropriations Committee Chair Rodney Frelinghuysen (R-N.J.) reported that the respective House and Senate bodies had completed work on the Defense and Labor, Health and Human Services and Education annual spending bills—bills which in this case represent the bulk of federal discretionary spending: combined, they total $786 billion, nearly two-thirds of all discretionary appropriations. The anticipation is that by including the continuing resolution (CR) in the package, it will make it less likely the President will make good on threats to shut down the federal government over border wall funding, albeit, last week, the President stated: “If it happens, it happens. If it’s about border security, I’m willing to do anything.”  

Motor City Comeback. There is stunning fiscal reversal of fortune in Detroit, where, after, decades ago, families fled the city, and suburban families wanted no part of moving in from the suburbs—contributing to what triggered the largest chapter 9 municipal bankruptcy in U.S. history, suddenly buyers appear to be home shopping—and shopping to purchase homes in Detroit with cash. It seems that affordable housing process, higher income buyers, and growing investor interest—with the investors smelling signal profits from flipping—have made cash deals more common. For the city, a relatively unique one in that it relies on income taxes more than most cities, the impact on assessed property taxes will be icing on the fiscal cake. In the first half of this calendar year, nearly 90% of all single-family and condo purchases were made with cash—more than triple the national average. One cause is that the median price in the first part of this year was only $32,428—which, albeit 20% higher than in the first half of this year: and it seems to be a heck of a bargain: ATTOM Data reports the national median price is $234,000.

So many purchasers are buying for investment purposes: renovating and flipping distressed homes, some as—some as large as 4,200 square feet and with architectural significance—in Detroit’s downtown area and historic neighborhoods. But in older neighborhoods near the regional Federal Reserve offices and the Detroit Institute of Art, home buyers looking to buy those renovated homes—often affluent young professionals or empty-nesters—may also face challenges in getting a mortgage, because those properties are difficult to appraise. Lenders have a challenge in determining the value of a newly renovated home in a neighborhood otherwise filled with distressed properties, because there are few comparable sales to benchmark against. That also makes payments in cash a likely option.

In effect, for the Motor City, this could be a phoenix moment of its fiscal and physical recovery: Quicken Loans is working with Home Depot and the Detroit Land Bank Authority to return Detroit’s vast stock of vacant, abandoned, and foreclosed property to productive use. Under the city’s “Rehabbed and Ready” program, the Authority selects properties in its inventory for Home Depot to rehab; Quicken preapproves interested buyers for mortgage financing; and the homes are purchased—all part of an effort to stabilize the market and create comparable sales to help future buyers.

Quicken Loans Community Fund Vice President of strategic investments, Laura Grannemann, noted: “Tax foreclosure is a force that has generated blight, increased speculation, and driven property values down…But by creating strategically placed sales, it has a ripple effect across the community and allows other individuals to refinance their home and get some equity out or to sell that home and buy a new one.”

Taking Stock in Stockton!

eBlog

September 7, 2018

Good Morning! In this morning’s eBlog, we consider the remarkable fiscal success of the implementation of Stockton’s plan of debt adjustment, before crossing over Tropical Storm Florence to the equally stormy demands of the PROMESA Board to the Commonwealth of Puerto Rico’s Governor Ricardo Rosselló to make major changes to his fiscal blueprint for the territory’s quasi plan of debt adjustment.

Taking Positive Stock in Stockton. Stockton, California, a now post-chapter 9 municipality, which was founded by Captain Charles Maria Weber in 1849 after his acquisition of Rancho Campo de los Francese, was the first community in California to have a name not of Spanish or Native American origin. The city, with a population just under 350,000, making it the state’s 13th largest, was named an All-America City in 1999, 2004, 2015, and again last year. It is also one of the cities we focused upon as part of our chapter 9 municipal bankruptcy analyses, after, a decade ago, it became the second largest city in the United States to file for chapter 9 municipal bankruptcy protection—a petition which was successful when, three years ago last February, the U.S. Bankruptcy Court approved its plan of debt adjustment. This week, S&P upgraded the city’s credit rating to “positive,” with CFO Matt Paulin noting the upgrade reflected the health and strength of the city’s general fund—after, last summer, the City Council approved the FY2018-19 budget, which anticipates $229.6 million in general fund revenues, versus $220.6 million in expenditures—with S&P, last month, noting its rating action “reflects our view of the city’s sustained strong-to-very strong financial performance, sustained very strong budgetary flexibility, and institutionalized integration of a revised reserve policy into its last three budget cycles.”   S&P analyst Chris Morgan noted: “What we’re seeing is a pretty good record of discipline in terms of spending and having a long-term view…“We’re increasingly confident they’re going to continue to meet their obligations,” adding that, over the last three budget cycles, Stockton has adopted a 20-year plan and built up its reserves. Stockton CFO Matt Paulin described the four-notch upgrade as unusual; he said it marked a reflection of the city’s fiscal discipline and improvement: “It’s really an affirmation of the things we’ve instituted here at the city so we can maintain fiscal sustainability.” The rating here, on some $9.4 million of lease revenue bonds, backed by the city’s general fund, had been originally issued in 1999 to finance a police administration building; they were refunded in 2006.

While the new fiscal upgrade reflects key progress, the city still confronts challenges to return to investment grade status: its economy remains weak, and, according to S&P, the city continues to fester under a significant public pension obligation, so that, as analyst Morgan put it: “How they handle the next recession is the big question.” And that, CFO Paulin, notes, is a challenge in that the city is not yet, fiscally, where it needs to be. nevertheless, he believes the policies it has enacted will get it there, noting: “I think if we continue to sustain what we’re doing, I’m pretty confident we’ll get to that investment grade next time around,” noting that the rating reflected the city’s strong-to very strong financial performance, sustained very strong budget flexibility, and “institutionalized integration of a revised reserve policy into the last three budget cycles,” adding that since the city’s emergence from chapter 9 municipal bankruptcy, the city has only issued two refundings. Now a $150 million sewer plant renovation could become the trigger for Stockton’s first post-chapter 9 municipal bonds if it is unable to secure sufficient grant funding from Uncle Sam or the State by next spring.

Mandating Mandate Retention. Without having been signed into law, the Puerto Rico Senate’s proposal to relieve municipios from the mandate to contribute to Puerto Rico’s health reform program has, nevertheless, been countermanded and preempted by the PROMESA Oversight Board after, yesterday, PROMESA Oversight Board Director Natalie Jaresko wrote to Governor Ricardo Rossello Nevares, to Senate President Thomas Rivera Schatz, and to House Leader Carlos Méndez to warn them that the bill which would exempt municipalities from their contribution to the government’s health plan is “inconsistent” with the unelected Board’s certified fiscal plan. Chair Jaresko wrote: “The Board is willing to amend the Certified Fiscal Plan for the Commonwealth to permit the municipality exemption contemplated by SB 879, provided that the legislation be amended such that the exemption terminates by September 30, 2019,” a deadline imposed by the Board which coincides with the moment when the federal funds to finance Mi Salud (My Health), would expire. The bill establishes that the exemption from payment to municipios would remain until the end of FY2020. In her letter, Director Jaresko also wrote to the officials that to grant the exemption, the government will need to identify the resources which would be devoted to cover the budget provisions to which the municipios would stop contributing. (Since 2006, municipios have been mandated to contribute to Mi Salud, based on the number of participants per municipio—a contribution currently equal to $168 million. The decision appears to be based upon the premise that once the Affordable Care Act ended, the federal government allocated over $2 billion for the payment of the health plan, an allocation apparently intended to cover such expenses for about two years. Thus, at the beginning of the week, Secretary of Public Affairs Ramon Rosario Cortes, said that the “Governor intends to pass any relief that may be possible to municipalities;” albeit he warned that the measure, approved by the Legislature, should be subject to PROMESA Board oversight—especially, as the Governor noted: “At the moment, there has been no discussion with the Board.”

The PROMESA Oversight Board has also demanded major changes to the fiscal plan Gov. Ricardo Rosselló submitted, with the Board requesting seeking more cuts as well as more conservative projections for revenues, making the demands in a seven-page epistle—changes coming, mayhap ironically, because of good gnus: revenues have been demonstrating improvement over projections, and emigration from the island to the mainland appears to be ebbing—or, as Director Jaresko, in her epistle to the Governor, wrote: “The June certified fiscal plan already identified the structural reforms and fiscal measures that are necessary to comply with [the Puerto Rico Oversight, Management, and Economic Stability Act], accordingly, the Oversight Board intended this revision to the fiscal plan to incorporate the latest material information and certain technical adjustments, not to renegotiate policy initiatives…Unfortunately, the proposed plan does not reflect all of the latest information for baseline projections and includes several new policies that are inconsistent with PROMESA’s mandate.” Ms. Jaresko, in the letter, returned to two issues of fiscal governance which have been fractious, asserting that the Governor has failed to eliminate the annual Christmas bonus and failed to propose a plan to increase “agency efficiency personnel savings,” charging that Gov. Rosselló had not included the PROMESA Board’s mandated 10 percent cuts to pensions, and that his plan includes an implementation of Social Security which is more expensive than the Board’s approved plan provided.

Director Jaresko also noted that Gov. Rosselló’s plan includes $99 million in investment in items such as public private partnerships and the Puerto Rico Innovation and Technology Services Office, which were contingent on the repeal of a labor law. Since, however, the Puerto Rico Senate has opted not to repeal the statute (Law 80), she stated Gov. Rosselló should not include spending on these items in her proposed fiscal plan, noting that Gov. Rosselló has included $725 million in additional implementation costs associated with the planned government reforms, warning that if he intends to include these provisions, he will have to find offsetting savings. In her epistle, the Director further noted that she believes his plan improperly uses projected FY2019 revenues as a base from which to apply gross national product growth rates to figure out future levels of revenue. Since the current fiscal year will include substantial amounts of recovery-related revenues and these are only temporary, using the current year in this way may over-estimate revenues for the coming years, she admonished. She wrote that Gov. Rosselló assumes a higher than necessary $4.09 billion in baseline payroll expenditures—calling for this item to be reduced—and that the lower total be used to recalculate payroll in the government going forward. Finally, Director Jaresko complained that the Governor’s plan had removed implementation exhibits which included timelines and statements that the government would produce quarterly performance reports, insisting that these must be reintroduced—and giving Gov. Rosselló until noon next Wednesday to comply.

The End of State Usurpation of Local Elected Authority? Uneasy shelter from the Fiscal and Physical Storms?

August 31, 2018

Good Morning! In this morning’s eBlog, we consider the end of the State of Michigan to usurp local authority via the appointment of an Emergency Manager, the safety of school drinking water has become an issue in Detroit—especially after Flint, and we consider the extraordinary revisions in the projected Hurricane Maria death toll in Puerto Rica—and the White House response.

Protecting a City’s Children. Detroit Public School Superintendent Nikolai P. Vitti has directed turning off drinking water across the district’s 106 schools  in the wake of after discovering higher-than-acceptable levels of copper and lead in some facilities, with Superintendent Vitti noting his decision came out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools.” he said in a statement. Test results found elevated levels of lead or copper in 16 out of 24 schools which were recently tested. Supt. Vitti stated: “Although we have no evidence that there are elevated levels of copper or lead in our other schools where we are awaiting test results, out of an abundance of caution and concern for the safety of our students and employees.” His actions, no doubt affected by fiscal and water contamination in Flint, came even as Detroit officials and the Great Lakes Water Authority sought to assure residents that water provided by the authority is safe to drink: they pointed to the city’s aging infrastructure as the problem.  Superintendent Vitti said he will be creating a task force to determine the cause of the elevated levels and solutions, noting he had initiated water testing of all 106 school buildings last spring to ensure the safety of students and employees. Water at 18 schools had been previously shut off. He added: “This was not required by federal, state, or city law or mandate: This testing, unlike previous testing, evaluated all water sources from sinks to drinking fountains.” The District does not plan to test students: a spokesperson for the school system noted: “Dr. Vitti said…he has no evidence at all that children have been impacted from a health standpoint.”

Fiscal & Physical Challenges: Earlier this summer, Supt. Vitti released details from a facilities review which had determined the school district would need to spend $500 million now to fix the deteriorating conditions of its schools—an effort for the system projected to cost as much as $1.4 billion if there is a failure to act swiftly, with the Administrator pointing to the failure by former state-appointed emergency managers to make the right investments in facilities while the system was preempted of authority and state-appointed emergency managers from 2009 to 2016 failed to make the right investments, sending what Dr. Vitti described as “the message to students, parents and employees that we really don’t care about public education in Detroit, that we allow for second-class citizenry in Detroit.” The remarks raised anew questions with regard to Michigan’s governance by means of gubernatorially chosen Emergency Managers.  

Superindent Vitti said he had notified Mayor Mike Duggan of his decision to shut off the drinking water, and a spokesperson, John Roach, noted: Mayor is “fully supportive” of the approach Supt. Vitti has taken, adding: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD (Detroit Water and Sewerage Department) has offered to partner with the district on any follow-up testing that needs to be done.” At the same time, the Great Lakes Water Authority issued a statement in an effort to assure “residents and customers of GLWA’s regional system that they are not affected by the lead and copper issues,” noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water,” adding water treated by the authority meets and surpasses all federal and state regulations, albeit adding: “A task force will be formed consisting of engineering and water quality experts” to will help the district “understand the cause and identify solutions.” (Initial results this past week showed elevated levels of copper, lead or both at one or more water sources in 16 of 24 school buildings, according to the statement. Water bottles will be provided at the schools until water coolers arrive. The district also found water-quality issues in some schools in 2016.)

The incident in Detroit raises a host of fiscal and governance issues—especially in the wake of the tragedy in upstate Flint—with, in both cases, the state’s history of appointing Emergency Managers to preempt the authority of local elected leaders. In the case of DPS, Dr. Vitti has contacted the Mayor, the Governor, and a task force of engineers and water experts to understand the cause and possible solutions; Superintendent Nikolai P. Vitti opted to close the water taps out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools,” with the decision coming just days before the school district’s 106 schools are scheduled to open next Tuesday. (Water bottles will be provided at the schools until water coolers arrive.) Water officials have blamed aging infrastructure as the cause of the public safety threat. Now Dr. Vitti has asked Mike Duggan and Gov. Rick Snyder to convene a task force of engineers and water experts to determine the cause of the elevated lead and copper levels, and to propose solutions. 

Importantly, it seems the public safety risk is limited to Detroit’s public schools: water officials released a statement Wednesday assuring residents and customers of the Great Lakes Water Authority and the Detroit Water and Sewerage Department that they are not affected by the lead and copper issues at the school district, noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water…The water at GLWA’s treatment plants is tested hourly, and DWSD has no lead service lines connected to any DPSCD building. The drinking water is of unquestionable quality.”

Nevertheless, the threat to public safety—combined with the heartbreaking, long-term threats to Flint’s children from that city’s public water contamination—could add further challenges to Detroit’s recovery from the nation’s largest-ever chapter 9 municipal bankruptcy: a critical part of the city’s plan of debt adjustment was to address its vast amassment of abandoned houses by enticing young families with children to move from the suburbs back into the city—an effort which had to rely on a perception of the quality and safety of its public schools. Now, for a system itself recovering from bankruptcy, DPS faces a bill of at least $500 million to repair its buildings: approximately 25% of the system’s school buildings are in unsatisfactory condition and another 20%are in poor condition, according to the report. The district noted nearly $223 million of high-priority repairs involving elevators and lifts, energy supply, heating and cooling systems, sprinklers, standpipes, electrical service and distribution, lighting, wiring, communications, security system, local area networking, public address and intercoms, emergency lights and plumbing fixtures.

Mayor Duggan’s office and the Detroit Health Department Wednesday issued a joint statement supporting “the approach Dr. Vitti has taken to test all water sources within DPS schools and to provide bottled water until the district can implement a plan to ensure that all water is safe for use,” noting: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD has offered to partner with the district on any follow-up testing that needs to be done. We also will be reaching out to our charter operators in the coming days to work with them on a possible similar testing strategy to the voluntary one Dr. Vitti has implemented.”

Restoring Municipal Authority. Mayhap it is ironic that Michigan’s relatively rare authority for the Governor to appoint an emergency manager to preempt local elected authority reflects the uneven results of the program—a program I well remember from meeting with Kevyn Orr, whom Gov. Rick Snyder had appointed as Emergency Manager  (EM) to preempt all governing authority of Detroit’s Mayor and Council, at the Governor’s office in Detroit on the first day the city entered the largest municipal bankruptcy in U.S. history—and after the grievous failure of a previous gubernatorially-appointed Emergency Manager to help the Motor City. The very concept of state authority to appoint a quasi dictator and to preempt any authority of local leaders elected by the citizens, after all, feels un-American.

Yet, from that very first moment, Mr. Orr had acted to ensure there was no disruption in 9-1-1 responses—and that every traffic and street light worked. Unlike the experience under an Emergency Manager in Flint, Mr. Orr was intently focused on getting Detroit back on its fiscal and physical feet—and restoring elected leadership to today’s grieving city.

Now, as of this week, Michigan no longer has any local government under a state appointed emergency manager—and observers are under the impression the state program to preempt local authority may be quietly laid to rest. It has, after all, been a program of preemption of local democracy with untoward results: while it proved invaluable in Detroit, it has proven fiscally and physically grievous in Flint, where it has been blamed for contributing to Flint’s water contamination crisis. Indeed, two of Flint’s former EMs have been criminally charged in connection with the crisis. Their failures—at a cost of human lives, appears to have put the future of state pre-emption of local governing authority—may well make state officials leery of stepping in to usurp control a local government, even as some municipal market participants and others see state oversight programs as a positive credit feature. The last municipality in Michigan to be put under a state-imposed emergency manager was Lincoln Park—an imposition which ended three years ago. Michigan Treasury spokesperson Ron Leix noted: “Each situation that led to the financial emergency is unique, so I can’t give a broad-brush assessment about how the law will be used in the future…For the first time in 18 years, no Michigan municipality or school district is under state financial oversight through an emergency manager. This is really about the hard work our local units of government have achieved to identify problems and bring together the resources needed to problem-solve challenging financial conditions.”

In Michigan, the emergency manager program was authorized twenty-eight years ago, granting the governor authority to appoint a manager with extensive powers over a troubled municipality or school district. By 2012, Michigan voters repealed the emergency manager program in a referendum; notwithstanding, one month later Gov. Snyder and legislators re-adopted a similar intervention program—under which local governments could opt among three new options in addition to the appointment of an emergency manager who reports directly to the Governor: chapter 9 municipal bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own. (In Michigan, municipalities which exit emergency management remain under the oversight of a receivership transition advisory board while executive powers are slowly restored to elected mayors and city councils.)

The state intervention/takeover program had mixed success, according to Michigan State University economist Eric Scorsone, who noted: “In some cases it’s worked well, like Allen Park where the situation was pretty clear-cut and the solution was pretty clear as to what needed to be done.” (Allen Park regained full local control of its operations and finances in February of 2017 after nearly four years of state oversight. Last June, S&P Global Ratings upgraded the city to investment-grade BBB-plus from junk-level BB, crediting strong budgetary performance and financial flexibility more than 12 months after exiting state oversight. But the appointment, in Flint, of emergency managers demonstrated the obverse: the small city had four emergency managers: Ed Kurtz, Mike Brown, Darnell Earley, and Gerald Ambrose—where the latter two today are confronted by charges of criminal wrongdoing stemming from the lead contamination crisis and ensuing Legionnaire’s disease outbreak that claimed 12 lives. It was the gubernatorially appointed Mr. Earley who oversaw the decision to change Flint’s water source to the Flint River in April 2014 as the city awaited completion of a new pipeline—a decision with fatal human and fiscal consequences. Indeed, two years ago, Gov. Snyder named a task force to investigate the Flint crisis and review the Emergency Manager law—a review which recommended the Governor consider alternatives to the current approach that would engage local elected officials. (No action has been taken to change the law.)

Because only a minority of states have authorized chapter 9 municipal bankruptcy, there is no uniform state role with regard to city or county severe fiscal distress and bankruptcy. Jane Ridley, senior director in the U.S. public finance government group at S&P Global Ratings and sector lead for local governments, has noted that state oversight is considered as part of the rating agency’s local GO criteria: “We do think that having a state that has oversight, especially if it’s a proven mechanism, can be very helpful for struggling entities…If they ended oversight entirely it would likely have an impact on the institutional framework scores and their sub scores.” A Moody’s analyst, Andrew Van Dyck Dobos, noted: “While an EM is in most cases is a last option, the ability for it to implement some policies and procedures is going to be typically viewed, at least at the onset, as a credit positive.”

Ending Shelter from the Storm. U.S. District Judge Timothy Hillman yesterday ruled that temporary housing given to hundreds of Puerto Ricans displaced by Hurricane Maria will end next month, meaning Puerto Ricans will be forced to check out of temporary housing provided by Federal Emergency Management Agency (FEMA) as part of the agency’s Transitional Sheltering Assistance (TSA) program. Judge Hillman, in his decision, wrote: I strongly recommend the parties get together to find temporary housing, or other assistance to the Plaintiffs and other members of the class prior to that date,” with his decision coming the same week Puerto Rico updated its official death toll from Maria to 2,975, a vast increase from the original count of 64. Judge Hillman’s decision also comes about two months after a national civil-rights group filed a lawsuit which had sought a restraining order to block FEMA from ending the program. The group, LatinoJustice, argued in the suit that it would lead to families’ evictions. It also came as, two days ago, President Trump met with reporters to respond to questions with regard to the mounting death toll—a session in which the President told the reporters: “I think we did a fantastic job in Puerto Rico.” Some 1,744 Puerto Rican adults and children were in the FEMA program when the lawsuit was filed. U.S. District Judge Leo T. Sorokin temporarily extended the program to the end of last July, and subsequently extended it until today—and then, once more, to September 14th.

Now, the White House is responding to a new estimate which increases the number by about 33% more to 2,975 after an independent study. White House spokeswoman Sarah Huckabee Sanders claimed in a statement that the back-to-back hurricanes which hit last year prompted “the largest domestic disaster response mission in history.” She added that President Donald Trump “remains proud of all of the work the Federal family undertook to help our fellow citizens in Puerto Rico.” She also says the federal government “will continue to be supportive” of Gov. Ricardo Rossello’s accountability efforts and says “the American people, including those grieving the loss of a loved one, deserve no less.” The new estimate of 2,975 dead in the six months after Maria devastated the island in September 2017 was made by researchers with the Milken Institute School of Public Health at George Washington University. It was released Tuesday.

Can There Be Too Many Local Governments?

August 8, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal and governing challenges confronting Puerto Rico’s municipalities or municipios—and a federal court’s dismissal of Puerto Rico’s suit challenging the preemption of its governing authority.

Can there be Too Many Local Governments? Puerto Rico Governor Ricardo Rosselló Nevares has stressed that the model of autonomous municipios has failed, because too many lack the fiscal capacity to implement their basic functions without the territory’s help. Instead, he believes that the municipal model must be changed to one where the equivalent of counties are in charge of providing services which are now provided by the territory and municipios, noting in a recent interview: “I know it’s a difficult initiative, but there has to be a conversation about what the future of local government is going to be. We had talked about establishing a counties system in Puerto Rico, and I think we need to have this conversation…The model of autonomous municipalities was a very nice one, but by not having total independence, it never truly showed as it should be.” Indeed, the debate is not new—either on the mainland, where, nearly a century ago, Farrington Carpenter, Colorado’s first Director of the Interior Department’s Grazing Service noted, at a time when there were 20 Colorado counties with populations under 5,000 and three with only 1,000: “How can such small counties afford the cost of a complete county government? So, the Governor noted: “I think there is an opportunity for the counties model…I have my ideas, but I think we depend a lot on local leadership, so that this can be achieved. I think our society understands that they can work under this model.”

Puerto Rico has 78 incorporated cities and towns—each municipio is governed under the Autonomous Municipalities Act of 1991, which establishes that each jurisdiction must have a strong mayor and municipal council or legislature—and each Council must be unicameral with its size determined by the population. Municipios with populations in excess of 50,000 are defined as incorporated cities; those with fewer are defined as towns—which rely on adjacent or nearby municipios to provide certain public services. San Juan, the capital, is home to about 400,000, while Culebra is the smallest municipio, with around 1,800.

The concept of governance change is not new: the Governor had already proposed it to the PROMESA Oversight Board. Likewise, it was a topic of debate under the administration of his predecessor, former Governor Alejandro García Padilla, albeit his administration only published a report which suggested options, such as: the consolidation of municipalities, the creation of counties, or groups of municipalities which could create consortiums made up of mergers with departments of nearby municipios—or, as the Governor put it: “I think there is an opportunity for the counties model…I have my ideas, but I think we depend a lot on local leadership so that this can be achieved. I think our society understands that they can work under this model.”

Unsurprisingly, however, the very idea of altering municipal authority has stirred up a veritable hornets’ nest. Just mentioning the idea of altering municipalities’ authority provokes a negative reaction from the mayors. Both the president of the Mayors Federation, Carlos Molina Rodriguez of Arecibo, and that of the Mayors Association, Rolando Ortiz, the Mayor of Cayey, have expressed their opposition to any consolidation: Mayor Ortiz argues that counties would bring additional expenses and an unnecessary layer of government bureaucracy, insisting that Mayors are the elected officials closest to the people, so their functions should not be limited. In contrast, Mayor Molina, from the New Progressive Party (NPP), while also opposed to the elimination or consolidation of municipalities, indicates that the Mayors Federation has created a committee to evaluate options to reform municipal structures, stressing that the intent is to make recommendations. He notes that he personally prefers that each municipio reach agreement to merge specific departments so that savings can be generated—in effect creating a consortium—a legal option available to municipios in Puerto Rico which has been available for decades, but which have been rarely used. Very few were created to merge tasks of departments of two different municipalities: since such consortia were authorized in 2012, when the Autonomous Municipalities Act was amended to facilitate the creation of these inter-municipal structures, such consortiums were established to manage the permit systems of Comerío, Barranquitas, and Aibonito; another was established for public roads maintenance in Villalba, Juana Díaz, Comerío, and Barranquitas.

Mayor Molina noted: “It would be necessary to analyze what is the best thing for Puerto Rico. I’m not in favor of letting municipal employees go. If you ask the mayors, nobody is in favor of that…I do not agree with the elimination of municipalities or mayoralties.” Similarly, Mayor Ortiz added: “I believe it’s a wrong vision. The municipal governments are the closest to needs and the people’s pain.”

Nevertheless, Gov. Rosselló emphasized that municipalities are in a precarious financial situation, so the local governance model must be revised to improve the government’s fiscal health and the quality of services received to the people, stressing that the model of autonomous municipalities in Puerto Rico has failed, because many municipalities lack the requisite fiscal capacity to implement their basic functions without the quasi-state government’s assistance. Nevertheless, he reaffirmed his view that the municipal model must be changed to one where counties are in charge of providing services which are now in the hands of municipalities and the Commonwealth, noting: “I know it’s a difficult initiative, but there has to be a conversation about what the future of local government is going to be. We had talked about establishing a counties system in Puerto Rico, and I think we need to have this conversation…The model of autonomous municipalities was a very nice one, but by not having total independence, it never truly showed as it should be.”

The Governor’s proposal is not new—it is one he included in his proposed fiscal plan, which was finally certified by the PROMESA Oversight Board last April. Nor is the issue new: the concept of changing municipal structures also was debated during the previous administration of Gov. Alejandro García Padilla; however, the concept never went beyond the publication of a report which suggested options, such as: the consolidation of municipalities, the creation of counties, or the option for groups of municipalities to create consortiums between different municipios’ departments—or, as the Governor put it: “I think there is an opportunity for the counties model…I have my ideas, but I think we depend a lot on local leadership so that this can be achieved. I think our society understands that they can work under this model.”

Nevertheless, any suggestion to curtail or limit the authority of municipios has drawn, as we noted above, a strong, adverse reaction from Mayors, with Mayor Molina emphasizing that mayors are the elected officials closest to the people, so their functions should not be limited; nevertheless, ha has indicated that, currently, the Mayors Federation has created a committee to evaluate options to reform municipal structures, stressing that the idea is to make recommendations—noting that, personally, he would opt for a consortium model, under which each municipality reaches agreements to merge specific departments so that savings could be generated. This is not a new model, but one which, despite being available, has seen few takers: since 2012, when the Autonomous Municipalities Act was amended to facilitate the creation of these kinds of inter-municipal structures, such consortia have been established to manage the permit systems of Comerío, Barranquitas, and Aibonito—and similar structures have been agreed to for public roads maintenance in Villalba, Juana Díaz, Comerío, and Barranquitas.

Nevertheless, as Mayors’ Federation President Molina noted: “It would be necessary to analyze what is the best thing for Puerto Rico. I’m not in favor of letting municipal employees go. If you ask the mayors, nobody is in favor of that…I do not agree with the elimination of municipalities or mayoralties.” His counterpart, Mayor Ortiz, echoed the apprehension: “I believe it’s a wrong vision. The municipal governments are the closest to needs and people’s pain.”

Governor Rosselló, however, emphasizes that the island’s municipios are in a precarious fiscal situation; ergo, he believes the governance must be revised to address not only Puerto Rico’s fiscal health, but also quality of public services received by the people.

Quien Es Encargado? U.S. Title III Judge Laura Taylor Swain yesterday dismissed a suit by Governor Ricardo Rosselló Nevares and Puerto Rico legislators challenging the authority of the PROMESA Oversight Board to impose to impose a fiscal plan and related budget, granting the Board’s motion to dismiss the U.S. territory’s claim that the Board had encroached on the Legislature’s authority by refusing to certify its budget, instead certifying a new fiscal plan with reduced appropriations. The legislators had sought to have the Judge rule the Board’s actions as “non-compelling recommendations.” PROMESA Board Chair Jose Carrion welcomed the decision in a statement: “There can be no doubt that the fiscal year 2019 budget certified by the Oversight Board is the only one and must be enforced,” adding that now the Board needs to focus on “implementing critical reforms, resolving the crushing debt crisis, and transforming the island’s economy.” He promised to announce steps in the coming weeks to increase public-sector efficiency and economic improvements, while working with creditors on debt restructuring.

After the court released its decision, Governor Rosselló released a statement vowing to disobey Judge Swain’s order, stating that: “The federal court ruling states that our public employees won’t receive their deserved Christmas bonus unless the government takes unjustified, draconian measures against our very own employees, which include massive layoffs. We are adamantly opposed and will not comply with the decision.”

Judge Swain wrote: “PROMESA is an awkward power-sharing arrangement…The power bestowed on the Oversight Board by section 205(b)(1)(K) of PROMESA allows the Oversight Board to make binding policy choices for the Commonwealth.” Nevertheless, she noted, this does not “render the elected Governor irrelevant or toothless.” She wrote that the Governor is required to start the process of putting together a budget—and that he has the right to publicly object to fiscal plan provisions, defining that to grant the Commonwealth some ability to obstruct the implementation of PROMESA Board-ordered policy, holding that the Board had power over the “reprogramming” or control of Puerto Rico departmental unspent funds, and writing that the PROMESA Board could include mandatory “policy” statutes in its fiscal plans even if the Governor deemed them unacceptable; however, Judge Swain said she would not rule against the PROMESA Board’s efforts to consolidate government agencies, eliminate the Christmas bonus, impose a hiring freeze, standardize healthcare provided to government employees, nor prohibit future liquidation of sick and vacation days. In an intriguing part of her decision, Judge Swain wrote that the Oversight Board had asserted it was not mandating the Governor to take these actions; rather the Board was cutting the budget with the assumption that these matters would be addressed, and noting that under PROMESA, the Board has the right to impose a budget on the government of Puerto Rica—comparable in many senses to the preemptive governing and budget authority granted to emergency managers in chapter 9 municipal bankruptcies in a number of states. At the same time, Judge Swain concurred with Gov. Rosselló on his claim that the Board was using planks of its approved budget to write Puerto Rico law concerning budgetary matters—steps which Judge Swain wrote appeared to go beyond the authority Congress granted to the Oversight Board.

Under the current PROMESA fiscal plan, one provision provides that, “If, after the third fiscal quarter of any fiscal year, there remains unrealized agency efficiency savings for any grouping relative to the projected agency efficiency savings in the new fiscal plan for the applicable fiscal year, the Oversight Board will automatically reduce the budget for the corresponding grouping for the following fiscal year in the amount equal to the unrealized agency efficiency savings.” However, Judge Swain determined this interpretation contravened the intent of the PROMESA statute to make any final fiscal decisions as interactive, rather than preemptive, albeit, under her ruling, her grant of final fiscal authority to the Board would appear to render any such guidance largely an empty governing promise.

Unsurprisingly, Governor Rosselló responded to her decision by stating: “This ruling is further proof of Puerto Rico’s colonial status and our lack of self-government. We must put an end to this undignified relationship that allows Congress to discriminate against us and take actions without our consent which are detrimental to our island.” He added that while his government would consider options to appeal Judge Swain’s decision, his government would “keep looking for ways to work with the Oversight Board, so that we avoid harsh, draconian measures that would be detrimental to our people.” In his own statement, PROMESA Chair José Carríon stated: “In the coming days and weeks, the Board expects the government to deliver material progress on reforms to increase public sector efficiency and transparency, and make Puerto Rico’s economy more competitive and attractive for businesses and investors…At the same time, we will continue to pursue plans of adjustment with creditors to achieve debt restructurings and a return to the capital markets.”

The Complex Challenges of Implementing a Municipal Bankruptcy Plan of Debt Adjustment

July 31, 2018

Good Morning! In this morning’s eBlog, we consider post-chapter 9 municipal bankruptcy challenges for the City of Detroit, before turning to learn about good gnus from Puerto Rico.

The Steep Route of Chapter 9 Debt Adjustment. Direct Construction Services, minority-owned firm, which has participated in Detroit’s federally funded demolition program, is suing Mayor Mike Duggan, the city’s land bank, and Detroit’s building authority as well as high-ranking officials from each division—alleging racial discrimination and retaliation. The suit asks the court to award damages and declare the actions of the city, its land bank and building authority as “discriminatory and illegal.” The suit alleges that some contractors had been asked to change bidding and cost figures “to reflect compliance” under the federal demolition Hardest Hit Fund guidelines. Filed in federal court, it charges that Service’s managing member, Timothy Drakeford, was treated unfairly based on his race and that officials in the program conspired to have him suspended for refusing to falsify documents and for cooperating with federal authorities. Mr. Drakeford, who is barred from bidding on federally funded demolition work, is also suing for breach of contract and discrimination against black contractors. The suit charges that some contractors, including Mr. Drakeford, had been asked to change bidding and cost numbers “to reflect compliance” under the federal Hardest Hit Fund guidelines; indeed, the suit alleges it was subsequently suspended—not because of the quality of its work, but rather “because of the refusal to change numbers in bid packages.” The suit adds: “This case arises because of defendants’ breach of contract, concert of action, due process violations, and discrimination on the grounds of race in its implementation of the Hardest Hit Homeowner demolition program, including failure to timely pay black contractors in comparison to their white counterparts, improper and disparate discipline and retaliation.”

This issues here are not new—and have previously been the focus of FBI, state, and city investigations, especially over bidding practices and rising costs. As we have previously noted, the city’s plan of debt adjustment efforts to raze abandoned homes was a particular focus—a program through which federal assistance was misappropriated while the city worked to demolish homes after its bankruptcy—in that case involving federal funds allocated via the Michigan State Housing Development Authority. The suit contends that Direct Construction was awarded three contracts for demolition work by the land bank, and asserts that payments were delayed and harder to obtain from the land bank than for “larger white companies,” such as Adamo and Homrich, two firms awarded the largest percentage of the work to date. The suit asserts Direct Construction was under contract for several demolition packages, but still has not been paid, and references in excess of $143,000 in unpaid invoices, noting: This “repetitive process has gone on for over a year now, with no success,” contending that it had been performing work on two contracts which it had been awarded for a total of 48 homes—before, on December 19, 2016, being hit with an “immediate stop work order” from the land bank, without explanation. A year ago in February, Direct received a letter regarding an Office of Inspector General report, which suggested that photographs submitted for repayment of sidewalk work had been falsified and that the company would not be compensated—a letter followed up the next month by a notice of suspension. (Direct was among a few businesses suspended last year on claims of manipulating sidewalk repair photographs to obtain payment.)

Detroit Corporation Counsel Lawrence Garcia yesterday noted: “The Office of Inspector General found that not only did Mr. Drakeford personally manipulate a photo of a demolition site to conceal tires that had not been removed from the lot, but also gave information that was not truthful to the OIG’s investigators. For the penalties issued with respect to these matters, the Detroit Land Bank, the DBA and the city followed the recommendations of the independently appointed inspector general…These facts more than justify the city’s actions.” Indeed, that office, at the request of the land bank, had initiated investigations in December of 2016 into allegations that sidewalk repair photographs were being doctored. (The land bank mandates that its contractors to take “before and after” photographs of sidewalks, drive approaches, neighboring residences, and surrounding areas to document conditions.) The Office, the following February, flagged Direct Construction over five of its submitted photographs, concluding the photos had been modified to disguise incomplete work; it recommended the company be barred from doing work in the city’s demolition program until at least 2020. (The Michigan State Housing Development Authority began placing greater emphasis on sidewalk replacement photographs in October of 2016, when a new set of practices went into place—at a point in time when federally funded demolition had been suspended for two months after a review by the Michigan Homeowner Assistance Nonprofit Housing Corp.).

Since Mayor Duggan’s election in 2013, the city has razed nearly 13,000 homes—a task that has fiscal and physical consequences—reducing assessed property values and property taxes, but also leaving medical scars: over that time, the percentage of children 6 and younger with elevated lead levels rose from 6.9% in 2012 to 8.7% in 2016, according to state records. Early last year, the land bank repaid $1.37 million to address improper expenses identified by auditors for the state. The land bank last summer reached a settlement with state housing officials to pay $5 million to resolve a dispute over invoices the state determined to be improperly submitted. Detroit’s administration has claimed the city has been transparent with its demolition program and cooperated fully with all inquiries.

Good Gnus. In Puerto Rico, Governor Ricardo Rosselló Nevares and the Labor Secretary Carlos Saavedra are celebrating a turnaround in employment in the U.S. territory: between May and June, some 11,000 people joined the island’s labor market, dropping Puerto Rico’s unemployment rate to its lowest level in half a century. Gov. Rosselló Nevares yesterday reported the unemployment rate to be 9.3%, the lowest rate in the last 50 years, noting: “On this occasion, unemployment drops and the participation rate increases are all numbers going in the right direction.” Sec. Saavedra explained the increase between May and June reflects summer employment programs, but at a level considerably better than in previous years, especially in the commercial and self-employment sectors—and, as he noted: “We have seen a substantial increase in self-employment,” apparently reflecting many involved with repairs and reconstruction for damage caused by Hurricane María, especially electricians, and builders. Economist Juan Lara explained that jurisdictions which have suffered deep economic declines as a result of a natural disaster experience a period of rebound that leads to growth, but cautioned: “[T]his can hardly be maintained in the long-term without a change in the economic model.” He estimated that in the next five or six years, federal investments could keep the economy in positive territory, noting: “The important thing is to remember that these funds do not last forever and that the economy needs sustained redevelopment.”

For his part, Gov. Rosselló stressed that the current economic improvement is occurring without the federal government having released a penny of the more than $1.8 billion in promised HUD assistance. Nevertheless, there can be little question but that the more than $3 billion in insurance claims already paid, according to according to Iraelia Pernas, the Executive Director of the Puerto Rico Insurance Companies Association have had a positive, if one-time, impact. Similarly, the island is anticipating, in August, a large CDBG grant.

Gov. Rosselló Nevares attributed the jobs upturn, interestingly, to emigration: many who were unemployed left Puerto Rico for the mainland, even as he reported the total number of citizens employed has increased, as well as the labor participation rate (not seasonally adjusted), which rose from 40.5% in May to 41.1% last month. percent in June. In the first months following Hurricane María, nearly 200,000 people left Puerto Rico. Many, however, have returned.

Informacion Mejor? PROMESA Oversight Board Executive Director Natalie Jaresko has reported the Board “welcomes the publication” of fiscal information mandated by the Board, after, on July 10th, the Board had sent a letter to FAFAA Executive Director Gerardo Portela Franco, complaining of a failure to submit documents, including documents comparing the General Fund budget to actual spending; PayGo balances; and public employee payroll, headcount, and attendance. The board said that, according to the approved quasi-plan of debt adjustment, the first two documents had been due on May 31st, and the third on June 30th. FAFAA released the PayGo report on July 17, and the other two reports last Friday.  Ms. Jaresko wrote: “The Oversight Board welcomes the publication of the General Fund to Actual Report, the Human Resources Report and the Payroll Report: Full monthly public reporting is essential to increase transparency of government finances, increase accountability, and monitor compliance and progress as per the fiscal plan and budget objectives in order to eliminate Puerto Rico’s structural deficits…The Oversight Board is committed to continuing this important work of monitoring full compliance by the government with reporting requirements, in order to achieve PROMESA’s mandate of restoring fiscal responsibility and market access to Puerto Rico.”

Rebuilding the Motor City, and Reconsidering Colonialism in Puerto Rico

July 27, 2018

Good Morning! In this morning’s eBlog, we consider post-chapter 9 municipal bankruptcy challenges in Detroit, before turning to legislative and legal challenges to Puerto Rico.

A Foreclosed Motor City Future? In Detroit, time is running out for the owners of foreclosed properties under a new program which arose out of a legal settlement two years ago intended to protect the rights of low-income owner-occupants of foreclosed homes to purchase back their properties back for $1,000—a plan which provided that occupied homes on tap for this coming fall’s tax auction will instead be purchased by the City of Detroit and sold to owner-occupants who can prove they qualify for the city’s poverty tax exemption or have in the past—an exemption which would reduce or eliminate property tax liabilities for those who qualify. The plan is an indication of one of the most challenging aspects of fashioning a plan of debt adjustment for recovering from the largest chapter 9 municipal bankruptcy in U.S. history: how does one enhance the property tax base by attracting higher income families to move back into the city without jeopardizing thousands upon thousands of the city’s poorest families?

To date, with a looming deadline in a month, the United Community Housing Coalition has received about 140 applications—the foundation received funds from the City and foundations to purchase the homes—with the assistance available to prospective homeowners who can prove they could have qualified for the tax exemption between 2014 and 2017, but did not receive one—and that they agree to sign a sworn statement they would have qualified in the past. The effort matters: Wayne County Treasurer Eric Sabree estimates as many as 700 owner-occupied homes in Detroit are at risk of being sold at the fall tax foreclosure auction.

Quien Es Encargado? (Who is in charge?) U.S. District Court Judge Laura Taylor Swain Wednesday stated she would issue an opinion soon with regard to the hard federalism question emerging from the by Puerto Rico versus the PROMESA Oversight Board over their authority, noting at the end of the Title II bankruptcy hearing: “I realize the urgency of the situation,” at the end of a Title III bankruptcy hearing in San Juan, referring to two adversary proceedings against the Board–one brought by Gov. Ricardo Rosselló, and the other by the Presidents of the Puerto Rico Senate and House of Representatives—while PROMESA Board attorney Martin Bienenstock described the Governor’s effort to challenge the Board’s efforts to preempt the legislative power and authority of the U.S. Territory’s elected Governor and Legislature as “ineffectual.” Mr. Peter Friedman, representing the Governor and Puerto Rico’s Fiscal Agency and Financial Advisory Authority (FAFAA), responded that the Governor was just trying to raise a narrow set of issues: they want the federal court to reject the notion that they have no meaningful role in governing.  But the unelected Mr. Bienenstock said the Governor’s challenge is based on five discrete issues intertwined with the PROMESA Board’s ability to revive the economy, regain capital markets access, and do other things mandated by the PROMESA law, as he focused especially on two issues: what he characterized as the Board’s power over “reprogramming” the use of unused Puerto Rico government funds, arguing before Judge Swain that if the Governor were permitted to appropriate and authorize funding to carry out his responsibilities, then the PROMESA Board would have lost control over the budget, fiscal plan, and debt restructuring.

In response to this extraordinary claim, Judge Swain said that while she recognized the Board has some authority, she questioned whether it applies to funding lines that had been authorized before PROMESA’s passage, describing the issue as a “conundrum,” even as Mr. Bienenstock testified that the Governor wants to make it legal to “knowingly and willingly” spend more than the PROMESA Board budget authorizes. This raised an issue which goes to the heart of governance in a democracy: should those elected by the citizens of a jurisdiction have the final say as opposed to those who neither reside in nor come from such a jurisdiction have the final governing authority?

Crossing Swords. Puerto Rico Governor Ricardo Rosselló, stated he would not testify before the U.S. House Natural Resources Committee unless Chairman Rob Bishop (R-Utah) said he was sorry for a Tweet tweeted from the Committee’s account last week: “Call your office, @ricardorossello,” accompanied an invitation to the hearing, where invited witnesses were to be grilled on a management crisis at PREPA. Gov. Rosselló noted the tweet falsely suggested that he was hard to reach. Perhaps more importantly, for the Governor, the Chairman’s comments appeared to reflect a disrespect which would not be shown to the Governor of any State, emphasizing the perception that the federal government has a colonialist attitude toward the Commonwealth, where residents are U.S. citizens, but are barred from having a vote in the House and Senate. Chairman Bishop did not apologize for the demeaning tweet, asserting that its removal meant no apology was required—a position hard to imagine he would make to Utah Governor Gary Herbert.

Converting Swords to Plowshares? With Congress adjourning today for six weeks, Puerto Rico Resident Commissioner Jenifer Gonzalez hopes her pro-democracy project can be discussed by Chairman Bishop’s Committee in September: her legislation, HR 6246, would enable the admission of the territory of Puerto Rico into the Union as a State. Chair Bishop, according to the Commissioner, “has a plan” to move the prospects for statehood forward in the short 19-day legislative window before this Congress adjourns in November. Rep. Gonzalez affirmed that her legislative goal is to incorporate Puerto Rico as a territory, which would be considered as a promise of statehood, and create a Congress Working Group, so that, within a period of just over a year, there would be a report on changes to laws that would have to be put in place to admit the island as a state in January of 2021.

Lighting up PREPA? Puerto Rico’s Governor Ricardo Rosselló was a no-show at a Congressional hearing Wednesday afternoon on efforts to wrench control of the bankrupt Puerto Rico Electric Power Authority from Puerto Rico’s government—a hearing, “Management Crisis at the Puerto Rico Electric Power Authority and Implications for Recovery,” with regard to which Chairman Rob Bishop (R-Utah) had written: “Despite your recognition of the politicization that has plagued PREPA and your commitment towards allowing for independence, the recent departure of PREPA’s CEO after only four months of service and the resignation of the majority of PREPA’s governing board are the most recent signs of the utility’s continued dysfunction and a sign that ‘political forces…continue to control PREPA.’” The Governor, late Tuesday had announced he would not be able to participate in the hearing—a hearing at which there was to be a focus on corruption within the utility and the possibility of privatization—but at which the Committee was scheduled to receive testimony from the invaluable chapter 9 expert Jim Spiotto, as well as DOE Assistant Secretary Bruce Walker.  In its most recent audit, Ernst & Young had noted there substantial  doubt whether PREPA could continue as a going concern, since it does not have sufficient funds to fully repay its obligations as they come due and is restructuring its long-term debt. (PREPA utility filed for bankruptcy one year ago in the face of accruing $9 billion in debt, under PROMESA’s provisions in Title III.