Fiscal Sand Traps & Disparate, Inequitable Responses

March 7, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal sand trap into which the small Virginia municipality of Buena Vista has fallen, before examining the ongoing, disparate physical and fiscal recovery issues in Puerto Rico.

Is the Municipal Fiscal Vista Good? Virginia is somewhat unique in that it does not specifically authorize municipalities to file for chapter 9 municipal bankruptcy; it does, in certain situations, allow for a receiver allow for the appointment of a receiver with respect to revenue bonds (§15.2-4910). Now, the aptly named Buena Vista, Virginia, a small, independent city located in the Blue Ridge Mountains with a population of about 6,650, where, as we have previously written, the issue of non-payments of municipal bond interest on debt issued for its public golf course became an election issue, has, in effect, cone back as a mulligan. This time, the issue involves, again, the municipal golf course, and the issue has re-arisen because of the municipality’s decision not to make the bond payments on a municipally-owned golf course that the new majority on Council oppose as inconsistent with an essential government activity—rejecting a moral obligation pledge on what has become a failed economic development project, as the city’s elected leaders have opted instead to focus—in the wake of the Great Recession—on essential public services, putting the city in a subpar fiscal situation with Vista Links, which was securing the bonds, according to Virginia state records. The company, unsurprisingly, has sued to get the bond payments it had been promised—potentially putting at risk the city’s city hall and other municipal properties which had been put up as collateral. Buena Vista City Attorney Brian Kearney discerns this to be an issue of a moral obligation bond, rather than a general obligation municipal bond, so that “[W]e could not continue to do this and continue to do our core functions.” In the wake of the fiscal imbroglio, the Virginia Commission on Local Government (COLG)—which provides an annual fiscal stress study‒ended up playing a key role in the Petersburg effort in the General Assembly—finding that very poor management had led to an $18 million hole.

Nevertheless, the municipality’s selective payment default on its $9.2 million in lease revenue bonds has driven Municipal Markets Associates to describe the city’s decisions as “perhaps a worst-in-class example of erosion in issuer willingness to pay bondholders. Buena Vista’s default can no longer be blamed on weak local budget or economic conditions; rather, the city is currently choosing neither to pay nor negotiate with bondholders, because the pledged appropriation security permits this to occur. Further, while the commonwealth has applied some pressure to the city by denying it access to state loan funds via the VRA program, Virginia has chosen not to more proactively interfere in city affairs and has made multiple grants to Buena Vista in recent years.” Nevertheless, Buena Vista won the first round in court regarding the bond default, after the court concurred that the city had a moral obligation, but not a full faith and credit obligation. (It is unclear whether there will be an appeal.) While the Commonwealth of Virginia has applied some pressure to the city by denying it access to state loan funds via the VRA program, Virginia has chosen not to more proactively interfere in city affairs and has made multiple grants to Buena Vista in recent years. Two years ago, Buena Vista had made payments toward all other out-standing debt obligations, including $5.5 million in general fund bonds and loans and $7.9 million in revenue bonds; the municipality added $500,000 to its net General Fund net revenues—leaving it in a fiscal sand trap caught between $94 million in obligations towards debt service on its ACA-insured bonds while continuing to growth fund balance.

Here, the municipality’s default triggered negotiations with bond insurer, ACA Financial Guaranty Corp., which led to a forbearance agreement—one on which the city subsequently defaulted—triggering the Commonwealth of Virginia to bar financing backup to the city from the state’s low-cost municipal borrowing pool, lest such borrowing would adversely impact the pool’s credit rating—and thereby drive up capital borrowing costs for cities and counties all across the state. In this instance, the Virginia Resources Authority refused to allow Buena Vista to participate in the Virginia Pooled Financing Program to refinance $9.25 million of water and sewer obligations to lower debt service costs—lest inclusion of such a borrower from the state’s municipal pool would negatively impact the pool’s offering documents—where some pooled infrastructure bonds, backed by the Commonwealth’s moral obligation pledge, are rated double-A by S&P Global Ratings and Moody’s Investors Service.

Seven years ago, the municipality had entered into a five-year forbearance agreement with bond insurer ACA Financial Guaranty Corp.—an agreement which permitted Buena Vista to make 50% of its annual municipal bond payments for five years—an agreement on which Buena Vista defaulted when, two years ago, the City Council voted against inclusion of its FY 2015 budgeted commitment to resume full bond payments. That errant shot triggered UMB Bank NA to file a lawsuit in state court in 2016 in an effort to enforce Buena Vista’s fiscal obligation. In response, the municipality contended the golf course deal was void, because only four of the city’s seven council members had voted on the bond resolution and related agreements—which included selling the city’s interest in its “public places,” arguing that Virginia’s constitution mandates that all seven council members be present to vote on the golf course deal, because the agreement granted a deed of trust lien on city hall, police, and court facilities which were to serve as collateral for the bonds.

The golf course in question, which opened in 2004, never generated sufficient revenue to keep up with loan payments, leading the municipality to default on its $9.2 million bond, which, in turn, led Buena Vista’s municipal bonds insurer, ACA Financial Guaranty Corp., to file suit against the municipality, seeking to have Buena Vista ordered to resume payments—a suit which a federal court last month dismissed, concluding the city was only under a moral obligation, not a legal one, to pay back the loans. Unsurprisingly, ACA has pulled out another club and now ACA plans to appeal the judge’s decision, thereby creating uncertainty with regard to the city’s fiscal solvency—creating uncertainty for the business community. Now, however, it seems that with greater confidence in their judicial outcome, and a key business investment in a number of downtown properties, it appears of developers are starting to pick up on the momentum. Buena Vista Mayor William “Billy” Fitzgerald believes these new potential developments fit perfectly with his goals as the municipality’s newly elected leader: he wants to bring five to seven new businesses and one manufacturer to the area this year. In addition, he said he wants to cut some of the red tape and fees associated with opening businesses, adding that there has been more movement recently than the city’s had in a long time, adding: “In two years, I think Buena Vista will be a different place.”

A year ago, the city filed a motion to dismiss the federal suit for failure to state a claim—a claim on which U.S. District Judge Norman K. Moon held a hearing last Friday—with the municipality arguing that the golf course’s lease-revenue debt is not a general obligation. Therefore, the city appears to be driving at a legal claim it has the right to stop payment on its obligation, asserting: “The city seeks to enforce the express terms of the bonds, under which the city’s obligation to pay rent is subject to annual appropriations by the City Council, and ceases upon a failure of appropriations.” Moreover, pulling another fiscal club from its bag, the city claimed the municipal bonds here are not a debt of the city; rather, the city has told the court that the deed of trust lien for the collateral backing the bonds is void. That is an assertion which ACA, in its motion to dismiss, deemed an improper attempt to litigate the merits of the suit at the pleading stage, noting: “Worse, the city wants this court to rule that the city only has a ‘moral obligation’ to pay its debts, and that [ACA’s] only remedy upon default is to foreclose on a fraction of the collateral pledged by the city and the Public Recreational Facilities Authority of the city of Buena Vista….If adopted, this court will be sending a message to the market that no lender should ever finance public projects in Virginia because municipalities: (a) have unbridled discretion to not repay loans; and (b) can limit the collateral that can be foreclosed upon.” In a statement subsequently, ACA added: “It’s unfortunate that Buena Vista’s elected officials have forced ACA into court after recklessly choosing to have the city default on $9.2 million in debt even though the city has ample funds to make the payments that are owed…This is particularly troubling, because ACA spent years negotiating in good faith after the city claimed financial hardship, and even provided a generous forbearance agreement that reduced payments by 50% starting in 2011. After the city defaulted on that deal in 2014, it offered ACA only pennies on the dollar, while seeking to be absolved of all future burdens of this financing. Left with no reasonable alternative, we must look to the court for an equitable and fair outcome.”

Fiscal Darkness & Despair. More than five months after Hurricane Maria plowed through Puerto Rico, some parts of the island remain in the dark; it remains a long, long way from getting back for businesses: the U.S. territory’s patchwork power grid remains fragile, and hundreds of thousands of Puerto Ricans remain without power. While many have been living in hotels with their expenses covered by FEMA, those reimbursements are nearing expiration—not just in Puerto Rico, but also on the mainland. Today, there are nearly 10,000 Puerto Ricans scattered throughout 37 states and Puerto Rico who have been living in hotels paid by FEMA—aid now on the brink of ending a week from Tuesday. Many of them are poor families, who on the island survived with low wages. Many do not have savings or relatives who can help them or own their homes on the island. Others confront health problems and distrust the medical system on the island or have children with disabilities who need continuous care. Government relief workers have installed 57,000 blue tarps as makeshift roofs on damaged homes across the island. There is no plan for installing permanent roofs. Major intersections in San Juan still lack working traffic lights. More than 10,000 small businesses — nearly 20 percent of the island is total — remain closed. At the upscale Mall of San Juan, two anchor stores — Saks Fifth Avenue and Nordstrom — are shut because of storm damage, although Nordstrom may reopen in a few months. Some hotel workers, cabdrivers and bartenders in San Juan have been living without power since September.

The most optimistic estimate is that Puerto Rico faces a two-year economic recovery. That assumes it can rebuild its power grid, restructure its finances in a court-supervised process and not be struck by another devastating storm. For its part, FEMA reports it has delivered more than $113 million in rental assistance to more than 129,000 Puerto Ricans affected by Maria. Governor Ricardo Roselló has said he has formally requested the federal government to allow families in hotels to stay there until May 14th. That recovery, moreover, is made more difficult by the fiscal circumstances before the storm even struck—when some 45% of the territory’s 3.4 million Americans lived in poverty and more than 16,000 homeowners were facing foreclosure. The size of the human devastation remains stark: more than one million Puerto Ricans applied to FEMA for emergency assistance: less than half have been served. The situation is, as Javier E. Zapata-Rodríguez, the Deputy Director of Economic Development for PathStone Enterprise Center, put it: “This is like the perfect storm of an economic disaster…There is not enough capital flowing, and a lot of small businesses are closing up shop, because they were ailing before the hurricane.” Adding to the dismal situation, even those claims that are being paid have been slow—and 60% have, so far, been denied. Meanwhile, tourism, which accounts for about 6 percent of Puerto Rico’s economy and supports more than 60,000 jobs, is all but gone for this season: nearly a dozen big resorts in and around San Juan are closed, while, many of those which are open and operating are filled not with tourists, but rather with relief workers and government contractors who are permitted discounted rates.

As we have noted, the economy is also suffering from emigration: it is not just the 200,000 residents who have departed to live on the mainland, but also how that has altered the demographics of those who remain—generally older and poorer. As the New York Federal Reserve reported last year, four months before Maria, 36% of Puerto Rico’s small businesses planned to hire more workers and 50% planned to invest in new equipment and technologies—all plans devastated by the storm.

Today, in the wake of such an inadequate federal response, the power situation in the U.S. territory remains dispiriting: at the end of last week, many in San Juan and along the island’s northern coast lost power in the middle of the workday. Indeed, generators are no longer an option for a business: they are a necessity—as they are for homes and hospitals with patients reliant upon vital medical devices. For potential overseas investors, new investments appear to be on hold pending some certainty on Puerto Rico’s electric grid restoration and reliability—and how FHA will act on the current moratorium on home foreclosures—a decision with implications for assessed property values affecting municipios bottom lines. The recovery too awaits the progress of what has been, so far, a slow trickle in response to filed insurance claims: to date, while 299,999 claims have been filed by homeowners and businesses, only $1.7 billion in payouts have been approved, according to the insurance department: much of the federal assistance is being dispensed as grants and loans for which businesses and individuals apply for from FEMA and the Small Business Administration, even as attorneys and community groups report that FEMA has rejected approximately 60% of the 1.1 million household applications it has received—a figure, it should be noted, which FEMA deems misleading, because some rejected applicants had received loans from the Small Business Administration or aid from other agencies. One key reason for the disproportionate rejection rate appears to be the stark difficulty many Puerto Ricans have encountered in proving that they own a home: only 65% of properties in Puerto Rico are officially registered, making this an especially harsh and acute problem affecting families and local governments in small cities and rural areas where there’s a custom of property owners not recording titles to homes.


Puerto Rico’s Migratory Challenges

January 30, 2017

Good Morning! In today’s Blog, we consider the migratory challenges to Puerto Rico’s fiscal recovery.

Post Storm Fiscal & Physical Misery. Puerto Rico’s legislature has passed and sent legislation to Gov. Ricardo Rosselló for his signature to authorize the U.S. territory to lend capital to the Puerto Rico Electric Power Authority (PREPA) and the Puerto Rico Aqueduct and Sewer Authority to handle imminent cash shortfalls (as of February last year, PREPA had $9 billion of debt and PRASA had $4.6 billion of debt). The intent is to avert any potential financing outage next month—an outage of further apprehension because of the efforts on the mainland to lure Puerto Ricans for employment opportunities on the mainland: the South Carolina Department of Corrections, seeking to fill 650 vacant positions, has erected billboard ads in Puerto Rico offering relocation assistance and salaries as much as $35,000 annually—plus overtime and benefits. Another company, Bayada Home Health Care, has been advertising available positions on Facebook: the company reports the response has been so strong that it had to take down its ads. Given an unemployment rate, according to the U.S. Labor Department, rising over 10 percent at the end of last calendar year in Puerto Rico compared to the mainland, where the unemployment rate was falling below 5 percent, the allure of emigrating is understandable.

According to the U.S. Census Bureau’s latest American Community Survey—even though outdated in the wake of post-Hurricane Maria migration, approximately 320,000 Puerto Ricans live in central Florida, with a significant percentage arriving recently: the post-Maria migration could mean an outflow of an additional 114,000 to 213,000 each year for the next two years, according to the to the Center for Puerto Rican Studies in New York City, whose researchers from the Climate Impact Lab estimated the impact of Hurricane Maria, using an econometric model of the costs of cyclones over the past 60 years and applied it to the pre-storm economic conditions in Puerto Rico: “Maria could lower Puerto Rican incomes by 21 percent over the next 15 years—a cumulative $180 billion in lost economic output,” concluding that “Maria could be as economically costly as the 1997 Asian financial crisis was to Indonesia and Thailand and more than twice as damaging as the 1994 Peso Crisis was to Mexico—but this time on American soil.”

The allure of emigrating is demonstrated by estimates from the Center for Puerto Rican Studies, which has estimated that in the period from 2017 to next year as many as 470,335 Puerto Ricans will leave for the mainland—the equivalent of approximately 14 percent. More critically, however, those that are living appear, disproportionately, to be those who can afford to: the Center estimates “Maria could lower Puerto Rico incomes by 21 percent over the next 15 years,” an amount the equivalent to $180 billion in foregone economic output—leading the Center to write: “Hurricane Maria has accelerated this propensity to a point where we can refer to the depopulation of Puerto Rico as one of the most significant hurdles for future economic recovery.” The Center’s data makes clear, moreover, that it is the young and employable who are emigrating: overwhelmingly, it is the seniors who are being left behind—raising, unsurprisingly, increasing questions with regard to pension and health care implications as revenues will fall.

Human & Fiscal Storms

January 25, 2017

Good Morning! In today’s Blog, we consider the seemingly unending physical and fiscal challenges to Puerto Rico’s fiscal and   physical recovery.

We all were sea-swallow’d though some cast again,
And by that destiny to perform an act 

Whereof what’s past is prologue, what to come
In yours and my discharge. 

Fiscal & Physical Storms.  In the second Act of The Tempest, William Shakespeare warned of the danger of storms. Now, in the wake of a storm and disparate federal responses, Puerto Rico Gov. Ricardo Rosselló has submitted a revised fiscal plan which estimates the U.S. territory’s economy will shrink by 11%–and its population will decline by nearly 8% next year. As submitted, the Governor’s revised fiscal proposal does not set aside any funds to reimburse creditors in the next five years as Puerto Rico seeks to restructure a portion of its $73 billion public debt; the original plan had set aside $800 million a year for creditors, a fraction of the roughly $35 billion due in interest and payments over the next decade. The revised five-year plan also assumes Puerto Rico will receive at least $35 billion in emergency federal funds for post-hurricane recovery and another $22 billion from private insurance companies—a generous assumption given that the U.S. Treasury Department and FEMA this month advised Puerto Rico officials they are temporarily withholding billions of dollars approved by Congress last year for post-hurricane recovery, because they believe Puerto Rico has sufficient fiscal resources.

The Governor’s revised plan does not propose either layoffs or new taxes; rather it proposes labor and tax reforms, as well as the privatization of PREPA in an effort to help generate (not a pun) revenue and promote economic development as the U.S. territory endures an 11-year recession. The Governor noted that nearly half of Puerto Rico’s  3.3 million inhabitants were in poverty prior to the hurricane—and Puerto Rico still confronts an 11 percent unemployment rate. The disparate circumstances have been aggravated in the wake of nearly half a million Puerto Ricans fleeing to the mainland U.S. over the past decade in search of jobs and opportunities—leaving behind older and less educated Puerto Ricans—an exodus which the Governor warned: “We must work as a government to prevent this from happening, and that’s what we’re focused on.” Gov. Rossello said he would hold back on his proposed $350 million cut in aid to Puerto Rico’s 78 municipalities or muncipios as they continue to struggle to recover from Maria; instead, he said they will receive more money than usual in future years, adding he will also propose tax cuts, including an 11.5 percent sales and use tax to 7 percent for prepared food. His comments came as more than 30 percent of power customers still remain in the dark more than four months after Hurricane Maria.

The Promise of PROMESA? PROMESA Board Executive Director Natalie Jaresko said the “Oversight Board views implementing structural reforms and investing in critical infrastructure as key to restoring economic growth and increasing confidence of residents and businesses: Our focus in certifying the revised plans will be to ensure they reflect Puerto Rico’s post-hurricane realities,” with her statement coming as the PROMESA Board has set a deadline of February 23rd to approve the plan.

The Precipitous Chapter 9 Road to Recovery

January 3, 2018

Good Morning! In this a.m.’s Blog, we consider the fiscal, scholastic, and governing challenges of the city emerging from the largest chapter 9 municipal bankruptcy in U.S. history.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery.  After years of failed leadership, financial mismanagement, quasi-chapter 9 municipal bankruptcy which led to a state takeover; the state of Detroit’s Public Schools Community District remains vital to encouraging young families to move back into the city—especially in the wake, last month, of DPS failing to meet critical deadlines necessary to be eligible for vital state aid.  (In 2016, Michigan enacted a $617 million DPS bailout, as we have previously noted.) That action separated the district’s debt from a new district that could start fresh. Now, renewed state intervention would be a critical fiscal step backwards; thus it is fortunate that Superintendent Nikolai Vitti appears to be on top of the situation: he warns that disciplinary action will follow in the wake of DPS’ failure to meet these deadlines, making it critical the Superintendent can trust his staff. It is especially vital now in the wake of a second credit rating upgrade—with the report card having recorded, last month, that DPS that Detroit Public Schools had lost out on $6.5 million in fiscal assistance to whittle down its old debt, because DPS officials had failed to turn in paperwork homework on time, according to Superindent Vitti (Michigan reimburses its public school districts for debt loss under Public Act 86 if they met the Aug. 15 deadline; thus, Superindent Vitte, on Monday, reported: “At this point, Detroit Public Schools is not eligible for the $6.5 million-dollar reimbursement from the state…After speaking with state officials, the available funds have already been disbursed to other qualifying entities. However, we will continue to petition the state to receive the reimbursement.”

Under the agreement, Detroit’s old district is still obligated to pay down its past operating debt; thus, the system’s failure to meet two deadlines last year cost not $6.5 million in aid from the state to help pay down its debt, but also a loss of public trust and confidence. As Superintendent Vitte noted last month: “At this point, Detroit Public Schools is not eligible for the $6.5 million-dollar reimbursement from the state: After speaking with state officials, the available funds have already been disbursed to other qualifying entities.” According to Superintendent Vitti, former CFO Marios Demetriou received the documents, but never completed them or sent them to the state. Even though the missed payout from the state is not expected to harm the day-to-day operations of the new district, it appears to curry a D grade; more importantly, it delays repayment of DPS’ legacy debt—or, as Superintendent Vitti notes: it is “unacceptable….The inability to submit the reimbursement form on time is a vestige of the past that continues to haunt the district…This is directly associated with the need for stronger leaders, systems, and processes. The individuals who were closest to the responsibility to submit the form will no longer be with the district.”

The unscholarly missteps appear to have contributed to ongoing doubts about the city’s fiscal acumen: The Motor City’s credit ratings remain deep in junk-bond territory, even after S&P Global Ratings last month upgraded Detroit’s credit rating from B to B+, while Moody’s last October had lifted its to B1 in the wake of the city’s launch of a new web portal to improve investor access to its financial data and bond offerings, Stephen Winterstein, a Managing Director and chief municipal fixed income strategist at Wilmington Trust Investment Advisors, Inc. to note he was “really optimistic about what they have been doing in terms of disclosure and the investor website is definitely a move in the right direction: The road to recovery is a long one, and I think that Detroit is doing the right things.”

Since exiting from the largest chapter 9 municipal bankruptcy in American history just three years ago last month, Detroit has issued debt twice: in August 2015 with $245 million of local government loan program revenue bonds, and in August 2016 with a $615 million general obligation/distributable state aid backed bond sale—albeit both issuances were via the Michigan Finance Authority, with the first enhanced with a statutory lien and intercept feature on the city’s income taxes. CFO John Naglick said that Detroit is also close to deciding on the underwriting team for a request for proposals it launched in October to find banks to lead a tender offer and refunding of its unsecured financial recovery municipal bonds with the aim of lowering its costs and easing a future escalation of debt service. For its part, S&P, in its upgrade, cited positive momentum the city is building with regard to stabilizing its operations and being better prepared to address future significant increases in pension contributions—or, as the agency noted: “We believe the city’s financial position is now more transparent compared with recent years, as is Detroit’s long-term financial strategy, which relies on fairly conservative growth assumptions…We also believe that the city has a stronger capacity to service its debt obligations than in years past.” Indeed, Detroit’s credit ratings are the highest since March of 2012, just over a year before Kevin Orr filed for chapter 9 bankruptcy in July of 2013. Nevertheless, Detroit’s credit rating remains deep in junk territory and vulnerable to another recession, say market participants. Or, as Michigan Attorney General and gubernatorial Bill Scheutte notes: “We still believe Detroit faces a long path that will require years of prudent decision-making from management and the avoidance of major economic shocks before its debt makes sense for investors looking for high-quality municipal exposure…The city still has an abundance of extremely high-risk characteristics and speculative-grade qualities that investors should be very cognizant of and understand what they are taking on.” Notwithstanding, Detroit appears to be on course to exit state oversight this year: it has presented deficit-free budgets for two consecutive years, enabling it to exit from oversight by the Financial Review Commission oversight; it ended FY2016 with a $63 million surplus; Detroit’s four-year forecast predicts an anemic annual growth rate of only about 1%; thus, any adverse public school news could have repercussions.


The Human & Fiscal Challenges of Recovery

November 3, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal recovery of Michigan municipalities; the City of Detroit’s efforts to upgrade the quality of rental housing, and the ongoing fiscal and human plight of the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Royal R-O-L-A-I-D-S. Michigan State officials Wednesday released Royal Oak Township, a suburb of Detroit and a charter township of Oakland County with a population as of the 2010 census of 2,419, from its consent agreement, with Michigan Treasurer Nick Khouri stating the Oakland County township is now free of the fiscal agreement under which the state placed it three years ago to resolve a financial emergency: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” He added that progress has been made since 2014 to resolve issues that led to a financial emergency for the Oakland County community, for example, noting that today the township has a general fund balance of $920,000 instead of a deficit—and that police and fire services are improved. Township Supervisor Donna Squalls says the community has been able to work with the state and “enact reforms to ensure our long-term fiscal sustainability. Royal Oak Township’s financial emergency resulted in an assets deficit of nearly $541,000 for its 2012 budget year. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever: The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” For his part, State Treasurer Khouri noted the township was the last remaining Michigan municipality operating under a fiscal consent agreement: over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements in response to fiscal and financial improvements and operational reforms. The Treasurer stated only three communities: Ecorse, Flint, and Hamtramck remain under state oversight through a Receivership Transition Advisory Board.

Protecting the Motor City’s Renters. The Detroit City Council this week voted unanimously to update its rental regulations, am update which included the enactment of rules to bar landlords from collecting rent on units which have not passed city inspections. Under the current ordinance, housing units are supposed to be registered and have passed city inspections by obtaining a certificate of compliance prior to being available for rental purposes; however, before they can be rented out. However, city officials admit they have permitted most landlords to ignore those rules for more than a decade—rules adopted to ensure compliance with safety regulations, especially lead poisoning prevention efforts, for which inspections are a part of obtaining a certificate of compliance. Or, as Councilman Andre Spivey put it: “We hope it will improve the quality of life in our neighborhoods and entire city.” However, some landlords have claimed that enforcing inspections with the threat of rent being withheld would discourage the incentive to provide rental housing opportunities in the city—already a challenge because of apprehensions about crime and the quality of public schools—with some even vowing to sue the city. Last year, just 4,174 addresses were registered and inspected—less than 3 percent of the Motor City’s estimated 140,000 rental units—and more than 20 percent below the number registered a decade ago. Indeed, last year, the Detroit News reported that only one of every 13 eviction cases was filed on an address legally registered with the city—with the paper reporting that families facing eviction in homes that were never inspected by the city and had numerous problems, including: lack of heat, hazardous electric systems, missing windows, and rodent infestation.

Under the updated regulations, to be phased in over the next six months, tenants who live in rentals which have not passed city inspections would be given the option to could put their rent in an escrow account for 90 days. If the landlord, by the end of such period, had failed to obtain a city certificate, the renter will be able to keep the money. Subsequently, a tenant would be permitted to continue to put rent in escrow if the landlord does not comply, while the city would hire a third-party company to manage the escrow fund. The new escrow provision will be phased in, and each neighborhood will have different deadlines. Renters who are escrowing their payments will also have the right to “retain possession of the rental property,” according to the updated regulations.

A Motor City of Dreams? Meanwhile, yesterday, Renu Zaretsky, writing for the Tax Policy Center, “Transformational Brownfield of Dreams in a Motor City,” about the role of fiscal tax policy in revitalizing two Michigan cities, noted that the city’s famed Renaissance Center had been constructed to revitalize Detroit in the wake of the 1967 riots—with Henry Ford II, in 1971, convincing dozens of businesses to invest in the $350 million project; however, she noted: the hoped-for transformation never took place, leading to the collapse of the Center’s assessed property value—and crushing hopes for the city’s fiscal revival. Yet, today, Detroit and the state of Michigan seem poised to invest half a trillion dollars to try once again to revitalize the recovering downtown—a downtown in which developer Dan Gilbert, the founder of Quicken Loans, is investing to transform via 3.2 million square feet of office, residential, and retail space, including a skyscraper and 900 apartments—albeit, Mr. Gilbert is seeking tax incentives to support the effort, claiming taxpayer subsidies are “essential,” for not only this project, but also other investment in the city. Under his proposal, he would to put up a total of $1.9 billion, with about $500 million up-front: in return, he is seeking the leverage of additional funding from a newly amended state tax incentive program—under which he anticipated some $557 million over the next three and a half decades, based on new state legislation Gov. Rick Snyder signed last summer to amend the state’s Brownfield Redevelopment Financing Act of 1996: under the state’s current statute, brownfield developers could recoup limited construction costs (such as demolition, site preparation, and infrastructure improvements) via tax increment financing; however, under his new proposal, the state would directly subsidize construction costs that directly benefit an eligible property—with the municipal bonds backed by Michigan state sales and income taxes generated during on-site construction, as well as 50 percent of state income and withholding taxes from those who will live and work on the sites in the future, as well as the added property tax revenue. The Detroit Brownfield Redevelopment Authority would issue municipal bonds to finance the project, with the bond payments secured by some $229.6 million in property tax revenues, $18.2 million from construction site state income taxes, $1.6 million from city income taxes, and $307.9 million from state income taxes paid by future workers and residents. She notes that Mr. Gilbert promises this project would attract 2,122 residents who would pay monthly rents ranging from $2,287 to $3,321 and create 8,500 direct permanent jobs, including 5,400 office jobs paying an annual average of $85,000 and 1,700 retail and service positions paying $25,000—with Michigan reimbursed via captured state and municipal income taxes over the next two decades.  

As we have noted—and she writes: this is a fiscal dare: notwithstanding its fiscal recovery, the Motor City still has the highest rate of concentrated poverty among the 25 most populous metro areas in the U.S.; its median household income is about $26,000; and its unemployment rate was 9.6% in July. That is: this is a gamble in an area in the downtown where—on the day Detroit filed for chapter 9 municipal bankruptcy, the hotel clerk told me it was unsafe for me to walk to the Governor’s Detroit offices—about a half mile away—to meet with Kevin Orr on his very first morning as the Governor’s appointed Emergency Manager. Now, nearly a decade later, the fiscal challenge—and risk—is whether new state tax expenditures which benefit developers could succeed in boosting Detroit’s recovering revenues.

Physical & Fiscal Destruction. Hurricane Maria left no equina or corner of Puerto Rico untouched: the cataclysmic storm meted out systemic physical and fiscal devastation to the U.S. territory and to the lives and livlihoods of its 3.4 million American citizens. This morning, more than five weeks later, too many residents still lack safe and clean drinking water, access to food, and communications. Power, and transportation links are only partially restored. While tens of thousands of public servants and volunteers are now hard at work restoring those essential needs and unblocking constraints from logistics to information flow, the contrast with the federal responses in Houston and Florida have become even more stark. It means Puerto Rico’s leaders face two simultaneous challenges: addressing people’s most urgent physical needs, and laying the foundations for the direction of the medium- and long-term recovery and reconstruction efforts ahead.

In a way similar to Detroit, Puerto Rico confronts a legacy of debt and economic uncertainty, but, as we have noted above; the physical and fiscal devastation might offer a historic opportunity to reimagine Puerto Rico’s future. Yet, how the island’s fiscal and physical reconstruction is conceived and implemented will determine the future of the island: it will be the architecture of Puerto Rico’s physical and civic infrastructure for the next half century, or, as Puerto Rico’s Economic Secretary Manuel Laboy said recently: “We have this historic opportunity: Instead of going with incremental changes, we can go and push the envelope to really transform the infrastructure. That is the silver lining opportunity that we have.” After all, Hurricane Maria exacerbated the considerable challenges already confronting Puerto Rico: a massive public finance debt crisis and migration flows which have witnessed a dramatic outflow of the island’s population: an outflow of more than 10%–but an unbalanced 10%, as the outflow has been characterized disproportionately by being both younger and more educated, meaning Puerto Rico has disproportionately greater low-income and elderly citizens in need of greater fiscal assistance, even as those most valuable to a vibrant economy has become smaller.

The fiscal and human challenge, this, will be for its leaders not to employ the paper towels thrown at them by President Trump, but rather to leverage its considerable natural assets: its central location in the Caribbean region, its hard-working and resourceful residents, its mostly mild climate, and its development-friendly topography. Indeed, many agencies involved in the reconstruction are rightly conducting a “needs assessment” to align their aid efforts. Equally important to medium- and long-term reconstruction is an “asset map” to ensure that Puerto Rico’s strengths, resources, and opportunities are taken into account when imagining the future potential of the island. At the same time, as part of rebuilding, its leaders will need to anticipate that global warming means that more category 4 and 5 storms are certain in the future—so that rebuilding what was is not a constructive option: there will have to be innovation to creating a resilient infrastructure for power, water and sanitation, communications and transportation.

But, again as in Detroit, the physical, governance, and fiscal reform process which Puerto Rico’s new administration has promised must remain front and center: how can Puerto Rico restore its own fiscal and political solvency—a challenge hardly enhanced in the wake of criticism of the Puerto Rico Electric Power Authority’s (PREPA) now-canceled contract with Whitefish Energy Holdings: the territory must create transparent budgets and plans with regard to how recovery funding is allocated—as well as complete its exploration how citizen panels and consultations to review different design options and careful procurement, oversight, and reporting mechanisms can earn respect and support—not only from its citizens and taxpayers, but also from the PROMESA Oversight Board: a transparent procurement system which can assess the myriad offers that will come in to ensure that the legacies created are cost-effective and the best options for the people and the island. 

Puerto Rico’s Municipalities or Muncipios. Unsurprisingly, the fiscal crisis which has enveloped most of Puerto Rico’s municipalities has multiplied after the passage of Hurricane Maria. The economic burden to respond to the emergency situation has undermined efforts to refills depleted coffers, meaning that the municipal executives of the Popular Democratic Party (PDP), grouped under the Association of Mayors, have not ruled out imposing austerity measures in addition to those applied last year—or, as Association President Rolando Ortiz, the Mayor of Cayey, put it:I am sure that all municipalities are exposed to having to reduce working hours or eliminate places permanently, because we are all exposed to lack of income.” According to reports from El Nuevo Día from last August, some 15 municipalities had to cut working hours of their employees—in some municipalities up to 50%, including in the towns of Vieques, Toa Baja, Las Piedras, and Cabo Rojo. The physical and fiscal devastation comes in the wake of fiscal declines of the municipalities in the past decades after assuming burdens imposed by the Commonwealth, such as mandated increases in contributions to the Retirement Systems, the subsidy to the Government Health Plan, and the reduction in the government contribution. Even though the municipalities have been unable to generate specific data on the economic impact that the municipalities have suffered in the wake of Maria’s impact, Mr. Ortiz emphasized that the blow has been severe: the mayors have had to assume recovery and first response tasks which were not budgeted, such as the collection and disposition of debris and the purchase and supply of diesel and gasoline. Notwithstanding that some of the funds will be reimbursed by the Federal Emergency Management Agency (FEMA), such funding will not represent an automatic improvement in the coffers. As Mr. Ortiz notes: “Before the hurricanes Irma and María, 40 municipalities were about to close their operations. With this impact we have had, we have almost two months of zero commercial economic activity…it makes the fiscal situation precarious.” One of the most serious fiscal claims of the mayors has been for the return of $ 350 million in revenue from contributions that the central government has proposed to cut to municipal assistance in the next fiscal year—with the Mayors meeting yesterday in San Juan to discuss the economic and social situation of each of the associated municipalities in the wake of the storms, where they agreed that the urgency of water and food supplies and the restoration of basic services persists—and that they could not “validate” the claim of Puerto Rico’s Aqueduct and Sewer Authority that 82 percent of subscribers have service. Mayor Marcelo Trujillo of Humacao noted: “If electricity does not arrive, the municipality will go bankrupt, given the case that we depend on 13 industries, trade, and hospitals that we have that are working halfway,” adding that some of the businesses in his city which are open, are only partly operating—while the municipality’s largest shopping center remains shuttered—depriving the community of tax revenues, earned income, and hop—and meaning, as he reported, that the municipality has been unable to restore operations, because the Casa Alcaldía (town hall) suffered damages that prevent work from there. 

His colleague, the Mayor of Comerío, José A. Josian Santiago, noted: “As of July 1 of next year, my budget goes down from 60 percent from $10 million to $4 million, which would mean that, at this time of crisis, I have to leave 200 employees out of a total of 300. How am I going to operate? How will I respond to the emergency?” He noted that the current situation of Comerío is complicated, because, in addition to the lack of basic services, citizens have no way to obtain money for the purchase of food and basic necessities, because banks and ATM’s are closed: “It is a fatigue for my team, as for the people, to be every day trying to survive. A country cannot establish that as a condition of life. There is no way to sentence the communities of our municipalities to survive every day.”

The Price of Solvency. Even as Puerto Rico is struggling to recover without anything comparable to the federal assistance rendered to Houston and Florida, the PROMESA federal oversight board has given the U.S. territory about seven weeks to revise its financial recovery plan to account for the devastating damage suffered in Hurricane Maria, raising the possibility the territory will need to impose deeper losses on owners of its $74 billion debt. The panel earlier this week mandated that Puerto Rico will need to seek approval for any contract over $10 million, significantly expanding its supervision—a step taken in the wake of PREPA’s decision to grant a critical $300 million rebuilding contact to a small Montana company which had just two full-time employees before beginning its work in Puerto Rico. With Maria wreaking an estimated $95 billion in physical devastation, Puerto Rico’s municipal bonds have tumbled on speculation that investors will be forced to accept even steeper concessions than previously anticipated: the territory’s main operational account, which receives most of its public funds and covers most of its expenses, is now projected to report a deficit of $2.4 billion by the end of this year—a deficit exploded not just by the storm devastation, but also by Maria’s toll on the government’s tax collections—or, as PROMESA Board Executive Director Natalie Jaresko put it: “The devastation has affected millions of lives, decimated critical infrastructure, made revenue collections almost impossible…In light of this new reality, we must work urgently towards revising the certified fiscal plans.” The commonwealth and PREPA have been ordered to submit to the federal board their updated fiscal plans by Dec. 22nd. It is unclear, however, whether the PROMESA Board has fully taken into account the demographic changes caused by the physical storm: The revisions need to take into account the anticipated population loss because of Maria, with Hunter College’s Center for Puerto Rican Studies estimates Puerto Rico will lose 14 percent of its population by 2019 because of the storm.

Director Jaresko told the PROMESA Board the hurricane left several variables that will affect the amount of revenues available and spending that will be necessary in the next few years, meaning that the territory’s fiscal recovery plan should show that structural balance should be achieved by FY2022, so that, according to the schedule discussed by the Board, it will seek draft fiscal plans from the commonwealth government, PREPA, and the Puerto Rico Aqueduct and Sewer Authority by Dec. 22nd, aiming to have approved fiscal plans for these entities by Ground Hog Day. The Board plans to adopt certified plans by March 16th, after holding two public meetings in Puerto Rico and one in New York City to receive public comment on the revision to the fiscal plans: these are tentatively scheduled for Nov. 16, 28, and Dec. 4.

Looming Municipal Insolvencies?

October 10, 2017

Good Morning! In today’s Blog, we consider the looming municipal fiscal threat to one of the nation’s oldest municipalities, and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Cascading Insolvency. One of the nation’s oldest municipalities, Scotland, a small Connecticut city founded in 1700, but not incorporated until 1857, still maintains the town meeting as its form of government with a board of selectmen. It is a town with a declining population of fewer than 1,700, where the most recent median income for a household in the town was $56,848, and the median income for a family was $60,147. It is a town today on the edge of insolvency—in a state itself of the verge of insolvency. The town not only has a small population, but also a tiny business community: there is one farm left in the town, a general store, and several home businesses. Contributing to its fiscal challenges: the state owns almost 2,000 acres—a vast space from which the town may not extract property taxes. In the last six years, according to First Selectman Daniel Syme, only one new home has been built, but the property tax base has actually eroded because of a recent revaluation—meaning that today the municipality has one of the 10 highest mill rates in the state. To add to its fiscal challenges, Gov. Malloy’s executive-order budget has eliminated Connecticut’s payment in lieu of taxes program—even as education consumes 81 percent of Scotland’s $5.9 million taxpayer-approved  budget: under Gov. Malloy’s executive order, Scotland’s Education Cost Sharing grant will be cut by 70 percent—from $1.42 million to $426,900. Scotland has $463,000 in its reserve accounts, or about 9 percent of its annual operating budget—meaning that if the Gov. and legislature are unable to resolve the state budget crisis, the town will have to dip into its reserves—or even consider dissolution or chapter 9 bankruptcy. Should the municipality opt for dissolution, however, there is an unclear governmental future. While in some parts of the country, municipalities can disappear and become unincorporated parts of their counties, that is not an option in Connecticut, nor in any New England state, except Maine, where more than 400 settlements, defined as unorganized territories, have no municipal government—ergo, governmental services are provided by the state and the county. Thus it appears that the fiscal fate of this small municipality is very much dependent on resolution of the state budget stalemate—but where part of the state solution is reducing state aid to municipalities.

Connecticut Attorney General George Jepsen has offered a legal opinion which questioned the legality of Gov. Dannel P. Malloy’s plan to administer municipal aid in the absence of a state budget,  he offered the Governor and the legislature one alternative—draft a new state budget. Similarly, Senate Republican leader Len Fasano (R-North Haven), who requested the opinion and has argued the Governor’s plan would overstep his authority, also conceded there may be no plan the Governor could craft—absent a new budget—which would pass legal muster, writing: “We acknowledge the formidable task the Governor faces, in the exercise of his constitutional obligation to take care that the laws are faithfully executed, to maintain the effective operations of state government in the absence of a legislatively enacted budget.” The fiscal challenge: analysts opine state finances, unless adjusted, would run $1.6 billion deficit this fiscal year, with a key reason attributed to surging public retirement benefits and other debt costs, coupled with declining state income tax receipts:  Connecticut is now about 14 weeks into its new fiscal year without an enacted budget—and the fiscal dysfunction has been aggravated by a dispute between Sen. Fasano and Gov. Malloy over the Governor’s plans to handle a program adopted two years ago designed to share sales and use tax receipts with cities and towns: a portion of those funds would go only to communities with high property tax rates to offset revenues they would lose under a related plan to cap taxes on motor vehicles.

Aggravating Fiscal & Human Disparities. The White House has let a 10-day Jones Act shipping waiver expire for Puerto Rico, meaning a significant increase in the cost of providing emergency supplies to the hurricane-ravaged island from U.S. ports, in the wake of a spokesperson for the Department of Homeland Security confirming yesterday that the Jones Act waiver, which expired on Sunday, will not be extended—so that only U.S‒built and‒operated vessels are make cargo shipments between U.S. ports. The repercussions will be fiscal and physical: gasoline and other critical supplies to save American lives will be far more expensive on an island which could be without power for months. The administration had agreed to temporarily lift the Jones Act shipping restrictions for Puerto Rico on September 28th; today, officials have warned that the biggest challenge for relief efforts is getting supplies distributed around Puerto Rico.

Even as President Trump has acted to put more lives and Puerto Rico’s recovery at greater risk, lawmakers in Congress are still pressing to roll back the Jones Act, with efforts led by Sens. John McCain (R-Ariz.) and Mike Lee (R-Utah), the Chairman of the House Water and Power Subcommittee of the Energy and Natural Resources Committee, recently introducing legislation to permanently exempt Puerto Rico from the Jones Act; indeed, at Sen. McCain’s request, the bill has been placed on the Senate calendar under a fast-track procedure that allows it to bypass the normal committee process; it has not, however, been scheduled for any floor time. Sen. McCain stated: “Now that the temporary Jones Act waiver for Puerto Rico has expired, it is more important than ever for Congress to pass my bill to permanently exempt Puerto Rico from this archaic and burdensome law: Until we provide Puerto Rico with long-term relief, the Jones Act will continue to hinder much-needed efforts to help the people of Puerto Rico recover and rebuild from Hurricane Maria.”

The efforts by Sen. McCain and Chairman Lee came as Puerto Rico Gov. Ricardo Rosselló, citing an “unprecedented catastrophe,” urged Congress to provide a significant new influx of money in the near term as Puerto Rico is confronted by what he described as “a massive liquidity crisis:” facing an imminent Medicaid funding crisis, putting nearly one million people at risk of losing their health-care coverage: “[a]bsent extraordinary measures to address the halt in economic activity in Puerto Rico, the humanitarian crisis will deepen, and the unmet basic needs of the American citizens of Puerto Rico will become even greater…Financial damages of this magnitude will subject Puerto Rico’s central government, its instrumentalities, and municipal governments to unsustainable cash shortfalls: As a result, in addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future.” Even before Hurricane Maria caused major damage to Puerto Rico’s struggling health-care system, the U.S. territory’s Medicaid program barely had enough funds left to last through the next year; now, however, nearly 900,000 U.S. citizens face the loss of access to Medicaid—more than half of total Puerto Rican enrollment, according to federal estimates: experts predict that unless Congress acts, the federal funding will be exhausted in a matter of months, and, if that happens, Puerto Rico will be responsible for covering all its costs going forward, or, as Edwin Park, Vice President for health policy at the Center on Budget and Policy Priorities notes: “Unless there’s an assurance of stable and sufficient funding…[the health system] is headed toward a collapse.” Nearly half of Puerto Rico’s 3.4 million residents participate in Medicaid; however, because Puerto Rico is a U.S. territory, not a state, Puerto Rico receives only 57 percent of a state’s Medicaid benefits. Under the Affordable Care Act, Puerto Rico received a significant infusion, of about $6.5 billion, to last through FY2019, and, last May, Congress appropriated an additional $300 million. However, those funds were already running low prior to Hurricane Maria, a storm which not only physically and fiscally devastated Puerto Rico and its economy, but also, with the ensuing loss of jobs, meant a critical increase in Medicaid eligibility.

The White House submitted a $29 billion request for disaster assistance; however, none of it was earmarked for Puerto Rico’s Medicaid program. House Energy and Commerce Committee Republicans have proposed giving Puerto Rico an additional $1 billion over the next two years as part of a must-pass bill to fund the Children’s Health Insurance Program (CHIP), with one GOP aide stating the $1 billion is specifically meant to address the Medicaid cliff. Adding more uncertainty: the Senate has not given any indication if it will take up legislation to address Puerto Rico’s Medicaid cliff: The Senate Finance Committee passed its CHIP bill this past week, without any funding for Puerto Rico attached. 

In a three-page letter sent to Congressional leaders, Gov. Ricardo Rosselló is requesting more than $4 billion from various agencies and loan program to “meet the immediate emergency needs of Puerto Rico,” writing that while “We are grateful for the federal emergency assistance that has been provided so far; however, [should aid not be available in a timely manner], “This could lead to an acceleration of the high pace of out-migration of Puerto Rico residents to the U.S. mainland impacting a large number of states as diverse as Florida, Pennsylvania, New Hampshire, Indiana, Wisconsin, Ohio, Texas, and beyond.”

On Puerto Rico’s debt front, with the PROMESA Board at least temporarily relocated to New York City, President Trump has roiled the island’s debt crisis with his suggestion that Puerto Rico’s $73 billion in municipal bond debt load may get erased—or, as he put it: “You can say goodbye to that,” in an interview on Fox News, an interview which appeared to cause a nose dive in the value of Puerto Rico’s municipal bonds, notwithstanding his lack of any authority to unilaterally forgive Puerto Rico’s debt. Indeed, within 24 hours, OMB Budget Director Mick Mulvaney discounted the President’s comments: he said the White House does not intend to become involved in Puerto Rico’s debt restructuring. Indeed, the Trump administration last week sent Congress a request for $29 billion in disaster aid for Puerto Rico, including $16 billion for the government’s flood-insurance program and nearly $13 billion for hurricane relief efforts, according to a White House official. No matter what, however, that debt front looms worse: Gov. Rosselló has warned Puerto Rico could lose up to two months of tax collections as its economic activity is on hold and residents wait for power and basic necessities. Bringing some rational perspective to the issue, House Natural Resource Committee Chair, Rep. Rob Bishop (R-Utah), said the current debt restructuring would proceed under the PROMESA Oversight Board: “Part of the reason to have a board was to have a logical approach [to the debt restructuring]. We need to have this process played out…There’s not going to be one quick panacea to a situation that has developed over a long time…I don’t think it’s time to jump around…when we already have a structure to work with.” Chairman Bishop noted that Hurricane Maria’s devastation would require the board to revise its 10-year fiscal plan, with the goal to achieve a balanced budget pushed back from the current target of FY2019; at the same time, however, Chairman Bishop repeated that the Board must retain its independence from Congress. He also said Congress would consider extending something like the Puerto Rico Oversight, Management, and Economic Stability Act to the U.S. Virgin Islands—an action which would open the door to a debt restructuring for the more than $2 billion in public sector Virgin Islands municipal debt.

The godfather of chapter 9 municipal bankruptcy, Jim Spiotto, noted that it would be Congress, rather than the President, which would pass any municipal bankruptcy legislation, patiently reminding us: “You can’t just use an edict to wipe out debt: If Congress were to wipe out debt, there would be constitutional challenges…Past efforts to repudiate debt debts have had very serious consequences in terms of future access to capital markets and cost of borrowing.” In contrast, if the federal government were to provide something like the Marshall Plan to Puerto Rico, Mr. Spiotto added: the economy could strengthen, and Puerto Rico would be in a position to pay off some its debts.

Physical & Fiscal Tempests

September 26, 2017

Good Morning! In today’s Blog, we consider the physical and fiscal threats to Connecticut’s capitol city, and the comparable crime apprehensions which could adversely affect Detroit’s ongoing recovery from the nation’s largest ever municipal bankruptcy, before assessing the equity of the U.S. response to the devastating hurricane in Puerto Rico–and what that might mean to its efforts of physical and fiscal recovery. 

Visit the project blog: The Municipal Sustainability Project 


Bleeding Hartford. As the City of Hartford reeled from a violent weekend during which two men were killed just hours apart, city leaders yesterday promised to bring more police to fearful neighborhoods, with Mayor Luke Bronin vowing the police department will continue increased staffing in areas where crime statistics show “a spike in violence or a risk of increased violence.” The Mayor’s vows came, however, at the same time he yesterday warned the holders of the city’s outstanding municipal bonds that Hartford has exhausted its fiscal capacity to levy new or higher taxes‒or to cut its way out of its insolvency: he reiterated that Hartford needs a substantial amount of state funding to avoid a Chapter 9 municipal bankruptcy. In a call with investors, Mayor Bronin detailed the city’s fiscal trauma, as well as its potential chapter 9 considerations—with one person describing the blueprint as relying on the “Detroit timeline as template for success,” referring to Detroit’s initial offer for pennies on the dollar. In this instance, the pre-planned investor call was made in the wake of Assured Guaranty’s public offer to support a refinancing of Hartford’s debt under a new Connecticut state law‒a plan under which the city would realize reduced debt service costs over the next 15 years‒with the remaining costs like a ball and chain extended far into the future, or, as Assured described it: “We believe a consensual agreement among stakeholders offers the city a better path forward than bankruptcy.”

Mayor Bronin, for his part, noted: “I appreciate Assured’s willingness to have constructive discussions…We are interested in long-term solutions that leave the city with a path to sustained solvency and strength.” The statements came as the city is biding time awaiting how much aid it might receive from the state, which itself is struggling, confronting high taxes, falling revenues, $73 billion of pension and debt obligations, and the risk of a greater out-migration of its citizens and businesses, as it is confronted by a $3.5 billion deficit over the next two years, even as its budget is nearly three months overdue. That is, Hartford’s fiscal deterioration has become part of a context of broader credit deterioration in the state—which, in response, appears likely to struggle within a context of worsening local credit quality in Connecticut. Not only is the state likely to make deep cuts to local aid in the current biennium: the state is already assuming that its municipalities will draw down reserves as a result—meaning that the fiscal ripples are likely to adversely the borrowing costs of municipalities throughout the state.

The Dangerous Road to Recovery. The FBI released data yesterday, which found that violent crime in Detroit surged 15.7 percent last year, ranking the city as the nation’s most violent big city, albeit a finding city police officials disputed. Last year, there were 13,705 violent crimes reported—murder, rape, assault, and robbery—more than 10 percent greater than the previous year. Nevertheless, Detroit Police Chief James Craig described the FBI numbers as wrong: he blamed an antiquated software system (CRISNET), which he said caused crimes to be double reported. The system, which was replaced in December, shows a 5 percent reduction in violent crime last year, according to Chief Craig. According to the FBI, Detroit’s rate of 2,047 violent crimes per 100,000 people placed it highest among cities with more than 100,000 residents, higher than St. Louis and Memphis, Tennessee—and seemingly reversing the city’s post chapter 9 implementation of its plan of debt adjustment: violent crime in the Motor City had declined 13% in 2015, making it second in the country behind St. Louis.  According to the FBI report, murders rose in Detroit last year as well: 303 in 2016 from 295 in 2015, up 3 percent, albeit that lagged the national violent crime rate increase, which rose for the second year in a row, up 4.1 percent from last year. Murders in the United States were up by 8.6 percent, according to the FBI data. Thus, notwithstanding the headlines the Windy City, Chicago, has garnered for its rise in murders: 765 in 2016 compared with 478 in 2015, a 60 percent increase, Chicago’s is significantly lower than Detroit’s.

A Double Standard for Puerto Rico? Puerto Rico Gov. Ricardo A. Rosselló yesterday warned the U.S. territory was on the brink of a “humanitarian crisis,” even as U.S. Navy vessels docked in Virginia which could be invaluable in rendering the kinds of critical recovery the federal government provided to communities in Texas and Florida remain docked nearly a week after Hurricane Maria knocked out all of Puerto Rico’s electricity, most of its potable water, and fearful of the collapse of a major dam. The Governor urged Congress to act swiftly to avert a deepening disaster, asking that Puerto Rico be accorded the same treatment as hurricane-ravaged states. Despite the silence from President Trump, the Governor urged Republican leaders in Congress to move swiftly to send more funds, supplies, and relief workers: “Puerto Rico, which is part of the United States, can turn into a humanitarian crisis…To avoid that, recognize that we Puerto Ricans are American citizens; when we speak of a catastrophe, everyone must be treated equally.”

The dire physical situation, moreover, could bode even more dire fiscal consequences: as Gov. Rosselló warned Puerto Ricans are expected to flee in droves to the continental U.S., increasingly leaving behind the old and the poor, aggravating the fiscal hurricane—or, as the Governor put it: “If we want to prevent, for example, a mass exodus, we have to take action. Congress, take note: Take action, permit Puerto Rico to have the necessary resources.”

In the wake of criticism for a lack of public support for Puerto Rico, President Trump yesterday took time from tweeting about the NFL to post a pair of tweets which nevertheless identified the devastating connections between the natural disaster to Puerto Rico’s increasingly desperate fiscal situation, writing that while Florida and Texas were coping well from hurricane damage, “Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble,” adding in a subsequent tweet: “…owed to Wall Street and the banks which, sadly, must be dealt with. Food, water and medical are top priorities—and doing well.” Congressional leaders yesterday claimed they were awaiting assessments of the damage in Puerto Rico, as well as a formal disaster request from the Trump administration, before Congress can act; unfortunately, such a request is not expected until early to mid-October, even as House Appropriations Committee Chairman Rodney Frelinghusyen (R-N.J.) issued a statement noting that Puerto Ricans on the island “are entitled to equal treatment under the law.”

FEMA is currently drawing from the same $15.3 billion appropriation approved this month by Congress in response to Hurricane Harvey, which hit Texas, and Hurricane Irma, which hit Florida and damaged Puerto Rico and the United States Virgin Islands. FEMA Director Brock Long, and Thomas P. Bossert, the President’s Homeland Security adviser, were both in Puerto Rico yesterday to assess the damage, with Director Long asserting that the federal government had 10,000 people “working around the clock” to help Puerto Rico. Puerto Ricans can now file damage claims with FEMA, which has sent teams to 10 municipios to go house to house to collect information and pass it on, according to Gov. Rosselló; nevertheless, more than half the territory is without potable water—100 percent is without electricity. All of Puerto Rico’s wastewater and water treatment plants lack electricity.

Some Democrats want Congress to quickly approve a relief bill, but to, at the same time, temporarily forgive Puerto Rico’s loan repayments and remove a requirement that Puerto Rico contribute into the federal emergency pot. Indeed, the physical and fiscal damage to the U.S. Virgin Islands and Puerto Rico, has meant the halt of all PROMESA-related creditor and debtor considerations: in the wake of the storm, and the diversion of all Puerto Rico governmental focus on saving lives, it is unlikely Puerto Rico will be making interest payments on its debts for the foreseeable future: the restoration of vital public utilities to ensure the provision of water and electricity is a much higher priority: there is access to safe drinking water to only a quarter of Puerto Rico’s residents. In the three decades that National Guard Brigadier General Wendul G. Hagler II has served, he described the situations as “about as large a scale damage as I have ever seen.” 

A related fiscal danger could be an accelerating exodus of more educated and skilled Puerto Ricans, likely in the thousands, to leave for the continental U.S., leaving behind a population in need of far greater vital public services, but a deteriorated tax base—with some estimates that such an exodus could be greater than 10%.