Governance in Recovering from Severe Physical and Fiscal Distress

March 2, 2018

Good Morning! In this morning’s eBlog, we consider the use of a municipality’s capital assets to get back on its fiscal feet; then we consider the fates, fiscal and physical, for many of Hurricane Maria’s Puerto Rican victims who have emigrated stateside. Are they “invisible Americans”?

Municipal Assets & Fiscal Balancing. In a surprising move, the Petersburg, Virginia City Council has unanimously adopted a motion to opt not to sell the municipality’s public water and wastewater assets, effectively ending a nearly yearlong debate with regard to whether or not to sell their public utility to Aqua Virginia and Virginia American Water, two private providers who had submitted bids in December of 2016—at a time when one of the nation’s oldest cities was on the precipice of insolvency. It would appear the decision was likely affected by several water main breaks and water boil notices in the city last month—forcing legislators and city leaders to act. In the wake of the breaks, Congressman A. Donald McEachin (VA-4) and the Virginia Conservation Network had joined forces to host a roundtable discussion on the dilapidated state of Petersburg’s water infrastructure. Under the successful motion, the Council instructed the City Manager to: 1) reject the offer made by Aqua Virginia; 2) discourage any future offers to purchase Petersburg’s water and wastewater assets; 3) reject the pending unsolicited proposal to purchase Petersburg’s water and wastewater assets. That is, the municipal fiscal and capital policy going forward is to concentrate all available city resources on devising a plan to improve the city’s collection rate—or, as Councilmember Cuthbert put it: “It was a diversion of energy…It diverted the city administration’s energy; it diverted the public’s energy; and it diverted the City Council’s energy.” Councilwoman Annette Smith-Lee noted: “For the citizens, their voice is their voice. We’re on Council because of them, and they did not want us to sell the water.”

Had the city opted to go forward with the proposed privatization and sale, the municipality would have lost control over setting the water rates—an important governance and fiscal issue, as neither the Council, nor many citizens support having a for-profit company to be in charge of the water rates. Previously, several Councilmembers had expressed skepticism about the sale of some of the city’s vital public infrastructure—even as former Richmond City Manager Robert Bobb’s Group, hired to take over the city in lieu of a chapter 9 municipal bankruptcy filing—had repeatedly made pleas to the Council to “open the envelope” and see what Aqua Virginia and Virginia American Water were offering for the system. Councilman Cuthbert noted: “Council realized that for us to sell our water and wastewater assets, it would have taken six affirmative votes, and the votes were not there.”

In the wake of that successful motion, Councilman Cuthbert told his colleagues he saw “no reason to go through another eight months of agony that was going to lead to nowhere.” The decision thus ended a year-long battle—or, as Mayor Sam Parham told his colleagues, Council Members had listened to citizens who were concerned about the sale, control over its water and sewer rates, and it never materialized. Barb Rudolph, one of those citizen leaders, where the citizen group Clean Sweep Petersburg, had questioned the idea from the Robert Bobb Group to privatize, especially after the consultants had departed Petersburg with what they had described as stabilized finances. Yet, even after offers by private companies were rejected, bids still continued to come in: obviously, private, for-profit corporations recognized intrinsic value in the system—and, of course, an opportunity for profit. Indeed, at a roundtable discussion about the city’s water and sewer infrastructure, City Manager Aretha Ferrell-Benavides acknowledged that Petersburg was still being pressured by a private vendor to sell its water and wastewater systems. The fact that Aqua Virginia leaders attended city meetings had not been lost on some residents—one even likened the private vendors to predators. Residents with Clean Sweep Petersburg took photos of empty chairs in the City Council chambers that they say Aqua Virginia executives vacated just after the Council’s vote. Now, city leaders say, energy should be devoted to improving the existing systems. In the past, necessary rate increases that the council approved were never implemented, in part because of turnover within city departments. In addition, billing issues that cost the utility system millions of dollars in recent years ended up slapping some residents with $4,000 bills, and the faulty rollout of a new utility billing system cost taxpayers upward of $1 million more. As recently as last week, some residents at the roundtable said their bills are still volatile. Ferrell-Benavides said a long-term plan to update the city’s infrastructure and improvements to the billing system are necessary and in the works.

For one of the nation’s oldest municipalities—a key city during both the Revolutionary and Civil Wars, a small, majority African-American municipality of just over 32,420, with a median household income of $33,927, where per capita income is about $18,535, and nearly 28% are below the poverty level—the politics of vital access to water matters.

The Physical & Fiscal Costs of Federalism. Physical catastrophes and federal insouciance can wreak terrible fiscal and human costs. In the case of Hurricane Maria, we can see those costs as not just fiscal, but especially in the welfare of our most vulnerable: young children and the elderly. More than 1,800 children have migrated from Puerto Rico and enrolled in Connecticut schools since Hurricane Maria decimated their homeland last September—a human and fiscal consequence of both the devastating physical and fiscal consequences, but also to the difficult fiscal challenges Connecticut is already confronting. Yet, unlike the federal government, Connecticut schools have scrambled to accommodate the new arrivals—most of them non-English speakers, and they have made such human, physical, and fiscal efforts notwithstanding the cash-strapped State of Connecticut. While Congress finally approved a compromise budget bill to provide millions of dollars to help schools care for displaced students (providing the equivalent of $8,500 for each displaced student, $9,000 for each one that is not English-speaking, and $10,000 for disabled students requiring special education); that still left a significant fiscal and physical burden for Connecticut, where State House Majority Leader Matt Ritter (D-Hartford) has set up a working group in the General Assembly to try to provide “one-stop shopping” for displaced Puerto Ricans who need assistance: he notes there “is no question that schools are looking for additional money” to accommodate the influx of unexpected students, many with special needs, and he is “very pleased” Congress finally offered some help. He believes the displaced student funding, part of the budget agreement’s $44 billion hurricane response package, will help. According to the Connecticut Department of Education, there were 1,745 displaced students in Connecticut schools as of mid-February—a slight reduction from the beginning of the year, as some families having opted to return to Puerto Rico or move to other states. Hartford, a city itself in difficult fiscal shape, finds its public schools have taken the bulk of the new arrivals, 376 at last count and 429 at the peak of the migration, followed by Waterbury, New Haven, and New Britain. Yet, while Congress finally provided some aid for displaced students, that aid appears unlikely to help school districts with the children who enroll next year.

Demographically Failing. While, as we noted above, there has been some federal and state aid to displaced children from Puerto Rico, the picture is more grim for Puerto Rico’s elderly: thousands of whom reside in vulnerable conditions outside the radar of government authorities, and too many of whom went hungry and thirsty due to mobility difficulties, or were unable to save their medicines due to the lack of light, without anyone knowing. Indeed, Department of the Family Secretary Glorimar Andújar described the challenge, because, in the wake of the physical destruction, the government lacked vital information with regard to where the most vulnerable were. Secretary Andújar noted the government neither knew where the most vulnerable lived, nor what their particular needs were. Thus, the devastating storm led her to acknowledge: “We have many elderly people in homes that we did not think were going to be in such high concentrations…Urbanizations complete with elderly people who depend on and are nourished by the help given by their neighbors…They are not necessarily under the jurisdiction of the Federal District, because we enter into protection. They are people who live alone and have particular needs, who are supplied by their neighbors: It is important, for future services that develop, to know where each of these populations are located.” That is, unlike children, who could be located via the school system—and could be lifted to accommodating state such as Connecticut, or depart with their families to Florida, Puerto Rico’s most vulnerable Americans were not only left behind, but also largely unaccounted for: as indicated, due to the nature of the services offered, the agency knows about elderly Americans only to the extent that they participate in their programs, such as Nutrition Assistance (PAN), protection services in cases of abuse or the homes of prolonged care—that is less than 3% of Puerto Rico’s nearly 860,000 senior citizens—where 36% live alone. This cohort, described by some as “that population that is most worrisome,” because they are older Americans who reside in the community, but have little support—or, as the Secretary put it: “They are invisible.”

During the most critical phase of the hurricane emergency many institutions did help many who live alone in their homes, offering food or extending electricity via long extension cords, those private efforts were far from sufficient for what is nearly a quarter of the population: In 2016, more than 23.5% of Puerto Ricans were 60 or older—compared to just 19.4% in 2011. It is almost like a teeter-totter, only where it is becoming increasingly fiscally and demographically imbalanced. Now, in the wake of the hurricane, and especially after the wave of immigration to the mainland by children and college-educated Puerto Ricans, estimates are that, by the next census, citizens over 65 will reach 30% of the population.  

To tend to these older Americans after Maria, Puerto Rico actually developed alternate methods of operation, especially because reliance on telephone communication was often impossible—the government sought to provide more personal contact and identify areas of what it deemed “high concentration,” utilizing contributions from organizations such as AARP to provide services. José Acarón, Puerto Rico’s AARP chapter president, stressed that there is “this older adult population, isolated, without a support network, living alone and mostly female, and they do not know where they are…We have to make a municipal census of needs and create community support mechanisms. Then we have to talk about different models of people supporting people, that work strategically and that is part of a plan.”

With estimates that 46.1% of Puerto Ricans live below the federal poverty level, Secretary Andújar said the Department had commissioned a study to verify socioeconomic changes, especially after Hurricane Maria, to the University of Puerto Rico, noting: “We hope to have a more up-to-date visibility of what the percentages are, what is going to throw us, what are the populations that are in those levels of poverty, and, obviously, how aligned our programs are towards services towards each one of those populations that results from the study.” She noted she was unable at present to be certain when that information would be ready. However, in the wake of Hurricane Maria, and by the end of last year, there were 35,000 new applicants for nutritional assistance. Demographer Judith Rodríguez reports that, taking into account only the difficulties brought by the emergency, she can say that the number of poor people on the island has increased: the most recent figures, from 2016, indicated that, in 30 municipios, 50% of the population lived in poverty, and that in six other towns, the figure reached 60%, adding: “Today, more than ever, families need the services offered by the government of Puerto Rico to respond to the changing needs of the people.”

What about the Youngest? Secretary Andújar reported her staff is aware of the possibility of an increase in the incidence of child abuse: “It is a reality for which we have been preparing. We are active with prevention mechanisms. After a phenomenon like the one suffered by the country, after months, it is expected that these indicators tend to increase.” Her agency noted that in the referrals from the last calendar quarter of 2017 of possible cases of abuse, the totals increased month after month, albeit they were below the records of the same period of the previous year. Due to the U.S. territory’s fiscal distress or quasi chapter 9 bankruptcy, her agency has taken a $605 million cut, with Gov. Ricardo Rosselló advising her: “You do not need more,” even as Larry Emil Alicea, president of the College of Social Work Professionals, notes: “Those who stay and cannot leave (from Puerto Rico), increase social stressors and may be associated with suicide rates: In the case of parents, protective capacities diminish and cases of child and adolescent abuse increase.”


Restructuring, Refinancing, & Repowering in the Wake of a Quasi Municipal Bankruptcy

January 23, 2017

Good Morning! In today’s Blog, we consider the fiscal challenges to the U.S. Territory of Puerto Rico in restructuring and rebuilding its public infrastructure.

Puerto Rico Governor Ricardo Rosselló yesterday announced he will privatize the state Electric Power Authority (AEE), stating: “ESA will cease to exist as it currently operates, and during the next few days the process will start where ESA assets will be sold to companies that will transform the generation system into a modern, efficient and less expensive one for the people.” The Governor’s announcement came at a time when almost half a million users of the system are still without service some 124 days after Hurricane Maria’s stormy passage. 

The privatization of the PREPA has been a priority objective of the Government and the PROMESA Fiscal Supervision Board—indeed, last August, before hurricanes Irma and Maria struck Puerto Rico, Chairman José Carrión, had assured that the privatization would be carried out as soon as possible. Indeed,the Board would have to approve any privatization—and, it seems likely that U.S. District Court Judge Laura Taylor Swain might well have some oversight as the Governor develops the first phase—drafting legislation, and then defining the public procurement process. The Governor, in what appears to be an effort to “kill two birds with one stone,” has also described the sale as one where proceeds would be used to help meet public pension obligations.

In his announcement, Gov. Rosselló explained that the process will take 18 months and will be carried out in three phases: “In the first one, the legal framework will be defined through legislation, the market will be assessed, and the call will be opened for companies interested in participating.” He said that in the second step, bids be received and evaluated; and in the third, the terms of the awarding and hiring of the selected company will be negotiated. In making his announcement, the Governor assured that Puerto Rico’s electrical system is 28 years older than the average for the industry in the U.S., noting: “PREPA has become a heavy burden for our people, who today are hostage to their poor service and high cost, what we know today as PREPA does not work and cannot continue to operate like this.” 

Unsurprisingly, his pronouncement was criticized by different authorities: Independence Party Senator Juan Dalmau described his announcement as a “manipulation” to justify the lack of energy on the island since the hurricane. Mayor Carmen Maldonado of Morovis, a city of some 27,000 founded in 1817, and the island’s only municipality which was not devastated by the 1853 cholera epidemic—a devastation remembered both by your scribe who had cholera in Colombia, but also an event which led to what, today, has become a common expression: “La isla menos Morovis,” [all the island but Morovis]—a phrase believed by most Puerto Ricans to have a negative connotation against moroveños. Morovis Mayor Carmen Maldonado responded that the Governor’s announcement does not offer solutions for those who still do not have service in their homes and businesses, stating: “People are still waiting for a service restoration plan.” 

For her part, San Juan Mayor Carmen Yulin Cruz, known for her criticisms of the Trump administration’s response to Puerto Rico after Hurricane Maria, spoke out against the proposal, noting: on her official Twitter account, that PREPA’s privatization would put the Commonwealth’s economic development into “private hands,” and that the power authority will begin to “serve other interests,” describing it as a “clear” strategy to “create chaos at a time when citizens are in need in order to sell something as positive that will be negative in the long run.” The malingering situation, however, is, according to the most recent report from the U.S. Department of Energy, that some 36% of PREPA customers are still without power four months after Maria caused widespread devastation on the island.

Municipal Fiscal Accountability

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eBlog, 03/31/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Atlantic City after its “lost decade,” before venturing inland to one of the nation’s oldest cities, Wilkes-Barre, Pennsylvania (founded in 1769) as it confronts the challenges of an early state intervention program, and, finally, to Southern California, where the City of Compton faces singular fiscal distrust from its citizens and taxpayers.  

A Lost Fiscal Decade? Atlantic City’s redevelopment effort appears to be gathering momentum following a “lost decade” which featured the closing of five casinos, a housing crisis and major recession, according to a new report released by the South Jersey Economic Review, with author Oliver Cooke writing: “The fact remains that Atlantic City’s redevelopment will take many years…The impact of the local area’s economy’s lost decade on its residents’ welfare has been stark.” The study finds the city to be in recovery—to be stable, but that it is still in critical condition with some work to do.  Nevertheless, its vital signs from developers and its improving economy are all good: that is, while the patient may not regain all its previous strength and capability,  it can thrive: it is “over(cost),” and needs to lose some of the fat it built up by going on a (budget) diet—a road to recovery which will remain steep and tortuous, because it lacks the fiscal capacity it had 15 or 20 years ago—and has to slim down to reflect it.  That is, the city will have to stress itself more in order to get better.  

The analysis, which was conducted in conjunction with the William J. Hughes Center for Public Policy at Stockton University, notes that vital signs from developers and its improving economy are in good condition—maybe even allowing the city to thrive, even if it is unable to regain all its previous strength and fiscal capacity—put in fiscal cookbook terms: Atlantic City is over(cost)weight and needs to lose some of the fat it built up by going on a (budget) diet.  The report also noted that Atlantic City is on track with some positive developments, including the decision at the beginning of this month by Hard Rock International to buy and reopen the closed Trump Taj Mahal property, as well as a recent $72 million settlement with the Borgata Hotel Casino & Spa related to $165 million in owed tax refunds. Mr. Cooke also highlighted other high-profile projects underway, including the reopening of the Showboat casino by developer Bart Blatstein and a $220 million public-private partnership for a new Stockton University satellite residential campus. Nonetheless, he warned that Atlantic City still faces a deep fiscal challenge in the wake of the loss to the city’s metropolitan area of more than 25,000 jobs in the last decade—and its heavy burden of $224 million in municipal bond debt, tied, in large part, to casino property tax appeals. Ultimately, as the ever insightful Marc Pfeiffer of the Bloustein Local Government Research Center and former Deputy Director with the state Division of Local Government Services, the city’s emergence from state control and fiscal recovery will depend on the nuances of the that relationship and whether—in the end—the state imposed Local Finance Board acts with the city’s most critical interests at heart.  

Don’t Run Out of Cash! Wilkes-Barre, first incorporated as a Borough in 1806, is the home of one of Babe Ruth’s longest-ever home runs. It became a city in 1871: today it is a city of over 40,000, but one which has been confronted by constant population decline since the 1930s: today it is less than half the size it was in 1940 and around two-thirds the size it was in 1970. It is a most remarkable city, made up of an extraordinary heritage of ethnic groups, the largest of which are: Italian (just over 25%), Polish (just under 25%), Irish (21%), German (17.9%) English (17.1%) Welsh (16.2%) Slovak (13.8%); Russian (13.4%); Ukranian (12.8%); Mexican (7%); and Puerto Rican (6.4%). (Please note: my math is not at fault, but rather cross-breeding.) Demographically, the city’s citizens and families are diverse: with 19.9% under the age of 18, 12.6% from 18 to 24, 26.1% from 25 to 44, 20.8% from 45 to 64, and 20.6% who are 65 years of age or older. The city has the 4th-largest downtown workforce in the state of Pennsylvania; its family median income is $44,430, about 66% of the national average, and an unemployment rate of just under 7%. The municipality in 2015 had a poverty rate of 32.5%, nearly double the statewide average. Last year, the City of Wilkes-Barre was awarded a $60,000 grant through the Pennsylvania Department of Economic Development (DCED) Early Intervention Program (EIP) to develop a fiscal, operational and mission management 5 year plan for the city—from which the city selected Public Financial Management (PFM) as its consultant to assist in working with the city on its 5 year plan—and from which the city has since received PFM’s Draft Financial Condition Assessment and Draft Financial Trend Forecasting related to the city’s 5 year plan. As part of the intervention, two internal committees were created to develop new sources of revenue for the city. The Revenue Improvement Task Force is comprised of employees from Finance, Tax, Health, Code, and Administration and was directed to analyze and improve upon existing revenue streams; the Small Business Task Force was designed to develop guidance for those interested in opening small businesses in Wilkes-Barre and is comprised of employees from Zoning, Health, Code, Licensing, and Administration. Overall, Mayor Anthony “Tony” George and his administration are confident that they have made significant progress is restoring law and order via the city’s goals of strengthening intergovernmental relationships, improving public safety, fixing infrastructure, fighting blight, restoring and improving city services and achieving long-term economic development.

Nevertheless, the quest for fiscal improvement and reliance on consultants has proven challenging: some of PFM’s proposed options to address city finances have caused a stir. City council Chairwoman Beth Gilbert and City Administrator Ted Wampole, for instance, agreed privatizing the ambulance and public works services as a cost-saving measure was one of the most drastic steps proposed by The PFM Group of Philadelphia, with Chair Gilbert noting: “I stand vehemently against any privatization of any of our city services, especially as an attempt to save money;” she warned the city could end up paying more for services in the long run, and residents could receive less than they get now—adding: “If privatization is on the table, then so is quality.” The financial consultant hired last year for $75,000 to assist the city with developing a game plan to fix its finances under the state’s Early Intervention Program was scheduled to present the options at a public meeting last night at City Hall. PFM representatives, paid from the combination of a $60,000 state grant and $15,000 from the city, have appeared before council several times since December.

Gordon Mann, director of The PFM Group, last night warned: “If the gunshot wound to the city’s financial health doesn’t kill it, the cancer will: both need to be treated, but not at the same time…You need to address the bullet wound, and you need to put yourself in the position to address the cancer.” Mr. Mann, at the meeting, provided an update on where the city stands and where it’s going if nothing is done to address the municipality’s structural problems of flat revenues and escalating expenses for pensions, payroll and long-term debt; then he identified a number of steps to stabilize the city and balance its books, beginning with: “Don’t run out of cash,” and “[D]on’t bother playing the blame game and pointing the finger at prior administrations either,…It may not be your fault, but it is your problem.”

Wilkes Barre is not unlike many of Pennsylvania’s 3rd class cities (York, Erie, Easton, etc.), all in varying degrees of fiscal distress, albeit with some doing better than others. The municipal revenues derived from the property tax and earned income tax will simply not sustain a city like Wilkes Barre—that it, unless and until the state’s municipalities have access to collective bargaining/binding arbitration and pension reform: the current, antiquated revenue options leave the state’s municipalities caught between a rock and a hard place. Worse, mayhap, is the increasing rate of privatization—where an alarming trend across the Commonwealth of communities selling off assets (water, sewer, parking, etc.), more often than not to plug capital into pensions, is, increasingly, leaving communities with no assets and with no pension reform facing the same issue in the future. 

Not Comping Compton: Corruption & Fiscal Distress. In Compton, California, known as the Hub City, because of its location in nearly the exact geographical center of Los Angeles County, the City of Compton is one of the oldest cities in the county and the eighth to incorporate.  The city traces its roots to territory settled in 1867 by a band of 30 pioneering families, who were led to the area by Griffith Dickenson Compton—families who had wagon-trained south from Stockton, California in search of ways to earn a living other than in the rapidly depleting gold fields, but where, the day before yesterday, the city’s former deputy treasurer was arrested for allegedly stealing nearly $4 million from the city. FBI agents arrested Salvador Galvan of La Mirada on Wednesday morning, as part of a federal criminal complaint filed Tuesday, alleging that, for six years, Mr. Galvan skimmed about $3.7 million from cash collected from parking fines, business licenses, and city fees: an audit found discrepancies ranging from $200 to $8,000 per day. Mr. Galvan, who has been an employee of the city for twenty-three years, has been charged with theft concerning programs receiving federal funds. If convicted, he could face up to five years in prison. As Joseph Serna and Angel Jennings of the La Times yesterday wrote: “The money adds up to an important chunk of the budget in a city once beset with financial problems and the possibility of [municipal] bankruptcy.” Prosecutors claim that one former city employee saw all these payments as an opportunity, alleging that the former municipal treasurer, over the last six years, skimmed more than $3.7 million from City Hall, taking as much as $200 to $8,000 a day—small enough, according to federal prosecutors, to avoid detection, even as Mr. Galvan’s purchase of a new Audi and other upscale expenses on a $60,000 salary, raised questions.

The arrest marks a setback for the Southern California city which has prided itself in recent years for its recovery from some of the crime, blight, and corruption which had threatened the city with municipal insolvency—or, as Compton Mayor Aja Brown noted: the allegations “challenge the public’s trust.”  Mayor Brown noted the wake-up call comes as the city has been working in recent months to improve financial controls and create new processes for detecting fraud—even as some of the city’s taxpayers question how the city could have missed such criminal activity for so many years. The Los Angeles County Sheriff’s Department had arrested Mr. Galvan last December in the wake of City Treasurer Doug Sanders’ confirmation with regard to “suspicious activity” in a ledger discovered by one of his employees: his position in the city involved responsibility for handling cash: as part of his duties, he collected funds from residents paying their water bills, business licenses, building permits, and trash bills. According to reports, Mr. Galvan maintained accurate receipts of the cash he received for city fees, but he would submit a lower amount to the city’s deposit records and, ultimately, on the deposit slips verified by his supervisors and the banks, according to federal prosecutors. Indeed, an audit which compared a computer-generated spreadsheet tracking money coming in to the city with documents Mr. Galvan prepared made clear that he had commenced skimming cash in 2010—starting slowly, at first, but escalating from less than $10,000 to $879,536 by 2015, a loss unaccounted for in the city’s accounting system. While Mr. Galvan faces a maximum of 10 years in federal prison, if convicted, the city faces a trial of public trust—or, as Mayor Brown, in a statement, notes: “Unfortunately, the actions of one employee can challenge the public’s trust that we strive daily as a City to rebuild…The alleged embezzlement and theft of public funds is an egregious affront to the hard-working residents of Compton as well as to our dedicated employees. The actions of one person does not represent our committed City employees who — like you — are just as disappointed.”