Fiscal Surgery to Restore Stability & Accountability

March 20, 2018

Good Morning! In this morning’s eBlog, we consider options for addressing serious fiscal challenges in Connecticut, before journeying to the U.S. territory of Puerto Rico, where we try to assess whether there might be too many fiscal cooks in the kitchen.

The State of the Constitution State. In the wake of the unveiling of a series of diverse and likely fiscally painful recommendations, the Connecticut Commission on Fiscal Stability and Economic Growth has challenged the state’s legislature to adopt the proposal. Moreover, the Connecticut Conference of Municipalities, notwithstanding that full adoption could jeopardize state aid to local governments in the state, endorsed the full report, finding it would offer more long-term benefits for the state and its municipalities. The Commission report recommendations focused on new long-term benefits for the state and its communities, with its recommendations focused on new revenue-raising options for cities and towns and collective bargaining changes which could prove to be vital reforms which could more than offset the steep reduction in the state budget. The Conference’s Executive Director Joe DeLong noted: “Connecticut has long been the land of steady habits, but the precarious fiscal condition that still plagues the state budget demands that Connecticut change key core public policies—now,” adding the Commission report echoes many of the recommendations the Conference proposed to state legislators just one year ago: “We can wait no longer for substantive change that will set the state on a sustainable economic path that will benefit hard-pressed residents and businesses.”

The 14-member Commission, which was created last October as part of the new state budget, was charged with the task of helping to navigate Connecticut through one of its worst fiscal crises in modern history: the state not only lagged the majority of states in recovering from the great Recession, but also is confronted by surging public retirement benefit costs tied to more than 70 years of inadequate contributions—creating a fiscal challenge projected to place unprecedented pressure on state finances for at least the next 15 years.

Unsurprisingly, the growing costs of financing retirement pensions of post-retirement health care benefits has acted like a python in squeezing aid to the state’s cities and towns. Thus, the Conference found some solace from the commission recommendations, which might grant greater fiscal flexibility to the state’s communities to manage their own budgets and programs. Among the key recommendations: 

  • Authorizing municipal coalitions to add one-half of 1 percentage point to the sales tax rate to fund regional services and diversify local budgets that rely excessively on property taxes.
  • Allowing regional coalitions of municipalities to raise supplemental taxes for capital projects by special referendum.
  • Allowing communities, through regional councils of government, to charge fees on nonprofit colleges and hospitals, which currently are exempt from local property taxation.
  • Permitting towns to increase fees for use of the public rights of way, storm water fees, hotels, car rentals, restaurants, and other services.
  • Urging the state to increase the grants it already provides to restore some of the funds communities lose because state property is exempt from local taxation.

The fiscal stability panel also proposed several changes to collective bargaining, which could help the state’s local governments, including:

  • Allowing communities to use non-union labor on rehabilitation projects costing less than $1 million;
  • Providing communities with a single, neutral arbitrator for labor negotiations;
  • And exempting a city or town’s emergency budget reserve from being used to pay for labor contract settlements.

The Commission’s recommendation that the Legislature reduce the state annual operating budget approximately 5%, or about $1 billion per year left unclear what areas would be targeted, albeit the co-Chairs said that recommendation is not intended to target the nearly $3 billion Connecticut spends annually on major statutory grants to cities and towns; rather, their intent appears to be that the Legislature could achieve these savings via privatizing more services, seeking other efficiencies, and trimming labor costs wherever possible. The Connecticut Business and Industry Association and other business leaders have been urging lawmakers to revisit six reports prepared in 2010 and 2011 by a business coalition known as The CT Institute for the 21st Century. The coalition outlined strategies to cut state spending by hundreds of millions of dollars in total spread across several areas, including reductions in public-sector benefits. These strategies, many of which would take several years, also involved prisons, long-term health care, public-sector benefits, and use of technology to deliver public services. Nevertheless, a number of state legislators questioned the reality of a $1 billion reduction, given that nearly two-thirds of the state budget involves retirement obligations, payments on bonded debt, Medicaid, and other largely fixed costs, without constraining aid to cities and towns.

A Consulting Estado de Emergencia? (State of Emergency) Puerto Rico’s Executive and Legislative branches, during the Hurricane Maria state of emergency, agreed to 1,408 consulting and professional contracts totaling $ 70.1 million, according to an analysis of El Nuevo Día. That effectively translates into approximately 16 contractual agreements for each of the 88 days in which 3.5 million Puerto Ricans were almost in survival mode in the wake of last September’s hurricane—all contracts which were subject to the scrutiny of the Chamber and the Senate of Puerto Rico, as well as the PROMESA Oversight Board with regard to any contract which exceeded $10 million. It appears that nearly half of the consulting and professional services agreements agreed upon during the emergency period registered with the Office of the Comptroller were given mainly to individuals and several dozen firms which provide services to the government under an “administrative consulting” agreement and services: agreements totaling $24 million, with the largest contracts provided via three amendments to agreements of the Department of Health and the Special Program of Supplementary Nutrition for Pregnant, Lactating, Postpartum, Infants and Children from 1 to 5 years old (WIC) with the company to ManPower for temporary employment services. In addition, there is a $ 3.1 million contract from the Office of Management and Budget (OGP) with Deloitte & Touche for financial consulting—which has subsequently signed another contract with the office which will be in charge of administering the federal funds Puerto Rico receives for recovery from Hurricane Maria. Meanwhile, the firm KPMG received an amendment to a contract with the Public-Private Partnerships Authority (AAPP) of $ 947,189. Based on data from the Comptroller, during the emergency, when it was known that the agencies and schools were not operating properly and the courts recessed their work substantially, the agencies also granted 123 contracts for “legal consulting” and “legal services” for $ 4.6 million—with another 31 contracts valued at $2.6 million to accounting firms.  The list of administrative consultants also includes several contracts with amounts close to $1 million, with some of the largest granted by the Bureau for Emergency Management and Disaster Management to the firms Consul-Tech Caribe and DCMC LLC for $ 900,000 each.


Exiting from Municipal Bankruptcy


March 16, 2018

Good Morning! In this morning’s eBlog, we consider the Motor City’s final steps in its successful exit from chapter 9 municipal bankruptcy; then we worry about lead level threats in Flint, before journeying to the warmer climes of the Caribbean to update the fiscal challenges for Puerto Rico.

Early Departure from Chapter 9. The City of Detroit this week dipped into its budget surplus to devote some $54.4 million to finance paying off the outstanding municipal bonds it had issued as part of its plan of debt adjustment four years ago, with the borrowing then issued by the city to settle debts with municipal bond insurers related to the Motor City’s pension-related debt—here the payments were to finance the remaining principal and interest owed on $88 million in 12-year Financial Recovery, with the city formally moving to pay off $54 million of its 2014 financial recovery bonds. The unexpected payments might make the leprechaun jump to celebrate still another demonstration of improved fiscal health. Here, the payment had the support of the Detroit Financial Review Commission, as well as the Detroit City Council, clearing the way for the city Wednesday to issue a 30-day redemption notice and report it had fully funded an escrow to retire $52.3 million of remaining principal and $2.1 million of accrued interest to fully redeem the 2014C bonds effective April 13th—an action projected to save Detroit’s taxpayers some $11.7 million in interest savings. CFO John Hill noted: “The Mayor and City Council have again shown their commitment to the city’s long-term financial sustainability by taking action to authorize the resolution for the redemption of the entire outstanding principal on the city’s Financial Recovery Bonds, Series 2014C.”  In this case, the C series of unrated, taxable municipal bonds totaled $88.4 million; they carried an interest rate of 5% interest, with the bonds secured by Detroit’s limited tax general obligation pledge and payable from city parking revenues. According to Detroit Deputy Chief Financial Officer John Naglick, approximately $54 million remains outstanding after early maturities amortized and the $15 million sale of a parking garage triggered a mandatory redemption. The C series was part of $1.28 billion of borrowing Detroit closed on in December of  2014 to fund creditor settlements, as well as raise revenues for revitalization efforts, thereby paving the way for its exit from the largest chapter 9 municipal bankruptcy in American history—and mayhap bring the luck of the Irish that the city could exit from direct state oversight within the next few months—especially in the wake of Mayor Mike Duggan recently proposed $2 billion balanced budget—the approval of which could facilitate Detroit’s exit from active state oversight, or. As Mr. Naglick put it: “I expect in April or May we’re going to see the Financial Review Commission vote to end oversight and return self-determination to the city of Detroit.”

The Motor City’s $1 billion general fund, according to the Mayor, continues to be healthy, because the city’s most important source of revenues, its income tax, is producing more revenues. Indeed, the city’s budget maintains more than a 5% reserve, which is projected at $62.3 million. At the same time, the city is continuing to set aside fiscal resources to address higher-than-expected pension payments starting in 2024 when annual payments of at least $143 million begin. Payments of $20 million run through 2019 with no payments then due through 2023 under U.S. Bankruptcy Judge Steven Rhodes’ approved plan of debt adjustment. Detroit’s bond ratings, albeit still deep in junk territory, were upgraded last year, with, just before Christmas, S&P Global Ratings slipping down the chimney to upgrade Detroit’s credit rating to B-plus.

Not in Like Flint. Recent tests of the Michigan City of Flint’s drinking water at elementary schools have found an increase in samples with lead levels above the federal action limit. The Michigan Department of Environmental Quality determined that 28 samples tested last month were above 15 parts per billion of lead. DEQ spokesman George Krisztian reported the increase may be due to changes in testing conditions, such as the decision to collect samples prior to flushing lines. (Samples collected before flushing tend to have higher lead levels because the water has been in contact with the pipes longer.) Thus, according to Mr. Krisztian, the overall results are encouraging, because they meet federal guidelines for lead if treated like samples collected by municipal water systems. Most of the more than 90 Legionnaires’ disease cases during the deadly 2014-15 outbreak in the Flint area were caused by changes in the city’s water supply — and the epidemic may have been more widespread than previously believed, according to two studies published Monday. The risk of acquiring Legionnaires’ disease increased more than six-fold across the Flint water distribution system after the city switched from the Detroit area water system’s Lake Huron source to the Flint River in April 2014, according to a report in the Proceedings of the National Academy of Sciences.

Despite the improvement in lead levels over the last 18 months, federal, state, and local officials have advised city residents to continue using bottled water—as the city continues its costly efforts to extract at least 6.000 lead lines from houses this year and next—with Mayor Karen Weaver reporting that state-funded bottled water should be available to residents until the work is completed; the effort to test the drinking water in the city’s schools has yet to be completed. The Michigan Department of Environmental Quality this week defended its outreach efforts in the city, after the Flint Journal reported on a new report which found that 51% of bottled water users surveyed here said they either had no faucet filter or are not confident they know how to maintain the equipment they do have. Mayor Weaver urges the State of Michigan to continue to finance the distribution of bottled water until the last of the leaded lines are removed.

Even as fears remain about the health of the city’s schoolchildren, the State of Michigan has selected a former emergency manager for two Michigan school districts to serve as interim Superintendent of Flint’s public schools after the school board removed the superintendent and two other senior officials. Thus, Wednesday, Gregory Weatherspoon was unanimously approved for the post by the Flint Board of Education, one day after the Board that Bilal Tawwab, Assistant Superintendent Shawn Merriweather, and the school district’s attorney had been placed on leave. It appears the school district’s roughly 4,500 students, an enrollment that has been falling steadily since 1968, when there were 1000% more students, are still at risk. The lower numbers and ongoing safe drinking water fears augur badly for assessed property values in a city where the population suffered a serious decline from 1970 to 1980, losing nearly 40,000 residents—a loss from which Flint never recovered—and a population which has declined continuously—so much so that an August 2015 WalletHub study revealed that Flint placed dead last, as one of the least healthy real estate markets out of 300 U.S. cities.

Arriba? In Puerto Rico, where about 60% of the U.S. territory’s children live below the federal poverty level, it appears there might be some rising optimism—even amidst growing frustration at the exorbitant costs of the Congressionally-imposed PROMESA process. The optimism comes in the wake of disclosures that Puerto Rico’s earlier estimates of the fiscal and financial impact of Hurricane Maria appear to have been overly pessimistic. The rising optimism appears to be reflected by the rally in Puerto Rico’s municipal bond prices. At the same time, Christian Sobrino, Governor Ricardo Rosselló’s representative before the PROMESA Oversight Board, Wednesday said that the Board’s letter regarding lawyers and advisers high fees in PROMESA Title III cases did “not reflect the truth,” adding he found it “laughable that there are unnecessary expenses on behalf of the government of Puerto Rico:  To start with, the structure of Cofina (the Puerto Rico Sales Tax Financing Corporation) and central government agents was not an invention of Puerto Rico in Title III,” Mr. Sobrino said, referring to the mechanism suggested by the Board to determine whether the Sales and Use tax collection belongs to the corporation which issued the debt or to the central government. He noted that the attorneys and counselors assisting these agents billed, all together, $17 million of the total $ 77.7 million in fees claimed during the first five months of the federal PROMESA law: “These letters reflect imprudence and a ridiculous use of these expressions and do not reflect the truth of what we have done in the government to avoid this. It is out-of-place.”

That led the PROMSEA Board to write to the Congressional leadership to indicate that high expenses for lawyers and advisers fees, participating in that process, are due to the PROMESA—or, as PROMESA Board President José B. Carrión noted: “Historically, the people of Puerto Rico have suffered a problem of wasteful spending, admitting that there has been duplication of efforts in Title III cases.” Representative Sobrino stressed that the government has tried not to duplicate efforts with the Board, but that drawing the fiscal plan and budget, as well as its implementation, are the government’s responsibility, adding that the government agreed that Citibank would act as the leading banker in the Electric Power Authority (PREPA) case, as suggested by the Board, and that only a firm hired by the Board would conduct the audit of the bank accounts. However, Rep. Sobrino stressed that there have been times when the government had to use its lawyers to ensure success in Court, as was recently the case with a claim by the Highway and Transportation Authority bondholders: “We have been forced to hire our lawyers to preserve self-government,” adding that the government intervention prevented that, after Hurricane Maria, Noel Zamot from being appointed as a PREPA de-facto trustee.

States Roles in the Wake of Fiscal and Physical Storms

March 13, 2018

Good Morning! In this morning’s eBlog, we consider the federalism challenges within Puerto Rico, where aid to local governments or muncipios for hurricane recovery appears nearly as derelict as federal aid to the U.S. Territory of Puerto Rico, before trying to untangle the perplexing fiscal challenges of public education in Detroit.

Unpromising? Puerto Rico Governor Ricardo Rosselló yesterday noted that from the “beginning, we (the government of Puerto Rico) have established that this is a time where you have to see the effectiveness of each penny invested. And we are all subject to that crucible,” with his comments coming in reaction a request from 11 conservative organizations demanding, in a letter to Congress, the dismissal of Natalie Jaresko, the Director of the PROMESA Oversight Board. No doubt, part of the concern relates to the exceptional disparity in pay: His claim is based on Ms. Jaresko’s salary of $625,000 per year compared to the median income in Puerto Rico of $19,429, or approximately 60% less than on the mainland. The organizations have also requested that “the basic precepts established in PROMESA‒‒precision, transparency, and the creation of a credible plan for the return of the people of Puerto Rico to the capital markets,” urging Congress to schedule a hearing to determine whether the Board is in compliance with the intent of the PROMESA provisions. The epistle was signed by the 60 Plus Retirement Association, the Taxpayers Protection Alliance, the Frontiers of Freedom, the Market Institute, the Americans for Limited Government, the Center for Freedom and Prosperity, the Independent Women’s Voice, the Consumer Action for a Strong Economy, and the Independent Women’s Forum. There is apprehension that the letter could jeopardize efforts by the New Progressive Party and the Popular Democratic Party to provide an immediate financial injection to Puerto Rico’s municipios to assist in the ongoing fiscal and physical recovery from Hurricane Maria. Senate President Thomas Rivera Schatz, who, last year, was elected to a second term as President of the Senate, thereby becoming the only reelected Senate President during the past 28 years, and the only Senate President ever elected as such to non-consecutive terms, said he would amend the Governor’s proposed legislation to grant immediate and direct financial assistance to the 78 municipal governments, as he was presiding over a public hearing of the Commission on Federal, Political and Economic Relations. The Senate President has identified a $100 million fund to be distributed among all municipios, albeit imposing a cap of $5 million to any recipient, and conditioning the aid, granted as a loan, to be administered by the Financial Advisory Authority and Fiscal Agency of Puerto Rico (Aafaf), the Office of Management and Budget, and the Department of the Treasury to authorize it.

Sen. Schatz asked his colleagues: “Who can deny that all the municipalities had losses? The hurricane devastated the island. Everyone knows that (the damage) exceeds a million dollars. If the governor of Puerto Rico has identified $ 100 million, then we have them. If we have them, I do not think it is appropriate to establish a loan and application mechanism that is a tortuous, long, and uncertain route.” In a public hearing, Rolando Ortiz and Carlos Molina, presidents of the Association and the Federation of Mayors, respectively, insisted that the municipalities should receive an allocation of funds, rather than a loan, arguing the island’s municipios lack the funds to repay the money, with Mayors Lornna Soto of Canovanas, Edwin Garcia of Camuy, and Javier Carrasquillo of Cidra, who reviewed the number of occasions in which they have had to withdraw funds from the municipal coffers to make expenses related to the process of emergency and recovery, even as distributions to the municipios from Puerto Rico’s sales and use tax were reduced.

The La Fortaleza project establishes that the Fiscal Oversight Board will have to approve the disbursement of funds—with the revised proposal coming in the wake of an earlier proposal vetoed by the PROMESA Board, because it was not tied to income and liquidity criteria of the municipios. However, Sen. Schatz argued that in the wake of Hurricane Maria, the Board had authorized the government to redirect $1 billion of the current budget for response and emergency tasks. That is, what is emerging is a consistent issue with regard to governance authority—a difference, moreover, not just between the PROMESA Board and the U.S. territory, but also between the Governor, Puerto Rico House, and Senate—differences potentially jeopardizing the proposed legislation to inject as much as $100 million into the municipal coffers damaged by the Hurricanes Irma and María: Sen. Schatz does not favor the granting of loans to municipalities for up to $5 million to mitigate the effects of hurricanes on their collections, or reductions by patents, taxes or remittances from the Municipal Revenues Collection Center; rather he favors helping municipalities with uniform allocations of $1 million, with his proposal providing that the Department of the Treasury, the Office of Management and Budget, the Fiscal Oversight Board, and the Financial Advisory Authority and Fiscal Agency of Puerto Rico must authorize the loans.

Perhaps unsurprisingly, Puerto Rico House Finance Committee Chair Antonio Soto disagrees: he argues that rather than a formula allocation, each municipio should be required to justify the amount it is requesting, noting: “That justification can be part of the project. It is not to give them $100 million, but to say: ‘I have this situation, the collections have fallen, I continued to provide these services,’” even as he acknowledged that PROMESA Board would have to authorize a project such as the one promoted by Sen. Rivera Schatz. 

Presión. The intergovernmental debate is under pressure as the U.S. territory’s cash position has been determined to be 24% below the pre-Hurricane Maria projection, according to cash flow data from EMMA as of the end of last month, showing increased financial pressure after earlier reports had shown limited deterioration. According to a cash flow summary, Puerto Rico’s primary central government account, the Treasury Single Account, contained $1.56 billion as of three weeks ago; whereas, prior to Hurricane Maria’s devastation, the government had projected that on that date there would be $2.061 billion. Puerto Rico Treasury Secretary Raúl Maldonado Gautier reported that January General Fund revenues were 12.2% below pre-Maria projections, no doubt further complicating the PROMESA Board’s efforts to certify a five-year fiscal plan for Puerto Rico: In the draft submitted last month by the Rosselló administration, the government anticipated sufficient cash flow to finance close to 20% of its debt service; however, according to the Puerto Rico Treasury, General Fund net revenues were down 5.2% in the first seven months of the fiscal year compared with projections, with the largest shortfalls compared to expectations coming from foreign corporation profit taxes ($135.4 million) and sales and use taxes ($80 million): in January, net revenues were 12.2% below projection. According to Treasury Secretary Raúl Maldonado Gautier, income taxes were above expectations, because Hurricane Maria had caused employers to postpone payments for the first few months of the fiscal year.

Let There Be Light! Puerto Rico’s Electric Power Authority (AEE) now projects electricity service will be restored to at least 95% by the end of May, with PREPA interim Director Justo González announcing, moreover, that the public utility will locate solar panels in certain high mountain parts of the island, which, he noted, was “part of what FEMA has in its hands and agrees to do so.”

Schooled on Recovery? On June 8, 2016, Michigan Senate Majority Leader Arlan Meekhof (R-West Olive), in urging his colleagues to vote for a significant bailout of Detroit’s public schools, said the plan would be sufficient to pay off the District’s debt, would provide transition costs for when the district splits into two districts and returns the district to a locally elected school board in January, stating: “This represents a realistic compromise for a path to the future: At the end of the day, our responsibility is to solve the problem…Without legislative action, the Detroit Public Schools would head toward [municipal] bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan.” Yesterday, Jonathan Oosting, writing for the Detroit News, wrote that U.S. Education Secretary Betsy DeVos said Sunday she “does not know if traditional public schools in Michigan have improved since she and others began pushing to open the state up to choice and charter schools. Recent analyses show Michigan students have continually made the least improvement nationally on standardized test scores since 2003, and it is one of only five states where early reading scores have declined over that span.” His article came in the wake of the Secretary’s interview with “60 Minutes,” where she had been pressed on her assertion that traditional public schools in places like Florida improved when students were given more choice to attend different schools, with CBS’s Lesley Stahl asking: “Now, has that happened in Michigan? “We’re in Michigan. This is your home state: “have the public schools in Michigan gotten better?” In response, the Secretary said: “I don’t know. Overall, I, I can’t say overall that they have all gotten better.” Ms. Stahl followed up, telling Secretary DeVos the “whole state is not doing well,” and that “the public schools here are doing worse than they did.” In response, Secretary DeVos said: “Michigan schools need to do better. There is no doubt about it.” Ms. Stahl then asked the Secretary if she has seen the “really bad schools” and attempted to try to figure out what has been happening in them—to which Secretary DeVos responded said she has “not intentionally visited schools that are underperforming.”

The interview resurrected a long-running debate in Michigan, which opened the door to publicly funded charter schools in 1994 and is now a leading state for charter academies; indeed, Detroit today ranks third in the nation for the percentage of students who attend charter schools, according to the National Alliance for Public Charter Schools. (Flint ranks second.) Today, according to a recent Education-Trust Midwest analysis of National Assessment of Education Progress standardized test scores, Michigan students ranked 41st in the country for fourth-grade reading performance in 2015, down from 38th in 2013, and 28th in 2003; in an analysis by University of Michigan Professor Brian A. Jacob, he found that Michigan students were at the bottom of the list when it comes to proficiency growth in the four measures of the exam; according to the NAEP results, in 2015, the average math score of eighth-grade students in Michigan was 278 out of 500, compared with the national average score, 281: the average Michigan score has not significantly changed from 280 in 2013 and 277 in 2000. Professor Jacob’s analysis found that 29% of Michigan students performed at or about the “proficient level” on the NAEP exam in 2015—results not significantly different from the 30% found in 2013, or the 28% recorded in 2000. Secretary DeVos, who had taken the lead in launching the Great Lakes Education Project to lobby for school choice in Michigan, and who has consistently said the government should invest in students, not buildings or institutions, in response to Ms. Stahl’s follow up query: “But what about the kids who are back at the school that’s not working? What about those kids?;” said: “[S]tudies show that when there is a large number of students that opt to go to a different school or different schools, the traditional public schools actually, the results get better, as well.”

Last week, the Detroit Public Schools Community District announced the launch of the 5000 Role Models of Excellence Project for minority males in grades 6 through 12: a project designed to develop a leadership pipeline for young men utilizing school-based and community mentors and role models through various methods of support, including themed weekly meetings, a monthly speaker series, community service projects, and college access support. The Detroit Board of Education members voted 7-0 to launch the 5000 Role Models Project in an effort to “create and develop a pipeline of leadership from within the walls of the District’s schools, describing thus as a proven mentoring program that prepares young men for success, generated by role models in our schools who are supported by male mentors in the community.”

Municipal Fiscal & Professional Erosion in Puerto Rico

February 20, 2018

Good Morning! In this morning’s eBlog, we consider the municipal fiscal threats to Puerto Rico’s municipios or municipalities, before turning to the continuing threats to the island’s future of its “brain drain” through the emigration of an increasing number of some of the island’s young professionals.

Severe Revenue Erosion. Since the last revenue quarter, Puerto Rico’s 78 municipios—cities and towns governed under Puerto Rico’s Autonomous Municipalities Act of 1991, which establishes that every municipality (those with populations in excess of 50,000 are designated as incorporated—those with less as incorporated towns: cities provision their own services, while towns typically depend on nearby cities for certain services) and must have a strong mayor form of government with a municipal legislature. All have experienced a consistent undermining of revenues: according to the most recent estimates, that includes a reduction of $56 million which will be reflected this fiscal year relating to the payment of movable and immovable property taxes, with the increasing losses related to business closures and the mass exodus of Puerto Ricans to the mainland, even as the capital and operating costs imposed in the wake of Hurricane Maria have left, in their wake, a fiscal hurricane of their own with, likely, long-term fiscal consequences. Some estimate that the losses related to property taxes have been as much as $55 million just in the last fiscal quarter, according to Javier Carrasquillo, President of the Governing Board of the Municipal Revenue Collection Center (CRIM), and the current Mayor of Cidra, a municipio known as La Ciudad de la Eterna, or the City of Eternal Spring.

CRIM is itself governed by a board composed of the President of GDB, the Commissioner of Municipal Affairs, and seven mayors of municipios: those elected mayors hold office for a term of four years (and not more than two consecutive terms) and until their successors have been appointed. CRIM’s principal offices are located at State Road 1, Km. 17.2, San Juan, Puerto Rico 00926. In addition, CRIM operates nine regional centers located in the municipalities of Aguadilla, Arecibo, Bayamón, Caguas, Carolina, Humacao, Mayagüez, Ponce, and San Juan.

CRIM estimated revenues for this fiscal year at $827,148,824 after the discount of the municipal Special Additional Contributions funds for the repayment of municipalities debts and the 5% for CRIM operational expenses. (Revenues of the municipalities of Puerto Rico are principally derived from ad valorem property taxes and Commonwealth contributions: Act No. 83 authorizes municipalities to impose the following property taxes: the Special Additional Tax, without limitation as to rate or amount, which as mentioned above is available primarily for the payment of a municipality’s general obligation debt; and a basic property tax to fund operating expenses up to a maximum amount of 6% of the assessed valuation on all real property within such municipality and up to a maximum amount of 4% of the assessed valuation on all personal property within such municipality (collectively, the “Basic Tax”)). Act No. 83 also continued in effect a special property tax imposed by the government of 1.03% of the assessed valuation of all real and personal property within Puerto Rico (other than exempted property) (the “Special Tax”) for the exclusive purpose of servicing the government’s general obligation debt. A portion of the Basic Tax levied by a municipality may be transferred to other municipalities by virtue of the operation of the Matching Fund.) In addition, under Act No. 64, each municipality is required to levy the Special Additional Tax in such amounts as shall be required for the payment of its general obligation municipal bonds and notes; principal of and interest on all general obligation municipal bonds and notes and on all municipal notes issued in anticipation of the issuance of general obligation bonds also constitute a first lien on the municipality’s Basic Tax. Accordingly, the municipality’s Basic Tax would be available to make debt service payments on general obligation municipal bonds and notes to the extent that the Special Additional Tax, together with moneys on deposit in the municipality’s Redemption Fund, are not sufficient to cover such debt service. Similarly, Act No. 83 provides for an exemption from the Special Additional Tax and Basic Tax on the first $15,000 of assessed valuation of primary personal residences of individuals (the so-called “$15,000 Real Property Exemption”) and an exemption from personal property taxes on the first $50,000 of assessed valuation of property owned by businesses that have gross revenues of less than $150,000 per annum (the “$50,000 Personal Property Exemption”). Recognizing the importance of the real and personal property tax for the fiscal requirements of the municipalities, the government makes annual appropriations to the municipalities from its General Fund as compensation for the amount of the revenues foregone owing to these exemptions. However, under Act No. 83, such appropriations will not be provided to cover any amount of property taxes, which any municipality elects to forgive for primary personal residences registered for the first time after January 1, 1992, and personal property of certain businesses registered for the first time after July 1, 1991.

Acts 83 and 80, which the Legislature approved in 1991, also provide for the following central government contributions to the municipalities: 2.50% of the net internal revenues of the General Fund for fiscal year 2004-2005 and thereafter; 35% of the annual net revenues derived from the operation of the additional lottery system created by Act No. 10, of the Legislature of Puerto Rico (approved in 1989). There are also so-called “Designated Commonwealth Contributions,” which provide an annual amount from the central governments’s General Fund to compensate the municipalities for the $15,000 Real Property Exemption and the $50,000 Personal Property Exemption; and an annual amount from the Commonwealth’s General Fund to compensate the municipalities for the exemption of 0.20% of the assessed valuation of all taxable property within the municipalities (the amounts in the clauses, with the exception of the annual contributions from the Commonwealth as compensation to the municipalities for the Special Additional Tax portions of the $15,000 Real Property Exemption and the $50,000 Personal Property Exemption (defined as the “Commonwealth Contributions”). Act 80, for its part, established the Municipal Matching Fund, into which CRIM is required to deposit with GDB the total amount collected on account of Basic Taxes and the Commonwealth Contributions. Certain funds in the Matching Fund (the “Equalization Moneys”) are available to CRIM in order to guaranty that each municipality will receive revenues in an amount at least equivalent to that received from Equalization Moneys in the previous fiscal year. The Equalization Moneys are comprised of: the Designated Commonwealth Contributions; and a portion of the Basic Tax equal to 1% of the assessed value of personal property and 3% of the assessed value of real property collected by each municipality (the “Designated Basic Tax”)—with all All Equalization funds distributed to the municipalities as follows: first, as may be required so that each municipality receives at least the same amount of aggregate revenues received during the previous fiscal year on account of Equalization Moneys, using first the Designated Commonwealth Contributions, and then, to the extent necessary, the Designated Basic Tax (it has never been necessary to use the Designated Basic Tax to perform such equalization); second, Designated Basic Taxes remaining in the Equalization Moneys are allocated to the municipalities in proportion to the amount by which revenues from their Basic Taxes in such fiscal year exceed their revenues from Basic Taxes in the previous fiscal year; and third, to all municipalities based on certain economic and demographic criteria specified in Act No. 80. The remaining Matching Fund moneys are returned to the municipalities whose Basic Tax levies gave rise to such remaining moneys, and are used, with their other revenues, to meet operating expenses. (Prior to July 1, 1993, the Secretary of the Treasury collected all municipal taxes upon real and personal property, including intangible property) in each municipality; since July 1, 1993, and pursuant to Act No. 80, CRIM has undertaken all of the Secretary of the Treasury’s responsibilities relating to the collection and distribution of such taxes. CRIM is responsible for the appraisal, assessment, notice of imposition, and collection of all municipal property taxes. All property taxes collected by CRIM are deposited at GDB, which acts as fiscal agent to the government and its municipalities. Real property is assessed by CRIM and personal property is self-assessed. These assessment values have not been adjusted to reflect the various applicable real property and personal property exemptions, such as those described under Municipal Revenues above and other exemptions granted under Puerto Rico tax incentives laws. As mentioned above, no real property reassessment has been made in Puerto Rico since 1958. All real property taxes are assessed on the basis of the replacement cost of the related real property in fiscal year 1957-58 values, regardless of when such property was constructed.

Unsheltered from the Storm. For some municipios, the cut in their remittances in the wake of Hurricane Maria reached as much as $6 million, as is the case of San Juan; however, in percentage terms, the most affected were Guayanilla and Manatí, with a reduction of 11.7% and 11.4%, respectively—meaning those municipios were forced to make signal fiscal adjustments even as expenses were swiftly rising. Indeed, as Mr. Carrasquillo had already warned, there would be a $30 million reduction from lotteries, even as collections between July and December were projected to be down by 15%. And even that amount has been assessed as only a start: In addition to the $ 56 million, municipios will have to deduct the money they have stopped receiving due to the elimination of the Sales and Use Tax on processed foods approved by the government in the wake of Hurricane Maria—as well as the exemption of the SUT collection for small businesses, with sales volumes for less than a million dollars, which was applied between November 20 and December 31. (Usually that 1% of SUT goes to municipalities to be used for essential services, such as garbage collection.) Mr. Carrasquillo said that the impact of the SUT exemption will not be measurable until they receive the Municipal Finance Corporation report; nor will the reduction which municipalities will have in their public coffers from the licenses payment: “Businesses file the license form once the economic activity year passed, so that will not be defined until January of 2019. We can only speculate now,” he added—with his own municipio having experienced the closure of some 123 businesses in the wake of the storm.

The current budget of Caguas, a municipio of about 142,000, is $ 92 million, an amount which reflects a reduction of $26,000 in the wake of rental space declines, as well as business related income losses and a court loss after an anticipated gain from a municipal initiative imposed on businesses which generated more than $3 million annually was struck down by the courts. In the municipio, some 25% of the nearly 5,000 shops remain closed, meaning, as the Mayor worries: “I cannot guarantee essential services for the population if the funds we need do not come.” The president of the Mayors Federation, Carlos Molina, estimated the direct impact in his municipality, Arecibo, to be $5 million, including the 20% in CRIM reduction. Thus, he reflects, municipios have no choice but to reduce operational expenses and establish consortiums to provide services to achieve lower costs: “We have to be realistic about how the island lives today, but we have to look for options and not wait for a miracle to happen.”

Mayor Rolando Ortiz of Cayey adds that the urgency of the municipalities is no longer limited to furloughs, but to shutdowns and closings: “There is no way out, because the municipal institution is misunderstood by the Governor. They see how effective we were before, during and after the hurricane, but now, when apparently that crisis has already passed and we say ‘we want to help,’ they are not there.” In his city, the CRIM reduction will be $700,000: “When they reduce money for municipalities, they are taking money from the most needy people of the island. Poverty is increasing.” But hope for a turnaround, in the wake of the PROMESA Board’s non-certification of Senate Bill 774 which would create a $100 million Municipal Recovery Fund, has been dashed.

Undercutting Hopes for a Recovery from the Storm. In the aftermath of Hurricane Maria, Florida Hospital, which operates 26 hospitals throughout the Gator state, the hospital has recruited as many as 45 health care professionals from Puerto Rico, including nurses, medical technologists, and nutrition specialists. With a mainland nursing shortage and an aging U.S. population, which is fueling demand for health care services, estimates are that the U.S. will need to produce over one million new registered nurses by 2022 to fill newly created jobs and replace a legion of soon-to-be retirees, meaning, that Florida, the premier retiree state in the nation, commenced an international recruitment program for nurses a decade ago, but, in recent years, has looked increasingly at Puerto as one of its most promising pipelines for talent. Prior to Hurricane Maria, about 3% of Florida Hospital’s nurses came from Puerto Rico as a growing number of its residents migrated to the U.S. to escape the economic problems plaguing the island; however, that percentage is expected to double; in fact, Florida Hospital has even developed an outreach program, partnering with community groups to find and help healthcare professionals from Puerto Rico find jobs. The hospital also fast tracks the hiring process: interviews, applications, as well as getting the state requirements for nursing are all expedited. In nearby Missouri, CoxHealth, a nonprofit regional healthcare system operating six hospitals and 80 clinics, initiated a nurse recruitment effort in Puerto Rico last spring, describing recruitment as an easier option compared to other countries because of work visa, language, and other issues. For nursing professionals from Puerto Rico, where pay can be $14.15 an hour, long shifts, and attending to as many as 15 patients at a time because of hospital was understaffing, the move to Florida would seem almost a no-brainer: the pay in Florida is $25.71 per hour—and the case load far lower. Mary Perrone, the international recruiter for Florida Hospital, said 20 more nurses from Puerto Rico will finish training and be on staff in the coming weeks; CoxHealth sent a recruiting team to Puerto Rico last weekend for on-site interviews with nursing candidates. If all goes well, it hopes to hire 30 more nurses soon.

Let there Be Light & Emergency Relief

February 12, 2018

Good Morning! In today’s Blog, we consider the courtroom efforts to secure emergency relief so that electric service is not disrupted in Puerto Rico—threatening critical services and the island’s only hopes for recovery from its quasi chapter 9 municipal bankruptcy.

Dark Fiscal Imbalances.  U.S. District Judge Laura Taylor Swain last night rejected a motion filed by the PROMESA Oversight Board for the central government to grant an emergency loan to the Electric Power Authority (PREPA), indicating that the federal agency failed to demonstrate the need for this financing although there is an immediate need for liquidity, albeit, she indicated the Board may file a new amended motion requesting a lesser amount and make adjustments to clarify the payment priority that financing will have without affecting the rights of the creditors—with her ruling coming down in the wake of a six and a half hour hearing at which the court was unconvinced of their respective arguments that PREPA needed the nearly $1 billion it had requested in its initial motion. Judge Swain indicated that any new financing requested should not exceed about $ 300 million—telling the court: “The lights cannot be turned off in Puerto Rico,” as she advised the parties she will need a clearer understanding of the priorities for any new financing. She made that ruling notwithstanding the warning from PREPA financial advisor Todd Filsinger, who advised the court that if a loan were not received as soon as possible, PREPA would be forced to activate its emergency plan to begin the cessation of operations and an eventual suspension of electric service.

The courtroom drama came as the Chief Financial Advisor of the Electric Power Authority (AEE), Todd Filsinger, yesterday indicated that the public corporation intends to implement an emergency plan starting today which could lead to the suspension of its employees as well as disruption of the operations of its generating plants—actions which would force the “rationing” of electric services, likely plunging homes, businesses, and industries into darkness” an emergency loan from the central government.  Mr. Filsinger made clear that should the plan be triggered, there would be a warning, as early as this morning, followed by a rolling suspension of operations, and a gradual suspension of employees; services to hospitals, police stations, firefighters, and gas stations would continue.

PREPA is seeking a loan of as much as $1.3 billion—a request the Board did not reject out of hand, but rather indicated a lesser amount of as much as $1 billion might be considered. In principle, the loan would be around $ 1,300 million, but last night the Board of Fiscal Supervision (JSF), acting on behalf of the government and the AEE, modified its request to about $ 1,000 million. There is urgency: Mr. Filsinger warned that unless PREPA receives an emergency loan by this weekend, the utility would only be able to maintain its operations for several additional weeks, after which it would no longer even be able to pay for the fuel it needs to generate electricity, testifying: “If we do not have the loan, and we do not receive the cash, we could be implementing the contingency measures on Saturday.”

Earlier in the hearing, Joseph Davis, the lawyer representing the Financial Advisory Authority and Fiscal Agency, warned of the fiscal cliff the agency faces, advising the panel it has delayed payments to suppliers as much as possible in an effort to preserve as much of its funds as possible, in attempt to render the cash they have available, but that there will be little option but to trigger additional contingencies, such as rationing services, partly because fuel suppliers have already threatened to halt service. The power authority’s emergency plan would be enforced even as some 400,000 subscribers remain without power, and after approximately 1.1 million subscribers had already experienced the longest interruption of electric service in Puerto Rico’s history in the immediate wake of Hurricane Maria. The threat to human life and safety came as the respective parties in the New York City courtroom—parties representing the Board, bondholders, and Puerto Rico, as well as insurers continued to file motions.

As if these human risks were insufficient, Judge Swain has also been confronted with arguments from contractors, such as ARC, Lord Electric, and Whitefish Holdings, who claim that PREPA must meet its payment obligations for restoration of the electricity grid after Hurricane Maria, as well as bondholders—who, for the most part, live far, far from Puerto Rico, but are seeking compensation for impairment of the rights of municipal bondholders.

The Board, at the end of last month, alleging that PREPA faces losses in excess of $1 billion, had requested Judge Swain to approve a post-requisition loan for the public utility—a loan critical to . According to the motion issued by the JSF, seeking a super priority, as PREPA sought the fiscal and physical capacity to insure its operations until the end of the fiscal year and avoid closing operations this month—in effect, asking the court to provide a super priority of payment to the central government.

Yesterday, in a last-ditch effort to assist the power authority, the Ad Hoc-AEE group and the insurance company, Syncora, which guarantee part of the public corporation’s debt, presented a new financing proposal, a proposal which the oversight Board rejected outright, noting: “The notification of the group of bondholders of the ESA is not a valid proposal and does not have a strong reason to deny the motion for post-petition financing for the PREPA.”

Fiscal & Physical Imbalances

Lincoln’s Birthday, February 12, 2018

Good Morning! In today’s Blog, we consider the outcome of last week’s actions to avoid another federal government shutdown, we consider the ongoing fiscal and physical plights of Puerto Rico.

Fiscal & Physical Imbalances.  Puerto Rico’s non-voting Member of Congress, Jenniffer Gonzalez, and Gov. Ricardo Rosselló have met with a group of New Progressive Mayors to describe the terms of the new federal assistance under the just passed $16 billion recovery assistance approved by Congress—funds ranging from what Secretary of Public Affairs Ramón Rosario Cortés noted would “range from construction to agriculture programs that will allow each municipality to develop its economy and create jobs.” The Secretary anticipates there will be a second meeting with associate mayors. Naguabo Mayor Noé Marcano said that the allocation of these funds represents “a unique opportunity” to repair and/or build infrastructure projects (including roads and bridges) and housing: “Part of the projects that we-at a given moment-had planned as improvements to the municipalities, we understand that this is the best opportunity.”

That could mean a new fiscal chance for this small muncipio of just over 23,000, one founded on July 15, 1821 near the mouth of the Daguao River—founded with the intent of providing a defense for the region from the Caribe Indians, based upon, 27 years earlier, the request of several influential neighbors of the Spanish Crown: on January 9, 1798, the erection of the Naguabo parish was authorized—but construction did not commence on its church until 1841. The muncipio’s name originated from the cacique and chieftainship named Daguao—as the territory was originally populated by Taíno Indians. Naguabo is also known as Cuna de Grandes Artistas (the birthplace of Great Artists) and Los Enchumbaos, “the Soaked Ones.”

For his part, Mayor William Aliceo of Aibonito, the City of Flowers, with the city’s appellation derived from the Taíno word “Jatibonicu,” the name of a Cacique leader of the region; a name also used to refer to a river in the area—and, in addition, a name used by the tribe of Orocobix. At the same time, there is a legend that tells of a Spanish soldier, Diego Alvarez, who, on May 17, 1615, reached one of the highest peaks in the area: upon taking in the view, he exclaimed: “Ay, que bonito!” The exclamation eventually led to the name of the region. Nearly two centuries later, Pedro Zorascoechea, in 1630, was one of the early Spaniards to settle on the island—apparently establishing one of the first fincas or ranches in the region; however, it was not until 1822, when Don Manuel Veléz presented himself before the government, representing the inhabitants of the area, to request that Aibonito be officially declared a town—a request which then Governor Miguel de la Torre granted on March 13, 1824.

Hurricane Maria’s eye tore through the region’s hills on September 20th: it was especially fierce along the exposed ridgelines, whipping in at a hundred and fifty-five miles an hour: it tore apart wooden houses; along the road leading up to Aibonito from San Juan, normally a two-hour drive, Maria tore a panorama of ruined houses and businesses, toppled and twisted trees, and downed utility poles. Mayor Aliceo said he would like to use part of the recovery funds for agriculture, roads, and electrical infrastructure: “In Aibonito, we have a project submitted to the U.S. Army Corps of Engineers for the canalization of the Aibonito River. And with poultry farming, which was well affected by Hurricane Maria, I’m interested (the funds) will find a way to help Aibonito’s poultry farmers, given the million-dollar losses they’ve had.”

The federal allocation came just prior to Puerto Rico’s resubmission of its revised fiscal plans to the PROMESA oversight Board—plans due today, with Puerto Rico’s representative, Christian Sobrino, simply advising the board that the plans comply with the public policy of the government, noting: “[W]e will comply with the stipulated date for the delivery of the fiscal plans. It has been an intense job, but the government will comply with the appointed time. The plans will continue in accordance with the Governor’s public policy of protecting the most vulnerable and that this document serves as a tool of fiscal responsibility and at the same time a path of long-term socio-economic development for the island.”

Nevertheless, uncertainty reigns, especially in the wake of the federal government shutdown. With last week’s Congressional approval of a package to keeps federal agencies running through March 23rd, the date of certainty has now been pushed off while House and Senate appropriators in Washington, D.C. work on final 2018 spending bills. The package suspends the debt ceiling through March 1, 2019, provides $89.3 billion in disaster aid, and extends a number of expired tax provisions, including a Jan. 1, 2022 extension of the rum cover-over for Puerto Rico and the U.S. Virgin Islands, which is projected to generate an estimated $900 million for the two U.S. territories. In addition, a related tax provision calls for all low-income communities in Puerto Rico to be treated as qualified opportunity zones. The disaster aid includes $4.9 billion to provide 100% federal funding for Medicaid health services for low-income residents of Puerto Rico and  the U.S. Virgin Islands for two years, $11 billion in CDBG block grants for the two territories, including $2 billion of CDBG money to rebuild Puerto Rico’s electrical grid—with Resident Commissioner Gonzalez reporting that, in total, $16.55 billion of the disaster aid is earmarked for Puerto Rico.

With the new allocations to mitigate last year’s natural disasters, the federal government has already authorized just over $140.7 billion within the past six months to be distributed mainly between Texas, Florida, California, Puerto Rico, and the US Virgin Islands—with Puerto Rico’s government projecting its share will be approximately $18 billion, plus access to a credit line of $4 billion—albeit, to access that line, the U.S. territory would be mandated to prove lack of liquidity. Of the total, almost $16 billion will surely go to the island from the funds allocated in the budget bill and to mitigate disasters—provided the territory complies with the conditions of both the federal government and the PROMESA Oversight Board. The projected package includes $4.8 billion for Medicaid and $11 billion for CDBG: last week, HUD Deputy Secretary Pamela Hughes Patenaude announced, during a visit to San Juan, that HUD will award $1.5 billion to help repair damaged houses and businesses. In addition, another $ 300 million, half of which would be allocated as a loan, has been allocated to match the FEMA project’s cost. The package includes $6 billion, funds under the U.S. Army Corps of Engineers, provided to U.S. electric companies to repair the power grid. FEMA has stated, moreover, its intent to grant an additional $13 billion to the island.

Puerto Rico’s Federal Affairs Executive Director, Carlos Mercador, notes that an official damage estimate from federal agencies is still pending; Commissioner González notes that Congress’ next disasters relief resolution may be discussed in Congress between April and May, noting: “Speaker Paul Ryan told me that there is going to be a fourth bill on supplementary allocations for Puerto Rico, with specific projects for transportation and electric power.”

Stop & Start Federal Governance, and Abandoning Puerto Rico


February 9, 2017

Good Morning! In today’s Blog, we consider the outcome of last night’s deliberations to avoid another federal government shutdown and the nexus between New Jersey’s public pension system and Puerto Rico’s growing foreclosure crisis, and we consider the growing frustration of the Executive Director of the PROMESA Oversight Board with regard to the absence of any real commitment by the Congress.

Dysfunctional Governing & Creating Record Federal Debt. In the wake of still another shutdown of the federal government last night, he U.S. House of Representatives, earlier this morning, voted to approve Senate-passed legislation (71-28), including a sweeping budget deal to increase the national debt, increase federal deficits, and fund the federal government through March 23rd, voting 240-186 to forward the bill to President Trump for his signature. The new, temporary patch for the federal budget will come at a signal cost: it will boost federal spending for both defense and non defense programs by $325 billion over the next two years; it will suspend the debt ceiling for one year; it will give the White House, House, and Senate until March 23rd to write an omnibus spending bill for the remainder of the federal fiscal year and break the pattern of gridlock that has led to five temporary funding patches since last September. As passed, the legislation includes a number of other priorities for both parties, including nearly $90 billion for disaster relief, $6 billion to address the opioid crisis, a four-year extension of the Children’s Health Insurance Program, and more than $7 billion for community health centers. As passed, the agreement includes a massive defense spending increase, and a smaller domestic discretionary increase. The legislation to reopen the federal government—temporarily—is estimated to add as much as $2 trillion to the national debt over the next decade. As passed, the legislation includes $15 billion in tax extenders, restoring nearly three dozen federal tax expenditures which expired at the end of last year, subsidizing owners of racehorses, NASCAR tracks, filmmakers, and railroads—that is, a Congress with the greatest debt and deficits of any in U.S. history already running a $1 trillion-plus annual deficit voted to subsidize businesses and individuals for activities they took in 2017.

Fiscal Imbalances. Meanwhile, in Puerto Rico, PROMESA Board Executive Director Natalie Jaresko stated the Board is making progress towards its goal of restoring the U.S. territory’s fiscal balance and renegotiating its public debt; the just adopted spending agreement this morning by Congress could help: it would allow full Medicaid access to Puerto Rico, laying a foundation to revive the territory’s health system for two years, and lay the foundations for rebuilding its power grid: the provisions, announced by the U.S. Senate leadership, could represent about $ 15 billion in direct allocations, according to Sen. Marco Rubio (R-Fla.); the package which went to the White House this morning Florida), include $ 4.8 billion in Medicaid funds for the island, as an allocation that would represent full access to the program, based on the emergency caused by Hurricane Maria. The bill includes $2 billion for the Puerto Rico Electric Power Authority (PREPA) to rebuild its infrastructure, a critical provision for the island, where, 141 days after Hurricane Maria, 28% of the territory’s citizens remain without power.

In an interview with El Nuevo Día, Director Jaresko stated there had been “measurable” fiscal progress, albeit “small, but important,” as she answered each of the questions regarding performance reported this week by this newspaper, assuring that there are “measurable progresses” that, although “small, are important.” She added, however, that the process of transformation driven by the oversight Board has not moved at the pace she would like; moreover, she said, the role of the Congressionally created entity is not understood either in Puerto Rico or by the Congress or White House; nevertheless, she added, the Board expects to resume the correct course that Puerto Rico needs: “Those who expected the Board to come to govern are disappointed. Those who expected the Board to be in favor of the creditors are not happy; and those who expected the Board to be against the creditors: the reality between what  the enabling law dictates, the powers of the Board and the relationship with the government is, by far, more complex than expectations.” She added: “I wish there was more support from Congress for Puerto Rico: More clarity is needed. The second round of the supplementary aid package to address the disaster is still pending; CHIP and Medicaid funds are still pending. We need more confidence and clarity,” noting fiscal quandary for the Board to be forced to make fiscal decisions without knowing clearly what federal resources Puerto Rico can realistically anticipate.

Her comments came as, this week, the Board advised Ricardo Rosselló that Puerto Rico’s fiscal plans do not comply with PROMESA, giving the government seven days to correct them. Among the requested or demanded changes: an update on the information with regard to the federal funds that Puerto Rico would receive for its recovery. She also made clear she was “disappointed,” because, in the newly enacted federal tax reform, the law does not include provisions to exempt U.S. multinational businesses operating in Puerto Rico from the new taxes on U.S.; nor did the law grant a transition period to counterbalance the impact of that decision on the local economy. She noted the PROMESA Board expects concrete actions by Congress, noting that, last month, the Board had invoked §103 of the PROMESA Law, requesting the transfer of federal employees to address the situation in Puerto Rico, with the request made to the departments of Energy, Agriculture, Commerce, Transportation, Health, Housing, the U.S. Treasury, the General Services Administration, and the Environmental Protection Agency.

Her comments came as the Board’s 18-month anniversary of service nears next month—marking their halfway point. Next month, the members of the Board will have served 18 months in office, that is, half of their term since they accepted the task of restoring the fiscal balance and access of Puerto Rico to the capital markets—a period during which the only voluntary agreement with bondholders of Puerto Rico municipal debt (in the Puerto Rico Electric Power Authority [PREPA]) was rejected, while the liquidation of the Government Development Bank (GDB) was approved. During her tenure, PREPA has exhausted its funding: it could cease operating as early as this month; bondholders this week have returned to Court for the Title III cases, determined to litigate their debts. Thus, to Director Jaresko, the progress of the Board must be measured in light of its dual federal partially funded mandate: fiscal balance and access to the capital market: a charge which she noted, to achieve, would require time and a series of reforms which the Board has just put on the table, in no small part by, this week, sending the Governor the first notices of violations to the PROMESA Law in the fiscal plans—and giving Puerto Rico until Monday, President Lincoln’s birthday, to respond.

Asked whether seven days were enough for the government to make all the changes that the Board has requested, Director Jaresko responded that “Most of the information being requested must be supporting information for the estimates in the plan. I understand the information is available, because, if they are talking about the savings they will achieve, the details of that policy have to be there,” adding that it is the Board’s intent to certify the fiscal plans on February 23rd. She added that the creation of the office of the government’s Chief Financial Officer will allow staff to engage in financial disclosure tasks without being at the mercy of a change of government. Finally, she noted that with the new fiscal plan, Gov. Rosselló had demonstrated a greater commitment towards the structural reforms needed—with those comments coming just as Gov. Rosselló reported that the negotiations to review the fiscal plans are still in place and that he will comply with the submission date imposed by the PROMESA Board.

Nevertheless, while the Director appears upbeat, that confidence is not felt in New Jersey, where members of the state investment council have made clear they would not be comfortable if the pension fund profited from the hardships of Puerto Ricans, warning that in the wake of Hurricane Maria, Puerto Rico is bracing for a mortgage crisis, with many residents now way behind on their payments. Thus, policymakers for New Jersey’s public-employee pension system are trying to make sure investments that were launched here years ago do not aggravate that fiscal and fiscal crisis: members of the New Jersey State Investment Council were recently notified that two private equity funds which the pension system owns have significant stakes in corporations which are pursuing foreclosures on Puerto Rico: the private equity funds are part of the $77.5 billion pension system’s substantial alternative-investment portfolio—and, private equity was a top performer for the system during the 2017 calendar year, according to the latest returns reviewed during the investment council’s public meeting this week: in all, the pension system enjoyed returns totaling nearly 15 percent last year, which more than doubled the 7 percent assumed rate of return. Currently, the federal government has placed a moratorium on most foreclosure proceedings in the wake of the hurricane; however, the moratorium is due to expire next month, creating uncertainty about what that might mean; however, the council members made it clear during a public meeting that they are not comfortable seeing the pension fund profit from the hardships being faced in Puerto Rico, with Chair Tom Byrne noting: “I don’t think any of us are looking to make three extra basis points on this fund by throwing people out of their homes in Puerto Rico.” said Tom Byrne, the panel’s chairman. The issue involves pension system’s ties to the companies pursuing foreclosures in Puerto Rico, ties related to a diversification strategy that the investment council launched more than a decade ago as it sought to protect against major losses that can occur during a market crash. The diversification strategy relies in part on alternative investments, such as hedge funds, venture capital, and private equity—investments which, however, wrest control from state pension decisions compared to some of the more conventional investments that are managed in-house by the Division of Investment, an agency within the New Jersey Department of Treasury. For example, three years ago, the Council was pressed to eliminate a stake in another private-equity firm, JLL Partners, in the wake of information the firm had ties to a Texas-based payday lending firm that was fined after being accused of heavy-handed lending practices—especially as the practice of payday lending is prohibited in New Jersey. Now, with an estimated 90,000 borrowers in Puerto Rico behind on their mortgages as a result of Hurricane Maria, memories of the Hurricane Sandy impact on New Jersey has resurrected memories of the many state citizens who were forced to pay rent for temporary housing and also cover the mortgages on their damaged homes. Jim Baker, from the Private Equity Stakeholder Project, told the council this week that some of the foreclosures were not just conventional mortgages, but also reverse mortgages that have been set up with senior citizens who are required to make property tax and homeowners insurance payments in order to receive payouts, as he urged the panel to get involved in the issue, saying the federal moratorium on foreclosures is “fast approaching” and it’s still not clear what is going to happen once it passes. Mr. Baker said he would like to see the moratorium extended for another year, which is something four U.S. senators, including New Jersey’s Robert Menendez, have asked the federal government to do.