Restoring Power–and Recovering Governing Authority

July 10, 2018

Good Morning! In this morning’s eBlog, we consider the challenges of restoration of electric power (as opposed to political power) in Puerto Rico, and then try to explore the risks of powers of appointments of emergency managers by a state—here as the City of Flint, Michigan is still seeking to fiscally and physically recover from the human and fiscal devastation caused by the State of Michigan.

Adios. Walter Higgins, the CEO Puerto Rico’s bankrupt PREPA Electric power authority resigned yesterday, just months after he was chosen to oversee its privatization, an appointment made in an effort to fully restore power some ten months after the human, fiscal, and physical devastation wrought by Hurricane Maria. Now his resignation adds to PREPA’s uphill climb to not only fully restore power, but also to address its $9 billion in debt. Gov. Ricardo Rosselló said in a statement that Mr. Higgins had resigned for personal reasons, while Mr. Higgins, in his resignation letter, wrote that the compensation details outlined in his contract could not be fulfilled—with his written statement coming just one month after the Commonwealth’s Justice Secretary said it would be illegal for him to receive bonuses. According to a PREPA spokesperson, Mr. Higgins will remain as a member of the PREPA Board. Nevertheless, his appointment was stormy itself, after, last month, Puerto Rican officials had questioned how and why he had been awarded a $315,000 contract without authorization from certain government agencies—in response to which PREPA’s Board advised the government as a consultant, rather than filling the vacancy for an executive sub-director of administration and finance. Unsurprisingly, his departure will not be mourned by many Puerto Ricans in view of his generous compensation package of $450,000 annual salary compared to the average income for Puerto Ricans of $19,518.  

Nevertheless, PREPA officials, announced that current Board member Rafael Diaz Granados will become the new CEO—with nearly double the compensation: he will assume the position on Sunday and receive $750,000 a year—a level which Puerto Rico Senate President Thomas Rivera Schatz described as the “kind of insult that to Puerto Ricans is unacceptable,” as the government and PROMESA Oversight Board continue to struggle to address and restructure Puerto Rico’s $70 billion in public debt. Nevertheless, as PREPA crews continue restoring power to the last 1,000 or so customers who have been without power since Maria hit nearly a year ago and destroyed up to 75% of transmission lines across the territory, the federal government is still operating 175 generators across the island.

Indeed, U.S. House Natural Resources Committee Chair Rob Bishop (R-Utah) has scheduled a hearing for July 25th to assess and inquire about the status of the Electric Power Authority and to examine the functioning and plans for the privatization of PREPA assets, an issue which the territory’s non-voting Congressional Representative Jenniffer Gonzalez noted “has been under the Committee’s jurisdiction for the past two years.” Rep. Gonzalez added: “I’m surprised with the salary: I did not expect that amount. I do not know the elements which affected Mr. Higgin’s resignation, and I believe that these changes affect the process of recovery on the island.”

Meanwhile, Chairman Bishop had announced a second potential hearing—this one to assess the operation of the PROMESA statute and how the PROMESA Oversight Board is working, after, last week, postponing an official trip with a dozen Members of Congress to assess the physical and fiscal recovery on the island, after meeting, early last month in San Juan with the now former PREPA Director Higgins, and after, in the spring, Chair Bishop, Chair Doug LaMalfa (R-Ca.), of the Subcommittee on Island Affairs, and Chairman Bruce Westerman (R-Ark.) had announced a probe into “multiple allegations of corruption and serious allegations of maladministration” during the restoration of the electric service after the storm.

Out Like Flint? Meanwhile, in a criminal and fiscal case arising out of Michigan’s Flint water crisis in the wake of fatal decisions by a gubernatorially appointed Emergency Manager, closing arguments in the involuntary manslaughter case against state Health and Human Services Director Nick Lyon began yesterday before Genesee District Court Judge David Goggins, who will determine whether Director Lyon will go on trial in the Flint water crisis prosecution on charges of involuntary manslaughter and misconduct in office connected to the 2014-2015 Legionnaires’ disease outbreak in the Flint region which killed at least 12 people and sickened another 79 people. A misdemeanor charge of “willful neglect” to protect the health of Genesee County residents was added last week. Director Lyon is receiving assistance in his defense from John Bursch, a former Michigan Solicitor General, who was hired for that position by Michigan Attorney General Bill Schuette—who has brought criminal charges related to the Flint water crisis against Director Lyon and 14 other current and former city and state government employees. Flint still faces financial questions after years of emergency management.

The criminal trial comes as questions still remain with regard to Flint’s long-term financial health, despite six years of state oversight that overhauled the city’s finances, after a 2011 state-ordered preliminary review showed problems with Flint’s finances and ultimately recommended an emergency manager for the city. Last April, State Treasurer Nick Khouri repealed all remaining Emergency Manager orders, with state officials claiming the city’s financial emergency has been addressed to a point where receivership was no longer needed, and, as the Treasurer wrote to Mayor Karen Weaver: “Moreover, it appears that financial conditions have been corrected in a sustainable fashion,” and Flint CFO Hughey Newsome said that while emergency managers had helped Flint get its financial house in order; nevertheless, Flint’s fiscal and physical future remains uncertain: “The after-effects of the water crisis, including the dark cloud of the financials, will be here for some time to come: We’re not out of the woods yet, but I don’t think emergency management can help us moving forward.” In the city’s case, the fateful water crisis with its devastating human and fiscal impacts, hit the city as it was still working to recover from massive job and population losses following years of disinvestment by General Motors. CFO Newsome said the crisis affected the city’s economic development efforts and may have left potential businesses wanting to come to Flint wary because of the water.

Flint’s spending became more in line with its revenues, changes were made to its budgeting procedures, and retiree healthcare costs and pension liabilities were reduced while under emergency management. Nevertheless, past financial overseers have warned the city about what would happen if Flint allows its fiscal responsibilities to slip. Three years ago, former Emergency Manager Jerry Ambrose, in a letter to Gov. Snyder, wrote: “If, however, the new policies, practices and organizational changes are ignored in favor of returning to the historic ways of doing business, it is not likely the city will succeed over the long term: The focus of city leaders will then likely once again return to confronting financial insolvency.”

Today, there are still signs of potential fiscal distress, notwithstanding  the city’s recovery; indeed, Mayor Weaver’s FY2019 budget plans for a more than $276,000 general fund surplus—even as the municipal budget is projected to grow to more than $8 million by FY2023, with that growth attributed by CFO Newsome to ongoing legacy costs and a lack of revenue—or, as he put it: “My last two predecessors have really delivered realistic budgets: I definitely don’t see this administration being irresponsible in that regard, and I don’t see this Council rubberstamping such a budget either.”

And, today, questions about criminal and fiscal accountability are issues for the state’s third branch of government: the judiciary, in District Court Judge William Crawford’s courtroom, where the issues with regard to criminal charges relating to the governmental actions of defendants charged for their actions during the Flint Water Crisis include former Emergency Manager Darnell Early and former City of Flint Public Works Director Howard Croft, and former state-appointed Flint Emergency Manager Jerry Ambrose, who, prosecutors  allege, knew the Flint water treatment plant was not ready to produce clean and safe water, but did nothing to stop it. The trial involves multiple charges, including willful neglect of duty and misconduct in office. (Mr.  Ambrose was the state appointed Emergency Manager from January until April of 2015; he also held the title of Finance Director under former state appointed emergency managers Mike Brown and Darnell Early. To date, four others have entered into a plea agreement in their cases.)

Bequeathing a Legacy of healthcare and retirees benefit costs: When Mr. Ambrose left in 2015 and turned things over the to the Receivership Transition Advisory Board, he stated that Flint’s other OPEB costs had been reduced from $850 million to $240 million, adding that a new hybrid pension plan put in place by state appointed emergency managers had reduced Flint’s long-term liability; however, he warned, on-going legacy costs are still one of the most pressing issues for Flint’s fiscal future: “Remember, the reality we’re facing: we have a $561 million liability to (Municipal Employees’ Retirement System), and the fund is only at $220 million; we also have an obligation to our 1,800 retirees to make sure that we’re paying our MERS obligation.” (A three percent raise for Flint police officers approved earlier this year added to those liabilities, with those increases attributable to two different contracts, which were imposed on officers by former state-appointed Emergency Managers Michael Brown and Darnell Earley in 2012 and 2014, respectively.)

The RTAB asked CFO Huey Newsome in January how the city would pay the additional $264,000 annually in wages and benefits along with a projected $3.4 million in additional retirement costs over the life of the contract—a question he was unable to specify an answer to at the time: “To tell you exactly where those‒where those dollars will come from right at this point in time, I can’t say…I think the ‘so what’ of this is that, you know, the incremental impact from this pay raise is not going to be that large when you think about the three and a half million. The city still needs to figure out where that three and a half million is coming from.” Moreover, he added, because police negotiated the raise, it also could be an issue with other unions wanting a similar increase during their future negotiations, adding that the city is making increased payments to MERS to avoid balloon payments in the future. For example, Mr. Newsome said, Flint will pay an additional $21.5 million this year, adding that all the city’s funds currently have a positive balance. However, Flint’s budget projections show the water fund will have a $2.1 million deficit in FY2018-19, a deficit projected to increase to $3.3 million by FY2022-23; Flint’s fiscal projections eventually put the water fund balance in the red by 2022-23; however, CFO Newsome warned: “The water fund is probably the most tepid one, because it is expected to be below the reserve balance by the end of the year,” noting the city can only account for 60% of the water that goes through its system, adding that the city has an 80% collection rate on its water bills, which is about $28 million this fiscal year, telling the Mayor and Council: “One of our top priorities is better metering.”

The city’s most-recent budget for 2018-19 calls for a combined revenue increase of $1.09 million more than previous budget projections because of increased assessed property values, more income taxes coming in, and additional state revenue sharing. Nevertheless, one Board member, notwithstanding projections for increased revenue, is apprehensive that Flint’s “tax base is likely going to continue to shrink, and the city currently has limited resources to reverse this trend,” or, as CFO Newsome put it: “Right now, revenue is not there: The income tax is relatively flat. The property tax is flat. That’s reality.” The city’s current proposed FY2019 budget calls for an increase of $120,000 from property taxes, $339,000 increase in income tax revenue, and an additional $631,000 in revenue from the state of Michigan. 

 

Unequal and/or Inequitable Fiscal & Physical Responses

January 29, 2017

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

Post Storm Fiscal & Physical Misery. Puerto Rico Gov. Ricardo Rosselló’s proposed privatization of the Puerto Rico Electric Power Authority faces opposition from local political leaders; thus, it may prove to be a tough sell to potential investors: the proposal, which the Governor has presented to privatize PREPA, the public utility burdened with some $8.2 billion of municipal bond debt—and the utility which the PROMESA Oversight Board has put into a Title III bankruptcy process, creating potential hurdles for any plan to alter its ownership, notwithstanding that Board members have expressed support for the idea. For his part, Puerto Rico House Minority Leader Rafael Hernández Montañez said he thought Governor Rosselló was seeking to distract people from his problems with his PREPA privatization proposal: “It’s a way of taking off the heat, on the re-energization of the houses and stores.” That is to write that the Gov. understands that neither the Puerto Rico House nor Senate will approve his proposal—so, Minority Leader Montañez asserts he is just posturing for public support, he said. Members of Gov. Rosselló’s own party in the legislature; moreover, appear to be opposed. Nevertheless, as part of the Title III PROMESA quasi-chapter 9 bankruptcy, parts of the utility appear certain candidates for sale–albeit, this would be a decision made by Judge Laura Taylor Swain—not Governor Rosselló.  

Moreover, there is apprehension that the Governor’s governance proposal would be unlikely to generate any support from investors, either: Tom Sanzillo, Director of Finance at the Institute for Energy Economics and Financial Analysis, noted: “We fail to see how any investor would put money into Puerto Rico with a regulatory system like that proposed by Gov. Rosselló: “He appoints and can fire board members at will. Under the current system, board members have staggered, fixed terms, and can only be fired for cause…This means the whim of every new Governor sets rules and contracts. This makes energy investing highly risky, contracts uncertain, and a politicized investment environment.” Indeed, Tomás Torres, Project Director at the Institute for Competitiveness and Sustainable Economy, believes the Puerto Rico Energy Commission’s oversight should be strengthened, and it should implement any transformation of PREPA.

Jose Rossi Coughlin, Chairman of the Institute for Competitiveness and Sustainable Economy has expressed apprehension about any interruption of key regulatory processes, much less permitting each new Governor to select all commission members when she or he assumes elected office—noting that is not only contrary to widely prevailing mainland U.S. practice, but also likely legally incompatible with Title V of PROMESA. For his part, Mr. Torres notes that with the Governor’s submission, last week, of a bill to eliminate the Energy Commission and substitute in its place a Public Service Commission (which would merge Telecom, Transportation & Public Services, and the Energy Commission), the “The three commissions/boards that are to be merged in this new body add to 15 commissioners, but the new boards will only be of three members…“The recently proposed Energy Commission reorganization and consolidation with other public service regulation would be a huge step backward.”

Moody’s Investor Service was not quite as pessimistic, writing: “The [proposed] privatization itself is positive, because it is another source of capital to help solve PREPA’s fiscal problems; however, there are still challenges; including negotiating a price in an environment of declining Puerto Rico population, investing in rebuilding aging infrastructure, and how PREPA’s pension liability will be handled. The 18-month timeline appears quite aggressive.” For its part, the PREPA Bondholders Group said they would support a “private operator” to “immediately” take over operations, subject to the Puerto Rico Energy Commission oversight. Indeed, in statement sent out by Gov. Rosselló’s office, some representatives of Puerto Rico’s business community indicated their support for the proposal, with Nelson Ramírez of the United Center of Retailers, noting: “The announced changes will allow Puerto Rico to become a competitive jurisdiction, ending a monopoly that discourages investment and the creation of jobs,” albeit, as Puerto Rico Senate Minority Leader Eduardo Bhatia Gautier said, the proposal was a step in the right direction but that “the devil is in the details.”  Leader Bhatia-Gautier, a co-founder and former editor of the Stanford Journal of Law and Policy, with previous service as a law clerk at the U.S. Court of Appeals for the First Circuit in Boston, as well as Chief of Staff for the resident Commissioner of Puerto Rico in the U.S. Congress, is the 15th president of the Senate of Puerto Rico, where he has focused on the U.S. Territory’s fiscal system and authored a comprehensive energy reform law. Now, he asserts that Puerto Rico’s electrical system should be decentralized into 20 to 25 micro grids, and believes that, with federal assistance, Puerto Rico should try for widespread installation of solar panels on rooftops. Nevertheless, as he notes: even though the Governor and the Puerto Rico legislature will privatize PREPA, the reality is that Judge Swain will have to be involved.

Power to the Muncipio? Jayuya Mayor Jorge L. González Otero, a muncipio founded in 1911, at a time it featured a population of around 9,000, was certain that power would be restored to close to 10,000 residents of his northwest coast municipality of around 88,000, on Saturday. Some 35% of residents in Arecibo do not currently have electricity, he reported, albeit, he said he had received word from PREPA that one of the region’s substations, Charco Hondo, would receive a generator from the U.S. Army Corps of Engineers to power a temporary micro grid while repairs on the substation continue. The muncipio, which, at its founding, was separated from the larger cities of the coasts with little to no communication: it was the site of the Jayuya uprising in 1950, in which the Nationalists commenced a revolt against the U.S. Government, when a social worker, Doris Torresola, and her cousins led the group into the town square and gave a speech, declaring Puerto Rico an independent republic. Subsequently, the police station was attacked, telephone lines cut, and the post office burned to the ground. The Nationalists held the town for three days, until it was bombed by U.S. planes, which were supporting a ground attack by the Puerto Rican National Guard. Even though an extensive part of the town was destroyed, however, news of the bombing was not reported outside of Puerto Rico. Today, unsurprisingly, the Mayor notes: “Four months is way too much time for people in Puerto Rico to not have energy. All of us, the representatives, the mayors, the people, the senators, have to raise our voices to get things done.”

In fact, last month, he had reached an agreement with PREPA to temporarily restore power by means of the micro grid: last Saturday, the Mayor planned to tour the substation with PREPA’s interim director, Justo González, as the generator was being installed. However, in another example of the dysfunction which has plagued Puerto Rico’s recovery, there was no sign of the generator, nor even PREPA’s interim director at the Charco Hondo substation—meaning thousands of Arecibo’s residents remained in darkness, just like nearly one-third of all Puerto Ricans: more than one million U.S. citizens—darkness wherein there is no remote contemplation of when power might be restored: a spokesperson for PREPA told BuzzFeed News that the U.S. Army Corps of Engineers was overseeing the project and providing the generator. A Corps spokesperson indicated that after a second inspection of the site, the Corps had determined there was too much damage to the nearby power lines to allow the generator to be safely switched on as planned; rather, he said contractors will “begin installing” the generator over the weekend, but that it will not become operational, albeit the Corps is unable to provide “definitive time” when it will.

Renogiaciones. The Fiscal Agency and Financial Advisory Authority reports that Puerto Rico’s decision to renegotiate its public debt will cost at least $ 800 million over five years, with FAFAA, relying on an expensive cadre of attorneys, consultants, and financial advisors who have been recruited as part of an effort to cobble together a quasi-plan of debt adjustment which would reduce more than $ 70 billion owed to  Puerto Rico’s bondholders—now the cadre has to translate its fiscal algorithms before Judge Swain’s courtroom. The document, however, fails to specify whether the plan incorporates the budget for either FAFAA or the PROMESA Oversight Board, much less the vast array of advisors and lawyers who have participated in voluntary negotiations, as in the case of the Government Development Bank (GDB)—not exactly as propitious beginning as, for the first time, there is to be an assessment of the actual costs of reducing or cancelling bondholders’ debts, albeit, already, some early estimates are that such costs could exceed $1 billion—the portion of which would redound to U.S. citizens of Puerto Rico, where, in comparison to the different mainland states, Puerto Rico falls far below the poorest mainland state, with 45% of its population living below the poverty line, would be most limited. Nevertheless, despite the seemingly endless process, and despite the PROMESA oversight, or quasi-chapter 9 plan of debt adjustment, there has been as yet, no agreement with any key creditor. Rather, in what many in Puerto Rico would deem noticias falsas, President Trump, last November, reported Puerto Rico was “doing well” and “it’s healing, and it’s getting better, and we’re getting them power, and all of the things that they have to have.” That was in sharp contrast with reality—or, as District Representative José “Memo” González Mercado, of Arecibo put it: “The reality is that we are U.S. citizens, but Donald Trump treats us as second-class citizens.”