Ending a State’s Fiscal Emergency Manager Preemption, & Who’s on First in Puerto Rico’s Governance?

July 2, 2018

Good Morning! In this morning’s eBlog, we consider what might be the end of the State of Michigan’s much maligned emergency manager program, before returning to assess the question with regard to whether a governor and legislature or a quasi U.S. bankruptcy court are in charge in Puerto Rico.

Exiting from Municipal Bankruptcy. For the first time in nearly two decades, a state-appointed Emergency Manager governs no municipality or school district in Michigan, after the state released Wayne County’s Highland Park School District in Wayne County from receivership under Michigan’s Local Financial Stability and Choice Act of 2012. Indeed, Michigan Treasurer Nick Khouri reports that Michigan municipalities have worked hard to become financially sound, noting: “Today’s achievement is really about the hard work our communities have accomplished to become financially sound…I commend the efforts of our local units to identify problems and bring together the resources needed to help problem-solve challenging financial conditions.” Under the terms of the release, Highland Park School District’s locally elected school board will oversee the contract for Highland Park Public School Academy and the cooperative agreement with the Detroit Public Schools Community District for the continuing education of students. In addition, the board will manage the repayment of long-term debt obligations. The Highland School District has a quasi-chapter 9 plan of debt adjustment in place to address its $7.5 million general fund deficit, with revenues from property taxes imposed on non-homestead property dedicated to finance outstanding debt, as well as an approved two-year budget. According to financial statements, as of the end of last year’s fiscal year, the District had $2.4 million in general obligation bonds outstanding.

The agreement means the school district, which had been under emergency management since January of 2012, and for which the state-appointed emergency manager had established Highland Park Public School Academy to provide educational services to district students while the school district paid off long-term debt obligations—for which, since 2015, said public school academy has been educating students from pre-kindergarten through eighth grades, and for the scholastic years through high school via a cooperative agreement with the Detroit Public Schools Community District, which has been providing educational services to students from ninth through 12th grades.

Nevertheless, the State of Michigan continues to maintain an oversight role in a limited number of Michigan communities: public school districts in Benton Harbor and Pontiac are operating under a consent agreement with the state, and the Muskegon Heights school district is overseen by a receivership-transition advisory board. The critical fiscal recoveries were marked by April’s exit from state oversight by the City of Flint, after seven years, and then, the following month: Detroit.

Conflicted Fiscal Governance. With the beginning of the new fiscal year, Governor Ricardo Rosselló Nevares still assessing fiscal options, as well as his authority to address the $8.7 billion operating budget imposed yesterday by the PROMESA Oversight Board on the U.S. territory–or, as he put it: “We are evaluating the budget certified by the Fiscal Oversight Board on the U.S. territory. Certainly, the impact on the budget of the three branches of government and municipalities will require additional adjustments that will limit our ability to provide services.” Ramon Rosario, Puerto Rico’s Secretary of Public Affairs, noted:  “The Governor and his cabinet continue to analyze all possible alternatives to the scenario.”

There was no public reaction to the imposed fiscal preemption of elected authority by House President Carlos Johnny Mendez, nor Senate President Thomas Rivera Schatz, respectively, to the budget imposed by the JSF. The Governor indicated, however, that some of the biggest concerns of the Executive are public employees and the payment of the Christmas bonus, as well as the elimination of funds for economic development.

The Board’s proposed budget, interestingly, is greater than that approved by the Legislature; however, it imposes additional cuts of up to $345 million. It does not repeal Law 80-1976, the Law Against Unjustified Dismissal. It does preserve the Christmas bonus for public employees and establish two funds, one of $ 25 million for the University of Puerto Rico, and another of $ 50 million for municipio recovery. PROMESA Board Chair José Carrión, in a written statement, noted: “The course has been drawn, and although it will be a challenge, we cannot afford to deviate. We must all work together.”

Working together would be a challenge—and a question now for Puerto Rico is whether to comply or go to court to preserve, ironically, an approved fiscal budget smaller than that to be imposed by the PROMESA Board: that is, what if the Governor and Legislature were to opt not to implement the unelected PROMESA Board’s proposed budget? One attorney noted: “There would be a confrontation that would generate a controversy in the court, because, then, the Board would have to go to the court and ask it to force the officials to comply with the budget.” Under such a scenario, the unelected fiscal oversight Board would issue a certification of non-compliance, which, were it not to compel the elected government of Puerto Rico to comply, could entail the Board availing itself of the mechanisms in the PROMESA statute preempting Puerto Rico’s governing authority. Independence Party’s Denis Márquez remarked that his “exhortation is not to obey the Fiscal Control Board, but they always tell you that you have to be against the Board, but at the end of the day you look for a reasonable accommodation that always ends up hurting the country.” However, unlike a chapter 9 governance situation, where a federal bankruptcy court assesses a municipality’s plan of debt adjustment, PROMESA allows the Board to establish the budget at its sole discretion. It appears to be virtually a form of colonialism.

As the oversight board had advanced during its approval of the fiscal plan last Friday, the public expenditure scheme contemplates reductions greater than those set in the first version of the document approved by the Legislature: the budgets of some agencies seem to have an increase compared to the current fiscal year, but this is due to the fact that, for the first time, each one was assigned an authorization corresponding to the payment of their employees’ pensions (pay as you go). A spokesperson for the Popular Democratic Party in the House noted: “The vision of the Board is the republican vision, a small government with less participation.” Indeed, the version to be imposed by the Oversight Board contemplates major cuts for the Department of Education, which ended with an allocation for this fiscal year of $2.479 billion, about a 5% cut for what the Legislature had approved, with the deepest cuts coming in payroll and operating expenses, even as the Board added nearly $30 million to “cover services related to the provision of therapies and other services for special education children, and $ 23.8 million for the payment of salary increases to teachers—leading Puerto Rico Senate Education Chair Abel Nazario to note that the PROMESA Board “itself recognizes that these measures must be maintained in the coming years is an achievement that we recognize and appreciate.”

The Board imposed a number of deep cuts, such as the Bureau of the Fire Department, where the Board cut operating expenses of $576,000, as proposed by the Legislature, to $148,000; it slashed just over $1 million for firefighter protection equipment, and cut the police department payroll by $587.1 million, as stipulated in the Legislature’s version, to $ 570.2 million, but the Board retained the proposed $18.8 million for increased police salaries.

Imbalanced Governance? The Board cut funding for the Governor’s office in excess of 10 percent, and funds for the Puerto Rico Legislature by nearly 20 percent; it cut funding for the Puerto Rico Health Department by just under 10 percent.

Can there be Shelter from the Storm? Meanwhile, in a different courtroom, U.S. District Judge Leo T. Sorokin of Massachusetts has ordered that FEMA cannot end its Transitional Sheltering Assistance program until at least midnight tomorrow, granting Puerto Ricans who fled Hurricane Maria’s devastation and have been living in temporary housing on the mainland a very brief reprieve. Christiaan Perez, manager of advocacy and digital strategy for the civil-rights group, LatinoJustice, the national civil-rights group which filed a lawsuit Saturday seeking the restraining order told the court the end of the FEMA assistance would lead to Puerto Rican evacuees being evicted. The temporary restraining order is projected to offer some protection for about 1,744 Puerto Ricans for whom the FEMA transitional assistance was to end Saturday. Judge Sorokin has scheduled a telephone hearing for today.

The outcome will impact many of the families who left Puerto Rico in the wake of the storm for the mainland who have been living in hotels in New York and Florida and those who have been unable to secure affordable housing and are now worried about what happens as FEMA assistance expires—or, as Cynthia Beard, one of the 600 Puerto Rican hurricane survivors living in New York, told NBC News this week: “I don’t know what’s going to happen. The city called me and said there’s a shelter, but there’s no guarantee; they didn’t say everything is going to be OK.” According to Mayor De Blasio’s office, New York City has a program in place to direct transportation from the hotels to the shelters. Once there, families have to find out if they are deemed eligible to register into the city’s shelter system: if accepted, families are assigned to case management and housing assistance services to help them find permanent homes. 

But FEMA has also offered displaced Puerto Ricans the option to return to Puerto Rico, asserting the agency has called more than 1,500 displaced Puerto Ricans to offer to pay for their plane tickets to return to Puerto Rico by yesterday or recommend them ways to look into their respective state’s shelter system. As of June 27, only 145 families had either booked their plane tickets or already returned to Puerto Rico. It appears the majority of displaced Puerto Rican families have opted to remain stateside, even though many do not have a permanent home. The offer came in the wake of four different deadline extensions, during which, under FEMA’s TSA program has housed Puerto Rican hurricane survivors for nearly 9 months. During other disasters, survivors participating in that program were given up to a year and a half—even though officials have said that the program normally lasts 30 days. Nevertheless, FEMA warned it was ending Transitional Sheltering Assistance for survivors of hurricanes Maria, Irma, and Harvey on Saturday, asserting it has spent more than $432 million on survivor lodging as part of the program, and that it has provided rental assistance to more than 25,000 TSA participant families to help them find permanent housing.

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Getting Schooled on Fiscal Challenges

June 19, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal challenge in the Connecticut legislature with how to get the state’s capitol city back on its feet, before turning, as the new hurricane season gets underway, to assess the Detroit-kinds of challenges to a public school system when so many families are leaving.

Recovering from Near Municipal Bankruptcy. With the new fiscal year fast approaching, Connecticut Governor Gov. Dannel P. Malloy vetoed bi-partisan legislation last Thursday which would have changed how the state board overseeing Hartford’s finances would have operated, and which would have required the continued financial support of Hartford for five years, but would allow the state to reduce other municipal aid to Hartford in the sixth year if the city failed to meet its obligations. The proposed legislation did not modify the debt assistance agreement signed by state Treasurer Denise Nappier and the provision which required the state to pay off the entire principal of Hartford’s bonded debt over the next 20 to 30 years, under which the state will make about $40 million in annual payments on the debt—all steps taken in the wake of the city’s teetering, last year, on the edge of municipal bankruptcy—when the state intervened to take on the city’s debt through the Municipal Accountability Review Board—a step, in retrospect, which has helped the city begin to rebalance its finances. However, it appears the city needs more time.

Republican legislators believed they should have been allowed to lower other municipal aid to Hartford in order to account for the obligations elsewhere in the budget, but the legislation Gov. Malloy vetoed sought to delay those types of decisions for at least five years. The Governor, however, noted: “The legislature may elect to offset contract assistance to Hartford in the future, and must approve state aid amounts for all communities; but it makes little sense to make an out year reduction without giving the program the opportunity to see results before imposing what amounts to a sanction.” In contrast, Senate Republican President Len Fasano (R-Wallingford) said the veto “demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars,” adding: “Once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature: this veto practically ensures a rough road ahead for Hartford, because, absent this fix, the legislature probably won’t be willing to help Hartford in the future.”

In his veto message—legislation which had gained bipartisan support, and which would have modified the $534 million bailout the legislature had approved last year in order to help the city it avoid filing for chapter 9 municipal bankruptcy, the Governor wrote that Senate Bill 528, an Act Concerning State Contract Assistance Provide to Certain Municipalities, would make “significant, detrimental impacts to the new Account Review Board and its operations,” noting that the changes to the Hartford bailout were “a reflection of indignation on the part of some legislators,” who were upset that the Municipal Accountability Review Board “exercised its statutory authority in coming to the aid of our capital city.” Instead, he told legislators, it is critical for the state to have “a viable mechanism in place to allow it to intervene in the case of other troubled municipalities in a way that is both effective and that holds those municipalities highly accountable.” He noted that the Municipal Accountability Review Board works; ergo there was no reason for the legislature to seek to change it at this point in time.

The vetoed measure had been passed in the House 105-45, with all Republicans voting in favor, but more than half of the House Democrats rejected the proposal, arguing that five years was insufficient to assist Hartford with its financial difficulties—even as opponents insisted the bailout was a “major misunderstanding,” because they had understood they were voting only for a two-year bailout, not a long-term $500 million deal that stretched into the future. Now, it will be, unlike in neighboring New Jersey, the legislature’s budget and tax committees which would need to vote on any future financial bailout, with a series of fiscal trip wires if any municipality were seeking an agreement similar to the one which was approved last year for Hartford. For his part, Senate Republican Leader Len Fasano (R-North Haven) noted: “This veto demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars: once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature. This veto practically ensures a rough road ahead for Hartford, because absent this fix, the Legislature probably won’t be willing to help Hartford in the future…This bill was the result of extensive bipartisan negotiations, supported by the Hartford delegation and the Mayor of Hartford: it defines what state assistance Hartford will be receiving and also puts into place needed protections to ensure taxpayer dollars are not squandered.’’

His counterpart, Senate President Pro Tem Martin Looney (D-New Haven) said no final decisions have been made with regard to whether the Senate would override the two latest vetoes, noting: “We will review the Governor’s veto messages and consult with our caucus members in order to determine any next steps the caucus may want to take.’’ A veto-override session is slated for Monday, because a little-known provision in the state Constitution provides that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz (D-Berlin) said the House, where the measure had passed 105-45, is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

A key niggle is a growing recognition that whatever final legislation is signed into law will, in effect, create a fiscal blueprint: thus the legislature has adopted a bill to clarify the process for the state’s municipalities in the future, under which the legislature’s budget and tax committees would need to vote on any future fiscal rescues, in advance, with a series of financial trip wires if any municipality were seeking an agreement similar to the one which had been approved last year for Hartford.

A veto-override session is scheduled for Monday, June 25, because a little-known provision in the state Constitution says that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz of Berlin said the House is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

El Fin. Puerto Rico’s legislature is nearing the end of its regular session—even as the new hurricane season is opening its season, so the gale budgetary challenges are anticipated to dominate its closing days—with the key issues being approval of the new year’s fiscal budget and repeal of the island’s Unjustified Dismissal Law (Law 80-1976). The focus, this week, will be on getting revenues for FY2019, some $9.1 billion—or some $700 million greater than the amount proposed by the PROMESA Oversight Board, promising a fierce legislative battle. Víctor Parés, president of the Commission for Economic Development, Planning, Telecommunications, Energy and Public-Private Partnerships, and president of the Finance Committee, Antonio Soto,  had indicated they would meet this week with personnel from the Department of the Treasury to define how the income estimates included in the Board’s proposal will be readjusted. Mr. Parés noted:Government revenues have increased this fiscal year; it is new money; it has to be allocated; and it is part of what is going to be negotiated and agreed with the Executive,” identifying key priorities as education, health, and safety.

The first in that list is, perhaps, of greatest apprehension, with the Department of Education facing a cut of $191.5 million—a cut of such severity that as many as eight programs could be put at risk, including special education, where the proposed cut would be $78.2 million. The Board has also recommended a cut of $16.1 million to the Department of Health, and just under $50 million to the Department of Public Security—that is, a reduction which would likely mean laying off as many as 1,300 police officers. That sets up a challenge, this week, with the Puerto Rico House, on Thursday, scheduled to act on the budget.

The regular session will defer to a special session consideration of the Incentive Code, described as a “very technical document,” which could be approved in July during an extraordinary session that Governor Ricardo Roselló Nevares would convene. With regard to the version of pending legislation to repeal the House-passed Law 80, the future is uncertain: Senate President Thomas Rivera Schatz announced the Senate would not agree to the amendments.  

A New Civil Code? Rep. Maria Milagros Charbonier is expected to introduce a proposed, renewed Civil Code, with debate deferred to August on the proposal—a comprehensive document dealing with family, persons, royals, obligations, contracts, and successions, but which does not address the issues of surrogate motherhood, domestic partnerships, and the minimum age. It proposes to increase the age to marry from 14 to 18 years, and limit marriages to the third degree of consanguinity. It would maintain the grounds for divorce for cruel treatment, adultery, as well as those of mutual consent and irreparable rupture. The new proposals come in the wake of four years of evaluation of the Civil Code.

Dying Communities? Verónica Dávila, a second-grade teacher at Pasom Palmas, in rural Puerto Rico, yesterday noted that a “community without a school…is a vacant community: It’s actually a dead community.” Pasom Palmas, located in Utuado in the central mountains of the island, is, in land area, the third-largest municipality in Puerto Rico (after Arecibo and Ponce): it has a population over 35,000 spread over 24 wards. The community derives its name from the Taíno word Otoao, which translates as “between mountains.” It is also known as La Ciudad del Vivi, because of the river which runs through it. It is the 11th oldest municipality in Puerto Rico—founded two hundred seventy-nine years ago. Her school has been teaching children for more than  70 years, but it closed its doors forever this month—one of some nearly 300 in Puerto Rico which are shutting down permanently this summer in the wake of Hurricane Maria’s devastation: it smote Utuado especially hard. It took two months to reopen Paso Palmas after the storm, and the school remained without water and had only limited electricity from a generator, which took the Federal Emergency Management Agency seven months to provide. The school’s population fell to 55, as about a dozen students and their families left the area after Maria.

In April, the government listed 283 schools for permanent closure—subsequently granting relief to 18, a number further revised after a court, last week, ordered a halt to the closure of still nine others. Whatever the final number, the school math paints a grim fiscal and demographic picture. After spending cuts for public education of about $1.5 billion over the last six years, and school closures forcing relocation of about 60,000 students—and the new laws providing vouchers for students to attend private schools and paving the way for charter schools, one can sense the physical challenges ahead. In Paso Palmas, kids, no longer able to attend school there, are confronted with the closest school being a forty minute drive along difficult roads—and that is without counting the walk several students make each morning to reach a road passable by car—or that some families simply do not have cars or money for gasoline. It, of course, renders futile concepts of parents’ days or PTA participation.

Whose Math? The income estimate for the next fiscal year could be readjusted by the PROMESA Board to reflect an increase that would have a direct impact on the coffers of countless agencies, in response to issues such as this which have been raised in three days of public hearings with regard to how the proposed cuts by the Board will impact Puerto Rico. A key issue at the top of the list is the $78 million decrease in the budget dedicated to the Special Education Program of the Department of Education. Representative Antonio Soto said that in a meeting with the technical staff of the PROMESA Board, he told them that the income of this fiscal year should reach $9,100 million. In his opinion, it made “no sense” that the estimated income of the U.S. territory for the upcoming fiscal year would decline by $700 million when the government projects estimated economic growth, benefitting from the injection of federal assistance to provide a 6.3% boost to the economy—or, as he put it: “It’s simple math: They tell me that the estimated income they have is what we provided, so we have to validate the information.”

Not in Like Flint, and Unschooled for Motor City Recovery

June 15, 2018

Good Morning! In this morning’s eBlog, we consider the seemingly unremitting efforts by the State of Michigan to force the City of Flint to sign a consent agreement; then we dip south to the Motor City, where, notwithstanding its exit from chapter 9 municipal bankruptcy, the city’s ital. efforts to encourage families to move back to the city from the suburbs depends upon turning around a school district which appears to be stumbling under its own quasi plan of debt adjustment from a state takeover.

Not in Like Flint. Flint Mayor Karen Weaver this week made clear she believes state officials cannot force her to sign a consent agreement seeking to make fixes to her city’s water system, challenging them to “bring it on” and take her to court. Her battle parallels a trial of Michigan Department of Health and Human Services Director Nick Lyon, who is anticipating, next month, to find out whether or not he will face a jury trial on involuntary manslaughter and misconduct charges tied to the Flint water crisis. Genesee District Judge David Goggins has signed an order detailing how the remainder of Secretary Lyon’s preliminary examination will play out: he has been charged involuntary manslaughter and misconduct in office, making him the highest-ranking state government official charged with crimes with regard to how he mishandled Flint water problems—making his the first of 15 criminal cases to advance to a preliminary exam. Ironically, the trial of the state leader is occurring even as, in parallel, the State of Michigan is threatening to withhold funds to Flint not just in an effort to try to force responsibility for ensuring the safety of its drinking water, but that state action could have devastating fiscal impacts, undercutting the city’s effort to preserve its assessed property values: between 2008 and 2016, Flint lost more than three-quarters of its taxable assessed property value. There is almost a David versus Goliath feeling: Flint household income has been declining, even as statewide income has been increasing: household income in the city, at just under $42,000 annually last year, is more than 20% below statewide income.

The issue, a federalism issue involving all three levels of government, involves findings from  last August’s state sanitary survey, which found the city’s water system had “significant deficiencies,” including with the water distribution, finances, “security,” and “operations and management.” The state further charges that the city has not fixed the problems within 120 days as mandated state law, according to the Michigan Department of Environmental Quality.

Mayor Weaver, however, told The Detroit News the Department of Environmental Quality (DEQ) is making “false accusations or lies” with regard to the city’s compliance with state and federal drinking water laws, among other allegations; rather she appears to perceive the proposed consent order to repair the problems as retaliation against her vigorous protest when Gov. Rick Snyder ordered, in April, the end of the state’s free bottled water deliveries to the city, noting: “We have been meeting our requirements every step of the way: There are some other things that need to be done by the end of this month, and some things aren’t required to be done until the end of the year. But every step of the way, we’ve done what we’re supposed to do.” The city currently purchases treated water from the Great Lakes Water Authority; however, Flint’s wastewater treatment plant performs additional treatment for acidity levels, corrosion control, and chlorine, according to the state.

In a letter at the beginning of this week, Michigan Assistant Attorney General Richard Kuhl threatened Flint with federal legal action if the municipality does not enter into and comply with a consent agreement addressing the city’s outstanding violations, writing that the state would prefer voluntary cooperation—having previously written that violations of the Michigan Safe Water Drinking Act mean the city needs to sign a consent decree in which state officials outline unfunded state mandates with which the city would have to comply, including the provision of a “permanent or contractual” manager to oversee control program activities.

At the beginning of this month, Michigan Drinking Water and Municipal Division Director Eric Oswald wrote that correcting the violations would help ensure Flint’s public water supply system prevents “contaminants from entering” the drinking water and prevent “imminent and substantial endangerment of public health.”

Flint is still recovering from a lead contamination water crisis first discovered in the late summer of 2015. The city’s water has tested below federal lead standards for nearly two years, but many residents still refuse to drink from the tap. In his June 4 letter, Director Oswald wrote that state officials had summarized in a March letter the “corrective actions that had been completed” and provided “dates to complete other corrective actions.” In his statement this week, the Director claimed: “The matter at hand is working together to address these deficiencies to help ensure that the city continues to have quality drinking water.”

Mayor Weaver is still considering what legal options might be available to protect her citizens—and the assessed property values of residences and business properties in the city—as well as the fiscal and physical implications of the end of free bottled water shipments—noting she is still pondering over the option of returning to federal court to the judge overseeing the replacement of Flint’s lead service lines, because the state has indicated that the funds may be withheld. Mayor Weaver noted, with regard to the seeming state retaliation: “I just believe this is absolutely retaliation, and then they want to blame us for what they did,” she said, referring to the water crisis that Snyder’s task force was caused by state-appointed emergency managers and negligent DEQ officials.

In her June 11 response epistle and proposed unfunded state mandate as “unnecessary and unwarranted,” adding she was “troubled by the timing of this proposed enforcement action, in the wake of the cessation of state funding for bottled water in Flint.” She further noted that “During two years of collaborative remediation efforts, an ACO has not been necessary,” calling it a “deliberate and willful misuse of the DEQ’s authority for political purposes and not as a good faith effort to address the issues faced by the City of Flint.” Mayor Weaver said she hoped to bring more contractors to Flint to begin the next phase of pipe replacement, but state officials, she said, want everything to be hydro-vacuumed to save money that would return to the state: “Now, after the state and MDEQ have been publicly castigated for their abrupt and unilateral termination of bottled water funding, MDEQ proposes an ACO that raises no issues not previously agreed upon…I thus see this ACO as a deliberate and willful misuse of the DEQ’s authority for political purposes and not a good faith effort to address the issues faced by the city of Flint.”

That would undercut her ongoing efforts to invest in new plumbing for Flint’s citizens: “We’re really trying to, and what I’ve been trying to do all along, is work together and put differences aside for getting what’s best for the people.”

What Will it Take to Earn a Passing Grade? Detroit’s public school district has 200 teaching vacancies, and with the new school year not so far off, a campaign is underway to try to draw kids back to its public schools. That effort, however, confronts an awkward challenge: only half the teachers and support staff and fewer than 40% of central office staff would recommend the Detroit Public School District according to survey data Detroit Public Schools Superintendent Nikolai Vitti released this week during a Board of Education meeting—a meeting that provided a temperature reading with regard to how the system’s students, their parents, and school staff perceive the school system. For instance, in response to the question, “How likely are you to recommend Detroit Public Schools Community District to a friend or family member or as a place to work. 40% responded they would not recommend the school district: only 38% replied they would be extremely likely to recommend the city’s schools. Even amongst teachers and support staff, the enthusiasm was missing: 50% were detractors—with the percentage near two-thirds by staff at the central office: overall, a majority in the system replied they would not recommend the system—or, as Superintendent Vitti put it: “That so many staff members were detractors is a problem…There’s nothing that hurts our brand…more than our actual employees. If our own employees are not favorable toward the organization, then how can we ever recruit new parents to schools or new employees to the district?”

The survey, conducted earlier this year, asked for feedback from more than 52,000 students, parents and guardians, teachers, support staff, instructional leaders, and central office staff. The results hardly seemed passing—and make clear that efforts to incentivize families with children in Detroit’s suburbs to move into the city face an uphill struggle. Or, as Superintendent Vitti noted: “If we’re truly going to be transformative, our employees are going to have to take ownership.”

The surveys addressed issues such as school climate, engagement, bullying, rigorous expectations and school safety. But Superintendent Vitti said the data surrounding promoting the district is “the most relevant data point we’re going to be looking at tonight.”

Here are other survey result highlights:

  • Just 42% of students in grades 3-5, 46% in grades 6-8 and 50% of students in grades 9-12 had positive feelings about school safety—an indication that a large number of students do not feel safe in district schools.
  • 69% of students in grades 3-5, 63% in grades 6-8, and 55% in grades 9-12 had positive feelings about rigorous expectations.
  • 56% of students in grades 3-5, 45% of students in grades 6-8, and 40% of students in grades 9-12 had positive feelings about school climate.
  • A larger percentage of parents and guardians, 72%, felt positively about school safety; however, just 26% felt positively about the engagement of families in the district.

Investing in Fiscal & Human Futures

June 11, 2018

Good Morning! In this morning’s eBlog, we consider the issue of keeping Puerto Rico’s schools open in the face of quasi municipal bankruptcy; then we veer north to assess post-state taken over Atlantic City: What Are the City’s Fiscal Odds for Its Future?  

The Governance Challenge for Schools and Demographic Changes. Puerto Rico Superior Court Judge Santiago Cordero Osorio has ordered the suspension of the closure of three of the U.S. territory’s schools in Morovis, pending an explanation from Secretary of Education Julia Keleher of the reasoning behind her orders. His ruling came as part of a lawsuit brought by the Municipality of Morovis challenging the closures of Alverio Pimentel, Manuel Alonso Díaz, and the Second David Colón Vega schools—and in the wake of the Judge’s earlier decisions ordering the closure of six other schools in the Arecibo region—closures also being challenged by the Teachers’ Association. In his order, Judge Osorio noted that all these claims will be evaluated in a court hearing scheduled for this morning—one to which he has invited the Secretary of Education or a representative to attend, noting: “This Court appreciates and recapitulates that the State must come prepared to justify in accordance with its regulations the closure, not only of the schools subject to this interdict, but of all the schools of the Commonwealth of Puerto Rico that the Department of Education has under its jurisdiction, and that it pretends according to the regulation to close.”

For his part, Mayor Carmen Maldonado of Morovis explained the suit was filed in the wake of a non-response to her request for a meeting with Secretary Keleher, stating, in a press release: “Today we are taking an important step in the defense of public education for Moroveño children. To all parents, principals, teachers and school staff, I invite you to attend that hearing on Monday at the Arecibo Court, so that together we can continue to fight to keep schools open. As I assured them in the many meetings we had, although the power is in the hands of the central government, the reason is on our side and we are going to defend that reason. The fiscal and governance challenge-as we had experienced in Detroit’s chapter 9 municipal bankruptcy, is a state versus local authority issue. Indeed, as the Department’s legal division stated: “The opening and closing of the schools is under the authority of the Secretary of Education and this is established by Law 85 of 2018 (Law on Educational Reform).”

The Rebirth of an Iconic American City?  Victor Fiorillo, writing in the Philadelphia Magazine, asked in his article, “The Re-Re-Re-Birth of Atlantic City,” what if everyone was wrong about the fiscal implications of the closure of the city’s famed casinos. Writing that Atlantic City had first drawn him in about 15 years ago with the opening of the Borgata Casino—at a time when “most other casinos in Atlantic City were in various stages of decay, and here was this brand-new Vegas-style resort with casino restaurants that were actually good and the best shows in town.” But he also noted that, back then, it was really a family focus: “My wife and I spend as much of the summer as possible on the A.C. beach with our 10-year-old and 12-year-old, opting for the relative solitude of the town’s southern end, far from any casinos or bars.” But in revisiting the municipality today, he noted he is not one of the only “believers in Atlantic City,” noting there are “some surprising signs of life these days, not to mention some serious investment—from small ventures, like Longacre’s projects, to big bets like Stockton University’s new beachfront campus and this month’s opening of the $550 million Hard Rock Hotel & Casino in the old Trump Taj Mahal.

Betting on the City’s Future. Mr. Fiorillo then turned to the recent U.S. Supreme Court decision allowing sports gambling, noting: “There’s more money pouring into A.C. right now than in all of Philadelphia,” according to development mogul Bart Blatstein, but, as with gambling, quoting Temple Professor Bryant Simon, author of 2004’s Boardwalk of Dreams: Atlantic City and the Fate of Urban America: “Atlantic City has risen and fallen innumerable times: “This is the story that has been told for a hundred years.” He added: “The irony, of course, is that this new resurgence is happening just a few short years after nearly half the city’s casinos went under, thousands of jobs disappeared, and Atlantic City itself seemed to be left for dead. Then again, maybe there’s no irony here at all. Maybe this more organic, up-from-the-ground rebirth of Atlantic City is exactly the kind of action that could mean sustained success for the city by the sea.”

Leaving on a Jet Plane. Mr. Fiorillo examined the city’s road to its state takeover from a non-fiscal perspective, writing: “It was right around this time that Atlantic City began to fade. Dissertations and books have been written about the many factors that led to the resort’s demise in the late 1960s and early 1970s, but a big one was the sudden ease of jet travel. You could get on a plane after breakfast and be on a beach in Miami for lunch. Atlantic City? Pfft. The Shore town began to disintegrate. By the mid-’70s, the city found itself at a pivotal crossroads. It could do nothing, ride out the downward trend, and see what happened. Or it could come up with some novel and wholly artificial way to inject new life into itself. It opted for the latter, betting that gambling would be Atlantic City’s salvation. Until that point, Nevada was the only place in the United States where you could open up a full-fledged casino. But in 1976, New Jersey citizens voted to make slots and table games legit in Atlantic City. The first casino, Resorts—which just turned 40 and is still standing — opened less than two years later.”

Noting that, for a time, business was booming, he credited Atlantic City’s casinos for bringing hundreds of millions of tourists to the Boardwalk during Atlantic City’s gambling heyday” “Some years, this city of 40,000 residents topped 34 million tourists. But outside the casino walls, the city struggled. The casino owners—including, for a time, Donald Trump—got fat, politicians got their kickbacks, and the impoverished residents of Atlantic City remained just that: And then everything went wrong. The new Atlantic City created in the late 1970s was premised almost entirely on maintaining a casino duopoly with Nevada; once casinos started popping up all over—including in Pennsylvania in 2006—Atlantic City imploded.”

Noting, as we have traced, the city’s fiscal nadir came to a head in January of 2014, when the Atlantic Club, which had opened as the Golden Nugget in 1980, collapsed, followed by Showboat, followed by the Revel, followed shortly thereafter by the Trump Plaza, noting: “Finally, in October 2016, one month before its namesake was elected to the Oval Office, the lights went out at Trump Taj Mahal. In just two and a half years, five casinos vanished, their cavernous buildings shuttered. Atlantic City had bottomed out economically in the most spectacular fashion possible.”

Tracing a Fiscal Turnaround. Writing that when assessed property values drop low enough, neighborhoods become more and affordable—and, ergo, more attractive to developers who could “pick up buildings for pennies on a dollar,” he noted that “Atlantic City suddenly became a risk worth taking”—adding: “Investing in Atlantic City now makes a lot more sense than it did five years ago, but it’s hardly a no-brainer. The city, with its 37% poverty rate) is overwhelmingly poor. Taxes are overwhelmingly high. And walking around on Atlantic or Pacific Avenue, the city’s two main north-south boulevards, which run parallel to and within blocks of the Boardwalk—can be nerve-racking after hours. In daylight, panhandlers accost and prostitutes solicit. Politically, things are hardly ideal: Then-governor Chris Christie instituted a state takeover in 2016.

John Longacre, who has acquired a reputation for building a business by spotting potential where others see potential disaster, and he works primarily in South Philadelphia, where he specializes in recovery projects that save buildings, convert seedy bars into trendy restaurants and turn vacant eyesores into neighborhood hubs, told Mr. Fiorillo: “Every bank in the region is terrified of Atlantic City.” Indeed, Mr. Longacre added: “If you look at the policy surrounding everything that exists in Atlantic City, it’s the perfect storm to keep investors out: From the state handling the zoning to the tax base to rent control, everything that happens from a policy level makes it seem like New Jersey is trying to make Atlantic City fail.” Nevertheless, he seems convinced the fabled city will not fail. Or, as Mr. Fiorillo described it, there are a new breed interested in the fabled city who likely will play an essential role in the city’s future: “It’s not about Aunt Edna and Uncle Fred and their casino bus trips anymore. It’s about younger people who aren’t into Atlantic City for the gambling. It’s about people who don’t just feel comfortable in but desire urban environments, with all their flaws and character. It’s about people who respect and require diversity. It’s about people like me and my wife, who, to be honest, cringe when we drive into a place like Avalon.”

Describing this fiscal and physical revival, he writes about the relationship of small projects complemented by large ones: “The Hard Rock Hotel is finally going to open on the Boardwalk later this month, where the Taj Mahal was until October 2016. Pottstown native Todd Moyer, senior vice president of marketing for this new outpost of the rock-and-roll-themed company, got his start in the casino business in 1990, when he worked as a tuxedoed greeter at, coincidentally, the Taj. I was working for Hard Rock out West, when I got the chance to come home: I jumped at it. Sometimes I would be at a bar or restaurant and hear people talking about Atlantic City being dead, and I’d jump in. I’m a defender and a giant supporter of A.C. We’re building hotels all around the world, but really, all the focus lately has been on Atlantic City.”

As for Mr. Longacre, his view is that he would “love for every casino to go out of business and see Atlantic City re-create itself without them, as an urban beach town.” Nevertheless, he believes there is one massive Atlantic City development which will be a game-changer: Stockton, the nearly 50-year-old public university, which has its main campus in Galloway Township, about 20 minutes from the Boardwalk: it is set to debut a brand-new beachfront Atlantic City campus this September, when one thousand students will use the campus, and many of them plan to live in town. Thus, he notes: “Stockton is huge. It’s the first real institutional investment in years that’s not a casino.”

Rolling the Fiscal Dice? As significant as these fiscal changes appear to be, they almost seem to pale against the city’s real world challenges: Atlantic City has a poverty level three times higher than the statewide rate: more than three times the number below the poverty level—and a disability rate among non-poor residents of just under 25%. In its rental housing, the percentage of residents below the federal poverty level is over 90%. A consequent governing challenge for the post-taken over city and the Garden State remains. Mr. Fiorillo notes that whether the gambles being made by Mr. Blatstein, Mr. Longacre, and others are successful remains to be seen—as does the question with regard to whether all the investment will put much of a dent in Atlantic City’s poverty rate or help the town’s current residents. He adds: “And it’s not going to be this summer or next summer when we find out who, if anyone, wins. Nevertheless, he wrote: “When I consider Point Breeze circa 2008 and that same area today, I have hope for this complicated Shore town. There will always be casinos here, for better or worse, and there will always be crime and poverty and grime. This is, after all, a city. But, 10 years from now, when my own kids are (I hope) in very good colleges, it’s not too hard to imagine us spending a summer weekend at some boutique hotel on New York Avenue. We’ll stop into the Boardwalk La Colombe for a draft latte, served up by a very hip-looking third-year Stockton student on break. For lunch, HipCityVeg down in the inlet. Happy hour will be at some John Longacre-owned brewpub overlooking the Atlantic.”

Exiting from Municipal Bankruptcy

eBlog

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.”

Motoring Back from Chapter 9 Bankruptcy

March 9, 2018

Good Morning! In this morning’s eBlog, we consider the state of the City of Detroit, the state of the post-state takeover Atlantic City, and the hard to explain delay by the U.S. Treasury of a loan to the U.S. Territory of Puerto Rico.

An Extraordinary Chapter 9 Exit. Detroit Mayor Mike Duggan yesterday described the Motor City as one becoming a “world-class place to put down your roots” and make an impact: “We’re at a time where I think the trajectory is going the right way…We all know what the issues are. We’re no longer talking about streetlights out, getting grass cut in the parks. We’re making progress. We’re not talking all that much about balancing the budget.” His remarks, coming nearly five years after I met with Kevin Orr on the day he had arrived in Detroit at the request of the Governor Rick Snyder to serve as the Emergency Manager and steer the city into and out of chapter 9 municipal bankruptcy, denote how well his plan of debt adjustment as approved by U.S. Bankruptcy Judge Steven Rhodes has worked.

Thus, yesterday, the Mayor touted the Detroit Promise, a city scholarship program which covers college tuition fees for graduates of the city’s school district, as well as boosting a bus “loop” connecting local charter schools, city schools and after-school programs. Maybe of greater import, the Mayor reported that his administration intends to have every vacant, abandoned house demolished, boarded up, or remodeled by next year—adding that last year foreclosures had declined to their lowest level since 2008. Over the last six months, the city has boarded up 5,000 houses, sold 3,000 vacant houses for rehab, razed nearly 14,000 abandoned houses, and sold an estimated 9,000 side lots. The overall architecture of the Motor City’s housing future envisions the preservation of 10,000 affordable housing units and creation of 2,000 new ones over the next five years.

The Mayor touted the success of the city’s Project Green Light program, noting that some 300 businesses have joined the effort, which has realized, over the last three years a 40% in carjackings, a 30% decline in homicides since 2012, and 37% fewer fires, adding that the city intends to expand the Operation Ceasefire program, which has decreased shootings and other crimes, to other police precincts. On the economic front, the Mayor stated that Lear, Microsoft, Adient, and other major enterprises are moving or planning to open sites: over the last four years, more than 25 companies of 100-500 jobs relocated to Detroit. On the public infrastructure radar screen, Mayor Duggan noted plans for $90 million in road improvements are scheduled this year, including plans to expand the Strategic Neighborhood Fund to target seven more areas across the city, add stores, and renovate properties. Nearly two years after Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) shepherded through the legislature a plan to pay off the Detroit School District’s debt, describing it to his colleagues as 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 bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan,” the Mayor yesterday noted that a bigger city focus on public schools is the next front in Detroit’s post-bankruptcy turnaround as part of the city’s path to exiting state oversight. He also unveiled a plan to partner with the Detroit Public Schools Community District, describing the recovery of the district as vital to encourage young families to move back into the city, proposing the formation of an education commission on which he would serve, as well as other stakeholders to take on coordinating some city-wide educational initiatives, such as putting out a universal report card on school quality (which he noted would require state support) and coordinating bus routes and extracurricular programs to serve the city’s kids regardless of what schools they attend.

The Mayor, who at the end of last month unveiled a $2 billion balanced budget, noted that once the Council acts upon it, the city would have the opportunity to exit active state oversight: “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,” adding: “As everybody here knows, the financial review commission doesn’t entirely go away: they go into a dormancy period. If we in the future run a deficit, they come back.”

His proposed budget relies on the use of $100 million of an unassigned fund balance to help increase spending on capital projects, including increased focus on blight remediation, stating he hopes to double the rate of commercial demolition and get rid of every vacant, “unsalvageable” commercial property on major streets by the end of next year—a key goal from the plan he unveiled last October to devote $125 million of bond funds towards the revitalization of Detroit neighborhood commercial corridors, part of the city’s planned $317 million improvements to some 300 miles of roads and thousands of damaged sidewalks—adding that these investments have been made possible from the city’s $ billion general fund thanks to increasing income tax revenues—revenues projected to rise 2.7% for the coming fiscal year and add another $6million to $7 million to the city’s coffers. Indeed, CFO John Hill reported that the budget maintains more than a 5% reserve, and that the city continues to put aside fiscal resources to address the  higher-than-expected pension payments commencing in 2024, the fiscal year in which Detroit officials project they will face annual payments of at least $143 million under the city’s plan of debt adjustment, adding that the retiree protection fund has performed well: “What we believe is that we will not have to make major changes to the fund in order for us to have the money that we need in 2024 to begin payments; In 2016 those returns weren’t so good and have since improved in 2017 and 2018, when they will be higher than the 6.75% return that we expected.” He noted that Detroit is also looking at ways to restructure its debt, because, with its limited tax general obligation bonds scheduled to mature in the next decade, Detroit could be in a position to return to the municipal market and finance its capital projects. Finally, on the public safety front, the Mayor’s budget proposes to provide the Detroit Police Department an $8 million boost, allowing the police department to make an additional 141 new hires.

Taking Bets on Atlantic City. The Atlantic City Council Wednesday approved its FY2019 budget, increasing the tax levy by just under 3%, creating sort of a seesaw pattern to the levy, which three years ago had reached an all-time high of $18.00 per one thousand dollars of valuation, before dropping in each of the last two years. Now Atlantic City’s FY2019 budget proposal shows an increase of $439,754 or 3.06%, with Administrator Lund outlining some of the highlights at this week’s Council session. He reported that over the years, the city’s landfill has been user fee-based ($1 per occupant per month) to be self-sufficient; however, some unforeseen expenses had been incurred which imposed a strain on the landfill’s $900,000 budget. Based on a county population of 14,000, the money generated from the assessment amounts to roughly $168,000 per year, allowing the Cass County Landfill to remain open. However, the financing leaves up to each individual city the decision of fee assessments. Thus, he told the Council: “The Per Capita payment to the landfill accounted for about .35 to .40 cents of the increase.”  Meanwhile, two General Department heads requested budget increases this year and five Department Heads including; the Police Department and Library submitted budgets smaller than the previous year. Noting that he “never advocate(s) for a tax increase,” Mr. Lund stated: “But it is what it is. It was supposed to go up to $16.98 last year and now we are at $16.86, so it’s still less,” adding that the city’s continuous debt remains an anchor to Atlantic City’s credit rating—but that his proposed budget includes a complete debt assumption and plan to deleverage the City over the next ten years.

Unshelter from the Storm. New York Federal Reserve Bank President, the very insightful William Dudley, warns that Puerto Rico should not misinterpret the economic boost from reconstruction following hurricanes that hit it hard last year as a sign of underlying strength: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster,” as he met with Puerto Rican leaders in San Juan: “We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” warning, however, he expects economic growth to slow again in 2019 or 2020: “It’s “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”

President Dudley and his team toured densely populated, lower-income, hard hit  San Juan neighborhoods, noting the prevalence of “blue roofs”—temporary roofs overlaid with blue tarps which had been used as temporary cover for the more permanent structures devastated by the hurricanes, leading him to recognize that lots of “construction needs to take place before the next storm season,” a season which starts in just two more months—and a season certain to be complicated by ongoing, persistent, and discriminatory delays in federal aid—delays which U.S. Treasury Secretary Steven Mnuchin blamed on Puerto Rico, stating: “We are not holding this up…We have documents in front of them that [spell out the terms under which] we are prepared to lend,” adding that the Trump Administration has yet to determine whether any of the Treasury loans would ultimately be forgiven in testimony in Washington, D.C. before the House Appropriations Subcommittee on Financial Services and General Government.

Here, the loan in question, a $4.7 billion Community Disaster Loan Congress and the President approved last November to benefit the U.S. territory’s government, public corporations, and municipalities—but where the principal still has not been made available, appears to stem from disagreements with regard to how Puerto Rico would use these funds—questions which the Treasury had not raised with the City of Houston or the State of Florida.  It appears that some of the Treasury’s apprehensions, ironically, relate to Gov. Ricardo Rosselló’s proposed tax cuts in his State of the Commonwealth Speech, in which the Governor announced tax cuts to stimulate growth, pay increases for the police and public school teachers, and where he added his administration would reduce the size of government through consolidation and attrition, with no layoffs, e.g. a stimulus policy not unlike the massive federal tax cuts enacted by President Trump and the U.S. Congress. It seems, for the Treasury, that what is good for the goose is not for the gander.

At the end of last month, Gov. Rosselló sent a letter to Congress concerned that the Treasury was now offering only $2.065 billion, writing that the proposal “imposed restrictions seemingly designed to make it extremely difficult for Puerto Rico to access these funds when it needs federal assistance the most.” This week, Secretary Mnuchin stated: “We are monitoring their cash flows to make sure that they have the necessary funds.” Puerto Rico reports it is asking for changes to the Treasury loan documents; however, Sec. Mnuchin, addressing the possibility of potential loans, noted: “We’re not making any decision today whether they will be forgiven or…won’t be forgiven.” Eric LeCompte, executive director of Jubilee USA, a non-profit devoted to the forgiveness of debt on humanitarian grounds, believes the priority should be to provide assistance for rebuilding as rapidly as possible, noting: “Almost six months after Hurricane Maria, we are still dealing with real human and economic suffering…It seems everyone is trying to work together to get the first installment of financing sent and it needs to be urgently sent.”

Part of the problem—and certainly part of the hope—is that President Dudley might be able to lend his acumen and experience to help. While the Treasury appears to be most concerned about greater Puerto Rico public budget transparency, Mr. Dudley, on the ground there, is more concerned that Puerto Rican leaders not misinterpret the economic boost from reconstruction following the devastating hurricanes as a sign of underlying strength, noting: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster: We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” before the economic growth slows again in 2019 or 2020, adding, ergo, that it was “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”