The Human & Fiscal Prices of Insolvency

October 20, 2017

Good Morning! In today’s Blog, we consider the spread of Connecticut’s fiscal blues to its municipalities; then we consider the health and fiscal health challenge to Flint; before, finally, observing the seemingly worsening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. It appears that the City of Hartford would have to restructure its debt to receive the requisite state assistance to keep it out of chapter 9 municipal bankruptcy under the emerging state budget compromise between the Governor and Legislature. Under the terms of the discussions, the State of Connecticut would also guarantee a major refunding of the city’s debt, as well as cover a major share of the city’s debt payments, at least for this fiscal year and next, with House Majority Leader Matt Ritter (D-Hartford) indicating this was part of a bipartisan compromise the legislature recognizes is needed to avert municipal bankruptcy: “This budget gives the city all of the tools it needs to be on a structural path to sustainability…This solution truly is a bipartisan one.” According to the city’s Mayor Luke Bronin, Hartford needs about $40 million annually in new state assistance to avert bankruptcy. The emerging agreement also includes $28 million per year for a new Municipal Accountability Review Board, likely similar to what the Commonwealth of Virginia has used so effectively, to focus on municipalities at risk of fiscal insolvency and to intervene beforehand: approximately $20 million of that $28 million would be earmarked for Hartford. The new state budget would require Hartford to restructure a significant portion of its capital debt, but the state would guarantee this refinancing, an action which—as was the case in Detroit—will help Hartford have access to lower borrowing costs: the agreement also calls for the state to pay $20 million of the city’s annual debt service—at least for this fiscal year and next.

The state actions came as Moody’s Investor Service this week placed ratings of 26 of the state’s municipalities, as well as three of the state’s regional school districts under review for downgrade, citing state aid cuts in the absence of a budget, warning those municipalities and districts face cuts in state funding equal to 100% or more of available fund balance or cash—with those cities most at risk: Hartford (which currently receives 50 percent of its revenues from the state), New Haven, New Britain, West Haven, and Bridgeport. Moody’s was even fiscally moodier, dropping the credit ratings of an additional 25 Connecticut cities and towns, and three other regional school districts, while maintaining the existing negative outlook on the rating of one town. Moody’s list did not, however, include Hartford. The down-gradings come as the state has continued to operate under Executive order in the absence of an approved fiscal budget, now more than a fiscal quarter overdue. Gov. Dannel Malloy, at the beginning of the week, had submitted his fourth FY2018-19 budget to lawmakers, a $41.3 billion spending plan in the wake of his veto last month of the version approved by the legislature, reporting that his most recent fiscal plan would eliminate some revenue proposals, including new taxes on second homes, cell phone surcharges, ridesharing fees, and daily fantasy sports fees—instead, he has proposed an additional $150 million in spending over the biennium, while simplifying the implementor language. According to Moody’s, under the Governor’s new executive order, state aid to local governments will be nearly $1 billion below last year’s level—or, as Moody’s put it: “The current budget impasse highlights the ongoing vulnerability of funding that Connecticut provides to its local governments.” Connecticut traditionally has provided significant funding to its local governments, largely through education cost sharing grants, but also through payments in lieu of taxes and other smaller governmental grants. Connecticut’s GO bond prices have deteriorated with 10-year credit spreads around 80 basis points, well above historical levels, according to Janney Capital Markets Managing Director Alan Schankel: “A state’s fiscal stress tends to flow downstream to local governments, and Connecticut is no exception.” The fiscal irony is that despite the state’s high per capita wealth, the state’s debt, at 9.2% of gross state product, is highest among the states, lagging only behind Illinois.

Not in Like Flint. U.S. District Court Judge David Lawson has ordered Flint’s City Council to choose a long-term water source for the city by Monday after it spent more than three months refusing to make a decision. In his 29-page opinion, he took Flint’s City Council to task for sitting on an April agreement backed by Mayor Karen Weaver, the state and the federal Environmental Protection Agencies that would see the city stay on the Detroit area water system through a new 30-year contract with the Great Lakes Water Authority, writing:. “The failure of leadership, in light of the past crises and manifold warnings related to the Flint water system, is breathtaking.” Judge Lawson’s decision came in response to a suit filed by the Michigan Department of Environmental Quality last June in the wake of the Flint City Council ignoring the state’s deadline for a water supply decision, arguing the delay would “cause an imminent and substantial endangerment to public health in Flint.” The Council, in hearing and filings, had requested more time from the court; however, Judge Lawson wrote that the state had demonstrated potential for “irreparable injury” in Flint and that there was an urgency to act, because the city’s short-term water agreements have expired and the long-term agreement is time sensitive, concluding: “The City Council has not voted on the negotiated agreement, it has not proposed an alternative, and the future of Flint’s fragile water system—its safety, reliability, and financial stability— is in peril…Because of the city’s indecision, the court must issue its ruling.” Judge Lawson’s order likely ensures the City Council will approve the proposed contract with the Great Lakes Authority that it had been resisting though it was negotiated with Mayor Karen Weaver’s approval. The city could choose to risk defying the court order; however, the State of Michigan has warned that tens of millions of dollars in extensive repairs and updates need to be made to the inactive Flint water plant—repairs which would take three and a half years to complete.

The warnings of Wayne State University Professor Nicholas Schroeck with regard to the risk to public health and the financial stability of the water supply system appeared key to persuading Judge Lawson to side with the state and issue a pre-emptive order. The Judge, in early August, had appointed a mediator in an effort to try gain an agreement between the city and the state Dept. of Environmental Quality; however, when the sides were unable to settle, he warned that  extending Flint’s contract with the Detroit area water system beyond 30 days could result in funding problems: “It seems to me that inaction is inviting intervention.” The Weaver administration analyzed various long-term water options for Flint, and the Mayor said Tuesday the Great Lakes agreement “proved to be in the best interest of public health by avoiding another water source switch, which could result in unforeseen issues.” The Michigan DEQ praised Judge Lawson for “recognizing there is no need to wait…and remains committed to working with the City of Flint to implement a plan once a source water determination has been finalized to ensure compliance with the Safe Drinking Water Act.” In its arguments before Judge Lawson, the State of Michigan had warned: “The City Council’s failure to act will result in at least a 55-63% increase in the water rate being charged to Flint residents, create an immediate risk of bankrupting the Flint water fund, will preclude required investment in Flint’s water distribution system, and create another imminent and substantial endangerment to public health in Flint.” That was similar to a statement from a key aide to Gov. Rick Snyder who had warned that stalling the water contract decision was costing the City of Flint an extra $600,000 a month, because it was paying for two sources—Great Lakes, from which it currently gets its treated water, and Karegnondi, from which it contractually would receive water by 2019 to 2020. Under the 30-year agreement with Great Lakes, Flint would no longer have to make payments to Karegnondi.

Unresponsiveness. President Trump last week awarded himself a perfect rating for his response to the hurricane that devastated Puerto Rico: “I would give myself a 10,” he responded when asked by reporters how he would score his efforts, on a one to 10 scale. He told Fox News correspondent Geraldo Rivera that Puerto Rican governments “owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out. You can say goodbye to that.” A comment to which OMB Director Mick Mulvaney noted: “I wouldn’t take it word for word.” Indeed, a week later, Congressional Republicans unveiled a relief plan that would only add to Puerto Rico’s unsustainable debt load. In his meeting this week with Puerto Rico Governor Ricardo Rosselló, who was in Washington to press for federal disaster relief, the President claimed: “We have provided so much, so fast.” Yet, today nearly 80 percent of the island remains without electricity, and almost 30 of the island still does not have access to clean water, according to Puerto Rican government figures.

In contrast with Texas after Hurricane Harvey and Florida after Irma, where thousands of repair workers rushed in to restring power lines, only a few hundred electrical workers from outside Puerto Rico have arrived to help: it was not until last Saturday that the Puerto Rican government said it had the federal funding needed to bring in more workers. That compares to some 5,300 workers from outside the region who converged on coastal Texas in the days after Hurricane Harvey to restore a power loss about a tenth of the size that struck Puerto Rico. Similarly, in Florida, 18,000 outside workers went in after Hurricane Irma knocked out electricity to most of the state last month, according to Florida Power and Light; whereas, in Puerto Rico, the challenge of restoration has fallen on the shoulders of about 900 members of local crews—an outcome industry experts report to be a result of poor planning, a slow response by power officials, and Puerto Rico’s dire fiscal situation—a sharp contrast to the President’s claim that his administration deserved a 10 for its response to the hurricanes which struck Puerto Rico and other parts of the United States.

The U.S. Army Corps of Engineers, charged by FEMA with restoring Puerto Rico’s power, estimated that it needed at least 2,000 additional workers. So far, the Corps has brought only about 200 workers, and most of them were dedicated not to restoring power, but to installing generators at crucial locations. In the wake of major storms, such as Katrina, power companies typically rely on mutual aid agreements to get electricity restored: such outside companies send thousands of workers, and electric companies pay for the service with funds from FEMA. However, providing such assistance to Puerto Rico is not just logistically a greater challenge—but also a discriminatorily greater challenge: the Jones Act—which the President only suspended for ten days—means that the time and cost of shipping comes at a 20% premium.  

The Human Storm. Maria risks accelerating the trend of the last decade of economic decline and depopulation, described as “a slower-moving catastrophe,” which is wreaking a devastating toll: The number of residents had plunged by 11 percent, the economy had shrunk by 15 percent, and the government has become fiscally insolvent. Already ranked among the worst cycles of economic decline and depopulation in postwar American history, the aftermath of Maria threatens an acceleration of residents fleeing en masse: accelerating economic decline and potentially accelerating a vicious cycle. Lyman Stone, an independent migration researcher and economist at the Agriculture Department notes: “We are watching a real live demographic and population collapse on a monumental scale.” At a news conference last week, Gov. Rosselló warned that without significant help, “millions” could leave for the U.S. mainland: You’re not going to get hundreds of thousands of Puerto Ricans moving to the States—you’re going to get millions…You’re going to get millions, creating a devastating demographic shift for us here in Puerto Rico.” Puerto Rico Treasury Secretary Raúl Maldonado has warned, meanwhile, that without more aid, the government could suffer a shutdown by the end of the month.

Today, only about 40 percent of Puerto Ricans in the territory are employed or seeking work—more than 33% below levels on the mainland. The danger, now, is of increased flight—but flight by the young and those with college degrees. After all, with the PROMESA Board charged with fashioning a fiscal plan to pay off more than $70 billion in Puerto Rico’s municipal debt calling for efforts to raise taxes and significant cuts to the government, the Board has predicted continuing shrinkage of the Puerto Rican economy. Thus, there is a real apprehension

As a result, for Washington and Puerto Rican officials planning a recovery, the ongoing exodus poses a multifaceted dilemma. “They’ve got to start from the ground up,” a former U.S. Treasury official said of any new plan for the island. In the short-term, at least, the island is likely to see an economic boost; rebuilding after a hurricane often injects a jolt of spending into local economies. But, according to recent research of 90 years of natural disasters in the United States, published as a National Bureau of Economic Research working paper, major natural disasters also have unfavorable effects: They increase out-migration, lower home prices, and raise poverty rates. Like many on the island, Sergio M. Marxuach, policy director for the Center for a New Economy, a San Juan-based think tank, said a massive federal investment is necessary. “We’re going to need some significant government intervention — essentially a big rescue package, not only to rebuild the economy but get it growing…People are saying, ‘I don’t want my children to grow up in a place where the economy is going to be devastated for the next 10 years.’ If enough people think that way, it’s going to be a self-reinforcing downward spiral.”

In addressing complaints about ongoing struggles on the island, President Trump noted this week that the disaster in Puerto Rico in many ways had begun years ago. Puerto Rico “was in very poor shape before the hurricanes ever hit. Their electrical grid was destroyed before the hurricanes got there. It was in very bad shape, was not working, was in bankruptcy.”

At the Level of a Muncipio. While many have considered the fiscal and physical impact on the U.S. territory of Puerto Rico, fewer have considered the fiscal challenge to Puerto Rico’s municipalities. Consider, for instance, Juncos, one of Puerto Rico’s 78 municipalities: it is located in the eastern central region of the island; it is spread over 9 wards and Juncos Pueblo (the downtown area and the administrative center of the city). The city, one of the oldest in the United States,was founded on the request of Tomas Pizarro on August 2, 1797, having previously been a village which evolved from a small ranch, the Hatillo de los Juncos. Hurricane Maria has changed this municipality forever: more than 1,000 families in Juncos lost it all that unforgettable September 20th, when Hurricane Maria struck. Yet, in a remarkable effort, residents of the La Hormiga sector of Las Piñas neighborhood, in the immediate aftermath of the hurricane, organized to help recover the humble community that is often highlighted by criminal incidents in the area: one of the community leaders of the sector, Wanda Bonilla, highlighted the deed of the trash rescuers: “Thanks to them, they have also relieved the pick up of the rubble.” The city’s community board worked immediately to install a shelter in the neighborhood community center given the circumstances that some 17 families, with between five and seven members each, where the storm tore the roofs off their homes—and most of those homes have single mothers. She noted: “Our president, Ivelisse Esquilín, who also lost everything, is helping us through the Municipality and with other donations.” Juncos Mayor Alfredo Alejandro noted that, in the wake of the storm, crossing arms was not an option for anyone “in the neighborhood” even though many of the 60 families living in the sector experienced the grief of having lost their home: “You have to do it because imagine …right now, look here, I have these pieces of a car to see if I invent a type of small generator to, even be, to turn on a fan.” The Mayor described Maria’s devastation to be of “great proportions:” Out of population of 42,000 people, more than 1,000 lost their homes and a comparable number suffered major damage to their structures; 85% of the city’s residents are still without potable water, while there are few expectations that electricity will soon be restored.

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Cascading Municipal Insolvencies

October 11, 2017

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

Visit the project blog: The Municipal Sustainability Project 

Cascading Insolvency. With questions stirring with regard to the potential impact of a chapter 9 municipal bankruptcy on the City of Hartford, the city’s leaders have called two public meetings to examine its effects on other cities and towns, inviting Kevyn Orr, the mastermind of putting Detroit into chapter 9, and then overseeing the city’s successful plan of debt adjustment; Central Falls, Rhode Island  Mayor James Diossa—where the city filed for chapter 9 the day our class of No. Virginia city and county staff visited its city hall in 2011 (publishing, in the wake of the visit, the “Financial Crisis Tool Kit,”) and Don Graves, senior director of corporate community initiatives at Key Bank. The focus is to better acquaint citizens on what municipal bankruptcy is—and is not, or, as the Mayor put it: “so we can learn from their experiences…As we consider all of our options for putting the city of Hartford on a path to sustainability and strength, it’s essential that our residents are a part of that conversation…We’ve had a number of requests for a more detailed discussion of what [municipal] bankruptcy would mean for our city.” With Connecticut still without a budget, Hartford is confronted not only by its current $65 million deficit and mounting debt, but also accelerating cash flow problems. Mayor Luke Bronin has requested at least $40 million from the state, in addition to the projected $260 million: Connecticut House Democrats have said they would set aside $40 million to $45 million; however, a Republican budget was adopted instead: that plan, vetoed by the Governor, only offered the city $7 million in additional aid. The city’s delegation in the Connecticut Legislature said last week that they oppose chapter 9 municipal bankruptcy, even as they acknowledged but they acknowledged it might be one of the few options left: or, Rep. Brandon McGee (D-Hartford) put it: “It’s been really impossible to reassure people that bankruptcy is not there…it’s there. It’s real.” One of his counterparts, state Sen. Douglas McCrory (D-Hartford), noted: lawmakers “have to get something done very quickly in order to save Hartford.”

Out-Sized Municipal Debt. Puerto Rico, the U.S. Virgin Islands, and Guam all face out-sized debt burdens relative to their gross domestic products, and each of the U.S. territories faces a repayment challenge, the Government Accountability Office found. Susan Irving and David Gootnick of the General Accounting Office, in their new report on Puerto Rico and other U.S. Territories (GAO-18-160), reported that between fiscal years 2005 and 2014, the latest figures available, Puerto Rico’s total public debt outstanding (public debt) nearly doubled from $39.2 billion to $67.8 billion, reaching 66 percent of Gross Domestic Product; despite some revenue growth, Puerto Rico’s net position was negative and declining during the period, reflecting its deteriorating financial position. They wrote that experts pointed to several factors as contributing to Puerto Rico’s high debt levels, and in September 2016 Puerto Rico missed up to $1.5 billion in debt payments. The outcome of the ongoing debt restructuring process will determine future debt repayment. Their report, released last week, details the debt situations of U.S. overseas territories from fiscal years 2005-2015 and provides brief commentary on their outlooks. (There are  five: Puerto Rico, the U.S. Virgin Islands (USVI), Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands. Puerto Rico’s public debt exploded in the decade the report covers, from $39.2 billion to $67.8 billion, reaching 66% of the island’s GDP. Even after some revenue growth in that period, Puerto Rico’s overall financial position deteriorated, leading to its eventual default on billions of dollars of bonds. GAO found that Puerto Rico’s fiscal challenges arose from the following factors: the use of debt to finance regular government operations, poor disclosure leading to investors being unaware of the extent of the fiscal crisis in the territory, the appeal of territorial debt being exempt from federal, state, and local taxation for investors in all states, as well as recession and population decline. Thus, the two authors noted: Puerto Rico’s long-term fiscal trajectory is dependent upon the restructuring process underway through the PROMESA Oversight Board.

Looming Municipal Insolvencies?

October 10, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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

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

Physical & Fiscal Solvency & the Unremitting Challenges of Water

Good Morning! In this morning’s eBlog, we consider the route to fiscal solvency taken by the small Virginia municipality of Petersburg, the major legal challenges to the physical and fiscal future of Flint; and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road Back to Fiscal Solvency. Forensic auditors earlier this week presented their findings from the audit they conducted into the city of Peters burg’s financial books during a special City Council meeting in the small, historic Virginia City of Petersburg, and answered questions from Council Members. Their key focus was on the “ethical tone” of the city government: they noted they had found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time: The culture led employees to do things they might not otherwise do.” The list of misdeeds included misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. They added that the ethical problems appeared to be more “systemic” rather than individual, testifying, for instance, that they had examined fuel consumption and “[W]e could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.” Because of the city’s limited budget, the scope of the auditor’s (PBMares) work could only go so far. Council Members Darrin Hill and Treska Wilson-Smith both expressed sentiments that the audit did not go far enough; however, former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more money than the nearly insolvent city had. In fact, the city spent approximately $1 million on turnaround services, with the vast bulk of that amount to the Bobb Group to obtain outside help from the firm led by the former Richmond City Manager in its efforts to pull Petersburg back from the brink of insolvency and scrutinize the cash-strapped government’s books. The city devoted nearly $195,000 to a forensic audit by the firm PBMares. Former Mayor and now City Councilman Howard Myers believes Petersburg’s taxpayers have gotten their money’s worth: “They brought us from the depths of indebtedness…I think the resistance then was mainly misinformed about the nature of how things had gotten to the point they were.” But from the abyss of insolvency, city officials now project Petersburg will have $2 million in savings left over from the fiscal year which ended June 30. To get there, the city has deeply reduced pay for emergency workers, cut funding for public schools, and eliminated programs for children in an effort to close a $12 million hole in the city’s budget—even as those efforts still left the Council confronted by some $18.8 million in past-due bills, as well as litigation over the city’s mounting debts—not to mention growing taxpayer pressure to cease to exist, but rather to dissolve its charter and revert to becoming part of one or more counties. Nevertheless, as Mayor Samuel Parham put it: “We had to take a chance: We were at a point where all the banks were laughing at us, saying: ‘We’re not going to pay you a dime; you couldn’t afford to mail an envelope.’”

Today, it seems that gamble has paid off: the contract with Mr. Bobb’s firm ended last month, and, as Mayor Parham stated: “Look, God bless Robert Bobb…We couldn’t get anyone — nobody wanted to come risk their career to save Petersburg. The storm was so massive, it was sinking all of us, but he told us he had dealt with many storms in his 40-year career.” The appointment of Mr. Bobb, however, was a political gambit which drew the opposition of a “good government group,” Clean Sweep Petersburg, which had helped launch an effort to recall Mr. Myers and Mayor Parham. The issue which created the greatest political discord: privatization of the city’s water and sewer authority.  In an interview this week, Mr. Bobb noted that the city’s future fiscal success will depend largely on the City Council’s ability to be accountable to taxpayers through their own decisions and those of the fresh administration hired in a municipal reset. Critical to that success will be firm municipal oversight of cash flow, strong leadership in the finance department, and a newly created revenue collection department designed to wrest responsibility away from the Treasurer’s office, which, according to Mr. Bobb, was not under the Council’s purview: he added the city’s elected leaders “have a tremendous fiduciary responsibility to perform at a high level on behalf of the city’s taxpayers: I think they have a chance, absolutely. They really have to control spending, though, and be careful.” He added that  of the $10 million the firm calculated it had helped save or bring in through a combination of state money it pursued, savings achieved by restructuring debt, the sale of city assets and other actions: “We’ve given the administration and the City Council a reset and an opportunity to build moving forward: “It really is up to the City Council now.”

Out Like Flint. Thousands of Flint, Michigan’s citizens are still grappling with the effects of the city’s state-caused lead-poisoning drinking water crisis, one occasioned by a gubernatorially appointed Emergency Manager, which has, today, confronted the city with many citizens facing possible tax liens and even foreclosure on their homes due to unpaid water bills: more than 8,000 residents have received notices that past-due water bills—categorized as those left unpaid for six months or more—must be resolved to avoid a lien being placed on their property. The bills in question cover two years: they total more than $5 million in delinquent water and sewer charges, according to the city. The ongoing fiscal and physical stress comes amid an involuntary manslaughter trial after  Federal Judge Judith Levy last June ruled that the conduct of government officials was “so egregious as to shock the conscience,” approving a $97 million settlement from the State of Michigan to replace water lines in at least 18,000 households.

Nevertheless, today, the water in Flint remains unsafe to drink without a filter. Unsurprisingly, in the city, where the estimated median household income in 2015 ($25,342) was more than 10 percent lower than in 2000, and where assessed housing (home/condo) values have dropped by nearly 50 percent to a level 75 percent lower than the statewide average, the city is ensnared in a vicious fiscal quandary: the liens threatened by the city, if implemented, represent the first step in making a claim on an individual’s property, setting off a legal process which could ultimately result in families losing their homes—further depressing assessed property values. And that is in a municipality where the city’s residents face some of the highest water bills in the country.  (To bring some relief, Michigan Gov. Rick Snyder last year approved a $30 million plan to reimburse residents for a portion of payments made since April 2014 on water used for drinking, bathing, and cooking.) That state assistance ended early this year, however, so now the city’s leaders are faced with the grim task of condemnation: once water payments are missed on water or sewer accounts for more than six months, the city’s ordinance requires the Treasurer to transfer the lien to a homeowner’s property tax bill—or, as Mayor Karen Weaver puts it: “We must follow the law…I understand the concerns that have been raised, and I am working to see if any changes or something can be done to help those affected by this, especially given the extraordinary circumstances we have endured due to the water crisis.”

But Flint’s fiscal and physical crisis has become a legal entanglement for the State of Michigan, where, in another courtroom, Michigan Gov. Rick Snyder, whose original appointment of a series of state-appointed emergency managers who ran Flint city government from 2011 until mid-2015, making key decisions related to city’s water system (under former Emergency Manager Darnell Earley, the city changed its water source in what was explained as a cost-saving move, switching from pre-treated water from Lake Huron to raw water from the Flint River—and after which the DEQ did not require the city to treat the water to make it less corrosive to lead pipes and plumbing, causing lead to leach into the water supply).

That decision to preempt the city’s local elected officials had led to the fateful decision to switch the city’s water supply to a contaminated system; while state responsibility appears to be a hot potato—with state leaders not saying who initially opposed issuing a  state emergency over the Flint water crisis. During a preliminary examination this Wednesday, in the criminal case against Nick Lyon, Director of the Michigan Department of Health and Human Services, special prosecutor Todd Flood read from a November 2015 email from Richard Baird, a senior advisor to Gov. Snyder, in which Mr. Baird had written “the ‘boss’ wanted to avoid triggering the emergency, which authorizes the Michigan State Police to coordinate relief efforts and requests for assistance from the federal government.” (Former President Obama signed an emergency declaration for Flint days after Gov. Snyder ultimately requested it, clearing the way for federal assistance to replace damaged lead and galvanized water service lines in the city.) Thus, the ongoing criminal trials in which the State of Michigan and City of Flint employees have been charged with criminal wrongdoing related to the water crisis (of which there are a total of 13 pending in Genesee District Court). In the trial, Corinne Miller, the former head of Disease Control for the State of Michigan, testified in a key court hearing Wednesday that the court must determine if Nick Lyon, the then Director of the Michigan Department of Health and Human Services, must face an involuntary manslaughter charge. (Note, Mr. Lyon, has remained on the job while facing charges of involuntary manslaughter and misconduct in office.)

Indeed, the Michigan courtrooms have become filled: attorneys for 21 law firms have filed a consolidated class-action lawsuit against two engineering firms, Flint officials, and Michigan officials, including Gov. Rick Snyder and former state Treasurer Andy Dillon over Flint’s lead-contaminated water—so egregious that last June, Judith Levy ruled that Flint residents have sufficiently argued that the conduct of government officials “was so egregious as to shock the conscience.” The complaint before her had noted that approximately 100,000 Flint residents “have experienced and will continue to experience serious personal injury and property damage caused by defendents’ deliberate, reckless and negligent misconduct…Defendents caused a public health crisis by exposing (Flint residents) to contaminated water” and “exacerbated the crisis by concealing and misrepresenting its scope, failing to take effective remedial action to eliminate it, and then lying about it to cover up their misconduct.”

The lawsuit, filed on behalf of Flint’s 100,000 residents and other users of its water system, says the defendants acted recklessly and did not respect residents’ due process rights argues that the engineering firms and government officials unconstitutionally did not treat the predominantly black residents of Flint the same as the predominantly white residents of great Genesee County. In late July, a three-judge panel of the 6th U.S. Circuit Court of Appeals allowed plaintiffs in one case before Judge Levy to try to seek relief from Gov. Snyder in the form of compensation for education, medical monitoring and evaluation services for ongoing harm from Flint’s lead-contaminated water. In the other case, the appeals judges dismissed the possibility of seeking penalties for Gov. Snyder, the State of Michigan, the Michigan Department of Environmental Quality, and the Michigan Department of Health and Human Services. All three of the judges, however, wrote that the 11th Amendment gives the state and Snyder immunity against damages sought by private citizens.

Undercutting Sovereignty. President Trump set off a broad sale of Puerto Rico’s municipal bonds this week when he said: “You can say goodbye to that,” referring to the U.S. territory’s $73 billion debt as one option to help Puerto Rico recover from Hurricane Maria in an interview on Fox News during his visit to Puerto Rico—a suggestion which OMB Director Mick Mulvaney discounted just hours later, stating the White House does not intend to become involved in Puerto Rico debt restructuring—debt which, in any case, the President has no unilateral authority to forgive. The President had stated: “We’re going to work something out. We have to look at their whole debt structure. They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out…you can wave goodbye to that,” unsurprisingly leading some to understand that the Trump administration would force municipal bondholders to forgive Puerto Rico’s debt. (The price of Puerto Rico’s municipal bonds, already down in the wake of Hurricane Maria, fell another 31 percent—only recovering in the wake of comments by Office of Management and Budget Director Mulvaney, attempting to backtrack, stating: “I wouldn’t take it word for word with that. I talked to the President about this at some length yesterday as we flew home on Air Force One: The primary focus of the federal effort is to make sure the island is safe and that we’re rebuilding the island,” adding that the federal government would not pay off debts or bail out municipal bondholders: “I think what you heard the President say is that Puerto Rico is going to have to figure out a way to solve its debt problem.”

The White House Wednesday asked Congress to approve $29 billion in additional hurricane relief and municipal debt forgiveness, seeking to help Puerto Rico and the U.S. Virgin Islands, as well as shore up the debt-ridden federal flood insurance program which provides flood insurance to homes and small businesses. The latest request seeks $12.8 billion for the Federal Emergency Management Agency, to stay current with the nearly $200 million a day the agency is spending on recovery work; the request also seeks action by Congress to erase some $16 billion in debt that the National Flood Insurance Program owes to the Treasury: under the White House proposal, premiums for flood insurance would rise, at least for homeowners who could afford to pay more, while private insurers would be encouraged to start writing their own flood insurance.

For the devastated U.S. territory, however, the physical and fiscal destruction has only worsened Puerto Rico’s short and long-term fiscal plight—or, as Gov. Rossello noted: “As far as the comment made about wiping the debt clean, that is the opinion of the President,” noting, carefully, he could not comment further because of the ongoing legal proceedings. Fortunately, in Congress, House Natural Resources Committee Chairman Rob Bishop (R-Utah) is putting together a funding package to aid Puerto Rico, and he said members of his committee and other Representatives were meeting to discuss temporary measures to reduce government rules slowing Puerto Rico’s recovery: his group will examine options for ways to make Puerto Rico’s and the U.S. Virgin Island’s electrical systems more resistant to storms, as well as consider how to improve things in both territories in the short-, medium-, and long-term.

Fiscal, Legal, Physical & Human Challenges

October 4, 2017

Good Morning! In today’s Blog, we consider the President’s visit to address the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Physical & Fiscal Mayhem. President Trump, visited Puerto Rico yesterday (nearly two weeks after Hurricane Maria, only 6.89% of the island has electricity, 22.54% of the telecommunications towers operate, 24% of the commercial flights operate, while the water and gas distribution problems persist in means of enormous damage to infrastructure. More than 9,000 people still live in shelters, according to official figures.). The President suggested the removal of Puerto Rico’s large debt so that Puerto Rico can to respond, short and long-term, to the emergency: “We have to work on something,” albeit adding Puerto Rico should be proud that only 16 died, unlike what he deemed “the real catastrophe” of Katrina. The devastating hurricane left some $90 billion in damage—on top of the $74 billion in debt Puerto Rico and the PROMESA Board (relocated to New York City) are confronting. The President added: “You have to look at the whole structure of the debt‒you owe a lot of money to your friends on Wall Street, and we’ll have to eliminate that. We’ll have to say good-by to that. I do not know if it’s Goldman-Sachs, but whoever it is, you can say goodbye to that. We will have to do something, because the island’s debt is huge.” The President’s remarks, however, coming as the PROMESA Board was meeting in New York City, created a question with regard to his intentions: did he mean the Administration is contemplating forgiving its debts? If so, what would that mean to the territory’s bondholders? Moreover, it is unclear whether the President even has such authority.

President Trump has called for Puerto Rico to have its crippling debt forgiven, describing the potential precedent as tough luck for the Wall Street holders of the debt, telling Fox New’s Geraldo Rivera: “They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” with his comments coming in the wake of considerable political heat for one of his earliest tweets on Hurricane Maria, in which he had written that Puerto Rico was already suffering because of its huge debt burden, which liberals interpreted as blaming the victim.

The President told Puerto Rico officials they should feel “very proud” they haven’t lost thousands of lives like in “a real catastrophe like Katrina,” while adding that the devastated island territory has thrown the nation’s budget “a little out of whack,” with his comments coming as he touched down in San Juan amid harsh criticism of the slow federal response to the natural disaster, and after he had praised himself earlier in the day for his administration’s “great job” and “A-plus” response to Hurricane Maria, marking his brief, only visit to Puerto Rico since the storm ravaged the U.S. territory nearly two weeks ago. The President commented: “Every death is a horror, but if you look at a real catastrophe like Katrina, and you look at the tremendous—hundreds and hundreds and hundreds of people who died, and you look at what happened here, with really a storm that was just totally overpowering, nobody’s ever seen anything like this.”  The President said this, then turned to a local official to ask how many people had died in storm. “What is your death count as of this moment? 17? 16 people certified, 16 people versus in the thousands.”

The hurricane, which killed at least 36, left millions without power and tens of thousands without access to drinkable water; it compounded a volatile economic situation in the territory, which is roughly $70 billion in debt. The President, at one point, stated that Puerto Rico had “thrown our budget a little out of whack.” President Trump, who in the past week has boasted about the federal government’s response to the disaster, evidence to the contrary notwithstanding, told Govs. Ricardo Rosselló of Puerto Rico and Kenneth Mapp of the U.S. Virgin Islands:  “You can be very proud of all of your people, all of our people working together,” adding, however, “I hate to tell you, Puerto Rico, but you’ve thrown our budget a little out of whack.”

San Juan Mayor Carmen Yulín Cruz, who has been deeply critical of the government’s relief efforts and whom the President Trump has criticized on Twitter, also joined the President for his first briefing. The President said: “I think it’s now acknowledged what a great job we’ve done, and people are looking at that…And in Texas and in Florida, we get an A-plus. And I’ll tell you what, I think we’ve done just as good in Puerto Rico, and it’s actually a much tougher situation. But now the roads are cleared, communication is starting to come back. We need their truck drivers to start driving trucks,” adding his thanks to Governor Rosselló for positive comments he had made about the Trump administration’s work in Puerto Rico, saying, “He has said we have done an incredible job, and that’s the truth.”

Unsurprisingly, the President’s statements were also marked by the controversy he has had with the San Juan Mayor Carmen Yulin Cruz, who had earlier stated publicly that citizens were dying on the island for lack of federal assistance—in response to which the President had tweeted “poor leadership” demonstrated by the Mayor. Her comments came shortly after the President said she should be proud that only 16 Americans died, unlike the “real catastrophe” of Katrina. Actually, so far, the storm has taken the lives of 34 Americans, leading the Mayor to state, in the wake of the President’s visit: “This is not a joke.”

In a subsequent interview, the President yesterday declared he would eliminate Puerto Rico’s debts, stating he has many friends on Wall Street, noting: they will have to say good-by to their investments, “I don’t know whether it is Goldman Sachs, but whoever it is, they will have to say good-by.” The President added, however, that what he had seen was not a “real catastrophe.”

While the cost of replacing and restoring critical public infrastructure destroyed by Hurricane Maria will largely fall to the Federal Emergency Management Agency, funding for other essential services, such as police and emergency rescue appears likely to remain Puerto Rico’s responsibility, according to FEMA experts—albeit something fiscally virtually out of reach: Puerto Rico’s fiscal capacity, beset by a shrinking population, spiking pension costs, and a looming health-care-funding cliff, now is confronted by hundreds of thousands of its citizens still without power and other basic necessities; its economic activity will take some time to restart, and it can expect severe interruptions in its tax collections for a time, according to Jim Millstein, a financial restructuring adviser to Gov. Ricardo Rosselló’s administration. Mr. Millstein adds: “On the revenue assumption side, you can assume they’re going to fall short: While they have a huge influx of FEMA funds over the next 6 months, those are for designated purposes, and not necessarily for running the government.”

He predicted that Puerto Rico could lose up to two months’ of tax collections, even as the government lacks resources to finance essential services and other government operations—likely leading to seeking critical assistance from the Federal Reserve and the U.S. Treasury—requests, however, already, unsurprisingly, opposed by the territory’s existing creditors, who are battling the PROMESA Board for payments on $73 billion in municipal-bond debt—or, as ACG Analytics has noted: a U.S. loan package “would, presumably, be structured to have priority” over payments to current bondholders.

The White House did, this week, act to ease the potential liquidity squeeze, waiving certain cost-sharing requirements for six months. Meanwhile, PREPA creditors offered $1 billion in new loans this week to jump-start rebuilding efforts, an offer which Gov. Rosselló’s fiscal advisers rejected as “not viable.” In Congress, meanwhile, no immediate action appears likely: Congressional leaders anticipate passing a second disaster aid package later this year with more specific directives with regard to how federal dollars sent to Puerto Rico should be spent, even as the Trump administration, facing criticism for its response to Hurricane Maria, has installed a U.S. Army commander to oversee federal relief efforts, and the PROMESA oversight Board has said Puerto Rico can afford to pay bondholders roughly a quarter of what they are owed over the next decade. While the Treasury Department had considered the option of authorizing so-called “super municipal bonds,” the concept found little support in Congress, where there is antipathy about setting any precedents for federal bailouts of financially struggling municipalities.

The Leadership Challenges on the Road to Fiscal and Physical Recovery

September 29, 2017

Good Morning! In today’s Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico; Hartford’s steep fiscal challenges; and Detroit’s ongoing road to fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal Safety Net? The White House yesterday announced President Trump had agreed to waive the Jones Act, which will temporarily lift shipping restrictions on Puerto Rico and enable the hurricane-ravaged island to receive necessary aid; however, the waiver from the shipping law, which mandates that only American-made and-operated vessels may transport cargo between U.S. ports, will only last for 10 days, after which the equivalent of a 20 percent tax will be reimposed. The delayed U.S. response to the save U.S. citizens compared unfavorably to the response to save and protect foreign citizens in Haiti seven years ago, when the U.S. military mobilized as if it were going to war—with the U.S. military, in less than 24 hours, and before first light, already airborne, on its way to seize control of the main airport in Port-au-Prince. Within two days, the Pentagon had 8,000 American troops en route; within two weeks, 33 U.S. military ships and 22,000 troops had arrived. By contrast, eight days after Hurricane Maria ripped across neighboring Puerto Rico, just 4,400 service members were participating in federal operations to assist the devastated U.S. citizens, according to a briefing by an Army general yesterday, in addition to about 1,000 Coast Guard members.

The seemingly inexplicable delay in waiving the Jones Act—temporarily—was due to opposition of the waiver by the Department of Homeland Security, which had argued that a federal agency may not apply for a waiver unless there is a national defense threat (as, apparently, there might have been in Houston and Florida). Sen. John McCain (R-Az.) has, for years, sought to repeal this discriminatory law: The 1920 Jones Act requires that goods shipped between U.S. ports be carried by vessels 1) built in the U.S., 2) majority-owned by American firms, and 3) crewed by U.S. citizens.

Key House and Senate members, since Monday, had been pressing for a one-year waiver from the rules in order to help accelerate deliveries of food, fuel, medical, and other critical supplies to Puerto Rico, especially with current estimates that Puerto Rico could be without power for six months. On Wednesday, 45 U.S. Senate and House Members had signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement. U.S. Rep. Nydia Velázquez (D.-N.Y.) warned: “If President Trump doesn’t swiftly deploy every available resource that our country has, then he has failed the people of Puerto Rico – and this will become his Katrina.” The temporary suspension of the onerous and discriminatory Jones law came only in the wake of a fierce backlash against the Trump administration for its inexplicable delay in not immediately lifting the federal law for Puerto Rico, especially after it issued a two-week waiver for Texas and Florida in response to Hurricanes Harvey and Irma. Nevertheless, San Juan Mayor Carmen Yulín Cruz praised the administration’s decision: she said it could help bring down the cost of emergency medical and other supplies, as well as vital construction materials by nearly 33 percent. Nevertheless, she warned there are still thousands of containers sitting idle at the ports of San Juan, a problem she blamed on “jurisdictional” and bureaucratic issues.

The belated Presidential action came as Puerto Rico continued to suffer the after effects of Hurricane Maria: Puerto Rico Electric Power Authority Executive Director Ricardo Ramos Rodríguez warned it could take PREPA as much as half a year to restore electricity.

Meanwhile, it appears the PROMESA Oversight Board is ready to revise the amount of debt to be paid in the next nine years. The Board is scheduled to meet today in New York City to revise the March-approved fiscal plan: the current Board fiscal plan specifies there should be enough funds to pay approximately 24% of the debt; however, it appears the Board will have little choice today but to revise every fiscal plan. Clearly none of the previous underlying assumptions can hold, and now the Board will have to await the actions and finding of the Federal Emergency Management Agency, while the Treasury Department will have to work with Puerto Rico to settle on a massive restructuring—or, as Puerto Rico House Representative Rafael Hernández Montañez put it: “We can’t have money spent on corporate lawyers and PowerPoint producing technocrats while funding is needed for immediate reconstruction efforts.” While FEMA has committed to paying for 100 percent of the costs of some work, on others, it is mandating a match of 20% to 25% of the costs for other work—a match which appears out of reach for the most savagely damaged municipalities or municipios—now confronted not just by enormous new capital and operating demands, but also by sharply reduced revenues.

Wednesday morning, the PREPA Bondholders Group offered up to $1.85 billion in debtor in possession loans to the authority. According to the group, part of the package would be a new money loan of up to $1 billion. Another part would be their possible acceptance of an $850 million in DIP notes in exchange for $1 billion in outstanding bonds owed to them—or, as the Group noted: “The new funding would allow PREPA to provide the required matching funds under various grants from the Federal Emergency Management Agency.” In response, PREPA’s Natalie Jaresko said: “We welcome and appreciate the expression of support from creditors…The Board will carefully consider all proposals in coordination with the government, but it is still very early as we begin to navigate a way forward following the catastrophic impact Hurricane Maria had on the island.”

The existing fiscal PREPA plan specifies there should be enough funding to pay about 24% of the debt due over the next decade; that, however, has raised questions with regard to the underlying assumptions of the Board, especially with regard to when FEMA will complete its work on the island.

Rafael Hernández Montañez, a member of Puerto Rico’s House, noted that Hurricane Maria put Puerto Rico’s territory-wide and municipal governments in very difficult financial situations. While FEMA has committed to paying for 100% of the costs of some work, he notes that the federal relief agency is still mandating a government match of 20% to 25% of the costs for other work: “It’s going to be a huge effort to cover that 20% with the government’s unbalanced budget,” adding that the hurricane will also lead to reduced revenues for the local governments.

On Wednesday, 145 U.S. Representatives and Senators signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement–the same day as the PREPA Bondholders Group offer. 

The Category 4 Maria destroyed Puerto Rico’s electrical grid; it left the island desperately short of food, clean water, and fuel—and sufficient shipping options, notwithstanding the claim from the Department of Homeland Security that: “Based on consultation with other federal agencies, DHS’s current assessment is that there is sufficient numbers of U.S.-flagged vessels to move commodities to Puerto Rico.” Thus DHS opposed a waiver of the Jones Act (Under the Jones Act federal cabotage rules, the entry of merchandise into Puerto Rico can only be made on US flag and crew ships – the most expensive fleet in the world.), which has been suspended in past natural disasters, to allow less expensive, foreign-flagged ships bring in aid. Former President George W. Bush suspended the Act after Hurricane Katrina in 2005, and President Barack Obama suspended it after superstorm Sandy in 2012. In a letter to the Department of Homeland Security, Sen. McCain criticized the department for waiving the Jones Act in the wake of hurricanes Harvey and Irma, but not for Puerto Rico. The Senator, who has long sought a repeal of the Jones Act, noted: “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster: Now, more than ever, it is time to realize the devastating effect of this policy and implement a full repeal of this archaic and burdensome Act.”  Only the Department of Defense may obtain a Jones Act waiver automatically, which it did to move petroleum products from Texas after Hurricane Harvey. The White House is expected to send Congress a request for a funding package for Puerto Rico in the next few weeks, a senior congressional aide said.

The Road to Hartford’s Default. Citing deep cuts to higher education, sharp reductions in aid to distressed communities, and unsound deferrals of public pension payments, Connecticut Gov. Dannel Malloy yesterday made good on his pledge to veto the budget that legislature, earlier this month, had adopted, deeming it: “unbalanced, unsustainable, and unwise,” adding his apprehension that were it to be implemented, it would undermine the state’s long-term fiscal stability and essentially guarantee the City of Hartford’s chapter 9 municipal bankruptcy. His veto came as the Governor and top legislators continued bipartisan talks in an attempt to reach a compromise; however, despite legislative attempts to pass a bill to increase the hospital provider tax to 8 percent, a 25 percent increase over the current level, the legislature will not meet today. In his executive order, the Governor allowed key stated services to remain operating; however, he ordered steep cuts to municipalities and certain social service programs: under his orders, approximately 85 communities would see their education cost sharing grants, the biggest source of state funding for public education in Connecticut, cut to zero next month—no doubt a critical element provoking the Connecticut Council of Small Towns, which represents more than 100 of the state’s smallest communities, to seek an override in a special session the week after next in order to avoid local property tax increases. Nevertheless, Gov. Malloy stood strongly against the Republican plan and a potential override, stating: “This budget adopts changes to the state’s pension plan that are both financially and legally unsound…This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature.” He added his apprehensions that the changes proposed to the state’s pension system could expose Connecticut taxpayers to potentially costly litigation down the road: “Prior administrations and legislatures have, over decades, consistently and dangerously underfunded the state’s pension obligations,’’ a strategy, he noted, which he said has led to crippling debt and limited the state’s ability to invest in transportation, education, and other important initiatives. Nonetheless, Republican leaders urged the Governor to sign the two-year, $40.7 billion budget, saying it makes significant structural changes, such as capping the state’s bonding authority and limiting spending. Fiscally conservative Democrats who bolted to the Republican side had criticized a Democratic budget proposal which had proposed new taxes on vacation homes, monthly cellphone bills, and fantasy sports betting, as well as increased taxes on cigarettes, smokeless tobacco, and hotel room rates.

House Republican leader Themis Klarides (R-Derby) warned she and her colleagues will try to override the veto—a steep challenge, as in Connecticut, that requires a two-thirds vote in each chambers, meaning 101 votes in the House and 24 in the Senate. The crucial Republican amendment passed with 78 votes in the House and 21 in the Senate—well short of the override margin in both chambers. The action came as S&P Global Ratings this week lowered Hartford’s credit rating, writing that its opinion “reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty,” albeit noting that the city could still avoid chapter 9 municipal bankruptcy by restructuring its debts. The agency wrote: “In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing. Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default. The mayor’s public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty.” Hartford’s fiscal plight is, if anything, made more dire by the fiscal crisis of Connecticut, which is still without a budget—and where the Legislature has under consideration a budget proposal from the Governor to slash state aid to the state’s capitol city of Hartford—where the Mayor notes that even were the state to make the payments it owes, Hartford would still be unable to pay its debts—so that S&P dropped the city’s credit rating from B- to C—a four-notch downgrade, writing: “The downgrade to ‘CC’ reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty.”

The Steep Recovery Road. Almost three years after exiting chapter 9 bankruptcy, Detroit is meeting its plan of debt adjustment, but still confronts fiscal challenges to a full return to the municipal market, even as it nears its exit from Michigan state oversight next year. Detroit’s Deputy Chief Financial Officer and City Finance Director, John Hill, this week noted that while the Motor City recognizes that any debt the city plans to issue will still need a security boost from a quality revenue stream and some enhancement, such as a state intercept, Detroit’s plan of debt adjustment did not assume the need for market access in a traditional and predictable way, without added security layers, for at least a decade. That assessment remains true today, as Detroit nears its third anniversary from its exit from the nation’s largest ever municipal bankruptcy. With chapter 9, Mr. Hill adds: “Everything that we have been able to do since exiting bankruptcy has an attached revenue stream to it: You secure it, and bond lawyers agonize over how that will be protected in the unlikely event of another bankruptcy, because everyone has to ask the question now. Then there is a strong intercept mechanism that goes to a trustee like U.S. Bank where the bondholders now know this is absolutely secure.”

Municipal Market Analytics partner Matt Fabian notes that Detroit continues to struggle with challenges which predate its chapter 9 bankruptcy, adding the city is unlikely to regain an ability to access the traditional municipal markets on its own in the near-to-medium term: “They don’t have traditional reliable access where if they need to go to the market, you can predict with certainty that they will and they will be within a generally predictable spread,” adding that reestablishing its presence in the traditional market is important, because it indicates whether bondholders have confidence in the city as a going concern. In fact, Detroit has adopted balanced budgets for two consecutive years; it is on a fiscal path to exiting Michigan Financial Review Commission oversight, and the city ended FY2016 with a $63 million surplus in its general fund; however, Detroit’s four-year fiscal forecast shows an annual growth rate of only about 1%.

The city’s public pension obligations, mayhap the thorniest issue in cobbling together its plan of debt adjustment, are to be met per its economic plan, via a balloon payment.  Mr. Fabian notes that the Motor City’s recovery plan and future revenue growth is complicated by the need to set aside from surpluses an additional $335 million between Fy2016 and Fy2023 to address that significant, unfunded pension liability, worrying that while the plan is “fiscally responsible;” nevertheless, it comes “at the expense of using these funds for reinvestment and service improvement.”

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health and Naglick says it shows the city has recognized the need to tackle it. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund, said Detriot CFO John Naglick, will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. “More importantly, the growing contributions each year from the general fund to the trust will build budget capacity to make the increased contributions in future years,” he said.

Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million. Pension woes aren’t the only challenge the city faces. Fabian said that economic development has been limited to the city’s downtown and midtown areas. The rest of Detroit’s neighborhoods haven’t fared so well.

Dan Loepp, the president and CEO of Blue Cross Blue Shield of Michigan, and Gerry Anderson, the Chairman and CEO of DTE Energy, are regarded to be among the important business leaders in Detroit, two key sectors of the Motor City’s economy, who see Detroit’s fiscal and economic trajectory as intertwined with the future of their companies; they  have headquarters in downtown and employ thousands of people including Detroiters—companies which had been making conscious and deliberate investments in the city. Asked recently to offer their perspectives about where Detroit is headed and how to include the many who are left out of the recovery, Mr. Loepp responded: “I’m a native Detroiter, and I lead a company that’s been a business resident of Detroit for nearly 80 years. I remember how uneasy it felt to be in Detroit when the national economy collapsed 10 years ago. It was hard and scary…From then to now, I strongly believe Detroit’s comeback is one of the best stories in America. The downtown is pulsing with growth and action. You’ve got business and residential development that has connected the river to Midtown and is now expanding into neighborhoods.” He added Detroit today is clear of debt and venture capital flowing backed by a city leadership which is “working well together, noting Detroit today is “now positioned to compete and win investment and jobs against any city in the country. All of this is great for Detroit.”

Notwithstanding, he warned that challenges remain: “The bankruptcy, while hard, gave the city’s leadership a clean slate to solve challenges faced by residents. The Mayor and council are working together on issues like lighting, infrastructure, zoning, and demolition…the Mayor, especially, has spent considerable energy advocating for the people of Detroit—doing things like making sure new housing developments hold space for working people of all incomes. This will promote a stronger, more diverse Detroit…Institutional issues, like improving the city’s schools and making neighborhoods safer for city residents, will take time to solve. They will take a constant, steady focus. And they need people within state and local government to work hand-in-hand with people from the neighborhoods to do the tough labor of finding sustainable solutions.” Nevertheless, he cautioned that the Motor City’s recovery is incomplete without participation of the majority: “Detroit can’t truly ‘come back’ if people living in the city are left behind. We need to always make sure there is a focus on people and that we make people a priority. Schools need to be improved. Transit needs to be addressed in a comprehensive way. Employment opportunities and housing need to be part of the master plan.”

A Human & Fiscal Disaster

September 27, 2017

Good Morning! In today’s second Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

President Trump has amended the Puerto Rico Disaster Declaration to provide that the federal government will cover 100%, rather than the usual 75%, of costs for debris removal and emergency protective measures in the wake of the extraordinary human, physical, and fiscal damage wrought—damage surely certain to set back the U.S. territory’s fiscal recovery and efforts under Judge Laura Taylor Swain to work out a quasi-plan of debt adjustment. Puerto Rico faces weeks, if not months, without electric service as utility workers repair power plants and lines that were already falling apart. It faces a potential permanent outflow of residents who can afford to leave—potentially leaving behind a quasi-state with disproportionate numbers of retired, poor, and less educated Americans. Judge Swain yesterday issued an order to indefinitely postpone the Title III PROMESA hearing, which had been scheduled for next Monday: she requested that stakeholders to submit comments by tomorrow with regard to when the hearing should be rescheduled—adding that all subsequent hearings will take place in New York City. Nonetheless, the attorneys representing the Puerto Rico Fiscal Agency and Financial Advisory Authority made clear their desire to move forward with the case as swiftly as possible: “Despite Puerto Rico’s current circumstances, FAFAA desires to move forward with these Title III cases with as little disruption as possible: FAFAA believes that any significant delay in advancing these Title III cases would place a cloud of uncertainty over these proceedings and potentially undermine the progress achieved to date.”

At the same time, elected leaders of the Puerto Rico House and Senate have requested that the PROMESA Oversight Board stop enforcing the fiscal plan’s austerity measures for at least this year and possibly over the next five years; Puerto Rico House President Carlos Méndez Núñez reportedly asked the Oversight Board to suspend all legal proceedings against the Puerto Rico government.

President Trump yesterday announced he will visit Puerto Rico early next week, stating: “The infrastructure was in bad shape, as you know, in Puerto Rico, before the storm…And now, in many cases, it has no infrastructure. So you’re really starting from almost scratch.” The announcement and tweets, far later than announcements, federal assistance, and Presidential visits to Houston and Florida in the wake of their respective hurricane, came in the wake a  series of tweets about Puerto Rico  Monday evening, including a reference to the “billions of dollars … owed to Wall Street and the banks which, sadly, must be dealt with,’’ a tweet which drew criticism from U.S. Senate Minority Leader Chuck Schumer (D-N.Y.), who stated on the Senate floor that raising the debt issue paled “in comparison to the immediate humanitarian crisis that the island faces,” adding: “Puerto Rico needs help from aid workers, not debt collectors from Wall Street: Yes, Puerto Rico needs debt relief, but first they need humanitarian relief. Water. Food. Medicine. Fuel.” He asked that the administration prepare an immediate federal aid request to Congress for a vote by the end of this week, pointedly noting: “The administration submitted a request for aid for Hurricane Harvey less than a week after the storm made landfall: We are rapidly closing in on that same marker for Maria hitting Puerto Rico.” His remarks came as a group of 10 Democratic U.S. Senators yesterday sent a letter Tuesday to Senate Majority Leader Mitch McConnell, R-Ky., and House Speaker Paul Ryan, R-Wis., asking for both chambers to begin “immediate consideration of a supplemental appropriations bill to provide relief for Puerto Rico and the U.S. Virgin Islands in the wake Hurricane Irma and now Hurricane Maria…Specifically, we are asking that additional funds be provided to ensure an adequate balance in FEMA’s Disaster Relief Fund, and Community Development Block Grants for disaster recovery along with other disaster relief accounts be authorized and funded to respond to this catastrophe.’’

According to House Speaker Paul Ryan’s (R-Wis.) office, Congress is likely to act on several pieces of legislation: First up will be a supplemental “to ensure the FEMA disaster relief fund (DRF) has sufficient funds for immediate relief and recovery,” likely early in October, noting that the DRF also funds rebuilding and post-disaster mitigation—albeit that can take years to do. The Speaker’s office also expects the House will be “likely to provide more,” with the Speaker committing that the emerging package will address not just Puerto Rico, but also the U.S. Virgin Islands, as well as remaining needs from the havoc wrought by Hurricanes Harvey and Irma. The Speaker made clear Puerto Rico will get the same kind of help and aid as Texas and Florida, adding: “The bill we passed out of here a couple of weeks again for FEMA equally applies to Puerto Rico.”

All of Puerto Rico, yesterday, remained without power, except for generators being run by hospitals. Officials of the Federal Emergency Management Agency have not yet offered an estimate when power or communication will be restored, but FEMA has identified the supplies needed for power restoration that will be delivered by barge once Puerto Rico’s ports are reopened. That will be a Herculean challenge: catastrophe risk modeling firm AIR Worldwide estimated that more than 85% of the $40 billion to $85 billion in estimated insured industry losses caused by Maria are in Puerto Rico. AIR added that its estimate does not include infrastructure repair and replacement, the cost of hazardous waste cleanup, damage to pleasure boats and other marine craft, damage to levees or uninsured property. Rep. Jenniffer Gonzalez-Colon (R-P.R.), Puerto Rico’s non-voting Representative in Congress has estimated that Hurricane Maria caused at least $25 billion in damage.

Long Term. Former U.S. Treasury official Kent Hiteshew, the Director of the Treasury Department’s Office of State and Local Finance in the Obama administration, said, “In the short-term, Hurricane Maria is likely to produce a severe economic and fiscal shock in Puerto Rico and may further accelerate out-migration off the Island – at least temporarily…Longer term, Maria’s silver lining will likely be significant amounts federal recovery aid that could stimulate Puerto Rico’s economy and rebuild its infrastructure in a way that would not have otherwise been possible absent the hurricane.” Nevertheless, he pointed out that apart from the President’s announcement that FEMA will pick up 100% of certain initial cleanup costs, any rebuilding aid provided by FEMA will likely be accompanied by limitations: “FEMA’s programs are administratively complex, funded on a reimbursement basis and generally project, rather than general fund-based: FEMA only funds repair and rebuilding of damaged facilities–not necessarily the broader capital plan envisioned in PROMESA’s Fiscal Plan. We will have to await more detailed assessments of Maria’s damage before we can fully understand the FEMA rebuilding opportunities.” He made an even more critical point: “Lastly, PROMESA’s Fiscal Plan will likely need to be revisited in light of all of these factors with potentially even fewer available revenues for debt service–at least in the near term: Any adjustments in the Fiscal Plan will impact the current litigation and debt restructuring mediation because, under PROMESA, any Plan of Adjustment must comply with the Fiscal Plan.”

Fiscal & Human Consequences. Florida government officials are taking measures to help Puerto Ricans migrating to that state–estimated in hundred thousand–as a result of Hurricane Maria. Florida State Representative Bob Cortés, the former Deputy Mayor of the Longwood City Commission, estimated a potential influx of 100,000 Puerto Ricans to Florida, noting: “Everyone here in Florida has family in Puerto Rico, and every Puerto Rican has lost something on the Island, those Puerto Ricans are going to come and take refuge with their relatives. Personally, I have seven relatives who are coming to my house.” That is, there is a potential double fiscal whammy: an outflow of those most fiscally and physically able to leave Puerto Rico—leaving behind a more aged, poorer U.S. territory, but a territory now confronting far steeper costs, short-term and long-term with a gravely deteriorated tax base.