The Raceway to Recovery

Taking the Checkered Flag. Detroit, on the verge of posting its third consecutive balanced budget, appears on course to exit state oversight as early as next year in the wake of yesterday’s Comprehensive Annual Financial Report (CAFR) demonstrating the Motor City has steadied its finances after emerging more than three years ago from the largest municipal bankruptcy in U.S. history. The state’s Detroit Financial Review Board could vote to waive its authority over the city as early as next month, according to Detroit Chief Financial Officer John Hill, who noted: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.” The CAFR, officially released Wednesday, appears to support the city’s hopes to soon regain full authority over its own finances: The report notes that Detroit ended its FY2017 with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million—even better than the city had originally projected: it ended its most recent fiscal year with a $63 million surplus—as well as a general fund unassigned fund balance of $169 million, better than 15% increase from the previous fiscal year, leading CFO Hill, as he prepares to present the results to the commission at a meeting later this month, to note: “It allows us to have a really good base of information as we are going into our budget process…It also gives us a chance to address some of the items that are identified as things we need to work on.” Mr. Hill added that Detroit has demonstrated vast improvements in its financial health, citing credit rating agency upgrades from rating agencies, a higher employment rate, and enhanced assessed property values: “I have to say that certainly there has been a positive impact from the financial review commission oversight: It’s been a real constructive process where the city has excelled.”

For his part, Mayor Mike Duggan noted that a third straight balanced budget proves his administration, in partnership with the City Council can “effectively manage the city’s finances: “This is another big step forward and helps set the stage for the end of the active state financial oversight,” as the Mayor preps to present the new budget later this month. Detroit Financial Review Commission member “Ike” McKinnon also credited the leadership role Mayor Duggan deserved for with getting the city’s finances back on track: “I remember when Mike Duggan took over as Mayor, we certainly had some hope and thoughts that things would happen…I did not know that it would happen this quickly. This says a lot about what he’s doing and certainly working with the state.”

The state’s financial review commission could vote to waive its authority over the city as early as next month, according to Mr. Hill. Zin any event, even if it does not, Detroit would no longer require the state board’s approval on budgeting or contracts, as it has since exiting chapter 9 municipal bankruptcy. As Mr. Hill put it: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.”

Key highlights of Detroit’s CAFR include the Motor City ending FY2017 fiscal year with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million. (The City had projected a $51 million surplus for FY2017). Detroit’s general fund unassigned fund balance will be $169 million, a $26 million increase from the previous fiscal year, according to the report. 

Detroit has also reported improvements in its management of $100 million in federal grants with no questioned costs resulting from audits, for the second consecutive year—after, two years ago, the city had federal funding for blight demolition funding suspended for two months due to procedural errors. Thus, hopes are high for the release from state oversight, albeit, concerns remain with regard to the looming 2024 pension payment and subsequent debt restructuring the following year. Mr. Hill notes: “I am sure that the FRC, as well as the city–because we are dealing with those issues, will be looking at those two items to make sure that plans are in place, money has been put aside, and the budget is able to absorb the additional costs that will come in those years.” Detroit is confronted by challenges to amortize debt payments on roughly $630 million of B notes that would see payments jump from $60 million to $120 million by 2025—notes issued as part of the implementation of Detroit’s chapter 9 municipal bankruptcy plan of debt adjustment—notes which are unsecured. Indeed, pending before the City Council is a proposal pending to dedicate $50 million from the city coffers to pay begin paying off the debt. Going forward, according to Mr. Hill, the strategy would be to dedicate a combination of restructuring some of the debt as well as paying it off, with the effort to address pension obligations a critical component to shoring up Detroit’s long-term fiscal health. The Motor City’s  long-term funding model approved by the City Council to modify its pension provisions which established the Retiree Protection Trust Fund, and deposited $105 million–$90 million from amounts reserved in FY2016 and 2017, plus $15 million appropriated in Fiscal 2018—and, for FY2018-2021 including the addition of an additional $115 million, contemplates another $115 million from FY2022–FY2023.

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Is the Federal Government Using a Double Standard in Responding to Puerto Rico, adding to its Fiscal and Physical Distress?

eBlog

January 19, 2017

Good Morning! In today’s Blog, we consider the ongoing federal and fiscal challenges to fiscal recovery for the U.S. territory of Puerto Rico.

Denial of Assistance. As if there has not been enough evidence of a double standard with regard to the provision of federal aid to the hurricane devastation to Puerto Rico, the Federal Emergency Management Agency (FEMA) and the U.S. Treasury have written to the Puerto Rico Fiscal Agency and Financial Advisory Authority Executive Director Gerardo Portela that, because the Commonwealth of Puerto Rico’s  central cash balance, as publicly reported, has consistently exceeded $1.5 billion in the months following the hurricanes, and “considering the implications of the $6.875 billion of total cash deposits across the Commonwealth, the federal government will institute, as a matter of policy, a cash balance policy that will determine the timing of Community Disaster Loans (CDLs) to the Commonwealth and its instrumentalities, including the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority.” Translated into English, that means Puerto Rico may have too much cash to be eligible for a federal loan—notwithstanding the discriminatory treatment compared to Houston or Florida, much less that still, nearly four months after the devastating storm—a storm to respond to which President Trump offered paper towels—some four months after the storm, many residents are still without electricity. Nevertheless, according to FEMA, the island is at risk of not receiving federal community disaster loans, because its cash balances may be too high.

For its part, the government of Puerto Rico has opted to pay up its arrears accounts with both the Electric Power Authority and the Aqueduct and Sewer Authority—as well as focus its efforts on legislation to address FEMA’s concerns—in a critical effort to free up federal assistance—assistance already approved by Congress. At the same time, Puerto Rico’s Financial Advisory Authority and Fiscal Agency Wednesday admitted that if FEMA opts not to grant the disaster loan to the U.S. territory, very hard decisions will confront the citizens of Puerto Rico and their leaders—or, as Sen. Anibal Jose Torres put it: the challenge will be to “ensure basic services to the population, the payment of pensions, and the payroll of public employees,” concerns which appear not to be apprehensions of the Trump Administration, even as Gerardo Portela Franco, the Executive Director and Chairman of the Board of Puerto Rico’s Fiscal Agency & Financial Advisory Authority, noted: “We will continue negotiating with the Treasury until we achieve that CDL,” adding: “We have faithfully complied with all the requirements,” referring to the negotiations his agency has had with the U.S. Treasury since last October. The contretemps emerged after El Nuevo Día Wednesday  revealed that FEMA and the U.S. Treasury had halted the disbursement of funds to Puerto Rico under the CDL program until adopting “a cash balance policy” which will determine when and how much funding FEMA will provide to Puerto Rico to address its operational expenses in trying to recover from the effects of Hurricane Maria, theoretically in “consultation” with the Fiscal Oversight Board created by Congress, even as the two stateside federal agencies made clear Puerto Rico will have to “cover its cash needs and those of the PREPA and the AAA.

Unsurprisingly, Héctor Figueroa, the President of the SEIU noted that it was “inconceivable that FEMA and the Treasury retain the aid funds approved three months ago for Puerto Rico following the scourge of Hurricane Maria…Puerto Rican working families continue to be considered second class citizens by the administration of (Donald) Trump and by Congress.”

The situation is further complicated, despite some four months of negotiations, by the fact that FEMA and the U.S. Treasury have yet to specify the specific conditions to be mandated—now, nearly four months after Congress approved a package of aid for Puerto Rico, as well as for the states of Florida, Texas, California, and the U.S. Virgin Islands: in that aid package which Congress approved, however, it appears there was a stipulation that, before the federal government could be obliged to provide aid, Puerto Rico, as collateral, had to pledge the unencumbered revenues from the Sale and Use Tax (IVU) or those paid by foreign corporations under Law 154—albeit it remains unclear whether the specific terms with regard to collateral are still being negotiated. What is clear, however, is a double standard, as the epistle from FEMA does not seem to reflect the human or fiscal urgency of the situation, especially in the wake of the fiscal warnings at the end of last September that “As a result of hurricanes Irma and María, the government, PREPA and AAA projected at the end of September 2017 that it would deplete its operational funds on or near October 31, 2017.” In their letter, however, FEMA and the Treasury opined that, as of December 29, 2017, the central government’s cash balance was approximately $1,700 million—an amount which, according to Portela Franco, does not detract from the fact that Puerto Rico is in a state of “insolvency.”

The head of the Puerto Rico Fiscal Agency and Financial Advisory Authority, the public corporation and governmental instrumentality in Puerto Rico which has assumed the majority of the fiscal agency and financial advisory responsibilities previously held by the Government Development Bank for Puerto Rico, and the Puerto Rican entity in charge of collaboration, communication, and cooperation between the Government of Puerto Rico and the PROMESA Oversight Board, noted that the figure cited in the letter includes the reserves required by La Junta de Supervisión y Administración Financiera (JSF) to finance the process of renegotiation of the debt in court, as well as the payment of pensions and public payroll, two priority items for Governor Rosselló Nevares.

Indeed, a review of Puerto Rico’s most recent liquidity report seems to validate Mr. Portela Franco’s views, noting, for instance, in his January 5th report, that the Department of Hacienda projections include the collections which are regularly sent to Cofina—reports still awaiting the attention of U.S. Judge Laura Taylor Swain—a figure in the range of  $316 million. In addition, the report reveals that, so far this fiscal year, Puerto Rico’s central government has withheld $ 437 million from the Automobile Accident Administration (ACAA) and the Highway and Transportation Authority (ACT), among others—even as government suppliers are owed about $ 331 million and government agencies hold $ 276 million in debt to each other, including water and electricity bills. Thus, as Portela Franco and Andrés Méndez, in charge of liquidity matters in the Aafaf, noted: the government seems to undress a saint to dress others such as the AEE and the AAA: “As we have to inject liquidity to the AAA and the AEE, that balance of the Treasury’s TSA account will fall precipitously,” adding that, without the FEMA loan, it would be necessary to continue adopting what he termed “difficult decisions,” such as stretching payments to suppliers.

Unsurprisingly, Governor Rosselló Nevares, described the epistle from Washington, D.C. as one in which the “government of Puerto Rico and the Treasury have reached an agreement. The agreement is that when the collections go down in Puerto Rico, the loans begin to arrive. What does this mean? That at the moment, we still have resources that are going to be running out,but that they will want to transfer those loans once it happens to that.” The Governor also rejected that the Oversight Board has an additional responsibility in the process of granting the CDL, because PROMESA had already established that the federal entity will have authority to interfere in any loan that Puerto Rico receives. (The epistle from FEMA and the U.S. Treasury notes that the cash policy for the loan from Puerto Rico will be adopted “in consultation with the government and the JSF.”

As of the end of last month, Puerto Rico had $1.7 billion of available cash, notwithstanding earlier predictions by local officials that the government would run out of money in late October because of the economic toll of responding to the hurricanes: by the end of November, it still had funds in other accounts, albeit some of it was earmarked for specific uses and could not be used to keep Puerto Rico’s government operating.

In FEMA’s epistle to Gerardo Portela, the Executive Director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, FEMA noted: “Under this cash balance policy, funds will be provided through the CDL program when the commonwealth’s central cash balance decreases to a certain level.” Executive Director Portela, earlier this week, noted that, because of the delay in federal loans, Puerto Rico’s central government will begin procedures to allow it to lend money to the island’s public electricity and water utilities, even as he urged the federal government to distribute the loans, stating: “AAFAF has complied with all the demands of federal agencies; however, despite our continuous efforts, to date, the Treasury Department and FEMA have not provided the final terms and conditions under which they will disburse the funds granted by the Congress.” With damage from Hurricane Maria estimated to total as much as $100 billion, Governor Ricardo Rossello earlier this month warned that Puerto Rico’s electric utility may be unable to continue recovery work in February due to lack of funds—even though, more than 100 days after the storm slamming into an island which had already filed a record-setting quasi chapter 9 municipal bankruptcy in May devastated Puerto Rico’s economy and destroyed its electrical grid: still today, about 45 percent of Puerto Rico Electric Power Authority customers are still without power.

The Epistle:

Mr. Gerardo J. Portela Franco

Executive Director and Chairman of the Board

Fiscal Agency and Financial Advisory Authority

Government of Puerto Rico

Robe1io Sanchez Vilella Government Center

De Diego Avenue, Stop 22

San Juan, Puerto Rico, 00907

Dear Mr. Portela Franco:

This letter summarizes the Federal Government’s policy for providing Community Disaster Loan (CDL) Program assistance to the Commonwealth of Puerto Rico, its instrumentalities, and municipalities as a result of Hurricanes Irma (DR-4336-PR) and Maria (DR-4339-PR). The purpose of the CDL Program is to provide loans to eligible recipients that have suffered a substantial loss of tax and other revenues as a result of a major disaster and that demonstrate a need for Federal financial assistance to perform essential governmental functions. The Additional Supplemental Appropriations for Disaster Relief Requirements Act of 2017, signed into law by the President on October 26, 2017, included $4.9 billion for CD Ls to assist the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and local governments in Florida and Texas in maintaining essential services as a result of Hurricanes Harvey, Irma, and Maria.

Implementing the CDL Program in the Commonwealth must be undertaken in a manner that is compatible with the ongoing financial restructuring of the Commonwealth’s financial obligations, including pursuant to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). For example, pursuant to PROMESA the Financial Oversight and Management Board (FOMB) must approve any new debt incun-ed by the Conunonwealth or by any of its instrumentalities that the FOMB has designated as covered territorial instrumentalities under PRO MESA, including the Puerto Rico Electric Power Authority (PREP A) and the Pue1io Rico Aqueduct and Sewer Authority (PRASA). Title III of PRO MESA also established a bankruptcy-like restructuring process for Puerto Rico and its covered territorial instrumentalities. As you are aware, the Commonwealth and PREPA have filed for Title III restructuring; PRASA has not.

As a result of Hurricanes Irma and Maria, the Commonwealth, PREP A, and PRASA projected in late

September 2017 that they would exhaust their operating funds on or about October 31, 2017. However, as of December 29, 2017, the Commonwealth’s central cash balance was approximately $1.7 billion. It is our understanding that the higher-than-expected central cash balance three months after the hurricanes resulted from greater-than-expected receipts, strategic management of payables, and the structure of relief funds from FEMA and other federal agencies, among other factors, although a review of the underlying detail is still underway. In addition to its central cash balance, on December 18, 2017, the Commonwealth released a report indicating that $6.875 billion in unrestricted and restricted cash was on deposit in over 800 accounts across all Commonwealth governmental entities. Despite these Commonwealth cash balances, the Commonwealth now indicates that PREPA and PRASA have an imminent need for liquidity in January 2018, and, as a result, each entity has applied for a CDL to cover operating expenditures.

Because the Commonwealth’s central cash balance, 1\S publicly reported, has consistently exceeded $1.5 billion in the months following the hurricanes, and considering the implications of the reported $6.875 billion of total cash across the Commonwealth, the Federal Government will institute, as a matter of policy, a Cash Balance Policy that will determine the timing of CD Ls to the Commonwealth and its instrumentalities, including PREP A and PRASA. Under this Cash Balance Policy, funds will be provided through the CDL Program when the Commonwealth’s central cash balance decreases to a certain level. This Cash Balance Policy level will be dete1mined by the Federal Government in consultation with the Commonwealth and the FOMB.

The current posture of the Federal Government is to disburse CDL program financing directly to the Commonwealth, which could then sub-lend to its various entities (including PREP A and PRASA), although this approach may be revised over time. Subsidiary borrowers will be expected to comply with remmitting, repayment, and collateral requirements that apply to the primary borrower. Unless the Cash Balance Policy level is reached, however, the Commonwealth will need to support its own liquidity needs and those of PREPA and PRASA.

Notwithstanding the above policy, local governments (as such term is defined in 42 U.S.C. §5122(8)) in Puerto Rico, including the 78 municipalities, will be eligible to apply directly for CD Ls independent of the Commonwealth under the traditional terms and conditions of Section 417 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §5184 (irrespective of the cash balance of the Commonwealth). Under these terms, a local government demonstrating a substantial loss of revenues may receive a streamlined CDL up to 25 percent of its annual budget, subject to a $5 million cap. FEMA will make arrangements to meet directly with the local governments and their management associations the week of January 15, 2018, in Puerto Rico to facilitate applications to the CDL Program onthe most timely basis possible consistent with program terms and requirements. If it is determined that a local government should require assistance beyond the $5 million cap, the Federal Government will consider providing additional financing under different terms and conditions, as appropriate.

FEMA and the Department of Treasury look forward to continuing to work with the Commonwealth of Puerto Rico and its instrumentalities and local governments to ensure funding is available for operating expenses to perform governmental functions while respecting the PROMESA Title III proceedings, the statutory authorities granted to the FOMB under PROMESA, and the overall fiscal condition of the Commonwealth and its instrumentalities and local governments.

Respectfully,

Alex Amparo

Assistant Administrator Recovery Directorate

Federal Emergency Management Agency

Gary Grippo

Deputy Assistant Secretary for Public Finance

U.S. Department of Treasury

 

cc: Governor Ricardo Rossello Nevares, Commonwealth of Puerto Rico

Financial Oversight and Management Board, Commonwealth of Puerto Rico

Puerto Rico State Agency for Emergency and Disaster Management

U.S. Office of Management and Budget

Governing under Takeovers

December 19, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report on continuing, discouraging blocks to Puerto Rico’s fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery.  The Hartford City Council last week forwarded Mayor Luke Bronin’s request for Tier III state monitoring under the new Municipal Accountability Review Board, the state Board established by §367 of Public Act 17-2  as a State Board  for the purpose of providing technical, financial and other assistance and related accountability for municipalities experiencing various levels of fiscal distress. That board, which met for the first time on December 8th, now could be the key for Hartford to avoid filing for chapter 9 municipal bankruptcy: the Board, chaired by State Treasurer Denise Nappier and Budget Director Benjamin Barnes, is to oversee the city’s budgeting, contracts, and municipal bond transactions. The Council also passed a bond resolution to permit the city to refund all of its outstanding debt obligations. In addition, the Council approved new labor contracts with the City of Hartford Professional Employees Association and the Hartford Police Union that management projects will save Hartford more than $18 million over five years. According to Mayor Bronin, the police labor contract could save the city nearly $2 million this fiscal year; moreover, it calls for long-term structural changes, or, in the Mayor’s words, the agreement “represents another big step toward our goal of fiscal stability,” adding that the employee contracts and state aid were essential to keeping the 123,000-population city out of Chapter 9 municipal bankruptcy—even as Mayor Bronin is also seeking concessions from bondholders. (Insurers Assured Guaranty and Build America Mutual wrap approximately 80% of the city’s outstanding municipal bonds.)

In its new report, “Hartford Weaknesses Not Common,” Fitch Ratings noted that Hartford appears to be fiscally unique in that other Connecticut cities are unlikely to face similar problems, after the company assessed the fiscal outlook of several cities, including Bridgeport, New Haven, and Waterbury—finding that while these municipalities have comparable demographics and fiscal challenges, none is as fiscally in trouble, noting the city’s “rapid run-up” of outstanding debt and unfunded pension liabilities as issues that set it apart from nearby municipalities. Indeed, Hartford Mayor Luke Bronin has threatened the state’s capitol city may file for Chapter 9 bankruptcy protection—a threat which likely assisted in the city’s receipt of an additional $48 million in aid from Connecticut’s FY2018 budget, as well as two recently settled contracts with two labor unions. In addition, Fitch pointed to Hartford’s fiscal reliance on one-time revenue sources, such as the sale of parking garages and other assets, as well as the city’s inability to obtain “significant” union givebacks as factors that augured fiscal challenges compared to other cities in the state which Fitch noted have “substantial flexibility and sound reserves.” Moreover, despite Mayor Luke Bronin’s pressure for labor concessions, only two of the city’s unions have agreed to new contracts—contracts which include pay freezes and other givebacks, albeit two other unions have agreed to pacts offering significant concessions. These changes have enabled Hartford to draw back from the brink of chapter 9 municipal bankruptcy, but still left the city confronting a $65 million deficit this year, and dramatically in debt and facing public pension payment increases—potentially driving Hartford’s annual debt contribution to over $60 million annually—even as it imposes the highest tax rate of any municipality in the state, especially because of its unenviable inability to levy property taxes on more than half the acreage in the city—a city dominated by state office buildings and other tax-exempt properties. These fiscal precipices and challenges have forced the city to prepare to apply for state oversight and begin a restructuring of Hartford’s $600 million in outstanding debt—a stark contrast with the state’s other municipalities, which, as Fitch noted, have achieved greater success in gaining labor concessions, even as they less reliant on state assistance, according to Fitch: “Unlike Hartford, most Connecticut cities have substantial budget flexibility and sound reserves.” In some contrast, Standard & Poor Global Ratings appeared to be in a more generous giving, seasonal spirit: the agency lifted its long-term rating on Hartford’s general obligation bonds to CCC from CC, and removed the ratings from credit watch with negative implications, reflecting its perspective that Hartford’s bond debt is “vulnerable to nonpayment because a default, a distressed exchange, or redemption remains possible without a positive development and potentially favorable business, financial, or economic conditions,” according to S&P analyst Victor Medeiros, who, nevertheless, noted that S&P could either raise or lower its rating on Hartford over the next year, depending on the city’s ability to refinance its outstanding debt, and realize any contract assistance support from the state. Thus, it has been unsurprising that Mayor Bronin has been insisting that bondholder concessions are essential to the city’s recovery.

Fitch made another key observation: many Connecticut local governments lack the same practical revenue constraints as Hartford due to stronger demographics, less reliance on state aid, and lower property tax rates. (Hartford’s mill rate is by far the state’s highest at 74.29.), noting: “In a state with an abundance of high-wealth cities and towns, Hartford continues to be challenged by poverty and blight,” contrasting the city with New Haven, Waterbury, Bridgeport, and New Britain‒all of which Fitch noted had successfully negotiated union concession on healthcare and pension-related costs, so that, as Fitch Director Kevin Dolan noted: “Their ability to raise revenues is not as constrained as Hartford’s and their overall expenditure flexibility is stronger.” said Fitch director Kevin Dolan. (Fitch rates New Haven and New Britain with A-minuses, and A and AA-minus respectively to Bridgeport and Waterbury.) State Senator L. Scott Frantz (R-Greenwich) noted: “I hate to say it, but it’s gotten so desperate in so many cases with the municipalities that they really need to be able to have the power go in there and open up contracts–not maybe not even renegotiate them–and just set the terms for the next three to five years, or longer, to make sure that each one of these cities is back on a sustainable track: The costs are smothering them, and their revenue situation has gotten worse, because people don’t necessary want to live in those cities as they start to deteriorate even further.”

Fiscal & Physical Storm Recovery. Just as on the mainland, municipalities in Puerto Rico assumed the first responder responsibilities in Puerto Rico in reaction to Hurricane Maria; however, the storm revealed the many challenges and obstacles faced—and ongoing—for Mayors (Alcaldes) to meet the needs of their people—including laws or decrees which limit their powers or scope of authority, state economic responsibilities which reduce their economic resources, and legislation which fails to recognize inadequate municipal fiscal resources and capacity. Thus, in the wake of the fiscal and physical devastation, Puerto Rico Senator Thomas Rivera Schatz, the fourteenth and sixteenth President of the Senate of Puerto Rico, is leading efforts to grant some mayors a greater degree of independence to operate and manage the finances of municipalities. He is proposing, effectively, to elevate municipal autonomy to a constitutional rank—a level which he believes should have been granted to City Councils by law, noting that with such a change, municipios “would not have to wait, as they had to wait, for federal and state agencies to handle issues that no one better than they would have handled. They would have the faculty, the responsibility, and the resources to do so…In emergencies, something that cannot be lost is time. Then and before the circumstances that the communications from the capital to the municipalities were practically zero, that shows you that, at a local level, they must have the faculty, the tools, and the resources.”

The Senate President’s proposal arose during exchanges between the Senate and Mayors, conversations which have resulted previously in a series of legislative measures, in what the Senate leader acknowledged to be a complex process, but a track which the Senator stated would, after consultation, be the result of consensus with Mayors of both political parties—providing via the Law of Autonomous Municipalities, “Puerto Rico’s municipalities a scope of action free of interference on the part of the State, even as it reformed a structure of government, to be efficient in collections.” (To date, 12 of Puerto Rico’s 78 municipalities have achieved the highest level of hierarchy granted by the Autonomous Municipalities Law.)

In a sense, not so different from the state/local strains in the 50 states, one of the greatest complaints by Puerto Rico’s Mayors has been over the economic burdens—or unfunded mandates—Puerto Rico has imposed on the municipios, as well as the decrees which establish contracts with foreign companies and grant them tax benefits, exemptions, and incentives—all state actions taken without municipal consultation—thereby, enabling businesses to avoid the payment of patents and municipal taxes, and undermining municipal collections—or, as the Senate President put it: “The reality of the case is that, for 12 to 16 years, governments have been legislating to nourish the State with economic resources.”  Currently, Puerto Rico’s municipalities contribute $116 million for the redemption of state debt, another $ 160 million for Puerto Rico’s Retirement System, and an additional $ 169 million to subsidize the Government Health Plan. Again, as the Senator noted: “If there are municipal governments that have a structure capable of raising their finances, of providing their services…the State does not have to intervene with them, taxing their resources.” Sen. Schatz noted that his proposal does not include eliminating municipalities; he confirmed that the governing challenge is to realize a “model” of interaction between the municipalities and the state—and that “the citizen has in his municipal environment everything he needs to be able to live happily and have quality of life. The end of the road is that. If it’s called county, province, or whatever you want to call it; the name does not do the thing, it’s the concept.” He asserted he was not proposing to “reward” municipalities, but rather to focus on establishing collaboration agreements through which there could be shared administrative tasks—in a way to not only achieve efficiencies, but also provide greater authority and ability for Puerto Rico’s municipalities to access funds free of intermediaries, noting: “The mayors did an exceptional job (during the emergency), and, practically without resources, had to come to the rescue of their citizens, open access, help sick people, cause the distribution of supplies with logic and speed…the passage of hurricanes rules out the idea of ​​eliminating municipalities.”

Thus, he affirmed that those municipalities which have achieved the maximum hierarchy of autonomy would have total independence, while the other municipalities would remain subject to the actions of the Puerto Rican government until they manage to establish fiscal sustainability—all as part of what he was outlining as a path to greater municipal autonomy, arguing that each of these changes implied the island’s municipalities need to make fiscal and governing adjustments: they have to watch over their finances and make sure they have the resources to meet their payroll, even as he acknowledged that repairing the finances in battered municipalities economically will take time, and said that, for this, the project will include some scales and grace periods to attain that fiscal solvency, noting: “The legislation we can approve, but, to get to the point where we would like to be, it will take years.”

For the president of the Association of Mayors, Rolando Ortiz, who has served as the Mayor of Cayey for a decade, after previously serving as Member of the Puerto Rico House of Representatives from 1993 to 1997, and being reelected in 2012 with 73.29% of the votes–the largest margin of victory for any mayor in that election, the assistance provided by the municipalities to the central government to face the crisis that the country is going through is the best way to see the urgency of empowering the municipalities via this legislation—or, as he put it: “If it were not for the municipalities, I assure you that the crisis would be monumental. We have been patrolling rural roads to ensure there are no trees on the road that impede the mobility of the family.” Mayor Ortiz agreed that the proposal includes hierarchy levels, so that municipal executives comply with minimum responsibilities and mandates which allow them to reach the maximum level: “It can be a strategy to prioritize the process from the perspective of land management, but it cannot take as an only category the element of the organization of the territory, but also the efficiency in public performance, economic capacity, efficiency in the service,” adding he has not heard “any Mayor in opposition to that proposal.” His colleague, Bayamón Mayor Ramón Luis Rivera Cruz, was more reserved when addressing the issue. Although he had no objections to the establishment of the project or to what has been proposed, he indicated that there were other mechanisms to prevent state governments from harming the municipalities that reached the maximum level of hierarchy—as well as other issues which must be addressed, such as the limitation on the collection of patents and the contribution on property. 

Senate President Rivera Schatz indicated the Senate is working on several amendments to the Autonomous Municipalities Law, and that some have already been established or approved, as a preamble to what will be the final project, noting: “We are going to discuss it with all the municipal governments to achieve a consensus project of what the procedure and the route will be.”

In response to a query whether the PROMESA Board could interfere, he noted that every government operation has a fiscal impact, so that he was seeking to create a positive: “It proposes efficiency, capacity to generate more collections, so who could oppose that?” Maybe, the Board. To me, honestly, I do not care in the least what anyone on the Board thinks.” Asked what would happen if the PROMESA Board proposed for the elimination of municipalities, he noted that the Board can say what they want and express what they want, but they will not eliminate municipal governments, they will not achieve it, because in Puerto Rico that would be untenable.

Unreform? Even as Puerto Rico’s state and local leaders are grappling with fiscal governance issues and recovering from the massive hurricane with far less fiscal and physical assistance than the federal government provided to Houston and Florida, there are growing apprehensions about disparities in the final tax “reform” legislation scheduled for a vote as early as today in the U.S. House of Representatives—concerns that the legislation might impose a new tax on Puerto Rico and other U.S. territories, with non-voting Rep. Jennifer González Colón (Puerto Rico) expressing apprehension that bill will impose a 12.5% tax on intangible property imported from foreign countries—and that, under the legislation, Puerto Rico and other U.S. territories would be treated as foreign countries. El Vocero, last Friday, on its news website reported that Rep. González Colón (R-P.R.) said the planned tax bill treated Puerto Rico like a colony: the taxed intangible assets would include items such trademarks and patents generated abroad, tweeting that “The tax reform benefits domestic, not foreign companies…While we are a colony, there will be more legislation like this passed…Unfair taxes show a lack of commitment and consistency from leadership in Congress; showing true hypocrisy.” The Federal Affairs Administration of Puerto Rico last Friday released a statement calling for the tax bill to be changed and for additional aid to recover from Hurricane Maria, noting the conference report could “destroy 75,000 jobs and wipe out a third of [Puerto Rico’s] tax base.” Howard Cure, director of municipal bond research at Evercore, noted that for Puerto Rico, still trying to recover from Hurricane Maria, and with a 10.6% unemployment rate: “Obviously, any tax law change that makes Puerto Rico less competitive for certain industries to expand or remain on the island is a negative for bondholders who really need the economy to stabilize and grow in order to help in their debt recovery.” Similarly, Cumberland Advisors portfolio manager and analyst Shawn Burgess said: “My understanding is that this would impact foreign corporations operating on the island and not necessarily U.S. companies. However, it is a travesty for Congress to treat Puerto Rico as essentially a foreign entity at a time when they need all the assistance they can get. Those are U.S. citizens and deserve to be treated as equals…Leave it to Congress to shoot themselves in the foot: They had voiced their support for helping the commonwealth financially, and they hit them with tax reform terms that could be a detriment to their long-term economic health.” Similarly, Ted Hampton of Moody’s noted: “In view of Puerto Rico’s economic fragility, which was exacerbated by Hurricane Maria, new federal taxes on businesses there would only serve as additional barriers potentially blocking path to recovery. In creating the [PROMESA] oversight board, the federal government declared its intention to restore economic growth in Puerto Rico. New taxes on the island would be at odds with that mission.”

  • 936. More than a decade ago, former House Speaker Newt Gingrich (R-Ga.) reached an agreement with former President Bill Clinton to allow the phasing out of section 936, the tax provision with permitted U.S. corporations to pay reduced corporate income taxes on income derived from Puerto Rico—a provision allowed to expire in 2006—after which the U.S. territory’s economy has contracted in all but one year—a tax extinguishment at which m any economists describe as the trigger for the subsequent fiscal and economic decline of Puerto Rico. Thus, as part of the new PROMESA statute, §409, in establishing an eight Congressional-member Congressional Task Force on Economic Growth in Puerto Rico, laid the foundation for the report released one year ago, in which the section addressing the federal tax treatment of Puerto Rico, noted: “The task force believes that Puerto Rico is too often relegated to an afterthought in Congressional deliberations over federal business tax reform legislation. The Task Force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform legislation….The Task Force recommends that Congress continue to be mindful of the fact that Puerto Rico and the other territories are U.S. jurisdictions, home to U.S. citizens or nationals, and that jobs in Puerto Rico and the other territories are American jobs.” Third, the task force said it was open to Congress providing companies that invest in Puerto Rico “more competitive tax treatment.” Thus it was last week that Governor Ricardo Rosselló tweeted that people should read the Congressional leadership’s “OWN guidelines on the task force report. Three main points, did not follow a single one.” The tweet recognizes there are no provisions in the legislation awaiting the President’s signature this week to soften the impact of the new modified territorial tax system—a system which will treat Puerto Rico as a foreign country, rather than an integral part of the United States, a change which Rep. Jose Serrano (D-N.Y.) this week predicted would act as a “a devastating blow to Puerto Rico’s economic recovery…Thousands more businesses will have to leave the island, forcing thousands Puerto Ricans to lose their jobs and leave the island.” Indeed, adding fiscal insult to injury, House Ways and Means Committee Chair Kevin Brady (R-Tx.) admitted that the “opportunity zone” provision in the House version of tax reform authored by Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s nonvoting member of the House of Representatives, to make Puerto Rico eligible for designation as a new “opportunity zone” that would receive favorable tax treatment, was stripped out because it would have violated the Senate’s Byrd Rule, the parliamentary rule barring consideration of non-germane provisions from qualifying for passage by a simple majority vote instead of a 60-vote super-majority. Adding still further fiscal insult to injury, the latest installment of emergency funding for recovery from hurricanes which hammered Puerto Rico, the U.S. Virgin Islands, Florida, and Houston had been expected this month; however, those fiscal measures have been deferred to next year in the rush to complete the tax/deficit legislation and reach an agreement to avoid a federal government shutdown this week. (The Opportunity Zone proposal was included in the Senate version of tax reform, adopted from a bipartisan proposal by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.) which would defer federal capital gains taxes on investments in qualifying low-income communities—under which all of Puerto Rico could, theoretically, have qualified as one of a limited number of jurisdictions. As the ever insightful Tracy Gordon of the Tax Policy Center had noted: part of the motivation for the opportunity zone designation had been to stem the migration of residents, which has accelerated since Hurricane Maria areas getting the designation throughout the United States. To qualify, the area must have “mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity,” and must “have demonstrated success in geographically targeted development programs such as promise zones, the new markets tax credit, empowerment zones, and renewal communities; and have recently experienced significant layoffs due to business closures or relocations.” Thus, Ms. Gordon notes: “There’s a concern you are basically taking away an incentive to be in Puerto Rico which is this foreign corporation status.” The tax conference report simply ignores the recommendation last year by the bipartisan Congressional Task Force on Economic Growth in Puerto Rico to “make Puerto Rico integral to any future deliberations over tax reform,” not acting on the recommendation for a permanent extension of a rum cover-over payment to Puerto Rico and the U.S. Virgin Islands the revenues of which have been used by the territories to pay for local government operations; last year’s Congressional report had warned that “Failure to extend the provision will cause harm to Puerto Rico’s (and the U.S. Virgin Islands’) fiscal condition at a time when it is already in peril.’’ Similarly, the conference report includes no provisions addressing the task force’s recommendation that the federal child tax credit include the first and second children of families living in Puerto Rico, not just the third as specified under current law.

Getting Schooled on Disaster

December 15, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report on continuing, discouraging blocks to Puerto Rico’s fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery. Detroit’s Cerveny – Grandmont neighborhood, where median household income has declined by 5 percent since 2000 and average household incomes are under $38,000—and median home sale prices are just over $51,000, this week was one of 10 areas in the Motor City yesterday was cited in a report, “Reset, Rethink, Rebuild: A Shared Vision of Performing Schools in Quality Buildings for Every Child in Detroit”  a study about neighborhoods, educational opportunity, and the conditions of public school buildings, as one of ten neighborhoods wherein it is nearly impossible to find a quality school. Indeed, the report determined that the problem is deeper than just those 10 neighborhoods: Only 20 percent of the children enrolled in a public school in the city, whether charter or traditional public, are attending a quality school: a discouraging, failing grade with implications for both assessed property values and Detroit’s budget. Chris Uhl, the Executive Director of the eastern region for IFF, which published the study, noted: “The fact that four out of five kids in this city” are not attending a quality school “is pretty horrifying to me…that…should catalyze action.” The report notes that nearly half of the space in school buildings in the city is underutilized. A key recommendation of the report was that greater coordination is needed between leaders of the Detroit Public School System and the authorizers of charter schools—presumably including the current U.S. Secretary of Education. (Currently, only Grand Valley State University and Central Michigan University are authorized to open new charters in the city, but there are a number of other authorizers with schools in the city.)  IFF’s recommendations are similar last week’s report by the Coalition for the Future of Detroit Schoolchildren.

In its report, the IFF identified quality schools using Michigan’s less than clear, but outdated quality schools color-coded accountability system–a system due to be replaced next year: a part of that old system provided for the assignment of five colors, based on how well students achieved academic goals. Of the city’s 178 general education public schools, just 2.4% received the equivalent of an A.  The report makes clear that the steep road back from the nation’s largest municipal bankruptcy requires a greater focus on the next generation’s future: schools good enough to attract families back into the city—attracted by a good school to enroll their children. Today, too few of them exist—or, as the report notes: Detroit needs nearly 70,000 more seats available in quality schools to ensure that every child has access to such a school. Tonya Allen, President and CEO of the Skillman Foundation, which funded the research, noted: “We’re not meeting the demand, which leaves us vulnerable to leakages: for students to leave the city to go to school in the suburbs.”

A Taxing Recovery? Just as Puerto Ricans were treated unequally by the federal response to hurricane devastation compared to Houston and Florida, so too there is apprehension that the tax “reform” legislation nearing completion in Congress—especially as there is growing apprehension that Congress could move towards adopting a territorial tax system for businesses—that is a new tax system which would treat Puerto Rico as a foreign country with respect to the numerous foreign subsidiaries of U.S. corporations which operate there. Puerto Rico Secretary of Economic Development and Commerce Manuel Laboy Rivera is apprehensive that subsidiaries of U.S. corporations which receive favorable treatment under current federal law could find the emerging federal tax reform would impose a new 20 percent federal excise tax on all pharmaceuticals, medical devices, and other products shipped to the mainland—that is a new, discriminatory tax—which would be in addition to the Jones Act provisions which render Puerto Rico unable to compete fairly vis-à-vis other Caribbean competitor nations—even as Puerto Rico is subject to the federal minimum wage and other federal regulations involving workplace safety and environmental protection. Indeed, last December, a bipartisan congressional task force had recommended changes in the tax treatment of the U.S. territory with the Congressional Task Force on Economic Growth writing: “Puerto Rico is too often relegated to an afterthought in Congressional deliberations over federal business tax reform legislation. The task force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform.” Among the recommendations: a modification of the federal child tax credit to include the first and second children of families living in Puerto Rico, not just the third as specified under current law; the report also recommended making permanent the so-called rum cover-over payments to the governments of Puerto Rico and the U.S. Virgin Islands. The task force, however, was divided with regard to whether to fully expand the eligibility of Puerto Rican families for the Earned Income Tax Credit. The report recommended that a domestic business production credit known as Section 199 that has covered Puerto Rico since 2006 should be maintained as long as Section 199 continues. Now, however, that credit has been targeted for elimination in the pending tax reform negotiations as they enter their final hours. Under the discriminatory treatment, for federal tax purposes, Puerto Rico is considered outside the U.S. tax code, even though for virtually all other issues the island is treated as a domestic part of the U.S. For the purposes of federal tax reform, however, Senate Finance Committee Chair Orrin Hatch (R-Utah) said during the Finance Committee’s deliberations that Puerto Rico’s tax issues would be handled in separate legislation. So, it seems that for Hurricane Maria ravaged Puerto Rico, where 20% to 40% of all businesses are at risk of being shuttered in the wake of the hurricane and its ensuing devastation for the economy because of challenges ranging from the lack of electricity to loss of inventory, physical damage to their facilities, business interruption, and lack of capital; the message from Congress is to wait for next year.

House Ways and Means Committee Chairman Kevin Brady (R-Tx.) has informed reporters that he and other lawmakers are considering several options for Puerto Rico—especially in the wake of meeting with Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Representative in Congress, to discuss her request to consider making Puerto Rico an economic opportunity zone or empowerment zone—provisions adopted by Congress to abet economic recovery in hard-hit cities and counties. Thus, a change would be to treat Puerto Rico similarly—as if it were, gasp, a part of the United States for federal tax purposes and eligible for the same treatment. Likewise, tax reform could have been a vehicle for Congress to eliminate or reduce the discriminatory 20% excise tax on goods from Puerto Rico—a tax which undercuts Puerto Rico’s ability to compete with Cuba, and other countries in the region.

Even as the tax reform-deficit/debt increase legislation has swiftly moved towards the President’s desk, in New York, U.S. Judge Laura Taylor Swain, presiding over Puerto Rico’s quasi-chapter 9 case, heard from attorneys for the Employees Retirement System and the Puerto Rico Oversight Board—with the critical issue what claims of Puerto Rico’s bondholders are valid. PROMESA Oversight Board attorney Steven Weise said the 2008 Financing Statements governing Puerto Rico’s municipal bonds did not provide bondholders any collateral, arguing that the bondholders’ written arguments quoted from legal rulings about “security agreements,” but that what is allowed in these agreements are not allowed in Financing Statements—adding that the system’s legal name changed in the last several years, but that bondholders had failed to properly follow-up on this development—a failure which meant, at least as he argued, that the system should not be legally obligated to pay interest on the municipal bonds—even as Bruce Bennett, representing bondholders, told Judge Swain the bondholders had a lien on employer contributions, based on multiple commitments, arguing that the 2008 Financing Statements gave the bondholders the lien. He said errors in the document were not of such gravity to merit undercutting to undercut the bondholders’ claims—and adding that the Spanish name of the system had not changed, and that the change in the English name was just a translation change—a change without legal significance. Moreover, he noted, that along with the Financing Statements, a parallel “security agreement” had been created in 2008 and this perfected the lien; further, he argued, the 2015 and 2016 Financing Statements also assured the bondholders’ lien on the employer contributions.

Where Are the Lights? U.S. Army Corps of Engineers Lieutenant General Todd Semonite, the commanding General and Chief Engineer for the Corps reports that Puerto Rico’s electrical grid is unlikely to be fully restored until the end of May, a far more pessimistic timeline that suggested by Puerto Rico Governor Ricardo Rossello, who Wednesday stated he expects Puerto Rico’s electric grid to reach 75 percent of customers by the end of January—and 95 percent by the end of February—and 100 percent by the end of May. Adding to the dissonance, the Puerto Rico Electric Power Authority last month pledged service would reach 95 percent of customers by the end of this month—even though, as of Wednesday, just 61 percent of electricity had been restored.  

Catalysts to Fiscal Recoveries

November 10, 2017

Good Morning! In today’s Blog, we consider the ongoing challenges to Detroit’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy; the State of Michigan’s winnowing down of municipalities under state oversight; and the ongoing physical and fiscal challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Reframing the Motor City’s Post Chapter 9 Future. Nolan Finley, a wonderful contributor to the editorial page of the Detroit News, this week noted “elections are a wonderful catalyst for refocusing priorities, as evidenced by the just-completed Detroit mayoral campaign, which moved the city’s comeback conversation away from the downtown development boom and centered it on the uneven progress of the neighborhoods. Never before has such an intense spotlight shown on the places where most Detroit voters actually live.” He attributed some of the credit to the loser in this week’s mayoral election, challenger Coleman Young II, who forced Mayor Mike Duggan to defend his record on improving quality of life in the neighborhoods. He perceptively wrote that while candidate Young’s ugly “Take back the Motherland” rallying cry was dispiriting, it spoke to the governing challenge the newly, re-elected Mayor confronts, writing: “Detroit is not a city united. It must become one. There were too many skirmishes along the racial divide in this mayoral contest. The old city versus suburb story line was replaced by a neighborhood versus downtown narrative, but both are code for black versus white. Four years ago, Duggan’s election as Detroit’s first white mayor in 40 years suggested much of the city was ready to stop looking back at its dark and divisive past and begin focusing on a brighter future.” Now, he wrote, after Mayor Duggan focused his first term on meeting the city’s plan of debt adjustment, and trying to improve the quality of life for residents—and as developers are beginning to add community projects to their downtown portfolios, “too many in the neighborhoods feel as if their lives are not getting better, or at least not fast enough.” Thus, he noted, Mayor Duggan needs to redouble his efforts to restore the city’s residential communities, and push ahead the timetable: “Four years from now, Detroit cannot still be wearing the mantle of America’s most violent city.” He added that while Mayor Duggan has little—too little—authority to address education in Detroit; nevertheless—just as his colleague Rahm Emanuel, the Mayor of Chicago recognized, needs to strongly back Detroit Public School Superintendent Nikolai Vitti’s efforts to rapidly boost the performance of the Detroit Public Schools Community District: it is a key to bringing young families back into the city. And, Mr. Finley wrote, the mayor “must also find a way to connect the neighborhoods to downtown, to instill in all residents a sense of ownership and pride in the rejuvenation of the core city. That means getting way better at inclusion. Downtown’s comeback must be more diverse, and include many more of the people who have grown up and stayed in the city. Encouraging and supporting more African-American entrepreneurs is a great place to begin breaking down the perception that downtown is just for white people: Detroit needs more diversity everywhere in the city, both racial and economic,” referring especially to young millennials who are steeped in social justice and imbued with the obsession to give back that marks their generation. “They are committed Detroiters. And they deserve to be appreciated for their contributions, not made to feel guilty or viewed as a threat to hard-won gains.”

Free, Free at Last. Michigan State officials have released Royal Oak Township, a municipality of about 2,500 just north of Detroit, from its consent agreement: Michigan Treasurer Nick Khouri said the Oakland County municipality has resolved its financial emergency and is ready to emerge from the state oversight imposed since 2014, stating: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” The township’s financial emergency resulted in an assets FY2012 deficit of nearly $541,000. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever…The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” Treasurer Khouri also said the township was the last Michigan remaining municipality following a consent agreement: Over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements because of fiscal and financial improvements and operational reforms. The Treasurer noted that today only three communities, Ecorse, Flint, and Hamtramck, remain under state oversight through a Receivership Transition Advisory Board.

Preempting Authority. House Natural Resources Committee Chair Rob Bishop (R—Utah) this week said the PROMESA Oversight Board should be granted even more power to preempt the authority of the government of Puerto Rico, stating: “Today’s testimony will inform the work of Congress to ensure the Oversight Board and federal partners have the tools to coordinate an effective and sustained recovery,” in a written statement after a hearing of the House Committee on Natural Resources: “It is clear that a stronger mechanism will be necessary to align immediate recovery with long-term revitalization and rebuilding.” Chairman Bishop added: “This committee will work to ensure [the Puerto Rico Oversight Board] has the tools to effectively execute that mission and build a path forward for this island and its residents.” The Board was created last year to oversee fiscal management by the island government, which had said more than $70 billion of debt was unpayable under current economic conditions. Since the hurricane, the Board has clashed with the territorial government over leadership at the power utility. During the hearing the board’s Executive Director, Natalie Jaresko, said the ability of Puerto Rico’s government to repay its debt was “gravely worse” than it was before Hurricane Maria, which arrived Sept. 20. By the end of December, the Board plans to complete a 30 year debt sustainability analysis with Puerto Rico’s government, she said: “After the hurricane, it is even more critical that the Board be able to operate quickly and decisively…to avoid uncertainty and lengthy delays in litigation, Congressional reaffirmation of our exercise of our authority is welcome.” On Oct. 27, the board had filed a motion in the Title III bankruptcy case for the Puerto Rico Electric Power Authority (PREPA) seeking the court’s permission to appoint Noel Zamot as the authority’s new leader. The government of Gov. Ricardo Rosselló has made it clear that it intends to challenge this motion. The court is scheduled to hold a hearing on the matter on Monday, November 13th.

In calling for more board power, Chairs Bishop and Jaresko probably were at least partly referring to the struggle over PREPA’s leadership. They may also want the Board’s power augmented in other ways: the Board has already announced that it will be creating five-year fiscal plan for Puerto Rico’s government and for its public authorities this winter. Puerto Rico’s government will have substantial needs for federal aid in the coming years, Ms. Jaresko said. Congress plans to tie this aid to the government following the Board’s fiscal plan and this would be appropriate, she said. “Before the hurricanes, the board was determined that Puerto Rico and its instrumentalities could achieve balanced budgets, work its way through its debt problems, and develop a sustainable economy without federal aid,” Ms. Jaresko said in her written testimony. “That is simply no longer possible. Without unprecedented levels of help from the United States government, the recovery we were planning for will fail.” She also said that over the next 1.75 years Puerto Rico’s government will need federal help closing a gap of between $13 billion and $21 billion for basic services. She added the federal government should change tax laws to benefit the island: “The representatives of the Financial Oversight and Management Board (FOMB) who appeared before the House Committee on Natural Resources insist on jeopardizing the necessary resources for the payment of pensions and job stability,” Gov. Rosselló testified in his written statement, adding to that the testimony of Ms. Jaresko and Mr. Zamot “evidenced ignorance about the recovery process in Puerto Rico, presenting incorrect figures relating to the existing conditions on the island,” adding: “I again invite the FOMB to collaborate so that the government of Puerto Rico, together with the support of the federal government, facilitates the fastest possible recovery of our island.” He noted that such assistance should not depend on the Board “assuming the administrative role” which belongs to the elected government of Puerto Rico.

Sanctioned Discrimination. The endorsement that the House Ways and Means Committee effectively incorporated in its “tax reform” legislation reported out of Committee this week appears to discriminate against Puerto Rico, imposing a tariff on the products which Puerto Rico exports to the mainland—threatening to deal a devastating blow to Puerto Rico’s industrial base at the very moment in time the territory is striving to recover from the already disparate hurricane recovery blows. According to economists Joaquín Villamil: “None of these measures, nor the repatriation of profits, the corporate rate and the 20% tax on imports is positive for the island…The companies are not going to pay a 4% royalty to Puerto Rico and a 20% tax to bring their product to the United States. They will leave the island, especially if the tax rate is lowered there.” Mr. Villamil added: “If that happens, 21% of the income received by the Puerto Rican Treasury is eliminated,” he added, referencing P.L. 154, the statute which established a 4% tax on sales of an operation in Puerto Rico to its parent company in the mainland. In its markup, yesterday, the House Ways and Means Committee left almost intact §4303 which establishes a 20% tariff on all imported goods for resale by companies and businesses in the United States. Moreover, the disposition forces multinationals with operations in places such as the U.S. territory of Puerto Rico to repatriate their income to the U.S. What that means is that the production of drugs, medical devices, and many other goods in Puerto Rico is done on U.S. soil; however, for federal tax purposes, Puerto Rico is deemed an international jurisdiction—or, as economist Luis Benítez notes: “This (House Ways and Means bill) generates greater uncertainty about what the economic future of the island should be: with this, the figure of the controlled foreign corporation (CFC) loses the competitive advantage it had (under §936).” He noted that by reducing the corporate rate to multinationals operating in Puerto Rico, the benefit of giving them tax exemptions at the local level is also reduced, as is the case of Law 73 on Industrial Incentives: via the elimination of §936, Puerto Rico, as a place to do business, went from competing with the continental U.S. to competing with countries such as Singapore and Ireland, adding that now a reduction in the corporate rate would cause Puerto Rico not only to compete with the rest of the world, but with jurisdictions on the mainland: “I think that if I were the Secretary of the Treasury, I would tremble with this situation.”

In Puerto Rico, he estimates manufacturing employs approximately 75,000 people directly—a number which rises to 250,000 when indirect and induced jobs are calculated, adding that even though the manufacturing sector has shrunk in the past years, the productive and contributory base rests on that activity, adding that: “As much as it is said that they do not pay taxes, this sector contributes 33% of the revenues…As long as jobs are lost there, the treasury will erode,” noting that the industrial sector plays such a large role in Puerto Rico’s economy that no other sector of the service economy can counterbalance it. He worries that if Congress fails to address the apparent discrimination, the chances that the PROMESA Board and the government of Puerto Rico can put together an economic recovery plan is minimal: “These are implications for all of Puerto Rico: It is difficult to think about options, because if this is approved, it would be disastrous, because of everything that has happened after Hurricane Maria.”

Last night, the former president of the Association of Certified Public Accountants, Kenneth Rivera Robles, who has been part of several lobbying delegations to Washington, remained relatively optimistic that the project language will be amended.

President Woodrow Wilson signed the Jones-Shafroth Act into law on March 2, 1917, with the law providing U.S. citizenship to Puerto Rico’s citizens, granting civil rights to its people, and separating the Executive, Judicial, and Legislative branches of its government. The statute created a locally elected bicameral legislature with a House and Senate—but retained authority for the Governor and the President of the United States to have the authority to veto any law passed by the legislature. In addition, the statute granted Congress the authority to override any action taken by the Puerto Rico legislature, as well as maintain control over fiscal and economic matters, including mail services, immigration, defense, and other basic governmental matters. 

Can Congress Uninflict Federally Caused Fiscal & Economic Disparities & Distress?

October 13, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, legal, physical, and human challenges to Puerto Rico, before heading north to New Jersey where the fiscal and governing strains between Atlantic City and the Garden State continue to fester.

Visit the project blog: The Municipal Sustainability Project 

Physical, Oratorical, & Fiscal Storms. President Trump served notice yesterday that he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria–even as House Speaker Paul Ryan (R-Wis.) goes to Puerto Rico this morning to assess not only the damage, but also how to more effectively respond to a staggering humanitarian crisis in the aftermath of Hurricane Maria. The Speaker will also bear some good news: the House yesterday approved 353-69, a $36.5 billion disaster aid package to help victims struggling to recover from a string of devastating hurricanes and wildfires, sending the aid package to the Senate, which returns from a weeklong recess next week. While the Trump administration requested $29 billion in supplemental spending last week, it asked for additional resources Tuesday night, including $4.9 billion to fund a loan program that Puerto Rico can use to address basic functions such as infrastructure needs. Speaker Ryan noted: “‎We think it’s critical that we pass this legislation this week to get the people the help they need, to support the victims, and also to help the communities still recovering and dealing with the problems with the hurricanes Harvey, Irma, and Maria.” Puerto Rico Governor Ricardo Rosselló had warned Congressional leaders that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.”

President Trump yesterday claimed that it will be up to Congress how much federal money to appropriate for Puerto Rico, but that relief workers will not stay “forever,” even as, three weeks after Hurricane Maria struck, much of Puerto Rico remains without power, with limited access to clean water, hospitals are running short on medicine, and many businesses remain  closed. The President added:  “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!”

The White House late yesterday issued a statement committing for now “the full force of the U.S. government” to the Puerto Rico recovery, seemingly contradicting the President, who has sought to portray Puerto Rico as in full recovery mode and has voiced frustration with what he considers mismanagement by local leaders. The Governor had warned earlier in the week that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.” The legislation the House adopted last night allows up to $4.9 billion in direct loans to local governments in a bid to ease Puerto Rico’s fiscal crunch—a vital lifeline, as, absent Congressional action, the territory may not be able to make its payroll or pay vendors by the end of this month.

In contrast, Speaker Ryan said that Puerto Rico must eventually “stand on its own two feet,” but that the federal government needs to continue to respond to the humanitarian crisis: “We’re in the midst of a humanitarian crisis…Yes, we need to make sure that Puerto Rico can begin to stand on its own two feet…But at the moment, there is a humanitarian crisis which has to be attended to, and this is an area where the federal government has a responsibility, and we’re acting on it.”

Rep. Nydia M. Velázquez (D-NY), who was born in Puerto Rico, said in a statement that the President’s “most solemn duty is to protect the safety and the security of the American people. By suggesting he might abdicate this responsibility for our fellow citizens in Puerto Rico, Mr. Trump has called into question his ability to lead. We will not allow the federal government to abandon Puerto Rico in its time of need.” Similarly, Jennifer Hing, a spokeswoman for House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.), who will accompany Speaker Ryan today, said that those who live on the island “are American citizens and they deserve the federal assistance they need to recover and rebuild. The Chairman and the Committee fully stand by them in these efforts, and will continue to be at the ready to provide the victims of these devastating hurricanes with the necessary federal resources both now and in the future.” Without Congressional action, the territory may not be able to make its payroll or pay vendors by the end of the month. Unmentioned is whether such contemplated assistance might entail repealing the Jones Act—an act which means the price of goods in Puerto Rico is at least double that in neighboring islands—including the U.S. Virgin Islands. The New York Federal Reserve  found that the Act hurts the Puerto Rican economy—Sen. John McCain (R-Az.) and Rep. Gary Palmer (R-Ala.) have offered legislation to repeal or suspend the law.

President Trump yesterday warned that his administration’s response to hurricane-ravaged Puerto Rico cannot last “forever,” tweeting: “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!” He added that the U.S. territory’s existing debt and infrastructure issues compounded problems. His tweeting came as the House is preparing to consider legislation under which Puerto Rico would receive a $4.9 billion low-interest federal loan to pay its bills through the end of October, as part of a $36.5 billion package. The temporary assistance comes as Moody’s Investors Service has downgraded the Commonwealth of Puerto Rico’s general obligation bonds to Ca from Caa3, in view of the protracted economic and revenue disruptions caused by Hurricane Maria. The President also threatened he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria: he said that relief workers will not stay “forever.” Three weeks after Hurricane Maria made landfall, much of Puerto Rico, an island of 3.4 million Americans, remains without power. Residents struggle to find clean water, hospitals are running short on medicine, and commerce is slow, with many businesses closed.

The lower ratings are aligned with estimates of Puerto Rico’s reduced debt servicing capacity given extensive damage from Hurricane Maria. Puerto Rico faces almost total economic and revenue disruption in the near term and diminished output and revenue probably through the end of the current fiscal year and maybe well into the next. The weaker trajectory will undercut the government’s ability to repay its debt, a matter now being weighed in a bankruptcy-like proceeding authorized by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). For the University of Puerto Rico, the downgrade factors in expected pressure on enrollment-linked revenue and on funding from the Puerto Rican government.

With 155 mile-an-hour winds and a path that cut diagonally across the island, Hurricane Maria was the most destructive storm to hit Puerto Rico in almost 90 years. It knocked out all electric power, destroyed more than 100,000 homes, and ruptured bridges and other public infrastructure. Beyond the disruption of the immediate aftermath, the potential long-term repercussions may be somewhat mixed, however. On one hand, a massive exodus of residents relocating to the mainland, rather than rebuilding on the island, could further erode Puerto Rico’s economic base. Moody’s opined that an infusion of federal relief and rebuilding funds could spur the economic growth and infrastructure replacement that, under normal conditions, has eluded Puerto Rico: “We, nevertheless ,view the economic impact overall as a substantial negative that has weakened the commonwealth’s ability to repay creditors: The negative outlook is consistent with ongoing economic pressures, which will weigh on the commonwealth’s capacity to meet debt and other funding obligations, potentially driving bondholder recovery rates lower as restructuring of the commonwealth’s debt burden unfolds.”

Tens of thousands of islanders left for the U.S. mainland to escape the immediate aftermath of the storm. With conditions back home still grim—approximately 85 percent of residents still lack electricity and 40 percent are without running water, and neither is expected to be fully restored for months—many find themselves scrambling to build new lives away from the island. Particularly in states with large Puerto Rican populations, such as New York, Illinois, Florida, and Connecticut, people are bunking with relatives while trying to find longer-term housing, jobs and schools for their kids.

There have been several major migratory exoduses from Puerto Rico to the mainland over the years, most recently during the past decade when the island’s population shrank by about 10 percent because of a long economic slide that shows no sign of easing anytime soon. Hurricane Maria struck Sept. 20th, and, according to the latest figures from the Puerto Rican government, killed at least 45 people. It also created a new surge that could have lasting demographic effects on Puerto Rico and on the mainland. “I think that we could expect that people who did not plan to stay permanently might do so now,” said Jorge Duany, a professor of anthropology at Florida International University who has long studied migration from the island. Many of those who left are elderly or sick people who fled or were evacuated because of the dangers posed by living on a tropical island with no power or air conditioning and limited water for an indefinite period of time.  It is too early to know exactly how many have departed Puerto Rico for the mainland, but Florida reports more than 20,000 have come to the Seminole state since Oct. 3rd. There were already about 1 million Puerto Ricans in the Sunshine State, second only to New York.

Addressing the urgency of fiscal assistance, House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.) stated: “These funds are vital right now, in the near term, to get the aid where it is needed most.” Puerto Rico faces a government shutdown at the end of the month without an infusion of cash, according to Puerto Rico Treasury Secretary Raul Maldonado: the proposed loan provides flexibility for repayment: it allows the Secretary of Homeland Security, in consultation with Treasury Secretary Mnuchin to “determine the terms, conditions, eligible uses, and timing and amount of federal disbursements of loans issued to a territory or possession, and instrumentalities and local governments.”

Gov. Ricardo Rossello Nevares, in his letter at the end of last week to the President, cited “independent damage assessments in the range of $95 billion–approximately 150% of Puerto Rico’s” economy, writing that “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.”

Saving Atlantic City. New Jersey Superior Court Judge Julio Mendez has ruled that Atlantic City can cut its Fire Department by 15 members early next year as a cost-saving measure under the Garden State’s Municipal Stabilization and Recovery Act, with his ruling lifting the restriction that any reduction in force must occur through retirements or attrition. Judge Mendez, who in late August had ruled against a state proposal for 50 layoffs, ruled no cuts may take place before February 1st—marking the first legal showdown under New Jersey’s Recovery Act takeover powers under designee Jeffrey Chiesa, which enables the state to alter outstanding municipal contracts. In his decision, Judge Mendez wrote: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.”  Judge  Mendez ruled the state may exercise its authority; however, the cuts are not allowed until after Feb. 1, according to the ruling: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic, but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.” In his August ruling, the Judge had written that any reduction in force below 180 members would compromise public safety, and any further reduction would have to come through attrition and retirements. Under this week’s ruling, before the state makes cuts, however, officials must explore other funding to cover lost SAFER Grant funding, allow for additional attrition to take place, and provide fair notice to those who may lose their jobs.

Atlantic City Mayor Don Guardian said he had hoped the state would offer an early retirement incentive—especially after, last August, Gov. Chris Christie had signed a bill allowing the state to offer such an incentive to the city’s police officers, firefighters, and first responders facing layoffs. However, the state has said the offer would not be financially beneficial, leading Mayor Guardian to note: “I am disappointed that the state has pushed forward this motion knowing that the state Senate, Assembly, and the Governor all passed an early retirement bill for just this reason: We could have easily gotten to 180 fighters through these incentives.”

New Jersey Community Affairs spokeswoman Lisa Ryan noted: “We remain disappointed by the court’s insistence on requiring an artificially and unnecessarily high number of firefighters…While the decision to allow a modest reduction in firefighters on Feb. 1, 2018, will provide some budget relief, the city will still be forced to make additional and significant reductions to fire salaries in order to afford paying for 180 firefighters.” (Last January, the Fire Department had 225 members; now there are 195, or, as Judge Mendez wrote: “The plans to reduce the size of the ACFD have evolved from a request to approve a force of 125, resulting in a loss of 100 positions, to the current request to reduce the force to 180, resulting in a loss of 15 positions.” 

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.