Who Is in Fiscal Command?

June 29, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing challenge of governance in the U.S. territory of Puerto Rico: is it a federal judge, a duly elected Governor and legislature, or a board imposed by Congress and the Administration?

Who Is In Fiscal Charge? With the new fiscal year beginning Sunday, the Puerto Rico Legislature is set to approve a budget less than that which was presented to the PROMESA Board. The initial version, approved by the House of Representatives of $8.782 billion provided for an increase of $33.2 million over the amount approved by the PROMESA Board. The Legislative Assembly is, today, expected to approve an FY2019 budget of $8.7 billion. Senator Migdalia Padilla Alvelo of Maraquitas, a small town founded in 1803, who has served in the Senate for nearly two decades, and is the current Finance Commission Chair, yesterday announced that, as part of the legislative discussion, they have managed to identify several items which will adjust the budget without touching the allocations included by the House of Representatives to meet the reductions imposed by the PROMESA Board to the umbrella of the Department of Public Security and tax agencies, such as the Office of Government Ethics and the Office of the Comptroller. Those modifications cleared the path to revert some $50 million for the operation of the Government Central Accounting System (Prifas). Concurrently, the budget was modified to adjust reserves down from $75 to $35 million, with the Senator explaining: “was reduced from $ 75 million to $ 35 million: We reduced the $8,749 billion which the Board had set for expenses to $8.709 billion: “we are below what the PROMESA Board originally set.” House Finance Committee Chair Antonio Soto also confirmed there would be approval of the budget today, explaining that the negotiations with the Senate team had been aimed at reducing the budget to the level proposed by the Board without touching the expense items that had been added, noting: “We understand that we are going to be able to maintain it…in the same level that they established, but including the expense items that are necessary.”

Meanwhile, in a press release, Senate President Thomas Rivera Schatz reported that a Conference Committee had been formed to address the amendments introduced on his side, adding: “We had planned to approve the budget today. In the House, the discussion of the measure has been delayed a little, but the House President Carlos Méndez Núñez yesterday told me that that body will approve it today.”

With the action, the PROMESA Oversight Board cancelled its scheduled public meeting set for today—where it had intended to act on the Puerto Rico budget, to await today’s actions by the legislature, and then act tomorrow to approve the U.S. territory’s budget, as well as those of several authorities, with the Board noting the delay would provide more time to “complete required technical and macroeconomic changes to the Commonwealth Fiscal Plan with updated information.” The board still expects to approve a budget by the end of the fiscal year—with the PROMESA Board apparently primed to preempt Puerto Rico’s authority and impose its own fiscal dictates, including a repeal of Law 80 and the establishment of at-will employment, per its preemption demand to Gov. Ricardo Rosselló last month—a demand the Puerto Rico Senate declined to act upon.

The Board preemption yesterday came in the wake of, earlier this week, of its issuance of notices of violation with regard to government-proposed budgets for the Puerto Rico Highways and Transportation Authority and University of Puerto Rico—with, in each instance, the unelected Board notifying the Puerto Rico Fiscal Agency and Financial Advisory Authority that the Board required “substantial revisions and additional information” before it could approve the budgets. Some believe the PROMESA Board’s actions could signal a likely rejection of Puerto Rico’s budget tomorrow. PROMESA Board Director Natalie Jaresko said that if Puerto Rico’s elected leaders did not repeal Law 80, the Board would eliminate several accommodations it made to the Governor, including the retention of Christmas bonuses for government employees and a multiyear $345 million economic development and reform implementation initiatives fund.

It appears that, irrespective of the final actions taken by the Legislature, Governor Ricardo Rosselló Nevares recognizes the authority under the PROMESA statute granted to the Board. Thus, with the clear expectation that Law 80 (the Law Against Unjustified Dismissal) will be repealed,  the Governor appears to seeking to ensure he will play a key role in the process of restructuring the debt in federal court, and that he will be a player in constructing the quasi chapter 9 plan of debt adjustment which is anticipated to be settled by next week.

Another key issue pending relates to Chamber 1662, on Puerto Rico public pensions, which the Gov. yesterday endorsed—likely to arm himself to oppose the Oversight Board’s proposed average 10% cut in Puerto Rico pension benefits—cuts the Board wishes to trigger in the new fiscal year.

In response to a press question yesterday with regard to whether the Governor would go to court if, as expected, the PROMESA Board preempts Puerto Rico’s law and eliminates the Christmas bonus and current provisions for sick leave and vacations of public employees, the Governor was clear he would, noting:Yes, I’ve always said it. The unfortunate thing is that we will be spending $20 to $25 million a month in litigation processes that we are not sure of how we are going to finish. Second,  the process of restructuring the debt is not started and, instead of having a visibility to finish this in a year and a half, two years, we are talking about years. Possibly eight years, a decade in which this can be resolved, because the Oversight Board is the only entity authorized to submit a plan of debt adjustment. We have been working with them, with certain differences on that adjustment plan. But this is very clear, if you have an agreement, the only difference is pensions where we can sit or go to court for a single component…The content of this adjustment plan will depend not only on the restructuring of the debt, but also on whether the island will continue to be protected against appropriations of its government funds.”

Hurricane Recovery. On the critical issue of recovery from Hurricane Maria, where Puerto Rico received thrown paper towels compared to Houston, estimates are that recovery costs could be as high as $94 billion—Puerto Rico has, to date, received about $6 billion. Nevertheless, Gov. Rosselló appears optimistic, noting the island is in its recovery phase: “I think we’re on the way. Certainly FEMA’s disbursement has been slow, but now a new phase is entering that is important for people to know, which is includes HUD housing and CDBG funds—funds from which Puerto Rico has already begun drawing down: he added: “We hope that by the beginning of January or the end of December we can already have access to the bank of the $18.5 billion.”  

Advertisements

Paternal Governance?

June 12, 2018

Good Morning! In this morning’s eBlog, we consider the demographic disparities in the wake of Hurricane Maria in Puerto Rico, before turning to the human and fiscal challenges in the federal courtroom issue of keeping schools open in the face of quasi-municipal bankruptcy; then we view the ongoing governing challenges and wonder when there might be too many cooks in the fiscal kitchen.   

Demographic Devastation. According to new data from the Puerto Rican Demographic Registry, 68% of Puerto Ricans who died between September and December of 2017, during the emergency caused by Hurricanes Irma and María, were over the age of 70. The new data from the Demographic Registry finds that nearly half of the deaths recorded in this period occurred among people who were hospitalized in Puerto Rico. Moreover, the risk of death, according to the data, was higher for men: 54% of the deceased were male, even though males make up only 48% of the island’s current population. The new data also found that deaths attributed to diseases such as Alzheimer’s, diabetes, septicemia, pneumonia, and chronic heart or respiratory conditions showed significant increases in the period which followed the hurricanes—or, as Puerto Rico demographer Judith Rodríguez noted: “This gives us a more specific idea of the health risk that the hurricane brought. That was the only significant factor to cause that increase seen in the data.” Ms. Rodríguez further reported that cases of septicemia doubled between August and September, reporting that this disease, often associated with infections in hospitals, noting: “The highest number of deaths is in hospital patients; however there were high-risk factors among people who were in care homes for the elderly, or who, in the middle of an emergency, were taken to an ER.”

Health and safety—especially for the most vulnerable—appeared to be related not just to damage caused by the hurricanes to the physical hospitals and clinics, but also by the stark disruptions of electricity: diesel supply to keep emergency generators operating, combined with failures in backup systems and telecommunications plagued the provision of vital health care services. Moreover, the issues took long to resolve: even as late as last December, at least two hospital were operating with electric generators. As the Senior Vice President of Operations at San Jorge Children’s Hospital, Domingo Cruz, noted: “It is always a risk (death) when there are patients in ventilators (artificial) and there is an outage.” Perhaps in a hope for the future, the data shows that death among Puerto Rican children due to the storms was less than 1%.

After storm reports also noted that even though tardy, the arrival from the mainland of hospital ships played a vital role: Good Samaritan Hospital Administrator Marilyn Morales reported that, due to their condition, many patients were transferred to the USNS Comfort hospital ship, the U.S. Navy’s largest such ship, as well as to the Medical Centers of Mayagüez and Río Piedras. The USNS Comfort is the largest U.S. Navy floating hospital. This ship and a series of field hospitals were set up in Puerto Rico during the first months that followed Hurricane Maria. Administrator Morales noted: “We understand that deaths (at the Good Samaritan Hospital) were minimal.”

It was not, however, just hospitals which were so adversely impacted: by early last October, access to vital pharmacies due to the loss of electricity and communications contributed to the health care emergency response breakdowns: some pharmacies did not have access to the system they use to process prescriptions; thus, they were only dispensing medicines if a patient paid the full price of the drug. According to the Health Department: “In the case of not having electronic systems for dispensing medications, the pharmacy must provide the medication to the patient and, then, it will have up to 60 days to process it.”

Many health professionals with private practices had to overcome many obstacles to offer services to their patients, mainly due to the lack of power, the impossibility of using some equipment only with a generator, and of billing for medical services. Demographer Rodríguez noted: “There are some conditions whose deterioration could be accelerated by issues associated with the emergency left by the hurricane. Chronic and degenerative diseases were the most affected in this process. These diseases skyrocketed, and many people might have died months later because of issues associated with the hurricane.”

Quien Es Encargado? (Who is in charge?) As we have noted, in chapter 9 municipal bankruptcies—in the minority of states which have authorized them, the state law determines the governance until a plan of debt adjustment is approved by a U.S. Bankruptcy Court. In Puerto Rico, under the PROMESA statute adopted by Congress, there is a hybrid form of governance—a form which has left unclear authority in this governmentally different circumstance where it is not a municipality which is fiscally exhausted, but rather a quasi-state—or, a U.S. territory. Thus, we have a Governor, a legislature, an oversight PROMESA Board imposed by the President and Congress, and a U.S. federal Judge.  It might be that some accommodation in governance is emerging: the PROMESA Board has proposed to the Puerto Rico Legislature that the raising of salaries or disbursement of allocated funds would not be allowed unless quarterly reports are presented and cuts established in the fiscal plan are executed, according to the its modified version submitted to the Legislature. Under the proposal, in order to ensure that the government does not spend more than it receives and complies with the spending cuts to which it committed in its certified fiscal plan, the budget modified by the Oversight Board restricts in a reserve fund the funds which would be used to increase the salaries of teachers and the Police. The Board also established that the government of Puerto Rico is mandated to submit quarterly reports beyond those required by PROMESA before it is authorized to appropriate any funding, with said conditions spelled out in the joint resolutions that the Board has sent to the Legislature as part of the budget certification process. Included in this unfunded mandate is a provision barring the Office of Management and Budget from disbursing funding to fulfill the promise made by Governor Ricardo Rosselló Nevares to increase the salary of teachers and the Police, or to provide Social Security. In addition, the mandate bars the authorization of funding to Puerto Rican agencies absent Board approval.

The Board’s restrictions, adopted in an effort to ensure a balanced budget, in addition to the repeal of the Unjust Dismissal Law (Law 80-1976), which eliminates the statute which provided certain legal remedies to private sector employees, is part of a structural reforms package imposed by the Board as part of its agreement with Gov. Rosselló Nevares to avoid litigation in Court.

Gov. Rosselló’s representative to the PROMESA Board, Christian Sobrino, concurs that it makes sense that the Board has established conditions for granting the monthly increase of $125 to Police and teachers, starting in the upcoming fiscal year, and that these imposed conditions are also subject to the repeal of Law 80, because this move may impact the revenue projection required by the Board. Nevertheless, unsurprisingly, Mr. Sobrino described the Board’s new demands as “complicating” the interaction between Puerto Rico and the PROMESA Board: noting: “But there is a reality: you can provide the benefits (if)  you have the income to budgetary support. If you do not have them, you do not have them: The revenue projection is the key part that makes all these agreements and these other programmatic commitments possible.” Thus he stressed the importance of the Legislature proceeding with the repeal of Law 80: “The effect of not carrying out this repeal would imply a reduction in the budgetary revenues available to the government and make it very difficult to maintain a series of benefits , including that (salary) increase and also the Christmas bonus to public employees: If the agreement can be complied with, there should be no problem moving that allocation (the money for salary increase) to the Public Security umbrella. If that agreement is not maintained, then additional cuts have to be made.”

Nevertheless, the governance situation remains difficult, especially in the wake of the PROMESA Board’s conclusion that, for what it asserted was the second time, Gov. Rosselló’s budget did not comply with PROMESA, and then proceeded to preempt that authority and impose its own adjustments—a fiscal and governance move which would mark the first time that the government of Puerto Rico would have constraints to use its funds. As written, the preemption reads: “The Secretary of Treasury, the treasurer and Executive Directors of each agency or Public Corporation covered by the New Fiscal Plan for Puerto Rico certified by the [PROMESA] Oversight Board, and the Director of the OMB (or their respective successors) shall be responsible for not spending or encumbering during fiscal year 2019 any amount that exceeds the appropriations authorized for such year. This prohibition applies to every appropriation set forth in this Joint Resolution, including appropriations for payroll and related costs. Any violation of this prohibition shall constitute a violation of this Joint Resolution and Act 230-1974.” In addition, in another section of the document, the Board mandated that quarterly reports must be submitted no later than 15 days after the closing of each fiscal quarter and that the Fiscal Agency and Financial Advisory Authority (FAFAA) and the OMB will certify that “no amount” of the Social Security Reserve funds in the Puerto Rico Police Department or the promised increases have been used to cover any expenses.

A Teaching Moment? In the wake of learning about the new conditions established by the PROMESA Board, Grichelle Toledo, the Secretary-General of the Puerto Rico Teachers Association-Local Union, noted that Gov. Rosselló had promised a monthly salary increase of $125 per month “beginning the 2018-2019 school year,” noting that it had been “10 years without a salary increase, and the cost of living has risen, benefits have been reduced and some have even been eliminated.”

Indeed, as we have noted previously, the loss of human capital—teachers, health care professionals, and others, harms the possibility of a sustained economic recovery. That is, the Board’s actions risk that Puerto Rico is in danger of losing one of its most critical assets, its skilled workforce, at a time when the island is in dire need of rebuilding: already teachers are leaving for more secure jobs on the mainland, a predictable outcome after the cash-strapped government announced it would close some 200 schools. Police, thousands of whom called in sick daily last year because they were not being paid overtime, are finding brighter futures in cities eager to find trained, bilingual officers.

An analysis by El Nuevo Día of the Governor’s proposed budget last month after agreement with the PROMESA Board, which focuses on the General Fund determined that the Board made sure to increase its own budget by 7.8%, plus another 3.7% to pay lawyers working in Title III cases, even as it cut FAFAA’s by nearly 10%. The Board met its part of its agreement with the Governor by not touching the Legislature’s budget, authorizing $ 50 million to municipios, and approving $25 million for the University of Puerto Rico (UPR) scholarship fund. However, the Board cut the Budget of the Health Insurance Administration by 41%, and cut the Office of Community Planning and Development by 21%, the State Commission on Elections by nearly 12%; the Police by 4%–and, of all places, the Fire Department by 11%, and the State Agency for Emergency and Disaster Management by 14%–mayhap an ill omen as the new hurricane season has already commenced.

Motor City Rising

June 1, 2018

Good Morning! In this morning’s eBlog, we consider the remarkable turnaround of Detroit—a city which, when I inquired on its very first day in chapter 9 municipal bankruptcy, for walking directions from my hotel to the Governor’s Detroit office—in response to which I was told the one mile route was not doable—not because I would be too physically challenged,  but rather because I would be slain. Yet now, as the  fine editorial writers for the Detroit News, Daniel Howes and Nolan Finley, wrote: “A regional divide that appeared to be healing since Detroit’s historic bankruptcy is busting wide open over a plan for regional transit, exposing anxiety that the city is prospering at the expense of the suburbs,” noting that the trigger is a is a proposed millage to fund expansion of the Regional Transit Authority of Southeast Michigan, a $5.4 billion plan that would seem to promise an exceptional reshaping of the metro region—indeed: a reversal a what had been a decades-long shift of the economy from downtown Detroit to is suburbs: an exodus that contributed to a wasteland and the nation’s largest ever chapter 9 municipal bankruptcy.” Or, as they wrote: “That battle reveals growing suburban resentments over the region’s shifting economic fortunes: decades-long capital flow is reversing directions as more jobs and tax revenue flee the ‘burbs for a rejuvenated downtown.”

Mr. Finley noted that Mayor Mike Duggan, this week, told him: “I can’t explain why Oakland and Macomb (suburban counties) are doing what they’re doing” three weeks ago Microsoft brought 400 employees from Southfield into the city of Detroit. And last week, Tata Technologies said they were moving 200 people from Novi and into Detroit. Google is in the process of moving people from Birmingham into the city of Detroit.” What the Mayor was alluding to was a u-turn from a decade of moderate and upper income families leaving Detroit for its suburban counties in the days when former Mayor Coleman Young had advised criminals to “hit Eight Mile” has the relationship between the Metro Motor City’s regional leaders become so difficult in the wake of the unexpected reverse exodus: this time from Detroit’s suburbs back into the city. Billions in private sector investment, spearheaded by Dan Gilbert’s Quicken Loans Inc., the Ilitch family, and growing enthusiasm among other business leaders to be part of the city’s post-chapter 9 municipal bankruptcy have been changing demographic and economic patterns.

As the city continues under decreasing state oversight to carry out its judicially approved plan of debt adjustment, Mayor Duggan notes: “Expectations are rising.” This, after all, is not a City Hall bound mayor, but rather what the editors described as a “short, stocky, balding white guy who is no stranger to block after block of dilapidated houses—and who was reelected to a second term with an amazing 72% of the vote in a city where slightly more than 82% of the voters are black—and where, when he took office, there were about 40,000 abandoned homes. He is not a stay at City Hall type fellow either—rather an inveterate inspector of this mammoth rebuilding of an iconic city, who listens—and with his cell phone—takes action immediately in response to constituents concerns. After all, as the Mayor notes: “Expectations are rising…People are putting more demands on me and more demands on the administration, and I think that’s a really good thing and that will keep us motivated to work hard.”

Already, the urban wasteland is changing—almost on a daily basis: already, under a city program which supports renovation over demolition to try to preserve the mid-century architectural character of neighborhoods, that number of abandoned homes has been halved—with many of the units set aside for affordable housing. In his State of the City address this year, Mayor Duggan said he wants 8,000 more homes demolished, 2,000 sold, another 1,000 renovated and 11,000 more boarded up by the end of next year.

On that first day of the nation’s largest ever municipal bankruptcy, Kevin Orr, whom the Governor had tapped to become the Emergency Manager for Detroit, had flown out from the Washington, D.C. region, and told me his first actions were to email every employee of Detroit that he would be filing that morning in the U.S. Bankruptcy Court, but that he expected every employee to report to work—and that the most critical priorities were that every traffic and street light work—and that there be a professional, courteous, and prompt response to every 911 call.  

That was a challenge—especially for a municipality in bankruptcy, but, by 2016, the city had completed a $185 million streetlight repair project; 911 response times have been reduced from 50 minutes in 2013 to 14.5 minutes last year, and ambulance response times fell from 20 minutes in 2014 to the national average of 8 minutes this year.

As we have previously noted, two months ago, just three and a half years after Detroit emerged from chapter 9, the city has exited from state oversight; its homeless population has, for the third consecutive year, declined—and, its unemployment rate, which had peaked during the fiscal crisis at 28%, is now below 8%. No wonder the suburbs are becoming fiscally jealous. And the downtown, which was unsafe for pedestrians when the National League of Cities hosted its annual meeting there in the 1980’s and on the city’s first day in bankruptcy, has been transformed into a modern, walkable metropolis.

Nevertheless, the seeming bulldog, relentless leader has refused to sugarcoat the fiscal and physical challenge—or, as he puts it: “I don’t spend a lot of time promising. I just say, here’s what we’re doing next and here’s why we’re doing it and then we do what we say…Over time, you don’t restore trust by making more promises; you restore trust by actually doing what you said you were going to do.”

Mr. Finley wrote that the Mayor, deemed a “truth teller” by Detroit Housing Director Arthur Jemison, has been direct in confronting the city’s harsh legacy of racist policies after the Great Depression lured thousands upon thousands of African-Americans north in the early decades of the 20th century to work in auto factories—luring them to a city at a time when Federal Housing Administration guidelines barred blacks in the city from obtaining home mortgages and even led to the construction in 1941 of a wall bordering the heavily African-American 8 Mile neighborhood to segregate it from a new housing development for whites.

Aaron Foley — the 33-year-old author of How to Live in Detroit Without Being a Jackass, noted: “When you deliver that kind of message about this is why black people are on this side of the wall in 8 Mile versus the other side of the wall, that gets people talking: This is a history that we all know in Detroit, and for the city government to acknowledge that in the way that it did on that platform, it did resonate.”

Mayor Duggan’s concern for Detroit’s people—and not forcing low-income families out, is evidenced too by his words: “Every single time that we had a building where the federal [housing] credits were expiring and people were going to get forced out of their affordable units, I had to sit down for hours with the building owner to convince them why those who stayed were entitled to be there, and I thought: I need to do just one speech and explain that this is the right thing to do…Since then there’s been just great support for the direction we’re going in the city. We have very little pushback now from our developers over making sure that what they’re doing is equitable.”

Amazonian Recovery

May 18, 2018

Good Morning! In this morning’s eBlog, we take a fiscal perspective on post-chapter 9 Detroit and its income and property taxes; then we dip south to assess the seemingly interminable governing challenge with regard to whom is in charge of restoring fiscal solvency in Puerto Rico.   

The Challenging Road to Recovery. Last January, Detroit failed to make the Amazon cut to make the finalists: Sandy Baruah, president and CEO of the Detroit Regional Chamber, who was on the fateful call, nevertheless described feedback from Amazon, describing the “creativity, the regional collaboration, the quality of the bid document, the international partnership with Windsor, all of that got incredibly high marks,” adding that: “We were good, but we weren’t good enough on the talent front.” The noted urban writer Richard Florida tweeted that he believed Amazon missed the mark on Detroit, if talent was the disqualifying factor—he, after all, early on, had identified Detroit as a sleeper candidate for HQ2, with a top three of greater Washington, D.C.; Chicago; and Toronto, noting that Detroit has more tech workers than many on the list, including Pittsburgh, Indianapolis, and Columbus—and that the city has access to major public research universities, not to mention its international partnership with Windsor, Ontario, in Canada gave the bid an international quality that only Toronto’s bid could match. Indeed, Mr. Florida had suggested that Detroit’s elimination was due to outdated perceptions of the Motor City’s economy, talent, and overall livability.

Nevertheless, Detroit’s near miss—when added to the city’s exit at the end of last month from state fiscal oversight, is a remarkable testament to Detroit, that, less than five years after filing for the largest municipal bankruptcy in American history, came so close to making the cut, so successfully has it overcome the adverse repercussions of nearly six decades of economic decline, disinvestment, and chapter 9 municipal bankruptcy. State officials praised the city for fiscal gains that came quicker than many anticipated after its Chapter 9 exit in December 2014. The city shed $7 billion of its $18 billion in debts during the 18-month bankruptcy. Last year, the city’s income tax take rose by 8%–and assessed property values rose for the first time in nearly two decades.

No doubt the auto industry has played a driving role: in the emerging age of self-driving cars, a recent report by real estate services giant CBRE which evaluated the top 50 U.S. metro areas in the country in terms of tech talent ranked Detroit 21st, ahead of several cities which made the Amazon cut, including Philadelphia, Los Angeles, Pittsburgh, Indianapolis, Nashville, and Miami. Indeed, remarkably, on a percentage basis, Detroit has as many tech jobs in its metro as Washington, D.C., and Boston. The report also found that Detroit’s millennial population with college degrees grew by just under 10% between 2010 and 2015, more than double the national average of 4.6% and equivalent to rates in the Bay Area (9.5%) and Atlanta (9.3%).

Nevertheless, the Motor City continues to face taxing challenges—including a less than effective record, until recently, of collecting income and property taxes it was owed under existing law—and of improving its school system: a vital step if the city is to draw young families with kids back into the city. Moreover, it still needs to reassess its municipal tax policies: its 2.4% income tax is double that paid by non-residents working in the city. That is not exactly a drawing card to relocate from the suburbs.

The Uncertain Promise of PROMESA. While the PROMESA Oversight Board has requested Puerto Rico to amend its recommended budget, Puerto Rico has responded it would prefer to negotiate, because it understands that resorting to the Court “is not an alternative.” Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, made clear, moreover, that there would be is no change of position with regard to the Board’s demand for reducing pensions or vacation and sick leave, much less eliminating the Christmas bonus. Nevertheless, the Commonwealth appears to be of the view that its differences with the PROMESA Board are “are minimal,” despite the Board’s rejection, last week, of Governor Ricardo Rosselló’s proposed budget—a rejection upon which the Board suggested that cuts in public pensions and the elimination of the mandatory Christmas bonus had not been incorporated. The Board also noted the omission of funds finance Social Security for police officers. Secretary Rosario Cortés noted: “The Governor called to the Board to sit down and review those points they exposed, as long as they do not interfere with the Governor’s public policy. In the coming days, Gov. Rosselló and his team will be responding to each of the Board’s points and providing information that supports each of the Government’s positions: The Government is open to dialogue in order to reach consensus that does not interfere or contravene those public policy positions that the Governor has already expressed; specifically: no cuts in pensions or eliminating the Christmas bonus and reducing sick leave.”

He acknowledged that the dispute could end up in Court, as PROMESA Board Executive Director, Natalie Jaresko, has warned: “Yes, certainly, they have not only resorted to Court in the past, but they have also said it is a possibility. We understand that it is not an alternative, it would delay the fiscal recovery of Puerto Rico and would require investing resources that are scarce at the moment: They made some observations, and we are willing to look at them,” adding that the work teams of the Governor and the Board are communicating and sharing information: “Dialogue continues and, along the way, we hope to reach a consensus that will avoid setbacks and reaching the courts.”

Who Is Governing? Precisely, Director Jaresko also acknowledged that not amending the budget would delay the renegotiation of Puerto Rico’s debt, warning that if the Rosselló administration does not act, the PROMESA Board will proceed to preempt its governance authority and power as provided by the PROMESA law, which authorizes the Board to amend the U.S. territory’s budget and submit its own version to the Legislature for approval—albeit, it rattles one’s fiscal imagination that Puerto Rican legislators could conceivably want to do so.

Nevertheless, the Board has advised Gov. Rosselló that his recommended budget does not reflect what is established in the fiscal plan: regarding the General Fund, the recommended budget represents about $200 million in expenses on the certified income projection; in addition, the budget information does not include public corporations or similar dependencies—meaning that Director Jaresko is of the view that the draft budget omits some 60% of the public spending. Thus, she has threatened that the Governor has until high noon on Tuesday to correct the ‘deficiencies,’ or risk the Board preempting its governing authority.  

Nevertheless, Puerto Rico’s fiscal position appears to be on the upswing: as of last week, revenues were 7% ahead of its July 2017 forecasts; last month’s revenues came in 18% stronger than projected. Notwithstanding the physical and fiscal impact of Hurricane Maria on Puerto Rico’s economy, Puerto Rico’s central bank account, the Treasury Singular Account, held $2.65 billion as of last Friday—some $211 million more than the government had anticipated last July according to information posted on the MSRB’s EMMA.

The Uneven Challenges to Chapter 9 Recovery from Municipal Bankruptcy

Mayday, 2018

Good Morning! In this morning’s eBlog, we note the uneven recovery in Detroit from the largest chapter 9 municipal bankruptcy in American history.

An Absence of Fiscal Balance? In a new report by 24/7 Wall Street about the nation’s poorest urban regions, Detroit is ranked 5th, raising, the publication notes, the question why so many communities in such good times have been left fiscally behind. . The report — from 24/7 Wall St., a New York-based financial news organization — ranks the Detroit area at No. 5 in a list of impoverished communities. It also raises the question: During such good economic times, why are so many being left behind? While the report notes the seeming good times for the U.S. economy, it also reports that the share of Americans living below the federal poverty level ($25,100 for a family of four) has increased by nearly 10 percent since 2010. But of greater concern for state and local leaders, the concentration of poverty has also risen—or, as the report noted: “This increased concentration of poverty is far more pronounced in certain metropolitan areas: The share of poor residents living in extremely poor neighborhoods—defined as those with a poverty rate of at least 40%—climbed by more than 3.5% in 20 metro areas in the last six years.” That is, in a post-Richard Nixon era where the federal government no longer appears to believe it has a role in providing some fiscal equity, the report writes that the Detroit metro area has “long been the poster child for economic decline in postindustrial America.”

It appears we are in a state of fiscal disequilibrium, where no major municipality is any longer in chapter 9 municipal bankruptcy, and Detroit, emerging from the largest ever municipal bankruptcy and now a center of innovation again for the auto industry, with the city’s poverty rates having declined by more than 10% from 2015 to 2016—to its lowest rate in a decade. Nevertheless, with a poverty rate of 35.7% in 2016, the report found that an increasing share of residents in the metro region are, today, below the federal poverty level: 16.2%, putting the Motor City behind Bakersfield, Fresno, Springfield (Mass.), and Albuquerque, N.M. The report noted: “The share of poor residents living in extremely poor neighborhoods—defined as those with a poverty rate of at least 40%—climbed by more than 3.5% in 20 metro areas in the last six years: Such high-poverty neighborhoods are often characterized by high crime rates, low educational attainment rates, and high unemployment. Partially as a result, those living in these extremely poor neighborhoods are at a greatly reduced likelihood of success and upward economic mobility.”

The 24/7 Wall Street bears out Brooking’s 2016 report which defined the Detroit metro region (including Wayne, Oakland, Macomb, Livingston, St. Clair, and Lapeer) to have the highest rate of concentrated poverty among the most populous metro areas in the U.S. That is, in a nationally growing economy, one can, mayhap, better appreciate some of the appeal of President Trump, as there remains, in a growing economy, a large segment of the population unable to take advantage of the growing economy.

Part of it, of course, is that the issue of fiscal disparities is neither on the agenda of the President nor Congress.

Nevertheless, as our colleagues at Municipal Market Analytics note, Detroit’s exit from state oversight this week after shedding about $7 billion of its fiscal liabilities  “seems a bit fast, given the depths of the city’s challenges, and suggests that the state continues to value a narrative of quick rebound versus evidence that such can be sustained.” While MMA noted Detroit’s relatively conservative budgeting, small resulting surpluses, planning for the upcoming spike in pension payments, and decision to redeem $52M in recovery bonds; it noted the “the rising pension payments are a significant concern (even with funds set aside to temporarily smooth incremental costs) particularly when considered in conjunction with the city’s limited flexibility to address other potential events outside of its control such as reductions in federal or state aid, changes in federal policies that impact the economy in the state and/or nationally, and probably most concerning, an economic recession.”

Interestingly, MMA noted that were the Motor City’s recovery to stumble, the “potential for additional state intervention or aid is remote. Going forward, the city is likely on its own,” adding that, notwithstanding that the city has become an epicenter of the self-driving car industry; nevertheless,  this represents just a portion of the city and: “The rising living costs in these areas risks pushing existing residents out to more challenged neighborhoods, creating a greater income divide and worsening inequality. Notwithstanding the burgeoning economy in some pockets of Detroit, significant challenges remain across the vast city including horribly high poverty, crime, and poor educational outcomes. Detroit’s poverty rate is 39.4%, and only 13.8% have attained at least a bachelor’s degree.”

Can the “City of Fog” Take the Fiscal Bulls by its Horns?

April 25, 2018

Good Morning! In this morning’s eBlog, we seek to understand the fiscal perspective in Puerto Rice from the municipal perspective, where a group of Mayors from the Popular Democratic Party are seeking to put together collaborative models in order to both achieve fiscal savings, and ensure the provision of essential services. The we jet West out of the rain to sunny San Bernardino, where voters in the post chapter 9 municipality are weighing candidates to lead the city through its plan of debt adjustment.

Taking the Fiscal Bull by the Horns. Cayey, Puerto Rico, is known as “La Ciudad del Torito” (town of the little bull), but also as “La Ciudad de las Brumas,” or the City of Fog. Founded in August of 1773, it is one of our nation’s oldest municipalities: its founder—and first Mayor, was Juan Mata Vázquez. The city’s name is also said to have been derived from the Taino Indian word for “a place of waters.” Located in Puerto Rico’s Central Mountain range, Cavey is surrounded by the Guavate, Jjome, Maton, La Plata, and Grande de Loiza rivers—and the Carite Forest Reserve, which offers more than 6,000 acres of protected parkland. The city is also home to Cayey University College, a branch of the University of Puerto Rico. The surrounding areas produces sugar, tobacco, and poultry—and cigars. Coca-Cola and Procter & Gamble have manufacturing facilities in Cayey. But Cayez’s Mayor—or Alcalde, Rolando Ortiz, is his own optimistic bull: it was, after all, just one year ago that he, together with the Mayors of Coamo (Juan Carlos García Padilla) Villalba (Luis Javier Hernández), and Salinas (Karilyn Bonilla) created what is now known as the Services and Permits Alliance, an innovative initiative through which they have managed to generate an increase of $105,000, and have reduced the approval period for municipal permits by 60 percent. Now, Mayor Ortiz reports: “The Fiscal Supervision Board (JSF) has just certified the different fiscal plans of the government agencies and those final determinations make the country in a position of starting, where Puerto Rico has to continue to seek solutions to the problems of Puerto Rican families,” with his remarks coming exactly one year after he met with his colleagues, the Mayors Juan Carlos García Padilla, of Villalba, Mayor Luis Javier Hernández; and Salinas Mayor Karilyn Bonilla, to create what is now known as the Services and Permits Alliance, an initiative through which they have managed to generate an increase of $105,000, and have reduced the approval period for municipal permits by a whopping 60%.

Their municipio coalition, in addition to the savings and efficiency of services, allows this unique coalition to have direct control over the development of infrastructure in their municipalities and protect those areas designated for agricultural use or the development of parks and public recreational areas. In addition, the agreement makes it easier for them to redirect the development to the areas of the urban centers—or, as Mayor Ortiz put it: “Development experts postulate that 70% of the world’s population has to move to live in cities in the coming decades, and cities have to temper that reality and have to organize their territories, their public spaces, in such a way that this mobilization to the urban centers can occur…This organization aims to organize the territory and have control of what is being built and what is developed from the point of view of planning and organization in each of our municipalities.” Mayor Bonillo added: “We have been able to comply with several of the goals we established when we established the service consortium, including that the services would be more accessible to citizens.” She added that the sharing of services would benefit efficiency, explaining that the consortium has a regional office in Cayey and satellite spaces in the remaining three towns—with a shared workforce of 15 employees—along with a technical staff of engineers, lawyers, planners, and inspectors to collaborate with the four City Councils. Or, as the Mayor put it: “He has given us a tool to all municipalities in the process of monitoring the construction taxes of all the permits that are located in each of our towns,” with a focus on four key objectives: accessibility, maximization of resources streamline the permit process and achieve new revenues. Indeed, it appears the model has been so effective that these municipal executives are already focused on the possibility of integrating the areas of Human Resources, Finance, and the Center for Municipal Revenue Collection, an integration that they hope to have completed in six months. Or, as Mayor Hernández explained: “What started as an alliance of permits…now takes another direction, an extension…today this success story is celebrated, but it is the beginning of many other alliances…the design of a platform that has been successful and that can serve as a model for other municipalities.”

Is There Mayoral Promise from PROMESA? The ambitions of the troika of Mayors comes in the wake of, last week, the PROMESA Board’s approval of a number of fiscal plans to be imposed upon Puerto Rico in efforts to address growth, revenue, expenditure, debt, and government reform—plans which some describe as mayhap “overly (and maybe recklessly) optimistic.” Our colleagues at Municipal Market Analytics, for instance, write that “while it is possible that, as the plan supposes, Hurricane Maria and subsequent aid-fueled rebuilding will leave the Puerto Rico economy stronger and larger than if there had been no storm, this should not be a baseline assumption. We note the island economy’s contraction despite decades of annual billion-dollar stimulus injections via deficit borrowing by Puerto Rico’s public entities. Further, with Maria highlighting the island’s increasing vulnerability to weather-related damage and climate change, MMA expects a material long-term reduction in corporations’ interest in locating facilities in Puerto Rico and a related drag on employment, all else being equal.” Writing that the PROMESA Board’s plans provide little margin for error, MMA worries of a potential slide back into bankruptcy. MMA also noted, as have we, that with so many fiscal cooks in the kitchen, and the Governor having already announced his dedicated opposition to any cuts in pensions or labor reforms, there appears little evidence of an overall change in Puerto Rico’s hunger for hard fiscal steps, such as would be required in a plan of debt adjustment.

A Taxing Imbalance. Perhaps demonstrative of the fiscal challenges of multiple cooks in the kitchen, Governor Ricardo Rosselló’s promised reduction of Puerto Rico’s Sales and Use Tax (IVU) in restaurants now appears to hang in the balance, because, according to the PROMESA plan, his government will be mandated to submit to the PROMESA Board quarterly reports on its budget to determine if the tax changes will remain or will be revoked: the Board’s conditions for approving any proposed tax reform join the list of demands that the Board had imposed on Puerto Rico last week: according to the plan, the tax reform must be revenue “neutral,” that is, it must be most unlike the federal tax reform passed by Congress and signed into law by President Trump. Moreover, under the plan, Puerto Rico will be mandated to carry out an annual so-called “fiscal responsibility test,” and submit an annual report which will be the reference to determine if any tax reduction may continue. According to the proposed fiscal plan, in the first two years of its implementation, incentives and subsidies granted through 17 laws will be eliminated or modified: for example, incentives to the film industry, reimbursements for the rum tax, credits, and incentives tied to affordable housing, the elderly, and the renewal of urban centers will be modified—with the Board plan claiming such changes would result in net savings of $123 million—or less than half the savings target announced by the government. Puerto Rico’s House plans to commence its public hearing process on tax reform next Wednesday.

A Sunny Post Chapter 9 Municipal Future? In San Bernardino, California, six Mayoral candidates on Tuesday offered their qualifications for the position, their plans to improve transparency and participation at City Hall and their vision for downtown before a number of citizens—but also an online audience: Mayor Carey Davis, Councilman John Valdivia, City Clerk Gigi Hanna, businesswoman Karmel Roe, general engineering contractor Rick Avila, and San Bernardino school board member Danny Tillman spoke about the city’s future, with Ms. Roe describing the post-chapter 9 municipality as “one big fix and flip,” describing the city as one which has the resources, money, and energy to cure its ails. Mr. Avila said he would run the city like a business and leave politics out of City Hall; while school board member Tillman explained his plan to increase outside investment by making San Bernardino safer and more visually appealing. Ms. Hanna, who has been twice elected to her current position, stated: “People know me, and people trust me…I have one of the largest Rolodexes in town, and I’m not afraid to use it.” Interestingly, the two veterans of the city’s long ordeal into and out of chapter 9 municipal bankruptcy, Mayor Davis and Councilmember Valdivia kept their distance while sharing their respective accomplishments as city leaders, with Mayor Davis touting his leadership in guiding the city through chapter 9 municipal bankruptcy, implementing a new city charter, hiring reputable city officials, and reducing crime—or, as he sought to frame his candidacy: “I’m a proven leader who delivers results.” Each candidate endorsed more participation in local government. Ms. Roe, a regular at City Council meetings, said she would be a “servant leader,” adding: “We cannot build this city divided.” Mr. Avila and Clerk Hanna noted San Bernardino’s negative reputation among prospective business owners, while School Board Member Tillman said the $30 million surplus Mayor Davis mentioned was not a surplus, but rather “money we haven’t spent on things we need.” Their presentations come as voters head to the primary election on Tuesday, June 5th, to select leaders for the city’s post plan of debt adjustment future.

 

The Fiscal Challenges of Exiting from Fiscal Oversight

April 23, 2018

Good Morning! In this morning’s eBlog, we return to Michigan to assess the unbalanced state of its municipal public pension and post-retirement health care obligations, before turning to the state’s largest city, Detroit, which appears to be on the brink of earning freedom from state oversight—marking the remarkable fiscal exodus from the largest chapter 9 municipal bankruptcy in American history. Then we return to Puerto Rico, a territory plunged once again into darkness and an exorbitant and costly set of fiscal overseers. 

Imbalanced Fiscal Stress. In the Michigan Treasury Department’s first round of assessments under a new state law, the Treasury reported that 110 of 490 local units of government across the state are underfunded for retiree health care benefits, pension obligations‒or both. That number is expected to increase. Nineteen municipalities in Wayne County, including Allen Park, Dearborn and two of the five Grosse Pointes (Farms and Woods), are behind on their retiree health care funding, the state says, as well as six Wayne County jurisdictions, including Redford Township, Trenton, Wayne and Westland are underfunded on both, as are Hazel Park, Oak Park, and Madison Heights in Oakland County. The state fiscal oversight effort to highlight the expanding obligations competing for scarce taxpayer dollars in the state which is home to the largest chapter 9 municipal bankruptcy in American history, the result of the state’s “Protecting Local Government Retirement and Benefits Act,” Act 202, which was enacted last December, marks a pioneering effort to put tighter local data to detect and assess the likelihood of severe fiscal distress—kind of a municipal fiscal radar—or, as Michigan Deputy Treasurer Eric Scorsone, who is the designated head of the State and Local Finance Group,  describes it: “By working together, we can help ensure the benefits promised by communities are delivered to their retirees and help ensure that the fiscal health of communities allows them to be vibrant now and into the future,” Eric Scorsone, deputy state treasurer and head of Treasury’s State and Local Finance Group, put it: “This is just a start. One of the common denominators of the financial crisis has been legacy costs. We know this is a big liability out there”—and it continues to grow for current and retired public employees, as well as their counterparts in public schools, whose districts are not covered by the new state law. In an era featuring longer lifespans, the unfunded liability of the Michigan Public School Employees Retirement System totaled $29.1 billion, or 40.3 percent, at the end of FY2015-16—an aggregate number, the likes of which have not been previously available at the municipal level. Now, under the new statute, a municipality’s post-retirement health care plan is deemed underfunded if its assets are “less than 40 percent” of its obligations, or require annual contributions “greater than 12 percent” of a jurisdiction’s annual operating revenues. A pension plan is deemed underfunded if it is “less than 60 percent funded,” or its annual contributions are “greater than 10 percent” of annual operating revenues. The new state mandates require the state’s panoply of cities, villages, townships, counties, and county commissions to report pension and retiree health care finances by the end of January. (Municipalities whose books close later could be included in future lists.) The aim is to underline the fiscal need to local elected leaders to do something the federal government simply does not do: reconcile reconciling long-term obligations with current contributions and recurring revenue—that is, not only adopt annual balanced budgets, but also longer term. The new state law, an outgrowth of the Responsible Retiree Reform for Local Government Task Force, is intended to enhance transparency and community awareness of local government finance, as well as to emphasize that failure to account for such obligations could negatively impact municipal bond ratings—effectively raising the costs of capital infrastructure. Indeed, as East Lansing City Manager George Lahanas stated last week, “The city’s pension plan was 80 percent funded in 2003 and is 50 percent funded today…The city has implemented numerous cost-controlling measures over the years to address the legacy cost challenges…City officials have identified that more aggressive payments need to be made moving forward to further address the challenges.”

Nevertheless, in one of the very few states which still try to address municipal fiscal disparities, the Michigan Senate General Government subcommittee met last week and reported (Senate Bill 855) its budget recommendations, including for revenue sharing, the subcommittee matched the Governor’s recommendation, which eliminate the 2.5% increase cities, villages, and townships received this year—a cut, ergo, of some $6.2 million for FY2019; the Senate version retained the counties current year 1% increase (which the Governor had also recommended removing) and added another 1% to the county revenue sharing line item—with the accompanying report language noting the increase was intended to ensure “fairness and stability” across local unit types, since counties do not receive Constitutional revenue sharing payments.  Estimates for sales tax growth related to Constitutional payments anticipate an additional 3.1% next year for cities, villages, and townships, distributed on a per capita basis. 

Moving into the Passing Lane? The Legislature’s actions came as the Detroit Financial Review Commission has approved the Motor City’s Four-Year Financial Plan, setting the stage for the city’s exit from direct state supervision as early as this month, enabling the city with the largest chapter 9 municipal bankruptcy in U.S. history to glimpse the possibility of exiting state oversight—or, as Detroit CFO John Hill put it:  “Today’s FRC approval of the City’s 2019 budget and plan for fiscal years 2020-2022, is another key milestone in the city’s financial recovery: It demonstrates the continued commitment of city leaders to prepare and enact budgets that are realistic and balanced now and into the future. It also demonstrates continued progress toward the waiver of active State oversight, which we expect will occur later this month.” The Commission is scheduled to meet at the end of this month for a vote to end state fiscal oversight, albeit the Commission would remain in existence, so that it could be jump started in the event of any reversal in the city’s fiscal comeback. Thus, Mr. Hill said there would likely be a memorandum of understanding between Detroit and the Commission to lay out the kinds of information the city would need to provide to the Commission for review, as he noted: “They still can at any time decide to change the waiver, although we hope and will make sure that doesn’t happen.” Mr. Hill noted that the now approved financial plan includes Mayor Mike Duggan’s budget for FY2019, as well as fiscal years 2020-2022—and that the Motor City now projects ending the current fiscal year with an operating surplus of $33 million: that would mark Detroit’s fourth consecutive municipal budget surplus since exiting from the nation’s largest ever chapter 9 municipal bankruptcy. He also noted that, as provided for under the city’s plan of debt adjustment, Detroit continues to put aside funds to address the city’s higher-than-expected pension payments, payments starting in 2024, when annual payments of at least $143 million begin. Payments of $20 million run through 2019 with no payments then due through 2023.

Unbalanced Budgets & Power–& Justice. Although they are still evaluating the impact that a new reduction of their budget would have, Puerto Rico’s Judicial Branch has expressed apprehension with regard to the PROMESA Board’s imposed cuts, with Sigfredo Steidel Figueroa, Puerto Rico’s Director of the Office of Court Administration, expressing apprehension: “At the moment, we are evaluating the impact that the proposals of the Fiscal Oversight Board, contained in the fiscal plan published yesterday, could have on the Judicial Branch,” referring to the Board certified plan of staggered cuts for the Judiciary—cuts of $31.9 million, rising to a cut of $161.9 million by 2023. He noted: “In the light of the measures already taken, any proposal for additional reduction to our budget is a matter of concern. Therefore, we will remain vigilant to ensure that the Judicial Branch has the resources it needs to ensure its efficiency and that any budgetary measures taken do not affect the quality of judicial services and the access to justice that corresponds to all the citizens and residents of Puerto Rico,” as he stressed that, “At present, even with the budgetary limitations of recent years, the Judicial Branch has managed to draw and execute the work plan defined by the presiding judge, Maite D. Oronoz Rodríguez, for an increasingly more judicial administration—one of efficiency, transparency, and accessibility.” He added:An independent and robust judiciary is essential to guarantee the legal security necessary for the stability and economic development of Puerto Rico.”

PROMESA Board Chair Jose Carrion, at the end of last week, issued a warning: “We hope the government and the legislature will comply. We don’t want to sue the government, but we have to fulfill the duties that we understand the law gives us.” That is to write that in this fiscal governance Rod Serling Twilight Zone, somewhere between chapter 9 municipal bankruptcy and hegemony; there is an ongoing question with regard to sovereignty, autonomy, and, as they would say in Puerto Rico, al fin (in the end): who is ultimately responsible for making decisions in Puerto Rico? We have a federal, quasi U.S. bankruptcy judge, a federal oversight board, a Governor, and a legislature—with only the latter two representing the U.S. citizens of Puerto Rico.

And now, in the midst of a 21st century exodus of the young and educated to Florida and New York, it appears that banks are joining this exodus—threating, potentially, to further not only isolate Puerto Rico’s financial system—a system in which the number of consumer banks has dropped by half over the past decade, and in which two of the largest, Bank of Nova Scotia and Bank of Santander SA, have been quietly shrinking—the challenge of governance and fiscal recovery as Puerto Rico seeks to emerge from recession and rebuild after last year’s Hurricane Maria, a small number of financial institutions could end up in charge of deposits and lending for its 3 million citizens. Poplar, Inc., First Bancorp/Puerto Rico, and OFG Bancorp, are cash rich and have many branches, but these financial institutions appear to have limited ability to facilitate trade beyond the Caribbean and Florida—and, as economist Antonio Fernos of the Interamerican University of Puerto Rico notes: “What would really be negative is if we lose access to the network of international banks.” The U.S. territory, once was an attractive place for banks to invest, with pharmaceutical manufacturing driving growth, meant that financial institutions entered and opened what had been scarce financing for everything from homes and cars to consumer electronics. However, as Congress changed the rules which had incentivized pharmaceutical companies to locate there—and as Congress moved to make it more attractive to provide shipping to other Caribbean nations, rather than the U.S. territory, many drug companies departed. Today, in the wake of a decade-long recession, Puerto Rico’s economy is 14% smaller, and the emigration of college graduates to the mainland appears to have accelerated—leaving behind the elderly and those who could not afford to leave—increasing a crushing public pension burden, while imposing greater fiscal burdens to serve an increasingly elderly and poor population left behind—and left with over $120 billion in debt and pension liabilities, and now, in then wake of Maria’s devastation, a spike in mortgage delinquency.