The Governance Responsibility to Protect a City’s Children

October 10, 2018

Good Morning! In this morning’s eBlog, we report on the physical and fiscal challenges of the Detroit Public Schools, before zooming south to assess whether the complex municipal financing in Puerto Rico’s recovery has perhaps exacerbated the U.S. territory’s debt challenges.

Protecting a City’s Children. A key challenge in Detroit’s plan of debt adjustment from the nation’s largest chapter 9 municipal bankruptcy was restoring trust in its public schools—a critical step if families with kids were going to move from the suburbs into the emptied city. That, of course, required making the schools not just trustworthy places for learning, but also safe—and not just safe from a gang perspective, but especially here from water contamination—Flint, not so far away, after all, is on many parents’ minds. Thus, the school district is developing plans to make drinking water safe inside its buildings, especially after a review of testing data shows one school had more than 54 times the allowable amount of lead under federal law, while another exceeded the regulated copper level by nearly 30 times. The Detroit News reviewed hundreds of pages of water reports for 57 buildings which tested for elevated levels of lead and/or copper in the water to provide a detailed look how excessive the metal levels were in the most elevated sources.

The News effort comes as Detroit Public School Superintendent Nikolai Vitti noted: “‎We discontinued the use of drinking water when concerns were identified without any legal requirement to do so, and hydration stations will ensure there is no lead or copper in all water consumed by students and staff, with the Superintendent yesterday reported the system expects to spend nearly $3.8 million enacting a long-term solution to widespread lead and copper contamination in students’ drinking water, with the cost including $741,939 to install 818 hydration stations and filters, $750,000 for water coolers until completed installation of the stations in the summer of 2019, $539,880 for environmental remediation costs, $1.2 million for maintenance services, and $282,000 for facilities maintenance—a tab unanimously approved yesterday by the Detroit Community Schools Board, with long-term plan to get drinking water flowing again inside the 106 Detroit schools after faucets were turned off ahead of the school year. The announcement followed Monday’s by Supt. Vitti, when he reported that he and the school board will reveal corporate funders for some $2 million in hydration stations he wants to install across the district.

The need, as the survey revealed, is urgent: among the elevated levels reported by the Detroit Public School District includes a kitchen faucet inside Mason Elementary-Middle School which had more than 54 times the amount of lead permitted the Safe Drinking Water Act; a drinking fountain inside Mark Twain School for Scholars was tested at more than 53 times the federal threshold; a drinking fountain on the first floor near the kitchen of Bethune Elementary-Middle School that had copper levels at nearly 30 times the permissible level—even as DPS officials still await the test results of 17 more buildings. Nevertheless, from the results so far, there is a failing grade: more than half of the 106 schools inside Michigan’s largest school district have contaminated water. Indeed, with EPA recommending lead limits of 15 micrograms per liter or 15 part per billion, water samples at Mason found extreme elevations of lead at Mason, Twain, Davis Aerospace Technical, and Bagley, and extreme levels of copper at Bethune Academy of the Americas elementary-middle school and Western International. Unsurprisingly, public health and water safety experts report that schools should use a tougher standard for lead levels, and nationally recognized Virginia Tech water expert Marc Edwards said: “Those are not good. There is no doubt there are worrisome lead levels: Whenever you take hundreds of thousands of samples in a school, you are going to get some results that are shockingly high.” At a Board of Education meeting last month, Superintendent Vitti said the most practical, long-term, and safest solution for water quality problems inside the schools would be to provide water hydration stations in every building—systems currently used in public school districts, including in Flint, Royal Oak, and Birmingham, as well as Baltimore: these stations, in addition to cooling water, more importantly remove copper, lead, and other contaminants.

Drinking water screening reports demonstrate that water was collected at some schools in April and others in August, with school district officials reporting sampling began in the district in the spring and continued through last August. In September, Superintendent Vitti said that DPS, through its environmental consulting firm, ATC Group, is following EPA protocol for collecting water samples, adding: “If testing occurred at a school after the regular school year, then it was done during summer school, where nearly 80 of our schools were offering classes,” adding that many of the schools with high levels had already identified for concern two years ago—and that those were the first group of schools to move to water coolers. Supt. Vitti initiated water testing of the 106 school buildings in May and August after initial tests results found that 16 schools showed high levels of copper and/or lead. Another eight tested for elevated levels in the spring after they were identified with concerns in 2016. Last month, the DPS District received more test results, which found an 33 additional schools with elevated contaminant levels, bringing the total number of schools with tainted water to 57 in a District already overwhelmed by some $500 million in building repair needs; moreover, the bad gnus could worsen: the total number of schools with high levels could increase as school officials await more test results on another 17 schools.

Dr. Mona Hanna-Attisha, noted for her expertise in Flint, who is a pediatrician and public health expert, concurred that Detroit’s policymakers need to set a much more aggressive limit on allowable amounts of lead in schools. In addition, Michigan Department of Environmental Quality’s school sampling guidance recommends that schools address fixtures which measure above 5 micrograms per liter, the same EPA standard as bottled water, according to Dr. Hanna-Attisha; the American Academy of Pediatrics recommends an action level of just 1 microgram per liter for drinking water in child care facilities and schools. Thus, as Dr. Hanna-Attisha warns: “This should be the District’s action level,” in a letter she co-authored with Elin Betanzo, founder of Safe Water Engineering, a consulting firm—a letter with which Superintendent Vitti said he agrees.

Dr. Hanna-Attisha, who witnessed lead levels in some Flint homes reach 22,000 micrograms per liter, said U.S. EPA school sampling guidance encourages schools to sample every drinking water tap a single time unless lead is detected at greater than 20 micrograms per liter, noting: “One low single tap sample is not sufficient to clear a tap as a potential source of lead, because lead release is sporadic.” Her words come with the benefit of her experience and practice as an associate Professor of Pediatrics at the Michigan State University College of Human Medicine, as well as Director of the MSU-Hurley Children’s Hospital Pediatric Public Health Initiative. She adds: “It is not appropriate to use a single low sample that was taken as a follow-up to a high sample to conclude that a drinking tap is ‘safe to drink,’ although this is how many schools have interpreted sampling data.” Dr. Joneigh Khaldun, the Director and Health Officer for the Detroit Health Department, said she recommends parents of children 6 and younger be tested for blood lead levels, because of the Motor City’s history of elevated levels for children, which has been primarily due to lead paint in homes, adding that the elevated rates in the tests were concerning: “I think, broadly speaking, I support Dr. Vitti in testing every water source in every school…For any school that comes back with elevated lead levels, the actual reasons for that school is not clear. It can be the infrastructure or the drinking fountain. Providing bottled water and other sources is the right thing to do.”

According to Michigan health officials, children are at higher risk of harm from lead, because their developing brains and nervous systems are more sensitive. Lead can cause health problems for children, including learning problems, behavior problems including hyperactivity, a lower IQ, slowed growth and development and hearing and speech problems. That risk is not just physical, but also fiscal: A key part of Detroit’s chapter 9 plan of debt adjustment approved by the U.S. Judge Steven Rhodes was its focus on the importance of provisions to give incentives for families to move back to the Motor City‒a difficult parental choice in the wake of, four years ago, the Detroit News investigation which reported that nearly 500 Detroit children had died in homicides since 2000.

Notwithstanding the terrible health tragedy in Flint, Michigan has no rules mandating the state’s school districts to test for lead in their water supply, according to the Michigan Department of Environmental Quality. According to the GAO, at least eight states require schools to test for lead, and many others assist with voluntary testing. Dr. Khaldun said she supports creating a state law to mandate testing of water sources inside schools—a proposal which would entail substantial costs, creating the query: who will pay—and how?

According to Tiffany Brown, a spokesperson for the Michigan Department of Environmental Quality, the Department supports any schools which wish to test, and the Department can offer technical assistance and general information on sampling, result interpretation, and recommended remedial actions in the event of elevated lead and/or copper results, adding that there are fiscal resources “available through the Michigan Department of Education,” and that the Michigan Department of Environmental Quality is providing information and guidance on best management practices for drinking water in schools to protect the health of students and staff.” In the meantime, the Detroit Public School District is spending $200,000 on bottled water and water coolers for the next several months, with the cost to have stations in every school, one for every 100 students, projected to be $2 million, with Dr. Vitti noting the goal is to deliver clean water, not replace the pipes, or as he put it: “We are not looking to replace the plumbing. The stations address the issue of older plumbing along with weekly flushing.”  

Unequal Treatment? The Financial Oversight and Management Board in Puerto Rico reports that over reliance on outside consultants with conflicts of interest and the failure to invest in a competent workforce have imposed huge costs on and severely weakened the Puerto Rico Electric Power Authority (PREPA) and other Puerto Rico government agencies, with the report including an entire chapter just on interest rate swap agreements, a complicated and high risk investment which, it estimates, has cost Puerto Rican government entities nearly $1.1 billion when they repeatedly bet the wrong way on interest rate movements—meaning that, instead of these investments reducing Puerto Rico’s debt, government entities, including PREPA, had to take on more debt to pay for the losses. It appears that the swaps, a novel means of transactions to Puerto Rico’s Government Development Bank (GDB), where officials made these interest rate bets, or, as the report found, many of the GDB Board members who were required to approve the swap transactions, “were not familiar with the mechanics and risks associated with swaps. Many told us outright they could not describe how a swap worked. Instead, the GDB Board members told us they relied on the advice presented to them by the swap advisor.” That appears to denote that the GDB board members effectively ceded control over their investments in these very risky financial instruments to a third-party swap advisor—an advisor  that earned, and will garner fees for as long as the government of Puerto Rico continued to invest in the swaps, regardless of the outcome—an outcome in this case which entailed enormous losses. Moreover, the report demonstrated that, more generally, as the financial condition of Puerto Rico deteriorated, the deals became more complex and less transparent. An example of the utility PREPA’s overreliance on an outside restructuring advisor, AlixPartners, to lead PREPA’s debt restructuring negotiations with its municipal bondholders, as well as developing PREPA’s business plan and savings initiatives, revealed that PREPA paid Alix Partners $45 million in fees for a debt restructuring deal which was ultimately rejected by the PROMESA Oversight Board, which found the proposed financial agreement called for PREPA to pay more debt than the economy of Puerto Rico could support, and as the Puerto Rico Energy Commission found that the review lacked appropriate due diligence over the ongoing fees for legal counsel, financial advisors, and underwriters that would have accrued had the PREPA restructuring deal moved forward: the Commission specifically noted that the restructuring team charged with ensuring the reasonableness of advisor fees “includes the very advisors whose fees are in question…that is not the arm’s-length relationship necessary to protect consumers from excess fees.”

Investment in Good Governance. For elected state and local leaders, over reliance on consultants can go hand-in-hand with a failure to invest in the technical capacity and expertise of government staff. As noted by a Kobre & Kim report prepared on the evolving fiscal situation in Puerto Rico, PREPA has suffered over the years from a high degree of political interference, including the appointment of hundreds of political appointees to managerial and technical positions without regard for qualifications—appointments which appear to have not only cost considerably from a fiscal perspective, but also weakened the managerial competence of the agency. However, instead of recognizing this reality and implementing labor reforms designed to sharply curtail the influence of political appointees within the agency, the PROMESA Board has instead sought an across-the-board salary freeze and benefit cuts, even as the Board recognizes that PREPA has lost 30% of its workforce since 2012 and has severe shortages of skilled workers in key areas—and that it has developed no plan for workforce training and development, effectively seeming to force PREPA to continue to depend on consultants, rather than build its own expertise.

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The Challenging Transition in the Wake of a State Takeover

September 25, 2018

Good Morning! In this morning’s eBlog, we report on the likely extension of the Garden State takeover of Atlantic City, because, as one of our most respected and insightful fiscal experts there, Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, put it: it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period. That is, Mr. Pfeiffer believes continued state oversight will be a positive for Atlantic City municipal bondholders, because it assures more fiscal discipline will be in place—or, in his own words: “You are going to have ongoing stability while the state is involved…The city will have to show that it can stand on its own.”

The Steep Road to Municipal Fiscal Recovery. In the wake of a release of a new state report, “Atlantic City, Building a Foundation for a Shared Prosperity,” [64-page report]  released by New Jersey Gov. Phil Murphy’s administration, a report recommending continuation of the almost two-year-old state takeover of Atlantic City’s finances, that state governance now appears likely to last a full five years, due to “longstanding challenges” to New Jersey officials, as recommended by the Governor’s office. While the Governor, in his campaign, had, as part of his platform, a commitment to terminate the state takeover of Atlantic City, now, three-quarters of a year after taking office, the Governor appears likely to leave the state takeover in place—indeed, possibly for an additional three years.

The Murphy Administration has released a plan to assist the city to get back on its fiscal feet, a plan which benefited from input from numerous study groups, task forces, and committees, as well as a redirection of some state government funds to youth programs, and a training program for municipal department heads; that plan does not end the takeover; rather the report recommends keeping the takeover in place for the full five years called for under the 2016 law, unless signal fiscal and financial improvement is put in place before then, including the significant reduction or total elimination of Atlantic City’s reliance on state aid—or, as Gov. Murphy put it: “We had a pretty clear-eyed sense of what the challenge was…That doesn’t mean Atlantic City doesn’t need the state, that the state won’t continue to stay the course and be a partner. We’re not going away; we’re going to go out and executive this plan.”

Under New Jersey’s state takeover law gave the state broad powers, including the right to overturn decisions of the city council, override or even abolish city agencies and seize and sell assets, including Atlantic City’s much-coveted water utility. The statue empowers state overseers, in addition, to hire or fire workers, break union contracts, and restructure Atlantic City’s debt, most of which was done to varying degrees, although no major assets have been sold off.

What Is the City’s Perspective? Atlantic City Mayor Frank Gilliam has conceded the uncomfortable governance challenge under the takeover, which was initiated in November of 2016 by former Governor Chris Christie, but he notes that Gov. Murphy’s administration has been willing to listen to concerns and work with city officials, even as it has retained the final governing say-so.

How Can a State Transition Governance Back to a City? Unlike under a chapter 9 municipal bankruptcy, where a federal bankruptcy court has the final say in approving (or not) a plan of debt adjustment under which governance authority reverts back to a municipality’s elected leaders, a state takeover lacks a Betty Crocker cookbook set of instructions. Gov. Murphy’s quasi-emergency manager, Jim Johnson, whom the Governor named to review Atlantic City’s transition back to local control, said the state administration should remain in place for an additional three years, unless Atlantic City’s reliance on state aid has been “substantially reduced or eliminated” and that its municipal workforce is on “solid footing.”  Under the provisions of the state takeover, enacted shortly after Atlantic City nearly defaulted on its municipal bond debt, the state was empowered to alter outstanding debt and municipal contracts—or, as Mr. Johnson wrote: “Atlantic City has a set of fiscal, operational, economic and social challenges that will only be resolved with significant direction from, and partnership with the State.”

Focus on the Fiscal Future. Mr. Pfeiffer said it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period, adding that the continued state oversight will be a positive for Atlantic City municipal bondholders, because it will assure greater fiscal discipline will be in place, or, as he put it: “You are going to have ongoing stability while the state is involved: The city will have to show that it can stand on its own.”

The report outlines a series of recommendations such, as:

  • the importance of diversifying Atlantic City’s economy beyond casinos,
  • providing increased training for senior municipal workers, and
  • purchasing data that can better track city services.

Mr. Johnson also urged Atlantic City to redirect Casino Reinvestment Development Authority funds into new development projects and toward providing increased financial support for youth programming.

Transitioning Back to Local Control. Atlantic City Mayor Frank Gilliam noted: “The citizens of Atlantic City deserve to have their local elected officials control their destiny…I am very optimistic that this is a huge step in the right direction for Atlantic City and its future.” Mr. Johnson, who was a primary challenger to the Gov. two years ago, was named after that election as a special counsel to review the state’s oversight of Atlantic City—and he came somewhat prepared thanks to his previous service as a U.S. Treasury Undersecretary for enforcement under former President Bill Clinton.

Gov. Murphy, who had been critical of the state takeover during his gubernatorial campaign, and who had criticized former Gov. Chris Christie’s administration for implementing it without support from former Mayor Donald Guardian, noted: “This is a community that needs the state’s help as a partner, not as a big-footing jamming down, taking away—you know, taxation without representation,” adding: “That doesn’t mean that Atlantic City doesn’t need the state, that the state isn’t going to stay the course and be a partner.” The Governor, soon after assuming office, had removed former Gov. Christie’s designated takeover manager Jeffrey Chiesa as the state designee to oversee the state role in Atlantic City. It should be noted, as we have previously, that Mr. Chiesa forged a number of settlements on owed casino property tax appeals and effected a $56 million reduction in Atlantic City’s FY2017 budget. All of which brings us back to the wary fiscal trepidation of Mr. Pfeiffer, because Atlantic City’s debt is still in the high risk range so favored by some casino players in the city: a CCC-plus from S&P Global Ratings and Caa3 from Moody’s Investors Service.

Post Municipal Bankruptcy Futures

September 21, 2018

Good Morning! In this morning’s eBlog, we report on the unsafe conditions of Detroit’s public schools, and dismissal by the Trump administration for self-government in Puerto Rico, and, a year after Hurricane Maria’s devastating strike on Puerto Rico and underwhelming federal response, the U.S. territory’s continued inequitable status.  Unlike in corporate bankruptcies, in municipal bankruptcies, the challenge is not how to walk away from accumulated debts, but rather how to fiscally resolve them.  

Detroit’s Future? In Detroit, where, last week, organizations gathered at the Marygrove College campus to announce a new cradle-to-career educational partnership, including a state-of-the-art early childhood education center, a new K-12 school, and the introduction of an innovative teacher education training modeled after hospital residency programs; Superintendent Nikolai Vitti has announced the closure of thirty-three more schools because of high levels of copper and/or lead, bringing the total number of schools with tainted water to 57 buildings. The Superintendent’s warning noted: “Of the results just received, 33 of 52 schools have one or more water sources with elevated levels of copper and/or lead…This means that 57 of 86 schools where test results have been provided have one or more water sources with elevated levels of copper and/or lead (this does not include the previous 10 Di-Hydro schools where copper and/or lead was detected).” He added the results were incomplete: the district is still awaiting results for 17 schools. He noted: “As you know, drinking water in these schools was discontinued as we await water test results for all schools. Although the kitchen water has only been turned off in schools where levels were determined high, we have been using bottled water to clean food in all schools: As a reminder, we have not used water to cook food in our kitchens for some time and instead have delivered pre-cooked meals to students. We plan to install filters for kitchen sinks to remedy challenges in kitchens.” Last week, the Superintendent, in a state hyper aware of the physical and fiscal threats of contaminated or unsafe water, that a $2 million water station system would address water quality issues, and School Board Member Deborah Hunter-Harvill confirmed, in the wake of the tests: “We completed our community meeting, and we’ve taken down recommendations and suggestions to make certain our kids are safe.” But who will finance the corrections is unclear: School Board member LaMar Lemmons said he supports spending $2 million to fix the water problems, and he continues to blame the state for neglecting school buildings during a decade of state control, which ended in 2017: “Under the $2 billion (spent) for new school construction and renovation, they did a terrible job. There is no excuse for these schools to not have been maintained.” Supt. Vitti said the most practical, long-term, safest solution for water quality problems inside the schools would be water hydration stations in every building, system currently in use in Flint, Royal Oak, Birmingham and in Baltimore, he noted, adding, in an email earlier this week: “Moving forward, we will continue to use water coolers district-wide and are actively working through the bid processes to make a recommendation to the board for the use of hydration stations. This will occur within the next couple of weeks. The hydration stations would be installed in all schools by next school year and replace the need for water coolers.”

The health apprehension came in the wake of, just days before the first day of class at the beginning of this month, the Superintendents’ decision to shut off drinking water inside all 106 school buildings after finding, in an initial check at 6 schools, high levels of copper and/or lead. The checks themselves are costly: they require stations in every school, one per every 100 students, with a resulting tab of $2 million, after taking into account stations in faculty rooms and gymnasiums, according to Supt. Vitti, who stated he intends to provide information to the Detroit School Board to consider next month, noting that, if the funds are approved, the system could be installed in the next school year. The delay comes at a physical and fiscal cost: the school district is spending $200,000 on bottled water and water coolers for the next several months, with Supt. Vitti reporting the cause of the water contamination is likely the result of the aging of the system’s public infrastructure, as well as older plumbing systems, warning that lower usage of water due to smaller enrollment sizes can lead to copper and lead buildup. Because DPS’ schools were built for use by thousands of students, the sharp decline in attendance has adverse effects, and, as the Superintendent noted: “The reality is our schools are vastly different: some are new, some are old. Some have outdated systems, some have outdated sinks and plumbing,” adding he had consulted with the Governor’s office, the Michigan Departments of Environmental Health, as well as Dr. Mona Hanna-Attisha, whose critical leadership exposed the Flint lead water crisis, noting: “They have provided lessons on Flint. They gave the recommendation for me to think about piping in general and a long-term solution.”

Despite the tragedy and ongoing Flint related litigation, Michigan has no rules mandating that public school districts test for lead in their water supply. That means, according to the Superintendent, that there are even newer schools built within the last decade which have water-quality issues, noting these problems could be blamed on inadequate piping or non-code compliant piping, adding he had i initiated water testing of DPS’ 106 school buildings last spring, with the testing evaluating all water sources, from sinks to drinking fountains—but learning that the actual source of the contamination remains uncertain—albeit the school system’s widespread infrastructure problems are likely causes: last June, a district report said it would cost $500 million to repair its buildings. The district has said it needs $29.86 million to repair or replace plumbing, according to the facilities report, not related to the current water problems.

Physical & Fiscal Recoveries. Maria was the worst storm to hit Puerto Rico in nearly a century: nearly 3,000 Americans lost their lives, according to a study commissioned by the Puerto Rican government. The storm devastated the economy: thousands of small businesses have been shuttered; some big businesses are leaving, and, in a demographic omen, the exodus of the young, productive population has accelerated. Over the last year, the island’s economy has contracted by 7.6%, according to the latest fiscal plan prepared for PROMESA Board. 

American Inequality. Puerto Rico Gov. Ricardo Rosselló this week asked President Trump to recognize that “Puerto Rico’s territorial status is discriminatory and allows for the unequal treatment of natural-born U.S. citizens.” In his letter to the President, coming one year in the wake of the devastating fiscal and physical impact of Hurricane Maria, the Governor wrote that Puerto Rico’s territorial status had negatively affected post-Maria recovery efforts, noting: “As we revisit all that we have been through in the last year, one thing has not changed and remains the biggest impediment for Puerto Rico’s full and prosperous recovery: the inequalities Puerto Rico faces as the oldest, most populous colony in the world.”

Gov. Rosselló, who campaigned on the promise of promoting statehood for Puerto Rico, added in his letter that FEMA’s bureaucratic processes—processes in which Puerto Rico has no say—had worked to delay disaster recovery, writing: “The ongoing and historic inequalities resulting from Puerto Rico’s territorial status have been exacerbated by a series of decisions by the federal government that have slowed our post-disaster recovery, compared to what has happened in other jurisdictions stateside.” He requested that the President reconsider a State Department request to dismiss a case in the Inter-American Commission on Human Rights with regard to the U.S.’ international responsibility regarding Puerto Rico’s status—a case in which the Commission is investigating complaints that the United States is violating the human rights of its citizens in Puerto Rico, because they lack the same political rights as other U.S. citizens, including the right to vote for President unless they relocate to one of the states or the District of Columbia, and, because they have no voting representation in the Congress. The Governor added he felt “compelled to respectfully address the most egregious errors in a [State Department] missive,” which sought to dismiss Puerto Rico’s concerns, noting, especially, the Department’s reference to Puerto Rico as a “self-governing territory,” rather than what the Governor believes is really a “territorial colony,” noting that defining Puerto Rico as self-governing “ignores that Congress often uses its plenary powers over the territory to impose a multitude of federal laws without the Commonwealth’s residents having any voting representation in the U.S. Senate and only a single Resident Commissioner in the U.S. House of Representatives, who cannot vote on the floor of that chamber.” He also disputed the State Department’s assertion that Puerto Ricans are not “banned” from voting for President, writing: “[T]he only way for U.S. citizens from Puerto Rico to vote in such an election and be counted is to leave Puerto Rico. If that is not a ban, then what is?” He further wrote that the current governance upholds an “inherently racist logic that deem the people of Puerto Rico as inferior and unable to fully participate in the institutions of democratic governance.”

The letter also touches on two referenda which statehood supporters have won in Puerto Rico, but that have not been deemed official results by the Department of Justice. The most recent, in 2017, was boycotted by local opposition parties, and the ballot never received final DOJ approval.  While that referendum only had a 23% participation rate, the pro statehood vote was an overwhelming 97%.

Gov. Rosselló added his apprehension in the wake of the U.S. Justice Department’s non-approval of Puerto Rico’s 2017 referendum, noting that “after the legislature even amended the format of the vote to meet the recommendations of the U.S. Justice Department,” the Trump administration had nevertheless “failed” to certify the ballot. Thus, he noted that asking an international body to dismiss its complaint was tantamount to asking it to “turn a blind eye to an inconvenient truth, that Puerto Rico remains the unfinished business of American democracy.” Finally, Gov. Rosselló ended his letter with an appeal to President Trump’s leadership, asking him to “work together to abolish this century old territorial-colonialism once and for all: Statehood for Puerto Rico is not only about realizing Puerto Rico’s full potential. It is about America living up to its most noble values by creating a more perfect Union.” (The Trump Administration has advised the Inter-American Commission on Human Rights (IACHR) that if Puerto Ricans want to vote for President, nothing prevents the government of Puerto Rico from calling for a referendum to determine the position of its residents regarding candidates for the U.S. Presidency—a referendum which, however, would be symbolic.)

The apparent position of the Trump Administration reflects its views that Puerto Ricans, in addition to being able to participate in Presidential primary elections, they may also, according to Kevin Sullivan, the U.S. Deputy Representative to the Organization of American States (OAS), organize and vote in presidential elections. Thus the U.S. representative asked the inter-American tribunal to dismiss the independent complaints filed by lawyer Gregorio Igartua and former governor Pedro Rossello alleging that the lack of participation of Puerto Rico’s residents in Presidential and Congressional elections represents a violation of their human and civil rights. Secretary Sullivan, who asserted that the government of Puerto Rico maintains a “broad” self-government, in a recently disclosed communication from the end of last June, maintained that within the colonial relationship with the U.S. territory, there are some electoral processes related to the federal government. Within this group of electoral processes, he thus sought to highlight as significant the ability for Puerto Ricans to vote in those for presidential primaries, as well as for its non-voting delegate in the U.S. House of Representatives.  Nevertheless, Secretary Sullivan recognized Puerto Ricans’ first vote in favor of statehood via the June 2017 plebiscite, describing that vote as having launched a process of requesting statehood before Congress, which outcome the “United States cannot predict.”

Puerto Rico Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Member of Congress, said she would have preferred the recognition of the undemocratic nature of the territorial status, and that statehood remains as “the only viable political status with a relationship with the United States, not territorial and not colonial.”

Puerto Rico Progressive Party representative Jose Aponte noted that it seemed unfortunate “at this point” that the federal government intends to develop some theory with regard to Puerto Rico’s self-government, especially in the wake of enacting the PROMESA law, thereby imposing the PROMESA Board, likening it to colonialism, and emphasizing what he views as Secretary Sullivan’s specious claim in which he advises Puerto Rican leaders that Puerto Ricans, “if they wish…are also free to move to any state,” noting: “It is hypocritical to hide the fact that they have a regime in which we cannot govern with the faculties and minimum rights that any human being deserves.”

Promising Good Gnus? Even if perceived by many Puerto Ricans as colonial overseers, the PROMESA Board, acting in a quasi-Emergency Manager role, such as Kevyn Orr did in putting together and managing the plan of debt adjustment for Detroit, is offering some hope for fiscal promise, as the Board is poised to lift its fiscal forecast and predicting a budget surplus in the wake of the recovery from the devastating Hurricane Maria, predicting a cumulative surplus, prior to debt payments, of in excess of $20 billion through 2058, or 500% greater than its quasi plan of debt adjustment certified by the PROMESA Board last June. PROMESA Board Executive Director has indicated that plan will be certified “in the coming weeks,” adding: “The changes in the fiscal plan will come from new data in actual FY18 revenue and expense figures, budget to actuals, and disaster spending.” Earlier last summer, the PROMESA Board, in certifying the most recent fiscal plan, had estimated that Puerto Rico would have a cumulative surplus of about $4 billion over the next four decades; the new projection, incorporating higher than expected disaster aid and tax receipts, would lift that projection to more than $20 billion.

Puerto Rico’s Fiscal & Governing Twilight Zone

August 28, 2018

Good Morning! In this morning’s eBlog, we consider the shaky promise of PROMESA for the U.S. territory of Puerto Rico, an entity somewhat in Rod Serling’s Twilight Zone between a state and a municipality.

A Fiscally Appealing Chapter 9 case? U.S. Representatives Raul Grijalva (D-Az.) and Nydia Velasquez (D-N.Y.) yesterday warned the U.S. First Circuit Court of Appeals that House Natural Resources Committee Chairman Rob Bishop’s (R-Utah) interpretation of the PROMESA statute to be legislation intended to offer special protections to creditors or limit the restructuring of the debt through the judicial route was erroneous, arguing, in an amicus brief in the case brought by AMBAC against Puerto Rico and the PROMESA Oversight Board that “the purpose of PROMESA was not to grant to the creditors of Puerto Rico, including the bondholders, special protections that other municipal creditors do not have, nor to avoid losses to those creditors.” In addition, they argued for rejection of the interpretation that the Congressional statute for the restructuring of the public debt of Puerto Rico by judicial means had been established as the last resort of the Promesa law. Ranking Member Rep. Raul Grijalva (D.-Az.) indicated that the statute simply requires Puerto Rico to make “good faith efforts to achieve a consensus restructuring with creditors” prior to filing a petition through the courts. The two Members noted: “Neither the legislative record, nor the legal text supports an interpretation of PROMESA that gives creditors greater rights than those of a traditional reorganization at the expense of debtors’ rights.”

Potholes in the Motor City Road to Recovery & un Federalism in Puerto Rico

eBlog

July 20, 2018

Good Morning! In this morning’s eBlog, we consider some of the post chapter 9 municipal bankruptcy challenges Detroit confronts, before returning to some of the legal, governing, and judicial challenges to Puerto Rico’s fiscal recovery.

The Potholes in Recovering from Municipal Bankruptcy. Five years out from the nation’s largest ever chapter 9 municipal bankruptcy incurred in the wake of accruing some $14 billion in long-term debt, the city’s plan of debt adjustment has unrolled in a sparkling fashion, especially downtown and around Michigan Central Station. Just under 40% of jobs in Detroit are deemed high skill—higher than the surrounding neighborhoods—and especially valuable in a city which, unlike most, boast an income tax. Nevertheless, median income, at about $56,000 is the lowest in the nation among major metropolitan regions. And the sorry state of the Detroit Public School system continues to discourage families with kids to move from the city’s suburbs into the city: in excess of 90% of eighth graders lack proficiency in math and reading.

A key to the recovery has been the auto industry—and major foundations, including the Kresge, Ford, and the Community Foundation of Southeast Michigan—all of which contributed to the so-called “grand bargain” in the city’s chapter 9 plan of debt adjustment approved by Judge Steven Rhodes—an adjustment which brought in hundreds of millions of dollars to safeguard pensions and preserve the city’s jewel in its crown: the Detroit Institute of Art. Moreover, since then, foundations have contributed great sums to workforce training in Detroit, retail revival, human welfare services and more—as well as for-profit corporations, such as JP Morgan Chase, which has been pumping $150 million into the city to support a variety of efforts from retail to job training. Moreover, millennials and empty-nesters have moved downtown: in the past few years, a trickle of newcomers has swelled to a flood, meaning what, on the city’s first day in chapter 9 municipal bankruptcy when it was unsafe to walk downtown, is, today, an area of dozens of new residential developments, which have been built or are underway in the greater downtown, from the revival of classic skyscrapers like the David Whitney Building and Broderick Tower to new construction like the Auburn and DuCharme Place. If anything, an urban challenge confronting city leaders today is the escalation of rents—forcing questions with regard to displacement.

Changing the Premise of PROMESA? In the wake of Judge Laura Swain Taylor’s rulings, there appears to be increasing pressure in Congress to revise or repeal the Puerto Rico Oversight, Management, and Economic Stability Act [PROMESA], after a the Judge suggested the U.S. government could be liable for cuts to bond values mandated by the PROMESA Oversight Board. U.S. Court of Federal Claims Chief Judge Susan Braden issued her opinion [Altair Global Credit Opportunity Fund et al. v. The U.S. Court of Federal Claims, No. 17-970C, July 17, 2018, in the case filed by investment funds against the U.S. government concerning defaulted employment retirement system bonds. Judge Braden’s signal that she was inclined to rule in favor on the claims drew reactions from members of the Puerto Rico Task Force of the Congressional Hispanic Caucus—or as U.S. Rep. Darren Soto )D-Fl.) put it: “This ruling exposes additional problems with the PROMESA act…It may also be a catalyst to support a reform or repeal to provide Puerto Rico full bankruptcy rights.”

Rep. José Serrano (D-N.Y.), who was born in Mayagüez, Puerto Rico, agreed that the opinion may have an impact on Puerto Rico; however, he was uncertain it would be for the better—rather, he seemed apprehensive Judge Braden’s opinion placed the interests of creditors in front of those of the citizens of Puerto Rico—American citizens, noting: “By making the U.S. government liable for Puerto Rico’s debt, the court has essentially determined that bondholders can have priority over the needs of the Puerto Rican people: This would force the federal government to make the hedge funds whole, rather than focusing on the true intent of PROMESA: helping Puerto Rico get on a sustainable economic and fiscal path. We have to make sure the people of Puerto Rico come first.” In stark contrast, Manal Mehta, founder of Sunesis Capital, agreed the ruling would help bondholders, but he saw this as a positive. “The plaintiffs had to get over the hurdle to show this is actually a claim against the federal government to get to federal claims court. This is a solid win for creditors,” noting: “It looks like the court made the correct decision, as the Lebron [legal case] test emphasizes ‘federal control’ to determine whether something is ‘federal’ for takings purposes, and it’s clear Congress controls the [PROMESA] Oversight Board, as it appoints it: So there’s now a takings route for creditors, at least in situations where the PROMESA Oversight Board/government has wiped out prepetition collateral, and it’s unlikely to be overturned.” Put more starkly, he added: “Until final adjudication, this ruling strikes a dagger at the heart of the legitimacy of the Oversight Board: I suspect that this will lead Congress to remove and reappoint members of the Oversight Board in a manner that is consistent with the appointments clause of the U.S. Constitution as well as modify Title III of PROMESA to ensure that the federal government does not become liable for creditor claims.”

In her decision, Judge Swain wrote that the PROMESA Oversight Board was part of Puerto Rico’s government, not the federal government. Reminiscent of the old question ‘Who’s on first and what’s on second, Judge Braden’s ruling reached the opposite conclusion, likely, as New York Congresswoman Nydia Velázquez put it: “There’s a good chance this ruling will be appealed.”

Federalism?  Just when the House Popular Democratic Party (PDP) minority joined the suits against the PROMESA Board, Rafael Cox Alomar, a former Popular Resident Commissioner candidate, said that there appears to be consensus in federal court regarding the fact that the territorial clause grants the U.S. Congress absolute powers over the island: “The environment is completely different, and it is an environment where the theory that Congress has plenary powers, powers that are basically unlimited seems to be growing. In other words, the colonial character of the relationship has been reaffirmed,” he added, asserting that he believe the U.S. Supreme Court has established that the Commonwealth of Puerto Rico does not have its own sovereignty with regard to double jeopardy cases, noting: “I do not think that, in the current environment, arguing that PROMESA is unconstitutional or that the Board does not have the power to do this, or that…or that Congress cannot get involved in legislating in internal affairs without the consent of Puerto Ricans, will be very successful,” suggesting “a new model based on the sovereignty of Puerto Rico is what is needed.”

Adding to the matter, the Popular Democratic Party caucus yesterday filed suit in federal court questioning the constitutionality of the creation of the PROMESA Board, as well as the alleged usurpation of powers, making it the third case filed in the wake of the PROMESA Board’s failure to certify the budget approved by the Legislative Assembly facing the breach of the agreement reached with Governor Ricardo Rosselló Nevares, which included repealing the Law of Unjust Dismissal (Law 80-1976) as a requirement to, among other things, retain the Christmas bonus of public employees.

Indeed, the courtroom is in a traffic jam: last week, Governor Ricardo Rosselló Nevares sued the Board for usurpation of his authority, while, in a separate lawsuit, the Legislative Assembly argued an excess of authority on the part of the PROMESA Board—or, as House Member Rafael “Tatito” Hernández put it: “The Board wants to rule, wants to legislate, and wants to establish public policy in Puerto Rico without being democratically elected. It does not have that power, and it does not result from any clause in PROMESA Law. We are not challenging PROMESA; we are specifically challenging the Board.”

The Fiscal Challenges of Federalism

July 13, 2018

Good Morning! In this morning’s eBlog, we consider the legal, governing, and judicial challenges to Puerto Rico’s fiscal recovery, before turning to the very different kinds of fiscal recovery challenges confronting Wilkes-Barre, Pennsylvania.

Who Is Preempting Whose Power & Authority? Yesterday, the PROMESA Oversight  Board requested dismissal of Gov. Ricardo Rosselló Nevares’ suit in which he is charging that the Oversight Board has usurped his power and authority, with the Board asking the federal court to issue an injunction to prevent such action, noting in its filing: “Although PROMESA relies in the sole discretion of the Board, two major policy instruments that exist, the fiscal plan and the budget, and the law expressly empowers the Board to formulate and certify them…the Governor questions whether PROMESA preserves to the government the political powers and of government to make policy decisions.”  In response, the Board asserted that the Governor’s claim lacks merit, asserting that the law provides that the Board has the final say with regard to budget and tax issues, writing: “The provisions to which the Governor objects are not recommendations in the sense of §205 of PROMESA,” with that response coming just minutes after the U.S. requested—for a second time—its insistence on the “Constitutionality of the PROMESA statute. In a motion filed Wednesday, U.S. Justice Department Assistant Attorney General Thomas Ward advised Judge Laura Taylor Swain that two recent decisions upon which Puerto Rico had relied were not pertinent to the legal issues at hand. Promise law.

In a motion filed Wednesday, Assistant U.S. Attorney General Thomas G. Ward and Jean Lin of the Justice Department asserted before Judge Taylor Swain that two recent U.S. Supreme Court decisions presented by the Aurelius Management Investment Fund were not relevant to the critical issues at hand, after, earlier this week, the Fund had provided the Judge with two U.S. Supreme Court decisions which, it asserted, affirm its perception of the statute, as it continues to argue before the federal court that the actions of the PROMESA Board are null and void, because the members of the Board without the consent of the Senate as required by the U.S. Constitution, referencing two recent U.S. Supreme Court decisions, Lucia v. SEC and Ortiz v. United States, where, in the former case, the court, last month, determined that a higher ranking SEC official should have been appointed to his position based on the Appointments Clause of the US Constitution, while, in the Ortiz decision, the Supreme Court held that it has jurisdiction to review decisions of the Armed Forces’ appellate courts—claims which the Justice Department described as incorrect, since such decisions only support his argument that the appointment clause of the U.S. Constitution does not apply to members of the PROMESA Oversight Board—or, as the Justice Department brief put it: “A finding that the clause applies to territorial officials would not only face this historic practice, but would also challenge the current governance structures of the territories and the District of Columbia that have been in place for decades,” adding to that Congress has full authority over its territories—authority which is not subject to the “complex” distribution of the powers of the government provided by the U.S. Constitution.

Last week, Gov. Rosselló had charged that the PROMESA Oversight Board has been trying to make policy decisions that the PROMESA law does not grant it authority to make, as he had petitioned Judge Swain to mandate that the Board to answer the complaint or motion to dismiss by yesterday. His attorneys stated: “The court should expedite resolution of this case to address the injury to the Commonwealth and its people occurring every day due to the Board’s attempt to seize day-to-day control of Puerto Rico’s government.” Even though the PROMESA Board asked for more time, Judge Swain ruled in favor of the Governor’s request—so, the complex federalism sessions are scheduled to resume on the 25th, when the quasi bankruptcy court will entertain oral arguments, possibly including participation by Puerto Rico Senate President Thomas Rivera Schatz and House President Carlos Méndez Núñez, who filed a similar suit against the board on July 9th, asserting that the PROMESA Board was preempting the legislature’s rightful powers. Thus, even the Board and the Governor have generally been in agreement this year in their fiscal plans, the Board has insisted its policies must be followed—with its proposed quasi plan of debt adjustment showing a surplus of $6.5 billion from this fiscal year through fiscal year 2023.

In the suit, Gov. Rosselló quotes from Judge Swain’s opinion of last November and order denying the PROMESA Board’s motion to replace the then-chief executive of the Puerto Rico Electric Power Authority with the board’s own appointee, with the opinion noting: “Congress did not grant the [Oversight Board] the power to supplant, bypass, or replace the Commonwealth’s elected leaders and their appointees in the exercise of their managerial duties whenever the Oversight Board might deem such a change expedient.”

Mayor of Wilkes-Barre Asks State for Financial Assistance. Mayor Tony George, whose city is confronting a $3.5 million deficit in the upcoming fiscal year, is seeking financial assistance under Pennsylvania’s program for distressed communities, the Financially Distressed Municipalities Act, approval of which request would mean the municipality would be eligible for loans and grants through the state Department of Community and Economic Development. The move came as Standard & Poor’s placed the city’s “BBB-” rating on CreditWatch with negative implications, in the wake of Mayor George’s petition to the Pennsylvania Department of Community and Economic Development, with the Mayor warning the city faces an estimated $3.5 million deficit next year and in the coming years despite efforts to place Wilkes-Barre on sound financial footing with its participation in Pennsylvania’s Early Intervention Program. The credit rating agency added it will gather more information before making a determination that could make it more expensive for the city to borrow money at higher interest rates, noting: “We expect to resolve the CreditWatch status within 30 days. We could lower the rating if we believe that the city’s credit quality is no longer commensurate with the rating. However, if we believe it does remain commensurate with the current rating, we could affirm the rating and remove it from CreditWatch.” Should the credit rating be downgraded, it would be the second time during Mayor George’s administration, after, a year ago last May, S&P lowered the rating to “BBB-” from “A-” because the city’s cash flow was constrained and was relying on borrowing to make ends meet. City officials are tentatively scheduled to hold a conference call with S&P on August 7th—by which time the state is expected to have made its decision on declaring the city distressed.

Under that state statute, municipalities may also restructure debt. If the Mayor’s request is granted, the state will appoint a financial adviser to design a financial recovery plan for the city—one of the nation’s oldest, having been inhabited first by the Shawanese and Delaware Indian and (Lenape) tribes, so that it was in 1769 that John Durkee led the first recorded Europeans to the area, where they established a frontier settlement named Wilkes-Barre after John Wilkes and Isaac Barre, two British members of Parliament who supported colonial America. At the time, these settlers were aligned with colonial Connecticut, which had a claim on the land that rivaled Pennsylvania’s. Indeed, armed Pennsylvanians twice attempted to evict the residents of Wilkes-Barre in what came to be known as the Pennamite-Yankee Wars, so that it was not until after the American Revolution, in the 1780s, that a settlement was reached granting the disputed land to Pennsylvania. A century later, the city’s population exploded in the wake of the discovery of anthracite coal, an explosion so powerful that the city was nicknamed “The Diamond City:” hundreds of thousands of immigrants flocked to the city. By 1806, it was incorporated as a borough; it became a city in 1871—as it gradually became a major U.S. coal center, and an early home to Woolworth’s, Sterling Hotels, Planter’s Peanuts, Miner’s Bank, Bell Telephone, HBO, Luzerne National Bank, and Stegmaier. But the coal which once contributed so much to the city’s growth, subsequently let it down: not only were there terrible mine disasters, but also the country began to switch to other energy sources. So, the city where Babe Ruth knocked one of his longest ever homes runs is, today, at risk of striking out at the plate.  The city, which a dozen years ago celebrated its 200th anniversary, is now seeking assistance via the state’s Act 47, with the Mayor citing—as additional factors, the lack of cooperation with area unions and his own City Council. He appears to be of the view that there was no other alternative to help stabilize the city’s finances other than filing for status under Pennsylvania’s Act 47 for Distressed Municipalities, noting: “My goal is to bring the city forward, and we’re stifled.”

In Pennsylvania there are four general methods of oversight used to aid local governments: Intergovernmental Cooperation Authorities, which are used with Philadelphia and Pittsburgh; ƒ School district assistance, which can come in the form of technical assistance, or schools which can be deemed in Financial Watch Status or in Financial Recovery Status; Early intervention program for municipalities before Act 475; and Act 47, or Pennsylvania’s Municipalities Financial Recovery Act of 1987.  What Is Pennsylvania’s Act 47? We will go into more depth about Act 47 because that is the program for which Wilkes-Barre recently applied. We also touch on the special consideration taken for Pittsburgh and Philadelphia as it relates to Act 47 as we close this commentary. The Pennsylvania Municipalities Financial Recovery Act of 1987, or Act 47 as it is commonly called, is an assistance program to help Pennsylvania municipalities after they file and are officially designated as “distressed.” Many states, such as the commonwealth of Pennsylvania, generally believe that the status of one of its municipalities can affect others throughout the state. This is even set forth in writing in PA’s Act 47, which states: “Policy—It is hereby declared to be a public policy of the Commonwealth to foster fiscal integrity of municipalities so that they provide for the health, safety and welfare of their citizens; pay principal and interest on their debt obligations when due; meet financial obligations to their employees, vendors and suppliers; and provide for proper financial accounting procedures, budgeting and taxing practices. The failure of a municipality to do so is hereby determined to affect adversely the health, safety and welfare not only of the citizens of the municipality but also of other citizens in this Commonwealth.”

How Does a Pennsylvania Municipality Become Part of Act 47? The Municipalities Financial Recovery Act authorizes Pennsylvania’s Department of Community and Economic Development (DCED) to validate municipalities as financially distressed. According to Act 47’s criteria, a municipality could be deemed financially distressed if it meets at least one of the following criteria: The municipality has maintained a deficit over a three-year period, with a deficit of 1% or more in each of the previous fiscal years. The municipality’s expenditures have exceeded revenues for a period of three years or more. The municipality has defaulted in payment of principal or interest on any of its bonds or notes or in payment of rentals due any authority. The municipality has missed a payroll for 30 days. The municipality has failed to make required payments to judgment creditors for 30 days beyond the date of the recording of the judgment. The municipality, for a period of at least 30 days beyond the due date, has failed to forward taxes withheld on the income of employees or has failed to transfer employer or employee contributions for Social Security; it has accumulated and has operated for each of two successive years a deficit equal to 5% or more of its revenues; and it has failed to make the budgeted payment of its minimum municipal obligation as required by §§302, 303, or 602 of the act of December 18, 1984 (P.L. 1005, No. 205), per the Municipal Pension Plan Funding Standard and Recovery Act, with respect to a pension fund during the fiscal year for which the payment was budgeted and has failed to take action within that time period to make required payments.

Pennsylvania’s Municipalities Financial Recovery Act authorizes Pennsylvania’s Department of Community and Economic Development to validate municipalities as financially distressed. Key criteria include: A municipality has sought to negotiate resolution or adjustment of a claim in excess of 30% against a fund or budget and has failed to reach an agreement with creditors; a municipality has filed for chapter 9 municipal bankruptcy; a municipality has experienced a decrease in a quantified level of municipal service from the preceding fiscal year, which has resulted from the municipality reaching its legal limit in levying real estate taxes for general purposes.  Act 47 offers aid to the commonwealth’s second class cities (defined as those with a population of 250,000 to 999,999) and below which are negatively affected by forces such as short-term swings in the business cycle, or those burdened by more harmful longer-term negative macro-economic shifts: state support or assistance is available in several forms in order to ensure municipalities can provide essential services without interruption.

Over the long-term, Act 47 is focused on balancing ongoing revenues with ongoing expenditures—and investing in the municipality so that growth occurs and, as in a chapter 9 plan of debt adjustment, a municipality can recover. The act provides state-sponsored emergency no-interest loans and grants in order to ensure distressed municipalities can continue meeting debt payments and creditor obligations. The Department appoints a recovery coordinator who creates and then leads in helping to implement a recovery plan. Unlike an emergency manager, the plan provides for a recovery coordinator, who may act as an intermediary between the Mayor and City Council–the recovery plan is similar to a plan of debt adjustment in that it details how the available assistance and other modifications will help the municipality regain its fiscal stability, including via commonwealth economic and community development programs, assistance while negotiating new collective bargaining contracts; and enhanced tax or revenue authority—a key of which is authority to levy a nonresident wage tax.  

Accounting for Municipal Futures

July 9, 2018

Good Morning! In this morning’s eBlog, we consider we consider the ongoing governance challenges in Puerto Rico—and how distinct its form of governmental bankruptcy is, before looking at some innovative efforts by Puerto Rico’s elected local leaders to institute new accounting measures.

Who’s in Charge of Puerto Rico’s Physical and Fiscal Future? U.S. District Judge Laura Swain Taylor has granted a motion by the Commonwealth to accelerate the terms of the motions and the aftershocks associated with the lawsuit filed by Gov. Ricardo Rosselló Nevares against the PROMESA Oversight Board, a judicial action which Christian Sobrino, the Governor’s representative before the Board, could be completed the end of this month, noting: “The Judge has a good appreciation of the right which will apply in the case and understands that (the dispute in the lawsuit) is a matter that is not dependent on facts, but rather on an interpretation of PROMESA statute.In the case, which was filed as an adversarial suit within the government’s quasi bankruptcy cases, Judge Swain is asked to issue an injunction and a declaratory judgment against the Oversight Board for preempting, by means of its fiscal plan and budget aims, to impose public policy decisions, rather than recommend “non-binding” recommendations. Therefore, the motion asserts the Governor does not have to comply, or, as he put it: “I think the judge appreciates how essential it is (the demand) for the government’s operation.”

The motion would appear to set a short time frame: the Oversight Board would have to respond to the demand by Thursday; responses to the motions will continue until July 20th, with the arguments considered as part of an “omnibus” hearing scheduled for July 25th in the District Court of Puerto Rico, in Hato Rey, the most densely populated neighborhood in San Juan. In his complaint, the Governor has argued that the Board is intent upon “micro administering” the government of Puerto Rico—a governing responsibility which belongs to his administration, and not to the body created by the U.S. Congress to control the finances of the government of Puerto Rico—adding that the remedy requested by the government of Puerto Rico does not imply that the fiscal plan approved by the Oversight Board last April is nullified, but rather that the so-called ‘corrective sheets’ issued by the Board, such as the suspension of the Christmas bonus, the reduction of personnel in the public service, or the consolidation of agencies, and the way in which the pension plans will be reformed, are competences of the government—not of the Oversight Board. A key sticking point, as we have noted, has been with regard to Law 80, the Law on Unjustified Dismissal (Law 80). The Board had demanded the preemption or elimination of this law, asserting it would improve the business climate in Puerto Rico—a preemption unsurprisingly opposed by legislative leaders, who had rejected an agreement between Gov. Rosselló Nevares and the PROMESA Board in which, in exchange for the repeal of Law 80, the Board would have granted a series of increases to some budget items for the new fiscal year which commenced this month. Thus, Gov. Rosselló, last Thursday, went to court to challenge the budget imposed by the PROMESA Oversight Board, claiming the Board had overstepped its authority. Moreover,

Puerto Rico Senate President Thomas Rivera Schatz said he supported the Governor’s suit against the both the Board and its proposed preemption budget, while the Board defended its authority, citing the 2016 PROMESA statute enacted, theoretically, to help the Commonwealth manage its economy and restructure its debt. In response, the PROMESA Board issued a statement: “The Financial Oversight and Management Board for Puerto Rico approved and certified a Commonwealth budget for FY2019 in compliance with the certified fiscal plan and in accordance with [the Puerto Rico Oversight, Management, and Economic Stability Act to put Puerto Rico on the road to recovery. The Oversight Board will vigorously defend against any suit attempting to thwart the carrying out of the budget and fiscal plan,”  referring to the fiscal plan it had approved on June 30th by unanimous consent and declaring it to be the valid budget for Puerto Rico—a proposed budget which allocated $8.758 billion for the General Fund and $20.664 billion for Puerto Rico’s consolidated budget—a fiscal budget intended to preempt Puerto Rico’s authority and go into effect on July 1.

Gov. Rosselló said that he would ask a court to establish that the Board’s fiscal plan and budget are recommendations—and recommendations only, adding he would seek a “declaratory judgment and an injunction” on the Board’s attempt to usurp the Commonwealth of Puerto Rico’s right to home rule by including components in the budget which control public policy—no doubt referencing the PROMESA Board’s approved budget’s elimination of funding for the government’s longstanding Christmas bonus, for a municipal aid program, and several other purposes supported by the Governor. The PROMESA Board had agreed with the Governor Rosselló to funding these items in exchange for a promise from the Governor that Puerto Rico would adopt at-will employment by rescinding Law 80; however, as we have noted, under the leadership of Senate President Thomas Rivera Schatz, the Puerto Rico Senate refused to rescind Law 80—an action which, while it led to strained relations between the Governor and Senate leader late last month, appears to have dissipated in the face of the preemptive efforts by the unelected PROMESA Board—or, as Sen. Rivera Schatz at the end of last month put it: “We must put a stop to the Napoleonic pretensions of the fiscal control board. We have and must defend the people of Puerto Rico. That’s the right thing, Governor. I congratulate you…Puerto Rico has a democratically elected government: “We don’t accept an imposed and abusive government.”

The federalism challenge came as, on June 30th, the PROMESA Board also approved budgets for the Government Development Bank, the Puerto Rico Highways and Transportation Authority, the University of Puerto Rico, the Puerto Rico Aqueduct and Sewer Authority, and the Puerto Rico Electric Power Authority—approvals upon which the Governor has not yet indicated whether he planned to challenge these budgets in court as well.

Nevertheless, the Governor has called for an extraordinary session of the Legislature in a bid to pass Law 80, the controversial labor reform bill which would modify worker protections in order to make the U.S. territory more attractive for investment—an effort the PROMESA Oversight Board has long insisted upon—a call which, at least so far, has gone begging . Nevertheless, the legislature has balked, including leaders from Governor Rossello’s own political party. Absent the reform, basic assumptions about Puerto Rico’s fiscal and governance future are unclear. The Governor, in a televised address to the Commonwealth, called for a last-ditch session of lawmakers to approve a version of the reform, noting: “I’m confident that this call for an extraordinary session will serve to avert the damage that the failure to fulfill the agreement with the Board causes to the island’s economy, as well as important sectors of our society.” Previously, both Gov. Rossello and the Board had acknowledged, reluctantly, that critical questions for the island’s future may have to be settled by a court—a settlement which the Governor apparently believes the government would stand little chance of winning, as his reading of PROMESA makes clear the Board’s power in matters of the budget, ergo, he said, compromise was critical to create a sense of predictability around Puerto Rico’s future. Nevertheless, he also said that he had signed the legislature’s budget, as opposed to an alternate version advocated by the PROMESA Board, and that, for the time being, that was the version, which is in effect: the PROMESA Board’s budget was unacceptable, he noted.

The Commonwealth has defaulted on its municipal bonds; it is confronted with $120 billion in debt and pension obligations, which it simply cannot fiscally meet. And now the question of ‘Who’s on First,” in the wake of a decade of recession and then the disparate federal fiscal and physical response to the devastation caused by Hurricane Maria—combine with the fiscal hurricane of federal preemption with the imposition by Congress of a fiscal oversight board—has made the path back to self-governance its own fiscal and governance maze.

Natalie Jaresko, the Executive Director of the PROMESA Board, stated: “The Board continues to believe that comprehensive labor reform, including the repeal of Law 80 to make Puerto Rico an at-will-employment jurisdiction, is an essential component of the reforms needed to improve the island’s economy and make the business environment more competitive.” Last Friday, at a press conference, PROMESA Board members said they viewed labor reform as essential to Puerto Rico’s transformation—demonstrating that, as opposed to governance in chapter 9 municipal bankruptcies, where, under most state laws, there is an emergency manager designated to put together a plan of debt adjustment for approval by a U.S. Bankruptcy Court; in PROMESA, it is almost as if there are too many judicial/fiscal cooks in the kitchen.

Accounting for Municipalities Futures. Even as the path to fiscal solvency is conflicted for the Commonwealth of Puerto Rico, the issue of municipal accounting is drawing constructive attention among the island’s municipalities. Mayor Carlos Delgado Altiera of Isabela, a muncipio spread over 13 wards and also known as the “Garden of the Northwest,” for its many wild flowers, and as the town of “Leaf Cheeses,” for its production of white cheese wrapped in banana leaves—and as the City of Fighting Cocks,” as it has served as a home for the breeding of these birds since the 18th century, has indicated that the issue of creating a standardized municipal accounting system “generates many questions,” so that there is an interest to acquire technology to standardize the accounting systems of the municipalities. Thus, Mayors or Alcaldes of the New Progressive Party have urged Gov. Rosselló Nevares to veto a measure (Senate 550) authored by Senate President Thomas Rivera Schatz, which seeks to impose a unique accounting system in the municipalities. The rejection of the so-called Senate 550 Project has also been joined by the popular municipal executives: the consensus is that such a change would represent a setback and an unnecessary and impossible economic investment for most municipalities—or, as Mayor Javier Jiménez of San Sebastian put it: “The Governor was being asked to veto that project, because, definitely, centralizing again (those functions) would create a tremendous problem for us,” noting that, in recent weeks, he has met with some 20 mayors, both popular and penepés (supporters of statehood): all are opposed to the measure. The Mayor argued that each municipality has already developed an accounting system, which meets their needs.

Indeed, it seems that for several mayors, the measure has come as a surprise, even more so when the Senate President had become their ally on other issues, such as the elevation to the constitutional rank of municipal autonomy and the development of measures aimed at having the State consult them with regard to the approval of exemptions and charges that adversely impact their collections. Mayor Jiménez explained that, in the past, the Office of Municipal Affairs was the body in charge of operating the accounting systems for the island’s municipalities. However, given the inability to maintain an updated system and in line with the progress, the mayors had been permitted to contract and use that technology that would meet their needs—or, as Mayor José A. Santiago of Comerío put it: “I cannot understand how, after so many examples of the problems caused by centralization: let us walk in the opposite direction to what should be the strengthening of local governments.” Under the proposal, which would be implemented through a contract with a private company, a requisite, so that the municipalities could access advanced services and reduce the risk of loss of essential services and municipal revenues, such a service would also give them the flexibility they need to adapt to the advances and challenges. The proposed Municipal Revenue Collection Center (CRIM) would become the entity charged, as the founders are of the perception that manymunicipalities do not have the way to know with certainty how much money they owe in municipal contributions, the debts between the different funds or their cash balances, or how many businesses have started or stopped operating in recent years.” The effort, the founders note, is necessary, because the “state government does not have the economic resources to develop such a large technology, the immersion of the private sector is of crucial importance,” with Isabel Mayor Carlos Delgado noting that among the island’s 78 municipios, a number simply lack the requisite technology and management experience.

In a letter sent to the Governor signed by the executive director of the Federation of Mayors, Mayor Isabelo Molina Hernandez, and signed by Federation President Carlos Molina Rodríguez, they wrote:The Federation of Mayors does not endorse the project…It promotes unnecessary centralization and negatively affects the public policy of greater municipal autonomy.”

According to the measure, a September 2016 report from Puerto Rican Office of the Comptroller, the “vast majority of municipios failed to comply” with the criteria considered in the components of computerized systems, such as physical security and environmental controls, logical access control and control of computers, among others.” Mayor Hernández argued that municipios are subject to oversight by the Office of the Comptroller, Government Ethics, the Federal Inspector General, as well as external audits; thus, he added, if the central government wishes to have additional tools to provide greater access to the public, it can develop an information system in which municipalities publish their financial information.