In the Wake of the Storm

October 2, 2018

Good Morning! In this morning’s eBlog, we report on the recent one-year anniversary of Hurricane Maria’s fiscal and human destruction in Puerto Rico, trying to learn from the incredible New York Fed experts about the fiscal and physical recoveries, before journeying north to assess the state of Atlantic City’s fiscal recovery in the wake of its state takeover. Then we swing south (again) to assess the serious and fiscally challenging costs of ongoing racial segregation in the St. Louis metropolitan region.

Un Ano Duro. Jason Bram and Joelle Scally of the exceptional Liberty Street Economics team at the New York Federal Reserve, writing about the U.S. Territory’s year of hardship in the wake of Hurricane Maria nearly one year ago, described the most destructive storm to slam Puerto Rico in 90 years. They wrote that: “Maria, combined with Hurricane Irma, which had glanced the island about two weeks prior, is estimated to have caused nearly 3,000 deaths and tens of billions of dollars of physical damage. Millions went without power for weeks, in most cases months. Basic services—water, sewage, telecommunications, medical care, schools—suffered massive disruptions. While it is difficult to assign a cost to all the suffering endured by Puerto Rico’s population, we can now at least get a better read on the economic effect of the storms.” In their marvelous post, the dynamic duo examined a few key economic indicators in an effort to gauge the adverse effects of the storms and the extent of the subsequent rebound—not just for Puerto Rico, but also for its various geographic areas and industry sectors. In addition, they examined data from the New York Fed Consumer Credit Panel to assess how well households held up financially and what effects the home mortgage foreclosure and payment moratoria had, noting that, overall, even when the hurricanes struck, the island’s economy had already been “struggling with a decade-long slump and a fiscal crisis.” Thus, they noted that from the outset, the hurricanes “exacerbated a complex pre-existing problem: a population, economy, and tax base that were all in decline.” They estimated that in last year’s fourth quarter, nearly 200,000 Puerto Ricans left Puerto Rico for the mainland—noting that, according to the Puerto Rico Institute of Statistics, about 72,000 had returned by last April—leading them to guesstimate that, as of last June, about 100,000 had returned. They guesstimate a net decline at 100,000—still a 3 percent drop in the population, which had already fallen by about 12 percent (500,000) since peaking in 2005, writing: “Over the years, Puerto Rico’s population loss has contributed to a feedback loop: a lack of economic opportunity and jobs spurs out-migration, which further undermines the island’s economic prospects. Even before the storm, private-sector employment had contracted by about 12 percent since 2005. In the month after Maria, it tumbled another 7 percent…but it has since recovered significantly: as of August 2018, private-sector employment had rebounded by 5 percent from the post-storm trough and was down 2 percent from its pre-storm levels—still a “sizable drop,” but considerably less than the decline seen after some similar disasters.

With regard to overall wage and salary income, which they describe as an even more telling measure of economic vitality than employment, they wrote that those two factors took a much bigger hit than employment during and right after the storm, albeit, they found, income has since rebounded more substantially, reaching new highs early this year: average wage and salary income for these job-holders was up about 7 percent—more than 5 percentage points above the 1.6 percent rise in the CPI. However, while they found that overall employment has reversed much of its steep initial post-hurricane drop, they wrote that some regions and industry sectors have fared much worse than others, noting that, in terms of industries, the post-Maria trends have largely, but not entirely, followed typical patterns after major natural disasters. Thus they determined that the leisure and hospitality industry was one of the hardest hit‒and has been one of the slowest to recover—especially the accommodation segment, where employment plunged more than 20%—unsurprising, in that there has been such a marked decline in tourism; but they found that retail trade employment has also been hit very hard, as have education and health care services. Given the awesome storm destruction, they did find that construction employment has surged nearly 25 percent since Hurricane Maria struck—and, mayhap more surprising, professional and business services, where there has been sturdy job creation since the hurricanes—particularly in waste management and remediation.

In examining income and salary climbs, the dynamic duo determined that the main contributing factor to be the construction industry, where average pay per worker soared more than 50 percent in the first quarter from a year earlier—writing that even though construction represents only about 4 percent of private-sector employment, that surge was sufficient to raise the average substantially—especially compared to other jobs. Large, average pay outside the construction sector was still up moderately in early 2018.

Nevertheless, in assessing whether Puerto Rican workers are really better off this year than before Maria, outside of construction workers, they found that construction jobs may be going to non-Puerto Ricans: relief and rescue workers from the mainland; they also determined that there are fewer jobs in lower-wage sectors, such as restaurants and retailers, and more jobs in higher-paying industries like professional and business services—meaning there “would appear to be fewer job opportunities for many of the more vulnerable low- to moderate-income Puerto Ricans.”

They noted that local employment data, as of the end of last March, finds a “very mixed picture of the recovery:” whereas San Juan had recovered from almost all of its post-hurricane job losses by last March, nearby municipios were not far behind; however, results for other cities were mixed: they noted that Ponce, Caguas, and Mayaguez had all sustained steep job losses right after Hurricane Maria, but that Ponce’s job count had rebounded almost fully by March, whereas Mayaguez experienced partial recovery. In nearby Vieques, they reported that, as of last March, employment was still down about 40%, and that in the interior, about 20%. They wrote that it was too early to be able to assess what the resulting population changes are for the more isolated municipios.

The authors also examined mortgage payment and foreclosure moratoria impacts from the super storm in the territory, where all real property is subject to taxation, except for property which serves as a primary residence and is valued at less than $150,000, because, in the wake of the storm, a key concern had been that many homeowners would fall behind on their mortgages and possibly face foreclosure. The authors discovered some good gnus: because a number of temporary policies were implemented to provide ill-fated homeowners time to recover, including forbearance on mortgage payments, as well as a suspension of late fees and credit reporting, and a potential loan modification to avoid a big jump in payments when the forbearance ends, in addition to a moratorium on new foreclosures; those governmental actions appeared to achieve their intended aims.

Using the New York Fed Credit Panel data set, constructed from Equifax credit report data which offers insight into mortgage balances and payment behavior, both in Puerto Rico and on the mainland, they determined that, because the moratoria prevented the reporting of delinquencies for participating mortgages on credit reports, mortgage delinquency has been “muted in Puerto Rico, dropping substantially before returning roughly to the pre-storm trend. The foreclosure moratorium had the intended effect of stopping foreclosure starts: new foreclosures on credit reports went to nearly zero in the quarters after the storm, before a small uptick in the second quarter of 2018,” estimating that the total value of payments skipped during the three quarters following the storm was “at least $335 million, which we interpret as a short-term loan to mortgage-holders. Guidance on how these skipped payments will be handled has varied by lender and loan type, but a mortgage modification or a smaller second loan to be paid over the term of the mortgage are likely treatments.” Thus, the Fed noted it believed these moratoria appear to have achieved their intended effects. Nevertheless, and notwithstanding that achievement, they did not feel confident that the territory’s economy is out of the woods, writing: “First, the fiscal, economic, and infrastructure problems that were so prevalent before the hurricanes still loom. Second, much of the recent rebound in economic activity is being driven by federal aid, insurance payouts, and massive reconstruction activity—stimulus that is likely to continue for a while, but not indefinitely. Still, some credit for the economic rebound must go to the people of Puerto Rico, who have shown tremendous fortitude during this incredibly difficult year. We will continue to monitor developments across the various sectors on the island in the coming months; stay tuned to this blog for a more detailed picture of Puerto Rico’s household debt situation.”

No Longer Rolling the Die for Atlantic City’s Fiscal Future. In the wake of a release by New Jersey Governor Phil Murphy’s administration of a 64-page report recommending continued state oversight and control of Atlantic City’s fiscal future through the fall of 2021 of the state Municipal Stabilization and Recovery Act, a report which Moody’s deemed a  credit positive,  with Moody analyst Douglas Goldmacher writing that State control has had a strong, positive impact on Atlantic City’s financial position, “which remains weak,” adding: “Without continued state oversight, the city’s ability to continue making substantial fiscal improvements is dubious.” Mr. Goldmacher noted that under state intervention, Atlantic City resolved long-standing tax appeals by casinos and reduced the city’s number of employees—affecting both its payroll and long-term public pension liabilities. At the same time, the state also reduced the city’s transitional aid and increased its Consolidated Municipal Property Tax Relief Act revenue, which Mr. Goldmacher said would create greater reliability with state funding and a more predictable revenue stream.

The Garden State’s five-year quasi-takeover under its Municipal Stabilization and Recovery Act began in November 2016 under former Gov. Chris Christie, just after Atlantic City nearly defaulted on its debt and appeared on the verge of chapter 9 municipal bankruptcy, and is scheduled to endure through . Now, this thorough and comprehensive report focuses on a framework for moving forward—a framework providing a direction for the city, where success will be measured by focusing on the details and establishing processes to move forward—and to effectively implement.  Among key recommendations:

  • Frameworks need to be reinforced for the structure to be operational. The multi-party nature of the proposed coordinating structures requires strong, consistent leadership and attention to project management to make sure the different groups move forward, have meetings, and communicate regularly. They will also need to efficiently resolve the inevitable differences and turf disputes.
  • Because the plan involves so many parties, time and attention must first be paid to get them to the right tables and gain consensus on the plan; or agree on modifications consistent with the themes. Participants must be “on the island” or otherwise engaged in some manner.
  • The proposed ExecCouncil must regularly meet and its members spend the time and attention necessary to execute the plans. It must establish clear, efficient and timely decision-making and dispute resolution processes. Staff must be assigned to manage coordination and reporting on all the different efforts.
  • Breaking down silos and coordinating across multiple parties requires time and attention. The parties must make the necessary resource commitments for the effort to succeed. Slacking should not be tolerated and be promptly addressed by appropriate leaders. Maintaining momentum is critical, especially after the first rosy blush of initial meetings. The report could not address the historic and underlying challenge of the City: the need for the City’s political infrastructure; the parties, ward leaders, factions, civic associations, and political influencers to come together and align themselves to ensure that the plans are executed. Turf, power, and personality differences must be put aside or compromised if the efforts are to succeed. That will take commitment and expenditure of political and social capital to align these disparate groups.

Moody analyst Douglas Goldmacher wrote: “State control has had a strong, positive impact on the city’s financial position, which remains weak: without continued state oversight, the city’s ability to continue making substantial fiscal improvements is dubious.” Mr. Goldmacher noted that under state intervention, Atlantic City resolved long-standing tax appeals by casinos and reduced its total number of employees—even as New Jersey reduced the city’s transitional aid and increased its Consolidated Municipal Property Tax Relief Act revenue, actions which Mr. Goldmacher wrote would create greater reliability of state funding, as well as a more predictable revenue stream. He noted that, notwithstanding a surge in net cash and an improving reserves under state control, the city’s adjusted fund balance is still near zero. Atlantic City did receive a $108 million lift in 2017 thanks to tax appeal settlements with its casinos. The city’s quasi emergency manager appointed by the Governor, Jim Johnson, laid out a long-term fiscal future in the state’s report—a report which included recommended changes to municipal governance and developing a master plan for redevelopment—one recommending the city diversify its local economy beyond casino gambling.

With regard to revenues and taxation, Mr. Goldmacher urged a focus on the city’s “decimated tax base” and the fact that New Jersey’s Casino Reinvestment Development Authority has partial jurisdiction over many properties which could be developed, adding that he believed ongoing state involvement would make it “far more likely” that Atlantic City and the Authority could coordinate redevelopment efforts. The city, which currently has some $223.6 million of outstanding municipal bond debt, is rated Caa3 by Moody’s with a positive outlook, and CCC-plus with a stable outlook by S&P Global Ratings. Mr. Goldmacher noted: “While the continued oversight is a credit positive, the city is far from being financially secure…The report, which has received preliminary approval from the Governor and is being reviewed in detail, lays out a strong vision for the future. But the devil is in the details, and it remains for the city, state, and CRDA to demonstrate that they can turn this vision into a sound plan.”

The Fiscal Arch. The City of St. Louis has issued FY2018 construction permits for projects valued at $1.14 billion, levels setting a new high; indeed, In FY 2018, St. Louis issued 5,396 building permits for projects totaling $1,142,040,378 in value, a $528 million increase over the previous fiscal year, or, as Mayor Lyda Krewson noted: “These numbers are very encouraging. It shows that developers, investors, and business leaders are bullish on St. Louis…It’s exciting to see that attitude reflected in not just in words, but in actions.  I love seeing all the construction dumpsters around town.” The building permits issued include new construction and rehabs of both residential and commercial property, in addition to smaller permits for alterations or additions. The FY2018 permits also reflect some major projects underway, including the new St. Louis University hospital campus, Ballpark Village Phase II, and St. Louis Community College’s new Center for Nursing and Health Sciences. In addition, large-scale construction projects, and small- and medium-scale rehabs have also been a significant source of development over the past year: of the 7,322 housing units issued permits, 86% are located in rehabilitated buildings. Moreover, development has not been limited to the central corridor: 17 wards across the city exceeded the total building permit value compared to the previous fiscal year.

Nevertheless, not all has changed since the National Governors Association, long ago, convened for its annual meeting there: both in and beyond its city limits, there remain signs of economic decline and ongoing racial segregation: opportunities for the city’s predominantly African-American residents appear grim: while gangs appear not to be especially a problem, drugs and gun violence are. Last weekend, six citizens were slain; nevertheless, while FBI statistics show the national rate of violent crime fell by 0.9% last year, and the murder rate declined by 1.4%, St. Louis last year experienced 205 homicides—the highest murder rate of any big city in the U.S.—more challenging for its leaders: almost all of the city’s homicides take place in just a few neighborhoods: a police plot via a heat map of crimes in St Louis finds clusters of glowing red dots which demonstrate that murders typically occur close to each other, in the same distressed streets in the north. While that would seem to suggest an ability to provide a more focused and efficient response, the city’s Commander of Investigative Services, Major Mary Warnecke, notes: “We do have a homicide rate we’d love to see smaller,” but she describes a host of fiscal and physical obstacles, including: lack of staff, long-running social and economic hardships, use of drugs, and overly lax gun laws, as well as criminals who skip over the Mississippi River to nearby Illinois—which make improvements intensely difficult. She reports that her detectives clear only a dismal 52% of their murder cases, a slight gain on the past few years—in part because they rely heavily on the co-operation of witnesses, who may, unsurprisingly, not be forthcoming. Major Warnecke said her overworked 33 homicide detectives officially have 4.8 cases each, but low clearances mean cases, like bodies, pile up.

Three years ago, the headquarters created a “real time crime center”, a collection of screens to relay images from cameras all over the city, letting police monitor for trouble. Pictures are matched with reports from Shotspotter—lots of microphones in public places which record sounds of gunshots. These are instantly analyzed, letting police know precisely where and what type of weapons are in use. Police would like access to drones for better aerial footage; however, local regulations do not permit them.

Not Fiscally Petering Out. Standard & Poor’s has raised Petersburg, Virginia’s credit rating from a BB to BB+–with a positive outlook, marking the second consecutive year in the historic municipality’s fiscal recovery from near chapter 9 municipal bankruptcy. S&P’s Timothy Barrett and Nora Wittstruck, after, last year, receiving a special tour, outlining the various economic opportunities and challenges within the city, this year followed up with a conference call, where, as Mr. Barrett put it: “We go through an economic update, a capital plan update, a debt update, a managerial update, and a policy practice update. I think in particular with [Petersburg], we concentrated on detailed updates on the financial progress.” Thus the S&P dynamic duo noted that a large part of S&P’s decision to raise Petersburg’s credit rating came from the city’s improved fund balance, with Mr. Barrett noting: “From our standpoint, usually the higher the reserves, the better the budgetary flexibility.” Petersburg, which came closer to filing for chapter 9 municipal bankruptcy than any other municipality in the Commonwealth, has budgeted fiscal resources to continue rebuilding the fund balance; it has set a goal of building the balance back up to equal 10% of the city’s general fund—demonstrating, as Mr. Barrett put it: “One of the reasons why we continue to have a positive outlook on the city is in part because they have set those goals and outlines for themselves,” adding that the city’s actions to clear out its backlog of unpaid bills was a contributing factor to the rating upgrade—or, as Ms. Wittstruck noted: “They have essentially caught up in all those past due obligations…We regarded that as a big step in the right direction.”

Nevertheless, Petersburg still has a fiscal ways to go—its credit rating is still below investment grade, and Ms. Wittstruck and Mr. Barrett said that the city would have to remain diligent when managing finances in order for the rating to keep getting raised, with S&P noting there is a one-in-three chance the city’s rating could be raised again in the next two years: Mr. Barrett said S&P will review the rating again next year, noting there will likely be a focus on the city’s fiscal weaknesses, including weak budgetary flexibility, weak debt and contingent liability profile, and historically weak management. Nevertheless, the report found the city to sport a “strong institutional framework score” and that it had demonstrated “adequate budgetary performance,” adding that the city’s proximity to Fort Lee and Richmond was “generating significant economic activity.” Going forward, Mr. Barrett cited the city’s “economic metrics,” such as its high tax rate and relatively low-income level, as challenges city administrations will face as they not only try to achieve financial stability, but improve the overall health of the locality.

Becoming Positively Moody in Detroit

May 24, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s on Tuesday upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes.  Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by retired U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, however, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs.

CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, which determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, who, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow, has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates; or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing.  

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the stated has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan municipality to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $ 125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.