December 6, 2017
Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city still under a state takeover, before heading south to assess the governing and fiscal challenges in a dissimilar, quasi-takeover of the U.S. territory of Puerto Rico.
Visit the project blog: The Municipal Sustainability Project
Fiscal, Intergovernmental, & Branches of Government Challenges under a State Takeover. Atlantic City’s Fire Department, which, like the City, remains under the control, as part of the ongoing state takeover, of the state Department of Community Affairs, faces another round of salary cuts as the state continues to cut spending in the municipality: the firefighters are anticipated to realize an 11.3 percent reduction in their salaries effective this Sunday, according to union officials, with the cuts coming just two months after Superior Court Judge Julio Mendez ruled the state had the authority to cut the Department by 15 members, to 180, after next February 15th. Moreover, in the wake of the state’s fiscal action, the state warned further salary cuts were possible, because Atlantic City only had sufficient fiscal resources to fund the department through November 30: Lisa Ryan, a spokesperson for the New Jersey Department of Community Affairs, noted: “While we have made considerable progress in stabilizing Atlantic City, significant work remains in restraining the city’s unsustainable finances…Judge Mendez’s decision requiring 180 firefighters instead of the 148 the state and city believe is sufficient to maintain public safety in Atlantic City resulted in $3.8 million in additional costs.” Over the past couple of years, the size of the city’s Fire Department has continued to shrink: in January, the department had 225 members; currently there are 195. Indeed, over the last seven years, the department has been reduced by 82 members—leading Fire Chief Scott Evans to note that in what would have to be an understatement, the year has been tough on the department, or, as he put it, the cuts and ongoing litigation have been a “distraction” to the firefighters: “It’s tough to keep the focus on your job…What the guys have faced all year have been the toughest challenges.” Ms. Ryan noted: “The state and city refuse to have taxpayers and other city stakeholders shoulder the burden of these costs caused by the fire union, thereby resulting in the salary reduction of firefighters, who are still highly compensated when compared to other city employees…Notably, the police have chosen to mediate and find compromise, and we encourage firefighters to do the same.”
Siguiendo en Disarollo. Puerto Rico currently expects its central government revenues to come in 25% short of budget in this fiscal year. Geraldo Portelo Franco, the Executive Director of the Puerto Rico Fiscal Advisory and Financial Information Authority, advised the PROMESA Oversight Board yesterday, meaning Gov. Ricardo Rosselló and the PROMESA Board will have to address the shortfall as the island government struggles to address not just recovery from the devastation from Hurricane Maria, devastation which received far less of a U.S. response than Houston or Florida, but also left the island with a substantial loss of those who could afford to leave—and who may not return. Now Mr. Portelo Franco is warning that public corporations will be without cash this month, while the General Fund will see a 25 percent drop in revenues this fiscal year: while he did not specify how the central government would help PREPA and PRASA if the disaster loan under FEMA, a loan the final terms of which are still undefined—even as the full restoration of electricity and water services is urgent; Puerto Rico’s two main public corporations on the island, those which provide essential public services, appear to be without fiscal resources with which to cover their operations this month, according to Mr. Portela, when he spoke at the eleventh public meeting of the PROMESA Oversight Board in New York City. He noted that in the case of PREPA (the Puerto Rico Electric Power Authority), which has not yet restored electricity service to most of its customers, the corporation will deplete what is left in its coffers by the end of the week of December 22nd; he anticipates PREPA will finish the calendar year with a cash deficit of $ 224 million. Meanwhile, the Puerto Rico Aqueducts and Sewers Authority (PRASA) is anticipated to end this month with a cash overdraft of about $ 1 million. The twin fiscal perils could, according to Mr. Portela, push Puerto Rico’s general fund into negative territory, because there might be no choice but to assist PREPA and PRASA if Washington does not allocate fiscal resources to Puerto Rico as soon as possible: in total, according to PAFAA, PREPA, and PRASA need $ 883 million of liquidity. Thus, Mr. Portela noted: “Our efforts are focus on obtaining liquidity for PREPA and PRASA through the CDL (Community Disaster Loan).”
If anything, the governance and fiscal challenge has been exacerbated, because the FEMA disaster loan, which was authorized about a month ago, but for which terms have yet to be negotiated, has yet to arrive. While Puerto Rico, as part of governing for contingencies, maintains reserves in case it needs to give liquidity to these quasi-public corporations, or, as he put it: “They (PREPA) have tried to preserve cash by managing the time of payment to suppliers,” in responding to PROMESA Board executive Arthur González, the liquidity crisis in PREPA and PRASA has complicated the governance and fiscal options facing the PROMESA Board as it confronts the challenge of approving a new fiscal plan which, among other things, seeks profound reforms of Puerto Rico’s economic framework and, in turn, will be key to the renegotiation of the debt through the cases of Title III of PROMESA. For one, if Puerto Rico uses General Fund resources, it would likely face further court challenges by Puerto Rico’s creditors—similar to a challenge already underway in the case of the bondholders of the Puerto Rico Sales Tax Financing Corporation (Cofina). (Recently, the insurer Ambac Assurance Corporation and several investment funds have asked U.S. Judge Laura Taylor Swain to investigate how Puerto Rico’s decisions to suspend the collection of the Sales and Use Tax (IVU) will affect that debt. But, with some $700 million owed to its suppliers, Puerto Rico’s central government has no cash options. Notwithstanding the gloomy fiscal portents, Mr. Portela reported better collections in items such as the 4 percent tax, FEMA assistance, and a less severe migration than had been feared; notwithstanding, however, he noted that if the predicted drop of 25 percent in revenues materializes, the General Fund would fall short in this fiscal year by about $ 2.4 billion—ensnaring the government in delaying payments to its suppliers and contractors, as he admitted that, apart from the estimate of accounts payable already recorded (around $ 500 million), there could be up to $ 250 million in additional payments to suppliers which are pending, noting that because “certain systems were inoperative in the immediate aftermath of the hurricane, there was a delay in payments and processing.”
Catch 22. With the PROMESA Board, the most likely bridge to gaining any additional fiscal help from the White House and Congress, thus a critical potential ally to Puerto Rico; the evident frustration by members of the PROMESA Board, combined with the speed with which Congress is moving on federal tax reform—but with virtually no analysis of the potential fiscal impact on Puerto Rico, albeit with a debt dwarfing Puerto Rico’s, the Board appears increasingly caught between a rock and hard place—a place Director Ana Matosantos described as “unacceptable,” adding that, for at least four times, PROMESA Board executives have asked for information on what is owed to government suppliers and contractors, stating: “This issue of not having clear things about accounts payable and the ongoing issue of late payments, at the same time that we are trying to look at what is happening economically in Puerto Rico while you have outstanding balances, is frustrating.” PRMOMESA Executive Andrew Biggs noted: “I have mostly dealt with governments at the state and federal level, but I’ve never seen a government that is so dependent on external consultants.”
The fiscal challenges, indeed, go both ways: as the exchange between the Board and officials of Gov. Ricardo Rosselló Nevares’ administration, the officials sought information and analysis of the potential fiscal impacts on Puerto Rico of the rapidly moving federal tax reform legislation in Congress—legislation, after all, which Congress’ Joint Committee on Taxation has warned will add close to $1.4 trillion to the federal debt.