Governing under Takeovers

December 19, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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

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

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

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

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

December 1, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s oldest municipalities, and its remarkable turnaround from verging on becoming the first municipality in Virginia to file for chapter 9 municipal bankruptcy, before veering south to assess what President Trump has described as the U.S. territory of Puerto Rico suffering from “from broken infrastructure and massive debt.” 

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Petersburg, Virginia’s City Council, one of the oldest of the nation’s cities, as part of its fiscal recovery, last week had voted 5-2 to request the Virginia Legislature to change the city’s charter in order to transfer the most critical duties of the Treasurer’s Office to a newly-created role of city collector—a position under the Council’s control, as part of its wish list for the newly elected state legislature. Petersburg, an independent city of just over 32,000, is significant for its role in African-American history: it is the site of one of the oldest free black settlements in the state–and the nation.  The unprecedented City Council effort seeks to strip power from an elected office—an office some believe curried some fault for contributing to Petersburg’s near chapter 9 municipal bankruptcy. Ironically, the effort came the same month that voters elected a former Member of the City Council to the office of Treasurer. Councilman Treska Wilson-Smith, who opposed the move, stated: “The citizens just voted in a Treasurer. For us to get rid of that position is a slap in the face to the citizens who put them in there.” Unsurprisingly, State Senator Rosalyn Dance, who for a dozen years has represented the city as part of her district in the Virginia House of Delegates, and who will consider the city’s legislative agenda, said she was concerned. Noting that the newly-elected treasurer has yet to serve a day in office, she added that much of the turmoil had to do with the current Treasurer, so, she said: “I hope [the] Council will take a second look at what they want to do.” Former Councilman and Treasurer-elect Kenneth Pritchett, who declined to comment, ran on a platform of improving the office’s operations by standardizing internal controls and implementing new policies: he urged Petersburg residents to contact lawmakers in a Facebook message posted after the Council took action, calling the decision “a prime example of total disrespect for the citizens’ vote.”

Nevertheless, Council Members who supported the legislative agenda language said it was time for a change, or, as Councilman Darrin Hill noted: “I respect the opinion of the citizens, but still, we believe if we keep on doing the same thing that we have done, then we will keep on getting the same results.” Other Councilmembers felt even better about their votes after the Council received good financial news earlier this week when newly audited reports showed a boost in Petersburg’s reserve funds, increased revenue, and a drop in expenditures—a marked fiscal reversal. In addition, the city’s external auditor provided a clean opinion—a step up from last year’s “modified” opinion—an opinion which had hinted the city had failed to comply with proper accounting principles—and a municipal fiscal year which commenced $19 million in the hole—and $12 million over budget—in response to which the Council raised taxes, cut more than $3 million in funding from the city’s chronically underperforming schools, eliminated a popular youth summer program, and closed cultural sites. Former Richmond City Manager Robert Bobb’s organization—which had been hired to help the city recoup from the verge of chapter 9 municipal bankruptcy, had supported transferring some of the duties of the Treasurer to a city collector position as a means to enhance the city’s ability to improve its tax collections.

Subsequently, late last September, another shoe fell with a 115-page report which examined eight specific aspects of city governance—and found allegations of theft involving current Treasurer Kevin Brown—claims Mr. Brown repeatedly denied, but appeared to contribute to his decision not to run for reelection—an elected which Mr. Pritchett won by a wide margin, winning just over 70 percent.  Nevertheless, Mayor Samuel Parham told his colleagues: “We are treading too thin now to risk someone who is just getting to know the job. We can’t operate as a city of hoping…Now that we are paying our bills and showing growth, there is no need to go back in time and have a situation that we had.” However, some Councilmembers believe they should await more facts with regard to Mr. Brown’s actions, especially with regard to uncollected municipal tax revenues, or, as Councilmember Wilson-Smith put it: “There are some questions which we still have unanswered when it comes to why the taxes were not collected: It appears to me that a lot of the taxes are not being collected, because they are un-collectable,” or, as she noted: Many listed for unpaid taxes were deceased.

David Foley with Robinson, Farmer, Cox Associates, Petersburg’s external auditor, had presented figures before Petersburg residents and the City Council, noting the clean opinion is a substantial improvement from last year, when auditors issued a modified opinion which suggested Petersburg had failed to maintain accounting principles—testifying that the improvement mainly came from the city being able to provide evidence of the status of some of its major financial accounts, such as public utilities. He did recommend that Petersburg strengthen some of its internal controls over the next fiscal year—noting, especially, the reconciliation of the city’s public utility system, which some officials have suggested should be sold to private companies. Indeed, City Manager Aretha Ferrell-Benavides told City Council members that a plan to correct some of the deficiencies will start in January, with monthly updates on corrective actions that she would like to continue to take. The see-saw, key fiscal change of nearly $2 million more than had been projected arose from a combination of increased real estate tax collections, and a $2.5 million reduction in expenditures, mainly came from health and welfare, and non-departmental categories: in total, there was a $7.5 million increase in the city’s chief operating fund. Unsurprisingly, Mr. Foley, in response to Councilmember Charlie Cuthbert, noted: “It was a significant year. There is still a long way to go,” indirectly referencing the city’s commencement of FY2017 $19 million in the hole and $12 million over budget—and with dire threats of legal action over unpaid bills—triggering a tidal wave of legal bills of nearly $1 million—of which about $830,000 went to Mr. Bobb’s group—while the city spent nearly $200,000 on a forensic audit.  Council members received the presentation on the annual financial report with a scant two days prior to the state imposed deadline to submit the report—after, last year, the city was about seven months late in submitting its annual financial report.

Insufficient Shelter from the Fiscal Storm. In the brutal wake of Hurricane Maria, which destroyed about 57,000 homes in Puerto Rico last September and left another 254,000 severely impacted, 50 percent of the U.S. territory’s remaining 3.5 million inhabitants are still without electricity—a lack that has adversely impacted the ability to reconstruct the toll wrought by Maria, not to mention the economy, or loss of those, more than 150,000, who could afford to leave for New York and Florida. Puerto Rico still confronts a lack of drinking water. Governor Ricardo Rosselló had assured that 95% of the island would have electricity by today, but, like too many other promises, that is not to be. An irony is that the recent visit of former President Bill Clinton, who did not come down to toss paper towels, but rather to bring fiscal and physical assistance, may be, at long last, an omen of recovery. It was just 19 days ago that Gov. Roselló appeared before Congress to request some $94 billion to rebuild the U.S. territory—a request unmet, and a request raising questions about the Puerto Rican government’s ability to manage such a vast project, especially in the wake of the $300 million no-bid contract awarded to a small Montana utility company, Whitefish, to restore the territory’s power—an effort House Natural Resources Committee Chair Rob Bishop (R-Utah) described as raising a “credibility gap.” Indeed, in the wake of that decision, Chairman Bishop and others in the Congress have called for the unelected PROMESA Financial Oversight and Management Board, known on the island as “la junta,” to extend its powers to overseeing the rebuilding effort as well—a call which, unsurprisingly, many Puerto Ricans, including pro-statehood Governor Rosselló, see as a further threat to their democratic rights. 

Nevertheless, despite the quasi-takeover threat from Congress, U.S. District Court Judge Laura Taylor Swain has denied the PROMESA Oversight Board’s request to appoint an emergency manager, similar to those appointed by Gov. Rick Snyder in Detroit, or by the former Governor of Rhode Island for Central Falls under their respective authority under state authorizations of chapter 9 municipal bankruptcy. Puerto Rico, because it is not a state, does not have such authority; consequently, Judge Swain has determined the Board does not have the authority to appoint public officials—a holding which Gov. Rosselló responded to by noting that the decision upheld his office’s position about the board’s power, writing: “It is clear that the [board] does not have the power to take full control of the Government or its instrumentalities…[T]he administration and public management of Puerto Rico remains with the democratically elected government.

“Now there’s a wall between us something there’s been lost I took too much for granted got my signals crossed Just to think that it all began on a long-forgotten morn “Come in” she said “I’ll give you shelter from the storm.”

November 28, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s founding cities, the ongoing fiscal challenges in Connecticut, where the capital city of Hartford remains on a fiscal precipice, and, finally, the  deepening Medicaid crisis and Hurricane Maria recovery in the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Six months ago, Richmond, Virginia Mayor Levar Stoney released a promised comprehensive review of his city’s municipal government—that is the government incorporated as a town “to be styled the City of Richmond” in 1742. From those Colonial beginnings, Richmond went on to become a center of activity prior to and during the Revolutionary War: indeed, it was the site of Patrick Henry’s famous speech “Give me liberty or give me death” at the city’s St. John’s Church, which was reported to have inspired the House of Burgesses to pass a resolution to deliver Virginia troops to the Revolutionary War in 1775. It was only in 1782 that Richmond was incorporated as a city—a city which was the capital of the Confederate States of America during the Civil War.  

The findings Mayor Stoney released, compiled by an outside consulting group, were bleak: they detailed excessive bureaucracy, low morale, and micromanagement. This week, Mayor Stoney’s administration is releasing its action plan to begin addressing those problems: the recommendations range from big-picture proposals, such as creating a new city department focused on housing and community development issues, to smaller suggestions, such as a citywide protocol for phone etiquette. Thad Williamson, Mayor Stoney’s chief policy adviser for opportunity described it this way: “We tried to consolidate all these moving parts into one coherent thing, which is a bear, but it’s kind of part one to what it takes to get a handle on changing the organization.”

Mayor Stoney’s administration hired Virginia Commonwealth University’s Wilder School of Government and Public Affairs to conduct the initial review, and the municipality released the 110-page report last May, so that, since then, officials report city staff have been working to convert those recommendations into a plan to be implemented. The report includes both short and long-term recommendations—and Mayor Stoney has already acted to replace several department directors, including the Director of Public Works and the Fire Chief. (The report recommends a goal of filling all remaining leadership positions by the end of next January.) Thus, Mayor Stoney has let go the Directors of Economic Development, Human Resources, Information Technology, and Procurement Services. At the same time, he has empowered, per the report’s recommendations, a team of employees to draw up a variety of proposals to improve communications among departments. The city has even acted to adopt the report’s recommendation to implement a citywide protocol for phone etiquette and “person-to-person etiquette.” On the key issue of municipal finance, Mayor Stony expects to address other recommendations as part of his next budget—to be presented in March—when the key issues he expects to put forward will focus on: procurement, human resources, finance, and information technology.

No doubt, that shift in focus relates to the review’s singling out dysfunction and staffing shortages in some of the city’s departments as adversely affecting nearly every element of city government—such as the report’s findings that it takes the Fire Department months working with procurement to get new shirts for its employees. “Police and public education are always top of mind when it comes to budgets, but if you go that way every year, then it has a negative impact on the organization,” according to Mr. Williamson. The plan also lays out a proposal to create a city department focused on housing and community development which “will be the driving force for public housing transformation, and East End revitalization.” The report also proposes reforms to the city’s funding of nonprofit community groups through annual grants, referred to internally as the city’s non-departmental budget. Organizations such as Sports Backers, the Better Housing Coalition, Venture Richmond, and CultureWorks are among the annual beneficiaries. Chief Administrative Officer Selena Cuffee-Glenn noted that revised funding applications have already been distributed and that, this year, the city will emphasize city goals like housing and poverty, describing them all as “valuable, worthy projects,” albeit, adding: “It’s just a limited amount of resources, so this helps identify targets and priorities for the city.” Finally, to track overall progress on the plan, Mayor Stoney is proposing the creation of a three-person performance management and change division which will report to the CAO to track whether, and presumably how, recommendations are being implemented.

State Municipal Oversight. In Connecticut, Gov. Dannell Malloy has appointed Thomas Hamilton, Scott Jackson, and Jay Nolan to six-year terms on the state’s new Municipal Accountability Review Board: the biennial budget which the Governor signed at the end of October provided for the appointment of an 11-member panel to work with cities and towns on early intervention and technical assistance, if needed, and to help financially distressed municipalities avoid insolvency or bankruptcy in exchange for greater accountability, with the Governor stating: “The state will be poised to intercede early to put struggling local governments on a path to sustainable fiscal health,” even as House Minority Leader Themis Klarides (D-Derby) has called for the General Assembly to reconvene and overturn the municipal aid cuts ordered last week by Gov. Malloy. The Republican leader’s announcement came less than a week after the legislature put the finishing touches on a two-year, $41.3 million budget, which provided Gov. Malloy wide discretion on unilateral cost-cutting which he announced last Friday. Connecticut Senate President Pro Tempore Martin M. Looney (D-New Haven) said that House and Senate leaders, who spent weeks in closed-door discussions to reach the recent bipartisan budget deal, will meet again next week. His counterpart, Senate Republican Leader Len Fasano (R-North Haven) believes Gov. Malloy is over-estimating the deficit so he can order further budget cuts, noting slashing. Leader Derby derided the Governor’s proposed cuts as “clearly intended to punish towns and cities,’’ saying that legislative leaders were under the impression that Gov. Malloy’s savings would come from personnel savings and other line items called Targeted Lapse Savings in the budget—after the Governor, last Friday, announced $880 million in cuts across both state agencies and municipal aid. Leader Klarides stated: “Governor Malloy clearly knew exactly how we intended to achieve the Targeted Savings Lapse…Instead, his recent action shifts more pain onto municipalities and is a blatant disregard for the will of the legislative leaders and the overwhelming majority of legislators who voted for the budget.”  Gov. Malloy yesterday reported that the estimate deficit in the current budget is more than $202 million. If Connecticut Comptroller Kevin Lembo agrees, Gov. Malloy will have to arrange further rescissions to balance the state’s budget—or, as House Speaker Joe Aresimowicz (D-Berlin) put it: “When you look at it in terms of percentages, about 1 percent of the total budget, and consider that we are only four months into the current fiscal year, it is not an unmanageable number…If and when the Governor does need to submit a mitigation plan to the legislature, we stand ready to work with the administration in the coming months to ensure the budget is balanced going forward.”

Leader Fasano said that Gov. Malloy had included some items in his deficit calculation which legislators had not planned to be part of the budget, noting: “I would have hoped Gov. Malloy would have been honest about the size of that deficit and focus on starting a conversation with lawmakers about how we can address these shortfalls together…He is releasing artificially high numbers to trigger the need for a formal deficit mitigation plan, a process that gives him the power to issue his own plan for the budget and make himself relevant. It’s disturbing that Gov. Malloy would purposefully make the state’s finances look worse than they actually are just so he can have a say in how we close the budget shortfall.”

The state political sparring comes as its state capital, Hartford, remains on the fiscal precipice: Hartford received an additional $40 million in the tardy state budget—and Mayor Luke Bronin continues to dicker with the city’s municipal bondholders and labor leaders in his ongoing effort to avoid filing for a chapter 9 municipal bankruptcy, noting: “With this accountability and review board, the state will be poised to intercede early to put struggling local governments on a path to sustainable fiscal health before they are on the brink of a fiscal crisis.” The new state statute mandates that the Governor appoint five members, three of his own choice, one from the recommendation of the American Federation of State, County and Municipal Employees, and the remaining from a joint recommendation of the Connecticut Education Association and the Connecticut branch of the American Federation of Teachers.

Shelter from the Storm & Governing Competency? With, as the Romans used to put it, tempus fugiting, Congress appears poised to increase the $44 billion of disaster assistance proposed by the Trump administration for Puerto Rico, the U.S. Virgin Islands, Texas, and Florida; however, there is recognition and apprehension at the proposed terms by the White House that any such financial aid be subject to a mandate of providing matching funds for a portion of the fiscal assistance—and that Congress enact $59.2 billion in offsetting spending reductions. The White House has recommended that one major piece of the emergency supplemental request, $12 billion for the CDBG Disaster Recovery program, should be awarded states and territories once they “present cost-effective solutions to reducing future disaster risk and lowering the potential cost of future disaster recovery.” More than half of the request is for $25.2 billion for disaster relief administered through the Federal Emergency Management Agency and Small Business Administration. Other pieces include: $4.6 billion for repair or replacement of damaged federal property and equipment and other federal agencies’ recovery costs; $1.2 billion for an education recovery fund; and $1 billion for emergency agricultural assistance.

Sen. Patrick Leahy (D-Vt.) has warned that Puerto Rico will not receive such federal assistance, because the Administration’s proposal “favors states that can provide matching funds,” even as Sen. Leahy observed that thousands of residents of Puerto Rico are abandoning their homes and moving to the mainland, noting: “Much like in the delayed response to Katrina and the people of New Orleans, we are seeing the people of Puerto Rico lose faith that we will help them rebuild.” Senate Minority Leader Chuck Schumer (D-N.Y.) added that the Trump administration’s request is inadequate to address the needs of Puerto Rico, the U.S. Virgin Islands, Florida, and Texas—as well as western states hit by wildfires. Moreover, Leader Schumer added that the Trump Administration’s failure to address “the impending Medicaid funding crisis the islands are facing,” much less to “provide waivers to cost share mandates which are sorely needed due to Puerto Rico and the U.S. Virgin Island’s financial challenges.” The Federal Emergency Management Agency had received just over 1 million applications for disaster assistance as of early last week; the agency has approved more than $180 million under the Individual Assistance Program and $428 million under the Public Assistance program, reporting: “There are over 10,000 federal employees working in Puerto Rico in the response and recovery efforts.”

Nevertheless, with this session of Congress nearing a critical final two weeks of its schedule, the U.S. territory’s Medicaid funding crisis is deepening: Hurricane Maria wrought serious physical and fiscal damage to Puerto Rico’s health-care system; yet, not a dime of the federal disaster relief money has, to date, been earmarked for the island’s Medicaid program. The White House, last Friday, belatedly submitted a $44 billion supplemental payment request, noting that the administration was “aware” that Puerto Rico needed Medicaid assistance; however, the Trump Administration put the onus on Congress to act—leaving the annual catchall omnibus appropriations bill as the likely last chance: this Congress is scheduled to adjourn on December 14th.  However, with a growing list of “must do” legislation, including the pending tax bill and expiring S-CHIP authorizations, time is short—and the administration’s request is short: In a joint statement, House Energy and Commerce Committee ranking members Frank Pallone Jr. (D-N.J) and Senate Finance Committee ranking member Ron Wyden (D-Or.) called on the Trump Administration to “immediately provide additional funding and extend a one-hundred percent funding match for Medicaid in Puerto Rico and the U.S. Virgin Islands, just as we did in the aftermath of Hurricane Katrina,” with the request coming amid apprehensions that unless Congress acts, federal funds will be exhausted in a matter of months—potentially threatening Puerto Rico’s ability to meet its Medicaid obligations. Gov. Ricardo Rosselló, last month, requested $1.6 billion annually over the next five years from Congress and the Trump administration in the wake of the devastating physical and fiscal storm, writing to Congressional leaders that the “total devastation brought on by these natural disasters has vastly exacerbated the situation and effectively brought the territory’s healthcare system to the brink of collapse.” Puerto Rico, last year, devoted almost $2.5 billion to meet its Medicaid demands—so even the proposed reimbursement would only cover about 60 percent of the projected cost. The urgency comes as the House, earlier this month, passed legislation reauthorizing the CHIP program, including $1 billion annually for Puerto Rico for the next two years, specifically aimed at shoring up the island’s Medicaid program. Nevertheless, despite the progress in the House on CHIP funding, the Senate has yet to moved forward with its version of the legislation—and the version reported by the Senate Finance Committee does not include any funds for Puerto Rico. Should Congress not act, up to 900,000 Puerto Ricans would likely be cut from Medicaid—more than half of total enrollment, according to federal estimates.

Putting Humpty-Dumpty Back Together Again

November 13, 2017

Good Morning! In today’s Blog, we consider the election results in Atlantic City, where incumbent Mayor Don Guardian was defeated by two-term Democratic City Councilman Frank Gilliam, in a municipality which has been under state intervention since last November.

Visit the project blog: The Municipal Sustainability Project 

Emerging from State Oversight? In New Jersey, voters elected a new Governor, Phil Murphy—and a new Mayor in Atlantic City, potentially paving the way for Atlantic City to emerge from its state takeover. Indeed, prior to his election, candidate Phil Murphy, who was elected over Republican candidate Lt. Gov. Kim Guadagno, had said he would end the state takeover of the city and instead work together with city officials as partners. The election came almost a year after the state takeover of the city—so that in his victory statement, Mayor-elect Frank Gilliam Jr., noted: “This is the beginning of a new era in Atlantic City: For the past 30-40 years Atlantic City has been taking the back seat, and now it is time for us to actually take the front seat.” How this new era will transform the municipality as it emerges from state intervention—and under a new Governor will be a challenge: the former Governor Chris Christie, under whom the state took over Atlantic City; has been replaced by the voters, who elected Philip Murphy, a former Wall Street banker with no experience in office, as the Garden State’s 56th governor—with Gov.-elect Murphy prevailing in a decisive victory to end the two-term reign of Gov. Chris Christie. The twin changes in governance could play a critical role as the city is emerging from its state takeover. The Governor-elect has proposed instituting a millionaire’s tax; he has also called for boosting public pension funding; he has not publicly discussed what he might propose with regard to the state’s current relationship with Atlantic City. Meanwhile, in Atlantic City, where voters turned Mayor Don Guardian out of office after a single, turbulent term, during which five of the city’s famed dozen casinos shut down, and the State of New Jersey seized control of the city’s assets and governing authority—voters selected Atlantic City Councilman and city native Frank Gilliam, who has served as a member of the City Council since 2009 to replace Mayor Guardian, with the Mayor-elect noting: “This is the beginning of a new era in Atlantic City.” Mayor Gilliam, in his first discussion, surrounded by his colleagues selected to fill the three open council-at-large seats, noted: “It’s going to always be about the people: We love Atlantic City: Now it’s time for us to actually take the front seat.” But the challenges ahead for the newly elected Mayor who, during his campaign, had promised the city’s voters would reverse the previous four years of debt and state takeover will not be easy. The Mayor-elect said he wants to focus on shaping up the city’s finances, improving tax rates, and bringing in more development for the city to appeal to people of all ages. In addition, he said he would like to clean up the beach blocks to raise the value of housing—a slight contrast from Mayor Guardian’s platform of taking credit for stabilizing the city’s finances and more interest from investors on new projects coming to the city, such as South Jersey Gas and Stockton University’s city campus: promises and promises which could not be converted to victory. Rounding out the City Council were victories by incumbent council-at-large candidates George Tibbitt and Moisse “Mo” Delgado, and the third at-large seat was won by Jeffrey Fauntleroy II. The Mayor-elect noted he was looking forward to having a “prosperous” relationship with the governor—describing it as it “is going to be a true partnership.”

Mayhap ironically the shuttered Trump Taj Mahal casino will reopen as a Hard Rock casino resort, bringing new life, and potentially new gaming, hotel revenue, and assessed property values; Stockton University is expected to open its Atlantic City satellite campus as part of a project which could also lead to the construction of a new corporate headquarters for South Jersey Gas in a section of the city starved for economic activity. As Brigid Harrison, a political science professor at Montclair State University put it: most people in the region believe Atlantic City has put its worst problems behind it, and are optimistic about a coming wave of development: “Part of Don Guardian’s greatest legacy will be the fact that he believed in and worked for a diversification of the city’s economic base, and, as Mayor, Frank Gilliam certainly will be able to reap some of the credit and benefits for projects initiated in the Guardian administration…Hopefully Mayor Gilliam will take a page from Mayor Guardian and continue the process of attracting a wide variety of businesses and enterprises to Atlantic City, which will only serve to strengthen the city and the region.”

But the new Mayor will also inherit unresolved challenges and problems, including the state’s takeover of Atlantic City, hundreds of millions in debt, the stalled development of a former airport property, and a city economy, which, albeit less dependent on casinos, is still disproportionately affected by their success or failure. And it is the unwinding of the state takeover which could prove the most challenging: The Mayor-elect, in his campaign, said he would commence with an audit of Atlantic City; he vowed to work closely with the incoming administration of Gov.-elect Murphy in what will be a key challenge with regard to how to unwind the state takeover of Atlantic City—a challenge to work across bureaucratic boundaries in a city where numerous state agencies held vast power even before the state takeover—or, as the Mayor-elect put it: “Atlantic City has been working in silos for 30 years: We have to talk to one another.”

S&P Global Ratings analyst David Hitchcock, in the wake of the election results, wrote that while Gov.-elect Murphy will have the support of a Democratic-controlled legislature, he will, nevertheless, be confronted by signal fiscal challenges due to decades of poor budgetary decisions. Mr. Hitchcock wrote that public pension-funding shortfalls under both Republican and Democratic administrations the last two decades have left the Garden State with a heavy pension liability shortfall along with high debt and consistent structural budget deficits, noting: “These impediments will likely constrain the state’s ability to increase funding for local aid or avoid deficits during an economic downturn, regardless of any near-term tax increases or spending cuts…The magnitude of the credit risks facing Governor-Elect Phil Murphy and the newly elected legislature means the state’s long-term credit conditions will remain challenging for the foreseeable future, no matter what policy direction they choose.”

Three Different Roads to Fiscal Recovery

November 6, 2017

Good Morning! In today’s Blog, we consider the next critical step in Detroit’s emergence from the largest chapter 9 municipal bankruptcy in U.S. history; then we consider the ongoing legal and fiscal recovery of Ferguson, Missouri, before, finally, trying to go to school in Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road Out of State Oversight. The city of Detroit expects to get the keys back to its financial house this spring for the first time since it exited bankruptcy in 2014. The question is whether it can keep the house in order once state oversight ends — and local elected officials regain control over budgets and contracts. With two balanced budgets and an audit of a third expected in May, city officials anticipate they will be released early next year from the strict financial controls required under Chapter 9 restructuring. The shift is especially important as voters cast ballots Tuesday for the Detroit leaders who will chart the city’s direction. Both Mayor Mike Duggan and challenger Coleman Young II have offered plans on how they would guide the city financially. Gov. Rick Snyder said he is optimistic about the city’s ability to manage finances on its own. “They’ve been hitting those milestones, and I hope they continue to hit them — that’s a good thing for all of us,” Snyder told The Detroit News.

There is evidence that the oversight is no longer warranted: Detroit’s credit has been upgraded among rating agencies, its employment rate is up and property values are climbing. The city, in a financial update last month, noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts and growth in multifamily home construction. Experts say bankruptcy allowed Detroit to drop billions in debt, setting it on a solid financial path. But the city faces massive future payments for past borrowing and pension obligations that are difficult to plan for. “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there,” said Lisa Washburn, managing director of the Concord, Massachusetts-based firm Municipal Market Analytics. “Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Post-oversight protections. The landmark municipal bankruptcy set forth strict conditions to help Detroit avoid falling back into debt. A nine-member commission, which under the law includes Duggan and City Council President Brenda Jones, currently signs off on the city’s four-year budget plan, certain contracts and transactions. It has also empowered to review, modify and approve operational budgets. The commission was established as a condition of a financial aid package approved by the state Legislature to defray cuts to Detroit retiree pensions and shield the Detroit Institute of Arts collection from bankruptcy creditors. There are still protections even if the city is released from oversight, Detroit officials note. The state-mandated commission would continue to meet monthly and could step back in if necessary, the city’s Chief Financial Officer John Hill said. The city would continue to hold revenue estimation conferences in February and September to set budgeting limits for each fiscal year, as well as develop a four-year financial plan. Detroit’s numbers are headed in the right direction when it comes to property values, income tax collection, median income and employment. Among the positives:

■The city’s taxable value is projected to climb by about $100 million, from $6.4 billion based on the taxable values from the end of the 2016 calendar year to $6.5 billion at the end of this year, according to data from the CFO’s office.

■The city projects an increase of about $30 million in its residential real estate — the first boost in the property class in almost two decades. Detroit’s level of owner-occupied homes went from a low of 59 percent in 2010 to a projected 74 percent in 2018, based on findings from the reappraisal, officials say.

■City figures show income tax collection has gone from $263.2 million in the 2016 fiscal year to a forecast of $285 million for 2017, based on unaudited figures.

■The city’s employment has gone up from 206,568 in January 2014 to 233,068 this July, according to labor statistics.

■Detroiters’ median household income was $28,099 in 2016, a 7.5 percent hike from the previous year, according to U.S. Census estimates released in September.

Not as encouraging are poverty and crime rates. The poverty rate has dipped 4 percentage points to 35.7 percent, Detroit’s lowest since 2008. But the rate is still the highest among large U.S. cities, as is the city’s violent crime rate. “You can’t ignore what’s happening in the downtown and Midtown, but Detroit is obviously so much bigger than that,” said Matt Butler, a vice president at Moody’s Investors Service and lead analyst for Detroit. “The real story here going forward is how is Detroit able to re-create that development in other areas of the city.”

The city filed for bankruptcy in the summer of 2013 and officially exited on Dec. 10, 2014, with a plan to shed $7 billion in debt and pump $1.7 billion into restructuring and city service improvements over a decade. Last month, Moody’s Investors Service upgraded Detroit’s credit outlook and praised the city for its gains. Detroit’s economy “remains vulnerable,” the report noted, but adds it “is showing real progress.” Detroit recorded a general fund surplus of just over $63 million in fiscal year 2016 and expects an additional surplus for 2017 of about $38.5 million. For 2015, the surplus was about $71 million. But Moody’s warns of economic unknowns that could pose future problems, namely the massive contributions that loom for its two pension funds.

A funding plan forged through Detroit’s bankruptcy coined the “grand bargain” relieved the city of much of those payments through 2023. But in 2024, the city will have to start funding a substantial portion of the pension obligations from its general fund for the General Retirement System and Police and Fire Retirement System. The initial payment was first contemplated at $113.9 million, but city officials later said estimates had been off, in part because of outdated mortality tables. If earnings meet the plan of debt adjustment’s assumed return rate of 6.75 percent, the city’s contribution in 2024 would be $167 million. If there are no earnings, it could soar to $344 million or more. Contributions to the pensions would be annual and could continue for 20-30 years. Investment returns have varied greatly. To minimize a shortfall, the city’s administration established a dedicated Retiree Protection Fund that’s expected to pull together $335 million in the coming years to help meet the required contributions. The City Council would contribute a dedicated amount from its general fund each year. So far, $105 million has been set aside. Moody’s has called the fund a “credit positive action,” noting, however, that once it’s depleted in 2033 the city will be required to fund annual pension payments directly from its budget.

Retooling debt structure. CFO Hill notes that today his greatest concern is restructuring the city’s debt, so, last month, the city solicited requests for proposals from investment banks which could help address debt tied to past capital borrowing and millages—or, as Mr. Hill put it: “We think revenues should increase, but if we can also deal with the structure of the debt and lower those payments then the city will be much better off,” said Hill, adding a plan, he said, would “set the city on the course to have dealt with two of its major challenges.” Indeed, the issue of the city’s debt and finance has been, unsurprisingly, an issue in the mayoral campaign, where Mayor Duggan, during a debate, said Detroit’s City Council has been rigorous in making sure that we “watch every dollar that we have,” and he expects the city will be released from state fiscal oversight this spring—adding that, under his administration, “We won’t ever lose self-determination again.” In response, his opponent, Coleman Young, counters that Detroit will not fully regain budget and contract authority back from the state; moreover, he vowed he would, if elected, find efficiencies and reduce costs—and cut what he deemed the “top heavy” staff to manager ratio, adding: “These are some of the things I am willing to do to make sure we have a balanced budget and our finances get back in order.”  “In theory, it would be great to have as much money plowed into redevelopment as possible, but that comes at a cost,” she said. “With less than seven years away from having to start making pension payments again, you don’t want to find yourself in a budgetary hole at a time when you can see it coming.”

Ferguson’s Steep Road to Recovery. Ferguson, Missouri, a small city of about 21,000, which in 2010 was 67.4% black, and 29.3% white, with 8,192 households of which 39.1% had children under the age of 18 living with them, and 31.5% had a female householder with no husband present—and where 32.9% were non-families, is a relatively young municipality: the median age in the city was 33.1 years, while 10.3% were 65 years of age or older. The gender makeup of the city was 44.8% male and 55.2% female. It is a city where the Mayor is directly elected (Mayor James Knowles ran unopposed in 2014 in an election where voter turnout was approximately 12%.) Ferguson is one of 89 municipalities in St. Louis County, where the county police have jurisdiction throughout. It is a city where the fatal police shooting of Michael Brown still weighs.

Last Friday, in Ferguson, as part of a street theater protest, activists set fire to a model depicting the Ferguson Commission report in front of City Hall: it was a demonstration intended to mock political leaders and the city police department’s response to crime and protests in the city. The demonstration came just two weeks after St. Louis police, using a technique called “kettling,” in which exits are blocked in and people are arrested en masse, arrested dozens of protesters, residents, journalists, and legal observers as people protested, for a third day, after former police officer Jason Stockley was found not guilty in the 2011 fatal shooting of Mr. Lamar–and after Mayor Lyda Krewson challenged the city to recommit itself to reforms laid out in the Ferguson Commission report—the nearly 200-page report which had proposed 189 “calls to action,” and marked the culmination of nearly 10 months of work for a commission established by former Gov. Jay Nixon in 2015, in response to the shooting death of Michael Brown, a black teenager, by a white Ferguson police officer—a report in which Commissioners grouped their post-Ferguson calls for action into three categories: Justice for All, involving urgent police and court reforms; Youth at the Center, exploring policies to promote better lives for children; and Opportunity to Thrive, laying out changes to address economic inequalities.

Regional leaders have largely focused on the “Justice for All” component of the report, overhauling municipal court practices such as jailing defendants who could not pay their fines, even as discussion has commenced on strengthening the Civilian Oversight Board, equipping police with body cameras, and developing police policies for using force and for handling public demonstrations. The report also called for improving the public’s relationship with law enforcement through community policing, by encouraging police departments to facilitate better interactions between officers and those they serve, and allowing the public to weigh in on programs and policies through forums. Starsky Wilson, the former co-chair of the Ferguson Commission, in a recent interview with the St. Louis Post-Dispatch, noted that while police accountability and reform has clearly been the starting point for those revisiting the Commission’s findings, he hoped elected leaders would not forget the aspects of the report devoted to building a better St. Louis for the city’s children: “It can’t just be about police. That’s just one piece of the puzzle.”

Nevertheless, the Ferguson protests appear to have produced changes, particularly in Ferguson itself, where new city and police leaders came into power. The state Legislature also passed a municipal reform statute, the most significant element of which lowered the cap on revenue from traffic tickets: It can now only make up 12.5 percent of a city’s general operating revenue in St. Louis County, and 20 percent elsewhere, down from 30 percent. Moreover, municipalities which fail to submit a timely and accurate report on their finances to the state auditor will immediately lose jurisdiction over their courts. (The previous law did little to punish the many courts that ignored the limits.) The impact was swift: Ferguson’s Municipal Court revenue plummeted from $2.7 million in 2014 to roughly $500,000 in 2016.

In St. Louis, Mr. Wilson cites several achievements, including the creation of a Civilian Oversight Board and the decision to raise the city’s minimum wage, both in 2015, though state lawmakers negated the wage effort this year. Meanwhile, other bills have been introduced to address some of the Ferguson Commission’s findings, including a measure being considered by the St. Louis Board of Aldermen limiting when St. Louis police could use pepper spray and tear gas. Sponsoring Alderman Megan Green, 15th Ward, reports she hopes it will serve as a starting point for officials to discuss revising the city’s vague ordinance against unlawful assembly. Asked what changes were made in the city police department in response to the Ferguson report, spokeswoman Schron Jackson said the St. Louis Police Department has begun training officers in de-escalation tactics and how implicit bias may affect their work, as well as how to work with victims of violence who are gay, transgender, and bisexual. These kinds of higher training standards were among recommendations laid out by the Ferguson Commission. Additionally, Ms. Jackson said, the department has launched its Community Engagement and Organizational Development Division, which carries out community outreach programs.

But Mr. Wilson questions these early efforts: “When we see police arrest more than 300 people over 18 days, then we have to ask how seriously the increased training requirements were implemented…and how much culture change is actually happening, around use of force: What were the lessons that were learned surrounding de-escalation?” Allegations that police have improperly used force in recent weeks have already prompted the ACLU to challenge St. Louis police tactics in federal court. They have also sparked conversations at the St. Louis Board of Aldermen about when force should be used—and who should investigate afterward. The aldermanic public safety committee has already interviewed Maj. Mary Warnecke, deputy Commander of the department’s Bureau of Professional Standards, and Circuit Attorney Kim Gardner. Attorney Gardner has pitched the formation of a new unit in her office to investigate use-of-force incidents and officer-involved shootings, arguing that it is no longer acceptable for police to be investigating themselves.

In the long-term, the Ferguson Commission recommended shifting deadly force investigations to the Missouri Highway Patrol and the state attorney general—a recommendation in response to which Gov. Eric Greitens said he was open to considering. City lawmakers, too, are exploring Attorney Gardner’s idea, crafting legislation expanding the circuit attorney’s prosecutorial powers and giving the office the ability to open investigations into police officers’ use of force, according to Board of Aldermen President Lewis Reed, who notes that events such as the Stockley verdict can be catalysts for change, if legislators work quickly enough: noting that the creation of a Civilian Oversight Board is proof of that. The Aldermen had attempted to institute an oversight board in 2006, but the bill, which included subpoena power, was vetoed by former Mayor Francis Slay. Ferguson finally opened the door for its creation, President Reed said, but subpoena power did not have the requisite support to make it into the final product. With the continued unrest, a new mayor and a more open-minded board, Mr. Reed sees a window of opportunity to revisit subpoena power: “I see a readiness for people now to step outside of what I would call their normal comfort zone and support efforts that probably in a normal state they would be a little more hesitant to support.” Mayor Krewson supports providing subpoena power to the city’s Civilian Oversight Board, which investigates complaints against police, and has said she agrees with community leaders who have demanded local police change how they handle use-of-force investigations and prosecutions. She also has committed to establishing a Racial Equity Fund, a proposed 25-year city fund dedicated to promoting racial equity in the region. “I know I don’t have the decision-making power across all of these things, but I am committed to adding my political will to the push to find the right way to get those things done,” Mayor Krewson said after the first week of protests over Stockley. One thing the Mayor says she has the power to do immediately is oust interim Police Chief Lawrence O’Toole, who declared police “owned the night” after law enforcement used a technique called “kettling” to surround and arrest more than 100 people on a single evening. She has shown no indication that she will act before the chief hiring process plays out.  “We have all the answers we need in the report. The road map exists. The longer (Krewson) chooses not to act, the longer our city hurts,” said Charli Cooksey, a catalyst with the Forward Through Ferguson advocacy group. ‘Not a short-term endeavor.’ There may be a long road ahead in making changes laid out in the report a reality, but leaders have pointed to some encouraging signs. Wilson says he has noticed a more diverse group of people engaging in disruption this time, suggesting that people understand the problems don’t amount to “black people’s issues” alone. “These are justice issues. Racial inequity harms the entire region and all people,” he said.

Forward Through Ferguson, the advocacy group that grew out of the Ferguson Commission, plans to knock on as many as 4,000 doors to get feedback before kicking off a series of policy campaigns next spring. “It’s not a short-term endeavor,” Ms. Cooksey said: “Diverse stakeholders in the region have to be committed to this for years to come.” But those inspired to run for office after the events of Ferguson, such as Rasheen Aldridge, a former Ferguson commissioner and now 5th Ward Democratic Committeeman, contend that new leaders have emerged at the state and local levels who have a better understanding of why young people have been protesting in recent weeks. “We have new people at the table, folks who are for the people, who haven’t been bought out and who haven’t been around for a while,” Aldridge said: “They’re willing to do the work.”

Learning about Fiscal & Physical Recovery. The Department of Education of Puerto Rico expects to open 80 percent of the 1,113 public schools on the island next Monday after having relaxed the criteria to enable the schools by the pressure of parents, mothers and students who demand a return to normalcy. Through twitter, the Department of Education published the list of schools that will open. The slowness in the process of resumption of classes on the island has been criticized by parents, educators, and even legislators who complain that six weeks after the passage of hurricane Maria on the island, only 152 schools have been opened (13 percent of the total) in the educational regions of San Juan, Ponce, Mayagüez and Bayamón. Groups of parents and teachers have held protests; the Federation of Teachers of Puerto Rico (FMPR) has called for a massive demonstration for November 9th to press for the opening of closed schools.  Members of the school community claim that many of the schools are able to operate, with water, no debris, or damage that poses a danger to students, but have not been opened. Even a mother of a special education student started a hunger strike against the DE in Hato Rey to demand that classes be resumed at the Urban Elementary School in Guaynabo, because the prolonged closure is having adverse effects on her child’s health: “Children of special education, when you take away their world, when you take away their school, you take away their therapies, you are leaving them unarmed. It is another hurricane that is reaching them: “I am seeing my daughter break down day by day, I am seeing my daughter who has started to attack herself, something that five years ago she did not do.”

The criticism focuses on the slowness of the work of the US Army Corps of Engineers and a company that contracted to inspect the schools and certify that they do not represent a danger to students and that they have water service, they are free of debris and fumigated. Most the the re-opened schools are without electricity: even the education unions FMPR and National Union of Educators and Education Workers (Unete) maintain that the limited opening of schools could be part of a supposed plan to close schools and eliminate teacher positions, something which had been happening before the impacts of hurricanes Irma and Maria, when Puerto Rico’s public education system had, after severe budget cuts, closed 167 schools—and suffered a decline of some 44,000 students. To date, some 800 schools which have been inspected, but there are still another 300—leaving Education Secretary Keleher to describe her frustration with the “slowness of the inspection process,” and that the Department will not use the Corps of Engineers or the CSA private firm for these works. The Secretary added that there are about 44 schools which will not open because of structural damage; she noted that for schools that will not open, “We are going to relocate that population or to bring them a temporary school, which is like a wagon.”

The Steep & Ethical Challenges in Roads to Fiscal Recovery

October 17, 2017

Good Morning! In today’s Blog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in American history; then we turn to the Constitution State, Connecticut, as the Governor and State Legislature struggle to reach consensus on a budget, before, finally, returning to Petersburg, Virginia to try to reflect on the ethical dimensions of fiscal challenges.

Visit the project blog: The Municipal Sustainability Project 

The Motor City Road to Recovery.  The City of Detroit has issued a request seeking proposals to lead a tender offer and refunding of its financial recovery municipal bonds with the goal of reducing the costs of its debt service, with bids due by the end of next week, all as a continuing part of its chapter 9 plan of debt adjustment. The city has issued $631 million of unsecured B1 and B2 notes and $88 million of unsecured C notes. The bulk of the issuance is intended to secure the requisite capital to pay off various creditors, via so-called term bonds, 30-year municipal debt at a gradually sliding interest rate of 4% for the first two decades, and then 6% over the final decade, as the debt is structured to be interest-only for the first 10 years, before amortizing principal over the remainder of the term, with the city noting: “It is the city’s goal to alleviate the significant escalation of debt service during the period when principal on the B Notes begins to amortize, and that any transaction resulting from this RFP process be executed as early as possible in the first quarter of 2018.” According to Detroit Finance Director John Naglick, “Those bonds are traded very close to par, because people view them as very secure…Those bondholders feel really comfortable because they see the intercept doing what it was designed to do.” The new borrowing is the city’s third since its exit from chapter 9 municipal bankruptcy, with the prior two issued via the Michigan Finance Authority. Last week the city announced plans to utilize the private placement of $125 million in municipal bonds, also through the Michigan Finance Authority, provided the issuance is approved by both the Detroit City Council and the Detroit Financial Review commission, with the bonds proposed to be secured by increased revenues the Motor City is receiving from its share of state gas taxes and vehicle registration fees.

Fiscal TurmoilConnecticut Gov. Dannel Malloy yesterday released his fourth fiscal budget proposal—with the issuance coming as he awaits ongoing efforts by leaders in the state legislature attempting to reach consensus on a two-year state budget, declaring: “This is a lean, no-frills, no-nonsense budget…Our goals were simple in putting this plan together: eliminate unpopular tax increases, incorporate ideas from both parties, and shrink the budget and its accompanying legislation down to their essential parts. It is my sincere hope this document will aid the General Assembly in passing a budget that I can sign into law.” The release came as bipartisan leaders from the state legislature were meeting for the 11th day behind closed doors in a so far unrewarding effort to agree on a budget to bring to the Governor—whose most recent budget offer had removed some of the last-minute revenue ideas included in the Democratic budget proposal. Nevertheless, that offer gained no traction with Republican legislators: it had proposed cuts in social services, security, and clean energy—or, as the Governor described it: “This is a stripped down budget.” Specifically, the Governor had proposed an additional $144 million in spending cuts from the most recent Democratic budget proposal, including: nearly $5 million from tax relief for elderly renters; $5.4 million for statewide marketing through the Department of Economic and Community Development; $292,000 in grants for mental health services; $11.8 million from the Connecticut Home Care Program over two years, and; about $1.8 million from other safety net services. His proposed budget would eliminate the state cellphone tax and a statewide property tax on second homes in Connecticut, as proposed by the Democrats; it also proposes the elimination of the 25 cent fee on ridesharing services, such as Uber and Lyft, and it reduces the amount of money Democrats wanted to take from the Green Bank, which helps fund renewable energy projects. His proposal also recommends cutting about $3.3 million each year from the state legislature’s own budget and eliminates the legislative Commissions for women, children, seniors, and minority communities—commissions which had already been reduced from six to two over the past two years. The Governor’s revised budget proposal would cut the number of security staff at the capitol complex to what it was before the metal detectors were implemented—proposed to achieve savings of about $325,000 annually, and the elimination of the Contracting Standards Board, which the state created a decade ago in response to two government scandals—here for a savings of $257,000.

For the state’s municipalities, the Governor’s offer proposes phasing in an unfunded state mandate that municipalities start picking up the normal cost of the teachers’ pension fund: Connecticut municipalities would be mandated to contribute a total of about $91 million in the first year, and $189 million in the second year of the budget—contributions which would be counted as savings for the state—and would be less steep than Gov. Malloy had initially proposed, but still considerably higher than many municipalities may have expected. Indeed, Betsy Gara, the Executive Director of the Council for Small Towns, described the latest gubernatorial budget proposal as a “Swing and a miss: The revised budget proposal continues to shift teachers’ pension costs to towns in a way that will overwhelm property taxpayers,” adding that if the state decides to go in this direction, they will be forced to take legal action, because requiring towns to pick up millions of dollars in teachers’ pension costs without any ability to manage those costs going forward is ‘simply unfair.’” Moreover, she noted, it violates the 2008 bond covenant.

In his revised new budget changes, Gov. Malloy has proposed cutting the Education Cost Sharing grant, reducing magnet school funding by about $15 million a year, and eliminating ECS funding immediately for 36 communities. The proposal to eliminate the ECS funding would likely encounter not just legislative challenges, but also judicial: it was just a year ago that a Connecticut judge’s sweeping ruling had declared vast portions of the state’s educational system as unconstitutional, when Superior Court Judge Thomas Moukawsher ruled that Connecticut’s state funding mechanism for public schools violated the state’s constitution and ordered the state to come up with a new funding formula—and mandated the state to set up a mandatory standard for high school graduation, overhaul evaluations for public-school teachers, and create new standards for special education in the wake of a lawsuit filed against the state in 2005 by a coalition of cities, local school boards, parents and their children, who had claimed Connecticut did not give all students a minimally adequate and equal education. The plaintiffs had sought to address funding disparities between wealthy and poor school districts.

Nevertheless, in the wake of a week where the state’s Democratic and Republican legislative leaders have been holed up in the state Capitol, without Gov. Malloy, combing, line-by-line, through budget documents; they report they have been discussing ways to not only cover a projected $3.5 billion deficit in a roughly $40 billion two-year budget, but also to make lasting fiscal changes in hopes of stopping what has become a cycle of budget crises in one of the nation’s wealthiest states—or, as House Speaker Joe Aresimowicz, (D-Berlin) put it: “I think what we’ve done over the last few days has been a really good step forward, and I think we’re moving in the right direction,” even as Senate Republican Leader Len Fasano said what the Governor put forward Monday will not pass the legislature: “It is obvious that the governor’s proposal, including his devastating cuts to certain core services and shifting of state expenses onto towns and cities, would not pass the legislature in its current form. Therefore, legislative leaders will continue our efforts to work on a bipartisan budget that can actually pass.”

Getting Schooled on Budgeting & Debt. Even as the Governor and legislature appear to be achieving some progress, the Connecticut Education Association (CEA) is suing the state over Gov. Dannel Malloy’s executive order which cuts $557 million in school funding from 139 municipalities: Connecticut’s largest teachers union has filed an injunction request in Hartford Superior Court, alleging the order violates state law. (The order eliminates education funding in 85 cities and towns and severely cuts funding in another 54 communities.) The suit contends that without a state budget, Gov. Malloy lacks the authority to cut education funding. The municipalities of Torrington, Plainfield, and Brooklyn joined the initial filing. Association President Sheila Cohen noted: “We can’t sit by and watch our public schools dismantled and students and teachers stripped of essential resources…This injunction is the first step toward ensuring that our state lives up to its commitment and constitutional obligations to adequately fund public education.”

Governance in Fiscal Straits? Connecticut Attorney General George Jepsen has questioned the legality of Governor Malloy’s executive order, and Connecticut Senate Republican Leader Len Fasano (R-North Haven) noted: “I think the Governor’s order is in very serious legal trouble.” Nevertheless, the Governor, speaking to reporters at the state capitol, accused the CEA of acting prematurely: “Under normal circumstances, those checks don’t go out until the end of October…Secondarily, they’ll have to handle the issue of the fact that we have a lot less money to spend without a budget than we do with a budget…Their stronger argument might be that we can’t make any payments to communities in the absence of a budget. That one I would be afraid of.”

Municipal Fiscal Ethics? Forensic auditors from PBMares, LLP publicly went over their findings from the forensic audit they conducted into the City of Petersburg, Virginia’s financial books during a special City Council meeting. Even though the audit and its findings were released last week, John Hanson and Mike Garber, who were in charge of the audit for PBMares, provided their report to Council and answered their questions, focusing especially on what they deemed the “ethical tone” of the city government, saying they found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time…The culture led employees to do things they might not otherwise do.” They noted misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. In response, several Council Members asked whether if some of the employees who admitted to misconduct could be named. Messieurs Garber and Hanson, however, declined to reveal names in public, but said they could discuss it in private with City Manager Aretha Ferrell-Benavides, albeit advising the City Council that the ethical problems seemed to be more “systemic,” rather than individual, adding: “For instance, we looked at fuel data usage…And we could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.”

In response to apprehensions that the audit was insufficient, the auditors noted that because of the city’s limited budget, the scope of PBMares’ work could only go so far. Former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more for a city which had hovered on the brink of chapter 9 municipal bankruptcy. However, Mr. Hanson noted that while the transgressions would have normally fallen under a conflict of interest policy, such was the culture in Petersburg that the city’s employees either did not know, or were allowed to ignore those policies: “When I asked employees what their conflict of interest or gifts and gratuity policy is, people couldn’t answer that question because they didn’t know.”

 

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

October 13, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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

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

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

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

Gov. Ricardo Rossello Nevares, in his letter at the end of last week to the President, cited “independent damage assessments in the range of $95 billion–approximately 150% of Puerto Rico’s” economy, writing that “financial damages of this magnitude will subject Puerto Rico’s central government, its instrumentalities, and municipal governments to unsustainable cash shortfalls: As a result, in addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future.”

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

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

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