Plans of Debt Adjustment

April 16, 2018

Good Morning! In this morning’s eBlog, we return to the Motor City, Detroit, a city, which, to some extent, was the touchstone of chapter 9 municipal bankruptcy, to observe how the process of debt adjustment, as approved by U.S. Bankruptcy Judge Steven Rhodes fared. Then we journey south to consider an assessment by the Capitol Hill publication, Politico, of the response to Hurricane Maria in Puerto Rico.

A Motor City Perspective from a Battle Veteran. Former CIA Director and U.S. Army General David Petraeus, speaking at the end of last week in Detroit at Wayne State University, likened Detroit’s rebound from the nation’s largest ever chapter 9 municipal bankruptcy to be like a “Phoenix rising from the ashes,” suggesting that the United States should emulate the Motor City’s multifaceted template for success. His speech, titled, “National Security: How safe are we at home and around the world?” was part of Wayne State’s Forum on Contemporary Issues in Society’s 10th anniversary lecture series. The issue, or question, Gen. Petraeus told the audience with regard to: “What in the World is Going On?” related to: “Detroit is a city that hit rock bottom that is bringing you back.” Thus, General Petraeus asked: “The question is: how to do that for the entire country?” Telling the audience: “In Detroit, where do you start when you have a city that’s crumbling at its core? Do you start with policing? Urban renewal? Economic revival? Education? It takes all of the above.” Gen. Petraeus said the biggest threats facing the U.S. are “countries that aren’t satisfied with the status quo and want a change…such as Russia, China, Iran and North Korea; Islamic extremists; cyber threats; and increasing domestic populism.”

Gen. Petraeus added: “We really need to come to grips with the legal pathway of unskilled workers who are hugely important, particularly to the agriculture and hospitality industries; we need to come to grips with those who are already here but not legally, particularly the DACA children.”

But, as the fine editorial writer for the Detroit News, Bankhole Thompson, writing about a forum over the weekend at the Kennedy School’s Institute of Politics, billed as a forum to focus on the Motor City’s recovery, featuring Mayor Mike Duggan, JP Morgan Chase Chair Jamie Dimon, and Peter Scher, the bank’s global head of corporate social responsibility,  the event “appeared more like a carefully orchestrated public relations and ‘job well done’ session for JPMorgan Chase, or at best the case of a bank issuing its own report card about its involvement in the city’s recovery,” adding that, “poverty, the greatest challenge to the city’s revival, was not given the deserving spotlight: They referenced the Mayor’s race speech last year without in-depth analysis about it. Listening to the entire exchange about Detroit, one would think the speakers were talking about a completely different city, not the one which is today the headquarters of poverty in America, as the 2016 Census shows Detroit leads the nation among the largest cities with poverty at 35.7%.” Mr. Thompson added that if one were unfamiliar with the crime index of Detroit, one would have been “hard-pressed to believe that the three-person panel led by Mayor Duggan was talking about a city that is now No. 1 in violent crime in the nation,” asking: “How can a discussion about rebuilding a city like Detroit not first acknowledge the problem of poverty, which is central to achieving even-handed recovery?” Wondering how if the city’s leaders continued to shy away “from the proper diagnosis, how can the problem be solved?” While expressing appreciation for the role that JPMorgan Chase and other entities are playing by investing in certain targeted neighborhoods, he wrote: “But the fact remains that while some neighborhoods are poised to revive and soar, the vast majority of them are nowhere close to experiencing economic salvation…As a result, Detroit has remained a city of different and especially unequal neighborhoods where the future of the city’s kids is determined by ZIP codes…Men and women of all races are born with the same range of abilities. Referencing former President Lyndon Johnson’s Howard University commencement address from 1965, he wrote: “ ‘But ability is not just the product of birth. Ability is stretched or stunted by the family that you live with and the neighborhood you live in, by the school you go to and the poverty or the richness of your surroundings,’” noting that the former President’s comments capture the “current realities of life for many in Detroit, where children wake up frightful and go to sleep hungry in high poverty neighborhoods,” Adding that the panel “failed to delve into the spectacles of destitution and misery that have created the ‘two Detroit’ phenomenon.” He wrote: “Detroit’s leaders must first acknowledge that poverty is real, not a myth, and then work assiduously to address it. An omission like this often leaves some people with this question: who is the city coming back for?”

Beating the Odds: A grim Assessment of FEMA. The Capitol Hill periodical, Politico, in an investigation by writer Danny Vinik “How Trump Favored Texas over Puerto Rico,” noted that the federal government had significantly underestimated the potential damage to Puerto Rico from Hurricane Maria and relied too heavily on local officials and private-sector entities to handle the cleanup, noting that its cleanup plan, which had been developed four years ago by a FEMA contractor in anticipation of a catastrophic storm and utilized by FEMA when Maria hit last September, prepared for a Category 4 hurricane and “projected that the island would shift from response to recovery mode after roughly 30 days. In fact, Hurricane Maria was a ‘high-end’ Category 4 storm with different locations on the island experiencing Category 5 winds. More than six months after Maria made landfall, the island is just beginning to shift to recovery mode,” adding that, according to a half-dozen disaster-recovery experts who reviewed the document at Politico’s request, FEMA did not anticipate having to take on a lead role in the aftermath of the disaster, despite clear signs that Puerto Rico’s government and critical infrastructure would be overwhelmed by the force of such a storm; rather, the document largely relied on local Puerto Rico entities to restore the island’s power and telecommunications systems. Moreover, the FEMA analysis omitted discussion of the U.S. territory’s fiscal instability, as well as the capacity of PREPA—or, as Mr. Vinik wrote: “The plan truly didn’t contemplate the event the size of Maria…They made assumptions that people would be able to do things that they wouldn’t be able to do.” Nevertheless, he added that disaster-recovery experts determined that the 140-page plan, published last month on the open-information site MuckRock through a Freedom of Information Act request, correctly predicted many challenges that FEMA faced with Hurricane Maria, including widespread road closures and difficulties transporting emergency supplies to the island territories, but failed to anticipate the extent of the damage. Mr. Vinik noted that Michael Coen, an appointee of President Barack Obama, who was serving as chief of staff at FEMA when the report was written, said the drafters should have expected that the federal government would need to play a larger role than they envisioned: “They probably should have made the assumption that it was going to require federal support: That should have been flagged,” with experts describing that omission as significant, because such planning documents are most useful in advance of the disaster, in significant part to assist federal, state, and local entities to better understand and coordinate their responsibilities. He found, mayhap ironically, that FEMA’s plan “did accurately predict that the island’s geographic position and aging infrastructure would make the response challenging. It correctly identified that moving assets to nearby locations in advance would be ‘limited’ as a result of the storm’s uncertain path and that ‘hotel space commonly used to house responders may be necessary to house survivors.’” Moreover, he found, FEMA’s plan also found that Puerto Rico’s power is generated in the island’s south, while most of the population lives in the north, requiring transmission lines which transverse Puerto Rico’s steep terrain would render “repair and restoration difficult and lengthy: It is anticipated that infrastructure of essential utilities will be out of service for extended periods of time.” Indeed, he noted that Jeremy Konyndyk, the former key USAID disaster response official during the Obama administration, had described FEMA’s plan as “reasonably good,” that it “presciently anticipate[d] many of the issues that emerged in the Maria response.” However, Mr. Konyndyk and other disaster response experts suggested that the plan contained some critical omissions, especially its heavy reliance on state and local officials to respond to the storm. The FEMA plan had determined that the U.S. Army Corps of Engineers could help with temporary power restoration, but “cannot fix transmission lines,” since such a job “is the responsibility of the owners.” However, after Maria struck, the Corps was tasked with repairing the entire power grid in Puerto Rico, a result of financial and management difficulties at PREPA. Thus, the plan’s over optimistic assumptions that temporary repairs to critical infrastructure, such as the power system, would be complete soon after the storm proved to be gravely off.

The plan also projected that private sector companies would move swiftly to restore telecommunications, or, as the report described it: “There are minimal expectations that federal assistance would be required to restore the infrastructure during the response and recovery of a storm,” adding that, if communication systems were not swiftly fixed, first responders could use satellite phones instead or rely on mobile communication trucks delivered to the island. The reality, as we have previously noted, however, is that Puerto Rico’s communication system was wiped out, leaving telecommunications companies in the midst of such serious infrastructure disruption to slowly repair the infrastructure, unaided by rolls of paper towels tossed by President Trump as Puerto Rico’s leaders and mayors desperately sought to communicate with FEMA and other first responders. Indeed, as Mr. Vinik wrote: “Local officials described limited communications as one of the biggest challenges in the first week after the storm.”

Noting the importance of having a FEMA plan on a Caribbean island subject to violent hurricanes, Mr. Vinik, wrote that in a March interview at FEMA’s joint field office in Puerto Rico, Michael Byrne, FEMA’s top official overseeing the response to Hurricane Maria, had, instead downplayed the importance of the plan—telling him: “A plan is good when you don’t have all the ground truth about what your requirements are going to be. You use that someone thought about this, someone took the time to think it through and said it’s likely that this is what’s going to happen. And then you execute the plan.” In the aftermath of Maria, FEMA is revising its hurricane plan for Puerto Rico, and, a day late and many dollars short, FEMA is creating teams to help Puerto Rico municipios to update their own plans, using new assumptions about the risks and damage from a catastrophic storm. 

Who Is on First? In its revised, quasi plan of debt adjustment, Puerto Rico has increased its projected five-year cash surplus to $7.36 billion; the plan, however, does not include layoffs or pension cuts that have been urged by the federally-appointed PROMESA oversight board—raising, once again, the difficult governance issue with regard to how the elected leaders of Puerto Rico and the federally appointed oversight board will reach any consensus after months of seeking to negotiate a consensual plan, with Governor Rossello vowing to oppose the PROMESA Board’s proposed 10% cut in public pension payments and a number of proposed labor reforms. In addition, the Governor has insisted he can achieve the Board’s requested level of spending cuts without layoffs in the public sector workforce—something with regard to which the Board has remained doubtful. Now, with the Board’s April 20th deadline looming this Friday, the question will be whether there might be still another deferral to continue talks with the Governor, albeit, there appears to be growing speculation that the Board will act to approve or disapprove this week.  

The Fiscal & Physical Challenge. In the real world, for any meaningful fiscal recovery, any plan agreed to—or imposed by the Board, will have to address the trials and tribulations of one of the nation’s oldest municipalities, Cidra, a municipio of about 44,000, which is one of the oldest cities in the U.S. Founded in 1795, the city has, in the wake of Maria, lost hundreds of jobs: chains of adverse events which are outside of local control demonstrate the complexity of assessing what kind of fiscal recovery plan could actually work. In February, PepsiCo announced the closure of its plant in the city—and the dismissal of 200 employees, after operating there for 30 years. Pepsi reported its decision was not related to Hurricane Maria or its location in that town, but with its strategy of optimizing global network and long-term growth. Whatever the reasoning, for Cidra, the bottom line will be the loss of jobs and the reduction of tax revenues for the municipality and for Puerto Rico: it will mark another knock on Puerto Rico’s fiscal base—of which manufacturing constitutes 20% of the island’s fiscal base. The closure will translate into losses of jobs, both private and public, reduced license taxes, corporate taxes, and individual taxes—meaning the loss of 70% of license revenues and 40% of the municipal budget. That, in turn, is forcing municipal layoffs: Cidra intends to dismiss 200 employees from a payroll of 526 representing a potential savings of $10.5 million a year—and a reduction in the city’s municipal budget, from $18 million to $11 million for FY2018-2019.

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eBlog, 2/16/17

Good Morning! In this a.m.’s eBlog, we consider the dwindling timeline confronting the city of Dallas to take action to avert a potential municipal bankruptcy; then we return to the small municipality of Petersburg, Virginia—an insolvent city with what appears to be an increasingly insolvent governing model, enmeshing the small city in litigation it can ill afford. Finally, we return to the trying governing and fiscal challenges in the U.S. territory of Puerto Rico—caught between changing administrations, a federal oversight board, a disparate Medicaid regime than for other states and counties, and trying to adjust to a new Administration and Congress.

Dallas, Humpty-Dumpty, & Chapter 9? In a state where, as one state and local government expert yesterday described it, that state has created a governance structure which allows everyone to avoid accountability, the City of Dallas is confronting a public pension problem that could force the city into municipal bankruptcy [Texas Local Government Code §101.006—seven Texas towns and cities have filed for such protection.]. Should the city lose its current case against its firefighters—a case with some $4 billion at stake—municipal bankruptcy could ensue. Another Texan, noting the challenge of putting “Humpty Dumpty back together again,” said failure of the city to emulate Houston and come to terms with its employees, retirees, and taxpayers would be “cataclysmic.” With about two weeks remaining to file bills in the Longhorn legislature and negotiations over the city’s mismanaged and underfunded police and fire pension at a standstill, state lawmakers note they will likely be forced to step into the crisis, if the city is to avoid chapter 9 municipal bankruptcy—or, as Rep. Jason Villalba (R-Dallas) noted: “I think we’re forced to step in. We’re [17] days away from the deadline, and there is yet to be an agreement between the city and the pension board…I think at this point we have to have a summit or some form of intervention, get everyone to the table and hammer those final issues down. If they don’t do that, it’s going to be a plan that’s drawn by the legislators, and we don’t have a stake interest like the other groups do to understand the nuances.” His statement came in the wake of a stoppage in negotiations over the last couple weeks—negotiations originally set up by the state, and negotiations with a short fuse: the last chance for the Texas Legislature to file bills to address the issue is looming: March 1st.

The severity of the crisis could be partially alleviated by a settlement reached late yesterday by the failing Dallas Police and Fire Pension System in its litigation against its former real estate advisers, whom pension officials had accused of leading the retirement fund astray. CDK Realty Advisors and the Dallas pension system both agreed to drop all claims and counterclaims with prejudice, according to court records filed late yesterday—and came as the city’s pension system and its attorneys have also been battling litigation from four City Council members, Mayor Mike Rawlings, a former contract auditor, and active and retired police and firefighters. The stakes are the city’s fiscal future: its retirement fund is now set to become insolvent within the next decade because of major losses and overvaluations—mostly from real estate—and generous benefits guaranteed by the system. Advising me that the “stigma or consequences for a city with the pride and stature of Dallas to fail would be cataclysmic,” one of the nation’s most insightful state and local pension wizards described the city’s pension challenge as “about as bad as any I have ever seen.”  

Hear Ye—or Hear Ye Not. A hearing for the civil case brought against Petersburg Mayor Samuel Parham and Councilman and former Mayor W. Howard Myers is set for this morning: Both men are defendants in a civil court case brought about by members of registered voters from the fifth and third wards of Petersburg: members of the third and fifth wards signed petitions to have both men removed from their positions. The civil case calls for both Parham and Myers to be removed from office due to “neglect, misuse of office, and incompetence in the performance of their duties.” The purpose of hearing is to determine a trial date, to hear any motions, to determine whether Messieurs Parham and Myers will be tried separately, and if they want to be tried by judge or jury. James E. Cornwell of Sands Anderson Law Firm will be representing Myers and Parham. The City Council voted 5-2 on Tuesday night to have the representation of Mr. Myers and Mayor Parham be paid for by the city. Mayor Parham, Vice Mayor Joe Hart, Councilman Charlie Cuthbert, former Mayor Myers, and Councilman Darrin Hill all voted yes to the proposition, while Councilwoman Treska Wilson-Smith and Councilwoman Annette Smith-Lee voted no. Mayor Parham and Councilmember Hill stated that the Council’s decision to pay for the representation was necessary to “protect the integrity of the Council,” noting: “It may not be a popular decision, but it’s [Myers and Parham] today, and it could be another council tomorrow.” Messieurs Hill and Parham argued that the recall petition could happen to any member of council: “[The petitions] are a total attack on our current leadership…We expect to get the truth told and these accusations against us laid to rest.” The legal confrontation is further muddied by City Attorney Joseph Preston’s inability to represent the current and former Mayors, because he was also named in the recall petition, and could be called as a witness during a trial.

Municipal Governance Bankruptcy? Virginia Commonwealth’s Attorney Cassandra Conover has felt forced to write a complaint, suggesting a conflict of interest in the virtually insolvent municipality of Petersburg, Virginia, in the wake of a city council vote to have the city pay for the legal expenses of Mayor Samuel Parham and Councilman Howard Myers. Ms. Conover, in an advisory opinion, described the vote to approve those expenses as a conflict of interest for the current and former mayors: “It is my advisory opinion that the undeclared conflict of interest disqualified both councilmen from voting on this motion and renders the vote invalid.” (The vote in question, as we have previously noted, was to hire a private attorney to represent Mayor Sam Parham and Councilman Howard Myers after more than 400 neighbors signed a petition to oust two Councilmembers from office.) Ms. Conover cited Virginia Code §2.2-3112, which says an employee of a state or local government entity “shall disqualify himself from participating in the transaction where the transaction involves a property or business or governmental agency in which he has a personal interest,” noting that Code §2.2-3115(F) mandates that in such a situation, there must be oral or written statements that show the transaction involved; the nature of the employee’s personal interest: that he (or she) is a member of a business, profession, occupation or group of members which are affected by the transaction: and that he is able to participate fairly, objectively and in the public interest. In this case, Ms. Conover stated that there was “no evidence that all four of these requirements were met in this case: concluding that the undeclared conflict of interest disqualified both men from voting and renders the vote invalid. 

The governance issue was not just the concept of an insolvent city’s Council voting to use public municipal funds to hire the private attorney, but also that neither Mayor Parham, nor Councilmember Myers recused himself from voting. Nevertheless, Petersburg City Attorney Joseph Preston responded that there was no conflict of interest and that the pair of elected officials had acted legally. Mayor Parham said the city likely will pay the bill for the personal attorney he and Councilmember Myers retained, albeit noting: “We’ve had to make cuts to schools and public safety, and we’re just starting to get back on our feet. It is a shame that we have to pump funds into something like this.” City Attorney Preston noted that Ms. Conover’s advisory opinion “adequately represents what occurred at their council meeting,” but he said he believes the pair of elected officials were legally allowed to take part in the vote, citing Virginia Code §2.2-3112 which provides that persons who have a conflict of interest can submit a disclosure statement on the issue—filings which the two elected officials filed with the Clerk of Court’s office the day after the vote. In addition, City Attorney Preston cited a decision from the Virginia Attorney General’s Office from 2009 which had ruled in favor of the Gloucester County Board of Supervisors, who were seeking compensation for their legal expenses; Ms. Conover, however, responded that the Attorney General’s 2009 decision did not apply to this case, because the charges against the Gloucester Board of Supervisors had been dismissed, and the court ordered the locality to pay for the majority of the legal fees which the board members had accrued, adding that the insolvent city had offered no estimate with regard to how much their legal fees could be. Notwithstanding the Commonwealth Attorney’s opinion, it appears unlikely that the Council will vote on the issue again: Mayor Parham yesterday noted: “I don’t feel like there was any conflict, and we did as we were advised by our attorney…We’ve had to make cuts to schools and public safety, and we’re just starting to get back on our feet. It is a shame that we have to pump funds into something like this.”  

Federalism, Governance, & Hegemony. With the enactment of the PROMESA legislation, Congress created governance and fiscal oversight responsibilities in the hands of seven non-elected officials to make critical fiscal reforms and restructuring of Puerto Rico—either through federal courts or via voluntary negotiations—for a debt that adds up to about $69 billion, but the new law also tasked a Congressional Task Force with analyzing initiatives which could help the island’s economy to grow; however, this bipartisan and bicameral committee ceased to exist upon submitting its report; ergo, unsurprisingly, both Governor Ricardo Rosselló and Jenniffer González, the new Resident Commissioner for Puerto Rico, have demanded that the PROMESA board members support their claims. But now a key area of concern has arisen: if the U.S. territory is unable to comply with the implementation of an information system which methodically integrates the management of important data for Medicaid claims—as mandated for federal eligibility as part of an integrated system to process claims and recover information, which is a Medicaid program requirement for federal fund eligibility which Puerto Rico should have long ago met, the island faces a more stark January 1 deadline by which it must comply with 60% of this system or be confronted with a fine of $147 million—a threat so dire that, according to the Health Secretary, Dr. Rafael Rodríguez Mercado, failing to comply with this requirement would mean the end of the Puerto Rico Government Health Plan. Puerto Rico is the only jurisdiction lacking such a platform, a platform intended to protect against medical fraud and establish eligibility, compliance, and service quality controls.

It was revealed in December, during the new government’s transition hearings for the Department of Health that the development of this platform began in 2011, but that it was not until 2014 that the project was resumed in its planning stage. The necessary funds to begin the implementation phase were finally matched during this fiscal year. The last administration predicted that the basic modules would begin working in a year and a half, and that the entire system would be operating in five years: it was expected that the window for the disbursement of Medicare and Medicaid funds would open in a year and a half. However, under threat of a fine, the government now expects to reach this goal before the date predicted by the last administration. Dr. Rodríguez Mercado stressed that there are currently 470,000 Puerto Ricans without health care insurance, many of whom cannot afford private insurance or are ineligible for the Government Health Plan, thus, many of these people seek out services in Centro Médico, an institution with a multi-million dollar deficit, when they become sick or are injured. Dr. Mercado further noted the disproportionate percentage of Medicare and Medicaid fraud cases, further undermining the territory’s credibility with the federal government—and, adding that local governments have complied  with the implementation of a Medicaid Fraud Control Unit (MFCU), which he says falls under the purview of the Department of Justice. Nevertheless, despite differing points of emphasis, both the leadership of the PROMESA Oversight Board and Resident Commissioner Jenifer González yesterday restated the importance of preventing Puerto Rico’s healthcare system from falling into a fiscal abyss, given the depletion of the $1.2 billion in Medicaid funds which has been provided on an annual basis under the Affordable Care Act.

Yesterday, in the wake of separate meetings with Commissioner González, with one of Speaker Paul Ryan’s advisors, and with Congresswoman Elise Stefanik (R-NY), PROMESA Oversight Board Chair José Carrión claimed that “we always try to include healthcare and economic development issues” in the meetings held in Congress, describing meetings in which he had been joined by Board member Carlos García and interim executive director, Ramón Ruiz Comas, as sessions to provide updates, while trying to deal with the issue which most concerns the Board: health care—emphasizing that especially in the wake of the end of the Congressional Task Force on Economic Growth in Puerto Rico.