Not Florence Nightingale: The Governance Challenge of Life Threatening Storms

September 12, 2018

Good Morning! In this morning’s eBlog, as Hurricane Florence bears down on the East Coast, the President, yesterday, patted himself on the back for what he deemed an “incredibly successful” job he had done in leading the federal government’s response to the human, fiscal, and physical devastation wrought by Hurricane Maria in Puerto Rico, boasting: “I think Puerto Rico was “an incredible, unsung success,” referring to the devastating hurricane which caused the death of nearly 3,000 Americans.

Hurricane Relief? President Trump patted himself on the back yesterday for an “incredibly successful” job done in Puerto Rico, where the President, in the wake of the storm, had travelled to Ponce and thrown paper towels, deeming federal response efforts as one of his administration’s “best jobs.” Asked what lessons his administration might have learned as it prepares for this week’s Hurricane Florence, headed towards the nation’s capital later this week, the President responded: “I think probably the hardest one we had by far was Puerto Rico, because of the island nature, and I actually think it was one of the best jobs that’s ever been done with respect to what this is all about…The job that FEMA, and law enforcement and everybody did working along with the governor in Puerto Rico, I think was tremendous: I think that Puerto Rico was an incredible, unsung success.” He added that his administration had received “A pluses” for its work in Texas and Florida following hurricanes last year. Yet, even as the official death toll in Puerto Rico has reached nearly 3,000—far in excess of FEMA’s original report of 64—and with electricity still not totally restored, San Juan Mayor Carmen Yulín Cruz yesterday stated: “If he thinks the death of 3,000 people is a success, God help us all.”

Speaking at the White House yesterday, the President sought to assure the public that the FEMA was ready for Hurricane Florence, noting: “We are as ready as anybody has ever been,” as he boasted that the federal government had earned excellent grades for its disaster response in Texas and Florida, but he complained that the even better job done in Puerto Rico had been ignored, describing his administration’s “incredible, unsung success,” by noting the Pentagon had deployed a “tremendous military hospital in the form of a ship” to the island, omitting mention of his failure to suspend the Jones Act and that the ship to which he referred was largely underused: prepared to support 250 hospital beds, it admitted an average of only six patients per day, or 290 in total, over its 53-day deployment. Yet the President described the White House response effort as “one of the best jobs that’s ever been done with respect to what this is all about,” adding, falsely, that Puerto Rico’s electric grid and generating plant “was dead” before Hurricanes Irma and then Maria struck within weeks of one another—or, as the President asserted: “[W]hen the storm hit, they had no electricity, essentially, before the storm.”

As readers are all too aware, electricity was not restored to every customer in Puerto Rico until a few weeks ago. Worse, according to the director of the Puerto Rico Electric Power Authority, approximately a quarter of the federally financed $3 billion in repairs will likely have to be redone. San Juan Mayor Yulín Cruz was more direct, posting on Twitter, yesterday: “If he thinks the death of 3,000 people is a success, God help us all.”

Jose Andrés, a Spanish chef who organized an emergency feeding program on Puerto Rico in the wake of one of the U.S.’s most devastating storms, deemed the President’s comments “astonishing: The death toll issue has been one of the biggest cover-ups in American history…Everybody needs to understand that the death toll was a massive failure by federal government and the White House. Not recognizing how many people died in the aftermath meant the resources and full power of the government was taken away from the American people of Puerto Rico.”

Chef Andrés stressed that the failures spread to food and water distribution—a failure belatedly acknowledged by FEMA in a report released in July, acknowledging the agency was unprepared, with empty warehouses and few qualified staff to attend to the disaster, that it had brought the wrong type of satellite phones to Puerto Rico, and did not have truck drivers to deliver aid from the port, adding that the federal disaster relief agency had been without “situational awareness” of what was happening outside. FEMA’s Michael Byrne, the coordinator for the agency’s Puerto Rico response, has ironically confessed that, unlike the White House, “I think one of the most courageous things FEMA has done is to be honest and frank in the after action and say, ‘We need to work on these areas…And we’re going to. We’re going to get better,” adding that among the areas which needed to be improved was the process to inspect damaged homes: many of the 300,000 homes damaged in the storm are still covered by canvas. To which, Amarilis González, a former English teacher who founded Toldos Pa’ Mi Gente, or Tarps for My People, a group that collected house coverings: “Anyone who flies in to Puerto Rico may notice the amount of blue tarps as they are landing, and that is only a small representation of the rest of the municipalities…If that is a ‘success,’ I do not understand the concept.”

The White House reference this week to Puerto Rico as a “colony” made it clear, however, as Gov. Ricardo Rosselló put it: “The historical relationship between Puerto Rico and Washington is unfair and un-American…It is certainly not a successful relationship,” as the Governor called on the President to extend federal coverage to continuing work on housing restoration and clean-up which is still ongoing, noting the hurricane had constituted the “worst natural disaster in our modern history: Our basic

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Intergovernmental Federalism Fiscal Recovery Challenges

March 26, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal challenges to Connecticut’s capitol city of Hartford, and the fiscal challenges bequeathed to the Garden State by the previous gubernatorial administration, before wondering about the level of physical and fiscal commitment of the U.S. to its U.S. territory of Puerto Rico.

Capitol & Capital Debts. The Hartford City Council is scheduled to vote today on whether to approve an agreement between the city and the state on a fiscal arrangement under which the state would pay off Hartford’s general obligation debt of approximately $550 million over the next two decades as part of the consensus seemingly settled as part of the Connecticut state budget—an agreement under which the state would assume responsibility to finance Hartford’s annual debt payments, payments projected to be in excess of $56 million by 2021, while the city would continue to make payments on its new minor league ballpark, about $5 million per year—a fiscal pact described by Hartford Mayor Luke Bronin as the :”[K]ind of long-term partnership we’ve been working for, and I’m proud that we got it done.” Mayor Bronin is pressing Council to vote before April Fool’s Day, which happens to be the city’s deadline for its next debt payment: if executed by then, the state would pay the $12 million which Hartford currently owes, under the provisions in the current state fiscal budget which, when adopted, had pledged tens of millions of dollars in additional fiscal assistance to the state capitol, fiscal assistance regarded as vital to avert a looming chapter 9 municipal bankruptcy—and, under which, similar in a sense to New Jersey’s Atlantic City, the aid provided included the imposition of state oversight. The effect of the state fiscal assistance meant that in the  current fiscal year, Connecticut would assume responsibility for Hartford’s remaining debt of $12 million; in addition, the state is to provide Hartford another $24 million to help close the city’s current budget deficit—and, in future years, assume the city’s full debt payment. The agreement provides that the state could go further and potentially finance additional subsidies to the city. Mayor Bronin had sought approximately $40 million in extra aid each year, in addition to the $270 million the city already receives—albeit, the additional state aid comes with some fiscal strings attached: a state oversight board, as in Michigan and New Jersey, is authorized to restrict how the municipality may budget, and finance: contracts and other documents must be run by the panel, and the board will have final say over new labor agreements and any issuance of capital debt. Going further, under the provisions, even if the oversight board were to go out of existence, Hartford’s fiscal authority would still be subject to state oversight: e.g. if the city wished to make its required payment to the pension fund, such payment(s) would be subject to oversight by both the Connecticut Treasurer and the Secretary of Connecticut’s Office of Policy and Management—where a spokesperson noted: “Connecticut cannot allow a city to default on its bond obligations or financially imperil itself for the foreseeable future: This action will ultimately best position Hartford to move into a better financial future.”

Mayor Bronin, in reflecting on the imposition of state fiscal oversight, noted that while the state assistance would help offset Hartford’s escalating deficits, deficits now projected to reach $94 million by 2023, noted: “This debt transaction does not leave us with big surpluses: “We’re looking to achieve sufficient stability over the next five years, and we can use that period to focus on growth.” Hartford Council President Glendowlyn Thames likewise expressed confidence, noting: “This plan is really tight, and it’s just surviving: We have to focus on an economic development strategy that gets us to the point where we’re thriving.”

State Fiscal Stress. For its part, with less than a week before the state enters its final fiscal quarter, the Connecticut legislature still has its own significant state debt issue to resolve—with Gov. Dannel P. Malloy warning he still expects the state legislature will honor a new budget control it enacted last fall to help rebuild the state’s modest emergency reserves, stating: “I don’t think I have given up any hope, or all hope” that legislators will close the $192 million projected shortfall in the fiscal year which ends June 30th; however, the Governor also said legislative leaders professed commitment to both write and commit to a new, bipartisan budget may be waning, stating: “The grand coalition seems to be fraying, and I think that’s what gives rise to the inability to respond to the budget being out of balance,” he said, referencing last October’s grand bargain under which there was bipartisan agreement on a new, two-year plan to balance state finances—an agreement achieved in a process excluding the Governor, who, nevertheless, signed the budget to end the stalemate, despite what he had described as significant flaws, including a reliance on too many rosy assumptions, hundreds of millions of dollars swept from off-budget and one-time sources, as well as unprecedented savings targets the administration had to achieve after the budget was in force. Indeed, meeting that exacting target is proving elusive: the fiscal gap in January exceeded $240 million in January, before declining to the current $192 million: it has yet to meet the critical 1% of the General Fund threshold—a threshold which, if exceeded, mandates the Comptroller to confirm, and triggers a requirement for the Governor to issue a deficit-mitigation plan to the legislature within one month.

The new state local fiscal oversight arrangement provides that, even if the state oversight board goes away, the city’s fiscal practices would remain subject to state oversight—where any perceived failures would subject the city fiscal scrutiny by the Connecticut Treasurer and the Secretary of Connecticut’s Office of Policy and Management, a spokesperson for which noted: “Connecticut cannot allow a city to default on its bond obligations or financially imperil itself for the foreseeable future: This action will ultimately best position Hartford to move into a better financial future.” Hartford City Council President Glendowlyn Thames asserted her confidence with regard to the contract, but noted more work needed to be done: “This plan is really tight, and it’s just surviving: We have to focus on an economic development strategy that gets us to the point where we’re thriving.”

Post Christie Garden State? New Jersey Gov. Phil Murphy, in his first post Chris Christie fiscal challenge is targeting state tax incentives as a potential source of revenue for the cash-starved state, noting, in his first fiscal address earlier this month that $8 billion in corporate state tax credits approved by the New Jersey Economic Development Authority under former Gov. Chris Christie had made the state’s fiscal cliff even steeper to scale, noting that one of his first fiscal actions was to sign an executive order directing the state Comptroller’s office to audit the New Jersey Economic Development Authority’s tax incentive programs, dating back to 2010 (the current program is set to expire in 2019), describing the programs as “massive giveaways, in many cases imprecisely directed, [which] will ultimately deprive us of the full revenues we desperately need: “These massive giveaways, in many cases imprecisely directed, will ultimately deprive us of the full revenues we desperately need to build a stronger and fairer economic future,” as the new Governor was presenting his $37.4 billion budget to the Garden State state legislature, noting: “We were told these tax breaks would nurse New Jersey back to health and yet our economy still lags.” Under his Executive Order the Gov., in January, had directed Comptroller Philip James Degnan to examine the Grow New Jersey Assistance Program, the Economic Redevelopment and Growth Grant Program, and other programs which have existed under the NJEDA since 2010 when former Gov. Christie assumed office: the audit is aimed at comparing the economic impact from projects that received the tax breaks with the jobs and salaries they created: it is, as a spokesperson explained: “[A]n important opportunity to evaluate the effectiveness of the State’s existing incentive programs.” New Jersey Policy Perspective, in its perspective, notes that the $8.4 billion of tax breaks NJEDA approved under former Gov. Christie compared to $1.2 billion of subsidies awarded during the previous decade, subsidies which the organization frets have hampered New Jersey’s fiscal flexibility to fund vital investments such as transportation and schools. Indeed, a key fiscal challenge for the new Governor of a state with the second lowest state bond rating—in the wake of 11 downgrades under former Gov. Christie, downgradings caused by rising public pension obligations and increasing fiscal deficits—will be how to fiscally engineer a turnaround—or, as Fitch’s Marcy Block advises: “It’s always a good idea for a new administration to see what the tax incentives program is like and what potential revenue they are missing out on,” after Fitch, last week, noted that the new Governor’s budget proposes $2 billion in revenue growth, including $1.5 billion from tax increases,” adding that the Governor’s proposed plan to readjust the Garden State’s sales and use tax back up to 7% from the 6.625% level it dropped to under former Gov. Christie was a “positive step” which would provide $581 million in additional revenue, even though it would impose strict fiscal restraints: “These increased revenues would go to new spending and leave the state with still slim reserves and reduced flexibility to respond to future economic downturns through revenue raising: The state has significant spending pressures, not only due to the demands of underfunded retiree benefit liabilities, but also because natural revenue increases resulting from modest economic growth in recent years have gone primarily towards the phased-in growth in annual pension contributions.”

For his part, Gov. Murphy has emphasized that while he opposes many of the state tax expenditures doled out by the former Christie administration, a $5 billion incentives program that the NJEDA’s Grow New Jersey Program is offering Amazon to build its planned second headquarters in Newark would be a positive for the state. (Newark is on Amazon’s short list of 20 municipalities it is considering for a new facility that could house up to 50,000 employees: the city is offering $2 billion in tax breaks of its own to create $7 billion in total subsidies.) The Governor noted a win here would be “a transformative moment for our state: It could literally spur billions of dollars in new investments, in infrastructure, in communities and in people,” as he noted that the Commonwealth of Massachusetts has grown jobs at a rate seven times greater than New Jersey in recent years, despite only spending $22,000 in economic incentives per job compared to $160,000 for each job in New Jersey, noting that other priorities beyond taxes are important to lure businesses, such as investments in education, workforce housing, and infrastructure: “Even with these heralded gifts, our economic growth has trailed almost every other competitor state in the nation in literally almost every category: “Massachusetts and our other competitor states are providing businesses a greater value for money and with that value in hand they are cleaning our clocks.”

Free, Free at Last? Announcing that “We’ve reached an agreement that is beneficial both for the taxpayer and for the people of Puerto Rico,” referring to a pact that is to lead to the release of some held up $4.7 billion in federal disaster recovery assistance reached between Puerto Rico Gov. Ricardo Rossello and U.S. Treasury Secretary Steven Mnuchin, the pair has announced at the end of last week agreement on the release of some $4.7 billion in disaster recovery loans which Congress had signed off on six months ago—but funds which Sec. Mnuchin had delayed releasing on account of disagreement over the terms of repayment, describing it as a “super-lien” Community Disaster Loan. After a meeting between the two, the new, tentative agreement would allow Puerto Rico access to the fiscal assistance once the cash balance in its treasury falls below $1.1 billion—a level more than the Secretary’s initial request of $800 million. (As of March 9th, U.S. territory had about $1.45 billion in cash.) The agreement ended half a year of tense negotiations over what were perceived as discriminatory loan conditions compared to the terms under which federal assistance had been provided to Houston and Florida in the wake of the hurricanes. Indeed, Gov. Rossello had written to Congress that the Treasury was demanding that repayment of those loans be given the highest priority, even over the provision of essential emergency services in Puerto Rico—even as the Treasury was proposing to bar Puerto Rico’s eligibility for future loan forgiveness. Under the new agreement, the odd couple have announced that the revised agreement would grant high priority to repayment of the federal loans—not above the funding of essential services, but presumably above the more than $70 billion Puerto Rico owes to its municipal bondholders. From his perspective, Sec. Mnuchin noted: “We want to make sure that the taxpayers are protected: It’s not something we’re going to do for the benefit of the bondholders, but it is something we would consider down the road for the benefit of the people if it’s needed,” opening the previously slammed door for access by Puerto Rico to the full amount approved by Congress, more than double the amount the Trump Administration had sought to impose. Nevertheless, notwithstanding the agreement, the terms must still be agreed to by Puerto Rico’s legislature, the PROMESA oversight board, and the federal court overseeing the quasi-chapter 9 bankruptcy proceedings. Under the terms of the agreement, Puerto Rico may borrow up to $4.7 billion if its cash balances fall below $1.1 billion. (Puerto Rico’s central bank account had $1.45 billion as of March 9th.) Governor Rosselló described the federal loan as one which will have a “super lien: There will be a lien within the Commonwealth, but it won’t be a lien over the essential services…I think both of our visions are aligned. We both want the taxpayer to be protected, but we also want the U.S. citizen who lives in Puerto Rico to have guaranteed essential services. And both of those objectives were agreed upon,”  noting that the U.S. government frequently forgives these types of loans. For his part, Secretary Mnuchin said the topic of loan forgiveness would be dealt with later “based on the facts and circumstances at the time,” and that, if and when the topic came up, the Treasury would consult with FEMA, the Congressional leadership and the administration, noting: “It’s not something we’re going to do for the benefit of bondholders, but it is something we would consider down the road for the benefit of the people of Puerto Rico.” The discussions come as the Commonwealth continues in the midst of its Title III municipal-like bankruptcy process affecting more than $50 billion of Puerto Rico’s $72 billion of public sector debt—with a multiplicity of actors, including: Puerto Rico’s legislature, the PROMESA Oversight Board, and Title III Judge Laura Taylor Swain. Under the terms, Puerto Rico would be allowed to draw upon the money repeatedly, as needed, according to Gov. Rossello, who noted that the U.S. Virgin Islands has already taken four draws totaling $200 million. The access here would be to fiscal resources available until March 2020.

Municipio Assistencia. In addition to the federal terms worked out for the territory, the new terms also provide that the U.S. Treasury will be making loans available for up to $5 million to every Puerto Rico municipality. FEMA is planning to make more than $30 billion available for rebuilding, while HUD is considering grants of more than $10 billion—leading Sec. Mnuchin to add: “There’s a lot of money to be allocated here, and I think it is going to have an enormous impact on the economy here: I think we are well on the path to a recovery of the economy here.” The Secretary added he would be returning to Puerto Rico on a quarterly basis to meet with the Governor, assess progress, and examine the island’s economy. His announcement came as the federal government is scaling back the number of contractors working on Puerto Rico’s electrical grid—critical work on an island where, still today, an estimated 100,000 island residents still lack power, with, last week, the U.S. House Oversight and Government Reform Committee hearing testimony from U.S. officials about bureaucratic challenges to power-restoration efforts, leading to bipartisan questioning about the drawdown of personnel there by the U.S. Army Corps of Engineers. The Corps, which brought in Fluor and PowerSecure as contractors to spearhead reconstruction of damaged transmission and distribution lines, has already reduced the number of contract workers by nearly 75%, according to tweets from the official Army Corps Twitter account, even as nearly 100,000 customers still lack service. Worse, of the restoration challenge remaining, the bulk is projected to fall mostly on Puerto Rico’s bankrupt public power utility, PREPA, especially after, last week, Fluor halted its subcontract efforts. Despite the Corps pledge to “do all possible work with the funds available” before the contractors leave Puerto Rico, access to vital construction materials, such as concrete poles, transformers and conductors were in short supply, and the Army Corps struggled to purchase and transport materials quickly enough, hindered, no doubt, in part by the discriminatory shipping rules (the Jones Act), increasingly forcing linemen to scrounge for replacement parts. The Corps has acknowledged the supply shortages, noting that natural disasters last year in Texas, Florida, and California strained supplies of construction materials across the U.S. Twelve Democratic Senators have written to Army Corps officials to inquire whether keeping its contractors in place would accelerate the timetable for power restoration—PREPA, last week, reported last week that 32% of the 755 towers and poles that were downed by Hurricane Maria still have not been repaired, and that, of 1,238 damaged conductors and insulators, 28% have not. Rep. Jenniffer González-Colón, Puerto Rico’s Republican delegate to Congress, in a letter to Army Corps officials last week, wrote: “The average citizen on the street in those communities cannot tolerate even the perception that at this point we will begin to wind down the urgent relief mission and that the process of finishing the job will slow down.”

Getting Schooled on Disaster

December 15, 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. Detroit’s Cerveny – Grandmont neighborhood, where median household income has declined by 5 percent since 2000 and average household incomes are under $38,000—and median home sale prices are just over $51,000, this week was one of 10 areas in the Motor City yesterday was cited in a report, “Reset, Rethink, Rebuild: A Shared Vision of Performing Schools in Quality Buildings for Every Child in Detroit”  a study about neighborhoods, educational opportunity, and the conditions of public school buildings, as one of ten neighborhoods wherein it is nearly impossible to find a quality school. Indeed, the report determined that the problem is deeper than just those 10 neighborhoods: Only 20 percent of the children enrolled in a public school in the city, whether charter or traditional public, are attending a quality school: a discouraging, failing grade with implications for both assessed property values and Detroit’s budget. Chris Uhl, the Executive Director of the eastern region for IFF, which published the study, noted: “The fact that four out of five kids in this city” are not attending a quality school “is pretty horrifying to me…that…should catalyze action.” The report notes that nearly half of the space in school buildings in the city is underutilized. A key recommendation of the report was that greater coordination is needed between leaders of the Detroit Public School System and the authorizers of charter schools—presumably including the current U.S. Secretary of Education. (Currently, only Grand Valley State University and Central Michigan University are authorized to open new charters in the city, but there are a number of other authorizers with schools in the city.)  IFF’s recommendations are similar last week’s report by the Coalition for the Future of Detroit Schoolchildren.

In its report, the IFF identified quality schools using Michigan’s less than clear, but outdated quality schools color-coded accountability system–a system due to be replaced next year: a part of that old system provided for the assignment of five colors, based on how well students achieved academic goals. Of the city’s 178 general education public schools, just 2.4% received the equivalent of an A.  The report makes clear that the steep road back from the nation’s largest municipal bankruptcy requires a greater focus on the next generation’s future: schools good enough to attract families back into the city—attracted by a good school to enroll their children. Today, too few of them exist—or, as the report notes: Detroit needs nearly 70,000 more seats available in quality schools to ensure that every child has access to such a school. Tonya Allen, President and CEO of the Skillman Foundation, which funded the research, noted: “We’re not meeting the demand, which leaves us vulnerable to leakages: for students to leave the city to go to school in the suburbs.”

A Taxing Recovery? Just as Puerto Ricans were treated unequally by the federal response to hurricane devastation compared to Houston and Florida, so too there is apprehension that the tax “reform” legislation nearing completion in Congress—especially as there is growing apprehension that Congress could move towards adopting a territorial tax system for businesses—that is a new tax system which would treat Puerto Rico as a foreign country with respect to the numerous foreign subsidiaries of U.S. corporations which operate there. Puerto Rico Secretary of Economic Development and Commerce Manuel Laboy Rivera is apprehensive that subsidiaries of U.S. corporations which receive favorable treatment under current federal law could find the emerging federal tax reform would impose a new 20 percent federal excise tax on all pharmaceuticals, medical devices, and other products shipped to the mainland—that is a new, discriminatory tax—which would be in addition to the Jones Act provisions which render Puerto Rico unable to compete fairly vis-à-vis other Caribbean competitor nations—even as Puerto Rico is subject to the federal minimum wage and other federal regulations involving workplace safety and environmental protection. Indeed, last December, a bipartisan congressional task force had recommended changes in the tax treatment of the U.S. territory with the Congressional Task Force on Economic Growth writing: “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.” Among the recommendations: a modification of the federal child tax credit to include the first and second children of families living in Puerto Rico, not just the third as specified under current law; the report also recommended making permanent the so-called rum cover-over payments to the governments of Puerto Rico and the U.S. Virgin Islands. The task force, however, was divided with regard to whether to fully expand the eligibility of Puerto Rican families for the Earned Income Tax Credit. The report recommended that a domestic business production credit known as Section 199 that has covered Puerto Rico since 2006 should be maintained as long as Section 199 continues. Now, however, that credit has been targeted for elimination in the pending tax reform negotiations as they enter their final hours. Under the discriminatory treatment, for federal tax purposes, Puerto Rico is considered outside the U.S. tax code, even though for virtually all other issues the island is treated as a domestic part of the U.S. For the purposes of federal tax reform, however, Senate Finance Committee Chair Orrin Hatch (R-Utah) said during the Finance Committee’s deliberations that Puerto Rico’s tax issues would be handled in separate legislation. So, it seems that for Hurricane Maria ravaged Puerto Rico, where 20% to 40% of all businesses are at risk of being shuttered in the wake of the hurricane and its ensuing devastation for the economy because of challenges ranging from the lack of electricity to loss of inventory, physical damage to their facilities, business interruption, and lack of capital; the message from Congress is to wait for next year.

House Ways and Means Committee Chairman Kevin Brady (R-Tx.) has informed reporters that he and other lawmakers are considering several options for Puerto Rico—especially in the wake of meeting with Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Representative in Congress, to discuss her request to consider making Puerto Rico an economic opportunity zone or empowerment zone—provisions adopted by Congress to abet economic recovery in hard-hit cities and counties. Thus, a change would be to treat Puerto Rico similarly—as if it were, gasp, a part of the United States for federal tax purposes and eligible for the same treatment. Likewise, tax reform could have been a vehicle for Congress to eliminate or reduce the discriminatory 20% excise tax on goods from Puerto Rico—a tax which undercuts Puerto Rico’s ability to compete with Cuba, and other countries in the region.

Even as the tax reform-deficit/debt increase legislation has swiftly moved towards the President’s desk, in New York, U.S. Judge Laura Taylor Swain, presiding over Puerto Rico’s quasi-chapter 9 case, heard from attorneys for the Employees Retirement System and the Puerto Rico Oversight Board—with the critical issue what claims of Puerto Rico’s bondholders are valid. PROMESA Oversight Board attorney Steven Weise said the 2008 Financing Statements governing Puerto Rico’s municipal bonds did not provide bondholders any collateral, arguing that the bondholders’ written arguments quoted from legal rulings about “security agreements,” but that what is allowed in these agreements are not allowed in Financing Statements—adding that the system’s legal name changed in the last several years, but that bondholders had failed to properly follow-up on this development—a failure which meant, at least as he argued, that the system should not be legally obligated to pay interest on the municipal bonds—even as Bruce Bennett, representing bondholders, told Judge Swain the bondholders had a lien on employer contributions, based on multiple commitments, arguing that the 2008 Financing Statements gave the bondholders the lien. He said errors in the document were not of such gravity to merit undercutting to undercut the bondholders’ claims—and adding that the Spanish name of the system had not changed, and that the change in the English name was just a translation change—a change without legal significance. Moreover, he noted, that along with the Financing Statements, a parallel “security agreement” had been created in 2008 and this perfected the lien; further, he argued, the 2015 and 2016 Financing Statements also assured the bondholders’ lien on the employer contributions.

Where Are the Lights? U.S. Army Corps of Engineers Lieutenant General Todd Semonite, the commanding General and Chief Engineer for the Corps reports that Puerto Rico’s electrical grid is unlikely to be fully restored until the end of May, a far more pessimistic timeline that suggested by Puerto Rico Governor Ricardo Rossello, who Wednesday stated he expects Puerto Rico’s electric grid to reach 75 percent of customers by the end of January—and 95 percent by the end of February—and 100 percent by the end of May. Adding to the dissonance, the Puerto Rico Electric Power Authority last month pledged service would reach 95 percent of customers by the end of this month—even though, as of Wednesday, just 61 percent of electricity had been restored.  

The Power of Storms & the Storms of Fiscal Power

October 31, 2017

Good Morning! In today’s Blog, we consider the growing questions with regard to both the federal and Puerto Rican response to the human and fiscal devastation caused by Hurricane Maria–and what the implication’s might be for the U.S. territory’s debt–and governance.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. Almost three weeks after the hiring of Whitefish Energy Holdings created its own storm wave of criticism and investigation claims, both the FBI and the PROMESA oversight board have commenced investigations about PREPA’s decision to award a $300 million contract to a small Montana energy firm, Whitefish Energy Holdings, to rebuild Puerto Rico’s electrical infrastructure—with the PROMESA Oversight Board intending to discuss and approve today a process to review Puerto Rico’s contract—one which Governor Ricardo Rosselló Nevares canceled on Sunday—at a time when only 30% of the U.S. territory’s power has been restored. The issue is anticipated to light up the agenda at the PROMESA Board’s tenth meeting today at the headquarters of the College of Engineers and Surveyors of Puerto Rico, in Hato Rey, under its authority to review and revoke laws which are incompatible with its Fiscal Plan, as well as any contract that the government of Puerto Rico has granted—marking the first time the Congressionally enacted entity will seek to exercise the authority Congress authorized to revoke contracts or laws of the Puerto Rican government. The House Committee on Natural Resources has scheduled hearings over the next three weeks in Washington on the storm recovery and transparency in the reconstruction process—although it remains unclear whether those hearings will closely examine the adverse fiscal, physical, and human costs imposed by the Jones Act on the recovery and loss of lives.  The Committee has not indicated whether it will compare the responses of FEMA in Puerto Rico to its responses in Houston and Florida.

Just after declaring an emergency due to the devastation wrought by Hurricane Maria, Gov. Rosselló Nevares had approved executive order 2018-53 to exempt government agencies from complying with the requirements of law when hiring and purchasing to deal with the ensuing physical disaster—effectively clearing the way to for the Electric Power Authority (AEE) to award a $ 300 million contract to Whitefish Energy-company, which, at the time of its hiring, had only two employees-to repair part of the electrical network devastated by the hurricane. That award, however, caused a governance storm of its own, triggering apprehensions by FEMA, Members of Congress, and now an investigation by the Federal Bureau of Investigation (FBI).

Thus the PROMESA Board holds its first meeting in the wake of the storm’s fiscal and physical devastation, mayhap marking a fiscal storm—albeit, presumably, the Board’s inquiries will examine not just PREPA’s responses, but also compare the responses of FEMA in Puerto Rico compared to its responses in Houston and Florida—that is, the PROMESA Board could question the accountability of FEMA.

As for the fiscal storm, the Oversight Board expects to be briefed on the process underway to reconfigure the Fiscal Plan, as well how the firm Kobre & Kim will investigate Puerto Rico’s debt: according to the report of the firm hired to investigate the reasons for the U.S. territory’s fiscal collapse and the issuance of debt, the first report of the causes of the crisis would take about 200 days: the investigator has already issued an information request to Banco Popular and has identified 79 witnesses who will he instructed to preserve documents.

 

The Human & Fiscal Prices of Insolvency

October 20, 2017

Good Morning! In today’s Blog, we consider the spread of Connecticut’s fiscal blues to its municipalities; then we consider the health and fiscal health challenge to Flint; before, finally, observing the seemingly worsening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. It appears that the City of Hartford would have to restructure its debt to receive the requisite state assistance to keep it out of chapter 9 municipal bankruptcy under the emerging state budget compromise between the Governor and Legislature. Under the terms of the discussions, the State of Connecticut would also guarantee a major refunding of the city’s debt, as well as cover a major share of the city’s debt payments, at least for this fiscal year and next, with House Majority Leader Matt Ritter (D-Hartford) indicating this was part of a bipartisan compromise the legislature recognizes is needed to avert municipal bankruptcy: “This budget gives the city all of the tools it needs to be on a structural path to sustainability…This solution truly is a bipartisan one.” According to the city’s Mayor Luke Bronin, Hartford needs about $40 million annually in new state assistance to avert bankruptcy. The emerging agreement also includes $28 million per year for a new Municipal Accountability Review Board, likely similar to what the Commonwealth of Virginia has used so effectively, to focus on municipalities at risk of fiscal insolvency and to intervene beforehand: approximately $20 million of that $28 million would be earmarked for Hartford. The new state budget would require Hartford to restructure a significant portion of its capital debt, but the state would guarantee this refinancing, an action which—as was the case in Detroit—will help Hartford have access to lower borrowing costs: the agreement also calls for the state to pay $20 million of the city’s annual debt service—at least for this fiscal year and next.

The state actions came as Moody’s Investor Service this week placed ratings of 26 of the state’s municipalities, as well as three of the state’s regional school districts under review for downgrade, citing state aid cuts in the absence of a budget, warning those municipalities and districts face cuts in state funding equal to 100% or more of available fund balance or cash—with those cities most at risk: Hartford (which currently receives 50 percent of its revenues from the state), New Haven, New Britain, West Haven, and Bridgeport. Moody’s was even fiscally moodier, dropping the credit ratings of an additional 25 Connecticut cities and towns, and three other regional school districts, while maintaining the existing negative outlook on the rating of one town. Moody’s list did not, however, include Hartford. The down-gradings come as the state has continued to operate under Executive order in the absence of an approved fiscal budget, now more than a fiscal quarter overdue. Gov. Dannel Malloy, at the beginning of the week, had submitted his fourth FY2018-19 budget to lawmakers, a $41.3 billion spending plan in the wake of his veto last month of the version approved by the legislature, reporting that his most recent fiscal plan would eliminate some revenue proposals, including new taxes on second homes, cell phone surcharges, ridesharing fees, and daily fantasy sports fees—instead, he has proposed an additional $150 million in spending over the biennium, while simplifying the implementor language. According to Moody’s, under the Governor’s new executive order, state aid to local governments will be nearly $1 billion below last year’s level—or, as Moody’s put it: “The current budget impasse highlights the ongoing vulnerability of funding that Connecticut provides to its local governments.” Connecticut traditionally has provided significant funding to its local governments, largely through education cost sharing grants, but also through payments in lieu of taxes and other smaller governmental grants. Connecticut’s GO bond prices have deteriorated with 10-year credit spreads around 80 basis points, well above historical levels, according to Janney Capital Markets Managing Director Alan Schankel: “A state’s fiscal stress tends to flow downstream to local governments, and Connecticut is no exception.” The fiscal irony is that despite the state’s high per capita wealth, the state’s debt, at 9.2% of gross state product, is highest among the states, lagging only behind Illinois.

Not in Like Flint. U.S. District Court Judge David Lawson has ordered Flint’s City Council to choose a long-term water source for the city by Monday after it spent more than three months refusing to make a decision. In his 29-page opinion, he took Flint’s City Council to task for sitting on an April agreement backed by Mayor Karen Weaver, the state and the federal Environmental Protection Agencies that would see the city stay on the Detroit area water system through a new 30-year contract with the Great Lakes Water Authority, writing:. “The failure of leadership, in light of the past crises and manifold warnings related to the Flint water system, is breathtaking.” Judge Lawson’s decision came in response to a suit filed by the Michigan Department of Environmental Quality last June in the wake of the Flint City Council ignoring the state’s deadline for a water supply decision, arguing the delay would “cause an imminent and substantial endangerment to public health in Flint.” The Council, in hearing and filings, had requested more time from the court; however, Judge Lawson wrote that the state had demonstrated potential for “irreparable injury” in Flint and that there was an urgency to act, because the city’s short-term water agreements have expired and the long-term agreement is time sensitive, concluding: “The City Council has not voted on the negotiated agreement, it has not proposed an alternative, and the future of Flint’s fragile water system—its safety, reliability, and financial stability— is in peril…Because of the city’s indecision, the court must issue its ruling.” Judge Lawson’s order likely ensures the City Council will approve the proposed contract with the Great Lakes Authority that it had been resisting though it was negotiated with Mayor Karen Weaver’s approval. The city could choose to risk defying the court order; however, the State of Michigan has warned that tens of millions of dollars in extensive repairs and updates need to be made to the inactive Flint water plant—repairs which would take three and a half years to complete.

The warnings of Wayne State University Professor Nicholas Schroeck with regard to the risk to public health and the financial stability of the water supply system appeared key to persuading Judge Lawson to side with the state and issue a pre-emptive order. The Judge, in early August, had appointed a mediator in an effort to try gain an agreement between the city and the state Dept. of Environmental Quality; however, when the sides were unable to settle, he warned that  extending Flint’s contract with the Detroit area water system beyond 30 days could result in funding problems: “It seems to me that inaction is inviting intervention.” The Weaver administration analyzed various long-term water options for Flint, and the Mayor said Tuesday the Great Lakes agreement “proved to be in the best interest of public health by avoiding another water source switch, which could result in unforeseen issues.” The Michigan DEQ praised Judge Lawson for “recognizing there is no need to wait…and remains committed to working with the City of Flint to implement a plan once a source water determination has been finalized to ensure compliance with the Safe Drinking Water Act.” In its arguments before Judge Lawson, the State of Michigan had warned: “The City Council’s failure to act will result in at least a 55-63% increase in the water rate being charged to Flint residents, create an immediate risk of bankrupting the Flint water fund, will preclude required investment in Flint’s water distribution system, and create another imminent and substantial endangerment to public health in Flint.” That was similar to a statement from a key aide to Gov. Rick Snyder who had warned that stalling the water contract decision was costing the City of Flint an extra $600,000 a month, because it was paying for two sources—Great Lakes, from which it currently gets its treated water, and Karegnondi, from which it contractually would receive water by 2019 to 2020. Under the 30-year agreement with Great Lakes, Flint would no longer have to make payments to Karegnondi.

Unresponsiveness. President Trump last week awarded himself a perfect rating for his response to the hurricane that devastated Puerto Rico: “I would give myself a 10,” he responded when asked by reporters how he would score his efforts, on a one to 10 scale. He told Fox News correspondent Geraldo Rivera that Puerto Rican governments “owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out. You can say goodbye to that.” A comment to which OMB Director Mick Mulvaney noted: “I wouldn’t take it word for word.” Indeed, a week later, Congressional Republicans unveiled a relief plan that would only add to Puerto Rico’s unsustainable debt load. In his meeting this week with Puerto Rico Governor Ricardo Rosselló, who was in Washington to press for federal disaster relief, the President claimed: “We have provided so much, so fast.” Yet, today nearly 80 percent of the island remains without electricity, and almost 30 of the island still does not have access to clean water, according to Puerto Rican government figures.

In contrast with Texas after Hurricane Harvey and Florida after Irma, where thousands of repair workers rushed in to restring power lines, only a few hundred electrical workers from outside Puerto Rico have arrived to help: it was not until last Saturday that the Puerto Rican government said it had the federal funding needed to bring in more workers. That compares to some 5,300 workers from outside the region who converged on coastal Texas in the days after Hurricane Harvey to restore a power loss about a tenth of the size that struck Puerto Rico. Similarly, in Florida, 18,000 outside workers went in after Hurricane Irma knocked out electricity to most of the state last month, according to Florida Power and Light; whereas, in Puerto Rico, the challenge of restoration has fallen on the shoulders of about 900 members of local crews—an outcome industry experts report to be a result of poor planning, a slow response by power officials, and Puerto Rico’s dire fiscal situation—a sharp contrast to the President’s claim that his administration deserved a 10 for its response to the hurricanes which struck Puerto Rico and other parts of the United States.

The U.S. Army Corps of Engineers, charged by FEMA with restoring Puerto Rico’s power, estimated that it needed at least 2,000 additional workers. So far, the Corps has brought only about 200 workers, and most of them were dedicated not to restoring power, but to installing generators at crucial locations. In the wake of major storms, such as Katrina, power companies typically rely on mutual aid agreements to get electricity restored: such outside companies send thousands of workers, and electric companies pay for the service with funds from FEMA. However, providing such assistance to Puerto Rico is not just logistically a greater challenge—but also a discriminatorily greater challenge: the Jones Act—which the President only suspended for ten days—means that the time and cost of shipping comes at a 20% premium.  

The Human Storm. Maria risks accelerating the trend of the last decade of economic decline and depopulation, described as “a slower-moving catastrophe,” which is wreaking a devastating toll: The number of residents had plunged by 11 percent, the economy had shrunk by 15 percent, and the government has become fiscally insolvent. Already ranked among the worst cycles of economic decline and depopulation in postwar American history, the aftermath of Maria threatens an acceleration of residents fleeing en masse: accelerating economic decline and potentially accelerating a vicious cycle. Lyman Stone, an independent migration researcher and economist at the Agriculture Department notes: “We are watching a real live demographic and population collapse on a monumental scale.” At a news conference last week, Gov. Rosselló warned that without significant help, “millions” could leave for the U.S. mainland: You’re not going to get hundreds of thousands of Puerto Ricans moving to the States—you’re going to get millions…You’re going to get millions, creating a devastating demographic shift for us here in Puerto Rico.” Puerto Rico Treasury Secretary Raúl Maldonado has warned, meanwhile, that without more aid, the government could suffer a shutdown by the end of the month.

Today, only about 40 percent of Puerto Ricans in the territory are employed or seeking work—more than 33% below levels on the mainland. The danger, now, is of increased flight—but flight by the young and those with college degrees. After all, with the PROMESA Board charged with fashioning a fiscal plan to pay off more than $70 billion in Puerto Rico’s municipal debt calling for efforts to raise taxes and significant cuts to the government, the Board has predicted continuing shrinkage of the Puerto Rican economy. Thus, there is a real apprehension

As a result, for Washington and Puerto Rican officials planning a recovery, the ongoing exodus poses a multifaceted dilemma. “They’ve got to start from the ground up,” a former U.S. Treasury official said of any new plan for the island. In the short-term, at least, the island is likely to see an economic boost; rebuilding after a hurricane often injects a jolt of spending into local economies. But, according to recent research of 90 years of natural disasters in the United States, published as a National Bureau of Economic Research working paper, major natural disasters also have unfavorable effects: They increase out-migration, lower home prices, and raise poverty rates. Like many on the island, Sergio M. Marxuach, policy director for the Center for a New Economy, a San Juan-based think tank, said a massive federal investment is necessary. “We’re going to need some significant government intervention — essentially a big rescue package, not only to rebuild the economy but get it growing…People are saying, ‘I don’t want my children to grow up in a place where the economy is going to be devastated for the next 10 years.’ If enough people think that way, it’s going to be a self-reinforcing downward spiral.”

In addressing complaints about ongoing struggles on the island, President Trump noted this week that the disaster in Puerto Rico in many ways had begun years ago. Puerto Rico “was in very poor shape before the hurricanes ever hit. Their electrical grid was destroyed before the hurricanes got there. It was in very bad shape, was not working, was in bankruptcy.”

At the Level of a Muncipio. While many have considered the fiscal and physical impact on the U.S. territory of Puerto Rico, fewer have considered the fiscal challenge to Puerto Rico’s municipalities. Consider, for instance, Juncos, one of Puerto Rico’s 78 municipalities: it is located in the eastern central region of the island; it is spread over 9 wards and Juncos Pueblo (the downtown area and the administrative center of the city). The city, one of the oldest in the United States,was founded on the request of Tomas Pizarro on August 2, 1797, having previously been a village which evolved from a small ranch, the Hatillo de los Juncos. Hurricane Maria has changed this municipality forever: more than 1,000 families in Juncos lost it all that unforgettable September 20th, when Hurricane Maria struck. Yet, in a remarkable effort, residents of the La Hormiga sector of Las Piñas neighborhood, in the immediate aftermath of the hurricane, organized to help recover the humble community that is often highlighted by criminal incidents in the area: one of the community leaders of the sector, Wanda Bonilla, highlighted the deed of the trash rescuers: “Thanks to them, they have also relieved the pick up of the rubble.” The city’s community board worked immediately to install a shelter in the neighborhood community center given the circumstances that some 17 families, with between five and seven members each, where the storm tore the roofs off their homes—and most of those homes have single mothers. She noted: “Our president, Ivelisse Esquilín, who also lost everything, is helping us through the Municipality and with other donations.” Juncos Mayor Alfredo Alejandro noted that, in the wake of the storm, crossing arms was not an option for anyone “in the neighborhood” even though many of the 60 families living in the sector experienced the grief of having lost their home: “You have to do it because imagine …right now, look here, I have these pieces of a car to see if I invent a type of small generator to, even be, to turn on a fan.” The Mayor described Maria’s devastation to be of “great proportions:” Out of population of 42,000 people, more than 1,000 lost their homes and a comparable number suffered major damage to their structures; 85% of the city’s residents are still without potable water, while there are few expectations that electricity will soon be restored.

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.” 

Looming Municipal Insolvencies?

October 10, 2017

Good Morning! In today’s Blog, we consider the looming municipal fiscal threat to one of the nation’s oldest municipalities, and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Cascading Insolvency. One of the nation’s oldest municipalities, Scotland, a small Connecticut city founded in 1700, but not incorporated until 1857, still maintains the town meeting as its form of government with a board of selectmen. It is a town with a declining population of fewer than 1,700, where the most recent median income for a household in the town was $56,848, and the median income for a family was $60,147. It is a town today on the edge of insolvency—in a state itself of the verge of insolvency. The town not only has a small population, but also a tiny business community: there is one farm left in the town, a general store, and several home businesses. Contributing to its fiscal challenges: the state owns almost 2,000 acres—a vast space from which the town may not extract property taxes. In the last six years, according to First Selectman Daniel Syme, only one new home has been built, but the property tax base has actually eroded because of a recent revaluation—meaning that today the municipality has one of the 10 highest mill rates in the state. To add to its fiscal challenges, Gov. Malloy’s executive-order budget has eliminated Connecticut’s payment in lieu of taxes program—even as education consumes 81 percent of Scotland’s $5.9 million taxpayer-approved  budget: under Gov. Malloy’s executive order, Scotland’s Education Cost Sharing grant will be cut by 70 percent—from $1.42 million to $426,900. Scotland has $463,000 in its reserve accounts, or about 9 percent of its annual operating budget—meaning that if the Gov. and legislature are unable to resolve the state budget crisis, the town will have to dip into its reserves—or even consider dissolution or chapter 9 bankruptcy. Should the municipality opt for dissolution, however, there is an unclear governmental future. While in some parts of the country, municipalities can disappear and become unincorporated parts of their counties, that is not an option in Connecticut, nor in any New England state, except Maine, where more than 400 settlements, defined as unorganized territories, have no municipal government—ergo, governmental services are provided by the state and the county. Thus it appears that the fiscal fate of this small municipality is very much dependent on resolution of the state budget stalemate—but where part of the state solution is reducing state aid to municipalities.

Connecticut Attorney General George Jepsen has offered a legal opinion which questioned the legality of Gov. Dannel P. Malloy’s plan to administer municipal aid in the absence of a state budget,  he offered the Governor and the legislature one alternative—draft a new state budget. Similarly, Senate Republican leader Len Fasano (R-North Haven), who requested the opinion and has argued the Governor’s plan would overstep his authority, also conceded there may be no plan the Governor could craft—absent a new budget—which would pass legal muster, writing: “We acknowledge the formidable task the Governor faces, in the exercise of his constitutional obligation to take care that the laws are faithfully executed, to maintain the effective operations of state government in the absence of a legislatively enacted budget.” The fiscal challenge: analysts opine state finances, unless adjusted, would run $1.6 billion deficit this fiscal year, with a key reason attributed to surging public retirement benefits and other debt costs, coupled with declining state income tax receipts:  Connecticut is now about 14 weeks into its new fiscal year without an enacted budget—and the fiscal dysfunction has been aggravated by a dispute between Sen. Fasano and Gov. Malloy over the Governor’s plans to handle a program adopted two years ago designed to share sales and use tax receipts with cities and towns: a portion of those funds would go only to communities with high property tax rates to offset revenues they would lose under a related plan to cap taxes on motor vehicles.

Aggravating Fiscal & Human Disparities. The White House has let a 10-day Jones Act shipping waiver expire for Puerto Rico, meaning a significant increase in the cost of providing emergency supplies to the hurricane-ravaged island from U.S. ports, in the wake of a spokesperson for the Department of Homeland Security confirming yesterday that the Jones Act waiver, which expired on Sunday, will not be extended—so that only U.S‒built and‒operated vessels are make cargo shipments between U.S. ports. The repercussions will be fiscal and physical: gasoline and other critical supplies to save American lives will be far more expensive on an island which could be without power for months. The administration had agreed to temporarily lift the Jones Act shipping restrictions for Puerto Rico on September 28th; today, officials have warned that the biggest challenge for relief efforts is getting supplies distributed around Puerto Rico.

Even as President Trump has acted to put more lives and Puerto Rico’s recovery at greater risk, lawmakers in Congress are still pressing to roll back the Jones Act, with efforts led by Sens. John McCain (R-Ariz.) and Mike Lee (R-Utah), the Chairman of the House Water and Power Subcommittee of the Energy and Natural Resources Committee, recently introducing legislation to permanently exempt Puerto Rico from the Jones Act; indeed, at Sen. McCain’s request, the bill has been placed on the Senate calendar under a fast-track procedure that allows it to bypass the normal committee process; it has not, however, been scheduled for any floor time. Sen. McCain stated: “Now that the temporary Jones Act waiver for Puerto Rico has expired, it is more important than ever for Congress to pass my bill to permanently exempt Puerto Rico from this archaic and burdensome law: Until we provide Puerto Rico with long-term relief, the Jones Act will continue to hinder much-needed efforts to help the people of Puerto Rico recover and rebuild from Hurricane Maria.”

The efforts by Sen. McCain and Chairman Lee came as Puerto Rico Gov. Ricardo Rosselló, citing an “unprecedented catastrophe,” urged Congress to provide a significant new influx of money in the near term as Puerto Rico is confronted by what he described as “a massive liquidity crisis:” facing an imminent Medicaid funding crisis, putting nearly one million people at risk of losing their health-care coverage: “[a]bsent extraordinary measures to address the halt in economic activity in Puerto Rico, the humanitarian crisis will deepen, and the unmet basic needs of the American citizens of Puerto Rico will become even greater…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.” Even before Hurricane Maria caused major damage to Puerto Rico’s struggling health-care system, the U.S. territory’s Medicaid program barely had enough funds left to last through the next year; now, however, nearly 900,000 U.S. citizens face the loss of access to Medicaid—more than half of total Puerto Rican enrollment, according to federal estimates: experts predict that unless Congress acts, the federal funding will be exhausted in a matter of months, and, if that happens, Puerto Rico will be responsible for covering all its costs going forward, or, as Edwin Park, Vice President for health policy at the Center on Budget and Policy Priorities notes: “Unless there’s an assurance of stable and sufficient funding…[the health system] is headed toward a collapse.” Nearly half of Puerto Rico’s 3.4 million residents participate in Medicaid; however, because Puerto Rico is a U.S. territory, not a state, Puerto Rico receives only 57 percent of a state’s Medicaid benefits. Under the Affordable Care Act, Puerto Rico received a significant infusion, of about $6.5 billion, to last through FY2019, and, last May, Congress appropriated an additional $300 million. However, those funds were already running low prior to Hurricane Maria, a storm which not only physically and fiscally devastated Puerto Rico and its economy, but also, with the ensuing loss of jobs, meant a critical increase in Medicaid eligibility.

The White House submitted a $29 billion request for disaster assistance; however, none of it was earmarked for Puerto Rico’s Medicaid program. House Energy and Commerce Committee Republicans have proposed giving Puerto Rico an additional $1 billion over the next two years as part of a must-pass bill to fund the Children’s Health Insurance Program (CHIP), with one GOP aide stating the $1 billion is specifically meant to address the Medicaid cliff. Adding more uncertainty: the Senate has not given any indication if it will take up legislation to address Puerto Rico’s Medicaid cliff: The Senate Finance Committee passed its CHIP bill this past week, without any funding for Puerto Rico attached. 

In a three-page letter sent to Congressional leaders, Gov. Ricardo Rosselló is requesting more than $4 billion from various agencies and loan program to “meet the immediate emergency needs of Puerto Rico,” writing that while “We are grateful for the federal emergency assistance that has been provided so far; however, [should aid not be available in a timely manner], “This could lead to an acceleration of the high pace of out-migration of Puerto Rico residents to the U.S. mainland impacting a large number of states as diverse as Florida, Pennsylvania, New Hampshire, Indiana, Wisconsin, Ohio, Texas, and beyond.”

On Puerto Rico’s debt front, with the PROMESA Board at least temporarily relocated to New York City, President Trump has roiled the island’s debt crisis with his suggestion that Puerto Rico’s $73 billion in municipal bond debt load may get erased—or, as he put it: “You can say goodbye to that,” in an interview on Fox News, an interview which appeared to cause a nose dive in the value of Puerto Rico’s municipal bonds, notwithstanding his lack of any authority to unilaterally forgive Puerto Rico’s debt. Indeed, within 24 hours, OMB Budget Director Mick Mulvaney discounted the President’s comments: he said the White House does not intend to become involved in Puerto Rico’s debt restructuring. Indeed, the Trump administration last week sent Congress a request for $29 billion in disaster aid for Puerto Rico, including $16 billion for the government’s flood-insurance program and nearly $13 billion for hurricane relief efforts, according to a White House official. No matter what, however, that debt front looms worse: Gov. Rosselló has warned Puerto Rico could lose up to two months of tax collections as its economic activity is on hold and residents wait for power and basic necessities. Bringing some rational perspective to the issue, House Natural Resource Committee Chair, Rep. Rob Bishop (R-Utah), said the current debt restructuring would proceed under the PROMESA Oversight Board: “Part of the reason to have a board was to have a logical approach [to the debt restructuring]. We need to have this process played out…There’s not going to be one quick panacea to a situation that has developed over a long time…I don’t think it’s time to jump around…when we already have a structure to work with.” Chairman Bishop noted that Hurricane Maria’s devastation would require the board to revise its 10-year fiscal plan, with the goal to achieve a balanced budget pushed back from the current target of FY2019; at the same time, however, Chairman Bishop repeated that the Board must retain its independence from Congress. He also said Congress would consider extending something like the Puerto Rico Oversight, Management, and Economic Stability Act to the U.S. Virgin Islands—an action which would open the door to a debt restructuring for the more than $2 billion in public sector Virgin Islands municipal debt.

The godfather of chapter 9 municipal bankruptcy, Jim Spiotto, noted that it would be Congress, rather than the President, which would pass any municipal bankruptcy legislation, patiently reminding us: “You can’t just use an edict to wipe out debt: If Congress were to wipe out debt, there would be constitutional challenges…Past efforts to repudiate debt debts have had very serious consequences in terms of future access to capital markets and cost of borrowing.” In contrast, if the federal government were to provide something like the Marshall Plan to Puerto Rico, Mr. Spiotto added: the economy could strengthen, and Puerto Rico would be in a position to pay off some its debts.