Governance Amidst Fiscal and Stormy Challenges & Uneven Federalism

December 1, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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Is There Shelter from the Storm?

November 20, 2017

Good Morning! In today’s Blog, we consider the deepening Medicaid crisis and Hurricane Maria recovery in the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Well I’m living in a foreign country, but I’d bound to cross the line
Beauty walks a razor’s edge, someday I’ll make it mine
If I could only turn back the clock to when God and her were born
“Come in” she said
“I’ll give you shelter from the storm”.

Bob Dylan

Shelter from the Storm & Governing Competency? With this session of Congress entering its final two weeks of the calendar year, Puerto Rico’s Medicaid funding crisis is deepening: Hurricane Maria wrought serious physical and fiscal damage to Puerto Rico’s health-care system; yet, not a dime of the federal disaster relief money has, to date, been earmarked for the island’s Medicaid program. The White House, Friday, belatedly submitted a $44 billion supplemental payment request, noting that the administration was “aware” that Puerto Rico needed Medicaid assistance; however, the Trump Administration put the onus on Congress to act—leaving the annual catchall omnibus appropriations bill as the likely last chance: this Congress is scheduled to adjourn on December 14th.  But with a growing list of “must do” legislation, including the pending tax bill and expiring S-CHIP authorizations, time is short—and the administration’s request is short: In a joint statement, House Energy and Commerce Committee ranking members Frank Pallone Jr. (D-N.J) and Senate Finance Committee ranking member Ron Wyden (D-Or.) called on the Trump Administration to “immediately provide additional funding and extend a one-hundred percent funding match for Medicaid in Puerto Rico and the U.S. Virgin Islands, just as we did in the aftermath of Hurricane Katrina,” with the request coming amid apprehensions that unless Congress acts, federal funds will be exhausted in a matter of months—potentially threating Puerto Rico’s ability to meet its Medicaid obligations: the Puerto Rican government has requested $1.6 billion from Congress and the Trump administration in the wake of the devastating physical and fiscal storm, with Gov. Ricardo Rosselló having, last month, requested $1.6 billion a year over the next five years, writing to Congressional leaders that the “total devastation brought on by these natural disasters has vastly exacerbated the situation and effectively brought the island’s healthcare system to the brink of collapse.” Puerto Rico in 2016 devoted almost $2.5 billion to meet its Medicaid demands—so even the proposed reimbursement would only cover about 60 percent of the projected cost. The urgency comes as the House, earlier this month, passed legislation reauthorizing the CHIP program, including $1 billion annually for Puerto Rico for the next two years, specifically aimed at shoring up the island’s Medicaid program. Nevertheless, despite the progress in the House on CHIP funding, the Senate has yet to moved forward with its version of the legislation—and the version reported by the Senate Finance Committee does not include any funds for Puerto Rico. Should Congress not act, up to 900,000 Puerto Ricans would likely be cut from Medicaid—more than half of total enrollment, according to federal estimates.

Rep. Bruce Westerman, Chair of the House Subcommittee on Oversight & Investigations of the House Natural Resources Committee, last month, had noted, it was “obvious PREPA did not know how to draft a FEMA-compliant contract, nor did PREPA officials adhere to the advice of their own counsel on how to comply: I believe this is precisely why the Oversight Board should be granted more authority. While we understand the sense of urgency for the people of Puerto Rico, oversight and transparency are vital to this recovery process.” House Committee on Natural Resources Chairman Rob Bishop added: “A legacy of dysfunction (at PREPA) has created a competence deficit that threatens the island’s ability to improve conditions for its citizens. Confidence in the utility’s ability to manage contracts and time-sensitive disaster related infrastructure work is long gone.” The Oversight Board announced its plan to appoint Noel Zamot to replace current PREPA leader Ricardo Ramos just a day or two after board members met with Chairman Bishop, according to a Bishop spokesperson. At a Committee on Natural Resources hearing last Wednesday, Chairman Bishop continued to call for more outside control over Gov. Ricardo Rosselló’s government, stating: “The lack of institutional controls…raises grave concerns about the government of Puerto Rico’s ability to competently negotiate, manage, and implement infrastructure projects without significant independent oversight: One of the things that I think we’re walking into here is a tremendous credibility gap, based on Whitefish and other subsequent decisions that are going on here.” (The “Whitefish” to which Chair Bishop was referring was Whitefish Energy, which had been retained by PREPA to help fix Puerto Rico’s electrical grid: observers have questioned the adequacy of the company’s experience, the fact that it is based in the same Montana town as the U.S. Secretary of the Interior, and the rates it is charging to Puerto Rico.)

Prior to the hearing, Gov. Rosselló had released a request to the federal government for $94 billion in medium- and long-term aid for recovery from hurricanes Irma and Maria—a request unlikely to be met—or, as Chairman Rob Bishop “You’re asking for an unprecedented $94 billion: “That’s a lot of money. That’s not going to happen unless people are going to see some changes in the way cooperation is made, and the way that money’s going to be spent.” The Governor’s responses came as—on the other side of the Hill, PREPA Executive Director Ricardo Ramos explained to the U.S. Senate Energy and Natural Resources Committee the process PREPA used to hire Whitefish Energy to repair Puerto Rico’s energy grid. He testified that in the wake of Hurricane Irma (which struck Puerto Rico on September 6th), six private companies submitted offers to PREPA to aid with restoring the grid. All six companies offered similar hourly rates. While only 25% of the island had electrical service immediately after Irma, this service had since improved to 96%.  Immediately after Hurricane Maria hit, Director Ramos testified he had limited communications ability and did not become fully aware of the extent of Maria’s damage to the electrical system for a week. Use of state mutual aid for restoring the grid, he testified, would have required PREPA to provide accommodations, food, communications, and other logistics to the incoming crews, because this was part of the mutual aid policies. Thus, Mr. Ramos noted that in the immediate aftermath of the hurricane, the utility was unable to make such provisions—meaning, ultimately, that he had to choose between using another company that was asking for $25 million up front versus Whitefish, which was willing to be paid when the work was completed. Ergo, Mr. Ramos authorized the use of Whitefish and chose to continue to look for other options. At the start of Wednesday’s Senate Energy and Natural Resources Committee meeting on the hurricanes’ impact on Puerto Rico and the U.S. Virgin Islands, Chairwoman Lisa Murkowski (R.-Alaska), said she thought it made little sense to spend hundreds of millions of dollars of Stafford Act funds to rebuild the electric grid as it had been in Puerto Rico and the Virgin Islands prior to the hurricanes. She said this would only re-erect it only to be later blown down again.

Governance in Puerto Rico. As U.S. Judge Laura Taylor Swain presides over Puerto Rico’s quasi-chapter 9 municipal bankruptcy trial in Puerto Rico, House Natural Resources Committee Chair Rob Bishop (R-Utah) and Rep. Bruce Westerman (R-Ark.) last week issued a statement that the Puerto Rico PROMESA Oversight Board ought to be granted additional legal authority over the Puerto Rico Power Authority (PREPA), with their statement coming just hours after Judge Swain had ruled that the PROMESA Board lacked authority to replace PREPA’s current director. The power authority issue came as Gov. Ricardo Rosselló sought some $17 billion in recovery assistance from the U.S. Senate for Puerto Rico’s beleaguered electric utility system—with his request coming engineer Ricardo Ramos resigned yesterday as PREPA’s Executive Director resigned—a resignation which PREPA’s governing board promptly accepted, voting unanimously to ratify the appointment of engineer Justo González as interim executive director. Mr. González, who has 28 years of service at PREPA and was the director of Generation, was recommended by Governor Rosselló, who noted: “The truth is that there was a series of distractions and there was a decision to go in another direction. This is going to happen and happens in every government,” referencing, in the wake of the devastating Hurricane María, that such challenges include technical failures, selective blackouts, lack of equipment, and hiring of companies with few employees and experience to carry out support tasks. He noted that Mr. Ramos “is a professional who has worked hard, but understands that this is a context that has greatly distracted from what recovery is.”

Failures and Blackouts. Until early yesterday, PREPA had reached 44.7 % of its pre-Maria generation—a level leaving Governor Rossello still frustrated, but stressing that failures also occur because: “it is an old system, which suffered previous damage….I know that it has been questioned why these failures happened, and if there was intervention…When you are lifting a collapsed power system, there will be ups and downs. There is progress; progress is inevitable; and it is being seen very clearly.”

The Electric Challenge Ahead. In the wake of the appointment of Mr. Gonzalez as interim executive director of PREPA, the Governor has commenced a search for a new head, noting: “With this appointment begins a process of evaluating the best available talent, inside and outside  of Puerto Rico, to proceed with an appointment in property of the position of executive director of PREPA: I hope that this process will be completed as quickly as possible, so that the work leading to the rehabilitation of the electrical system throughout the island is not affected, according to the guidelines we have given.” PREPA governing board President Ernesto Sgroi advised the Talent Search Committee of the governing body will be in charge of identifying the new executive director of the public corporation.

Responding to Fiscal, Political & Physical Storms

November 17, 2017

Good Morning! In today’s Blog, we consider, again, some of the governance and federalism challenges in the wake of the devastating Hurricane Maria impact on the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Governor Ricardo Rosselló this week asked Congress to reject the requests of the PROMESA Oversight Board to be granted greater authority over the government of Puerto Rico in the wake of the slow process of recovery and reconstruction after Hurricane Maria. In his written statement to the House Natural Resources Committee, Governor Rosselló specifically requested that the efforts by the Board to control emergency assistance funds, public corporations, and be granted the authority to veto government legislation be dismissed, noting: “The Government and the Fiscal Oversight Board must be able to resolve any differences,” and that “collaboration, not control, is the key to a successful future for Puerto Rico.” The Governor’s views came as U.S. Judge Laura Taylor Swain dismissed the motion of the PROMESA Board to appoint engineer Noel Zamot as trustee of the AEE, under the title of principal Transformation official.

In addition, Puerto Rico is seeking $94 billion from Congress to help in the recovery efforts that devastated the U.S. territory in September, leaving much of the island still without power and worsening a fiscal crisis. The bulk of the funds the Gov. has requested, some $31 billion, would be focused on rebuilding homes, with another $18 billion requested for PREPA: in his epistle to President Trump, Gov. Rossello wrote: “The scale and scope of the catastrophe in Puerto Rico in the aftermath of Hurricane Maria knows no historic precedent…We are calling upon your administration to request an emergency supplemental appropriation bill that addresses our unique unmet needs with strength and expediency.” Natalie Jaresko, the PROMESA Board’s Executive Director, said that $13 billion to $21 billion was needed over the next two years just for Puerto Rico to keep the government running, given the toll the storm has taken on the economy and anticipated tax collections. (Two months after the storm, much of Puerto Rico remains without power, further eroding the government’s already precarious finances. Prior to the hurricane, the government had put together a fiscal plan to cut back spending severely and finance only a fraction of the debt payments due over the next decade—but, like the island’s physical situation, the storm also devastated its fiscal plight. Puerto Rico’s long-term economic recovery will depend not just on an equitable response by Congress and the White House, comparable to the aid provided to Houston and Florida, but also whether its citizens who fled to the mainland will return—or make their moves permanent. According to the PROMESA Board, about 100,000 residents have fled since the storm. The Board did not break down the data of those who had left; however, it seems likely that those who left were both younger—and better able to afford to depart. The Governor also warned that calls for him to raise taxes could further undermine the precarious state of the territory’s economy: “If Congress does not consider Puerto Rico in tax reform, it would lead to the exodus of companies that currently generate 42 percent of Puerto Rico’s gross domestic product, the loss of jobs on the island and exacerbate the outward migration of island residents moving to the mainland.” statement from the governor’s office accompanying the letter said.

In Congress, however, there appears to be growing skepticism with regard to the Governor’s ability to manage federal emergency assistance funds, as House Natural Resources Committee Chair Rob Bishop (R-Utah) warned: “There are serious concerns of committee members, and Congress in general, about the ability and the capacity of the current local government to adequately handle the massive amounts of dollars in federal assistance that has begun to be sent,” with the Chairman’s comments coming in the wake of the discovery of documents provided by the Puerto Rico Electric Power Authority (PREPA) about the contract with Whitefish Energy Holdings, which has become the symbol of Congressional apprehensions with regard to the administration of federal funds: the documents appear to 1) demonstrate that the Puerto Rican authority ignored recommendations of the Greenburg Traurig law firm to protect the public corporation in the contract, 2) raise complaints about the high cost of the fees requested by Whitefish, and 3) disclose a personal offer made by the president of the energy company, Andrew Techmanski to the head of the Supply Division of the public corporation, Ramón Caldas Pagán, to take supplies (generators, water or food), as part of the mobilization to Puerto Rico. Chairman Bishop noted: “Confidence in the ability of the public corporation to administer contracts and infrastructure work in response to the disaster, which is very sensitive in terms of time, disappeared a long time ago.” Adding to the Congressional apprehension, Rep. Bruce Westerman (R-Ca.), the Chair of the Committee’s Oversight and Investigations Subcommittee, pointed out that the contract with Whitefish underscored the need for the Board to have higher responsibilities over the government of Puerto Rico: “It is obvious that PREPA did not know how to draft a contract that complied with FEMA, nor did PREPA officials follow the advice of their own lawyers on how to comply with it. This is precisely the reason why the Board should be given more authority.”

The Congressional concerns came in the wake of U.S. Judge Laura Swain, at the beginning of the week, rejecting a motion by the PROMESA Board to impose engineer Noel Zamot as a trustee or Chief of Transformation of PREPA. Mr. Zamot has been the Revitalization official of the financial authority imposed on the government of Puerto Rico through the Promesa Law. Chairman Bishop, has defended the claims of the Board in favor of new powers to control emergency funds and to direct the work of PREPA. However, in the wake of Judge Swain’s decision, the Chairman said he wants to see the written opinion prior to deciding on a next course of action. In the hearing before the Senate Committee on Energy and Natural Resources, the executive director of the PROMESA Board, Natalie Jaresko, said that the judge’s decision had been “a setback,” but also preferred to wait to see the decision in writing before commenting publicly on the steps to follow—adding it was unrealistic to think that the federal government will provide new emergency funds without proper supervision.

Governor Rosselló, in his testimony, told Chairman Bishop that during the past 10 months the U.S. territory has collaborated much more than it has struggled, and alluded to the approval of the fiscal plan that now will have to be revised due to the catastrophe caused by Hurricane Maria. In response, Chairman Bishop noted: “There has to be an increase in collaboration, for the sake of Puerto Rico.” At the session, the Governor affirmed that the Central Recovery and Reconstruction Office of Puerto Rico, which he established by executive order, has been seeking to establish controls on the use of funds, an issue that is also under discussion with the White House and the Office of Management and Budget, regarding Puerto Rico’s request for some $94.4 billion in emergency assistance; moreover, in addition, the Governor told Chairman Bishop that any collaboration cannot be at the expense of “the sovereign powers” of the people of Puerto Rico and “the democratically elected government,” with his comments appearing to raise the specter of a governance challenge between the oversight PROMESA Board created by Congress and the Governor: last week, when she appeared before the Committee on Natural Resources, the oversight Board Chair Jaresko requested that, if necessary, Congress should modify federal legislation in order to “clarify” that the Board has the power to appoint a trustee in  PREPA or, she even suggested, that any new federal assistance to Puerto Rico be conditioned. During the hearing, other Members of the Committee queried why Governor Rossello did not consult with the PROMESA Board with regard to the decision to exempt small and medium-sized companies from the Sales and Use Tax during the period from January 20 to December 31, at a time when the government had a serious liquidity crisis that has forced it to request a credit line of up to $4.7 billion from the federal government. Interestingly, Rep. Don Young (R-Alaska) noted that “Puerto Rico would not have the problems it has if it were a state.” Rep. Garret Graves (R-La.) asked the Governor what he should say to one of his voters if questioned, in the wake of the PROMESA enactment, whether the law constituted a financial bailout at a time when its citizens do not pay federal income taxes—in response to which, the Governor replied that Puerto Ricans are U.S. citizens, who have faced a historical catastrophe that keeps the Island in an emergency situation and that it is not an issued related to “the strange territorial arrangement that we have.”

Catalysts to Fiscal Recoveries

November 10, 2017

Good Morning! In today’s Blog, we consider the ongoing challenges to Detroit’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy; the State of Michigan’s winnowing down of municipalities under state oversight; and the ongoing physical and fiscal challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Reframing the Motor City’s Post Chapter 9 Future. Nolan Finley, a wonderful contributor to the editorial page of the Detroit News, this week noted “elections are a wonderful catalyst for refocusing priorities, as evidenced by the just-completed Detroit mayoral campaign, which moved the city’s comeback conversation away from the downtown development boom and centered it on the uneven progress of the neighborhoods. Never before has such an intense spotlight shown on the places where most Detroit voters actually live.” He attributed some of the credit to the loser in this week’s mayoral election, challenger Coleman Young II, who forced Mayor Mike Duggan to defend his record on improving quality of life in the neighborhoods. He perceptively wrote that while candidate Young’s ugly “Take back the Motherland” rallying cry was dispiriting, it spoke to the governing challenge the newly, re-elected Mayor confronts, writing: “Detroit is not a city united. It must become one. There were too many skirmishes along the racial divide in this mayoral contest. The old city versus suburb story line was replaced by a neighborhood versus downtown narrative, but both are code for black versus white. Four years ago, Duggan’s election as Detroit’s first white mayor in 40 years suggested much of the city was ready to stop looking back at its dark and divisive past and begin focusing on a brighter future.” Now, he wrote, after Mayor Duggan focused his first term on meeting the city’s plan of debt adjustment, and trying to improve the quality of life for residents—and as developers are beginning to add community projects to their downtown portfolios, “too many in the neighborhoods feel as if their lives are not getting better, or at least not fast enough.” Thus, he noted, Mayor Duggan needs to redouble his efforts to restore the city’s residential communities, and push ahead the timetable: “Four years from now, Detroit cannot still be wearing the mantle of America’s most violent city.” He added that while Mayor Duggan has little—too little—authority to address education in Detroit; nevertheless—just as his colleague Rahm Emanuel, the Mayor of Chicago recognized, needs to strongly back Detroit Public School Superintendent Nikolai Vitti’s efforts to rapidly boost the performance of the Detroit Public Schools Community District: it is a key to bringing young families back into the city. And, Mr. Finley wrote, the mayor “must also find a way to connect the neighborhoods to downtown, to instill in all residents a sense of ownership and pride in the rejuvenation of the core city. That means getting way better at inclusion. Downtown’s comeback must be more diverse, and include many more of the people who have grown up and stayed in the city. Encouraging and supporting more African-American entrepreneurs is a great place to begin breaking down the perception that downtown is just for white people: Detroit needs more diversity everywhere in the city, both racial and economic,” referring especially to young millennials who are steeped in social justice and imbued with the obsession to give back that marks their generation. “They are committed Detroiters. And they deserve to be appreciated for their contributions, not made to feel guilty or viewed as a threat to hard-won gains.”

Free, Free at Last. Michigan State officials have released Royal Oak Township, a municipality of about 2,500 just north of Detroit, from its consent agreement: Michigan Treasurer Nick Khouri said the Oakland County municipality has resolved its financial emergency and is ready to emerge from the state oversight imposed since 2014, stating: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” The township’s financial emergency resulted in an assets FY2012 deficit of nearly $541,000. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever…The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” Treasurer Khouri also said the township was the last Michigan remaining municipality following a consent agreement: Over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements because of fiscal and financial improvements and operational reforms. The Treasurer noted that today only three communities, Ecorse, Flint, and Hamtramck, remain under state oversight through a Receivership Transition Advisory Board.

Preempting Authority. House Natural Resources Committee Chair Rob Bishop (R—Utah) this week said the PROMESA Oversight Board should be granted even more power to preempt the authority of the government of Puerto Rico, stating: “Today’s testimony will inform the work of Congress to ensure the Oversight Board and federal partners have the tools to coordinate an effective and sustained recovery,” in a written statement after a hearing of the House Committee on Natural Resources: “It is clear that a stronger mechanism will be necessary to align immediate recovery with long-term revitalization and rebuilding.” Chairman Bishop added: “This committee will work to ensure [the Puerto Rico Oversight Board] has the tools to effectively execute that mission and build a path forward for this island and its residents.” The Board was created last year to oversee fiscal management by the island government, which had said more than $70 billion of debt was unpayable under current economic conditions. Since the hurricane, the Board has clashed with the territorial government over leadership at the power utility. During the hearing the board’s Executive Director, Natalie Jaresko, said the ability of Puerto Rico’s government to repay its debt was “gravely worse” than it was before Hurricane Maria, which arrived Sept. 20. By the end of December, the Board plans to complete a 30 year debt sustainability analysis with Puerto Rico’s government, she said: “After the hurricane, it is even more critical that the Board be able to operate quickly and decisively…to avoid uncertainty and lengthy delays in litigation, Congressional reaffirmation of our exercise of our authority is welcome.” On Oct. 27, the board had filed a motion in the Title III bankruptcy case for the Puerto Rico Electric Power Authority (PREPA) seeking the court’s permission to appoint Noel Zamot as the authority’s new leader. The government of Gov. Ricardo Rosselló has made it clear that it intends to challenge this motion. The court is scheduled to hold a hearing on the matter on Monday, November 13th.

In calling for more board power, Chairs Bishop and Jaresko probably were at least partly referring to the struggle over PREPA’s leadership. They may also want the Board’s power augmented in other ways: the Board has already announced that it will be creating five-year fiscal plan for Puerto Rico’s government and for its public authorities this winter. Puerto Rico’s government will have substantial needs for federal aid in the coming years, Ms. Jaresko said. Congress plans to tie this aid to the government following the Board’s fiscal plan and this would be appropriate, she said. “Before the hurricanes, the board was determined that Puerto Rico and its instrumentalities could achieve balanced budgets, work its way through its debt problems, and develop a sustainable economy without federal aid,” Ms. Jaresko said in her written testimony. “That is simply no longer possible. Without unprecedented levels of help from the United States government, the recovery we were planning for will fail.” She also said that over the next 1.75 years Puerto Rico’s government will need federal help closing a gap of between $13 billion and $21 billion for basic services. She added the federal government should change tax laws to benefit the island: “The representatives of the Financial Oversight and Management Board (FOMB) who appeared before the House Committee on Natural Resources insist on jeopardizing the necessary resources for the payment of pensions and job stability,” Gov. Rosselló testified in his written statement, adding to that the testimony of Ms. Jaresko and Mr. Zamot “evidenced ignorance about the recovery process in Puerto Rico, presenting incorrect figures relating to the existing conditions on the island,” adding: “I again invite the FOMB to collaborate so that the government of Puerto Rico, together with the support of the federal government, facilitates the fastest possible recovery of our island.” He noted that such assistance should not depend on the Board “assuming the administrative role” which belongs to the elected government of Puerto Rico.

Sanctioned Discrimination. The endorsement that the House Ways and Means Committee effectively incorporated in its “tax reform” legislation reported out of Committee this week appears to discriminate against Puerto Rico, imposing a tariff on the products which Puerto Rico exports to the mainland—threatening to deal a devastating blow to Puerto Rico’s industrial base at the very moment in time the territory is striving to recover from the already disparate hurricane recovery blows. According to economists Joaquín Villamil: “None of these measures, nor the repatriation of profits, the corporate rate and the 20% tax on imports is positive for the island…The companies are not going to pay a 4% royalty to Puerto Rico and a 20% tax to bring their product to the United States. They will leave the island, especially if the tax rate is lowered there.” Mr. Villamil added: “If that happens, 21% of the income received by the Puerto Rican Treasury is eliminated,” he added, referencing P.L. 154, the statute which established a 4% tax on sales of an operation in Puerto Rico to its parent company in the mainland. In its markup, yesterday, the House Ways and Means Committee left almost intact §4303 which establishes a 20% tariff on all imported goods for resale by companies and businesses in the United States. Moreover, the disposition forces multinationals with operations in places such as the U.S. territory of Puerto Rico to repatriate their income to the U.S. What that means is that the production of drugs, medical devices, and many other goods in Puerto Rico is done on U.S. soil; however, for federal tax purposes, Puerto Rico is deemed an international jurisdiction—or, as economist Luis Benítez notes: “This (House Ways and Means bill) generates greater uncertainty about what the economic future of the island should be: with this, the figure of the controlled foreign corporation (CFC) loses the competitive advantage it had (under §936).” He noted that by reducing the corporate rate to multinationals operating in Puerto Rico, the benefit of giving them tax exemptions at the local level is also reduced, as is the case of Law 73 on Industrial Incentives: via the elimination of §936, Puerto Rico, as a place to do business, went from competing with the continental U.S. to competing with countries such as Singapore and Ireland, adding that now a reduction in the corporate rate would cause Puerto Rico not only to compete with the rest of the world, but with jurisdictions on the mainland: “I think that if I were the Secretary of the Treasury, I would tremble with this situation.”

In Puerto Rico, he estimates manufacturing employs approximately 75,000 people directly—a number which rises to 250,000 when indirect and induced jobs are calculated, adding that even though the manufacturing sector has shrunk in the past years, the productive and contributory base rests on that activity, adding that: “As much as it is said that they do not pay taxes, this sector contributes 33% of the revenues…As long as jobs are lost there, the treasury will erode,” noting that the industrial sector plays such a large role in Puerto Rico’s economy that no other sector of the service economy can counterbalance it. He worries that if Congress fails to address the apparent discrimination, the chances that the PROMESA Board and the government of Puerto Rico can put together an economic recovery plan is minimal: “These are implications for all of Puerto Rico: It is difficult to think about options, because if this is approved, it would be disastrous, because of everything that has happened after Hurricane Maria.”

Last night, the former president of the Association of Certified Public Accountants, Kenneth Rivera Robles, who has been part of several lobbying delegations to Washington, remained relatively optimistic that the project language will be amended.

President Woodrow Wilson signed the Jones-Shafroth Act into law on March 2, 1917, with the law providing U.S. citizenship to Puerto Rico’s citizens, granting civil rights to its people, and separating the Executive, Judicial, and Legislative branches of its government. The statute created a locally elected bicameral legislature with a House and Senate—but retained authority for the Governor and the President of the United States to have the authority to veto any law passed by the legislature. In addition, the statute granted Congress the authority to override any action taken by the Puerto Rico legislature, as well as maintain control over fiscal and economic matters, including mail services, immigration, defense, and other basic governmental matters. 

Fiscal & Physical Storm Recoveries

October 30, 2017

Good Morning! In today’s Blog, we consider, again, the spread of Connecticut’s fiscal blues to its municipalities; then, we observe the lengthening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. Ending months of fiscal frustration, the Connecticut House of Representatives late Thursday provided its strong, bipartisan endorsement (126-23) to two-year, $41 billion state budget which closes a gaping deficit, rejects large-scale tax increases, and seeks to bolster the state’s future fiscal stability. Notwithstanding, S&P Global Ratings, the following day, issued its own fiscal storm warnings that it is a budget which will still leave the state’s municipalities at fiscal risk. Governor Dannell Molloy has not yet said if or when he might sign that budget into state law; however, because it passed both Houses by veto-proof margins, the question is no longer “if,” but rather: what will it mean for the state’s municipalities? Thus, S&P warned:  “We note that virtually all local governments will see some reductions to state aid, while only a few—typically those with the greatest economic challenges—will see flat year-over-year state aid.” Similarly, Conn. House Majority Leader Matt Ritter (D-Hartford) told his colleagues: “We’re at the end of a journey: This budget offers needed reforms, but also some immediate comfort that is so needed by a lot of our residents and our towns…In the darkest of days…we found a way to pull through.”

As adopted, the budget bill provides financial assistance to eastern Connecticut homeowners dealing with crumbling foundations, reduced funding for UConn, offers $40 million to help the City of Hartford avoid filing for Chapter 9 municipal bankruptcy. The Connecticut Conference of Municipalities Executive Director Joe DeLong, in the League’s initial analysis of the municipal impact of the bipartisan budget agreement, noted: “Municipal leaders acknowledge the difficult choices made by state leaders in forging this bipartisan budget agreement and the impact they have on the lives of Connecticut residents: The actions taken by State leaders to support cities and towns protects the interests of residents and businesses across the state and for that we are grateful.” With the State facing a $5 billion biennial budget deficit, the state budget agreement spares towns and cities from the draconian cuts set to roll out under the Governor’s Executive Order and includes many significant structural reforms that municipalities have been advocating for years. Mr. DeLong added that the final budget agreement provides for numerous municipal reforms sought by the League last January in its groundbreaking public policy initiative, “This Report Is Different.”  

Connecticut House Speaker Joe Aresimowicz noted: “Leaders do things that are maybe not in their best interests, or may be against their own beliefs, in an effort to do what’s right. And I think that was done,’’ as Rep. Toni Walker (D-New Haven), Co-Chairwoman of the appropriations committee, described the bill as a significant step toward closing a $3.5 billion deficit over the next two years and righting the state’s wobbly finances for decades to come: “I want everybody to understand we must recalibrate the financial future of Connecticut, for our families and for our businesses and this budget begins that process.’’

As adopted, the budget does not increase income or sales tax rates, although it raises hundreds of millions of dollars in revenue via an assortment of smaller measures, such as higher taxes on cigarettes, a $10 surcharge on motor vehicle registrations to support parks, and new fees on ride-sharing companies, such as Uber. On the other hand, the final agreement rolled back proposed taxes on cellphone plans, second homes, and restaurant meals. In the end, small tax increases represent just .85 percent of the budget; fee hikes constituted an even smaller contribution .11%. On the revenue side, the new budget proposes the elimination of a property tax credit for many middle-income homeowners, raises the cigarette tax, and sweeps $64 million from a clean energy fund.

In the wake of the passage, S&P Global Ratings indicated it would review the state’s municipal bond rating, but noted the municipal impact, citing the $31.4 million cut to the Education Cost Sharing Grant, the primary state grant which goes to cities and towns to help operate their schools—albeit, the cut is to be nearly fully restored next year, and distributed using an updated formula which more heavily favors the state’s lowest-performing school districts. The adopted budget also rejected Gov. Malloy’s proposal to mandate that the state’s cities and towns assume some fiscal share of the state’s soaring contributions to the teachers’ pension fund. Nevertheless, the budget was less generous to municipalities on the revenue front: the 2015 state plan to share sales tax receipts with cities and towns is all but eliminated in this budget, which officially ends the diversion of these receipts into a special account: the last remnants of a program which was supposed to distribute more than $300 million per year in sales tax receipts are: A “municipal transition grant” worth $13 million in FY 2017 and $15 million for next year. Similarly axed: a $36.5 million payment this year to offset a portion of the funds communities with high property tax rates lose because of a state-imposed cap on motor vehicle taxes: the new budget would cut $19 million in each year from grants that reimburse communities for taxes they cannot collect on exempt property owned by the state and by private colleges, hospitals and other nonprofit entities.

The adopted budget, however, from a municipal perspective, proposes to revise the prevailing wage and binding arbitration systems: municipalities would have greater flexibility to launch more publicly financed capital projects without having to pay union-level construction wages, and arbiters would have more options when ruling on wage and other contract issues involving municipalities and their employees.

Nevertheless, S&P noted: “Since new state revenue measures would have less than a year to be collected, this may leave the state without the available resources to fully appropriate for these (municipal grants),” adding: “The length of the budget impasse underscores the state’s struggling financial health.” The rating agency last month had already placed nine Connecticut municipalities and one school district on a “negative” credit watch, warning it could lead to a rating downgrade within 90 days unless their fiscal outlook improves, citing the uncertainty of Connecticut’s ability to maintain existing levels of municipal aid, reinforcing Moody’s moody outlook earlier this month when it warned that the state actions could lead to lower bond ratings for 51 municipalities and six regional school districts, placing ratings for 26 cities and towns and three regional school districts under review for downgrade, and assigning negative outlooks to an additional 25 municipalities and three more regional school districts. For its part, S&P warned: “In the end, if state fiscal pressures persist, all local governments in Connecticut will continue to be affected…and the degree of credit deterioration will depend on each government’s level [of] budgetary reserves and ability to adapt.”

Underpowered. House Natural Resources Committee Chairman Rob Bishop (R-Utah) said he does not want to “come to conclusions” before he has all the information regarding the controversial $300 million contract of the Montana-based company, Whitefish Energy Holdings, with the Puerto Rico Electric Power Authority (PREPA); nevertheless, Chairman Bishop has given PREPA Chairman Ricardo Ramos until this Thursday to submit a series of documents related to the contract with the company—a company whose largest project prior to Hurricane Maria was $ 1.3 million in the state of Arizona—especially in the wake of the contract award here made without bidding—ergo triggering a series of questions and requests for investigations by the Office of  Inspector General and from the Government Accountability Office (GAO). Chairman Bishop was part of the Congressional delegation with House Majority Leader Kevin McCarthy (R-Ca.) and Deputy Minority Leader Steny Hoyer (D-Md.), as well as Puerto Rico resident Commissioner in Washington, D.C., Jennifer González. House Speaker Paul Ryan ((R-Wis.) who had earlier visited the town of Utuado, known as “El Pueblo del Viví,’ which was founded in 1739 by Sebastían de Morfi, and derives its name from a local Indian Chief Otoao, which means between the mountains, to see first-hand the devastation caused by Hurricane Maria—in the wake of which he noted: “Our committee, like other groups, will investigate and we will know what is behind the Whitefish contract. I do not know enough right now to come to a conclusion against or in favor, but that’s the idea, to know the details and how it happened.”

The Chairman was not alone: the Federal Agency for Emergency Management (FEMA) has released a statement making clear that agency’s concerns about certain aspects of the contract, including an absence of certainty that some prices were even “reasonable,” in apparent reference to the hourly pay of some employees of the company. FEMA also warned that entities that fail to meet FEMA requirements may not see their expenses reimbursed. Nevertheless, Chairman Bishop said he will not “let” any concern of FEMA “get in the way…FEMA will do its job,” he insisted when asked if he was worried that FEMA would not reimburse the Puerto Rico government for payments to Whitefish. (Last night, Governor Ricardo Rosselló Nevares confirmed that he was about to receive a report he had requested from the Office of Management and Budget about the contract.).

Chairman Bishop noted that, as a result of the destruction caused by Hurricane Maria, he is considering possible changes to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), albeit, when asked about specific changes, he limited himself to saying that the Oversight Board “does not need more authority;” rather, he said, the focus now needs to be on the provision of power and drinking water. Asked by Majority Leader McCarthy whether the devastation he had witnessed makes him think that the aid mechanism for Puerto Rico should change, he answered that “a lot of infrastructure is needed, and we have to lift the electrical system…I spoke with (Minority Leader) Steny Hoyer. I do not think it would be the best use of taxpayers’ money to build the same grid that we had. We need a 21st century one that is more efficient and effective and we can do it with more transparency,” albeit he was unclear what he meant by transparency. Rep. Hoyer noted: “We know there is an urgency,”  adding the delegation needed to all go back to Washington, D.C. to work together, but “we need an urgency to fix the electrical system and for power to reach the whole island. Governor Rosselló Nevares, who accompanied them on the tour, has said that if the quality of life in Puerto Rico does not reach what it should be: “People will be disappointed, and they will leave.”

Physical & Fiscal Solvency & the Unremitting Challenges of Water

Good Morning! In this morning’s eBlog, we consider the route to fiscal solvency taken by the small Virginia municipality of Petersburg, the major legal challenges to the physical and fiscal future of Flint; and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road Back to Fiscal Solvency. Forensic auditors earlier this week presented their findings from the audit they conducted into the city of Peters burg’s financial books during a special City Council meeting in the small, historic Virginia City of Petersburg, and answered questions from Council Members. Their key focus was on the “ethical tone” of the city government: they noted they had found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time: The culture led employees to do things they might not otherwise do.” The list of misdeeds included misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. They added that the ethical problems appeared to be more “systemic” rather than individual, testifying, for instance, that they had examined fuel consumption and “[W]e could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.” Because of the city’s limited budget, the scope of the auditor’s (PBMares) work could only go so far. Council Members Darrin Hill and Treska Wilson-Smith both expressed sentiments that the audit did not go far enough; however, former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more money than the nearly insolvent city had. In fact, the city spent approximately $1 million on turnaround services, with the vast bulk of that amount to the Bobb Group to obtain outside help from the firm led by the former Richmond City Manager in its efforts to pull Petersburg back from the brink of insolvency and scrutinize the cash-strapped government’s books. The city devoted nearly $195,000 to a forensic audit by the firm PBMares. Former Mayor and now City Councilman Howard Myers believes Petersburg’s taxpayers have gotten their money’s worth: “They brought us from the depths of indebtedness…I think the resistance then was mainly misinformed about the nature of how things had gotten to the point they were.” But from the abyss of insolvency, city officials now project Petersburg will have $2 million in savings left over from the fiscal year which ended June 30. To get there, the city has deeply reduced pay for emergency workers, cut funding for public schools, and eliminated programs for children in an effort to close a $12 million hole in the city’s budget—even as those efforts still left the Council confronted by some $18.8 million in past-due bills, as well as litigation over the city’s mounting debts—not to mention growing taxpayer pressure to cease to exist, but rather to dissolve its charter and revert to becoming part of one or more counties. Nevertheless, as Mayor Samuel Parham put it: “We had to take a chance: We were at a point where all the banks were laughing at us, saying: ‘We’re not going to pay you a dime; you couldn’t afford to mail an envelope.’”

Today, it seems that gamble has paid off: the contract with Mr. Bobb’s firm ended last month, and, as Mayor Parham stated: “Look, God bless Robert Bobb…We couldn’t get anyone — nobody wanted to come risk their career to save Petersburg. The storm was so massive, it was sinking all of us, but he told us he had dealt with many storms in his 40-year career.” The appointment of Mr. Bobb, however, was a political gambit which drew the opposition of a “good government group,” Clean Sweep Petersburg, which had helped launch an effort to recall Mr. Myers and Mayor Parham. The issue which created the greatest political discord: privatization of the city’s water and sewer authority.  In an interview this week, Mr. Bobb noted that the city’s future fiscal success will depend largely on the City Council’s ability to be accountable to taxpayers through their own decisions and those of the fresh administration hired in a municipal reset. Critical to that success will be firm municipal oversight of cash flow, strong leadership in the finance department, and a newly created revenue collection department designed to wrest responsibility away from the Treasurer’s office, which, according to Mr. Bobb, was not under the Council’s purview: he added the city’s elected leaders “have a tremendous fiduciary responsibility to perform at a high level on behalf of the city’s taxpayers: I think they have a chance, absolutely. They really have to control spending, though, and be careful.” He added that  of the $10 million the firm calculated it had helped save or bring in through a combination of state money it pursued, savings achieved by restructuring debt, the sale of city assets and other actions: “We’ve given the administration and the City Council a reset and an opportunity to build moving forward: “It really is up to the City Council now.”

Out Like Flint. Thousands of Flint, Michigan’s citizens are still grappling with the effects of the city’s state-caused lead-poisoning drinking water crisis, one occasioned by a gubernatorially appointed Emergency Manager, which has, today, confronted the city with many citizens facing possible tax liens and even foreclosure on their homes due to unpaid water bills: more than 8,000 residents have received notices that past-due water bills—categorized as those left unpaid for six months or more—must be resolved to avoid a lien being placed on their property. The bills in question cover two years: they total more than $5 million in delinquent water and sewer charges, according to the city. The ongoing fiscal and physical stress comes amid an involuntary manslaughter trial after  Federal Judge Judith Levy last June ruled that the conduct of government officials was “so egregious as to shock the conscience,” approving a $97 million settlement from the State of Michigan to replace water lines in at least 18,000 households.

Nevertheless, today, the water in Flint remains unsafe to drink without a filter. Unsurprisingly, in the city, where the estimated median household income in 2015 ($25,342) was more than 10 percent lower than in 2000, and where assessed housing (home/condo) values have dropped by nearly 50 percent to a level 75 percent lower than the statewide average, the city is ensnared in a vicious fiscal quandary: the liens threatened by the city, if implemented, represent the first step in making a claim on an individual’s property, setting off a legal process which could ultimately result in families losing their homes—further depressing assessed property values. And that is in a municipality where the city’s residents face some of the highest water bills in the country.  (To bring some relief, Michigan Gov. Rick Snyder last year approved a $30 million plan to reimburse residents for a portion of payments made since April 2014 on water used for drinking, bathing, and cooking.) That state assistance ended early this year, however, so now the city’s leaders are faced with the grim task of condemnation: once water payments are missed on water or sewer accounts for more than six months, the city’s ordinance requires the Treasurer to transfer the lien to a homeowner’s property tax bill—or, as Mayor Karen Weaver puts it: “We must follow the law…I understand the concerns that have been raised, and I am working to see if any changes or something can be done to help those affected by this, especially given the extraordinary circumstances we have endured due to the water crisis.”

But Flint’s fiscal and physical crisis has become a legal entanglement for the State of Michigan, where, in another courtroom, Michigan Gov. Rick Snyder, whose original appointment of a series of state-appointed emergency managers who ran Flint city government from 2011 until mid-2015, making key decisions related to city’s water system (under former Emergency Manager Darnell Earley, the city changed its water source in what was explained as a cost-saving move, switching from pre-treated water from Lake Huron to raw water from the Flint River—and after which the DEQ did not require the city to treat the water to make it less corrosive to lead pipes and plumbing, causing lead to leach into the water supply).

That decision to preempt the city’s local elected officials had led to the fateful decision to switch the city’s water supply to a contaminated system; while state responsibility appears to be a hot potato—with state leaders not saying who initially opposed issuing a  state emergency over the Flint water crisis. During a preliminary examination this Wednesday, in the criminal case against Nick Lyon, Director of the Michigan Department of Health and Human Services, special prosecutor Todd Flood read from a November 2015 email from Richard Baird, a senior advisor to Gov. Snyder, in which Mr. Baird had written “the ‘boss’ wanted to avoid triggering the emergency, which authorizes the Michigan State Police to coordinate relief efforts and requests for assistance from the federal government.” (Former President Obama signed an emergency declaration for Flint days after Gov. Snyder ultimately requested it, clearing the way for federal assistance to replace damaged lead and galvanized water service lines in the city.) Thus, the ongoing criminal trials in which the State of Michigan and City of Flint employees have been charged with criminal wrongdoing related to the water crisis (of which there are a total of 13 pending in Genesee District Court). In the trial, Corinne Miller, the former head of Disease Control for the State of Michigan, testified in a key court hearing Wednesday that the court must determine if Nick Lyon, the then Director of the Michigan Department of Health and Human Services, must face an involuntary manslaughter charge. (Note, Mr. Lyon, has remained on the job while facing charges of involuntary manslaughter and misconduct in office.)

Indeed, the Michigan courtrooms have become filled: attorneys for 21 law firms have filed a consolidated class-action lawsuit against two engineering firms, Flint officials, and Michigan officials, including Gov. Rick Snyder and former state Treasurer Andy Dillon over Flint’s lead-contaminated water—so egregious that last June, Judith Levy ruled that Flint residents have sufficiently argued that the conduct of government officials “was so egregious as to shock the conscience.” The complaint before her had noted that approximately 100,000 Flint residents “have experienced and will continue to experience serious personal injury and property damage caused by defendents’ deliberate, reckless and negligent misconduct…Defendents caused a public health crisis by exposing (Flint residents) to contaminated water” and “exacerbated the crisis by concealing and misrepresenting its scope, failing to take effective remedial action to eliminate it, and then lying about it to cover up their misconduct.”

The lawsuit, filed on behalf of Flint’s 100,000 residents and other users of its water system, says the defendants acted recklessly and did not respect residents’ due process rights argues that the engineering firms and government officials unconstitutionally did not treat the predominantly black residents of Flint the same as the predominantly white residents of great Genesee County. In late July, a three-judge panel of the 6th U.S. Circuit Court of Appeals allowed plaintiffs in one case before Judge Levy to try to seek relief from Gov. Snyder in the form of compensation for education, medical monitoring and evaluation services for ongoing harm from Flint’s lead-contaminated water. In the other case, the appeals judges dismissed the possibility of seeking penalties for Gov. Snyder, the State of Michigan, the Michigan Department of Environmental Quality, and the Michigan Department of Health and Human Services. All three of the judges, however, wrote that the 11th Amendment gives the state and Snyder immunity against damages sought by private citizens.

Undercutting Sovereignty. President Trump set off a broad sale of Puerto Rico’s municipal bonds this week when he said: “You can say goodbye to that,” referring to the U.S. territory’s $73 billion debt as one option to help Puerto Rico recover from Hurricane Maria in an interview on Fox News during his visit to Puerto Rico—a suggestion which OMB Director Mick Mulvaney discounted just hours later, stating the White House does not intend to become involved in Puerto Rico debt restructuring—debt which, in any case, the President has no unilateral authority to forgive. The President had stated: “We’re going to work something out. We have to look at their whole debt structure. They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out…you can wave goodbye to that,” unsurprisingly leading some to understand that the Trump administration would force municipal bondholders to forgive Puerto Rico’s debt. (The price of Puerto Rico’s municipal bonds, already down in the wake of Hurricane Maria, fell another 31 percent—only recovering in the wake of comments by Office of Management and Budget Director Mulvaney, attempting to backtrack, stating: “I wouldn’t take it word for word with that. I talked to the President about this at some length yesterday as we flew home on Air Force One: The primary focus of the federal effort is to make sure the island is safe and that we’re rebuilding the island,” adding that the federal government would not pay off debts or bail out municipal bondholders: “I think what you heard the President say is that Puerto Rico is going to have to figure out a way to solve its debt problem.”

The White House Wednesday asked Congress to approve $29 billion in additional hurricane relief and municipal debt forgiveness, seeking to help Puerto Rico and the U.S. Virgin Islands, as well as shore up the debt-ridden federal flood insurance program which provides flood insurance to homes and small businesses. The latest request seeks $12.8 billion for the Federal Emergency Management Agency, to stay current with the nearly $200 million a day the agency is spending on recovery work; the request also seeks action by Congress to erase some $16 billion in debt that the National Flood Insurance Program owes to the Treasury: under the White House proposal, premiums for flood insurance would rise, at least for homeowners who could afford to pay more, while private insurers would be encouraged to start writing their own flood insurance.

For the devastated U.S. territory, however, the physical and fiscal destruction has only worsened Puerto Rico’s short and long-term fiscal plight—or, as Gov. Rossello noted: “As far as the comment made about wiping the debt clean, that is the opinion of the President,” noting, carefully, he could not comment further because of the ongoing legal proceedings. Fortunately, in Congress, House Natural Resources Committee Chairman Rob Bishop (R-Utah) is putting together a funding package to aid Puerto Rico, and he said members of his committee and other Representatives were meeting to discuss temporary measures to reduce government rules slowing Puerto Rico’s recovery: his group will examine options for ways to make Puerto Rico’s and the U.S. Virgin Island’s electrical systems more resistant to storms, as well as consider how to improve things in both territories in the short-, medium-, and long-term.

Fiscal, Legal, Physical & Human Challenges

October 4, 2017

Good Morning! In today’s Blog, we consider the President’s visit to address the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Physical & Fiscal Mayhem. President Trump, visited Puerto Rico yesterday (nearly two weeks after Hurricane Maria, only 6.89% of the island has electricity, 22.54% of the telecommunications towers operate, 24% of the commercial flights operate, while the water and gas distribution problems persist in means of enormous damage to infrastructure. More than 9,000 people still live in shelters, according to official figures.). The President suggested the removal of Puerto Rico’s large debt so that Puerto Rico can to respond, short and long-term, to the emergency: “We have to work on something,” albeit adding Puerto Rico should be proud that only 16 died, unlike what he deemed “the real catastrophe” of Katrina. The devastating hurricane left some $90 billion in damage—on top of the $74 billion in debt Puerto Rico and the PROMESA Board (relocated to New York City) are confronting. The President added: “You have to look at the whole structure of the debt‒you owe a lot of money to your friends on Wall Street, and we’ll have to eliminate that. We’ll have to say good-by to that. I do not know if it’s Goldman-Sachs, but whoever it is, you can say goodbye to that. We will have to do something, because the island’s debt is huge.” The President’s remarks, however, coming as the PROMESA Board was meeting in New York City, created a question with regard to his intentions: did he mean the Administration is contemplating forgiving its debts? If so, what would that mean to the territory’s bondholders? Moreover, it is unclear whether the President even has such authority.

President Trump has called for Puerto Rico to have its crippling debt forgiven, describing the potential precedent as tough luck for the Wall Street holders of the debt, telling Fox New’s Geraldo Rivera: “They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” with his comments coming in the wake of considerable political heat for one of his earliest tweets on Hurricane Maria, in which he had written that Puerto Rico was already suffering because of its huge debt burden, which liberals interpreted as blaming the victim.

The President told Puerto Rico officials they should feel “very proud” they haven’t lost thousands of lives like in “a real catastrophe like Katrina,” while adding that the devastated island territory has thrown the nation’s budget “a little out of whack,” with his comments coming as he touched down in San Juan amid harsh criticism of the slow federal response to the natural disaster, and after he had praised himself earlier in the day for his administration’s “great job” and “A-plus” response to Hurricane Maria, marking his brief, only visit to Puerto Rico since the storm ravaged the U.S. territory nearly two weeks ago. The President commented: “Every death is a horror, but if you look at a real catastrophe like Katrina, and you look at the tremendous—hundreds and hundreds and hundreds of people who died, and you look at what happened here, with really a storm that was just totally overpowering, nobody’s ever seen anything like this.”  The President said this, then turned to a local official to ask how many people had died in storm. “What is your death count as of this moment? 17? 16 people certified, 16 people versus in the thousands.”

The hurricane, which killed at least 36, left millions without power and tens of thousands without access to drinkable water; it compounded a volatile economic situation in the territory, which is roughly $70 billion in debt. The President, at one point, stated that Puerto Rico had “thrown our budget a little out of whack.” President Trump, who in the past week has boasted about the federal government’s response to the disaster, evidence to the contrary notwithstanding, told Govs. Ricardo Rosselló of Puerto Rico and Kenneth Mapp of the U.S. Virgin Islands:  “You can be very proud of all of your people, all of our people working together,” adding, however, “I hate to tell you, Puerto Rico, but you’ve thrown our budget a little out of whack.”

San Juan Mayor Carmen Yulín Cruz, who has been deeply critical of the government’s relief efforts and whom the President Trump has criticized on Twitter, also joined the President for his first briefing. The President said: “I think it’s now acknowledged what a great job we’ve done, and people are looking at that…And in Texas and in Florida, we get an A-plus. And I’ll tell you what, I think we’ve done just as good in Puerto Rico, and it’s actually a much tougher situation. But now the roads are cleared, communication is starting to come back. We need their truck drivers to start driving trucks,” adding his thanks to Governor Rosselló for positive comments he had made about the Trump administration’s work in Puerto Rico, saying, “He has said we have done an incredible job, and that’s the truth.”

Unsurprisingly, the President’s statements were also marked by the controversy he has had with the San Juan Mayor Carmen Yulin Cruz, who had earlier stated publicly that citizens were dying on the island for lack of federal assistance—in response to which the President had tweeted “poor leadership” demonstrated by the Mayor. Her comments came shortly after the President said she should be proud that only 16 Americans died, unlike the “real catastrophe” of Katrina. Actually, so far, the storm has taken the lives of 34 Americans, leading the Mayor to state, in the wake of the President’s visit: “This is not a joke.”

In a subsequent interview, the President yesterday declared he would eliminate Puerto Rico’s debts, stating he has many friends on Wall Street, noting: they will have to say good-by to their investments, “I don’t know whether it is Goldman Sachs, but whoever it is, they will have to say good-by.” The President added, however, that what he had seen was not a “real catastrophe.”

While the cost of replacing and restoring critical public infrastructure destroyed by Hurricane Maria will largely fall to the Federal Emergency Management Agency, funding for other essential services, such as police and emergency rescue appears likely to remain Puerto Rico’s responsibility, according to FEMA experts—albeit something fiscally virtually out of reach: Puerto Rico’s fiscal capacity, beset by a shrinking population, spiking pension costs, and a looming health-care-funding cliff, now is confronted by hundreds of thousands of its citizens still without power and other basic necessities; its economic activity will take some time to restart, and it can expect severe interruptions in its tax collections for a time, according to Jim Millstein, a financial restructuring adviser to Gov. Ricardo Rosselló’s administration. Mr. Millstein adds: “On the revenue assumption side, you can assume they’re going to fall short: While they have a huge influx of FEMA funds over the next 6 months, those are for designated purposes, and not necessarily for running the government.”

He predicted that Puerto Rico could lose up to two months’ of tax collections, even as the government lacks resources to finance essential services and other government operations—likely leading to seeking critical assistance from the Federal Reserve and the U.S. Treasury—requests, however, already, unsurprisingly, opposed by the territory’s existing creditors, who are battling the PROMESA Board for payments on $73 billion in municipal-bond debt—or, as ACG Analytics has noted: a U.S. loan package “would, presumably, be structured to have priority” over payments to current bondholders.

The White House did, this week, act to ease the potential liquidity squeeze, waiving certain cost-sharing requirements for six months. Meanwhile, PREPA creditors offered $1 billion in new loans this week to jump-start rebuilding efforts, an offer which Gov. Rosselló’s fiscal advisers rejected as “not viable.” In Congress, meanwhile, no immediate action appears likely: Congressional leaders anticipate passing a second disaster aid package later this year with more specific directives with regard to how federal dollars sent to Puerto Rico should be spent, even as the Trump administration, facing criticism for its response to Hurricane Maria, has installed a U.S. Army commander to oversee federal relief efforts, and the PROMESA oversight Board has said Puerto Rico can afford to pay bondholders roughly a quarter of what they are owed over the next decade. While the Treasury Department had considered the option of authorizing so-called “super municipal bonds,” the concept found little support in Congress, where there is antipathy about setting any precedents for federal bailouts of financially struggling municipalities.