What Do Today’s Fiscal Storms Augur for Puerto Rico and New Jersey’s Fiscal Futures?

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eBlog, 03/13/17

Good Morning! In this a.m.’s eBlog, we consider the frigid challenges awaiting Puerto Rico in New York City’s Alexander Hamilton Building today, where even as a fierce winter storm promises heavy snow, the U.S. Territory of Puerto Rico will likely confront its own harsh challenge by the PROMESA Board to its efforts to reassert ownership and control of Puerto Rico’s fiscal future. Then we turn south to New Jersey, where there are fiscal and weather storm warnings, with the former focused on a legacy of public pension debt that Governor Chris Christie will bequeath to his successors.

Is There Promise or UnPromise in PROMESA? In the wake of changes made by Puerto Rico Governor Ricardo Rosselló Nevares to update its economic growth projections to address a concern expressed by the PROMESA Oversight Board, it remains unclear whether that will be certified by today—when the Board will convene in New York City in the Alexander Hamilton building to act on measures intended to guide the fiscal future of the U.S. territory over the next decade. The update was made in an effort to close a new gap between Puerto Rico’s projected revenue and expenditure projections, since the new economic projections altered all the Government’s revenue estimates. Gov. Rosselló, in an interview with El Nuevo Día, explained his administration had ordered four new measures to correct the insufficiency, which had been estimated at $262 million: the first measure would be an increase in the tax on tobacco products, an increase projected to add around $161 million in public funds, nearly doubling the current rate. The Governor proposed eliminating Christmas bonuses from the highest salaries in the government and public corporations, albeit without providing details with regard to the distinction between an executive salary and a non-executive salary, stating the changes would generate savings of between $10 million and $20 million. He also said the revised, updated plan would reflect an additional $78 million by means of the reconfiguration of the property tax through an appraisal process, as well as modifications to achieve $35 million in savings by means of changing the amount of sick and vacation days which public servants accrue, noting: “We were able to evaluate some of the economic development projections, and, even though our economists don’t agree with the Oversight Board’s s economists, we’ve used the Board’s economic projections within our model for the sake of getting the fiscal plan certified…(Due to the changes) we’ve prepared, some initiatives to have additional savings of up to $262 million. We had already assuaged some of the Board’s concerns within the same proposal we had made, and those were clarified.”

The Governor indicated that the decision taken yesterday does not imply that he will support other proposals made by the Board, noting that he especially opposed the suggestions to reduce the working hours of public employees by almost 20% and cutting professional services in the government by 50%, in order to reduce costs immediately in an effort to ensure the government does not run out of cash by the first two quarters of the next fiscal year, admitting that current projections suggest they are short by around $190 million, and warning: “This (the Board’s proposals) has a toxic effect on workers and on the economy.”

In response to the PROMESA Board’s apprehensions about the double counting of revenues in its submitted plan, the Governor noted: “We’ve established that our public policy is to renegotiate the debt. The idea is to keep everything in one place so we can work with it. The debt service will be affected depending on economic development projections, but we haven’t touched that part of the fiscal plan. We’re focusing on preparing the collection areas, because we’re aware that (government revenues) have been overestimated in the past. We’ve answered questions about healthcare, revenue, government size, and we’ve worked on the pension category within our administration’s public policy about protecting the most vulnerable as much as possible.”

As for today’s session in New York, noting that he believes the government has succeeded in answering the Board’s questions and concerns, and, using the Board’s economic growth numbers, the Governor believes the updated plan will address the revenue gap without major cuts, noting: “That’s no small thing. We’ve been able to dilute it and make the impact progressive, in the sense that those who have more have to contribute more, and keep the most vulnerable from losing access. We’ve established a plan of cost reduction. Now, the plan guarantees structural changes in the government so it operates better, as well as changes to the healthcare model and the educational model. It defends the most vulnerable, it doesn’t reduce the payroll by 30% or 20%, and it doesn’t reduce working hours like they’ve asked, and we reduced tax measures.” Nevertheless, Gov. Rosselló noted that the Board’s proposed service delivery cuts of as much as 50% affect health care and education—defining those two vital government services as ones in which such deep proposed cuts could trigger a drop in the economy by 8% or 9%, noting: “I’m very aware that the ones that are in the middle of all this are the people of Puerto Rico.” Indeed, the plan considers cuts to retiree pensions, lapses in the basic coverage of the Mi Salud healthcare program, a freeze in tax incentives, agency mergers, privatizations, and reductions in transfers to the University of Puerto Rico and to municipalities. On the revenue side, the Governor’s proposal seeks to increase the collection of the Puerto Rico Sales and Use Tax, the property tax, and corporate taxes. In addition, it boosts the cost of insurance, penalties, and licenses granted by the Government.

With or without the endorsement of Governor Rosselló’s administration, when the PROMESA Board meets today in the Alexander Hamilton US Custom House, the agenda includes certifying a plan that some argue goes far beyond not only considering the Governor’s proposed fiscal recommendations, but to some marks a transition under which the PROMESA Board members will “will become both the Legislative and Executive powers in Puerto Rico.” That is to note that this and ensuing fiscal budgets, or at least until the government of Puerto Rico is able to balance four consecutive budgets and achieve medium- and long-term access to financial markets—will first be overseen and subject to approval by the Oversight Board, as well every piece of legislation which has a fiscal impact.

Balancing. The undelicate federalism balance of power will be subject to review next week, when the House Committee on Natural Resources’ Subcommittee on Insular Affairs has a scheduled PROMESA oversight hearing.

The Stakes & States of Yieldy—or Kicking the Pension Can Down the Road.  Alan Schankel, Janney Capital Markets’ fine analyst has now warned that the Garden State’s lack of a significant plan to address New Jersey’s deteriorating fiscal conditions will lead to more credit rating downgrades and wider credit spreads, writing that New Jersey is unique among what he deemed the nation’s “yieldy states,” because the bulk of its tax-supported debt is not full faith and credit, lacks a credit pledge, and some 90% of the debt payments are subject to annual appropriation. If that were not enough, Mr. Schankel wrote that the state is burdened by another fiscal whammy: it sports among the lowest pension funding levels of any state combined with a high debt load and other OPEB liabilities. Mr. Schankel warned the fiscal road ahead could aggravate the dire fiscal outlook, noting that the recent sales tax reduction from 7% to 6.625%, combined with phasing out the estate tax under last year’s $16 billion Transportation Trust Fund renewal, will reduce the state’s annual revenue by $1.4 billion by 2021—long after Gov. Christie has left office, noting that the state’s unfunded pension liabilities worsened when in the wake of FY2014—16 revenue shortfalls, New Jersey reduced pension funding to a level below the scheduled-ramp up Gov. Chris Christie had agreed to his as part of New Jersey’s 2011 pension reform legislation, emphasizing that public pension underfunding has been “aggravated by current leadership,” albeit noting that such underfunding is neither new, nor partisan: “This long history of kicking the can down the road seems poised to continue, and although New Jersey appropriation backed debt offers some of the highest yields among all states, we advise caution…Given the persistent lack of political willingness to aggressively address the state’s financial morass, we believe the future holds more likelihood of rating downgrades than upgrades.”

Post Chapter 9 Challenges

eBlog, 2/22/17

Good Morning! In this a.m.’s eBlog as we remember the first President of our country,  we consider the accomplishments and challenges ahead for the city recovering from the largest ever municipal bankruptcy; then we visit the historic Civil War city of Petersburg, Virginia—as it struggles on the edge of fiscal and physical insolvency; from thence, we roll the dice to witness a little fiscal Monopoly in the state-taken over City of Atlantic City, before finally succumbing to the Caribbean waters made turbulent by the governance challenges of a federal fiscal takeover of the U.S. territory of Puerto Rico, before considering whether to take a puff of forbidden weed as we assess the governing and fiscal challenges in San Bernardino—a city on the precipice of emerging from the longest municipal bankruptcy in American history.   

State of a Post Chapter 9 City. Pointing to FY2015 and 2016 balanced budgets, Detroit Mayor Mike Duggan, in his fourth State of the City address, pointed to the Motor City’s balanced budgets for FY2015 and 2016 and said the city’s budget will be balanced again at the close of this fiscal year in June—progress he cited which will help the city emerge from state get oversight and back to “self-determination” by 2018. Mayor Duggan cited as priorities: job training, affordable housing, and rebuilding neighborhoods, orating at the nonprofit human rights organization Focus: HOPE on Oakman Boulevard on the city’s northwest side, where residents and others for decades have received critical job training. Mayor Duggan was not just excited about what he called the transformation of city services and finances in a city that exited municipal bankruptcy three years ago, but rather “what comes next,” telling his audience: “We’ve improved the basic services, but if we’re going to fulfill a vision of building a Detroit that includes everybody, then we’ve got to do a whole lot more…You can’t have a recovery that includes everyone if there aren’t jobs available for everyone willing to work.” Ergo, to boost job opportunities, Mayor Duggan announced a new initiative, “Detroit at Work,” which he said would help connect the Motor City’s job seekers with employers, deeming it a portal which would provide a “clear path to jobs.” He also discussed his administration’s program to help city youth secure jobs and the Detroit Skilled Trades Employment Program, a recent partnership with local unions to increase Detroit membership and boost job opportunities.

With regard to neighborhoods, Mayor Duggan touted his Neighborhood Strategic Fund, his initiative to encourage neighborhood development, especially in wake of the exceptional success of Detroit’s new downtown: this fund allocates $30 million from philanthropic organizations toward development, commencing with the engagement of residents in the areas of Livernois/McNicols, West Village, and in southwest Detroit to create revitalized and walkable communities—under the city’s plan to align with the city’s vision for “20-minute neighborhoods” to provide nearby residents with close, walkable access to grocery stores and other amenities—or, as Mayor Duggan noted: “If we can prove that when you invest in these neighborhoods, the neighborhoods start to come back. The first $30 million will only be the beginning. I want everybody to watch…If we prove this works…then we go back for another $30 million and another $30 million as we move across the neighborhoods all through this city.”

In a related issue, the Mayor touted the return of the Department of Public Works’ Street Sweeping Unit, which is preparing to relaunch residential cleanings for the 2017 season, marking the first time in seven years for the program. On the affordable housing front, Mayor Duggan addressed affordable housing, saying that future projects will ensure such housing exists in all parts of the city, referencing a new ordinance, by Councilwoman Mary Sheffield, which seeks to guarantee that 20 percent of the units in new residential projects which receive financial support from the city will be affordable: “We are going to build a city where there is a mix of incomes in every corner and neighborhood and we’re going to be working hard.”

But in his address—no doubt with his re-election lurking somewhere behind his words, Mayor Duggan reflected not just on his successes, but also some missteps, including his administration’s massive federally funded demolition program, now the focus of a federal probe and state and city reviews: that initiative has been successful in the razing of nearly 11,000 abandoned homes since the spring of 2014, but has also triggered federal and state investigations over spiraling costs and bidding practices: an ongoing state review of the program’s billing practices turned up $7.3 million in what the State of Michigan deems “inappropriate” or “inaccurate” costs: the vast majority in connection with a controversial set-price bid pilot in 2014 designed to quickly bring down big bundles of houses—an initiative over which Mayor Duggan has so far rejected the state’s assertion that about $6 million tied to costs of the pilot were inappropriate. Thus, yesterday, he conceded that the federal government’s decision to suspend the demolition program for 60 days beginning last August had been warranted, but noted the city has since overhauled procedures and made improvements to get the program back on track, so that, he said, he is confident the city will raze an additional 10,000 homes in the next two years.

For new initiatives, Mayor Duggan said the Detroit Police Department will hire new officers, and invest in equipment and technology, and he announced the launch of Detroit Health Department’s Sister Friends program, a volunteer program to provide support to pregnant women and their families. On the school front, the Mayor noted what he deemed a “complete alliance” between his office and the new Detroit Public Schools Community District school board, saying the city has joined the Board in its attempt to convince the state’s School Reform Office not to close low-performing schools. (As many as 24 of 119 city schools could potentially be shuttered as soon as this summer.) In a hint of the state-local challenge to come, Mayor Duggan said: “The new school board hasn’t had an opportunity to address the problem…We have 110,000 schoolchildren in this city, which means we need 110,000 seats in quality schools. Closing a school doesn’t add a quality seat. All it does is bounce our children around from place to place. Before you close a school, you need to make sure there’s a better alternative.”

Fiscal & Physical Repair. In a surprising turn of events in Virginia, the Petersburg City Council accepted a motion by Councilman Charlie Cuthbert to postpone the vote on moving forward with the bids for Petersburg’s aging water system, after the Council had been scheduled to vote on whether to move forward with the bids the city had received from Aqua Virginia and Virginia American Water Company to purchase the nearly insolvent city’s water and wastewater system. While the vote, by itself, would not have authorized such a sale, it would have paved the way for formal consideration of such proposals. Under his motion, Councilman Cuthbert outlined a plan to delay the vote, so the Council and the City would have more time to consider options, in part through the formation of a seven person committee, which would be separate from the one the Robert Bobb Group, which is currently overseeing the city in place of the Mayor and Council, has been proposing. Mayhap unsurprisingly, citizens’ reactions to a potential sale has been negative; thus there was approbation when Councilmember Cuthbert’s motion passed—even as it appears many citizen/tax/ratepayers appeared to be hoping for the bids to be scrapped entirely: many had spoken in strong opposition, and there were numerous signs held up in chambers for the Mayor and Council to read: “Listen to us for once, do not sell our water,” or, as one citizen told the elected officials: “We have a choice to make: to make the easy, wrong decision, or the hard, right decision,” as he addressed the Council. The city’s residents and taxpayers appear to want other options to be explored, with many citing reports of Aqua Virginia having trouble with the localities with which it holds contracts.

On the fiscal front, many citizens expressed apprehension that any short-term profit the city would realize by selling its system would be paid back by the citizens in the form of rate-hikes by Aqua Virginia or Virginia American, or as one constituent said: “Never have I seen private industry interested in what the citizens want…They’re going to come in here and raise the rates.” Interim City Manager Tom Tyrell had begun the meeting by giving a presentation outlining the problems with the system. Due to past mismanagement and a lack of investment over decades, the Petersburg water system is in urgent need of upgrades. Tyrell outlined certain deficiencies, such as water pumps that need replacing, and pipes nearly blocked by sediment build up. The water quality has never come into question, but Mr. Tyrell said that the system is very close to needing a complete overhaul: the projected cost needed to get the system completely up to standard is about $97 million. Mr. Tyrell stressed that water rates will need to increase whether or not the city sells the system, going over Petersburg’s water rates, which have been relatively low for many years, ranking near the lowest amongst municipalities across the Commonwealth of Virginia. Even if the rates were to double, he told citizens, the rates still would still not be in the top 15 amongst Virginia localities. The Council had received two unsolicited bids for the system in December, one from Aqua Virginia, a second from the Virginia American Water Company. The Robert Bobb Group recommended to the Council that it move forward to examine the detailed proposals in order to “keep all options open.” The cost of moving forward with the proposals will cost approximately $100,000, which includes the cost of examining each proposal. Thus, the Robert Bobb Group recommended that the Council put together a citizens’ advisory group as an outside adviser group. The council gave no timetable on when they will officially vote to see if the bids will go forward. The people who will make up the seven person committee were not established.

Monopoly Sale. Atlantic City has sold two of its Boardwalk properties and several lots along the Inlet for nearly $6 million, closing on three properties at the end of last week, according to city officials—meaning that a Philadelphia-based developer has gained control of five waterfront properties since 2015. His purchases, he said, reflect his belief in Atlantic City’s revival. Mayor Don Guardian reported the city had received wire transfers for the former Boardwalk volleyball court on New Jersey Avenue ($3.8 million), Garden Pier ($1.5 million) and 12 lots bordered by the Absecon Inlet, Oriental Avenue and Dewey Place ($660,000), according to Atlantic City Planning and Development Director Elizabeth Terenik, all part of a way to raise money for the insolvent municipality – and to spur redevelopment, or, as Ms. Terenik noted: “The effort was part of the Guardian administration’s initiative to leverage underutilized or surplus public lands for economic development and jobs, and to increase the ratable base.” How the new owner intends to develop the properties or use them, however, is unclear—as is the confusing governance issue in a city under state control. The Inlet lots were sold in a city land auction last summer, purchased through an entity called A.C. Main Street Renaissance, according to city officials: the Atlantic City Council approved the auction and voted to name the purchaser, conditional redeveloper of Garden Pier and the volleyball court last year. Unsurprisingly, Council President Marty Small deemed the sales as great news for the city, saying they would bring revenue, jobs, and “new partners to the Inlet area…This instills investor confidence…It lets me know that we made the right decision by going out to auction for land and getting much-needed revenue for the city.”

Paying the Piper. Atlantic City has also announced its intention to issue $72 million in municipal bonds to pay for its tax settlement with the Borgata casino, securing the funds to cover its property tax refunds by borrowing though New Jersey’s Municipal Qualified Bond Act (MQBA), according to Lisa Ryan, a spokeswoman for the New Jersey Department of Community Affairs, which is overseeing the state takeover which took effect last November, with her announcement coming just a week after the state announced it had struck a deal for Atlantic City to pay less than half of the $165 million it owes the Borgata in tax appeals from 2009 to 2015, or, as Ms. Ryan noted: “Qualified bonds will be issued in one or more tranches to achieve the settlement amount…The parties are confident in the City’s ability to access the capital market and raise the necessary amount needed to cover the financing,” albeit adding that the city’s borrowing costs would not be known until the sale. (The Garden State’s MQBA is a state intercept program which diverts a municipality’s qualified state aid to a trustee for debt service payments.) Prior to the New Jersey’s state takeover of Atlantic City, city officials had proposed paying $103 million for a Borgata settlement through MQBA bonding as part of a five-year rescue plan—a plan which the state’s Department of Community Affairs had rejected.

As the state taken over city struggles to adjust, Mayor Don Guardian, in a statement, noted: “I’m glad the state is seeing the wisdom in what we proposed in our fiscal plan back in November…I applaud them for getting the actual amount due upfront lower, even though they have had over two years to do it. It remains to be seen how the other $30 million will be taken care of, but the quicker we can get this issue off the table, the quicker we can move forward tackling the remaining legacy debt.” Atlantic City last utilized New Jersey’s state credit enhancement program in May of 2015 to pay off an emergency $40 million loan and retire $12 million of maturing bond anticipation notes, paying a substantial fiscal penalty for a $41 million taxable full faith and credit general obligation municipal bond sale to address its loan payment with Bank of America Merrill Lynch pricing the bonds to yield at 7.25% in 2028 and 7.75% in 2045. Today, the city, under state control, is seeking to recover from five casino closures since 2014, closures which have bequeathed it with $224 million in outstanding municipal bond debt—debt sufficient according to Moody’s to have saddled the city with some $36.8 million in debt service last year.

Grass Fire? Two separate groups have now filed lawsuits challenging San Bernardino’s Measure O, the initiative citizens approved last November to allow marijuana dispensaries in the city—a measure yet to be implemented by the city—and one which now, according to City Attorney Gary Saenz, will almost surely be further delayed because of the suit. Should Measure O be struck down, the related, quasi-backup Measure N, a second marijuana initiative San Bernardino voters approved last November, but which received fewer votes, would pop up, as it were. The twin suits, one filed by a group of marijuana-related entities, the second by interested property owners in San Bernardino, challenge Measure O on multiple grounds, including the measure’s language determining where dispensaries may operate in the city. One suit charges: “The overlay zones together with the parcel numbers and the location criteria limit the locations within the City of San Bernardino where marijuana businesses may be permitted to only approximately 3 to 5 parcels of land within the entire city, and all of these parcels of land are either owned or controlled by the proponents of Measure O…The locations of these 3 to 5 parcels of land, furthermore, are incompatible for a medical marijuana business by virtue of the locations and surrounding land uses and for this reason are in conflict with the City of San Bernardino General Plan.” Unsurprisingly, Roger Jon Diamond, the attorney for the proponents of Measure O, disputes that number and predicts the challenge will fail, noting that thirteen marijuana dispensaries and related groups that describe themselves as non-profits are operating in San Bernardino or which have invested substantial sums of money in plans to operate in San Bernardino. The soon to be out of chapter 9 municipal bankruptcy city, prior to citizen adoption of Measure O, means, according to Counselor Diamond, that the dispensaries have been operating illegally, or as he put it: “There’s a concept in the law called clean hands: If you don’t have clean hands, you can’t maintain a lawsuit…Here we have people who don’t qualify (to operate a dispensary in their current location), complaining that they would not become legal under the new law. It sounds like sour grapes.”

The second, related suit, filed earlier this month, calculates a somewhat higher (not a pun) number of eligible locations—between three to twelve, but makes the same observation regarding physical location: “We think there is a financial interest in the people who wrote it up,” said Stephen Levine of Milligan, Beswick Levine & Knox: “We don’t think that is fair, because it was so narrowly constricted. Zoning by parcel numbers is a highly unusual practice in California. Let’s include Colorado and Washington State in there, too; they don’t use parcel numbers for this.” (Measure O restricts marijuana businesses to marijuana business overlay districts, which are identified by parcel number, and further prohibits the businesses from being within 600 feet of schools or residentially zoned property.) In this case, Mr. Levine is representing a consortium of property owners calling themselves AMF as well as Wendy McCammack, a business owner and former San Bernardino Councilmember. According to Mr. Levine, the plaintiffs’ interest is in possible changes in assessed property values due to the location of the dispensaries.

Getting High on the City Agenda. The City Council last week, in a closed session, discussed the lawsuit in closed session; however, City Attorney Saenz reported he was unaware aware of the lawsuit and had yet to decide upon a response to either, noting: “We haven’t totally assessed the merits of the lawsuit, nor how we’ll respond.” Nevertheless, the lawsuits’ arguments appear likely to interfere with the city’s process of incorporating Measure O into the development code and beginning to issue permits, or, as Mr. Saenz notes: “It (the AMF lawsuit) very much calls into question the validity of Measure O…Being a city of very limited resources, we don’t want to expend resources on an implementation that’s never going to occur. That would be a waste of resources.” The suits will also complicate governance: last month the city, on its website, and in a letter to interested parties, said it would provide an update in March on when the marijuana measure would be implemented: “City departments are in the process of integrating the provisions of Measure O into the City’s existing Development Code, developing procedures for receiving applications, and identifying provisions that may require interpretation and clarification prior to implementation…The San Bernardino Development Code and Measure O are both complex legal regulatory frameworks and it will require time to properly implement this new law.”

Governance & Challenges. Puerto Rico Gov. Ricardo Rosselló has arrived in Washington, D.C., where he will meet with his colleagues at the National Governors Association and join them at the White House tomorrow; he will also dine with Vice President Mike Pence this week. Last week, in Puerto Rico, he had hosted Chairman Sean Duffy (R-Wisc.), of the House Financial Services Subcommittee on Housing & Insurance, and an author of the Puerto Rico Oversight, Management and Economic Stability Act – in San Juan.  Chairman Duffy told the Governor he is available to amend PROMESA to ensure that the PROMESA oversight board treats Puerto Rico fairly, according to an office press statement. The lunch this week might occasion an interesting discussion in the wake of the Governor’s claim that the PROMESA Oversight Board’s plans for austerity may violate federal law: the Governor’s Chief of Staff, William Villafañe, this week stated: “The Fiscal Supervision Board officials cannot act outside of the law that created the body. If the board were to force the implementation of a fiscal plan that affects people’s essential services, it would be acting contrary to the PROMESA law.” His complaints appear to signify an escalation of tensions between the U.S. territory and the PROMESA Board: Mr. Villafañe added: “The [PROMESA] board is warned that it must act in conformance with the law…The commitment of Governor Ricardo Rosselló is to achieve economies that allow government efficiency, doing more with fewer expenses, without affecting essential services to the people and without laying off public employees.” If anything, Mr. Villafañe added fuel to his fire by criticizing the Board’s new interim executive director, Ramón Ruiz Comas, in the wake of Mr. Ruiz’ radio statement this week that if Gov. Rosselló did not present an acceptable fiscal plan by the end of February, the PROMESA Board would provide its own—and the plan would be deemed the legally, binding plan—in reaction to which, Mr. Villafañe had responded: “To make expressions prejudging a fiscal plan proposal that the board has not yet seen demonstrates on the part of the board improvisation and lack of a collaborative attitude for the benefit of the Puerto Rican people,” adding that “The board must be aware that the federal Congress will supervise the board.” He went on to say that when the Governor presents a fiscal plan, Congress will be aware of the way the board evaluates it.

Mr. Villafañe’s complaints and warnings extend tensions between the board and the U.S. territory: even before the Governor took office in January, a Rosselló official complained that the board was seeking a $2 billion cut in spending. On Feb. 13 the governor rejected the board’s claimed right to review bills before they are submitted to the Puerto Rico legislature. On Jan. 18 the board sent a letter to Gov. Rosselló stating that spending cuts and/or tax raises equaling 44% of the general fund would have to be made in the next 18 months. At its Jan. 28 meeting, board chairman José Carrion, for emphasis, said twice that some governor-proposed changes to the board’s Jan. 18 proposals may be OK, “as long as the ultimate fiscal plan is based on solid savings and revenue projections, a once and done approach, and not simply on hope or predictions that various changes will generate more revenues in the future.”

The Governing Challenge in Averting Insolvency

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eBlog, 6/10/16
In this morning’s eBlog, we consider the bipartisan legislation overwhelming passed by the U.S. House of Representatives last night to address Puerto Rico’s looming insolvency—and a related U.S. Supreme Court decision; then we look at the almost Detroit Public Schools filing for chapter 9 municipal bankruptcy. It almost seems as if these events and actions were staged just for my fine graduate class on public policy process.

 

Oye! The House last evening passed and forwarded to the Senate legislation to address Puerto Rico’s looming insolvency on a bipartisan 297-127 vote: Speaker Paul Ryan (R-Wi.) and Minority Leader Nancy Pelosi (D-Ca.) took to the House floor to urge support for the legislation, with Speaker Ryan noting: “The Puerto Rican people are our fellow Americans. They pay our taxes. They fight in our wars…We cannot allow this to happen.” The bill now heads to the Senate, where there is little evidence Senators are eager to remake the bill wholesale, particularly as conditions on the island continue to worsen. The only amendment to fail was one offered by Democrats that would have struck a provision of the bill permitting Puerto Rican employers to pay workers under 25 years old less than the minimum wage. The legislation is critical as Puerto Rico—being neither a municipality, nor a state, falls into a Twilight Zone in terms of authority to address an insolvency. Puerto Rico has defaulted on three classes of municipal bonds, including last month when it missed most of a $422 million payment, and faces $2 billion in payments on July 1 that the island’s governor said cannot be paid. That final vote on the amendment was 196 in favor to 225 against. Puerto Rico’s government has begun defaulting on $70 billion in debts, and has warned it could run out of cash this summer.

In pressing for the vote, the Speaker warned that pressure would mount on Congress to spend money rescuing the territory if it could not arrest its economic decline, telling his colleagues: “This bill prevents a bailout. That’s the entire point…if we do not pass this bill…there will be no other choice.” Anne Krueger, a former IMF economist who led a detailed review of Puerto Rico’s economy, has warned: “Come July 1, if nothing is done, Puerto Rico will technically be bankrupt…Assets will be tied up in courts. It is very likely that essential services will have to be suspended.”

As drafted, the House-passed legislation does not commit a single federal dollar to Puerto Rico. The legislation creates a federal oversight board—whose members will be appointed by Congress and President Obama, and not the governor—to determine whether and when to initiate court-supervised debt restructuring: it charges the board with the responsibility to determine the hierarchy of municipal debt obligations and encourages it to respect the existing legal framework, which places constitutionally backed general obligation debt above pension liabilities. The board terminates after Puerto Rico regains the ability to borrow at reasonable interest rates and balances its budget for four consecutive years. Congressional leaders and the Treasury hope the bill will avert a long, expensive courtroom battle between hedge funds and the federal government—a battle that could harm investment in the U.S. territory’s economic future and undercut its ability to provide essential public services (servicing Puerto Rico’s current debt burden today absorbs approximately 30 percent of the Commonwealth’s revenues)—especially as Puerto Rico is now at the forefront of the Zika virus. While critics have falsely warned the bill could set a precedent for distressed states to seek similar relief, the dual sovereignty created by the founding fathers—or statesmen—in the U.S. Constitution clearly undercuts such claims: Congress granted U.S. citizenship in 1917 under the Jones-Shafroth Act to residents of Puerto Rico, which was seized in the Spanish-American War of 1898. The U.S. gave the territory the right to elect its own governor in 1947.

 Republicans have been concerned that the language would allow the to-be appointed oversight board to elevate pensions above the island’s full faith and credit general obligation municipal bond debt: Rep. John Fleming (R-La.) submitted an unsuccessful amendment to require compliance with the legal hierarchy, calling the statutory use of the word “respect” a “weasel word.”

Hear Ye! By coincidence, the U.S. Supreme Court chimed in almost simultaneously in a 6-2 decision (Commonwealth of Puerto Rico v. Sanchez Valle et al., (2016), No. 15-108, involving a simple criminal prosecution for firearms sales, but also the related governance issue of the Commonwealth’s autonomy—a case in which attorneys for Puerto Rico argued that it should be able to try two men who already had pleaded guilty in federal court. Justice Elena Kagan, writing for the majority, said that would amount to double jeopardy, writing: “There is no getting away from the past…Because the ultimate source of Puerto Rico’s prosecutorial power is the federal government…the Commonwealth and the United States are not separate sovereigns.” Reasoning that even though Congress, in 1950, gave Puerto Rico the authority to establish its own government under its own constitution, that did not, in and of itself, break the chain of command that originates with Congress. As a result, the majority determined, the Commonwealth should be treated the same as other U.S. territories. While the 50 states and even Indian tribes enjoy sovereign powers that preceded the union or were enshrined in the U.S. Constitution, Justice Kagan wrote, Puerto Rico in 1952 “became a new kind of political entity, still closely associated with the United States, but governed in accordance with, and exercising self-rule through, a popularly ratified constitution,” adding that Puerto Rico’s Constitution, significant though it is, does not break the chain.” Justice Ruth Bader Ginsburg went further in her concurrence, suggesting that the high court should hear a case that tests whether states and the federal government should remain able to try defendants for the same crime.

During oral argument last January, a majority of Justices appeared to side with the Obama administration, which argued that, as a territory of the United States, Puerto Rico cannot try the gun dealers after federal courts have acted, with Asst. Solicitor General Nicole Saharsky arguing: “Congress is the one who makes the rules.” The majority appeared to agree: Justice Kagan, writing for the majority, noted: “If you go back, the ultimate source of authority is Congress.” Nevertheless, in their dissent, Justices Stephen Breyer and Sonia Sotomayor stood by Puerto Rico — with Justice Breyer writing that if the court ruled against it, “that has enormous implications” for setting back the U.S. territory’s legal status: “Longstanding customs, actions and attitudes, both in Puerto Rico and on the mainland, uniformly favor Puerto Rico’s position — that it is sovereign, and has been since 1952, for purposes of the double jeopardy clause.” Justice Sotomayor, whose parents were born in Puerto Rico, said during oral argument that the island is an “estado libre asociado” Ironically the case was the first of two involving Puerto Rico to come before the high court this term. The Court is also re weighing the Commonwealth’s effort to restructure part of its $70 billion public debt, an issue addressed last evening by the House: a federal appeals court blocked the restructuring because of conflicts with U.S. bankruptcy laws.

Schooling for What If & Municipal Bankruptcy. With uncertainty whether the Michigan legislature would be able to pass and send legislation to him before the Detroit Public Schools exhausted all its cash—and before the legislature completed its session, Gov. Rick Snyder’s administration had commenced discussion with regard to drafting a chapter 9 municipal bankruptcy filing for DPS—in some apprehension of a wave of vendors’ and employees’ suits against DPS—the city’s public school system foundering in more than $515 million in outstanding operating debt: key staff worked with attorneys on a possible DPS chapter 9 bankruptcy, and Gov. Snyder had exchanged text messages with his former law school colleague and appointee as Detroit’s Emergency Manager, Kevyn Orr, who had, as we have catalogued, served as Emergency Manager in charge of both taking Detroit into municipal bankruptcy, and then piloting it through its successful emergence and approval of its plan of debt adjustment. Michigan State Treasurer Nick Khouri recently estimated the DPS would need $65 million for capital costs, including deferred maintenance and upgraded security equipment; $125 million for cash flow needs due to the timing of school aid payments and other startup expenses; and $10 million for academic programming. Now, in the wake of partisan action on which we reported yesterday, DPS will be able to make payroll, pay vendors, and purchase supplies this summer to prepare for school this fall. Logistically, the new school district will be created by July 1: retired U.S. Judge Steven Rhodes, DPS’s emergency manager appointed by Gov. Snyder and now serving as DPS’ transition manager, is working with state administrators to implement the new agreement.

Governance Challenges to Cities’ Futures

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eBlog, 6/07/16

In this morning’s eBlog, we examine the exceptional governance challenges critical to a city’s fiscal future: here observing the issues confronting the future of Detroit’s public and charter schools—with differing positions between not just the Michigan House and Senate, but also significant divisions in the city. As we have noted, the perception and performance of a city or county’s schools are fundamental to families—thus they have significant implications for assessed property values—and for the balancing—or unbalancing—roles of states, city councils, and public school boards. And, as we await Thursday’s anticipated vote in the U.S. House of Representatives on proposed legislation to create a control board for the nearly insolvent U.S. territory of Puerto Rico, we observe the narrow margin of victory in Puerto Rico in the U.S. territory’s gubernatorial primary.

Will It Pass or Fail? With the start of school now not so far off, the question for parents, students, and the City of Detroit is whether whatever final decision to, as Michigan House Speaker Kevin Cotter (R-Mt. Pleasant) puts it, “return local control in the same way that the settlement of the municipal bankruptcy returned control,” will be in place and provide confidence for the families of Detroit. The hard part is the process of restoring local control. An indication of just how searing and difficult this process of recovery from insolvency is can be measured by the razor-thin 55-53 vote by which the House acted. As the Speaker notrd: “The city (Council) is in place, however, there is financial oversight from the (review commission). The same is true here,” referencing that the House-passed version of the state legislative rescue package to address the Detroit Public Schools (DPS) fiscal and physical degradation—one which would authorize Detroit’s Financial Review Commission, which helped the city exit chapter 9 municipal bankruptcy, oversight of DPS: the city’s school board would need Commission approval to hire a chief financial officer, fire a superintendent, or fund out-of-state travel for board members or district officials. For his part, DPS Emergency Manager retired U.S. Bankruptcy Judge Steven Rhodes appears to believe is a key step towards averting insolvency by the end of this month—and recognizes it would restore some authority to an elected school board. While the House-passed version includes fewer dollars for startup costs for a new, debt-free Detroit district than the $715 million plan approved by the Senate, the final House version is more than $100 million larger than the initial House proposal. The pending version includes $150 million in transition costs, more than $100 million higher than the chamber’s initial bill; the Senate version authorizes $200 million for those costs. The House version would provide for the restoration of local control through election of a new school board this November and giving the panel control of the district’s academics, through a superintendent it would appoint, starting in January.

On the issue of state oversight, Judge Rhodes supports the Speaker’s position vis-à-vis giving the review commission oversight of DPS—not a surprise given his key role in approving Detroit’s final plan of debt adjustment to enable Detroit to emerge from municipal bankruptcy by subjecting the city to the Financial Review Commission—even as current DPS school board President Herman Davis termed such oversight a deal-breaker, calling it yesterday “a bunch of garbage,” adding: “It can’t really be called local control, because they’d still be controlling the money. We expect to be able, as we regain governance — to regain neighborhood schools and charters will fall by the wayside anyway.”

But in addition to contention with regard to funding, there is also contention over governance: the pending Senate-passed version of the legislation includes a proposed Detroit Education Commission—a commission which would have the power to open and close schools, including charters—a key issue which Judge Rhodes and others have deemed critical to impose some restraints on the opening of new charter schools or, otherwise, risk stripping the new DPS of any realistic chance of success. The House version of the legislation would give the Michigan School Reform Office the power to close schools that receive failing grades for three years under a new letter-grade system. Senate Majority Leader Arlan Meekhof, an advocate of the Detroit Education Commission, has indicated a willingness to accept the House measure; Michigan Gov. Rick Snyder has indicated he still supports the Senate bill, but does not want the fate of DPS to rise or fall solely on the basis of one issue. For his part, Detroit Mayor Mike Duggan is urging business and civic leaders to oppose the House bill: he is apprehensive that, because it lacks the citywide education commission, any state aid package would risk being wasted; he believes state help is critical to stabilize DPS’s enrollment and finances.

Lifebuoy. With the House scheduled to take up consideration of the PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act, HR 5278) legislation for Puerto Rico this Thursday, the Obama administration is offering federal aid to the muncipios of Ceiba, Fajardo, and Naguabo—small municipalities whose economies, where more than 45 percent of the region is in poverty and there is a 17 percent unemployment rate, some thrice the national average—were slammed by the loss of a U.S. naval station. According to the announcement, the federal assistance, under the Promise Zone program, is intended to help stance to bolster their economy and infrastructure. According to the White House, the assistance is focused on “upgrading the former Naval Station, improving marine industry infrastructure, boosting hotel development and local tourism, and developing a local food hub and a commercial-scale hydroponic farm with teaching kitchens and a food business incubator.”

New Leadership. Puerto Rico’s pro-statehood party on Sunday narrowly selected Ricardo Rosselló Nevares’ over Pedro Rafael Pierluisi Urrutia, the current and Resident Commissioner of Puerto Rico in the U.S. Congress, by a margin of less than 2 percent in the New Progressive Party gubernatorial primary, according to the Puerto Rico Election Commission. The close election could have implications for governance: Delegate Pierluisi, who has served two terms in the U.S. House of Representatives, has frequently described and advocated for statehood, claiming that could be a solution to Puerto Rico’s fiscal challenges. Mr. Rosselló has promoted an even more rapid and aggressive approach to gaining statehood—and he opposes the pending PROMESA legislation, claiming it would return Puerto Rico to a colonial position, even as Commissioner Pierluisi had given cautious support to this bill, describing the proposed fiscal control board a politically necessary price to pay for restructuring the island’s debts. Mr. Rosselló has indicated he may favor paying a larger portion of due debt service than Puerto Rico Gov. Alejandro García Padilla proposed in his FY2016-2017 budget—a budget in which he had sought to devote $209 million of the general fund to debt service, so that he could finance freed up fiscal resources for other purposes he deems essential.

Federal & State Takeovers or Oversight Boards

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eBlog, 6/06/16

In this morning’s eBlog, we prep for an anticipated vote in the U.S. House of Representatives this Thursday on proposed legislation to create a control board for the nearly insolvent U.S. territory of Puerto Rico, and we observe the comparable takeover just announced by Florida Gov. Rick Scott of Opa-Locka.

Decision Time. The U.S. House will take up consideration of the PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act, HR 5278) legislation under a structured rule Thursday. The Congressional Budget Office on Friday described the bill as one which “would create a legal framework for the federal government to oversee the fiscal and budgetary affairs of certain U.S. territories. In particular, the bill would outline procedures under which the governments of such territories and their instrumentalities could establish an oversight board and thus restructure their public debt.” The bill would immediately establish such a board for the Commonwealth of Puerto Rico:

In CBO’s view, and in keeping with guidance specified by the 1967 President’s Commission on Budget Concepts, a control board established under H.R. 5278 should be considered a federal entity largely, because of the extent of federal control involved in its establishment and operations. Because it would be a federal entity, all cash flows related to the board’s administrative costs should be recorded in the federal budget. On that basis, over the 2017-2026 period, CBO estimates that enacting H.R. 5278 would:

• Increase direct spending by $370 million for the board’s administrative costs;
• Increase revenues—from amounts transferred to the oversight board by the government of Puerto Rico to cover the board’s expenses—by $370 million; and
• Have no significant net effect on the federal deficit.

In addition, CBO estimates that completing various reports and administrative requirements specified by the bill would cost about $1 million in 2017; such spending would be subject to the availability of appropriated funds. Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues. CBO estimates that enacting the legislation would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2027.

According to CBO, H.R. 5278 contains intergovernmental and private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). CBO estimates that the aggregate costs of the mandates on public entities would exceed the annual threshold established in UMRA for intergovernmental mandates ($77 million in 2016, adjusted annually for inflation). Because CBO is uncertain about how claims by creditors would be affected and the amount of losses that would occur as a result of the bill, CBO cannot determine whether the aggregate cost of the mandates on private entities would exceed the annual threshold established in UMRA for private-sector mandates ($154 million in 2016, adjusted annually for inflation).

State Takeover. With Opa-Locka, the small, but growing municipality of just over 16,000 in Florida, on the edge of municipal bankruptcy, and Opa-Locka Commissioner Terence Pinder—who had been scheduled to turn himself in to state prosecutors on corruption charges, killed after driving into a tree, Florida Gov. Rick Scott has declared a financial emergency (order #16-135—Determination of Financial Emergency), providing for, similar to Puerto Rico, a special oversight board to take over the small city’s finances. The city, where estimated median household income has barely changed in more than a decade, is well under half estimated statewide median household income.

The executive order comes just weeks after Miami-Dade County officials sent letters to the Governor warning that the city could be shut down because of gaping budget shortfalls in the millions. Under the order, the state will appoint members of an oversight board to monitor the spending of every city department; the order marks the second time the municipality of 16,000 residents has been placed under an emergency since 2002. It comes as Opa-Locka Commissioner Terence Pinder, who had been scheduled to turn himself in to state prosecutors on corruption charges, was killed after driving into a tree. Under the state order, any local governing decision affecting the municipality’s finances will need state approval. The state takeover order, unlike what happened in Detroit or Central Falls, Rhode Island, came even as the FBI is carrying out a sweeping corruption investigation targeting some of the city’s most prominent leaders, including Mayor Myra Taylor, City Manager David Chiverton, and City Commissioner Luis Santiago. Not since the late Gov. Lawton Chiles ordered a takeover of the city of Miami — with a $68 million shortfall — has a Miami-Dade city captured so much attention over a financial crisis. Just last week, one of the outspoken critics of the city’s handling of the budget, Commissioner Terence Pinder, took his own life by crashing his SUV into a tree.

Scooping & Tossing in Puerto Rico & Actions that Could Shape a City’s Future in Michigan

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eBlog, 6/03/16

In this morning’s eBlog, we consider a critical audit commission report released yesterday in Puerto Rico: a report which could have significant implications for Congress when it takes up HR 4900, the Committee on Natural Resources Puerto Rico Oversight, Management, and Economic Stability Act or PROMESA, as early as next week, as well as passage last night in the Michigan House of legislation to address the Detroit Public Schools’ looming insolvency: ironically both DPS and Puerto Rico confront July 1 deadlines. 

Scooping & Tossing. The Puerto Rico Public Credit Comprehensive Audit Commission, a government-appointed commission made up of 17 members, including elected officials, representatives of the financial institutions, credit unions, academics and organized labor, in an audit published yesterday, suggests that much of the territory’s debt may have been sold illegally—and that Puerto Rico may be able to void some of its borrowing repayment obligations because politicians exceeded constitutional debt limits and their own authority: that is, potentially the finding would permit the government to declare the tax-exempt bonds invalid and courts to then decide that creditors’ claims are unenforceable. The scope of the audit report covers the two most recent full-faith-and-credit debt issues of the Commonwealth: Puerto Rico’s 2014 $3.5 billion general-obligation bond offering and a $900 million issuance in 2015 of Tax Refund Anticipation Notes to a syndicate of banks led by J.P Morgan. The report’s conclusions may allow the Commonwealth to pursue a strategy with even more dire consequences for the island’s municipal bondholders: the report says that Puerto Rico may have violated its constitution by borrowing to finance deficits, borrowing beyond its debt ceiling and using a refinancing technique called the “scoop and toss” to effectively exceed bond-duration limits.

Funds to meet these debt obligations are not in the Commonwealth’s proposed budget: this Tuesday, Gov. Alejandro García Padilla, sent a proposed FY2017 budget to the island’s legislature that provides for only $209 million of the $ 1.4 billion of current debt-service cost. As Gov. Padilla told reporters at a news conference: “This is simple: either we pay Wall Street or we pay Puerto Ricans. If the legislature decides we pay Wall Street more, well, each has his responsibility. I will continue defending Puerto Ricans. Money I send to Wall Street, I do not have to provide services here.”

Puerto Rico defaulted May 1 on a portion of its $72 billion in outstanding debt, but the commission’s audit covers two debt issues expected to default on July 1. 

The Puerto Rican constitution contains a balanced-budget clause that explicitly prohibits borrowing to finance operating deficits, but its politicians borrowed to cover deficit financing in its 2014 General Obligation Bond Offering, according to the commission’s initial review. The March 2014 General Obligation Bond states that the proceeds would be used in part to cover deficits that had accumulated and that were expected to occur in the year of the offering. The documents include a chart showing deficits financed with borrowing during the past and that were expected to recur. In addition, Puerto Rico did not inform its bondholders that its constitution forbids it from using debt to finance deficits. That, the Commission’s report suggests would constitute “substantive” noncompliance with the letter of the Constitution.

The U.S. Supreme Court has said in the Litchfield v. Ballou case and, more recently, in litigation related to Detroit’s bankruptcy that borrowing above a debt ceiling may allow the issuer to declare debt invalid and, therefore, unpayable. Detroit, in its plan of debt adjustment, sought to invalidate $1.45 billion in COPs (certificates of participation), debt issued by two shell companies called “service corporations.” The parties settled before the case went to trial, but, while refusing two initial proposed settlements, U.S. (now retired) Bankruptcy Judge Steven Rhodes determined that Detroit’s argument had “substantial merit” and that the suit would have had a “reasonable likelihood of success.” According to Melissa B. Jacoby, a professor of law at the University of North Carolina who specializes in distressed debt, negotiations have been complicated by claims that certain tax-exempt bonds are special and have priority over debt held by other creditors. She states: “But if some debt was issued illegally, then, at the very least, those creditors’ claims of priority are dramatically weakened: Indeed, they would be lucky to get anything at all.”

The commission itself is a creature set up two years ago, with yesterday’s report its first step in the commission’s work output: it includes many of the most powerful members of the Puerto Rico legislature; it also included Melba Acosta Febo, president of the Government Development Bank for Puerto Rico, several prominent Puerto Rican economists, accountants, business leaders, and one union official. In its report, the commission suggests that Puerto Rico’s selling of bonds going back to 1979 may have illegally broken the Puerto Rican constitution’s requirement for a balanced budget. The consequence of this may be that a court may bar it from borrowing in the future to finance operating deficits: the Commonwealth may be forced to raise taxes, or “declare the debt unpayable for lack of authorization.” (Puerto Rico’s constitution states that it cannot spend more than 15% of “internal revenues” in its Treasury on GO debt. Depending on definitions, it may be exceeding this level, according to the commission.) The report also finds that the constitution’s prohibition against issuing debt with more than 30 year maturities may have been broken through the sale of refunding bonds, and it questions whether the commonwealth and its advisors and underwriters complied with SEC Rule 15c(2)-12, which bars the sale of debt when an issuer is not disclosing financial information in a reasonable and timely manner.

Howard Cure, Director of municipal research at Evercore Wealth Management yesterday noted: “It seems as if this commission is trying to re-write history by questioning the commonwealth’s ability and authorization to have entered into many of their recent debt agreements…The idea of requiring a balanced budget is somewhat spurious since most states, as well as the commonwealth, don’t distinguish between a balanced budget on a cash or an accrual basis. Since most states look at their budget on a cash basis, there have been various gimmicks to balance operations such as deferring salaries or leasing back facilities. States such as California and Connecticut have also deficit financed their operations at various points in time…Questioning the actual authority to have entered into these debt issuances seems dubious.”

Focusing on Not Leaving a City’s Children Behind. Michigan House Speaker Kevin Cotter (R-Mount Pleasant) yesterday, in the wake of House passage of a legislative package by which Michigan would help pay off Detroit Public Schools’ (DPS) crippling debt and provide more transition aid under a $617 million rescue plan, described the marathon outcome as a “a plan put forward to save education in Detroit, not just an entity…and at the same time avoid what would be a disastrous [municipal] bankruptcy.” What’s not included in the adopted House plan is a Detroit Education Commission that would have authority over some charter and public schools, especially where the schools are located in the city.

In this set of bills, an advisory council will produce non-binding reports on where schools and transportation are needed in the city. Of the $150 million in transition costs, only $25 million can be used for maintenance and improvements in the district’s deteriorating school buildings. The rest of the money can be used for items such as teachers, vendors, financial services, human resources, cash flow needs, and improvements to technology in the new school district. The legislation also includes anti-strike language with substantial fines for teachers, administrators and school board members in response to sick-outs staged by Detroit teachers earlier this year to bring attention to the horrible conditions in the schools and the prospect of payless paydays. 

Final legislative action and the Governor’s signature on some plan is key before DPS runs out of cash on June 30th. Earlier yesterday, Michigan Governor Rick Snyder, speaking at the Mackinac Policy Conference, had warned that a lack of financial stability in DPS this summer could cause more students to leave the school system, which has seen its enrollment plunge from 150,000 students a decade ago to about 46,000 this spring.

The key House action came on a 55-53 vote in the wake of intense talks between legislative leaders and Gov. Snyder: that bill would call for school board elections in November, but does not include a Senate-approved education commission, backed by Gov. Snyder and described as a critical priority by Detroit Mayor Mike Duggan—because of its vital role in determining where traditional and charter schools could locate in the city. Now the six-bill package heads to the Republican-controlled Senate, where it faces its own tests and final exam as early as next week. During House debate, Speaker Cotter said the compromise plan achieves the twin goals of returning the district to local control and relieving district debt, which would free up more money for classrooms, while key sponsor Rep. Daniela Garcia (R-Holland) added the bills will free up money that can go back into Detroit classrooms and provide oversight to taxpayers in other parts of the state.

For his part, Gov. Snyder embraced the House package despite its omission of the commission, calling it “a good step toward a compromise that sets in motion positive progress for the families of Detroit to have a sustainable and successful educational system.” As adopted, the amended House package includes $150 million in transition aid to restore academic programs and fix school buildings. Instead of the commission, vehemently opposed by the charter school lobby, the legislation would provide for an advisory council to produce reports highlighting where schools are needed and study a potential city-wide transportation system to serve all students. The six-member council would include district officials and charter representatives. Poor-performing traditional public or charter schools could be closed under the legislation, which would require the School Reform Office to develop an A-F letter grade system to evaluate schools. Three years with a failing grades would prompt closure. A state-appointed transition manager would run the new debt-free Detroit district until the elected school board took over in January. The manager could appoint an interim superintendent and adopt an initial budget. As passed by the House, the bill would effectively end the governor’s Education Achievement Authority, requiring the new district to withdraw from the inter-local agreement that facilitated its creation. The school board would appoint a new superintendent, but would need approval from Detroit’s Financial Review Commission to hire a CFO, fire a superintendent, or fund out-of-state travel for board members or district officials. The final legislative package includes several reforms previously approved by the House, including: increased penalties for teacher “sickouts,” merit pay, and the option for the school board to hire non-certified teachers to fill vacancies. The House plan differs from a plan passed by the Senate in March that included the DEC, which would be appointed by the Detroit Mayor and have authority over some of the charter and public schools.

The Importance of Bipartisan Leadership in Averting Severe Human & Fiscal Distress

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eBlog, 5/26/16

In this morning’s eBlog, we applaud House Speaker Paul Ryan (R-Wisc.), House Natural Resources Committee Chair Rob Bishop’s (R-Utah), U.S. Treasury Secretary Jacob Lew, and House Minority Leader Nancy Pelosi (D-Ca.) for their leadership roles in contributing to the remarkably swift, bipartisan markup of legislation (PROMESA) to address Puerto Rico’s looming insolvency; and, we continue to follow the seemingly unrelenting challenge in Wayne County to emerge from its fiscal emergency consent agreement.

House Panel Forwards Puerto Rico Legislation. The House Natural Resources Committee yesterday voted 29-10 to send to the full House legislation, HR 5278, to address Puerto Rico’s debt crisis with solid bipartisan support, a strong sign the bill could move quickly through Congress ahead of a potential default by the territory on July 1. As reported, the bill would create a debt-restructuring process and name a seven-member financial control board, not the government elected by Puerto Rico, to determine whether and when to initiate court-supervised debt restructuring, and it would have the power to approve or reject budgets. The board would terminate after Puerto Rico regains the ability to borrow at reasonable interest rates and balances its budget for four consecutive years.to oversee the U.S. territory—not unlike previous control boards in New York City and Washington, D.C.—and similar to the oversight fiscal control board created as part of Detroit’s exit from the largest municipal bankruptcy in American history. The bipartisan vote came despite the strong opposition from some municipal bondholders, hedge funds, and unions: millions of dollars on television advertisements had been expended to defeat it. Chair Rob Bishop (R.- Utah) said he expects majorities of both parties to back the bill when it comes to the House floor when Congress returns the week after next, while in the Senate, Majority Leader Mitch McConnell (R.- Ky.) said Senators were “anxious to take up” whatever the House could pass. The White House supports the measure. The measure was opposed by both labor unions and Puerto Rican elected officials, as well as some House members, who claimed the bill would threaten creditors’ rights and create a potential precedent for distressed states—claims not only inconsistent with the dual sovereignty of the United States, but also because the legislation was done through the territories clause of the U.S. Constitution—or, as David Hammer, co-head of municipal bond portfolio management at Pacific Investment Management Co. put it: “This creates a clear firewall and ring-fences Puerto Rico from the broader muni market,” adding hat, moreover, the debt-restructuring mechanism would require Puerto Rico to cede more power to the federal government, noting: “That’s not something a state or local government would ever seek to do.”

The Committee rejected proposed amendments to delete language limiting Puerto Rico’s minimum wage, ease economic aid to the island, and ban the Federal Reserve from purchasing Puerto Rican bonds or paying down the commonwealth’s debt—as well as amendments focused on Puerto Rico’s constitutionally guaranteed debt. (Roughly $18 billion of the more than $70 billion in Puerto Rican municipal debt is backed by its constitution.) The committee also rejected an amendment from Rep. John Fleming (R-La.) that critics said would not give the board enough flexibility to properly sort out debt repayment priorities according to the Puerto Rican Constitution. The bill cleared committee with one significant change. The adopted amendment from Rep. Garret Graves (R-La.) mandates that no federal money can go to paying down or buying Puerto Rican debt or liability, which could help tamp down Republican fears of a potential bailout.

Pensionary Solvency. Wayne County, Michigan Executive Warren Evans has taken another step in pressing his commitment to take the county surrounding Detroit out of its emergency consent agreement by the end of this year by, yesterday, announcing the County will make an additional $14 million contribution toward its underfunded pension system—a contribution which will be in addition to the $63 million which the County is currently obligated to pay annually into its retirement fund, but falls short of the $19 million county officials originally anticipated they would be able to afford. In FY2014, Wayne’s pension audit revealed some $840.5 million of unfunded pension liabilities. According to Wayne County spokesman James Canning, last December officials determined the County could make a $10 million contribution into the pension fund from funds declared as surplus from its Delinquent Tax Revolving Fund and Property Forfeiture funds; in addition Wayne anticipated it could funnel another $9 million from fund balances—albeit, in the wake of a third-party administered study on its pension system conducted earlier this year, the County determined it would only be able to contribute an additional $4 million from the fund balances. When the County entered into the consent agreement, it faced an accumulated deficit of $82 million, a yearly structural deficit of $52 million, $1.3 billion in unfunded health care liabilities, and a pension fund that was underfunded by nearly $900 million. By last month, according to its CAFR, its FY15 year-ending accumulated deficit of more than $82 million had been eliminated and the books were closed with a $35.7 million unassigned surplus—albeit some $30 million of that was earmarked for specific uses, leaving Wayne County with a surplus of only $5.7 million.

Other key steps involved reductions in other post-employment benefits, where the County achieved reductions of about $850 million in unfunded liabilities—reducing its OPEB liability by 65%, and bringing the county’s pay-as-you-go contribution this year down more than 50 percent from $40.4 million to $17.6 million—savings achieved by switching some retirees to what the county deems more “cost-effective health plans and providing others with need-based stipends to purchase their own insurance.” Absent such changes, Wayne County had warned that the actuarial accrued liability was on track to rise to $1.8 billion.