Fiscal Recoveries from Fiscal & Physical Storms


February 23, 2018

Good Morning! In this morning’s eBlog, we consider the municipal fiscal threats to Puerto Rico and the U.S. Virgin Islands, before taking a fiscal spin on the roulette tables of Atlantic City.

Fiscal Hurricane Fallout. Jaison R. Abel, Jason Bram, Richard Deitz, and Jonathan Hastings of the New York Federal Reserve this week, in their examination of the fallout in the wake of Hurricanes Irma and Maria on the economies of the U.S. territories of Puerto Rico and the U.S. Virgin Islands noted that both were suffering from significant economic downturns and fiscal stress well before the storms hit nearly six months ago—noting that in their wake, the initial job losses in Puerto Rico totaled about 4 percent; in the U.S. Virgin Islands, job losses were double that—and there has been no rebound thus far. The authors wrote that these losses are considerably steeper than what has typically been experienced in the wake of most significant U.S. natural disasters, albeit not nearly as devastating as Hurricane Katrina’s unprecedented impact on the New Orleans economy more than a decade ago. The Fed three noted that domestic air passenger data indicate that from last September through November, more than 150,000 people left Puerto Rico, net of arrivals, and that the number who left the U.S. Virgin Islands was proportionally even larger. Thus, they opined, looking ahead, recovery will be affected by a variety of factors: especially: the level degree of out-migration, the level of external aid these economies receive, and the effectiveness of fiscal and other reforms—especially in Puerto Rico. They noted that Hurricane Maria was the most devastating hurricane to slam Puerto Rico in nearly a century—leaving an enormous toll of lives, homes, and businesses lost or suffering enormous damage, devastation of most crops and other agricultural assets, and severe havoc to its public infrastructure, adding that both for responding to the human and economic misery, the island’s experiencing of the most severe power outage in U.S. history means “it may still take months to fully restore electricity and other critical infrastructure,” describing the devastation to the U.S. Virgin Islands as similar, especially St. Croix, where I taught school long before most readers were born.

Nevertheless, the Fed Gang of Three wrote that recovery is underway in both Puerto Rico and the U.S. Virgin Islands, reporting that, as of last month, satellite images of nighttime lights suggest roughly 75 percent power restoration for Puerto Rico overall, with the southern and western parts of the island seeing nearly full restoration, and San Juan close to that level. In contrast, however, they determined that the eastern end of Puerto Rico and many interior areas have lagged substantially. As of the end of last year, they reported that the labor market has begun to recover in Puerto Rico: employment in leisure and hospitality (largely restaurants), the sector usually most affected by natural disasters, have started to bounce back in Puerto Rico, albeit not yet in the U.S. Virgin Islands. And, as often happens following natural disasters, jobs are being added in both Puerto Rico and the U.S. Virgin Islands in industries involved in clean-up, restoration, and rebuilding efforts—most notably, construction. Thus, they believe Puerto Rico and the U.S. Virgin Islands are confronted with a long and difficult recovery process ahead—a fiscal and physical process made all the more difficult because of poor economic and fiscal conditions prior to the storms.  

Financing a Recovering City’s Emergence from a State Takeover. The Atlantic City Council has voted approval the issuance of debt to pay off millions the municipality owes to pay off deferred pension and health care contributions from 2015—after, in 2015, state officials had urged the delay of some $37.2 million in pension and health care contributions—a delay which, today, officials note has added up to about $47 million with the added interest. In the ordinance the Council voted Wednesday 6-3 to authorize, Atlantic City can now issue as much as $55 million worth of municipal bonds to help finance those accrued debts, with the vote coming in the wake of a lengthy discussion between the Council and 13 residents, each of whom spoke in opposition: some urged the elected leaders to table the matter for further review, while others questioned who had authorized the deferment, whether the city was obligated to pay the interest rate, and whether there were other options to finance the debt—debt which, as of the end of the calendar year, had reached more than $344 million in outstanding debt. Timothy Cunningham, New Jersey’s local government services director and now the state appointed takeover appointee, has explained to residents the option to bond for the deferred payments would prevent it from having to go into the general fund—that is in lieu of the city being forced to raise tax rates: the municipal bond interest payments would instead be financed via the Investment Alternative Tax from casinos, which, under state takeover regulations, are redirected to be used in Atlantic City for debt service, he noted. The City Council had originally slated the issue for a vote last month, but withdrew the scheduled vote in order to host two public hearings on the matter.

At the session, Councilman Jesse Kurtz said he would have preferred a different resolution to making the payments, questioning whether Atlantic City would be obligated to pay back the payments’ interest if the deferment was at the suggestion of the State, noting it did not “sit right” with him to vote for the ordinance without a formal statement from Gov. Phil Murphy’s administration authorizing it: “When we’re short on money, the answer is to borrow money…I don’t like that.” Atlantic City Council President Marty Small responded that after the ordinance was pulled last month, city and state officials asked the Governor’s administration for forgiveness on the payment; however, the response was negative, adding that the city knew the day was coming to pay the deferred payments—and that such payment was the city’s obligation: to act otherwise, he noted, would be “putting the taxpayers in harm’s way” if they did not act to borrow to make the payments: “It’s not us versus you: What affects you, affects us.” Councilmember Kurtz, along with Councilmen Moisse Delgado and Jeffree Fauntleroy II, voted against the measure, while Councilmembers Small, George Tibbitt, Chuen “Jimmy” Cheng, William Marsh, Kaleem Shabazz, and Aaron Randolph voted aye. For his part, Mayor Frank Gilliam, told his colleagues in opposing the matter, the city needs to come up with “better ways to deal with our finances,” regardless of whether council passed the bond ordinance: “We’re still $400 million in debt.”


A Valentine’s Day Message?

St. Valentine’s Day, 2018

Good Morning! In today’s Blog, we consider the continued scrutiny by the PROMESA Board and Puerto Rico’s progress in not just recovering from Hurricane Maria—but also from its quasi chapter 9 municipal bankruptcy. That progress has been achieved through federal assistance, the Board’s vigorous oversight, and, as we note, tax and spending changes undertaken by the government of Puerto Rico.  

Fiscal Imbalances.  While states, cities, and counties operate in regular order, the federal shutdown, far into the federal fiscal year, illustrated the challenge to state and local governments of the unpredictability of federal funding that state and local governments would otherwise count upon. Now, in the wake of Congress’ vote to suspend the national debt ceiling, the package included nearly $100 billion in disaster aid, as well as extend a number of expired tax provisions, including a Jan. 1, 2022 extension of the rum cover-over for Puerto Rico and the U.S. Virgin Islands—an extension projected to generate an estimated $900 million for the two U.S. territories, as well as a related tax provision which would, at long last, allow low-income Puerto Rican muncipios to be treated as qualified opportunity zones: that disaster aid includes $4.9 billion to provide 100% federal funding for Medicaid health services for low-income residents of Puerto Rico and U.S. Virgin Islands for two years and $11 billion of Community Development Block Grants for the two territories, including $2 billion of CDBG money to rebuild Puerto Rico’s electrical grid. Puerto Rico anticipates it will be the recipient of as much as $18 billion—with an option to access a line of credit of as much as $4 billion—albeit, to the extent the territory can continue to demonstrate its lack of liquidity. Those amounts, including $4.8 billion in Medicaid, and $11 billion from HUD, however, are subject to conditions of both the federal government and the PROMESA Board. HUD Deputy Secretary Pamela Hughes Patenaude last week stated HUD would award $1.5 billion to assist in the repair of damaged homes and business structure, while FEMA has already awarded $300 million, half of which is via a loan. In addition, the aid includes $14 million in the Women, Infants & Children (WIC) program assistance. The package provides some $14 million for the Army Corps of Engineers to award contracts to U.S. electric companies to repair the power grid. Importantly, the FEMA funding will provide not just for improvements in the island’s public power system, but also for repairs: Puerto Rico has guestimated it will require $ 94.4 billion to rebuild the island’s public infrastructure.

Puerto Rico’s non-voting Representative in Congress, Jenniffer González, noted the next disaster relief resolution may be discussed in Congress later this Spring—at which point she anticipates the critical focus Will be on Puerto Rico and the U.S. Virgin Islands. She noted: “Speaker Paul Ryan told me that there is going to be a fourth bill on supplementary allocations for Puerto Rico with specific projects for transportation and electric power.” U.S. Senator Marco Rubio (R-Fla.) noted that claims of states such as Florida and Texas were very helpful in recent efforts in favor of funds for Puerto Rico; however, he warned that Congress needs to allocate additional funds for disasters regularly: “There are other places that, by then, will have needs.”

Negocios. Meanwhile, with regard to the fiscal storm, the fiscal amendments Governor Ricardo Rosselló presented to the PROMESA this week presented a more positive outlook for creditors to reach an accumulated surplus of $3,400 million, even as his offer retained virtually unchanged the terms of fiscal measures and severe cuts in government revenues over the next 5 fiscal years. The plan the Governor presented, moreover, did not comply with the requirements to reduce the pensions of government retirees, nor to eliminate additional labor protections for private sector workers, after the notification of violation of the federal PROMESA law—demands calling for a series of amendments, including a 25% reduction in pensions exceeding $1,000 per month (in combination with social insurance), in addition to the elimination of a series of protections for private sector employees. Indeed, in an interview with El Vocero, Gov. Rosselló replied that his administration is neither contemplating reductions to pensions nor including legislation to eliminate the employer’s obligation to pay the Christmas bonus and compensation for unjustified dismissal or to reduce the requirements for vacation leave and sick leave, stating: “We are not contemplating reductions in pensions.” As for eliminating labor protections, the Governor made clear: “We have not included that in the reform of human capital… certainly, it is an area that is important for us to work: how do we raise labor participation in Puerto Rico? How do we encourage them to transition to work? “

The most dramatic modification of the tax plan proposed by Gov. Rossello is the elimination of the aggregate deficit of $3,400 million for the FY2022 budget, since the previous version of its fiscal plan was in default with the objective of eliminating structural deficits: as early as FY2019, he projects the government will achieve a surplus of $750 million, thanks in large part, according to the Governor, to the federal assistance provided by Congress. Even though it had been estimated that the aid to date has reached $16.5 million, Puerto Rican authorities assert only $12,800 million has been incorporated as a result of supplementary allocations in the fiscal plan—allocations related to the FEMA $ 35.3 billion in the public assistance program and $21 billion in private insurance. The Governor noted his administration plans to spend $13 million of disaster recovery funds for Hurricane Maria, enabling, he added, a GDP growth projection of 8.4%. He also noted he expects a reduction in the rate of emigration from Puerto Rico down to 2.4%.

Unsurprisingly, he warned, the most difficult challenge will be what he termed the FY2020 Medicaid fiscal cliff –the year when the current Congressional appropriated funds will be exhausted. To address that abyss, he said the government has intensified cuts to government programs, as well as adopted measures to increase revenues, resulting, he asserted, in a positive or surplus balance of $800 million for FY 2023, noting: “Stabilization (the surplus) continues with other structural measures and impacts that have: the reduction in expenditures by government items and the rightsizing (shrinking) that is being done.” It appears that the $800 million projected surplus was included in the analysis of the sustainability of the public debt, an element which will be considered by the PROMESA quasi-bankruptcy court for the payment arrangement to the creditors—or, as he put it: “The discussion with the creditors will go by Title III, in everything that has not been agreed by Title VI. It is a numerical exercise, without differentiating creditors, about the numbers that reflect the fiscal plan, and that will certainly be part of the elements of judgment…that the judge would use in her determinations.”

The Governor noted that cuts to agencies such as Education, Corrections, Health, as well as across the board via shrinking services and utilizing tighter payroll control have succeeded in increasing revenues by $29 million; nevertheless, he added, because the new revenues failed to meet the anticipated goals, the agency, Mi Salud, will continue to be required to face an FY2022 reduction of some $795.

Governing under Takeovers

December 19, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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

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

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

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

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

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

November 28, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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

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

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

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

October 13, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Physical & Fiscal Storms

September 20, 2017

Good Morning! In today’s Blog, we consider the fiscal challenge confronting the small Virginia municipality of Pound; then we turn to the fiscal and physical storms pounding the U.S. Territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Pound fiscally pounded. The Council of the small Virginia Town of Pound, the original home of former U-2 pilot Gary Powers, with a population under 1,200, where the median income for a household is under $30,000, confronted by an inability to make payroll and pay other bills due has unanimously agreed in an emergency meeting to borrow enough to pay employees, but not any other outstanding obligations. The Mayor and interim Town Manager George Dean advised the Council that resources in the general fund get low about this time every year; this year, he noted, however, the town has experienced some unanticipated expenditures; thus it needed to tap into its line of credit. As factors, Manager Dean identified unbudgeted overtime, especially in the police department, as the single biggest problem.  He added: “I did not budget to have a chief of police and an assistant police chief in the office side by side,” adding the town could not sustain the current level of overtime. In response, Councilman Terry Short said that with eight officers, there should be no need for overtime, asking how the officers are receiving more overtime than is budgeted. The Manager responded: “You have to ask him,” referring to Chief Tony Baker—which unsurprisingly led Councilman Clifton Cauthorne to note that the town manager is in charge of the finances. But Manager Dean was clear: “I’m not telling the Chief of Police how to run his department: You all need to address that.”  But Councilmember Short noted that when four full-time officers are receiving more than 100 hours of overtime, “we’ve got a problem.”  Town clerk and bookkeeper Jenny Carter, however, said the Police Department was not the only position drawing overtime out of the general fund, telling Council her position also is paid through that account, and she logs considerable overtime, because the office is so understaffed. She had four meetings last month, Ms. Carter noted, and it took 23 and a half hours to type up all those minutes. So, how much was budgeted, Councilman Danny Stanley asked. Eight hours, Ms. Dean responded. While there was some discussion that the seasonal financial crush should ease when the town converts to a twice-annually billing cycle, Ms. Carter said she was confident that will resolve matters in the future; however, she also suggested Council consider increasing the town’s line of credit—a suggestion Councilmember Cauthorne was quick to oppose, noting: “I feel that is like giving a drunk more booze,” adding this was not the first year the town has run into this fiscal problem—or, as one of his colleagues added: “[it] just continues to snowball,” overspending every year, robbing Peter to pay Paul, borrowing money it does not have and without a method to pay it back. Asked how much the town has repaid of its original debt, Ms. Dean said the town still owes the bank about $65,000, adding the town has access to roughly $35,000 available of a $100,000 line of credit, while Ms. Carter said the town is negative $24,500 in the general fund, with open payables of almost another $10,000. If the Council is going to put any more on the line of credit, Councilman Cauthorne made clear he wants to revisit automatic spending cuts—reminding his colleagues that Pound had adopted a plan in 2014 to trigger automatic cuts if the town ever reached $55,000 of its line of credit—an action the Council rescinded a year later.

Councilmember Short said the town’s internal controls require use of time cards, and other kinds of time sheets have not been approved, moving to mandate immediately that all employees use time cards as required by Pound’s internal controls policy: he further noted that the town has a budget and has policies and procedures to control operations, adding: “All we have to do is follow it. It’s that simple.” Council unanimously endorsed requiring time cards as per existing policy. Councilmember Short then moved that all overtime require approval of the town manager, including the police force, but Manager Dean immediately objected, stating: “That’s not going to work,” adding he was not going to comply and Council would have to figure out who was going to tell the police chief, adding: “I am not in control of the chief of police’s overtime hours…He works for you…We’ve got a financial problem here and we’ve got to do something about it: the Council is being asked to borrow money to pay for bills which “we are not controlling.” With regard to employees spending more money than is budgeted, he added: “I don’t know of any business that works like that. If they do, it ain’t long before they are out of business…” He noted they are obligating all taxpayers in the town when they sign contracts borrowing money and citizens are financially obligated to repay that money if the town goes under.

Fiscal & Physical Storms. Promesa Oversight Board Executive Director Natalie Jaresko, in an interview with the Bond Buyer, warned that Puerto Rico is confronted by what this morning could be the strongest hurricane to ever hit the U.S. territory, further decimating public utilizes and forcing the virtually insolvent government to rebuild dozens of communities. But she also said she anticipated Puerto Rico’s fiscal ability to make its requisite municipal bond payments should improve after nine years, expressing optimism with regard to Puerto Rico’s future and the PROMESA board’s relationship with the government of Gov. Ricardo Rosselló—albit, she added, the next few years of reform will inevitably be tough: the PROMESA Board does not expect Puerto Rico to return to nominal gross national product growth until FY2022 and inflation-adjusted growth until FY2024, adding that by the end of the next decade, she anticipates Puerto Rico’s economy to be growing, noting: “In the years 11 to 40 there’s bound to be more cash in all the estimates available for debt service: So creditors shouldn’t only focus on the 10 years.” She added that the Board is working on a “plan of adjustment” for the debt, as provided under PROMESA, albeit she was uncertain when the plan would be publicly released. With regard to timing, she said, in the interview, that Judge Swain has said she plans to rule by mid-December on the dispute between the Puerto Rico Sales Tax Financing Corp. (COFINA) and Puerto Rico over the ownership of sales tax proceeds allotted for the former. Once this is done, she noted, Puerto Rico may pay some of the debt due this fiscal year, adding that work on restructuring all of Puerto Rico’s public sector debt is proceeding simultaneously on three tracks: in negotiations, in the private mediation process overseen by Barbara Houser, and in the Title III litigation process overseen by Judge Swain. She added that the PROMESA Board is working with PREPA and parts of Gov. Rosselló’s administration to adopt a new fiscal plan for PREPA, noting that lowering Puerto Rico’s electric rates would be a vital step for enhancing the economy—albeit Hurricane Maria appears to have very different implications.

With regard to the relationship between the PROMESA Board and the Governor, the Director was generally positive, adding she said she was satisfied with government’s progress in releasing financial information to the board, noting that the Rosselló administration is providing the PROMESA board a report comparing budgeted to actual spending department by department, as well as weekly reports on cash and liquidity, adding that Puerto Rico is moving towards better accounting practices.

Interestingly, the Director said the experience she gained from her service as the Minister of Finance for Ukraine from 2014–2016, taught her “implementation is everything.” Last month, she said, a lack of implementation plans had led the PROMESA Board to order Puerto Rico to institute furloughs, noting: “There are governments aplenty that can adopt plans, adopt laws, have full commitment and desire to change but implementation at an agency level in a bureaucracy is extremely difficult: that is the key to success,” adding that she believes the Rosselló administration has been “committed” to the fiscal plan: “If you take the case of right-sizing the government, I have no doubt there is a desire and intent and it is part of the public campaign of the governor to right-size the government. So I don’t think there’s not an alignment in the goal.” Nevertheless, as she put it—and as we have learned from Pound: “[T]he devil will be in the details of the implementation and enforcement of the fiscal plan, and that is the biggest lesson learned [from the Ukraine.]” to execute cuts in an agency, the agency can run out of money eight or nine months into the fiscal year, she said. “Then the agency usually turns to the central government for an additional allocation to continue operations…“There is a general fatigue among creditors [with Puerto Rico’s continuing problems] and I understand that because they have been dealing with these problems for years. But the problems that grew didn’t evolve overnight and didn’t evolve over one year and resolving them is also going to take time.”

It is unclear what level of fiscal planning will be sufficient today as Hurricane Maria, bringing sustained winds of 160 miles per hour (mph) appears relentlessly approaching—with the government insisting its the priority is to save lives, even as it continues to deal with the after effects of Hurricane Irma, which passed tens of miles above the north coast. The National Weather Service warned: “It is catastrophic in every way, winds, rain and storm surge. We are talking about an extremely dangerous event.” Along with winds of 160 mph and even higher gusts, Maria was predicted to bring 12 to 18 inches of rain, and up to 25 inches for isolated areas in Puerto Rico: the storm surge is estimated from 6 to 9 feet, with large breaking waves that could reach 25 feet. Governor Ricardo Rosselló Nevares urged citizens and families to seek save havens to prevent the loss of human lives: “We have not experienced an event of this magnitude in our modern history…An event like this has never happened before. Maria is predicted to be the worst atmospheric event in a century in Puerto Rico, and, if we do not take precautions, we will have loss of lives that we could have avoided.” The Governor noted that yesterday afternoon residents had already begun to move in five communities which are threatened due to their location in flood-prone areas: Juana Matos, in Cataño; Playita, in Salinas; Amelia, in Guaynabo; Islote, in Arecibo, and Palo Seco, in Toa Baja: by yesterday afternoon, there was clearance and authorization for opening 499 shelters, 49 more than for Hurricane Irma: the Gov. noted: “The main goal is to save lives. If you are in a flood area, your life is in danger. If you live in a wooden home, your life is in danger.” Already, from the previous Hurricane Irma 27 municipalities in Puerto Rico have already been declared disaster areas. Thus, even as Maria roars in, there are still many, many customers without power, homeless citizens, houses without walls, trees lying on power lines, and debris accumulated along the roads.

At the request of the Puerto Rican government, President Trump had already authorized a new emergency declaration before the arrival Maria: Puerto Rico FEMA Director Alejandro de la Campa indicated that he had requested more equipment from the US Department of Defense: “We are asking for more ships, and the aircraft carrier (available for the emergency) has moved to be in a safe area… And ships with helicopters that we will use in case of evacuation or search and rescue are still in the area.” Nevertheless, due to the fragility of the infrastructure of the Puerto Rico Electric Power Authority (PREPA), the Governor anticipates Puerto Rico will be without power after the passage of Maria: “No one in Puerto Rico should expect to have power on the days following María. The time it will take us to fix (the damage caused by the hurricane) remains to be seen.” PREPA Executive Director Ricardo Ramos noted that the total recovery of the system after the passage of Hurricane Hugo in 1989 took about six months. One especially cruel threat will be water: Elí Díaz, the Executive Director of the Puerto Rico Aqueduct and Sewer Authority, noted: “If there is damage to large generators, there will be no power generation, therefore, our facilities will not have power to operate,” adding that there are approximately 1,300 generators which received preventive maintenance since the beginning of the hurricane season, but they are not enough for their 4,000 facilities, including pumping stations. By yesterday afternoon, they managed to prepare 110 tanker trucks, more than double those used during Irma, and are already managing imports from the port of Jacksonville in agreement with private companies. He added that since last Sunday, the levels of the Carraízo and La Plata dams have been gradually dropped to about three meters in order to prevent them from having to open the emergency flood gates.

For his part, last evening, President Trump tweeted his support: “Puerto Rico being hit hard by new monster Hurricane. Be careful, our hearts are with you-will be there to help!” The eye of the hurricane passed near or over St. Croix last night, prompting U.S. Virgin Islands Gov. Kenneth Mapp to insist that people remain alert. St. Croix was largely spared the widespread damage caused by Hurricane Irma on the chain’s St. Thomas and St. John islands just two weeks ago; however, this time, the island would experience five hours of hurricane force winds, Mapp warned: “For folks in their homes, I really recommend that you not be in any kind of sleepwear: Make sure you have your shoes on. Make sure you have a jacket around.”