A British Chapter 9 Municipal Bankruptcy?

August 29, 2018

Good Morning! In this morning’s eBlog, we consider a potential fiscal threat to the U.S. Virgin Islands, before considering the fiscal challenge to a municipality across the pond: Northamptonshire County, England.

A U.S. Virgin Islands taxpayer has brought a proposed class action against the U.S. Virgin Islands government, saying it hasn’t paid nearly 20,000 income tax refunds totaling $37 million for the 2016 tax year and the government owes $97 million in refunds since 2007. The complaint filed by Jennifer Duncan, a U.S. citizen who operated a business in the territory in 2016 and pays taxes there, also alleged that the government of the territory set aside no money in 2017 to pay income tax refunds despite a significant deficit in the refund account. The suit alleges that as of March, the U.S. Virgin Islands government had estimated that 19,653 income tax returns claiming refunds had not been paid and claims the territory’s government is using the money as a “bridge fund” to cover budget shortfalls.

A Fiscally Appealing Chapter 9 case? Councilors in Northamptonshire County, England, a county of over a quarter of a million residents, is in severe fiscal distress; now it appears supportive of plans to replace the county’s eight existing councils with two unitary ones in the wake of a government inspector’s recommendation—an action which will trigger a second vote before such a fiscal plan would come into operation in 2020, with the Council voting 31-14—effectively forwarding the quasi chapter 9 municipal bankruptcy plan to all eight of the county’s authorities for a vote on the plan, which comes after the Council, which faces a funding shortfall of about $82 million, issued two notices banning all new spending this year. Conservative Council leader Matt Golby reported the vote would help to give the county an “opportunity to reset,” noting: “There is lots to celebrate about Northamptonshire: Our residents deserve the best we can offer. We need to instill from day one the best practice in all of our scrutiny and functions.” The new, unitary authority would cover Daventry, Northampton, and South Northamptonshire. Labour Councilor Mick Scrimshaw noted: “This is clearly a proposal put forward by government to abolish the political embarrassment of this Council.” The local governmental action came against a seething backdrop of residents, whistling and booing, and swarming the County Hall, shouting: “Criminals!” and holding up banners that read: “Tory councilors wanted for crimes against people in Northamptonshire.”

The residents of what began as an ancient borough before, in 1835, under the Municipal Corporations Act of 1835, paving the way for an elected Council, are reacting to the quasi-municipal bankruptcy, which has forced the local government to halt all but the minimum services required by law: the Council has already voted to close libraries and stop repairing roads.

Last February, the County became the first, in two decades, to, effectively, run out of money—albeit, it could be that Northamptonshire is a fiscal omen for other cities—many of which are sharply cutting essential services. (The municipality, one of the largest towns in the United Kingdom, with a population over 200,000, was granted its first charter by King Richard I in 1189; its first Mayor was appointed (not elected) by King John in 1215. Northampton was unsuccessful in its application for unitary status in 1996, and recognition as a city in 2000. The city, about 60 miles from London, and one of the largest towns in the United Kingdom, with a current population of over 200,000, dates its founding to its first town charter, granted by King Richard I in 1189; King John appointed its first Mayor.

Councils are Britain’s fundamental unit of local government, dealing with an array of basic needs: trash collection, public transport, libraries, town planning, and care for children and other vulnerable people, among other things. They levy a tax on homes and charge fees for some services. They also collect a nationally set tax on commercial real estate, and keep an increasing share of it. But, for years they received most of their funding from the central government.

The crisis in Northamptonshire is complicated and partly self-inflicted. It has roots in the austerity policies and cost cutting that the Conservative-led national government imposed a decade ago in response to the global financial crisis. The Tories in London argued that austerity was the responsible solution to balance public accounts and encourage future growth. Now some Conservatives, especially at the local level, are openly defying what has been a pillar of the party’s ideology.

Funding from London for local governments has fallen 60 percent since 2010, with reductions expected to total $21 billion by 2020, the Local Government Association has calculated. In response, nearly every council in Britain has cut or outsourced services, sold off assets and tried a host of budget gimmicks, experts in local finance say.

One in 10 of the larger councils that have obligations to care for children and elderly people—about 35 councils in all—are in danger of exhausting their reserves within the next three years, according to the National Audit Office. Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, notes: “There’s a slow-moving domino effect.”

Northamptonshire was the first flashing red light. East Sussex County Council, run by Conservatives, recently announced it would reduce services to the “legal minimum.” The Conservative-led county council in Somerset warned it might be facing bankruptcy. This month, two families won a case against Bristol City Council to block plans to reduce funding of special education needs and disability services.

The Northamptonshire Council, having run through its rainy-day funds, now has enough money to pay only for mandatory services for the elderly and children. Unable by law to run a deficit, the council voted in February to shut down 21 of the county’s 36 libraries, remove bus subsidies and suspend road repairs. (A court recently blocked the decision to close the libraries.) At the meeting earlier this month, some councilors seemed resigned to the angry public response.

“I am happy to apologize,” said Richard Auger, a Tory councilor. “I think mistakes were made,” he added. “It’s a situation we’re responsible for.” The crisis is a political embarrassment for Conservatives, who are already divided into warring camps over Brexit. The former leader of the Northamptonshire council, Heather Smith, has resigned from her position, and from the Conservative Party. Investigators sent from London blamed her and other councilors for mishandling local finances, even as she blamed London for impossible mandates and a refusal to consider higher taxes. Sounding increasingly like their Labour opponents, some Conservative councilors in Northamptonshire are now talking about stopping the outsourcing of public services and demanding tax increases—or, as recently elected Conservative Councilor John Elkins put it: “I was a believer that we had to save money, but there had to be other ways than to slash and burn: How did we get to where we are? What the hell has been going on?”

Some describe this as the Graph of Doom, referencing, from 5 years ago, a power point shown to the Northamptonshire Council depicting an unavoidable contradiction: a sharp, rising public demand for local services contrasted against a sharp cutback in revenue from the national government (think post General Revenue Sharing), as part of the austerity program led by Conservatives in London. Ms. Smith described it thusly: “It was showing how we were all heading towards this cliff edge,” referring to a shortfall of $175 million that needed to be addressed by 2020. A committed Tory, Ms. Smith initially embraced the calls for austerity, as did many in reliably Conservative Northamptonshire, noting: “Being a Conservative-run Council, everybody accepted that the country had been overspending and that it was time to scale all of that back…At the time we will be spending millions on transformation we will be cutting frontline services. We should not be making a decision today. We need the detail.”

The fiscal pain, moreover, appears to be contagious: This week, all of the Councils in the county will have similar meetings, prior to submitting a plan for reorganization to James Brokenshire, the Minister responsible for local government. (Legally, only one Council needs to vote to back the plan for it to go to the Secretary of State for approval.)  

Reorganizing Governance. For its part, according to a report requested by the government, the Northamptonshire County Council should simply be abolished: the report, requested by Local Government Secretary Sajid Javid, recommends: Any “a new start” which is “best achieved by the creation of two new unitary councils,” in this case, this being a report which appeared to trigger the resignation of  Council Leader Heather Smith, while Northampton North Parliament Member Michael Ellis called the management of the authority a “national scandal.” He added he had been “appalled” by the report. KPMG , in its audit, warned the Council would have to re-work its FY2019 budget to make £40m worth of cuts. Max Caller, who led the government investigation, said Northamptonshire should have two new unitary authorities by 2020, one covering Daventry, Northampton, and South Northamptonshire; and the other covering Corby, East Northamptonshire, Kettering, and Wellingborough—meaning the County Council would cease to exist. Mr. Caller added that “living within budget constraints is not part of the culture” of the Council, noting it had not responded “well, or in many cases even react, to external and internal criticism,” noting that individual Councilors “appear to have been denied answers” to legitimate questions.

But he was also critical of the Council’s proposed Next Generation Model, under which the County would outsource all services and create four new bodies for: child protection, care of vulnerable adults, providing health and well-being services, and improving the county.

Intergovernmental Challenges. Deputy leader Matthew Golby, who is performing the functions of Council Leader prior to any formal appointment, said the authority accepted the findings the inspector has found with regard to “what he believes to be significant failings at the Council,” adding that while the report says the authority is “in no worse position than any other Council,” Northamptonshire’s leadership “would argue the sector as a whole does face significant financial challenges;” the leaders of Northamptonshire’s district and borough Councils issued a joint statement saying they “acknowledge the enormity of the situation,” but “do not believe a unitary model is the only way forward.”

Northamptonshire County Council’s financial crisis timeline: Funding from the central government for local governments has dropped 60% since 2010, reminiscent of the challenge confronting cities, counties, and states after Congress voted to end the General Revenue Sharing program during the Reagan Administration. According to the Local Government Association, those cuts are projected to total $21 billion by 2020. In response, nearly every Council in Britain has cut or outsourced services, sold off assets, and tried a host of budget gimmicks. Nevertheless, one in 10 of the larger Councils which have obligations to care for children and elderly people—about 35 Councils in all—are in danger of exhausting their reserves within the next three years, according to the National Audit Office—or, as Rob Whiteman, CEO of the Chartered Institute of Public Finance and Accountancy, put it: “There’s a slow-moving domino effect,” meaning that Northamptonshire was likely just the first flashing red light. In nearby East Sussex County Council, run by Conservatives, the County recently announced it would reduce services to the “legal minimum,” while the Conservative-led county council in Somerset warned it might be facing bankruptcy.

The fiscal situation means the Northamptonshire Council, having run through its rainy-day funds, now has enough funding to finance only for mandatory services for the elderly and children. Barred by national law from running a deficit, the Council, last February, voted to shut down 21 of the county’s 36 libraries, remove bus subsidies and suspend road repairs. (A court recently blocked the decision to close the libraries.)

A Fiscal Cliff Foretold? The virtual chapter 9 municipal bankruptcy was anticipated by some, in what some deem the Graph of Doom, referring to a staff power point shown to the Northamptonshire Council five years ago, which depicted an unavoidable contradiction: a sharp, rising public demand for local services contrasting with a sharp cutback in funding from the national government, as part of the austerity program led by Conservatives in London—or, as Senior Counselor at the time Ms. Smith noted: “It was showing how we were all heading towards this cliff edge,” a fiscal precipice of $175 million that needed to be addressed by 2020. A committed Tory, Ms. Smith initially embraced the calls for austerity, as did many in reliably Conservative Northamptonshire—or, as she put it: “Being a Conservative-run Council, everybody accepted that the country had been overspending and that it was time to scale all of that back.” The problem, however, was how. The Council needed to find huge savings, but it also had limited revenue sources. Raising taxes was ruled out: deemed ideologically unpalatable while the Conservatives were making austerity-related cutbacks. Eric Pickles, the government minister who oversaw local government financing between 2010 and 2015, said it was a “moral duty” for the Tories to keep local taxes low, noting: “Some Conservative Councils had a big fight over it, and said, ‘No, we’re not doing it,’ ” Ms. Smith said. Indeed, before declaring bankruptcy, Northamptonshire took the desperate step of selling and leasing back a $70 million headquarters building it opened in October.

Last February, the Council recognized the depth of its fiscal plight and issued a formal notification of de facto municipal bankruptcy. In response, Conservative leaders in London dispatched government inspectors—inspectors who, last March, issued a damning report: Max Caller, the chief inspector who wrote the report, said that the County Council’s troubles were self-inflicted and that the Next Gen approach did not have any “documented underpinning” that set out how it was expected to deliver savings. In an interview, Inspector Caller noted: “The things that they did were unwise: You could say that they didn’t want to face up to the challenges of austerity, but all the other councils have.” According to his findings, Northamptonshire overspent by $130 million over three years, but took no steps to rein in expenditures—or, as he put it: “Everything has been a waste of money…You can’t go year after year holding down taxation rates at local level and taking the money away and expecting the same level of service. That’s not possible.”

This year, the British government announced some new financial aid for councils, including about $200 million for adult social services. Nevertheless, according to some experts, local Councils are still confronted by a $4 billion funding hole. In response, according to an annual government survey of Council leaders, an overwhelming majority of county councils across England plan to raise council tax, their levy on homes, and 5.99% this year— the maximum the central government will allow. Many have also said they would like to raise business rates, a move the central government is still rejecting.

Prior to declaring municipal bankruptcy, Northamptonshire had taken the desperate step of selling and leasing back a $70 million headquarters building it opened in October—a step which drew withering public ridicule—and instead of helping, appeared to prompt the arrival of national government inspectors. According to officials, Northamptonshire’s fiscal plight was clear from the moment the national government began to pull back on grants to local authorities. What appeared to stun local elected leaders was that a Conservative national government would allow a local government to slide into bankruptcy, or, as former Councilor Smith put it: “I honestly believed that the government would not let us sink because we were a Conservative authority…But I was wrong. They were quite happy to just throw us out and annihilate us, really.”

Last month, the Northamptonshire Council issued a §114 notice which banned any new expenditure of public money, a critical step as the jurisdiction seeks to achieve $90 million in budget savings this year; the Council voted to shut down most of the county’s libraries, after, in recent years, closing local centers for children and sharply reduced educational funding. The fiscal action that appeared to most shake the public was the vote to shut down the libraries. Conservative Councilor Sam Rumens noted: “I couldn’t face the libraries being cut.”

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Contrasting Responses to Fiscal and Physical Storms

July 10, 2018

Good Morning! In this morning’s eBlog, we consider the superb update on the fiscal impact of Hurricanes Irma and Maria on the U.S. Virgin Islands by Jason Bram and Lauren Thomas of the New York Federal Reserve.

Much more dependent on tourism than Puerto Rico, the authors noted that there has been far less attention to the fiscal ravages of the two storms despite the fact that St. Thomas, St. Croix, St. John, and a number of smaller islands suffered comparable devastation. No doubt, they point out, this is in part due to their much smaller population: the U.S. Virgin Islands is home to about 105,000 Americans—1/30th Puerto Rico’s population. It is home to Claude O. Markoe Elementary School in Christiansted, where, long, long ago, this author taught school as part of training for the Peace Corps to teach in Bush Gbaepo Grebo Konweaken, in Grand Gedah County, Liberia.

The Fed authors reminded us that the Virgin Islands had already been fiscally weakened prior to the hurricanes in the wake of a shutdown of a major refinery on St. Croix in 2012—a shutdown which dramatically increased the dependence on tourism: employment dropped by about 15 percent between 2011 and 2014; it has changed little since. Then, last September 20th, Hurricane Maria smote St. Croix where, as they described it, the “magnitude of the damage and disruption for the territory as a whole was unprecedented in recent history.” Adding to the physical and fiscal misery, the Virgin Islands could not count on any assistance from Puerto Rico—and, as we have noted based upon the devastating lack of help from the federal government, the U.S. Virgin Islands were mostly left to fend for themselves.

The economic, physical, and fiscal damage, according to the latest available data, meant that total employment in the U.S. Virgin Islands dropped by an estimated 12% between August 2017—right before Hurricanes Irma and Maria—and November of that year; but by May of this year, the authors found that only a fraction of those job losses, about 600, had been reversed. Indeed, it appears that the fiscal and economic effects of Irma and Maria were “substantially more severe in the Virgin Islands than in Puerto Rico, where employment fell by about 6 percent right after Maria.”

Such a disparate outcome would, they wrote, seem unexpected, especially when considering not only the widespread power outages and pathetic FEMA responses which affected so much of Puerto Rico for so very long—and began to drain the U.S. territory of those most fiscally and physically able to leave for the mainland, especially when compared to the Virgin Islands, where “literally everyone lives within a few miles of the coastline,” unlike Puerto Rico where the steep mountains vastly complicated the task of restoring power to hospitals and police and emergency response centers, leading the Fed authors to pose the question: “With this greater disruption of everyday life occurring in Puerto Rico, why would the economic effect appear considerably more severe in the Virgin Islands?”

The authors note that a critical distinction relates to the Virgin Islands’ high dependence on tourism—a reliance which can be especially pernicious in the wake of a major natural disaster. Thus, they wrote, because tourism tends to be particularly sensitive to the aftermath of natural disasters, “the Virgin Islands’ dependence on this industry largely explains the relatively severe economic hit,” contrasting that with Puerto Rico’s much more diversified economy, illustrating the difference by noting that Puerto Rico’s hotel/accommodation industry, which represents just over 2% of private-sector jobs in Puerto Rico, accounts for about 13% of jobs in the U.S. Virgin Islands. Thus, one fiscal outcome of the storm was the hotel/tourist industry in the U.S. Virgin Islands experienced an especially steep slump after the storm: as of last December, employment in that industry had fallen by 1,300 jobs, or 35%; employment in the broader leisure and hospitality sector—which also includes restaurants and bars but largely caters to visitors—fell by just under 30%. Nearby in Puerto Rico, in comparison, tourism and hospitality job losses accounted for only about 25% of the total job loss. 

The Fed writers also examined the contrasting capacities of the two U.S. territories to accommodate tourists, writing that the damage wrought to hotels in the Virgin Islands after the two hurricanes significantly impacted the capacity for fiscal recovery: by the middle of last May, nearly 90% of Puerto Rico’s 149 hotels had reopened. In contrast, only 60% of the Virgin Islands’ had—adding that, in the Virgin Islands, relief workers were being housed in many of the available rooms, reducing the capacity for tourists or business travelers—and noting: “Remarkably, there has been virtually no new hotel construction in the Virgin Islands for more than two decades.” With the latter, they note, adding to the fiscal challenges to the U.S. Virgin Islands, because of the related sharp decline in restaurant business—finding that local economies had contracted far more sharply in the Virgin Islands than in Puerto Rico, where the surge of rescue workers, including from FEMA and army personnel, utility crews, and construction workers, helped offset the loss of tourists.

Now, they note, the key challenge for the U.S. Virgin Islands’ economy is to restart its vital tourism, noting that the critical steps “appear to be twofold: restoring its capacity to accommodate overnight guests, and encouraging visitors to come,” but, critically, also noting that, in the long-term, the Virgin Islands confront a dilemma: “Is it best to focus resources and policy on a key industry like tourism, which brings in money from outside, or should policy place more of an emphasis on diversifying into other industries, which may be less vulnerable to the periodic hurricane?”

Justice for All?

June 27, 2018

Good Morning! In this morning’s eBlog, we consider the unequal treatment of Americans in Puerto Rico.

The United States government, this week, in the U.S. District Court in San Juan, defended the disparate treatment and provision of federal program services available on the mainland, but not in Puerto Rico, such as Supplemental Social Security (SSI). The Justice Department, at the beginning of the week, filed a motion to dismiss, primarily for lack of jurisdiction, a lawsuit in which eight residents of Puerto Rico claim access to food assistance benefits, Medicare, and SSI. In its response, the Justice Department asserted that equal protection does not obligate the federal government to treat Puerto Rico as if it were a state, referencing a 1980 decision in Harris v. Rosario finding the U.S. Constitution granted Congress plenary powers over U.S. territories such as the U.S. Virgin Islands and Puerto Rico—meaning that discrimination may occur if it is on a rational basis. Now, in Sixta Gladys Peña Martínez v. U.S. Secretary of Health, eight plaintiffs have asserted claims to have access to the benefits of the Supplemental Nutrition Assistance Program (SNAP), which operates in the states and Washington, D.C., and to Medicare Part D and SSI. The in the federal response, signed by interim Assistant Secretary Chad Readler and U.S. San Juan prosecutor Rosa Emilia Rodriguez, the Justice Department is arguing  that the complaints regarding SSI and Medicare should be dismissed, because the plaintiffs did not exhaust administrative procedures. With regard to SNAP benefits, the federal government maintained that the plaintiffs have not been able to demonstrate that they would have access to that program if they resided in any of the 50 states, Washington D.C., Guam, or the U.S. Virgin Islands.

In the case of Ms. Peña Martínez, the Justice Department has asserted that she claims she received $198 dollars in SNAP food assistance when she lived in New York, and that in her current residence in Puerto Rico, she receives $154. According to the Department, Ms. Peña Martínez did not specify how much additional money she may have received in recent months due to the special allocation of $1.27 million in SNAP funds made available to Puerto Rico in the wake of Hurricane Maria—assistance which was one-time help. Thus, the Department claimed the federal decision from the Supplemental Social Security (SSI) program was “rational,” because Puerto Ricans do not pay federal income taxes—asserting that the court had to find the U.S. position to be “constitutional.” The Department, referencing the Harris and Secretary of Health cases, asserted the sole contributory status of Puerto Rico and the cost of treating Puerto Rico as a state for the purpose of determining the allocation of funds under SSI , part D of Medicare and SNAP, constituted “a rational basis for the actions of the Congress,” adding that these additional costs to the U.S. Treasury provided, at a minimum, “a reasonably conceivable state of affairs that could provide a rational basis” for its actions.

Fiscal Recoveries from Fiscal & Physical Storms

eBlog

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.