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.” 

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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.”

Federalism & Fiscal Challenges

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eBlog, 2/07/17

Good Morning! In this a.m.’s eBlog, we consider some of the implications of New Jersey’s constitution with regard to the state’s takeover of Atlantic City: does the state takeover violate parts of the Garden State’s constitution? Then we head south to the Caribbean to try to understand the extraordinary fiscal challenges to the neighboring U.S. territories of Puerto Rico and the U.S. Virgin Islands.

New Jersey Federalism? New Jersey Superior Court Judge Julio Mendez has issued an order temporarily blocking the state’s effort to eliminate one hundred Atlantic City firefighter positions—all part of an order which momentarily halts the state from imposing any layoffs or unilateral contract changes to Atlantic City’s 225-member fire department. The issue and legal challenge here arose in the wake of the International Association of Fire Fighters, Local 198, and the AFL-CIO filing a lawsuit arguing that the State of New Jersey’s action under the Municipal Stabilization and Recovery Act—which empowered the state takeover of the City, and authorized New Jersey’s Local Finance Board to take over the city, violates New Jersey’s constitution. The suit comes even as the state’s Department of Community Affairs claims the state had already decided before the ruling to push back implementing the firefighter cuts until next September—with the changes to pay structure, hours, and overtime postponed until the end of next week; however, the state made clear the “temporary restraining order signed by Judge Mendez does not change the State’s timetable for advancing reforms of Atlantic City firefighters’ contracts…We decided to delay implementing the proposed contract reforms until February 19th as a good faith gesture to give the fire department more time to prepare.”

Judge Mendez had initially scheduled a hearing for next Monday; however, the state successfully fought to get the case removed to federal court at an undetermined date. Judge Mendez issued the restraining order despite the state, in a court filing, advising the court it would hold off implementing the proposed 100 layoffs until September, and would delay changes to pay structure, hours, overtime, and benefits until February 19th. However, Judge Mendez’s order bars the state from taking any action under the Municipal Stabilization and Recovery Act that is “in violation of the Due Process and Equal Protection, Contracts, Takings, Collective Negotiation, and Civil Service clauses of the New Jersey Constitution.” The case marks the first legal challenge to the broad state preemption and takeover of Atlantic City imposed by the state last November: the subsequent court case could shape up to be a significant test of the takeover’s constitutionality against criticisms that it violates residents’ civil rights and the collective bargaining rights of the city’s unions.

The state’s strategy in responding by seeking removal to the federal court seems exceptional—and in stark contrast to the unique concept of dual federalism in this country, especially so in this case, because the New Jersey constitution includes a comparable provision with regard to voiding contracts—or, as a colleague late last night noted: “It’s odd for a state law to be appealed to the federal court when there are state constitutional issues at stake.” Nevertheless, the filing raises two issues: 1) would a federal court even consent? It is, after all, a matter of New Jersey law, and 2) it would seem, especially in a New Jersey court, that the state constitution issue should supersede a federal action.  

At the same time, in a separate fiscal arena, Moody’s Investor Service’s affirmed  Atlantic City’s deep-junk level Caa3 bond rating and retained the city’s negative outlook, citing an ongoing “liquidity crisis” and likely default in the next year notwithstanding the state’s takeover—the city, after all, is confronting a structural deficit of more than $100 million and has suffered five casino closures since 2014; it has $240 million in municipal bond debt and more than $500 million in total debt when factoring in casino tax refunds and other obligations. It would seem Moody’s is seeking to ensure investors are aware of what is transpiring—and needed to remind the city’s municipal bondholders that there will be a new Governor who will have to reassess what actions—and relationship with Atlantic City—they ought to consider.

Statehood I? Puerto Rico Gov. Ricardo Rosselló has signed into law a bill for a June referendum on Puerto Rico’s political status. The law provides for a non-binding referendum that would allow the U.S. territory to vote on statehood. The referendum, to be held this June, will allow the voters to choose between statehood and independence/free association. Those in support of Puerto Rican statehood believe approving statehood could help the country restructure its $70 billion in public debt and stave off further federal austerity measures. Functionally, if approved, Puerto Rican statehood would allow the state to receive $10 billion in federal funds per year, as well as allowing government agencies and municipalities to file for chapter 9 municipal bankruptcy. In signing the legislation, Gov. Rosselló called the vote “a civil rights issue;” he said the U.S. will have to “respond to the demands of 3.5 million citizens seeking an absolute democracy.” Importantly, if granted statehood, the U.S. citizens of Puerto Rico would, at long last, no longer be denied many of the benefits provided to citizens in U.S. mainland and Hawaii, including equal access to Social Security and Medicare, despite paying taxes for these services. In addition, Puerto Rico’s representatives in Congress would be granted the same voting rights as all other Members of Congress—except for the Delegate from the District of Colombia. Under the referendum, voters would, in effect, determine whether to alter Puerto Rico’s status as a territory granted under the Jones-Shafroth Act: they will be asked if they support Puerto Rico becoming a state or a country independent of the United States of America. Should voters opt for independence, a subsequent referendum next October would be held to determine whether citizens wish to maintain some sort of association with the U.S., or become independent. In a written statement from Gov. Rosselló, Puerto Rico House of Representatives President Carlos Méndez said, “The colonial situation that currently defines Puerto Rico has deprived Puerto Ricans of participating fully in the federal government, of voting for the president of the United States, of electing representatives with a say and vote in the federal congress, and of receiving equal treatment in opportunities that strengthen socio-economic development and quality of life.”

Statehood or Independence? Even as Gov. Rosselló has signed into law a provision to allow Puerto Rico’s citizens to vote on their own governing destiny, Congressman Luis Gutiérrez (D-Puerto Rico) today plans to offer legislation in Congress to promote a federal plebiscite in which Puerto Ricans can select between independence and a free association pact between Puerto Rico and the United States, with a draft of his proposal, as reported by El Nuevo Día, stating: “The annexation of Puerto Rico as a state of the Union would be detrimental both to the United States and to Puerto Rico. It is time to return sovereignty to Puerto Rico…Statehood and full assimilation—in which Puerto Rico delivers its nationality, culture, Olympic team, language, and ability to determine its future—is not the only option and is not the best option for Puerto Ricans.” Under the proposed legislation, all Puerto Ricans or a father or mother born in Puerto Rico, would be granted the right to vote; rights granted via federal programs, such as veterans, pensions, and benefits from military service would be recognized. The proposal suggests a process to restructure public debt as well as an agreement to keep the current total of federal transfers, as a bloc, during a transitional period. The bill provides that citizenship of Puerto Rico would be recognized; however, Puerto Ricans would be eligible to retain U.S. citizenship.

Caribbean Fiscal Contagion? Fitch Ratings has lowered its credit ratings for the U.S. Virgin Islands, just seventeen miles from Puerto Rico, downgrading its ratings on about $216 million of the U.S. territory’s water and power authority municipal bonds—acting in the wake of the island government’s rescission of a utility rate increase which had been approved last month. Fitch’s action put the island’s ratings eight levels below investment grade—and near default, and came in the wake, last month, of its downgrade of the Virgin Islands’ public finance authority, which borrows on behalf of the government, writing: “The rating downgrade reflects the heightened credit risk as a consequence of the island’s Water & Power Authority’s continued inability to gain regulatory approval of rate relief needed to address its exceptionally weak cash flow and liquidity.” The downgrade came in the wake of the U.S. territory’s increasing inability to issue municipal debt: the government has been unable to issue municipal debt since December, twice delaying a planned $219 million municipal bond sale. The U.S. territory, confronted by budget shortfalls, had intended to use the bond proceeds to help cover the government’s bills. Virgin Islands Governor Kenneth Mapp has proposed a series of tax increases intended to bolster the territory’s finances and restoring its access to the financial markets. However, as the Romans used to say: tempus fugit: Last week, Gov. Mapp warned the government may not be able to make payroll by the middle of this month if nothing is done.

Municipal Sovereignty: What’s at Stake?

eBlog, 9/26/16

In this morning’s eBlog, we wonder whether the end for Atlantic City is nigh: will the state, in fact, take it over? Then we turn to the beleaguered cities of Cleveland and East Cleveland as they contemplate a potential merger: could that avert a chapter 9 municipal bankruptcy—an option which the State of Ohio has made like waiting for Godot? Then we veer east to Connecticut, where the capital City of Hartford faces insolvency—captive to fiscal and physical borders bequeathed from Pilgrim times. Just as inequality in that state’s schools propelled a powerful Connecticut Supreme Court decision, so too, we consider an insightful piece about the inequity of the post municipal bankruptcy Detroit school situation. What might it augur for the city’s post-bankruptcy future? Then, as Horace Greeley asked, we go west, where the governance challenges in San Bernardino and the upcoming ballot question about marijuana have made for heated debate about what kind of debates can the city hold to inform voters on an upcoming election critical to the city’s post-municipal bankruptcy charter. Finally, we look south to the U.S. Virgin Islands—just a hop, skip, and a jump from Puerto Rico to consider how this U.S. Territory is addressing its fiscal challenges. Phew!

Can a City Maintain its Sovereignty? The New Jersey Division of Local Government Services has notified Atlantic City that it has until next Monday to comply with the terms of a $73 million state loan or face the possibility of default because it is in violation of its loan terms, so that it must act swiftly to “cure the breach to come into compliance with the agreement,” albeit LGS spokesperson Tammori Petty noted: “We decline to speculate on next actions.” The notification appears to be a response to Mayor Don Guardian’s request last week for a reprieve after the City Council failed to agree to meet one of the terms in the loan agreement: dissolving the Atlantic Municipal Utilities Authority by September 15th. Should the city not comply by the looming deadline, the state can demand full repayment of the $73 million as well as withhold any state aid. In addition, the state could also to seize the city’s municipal utility authority or its airport as collateral, based on the terms by which the city had agreed to the bridge loan terms in order to avoid defaulting on a $3.4 million debt payment—a payment, which under the terms of the agreement, fell due at the beginning of last month. Doug Goldmacher of Moody’s noted that the city’s “inability to meet its loan covenants is a credit negative and indicative of the city’s severe fiscal distress.” Should the state take over Atlantic City, the Local Finance Board would be authorized and empowered to alter debt and municipal contracts. For the beleaguered city which has tried to weather the closure of four of its casinos—closures reducing its tax base by as much as 70 percent, in addition to undercutting assessed property values—the options appear to be waning. Nevertheless, the Mayor’s Chief of Staff, Chris Filiciello, stated: “We continue to focus on putting together the 150 day plan…If we are given the time to complete and present it, we know it will be the best plan to move Atlantic City forward while still maintaining our local sovereignty.”

To Be or Not to Be? Two of the nation’s poorest cities, East Cleveland and Cleveland, (East Cleveland’s per capita income of $12,602 ranks it 1,000th in Ohio, while Cleveland’s $14,291 ranks it 887th) are undertaking so far informal discussions about a potential merger, albeit with recognition even a combined municipality would need a sizable boost in taxpayer dollars to make it happen. From Cleveland’s perspective, the city is exploring whether there might be development possibilities through such a combination—albeit recognizing the potential pitfalls: East Cleveland is so impoverished that some residents fill their own potholes. Moreover, from a governance perspective, there appears little initiative: East Cleveland has learned that requesting authority from the State of Ohio to file for chapter 9 municipal bankruptcy is like waiting for Godot. Nevertheless, after long balking at the concept of dissolving their city, its elected leaders agreed last month to pursue annexation by the City of Cleveland without the list of demands it had earlier made as a prerequisite, such as continuing the pay of its Mayor and elected officials as its Council had originally submitted to the dismay of Cleveland officials. Nevertheless, with the writing seemingly on the wall, Thomas Wheeler, President of East Cleveland City Council, notes: “Without a revenue stream, I don’t know how we would exist,” adding he and East Cleveland Mayor Gary Norton recognize their city is out of options: it has millions in unpaid bills, and it has had no access to borrow on the municipal credit market for years; it is so cash strapped that in the wake of deep cuts in its workforce, only five firefighters were available to respond to a recent house fire: it is becoming a municipality of crumbling streets, abandoned buildings, uncertain waits for essential emergency 9-1-1 services, and, increasingly, so dangerous that citizens have armed themselves, knowing it could be a long wait for police. Nevertheless, some Cleveland politicians are enthusiastic about the possibility of a merger, citing development possibilities along a main thoroughfare which connects East Cleveland with Cleveland’s fastest-growing neighborhood, University Circle, the home of its fine research hospitals, Case Western Reserve University, and most of Cleveland’s cultural institutions. Ergo: negotiations by a commission consisting of three members from each municipality could begin sometime in the next few months.

Hard Fiscal Times for Hartford. S&P Global Ratings has downgraded the City of Hartford four notches, with the downgrade coming in the wake of the Connecticut Supreme Court decision’s [Connecticut Coalition for Justice in Education Funding v. Rell] finding unconstitutional the state’s fiscal disparities in school funding—or, as Hartford Mayor Luke Bronin put it: “The rating agency action reflects what I’ve been saying for many months, which is that the city of Hartford can’t cut or tax its way out of this challenge by itself.” Or, as S&P credit analyst Timothy Little put it, “Until the city can adopt a credible plan and sustain improved budgetary performance, the rating reflects our weak view of management conditions.” The city, which is on course to insolvency by the end of the year, reflects what S&P, in its downgrade, cited continued deficits and the “lack of a credible plan” to balance the 125,000-population city’s budget and curb out-year fiscal gaps—and it cited a one-third chance of further downgrades within a year. Mayor Bronin has repeated his call for help from the state and the region’s suburbs, pressing for consideration of a regional tax and state reconsideration of tax laws to abate municipal reliance on property taxes, noting: “We can put Hartford and the capital region on a path to fiscal health and economic growth, but it’s going to take everyone coming together—in Hartford, the region and the state—to face the realities that we need to face.” As our respected colleagues at Municipal Market Analytics put it, Hartford’s struggles parallel those of many older cities: the city confronts high, escalating fixed costs: debt service, pension obligations, and other post-employment benefits—fixed costs which now consume nearly 20 percent of its annual budget, even as it has a depleting or disparate municipal tax base, because more than one-third of its population lives below the poverty line. Unemployment reached nearly 11% in July, nearly double the statewide rate of 5.6 percent. As MMA notes, the fiscal numbers appear to more than offset the capital city’s concentrations of art, entertainment, and hospital clusters—even as its dependence on state aid meant that this year’s $45 million state aid reduction triggered a spike in its reliance on short-term debt—meaning the city’s debt service could nearly double to about $46 million by FY2018, according to forecasts by city officials. Mayor Bronin notes that past budget practices made Hartford a disaster waiting to happen, or, as he puts it: “When governments are in fiscal crisis, one approach is to hide it or minimize it just to buy a little more time. That’s what Hartford did for many years…That’s not the approach I take. We’re opening the books and telling the real story, because that’s the only way we’re going to be able to make real and lasting change.” The city band-aided its FY2017 $553 million budget on reserves and labor concessions—neither of which the city has yet to realize; the fiscal cliff looms larger in the out-years, when there are anticipated gaps of more than $30 million in FY2018, rising to $50 million thereafter.” … Judge Thomas’ ruling in the 11-year case, like those of Horton v. Meskill in 1977 and Sheff v. O’Neill in 1996, spotlights the most glaring feature of Connecticut’s taxing arrangements — the inequity of school funding.

Sins of the Founding Fathers? Connecticut, like much of New England, traces its municipal roots to the four century-old system of towns, towns based on the parish boundaries of the Puritans, which required that every resident be able to walk to church, meaning, in the case of Connecticut municipalities, many remain approximately the same size geographically, albeit that some of its cities are among the smallest towns (17 square miles in the case of Hartford, 5.5 square miles in New London). From the original parish boundaries have devolved municipal boundaries, each town with taxing power and its own elected council, police department, public works department, fire department and school system. That appears to have contributed to a governance system in which the state is made up of several medium-to-large Metropolitan Statistical Areas, defined as having one or more adjacent counties or county equivalents with at least one urban core of 50,000 population, plus adjacent area tied to the core through a high degree of social and economic integration measured by commuting ties. Of the 382 MSAs nationally, the New York City MSA is ranked No. 1 in population; the Boston MSA is No. 10; the largest MSA in Connecticut, the Hartford-West Hartford-East Hartford MSA, is made up of 29 towns: it is ranked 47th in the country in population. In 2015, it had a population of 1,211,324, just below the New Orleans-Metairie MSA at 1,262,888, and just above the Salt Lake City MSA at 1,170,266. The Bridgeport-Stamford-Norwalk MSA ranks 57th, with a population just under a million; the New Haven-Milford MSA ranks 65th with a population 859,470; the Norwich-New London MSA ranks 175th with a population of 271,863. If one transposed these places: if Simsbury were in Louisiana, it would be a neighborhood of New Orleans; if it were in Utah, it would be a neighborhood of Salt Lake City. That seems to mean a double fiscal whammy bedevils the state’s municipalities: 1) the terrible disparities or inequities so devastatingly painted by Connecticut Supreme Court Justice Moukawsher in his school decision, but 2) the inefficiency of the arrangement. Or, as Toni Gold, a transportation and community development consultant and a member of the board of the Connecticut Main Street Center, last Saturday wrote: “Regionalism is the dirtiest word in the Connecticut political vocabulary because real regionalism would require small towns and affluent suburbs alike to stop pretending that they have no connection to or responsibility for the center cities on which they depend. This snipping of a state into a lot of minuscule towns is not what the rest of the country does — and for good reason. It is financially irrational…If all legislative remedies fail in the wake of the CCJEF decision, one must ask whether there isn’t a broader legal remedy. All the school funding cases have been brought under the state constitution. Why couldn’t there be a federal case, brought on the broader issue under the 14th Amendment to the federal Constitution, which says in part, “nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws?”

Schooling on Detroit’s Future. The State of Michigan, as we have noted, in the wake of the insolvency of the Detroit Public School System, has created a dual system of public and charter schools, with the former now under the auspices of retired U.S. Bankruptcy Judge Steven Rhodes. Vikram David Amar, last Friday, writing in Justia, “In a Case with Blockbuster Potential, Detroit School Children Assert a Federal Constitutional Right to Literacy,” wrote about a class action lawsuit, Gary B. v. Snyder, pending in the U.S. District Court for Eastern Michigan, which has been filed on behalf of children who attend some of the most dilapidated and lowest-performing Detroit public schools, in which the plaintiffs allege Gov. Rick Snyder and other state officials are violating the constitutional rights of Detroit children by depriving students of their “fundamental right” to literacy under the Fourteenth Amendment’s due process and equal protection clauses. The 129-page complaint “recites in heart-wrenching detail the physical, curricular, and human resource shortcomings of the schools attended by the plaintiffs;” it also documents what he describes as the “woeful underperformance of the students at these schools, as compared to other schools in the state and also to the state’s competency baselines established for various grade levels. It is hard to believe the conditions laid out in the Complaint exist in 21st Century America; at times the allegations seem more like the setting of a Dickens novel.” He notes that the complaint also proposes what he deems an “an ambitious legal theory, effectively asking the federal court to apply ‘heightened scrutiny’ to what is going on in Detroit, and urging it not to apply the deference ordinarily given to state and local school officials [author’s emphasis]concerning their administration of public education.” The complaint identifies two related, but distinct grounds for judicial skepticism—the first being equal protection (describing the plaintiffs as a “discrete class,” almost all of whom are “low income children of color.”), but the second asserts that “heightened judicial oversight is warranted, because in the Fourteenth Amendment’s due process clause there is a ‘fundamental right of access to literacy,’ which presupposes better facilities, better instructional materials, and better teacher training than exist in Detroit. It asserts a federal “fundamental right” to literacy under the so-called “substantive due process doctrine” of the Fourteenth Amendment, the lawsuit is path-breaking, and perhaps ultimately destined for the Supreme Court. The complaint here asserts that many “Detroit public school children lack any realistic chance at literacy; the Complaint links its concept of literacy directly to expressive and political rights (including military service), saying that literacy is essential not only to success in the workplace and higher education, but also (importantly) to ‘be[ing] an informed citizen capable of participating in democracy.’” He notes that the complaint repeatedly points out, “the State of Michigan (like other states) has made attendance in some kind of state-approved school compulsory, so the State is already interfering with private choices in this realm, and in ways that allegedly make it nigh impossible for Detroit children to attain literacy.” Finally, he writes:

But the affirmative/negative rights line does implicitly bring up probably the biggest hurdle for the plaintiffs—the practical and logistical concerns about appropriate remedies that might disincline federal courts to become deeply involved in decisions about school facilities, curricula, teacher training, and the like. Most of the other settings in which the Court has recognized a fundamental right do not involve the remedial complexity the Snyder case implicates. And as the Court cautioned in Rodriguez, at a time when the federal judiciary was in the midst of a mixed experience of federal judicial oversight over busing, pupil reassignment, and other aspects of the federal judicial effort to eliminate the vestiges of racial school segregation:

He writes: “We stand on familiar ground when we continue to acknowledge that the Justices of this Court lack both the expertise and the familiarity with local problems so necessary to the making of wise decisions with respect to the raising and disposition of public revenues. . . . In addition to matters of fiscal policy, this case also involves the most persistent and difficult questions of educational policy, another area in which this Court’s lack of specialized knowledge and experience counsels against premature interference with the informed judgments made at the state and local levels. Education, perhaps even more than welfare assistance, presents a myriad of ‘intractable economic, social, and even philosophical problems.’ The very complexity of the problems of financing and managing a . . . public school system suggests that ‘there will be more than one constitutionally permissible method of solving them,’ and that, within the limits of rationality, ‘the legislature’s efforts to tackle the problems’ should be entitled to respect.”

Electing a Higher Future for Post-Chapter 9 San Bernardino? With an exit from chapter 9 bankruptcy finally within sight—and elections just around the corner, the San Bernardino City Council has voted to schedule not one, but at least two sets of debates at City Hall, after the Council overruled City Manager Mark Scott’s decision not to permit such debates. Mr. Scott had emailed those seeking or proposing such pre-election debates, debates customary in previous election years, that none would be permitted this election year,  out of a concern about a conflict of interest since the city had placed two measures on the ballot—albeit, in his email, Mr. Scott had written the City Council could vote to reverse him if it wished—an email which, unsurprisingly, drew a response from Council Members, some of whom attacked him for seeking to shut down free speech, while others defended him as implementing the implied direction of a Council that has directed staff not to spend any funds to educate the public about the city charter ballot measure. However, the Council has been unanimous in the vote to allow pre-election debates at City Hall and on the public access channel, waiving fees for both—or, as Councilman John Valdivia put it: “The actual statement from Mr. Scott is that there is a council discretion to overturn his decision, so I think he left it completely wide open for the Council to make the ultimate decision…This is unacceptable on behalf of what Mr. Scott is attempting to do.” Surprisingly, Mr. Scott was not at the meeting; however, he wrote in an email that it seemed “smart to stay completely arms-length” because the city was behind both Measure L (to replace the city charter), and Measure P, to replace the city’s marijuana ban with a regulatory scheme. City Attorney Gary Saenz noted: “It’s necessary to take precaution and care that you don’t cross over the line into endorsement and you stick within the parameters of education…Sometimes that’s hard to do. I personally encountered a forum – or a couple of forums, actually – when I was campaigning and there was a conflict of interest that I believe tainted the discussions.”

Entering Virgin Territory.  Just 17 miles from Puerto Rico lies the insular area, the U.S. Virgin Islands, which consist of the main islands of Saint Croix (where the author trained for his Peace Corps service in Liberia, West Africa) Saint John, and Saint Thomas, as well as many other surrounding minor islands reaching a total land area of 133.73 square miles with a population just over 106,000. Tourism is the primary economic activity, although there is a significant rum manufacturing sector. Previously part of the Kingdom of Denmark-Norway, they were sold to the United States in 1917: they are considered an organized, unincorporated U.S. Territory. The Territory has convened five constitutional conventions; however, its most recent and only proposed Constitution, adopted in 2009, was rejected by Congress in 2010. Thus, its status vis-à-vis the U.S. government, as it confronts severe fiscal challenges, is more difficult than Puerto Rico’s. Now U.S. Virgin Islands Gov. Kenneth Mapp has introduced legislation to authorize issuance of some $396 million in municipal bonds, with the goal of issuance this this fall—with the proposal for the fiscally challenged U.S. territory coming as his government is seeking approval of revenue increases and spending reductions. A confidential draft of the territory’s five-year financial plan of September 15th shows that, absent any changes in revenue measures or spending, the government anticipates operating deficits between $130 million and $140 million from FY2017—FY 2021, thus triggering the government to propose a wide array of revenue and spending initiatives—an array which the government projects would lead to operating deficits of $0.8 million in FY2017, $14.3 million in FY2018, and $13.8 million in FY2019—but followed by surpluses of $50 million in fiscal 2020 and $77.5 million in fiscal 2021. Gov. Mapp has, ergo, proposed revenue initiatives to increase the marine terminal user’s tax (adding $7 million in annual revenue), a new internet gross receipts tax ($5.1 million annually), an increase in cigarette taxes ($6.9 million a year), and an increase in beer taxes ($12.8 million annually)—both to reduce the current and projected deficits, but also to apply to economic development. The cuts he has proposed would affect hat it would produce at least $25 million annually. In the five year plan, Gov. Mapp proposes to take out a $55 million working capital loan and a $55 million draw on a line of credit; he projects using nearly 40 percent of the bond proceeds for operating expenses, and the balance for capital projects. Under his proposal, the interest rate on the bonds may not exceed 9.5%, nor a term of more than 30 years, with the draft legislation providing that the municipal bond issuance will be sold as either: a matching fund revenue bond, paid back with a portion of taxes on the sale of rum in the 50 states that the federal government sends to the Virgin Islands; or a gross receipts taxes bond, paid back from a government sales tax. Compared to Puerto Rico, the Virgin Islands have significantly higher unemployment and murder rates, but a significantly better rate with regard to infant mortality.

The Awkward Mix of Democracy, Governance & Insolvency.

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eBlog, 8/29/16

In this morning’s eBlog, we consider the important debate between candidates in November’s municipal election in what could be post-bankrupt San Bernardino on the critical issue of the city’s charter—an issue we had noted in our original report on San Bernardino to be “a key challenge” if the city was to have a future. Then we turn, again, to the aftermath of the City of Cleveland’s rejection of nearly insolvent East Cleveland’s proposal to be annexed by Cleveland: what options are next? Then we veer south to consider the enduring confrontation in municipal distress and bankruptcy between public pension obligations and essential public services—and municipal bondholders—today in not just Puerto Rico, but also in the nearby Virgin Islands.

Is Post Chapter 9 as Simple as a Coin Flip? In our original report on critical factors which forced San Bernardino into the longest municipal bankruptcy in U.S. history, we wrote that in the estimation of most individuals, “a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” So too does the city’s plan of debt adjustment awaiting final approval from U.S. Bankruptcy Judge Meredith Jury’s approval next month. Indeed, the city’s plan calls for the city to “update the charter to operate in a more efficient, accountable, and transparent way.” So now it is that a new version of the charter — in essence, a constitution that structures the city’s government and limits what officials may do — will be on the ballot Nov. 8, after a citizen committee determined that the existing charter contributed to the city’s problems and spent nearly two years writing a new one. But whether it will remain has become a political football.

The argument in favor of the new city charter is signed by Jill Vassilakos-Long, president, League of Women Voters of San Bernardino; Albert Karnig, president emeritus, Cal State San Bernardino; Margaret Hill, board member, San Bernardino City Unified School District; Gloria Macias Harrison, small businesswoman; and Chris Mann, founder, Inland Empire Taxpayers Association.

“The Bankruptcy Court’s Recovery Plan called for the city to update the charter to operate in a more efficient, accountable, and transparent way,” they argue, listing some of the components of the proposed new charter. “Measure L does that so San Bernardino can get back on the right track and begin to move forward.”

Because, now it is that former City Attorney James Penman and his opponent in November’s election, Tim Prince, each believes that changing the city charter would be a bad idea; moreover, they represent groups which have submitted ballot arguments against the charter change proposal. Their arguments, however, are different—creating a distinct challenge for City Clerk Gigi Hanna: on which may voters opine? Being on vacation in Oregon, she opted to flip a coin to decide—an action which the loser, Mr. Penman, the former city attorney, ergo, objected to as a “clandestine” coin toss, saying she should have selected the argument signed by himself and other current and former elected officials: “You have chosen to print an opposition argument with little or no substance, one signed by citizens whom we assume are well-intended but who, unfortunately are not as well informed as to how the repeal of our current, pro-public city charter and its replacement by a voter unfriendly substitute, will impact San Bernardino City governance…Just as disturbing is the fact that you purportedly made your decision based on a ‘coin toss,’ held without any notice or public announcement beforehand.” In a follow-up email, he added that his interpretation of the law his group’s argument should be put on the ballot, warning: “Failure to do so could result in a subsequent invalidation of the election outcome, in our opinion.”

Mr. Prince, who ran to replace Mr. Penman as City Attorney, responded: “That’s typical banter from a really disastrous city attorney who took over this city at its top as an All-America City, as a city that had a bright future, and, through his personality, flaws, and defects literally ran us into the ground and wouldn’t let go his clutches until we were gasping for our very life in [federal] bankruptcy court…and he still thinks he has the answer.”

Under California’s election laws, when more than one argument is submitted, the code states that the city election official (Mr. Hanna in this case) “shall select one of the arguments in favor and one of the arguments against the measure for printing and distribution to the voters,” instructing said official to give preference, in order, to members of the legislative body authorized by that body, the sponsors of the measure, bona fide associations of citizens, and individual eligible voters. Although Mr. Penman’s first contention was that the coin toss should have been public, in the wake of consulting the election code, he noted that his argument was the only one signed by a member of a legislative body — Councilman John Valdivia, the only councilman to vote against putting the charter on the ballot; thus he acknowledged that Council Member Valdivia was not authorized by the City Council, but said it would be unrealistic for the majority that voted against him to make that authorization. Ergo, he wrote: “Nonetheless, the intent of the Legislature in passing §9287 is clearly shown by stating that a member of the legislative body was to be given preference in writing a ballot measure argument under the conditions stated…We contend that the spirit of the law, giving preference to a member or members of the legislative body, should be applied by you in this case and the argument against Measure L signed by Council Member Valdivia should be the one printed.”

City Attorney Gary Saenz said his deputy, Jolena Grider, recommended a coin toss — or the roll of a dice in the case of marijuana legalization measures that also drew more than one argument against, but not the controversy.

Mr. Prince’s argument was signed by Clifton Peters III, president, San Bernardino City Library Foundation; Roger Henderson, ambassador, San Bernardino Area Chamber of Commerce; Robert Porter, founder of the Facebook group “I Love San Bernardino;” Richard Avila, business owner; and Prince, who is vice president of the Democratic Luncheon Club of San Bernardino. It notes “checks and balances” of allowing people to elect the city attorney, city clerk and city treasurer, which would be appointed positions under the new charter, and emphasizes San Bernardino’s heritage: “This proposal to throw away our historic charter follows outsourcing City departments and giving away our historic fire department, reflecting loss of pride in our history and hope in San Bernardino’s future…We stand apart from cookie cutter cities in Orange County (from which our politicians’ high-priced consultants hail). Orange County suburbs lack San Bernardino’s time-tested charter, heritage and follows.”

In contrast, Mr. Penman’s argument is signed by John P. Wade, a retired Superior Court judge; former mayors Evlyn Wilcox and Judith Valles; Valdivia; and Mr. Penman: who claim Measure L would eliminate citizens’ votes, lessen accountability, mean no independence, and remove power from the elected mayor to give it to the unelected city manager, claiming it would take away voter choice and reduce “accountability to the people and increase exposure to mismanagement and corruption similar to that alleged in Bell, Beaumont and Moreno Valley.” Rebuttals to those arguments will also be distributed to voters—with the rebuttals due by sundown this evening.

Unmergering. In the wake of Cleveland’s unsurprising rejection of a merger with neighboring East Cleveland, the latter’s Mayor Gary Norton reports his city’s proposed “merger will be delayed until disaster and/or multiple preventable deaths occur; then there will be a shotgun wedding.” Indeed, as we noted last week, it was virtually inconceivable that Cleveland would be able to find any benefit out of what East Cleveland had proposed. If anything, the laundry list of demands likely poisoned the waters for any serious consolidation or merger. That puts the governance ball back before the Mayor and Council in East Cleveland–and the State of Ohio: should it press for the state to give it the green light to file for chapter 9? Should it opt for dissolution? Should it put together a realistic proposal to be incorporated into Cleveland? As they used to say in Rome: tempus fugit. (Time flies.) East Cleveland’s Police and Fire departments have been degraded to skeletal status; the city’s Service Department has only eight overworked souls responsible for the physical upkeep of municipal property. In the end, this is a difficult governance question: who will accept and assume responsibility for the children in East Cleveland so they have some chance for a future?

Balancing Unbalance. Even as the inexplicable and unaccountable delay in naming the PROMESA oversight board responsible for addressing Puerto Rico’s insolvency and determining its quasi-plan of debt adjustment debt crisis is deciding how to balance a $70 billion debt load with nearly $43 billion in unfunded pension liabilities pends, fabulous Matt Fabian of Municipal Market Analytics has noted the sharp conflict between the Commonwealth’s constitution, under which Puerto Rico is obligated pay the holders of its general-obligation bonds before making payments for essential public services or public pensions, the new PROMESA law does the opposite: it directs the as yet unnamed board to ensure pensions are adequately funded. It is a Gordian knot—with the option of reducing public pension payouts running the risk of accelerating the out-migration of younger, employed Puerto Ricans: accelerating the loss of those most critical to the island’s future economic growth. It is a problem, moreover, complicated by bondholder creditors, who have sued Puerto Rico in federal court, because the Commonwealth’s adopted budget increases funding for pensions, but does not set aside budget resources to address municipal bond obligations, or, as the hedge funds’ claim puts it: diverts “vast resources to purposes that apparently enjoy political favor but are indisputably junior to constitutional debt.” Municipal bondholders, not surprisingly, are looking to the outcomes of the plans of debt adjustment approved in U.S. Bankruptcy Courts in Stockton and Detroit under which pensioners emerged in better shape than municipal bondholders. (Puerto Rico’s public pension funds have about $2 billion in assets against $45 billion in liabilities: with young professionals leaving for the mainland, the imbalance, moreover, is worsening: Puerto Rico’s pensions are on track to be empty in just three years. The plight was summed up by Treasury Secretary Jacob Lew last May when he noted: “If people leave the island because they’re not willing to work and pay into a system that isn’t going to pay any benefits, how is that going to help the bondholders?”

In Puerto Rico’s Footsteps? Fitch has now joined Moody’s in downgrading the Virgin Islands, a U.S. territory not far from Puerto Rico, dropping its rating on the Virgin Island’s matching fund bonds, backed by the flow of rum tax revenues, and on V.I. Gross Receipts bonds, backed by the Virgin Islands’ Gross Receipts Tax revenues. Fitch added a twitch by dropping the territory’s general credit, or issuer default rating, more deeply into junk status. The downgrade appears to have been the outcome of Fitch’s decision early last month to put the Virgin Islands’ gross receipts bonds and matching funds bonds on a negative watch, in order to assess how the fiscal impact of PROMESA might be. That seems to have translated into Fitch’s decision to lift the Virgin Islands’ bond ratings two notches above its general credit rating, “reflecting Fitch’s assessment that the bonds are exposed to operating risks of the territory but benefit from enhanced recovery prospects assuming passage of legislation by the USVI legislature to provide a statutory lien on the respective revenue streams for bondholders.” Monday’s announcement said…Fitch believes a statutory lien would enhance the recovery prospects for bondholders should the federal government adopt legislation in the future allowing for a restructuring of USVI-backed debt.” In its ratings actions, Fitch noted: “The adoption of PROMESA demonstrated the capacity of the federal government to adopt legislation controlling territorial bankruptcy in much the same manner that a state might do to control the ability of municipalities to seek bankruptcy protection.” Ergo, Fitch plans to treat the territory similarly to a local government in applying dedicated tax bond criteria.

Might there Be a Federal Role in Causing Severe Municipal Fiscal Distress?

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eBlog, 8/23/16

In this morning’s eBlog, we revisit Ferguson, Missouri—a small municipality in St. Louis County struggling to recover from racial violence and an expensive U.S. Justice Department imposition of subsequent unfunded fiscal mandates. Yesterday, a federal judge found the city’s school board election system biased against black voters. The judge’s findings and a Moody’s downgrade combine to raise questions with regard to the municipality’s solvency: has the U.S. Justice Department unintentionally made the small city a candidate for municipal bankruptcy? It brings back to mind, in addition, an old question: are there too many municipalities in St. Louis County? Can we afford so many? Could a municipality dissolve itself? Then we turn to archipelago of the U.S. Virgin Islands—seemingly a hop, skip, and a jump from Puerto Rico, where the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities put still another U.S. territory at risk of insolvency.

Public Schools & Arithmetic. U.S. District Judge Rodney Sippel yesterday, writing that “The ongoing effects of racial discrimination that have long plagued the region, and the District in particular, have affected the ability of African-Americans to participate equally in the political process,” ruled that Ferguson, Missouri’s school board elections are biased against black voters. The suit, filed by the American Civil Liberties Union, claimed that the Ferguson-Florissant School District makes it unlawfully difficult for black candidates to win positions on the school board. Voters in the district elect school board members at large, rather than on a ward or sub-district basis, a process, Judge Sippel wrote, which has reduced black representation. Currently, three out of seven board members are black, a ratio that reflects the demographics of the city, the school district has argued. Black students make up four-fifths of the 13,200-student population. During the trial, a demographer demonstrated that Ferguson’s black population is concentrated and politically unified enough to affect results if the FFSD were divided into voting districts: black voters would constitute a majority in four out of seven of those theoretical districts. U.S. District Judge Rodney W. Sippel said that while he does not see evidence of intentional discrimination, there is a more subtle “complex interaction” of political processes that deter black voters from electing the candidates of their choice, writing: “Rather, it is my finding that the cumulative effects of historical discrimination, current political practices, and the socioeconomic conditions present in the District impact the ability of African-Americans in (the school system) to participate equally in Board elections.” The Ferguson-Florissant district serves about 11,200 students in parts of 11 municipalities. About 80 percent of those students are black, and 12 percent are white. District residents are nearly evenly split between black and white. (The ACLU filed the lawsuit on behalf of the Missouri National Association of the Advancement of Colored People in the wake of protests over the shooting.) The court decision comes in the wake of Moody’s placing the city’s already junk-level rating on review for downgrade because of threats to the city’s solvency—with the downgrade of the city’s general obligation rating reflecting “the continued pressure on the city’s finances from a persistent structural imbalance and incorporating the recently approved U.S. Department of Justice (DOJ) consent decree, projected to increase annual General Fund expenses over the next several years. The downgrade also took into consideration the outcome of an April 5 ballot election, in which voters rejected a proposed property tax hike (but approved a sales tax for economic development). Both ballot measures were integral to city management’s proposed solution to close a large General Fund budget gap that existed before accounting for the additional consent decree costs. Moody’s had acted after the U.S. Justice Department filed a lawsuit in February, marking the latest setback in Ferguson’s struggle to recover from a controversial police shooting in 2014. The Justice Department accused Ferguson of policing and municipal court practices that violate constitutional and federal civil rights. The credit rating company had noted that its rating concerns had been driven by the uncertainty of the potential financial impact of litigation costs from the lawsuit and the price tag for implementing the proposed DOJ consent decree: “We believe fiscal ramifications from these items will be significant and could result in insolvency.”

Is there Promise from PROMESA? Fitch ratings has reduced the U.S. Virgin Islands’ bond ratings to junk level, citing the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities. Fitch noted that the enactment of the PROMESA legislation for neighboring Puerto Rico could open the door for a comparable restructuring of the Virgin Island’s debt. The territory, where the author trained for his Peace Corps service in Liberia, West Africa, is comprised of a number of islands in the Caribbean not far from Puerto Rico. The islands cover just under 134 square miles and boast a population of just over 100,000. Tourism is the primary economic activity, with the manufacture of rum a significant sector. The islands are classified as a non-self-governing territory—one which since 1954 has held five constitutional conventions—with its most recent, its fifth, adopting in 2009 a proposed Constitution—one rejected by Congress the following year, with Congress urging the convention to reconvene to address the concerns Congress and the Obama Administration had with the proposed document. The convention subsequently reconvened in October of 2012, but was not able to produce a revised Constitution before its October 31 deadline. In its ratings, Fitch downgraded the Virgin Island’s gross receipts tax bonds, affecting $722 million in debt; Fitch also downgraded the territory’s senior lien matching fund revenue bonds to BB from BBB and subordinate lien matching fund revenue bonds to BB from BBB-minus. In amounts of debt, the former affected $773 million and the latter affected $428 million. Fitch also downgraded the Virgin Islands’ issuer default rating to B-plus from BB-minus. In its release, Fitch noted that the Virgin Islands plans to sell $217 million in gross receipts taxes bonds, $126 million in senior lien matching fund bonds, and $69 million in subordinate lien matching fund bonds near the end of next month—noting that the U.S. territory has a “severely unbalanced operating budget” and multiple years of borrowing to fund operating needs—and is expected to feature ongoing budget imbalances: its debt burden has increased, and its unfunded public pension liability has increased at a faster pace.