Not in Like Flint, and Unschooled for Motor City Recovery

June 15, 2018

Good Morning! In this morning’s eBlog, we consider the seemingly unremitting efforts by the State of Michigan to force the City of Flint to sign a consent agreement; then we dip south to the Motor City, where, notwithstanding its exit from chapter 9 municipal bankruptcy, the city’s ital. efforts to encourage families to move back to the city from the suburbs depends upon turning around a school district which appears to be stumbling under its own quasi plan of debt adjustment from a state takeover.

Not in Like Flint. Flint Mayor Karen Weaver this week made clear she believes state officials cannot force her to sign a consent agreement seeking to make fixes to her city’s water system, challenging them to “bring it on” and take her to court. Her battle parallels a trial of Michigan Department of Health and Human Services Director Nick Lyon, who is anticipating, next month, to find out whether or not he will face a jury trial on involuntary manslaughter and misconduct charges tied to the Flint water crisis. Genesee District Judge David Goggins has signed an order detailing how the remainder of Secretary Lyon’s preliminary examination will play out: he has been charged involuntary manslaughter and misconduct in office, making him the highest-ranking state government official charged with crimes with regard to how he mishandled Flint water problems—making his the first of 15 criminal cases to advance to a preliminary exam. Ironically, the trial of the state leader is occurring even as, in parallel, the State of Michigan is threatening to withhold funds to Flint not just in an effort to try to force responsibility for ensuring the safety of its drinking water, but that state action could have devastating fiscal impacts, undercutting the city’s effort to preserve its assessed property values: between 2008 and 2016, Flint lost more than three-quarters of its taxable assessed property value. There is almost a David versus Goliath feeling: Flint household income has been declining, even as statewide income has been increasing: household income in the city, at just under $42,000 annually last year, is more than 20% below statewide income.

The issue, a federalism issue involving all three levels of government, involves findings from  last August’s state sanitary survey, which found the city’s water system had “significant deficiencies,” including with the water distribution, finances, “security,” and “operations and management.” The state further charges that the city has not fixed the problems within 120 days as mandated state law, according to the Michigan Department of Environmental Quality.

Mayor Weaver, however, told The Detroit News the Department of Environmental Quality (DEQ) is making “false accusations or lies” with regard to the city’s compliance with state and federal drinking water laws, among other allegations; rather she appears to perceive the proposed consent order to repair the problems as retaliation against her vigorous protest when Gov. Rick Snyder ordered, in April, the end of the state’s free bottled water deliveries to the city, noting: “We have been meeting our requirements every step of the way: There are some other things that need to be done by the end of this month, and some things aren’t required to be done until the end of the year. But every step of the way, we’ve done what we’re supposed to do.” The city currently purchases treated water from the Great Lakes Water Authority; however, Flint’s wastewater treatment plant performs additional treatment for acidity levels, corrosion control, and chlorine, according to the state.

In a letter at the beginning of this week, Michigan Assistant Attorney General Richard Kuhl threatened Flint with federal legal action if the municipality does not enter into and comply with a consent agreement addressing the city’s outstanding violations, writing that the state would prefer voluntary cooperation—having previously written that violations of the Michigan Safe Water Drinking Act mean the city needs to sign a consent decree in which state officials outline unfunded state mandates with which the city would have to comply, including the provision of a “permanent or contractual” manager to oversee control program activities.

At the beginning of this month, Michigan Drinking Water and Municipal Division Director Eric Oswald wrote that correcting the violations would help ensure Flint’s public water supply system prevents “contaminants from entering” the drinking water and prevent “imminent and substantial endangerment of public health.”

Flint is still recovering from a lead contamination water crisis first discovered in the late summer of 2015. The city’s water has tested below federal lead standards for nearly two years, but many residents still refuse to drink from the tap. In his June 4 letter, Director Oswald wrote that state officials had summarized in a March letter the “corrective actions that had been completed” and provided “dates to complete other corrective actions.” In his statement this week, the Director claimed: “The matter at hand is working together to address these deficiencies to help ensure that the city continues to have quality drinking water.”

Mayor Weaver is still considering what legal options might be available to protect her citizens—and the assessed property values of residences and business properties in the city—as well as the fiscal and physical implications of the end of free bottled water shipments—noting she is still pondering over the option of returning to federal court to the judge overseeing the replacement of Flint’s lead service lines, because the state has indicated that the funds may be withheld. Mayor Weaver noted, with regard to the seeming state retaliation: “I just believe this is absolutely retaliation, and then they want to blame us for what they did,” she said, referring to the water crisis that Snyder’s task force was caused by state-appointed emergency managers and negligent DEQ officials.

In her June 11 response epistle and proposed unfunded state mandate as “unnecessary and unwarranted,” adding she was “troubled by the timing of this proposed enforcement action, in the wake of the cessation of state funding for bottled water in Flint.” She further noted that “During two years of collaborative remediation efforts, an ACO has not been necessary,” calling it a “deliberate and willful misuse of the DEQ’s authority for political purposes and not as a good faith effort to address the issues faced by the City of Flint.” Mayor Weaver said she hoped to bring more contractors to Flint to begin the next phase of pipe replacement, but state officials, she said, want everything to be hydro-vacuumed to save money that would return to the state: “Now, after the state and MDEQ have been publicly castigated for their abrupt and unilateral termination of bottled water funding, MDEQ proposes an ACO that raises no issues not previously agreed upon…I thus see this ACO as a deliberate and willful misuse of the DEQ’s authority for political purposes and not a good faith effort to address the issues faced by the city of Flint.”

That would undercut her ongoing efforts to invest in new plumbing for Flint’s citizens: “We’re really trying to, and what I’ve been trying to do all along, is work together and put differences aside for getting what’s best for the people.”

What Will it Take to Earn a Passing Grade? Detroit’s public school district has 200 teaching vacancies, and with the new school year not so far off, a campaign is underway to try to draw kids back to its public schools. That effort, however, confronts an awkward challenge: only half the teachers and support staff and fewer than 40% of central office staff would recommend the Detroit Public School District according to survey data Detroit Public Schools Superintendent Nikolai Vitti released this week during a Board of Education meeting—a meeting that provided a temperature reading with regard to how the system’s students, their parents, and school staff perceive the school system. For instance, in response to the question, “How likely are you to recommend Detroit Public Schools Community District to a friend or family member or as a place to work. 40% responded they would not recommend the school district: only 38% replied they would be extremely likely to recommend the city’s schools. Even amongst teachers and support staff, the enthusiasm was missing: 50% were detractors—with the percentage near two-thirds by staff at the central office: overall, a majority in the system replied they would not recommend the system—or, as Superintendent Vitti put it: “That so many staff members were detractors is a problem…There’s nothing that hurts our brand…more than our actual employees. If our own employees are not favorable toward the organization, then how can we ever recruit new parents to schools or new employees to the district?”

The survey, conducted earlier this year, asked for feedback from more than 52,000 students, parents and guardians, teachers, support staff, instructional leaders, and central office staff. The results hardly seemed passing—and make clear that efforts to incentivize families with children in Detroit’s suburbs to move into the city face an uphill struggle. Or, as Superintendent Vitti noted: “If we’re truly going to be transformative, our employees are going to have to take ownership.”

The surveys addressed issues such as school climate, engagement, bullying, rigorous expectations and school safety. But Superintendent Vitti said the data surrounding promoting the district is “the most relevant data point we’re going to be looking at tonight.”

Here are other survey result highlights:

  • Just 42% of students in grades 3-5, 46% in grades 6-8 and 50% of students in grades 9-12 had positive feelings about school safety—an indication that a large number of students do not feel safe in district schools.
  • 69% of students in grades 3-5, 63% in grades 6-8, and 55% in grades 9-12 had positive feelings about rigorous expectations.
  • 56% of students in grades 3-5, 45% of students in grades 6-8, and 40% of students in grades 9-12 had positive feelings about school climate.
  • A larger percentage of parents and guardians, 72%, felt positively about school safety; however, just 26% felt positively about the engagement of families in the district.
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Municipal Finance Transparency

June 13, 2018

Good Morning! In this morning’s eBlog, we consider efforts in a  Puerto Rican municipality to focus on municipal finance transparency.

Toa Baja, a municipio of just under 90,000 in Puerto Rico, was first settled around 1511—long, long before Lexington and Concord. It was officially organized as a town in 1745, when it was dedicated to Nuestra Señora de la Concepción. By the dawn of U.S. independence in 1776, it was a town of some six cattle ranches and 12 sugar cane estates, but a town at risk of flooding because of the confluence of surrounding rivers. In 1902, in the wake of the U.S. invasion, the town became part of a consolidated region when the Legislative Assembly of Puerto Rico approved the consolidation of a number of municipalities—before a 1905 statute annulled the statute and Toa Baja regained its status as an independent town. This municipio of around 90,000 divided into seven barrios or neighborhoods has not been a stranger to floods: nine years ago, former Governor Luis G. Fortuño ordered a shut off essential services, such as water and electricity, to Villas del Sol, a village within the municipality of Toa Baja, and FEMA actually purchased homes in the municipality from the Puerto Rican Government in order to ensure public safety.  What had been a farming-based economy, mostly sugar, turned increasingly to fishing, cattle, and then, by the 1950’s, manufacturing began to replace replacing agriculture, so that, today, it is a center for the manufacture of metal, plastic, concrete, textile, electrical, electronic machinery, and rum. The city’s leader, Mayor Anibel Vega Borges, was first elected in 2004; he has since been re-elected twice (2008 and 2012)—and by wide margins.

Now the city or ciudad is set to be a leader in fiscal transparency: it will be the first Puerto Rico municipality to publish its accounts, in the wake of signing an agreement with the Statistics Institute after Institute President Mario Marazzi urged all public agencies, including municipalities and public corporations, to make use of the Institute’s transparencyfinanciera.pr platform. Ergo, Alcalde or Mayor Bernardo “Betito” Márquez García will disclose, beginning with the fiscal year next month, all its transactions, evaluations of income, costs and benefits in order to ensure the public has access to inspect all its fiscal and financial actions—or, as Mayor Garcia put it:I understand that it is the right step. I think that the responsibility to administer the municipalities is shared with the people, and the people have to have the information to be an oversight of what is done with their resources.”

President Marazzi noted that his offer, made available in 2015, had, so far, only attracted two previous takers: the Institute of Statistics, and the Institute of Puerto Rican Culture, noting: “(Toa Baja) is the first municipality to take the step forward to provide extremely detailed information on their finances…Toa Baja is truly opening its books, here it is going to be done because the platform demands it: The platform requires a level of disclosure that definitely has to be someone with courage, who has nothing to hide,” as he urged all Puerto Rican agencies, public corporations, and municipalities to make use of the platform, stressing that, in times of fiscal crisis, the tool becomes even more useful to record how public funds are being used at the central and municipal levels, and also to recover the credibility of Puerto Rico before the financial markets, and—as he described it: “Give it a good goodbye to the [PROMESA] Board of Fiscal Supervision: All we need is that in our country, we have the political will to implement what already exists technologically.”

His initiative comes even as the Legislature is set to debate Senate Bill 236, the “Open Data Law of the Government of Puerto Rico.”

Mr. Marazzi described his effort by noting that “Lack of transparency is the best breeding ground for corruption, and sunlight–or transparency–is the best disinfectant,” adding that his Institute will also train municipal personnel in the use of the electronic platform, and in the handling and sending of the necessary information, at the same time that it will offer assistance, advice, and collaboration in the preparation of a work plan for the implementation of the project, Open Government, in Toa Baja, noting: “Governments do not have the resources to audit all the information. This will allow external auditors to help us find flaws in our data, (to identify) corruption.” Audit reports (from the Office of the Comptroller), he noted, take so much time that by the time they are made available, the proverbial cow is often already outside the barn.  

In turn, the Fundación Agenda Ciudadana will join the effort to educate the Tobajeña citizenship with the necessary skills to control the available information and use it in the democratic exercise. Mayor Márquez García emphasized this educational process, and indicated that a second phase of the project would be the search for participatory budgeting: “In my personal character, I think we had to work on this type of initiative for a long time … This will allow Mayors to be forced to render collective accounts … Here there must be active citizen participation. The responsibility is shared.”

Paternal Governance?

June 12, 2018

Good Morning! In this morning’s eBlog, we consider the demographic disparities in the wake of Hurricane Maria in Puerto Rico, before turning to the human and fiscal challenges in the federal courtroom issue of keeping schools open in the face of quasi-municipal bankruptcy; then we view the ongoing governing challenges and wonder when there might be too many cooks in the fiscal kitchen.   

Demographic Devastation. According to new data from the Puerto Rican Demographic Registry, 68% of Puerto Ricans who died between September and December of 2017, during the emergency caused by Hurricanes Irma and María, were over the age of 70. The new data from the Demographic Registry finds that nearly half of the deaths recorded in this period occurred among people who were hospitalized in Puerto Rico. Moreover, the risk of death, according to the data, was higher for men: 54% of the deceased were male, even though males make up only 48% of the island’s current population. The new data also found that deaths attributed to diseases such as Alzheimer’s, diabetes, septicemia, pneumonia, and chronic heart or respiratory conditions showed significant increases in the period which followed the hurricanes—or, as Puerto Rico demographer Judith Rodríguez noted: “This gives us a more specific idea of the health risk that the hurricane brought. That was the only significant factor to cause that increase seen in the data.” Ms. Rodríguez further reported that cases of septicemia doubled between August and September, reporting that this disease, often associated with infections in hospitals, noting: “The highest number of deaths is in hospital patients; however there were high-risk factors among people who were in care homes for the elderly, or who, in the middle of an emergency, were taken to an ER.”

Health and safety—especially for the most vulnerable—appeared to be related not just to damage caused by the hurricanes to the physical hospitals and clinics, but also by the stark disruptions of electricity: diesel supply to keep emergency generators operating, combined with failures in backup systems and telecommunications plagued the provision of vital health care services. Moreover, the issues took long to resolve: even as late as last December, at least two hospital were operating with electric generators. As the Senior Vice President of Operations at San Jorge Children’s Hospital, Domingo Cruz, noted: “It is always a risk (death) when there are patients in ventilators (artificial) and there is an outage.” Perhaps in a hope for the future, the data shows that death among Puerto Rican children due to the storms was less than 1%.

After storm reports also noted that even though tardy, the arrival from the mainland of hospital ships played a vital role: Good Samaritan Hospital Administrator Marilyn Morales reported that, due to their condition, many patients were transferred to the USNS Comfort hospital ship, the U.S. Navy’s largest such ship, as well as to the Medical Centers of Mayagüez and Río Piedras. The USNS Comfort is the largest U.S. Navy floating hospital. This ship and a series of field hospitals were set up in Puerto Rico during the first months that followed Hurricane Maria. Administrator Morales noted: “We understand that deaths (at the Good Samaritan Hospital) were minimal.”

It was not, however, just hospitals which were so adversely impacted: by early last October, access to vital pharmacies due to the loss of electricity and communications contributed to the health care emergency response breakdowns: some pharmacies did not have access to the system they use to process prescriptions; thus, they were only dispensing medicines if a patient paid the full price of the drug. According to the Health Department: “In the case of not having electronic systems for dispensing medications, the pharmacy must provide the medication to the patient and, then, it will have up to 60 days to process it.”

Many health professionals with private practices had to overcome many obstacles to offer services to their patients, mainly due to the lack of power, the impossibility of using some equipment only with a generator, and of billing for medical services. Demographer Rodríguez noted: “There are some conditions whose deterioration could be accelerated by issues associated with the emergency left by the hurricane. Chronic and degenerative diseases were the most affected in this process. These diseases skyrocketed, and many people might have died months later because of issues associated with the hurricane.”

Quien Es Encargado? (Who is in charge?) As we have noted, in chapter 9 municipal bankruptcies—in the minority of states which have authorized them, the state law determines the governance until a plan of debt adjustment is approved by a U.S. Bankruptcy Court. In Puerto Rico, under the PROMESA statute adopted by Congress, there is a hybrid form of governance—a form which has left unclear authority in this governmentally different circumstance where it is not a municipality which is fiscally exhausted, but rather a quasi-state—or, a U.S. territory. Thus, we have a Governor, a legislature, an oversight PROMESA Board imposed by the President and Congress, and a U.S. federal Judge.  It might be that some accommodation in governance is emerging: the PROMESA Board has proposed to the Puerto Rico Legislature that the raising of salaries or disbursement of allocated funds would not be allowed unless quarterly reports are presented and cuts established in the fiscal plan are executed, according to the its modified version submitted to the Legislature. Under the proposal, in order to ensure that the government does not spend more than it receives and complies with the spending cuts to which it committed in its certified fiscal plan, the budget modified by the Oversight Board restricts in a reserve fund the funds which would be used to increase the salaries of teachers and the Police. The Board also established that the government of Puerto Rico is mandated to submit quarterly reports beyond those required by PROMESA before it is authorized to appropriate any funding, with said conditions spelled out in the joint resolutions that the Board has sent to the Legislature as part of the budget certification process. Included in this unfunded mandate is a provision barring the Office of Management and Budget from disbursing funding to fulfill the promise made by Governor Ricardo Rosselló Nevares to increase the salary of teachers and the Police, or to provide Social Security. In addition, the mandate bars the authorization of funding to Puerto Rican agencies absent Board approval.

The Board’s restrictions, adopted in an effort to ensure a balanced budget, in addition to the repeal of the Unjust Dismissal Law (Law 80-1976), which eliminates the statute which provided certain legal remedies to private sector employees, is part of a structural reforms package imposed by the Board as part of its agreement with Gov. Rosselló Nevares to avoid litigation in Court.

Gov. Rosselló’s representative to the PROMESA Board, Christian Sobrino, concurs that it makes sense that the Board has established conditions for granting the monthly increase of $125 to Police and teachers, starting in the upcoming fiscal year, and that these imposed conditions are also subject to the repeal of Law 80, because this move may impact the revenue projection required by the Board. Nevertheless, unsurprisingly, Mr. Sobrino described the Board’s new demands as “complicating” the interaction between Puerto Rico and the PROMESA Board: noting: “But there is a reality: you can provide the benefits (if)  you have the income to budgetary support. If you do not have them, you do not have them: The revenue projection is the key part that makes all these agreements and these other programmatic commitments possible.” Thus he stressed the importance of the Legislature proceeding with the repeal of Law 80: “The effect of not carrying out this repeal would imply a reduction in the budgetary revenues available to the government and make it very difficult to maintain a series of benefits , including that (salary) increase and also the Christmas bonus to public employees: If the agreement can be complied with, there should be no problem moving that allocation (the money for salary increase) to the Public Security umbrella. If that agreement is not maintained, then additional cuts have to be made.”

Nevertheless, the governance situation remains difficult, especially in the wake of the PROMESA Board’s conclusion that, for what it asserted was the second time, Gov. Rosselló’s budget did not comply with PROMESA, and then proceeded to preempt that authority and impose its own adjustments—a fiscal and governance move which would mark the first time that the government of Puerto Rico would have constraints to use its funds. As written, the preemption reads: “The Secretary of Treasury, the treasurer and Executive Directors of each agency or Public Corporation covered by the New Fiscal Plan for Puerto Rico certified by the [PROMESA] Oversight Board, and the Director of the OMB (or their respective successors) shall be responsible for not spending or encumbering during fiscal year 2019 any amount that exceeds the appropriations authorized for such year. This prohibition applies to every appropriation set forth in this Joint Resolution, including appropriations for payroll and related costs. Any violation of this prohibition shall constitute a violation of this Joint Resolution and Act 230-1974.” In addition, in another section of the document, the Board mandated that quarterly reports must be submitted no later than 15 days after the closing of each fiscal quarter and that the Fiscal Agency and Financial Advisory Authority (FAFAA) and the OMB will certify that “no amount” of the Social Security Reserve funds in the Puerto Rico Police Department or the promised increases have been used to cover any expenses.

A Teaching Moment? In the wake of learning about the new conditions established by the PROMESA Board, Grichelle Toledo, the Secretary-General of the Puerto Rico Teachers Association-Local Union, noted that Gov. Rosselló had promised a monthly salary increase of $125 per month “beginning the 2018-2019 school year,” noting that it had been “10 years without a salary increase, and the cost of living has risen, benefits have been reduced and some have even been eliminated.”

Indeed, as we have noted previously, the loss of human capital—teachers, health care professionals, and others, harms the possibility of a sustained economic recovery. That is, the Board’s actions risk that Puerto Rico is in danger of losing one of its most critical assets, its skilled workforce, at a time when the island is in dire need of rebuilding: already teachers are leaving for more secure jobs on the mainland, a predictable outcome after the cash-strapped government announced it would close some 200 schools. Police, thousands of whom called in sick daily last year because they were not being paid overtime, are finding brighter futures in cities eager to find trained, bilingual officers.

An analysis by El Nuevo Día of the Governor’s proposed budget last month after agreement with the PROMESA Board, which focuses on the General Fund determined that the Board made sure to increase its own budget by 7.8%, plus another 3.7% to pay lawyers working in Title III cases, even as it cut FAFAA’s by nearly 10%. The Board met its part of its agreement with the Governor by not touching the Legislature’s budget, authorizing $ 50 million to municipios, and approving $25 million for the University of Puerto Rico (UPR) scholarship fund. However, the Board cut the Budget of the Health Insurance Administration by 41%, and cut the Office of Community Planning and Development by 21%, the State Commission on Elections by nearly 12%; the Police by 4%–and, of all places, the Fire Department by 11%, and the State Agency for Emergency and Disaster Management by 14%–mayhap an ill omen as the new hurricane season has already commenced.

Investing in Fiscal & Human Futures

June 11, 2018

Good Morning! In this morning’s eBlog, we consider the issue of keeping Puerto Rico’s schools open in the face of quasi municipal bankruptcy; then we veer north to assess post-state taken over Atlantic City: What Are the City’s Fiscal Odds for Its Future?  

The Governance Challenge for Schools and Demographic Changes. Puerto Rico Superior Court Judge Santiago Cordero Osorio has ordered the suspension of the closure of three of the U.S. territory’s schools in Morovis, pending an explanation from Secretary of Education Julia Keleher of the reasoning behind her orders. His ruling came as part of a lawsuit brought by the Municipality of Morovis challenging the closures of Alverio Pimentel, Manuel Alonso Díaz, and the Second David Colón Vega schools—and in the wake of the Judge’s earlier decisions ordering the closure of six other schools in the Arecibo region—closures also being challenged by the Teachers’ Association. In his order, Judge Osorio noted that all these claims will be evaluated in a court hearing scheduled for this morning—one to which he has invited the Secretary of Education or a representative to attend, noting: “This Court appreciates and recapitulates that the State must come prepared to justify in accordance with its regulations the closure, not only of the schools subject to this interdict, but of all the schools of the Commonwealth of Puerto Rico that the Department of Education has under its jurisdiction, and that it pretends according to the regulation to close.”

For his part, Mayor Carmen Maldonado of Morovis explained the suit was filed in the wake of a non-response to her request for a meeting with Secretary Keleher, stating, in a press release: “Today we are taking an important step in the defense of public education for Moroveño children. To all parents, principals, teachers and school staff, I invite you to attend that hearing on Monday at the Arecibo Court, so that together we can continue to fight to keep schools open. As I assured them in the many meetings we had, although the power is in the hands of the central government, the reason is on our side and we are going to defend that reason. The fiscal and governance challenge-as we had experienced in Detroit’s chapter 9 municipal bankruptcy, is a state versus local authority issue. Indeed, as the Department’s legal division stated: “The opening and closing of the schools is under the authority of the Secretary of Education and this is established by Law 85 of 2018 (Law on Educational Reform).”

The Rebirth of an Iconic American City?  Victor Fiorillo, writing in the Philadelphia Magazine, asked in his article, “The Re-Re-Re-Birth of Atlantic City,” what if everyone was wrong about the fiscal implications of the closure of the city’s famed casinos. Writing that Atlantic City had first drawn him in about 15 years ago with the opening of the Borgata Casino—at a time when “most other casinos in Atlantic City were in various stages of decay, and here was this brand-new Vegas-style resort with casino restaurants that were actually good and the best shows in town.” But he also noted that, back then, it was really a family focus: “My wife and I spend as much of the summer as possible on the A.C. beach with our 10-year-old and 12-year-old, opting for the relative solitude of the town’s southern end, far from any casinos or bars.” But in revisiting the municipality today, he noted he is not one of the only “believers in Atlantic City,” noting there are “some surprising signs of life these days, not to mention some serious investment—from small ventures, like Longacre’s projects, to big bets like Stockton University’s new beachfront campus and this month’s opening of the $550 million Hard Rock Hotel & Casino in the old Trump Taj Mahal.

Betting on the City’s Future. Mr. Fiorillo then turned to the recent U.S. Supreme Court decision allowing sports gambling, noting: “There’s more money pouring into A.C. right now than in all of Philadelphia,” according to development mogul Bart Blatstein, but, as with gambling, quoting Temple Professor Bryant Simon, author of 2004’s Boardwalk of Dreams: Atlantic City and the Fate of Urban America: “Atlantic City has risen and fallen innumerable times: “This is the story that has been told for a hundred years.” He added: “The irony, of course, is that this new resurgence is happening just a few short years after nearly half the city’s casinos went under, thousands of jobs disappeared, and Atlantic City itself seemed to be left for dead. Then again, maybe there’s no irony here at all. Maybe this more organic, up-from-the-ground rebirth of Atlantic City is exactly the kind of action that could mean sustained success for the city by the sea.”

Leaving on a Jet Plane. Mr. Fiorillo examined the city’s road to its state takeover from a non-fiscal perspective, writing: “It was right around this time that Atlantic City began to fade. Dissertations and books have been written about the many factors that led to the resort’s demise in the late 1960s and early 1970s, but a big one was the sudden ease of jet travel. You could get on a plane after breakfast and be on a beach in Miami for lunch. Atlantic City? Pfft. The Shore town began to disintegrate. By the mid-’70s, the city found itself at a pivotal crossroads. It could do nothing, ride out the downward trend, and see what happened. Or it could come up with some novel and wholly artificial way to inject new life into itself. It opted for the latter, betting that gambling would be Atlantic City’s salvation. Until that point, Nevada was the only place in the United States where you could open up a full-fledged casino. But in 1976, New Jersey citizens voted to make slots and table games legit in Atlantic City. The first casino, Resorts—which just turned 40 and is still standing — opened less than two years later.”

Noting that, for a time, business was booming, he credited Atlantic City’s casinos for bringing hundreds of millions of tourists to the Boardwalk during Atlantic City’s gambling heyday” “Some years, this city of 40,000 residents topped 34 million tourists. But outside the casino walls, the city struggled. The casino owners—including, for a time, Donald Trump—got fat, politicians got their kickbacks, and the impoverished residents of Atlantic City remained just that: And then everything went wrong. The new Atlantic City created in the late 1970s was premised almost entirely on maintaining a casino duopoly with Nevada; once casinos started popping up all over—including in Pennsylvania in 2006—Atlantic City imploded.”

Noting, as we have traced, the city’s fiscal nadir came to a head in January of 2014, when the Atlantic Club, which had opened as the Golden Nugget in 1980, collapsed, followed by Showboat, followed by the Revel, followed shortly thereafter by the Trump Plaza, noting: “Finally, in October 2016, one month before its namesake was elected to the Oval Office, the lights went out at Trump Taj Mahal. In just two and a half years, five casinos vanished, their cavernous buildings shuttered. Atlantic City had bottomed out economically in the most spectacular fashion possible.”

Tracing a Fiscal Turnaround. Writing that when assessed property values drop low enough, neighborhoods become more and affordable—and, ergo, more attractive to developers who could “pick up buildings for pennies on a dollar,” he noted that “Atlantic City suddenly became a risk worth taking”—adding: “Investing in Atlantic City now makes a lot more sense than it did five years ago, but it’s hardly a no-brainer. The city, with its 37% poverty rate) is overwhelmingly poor. Taxes are overwhelmingly high. And walking around on Atlantic or Pacific Avenue, the city’s two main north-south boulevards, which run parallel to and within blocks of the Boardwalk—can be nerve-racking after hours. In daylight, panhandlers accost and prostitutes solicit. Politically, things are hardly ideal: Then-governor Chris Christie instituted a state takeover in 2016.

John Longacre, who has acquired a reputation for building a business by spotting potential where others see potential disaster, and he works primarily in South Philadelphia, where he specializes in recovery projects that save buildings, convert seedy bars into trendy restaurants and turn vacant eyesores into neighborhood hubs, told Mr. Fiorillo: “Every bank in the region is terrified of Atlantic City.” Indeed, Mr. Longacre added: “If you look at the policy surrounding everything that exists in Atlantic City, it’s the perfect storm to keep investors out: From the state handling the zoning to the tax base to rent control, everything that happens from a policy level makes it seem like New Jersey is trying to make Atlantic City fail.” Nevertheless, he seems convinced the fabled city will not fail. Or, as Mr. Fiorillo described it, there are a new breed interested in the fabled city who likely will play an essential role in the city’s future: “It’s not about Aunt Edna and Uncle Fred and their casino bus trips anymore. It’s about younger people who aren’t into Atlantic City for the gambling. It’s about people who don’t just feel comfortable in but desire urban environments, with all their flaws and character. It’s about people who respect and require diversity. It’s about people like me and my wife, who, to be honest, cringe when we drive into a place like Avalon.”

Describing this fiscal and physical revival, he writes about the relationship of small projects complemented by large ones: “The Hard Rock Hotel is finally going to open on the Boardwalk later this month, where the Taj Mahal was until October 2016. Pottstown native Todd Moyer, senior vice president of marketing for this new outpost of the rock-and-roll-themed company, got his start in the casino business in 1990, when he worked as a tuxedoed greeter at, coincidentally, the Taj. I was working for Hard Rock out West, when I got the chance to come home: I jumped at it. Sometimes I would be at a bar or restaurant and hear people talking about Atlantic City being dead, and I’d jump in. I’m a defender and a giant supporter of A.C. We’re building hotels all around the world, but really, all the focus lately has been on Atlantic City.”

As for Mr. Longacre, his view is that he would “love for every casino to go out of business and see Atlantic City re-create itself without them, as an urban beach town.” Nevertheless, he believes there is one massive Atlantic City development which will be a game-changer: Stockton, the nearly 50-year-old public university, which has its main campus in Galloway Township, about 20 minutes from the Boardwalk: it is set to debut a brand-new beachfront Atlantic City campus this September, when one thousand students will use the campus, and many of them plan to live in town. Thus, he notes: “Stockton is huge. It’s the first real institutional investment in years that’s not a casino.”

Rolling the Fiscal Dice? As significant as these fiscal changes appear to be, they almost seem to pale against the city’s real world challenges: Atlantic City has a poverty level three times higher than the statewide rate: more than three times the number below the poverty level—and a disability rate among non-poor residents of just under 25%. In its rental housing, the percentage of residents below the federal poverty level is over 90%. A consequent governing challenge for the post-taken over city and the Garden State remains. Mr. Fiorillo notes that whether the gambles being made by Mr. Blatstein, Mr. Longacre, and others are successful remains to be seen—as does the question with regard to whether all the investment will put much of a dent in Atlantic City’s poverty rate or help the town’s current residents. He adds: “And it’s not going to be this summer or next summer when we find out who, if anyone, wins. Nevertheless, he wrote: “When I consider Point Breeze circa 2008 and that same area today, I have hope for this complicated Shore town. There will always be casinos here, for better or worse, and there will always be crime and poverty and grime. This is, after all, a city. But, 10 years from now, when my own kids are (I hope) in very good colleges, it’s not too hard to imagine us spending a summer weekend at some boutique hotel on New York Avenue. We’ll stop into the Boardwalk La Colombe for a draft latte, served up by a very hip-looking third-year Stockton student on break. For lunch, HipCityVeg down in the inlet. Happy hour will be at some John Longacre-owned brewpub overlooking the Atlantic.”

Breaking Up Is Hard to Do

June 8, 2018

Good Morning! In this morning’s eBlog, we consider the issue of unincorporated areas: what are the fiscal implications?

In many U.S. states, it’s not uncommon for homeowners to reside in what are known as “unincorporated” areas, meaning portions of the state or county that are not contained within the boundaries of an incorporated city, town, village or similar local governmental entity. From a municipal perspective, that means a community not governed by its own local municipal corporation, but rather is administered as part of larger governmental administrative division—such as a township, parish, borough, county, or city—governance entities which, depending upon the pertinent state laws, may file for chapter 9 municipal bankruptcy, dissolve, disincorporate, or, as we noted in today’s eGnus, make even separate. Widespread unincorporated communities and areas are a distinguishing feature of both the U.S. and our neighbor Canada—but rare in any other countries around the globe. In fact, unincorporated areas are mostly found in this country in Texas—an enormous state, but which has the nation’s smallest municipality: McAllen, in Jim Hogg County, with a population of 6.

When it comes to unincorporated areas within states, Pennsylvania appears unique: it is, after all, the state with the greatest number of local governments or political subdivisions: the Census Bureau puts the number at 5,000—putting the state only behind Texas and Illinois; but maybe ranks it first in terms of imposing vast and conflicting arrays of taxes—taxes which, however, are imposed on shrinking tax bases. Indeed, the fiscal stress has reached such a point that the state’s House Urban Affairs Committee recently convened a public hearing on legislation intended to assist smaller municipalities mired in cycles of financial distress—threatened with insolvency absent outside assistance. House Bill 2122 would allow these communities, after gaining approval in a voter referendum, to dissolve themselves and have their functions absorbed by the county. The co-sponsors, Representatives Dom Costa and Harold English, offered the bill as a means they described to provide for the voluntary dissolution of municipal corporations (cities, boroughs, towns, & townships) within counties of the second class (Allegheny), and the substitution of an unincorporated districts as a new form of government to be administered by the county. Under the proposed legislation, the process of dissolution would be initiated by the governing body of the municipal corporation through passage of a non-binding resolution to engage in discussion with the county over a period of six months, during which time they would develop a proposed essential services-transition plan as part of an intergovernmental cooperation agreement.: such a plan would be subject to public meetings in the community and would have to be voted on by the governing body of the municipal corporation, as well as the County Council: should both the municipal corporation and county governing bodies approve said plan, a referendum would be scheduled—an election where, if approved by the voters, a six-month winding down of the affairs of the municipal corporation would begin. At the conclusion of such a period, an unincorporated district administered by the county would go into effect, and the essential services-transition plan would become an official ordinance of the county. That would entail significant powers to said county to administer and manage such a district; the county would also retain the tax levying power and authority to assess fees and service charges previously authorized to that particular class of municipal corporation. All taxes and fees levied within the service district would have to be used for the benefit of the district.

Finally, the bill provides for the potential merger and consolidation of the unincorporated district with another municipal corporation or would permit the district to re-incorporate itself as another type of municipal corporation in accordance with the existing municipal codes applicable to such entities.

They reported the legislation was carefully crafted with input from the staff of the bicameral/bipartisan Local Government Commission, confident that it represents a unique voluntary agreement between municipalities – one in which a given city, borough or township would be able to ensure a more efficient and effective delivery of services to their residents while retaining their municipal identity. 

Pennsylvania’s Department of Community and Economic Development administers Act 47, as we have previously noted, a program to help “distressed” communities as designated under the terms of the state’s Act 47, under which the state could ultimately take on the task of providing local services. However, it appears that Deputy Secretary for Community Affairs Rick Vilello, the department’s deputy secretary for community affairs and development, HB2122 might provide a better option, or, as he testified: “We’ve not timed out [on recovery options] on a community who we felt wasn’t ready to try to make it on their own…But we are fast approaching a time when several municipalities will time out. When municipalities time out, there are very few good solutions from that point forward. House Bill 2122 provides a potential solution for local leaders facing hard decisions and is a tool worth trying.” Secretary Vilello testified that to date, only 31 municipalities in the state had ever reached “distressed” status out of 2,560. Of those 31, nine were in Allegheny County.

The Secretary noted: “House Bill 2122 could be a life-preserver for communities that have been treading water for a very long time: Who knows, if it works in [Allegheny County], what would be possible next. House Bill 2122 is a tool for the elected officials and for the citizens of distressed municipalities to make a choice about their future.”

Allegheny County Executive Rich Fitzgerald testified that the proposed legislation could be useful, not only to those communities whose finances have spiraled out of control, but also to those that have managed to avoid financial disaster by cutting essential services to minimal levels:  “Some of them, quite frankly, have not gone into Act 47…They just quit providing the services. They haven’t gone into the debt problem, but they haven’t provided the services their citizens have wanted. And what [residents have] basically been doing is voting with their feet. They’ve been leaving, [and] those municipalities have been shrinking in population.” The County Executive emphasized that the legislation could not lead to any municipality being dissolved against its will; similarly, he testified that no county could be forced to absorb a municipality against its will: both governments would have to agree to the terms of the disincorporation before it even went to the voters for approval.

Under the proposed legislation, the unincorporated community would retain some level of local governance through the establishment of a district advisory committee appointed by the county council. The advisory committee would hold open meetings in the former municipality and issue reports to the county on matters pertaining to local residents.

Nevertheless, Melissa Morgan, legislative and policy analyst for the Pennsylvania State Association of Township Supervisors, warned the proposed legislation would go too far in wresting local power and vesting it in a higher level of government, telling legislators her organization, which she said represents 1,454 townships in the state, opposes the passage of HB2122 or any other legislation that would allow for the dissolution of municipalities: “County government should not be given additional powers to administer unincorporated territory…Instead, the Legislature should consider relieving unfunded mandates for municipalities, such as those requiring benefits to uniform employees to help alleviate financial challenges.” County Executive Fitzgerald said he was in favor of the Legislature taking other steps such as those suggested by Ms. Morgan to ease the plight of struggling communities; however, he noted that HB2122 was also a good option to have on the books in case those other steps fail to provide relief: “It’s a voluntary program: It’s just giving people an option. And to me, that’s what democracy is about, giving people the choice. Right now, they don’t have that choice.”

Assessing the Promise of PROMESA

D-Day, 2018

Good Morning! In this morning’s eBlog, we consider the status—and promise—of the quasi chapter 9 municipal bankruptcy process in the U.S. territory of Puerto Rico.

Nearly two years after the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was enacted to establish a federally appointed oversight board to oversee a quasi-chapter 9 municipal bankruptcy process for restructuring or adopting a plan of debt adjustment of the U.S. territory’s debt—a statute which enabled the territory to suspend debt payments effective July 1st in 2016 on its debt in excess of $123 billion, the end might be looming. The statute also cleared the way for deep cuts in Puerto Rico’s public service budget—including cuts to health care, pensions, and education. Just over a year ago, Judge Laura Taylor Swain began the process of overseeing the quasi chapter 9 municipal bankruptcy process in search of some consensus on a quasi-plan of debt adjustment. Now that plan is beginning to take shape, with, this week, the Puerto Rico Financial Advisory Authority and Fiscal Agency (Fafaf) ) informing Judge Swain that, as early as next month, there will be a plan to adjust the debt of the Government Development Bank. Attorneys for the Agency have indicated to Judge Swain that as early as June 22nd they intend to provide drafts of the legal documents which are prerequisites to renegotiate the debt of the Government Development Bank (GDB) and the deposits of third parties which the Bank has retained in its custody since its decapitalization about two years ago. The adjustment with the creditors, whether bondholders or depositors, would occur in light of Title VI of the PROMESA statute—the title which provides for a voluntary negotiation between the parties and on which the judicial branch does not issue direct judgment regarding its reasonableness. The goal is to complete such submission by August, according to Christian Sobrino, the Governor’s chief advisor for economic development, who noted: “It is anticipated that at some point in August, the transaction must be closed,” as he discussed details of the quasi plan of debt adjustment process that would mark a milestone in the restructuring of Puerto Rico’s quasi municipal bankruptcy, noting: “This is the only agreement that has both the government and the Oversight Board, and this will demonstrate the ability of Puerto Rico to reach consensual agreements,” as he stressed the importance of the agreement reached with many of the government’s creditors, adding: “Given that they will be negotiable instruments, it will be the first issue of restructured debt issued by Puerto Rico since 2014.”

According to the agency’s motion, the government would open the application process to seek the consent of the creditors on July 5th. According to Mr. Sobrino, the process of compliance with Title VI of PROMESA would begin one day later, when it is expected that Aafaf, after receiving the approval of the Oversight Board, will file a request for a qualified modification of the GDB debt in court. He notes that PROMESA’s Title VI process requires presenting a breakdown of claims by creditors according to their guarantee or priority, but that process would have already been substantially completed upon the approval of the Debt Restructuring Agreement with various funds. (At present, some six credit unions have sued the government for the renegotiation of GDB debt.)

According to the RSA, the agreement between the Puerto Rico Electric Power Authority (PREPA) and its creditors to extend several deadlines under their restructuring support agreement, will be modified again to reflect the changes in the transaction calendar: the GDB bondholders would receive 55 cents of each dollar they lent to the former fiscal agent. Meanwhile, the depositors, including muncipios, would recover a similar amount for the deposits they have put in custody with the GDB—with, in their case, Mr. Sobrino stressing they would receive 55% of the deposits held in the bank. However, if the muncipios have loans in the GDB, their deposits would be used to settle dollar-to-dollar financing, without reflecting the 45 cents which will apply to the rest of the credits: “The approval request will seek to establish clear procedures related to the approval of the qualified amendment, including the timetable for the parties to object the vote portfolio, the request and the tabulation processes, thus ensuring that all parties with an interest in the restructuring of the GDB have an opportunity to be heard in relation to Title VI.”

To date, according to the RSA (the restructuring support agreement), through last December, the GDB owed approximately $3,765 million; it also owed $376 million in deposits to private and similar companies; and another $507 million in deposits from agencies and government entities. The proposed transaction contemplates repaying the bondholders of the municipal loans and government agencies that the GDB still hopes to recover, as well as the sale of properties of the institution, which closed its doors last March.

The Puerto Rican agency’s motion came less than 48 hours before Judge Swain is due back to preside over the general hearing of the Title III cases today—a hearing where Judge Swain must decide whether to authorize a second payment to the professionals involved in PROMESA cases.

Post Municipal Bankruptcy Election, and How Does a City, County, State, or Territory Balance Schools versus Debt?

June 4, 2018

Good Morning! In this morning’s eBlog, we consider tomorrow’s primary in post-chapter 9 municipally bankrupt Stockton, and the harsh challenges of getting schooled in Puerto Rico.

Taking New Stock in Stockton? It was Trick or Treat Day in Stockton, in 2014, when Chris McKenzie, the former Executive Director of the California League of Cities described to us, from the U.S. Bankruptcy Court courtroom, Judge Christopher Klein’s rejection of the claims of the remaining holdout creditor, Franklin Templeton Investments, and approved the City of Stockton’s proposed Chapter 9 Bankruptcy Plan of Adjustment. Judge Klein had, earlier, ruled that the federal chapter 9 municipal bankruptcy law preempted California state law and made the city’s contract with the state’s public retirement system, CalPERS, subject to impairment by the city in the Chapter 9 proceeding. Judge Klein determined that that contract was inextricably tied to Stockton’s collective bargaining agreements with various employee groups. The Judge also had stressed that, because the city’s employees were third party beneficiaries of Stockton’s contract with CalPERS, that, contrary to Franklin’s assertion that CalPERS was the city’s largest creditor; rather it was the city’s employees—employees who had experienced substantial reductions in both salaries and pension benefits—effectively rejecting Franklin’s assertion that the employees’ pensions were given favorable treatment in the Plan of Adjustment. Judge Klein, in his opinion, had detailed all the reductions since 2008 (not just since the filing of the case in 2012) which had collectively ended the prior tradition of paying above market salaries and benefits to Stockton employees. Moreover, his decision included the loss of retiree health care,  reductions in positions, salaries and employer pension contributions, and approval of a new pension plan for new hires—a combination which Judge Klein noted meant that any further reductions, as called for by Franklin, would have made city employees “the real victims” of the proceeding. We had also noted that Judge Klein, citing an earlier disclosure by the city of over $13 million in professional services and other costs, had also commented that the high cost of Chapter 9 municipal bankruptcy proceedings should be an object lesson for everyone about why Chapter 9 bankruptcy should not be entered into lightly.

One key to the city’s approved plan of debt adjustment was the provision for a $5.1 million contribution for canceling retiree health benefits; however a second was the plan’s focus on the city’s fiscal future: voter approval to increase the city’s sales and use tax to 9 percent, a level expected to generate about $28 million annually, with the proceeds to be devoted to restoring city services and paying for law enforcement.

Moody’s, in its reading of the potential implications of that decision opined that Judge Klein’s ruling could set up future challenges from California cities burdened by their retiree obligations to CalPERS, with Gregory Lipitz, a vice president and senior credit officer at Moody’s, noting: “Local governments will now have more negotiating leverage with labor unions, who cannot count on pensions as ironclad obligations, even in bankruptcy.” A larger question, however, for city and county leaders across the nation was with regard to the potential implications of Judge Klein’s affirmation of Stockton’s plan to pay its municipal bond investors pennies on the dollar while shielding public pensions.

Currently, the city derives its revenues for its general fund from a business tax, fees for services, its property tax, sales tax, and utility user tax. Stockton’s General Fund reserve policy calls for the City to maintain a 17% operating reserve (approximately two months of expenditures) and establishes additional reserves for known contingencies, unforeseen revenue changes, infrastructure failures, and catastrophic events.  The known contingencies include amounts to address staff recruitment and retention, future CalPERS costs and City facilities. The policy establishes an automatic process to deposit one-time revenue increases and expenditure savings into the reserves.  

So now, four years in the wake of its exit from chapter 9 municipal bankruptcy, Republican businessman  and gubernatorial candidate John Cox has delivered one-liners and a vow to take back California in a campaign stop in Stockton before tomorrow’s primary election, asking prospective voters: “Are you ready for a Republican governor in 2018?”

According to the polls, this could be an unexpectedly tight race for the No. 2 spot against former Los Angeles Mayor Antonio Villaraigosa, a Democrat. (In the primary, the two top vote recipients will determine which two candidates will face off in the November election.) Currently, Democratic Lt. Gov. Gavin Newsom is ahead. Republicans have the opportunity to “take back the state of California,” however, candidate Cox said to a group of more than 130 men and women at Brookside Country Club—telling his audience that California deserves and needs an honest and efficient government, which has been missing, focusing most of his speech on what he said is California’s issue with corruption and cronyism worse than his former home state of Illinois. He vowed that, if elected, he would end “the sanctuary protections in the state’s cities.”

Seemingly absent from the debate leading up to this election are vital issues to the city’s fiscal future, especially Forbes’s 2012 ranking Stockton as the nation’s “eighth most miserable city,” and because of its steep drop in home values and high unemployment, and the National Insurance Crime Bureau’s ranking of the city as seventh in auto theft—and its ranking in that same year as the tenth most dangerous city in the U.S., and second only to Oakland as the most dangerous city in the state.

President Trump, a week ago last Friday, endorsed candidate Cox, tweeting: “California finally deserves a great Governor, one who understands borders, crime, and lowering taxes. John Cox is the man‒he’ll be the best Governor you’ve ever had. I fully endorse John Cox for Governor and look forward to working with him to Make California Great Again.” He followed that up with a message that California is in trouble and needs a manager, which is why Trump endorsed him, tweeting: “We will truly make California great again.”

Puerto Rico’s Future? Judge Santiago Cordero Osorio of the Commonwealth of Puerto Rico Superior Court last Friday issued a provisional injunction order for the Department of Education to halt the closure of six schools located in the Arecibo educational region—with his decision coming in response to a May 24th complaint by Xiomara Meléndez León, mother of two students from one of the affected schools, and with support in her efforts by the legal team of the Association of Teachers of Puerto Rico. The cease and desist order applies to all administrative proceedings intended to close schools in the muncipios of Laurentino Estrella Colon, Camuy; Hatillo; Molinari, Quebradillas; Vega Baja; Arecibo; and Lares—with Judge Cordero Osorio writing: “What this court has to determine is that according to the administrative regulations and circular letters of the Department of Education, there is and has been applied a formula that establishes a just line for the closure without passion and without prejudice to those schools that thus understand merit close.”  

With so many leaving Puerto Rico for the mainland, the issue with regard to education becomes both increasingly vital, while at the same time, increasingly hard to finance—but also difficult to ascertain fiscal equity—or as one of the litigants put it to the court: “The plaintiff in this case has clearly established on this day that there is much more than doubt as to whether the Department of Education is in effect applying this line in a fair and impartial manner.” Judge Osorio responded that “this court appreciates the evidence presented so far that the action of the Department of Education regarding the closure of schools borders on arbitrary, capricious, and disrespectful;” he also ruled that the uncertainty he saw in the testimonies of the case had created “irreparable emotional damage worse than the closing of schools,” as he ordered Puerto Rico Education Secretary Julia Keleher to appear before him a week from today at a hearing wherein Secretary Keleher must present evidence of the procedures and arguments that the Department took into consideration for the closures.  

Meléndez León, the mother who appears as a plaintiff in the case, stated she had resorted to this legal path because the Department of Education had never provided her with concrete explanations with regard to why Laurentino Estrella School in Camuy, which her children attend, had been closed—or, as she put it: “The process that the Department of Education used to select closure schools has never been clarified to the parents: we were never notified.” At the time of the closure, the school had 186 students—of which 62 belonged to Puerto Rico’s Special Education program—and another six were enrolled in the Autism Program. Now, she faces what might be an unequal challenge: one mother versus a huge bureaucracy—where the outcome could have far-reaching impacts. The Education Department, after all, last April proposed the consolidation of some 265 schools throughout the island.