The Challenge of Governance in Bankruptcy

Good Morning! In this morning’s eBlog, we consider the governance challenges in the U.S. territory of Puerto Rico, where the streets are in flames in San Juan in the wake of the leak of hundreds of pages of texts featuring sexist and homophobic remarks between Gov. Rosselló and his executive team, as well as possible instances of illegal activities designed to shift the public narrative and discredit opponents. Puerto Riconeither a state nor a municipality—and currently fiscally overseen by both a federally appointed control board, as well as a Governor and Legislature, and the 1st U.S. Circuit Court of Appeals, in the wake of federal arrests of top members in Gov. Rosselló’s cabinet, including former Education Secretary Julia Keleher—on corruption charges, and public accusations of wrongdoing from the son of Raúl Maldonado, a former Treasury Secretary who had been ousted after he spoke out about an “institutionalized mafia” within the agency.  Puerto Rico, in the Twilight Zone between a state and a municipality, has found itself in a political situation not unlike that which led to the resignation of former President Richard Nixon—a resignation likely coming lest Congress would proceed at the time to impeach him. But, in Puerto Rico, the role of the U.S. Congress, the federal courts, and the American citizens of this U.S. territory is breaking new ground.

Puerto Rico’s non-voting delegate to Congress, Jenniffer Gonzalez, has recommended that Thomas Rivera Schatz serve as interim president of Puerto Rico’s New Progressive Party—and she has reaffirmed that Gov. Ricardo Rossello Nevares must resign—recommending that Thomas Rivera Schatz be designated as the interim president of the New Progressive Party, adding that, because of her role as Puerto Rico’s Resident Commissioner in Washington, D.C., she views her presence in the nation’s capitol as vital to “restore credibility and confidence in the island,” adding that, in the wake of the Governor’s decision to hand over the presidency of the New Progressive Party and rule out the possibility of seeking reelection, Puerto Rico Senate President Rivera Schatz must serve as the interim Senate President. At a time when space is open for the PNP party to find a new candidate for governor, Rep. Gonzalez said noted: “I will be available and ready to help and take on the challenge that my party and Puerto Rico entrusts to me.”

Meanwhile, the Governor’s former Treasury Secretary has made allegations of corruption, two, former senior members of his administration have been indicted on federal charges—and almost 900 pages of most inappropriate, vulgar texts between the Governor and his aides have now titillated the local media; nevertheless, the Governor has, so far, defied demands that he step down, albeit, in a video message, he said he would resign as the statehood party leader, noting: “The priority should be the people of Puerto Rico…So all my time should be destined to fulfilling the responsibilities I assumed as Governor. I left aside any personal interest by desisting in my aspiration to be re-elected as governor next year.”

From a governance perspective for this U.S. territory which is somewhere in the governing twilight zone between a state and a municipality—and which is caught in a web of oversight by the 1st U.S. Court of Appeals and a federally imposed Oversight Board—there are many, many players, but no clear line of authority. In a chapter 9 municipal bankruptcy, as we have seen in Detroit and Central Falls, Rhode Island, the ability of a Kevyn Orr, selected as the Emergency Manager for the Motor City, and given all governing authority until a U.S. bankruptcy court approved a plan of debt adjustment, the action ensured there was no disruption of essential services, especially street lights, traffic lights, and 9-1-1 responses. The danger in Puerto Rico is there is no such simple line of authority.


Governance at Risk: What to Do?


July 19, 2019

Good Morning! In this morning’s eBlog, we consider the governance challenges in the U.S. territory of Puerto Rico, where the streets are in flames in San Juan in the wake of the leak of hundreds of pages of texts featuring sexist and homophobic remarks between Gov. Rosselló and his executive team, as well as possible instances of illegal activities designed to shift the public narrative and discredit opponentscitizens are protesting in the wake of a tense couple of weeks in the territory in the wake of federal arrests of top members in Gov. Rosselló’s cabinet, including former Education Secretary Julia Keleher—on corruption charges, and public accusations of wrongdoing from the son of Raúl Maldonado, a former Treasury Secretary who had been ousted after he spoke out about an “institutionalized mafia” within the agency.  How does one put Humpty-Dumpty back together again amid a seemingly dysfunctional government with ongoing legal challenges with regard to the quasi-municipal bankruptcy in the U.S. territory of Puerto Rico—where an un-elected board and a federal judge appear to carry more governance authority than the elected leaders of these American citizens and taxpayers

As of last night, more than 221,000 people have signed a petition for Governor Ricardo Rosselló to resign his position, with the petition coming amid the debacle in his government in the wake of federal accusations of corruption against two former high officials of his cabinet, as well as the unveiling of a scandalous chat that the first executive had with his closest advisers. One organization, wrote: “We demand the resignation of the Governor of Puerto Rico, Ricardo Rosselló Nevarez, for his incompetence and lack of maturity to govern, and for the continuous accusations of corruption in the highest spheres of his cabinet,” adding: “It’s sad to see the embarrassing arrests of officials who were supposed to work on behalf of a town that only takes a short time after being hit by a hurricane with devastating results that we all know; it is a mixture of sadness and outrage at the see that many Puerto Rican brothers still live under an awful and in subhuman conditions, where too many often go to sleep without even taking a bite of food.” Thousands of Americans marched yesterday from the Capitol to La Fortaleza in a massive demonstration in which they asked for the Governor’s resignation; dozens of political leaders, artists, religious and private companies have demanded his resignation.  

Tom Sanzillo, the Director of Finance at the Institute for Energy Economics and Financial Analysis, who has 30 years of experience in public and private finance, including as a first deputy comptroller of New York State, where he held oversight over a $156 billion pension fund and $200 billion in municipal bond programs, noted that Puerto Rico’s economic recovery has been set back by the taint of criminality at the highest levels of government, albeit insisting the U.S. territory’s recovery must proceed—as the growing perception is that Governor Rosselló’s betrayal of his public responsibilities has shaken the already vulnerable public and market confidence in Puerto Rico’s fiscal and governance future: all contractors and partners involved with Puerto Rico are now seen as suspect. Mr. Sanzillo believes all those involved in governance on the island should be called before a team of independent experts headed by the Puerto Rico Financial Oversight and Management Board (PROMESA and include independent, skilled, prominent public leaders. The purpose of this review would be to establish the degree to which companies now doing business with Puerto Rican government agencies received their contracts based on a fair process, are performing real services for fair compensation, and are free from corrupt ties to government officials or other people with influence in the government. The review should especially focus on the larger contractors: Citibank, Filsinger Energy Partners, Rothschild, law firms, accountants, financial advisors, builders and others—recommending that real performers with real credentials should remain; those determined to have been corrupted should be terminated. He believes the status of some contractors may be unclear: if they are retained, they should be monitored. The review team should only accept verbal and written statements from company principals and counsel; false statements made during this process should result in immediate referral of the company and its representatives for criminal prosecution. While he believes a new Governor may change policy priorities, the Governor and the public need to know immediately that all the firms with major government contracts owe their allegiance to the people of Puerto Rico.

The potential fall of the Rosselló administration comes at an unpropitious time: major contracts are in the works, as well as an $8 billion debt restructuring for the Puerto Rico Electric Power Authority; thus, it would seem there is sufficient evidence to put current court proceedings on hold, as well as any steps to close the debt restructuring process under the proposed Restructuring Support Agreement. Until the Governor’s status is settled, there should be a moratorium on any further steps to award a contract for the operator of PREPA’s transmission and distribution systems until there is a thorough independent investigation of the process to date.

The chapter 9 municipal bankruptcy in Stockton, California involved suspect behavior by elected officials—as did the nation’s largest ever municipal bankruptcy in Detroit. Puerto Rico is not a municipality; it is not a state: it is in a governmental Twilight Zone: but perhaps these tragic events open the door to not just fiscal reform in the ongoing quasi-plan of debt adjustment process, but also for Puerto Rico’s people to insist upon a new Governor—and the adoption of new ethics laws. Instead of having the PROMESA Board, where there is a perception of conflicts of interest, seek to preempt governance authority, usurp the authority of elected leaders, recommend a time period for the American citizens of Puerto Rico to make and act on decisions with regard to what kind of government they will support—and what accountability is appropriate.  

A critical role of chapter 9, whether in Central Falls, Rhode Island, Detroit, Stockton, etc. is to lift the terrible burden of debt—in the case of Puerto Rico, some $72 billion in old debt—a legacy of debt that has attracted bond investors seeking high tax-exempt interest rates, but incentivized a seeming generation of young Puerto Ricans to leave for the mainland. What this would suggest is that no creditor should be paid anything by Puerto Rico until all litigation is resolved, adjudicated, or settlements are made regarding culpability of the vast swarm of financial advisors who have collected large fees for Wall Street firms while pushing Puerto Rico to issue more and more municipal debt at higher and higher interest rates—debt that can never be paid off.

Last Friday, the PROMESA Board Chair, noted that the recent corruption and other scandals would adversely impact Puerto Rico’s physical and fiscal recovery—and the perception of its capacity to self-govern; nevertheless, despite recognizing the gravity of the situation, the Oversight Board has made no indication that it will adjust its actions accordingly. The Board is still rushing through the quasi bankruptcy court system to get the Puerto Rico Electric Power Authority’s (PREPA) debt restructuring agreement approved. Earlier this month, the Board filed a motion and supporting testimony with the court requesting that the judge grant a narrow approval of the debt restructuring agreement on procedural grounds and leave it to the Puerto Rican Legislature and Energy Bureau to approve the associated (and substantial) increase in electricity rates.

Indeed, there is the appearance that the Board is seeking to limit the scope of the court’s authority to exclude economic issues, such as the impact of higher electricity rates on the U.S. territory’s economy, whether the citizens of Puerto Rico can actually afford to pay back the mountain of debt, and what will happen to the electrical system if they cannot. At the end of the day, pushing a bond deal that drives the electrical system back into financial ruin serves no one, except the bankruptcy lawyers and richly compensated consultants involved.

There is also the question, raised by the FOMB itself in a different venue, of how much of the debt that is covered by the restructuring agreement was legally issued. In a lawsuit against some of PREPA’s oil suppliers and fuel testing laboratories, the FOMB alleges that PREPA was insolvent in 2011. Yet the FOMB has made no move to argue that the $1.3 billion in debt incurred by PREPA after 2011 was issued fraudulently. Instead, it is rushing to close a debt deal that will lock Puerto Ricans into paying off that debt for the next 47 years.

Self-Governance at Risk

July 17, 2019

Good Morning! In this morning’s eBlog, we consider the governance challenges when elected leaders behave in unacceptable and illegal ways: Are there consequences? Might this behavior jeopardize Puerto Rico’s chances for statehood? Might it adversely affect Puerto Rico’s chances for emerging from federal oversight? 

Governance Burning. Old San Juan was in flames Monday night, when thousands of residents protested in its streets to demand the resignation of Governor Ricardo Rosselló—with the demands coming on the third day after the leak of hundreds of pages of texts featuring sexist and homophobic remarks between Gov. Rosselló and his executive team, as well as possible instances of illegal activities designed to shift the public narrative and discredit opponents. The march came in the wake of a tense couple of weeks in the territory in the wake of federal arrests of top members in Gov. Rosselló’s cabinet, including former Education Secretary Julia Keleher—on corruption charges, and public accusations of wrongdoing from the son of Raúl Maldonado, a former Treasury Secretary who had been ousted after he spoke out about an “institutionalized mafia” within the agency.

Nevertheless, notwithstanding the public pressure, Gov. Rosselló has remained steadfast in keeping his position as Governor and as President of the pro-statehood New Progressive Party (NPP). Similarly, the Governor has, apparently, given no consideration to abandoning his re-election campaign.  Although demonstrations began peacefully, with a march which started around 5:00 p.m., the situation turned more violent later at the gates of the Governor’s mansion, known as La Fortaleza, with protesters throwing objects at heavily armed security guards—efforts that drew tear gas canisters. Even though police claimed some of the tear gas canisters were thrown by protesters, it later turned out that several such canisters were of a make that is only sold to government agencies.  Police Commissioner Henry Escalera commented: “Throwing bricks and cherry bombs, that is not a democracy. We are ready to defend this democracy to the last drop of blood.” In total, five people were arrested, and 21 officials were injured, according to the Police Department.

Yesterday morning, groups of volunteers began to paint over graffiti signs strewn all over the buildings in the streets and blocks surrounding La Fortaleza, calling for Gov. Rosselló’s resignation. Demonstrations in the capital are expected to keep drawing large crowds throughout the week, especially today, when entertainers Bad Bunny and Residente are scheduled to show up and protest.

In his first response, Monday, Gov. Rosselló, in his first interview with a media outlet, on local FM radio station Z93, featured Gary Rodríguez, a former representative of the New Progressive Party, as one of the interviewers, a fact that raised many eyebrows. It seems that Mr. Rodríguez’s name has also appeared on an infamous 889-page chat document, where he is described as a figure friendly to the administration. Further complicating matters, Gov. Rosselló’s security personnel blocked Mayra López Mulero, Mr. Maldonado’s attorney and a moderator in the same radio program, from entering the studio during the broadcast. At a press conference yesterday, Gov. Rosselló said that “an internal legal team” analyzed the chat document and found no evidence of wrongdoing; however, he refused to show the results to reporters.

Notwithstanding the demonstrations and disclosure of his behavior, Gov. Rosselló vowed to remain in office—even as that office appears to be in peril: over the past week, two former high-ranking officials in his administration have been indicted on corruption charges, other top officials resigned, and there have been leaks vulgar messages between the Governor and others. Nevertheless, at a press conference yesterday, the Governor noted: “My responsibility, and I feel it is a great responsibility…is to continue working…My message to the people of Puerto Rico is that we will make changes. Of that there is no doubt.”

It is difficult, however, to imagine worse timing for Puerto Rican hopes to emerge from its quasi-chapter 9 municipal bankruptcy and governance oversight by the PROMESA Oversight Board—which is nearing completion of a proposal to restructure terms to end Puerto Rico’s its court-supervised bankruptcy. The events, too, could threaten promised tens of billions of dollars in federal aid for repairs to infrastructure damaged by the hurricane. Indeed, yesterday, White House spokesperson Judd Deere said: “The unfortunate events of the past week in Puerto Rico prove the President’s concerns about mismanagement, politicization, and corruption have been valid.” The Governor, last Saturday, announced that his Chief Financial Officer, Christian Sobrino, and Secretary of State Luis G. Rivera Marín would step down in the wake of their participation in a private discussion liberally laced with profanities to describe an ex-New York City official and the PROMESA Oversight Board. Nevertheless, the Governor, for his part, noted that corruption is an ill that exists in many jurisdictions in the U.S. and that he is seeking to root it out: “I just hope we can have a serious conversation about what we’re doing to battle it, as opposed to just pointing fingers.” What is different is that those asking him to step down are no longer just residents of Pennsylvania Avenue in Washington, D.C., but thousands of Puerto Ricans calling for him to step down. Gov. Rosselló subsequently released a statement saying he would let go members of his administration who participated in the chat on a messaging system used by government officials, and he apologized for his comments, reporting he had been working 18-hour days and releasing tensions when he called former New York City Council Speaker Melissa Mark-Viverito a puta, (whore in Spanish) and told the PROMESA Oversight Board it could “go f**k yourself,” followed by a string of emojis with the middle finger raised.

In the wake of these events, Justice Secretary Wanda Vázquez announced she was appointing a special task force to determine whether any laws were broken regarding the chat and comments made—even as the Governor said he would not resign, with these events coming just days after the FBI had arrested former Puerto Rico Secretary of Education Julia Keleher and five others on charges of steering federal money to unqualified, politically connected contractors. According to officials, the alleged fraud involves $15.5 million worth of federal funding issued between 2017 and 2019: they reported $13 million was spent by Puerto Rico’s Department of Education during the time Ms. Keleher was Secretary and another $2.5 million spent by Ángela Ávila Marrero when she was Director of Puerto Rico’s Health Insurance Administration. Ávila Marrero was charged along with businessmen Fernando Scherrer-Caillet and Alberto Velázquez-Piñol, and education contractors Glenda E. Ponce-Mendoza and Mayra Ponce-Mendoza, who are sisters. Officials did report there was no evidence that former Secretary Keleher or Director Ávila-Marrero had personally benefited from the scheme.

Governance Structural Crisis? Professor Charles Venator-Santiago of the University of Connecticut noted that Gov. Rosselló’s “days appear to be numbered;” however, because the Secretary of State is among those who resigned and the official designated by law to succeed Gov. Rosselló if he were to step down, “there is a potential constitutional crisis in replacing him.” Yesterday, Gov. Rosselló said that his comments in the leaked messages—published by Puerto Rico’s Center for Investigative Journalism—were inappropriate and repeated his apologies for them; however, he claimed that an internal review that he ordered—but which he has refused to release—determined that he had not broken any laws: “I haven’t committed an illegal act, and I haven’t committed a corrupt act;” rather, he said: “I committed improper acts.”

Governance at Risk. It is not just the Governor who is at risk, but the U.S. territory’s self-governance which is now in jeopardy. In the wake of the indictments, members of the House in Washington are discussing the imposition of additional financial controls and transparency measures in block-grant legislation providing roughly $3 billion a year for Puerto Rico’s Medicaid program through 2023, while, in Puerto Rico, many elected leaders are urging the Governor to resign; however, the Governor yesterday said he had decided to remain in place after a period of introspection, citing an array of accomplishments, from lowering the unemployment rate to developing new industries. Reminiscent in some ways with the difficult governance path leading to former U.S. President Richard Nixon’s torturous road to resignation, Gov. Rosselló said he felt a responsibility to continue pursuing his administration’s agenda, and that he was evaluating candidates to fill the openings in his administration and would unveil new initiatives to increase transparency and combat corruption.

R-O-L-A-I-D-S for the PROMESA Oversight Board?

July 8, 2019

Good Morning! In this morning’s eBlog, we consider the governance and ongoing legal challenges with regard to whether ethical challenges when elected and appointed state leaders make decisions that potentially endanger lives: Are there consequences? Then we note the stunning fiscal turnaround in the U.S. territory of Puerto Rico. Maybe the quasi plan of debt resolution is contributing to a remarkable fiscal success.

Waiting for Godot in Puerto Rico? While waiting for the U.S. Supreme Court to hold a hearing on the case in October, the U.S. 1st Circuit Court of Appeals has given the PROMESA Oversight Board relief by extending its terms of appointment, which allows the Board to continue in its role in the debt restructuring process and to impose budgets on the U.S. territory’s elected government—an extension which appears to have discouraged the Senate acting this month on the appointments made by President Trump, since the Supreme Court is not expected to consider the case until at least October, whereas the President’s  request was to confirm the current members to serve their term, which expires on August 30. Javier Ortiz, the Executive Director of and a former member of President Trump’s transition team noted: “It is up to the Senate to decide whether it is prudent to continue with the confirmation process or wait for the Supreme Court to decide. It would be important for the Senate to be ready to act regardless of the Supreme Court’s decision.” In a brief order the 1st Circuit indicated that it has accepted the Board’s motion to extend the stay until the U.S. Supreme Court reviews the constitutionality of the appointments and whether the decisions made by its members are valid if the unconstitutionality were to be affirmed—written arguments are anticipated by the last week of the month.

In its February 15 decision, the First Circuit declared the appointments of the current Board members were unconstitutional because they are U.S principal officers who should have been appointed by the President and confirmed by the Senate. Six of the seven Board members were appointed by former President Barack Obama based on a list of candidates recommended by Congressional leaders. None was confirmed by the Senate. As it is, the current Board, ergo, will continue unless and until the U.S. Supreme Court rules otherwise. According to Amy Howe in a post on the SCOTUSblog website, by accepting all the petitions for certiorari, the Supreme Court agreed not only to review the constitutionality of the appointments but also whether the board’s decisions since its appointment are valid, which the First Circuit found.

Hard Ethical Governance Challenges

July 2, 2019

Good Morning! In this morning’s eBlog, we consider the governance and ethical challenges when elected and appointed state leaders make decisions that potentially endanger lives: Are there consequences? Then we note the stunning fiscal turnaround in the U.S. territory of Puerto Rico. Maybe the quasi plan of debt resolution is contributing to a remarkable fiscal success.

Merited Award? Harvard’s Kennedy School has announced the appointment of former Michigan Gov. Rick Snyder as a senior research fellow at the Harvard Kennedy School’s Taubman Center for State and Local Government, touting the two-term governor’s achievements on the Detroit bankruptcy, the state’s finances and workforce training. The announcement omits mention of the former Governor’s role in the Flint water crisis that led to lead poisoning in the city. The University’s press release noted: “Governor Snyder brings his significant expertise in management, public policy, and promoting civility to Harvard Kennedy School,” according to Professor Jeffrey Liebman, Malcolm Wiener Professor of Public Policy and Director of the Taubman Center for State and Local Government, in a press release. The Taubman Center welcomes several research fellows each year who study, teach, and write on state government while engaging with students and faculty, according to the university. For his part, the former Governor noted: “I’m excited to join the talented faculty and staff there who are on the leading edge in improving public policy, civic engagement, and innovations in state and local government. I look forward to sharing my experiences in helping Michigan to national leadership in job creation, improved government performance, and civility.”

Mayhap ironically, the announcement came as Michigan Solicitor General Fadwa Hammoud and Wayne County Prosecutor Kym Worthy, last Friday, slammed the Flint water probe conducted under former Michigan Attorney General Bill Schuette, saying investigators failed to review and secure millions of documents and presented an “incomplete” case which would have failed in court. Speaking at a town hall meeting at a UAW hall, Solicitor General Hammoud and Prosecutor Worthy appeared to win over most of the crowd of about 100 people, who were skeptical of Attorney General Dana Nessel’s decision to dismiss criminal charges against eight defendants and start the investigation over—even as they also faced angry remarks from residents who said prosecutors should have communicated about their decision sooner. The two officials provided detailed explanations with regard to the deficiencies of the investigation led by fired special prosecutor Todd Flood, saying neither prosecutor had seen anything like it in their careers, as they took turns speaking in tandem to the audience: they noted new search warrants produced at least 20 million new documents along with 600 devices, and they reported that defense firms hired by the various state agencies were gatekeepers of information presented to Prosecutor Flood’s team, giving these lawyers power to determine what  investigators received. Solicitor Hammoud said Andy Arena, the former director of the Detroit FBI office who worked on the investigation, was complicit in not handling document retrieval properly. The Prosecutor and Solicitor General said that when they came into the investigation nearly five months ago, they had “major concerns” with regard to how the probe was handled. Among them was the plea deals with seven defendants that reduced felonies originally filed against them. Prosecutor Worthy noted that only a “very small percentage” of the millions of documents have been reviewed by the new team, asking, under such circumstances, “How do you go forward with an investigation? How do you charge anyone?,” while the Solicitor General noted that the investigation up to the point when Solicitor General Hammoud took over made “no sense to me…No one is off the hook.”

Tempus Fugit. In Rome, the Latin express for time flies applies: how do cities, counties, and states balance the costs of investigations versus other public priorities? Some members of the public have even called for Mr. Flood, whose law firm made $8 million as part of the investigation, to face charges if what Solicitor General Hammoud and Prosecutor Worthy said about the halted investigation is true. Last Friday, Attorney General Schuette defended the closed investigation, saying “we were prepared to go forward with robust prosecutions…We took the steps that preserved the evidence in this case…And our work was not done.” A critical part of the challenge is to pursue evidence in thousands of documents as time is running out: the statute of limitations expires in nine months. Solicitor General Hammoud notes: “We believe every person in the city of Flint is a victim…The easy route would have been to stick with the 1 percent if we cared about speed,” as he argued that restarting the probe was the right thing to do, noting: “We believe it’s about time that the people are on the front lines of this investigation.” A hard governance challenge for states—unlike the federal government—is how to balance a budget: hard choices are required. Indeed, here, two weeks ago, the Solicitor General and the Prosecutor dropped criminal charges against the eight Flint water crisis defendants, including two high-level state health officials and two state-appointed Flint emergency managers: they reported they need time to restart the investigation and explore new evidence, new people of interest, and new criminal culpability linked to the 2014-15 Legionnaires’ disease outbreak that killed 12 people in the Flint region and sickened at least 79 others. There is a difficult scale of financing justice versus helping the victims of the state’s actions. Indeed, prior to last Friday’s two-hour town hall, many Flint residents expressed outrage at the dropping of criminal charges—with one, a citizen who was the first speaker at the town hall, stating: “I really trusted Todd Flood…And just to think they got less time for poisoning over 98,000 people then somebody stealing a slice of pizza. People are dying. It’s hard to trust.”

Recovery Ahoy! Puerto Rico’s May revenue of $922 million was the highest of any May on record—and some 19.9% above last November’s projection for May revenues—a projection which, at the time, was more optimistic than the PROMESA Oversight Board’s projections associated with its June 28, 2018-approved FY2019 budget. The government is now anticipating net General Fund revenue of $11.3 billion for the current fiscal year, according to Treasury Department Acting Secretary Francisco Parés Alicea, who noted: “This would represent $2.842 billion over the original budget projection of the Board of June 29, 2018, and $593 million over that of May 9, 2019.” Indeed, through the fiscal year’s first 11 months Gov. Ricardo Rosselló has seen an 11.7% increase in revenues over November’s projections. Acting Secretary Parés Alicea said the performance exceeded expectations for three reasons: one, economic activity following Hurricanes Irma and Maria; two, new tax laws which came into effect last January; and three, efforts to improve levels of tax compliance. Through the first 11 months of the fiscal year net revenue, at $10.234 billion, is 11.7% above the November 23 projection. Corporate income taxes account for the biggest increase of the November projection, at $532 million. But the categories with the largest haul in the first 11 months were: sales and use taxes with $2 billion, individual income taxes with $1.97 billion, foreign corporation (Law 154) taxes with $1.65 billion, and corporate income taxes with $1.64 billion. The category with the biggest increase in May compared to the November projection was for taxes retained from non-residents, at $43 million.

Pensionary Challenges. There are about 167,000 public pensioners in Puerto Rico: more than half are over the age of 70. On average, these pensioners receive about $12,000 in pension benefits annually—well below the federal poverty line considering the number of people within a household supported by this modest amount: most rely on pensions to pay for their basic needs such as food and housing, and many support not only themselves but also their extended families. Because of the economic crisis, an increasing number of pensioners care for their grandchildren and even their elderly parents. Retirees experienced significant reductions in 2013 as the territory’s quasi-chapter 9 insolvency took hold: retirees have not seen a cost of living adjustment in more than a decade. Part of the fiscal challenge is the uneven teeter-totter as younger Puerto Ricans with college degrees have left for the mainland—and the cost of living on the island is about 13 percent higher than in cities on the U.S. mainland. Moreover, Puerto Rico’s government routinely failed to remit the required funds to the public pension systems to ensure that benefits could be paid. The human and governance challenge has been further aggravated by the cost of financing payments to municipal bondholders of bonds issued by Puerto Rico. There has also been some turmoil after the Governor appointed Parés Alicea Acting Secretary after the Governor dismissed his predecessor, Raúl Maldonado Gautier—who, in a subsequent radio interview, said there were a variety of corrupt practices among members of the Treasury and that he was working with the FBI to root them out. The Governor responded by dismissing him, asserting that the former Treasury Secretary had not brought these concerns to him. The El Vocero news web site quoted FBI Puerto Rico Director Douglass Leff as saying he was working on the investigations and expected the summer to be very busy for his staff.

In an action similar to those taken as parts of plans of chapter 9 debt adjustment in Central Falls, Rhode Island and in Detroit, PROMESA Board Executive Director Natalie Jaresko had proposed public employee pension cuts, because they provide a pathway to 30 years of actuarial balance. Director Jaresko told reporters at a Washington briefing that taking no action on the pensions is not an option, because the retirement system is bankrupt. (Disagreement on the proposed cuts is one the few remaining major obstacles to a restructuring of the commonwealth’s debt as officials work toward a goal of exiting bankruptcy in the first half of next year.) There is some optimism—or, as Director Jaresko put it: “From my perspective, the end is in sight.” But it might be an impoverished sight: Fiscal Agency and Financial Advisory Authority Executive Director Christian Sobrino Vega noted that the new deal would hurt more than 65,000 retirees, comparing the Commonwealth’s government pensions to state pension systems, showing reporters a graph that listed Puerto Rico at the bottom. “Here is Puerto Rico which is negatively funded…The next state in the list is New Jersey which is at 30%.”

In a related fiscal action, the PROMESA Oversight Board has reached an agreement with the Committee of Retirees that makes a flat 8.5% cut to pensions greater than $1,200 a month and does not change payments to the 61% of current retirees who receive monthly pensions of $1,200 or less—an agreement not unlike the chapter 9 plan of debt adjustment for Detroit—a plan which imposed significant cuts in pensions for retirees, but was adjusted to ensure that no retiree from the city of Detroit would see her or his pension payments place her or him below the federal poverty level. Thus, under the Board plan, if active employees are added to the group, there would be no pension cut for 74% of plan participants. Miguel Fabre, chairman of the Committee of Retirees, issued a statement last week saying that the group would have preferred no cuts, but explained, “We believe that significantly worse cuts would have been sought by the [Oversight Board] in the bankruptcy process and that ignoring said reality would have been irresponsible from our part and lethal to our community of retirees.” The agreement requires the commonwealth to make a payment of at least $175 million for 8 years to fund a pension reserve, which makes the plan actuarially balanced for 30 years.

The Governor’s administration opposes the pension reserve, because it would be managed by an independent trust, Director Jaresko said, after, earlier this week, Gov. Rosselló proposed making a $1.4 billion payment to the Accounts Program of Savings, better known as “Reforma 2000” and the Hybrid Defined Contribution Program between the years 2000 and 2017: Employees would receive their share of the money at the time of their retirement. Director Jaresko said the pension underfunding needs to be resolved under the commonwealth’s debt restructuring or quasi plan of debt adjustment, because it is the largest part of the bankruptcy being overseen by Judge Laura Taylor Swain, noting: “The board does not want to cut pensions, but we do believe that their $50 billion claim in court will not be ignored and that the creditors will insist on some form of impairment: They are the single largest class in this bankruptcy.”

Nevertheless, she noted, in the larger picture, the overall bankruptcy reorganization has made a great amount of progress: “We’ve certified and updated the fiscal plan for Puerto Rico; we sent a budget for FY2020 to the Puerto Rico legislature. And we’ve entered into a series of agreements that I think will help Puerto Rico turn the corner from this crisis.” Director Jaresko said the Oversight Board has reached agreements to reduce claims from $35 billion to $12 billion that makes the debt payments affordable and sustainable, secures pensions for the next 30 years, mitigates litigation costs, and provides a path for exiting the Title III bankruptcy next year. Debt service would be reduced nearly 50 percent to $44 billion from what would have been $82 billion over the next 30 years. Annual maximum debt service, including COFINA payments, will be reduced to $1.5 billion from $4.2 billion, she noted, and the percentage of the Commonwealth’s revenues dedicated to debt payments would be reduced nearly 75% to under 9% from more than 28%, according to Director Jaresko.

Gov. Rosselló, who held a similar financial briefing for reporters in Washington, D.C. last week, also expressed optimism about the commonwealth’s finances: he outlined the steps his administration has taken over the last two years which have included reducing payroll by 20%, reducing the number of agencies nearly 20% to 102 from 124, labor and human resources reforms, streamlining government permits, pension reforms, procurement reform and local tax reforms that have included a local earned income tax credit. Nonetheless, Gov. Rosselló opposes what he has felt has been micromanagement by the Oversight Board and intrusions into the Commonwealth’s day-to-day operations. Chief Fiscal Officer of the Government of Puerto Rico & Governor’s Representative to PROMESA Oversight Board Christian Sobrino, who joined the Governor at the briefing, said the Commonwealth’s fiscal plan has projected debt payments for Puerto Rico if placed in the same category is as the top 10 states in debt service or alternatively, to the top 25 states:  “Since it’s a matter of negotiation between bondholders, the Oversight Board and Puerto Rico, we are not going so far as to say this is the exact number…But you can project based on the amount in the debt sustainability chapters what that is,” adding that Puerto Rico’s current $6.7 billion cash balance does not represent how much it is capable of paying in debt service: the cash balance is not only a result of not paying debt service, but also reflects budgetary cuts, increased collection and increased revenue, and that the Commonwealth has spent more than $4 billion on the pay-go payments to the new defined contribution pension system.

How Do State & Local Leaders Define Equity & Fairness When a Government Defaults on its Debt?

June 25, 2019

Good Morning! In this morning’s eBlog, we consider the federalism and governance challenge when a government defaults on its debt, not because it is unable to make it, but rather because it does not want to pay. Are there consequences?  Then we head south to assess the pending judicial challenges over the appointments to the PROMESA Board, wonder whether public pensions might be at risk in Puerto Rico, and, finally, we wonder how lessons learned in Detroit, Central Falls, Stockton, and other municipal bankruptcies with regard to public pensions might play out in Puerto Rico. 

Attention Shoppers: Debt & Municipal Debt now on Aisle 7. Platte County, Missouri Circuit Court Judge James Van Amburg has ruled that Platte County, a county of just under 100,000, and home to the Kansas City metro area, was within its rights when it opted, six months ago, not to make payment on a $765,000 municipal bond due for a long-struggling shopping development. In his decision, Judge Van Amburg noted there was “no promise or requirement” for the County to pay the debt on the Zona Rosa retail center, even if the county auditor’s proposed budget included a line item for the payment (which was the case last year). Thus, last December’s deadline passed without any party making the due interest payment related to a parking garage debt in the Zona Rose Shopping Center—an interest payment which came due last December 1st to investors who bought $32 million in municipal bonds in 2007 to provide sufficient down payment to begin construction of a parking garage at Zona Rosa—with the commitment that investors were to be paid over time by sales taxes generated at Zona Rosa. But dreams on aisle 7 or any other do not always come to fruition: here the shopping district has failed to produce sufficient revenue to make payments on its own—leaving open the question who is left holding the bag? Unsurprisingly, Platte County continues to insist its taxpayers are not responsible for making the payment, notwithstanding the County has budgeted the requisite funds to do so. Some describe this as a “moral” obligation, as distinct from a legal obligation. In Platte County’s case, the Zona Rosa municipal bonds were issued by the Platte County Industrial Development Authority to finance parking garages in the shopping center. That is, even though the county was not legally obligated to make up for any shortfalls, the county’s credit rating could be adversely affected because its investors—and credit rating agencies—would normally describe these as “moral obligations,” with the risk that a default by a related government entity—here the Industrial Development Authority—could adversely reflect on the credit worthiness of the County.

The issue, for state and local leaders, can, in a sense, be derived from chapter 9 municipal bankruptcy—that is creating a plan of debt adjustment, even if it not a part of an actual municipal bankruptcy. But that is hard to: does a municipality give all debtors the same percentage? The answer, as we have seen in Detroit, Central Falls, etc. is no. Detroit was sustained in ensuring that no retiree would have her or his pension reduced to a level putting her or him below the federal poverty level. In the Puerto Rico quasi-chapter 9, the First Circuit Court of Appeals held that Puerto Rico was not required while in quasi-chapter 9 bankruptcy to continue paying interest on bonds that are paid back through a special dedicated revenue—a holding that undermined the Don Quixote dreams that special revenue municipal bonds can be safe harbors in a municipal bankruptcy.

In the case of Platte County, Moody’s moodily downgraded the county to junk status. Nevertheless, Todd Graves, an attorney for Platte County, said the ruling in Missouri helped stop what he described as a “bondholder bailout” by the taxpayers, describing it as a “great day for taxpayers—and a firm rebuke to financiers attempting to abuse the public treasury.”

Capitulo in Puerto Rico? Far east of Kansas City, with the U.S. Supreme Court working to wrap up, we await an announcement as early as next week with regard to whether the Justices review the First Circuit’s ruling with regard to the appointments of the PROMESA Oversight Board—the President Trump sent the names of the existing Board: Andrew Biggs, José Carrión, Carlos García, José González, Arthur González, Ana Matosantos, and David Skeel. (It should be noted that “capitulo” translates, in Spanish, to chapter—not to capitulate.) In the wake of completing debt restructurings for Puerto Rico’s sales tax-backed debt and Government Development Bank, the PROMESA Board has said it will soon unveil a core government quasi-chapter 9 plan of debt adjustment plan that includes outstanding general obligation bonds and unfunded pension liabilities. This week, the PROMESA Board filed a request with the First Circuit Court to further extend the period when the current Board members could serve, asking the court to extend the stay until the U.S. Supreme Court can review the case, which the Board has asked high court to do. To explain the President’s nomination, the White House press office said: “Mismanagement, corruption, and neglect continue to hurt the people of Puerto Rico, who deserve better from their government. The future health and growth of Puerto Rico is dependent upon financial constraint, reduced debt, and structural reforms. “Through its work, the Financial Oversight and Management Board for Puerto Rico is providing the stability and oversight needed to address these chronic issues and bring hope for a brighter future.” The press statement omitted any mention of paper towels—and came as his administration still has not provided Puerto Rico $600 million in food stamp aid more than two weeks after the President signed into law the emergency funding. Glorimar Andújar Matos, the Executive Director of the Departamento de la Familia, the Puerto Rico government agency which administers the program, noted that the Commonwealth does not expect to be able to spend the emergency food stamp funding until September, most likely, six months after food stamp cuts began for the more than 1 million island residents who rely on the program. The White House has yet to release any rational explanation for the delay to Puerto Rico’s food stamp aid, where, last March, emergency food stamp assistance money ran out, triggering widespread reductions in benefits, and funding renewal was delayed by several months amid an impasse among federal lawmakers and opposition to additional funding for Puerto Rico from the Trump administration. Further, Puerto Rican officials report they have been unable to gain any information from the Department of Agriculture’s Food and Nutrition Service with regard to what it will take to swiftly secure the food stamp funding. Glorimar Andújar Matos, the Executive Director of the Puerto Rico Departamento de la Familia, noted: “The situation is dire, and we are ready to submit either a plan or an amendment to an existing plan as soon as we get directions from FNS in order to speed up the disbursement of the funds: Given Puerto Rico’s unfair treatment in federal programs, we are pushing to receive and utilize the funds as soon as possible.”

A spokesman for the USDA’s Food and Nutrition Service said the agency has been in contact with Puerto Rico’s government, but that the U.S. territory must first propose a plan for how the aid will be spent and make “required system changes” to its food stamps program. The agency said Puerto Rico’s government must also follow financial management procedures that could not be implemented until after Congress appropriated the new funding. Kevin Concannon, who served in the Department of Agriculture as undersecretary for Food, Nutrition and Consumer Services during the Obama administration, said there is no reason for officials not to be able to approve the aid much more quickly, noting: “It’s normally rapidly approved, because you’re trying to mitigate the impact of hunger and food insecurity…This should be straightforward. It should not take this long. The existing program in Puerto Rico has been there for decades, and the infrastructure is used months in and months out.” Puerto Rico officials have for months demanded the approval of the additional food stamps funding. The food insecurity rate in Puerto Rico is triple that of the mainland — and that was before the hurricane, according to the 2017 American Community Survey of the U.S. Census Bureau: currently, nearly 45 percent of households with children younger than 18 in Puerto Rico depend on food stamps, according to the Instituto Desarollo Juventud, a nonpartisan public policy organization. The emergency food stamp aid allowed Puerto Rico to bring its food stamp benefits roughly in line with those received by mainland U.S. states, but the cuts forced a reduction of about 25 percent for the food stamp benefit, reductions that were in some cases closer to 50 percent.

Pensions at Risk? Christian Sobrino, Puerto Rico’s Executive Director of the Fiscal Agency and Financial Advisory Authority (FAFAA) this week warned that if the PROMESA Oversight Board includes cuts to public pensions in the central government’s plan of debt adjustment they will not pass any legislation leading to the implementation of the plan. His warning came as, on Wednesday, the Board’s lead attorney Martin Bienenstock, announced at a hearing before Judge Laura Taylor that he would be submitting the document within 30 days, adding, before the court, that the quasi plan of debt adjustment will contain the agreements the Board has reached with different creditors, including the Official Committee of Retirees and the Teachers Association—even as the teachers union rejected the agreement with the Board. Sr. Sobrino explained that implementing these adjustments requires the issuance of new municipal bonds (which would be exchanged for the old bonds), which, in turn, would have to be approved by the Legislative Assembly and gain the approval of FAFAA, noting: “That plan implies issuing new debt to replace the old debt. Under state law, you need to legislate to do that kind of transaction, and this servant, as fiscal agent, has to sign. That will not happen. If that plan is tied to a pension adjustment, the plan is not confirmable…There is no middle ground here. If they include changes in retirement, we don’t have anything to talk about (with the PROMESA Board).”

For its part, PROMESA Board spokesman Edward Zayas stressed that for the fiscal entity, the agreements reached with COR and the unions are an integral part of the path toward a plan of debt adjustment getting the territory out of PROMESA Title III processes.

Sr. Sobrino stressed that the Board does not have the authority to replace the Legislative Assembly, nor can it make decisions over Puerto Rico’s public policy; he warned that not even the federal court can force an elected body, such as the Legislature, to adopt any agreement: “A lawmaker’s vote is protected by the First Amendment of the U.S. Constitution…a Legislator’s vote is protected and nothing can be done to impact her or his right to express themselves.” Noting that Stockton’s approved chapter 9 plan of debt adjustment did not mandate a change in the city’s pensions, he noted that the current fiscal plan contains pension adjustments up to a 10 percent reduction in pensions. Since the adjustments are progressive, he said those who receive less money will see proportionally smaller cuts than those who have higher paychecks, adding that, per the most recent agreement between the Board and COR (the official Committee of Retirees) involves an 8 percent reduction in the payroll of retired employees. He argued that actuality, this change does not represent much in fiscal terms since it advances future budget deficiencies in a single year: “Debt restructuring does not require a change in pensions and most creditors do not look at this.” Sr. Sobrino explained that the 10 percent pension cuts proposed by the Board represent savings ranging from $180 million to $200 million annually: adjusting that cut to 8 percent, as would happen with the agreement between the fiscal entity and the Official Retirees Committee, would imply that savings would reach between $100 million and $150 million annually—or, as he put it: “With these aggressive cuts, the difference they have in the Board’s long-term model until 2049, the government’s) operational deficit is just one year forward,” noting that the position of the administration of Gov. Ricardo Rosselló Nevares is not to change public pensions: the government’s position is partly based on the fact that between 2013 and 2014 many of the public employees’ retirement benefits were adjusted so the adjustment they seek in this line has already been done.

Originally, retirement systems in Puerto Rico followed a defined-benefit model: pensions were not calculated based on the employee’s contribution to the system, but on years of service and salaries. Retirees were entitled to pensions that could reach up to 75 percent of the income they earned when they were public active employees. The first major change to the system was in 2000 when employees joining the public service, rather than participating in the old defined benefit system; between 2013 and 2014, there were additional changes legislated for the three main public retirement systems. Those new laws froze the accumulation of benefits for those employees who were still in the old pension system and place them into the defined-contribution system, as retirement savings plans are known. Also, through special laws, some benefits such as summer bonuses and medication were eliminated.

A State of Confusion. Presidential candidate Sen. Bernie Sanders on Monday slammed U.S. Senate Majority Leader Mitch McConnell (R-Ky.) in a tweet with regard to the Leader’s TV comments after Leader McConnell told host Laura Ingraham that House Democrats were all part of a “socialist agenda: They have planned to make the District of Columbia a state that would give them two new Democratic senators, Puerto Rico a state, that would give them two more new Democratic Senators.”

In or Out Like Flint?

June 20, 2019

Good Morning! In this morning’s eBlog, we consider the rejection by U.S. Supreme Court Justice Sonia Sotomayor of the State of Michigan’s request to block lower court rulings determining that state officials could be found liable with regard to the lead contamination of Flint’s drinking water.

In Like Flint? U.S. Supreme Court Justice Sonia Sotomayor on Friday denied a request from officials of the State of Michigan seeking to have the court to block lower court rulings finding state officials could be sued over lead in the City of Flint’s drinking water supply: state officials were seeking to block lower court rulings which allowed residents to sue over their injuries from lead poisoning. Justice Sonia Sotomayor denied their petition without comment—albeit, Michigan state officials received some good gnus—as federal prosecutors decided to drop criminal charges against them. Eight former state and city officials, including Michigan’s Chief Medical officer had been faced criminal charges for their roles in the water crisis—a crisis in which at least 70 people were sickened by the pollution, and 12 died—and, from a fiscal perspective, a crisis with signal, adverse consequences for assessed property values and income tax revenues. In a statement, Michigan Solicitor General Fadwa Hammoud and Wayne County Prosecutor Kym Worthy said they need a more thorough investigation before proceeding, noting: “Dismissing these cases allows us to move forward according to the non-negotiable requirements of a thorough, methodical, and ethical investigation.” Justice Sotomayor, who handles these types of appeals from this region of the country, received it last Monday and denied the request without explanation Friday.(Liane Shekter-Smith, et al v. Shari Guertin, et al.,#17-1745, June 13, 2019). The four Michigan DEQ officials are:Liane Shekter-Smith, Chief of the DEQ Office of Drinking Water and Municipal Assistance, Stephen Busch, Lansing district coordinator for the MDEQ’s Office of Drinking Water and Municipal Assistance, Michael Prysby, MDEQ district engineer, and Bradley Wurfel, MDEQ Communications Director. Here Ms. Shekter-Smith, Mr. Busch and Mr. Prysby had reached plea deals with Special Prosecutor Todd Flood: they had argued they should not be held liable after Flint residents Shari Guertin and her child, Diogenes Muse-Cleveland, sued. In her suit, Ms. Guertin claims she and her daughter sustained injuries from drinking and bathing in the contaminated water during the Flint water crisis. Two years ago this month, U.S. District Judge Judith E. Levy dismissed many of the counts charged in Ms. Guertin’s lawsuit, but Judge Levy concurred the “bodily integrity” of Ms. Guertin and her child were violated when city residents were unknowingly exposed to dangerous levels of lead in Flint’s drinking water, which officials were aware of but hid from the public.