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.