The Challenge of Federalism in Puerto Rico–and the Challenge of Blight Reoval in Detroit


November 20, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing federalism challenges in Puerto Rico to assess its path to statehood and its fiscal and physical challenges, before heading to the Motor City, where Mayor Duggan’s efforts to accelerate blight removal suffered a setback.

Problemas en Puerto Rico.  The finances of Puerto Rico’s municipios mostly held steady or improved in FY2018, but not in the capital city of San Juan. A public policy organization, ABRE Puerto Rico announced these results at the beginning of the week as part of its annual municipal study. (ABRE awards Puerto Rican municipalities the grades A, B, C, D, or F.) Compared with the previous fiscal year, 42 municipios retained their old grades, 12 were given a lower grade, 18 were given a higher grade, and 6 did not participate. Abre co-founder Arnaldo Cruz noted: “Given the unstable situation in Puerto Rico, in this edition, we expected a greater deterioration of municipal finances,” particularly given that Hurricane Maria took place about three months into the fiscal year: “However, the numbers reflect that municipios, in the aggregate, substantially improved their fiscal indicators. This means that, for the most part, municipios exercised fiscal discipline in 2018.” Mr. Cruz said most of the municipalities had not been able to calculate the hurricane’s damage to their physical assets by the end of FY 2018. The municipios’ fiscal report card matters, because, according to the PROMESA Oversight Board’s March 2017 fiscal plan, the municipios had $556 million in municipal bond debt outstanding as of February 2017. Second, as of FY2019, Puerto Rico’s central government provided $220 million each year in subsidies to the municipios: the PROMESA Board has promised to reduce those subsidies continuously until zeroing them out in FY2024.

ABRE flunked San Juan, the U.S. territory’s largest city, San Juan, noting its financial ratios had declined. San Juan also received an F from ABRE in FY2107; at the end of FY2019, San Juan had current liabilities of $247 million, long-term debt of $889 million, and unfunded pension liabilities of $1.3 billion—leading John Hallacy of the Bond Buyer, after noting Puerto Rico’s annual general revenues were $428 million and annual debt service expenditures of $91 million, to write that the ratio of debt service to general revenues was “very high,” indeed; “extraordinary.” San Juan ended its fiscal year with a negative General Fund balance of $90 million and a negative total position of $1.313 billion.

Over the course of FY2018, the municipios in the study reduced their operating expenses by 15%, while losing 7% of their income—a healthy fiscal direction, as they increased their general fund balance 6%–and reduced their long-term debt by 6%, mainly because they were restricted from issuing new loans: as of June 30, 2018, the 72 municipios in the study had $4.3 billion of long-term debt plus $4 billion of net position liability for pensions.

Puerto Rico is currently the jurisdiction with the greatest social inequality in the United States and is among those jurisdictions topping that category in the world.

Detroit’s Blight Removal Hits a Road Block. The Detroit City Council has voted 6-3 to reject Mayor Mike Duggan’s $250 million bond proposal to speed up blight removal in the post-chapter 9 city—a program which, to date, has been successful in razing thousands of blighted homes which had made parts of the city crime-ridden wastelands on the day the city went into municipal bankruptcy—on which day my hotel advised it was unsafe for me to walk a few blocks to the Governor’s downtown Detroit offices. The blight removal program did, however, trigger a federal investigation—after which Mayor Duggan vowed to work with the City Council to hammer out a plan to accelerate blight removal. In rejecting the Mayor’s plan, which he submitted last September, the Council noted apprehensions with the demolition program, as well as budget concerns.  City Council President President Brenda Jones, was joined by President Pro Tem Mary Sheffield, and Councilmembers Roy McCalister, Andre Spivey, James Tate, and Raquel Castaneda-Lope in opposition, with the outcome marking a setback for the Mayor’s plans to rid the Motor City of abandoned homes by mid-2025. Nevertheless, the Mayor remained committed, noting he was committed to working with the Council to “hopefully move forward later in the year” on a blight removal plan, stating: “I respect that decision…I didn’t hear any council members say it wasn’t important to get blight out of our neighborhoods…We knew going into this that we’ve had problems with the demolition program.” Mayor Duggan was silent with regard to whether he will continue to push for a spring initiative or instead refocus on November of 2020. (The City Council has until 4 p.m. Monday to file a motion to reconsider the vote, while Mayor Duggan needs approval from City Council by Dec. 17th to get his bond proposal on the March 10 Presidential primary ballot.

Prior to the Council vote, Detroit city Ombudsman Bruce Simpson addressed Council with regard to complaints he received regarding blight removal, noting he became aware in the fall of a potential conflict of interest involving demolition work being awarded to a city employee who had gone through the proper application channels without the conflict being flagged. The now former employee, Mark Green, who is CEO of demolition firm Detroit Next Inc., won the city contracts when he was still a Detroit firefighter, according to a report from the Detroit Free Press. Similarly, a report by Detroit’s auditor general has cited unreliable data, documentation issues, and other problems with the city’s demolition work. Some demolitions were halted last year over lead concerns, and several companies were suspended from the program over potential conflicts of interest.

What Lies Ahead? In response to the demolition issues, Mayor Duggan on Tuesday said: “In this business, the one way to make sure you never make a mistake is don’t do anything. We move very hard,” noting he was confident he could have showed voters a viable plan to transfer the demolition program from the Detroit Building Authority to the city and iron out its problems; nevertheless, the Council’s vote signaled members want to see that plan before a proposal is put on the ballot. These efforts have been funded primarily by $265 million in federal assistance—but the Motor City’s federal Hardest Hit grant funding for blight demolition is nearly depleted. As of September, Detroit was approximately halfway through the Mayor’s demolition campaign that began in 2014, with approximately 19,000 vacant homes to go. The Mayor noted that about $8 million is allocated for blight removal through the spring. As part of the proposed bond, $50 million would have been pulled from FY2021 to be used in 2020, with the Mayor noting that city CFO Dave Massaron is looking into ways that could still be accomplished, stating: “We’re gonna have to slow demolitions down temporarily…One way or another, we’re gonna find a way not to shut down demolitions.” Notwithstanding, the Mayor remains committed to working with the Council to “hopefully move forward later in the year” on a blight removal plan, as he stated: “I respect that decision…I didn’t hear any Councilmembers say it wasn’t important to get blight out of our neighborhoods …We knew going into this that we’ve had problems with the demolition program.”

Mayor Duggan was silent with regard to whether he will continue to push for a spring initiative or instead refocus on November of 2020, as, meanwhile, the City Council has until 4 p.m. Monday to file a motion to reconsider the vote. Mayor Duggan needs approval from City Council by Dec. 17 to get his bond proposal on the March 10 Presidential primary ballot, meaning the last day Council can vote before its Nov. 27-Jan. 6 winter recess is next Tuesday.

Ahead of Tuesday’s vote, Detroit’s city Ombudsman Bruce Simpson addressed the Council about complaints he received regarding blight removal, stating he became aware in the fall of a potential conflict of interest involving demolition work being awarded to a city employee who had gone through the proper application channels without the conflict being flagged. The now former employee, Mark Green, who is CEO of demolition firm Detroit Next Inc., won the city contracts when he was still a Detroit firefighter, according to a report from the Detroit Free Press.

In perhaps the quote of the week, Mayor Duggan said: “In this business, the one way to make sure you never make a mistake is don’t do anything. We move very hard,” adding he was confident he could have showed voters a viable plan to transfer the demolition program from the Detroit Building Authority to the city and iron out its problems; however, the Council’s vote signaled members want to see that plan before a proposal is put on the ballot. (Detroit’s blight removal efforts have been funded primarily by $265 million in federal funding; now, however, the Motor City’s federal Hardest Hit grant funding for blight demolition is nearly depleted: as of September, the city was about halfway through Mayor Duggan’s demolition campaign that began in 2014, with approximately 19,000 vacant homes to go. The Mayor stated that about $8 million is allocated for blight removal through the spring. As part of the proposed bond, $50 million would have been pulled from FY2021 to be used in 2020, noting that CFO Dave Massaron is looking into ways that could still be accomplished: “We’re gonna have to slow demolitions down temporarily…One way or another, we’re gonna find a way not to shut down demolitions.”

November 15, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing federalism challenges in Puerto Rico to assess its path to statehood and its fiscal and physical challenges.

Unreconstructed. The American Society of Civil Engineers (ASCE) this week reported that the U.S. Territory of Puerto Rico’s public infrastructure is failing—in no small part due to the hold imposed on federal aid, noting that Puerto Rico needs up to $23 billion in public infrastructure investment over the next decade, because, in the wake of hurricanes Irma and Maria, which devastated Puerto Rico, the territory’s bridges, dams, drinking water, ports, roads, and power grids have reached a breaking point, even as federal recovery assistance remains not just tardy, but also inadequate, with the Society, in its report released this week, assigning Puerto Rico’s public infrastructure with a failing overall grade of D-, with its report card marking the first evaluation the organization has completed relating to the territory’s public infrastructure: the report found that the infrastructure needs on the island are huge; it calculated that Puerto Rico must increase received investment by $1.23 billion to $2.3 billion annually and putting it at $13 to $23 billion over the next decade, not counting deferred maintenance and hurricane-related recovery projects.

Although the report primarily addresses the FEMA’s slow release of some $42.5 billion, noting the territory had received only $15 billion as of last May, the report was similar to the views of Members of the House Appropriation Committee’s Subcommittee on Transportation and Housing and Urban Development last month, when they specifically pointed out the unexplained Department of Housing & Urban Development’s seeming withholding of some $19.9 billion in recovery assistance via the CDBG Disaster Recovery Fund, with the withholding justified after the Department refused to post the notice that would instruct Puerto Rico with regard to how to apply for and spend the federal dollars available to it. Ergo, because the CDBG disaster fund is not authorized, Puerto Rico does not have access to those dollars until the notice is posted.

Discrimination? HUD released similar notices for other disaster-stricken cities, counties, and states on the mainland, but held back in the case of Puerto Rico, because of what it described as its concerns with regard to government corruption in Puerto Rico, according to HUD Principal Deputy Assistant Secretary for Community Planning & Development David Woll, who described Puerto Rico a “very high-risk grantee,” because of the large amount of money and corruption issues that have troubled the territory, stating: “We want to have a belts and suspenders plan in place to make sure that, A) we’re protecting taxpayers, but B—more importantly—the money is going to the people of Puerto Rico, and not being wasted or abused.” Unsurprisingly, House Transportation Housing & Urban Development Subcommittee Chair David Price (D-NC.) was not satisfied with that response, noting that even after the notice is posted, there will be multiple opportunities to make sure the funds are being spent appropriately—or, as the Civil Engineers noted, once available, the federal dollars from the CDBG disaster recovery program can be spent on projects laid out in the ASCE report, such as hardening electrical grids in order to minimize the impact of future storms. (In its post-hurricane report. ASCE noted that Hurricanes Irma and Maria destroyed much of Puerto Rico’s electric grid in 2017, causing the U.S. territory to experience the longest blackout in American history and the second-longest blackout in the world). Thus, as Chair Price put it: “We’ve seen the urgent need for this funding…And yet, it has been held back.”

Congress had sought to compel HUD to post the Puerto Rico disaster funding notice last June as part of a supplemental appropriations measure by mandating HUD to act by last September 4th; however, HUD was unresponsive—leading Chair Price to note: “The administration has a duty to faithfully execute the law: Why didn’t HUD follow the law, and issue the Federal Register notice for mitigation funding for Puerto Rico?” In addition, the concern was not partisan: Rep. Mario Diaz-Balart (R-Fl.) also expressed dismay that the federal assistance has not yet been released, saying he was “troubled” that the agency missed the statutory deadline for publishing the notice. Rep. Pete Aguilar (D.-Ca.) added: “What it looks like is that you don’t believe that these individuals deserve this money, that these individuals deserve access to disaster recovery dollars.” Asst. Secretary Woll responded: “That’s just not true,” claiming HUD was “working extremely hard” to get the money to Puerto Rico.

Fiscal Disparity. The callous treatment by HUD comes against an entity somewhere between a state and a municipality, but, compared to states, income in Puerto Rico is almost half of what it is in the poorest U.S. state, Mississippi: the average income of Puerto Rican drivers, for instance, is equivalent to 45 percent of their counterparts in Mississippi; the median income of full-time Puerto Rican workers is $ 23,538. That same indicator for Mississippi, the poorest state in the United States, is 57 percent higher ($ 37,001), according to U.S. Census Bureau data—even as, according to the Institute of Statistics Cost of Living Index, the cost of living in Jackson, Mississippi is 9 percent lower than in San Juan: in other words, Puerto Rican workers earn less and have to spend more to survive compared to workers in the poorest mainland state.

Pay or salaries is, if anything a matter of even greater disparities: the average income of Puerto Rican drivers is equivalent to 45 percent of their counterparts in Mississippi; the same applies to construction workers (46 percent), firefighters (51 percent), the medical diagnostic industry (57 percent), educators (67 percent) and engineers (67 percent). Retired Public Administration Professor Mario Negrón Portillo notes: “Generally speaking, public employees are all underpaid, especially in Puerto Rico. Some are considerably underpaid, like teachers, police officers, and firefighters. There are exceptions to these bad salaries, such as Cabinet secretaries and judges,” adding that: “When you compare their salaries (judges) with that of police officers, the difference is incredibly huge.” He added, referring to the proposal to increase the salaries of judges in Puerto Rico between 30 and 44 percent. Puerto Rico Supreme Court Chief Justice Maite Oronoz Rodríguez. Noted the legislation including this initiative responds to the fact that judges’ salaries have not been updated since 2004 and to a drastic increase in the number of resignations recorded this year in this branch of Puerto Rico’s government: the proposed increase seeks to match the salary of judges in Puerto Rico to that of their stateside counterparts. According to economist José Alameda, the consumer price index has been showing annual increases of about 1.1 percent over the past decade: based on that, an adjustment in the purchasing power of judges, whose salaries have not increased since 2004, should be around 16.5 percent and not 30 percent, as proposed for municipal judges or the 44 percent for Supreme Court justices. Indeed, if the same percentage were applied to the minimum wage paid in Puerto Rico by federal law, which has not changed since 2007, workers who earn the lower salaries in Puerto Rico would receive at least $ 8.45 per hour, equivalent to an annual salary for these workers of an increase from $ 15,080 to $ 17,576. (Currently, a single mother with an income of $ 16,910 is considered poor under federal standards.)

Nevertheless, last week, José Ledesma, President of the Puerto Rico Chamber of Commerce spoke at a hearing before the legislature against an increase in the minimum wage. Economist José Joaquín Villamil noted: “I think that, as a matter of justice, the minimum wage could be increased to recover the loss in purchasing power. In 15 years, inflation has eaten up a portion of that $ 7.25 (federal minimum wage). At the very least, we should compensate for that erosion. There shouldn’t be much controversy over that: I think additional raises (to adjustment) should depend on the economy. You can’t increase salaries more if the economy isn’t growing.” He added that, with very few exceptions, Puerto Rico’s private sector has the financial capacity to assume an increase in salaries, so that workers can recover the purchasing power loss: the Planning Board estimates that, between 2007 and 2017, it took $1 to buy what cost 85 cents back then. Professor Portillo noted: “Perhaps, there are some companies that find it difficult to cover a raise, but the vast majority of businesses should not have problems. Maybe, the grocery store on a corner in Morovis, which has a minimum profit margin, has problems, but large chains, supermarkets, and stores in shopping malls, I don’t think they would have problems.”

This redistribution of wealth becomes clear when considering that, according to the Planning Board, the pay to workers in Puerto Rico represents a smaller portion of the net income generated by the island annually. In 2009, for example, workers were compensated with 61 percent of net income, which is the earnings generated after covering obligations. Estimates for 2018 suggest that this percentage dropped to 51 percent.

Puerto Rico is currently the jurisdiction with the greatest social inequality in the United States and is among those jurisdictions topping that category in the world.


The Suffering of Flint’s Children, and the Seemingly Unending Federalism Challenges for the U.S. Territory of Puerto Rico

November 8, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing federalism challenges in Puerto Rico, and assess the ongoing fiscal and physical challenges to Flint’s public school children.

Suffer the Innocent Children. One of the critical factors in Detroit’s chapter 9 municipal bankruptcy was the decrepit and dangerous state of the city’s public schools—physical effects which discouraged families with children from wanting to be in a city that is disproportionately dependent upon income taxes compared to most U.S. cities. They reasonably feared about the danger of the schools’ drinking water—and of crime. Fear which, four years ago, was justified when the state diagnosed high levels of lead. That is, some five years after the State of Michigan had switched the drinking water supply for the city of Flint, leading to the seepage of lead into drinking fountains at schools and in homes, the health problems not only increased medical care costs, but also undercut assessed property values and taxes. What parents would want to purchase a home where the nearby public schools could devastate the health of their children? Indeed, the contamination in Flint exposed nearly 30,000 schoolchildren to a neurotoxin known to have detrimental effects on children’s developing brains and nervous systems. Requests for special education or behavioral interventions began rising four years ago, when the water contamination became public, bolstering a class-action lawsuit that demanded more resources for Flint’s children.

In Flint, the percentage of the city’s students who qualify for special education services has nearly doubled to more than a quarter of its children compared to when the lead crisis first was detected—and, since last year, the city’s screening center has received more than 1,300 referrals—out of which approximately 70 percent of the students evaluated have required school accommodations for issues such like attention deficit hyperactivity disorder, also known as A.D.H.D.; dyslexia; or mild intellectual impairment, said Katherine Burrell, the associate director of the center.

“We have a school district where all that’s left are damaged kids who are being exposed to other damaged kids, and it’s causing more damage,” said Stephanie Pascal, who has taught in Flint for 23 years. But medical experts report there is no way to prove that the lead has caused the barrage of disabilities, while pediatricians in Flint caution against over-diagnosing children as irreparably brain damaged—fearing, understandably, the stigma to any family or business considering moving there. Interestingly, the Michigan State Department of Education, in challenging a class-action suit filed by the American Civil Liberties Union of Michigan and the New Jersey-based Education Law Center, has enlisted an expert who testified that the real public health crisis was not the lead-contaminated water, but rather the paranoia of parents, students, and teachers exposed to it—an expert who asserted that many of the problems uncovered by the lead testing might well already been in existence. Understandably, with the lack of confidence in what has been determined, Lisa Hagel, the Superintendent of the Genesee Intermediate School District, of which Flint’s schools are a part, noted: “What the research says is that as they get older, and cognitive demands get harder, we will start to see the demands get higher, and the resources are not going to be there.” The fiscal challenge is disheartening: between 2009 and 2013, some 41.5% of Flint’s residents lived below the federal poverty level—nearly three times as much as the state average: a quarter of the city’s families have an annual income of less than $15,000, and the city’s child poverty rate is 66.5%.

Reading, Writing, & Arithmetic. Flint’s schools, as the city’s tax base shrunk, contributed to an exodus from its public school to charter schools, increasingly contributing to public schools left with a small but troubled and impoverished student body. More than half a century ago, Flint enrolled nearly 50,000 students in more than 50 buildings; today, it educates 4,500 students on 11 campuses—while 55% of its school children attend charter schools, the second highest charter enrollment in the country. Five years ago, at the onset of the drinking water lead contamination, Flint’s school district had a $21 million budget deficit—a deficit which mean the math forced a subtraction of more than 200 staff members, including special education teachers: the system was transferring millions of dollars from its operating budget to pay for special education, and, in violation of federal law, it was segregating special education students from their peers for most of the school day. Flint’s teachers were—and remain–among the lowest paid in Genesee County.

Doing the Tax Math. Even prior to the discovery of the city’s lead contamination, the city’s public schools were leaking to charter schools—meaning the city’s core public schools were, increasingly, left with a smaller student body—and less support for the kinds of tax revenues needed to sustain a healthy system—and a serious fiscal challenge: with the schools not a draw, assessed property values were at greater risk. Indeed, over the last half century, enrollment at public schools has declined from nearly 50,000 students in more than 50 buildings to today’s 4,500 students on 11 campuses, while about 55 percent of the city’s kids today attend charter schools—the second highest charter enrollment in the country. Perhaps unsurprisingly, with the syphoning off of so much in special education funds, today the city’s public school teachers are among the lowest paid in Genesee County.

The suit here accuses the school systems of violating federal and state laws, including the federal Individuals with Disabilities Education Act, by:

  • failing to identify students who could qualify for special education services, and
  • failing to provide the mandated instructional services to those who do qualify and by punishing children for disability-related behavior.

The suit charges that students were denied assessments for education plans or behavioral intervention plans, and then were segregated from their peers, secluded and restrained, repeatedly sent home from school, expelled or arrested.

Impeachment? Federal Bureau of Investigation agents have arrested Puerto Rico Sen. Abel Nazario, the former Mayor or Alcalde of Yauco, who was first elected 19 years ago, representing the New Progressive Party (PNP). He was subsequently reelected in 2004, 2008, and 2012; he also serves as the Vice President of the PNP. The arrest was for allegedly conspiring to commit fraud; he also faces bribery charges for mishandling federal funds in his municipio of Yauco from the time of his public service as Mayor for allegedly conspiring to have employees bill the municipality for federal funds while working on his Senatorial campaign, as well as on other pro-statehood party members’ campaigns, according to the federal indictment. Unsurprisingly, the Senator has asserted the charges are “totally false.” He has pled not guilty and been released without bail. Nevertheless, Puerto Rico’s  District Attorney W. Stephen Muldrow noted that this “prosecution and that of other public officials involved in these types of schemes will be punished, and as a promise to taxpayers that such violations of the public trust will not be tolerated.” For Sen. Nazario, this arrest marked his second, after, last year in September, he was arrested related to accusations of defrauding his employees while serving as Mayor: according to the U.S. Attorney’s Office, his employees were mandated to put in two hours of voluntary labor per day—a mandate the Department of Labor identified as a violation. In response, Sen. Nazario agreed to pay almost $600,000 in back wages to 177 employees—and asserted he would not retaliate against the workers. Now he awaits trial in that case.

On the governance front, Puerto Rico Senate President Thomas Rivera Schatz asked for Sen. Nazario’s resignation shortly after his arrest, writing in a Facebook post that while the situation “is unfortunate for him and his family, it’s even worse for the people of Puerto Rico who watch these events with anguish that lacerate the trust in government institutions.” In response, Sen. Nazario said he believes the charges against him have not affected his work in the Senate, nor have they diminished people’s trust in the government, adding: “That’s why I’m addressing this in front of you and in front of the people…I’m never going to resign. I’m innocent, and innocent people do not resign. Only people who are afraid resign.” In the face of the events, however, Senate President Rivera Schatz filed a complaint with the Puerto Rico Senate Ethics Commission.

Edgardo Rosado, a spokesperson for Sen. Nazario, has asserted that the Senator is innocent, adding that the arrest is tied to an ongoing federal case involving people accused of charging the U.S. territory’s government for services which were never provided; other suspects have already been accused in that case, including a former director of the Puerto Rico Senate Government Affairs Office.

It seems the Senator is not alone: seven others have been accused of theft or bribery during his term as Mayor; moreover, he was not alone: the Justice Department accused Sen. Nazario and two former aides of illegally using municipal funds to pay five persons who actually worked for his Senate campaign—not for the town. The five people — known in Puerto Rico as fantasma or “ghost” employees, were also paid to campaign for other candidates whose support the Senator had hoped to gain for a bid to become the next Puerto Rico Senate President, according to the indictment.

A Setback for Statehood? The Senator, whose party supports statehood for Puerto Rico, has denied the charges, deeming them “totally false.” However, widespread popular anger over political corruption has become a potent political force in Puerto Rico, indeed, a major factor which contributed to the resignation last summer of former Gov. Ricardo A. Rosselló, also a New Progressive. Or, as Senate President Schatz put it: “It’s unfortunate for him and his family, but even more so for the people of Puerto Rico, who watch with anguish events that lacerate the trust in government institutions.”

Nevertheless, Sen. Nazario said on Wednesday that he would not step down, claiming: “I am innocent…The innocent don’t resign.”

Fantasma Government Employees? The issue of ethics has not been invisible, notwithstanding the Puerto Rican Senate’s own challenge with “fantasma” or “ghost” employees. Last May, federal authorities arrested the executive director of the Senate Office of Government Affairs and two other persons fraud charges, accusing them of being part of a scheme to obtain government contracts for work which they did not complete or performed improperly, and to submit and approve bills based on falsified time records and other documentation—including: Edwin Torres Gutiérrez, who was a special assistant to Mr. Nazario when he was Mayor; Claribel Rodríguez Canchani, who was the Yauco’s Human Resources Director. This investigation began after a routine audit of the town’s records by the Puerto Rico Comptroller’s Office three years ago last August 2016—an investigation which determined employees who were showing up for work only sporadically or not at all. Indeed, according to the authorities, Mr. Torres had instructed the five irregular employees to report to the town hall either once a week or once a month, albeit, when he learned that the municipio was under investigation, Mr. Torres Gutiérrez told them to begin start appearing twice as often, according to authorities, adding that when the irregular employees did come in, it was to collect paychecks and attend meetings with former Mayor Nazario and Mr. Torres about Mr. Nazario’s campaign, not to do any municipal work. The five employees submitted timecards with their work hours left blank. Mayor Nazario ordered his aides to process them and approve payments based on “false or no documentation,” according to federal prosecutors, with W. Stephen Muldrow, the U.S. Attorney for Puerto Rico noting: “This prosecution serves as a warning to other public officials involved in these types of schemes that they will be punished, and as a promise to taxpayers that such violations of the public trust will not be tolerated.” (The Labor Department’s Office of Inspector General was also involved in the investigation.)

Former Mayor Nazario, it appears, in not a stranger to unethical behavior: he was previously arrested a year ago last September, when he was vice president of the New Progressive Party, with federal authorities charging him with defrauding employees by requiring them to work two “voluntary” hours a day without pay, in violation of Labor Department regulations. The former Mayor initially agreed to pay nearly $589,000 in back wages to 177 employees; however, he later withheld the funds, according to the authorities, leading to his arrest. He has denied the charges and is awaiting trial in that case.

Will the President Be Impeached?What are the Chances for Statehood for Puerto Rico?

November 1, 2019

Good Morning! In this morning’s eBlog, we consider yesterday’s 232-196 vote in the U.S. House of Representatives to agree to impeachment procedures, before slipping south to assess the option for statehood in the U.S. territory of Puerto Rico.

Impeachment? The House yesterday voted 232-196 in support of advancing impeachment inquiry procedures: Republicans were unanimous in opposing the resolution, and two Democrats voted against it. The vote sets the stage for a public phase of impeachment proceedings related to the Trump administration’s policy on Ukraine. The next steps will likely force the Trump administration to determine whether or not to cooperate with the investigation in the wake of weeks spent complaining about the lack of transparency in the process thus far—and opens the door to Republicans to be able to request documents and testimony and issue subpoenas, albeit Democrats reserve the right to veto their demands. The procedures center on a July 25 phone call during which President Trump is reported to have asked Ukraine’s President to “look into” former Vice President Joe Biden and his son Hunter Biden’s business dealings in Ukraine, a contact that triggered an intelligence community whistleblower complaint alleging the President solicited foreign election interference. The President has insisted the call was “perfect” and about fighting corruption in Ukraine, not politics. To date, the White House has refused to cooperate with the impeachment inquiry since House Speaker Nancy Pelosi (D-Ca.) announced it just over five weeks ago. The White House has derided the investigation as illegitimate and unconstitutional, accusing Democrats of not affording the President due process and flouting past precedent by failing to hold a vote to formalize the investigation. The President and Republican allies have also criticized House Democrats for holding closed-door depositions as part of the first phase of the inquiry.

Nevertheless, the vote yesterday appeared to create little increased likelihood that the White House would be forthcoming. The President tweeted: “Republicans are very unified and energized in our fight on the Impeachment Hoax with the Do Nothing Democrats, and now are starting to go after the Substance even more than the very unfair Process.” White House efforts to block witnesses from testimony have also, for the most part, been unsuccessful, as Democrats have ushered in a number of current and former officials—both career and political appointees—to deliver private testimony under subpoena.

The Steep Step from Territory to Statehood. Puerto Rican leaders are making another effort to achieve statehood again after, this week, Rep. Jenniffer González-Colón, Puerto Rico’s sole non-voting member of Congress, introduced a bill to create a path for the U.S. territory to become the 51st state. Her bill, the bipartisan Puerto Rican Statehood Admission Act, would fund a ballot referendum in Puerto Rico in November of 2020, asking voters if they want statehood or not—a slight variation of previous ballot measures which went nowhere. Indeed, should such a bill pass, it would mark the third time Puerto Ricans have voted on the statehood issue since 2012. However, even were the effort to succeed, there would appear to be little certainty of a guarantee of statehood, because the result of such a vote would not be legally binding. Ergo, Thus, even if a majority of Puerto Ricans voted for statehood, the final decision rests with Congress, as has been the case previously—not to mention the U.S. Senate, where Senate Majority Leader Mitch McConnell (R-Ky.) has shown little interest in admitting Puerto Rico into the union.

Nevertheless, Puerto Rican leaders are pushing forward anyway. Part of their hopes rest with Democratic control in the U.S. House. Although Puerto Rico has been a territory under the Jones-Shafroth Act for more than a century, all Puerto Ricans are U.S. citizens, albeit the 3.4 million Americans who reside in Puerto Rico have fewer Constitutional rights than anyone living in the 50 states. U.S. citizens in Puerto Rico cannot vote for President in the general election or elect a voting member of Congress. Unsurprisingly, the question with regard to whether or not Puerto Rico should become a state has been the most divisive issue in Puerto Rico for decades. But Puerto Rico’s financial crisis, which began in 2006, began to revive support for statehood. The devastating aftermath of Hurricane Maria contributed to making the issue more urgent to resolve.

It appears the greatest obstacle for statehood is that our Constitution sets no clear, legal process for a U.S. territory to become a state—notwithstanding that some previous Presidents have endorsed statehood, including, former Presidents George W. Bush and Barack Obama; Puerto Rican elected leaders have been asking for a clear path to statehood since the 1960s: Puerto Rico’s Congressional delegates (meaning they may not vote on the floor of the U.S. House) have introduced multiple (failed) bills over the years, which granted Puerto Rico statehood based on the outcome of a popular vote on the island. Three years ago, the pro-statehood political party won control over Puerto Rico’s legislature, as Governor, as well as the territory’s non-voting Member of Congress. Two years ago last June, after the pro-statehood party swept into power, Puerto Ricans voted to join the United States as the 51st state, marking the fifth time Puerto Rico has held a referendum on whether to join the republic: 97 percent voted aye—the largest majority ever; however, less than a quarter of registered voters turned out to the polls—likely attributable to a boycott from the anti-statehood political groups, who were upset with regard to the way in which the referendum was written.

Former Gov. Ricardo Rosselló was fulfilling his campaign promise to push forward with the statehood process, as part of the pro-statehood party; the second main political party in Puerto Rico is the Popular Democratic Party, which supports remaining a commonwealth, whilst a minority of citizens support full independence. That support in no small part likely relates to the issue of parity: more federal funds would flow to Puerto Rico if it were a state, albeit, some of that benefit would be offset for Puerto Ricans who would face increased federal tax liabilities.

In the wake of the 2016 election, non-voting U.S. Rep. Jenniffer González-Colón introduced two House bills that would allow Puerto Rico to become the 51st American state. When she introduced a statehood bill a year ago last June, she was able to secure support from 53 Republicans and Democrats co-sponsors for her proposed Puerto Rico Admission Act, which would have created a task force to immediately start the process of transitioning Puerto Rico into a U.S. State by January 1, 2021. Perhaps one of the strongest proponents of the effort was former President George H.W. Bush, who, in his first State of the Union Address in 1989 stated: “Personally, I strongly favor statehood,” as he urged Congress to act.

Cities at Fiscal Risk on the Atlantic & Pacific

October 28, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing governance challenges in Atlantic City, New Jersey, before sweeping west to California to assess why nearly a score of its cities are at fiscal risk.   

… Everything dies baby that’s a fact
But maybe everything that dies someday comes back
Put your makeup on fix your hair up pretty and
Meet me tonight in Atlantic City

Betting on a City’s Future? Atlantic City Mayor Frank Gilliam last week pleaded guilty to soliciting donations to a non-profit youth basketball club he co-founded, where he had promised the funds would go to helping underprivileged children. Instead, however, he defrauded contributors of $87,000, which he spent on designer clothes, expensive meals, and trips. Thus, last Thursday, he pled guilty in a federal court to fraud and resigned from office hours later. The former Mayor thus became the sixth Atlantic City Mayor since the 1970s to leave office in disgrace: four of the past nine mayors have been arrested for graft; twelve years ago, one-third of the nine-member City Council pled guilty to receiving bribes—continuing what appears to have become a sordid tradition of more than a century of political bosses, many of them corrupt, associating with mobsters, shaking down constituents and businesses.

For his part, two years ago, allegations of campaign finance fraud arose—allegations a judge dismissed last year; then, last November he was involved in a fist-fight outside a nightclub at the Golden Nugget casino; the state declined to press charges. Last December the FBI and the Internal Revenue Service raided his home. Interestingly, in his book Boardwalk Empire: The Birth, High Times and Corruption of Atlantic City, author Nelson Johnson wrote that right from the get-go “corruption was organic.” He points back to Louis “the Commodore” Kuehnle, who ‘ran’ the city from 1890 to 1910: under his watch brothels, gambling dens, and speakeasies operated openly—noting that the only time the police stepped in came when someone was late with a payment. The “Commodore” eventually served time for election fraud, while his successor, Enoch “Nucky” Johnson ran the city and everything else: after three decades he was dethroned for tax evasion.

In the wake of World War II, the sea side city’s fortunes took a downturn as one of the nation’s premier gaming sites—and for governance: Two Mayors were arrested for extortion in the early 1970s. But, when gambling became legal in 1976, the city once again became a mecca, albeit, as author Bryant Simon noted: “There was a mismatch between the money in the city and the size of the city itself (the population is 38,000).” By the next decade, notwithstanding pledges to keep gambling clean, politicians kept getting into trouble: former Mayor Mike Matthews was arrested in 1983 for extortion. At his sentencing, he told the court: “Frankly, greed got the better of me.” His successor, Atlantic City’s first black Mayor, James Leroy Usry, a former professional basketball player, accepted bribes and broke a campaign-finance law. Twelve years ago, former Mayor Bob Levy resigned as Mayor after disappearing for a spell: he subsequently plead guilty to lying about his military record to inflate his veteran benefits. By the time former Mayor Don Guardian was elected in 2014, the city had lost its gambling monopoly: casinos were closing and the city was running out of money—leading to a state takeover. Unsurprisingly, former Mayor Guardian lost his re-election bid to Mr. Gilliam.

In New Jersey, where filing for chapter 9 municipal bankruptcy is permitted only with the consent of the Municipal Finance Commission, the Governor is authorized to appoint a chief operating officer to effectively co-manage—and, in the event of receivership, allows for the appointment of a receiver to address revenue municipal bonds; property owners, who were caught off guard by a tax increase this past summer, may see more of the same in coming years unless state and city officials develop long- and short-term plans to tackle the issue head on. The issue will be framed by the outcome of a citywide property revaluation scheduled to be completed by the end of this year: increasing debt payments and the likely reduction in casino investment alternative tax revenue used to pay down the city’s debt obligations could all contribute to an increase in taxes. Indeed, last August, property owners were shocked to see their taxes had increased significantly: $676.50 on a home assessed at $150,000, notwithstanding that county, school, and city officials adopted budgets with flat or reduced tax rates.

Ergo, a tax task force, formed by Lt. Gov. Sheila Oliver to address the present tax increase and identify solutions which would prevent future increases, is nearing the end of its work—work which could result in findings and recommendations as soon as the end of the month. Lt. Gov. Oliver noted there remained a possibility the task force could present a solution to assist Atlantic City property owners with this year’s fourth quarter increases. Mayor Marty Small Sr., who served as Chairman of the City Council’s Revenue and Finance Committee for the past several years, said state and local officials are aware of the looming fiscal pitfalls, noting: “No. 1 goal as mayor is to come up with solutions to not put this on the taxpayers of Atlantic City…We’re in a tough situation…but the bottom line is we need more revenue sources and we need to grow the ratable base.” (Atlantic City’s ratable base has shrunk by nearly 86% over the last decade, from $20 billion in 2008 to less than $3 billion last year; nevertheless, the city’s property base is still overvalued, based on a formula used by Atlantic County.) Indeed, the property revaluation—the first since 2008, and only the second since 1978, according to Council Vice President George Tibbit, is going to have an impact on taxes: “When property values go up, taxes go up…because of the revaluation, a lot of people’s taxes are going to go up.”

Betting against Taxes? We have yet to find anyone who likes taxes—and even fewer who like the concept of increasing taxes. Ergo, unsurprisingly, in Atlantic City, there is an effort (via a petition) to change the city’s form of government : Jim Kennedy, local economist and former Executive Director of the Casino Reinvestment Development Authority, reports two ways local officials could stave off another tax increase would be to seek additional state aid or defer certain costs in upcoming budgets—adding that, because the state has been weaning the city off transitional aid for several years, an increase in aid is unlikely, and adding: “The other option is to find a (line item in the upcoming budget) that they just don’t pay this year.” Some would describe this as digging the fiscal hole deeper: the last time Atlantic City deferred paying its obligations, in 2015, it resulted in a $49 million municipal bond issuance last year which increased the municipality’s annual debt payments: based on the bond statement, Atlantic City was scheduled to only make payments on the interest in 2018 and 2019, but, beginning in 2021, will begin making multimillion-dollar payments on the principal, with the combined interest and principal payment reaching nearly $5 million for the FY2021 budget year before nearly doubling to $9.9 million the next four years and finishing with a $12.5 million payment in FY2026. The city, uneager to gamble on its fiscal future, also plans to look for other ways to generate revenue—especially because of its substandard credit rating, which has limited its access to capital markets—and raised the cost of borrowing: two years ago, the city paid $29 million toward municipal debt, but for FY2019, Atlantic City made $35.3 million in debt payments—a 20% increase. Indeed, Atlantic City’s total debt increased nearly $130 million between 2015 and 2018, according to annual statements filed with the New Jersey Department of Community Affairs. For FY2018, Atlantic City’s municipal debt was $376.7 million—and, when local school debt is included, the total jumps to $441.5 million.

A view from the State Perspective. Lisa Ryan, spokeswoman for the state Department of Community Affairs, the agency which oversees city operations, noted: “Debt service payments will increase in the next few years, so the city’s and state’s focus is on keeping the city budget stable, holding the line on municipal property taxes, and addressing quality-of-life issues, so that Atlantic City retains its current residents and positions itself to attract new residents to strengthen the city’s ratable base.” However, a provision in the Payment in Lieu of Taxes legislation includes a crediting mechanism which holds the casino’s payments at 2015 levels. Thus, even though total gaming revenue is projected to eclipse the next benchmark ($3 billion), the increase in payments by the casinos is offset by a larger credit that is paid using money dedicated to pay down the city’s debt. Council Vice President Tibbitt said the “double-standard” which exists for the casinos compared to the city’s taxpayers needs to be addressed immediately: he said if the state would return even a portion of the nearly $90 million in taxes and fees collected from luxury, parking, room, and sports betting to the city, property taxes would not be an issue right now.

A view from a Task Force Perspective. The Taskforce on Atlantic City Initiatives has developed proposals regarding fiscally responsible academic opportunities in Atlantic City, noting that everything is on the table,” as stakeholders have been meeting behind closed doors, even as Steve Callendar, President of the Casino Association of New Jersey, said the PILOT has stabilized the city’s economy, noting, in a statement: “As intended, the PILOT has brought certainty and stability to tax payments for the operating casinos and the government of Atlantic City…This stabilization has helped maintain thousands of jobs and investment dollars in the market and enabled and stimulated further diversification, investment and growth.” One option, reducing spending, could eliminate the need for a tax increase; however, there appear to be few areas left in municipal expenditures where local officials could cut costs: the city has reduced spending by more than $53 million in the past five years and passed an operating budget for 2019 that was slightly more than $207 million.

Are California’s Cities at Physical and Fiscal Risk? In California, where wildfires are wreaking such awful human and fiscal havoc, new data from the state auditor indicates pensions, questionable management, and other fiscal risks have put at least 18 municipalities at some fiscal risk, finding that pockets of the state could be devastated in the next recession, according to a first-in-the-nation dashboard released Thursday by State Auditor Elaine Howle. According to the Auditor’s report, Compton, Atwater, Blythe, Lindsay, and Calexico were the top 5 cities, based on their cash flow, debt burden and pension liabilities in a new online display for the High Risk Local Government Audit Program. Others include Oakland, Richmond, and El Cerrito in the San Francisco Bay Area and San Gabriel, Monrovia, West Covina, Vernon, and Maywood in Los Angeles County. The Central Valley towns of Lindsay and Ione also signaled possible distress. Auditor Howle noted: “Right now, we’re in strong economic times, but everyone is expecting that recession to hit…So hopefully this information will trigger discussions and decision-making that better prepares cities to be able to respond without cutting services.” Her office began examining local governments for signs of fiscal shakiness in the wake of a financial scandal in the City of Bell, an incorporated city in Los Angeles County, near the center of the former San Antonio Township, with a population of 35,477. Then-Assemblyman Ricardo Lara, whose district includes Bell, authored Assembly Bill 187, authorizing the Auditor to determine whether local agencies are at risk of fraud, waste, or mismanagement: the resulting top 18 high-risk cities comprise a mix of size and geographic areas, but regional pockets were apparent in the East Bay and inland Los Angeles County. Indeed, Compton was determined to be at highest risk due to the lack of transparency over its finances: the working class city near Los Angeles, known in years past for its high crime rates and gang problems, also has a history of being cited for alleged waste, fraud, and abuse—and, previously, neared chapter 9 municipal bankruptcy. The Auditor also noted that the desert town of Blythe in Riverside County has also been perceived as at some fiscal risk, due to its high poverty rate and shrinking population.

More bad gnus: The East Bay city of El Cerrito made the list at No. 7 for poor liquidity and low reserves in addition to a high ratio of pension obligations and costs. And suburban communities to the east of Los Angeles – San Gabriel, Monrovia and West Covina – were singled out for being saddled by high pension and retirement burdens. Compton City Manager Craig Cornwell, in a statement, said that the city has been working for the past year with the state Controller’s office, and “diligently preparing to release the audited financials so the public will have a better understanding of our fiscal health,” adding: “We remain dedicated to continuing to make improvements.” Atwater City Manager Lori Waterman said the Central Valley community has been cooperating with the state auditor’s team, and has implemented recommendations that helped take a $4.1 million deficit down to zero over the past five years, noting: “We didn’t get here overnight…and so they understand we’re not going to get out of it overnight.” But Jill Oviatt, Director of Communications and Marketing for the League of California Cities, took issue with Auditor Howle’s findings, calling the dashboard “a data dump that’s void of context and analysis,” noting that most of the numbers are from the 2016-17 fiscal year, which is the most recent year for which information is complete: “It doesn’t tell the story of now, and so we’re not really clear on how helpful this dashboard is to the public, to the cities, or basically anybody.” However, Oakland City Administrator Sabrina Landreth acknowledged that the dashboard “does highlight the challenges many California cities, including Oakland, are facing related to pension obligations and retiree medical benefits,” while City Manager Waterman noted it offers an additional incentive to improve Atwater’s fiscal health next year: “I would anticipate when the new list comes out you’re going to see more valley communities on here because of the retirement obligations, but I would anticipate that Atwater is going to be substantially moved down the list because of the strides that we made.”

Auditor Howle said her office can investigate local agencies if it receives authorization from the Joint Legislative Audit Committee. In the case of Bell, eight officials, including the City Manager and Councilmembers, were convicted on corruption charges for looting the city treasury and boosting their pay and benefits; she also noted there are pockets of the state gravely at risk to the next recession, noting she hopes the dashboard will prevent the next City of Bell scandal by fostering transparency—and better prepare cities for the next economic downturn even as pension costs continue to climb: “If some of these costs continue to go up and these cities aren’t prepared for them, will they have to cut services in order to pay pensions, to pay for benefits, to pay for the debts that some of the cities have taken on.” With assistance from a panel of local government financial experts, Auditor Howle’s office has filtered nearly all 482 California cities through 10 financial criteria, six of them addressing pension and retirement debt. (Eleven cities were omitted, because they were either too small or had incompatible financial reporting requirements.) Her office used green-yellow-red traffic light colors to indicate a city’s level of risk, finding that while 18 cities are at high risk overall, 236 cities were labeled moderate risk, and 217 cities deemed low risk for the 2016-17 fiscal year.

In assessing the amount of revenues a municipality is collecting and spending each year, Auditor Howle’s team looked heavily at the pension and retirement obligations that make up a big part of local government debt in California: for example, the dashboard displays a city’s pension obligations by comparing its unfunded pension liability and so-called pension obligation bonds, a form of borrowing to cover existing pension costs, to the city’s revenue. And, in trying to forecast how well cities can manage future pension costs, her team pulled 5-year financial projections from the California Public Employees’ Retirement System (CALPERS), finding a high number—nearly half of all cities—are at high risk of insufficient funds to cover their CalPERS payments unless they cut services or impose new taxes. (She said she plans to update the list annually.)

Quien Es Encargado? Who is Responsible for Approving a Plan of Debt Adjustment for a U.S. Territory–an issue in the Twilight Zone between a Municipality authorized by state law to file, versus one where chapter 9 is not?

October 25, 2019

Good Morning! In this morning’s eBlog, we consider the challenges—fiscal and political—of determining governance authority in the U.S. territory of Puerto Rico.   

Although his ranking member, Rep. Rob Bishop (R-Utah) has distanced himself from efforts to amend PROMESA, the Chairman of the House Committee on Natural Resources, Raúl Grijalva (D.-Az.) was hopeful this week he would be able to markup legislation, “To amend the Puerto Rico Oversight, Management, and Economic Stability Act or ‘PROMESA,’ and for other purposes,” to promote amendments aimed at ensuring greater transparency, protecting essential public services, and reducing the powers of the PROMESA Oversight Board—that is, putting the Governor and Legislature on a path to resuming sovereignty. In the wake of nearly a three-hour hearing on the draft bill that has circulated with a dozen significant amendments to PROMESA, However, Chairman Grijalva acknowledged that the proposals to appoint a federal Reconstruction Coordinator, and a Revitalization officer for the Electric Power Authority (PREPA) generate controversy, or, as he put it: “There seems to be support for the idea of auditing the debt, defining essential services, promoting greater transparency, avoiding conflicts of interest and slightly reducing the Board’s quasi-colonial powers.”

The four Puerto Rican lawmakers who testified before the committee and San Juan Mayor Carmen Yulín Cruz supported the idea of creating, at the federal level, a commission to audit the debt and that the federal government pay the costs of the PROMESA Board. Although there was general opposition to the idea of appointing a Revitalization officer for PREPA, Puerto Rico’s CFO, Omar Marrero, and Representatives Carmelo Ríos, Eduardo Bhatia, Antonio Soto, and Rafael “Tatito” Hernández said that if the Reconstruction Coordinator would serve as a liaison at the U.S. government level, they could support the idea. Likewise, in her written testimony, PROMESA Board Executive Director Natalie Jaresko had already given the green light to the idea of appointing a federal Reconstruction Coordinator. In addition, Rep. Bhatia noted: “If it is as defined in the draft legislation then, no. If it’s to unlock what’s happening here in Washington, it could be helpful.”

Nevertheless,  Mayor Cruz still rejected the idea of a new federal layer on the reconstruction process and stressed that PROMESA is what she termed a “manifestation” of the territory’s colonial situation; she insisted that Mayors control funds aimed at Puerto Rico’s recovery in the wake of the catastrophe caused by Hurricane María: she recommended appointing, under PROMESA, a kind of an advisory committee that includes the Mayors; she also said it is key to define which essential public services must be protected amid the quasi chapter 9 debt restructuring process, at a time when there are tens of thousands of homes still with tarps after Hurricane María, as well as tens of thousands of Puerto Ricans without health insurance.

Joining them in testifying before the Committee were New Progressive Party (PNP) Senate spokesman Carmelo Ríos, PNP representative Antonio Soto, and PDP House Speaker Rafael “Tatito” Hernández. During Director Jaresko’s testimony, a demonstrator raised a sign with a vulture, referring to the so-called vulture funds that own a large part of Puerto Rico’s public debt; others waved a Puerto Rican flag with black stripes.

Although Chair Grijalva had originally called Governor Wanda Vázquez Garced, it was announced Friday that she would be represented by Omar Marrero, the Executive Director of the Fiscal Agency and Financial Advisory Authority (FAFAA). Mr. Soto testified on behalf of House Speaker Carlos “Johnny” Méndez, and Rep. Ríos represented Senate Speaker Thomas Rivera Schatz.

In the capital in San Juan, the PNP legislative majority eliminated the debt audit commission, which was created during the administration of Alejandro García Padilla. However, Rep. Ríos testified that if the commission were created at the federal level, the PNP legislative leadership, which Commissioner Jenniffer González recently welcomed, would support it. Nevertheless, prior to the hearing, Ranking Member Rep. Bishop had circulated a press release in which he described yesterday’s hearing as a distraction and an effort aimed at seeking headlines: he claimed: “The Democrats’ draft legislation is a distraction that uses a complex crisis for trivial pandering…Democrats are trading Puerto Rico’s path to stability and statehood for political points and headlines.” Similarly, Director Jaresko also described Chair Grijalva’s draft legislation as a distraction in her presentation, asserting that no changes to the law are required, although she supports, like all those who testified yesterday, the bill by Democratic Congresswoman Nydia Velázquez (D.-N.Y.) seeking to avoid potential ethical conflicts with Board contractors. Chair Grijalva said Rep. Bishop can represent “the majority” of Republicans, “but not all of them,” whilst acknowledging that it will be a difficult process, and opining that Rep. Bishop’s position might necessarily represent a bad omen for a PROMESA amendment bill in the Senate, where Republicans have a 53-47 majority. (Ranking Member Bishop is of the view that the status quo should be maintained.  A second hearing has been scheduled for the end of the month, with the Chair hoping to report legislation in December or January.

Another U.S. Territory’s perspective. At the hearing, Guam Delegate Michael San Nicholas asked Ms. Jaresko whether it would not be counterproductive to promote investment in Puerto Rico when it is the PROMESA Board members who are mainly taking decisions on fiscal responsibility and not the elected government of Puerto Rico. For her part, Delegate González made clear she will support measures aimed at greater “transparency and accountability.” Indeed, earlier in the week, she supported a debt audit, and reaffirmed her support for seeking a language of consensus to define the essential services which must be protected, such as those related to education, health and public safety, as well as public employees pensions. Delegate González, however, opposed the way in which the position of federal Reconstruction Coordinator is described, and she also opposed the appointment of a Revitalization officer only for PREPA; rather, she stated, there must be a deeper discussion about the current position of Infrastructure Revitalization Coordinator before proposing its elimination, adding her support for statehood. Mayor Cruz noted that she promotes Puerto Rico’s self-determination and that “My country is Puerto Rico. I am a citizen of the United States, but I’m a Puerto Rican,” as she advocated for Puerto Rico to have the power to sign international agreements, but at the same time full access to Medicaid and Medicare programs. Unsurprisingly, Reps. Nydia Velázquez (D-Puerto Rico) and Darren Soto (D-Fla.) Members of the Natural Resources Committee, expressed doubts about the idea of creating new federal positions to oversee the territory’s affairs. Thus, unsurprisingly, the powers of the PROMESA Board and how to define essential services were the issues which generated long debates: although they did not support Chair Grijalva’s proposed language, both lawmakers and Mayor Cruz agreed with Rep. Bhatia’s expression that it should be the government of Puerto Rico to decide with regard to which essential services are to be protected. While, with regard to the oversight Board, Mr. Marrero insisted that the fiscal entity should be prevented from imposing restrictions on specific spending when approving fiscal plans and the budget so that the entity does not get into public policy decisions: “The role of the Board should be to decide the size of the room, not to arrange furniture.” As they did in the written statements, as reported by El Nuevo Día, CFO Marrero and Director Jaresko rejected the creation of a debt audit commission, cancelling the territory’s unsecured debt, defining essential services, appointing a Revitalization officer for PREPA and to the idea of considering that documents on the debt aa public documents.

Not R-O-L-A-I-D-S. Meanwhile, this week, HUD Secretary Bren Carson clashed with Rep. Nydia Velazquez (D.-NY) on the issue of disaster or FEMA funding for Puerto Rico—with the issue centered on HUD missing a deadline to give Puerto Rico instructions on how to apply for $8.3 billion in aid to prevent damage from future natural disasters. (Legislation the President signed last June gave HUD a 90-day deadline to promulgate those rules: ten jurisdictions included in the bill received the guidance they needed, the eleventh, Puerto Rico was the only jurisdiction omitted. Sec. Carson was grilled by the Rep. Velasquez on the apparent decision to withhold funding over concerns about the government’s management, telling Sec. Carson: “Last week, your Chief Financial Officer and your principal deputy assistant secretary for community planning and development admitted before Congress that HUD intentionally missed a legally required deadline that would have made congressionally appropriated funds available to Puerto Rico: Let me ask you, where specifically in federal law is HUD empowered to unilaterally withhold…funds that have been appropriated by Congress?” Perhaps unsurprisingly, there has been no answer.

The Problem with Retirement. The Puerto Rico House has voted unanimously to not collaborate with pension cuts found in Puerto Rico’s proposed plan of adjustment: the House voted 49 to 0 with two members absent on Monday for the resolution that was addressed at a Puerto Rico Oversight Board plan of adjustment-a plan which includes 8.5% cuts to pension amounts over $1200 per month. The resolution directs the President of the House not to cooperate with the PROMESA Oversight Board-proposed plan of debt adjustment. The PROMESA Oversight Board has a mandate under the Puerto Rico Oversight, Management and Economic Stability Act to restructure approximately $123 billion of municipal bond and pension obligations and restore fiscal stability—with the Board is to remain in operation until the U.S. territory has had a balanced budget for three consecutive years. “The intent of the House resolution is to express the most absolute and energetic rejection of the Legislature of Puerto Rico to the Fiscal Oversight Board Plan of Adjustment to recommend to the federal court a cut of 8.5% to the amount that our public pensioners receive from the Government of Puerto Rico; to express that the legislature will not approve legislation that makes the aforementioned adjustment plan feasible; to authorize the presidents of the House of Representatives and the Senate of Puerto Rico to perform all the acts they deem necessary to enforce the rejection declared above; and for other related purposes.”

The guru of chapter 9 municipal bankruptcy, Jim Spiotto, Managing Director of Chapman Strategic Advisors, said that Title III Bankruptcy Judge Laura Taylor Swain did not, however, require the approval of the Puerto Rico House or Senate; however, after approval, the Legislature could attempt to over-appropriate money for the pensions so the pensions could be paid at the originally promised levels. Mr. Spiotto added that parties could go to a court to get it to order the lower levels of spending, but, by then, matters could have deteriorated—noting it would be better for the PROMESA Board and the legislature to discuss their differences now rather than turning to the courts later, adding that Puerto Rico’s case was the first time since World War II in which at least one body of the local government is united in opposition to the actions of the control board. Gov. Wanda Vázquez has said that she supports the plan of adjustment as a package, even if she would rather it did not reduce pensions.

Protecting a Municipality’s Children & Assessing the U.S. Supreme Court’s Perspective on the U.S. Territory of Puerto Rico

October 21, 2019

Good Morning! In this morning’s eBlog, we consider the FBI investigation of the Mayor of Taylor, Michigan on charges of racketeering, bribery, wire fraud, and money laundering, then we assess the City of Detroit’s efforts to protect its children, before returning to Puerto Rico to assess its status in the U.S. Supreme Court. 

Mayoral Integrity? The FBI has subpoenaed documents about Taylor, Michigan Mayor Rick Sollars’ re-election fundraising while investigating the potential charges of racketeering, bribery, wire fraud, and money laundering, according to a grand jury subpoena. It appears investigators are focused on the use of the city-owned Lakes of Taylor golf course from 2016-18 and whether Mayor Sollars’ re-election committee or a third party paid to use the facilities, according to the subpoena.

The subpoena provides new insight into an ongoing corruption investigation which emerged publicly last February when FBI agents raided City Hall, the Mayor’s home and cottage, and the home and office of a city contractor: investigators seized campaign records and $206,493 from Mayor Sollars. Subsequently, they raided the home and business of a second businessperson.

Taylor, a suburb of Detroit, a municipality of just over 63,000 in Wayne County, is the 17th most populous city in Michigan: it was named in honor of former military hero and 12th President of the United States Zachary Taylor. Taylor Township was organized on March 16, 1847 from 24 square miles which had originally been part of Ecorse Township: it is 18 miles southwest of Detroit.

Although the grand jury subpoena was issued last April, it was only revealed this week in the wake of a Freedom of Information Act request—with said requestor subsequently, in an email to the Detroit News, writing: “It is apparent from the newly released federal grand jury subpoenas that Mayor Sollars may be facing multiple federal felonies: The detail contained in the newly released federal grand jury subpoenas seem to indicate that a number of city vendors have been spilling the beans with respect to Mayor Sollars and his campaign fundraisers.”

As of yesterday, prosecutors had not filed any criminal charges since searching the locations, and Mayor Sollars remains in office. It seems the golf course and banquet center has been a frequent setting for Mayor Sollars, who delivered his State of the City address at the facility just two days after the FBI raids. He has, unsurprisingly, professed his innocence. The grand jury subpoena sought documentation related to golf
fundraisers and cigar parties Mayor Sollars’ re-election committee has held at the golf course since 2016. The subpoena here specifically requested copies of checks, credit card documents, and records of any cash payments to the Lakes of Taylor related to the various events.

It seems Mayor Sollars’ election committee has not filed a campaign statement since last year, according to county elections records; a year ago, in October, the
committee reported a $162,382 balance. The campaign has hired the Clark Hill law firm to review campaign finance reports and correct irregularities involving contributions and expenses, according to attorney Michael Pattwell, writing: “Since this summer, the committee has been working with the Michigan Secretary of State to prepare amended campaign finance reports…Once the committee has amended those historic campaign finance reports, it will turn its attention to preparing and filing the more recent reports which had not been filed due to the federal government seizing the underlying records in an unrelated matter.”

During the City Hall search, investigators were seeking records linking the Mayor to property management owner Shady Awad, records involving the Mayor’s personal and campaign finances, as well as his casino activity, according to search warrant records obtained by The Detroit News.

Mayor Sollars was first elected nearly five years ago in the wake of serving two terms on the City Council and a career in private business as a partner of three Romulus-based manufacturing companies. Now, federal prosecutors are seeking to seize his home and vacation chalet in Lenawee County: they have filed liens to have the approximately $600,000 worth of real estate forfeited to the government upon conviction.

Suffer the Little Schoolchildren? When the Detroit public schools opened this year, the Detroit Public Schools Community District took steps to ensure that families were not afraid to send their children to school, regardless of their immigration status. Indeed, the system’s sanctuary policy bars federal immigration authorities, including Immigration and Customs Enforcement, from entering schools without a search warrant and district
personnel from collecting information on students’ immigration status. Compared to other states, Michigan does not have a large immigrant population—approximately seven percent of Michigan’s population is foreign born (compared to about 14 percent nationwide), albeit about 13 percent of the state’s school-age children have at least one immigrant parent. (Over 80 percent of the children of immigrant parents in Michigan are
born in the U.S.) Detroit Public Schools Superintendent Nikolai Vitti noted: “The trauma our kids are dealing with is very real: Every day, they don’t know if mami and papi are going to come home,” as he explained his recent announcement of new guidelines at a community meeting in the wake of highly publicized immigration raids of Mississippi poultry processing plants over the summer, where nearly 700 workers were arrested in
the biggest work site immigration enforcement operation in a single state: the Superintendent noted: “The immigration raids shocked our immigrant community and heightened the fear that already existed due to the positions of the president and his administration on immigration and immigrants in general.”

Recognizing that hundreds of children did not go to school for days after the raids, Superintendent Vitti considered it crucial to delineate the school district’s position: “The community meeting allowed our position to be better understood and empowered students and parents to know we supported and protected them,” at a meeting where he was assisted by Spanish, Arabic, Bengali, and Hmong translators—representing the most common languages spoken in the district. The event came in the wake of an epistle the District sent parents with a clear message: “School personnel have been directed not to allow any officials from Immigration and Customs Enforcement (ICE), U.S. Customs and Border Patrol (CBP) or other federal immigration enforcement agencies access to our school buildings or grounds.” The letter also said that personnel at the campuses had been directed not to provide any federal law enforcement agents with information about students. Protecting the city’s children has mattered, because Michigan has one of the nation’s highest rates of arrests for suspected immigration violations.

Getting Ready to Rumble. The U.S. Supreme Court will hear oral arguments tomorrow on the legitimacy of the debt restructuring being imposed on Puerto Rico by the PROMESA Financial Oversight and Management Board whose members were not confirmed by the U.S. Senate, with the U.S.  Chamber of Commerce and the American Civil Liberties Union among the parties which have amicus briefs. A Supreme Court ruling in the case could have a far-reaching impact on the separation of powers between the executive and legislative branches. Likewise, the court’s decision could
invalidate the authority of the PROMESA Oversight Board—with questions for the court to consider related to the original Jones-Shafroth Act creating Puerto Rico as a U.S. territory, as well as reviewing decisions known as the Insular Cases and rule on the constitutional rights of U.S. citizens living in territories outside the 50 states.

The PROMESA Oversight Board had lost an appellate court lawsuit filed by the hedge fund Aurelius Investment and other hedge funds as well a labor union representing utility workers, when the First Circuit of the U.S. Court of Appeals ruled that the
appointment of members of the Oversight Board violated the separation of powers contained in the Appointments Clause of the U.S. Constitution, because former President Barack Obama’s appointees were not first confirmed by the U.S. Senate.

The federal government’s brief wrote that Congress acted, because “Puerto Rico faced the most debilitating fiscal emergency in its history” with the Commonwealth and its instrumentalities loaded with “around $71.5 billion in outstanding debt, more than the
whole annual output of the island’s economy…Their credit ratings had been downgraded to junk, leaving them unable to borrow money on the bond markets…Nor could they get debt relief through the federal or municipal chapter 9 bankruptcy code.”  It was because of this “financial catastrophe” and “humanitarian crisis for the more than three million U.S. citizens living in Puerto Rico” that Congress acted. But the PROMESA Oversight Board and the federal government argue that the Appointments Clause does not apply in this case under Article IV of the Constitution, which empowers Congress to admit new states and administer the territories. So the question for the court is whether some
parts of the Constitution, such as the Appointments Clause, do not apply to U.S. territories.

For their part, the utility workers union, Unión de Trabajadores de la Industria Eléctrica y Riego Inc., represents employees of the Puerto Rico Electric Power Authority (PREPA), who, in their amicus brief, wrote that they have been “extremely harmed” by the “profound austerity measures” imposed by the Oversight Board on their salaries, bonuses, pension, and health plans, writing: “The Oversight Board has rushed to finalize as many actions as possible, all while holding an unconstitutional appointment, thus, having no authority to act.”

The appellate court, however, allowed the PROMESA Oversight Board’s previous actions to stand under the so-called de facto officer doctrine as long as a new Board was promptly nominated by the President and confirmed by the U.S. Senate. President Trump has re-nominated all of the current Oversight Board’s members since that ruling;
however, the U.S. Senate has not voted on confirmation.

In its brief, the U.S. Chamber of Commerce argues that the de facto officer doctrine should not be allowed to paper over constitutional errors: “Never before has the court endorsed use of the de facto officer doctrine to excuse structural constitutional errors that go to the core of preserving political accountability and protecting individual liberty,” as the Chamber requests that the case be remanded to the lower courts “unless and until the constitutional violation has been cured.”

The ACLU and its sister chapter in Puerto Rico have asked the Supreme Court not to use the so-called Insular cases to decide whether the members of the Oversight Board required Senate confirmation under the Appointments Clause. The Insular Cases from the early 20th century determined that residents of territories had only some of the protections of the U.S. Constitution: those rulings distinguish between incorporated territories destined for eventual statehood, such as Alaska, and unincorporated territories that were not. “The Insular Cases, which impose a second-class constitutional status on all who live in so-called ‘unincorporated’ territories, explicitly rest on outdated racist assumptions about the inferiority of ‘alien races,’ and depart in unprincipled ways from the fundamental constitutional tenet of limited government,” the ACLU said. Those Supreme Court decisions came under Chief Justice Melville Fuller, who also led the 1896 majority decision in Plessy v. Ferguson which established the “separate but equal doctrine” of racial segregation–albeit, as Rafael Cox Alomar, a Professor of Law at the University of the District of Columbia, who is one of four constitutional scholars who filed an amicus brief, wrote, the professors are asking the Supreme Court to either not use the Insular cases in deciding the case or that those decisions be overruled, describing them to the Bond Buyer as the “consequence of a racist approach: We are saying the Constitution fully applies to Puerto Rico.”

Motor City Assessments? Detroit and Wayne County elected officials are headed back to the state capital in Lansing to seek relief from the Legislature for fines and penalties that low-income homeowners have been assessed for years of unpaid property taxes. Mayor Mike Duggan, Wayne County Executive Warren Evans, and other local officials announced a proposal Wednesday that would lower the monthly payment plans for homeowners who owe back taxes by erasing 6 percent interest penalties and other fines which were added on top of their unpaid tax debts. Under the proposal, individuals earning less than $19,000 a year or a family of four earning less than $28,675 would qualify for the interest and penalties on their back tax bill to be forgiven, Mayor Duggan said: for an average homeowner paying $120 a month in taxes and penalties, the monthly payment would be reduced to $20 for the portion of property taxes which they still owe, according to the Mayor. Officials estimate around 20,000 homeowners in Wayne County who are behind on their taxes may fall under this income cap to qualify for the relief.

There are usually as many as 31,000 homeowners in Wayne County behind on their taxes, according to Detroit CFO Dave Massaron: most of these homeowners entered into payment plans as a result of a 2015 ordinance Mayor Duggan had advocated for which allowed the Wayne County Treasurer’s office to create a repayment plan. The
goal of the proposed relief of fees and penalties is to avert further foreclosures for unpaid taxes — one of the leading causes of abandonment and blight in Detroit’s neighborhoods. Or, as Mayor Duggan put it: “We’ve got to find a way for them to be out and from under this once and for all. And I think all of us should want those 30,000 people to not be living in anxiety over their house.”

State Rep. Wendell Byrd (D-Detroit), plans to sponsor the legislation seeking relief of the penalties, which are set in state law. This legislative effort follows several years of groundwork by housing advocacy groups, as well as the Quicken Loans Community Fund, which has funded door-to-door campaigns to educate low-income residents in Detroit on how they may qualify for an exemption of property taxes. Laura Grannemann, Vice President of strategic investments for the Quicken Loans,Community Fund, said, in a statement: “The city’s announcement today shows a clear commitment to increasing access to exemptions and dramatically simplifying payment plans…Once enacted by the state, this legislation will change the landscape for low-income Detroit homeowners.” The pool of homeowners who could qualify for the proposed relief would amount to “half of the city” residents facing potential foreclosure for unpaid taxes, according to Mayor Duggan, who acknowledged, however, that the proposed fee and interest penalty forgiveness program would not help every homeowner in Detroit who is struggling to pay back taxes and avert foreclosure.

Part of the political challenge is that a conservative, Republican-controlled Legislature is almost surely going to resist granting additional tax debt relief five years after  the Legislature created the payment plan. Ergo, Mayor Duggan perceives the very-low income threshold for relief as having the most “realistic chance” of passing: “The easiest thing in the world as a politician is to stand up here and say, ‘I’m for everything, for everyone,’ when you know full well that when you actually get down to it, it’s not likely to get passed…We’ll see. By the time we’re done in Lansing, this will probably get modified. If we get more votes by making it more attractive, we’ll make it more attractive. If we get the votes to pass it by making it less attractive, we’ll make it less attractive.”

Housing & Undercutting Development & Recovery? At a hearing last week,  David Woll, Principal Deputy Assistant Secretary for Community Planning and Development at the Department of Housing & Community Development, testified: “All of us at HUD stand shoulder to shoulder with the people of Puerto Rico,” Woll said during the hearing: “At HUD we are committed to the recovery of all Americans whose homes and communities were devastated by natural disasters, and we are steadfast in our stewardship of the funding and trust in us by you in your colleagues in Congress.” Rep. David Price (D-N.C.) noted in response: “HUD did fail to comply with the law.” HUD was supposed to deliver funding notices to 18 states hit by natural disasters by September 4th: the agency, indeed, successfully published all the notices except for the one for Puerto Rico. The notice’s publication would have allowed the territory to begin crafting a plan to help manage the disaster relief funds. Indeed, to date, Puerto Rico has received a third of the nearly $43 billion Congress allocated towards hurricane recovery efforts two years after Maria ravaged the U.S. territory. Indeed, some HUD officials have previously expressed concerns with regard to potential misuse of funds in seeking to explain or justify why the Puerto Rico funds have not been disbursed. Indeed, the Deputy Assistant Secretary defended the delay again at the end of last week by claiming that the delay was caused by alleged corruption and financial irregularities. Deputy Woll also referenced an audit from HUD’s Office of Inspector General into “Puerto Rico’s capacity to manage these funds” and the upcoming appointment of a financial monitor to review the disbursement of the money.

Not Diana Ross, but the SupremesU.S. Supreme Court Justice Samuel Alito last week inquired: “Are you and your client here just to defend the integrity of the Constitution?…Or would one be excessively cynical to think that something else is involved here, involving money?” His query came in the wake of arguments from Donald Verrilli, for the PROMESA Board; Jeffrey Wall, for the federal government; and Theodore Olson, to whom the judge’s remarks were addressed. Mr. Olson’s client is Aurelius Capital Management, a hedge fund that invests in distressed debt. At stake are some $125 billion in creditor claims. (Aurelius was founded in 2006 by Mark Brodsky, formerly of Elliott Management. Both funds were involved in a fight with Argentina about its bonds five years ago, during which then President Cristina Fernández de Kirchner dubbed Aurelius “vultures.” The firm was among six funds which held out for full repayment. In 2016 they settled favorably and were paid a mere $9.3 billion. Aurelius now is seeking to get the U.S. Supreme Court to declare the Puerto Rico PROMESA Oversight Board unconstitutional, in the hope of improving on its offer to the territory’s creditors of 35-45 cents on the dollar.

The Issue: Under PROMESA, the Puerto Rico Oversight, Management and Economic Stability Act, Congress authorized the appointment of this oversight board to approve Puerto Rico’s budget and supervise its debts–somewhat akin to the chapter 9 municipal bankruptcy process in those states which have authorized municipal bankruptcy. Under PROMESA, then President Barack Obama was to appoint the board members, with no requirement to seek the Senate’s approval—which, according to our Constitution is needed for “officers of the United States.” Aurelius, in its brief, argues that this should cover the PROMESA Board members, and that, ergo, the PROMESA Board is unconstitutional. Indeed, both the Board and Trump Administration argue that the board’s business is “primarily local.” Lower courts, however, had disagreed. The Board was created to oversee bankruptcy proceedings unresolvable by Puerto Rico’s Governor, arguably implying that its powers supersede the Territory’s. But those lower courts also blessed the Board’s actions under the “de facto” doctrine, which allows actions by officials to stand, even if they are found to have been wrongfully appointed.

Last week, the Supreme Court devoted little time on the de facto doctrine; rather it focused on whether the Board acts locally, in the interest of Puerto Rico, or federally, in the interests of all Americans. Remarks from some of the Justices seemed to lean towards the latter—and thus towards Aurelius. Justice Elena Kagan noted: “One option could have been some kind of financial bail-out…(Congress “instead chose an option that had less financial cost for the American people as a whole. Justice Sonia Sotomayor probed the idea that the act gave the PROMESA Board members powers which ordinary local officials did not previously have.

Experts guesstimate the Court will render a decision by July: if it goes Aurelius’s way, it would be a mighty upset—and hugely disruptive for Puerto Rico. Already the PROMESA Board has collected and paid out claims, and issued $12 billion in bonds. Indeed, one federal witness noted: “I have no idea how one unwinds this.” From the hearing, the more conservative justices, who are in a majority, appeared to lean towards finding the Board Members to be Puerto Rican officers. That would appear to be a profound distinction from the intent of the Jones-Shafroth Act: indeed, as Justice Brett Kavanaugh asked of Mr. Olson: “If we conclude that the powers and duties here are primarily local…do you lose?”

But it certainly appears there will be few winners: already the PROMESA Oversight Board has concluded there may less money to pay bondholders than it has projected and Puerto Rico’s $18 billion in bank accounts allows for no additional money to pay bondholders, making those arguments in two documents it made public on the MSRB Electronic Municipal Marketplace Access web site last Thursday night: documents which had been circulated to bondholders over the last 30 days in confidential mediation talks. According to the Oversight Board, lower-than-projected levels of federal aid for reconstruction after Hurricane Maria may reduce economic growth. At the same time, government financial reports since Hurricanes Maria and Irma hit in late summer of 2017 have shown more revenue than either the PROMESA Board or the local Treasury Department had projected. Unsurprisingly, some bondholders have used those reports to urge a more generous settlement.

But the documents raise fiscal and governance doubts–as they make clear there has been a slow pace of disaster aid relief–and a concurrent deterioration of local or municipio government finances–enhancing the prospect that there might have to be quasi-chapter 9 municipal restructuring of the debts of those local governments.”

Professor Robert Chirinko of the U. of Illinois noted: “The Commonwealth Fiscal Plan Risks document does a nice job of discussing the many factors potentially affecting the surplus projections for Puerto Rico…Commonwealth Fiscal Plan Risks” points to several ways the PROMESA Board’s fiscal plan projections for revenue may be overly optimistic. As reactions to economic or political uncertainty, population could decline more quickly than had been projected. Another storm, financial crisis, or health epidemic could also be causes of greater migration.”

Puerto Rico could receive substantially less federal Hurricane Maria and Irma disaster aid than the plan had projected. The PROMESA Board’s “Commonwealth Fiscal Plan Risks” warns there might be a $30 billion shortfall on what it had projected to be $69 billion in aid, adding the FEMA assistance is also being delivered more slowly to the U.S. territory–even as the PROMESA Board said the federal government may also cut its funding of local Medicaid. In its report, the Oversight Board points out that 85% of the exceedance in FY2019 revenues compared with the May fiscal plan came from just four taxes: corporate income taxes, Act 154 foreign corporate excise tax, motor vehicles, and other General Fund revenue, indicating the potential fiscal vulnerability to Puerto Rico, because fiscal patters or experience often find that corporate income tax booms are usually followed by busts,: Puerto Rico is particularly susceptible because much of the corporate income tax revenue comes from just a few corporations.

With regard to structural reforms the report noted: “[T]he government is behind on implementing all of the major structural reforms required to drive economic growth on the island.” Of particular concern are the potential impact of energy and ease-of-doing-business measures. The board estimates the former would contribute $12.9 billion to surplus for fiscal year 2019 to 2049 and the latter would contribute $16.6 billion in that period. In addition, the Board said that its government fiscal measures are at risk. Due to local government inaction there is a possibility of reducing full time equivalent employment by 50% less than the fiscal plan envisions. That would cost Puerto Rico $20.3 billion from fiscal 2019 to fiscal 2049. In addition, the Board has determined that its efforts to curb healthcare costs are imperiled by poor implementation and new federal benefit requirements, noting that, together, these could cost the government $27.8 billion through fiscal 2049.

Mas Pena Adelante?  The PROMESA Board’s fiscal plan projects to reduce subsidies to the University of Puerto Rico and municipios; however, a lack of progress in lowering these costs could force the central government to continue these subsidies–a continuation which might cost $16.3 billion through FY2049, with the Board noting that just over one-fifth of municipios rely on Commonwealth government subsidies for at least 40% of their revenue, and 41% rely on these subsidies for at least 30% of their revenue.