Human, Physical, & Fiscal Storms

October 3, 2017

Good Morning! In today’s Blog, we consider Connecticut and its capital city’s fiscal road—including the assessment of municipal bankruptcy for Hartford, and then, with the President set to visit today, the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road to Municipal Bankruptcy. Connecticut Comptroller Kevin Lembo yesterday said the state, still lacking an FY2018 budget, remains on track to end the year with a deficit of $93.9 million under the provisions of an executive order by the Governor, even as Hartford City Council members yesterday received a legal report about the city’s bleak fiscal situation from advisers hired to explore chapter 9 municipal bankruptcy as one way to restructure Hartford’s fiscal future. An attorney from Greenberg Traurig, the firm hired by Hartford to assess the viability of Chapter 9 bankruptcy protection, and a representative from financial advisory group Rothschild & Co., stressed that even if Hartford were to file for bankruptcy, the city would remain under the leadership and control of elected officials. Greenberg Traurig attorney Maria DiConza advised: “When a municipality files for bankruptcy, a judge, a court, does not take over and run the city: The city continues to run itself during the court-supervised process.” She added that filing for Chapter 9 protection would allow the city to restructure debt and re-open contractual arrangements: “It’s not a process where the court is taking over operations of the city. And that’s something that’s really important to understand.” Moreover, Todd Snyder, a restructuring specialist with Rothschild & Co., stressed that Hartford’s elected leaders would not be superseded by the orders of a federal bankruptcy court, should city leaders opt to take Hartford’s affairs there: “I want to be very, very clear—a federal judge is not going to come in here and say, ‘Oh, you’re overspending in this area, and you should change the way you govern the city of Hartford…That’s not going to happen.”

In response, Councilmember Larry Deutsch asked what would happen if the city “stiffed the bondholders” of a looming $27 million bond payment at the end of this month—in response to which, Mr. Snyder replied that opting not to make that municipal bond payment would be “tantamount to making the decision that you are going to file for bankruptcy.” Ms. DiConza advised that the city’s municipal bondholders could not repossess city property to cover missed payments, but they could take Hartford to court and try to force the city to raise taxes to cover its debts.

Councilwoman Wildaliz Bermudez questioned whether the two attorneys were doing enough to divert the city from bankruptcy “at all costs,” having previously deemed Mayor Luke Bronin’s consideration of municipal bankruptcy “undemocratic.” To that, Ms. DiConza said: “The city is trying to avoid bankruptcy—‘at all costs’ is really a question for you,” referring to the Council: “What is the cost of the city avoiding bankruptcy? Is the cost that people are going with trash all over their lawn, because there’s no trash service? Is the cost that crime is going to go up, because there’s no payments to the police force? Is the cost that taxes go up? That’s the question the city has to decide. What are the costs of avoiding Chapter 9?” Mr. Snyder added that whether or not Hartford files for municipal bankruptcy, the city still needs to address longstanding structural issues with the city’s finances that see it posting deficits and increasing debt year after year: “There’s a need to address all the constituencies about making contributions to this solution: We live in a beautiful city, and people have valuable property. I would think that restructuring our obligations and entering into a new partnership with the state would enhance everybody’s life in the city.”

In a letter to Gov. Dannel P. Malloy, Mr. Lembo said the administration’s spending reduction authority under his executive order should allow him to meet current state savings targets, adding, however, that state spending trends so far, some 7.2 percent higher than the same period last fiscal year, demonstrate that fixed costs (including debt, state employee and teachers retirement and retiree health care) continue to rise, while discretionary spending is forcibly decreasing, writing: “The state’s municipalities, nonprofits and Connecticut residents, including the most vulnerable, depend on discretionary program spending for critical services and to enhance the quality of life…Vital programs that have faced significant cuts include Grants for Substance Abuse Services; Mental Health Service Grants; the Connecticut Home Care Program, Aid to the Disabled; Employment Opportunities; and the Early Care and Education program. He added: “The state’s capacity to meet its spending obligations is impaired by the inability to enact a budget that provides for policy changes that increase revenue. This problem is exacerbated each month as potential sources of additional revenue are foregone due to the absence of necessary changes to the revenue structure,” warning that as the “state enters the second quarter of the fiscal year, even a potential agreement to increase in the hospital tax remains in doubt, even though it would result in higher federal reimbursements. Moreover, ongoing budget uncertainty will slow Connecticut’s economic growth and could ultimately lead to the state and its municipalities receiving downgrades in credit ratings that will cost taxpayers even more…These results do not indicate Connecticut can grow its way out of the current revenue stagnation, especially in light of the state missing it revenue targets in the last two fiscal years.”

Adding to the downbeat state fiscal plight, he reported that preliminary state Department of Labor (DOL) data for August 2017 show that Connecticut lost 3,900 jobs during the month of August to a level of 1,687,200 seasonally adjusted, adding that July’s original preliminary job loss of 600 had been revised down by the Bureau of Labor Statistics to a loss of 1,100. Over the past 12-month period ending in August, the state has posted 6,000 new payroll jobs. During the last period of economic recovery, employment growth averaged over 16,000 annually. 

Physical & Fiscal Mayhem. Some two weeks after Hurricane Maria devastated Puerto Rico, creating a humanitarian crisis, President Trump arrives today to see first-hand the damage, becoming the first President of the United States to make an official visit in the wake of a crisis. The President will meet with Gov. Rosselló Nevares and San Juan Mayor Carmen Yulín Cruz—who had alerted the media about the signal seeming disparities in responding to the human, physical, and fiscal crisis compared to Houston and Florida.

As President Trump visits Puerto Rico today, nearly two weeks after the destruction and havoc created by Hurricane Maria, officials report only 5% of the island has electricity and its schools are not close to reopening. Puerto Rico Secretary of Education Julia Kelleher told CNN on Sunday that some public schools might not resume classes until mid-month because of storm damage, though decisions will be made on a regional basis. The U.S. territory has 1,113 public schools and a student population of 350,000; however, only a small fraction (400) have been assessed for damage; thus, school districts from Florida to Massachusetts are anticipating an influx of Puerto Rican students displaced by the hurricane, so a different kind of relief operation is underway to identify which schools have space and which resources will be needed in the wake of last month’s loss, all across Puerto Rico, of power and communications. Officials hope to reopen some schools by mid-month. Edwin Meléndez, Director of the Center for Puerto Rican Studies at Hunter College in New York, said his conservative estimate is that more than 200,000 children and adults will leave Puerto Rico for the mainland—with his decision coming one day after President Trump took to Twitter to criticize the leadership of Puerto Rican leaders, especially San Juan Mayor Carmen Yulin Cruz and those the President claimed “want everything to be done for them when it should be a community effort.” The inexplicably belated, temporary suspension of the Jones Act has enabled FEMA to expand its delivery of food and water throughout Puerto Rico, though officials stressed that many people still lack the essentials: FEMA has, finally, been able to deliver food and water to all of Puerto Rico’s 79 municipalities; however, FEMA reports that some isolated areas of these municipalities may not have received the commodities, partly because lack of communication systems has hampered distribution efforts. As of late Sunday, there was safe drinking water available to 41% of Puerto Rico; FEMA has installed eleven regional staging areas for food and water distribution; some 5 percent off the island has power, and Gov. Ricardo Rossello reported the Army Corps of Engineers has begun a mission to repair the power grid. Over the next few days, close to a million gallons of gasoline and half a million gallons of diesel fuel will arrive, according to the Governor, who added that just over one-third of Puerto Rico’s residents now have phone service: all landlines are operating, but only about 11% of the cell towers are operational; 51 of 69 hospitals are running in some capacity now, along with 46 of 48 dialysis centers.

Brookings’ Michael O’Hanlon yesterday described the “patriotism, courage, compassion, and grit of the several thousand Coast Guard and other U.S. military personnel belatedly detailed by the White House to respond, writing: “But the overall approach might best be described as a modest response to a disaster: at a time when so many American citizens are suffering, we need to consider a much more massive effort.”

 

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