Who Is in Fiscal Command?

June 29, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing challenge of governance in the U.S. territory of Puerto Rico: is it a federal judge, a duly elected Governor and legislature, or a board imposed by Congress and the Administration?

Who Is In Fiscal Charge? With the new fiscal year beginning Sunday, the Puerto Rico Legislature is set to approve a budget less than that which was presented to the PROMESA Board. The initial version, approved by the House of Representatives of $8.782 billion provided for an increase of $33.2 million over the amount approved by the PROMESA Board. The Legislative Assembly is, today, expected to approve an FY2019 budget of $8.7 billion. Senator Migdalia Padilla Alvelo of Maraquitas, a small town founded in 1803, who has served in the Senate for nearly two decades, and is the current Finance Commission Chair, yesterday announced that, as part of the legislative discussion, they have managed to identify several items which will adjust the budget without touching the allocations included by the House of Representatives to meet the reductions imposed by the PROMESA Board to the umbrella of the Department of Public Security and tax agencies, such as the Office of Government Ethics and the Office of the Comptroller. Those modifications cleared the path to revert some $50 million for the operation of the Government Central Accounting System (Prifas). Concurrently, the budget was modified to adjust reserves down from $75 to $35 million, with the Senator explaining: “was reduced from $ 75 million to $ 35 million: We reduced the $8,749 billion which the Board had set for expenses to $8.709 billion: “we are below what the PROMESA Board originally set.” House Finance Committee Chair Antonio Soto also confirmed there would be approval of the budget today, explaining that the negotiations with the Senate team had been aimed at reducing the budget to the level proposed by the Board without touching the expense items that had been added, noting: “We understand that we are going to be able to maintain it…in the same level that they established, but including the expense items that are necessary.”

Meanwhile, in a press release, Senate President Thomas Rivera Schatz reported that a Conference Committee had been formed to address the amendments introduced on his side, adding: “We had planned to approve the budget today. In the House, the discussion of the measure has been delayed a little, but the House President Carlos Méndez Núñez yesterday told me that that body will approve it today.”

With the action, the PROMESA Oversight Board cancelled its scheduled public meeting set for today—where it had intended to act on the Puerto Rico budget, to await today’s actions by the legislature, and then act tomorrow to approve the U.S. territory’s budget, as well as those of several authorities, with the Board noting the delay would provide more time to “complete required technical and macroeconomic changes to the Commonwealth Fiscal Plan with updated information.” The board still expects to approve a budget by the end of the fiscal year—with the PROMESA Board apparently primed to preempt Puerto Rico’s authority and impose its own fiscal dictates, including a repeal of Law 80 and the establishment of at-will employment, per its preemption demand to Gov. Ricardo Rosselló last month—a demand the Puerto Rico Senate declined to act upon.

The Board preemption yesterday came in the wake of, earlier this week, of its issuance of notices of violation with regard to government-proposed budgets for the Puerto Rico Highways and Transportation Authority and University of Puerto Rico—with, in each instance, the unelected Board notifying the Puerto Rico Fiscal Agency and Financial Advisory Authority that the Board required “substantial revisions and additional information” before it could approve the budgets. Some believe the PROMESA Board’s actions could signal a likely rejection of Puerto Rico’s budget tomorrow. PROMESA Board Director Natalie Jaresko said that if Puerto Rico’s elected leaders did not repeal Law 80, the Board would eliminate several accommodations it made to the Governor, including the retention of Christmas bonuses for government employees and a multiyear $345 million economic development and reform implementation initiatives fund.

It appears that, irrespective of the final actions taken by the Legislature, Governor Ricardo Rosselló Nevares recognizes the authority under the PROMESA statute granted to the Board. Thus, with the clear expectation that Law 80 (the Law Against Unjustified Dismissal) will be repealed,  the Governor appears to seeking to ensure he will play a key role in the process of restructuring the debt in federal court, and that he will be a player in constructing the quasi chapter 9 plan of debt adjustment which is anticipated to be settled by next week.

Another key issue pending relates to Chamber 1662, on Puerto Rico public pensions, which the Gov. yesterday endorsed—likely to arm himself to oppose the Oversight Board’s proposed average 10% cut in Puerto Rico pension benefits—cuts the Board wishes to trigger in the new fiscal year.

In response to a press question yesterday with regard to whether the Governor would go to court if, as expected, the PROMESA Board preempts Puerto Rico’s law and eliminates the Christmas bonus and current provisions for sick leave and vacations of public employees, the Governor was clear he would, noting:Yes, I’ve always said it. The unfortunate thing is that we will be spending $20 to $25 million a month in litigation processes that we are not sure of how we are going to finish. Second,  the process of restructuring the debt is not started and, instead of having a visibility to finish this in a year and a half, two years, we are talking about years. Possibly eight years, a decade in which this can be resolved, because the Oversight Board is the only entity authorized to submit a plan of debt adjustment. We have been working with them, with certain differences on that adjustment plan. But this is very clear, if you have an agreement, the only difference is pensions where we can sit or go to court for a single component…The content of this adjustment plan will depend not only on the restructuring of the debt, but also on whether the island will continue to be protected against appropriations of its government funds.”

Hurricane Recovery. On the critical issue of recovery from Hurricane Maria, where Puerto Rico received thrown paper towels compared to Houston, estimates are that recovery costs could be as high as $94 billion—Puerto Rico has, to date, received about $6 billion. Nevertheless, Gov. Rosselló appears optimistic, noting the island is in its recovery phase: “I think we’re on the way. Certainly FEMA’s disbursement has been slow, but now a new phase is entering that is important for people to know, which is includes HUD housing and CDBG funds—funds from which Puerto Rico has already begun drawing down: he added: “We hope that by the beginning of January or the end of December we can already have access to the bank of the $18.5 billion.”  

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Will Congress Grant Puerto Rico Statehood?

June 27, 2018

Good Morning! In this morning’s eBlog, we consider statehood issues for Puerto Rico.

Un Estado? Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting representative in Congress is introducing legislation, H.R.6246 to modify the Jones-Shafroth Act and make the U.S. territory a state by 2021—an effort she is making with the key support of House Natural Resources Committee Chair Rob Bishop (R-Utah). As of yesterday, Commissioner Jenniffer Gonzalez reported she had 20 Republican and 14 Democratic co-sponsors, noting: “This is the first step to open a serious discussion regarding the ultimate status for the island.” In addition to Chairman Bishop, another key co-sponsor is Indian and Insular Affairs Subcommittee Chair Doug Lamalfa (R-Ca.). As proposed, the bill calls for the creation of a bipartisan, nine-member task force which would submit a report to Congress and to the President identifying laws which would need to be amended or repealed in order for Puerto Rico to be granted statehood. In response, Gov. Ricardo Rosselló Nevares noted: “In the past, this issue has been very hard to move forward…No longer do we want ambiguity. We want clarity. Either here in Congress you are with us or you are against the people of Puerto Rico.”

Under the proposed legislation, Puerto Rico would immediately become an incorporated territory; Congress would establish a Working Group with the promise of studying how the U.S. territory could become a state in January of 2021—the bill does guarantee the direct admission to statehood, nor does it propose a new referendum. The effort, however, faces a short timetable in the remaining few months of this Congress and little sense of White House support. Its chances depend upon the efforts of a bicameral, bipartisan Working Group  of nine members, eight appointed by the legislative leadership (four from the House and four from the Senate), which must be submitted within a period of 13 months, along with a report to Congress on how laws which do not apply to the U.S. territory of Puerto Rico or are enforced in the territory differently from the states would have to be “amended or eliminated” in order to provide for a transition to equal treatment of Puerto Rico, with the states, effective January 1, 2021. The effort will also have to address a transition—e.g., incorporate “flexibility in the entry of federal programs” and the development of the territorial economy through “incentives, tax arrangements, and other measures.”

As proposed, the legislation also requires proposing rules and dates for elections to federal positions in the territory, as well as studying the effect of perhaps adding as five new Members of Congress—a potential conundrum, as it would increase the number of seats in the U.S. House of Representatives to 440—effectively diluting the strength of other state delegations. Indeed, bearing in mind that one Congress cannot tie the hands of another, the bill provides that the ratification of the legislation would imply “the intention of the Congress to approve legislation based on of the final report of the Working Group.”

In reaction, Gov. Ricardo Rosselló Nevares noted; “This is the moment. The catastrophe left by the hurricanes Irma and María stripped bare the reality of the unequal treatment of the American citizens living in Puerto Rico, the Executive having to approve waivers, and the Congress to make exceptions in the laws so that we could receive help.” He added: “This is a matter of equality, justice and civil rights.” It would also be a taxing matter: statehood, were it granted, would subject Puerto Ricans to federal income taxes without the political rights of statehood, and the US Constitution would have full force.

Chairman Bishop noted that one of the obstacles to statehood would be the current PROMESA statute—which created the current PROMESA Board to oversee (along with a federal court) Puerto Rico’s quasi plan of debt adjustment—a panel of which eight of the nine named committee members were appointed by the Congressional leadership, with the Chair appointed by the Speaker of the House, who would designate the Chairman of the committee. Subcommittee Chair LaMalfa noted that the proposed legislation provides that once the Working Group presents its report to Congress, “We will make a decision” with regard to Puerto Rico’s statehood.

Puerto Rico Senate President Thomas Rivera Schatz, at an event with Gov. Rosselló Nevares yesterday, noted: “This is the common front that Puerto Rico wanted to see a long time ago.” Other Members expressing support included Reps. Don Young (R-Alaska), Don Bacon (R-Neb.) Peter King (R-N.Y.) and Delegate Amata Coleman Radewagen (Samoa). For her part, Rep. Nydia Velázquez (D-NY), who is Puerto Rican and a member of the House Natural Resources Committee, emphasized that attention by Congress must be focused on the “reconstruction of Puerto Rico,” adding: “I do not know how statehood for Puerto Rico will solve the problems of Puerto Rico,” and Rep. Tom McClintock (R-Ca.) warned: “What you are going to do is cause additional problems. The fiscal mismanagement in Puerto Rico does not make them eligible for admission to the United States.” Chair Bishop noted the process towards statehood would proceed “one step at a time.”

In Puerto Rico, the possibility of statehood finds a mixed reaction, with the Popular Democratic Party and Independence Party perceiving pro-statehood legislation by Congress as futile. The Puerto Rican Independence Party (PIP),  which boycotted the 2017 referendum, saw the new pro-statehood legislation as a futile and contradictory process. Puerto Rico’s Popular Democratic Party President Héctor Ferrer worries proposed changes could “lead Puerto Rico to the worst of the relationship through assuming all the responsibilities of the state, without receiving the supposed benefits of being a state.” He also noted there remain only 32 legislative days before November’s elections.

Nevertheless, Puerto Rico’s fiscal situation, as the new hurricane season is underway, is on the upswing: the May General Fund revenues were $217.7 million or 32% higher than budgeted, marking a recovery from the physical and fiscal devastation of last September’s Hurricane Maria; the territory’s budget has experienced a surge, leaving its revenues $78.9 million or 1% ahead of budget projections for the first 11 months of the fiscal year. In a non-April Fool’s report, that month’s revenues were 20.2% ahead of projections, with Puerto Rico Secretary of the Treasury Raúl Maldonado Gautier reporting that increased economic activity connected to rebuilding from the hurricanes had helped tax collections—a finding that could affect the PROMESA Board’s decision with regard to when and how Puerto Rico should resume making interst payments on its outstanding municipal bonds—or, as Puerto Rico Secretary of the Treasury Raúl Maldonado Gautier put it, the fact that revenues are now ahead of budget “is a favorable fact in view of the fiscal challenges faced by public finances since before the hurricanes collections were favorable but after the hurricanes for several months the revenues were low.” According to Secretary Maldonado Gautier, much of the increase was due to temporary economic activity of companies engaged in recovery tasks and to the flow of money from insurance payments, both in response to the two hurricanes that hit Puerto Rico in September. Key revenue changes included non-resident withholding ($63.1 million), sales and use tax revenues ($40.9 million), and the individual income tax ($25.8 million). Over the first 11 months, the tax categories deviating the most from projections in dollar terms were the corporate income tax, which came in $197.4 million ahead of budget, and the Law 154 foreign corporate profit tax, which arrived $151.2 million short. Secretary Maldonado Gautier noted he was confident that once June’s revenues are included, FY2018’s revenues will come in ahead of projections.

Justice for All?

June 27, 2018

Good Morning! In this morning’s eBlog, we consider the unequal treatment of Americans in Puerto Rico.

The United States government, this week, in the U.S. District Court in San Juan, defended the disparate treatment and provision of federal program services available on the mainland, but not in Puerto Rico, such as Supplemental Social Security (SSI). The Justice Department, at the beginning of the week, filed a motion to dismiss, primarily for lack of jurisdiction, a lawsuit in which eight residents of Puerto Rico claim access to food assistance benefits, Medicare, and SSI. In its response, the Justice Department asserted that equal protection does not obligate the federal government to treat Puerto Rico as if it were a state, referencing a 1980 decision in Harris v. Rosario finding the U.S. Constitution granted Congress plenary powers over U.S. territories such as the U.S. Virgin Islands and Puerto Rico—meaning that discrimination may occur if it is on a rational basis. Now, in Sixta Gladys Peña Martínez v. U.S. Secretary of Health, eight plaintiffs have asserted claims to have access to the benefits of the Supplemental Nutrition Assistance Program (SNAP), which operates in the states and Washington, D.C., and to Medicare Part D and SSI. The in the federal response, signed by interim Assistant Secretary Chad Readler and U.S. San Juan prosecutor Rosa Emilia Rodriguez, the Justice Department is arguing  that the complaints regarding SSI and Medicare should be dismissed, because the plaintiffs did not exhaust administrative procedures. With regard to SNAP benefits, the federal government maintained that the plaintiffs have not been able to demonstrate that they would have access to that program if they resided in any of the 50 states, Washington D.C., Guam, or the U.S. Virgin Islands.

In the case of Ms. Peña Martínez, the Justice Department has asserted that she claims she received $198 dollars in SNAP food assistance when she lived in New York, and that in her current residence in Puerto Rico, she receives $154. According to the Department, Ms. Peña Martínez did not specify how much additional money she may have received in recent months due to the special allocation of $1.27 million in SNAP funds made available to Puerto Rico in the wake of Hurricane Maria—assistance which was one-time help. Thus, the Department claimed the federal decision from the Supplemental Social Security (SSI) program was “rational,” because Puerto Ricans do not pay federal income taxes—asserting that the court had to find the U.S. position to be “constitutional.” The Department, referencing the Harris and Secretary of Health cases, asserted the sole contributory status of Puerto Rico and the cost of treating Puerto Rico as a state for the purpose of determining the allocation of funds under SSI , part D of Medicare and SNAP, constituted “a rational basis for the actions of the Congress,” adding that these additional costs to the U.S. Treasury provided, at a minimum, “a reasonably conceivable state of affairs that could provide a rational basis” for its actions.

The Tides of Immgration: Are there Fiscal Consequences?

June 25, 2018

Good Morning! In this morning’s eBlog, we consider the tides of emigration as they fiscally challenge the U.S. territory of Puerto Rico.

Today, more than one million Puerto Ricans live in New York City, just under one-third of Puerto Ricans who reside in Puerto Rico, with the likelihood of emigrating from Puerto Rico to Gotham increasing for single Puerto Ricans between the ages of 25 and 29 who have never married, do not own property, and whose income is limited, albeit not to the point of being below the federal poverty level. The majority are men, and the destinations of preference seem to be cities in Florida, New York, or Texas. In theory, about a fifth of those who left will return, judging by the rate of return reported on the immigration side to Puerto Rico. According to the most recent census data, in 2016, some 89,000 left Puerto Rico, a number which appears to indicate a rising trend, albeit, there is some evidence that the pattern might be changing—with that pattern affected by not only destination, but also by the level of academic achievement of those leaving Puerto Rico.

While we await, in December, 2017 emigration data, early indications based upon passenger counts at airports, appear to represent very high migration trends, finding, for instance, that last year, more than 281,000 Puerto Ricans left Puerto Rico than arrived there—an indication of the demographic impact of Hurricane Maria. Demographer Judith Rodríguez wrote in the 2016 Migrant Profile (published last week) that “The recent wave of migration in the last decade exceeds the Great Exodus of 1950-60, which has great impact on the social and economic level.” More recent data, however, indicates this demographic tide may finally be ebbing: during this year’s first month, January, 58,202 more arrived on the island than left, with the patter continuing the next month when there was a net positive inflow of 10, 698—a number which ebbed by March to 1,510—a change estimated to be temporary.

After New York, Florida appears to be the emigration state of choice: currently, around 30% of Puerto Rican emigrants choose a city in Florida, mainly in the central zone. At the same time, Texas is rising as a demographic state of choice. It appears more likely than not that New York City will continue to be a focal point of Puerto Rican emigration, due to cultural and family ties with Puerto Ricans since the migrations of the early twentieth century in the wake of the enactment of the Jones-Shafroth Act. According to the most recently updated Census figures, New York City is in the top three exodus destinations for emigrating Puerto Ricans.

But this is not all one-way traffic: many Puerto Ricans appear to be going home, with the largest such numbers coming from the states of Florida and New York; however, the number returning from the states of Massachusetts, Louisiana, and Washington make up more than half the total.

While it is more difficult to assess who is leaving and who is staying, Census data indicates that 48% of Puerto Ricans living in the D.C. metropolitan area have at least a bachelor’s degree, and, overall, 78% of Puerto Ricans living on the mainland have at least some level of university education, nearly three times the percentage of Puerto Ricans who have moved to Miami. Income wise, Washington, D.C. is the location, which appears to have drawn Puerto Ricans with both the greatest levels of scholastic achievement and the most income: the median household income for Puerto Ricans in the nation’s capital is $87,713. Next, after Washington DC, mainland cities with the highest median income for the Puerto Ricans are Miami ($50,945), Chicago ($47,232) and New Haven ($43,165). The disparity in annual income perhaps demonstrates the lure of emigrating from Puerto Rico, where the median income of a household is around $ 19,977, according to the Census data.

However, for Puerto Ricans leaving for the mainland, nirvana is not guaranteed: in the cities of Springfield and Boston, as well as in Hartford, there are high poverty levels are high for Puerto Ricans: in Springfield, more than one-third of the more than 100,000 Puerto Ricans live below the federal poverty level—a level comparable to the 31% below that level in the Boston metro region, and 26.5% in the Springfield metropolitan area have incomes that place them below the poverty level.  In addition, age is a discriminating factor: in Springfield, almost 50% of Puerto Ricans under the age of 18 live below the poverty line—a figure that compares unfavorably to the 46% of Puerto Ricans in Puerto Rico who fall below the federal poverty line of $12,060 for an individual.

The Prospects and Draws for Emigration. Demographic data with regard to those leaving Puerto Rico finds that the bulk of emigrants worked in 2016 as administrative office staff (6,822), followed by operators of production lines (5,445), vendors (4,870), and food preparers (3,264). According to the date, some 382 desperately needed doctors left—while some 1,376 nursing professionals left the island. Stateside, 82% of the 2.2 million Puerto Ricans who are working on the mainland are employed in the private sector; 4% have their own business. 14% of the jobs occupied by Puerto Ricans are in the government. In Puerto Rico, that figure rises to 22%, according to data from the Census Bureau. On the other hand, most of those who immigrated or returned to Puerto Rico were vendors (1,383) or educators (1,101).

Quien Es Encargado? (Who is in charge?) The Puerto Rico Senate has killed a an agreement between Puerto Rico Gov. Ricardo Rosselló and the PROMESA Oversight Board, potentially escalating the governance conflict with regard to Puerto Rico’s operating budget and the restructuring of the central government’s $51 billion of debt. Last Friday, Puerto Rico Senate President Thomas Rivera Schatz threatened a lawsuit against the Board if it continues to attempt to preempt Puerto Rico’s government in order to impose budget cuts or the repeal of worker protection measures. In a compromise with the Governor, the Board had agreed to maintain Puerto Rico’s mandatory Christmas bonus, vacation and sick day policies in exchange for Gov. Rosselló’s agreement to introduce at-will employment for all employers by repealing a 1976 law, Law 80. The House, at the end of last month, had approved the measure, before the Senate amended it to introduce at-will employment only for employees entering the workforce. Indeed, as we had previously noted, last Thursday, the Senate President had declared the Law 80 repeal to be dead, after speaking with other members of the majority New Progressive Party caucus in the Senate. Moreover, according to a video posted on the El Nuevo Día website, the Senate leader said he had consulted lawyers and was ready to fight in court, if the PROMESA Board seeks to preempt the island’s elected leaders. The power struggle came as the Puerto Rico House has added funding to a budget bill—spending which Puerto Rico House President Carlos Méndez and Treasury Committee President Antonio Soto said they expected the PROMESA Board would reject—relying on the Congressional PROMESA Act granting the Board the right to create and approve its own version of Puerto Rico’s budget—as is, for instance, the current budget. Puerto Rico’s new fiscal budget year begins this Sunday—a date by which, on normal years, like most states, but unlike the federal government, its fiscal year operating budget would normally have been adopted—but, where, last Thursday, PROMESA Board Chair José Carrión, in New York City, stated that if the government opted not to repeal Law 80, the currently certified fiscal plan would operate—a plan which would mandate at-will employment to be introduced by January 1, 2019—a plan which, unsurprisingly, Senate President Rivera Schatz is set to challenge, especially after, on May 9th, Sergio Marxuach, the New Economy Policy Director, testified before the Puerto Rico Senate Committee on Federal, Political, and Economic Relations that repealing Law 80 would be a bad idea, noting that a 2016 International Monetary Fund study showed that in times of economic weakness, eliminating job protections would have had a negative economic impact in the short and medium term, noting: “By triggering a wave of layoffs, reforming employment protections further weakens aggregate demand and delays economic recovery.” Similarly, a 2017 report from the Organization for Economic Cooperation and Development said that in Portugal from 2006 to 2014 “reforms increasing the flexibility of the labor market negatively affect firms’ productivity both in the short- and long-run. A possible explanation is that higher job turnover reduces firms’ incentives to invest in job-specific training and reduce the scope for workers’ specialization.”

In response, Governor Rosselló released a statement: “Puerto Rico has just seen how politics is done and not how a future government should be made in challenging and difficult times, with this regrettable decision by the President of the Senate, Thomas Rivera Schatz.”

Now Senate Finance Committee President Migdalia Padilla is scheduled to meet with the Governor’s fiscal team to discuss the changes which have been included in the joint resolutions that make up the budget for the next fiscal year; he will also  meet with Financial Advisory Authority and Fiscal Agency (Aafaf) Executive Director Raul Maldonado and the Secretary of Finance, Gerardo Portelo—with the Chairman noting: “They are going to have meetings with me so that we can all harmonize what we have observed, what the Board says, and what the Executive establishes.” Chairman Padilla added that he trusts that today will be constituted the conference committee to discuss the House amendments, especially after, at the end of last week, House approval of an FY2019 budget $33.2 million higher than the one presented by PROMESA Board—followed, the next day, by Senate approval, albeit with amendments intended to force a conference committee to settle the differences.

In addition to the perception of preemption, one of the legislature’s greatest reservations with regard to the PROMESA Board’s version of the budget their perception that that version underestimates the revenue estimate is $7,000 million, according to the President of the Finance Commission of the Chamber, Antonio Soto, who noted that the government will close the year with revenues of more than $9,172 million, but the fiscal entity estimates $8,400 million for the next fiscal year, despite the fact that it proposes a growth in the economy of 6.3%.

Senate President Padilla explained that one of the changes that will be introduced to the House version is aimed at addressing the $164,000 reduction for the Independent Special Prosecutor’s Panel Office (OPFEI), advising that he would be subtracting that $164,000 from the additional $2 million that the Chamber allocated in the budget to the Alliance for Alternative Education program. In its version, the Chamber dealt with the cuts contemplated in the PROMESA Board’s proposal for the oversight agencies, such as the Office of Government Ethics, the Office of the Comptroller and the Office of the Citizen Procurator, but left out the Special Prosecutor, noting: “I am not increasing the spending budget; I am simply moving part of an allocation of $2 million,” adding that it is inconsistent with the amendments submitted by the Chamber aimed at ensuring the functioning of the agencies under the Department of Public Safety, such as the Bureau of Emergency Management and Disaster Management, the Emergency Medical Bureau, the Bureau of the Corps of Firemen, and the Bureau of Forensic Sciences—all agencies with regard to which there is heightened concern in the wake of Puerto Rico’s devastating hurricanes and inequitable FEMA responses.  Indeed, Miguel Romero the vice president of the Senate Finance Committee, agreed on the need to assign the necessary funds to the Department of Public Security to ensure its operation: “There is a deficiency of over $40 million that we have to address.” In addition, Senator Padilla indicated the Senate would take a close look at the Board’s proposed $7 million cut to Court Administration, noting: “There is a need for appointment of judges and to maintain diversion programs with the correctional population.” Moreover, Senate President Thomas Rivera Schatz also indicated that the controversy centers on inconsistencies between the budget and the fiscal plan, both presented by the PROMESA Board, explaining, in the wake of discussions, that it had been “established that there is a gap between the approved budget and the fiscal plan: basically, regarding the collections we will have available to cover the budget.” With the session scheduled to end on Saturday, that date falls three days after the limit established by the PROMESA Board to approve the budget, with the Board anticipating that, if Puerto Rico does not comply with the agreement reached with the Governor to repeal the Law Against Unjustified Dismissal (Law 80-1976), it will revert the fiscal plan to the approved one.

“Who’s on First? Who’s in Charge–elected or imposed leaders?

June 22, 2018

Good Morning! In this morning’s eBlog, we consider the physical, fiscal, and mixed governance challenges which must be overcome in Puerto Rico.

Will There Be Luz? Gov. Ricardo Rosselló has signed into law a bill to partially privatize the Puerto Rico Electric Power Authority, potentially affecting the authority’s $8.9 billion in outstanding debt. The new law is intended to provide for the sale of the public utility’s power generation units and make a concession of its transmission and distribution system, according to a statement by the Governor—a concession which could involve a lease arrangement, as was done for Puerto Rico’s main airport. Under the proposed privatization, revenues realized could be utilized to address PREPA’s debt. purchasers would not assume PREPA’s debt; instead the public utility would use proceeds from any sale of a power plant to pay off a portion of the debt, or, as the Governor put it on Wednesday, the money raised could be used, at least in part, to contribute to PREPA’s underfunded public pension system. The new legislation comes in the wake of, last April, the PROMESA Oversight Board’s certification of a fiscal plan which assumed PREPA privatization—but which did not impose assumptions with regard to how the proceeds would be used. Puerto Rico Senate Minority Leader Eduardo Bhatia, an attorney-at-law and the former 15th President of the Puerto Rico Senate—as well as a former Fulbright scholar, noted: “The bill that Governor Rosselló signed today essentially authorizes the Governor to proceed with a ‘market sound[ing]’ and identify any and all potential private sector interest in the development of a new energy system in Puerto Rico,” adding: “Notable is that the bill does not authorize any sale before the Puerto Rico Legislature prepares, within 180 days, a statement of public policy specifically mandating what the new system will look like in 30 years.” Gov. Rosselló noted that Puerto Rico’s Public-Private Partnerships Authority would oversee the potential leasing of the transmission and distribution grid—a process expected to occur over the next year and a half. From a governance perspective, the Governor, PROMESA Oversight Board, and advisory teams plan to form a working group to steer the process.

Quein Es Encargado II? Meanwhile, the seemingly unending governance question with regard to who is in charge appears to be escalating. In putting an end, yesterday, to Puerto Rico’s debate on Law 80-1976, the Law on Unjustified Dismissal, the Puerto Rico Senate not only opened the door to annul the agreement reached by the Executive and the Oversight Board around the budget, but also appeared to intensify the power struggle between Senate President Thomas Rivera Schatz; Governor Ricardo Rosselló Nevares, and the PROMESA Oversight Board. Upon learning the Puerto Rico Senate did not support the repeal of the statute—as demanded by the PROMESA Board, the Governor accused Senate President Schatz of acting to the detriment of Puerto Rico, for political reasons, even as PROMESA Board Chair José Carrión, who, like the Senate President, was in Washington, D.C. yesterday, warned that keeping the labor statute in force would imply reversing the certified tax plan, which includes cuts in vacation leave, days of sickness, and the Christmas bonus, stating: “There is a certified plan. If not (repeal it), we revert to the fiscal plan,” in the wake of his participation at forum sponsored by the Heritage Foundation.

Chair Carrión warned that reversion to the certified fiscal plan would mean at least $300 million in additional budget cuts over the next five years. He noted that the proposed structural reforms seek to “generate economic growth: We have limited powers (to make decisions that boost economic growth), but one of them is the labor area.”

The Board is scheduled to meet a week from today to discuss the upcoming fiscal year budget—scheduled to take effect at the end of next week.

In criticizing the actions of Senate President Rivera Schatz, Gov. Rosselló Nevares said that the upper House leader had opted to “hinder” his administration, and held him responsible for the millions of dollars in cuts that may wreak fiscal harm to the island’s municipios, as well as other governmental entities, noting, in a written statement: “Puerto Rico has just seen how politics is made and not how a future government should be made in times of challenges and difficulties, with this regrettable decision by the President of the Senate. We will follow the path of change and transformation that we have forged; however, this was the time to unite and together to get out of the shameful past we inherited. He chose to hinder, chose to follow the tricks of the past that have put us in this situation: the risk of the loss of billions of dollars for Puerto Rico as a result of restructuring the debt falls on this action. Likewise, the loss of millions of dollars in appropriations for the municipal governments that we had achieved also falls on the President of the Senate. Sen. Rivera Schatz added that he anticipated he would appear before a judicial forum to challenge the powers of the unelected PROMESA Oversight Board to alter Puerto Rico’s budget, noting: “The Senate ends the matter of Law 80. It is not going to repeal Law 80. If it were up to us to go to court to litigate against the Board, I advance that I already talked with lawyers to do so.” (The repeal of Law 80 was a specific condition presented by the Board in exchange for disbursing additional financial aid to municipios, the University of Puerto Rico, and guaranteeing holiday leave and sick days for private sector employees.)

At the same time, during the meeting of the majority caucus of the New Progressive Party, a proposal by Sen. Miguel Romero to ascribe to the Law against discrimination in employment (Law 100-1959) by adding some amendments to Law 80 was defeated  15 -5, with the prevailing majority choosing to defer consideration of the issue during the current session—which ends Monday. Sen. Romero proposed creating a system of fixed payments for dismissals that violate only the Anti-Discrimination Law 100, but insisted on repealing Law 80, which deals with another area of ​​labor law by providing remedies for severance without just cause.

Not unlike in the U.S. Congress, the Puerto Rico House and Senate do not always see ojo to ojo (eye to eye). The House intends to address Puerto Rico’s relationship with the Oversight Board differently, with House President Carlos “Johnny” Méndez stating, yesterday, that he has to study what is the probability of prevailing in a lawsuit with the Oversight Board defense of budget items, adding that he considers the controversy over Law 80 to be over. In response to a question whether the House would join a lawsuit initiated by the Senate to combat the cuts applied by the Board, Senate President Méndez replied: “We have to sit down to see what the arguments are and make a decision: the Promise law has supremacy over everything. It does not even allow us to sue the Oversight Board. We have to see what the arguments are, the legal basis for making a decision. It is not going to be a futile exercise. If we have more than a 50% chance of prevailing, of course we will be there.” He added that, if he opts for litigation, he would challenge the authority and ability of the unelected Oversight Board to establish public policy.

What about Manana? Even as the question of governance proceeded, two PROMESA Board members yesterday concurred with a panel of other experts that an overhaul Puerto Rico’s local labor laws is a key for the territory’s future growth. At a session in Washington, D.C. at the Heritage Foundation, PROMESA Chair Jose Carrion joined Anne Krueger, economics Professor at Johns Hopkins School for Advanced International Studies, and fellow Board Member Andrew Biggs—with their discussion coming on some of the same issues. With Puerto Rico’s elected leaders considering instituting the same at-will employment statutes used in many states, as well as adding more restrictive rules for receiving food stamps and instituting an earned income tax credit to encourage work, the panelists described Puerto Rico’s labor laws as more restrictive than any state—a factor, perhaps, that could help explain the exodus from Puerto Rico of so many better economic opportunities on the mainland. The panelists noted the challenge will be to convince the people of Puerto Rico that a more competitive labor market will produce more jobs, with PROMESA Board member Andrew Biggs, noting that economists predict there would be an additional one percentage point of annual economic growth if the reforms were adopted. PROMESA Board Chair Jose Carrión noted he, as an employer in Puerto Rico, is only too well aware of how “onerous” the labor laws are, adding: “[I]t does not make Puerto Rico competitive with places to where we are losing our population such as Florida.” Employers in Puerto Rico, for instance, are required to give workers 24 hours off after they work 8 hours, said Professor Anne Krueger of Johns Hopkins School for Advanced International Studies, noting that the labor force participation rate is only 38% on Puerto Rico compared to 63% on the mainland, she said. In the end, the PROMESA Board appeared to reach an agreement with the Governor on proposed labor law changes. Now, warns Chair Carrión, if the legislature does not agree, the PROMESA Board will govern in place of Puerto Rico’s elected leaders.

Getting Schooled on Fiscal Challenges

June 19, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal challenge in the Connecticut legislature with how to get the state’s capitol city back on its feet, before turning, as the new hurricane season gets underway, to assess the Detroit-kinds of challenges to a public school system when so many families are leaving.

Recovering from Near Municipal Bankruptcy. With the new fiscal year fast approaching, Connecticut Governor Gov. Dannel P. Malloy vetoed bi-partisan legislation last Thursday which would have changed how the state board overseeing Hartford’s finances would have operated, and which would have required the continued financial support of Hartford for five years, but would allow the state to reduce other municipal aid to Hartford in the sixth year if the city failed to meet its obligations. The proposed legislation did not modify the debt assistance agreement signed by state Treasurer Denise Nappier and the provision which required the state to pay off the entire principal of Hartford’s bonded debt over the next 20 to 30 years, under which the state will make about $40 million in annual payments on the debt—all steps taken in the wake of the city’s teetering, last year, on the edge of municipal bankruptcy—when the state intervened to take on the city’s debt through the Municipal Accountability Review Board—a step, in retrospect, which has helped the city begin to rebalance its finances. However, it appears the city needs more time.

Republican legislators believed they should have been allowed to lower other municipal aid to Hartford in order to account for the obligations elsewhere in the budget, but the legislation Gov. Malloy vetoed sought to delay those types of decisions for at least five years. The Governor, however, noted: “The legislature may elect to offset contract assistance to Hartford in the future, and must approve state aid amounts for all communities; but it makes little sense to make an out year reduction without giving the program the opportunity to see results before imposing what amounts to a sanction.” In contrast, Senate Republican President Len Fasano (R-Wallingford) said the veto “demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars,” adding: “Once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature: this veto practically ensures a rough road ahead for Hartford, because, absent this fix, the legislature probably won’t be willing to help Hartford in the future.”

In his veto message—legislation which had gained bipartisan support, and which would have modified the $534 million bailout the legislature had approved last year in order to help the city it avoid filing for chapter 9 municipal bankruptcy, the Governor wrote that Senate Bill 528, an Act Concerning State Contract Assistance Provide to Certain Municipalities, would make “significant, detrimental impacts to the new Account Review Board and its operations,” noting that the changes to the Hartford bailout were “a reflection of indignation on the part of some legislators,” who were upset that the Municipal Accountability Review Board “exercised its statutory authority in coming to the aid of our capital city.” Instead, he told legislators, it is critical for the state to have “a viable mechanism in place to allow it to intervene in the case of other troubled municipalities in a way that is both effective and that holds those municipalities highly accountable.” He noted that the Municipal Accountability Review Board works; ergo there was no reason for the legislature to seek to change it at this point in time.

The vetoed measure had been passed in the House 105-45, with all Republicans voting in favor, but more than half of the House Democrats rejected the proposal, arguing that five years was insufficient to assist Hartford with its financial difficulties—even as opponents insisted the bailout was a “major misunderstanding,” because they had understood they were voting only for a two-year bailout, not a long-term $500 million deal that stretched into the future. Now, it will be, unlike in neighboring New Jersey, the legislature’s budget and tax committees which would need to vote on any future financial bailout, with a series of fiscal trip wires if any municipality were seeking an agreement similar to the one which was approved last year for Hartford. For his part, Senate Republican Leader Len Fasano (R-North Haven) noted: “This veto demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars: once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature. This veto practically ensures a rough road ahead for Hartford, because absent this fix, the Legislature probably won’t be willing to help Hartford in the future…This bill was the result of extensive bipartisan negotiations, supported by the Hartford delegation and the Mayor of Hartford: it defines what state assistance Hartford will be receiving and also puts into place needed protections to ensure taxpayer dollars are not squandered.’’

His counterpart, Senate President Pro Tem Martin Looney (D-New Haven) said no final decisions have been made with regard to whether the Senate would override the two latest vetoes, noting: “We will review the Governor’s veto messages and consult with our caucus members in order to determine any next steps the caucus may want to take.’’ A veto-override session is slated for Monday, because a little-known provision in the state Constitution provides that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz (D-Berlin) said the House, where the measure had passed 105-45, is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

A key niggle is a growing recognition that whatever final legislation is signed into law will, in effect, create a fiscal blueprint: thus the legislature has adopted a bill to clarify the process for the state’s municipalities in the future, under which the legislature’s budget and tax committees would need to vote on any future fiscal rescues, in advance, with a series of financial trip wires if any municipality were seeking an agreement similar to the one which had been approved last year for Hartford.

A veto-override session is scheduled for Monday, June 25, because a little-known provision in the state Constitution says that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz of Berlin said the House is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

El Fin. Puerto Rico’s legislature is nearing the end of its regular session—even as the new hurricane season is opening its season, so the gale budgetary challenges are anticipated to dominate its closing days—with the key issues being approval of the new year’s fiscal budget and repeal of the island’s Unjustified Dismissal Law (Law 80-1976). The focus, this week, will be on getting revenues for FY2019, some $9.1 billion—or some $700 million greater than the amount proposed by the PROMESA Oversight Board, promising a fierce legislative battle. Víctor Parés, president of the Commission for Economic Development, Planning, Telecommunications, Energy and Public-Private Partnerships, and president of the Finance Committee, Antonio Soto,  had indicated they would meet this week with personnel from the Department of the Treasury to define how the income estimates included in the Board’s proposal will be readjusted. Mr. Parés noted:Government revenues have increased this fiscal year; it is new money; it has to be allocated; and it is part of what is going to be negotiated and agreed with the Executive,” identifying key priorities as education, health, and safety.

The first in that list is, perhaps, of greatest apprehension, with the Department of Education facing a cut of $191.5 million—a cut of such severity that as many as eight programs could be put at risk, including special education, where the proposed cut would be $78.2 million. The Board has also recommended a cut of $16.1 million to the Department of Health, and just under $50 million to the Department of Public Security—that is, a reduction which would likely mean laying off as many as 1,300 police officers. That sets up a challenge, this week, with the Puerto Rico House, on Thursday, scheduled to act on the budget.

The regular session will defer to a special session consideration of the Incentive Code, described as a “very technical document,” which could be approved in July during an extraordinary session that Governor Ricardo Roselló Nevares would convene. With regard to the version of pending legislation to repeal the House-passed Law 80, the future is uncertain: Senate President Thomas Rivera Schatz announced the Senate would not agree to the amendments.  

A New Civil Code? Rep. Maria Milagros Charbonier is expected to introduce a proposed, renewed Civil Code, with debate deferred to August on the proposal—a comprehensive document dealing with family, persons, royals, obligations, contracts, and successions, but which does not address the issues of surrogate motherhood, domestic partnerships, and the minimum age. It proposes to increase the age to marry from 14 to 18 years, and limit marriages to the third degree of consanguinity. It would maintain the grounds for divorce for cruel treatment, adultery, as well as those of mutual consent and irreparable rupture. The new proposals come in the wake of four years of evaluation of the Civil Code.

Dying Communities? Verónica Dávila, a second-grade teacher at Pasom Palmas, in rural Puerto Rico, yesterday noted that a “community without a school…is a vacant community: It’s actually a dead community.” Pasom Palmas, located in Utuado in the central mountains of the island, is, in land area, the third-largest municipality in Puerto Rico (after Arecibo and Ponce): it has a population over 35,000 spread over 24 wards. The community derives its name from the Taíno word Otoao, which translates as “between mountains.” It is also known as La Ciudad del Vivi, because of the river which runs through it. It is the 11th oldest municipality in Puerto Rico—founded two hundred seventy-nine years ago. Her school has been teaching children for more than  70 years, but it closed its doors forever this month—one of some nearly 300 in Puerto Rico which are shutting down permanently this summer in the wake of Hurricane Maria’s devastation: it smote Utuado especially hard. It took two months to reopen Paso Palmas after the storm, and the school remained without water and had only limited electricity from a generator, which took the Federal Emergency Management Agency seven months to provide. The school’s population fell to 55, as about a dozen students and their families left the area after Maria.

In April, the government listed 283 schools for permanent closure—subsequently granting relief to 18, a number further revised after a court, last week, ordered a halt to the closure of still nine others. Whatever the final number, the school math paints a grim fiscal and demographic picture. After spending cuts for public education of about $1.5 billion over the last six years, and school closures forcing relocation of about 60,000 students—and the new laws providing vouchers for students to attend private schools and paving the way for charter schools, one can sense the physical challenges ahead. In Paso Palmas, kids, no longer able to attend school there, are confronted with the closest school being a forty minute drive along difficult roads—and that is without counting the walk several students make each morning to reach a road passable by car—or that some families simply do not have cars or money for gasoline. It, of course, renders futile concepts of parents’ days or PTA participation.

Whose Math? The income estimate for the next fiscal year could be readjusted by the PROMESA Board to reflect an increase that would have a direct impact on the coffers of countless agencies, in response to issues such as this which have been raised in three days of public hearings with regard to how the proposed cuts by the Board will impact Puerto Rico. A key issue at the top of the list is the $78 million decrease in the budget dedicated to the Special Education Program of the Department of Education. Representative Antonio Soto said that in a meeting with the technical staff of the PROMESA Board, he told them that the income of this fiscal year should reach $9,100 million. In his opinion, it made “no sense” that the estimated income of the U.S. territory for the upcoming fiscal year would decline by $700 million when the government projects estimated economic growth, benefitting from the injection of federal assistance to provide a 6.3% boost to the economy—or, as he put it: “It’s simple math: They tell me that the estimated income they have is what we provided, so we have to validate the information.”

Municipal Fiscal Distress & State Oversight.

June 18, 2018

Good Morning! In this morning’s eBlog, we consider a new study assessing the potential role of property tax assessments in Detroit’s historic chapter 9 municipal bankruptcy; then we observe, without gambling on the odds, the slow, but steady progress back to self-governance in Atlantic City, and weaning off of state fiscal oversight; before, finally noting the parallel efforts to exit state oversight in Flint, Michigan—where the proximate cause of the city’s fiscal and physical collapse occurred under a quasi-state takeover.

Foreclosing or Creating a City’s Fiscal Recovery? One in 10 Detroit tax foreclosures between 2011 and 2015 were caused by the city’s admittedly inflated property assessments, a study by two Chicago professors has concluded. Over-assessments causing foreclosure were concentrated in the city’s lowest valued homes, those selling for less than $8,000, and resulted in thousands of Detroit homeowners losing their properties, according to the study: “Taxed Out: Illegal property tax assessments and the epidemic of tax foreclosures in Detroit,” which was written by  Bernadette Atuahene and Christopher Berry. Chicago-Kent Law School Professor Atuahene noted: “The very population that most needs the city to get the assessments right, the poorest of the poor, are being most detrimentally affected by the city getting it wrong: “There is a narrative of blaming the poor that focuses on individual responsibility instead of structural injustice. We are trying to change the focus to this structural injustice.” (Professor Atuahene is also a member of the Coalition to End Unconstitutional Tax Foreclosures.) Their study came as the Wayne County Treasurer has foreclosed on about 100,000 Detroit properties for unpaid property taxes for the period from 2011 through 2015, about a quarter of all parcels, as the Motor City suffered the after-effects of population decline, the housing market crash, and the Great Recession.

Professors Atuahene and Berry acknowledged many factors can trigger tax foreclosure, estimating that the number of foreclosures was triggered by over-assessments, in part by calculating the foreclosure rate if all properties were properly assessed. The study also controlled for properties various purchase prices, neighborhoods and sale dates.

Detroit Mayor Mike Duggan has, as we have noted, acknowledged such over assessments; yet he has made clear accuracy has improved with double-digit reductions over the last four years—and completed the first comprehensive such assessment two years ago for the first time in more than half a century. The city’s Deputy Chief Financial Officer, Alvin Horhn, last week stated he had not reviewed the study; however, he noted that “most of their assumptions rely on data that does not meet the standards of the State Tax Commission and would not be applicable under Michigan law,” a position challenged by Professor Atuahene, who had previously stated the data does comply with the law, noting: “We believe the citywide reappraisal has been an important part of the major reduction in the number of foreclosures occurring in the city, which continue a steady decline and will provide a solid foundation for future growth: The number of foreclosures of owner occupied homes, specifically, has gone down by nearly 90% over the past few years.”

The city’s authority to foreclose, something which became a vital tool to address both property tax revenues and crime in the wake of the city’s chapter 9 municipal bankruptcy, was enabled under former Gov. John Engler 29 years ago under a statewide rewrite of Michigan’s property tax code: changes made in an effort to render it faster and easier to return delinquent properties to productive use. On a related issue, the Motor City is currently facing a lawsuit by the American Civil Liberties Union of Michigan—a suit which maintains the city’s poverty tax exemption, which erases property taxes for low-income owners, violated homeowner’s due process rights because of its convoluted application process, arguing that the practice violates the federal Fair Housing Act by disproportionately foreclosing on black homeowners. However, the Michigan Court of Appeals has upheld a ruling by Wayne County Judge Robert Colombo, dismissing Wayne County from the lawsuit, ruling the suit should have been brought in front of the Michigan Tax Tribunal. 

Pole, Pole. In Bush Gbaepo Grebo Konweaken, Liberia, a key Gbaepo expression was “pole, pole” (pronounced poleh, poleh), which roughly translated into ‘slowly, but surely’—or haste makes waste. It might be an apt expression for Atlantic City Mayor Frank Gilliam as the boardwalk city has resumed control back from the state to forge its own fiscal destiny—presumably with less gambling on its fiscal future. In his new $225 million budget, the Mayor has proposed to keep property taxes flat for the second consecutive year, and is continuing, according to the state’s Department of Community Affairs, charged with the municipality’s fiscal oversight and providing transitional assistance, to note that the Mayor and Council President Marty Small’s announcement demonstrated that “an understanding of the issues that Atlantic City faces, and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Under Mayor Frank Gilliam’s proposed $225 million budget, property taxes would remain flat for a second straight year, there would be some budget cuts, as well as savings realized from municipal bond sales to finance pension and healthcare obligations from 2015. The Mayor also was seeking support for capital improvements, additional library funding, and one-time $500 stipends for full-time municipal employees with salaries below $40,000. The ongoing fiscal recovery is also benefitting from state aid: the state Department of Community Affairs reported the state is providing $3.9 million in transitional aid, a drop from the $13 million awarded to the City of Trenton in 2017 and $26.2 million from 2016. Last year Atlantic City adopted a $222 million budget, which lowered taxes for the first time in more than a decade. The Department’s spokesperson, Lisa Ryan, noted: “Yesterday’s announcement by Mayor Gilliam and Council President [Marty] Small demonstrates city officials are showing an understanding of the issues that Atlantic City faces and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Gov. Phil Murphy scaled back New Jersey’s intervention efforts in April with the removal of Jeffrey Chiesa’s role as state designee for Atlantic City. Mr. Chiesa, a former U.S. Senator and New Jersey Attorney General, was appointed to the role by former Gov. Chris Christie after the state takeover took effect.

Not in Like Flint. The Flint City Council was unable last week to override Mayor Karen Weaver’s veto of its amendments to her proposed budget: the Council’s counter proposal had included eight amendments to the Mayor’s $56 million proposed budget for 2018-2019—all of which Mayor Weaver vetoed in the wake of CFO Hughey Newsome’s concerns. The situation is similar to Atlantic City’s, in that this was Flint’s first budget to be considered and adopted in the wake of exiting state oversight. Mayor Weaver advised her colleagues: “This is a crucial time for the City of Flint: this is the first budget we are responsible for since regaining control…I am proud of the budget that I submitted, and I have full faith in the City’s Chief Financial Officer. Just as I have the right to veto the budget, the City Council has the right to override that veto. It is my hope that they would strongly consider my reasons for vetoing and that the Council and I can work together to create a budget that can sustain the City for years to come.” Her veto means the budget will be before the Council for a final vote in order to have it in place for the new fiscal year beginning on the first of next month.

Among the Council proposals the Mayor rejected was employee benefits, including a proposed pay raise for the City Clerk of $20,000, the creation of a new deputy clerk position, a new parliamentarian position, and full health benefits for part-time employees. Or, as CFO Newsome noted: “The risk these added costs could pose on the city’s budget is not in the best interest of the city nor the citizens of Flint,”  as he expressed disappointment over the time wasted on arguing over what amounted to $55,000 in the Mayor’s budget, especially when the city was currently tackling bigger fiscal challenges, such as its $271 million unfunded pension liability and keeping the city’s water fund out of red ink, noting: “These are things that we are looking at, and during all of these [budget] proceedings so little attention was paid to that.”

That is to note that while sliding into chapter 9 municipal bankruptcy, or, as in Atlantic City, state oversight, can be easy; the process of extricating one’s city is great: there is added debt. Indeed, Flint remains in a precarious fiscal position, confronted by serious fiscal challenges in the wake of its exit from state financial receivership the month before last. Key among those challenges are: employee retirement funding and the aging, corroded pipes (with a projected price tag of $600 million) which led to the city’s drinking water crisis and state takeover.

On the public pension front, in the wake of state enactment of public pension reforms at the end of 2017 which mandate that municipalities report underfunded retirement benefits, Flint reported a pension system funded at only 37% and zero percent funding of other post-employment retirement benefits, which, according to the state Treasury report, Flint does not prefund.

The proposed budget assumes FY2019 general fund revenues of approximately $55.8 million, of which $4.7 million is expected to come from property taxes. This would be an increase of about $120,000; Flint’s critical water fund will have a $4 million surplus at the end of FY2018; however, CFO Newsome warned the fund will fall into the red within the next five years if it fails to bring in more money.