Puerto Rico & Federal Fiscal Policy Insolvency

May 6, 2015
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A County of No Good Options. The Detroit Press, in an editorial this morning, wrote: “We’re running out of ways to say it: Wayne County is in serious trouble.” The county, the 18th most populous county in the United States, includes 43 distinct municipalities, including Detroit. Thus, as much as they are separate and distinct entities, their fiscal fates are likely intertwined. They have a distinct fiscal link which will impact their respective fiscally sustainable futures. Noting that the Detroit neighbor is spending—annually—about “$52 million more” than it takes in, the editorial noted the “grim budgetary reality that resulted in a $150-million operating shortfall at the end of the last fiscal year. Transferred funds from the Wayne County Treasurer’s Revolving Fund filled the hole, but didn’t stop the bleeding — if something doesn’t change, the deficit will add up to $171 million by 2020.” The Press added that was just the “the tip of the iceberg: The county’s pension system is funded at 46%, meaning it has sufficient assets to pay 46% of what it owes over a 30-year period. Over the same time, the county will have to pay about $1.3 billion for retiree health care; it has just $10 million in assets to cover that debt….The mothballed Wayne County Jail project sits unfinished on Gratiot Avenue, as the county’s existing jail deteriorates, a constant reminder of the county’s second-most pernicious budget quandary, costing taxpayers about $1 million a month…Worse, if something doesn’t change, the county will run out of money next year.”

Asking how this could happen, the editors itemized: “Bad decision-making played a role, certainly, particularly in too-generous pensions provided by the previous administration. But this is the bottom line: Since 2007, the value of property in Wayne County has dropped by $20 billion, a devastating toll on the county’s tax base…A budget plan released last week, Wayne County Executive Warren Evans says, won’t solve all of the county’s most intractable financial problems, but adopting this plan would put Wayne on more solid footing. Evans is asking the county’s labor unions to agree to a 5% across-the-board wage cut, elimination of health care benefits for future retirees, an increase in employee contributions to the pension fund and changes to the way average final compensation — used to determine pension benefits — is calculated, among others. The county will also consolidate or eliminate some departments — including its ill-fated economic development agency — and launch a new procurement system. The plan also asks for changes to work rules that dictate layoffs on the basis of seniority, not qualification. The changes will save about $60 million a year. That would take care of the county’s accumulated deficit, but doesn’t begin to address the jail or the pension deficit…But, Mr. Evans says, that’s how you march out of this financial morass: Slowly. Al Garrett, President of the American Federation of State, County and Municipal Employees Council 25, told a Free Press reporter that the plan is unfair, saying it places the cost of the county’s past financial mismanagement on the backs of working families.” The editorial concurs: “He’s right. It’s not fair…Wayne County workers have accepted cuts and made sacrifices; for most, the previous administration’s lucrative pensions and compensation packages for a few high-profile appointees are headlines in a newspaper, not the facts of their lives. And all of Evans’ decisions must be informed by the needs of Wayne County’s workers. The county can’t simply throw away the promises it made to employees. But this is what a budget crisis means: There are no good options. Sorting out the county’s operating budget is the first step in managing the county’s long-term financial problems. If there’s a better plan, labor leaders should bring it forward. Evans warns that the county’s pension fund could go belly up. It’s a worst-case scenario that can’t be allowed to happen.” In his poem, “Mending Wall,” Robert Frost wrote: “Good fences make good neighbors.” Yet it is hard to imagine that their respective fiscal fates can be so inseparable.

Puerto Rico & Federal Fiscal Policy Insolvency. Kasia Klimasinska of Bloomberg this morning writes of the MIA status of the Executive and Legislative branches of the federal government in not responding to not only the largest municipal bankruptcies in U.S. history, but also in the pervasive silence of the two branches as the U.S. Territory of Puerto Rico appears headed towards insolvency, writing: “The Treasury has a similar no-rescue approach with the Caribbean island beset by unsustainable debt. What Treasury officials are offering Puerto Rico is advice on how to help ease its fiscal burdens and ensure the U.S. territory receives all federal funding for which it is eligible―about $6 billion a year.” That is clearly significantly more assistance than Congress, which this week adopted a budget resolution barring so-called “bailouts” to municipal corporations, while leaving unchanged federal support for federal bailouts of non-governmental corporations. Congress has been similarly recalcitrant about even granting authority for Puerto Rico to have the same municipal bankruptcy authority as each of the nation’s 50 states to protect the Americans living in its municipalities. In a year when Congress has not only not provided any special assistance to Detroit, Stockton, or other major municipalities whose economies were devastated by the Great Recession, but also significantly reduced aid—and now cemented in place sequester authority for the end of this federal fiscal year, the focus has instead turned to hundreds of billions of dollars for federal tax subsidies to non-municipal corporations. Brandon Barford, a former staffer (as am I) of the U.S. Senate Banking Committee, said in the story that it is unlikely the federal government will aid Puerto Rico after refusing to help Detroit: “I can’t see any way that they would do that when they didn’t do it for Detroit: Treasury could ask, but it would only exacerbate market disruptions if prices spiked and then fell even further after an inevitable Congressional defeat.” Instead, the article writes that the Obama administration is making a special effort to support the $100 billion Puerto Rican economy by helping the Commonwealth and its residents take full advantage of aid currently available through programs such as Social Security and Medicaid, and funds for nutrition, education and agriculture.

In fact, if anything, Puerto Rico is disadvantaged compared to other U.S. states and municipalities: The Government Development Bank of Puerto Rico, which acts as the island’s fiscal agent, financial adviser on bond sales, and handles the same debt-management functions State Treasurers, CFO’s, etc., is neither federally regulated, nor does it have access to Fed’s discount window, a lending facility aimed at boosting liquidity. That is not to say there has been no effort by the U.S. Treasury: Treasury officials have traveled to the Puerto Rico to discuss its finances: Antonio Weiss, counselor to Treasury Secretary Jacob Lew and Kent Hiteshew, who runs the office of state and local finance, met with officials in San Juan earlier this year. Last month, Treasury Secretary Lew spoke by phone with Puerto Rico Governor Alejandro Garcia Padilla, Senate President Eduardo Bhatia, and House of Representatives President Jaime Perello Borras: he urged them to develop a “credible” budget and implement a long-term fiscal plan. Early this week, Treasury spokesman Daniel Watson reiterated that “federal policy experts are sharing their expertise with the Puerto Rican officials who are leading the Commonwealth’s economic policies, but these efforts should not be interpreted as any kind of federal intervention.” Fabulous Matt Fabian of Municipal Market Analytics puts it more succinctly: the only situation in which the administration would be willing to provide aid to Puerto Rico would be to help keep order if a default leads to social unrest. Even were the White House to press for a greater role to avert Puerto Rico’s insolvency, the combination of the just-adopted 2016 Budget Resolution by Congress barring bailouts to municipalities—but not other corporations—combined with steps taken by Congress to limit Executive authority in the wake of the financial crisis of 2008, such as barring use of the Exchange Stabilization Fund, which had been used to help Mexico during the 1990s, for emergency purposes—have served to handcuff the Executive branch—even as the financial/fiscal crisis has worsened. Indeed, according to the Treasury: beyond asking for Congress to appropriate money or the Fed purchasing bonds, there are no other pots of money that could be used for direct and unrestricted fiscal relief.