Joseph Krist

Publisher

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PA TURNPIKE FUNDING UPHELD IN COURT

Over the last decade, Pennsylvania has struggled with meeting the infrastructure needs of the state in the face of difficult overall budget pressures. One way that the Commonwealth chose to address it’s crumbling state road and bridge system was to apply revenues derived from tolls on the Pennsylvania Turnpike. Historically, the Turnpike had only rarely raised tolls and yet still achieved a strong credit position. Now the Turnpike is looked to as a major source of road funding for the state as a whole. This has led to regular annual toll increases.

When enacted, the plan to raise tolls to finance non-toll road facilities was controversial. Users did not like subsidizing other facilities. Bondholders did like seeing their credit security diluted. The Turnpike Commission (PTC) saw its rating lowered. The legislation provided that the funding would be temporary requiring the annual PTC transfer to the state to decline to $50 million from $450 million starting in fiscal 2023.

In the meantime, opponents took their case to the federal Courts. In April, the US District Court for the Middle District of Pennsylvania dismissed their lawsuit against the Pennsylvania Turnpike Commission (PTC, A1 senior and A3 subordinate stable) and the Commonwealth of Pennsylvania (Aa3 stable) brought by the Owner Operator Independent Drivers Association, Inc. (OOIDA). The plaintiffs claimed that the PTC and state (and others) violated the dormant Commerce Clause and the constitutional right to travel by charging higher tolls on the turnpike system to fund other state transportation needs, like capital needs of the state’s transit enterprises.

They appealed the dismissal. Last month, the US Court of Appeals for the Third Circuit affirmed the  April order. The appellate judge reasoned that since Congress expressly authorized the use of tolls for non-tolled purposes under the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), the dormant Commerce Clause does not apply. Also upheld was the dismissal of the claim that the plaintiff’s “constitutional right to travel” was violated because not all entry and exit points into and out of the state are “tolled” and thus there are methods to travel across the state that are free, though they may be less convenient. In sum, “the right to travel” does not mean “the most efficient and direct route.”

So the funding scheme remains intact. That is a short run positive for the Commonwealth’s budget. For the Turnpike Commission, the impact is less clear. Now that it has won its litigation challenge, will the Commonwealth amend the legislation and keep the funding scheme in place at its higher current level. The plan has not been positive for the PTC senior lien bond credit. For example, the Commission makes quarterly payments to the Commonwealth for non-PTC projects but recently the state had granted a waiver to the Commission while the litigation unfolded. Once the court handed down the original dismissal order, the waiver from the Commonwealth was not extended and the bill for 2019 and2020 came due. This forced the Commission to issue $712 million of subordinate bonds in June 2019 to pay the state its deferred fiscal 2019 Act 44 payments and the upcoming fiscal 2020 payments.

While the decision may be positive for the Commonwealth’s general credit, the Turnpike Commission remains under pressure. There is concern that the judicial support for the Act 44 funding plan will slow momentum in the effort to establish a more broad based funding plan that takes pressure off the Commissions ratings and bonding capacity.

PUERTO RICO

The Financial Oversight and Management Board for Puerto Rico has released its 2019 annual report. It documents the variety of actions which have occurred in the effort to restructure the Commonwealth’s debt. Our focus however is on the comments regarding the budget for the current 2020 fiscal year. They highlight the inherent conflict between “rightsizing” government relative to its resources with the political reality created by the government’s inordinately large role as a source of employment.

Total government spending of $20.2 billion is focused on the following priority areas: 21% for health, 17% for education, 13% for pensions paid via PayGo, 12% for families and children, and 5% for public safety. The areas prioritized make sense. Here’s where legitimate questions may be raised.  The budget, for example, provides for increased salaries and benefit contributions for police officers and incremental funds to purchase bullet proof vests, radios, and vehicles. Increased salaries during a period when the population at large faces  such huge difficulties?  Social Security is budgeted for all police as of July 2019 to provide them a more secure future retirement. In addition, the Certified Budget raises teachers’ and school principals’ salaries for the second  consecutive  year. This in a school system that faces contracting demand. It also raises the  salaries of firefighters.

The report references, among other places, the experience of New York City under a control board in an effort to prepare citizens for a long recovery period. It’s all well and good to make the reference but to refresh those who forget or do not really know the history, keep these items in mind. New York City made substantial cuts to basic public services in the immediate post-1975 crisis era. Raises? NYC police and firefighters were laid off. That is serious belt tightening.

STORM CLOUDS AHEAD

The outlook for state general obligation credits has been fairly solid up until now throughout the budget process.  We saw many favorable comments about reserves and taxes creating a strong foundation for states to fall back on. Well let’s hope that this do indeed hold up as the economic storm clouds gather at an inopportune point in the budget cycle.

US industrial production decreased 0.2% last month, according to the Federal Reserve, missing economists’ forecast of a 0.2% increase. Meanwhile, 77.5% of capacity was in use at factories, utilities and mines, the lowest figure since October 2017. Continuation of the trend will hurt earnings and tax revenues. Analysts have been cutting S&P 500 profit estimates for the second half of the year. According to FactSet, companies’ earnings will increase 1.5% this year at best, down from a January prediction of growth exceeding 6%.

And that is what could be the problem. Since many of the states budgeted based on best economic data available (which may have included some 1Q data) they weren’t able to account for the current negative impacts of the trade war. The retail industry’s freak out over tariffs is a clue to how fragile things are. Nine major world economies have entered a recession or are on the verge of one.

TECH REDLINING

It is a policy reminiscent of the bad days of urban development. The practice of redlining – the effective refusal of banks to make mortgage loans in certain, usually poorer and less white neighborhoods. The practice has rightly been criticized and has been greatly reduced. One would think that anything that smacked of redlining – no matter what the business – would be a practice which would not be undertaken by our progressive, technology educated brethren. Sadly, this is not the case.

A recent report on scooter use in SF – the epicenter of the micromobility industry – highlights a practice that walks, talks, and squawks of redlining. Despite a promise that it wouldn’t prioritize lucrative wealthy areas of San Francisco over low-income zones, electric scooter company Scoot has blocked drop-offs in two of the city’s poorest neighborhoods. Scoot is a scooter provider which was acquired by Bird – a micromobility provider which has yet to see a regulation it couldn’t ignore.

As a condition for joining the city’s scooter pilot program, Scoot specifically promised it would prioritize serving the Tenderloin and Chinatown as  “communities of concern. ” Scoot claims to only be thinking of the elderly. Communities in Chinatown and the Tenderloin had expressed concerns about potential hazards from scooters to older people and others, as well as possible pitfalls related to narrow sidewalks, so the company decided to exclude areas to address those worries. The no-drop-off zones don’t cover the entirety of either neighborhood, and scooters are available on the peripheries of closed-off areas, so the company believes it is serving those neighborhoods as promised in its permit application.

Bird also maintains red lines around areas of Oakland, its app shows, including Lake Merritt (the home of Barbeque Becky).  Numerous scooters have been deposited in the lake (likely by established neighborhood residents under gentrification pressure from newly arriving tech types). A company spokesperson claims it closed off those areas at the request of city and school district officials.

Lime also operates in Oakland and excludes Lake Merritt and Oakland Technical. A Lime spokesperson said city officials had asked it to close to drop-offs the area surrounding Lake Merritt, and exclude Oakland Technical. Lime also excluded all the other schools in Oakland.

So like Citibikes in New York, the scooter providers just cannot seem to find a way to serve all of a population. They continually reinforce the notion that electric scooters are not a real alternative to today’s public transportation option set but rather a plaything for white hipsters. It simply is not an effective model for developing, financing, and funding public transit.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not inter, intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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MOODY’S AND THE MTA

The transportation space increasingly finds itself at the center of many of the larger debates underway as the nation’s urban landscape develops. One of those issues is the need for significant investment in the nation’s urban mass transit infrastructure. How to pay for it is a question which dominates the discussion on the federal, state, and local levels. So we were intrigued to see Moody’s weigh in on how it thinks transit should be funded at least in the case of New York’s MTA.

First, some context. Funding of the mass transit system in New York has been a constantly evolving process. Initial private investment was ultimately accompanied by public investment and over time the funding responsibility became all public. Each iteration of fun ding policy was accompanied by a variety of funding methods including general obligation debt from the City for the Independent lines. There was always a variety of revenues derived from a variety of sources that matched the diversity of the passenger base.

Over time the realization was achieved that the lifeblood of the economic engine that drove New York State was the City’s mass transit system. It fueled unprecedented levels of development in the City and beyond and the impact was reflected in the source of funding. Fares always generated a higher level of operating revenues than was the case in other cities for years. Those fares, however, were always accompanied by taxes and tolls which effectively accessed much of the income derived from the city economy.

That compact began to fray as the financial recovery of NYC was competing with agencies like MTA for financing. Under those circumstances, a series of dedicated taxes and the authorization of $800 million in fare-backed bonds. The money allowed the agency to buy new cars and fund urgent structural repairs. As time went on bonds became a way to provide political cover to artificially hold down fares and taxes. Taxes are constantly subject to change as the result of one county’s historic intransigence against having to fund the MTA. It is, as they say, no way to run a railroad.

So too it is important to remember that the MTA fare box credit has been remarkably stable given the challenges the system faces daily. This in the face of enormous capital needs, lack of funding consensus, and significant pressures to increase subsidized or even free service. So we find it interesting that after such support of the existing, failing funding model we hear this. “Lagging income growth among the lowest-earning residents of its service area will weaken the MTA’s ability to raise fares and balance its operating budgets,” Moody’s  said in a press release. “However, the essential role of mass transit in the New York economy provides a strong incentive to tap the region’s high and growing overall wealth to subsidize transit operations.”

That’s the sort of leap from rating credit to making policy recommendations that gets the agencies into trouble. Essentially by supporting good ratings for the MTA fare box credit for a long time they unwittingly aided and abetted the effort to postpone funding choices.  When the debate first began essentially in the 80’s, issues of fairness and equity were at the heart of the transit funding debate. That has not changed in the era since but the politics have. This comes off  jumping on the bandwagon. A Brooklyn councilman wants the MTA to offer free service on holidays. He compares is to suspending alternate side of the street parking on holidays. Christmas Day, New Year’s Day, Memorial Day, Independence Day, L​​abor Day and Thanksgiving would be the days. Admittedly, MTA ridership is significantly lower during major holidays. It’s reflective of the political headwinds facing the agency.

If you’re Moody’s is that a train you want to be in front of?

MEDICAID EXPANSION SPEED BUMP

It appears that the Utah state legislature’s effort to have its cake and eat it too as it responds to a voter initiative expanding Medicaid will not fly. At least not from the standpoint of the Centers for Medicaid and Medicare (CMS), the agency with oversight over Medicaid expansion waivers. In November, 2018, Utah voters authorized he expansion of Medicaid eligibility under the terms of the Affordable Are Act. Republicans in the Legislature agreed to expand the program to include people making up to 100% of the federal poverty income line. Under the Affordable Care Act, states can expand Medicaid to people making up to 138% of the federal poverty line. 

And therein lies the rub. Utah was asking for full reimbursement although it was not expanding the program to the same extent. It essentially wanted full coverage even though it was – based on the income limit – only making three fourths of the effort. CMS takes the position that while it remains committed to its goal of allowing states additional flexibility in Medicaid, it would reject plans that would limit expansion enrollment while requesting full Medicaid funding available from the government.

At its core, the action is another in a chain of them coming from the federal government in a continuing effort to gut the Affordable Care Act. CMS approved a version of the plan to serve as a “bridge” ahead of a full expansion, allowing Utah’s Medicaid program to begin enrolling individuals April 1. Those who have enrolled will be able to keep their coverage as the state finds a new solution. It’s worth noting that the program failed to pass even though it contained the current Trump Administration work requirements.

All of this occurs against the backdrop of pending litigation in the Fifth Circuit Court of Appeals which seeks to have the ACA declared unconstitutional.  A District Court determined that the ACA is unconstitutional now that Congress has rolled back the penalty requiring everyone who did not carry health insurance to pay a fine. Other court action generated a third loss for the Administration’s efforts to impose work rules. For a third time the same federal judge who ruled against Arkansas and Kentucky’s work rule schemes ruled that federal health officials were “arbitrary and capricious” when they approved the New Hampshire’s plans, failing to consider the requirements’ effects on low-income residents who rely on Medicaid for health coverage.

Data came out this week in a study by the General Accounting Office (GAO) which shows what might happen if the ACA goes away and the ranks of the uninsured grow again. Medicaid, the joint federal-state program that finances health care coverage for low-income and medically needy individuals, spent an estimated $177.5 billion on hospital care in fiscal year 2017. About a quarter ($46.3 billion) of those hospital payments were supplemental payments—typically lump sum payments made to providers that are not tied to a specific individual’s care. States determine hospital payment amounts within federal limits. In fiscal year 2017, DSH payments totaled about $18.1 billion. 

Medicaid disproportionate share hospital (DSH) payments are one type of supplemental payment and are designed to help offset hospitals’ uncompensated care costs for serving Medicaid beneficiaries and uninsured patients. Under the Medicaid DSH program, uncompensated care costs include two components: (1) costs related to care for the uninsured; and (2) the Medicaid shortfall—the gap between a state’s Medicaid payment rates and hospitals’ costs for serving Medicaid beneficiaries. As we go to press, plans to delay cuts to the DSH program are under negotiation as a part of the federal budget process. Medicaid DSH payments covered 51 % of the uncompensated care costs nationwide. In 19 states, DSH payments covered at least 50% of uncompensated care costs.

MARIJUANA – FACTS OR FEARS?

In the wake of recent efforts to legalize marijuana, it helps to look at the facts behind some of the claims made especially by opponents of legalization. Any debate is always ore useful and illuminating when it is a debate based n facts. Two concerns are almost always cited. One is the potential for increased use by teenagers and the other is the specter of thousands of newly impaired drivers on the roads. No matter one’s position on the matter, it is always useful to look at data to evaluate these claims. In that light, we view the findings of two sets of data from dispassionate sources.

The first issue is that of increased access to marijuana by minors. A recent report from the Journal of the American Medical Association deals with this issue. In the United States, 33 states and the District of Columbia have passed medical marijuana laws (MMLs), while 10 states and the District of Columbia have legalized the recreational use of marijuana. A 2018 meta-analysis concluded that the results from previous studies do not lend support to the hypothesis that MMLs increase marijuana use among youth, while the evidence on the effects of recreational marijuana laws (RMLs) is mixed. 

The estimates generated for the report showed that marijuana use among youth may actually decline after legalization for recreational purposes. This latter result is consistent with findings in prior studies and with the argument that it is more difficult for teenagers to obtain marijuana as drug dealers are replaced by licensed dispensaries that require proof of age. The data is not necessarily consistent.

One study found increased marijuana use among 8th and 10th graders after it was legalized for recreational use in Washington State. However, the same authors found no evidence of an association between legalization and adolescent marijuana use in Colorado. A third study using data from the Washington Healthy Youth Survey, found that marijuana use among 8th and 10th graders fell after legalization for recreational purposes.

On the issue of safety, the Nevada Office of Traffic Safety recently released new data which shows that marijuana related fatalities in Clark County had gone down. The number spiked in 2017 immediately after the legalization of marijuana. However, within a year, those numbers decreased by about 30%. This reflects patterns seen in other jurisdictions.

A study sponsored by the Society for the Study of Addiction, after the legalization of recreational marijuana showed that in the year following implementation of recreational cannabis sales, traffic fatalities temporarily increased by an average of one additional traffic fatality per million residents in both legalizing US states of Colorado, Washington and Oregon and in their neighboring jurisdictions.

LEADING BY EXAMPLE – ELECTRIC BUSES

The Los Angeles County Metropolitan Transportation Authority (Metro) has received its first zero emission electric bus that will be used on the Orange Line later this year. The Orange Line will be the first line to receive these electric buses with a total of 40 buses to be delivered to the agency and deployed on the Orange Line by the fall of 2020.

The buses will be purchased from the US subsidiary of BYD, the Chinese manufacturer of electric buses. China is way ahead of the US in terms of its development and production of electric buses. Bus purchasers are not experiencing the same type of intervention being experienced by rapid transit operators who wish to purchase Chinese made subway cars. The federal government and Congress have acted to intervene in those purchases on national security grounds.

The vehicles are not cheap even from the most competitive vendor. The electric buses cost $1.15 million each in a contract valued at $80,003,282. This contract includes the deployment of the electric buses and associated charging infrastructure. The new buses will be capable of being recharged at various points along the Orange Line to support its 24/7 operation.

Metro hopes to extend its deployment of electric vehicles. In a separate purchase, Metro ordered an additional 65 zero emission electric buses from the manufacturer BYD with five of those buses being 60-foot articulated buses earmarked for the Orange Line and the remainder to be used on the Silver Line that operates between the El Monte Bus Station and the Harbor Gateway Transit Center in Gardena. Metro plans to convert the Silver Line to zero emission buses in 2021.

The electric buses cost $1.15 million each in a contract valued at $80,003,282. This contract includes the deployment of the electric buses and associated charging infrastructure. The new buses will be capable of being recharged at various points along the Orange Line to support its 24/7 operation.

In Atlanta, MARTA has announced that it will replace six diesel buses with zero-emission battery electric models. Funding for the purchase will come from a $2.6 million grant from the U.S. Department of Transportation. The grant is one awarded under the U.S. Department of Transportation the Low- or No-Emission (Lo-No) Grant program run by its Federal Transit Administration (FTA).

Overall, the FTA will award $84.9 million in grants to 38 projects for the deployment of transit buses and infrastructure that use advanced propulsion technologies. These include hydrogen fuel cells, battery electric engines, and related infrastructure investments such as charging stations. The 38 awarded projects are from 38 states. Some other municipal recipients include the Vermont Agency of Transportation and the Prince George’s County, Maryland Department of Transportation.

The use of electric vehicles by transit agencies and governments is a great opportunity for municipal entities to take a leadership position in the transition from internal combustion engines. The involvement of the federal government in funding these projects is a positive development.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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WHEN GUTTING HIGHER EDUCATION IS A CREDIT POSITIVE

We understand that certain actions and events can be seen as having a positive effect  in a every discrete way for an individual credit. A revenue source dries up or is withdrawn and an institution takes clear somewhat radical steps to deal with the situation which serve to shore up the ability to pay debt service in the short run. Such a scenario is likely “credit positive”.  While that may be true n the very near term, there are times when it is hard to view such a credit in a positive light when viewed through the lens of its larger economic and policy impact.

The latest example of that dilemma is what is going on at the University of Alaska. The budget adopted by the Legislature at the behest of the new Governor restores the annual payment to each Alaskan resident funded by revenues in the State’s Permanent Fund. The payment had been reduced in response to lower oil production and prices and declining reserves of oil.  The payment had been reduced to balance the budget in the face  lower oil revenues.

In order to restore the payment to its prior level and maintain a balanced budget, significant cuts needed to be made. Among the entities targeted for cuts was the state’s university system. Under the budget adopted (even after a special session to reconsider the cuts) the state legislature acquiesced and allowed the Governor’s cuts to the University to stand. The result is a reduction of 41% in the states funding for the University effective as of July 1.

The university has represented that it has a moderate amount of liquidity but estimates that if it has to maintain spending at fiscal 2019 levels, it will deplete reserves by early 2020. So the only real response is to cut expenses. The overwhelming majority of expenses at most universities is related to personnel. Much of the expense stem from the tenure system governing faculty. That means that short term budget relief in the face of this magnitude of revenue reduction can only be dealt with extraordinarily. So it is the case in Alaska.

On July 22, the University of Alaska’s Board of Regents voted to declare financial exigency. This is a legal strategy to eliminate tenured positions in the face of extraordinary fiscal circumstances. The University has said that administrative positions will  be the first to be reduced but that efforts to implement cut to faculty including  tenured faculty will follow. In September, the Board of Regents will decide on a course of action.

In response to this action we see the Moody’s headline that says “University of Alaska’s financial-exigency declaration is credit positive”.  We understand that from a very narrow University of Alaska revenue bond standpoint it could be seen as positive. Moody’s notes that the action will force the University to deal with declining enrollment, loss of research competitiveness, a material reduction in liquidity and additional accreditor scrutiny as it implements changes over the next one to two years. This leads us to ask what exactly is credit positive about a credit which faces these aforementioned pressures?

Alaska is a state which because of its size and small population does not have a robust private higher education alternative. Significantly cutting back faculty, offerings, and research can only harm the economy of the State at a time when its major industries e under stress (the price of being resource dependent in an environment of climate change). The diminishment of higher education at a time when technology becomes more and more important to economic success seems  represent an unnecessary self-inflicted wound in the interest of short term gain.

Here’s where the rating agencies unwittingly put themselves in the middle of political debates. The headline “University of Alaska’s financial-exigency declaration is credit positive” will be seized upon by supporter of the cuts as some kind of outside endorsement of the action. Better the rating had been put on uncertain status with the potential for a downgrade than to take an action which could be misused for political ends.

At the end of the day, the cuts are bad for Alaska. Major state universities are not just sources of more reasonably priced higher education. The conduct and produce research which supports, government, industry, and small business. The loss of that capability and knowledge base can have only negative longer term consequences for the State. So we respectfully disagree with the idea that in the broader sense that this move is credit positive.

CALIFORNIA AUDIT

The federal government requires California to publish its Single Audit report, which includes the Comprehensive Annual Financial Report (CAFR), within nine months of the end of the fiscal year, or by March 31, 2019; however, the State Controller’s Office (State Controller) did not issue the State’s CAFR until June 2019, more than two months after it was due. One reason for the CAFR’s delay was that the State Controller did not implement a major new accounting and financial reporting standard for postemployment benefits other than pensions (OPEB) in a timely manner. It also chose a methodology for allocating OPEB liabilities to state funds in a manner that is inconsistent with how the State pays for OPEB benefits, which created the risk of a material misstatement to the CAFR.

Currently, the State pays for these benefits as they become due using the pay‑as‑you‑go method. Specifically, the General Fund initially pays health and dental insurance premiums for state retirees and their dependents, and is subsequently reimbursed by other funds for a portion of these costs based on their proportionate share of the healthcare and dental costs of active employees. However, the State Controller’s allocation methodology is based on the State’s recent efforts to prefund its OPEB liability by making financial contributions to OPEB plans based on pensionable compensation (the portion of employee pay used to calculate retirement benefits). However, these contributions cannot be used to pay benefits until the earlier of July 2046, or when an OPEB plan is fully funded. 

The CSA finding asserts that the methodology SCO used to allocate OPEB liabilities to State funds creates a risk that a material misstatement to the State’s CAFR could occur. However, later in the finding, CSA states the allocation did not result in a material misstatement in the FY 2017–18 CAFR. This was the first year of implementation of Governmental Accounting Standards Board Statement Number 75 (GASB 75), and SCO had to work with the most complete and accurate data available at the time. With the constraints on time and data accessibility, SCO moved forward with what it believed was a reasonable and rational approach, that could be supported by source documents, in allocating the State’s OPEB liability. SCO is not opposed to re-evaluating its allocation methodology in future years when additional information becomes available.

Press reports have expressed some surprise that this is not a big issue for investors. Reports like this one from the State Auditor are useful in terms of highlighting details of potential reporting shortcomings but it is not surprising to us that the discussion is effectively a nonevent in terms of its impact on the State’s credit. It has not been implied that the numbers ultimately generated were untrue. The reasons for the delay do not seem to reflect malfeasance so it really is not a big event.

PUERTO RICO

What we know is that Gov. Ricardo Rosselló resigned Friday as promised. We know that he used a recess appointment to name former non-voting representative to the US House of Representatives Pedro Pierluisi Secretary of State. Thus, Pierluisi automatically became Governor Rosello’s successor. He only promised to serve as governor until Wednesday, when the Puerto Rico Senate has called a hearing on his nomination. If the Senate votes no, Pierluisi said, he will step down and hand the governorship to the justice secretary, the next in line under the constitution.

Even if he retains the position, his options are limited by the short 18 month remaining time on his term. While it is heartening to see that he advocates privatization of the power system-a step we have advocated for since the immediate aftermath of Maria, he also is on record opposing several austerity measures demanded by the board, including laying off public employees and eliminating a Christmas bonus.

Until elections take place in November 2020,  it is hard to articulate a positive case for the Commonwealth’s credit. There will be bankruptcy ruling which will almost certainly be appealed, more maneuvering over the next 18 months for political power on the island, and no real end to the uncertain state of affairs. The Puerto Rico Senate ended Monday the special session convened by former Gov. Ricardo Rosselló to consider the nomination of Pedro Pierluisi as secretary of State. This means that Mr. Pierluisi has not been confirmed thus putting his governorship in legal peril. The Governor’s position? “Given that today the Senate did not cast a vote and that the vast majority of the Senators did not have the opportunity to express themselves concerning my governorship, with the utmost deference to the Supreme Court of Puerto Rico, I will wait for its decision, trusting that what is best for Puerto Rico will prevail.” 

On Sunday night, the Senate sued Pierluisi and the government of Puerto Rico, requesting Pierluisi’s swearing-in as governor be declared null. The Supreme Court gave the Senate, Pierluisi and the attorney general until noon Tuesday to present their arguments.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.