Trimming Municipal Excess
Board May Force Municipal Consolidations
Can Consolidation of Puerto Rico’s Municipalities into Regions Bring Needed Savings, Efficiencies, Economic Development to Island?
While the federal oversight board that will make financial decisions for the government of Puerto Rico does not have the legal power to eliminate the island’s cash-hungry municipalities, many of which are draining the general fund, it could indirectly force them to merge.
As the Puerto Rico government scrambles under a debt of about $70 billion, and recently defaulted on payment of more than $800 million, the fiscal control board is slated to seriously question whether the island truly needs 78 town halls whose expenses are nearly draining government coffers. The island will be forced to deal with the thorny issue of whether to reduce the number of municipalities by consolidating smaller towns with larger ones, or by merging services into regions or consortiums. Some towns have already opted to join forces to provide services by creating consortiums but that appears to have not translated into savings.
“Money talks and you know the rest,” said Popular Democratic Party Rep. José Luis Báez, representing San Juan’s District 4-Cupey. “This [reality] will attract the [fiscal oversight] board’s attention because they will see the duplicity in spending. People like me will make sure they know there are alternatives to eliminate duplicity through consolidation and other possibilities.”
The Commonwealth Constitution states that for the government to eliminate municipalities, it must bring the matter to a vote by the people. The last municipality eliminated in Puerto Rico was Río Piedras, when it was consolidated with San Juan in 1951.
How would the Financial Oversight & Management Board force the restructuring of municipalities? There are several ways the board can indirectly do so. The federal law that created the board states that if members find inconsistencies in the budget that are not corrected, the board can make reductions in non-debt expenditures, in addition to imposing hiring freezes and prohibiting contracts.
The Oversight Board must also approve a fiscal plan and submit recommendations to ensure its compliance, and ways to transfer territorial government services, including through privatization or commercialization of these entities.
Báez said island mayors, who for many years have declined to give up their powers, will be forced to reorganize their structures by their own constituents, who will become upset if the fiscal control board forces towns to make cutbacks and layoffs. The island’s 78 municipalities employ 53,987 people, according to the Municipal Affairs Commissioner’s Office.
How much money do municipalities take from the government? The central government’s budget for the current fiscal year earmarks $394.7 million for municipalities. This amount includes $227.5 million in Matching Revenue Funds that come from a 1991 law and $133 million that the government gives towns as compensation for uncollected property taxes. However, the current budget also earmarks $34.1 million to fund the operations of 15 towns with fiscal needs, which includes $12 million for Christmas bonuses for municipal workers. These municipalities are Vieques, Culebra, Las Marías, Loíza, Ciales, Maunabo, Yabucoa, Maricao, Cabo Rojo, Guayanilla, Juana Díaz, Lajas, Patillas, Salinas and Villalba.
Mayors make as little as $2,500 monthly, as is the case in Yauco, to $10,417 monthly, which is the salary for San Juan’s mayor. Municipalities spent $1.1 billion in fiscal year 2015-16 in payroll, including $722 million for salaries. Their total budgets for fiscal year 2015-16 was $2.25 billion. They have $6 billion in debt but payments are made a year in advance.
Mayors Federation Executive Director Reynaldo Paniagua recently said municipalities have proven they can provide services better than the central government and are better at collecting taxes. He said the central government should give towns more responsibilities along with economic resources. Paniagua pointed out that municipalities contribute more than $300 million in payments to the central government in health insurance and retirement payments.
Size does matter
Mario Negrón Portillo, a former director of University of Puerto Rico’s School of Public Administration, indicated that while municipalities do provide services and contribute to Health Reform, they cannot operate without assistance from the central government because most of their income is from property taxes.
He said big cities like Carolina, Guaynabo and Caguas receive enough money from property taxes, which is not the case in many small towns, such as Las Marías, Naranjito or Morovis. While the large cities have benefited from the 1991 Municipal Autonomy Law, he said smaller towns have lagged behind. This means the mergers of small towns with larger cities will be beneficial in the long run because the resulting municipality would be able to obtain more income.
Rep. Báez, who through House Bill 2948, introduced in May, proposed reducing some 58 municipalities into 20, insisted towns are draining the general fund and should be cut down so they can become more sustainable and are able to take on more responsibilities. He noted that most towns do not provide essential services, such as healthcare, education or security. “Only some cities, large ones, do that,” he said.
Báez’s bill, which he said is the same as one that was proposed by former New Progressive Party Rep. Eric Correa (District 38-Canovónas-Carolina-Tujillo Alto), did not call for the elimination of municipalities, because they would continue to exist, but would be called “municipal zones.”
Several attempts have been made to restructure the island’s municipal governance system. However, none have become a reality because mayors refuse to give up their power, Negrón Portillo said.
In 2015, economist Gabriel Figueroa Cintrón made a case in favor of consolidating the island’s municipalities, in a study titled “Optimum Size for the Offer of Municipal Services: The Case for the Consolidation of Puerto Rico.” In the study, he concluded that as towns’ populations increase per square mile, their expenditures go down until reaching a certain size; after which, expenditures go up. He proposed a partial consolidation of certain municipalities through the creation of five regions with six towns each. The proposal, he said, would save millions of dollars.
Both the Mayors Association and Mayors Federation support regionalization of municipal services instead of repealing or consolidating municipalities.
A House proposal that would have allowed towns to create regions went nowhere, but over the weekend, Gov. Alejandro Garcia Padilla signed into law House legislation that will allow towns to create consortiums to provide services or to sign agreements in which one of them will provide a service, currently required of all 78 municipalities, by amending the 1991 Autonomous Municipalities Act, which requires towns to have at least eight different types of offices within their structures.
Before the law was enacted, some municipalities, in fact, had already joined into regions and consortiums to provide services, such as trash collection, and to promote infrastructure projects. Cabo Rojo, Lajas, San Germán and Hormigueros united efforts to promote the Proyecto PASO tourism development initiative, in which they would operate the transportation system for tourists.
Juana Díaz, Coamo and Villalba joined in an agreement to jointly bid for products and services to obtain lower prices. Comerío, Barranquitas and Aibonito shared an agreement in which they created a single permitting office for projects in their towns and to promote economic development.
Reforming municipal structures goes with government reform
Negrón Portillo and other researchers have also worked on a regionalization proposal that used as its base a Planning Board model that would divide the island into seven regions and amend the 1991 Municipal Autonomy Law.
However, he said the regionalization model also entails reforming the central government so services are delegated to the municipalities and are not being duplicated. He noted that the 1991 Autonomous Municipalities Act was supposed to be accompanied by government reform as the responsibilities were delegated to the municipalities and the central government was decentralized.
“And agencies refuse to die,” Negrón Portillo said.
Camuy NPP Mayor Edwin García Feliciano, who opposes suppressing municipal powers, said towns are not the problem; rather the Legislature and the central government legislating against the municipalities is.
“Right now, the municipalities are not the problem. Towns pay their loans in advance. Municipal debt, which is $6 billion, has never been a problem for the island’s finances. The problem is that the state government keeps adding [unpaid] responsibilities [to the municipal tasks],” he said, adding that he is paying $500,000 for employees’ retirement because of a law enacted by the central government.
The process to consolidate Puerto Rico’s municipalities will experience problems because it is regulated by the Constitution and will require a public vote. Portillo Negrón says regionalization of services—which would entail six or seven mayors joining resources to deliver a specific service, such as cleaning rivers or streets, collecting garbage or building a hotel—is more viable.
“There has to be a willingness to work together,” he said.
Other countries want to merge their towns
In recent years, there has been a trend throughout the world to reduce the number of municipalities in various countries, often saving millions in the process or providing better services.
Spain, for instance, is working on a plan to cut down its 8,114 municipalities. In 2012, Greece consolidated its 1,042 municipalities into 355, saving $1.5 billion by eliminating 687 towns.
Malta is also making changes to its local government, organizing into five regions for upkeep and maintenance of street lighting, law enforcement, cultural activities and protection of the environment.
Denmark is now divided into five regions, each containing 98 municipalities, after implementing a new structure in 2007. The country’s 270 municipalities were consolidated into 98 larger units, most of which have at least 20,000 inhabitants. Counties were eliminated. The reason for the change was to give the new municipalities greater financial and professional sustainability. Many of the responsibilities of the former counties were taken over by the enlarged municipalities. Thirty-two of the former municipalities did not merge into larger units, either because they already had merged or had a population that was larger than 20,000 or because they signed a cooperation agreement with a larger municipality.
Norway changed the geographical boundaries of its cites in the 1960s and is looking at additional municipal reforms. With 428 municipalities and 19 county authorities, Norway has more than 5 million inhabitants. The municipalities and county authorities vary significantly in size and population. More than half of the municipalities have fewer than 5,000 inhabitants and 14 have more than 50,000 inhabitants. The largest municipality is Oslo with about 640,000 inhabitants and the smallest is Utsira with 211 inhabitants. Large parts of the country are sparsely populated.
Despite such differences, all municipalities have the same abilities and responsibilities, which include providing education, healthcare, local planning, utilities, culture and business development.
Why reform? The municipalities are key players in Norway’s welfare society but their geographical boundaries are more or less the same as they were in the 1960s, when the last municipal reform took place, which reduced the number of municipalities from 750 to 428. Several attempts to modify this structure have ended in relatively small changes.
On the other hand, New Jersey residents are exploring the idea of consolidating towns to curtail property taxes. Government officials have said the state’s 565 municipalities can save money if they share services. Many residents object to the idea, saying they support the concept of “home rule” and maintaining a local identity, much as is said in Puerto Rico. In 2011, however, two towns, Prince Borough and Prince Township, voted to merge and they cut property-tax rates by 2%.
Names of Possible Candidates for Fiscal Oversight Board Continue to Grow
Since Caribbean Business last published a list of potential candidates for the “territorial oversight board” created by the Puerto Rico Oversight, Management & Economic Stability Act, or Promesa, the names of other potential candidates have popped up (CB July 28, 2016).
One of the names rumored to be on that list is Patricia Eaves, general manager of Sprint Puerto Rico, the telecommunications company. It is unclear why her name came up because she has not been vocal in the media about the island’s financial problems. A summary of her work states that under her tenure at Sprint, the company invested $60 million to build a 4G LTE (long-term evolution) network on the island and opened several new stores. She has been praised for leading Sprint through tough economic times.
Another candidate mentioned is David Walker, who last year joined PricewaterhouseCoopers as a senior strategic adviser in the public sector practice. His name has been floating among congressional Republicans because he is a fierce opponent of federal debt. Walker has served in several high-level leadership roles, including as the seventh U.S. Comptroller General and head of the U.S. Government Accountability Office (GAO). He also served as the first president & CEO of the Peter G. Peterson Foundation and founded the Comeback America Initiative, where he led national campaigns to promote fiscal responsibility, sustainability and the building of public support for various solutions to the nation’s federal, state and local fiscal imbalances.
He is a Fellow of the National Academy of Public Administration and the National Academy of Social Insurance. His international experience includes serving as the first chairman of the Independent Audit Advisory Committee for the United Nations.
Height Securities has cited several other potential likely candidates for the board but they have not discussed Puerto Rico’s debt. These candidates are José Ramón González, executive at the Federal Home Loan Bank (FHLB); Steven Shafran, formerly of Goldman Sachs and the U.S. Treasury; Aida Álvarez, a healthcare executive and Wal-Mart board member; Mikey Dickerson, director of U.S. Digital Service; and Andrés López, a Puerto Rican lawyer and Democratic National Committee (DNC) member.
Besides the FHLB, González also serves as a consultant & director of Banco Santander Puerto Rico. He is a past president of the Puerto Rico Bankers Association and a past president of the Securities Industry Association of Puerto Rico. On the other hand, Shafran served as a managing director at Goldman Sachs Group’s Merchant Banking Division and GS Capital Partners II L.P. He is currently a director at Hamilton State Bancshares Inc., according to several media outlets. Álvarez is a Puerto Rican native who became the first Latina to hold a U.S. cabinet position as the administrator of the Small Business Administration, during the former administration of President William “Bill” Clinton. Dickerson is a former Google engineer who was involved in the 2013-2014 rescue of the HealthCare.gov website.
López, who reportedly lives in Puerto Rico, is the main link between President Barack Obama and the DNC. He reportedly believes Puerto Rico’s political status must be changed so the island can deal with its economic problems. Last week, Caribbean Business published a summary of 11 other candidates whose names were publicly mentioned to serve on the territorial oversight board or were provided by sources familiar with the issue. They included lobbyist Jeffrey Farrow, former Judge Arthur González; Overseas Private Investment Corp. board member Roberto Herencia; American Action Forum President Douglas Holtz-Eakin; Prof. Simon Johnson; Phoenix Management Services Senior Managing Editor Martha Kopacz; Bankruptcy Lawyer Sharon Levine; former New York Gov. George Pataki; former New York Lt. Gov. Robert Ravitch; former Washington, D.C. Mayor Anthony Williams; and Maeva Group CEO Harry Wilson.