The Silent Expansion of Fiscal Control Boards in the U.S.

The figure of boards that take control over the finances of cities or territories is becoming more generalized, although they affect local democracy, impose austerity measures without controls, and lack mechanisms to evaluate their efficiency or be scrutinized.

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Regardless of their size, the number of residents, or the fiscal problems they have, U.S. cities under fiscal control boards have faced a formula that consists primarily of the firing of public employees, pension cuts, an increase in the cost of college education, and a reduction in essential services, such as health. The structures, the laws that create them and the names of the boards vary; the public policies they impose, not so much.

Despite the normalization of the boards and their commonly broad powers, the federal government and Congress lack control mechanisms, studies, databases or any entity that actively monitors their impact or efficiency, the Center for Investigative Journalism (CIJ) in Puerto Rico found.

“In the United States, there is no centralized information across states (about Fiscal Control Boards), said Deborah Kobes, author of the thesis Out of Control?: Local Democracy Failure and Fiscal Control Boards, published in 2009. “There also isn’t a real definition about what a board is.”

Some cities have a receiver, which is a person appointed to take control over a local agency or government. It can carry different titles: coordinator, supervisor or emergency manager, as was the case in Detroit.

“It might not be a full board. It might be just one person that is appointed, that comes with the backing support of the state, but the characteristics or the powers, align with what is thought of as a control board. Given the range of the way they are implemented, there was no single way to identify all existing examples,” said the doctor in urban economic policy.

Boards are created by state laws, such as Detroit, which has had two boards with different names since 2013, or by congressional laws, such as Puerto Rico and Washington D.C. In both scenarios, they are conceived as temporary entities, with the promise of improving the fiscal situation, balance budgets, pay debts and recover access to the bond market in localities with a “fiscal emergency”.

But the social costs of the measures taken by the boards to achieve their objectives do not appear to enter the equation, are being overlooked by policymakers, or are considered an acceptable collateral damage to improve government finances. Citizens, on the other hand, often have expectations that boards will bring effectiveness to the government, improve the local economy or end government corruption.

Detroit, for instance, entered bankruptcy in 2013, once the Detroit Financial Advisory Board was appointed. When the Chapter 9 process was completed in 2014, another board named the Detroit Financial Review Commission was formed. In December 2017 the city will present its third balanced fiscal budget, an event that marks the end of the functions of the 11-member commission that controls the city’s finances.

Now some say that Detroit is blooming in reference to several infrastructure projects and commerce in the urban center. However, Adela Nieves, a Puerto Rican community organizer living in Detroit for 11 years, questions: “Detroit is back, but for whom?”

City administrators are claiming successes in fiscal management, but several social indicators reflect that between 2007 and 2015, the quality of life of some of its residents deteriorated.

In 2007, before the “fiscal emergency” was declared and the Board’s arrival, the median household income in Detroit was $28,097, while in 2015 it was $25,980. As for people 65 years of age and older below the poverty line, the trend is on the rise: in 2007 it was 17.5% and in 2015 it reached 19.1%, according to the Census Bureau.

“This goes against the tendency to reduce poverty in adults over 65 that the United States has had for decades,” said social statistics expert Luis Avilés, Professor of the Graduate School of Public Health at the University of Puerto Rico.

“In addition, to the extent that poverty avoids maintaining preventive care for chronic diseases, such as diabetes or hypertension, the health system will address more serious and complicated cases that may have been avoided. It represents a financial burden on the health system,” said Avilés.

The number of homeowners decreased in Detroit from 55.41% in 2007 before the Board to 46.57% in 2015.

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Deteriorated house in the suburbs of Detroit

“The consequence this has for the development of communities is terrible. When you have fewer people who are property owners in a community, social deterioration increases. First of all, because you have people who do not establish community bonds, because they are people who rent; today they rent here and in a year they rent somewhere else. Community ties are lost. Then, you have people there that hardly know each other; people become more transient. Maybe people do not invest in improving property and the quality of residences drops a lot; neighborhoods change drastically. So, if there is the possibility of crimes or assaults, they tend to be higher in places where there are fewer homeowners,” Avilés noted.

In Washington D.C., where the control board, whose name was District of Columbia Financial Responsibility and Management Assistance Authority, operated from 1995 to 2001, homeowners increased from 36.4% in 1990 to 42.7% in 2001. However, this increase was accompanied by the displacement of people, mostly black, by white residents with higher incomes; an urban transformation process known as gentrification.

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Rolando Roebuck

“Here the rent is expensive, because that was one of the strategies of the Financial Control Board. In the 1990s, when people started to get fired, part of the strategy was to reduce the number of employees in the District, and most of the District employees under Marion Barry’s administration were Afro and minorities. So when you move all those people, you create a vacuum within real estate and housing, and speculators come, buy, sit and wait for the investment climate to change… But that’s part of the wave, even Jesse Jackson (the civil rights activist) complained; there were protests here… But there was no ‘Latino and Afro coalition against the Board’, that did not happen. It manifested itself organically, because they saw the Board had to exercise its duties. But we did not like the fact that the Board also had the power to destroy your life. Because when they fire you and you’re forty-something, starting over… “, recalled Rolando Roebuck, a black Puerto Rican based in D.C. who worked for the city’s Human Resources Department from 1979 to 2008.

“There are parts of D.C. that were once 100% black and turned white because people were forced to leave. A friend of mine has a house in an area that was entirely black and now his is one of the only two African American families left; I think that’s gentrification,” said John Hill, a public accountant who initially oversaw Washington D.C. from the General Accounting Office and from 1995 to 1999 was executive director of the city’s Control Board. Now Hill is head of finance for Detroit and a member of the Detroit Financial Review Commission.

“The oversight board (Detroit Financial Review Commission) has no responsibilities and no accountability towards the community, nor they care about what they impose on its people,” said Nieves, who spoke from the living room of her suburban Southwest Detroit home, a neighborhood she describes as predominantly Latin that is also known as Mexicantown.

Houses have the typical attic cabin style of American homes, many of which, especially in this city, have been reduced to ruins and converted into “pornographic images of poverty.” That’s how Nieves describes the tourist practice of coming to take pictures of the abandonment and deterioration of a city that in the 1950s had a population that reached a million, and now consists of just over 600,000 residents. In Nieves’s street, most of the houses are standing and in good condition. One Sunday afternoon you breathe a calm, quiet air in the neighborhood. She works with immigrants and people with addiction problems and points out that the Detroit Financial Review Commission is disconnected from people.

“They have no history, no experience with what is going on here, and they are trying to be experts in telling us what to do in our community.”

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Charlie LeDuff

A short distance from downtown Detroit, with its clean streets, a fountain roundabout and Ford Stadium, a desolate landscape of vacant lots where houses were demolished pops up. There are brick buildings in good condition bordering the remains of homes that were consumed by fire. “Diana Ross (the singer), was raised here,” says Detroiter Charlie LeDuff, pointing to an abandoned housing complex. It is Sunday and there are no people or cars near Gratiot Avenue. “This is Detroit,” says LeDuff, a journalist and author of the book, Detroit, An American Autopsy, at the wheel of his black Cadillac.

The expansion of the boards

The mechanism of fiscal control boards has been into effect since the late 19th century in the United States. It began to expand after the Great Depression of 1930.

Only between 1975 and 2009, there were at least 120 cities and counties where entities of this kind were appointed across the United States, according to Kobes. For 2009, there were 49 of them active in 15 states. There are places with only 171 residents where a board has been named, like West Millgrove Village in Ohio, which is a state where surprisingly 31 boards have been appointed in different cities and counties in the last decades.

One of the boards that also draws attention for its longevity is in the city of Philadelphia, Pennsylvania. It was named since 1991 and is still active.

“Since the Great Recession of 2008, many municipalities have faced difficult fiscal conditions. During these fiscal emergencies, states have often intervened in an attempt to minimize the damage done to credit markets and public safety,” says economist and Senior Deputy State Treasurer in the Michigan Department of Treasury, Eric Scorsone in his paper Municipal Fiscal Emergency Laws.

In 2016, 28 states, the District of Columbia and one territory (Puerto Rico) had laws that allow them to intervene in the finances of their municipalities using control boards, an emergency manager or other mechanism, as James Spiotto, Ann Acker and Laura Appleby point out in the book Municipalities in Distress? How States and Investors Deal with Local Government Financial Emergencies.

“There’s actually very little literature on control boards,” regrets Alice Rivlin, who presided over the Washington D.C. fiscal control board from 1998 to 2001, which is emblematic for being one of the first in “modern times.”

The austerity handbook

In 1995, the General Accounting Office (GAO) of the United States summarized the actions taken in five cities with fiscal control boards to improve their financial health. The agency visited Boston, Chicago (with a school board), Cleveland, New York and Philadelphia, and reported that: “All five cities cut costs by reducing the number of their full-time employees. For example, by 1978, New York reduced its workforce by about 20 percent, or 60,000 employees, primarily through involuntary layoffs. When it improved its financial health in the 1980s, the city increased its workforce to previous levels. Philadelphia did not reduce its number of employees through involuntary layoffs. However, Philadelphia negotiated with labor unions, which led to immediate reductions in benefits and freeze in wages.”

In Puerto Rico, the five-year fiscal plan submitted by Gov. Ricardo Rosselló’s administration and approved by the Fiscal Control Board includes health cuts, wage freezes, reduction of “non-essential services” and 179 public school closings. In addition, the government recommended a $520 million cut over 10 years to the subsidy granted to the University of Puerto Rico. Detroit has also implemented cost increases for college education, a move New York City made as well under the board. “In 1976, amidst the turmoil of a serious fiscal crisis in the city, the free enrollment policy was removed under pressure from the federal government, the state and the financial community to rescue the city from bankruptcy,” says the CUNY website.

In D.C., the Control Board made cuts in the university that, in Rivlin’s opinion, went too far.

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Alice Rivlin

“The University was not very efficiently run and had an aging faculty that could be cut back. I wasn’t really part of this decision because I wasn’t on the Board, but I think in retrospect, they cut too much. They had a hard problem and since they didn’t want to cut schools and they didn’t want to cut social services, they had to cut somewhere and so they did some pretty drastic cutting in some places,” Rivlin said.

In 2004, local funds for the University of the District of Columbia were $49 million, 57% less than in 1990 when it was $113 million. The largest reduction occurred between 1994 and 1997 — at the climax of the D.C. fiscal crisis — when local funds fell by $46 million. During that period, approximately 40% of the university’s degree programs were eliminated. The number of students enrolled in credit courses fell from about 12,000 in 1990 to 5,000 in 2004, according to The Untold Story of D.C. Budget study, by Ed Lazere and Idara Nickelson of the D.C. Fiscal Policy Institute.

Fiscal control boards follow a globally tested formula that is well-known for not being effective in improving the quality of life of the population: austerity.

In some cases, the narrative and the austerity scenario begin to be built by local governments before the board’s entry. In Puerto Rico, austerity measures began to be accentuated in 2009 under the administration of former Gov. Luis Fortuño with the approval of a law under which thousands of public employees were dismissed.

By 2015 former Gov. Alejandro García-Padilla commissioned a report on the Puerto Rican government’s fiscal situation to economist Anne Krueger, former deputy director of the International Monetary Fund. The recommendations of the Krueger Report included increases in taxes, expenditure reductions, pension reforms, and cuts in the number of teachers.

As for Rivlin, in 1990, before becoming chair of the Control Board, she recommended a $700 million cut for D.C. in her Rivlin Commission Report.

“(The Rivlin Commission) was not a government thing, it was a privately funded commission and we had very good people and a good staff from an accounting firm, KPMG. And we wrote a report on the future of government finances. We recommended substantial cuts in spending and staff reductions and modernization of computer systems,” said Rivlin, who ran the Federal Office of Management and Budget during Clinton’s presidency.

Rivlin’s current office in the Brookings Institute building in D.C. — where she is a senior member in the area of economics and health policy — is simple. A desk, three bookcases and photos of trips, family and others with Bill Clinton or Alan Greenspan, former chairman of the Federal Reserve, where Rivlin was vice-chair of the board of governors between 1996 and 1999.

At the time when the Fiscal Control Board was named in D.C. in 1995, “they did a lot of hard work: cutting expenses and raising tax collection,” recalled Rivlin, who helped create the law that imposed the board in D.C., modeled after the Pennsylvania law.

In Detroit, the recommended budget for fiscal year 2013 presented by Mayor Dave Bing to the City Council in April 2012, included the elimination of 2,500 job posts and a $50 million expense reduction, “to align income with expenses and move forward in eliminating the significant deficit of the General Fund,” according to an analysis of the budget by Scorsone.

A year later, Michigan Gov. Rick Snyder declared Detroit in a fiscal emergency, named Kevyn D. Orr as an “emergency financial manager” and the city went bankrupt under Chapter 9 of the federal bankruptcy code. In 2015, already out of bankruptcy and with the Detroit Financial Review Commission in place, a reduction of 6.7% was implemented in the pensions of 12,000 public employees and 5,466 education system employees were dismissed.

While participatory budgets are implemented in some districts and cities in the United States, such as Boston, in others where boards are established, most of them have veto power over the use of the city budget, such as Detroit, Washington D.C., New York State, Puerto Rico and Pennsylvania. That is, people do not participate in how the boards will use the money taxpayers give, elected officials are limited in their ability to decide on the use of those funds, and decisions about the use of public money are made by an unelected group, which does not go through any scrutiny.

According to Rivlin, the criteria followed by the Washington D.C. Fiscal Control Board to carry out layoffs and budget cuts was to “preserve services for the low-income population.”

But Lazere, executive director of the D.C. Fiscal Policy Institute, reveals a different panorama: “What we had were really substantial cutbacks to a lot of things, from education, housing and so on. There were a lot of things that were needed to help people succeed that were cut in the midst of fiscal austerity. We did a study about how the city budget had changed from 1992 to 2000, which included the period of the Control Board. You can probably imagine the Board saying ‘we need to get our finances in order and fix them’ or whatever they said. They went into an austerity process, despite knowing there was a high unemployment rate and a need to stimulate the economy.”

“There was room for cutting because, what we discovered when we did the Rivlin Report was that there were layers of bureaucracy they really didn’t need. Cutting back on that was actually very good, not for the people who lost their jobs, but for the efficiency of the government,” said Rivlin in an interview with the Center for Investigative Journalism.

“Hundreds of people were fired because the Board’s attitude was that there were too many people doing the same job. Within the government there was an atmosphere of terror because you did not know if you were going to have your little chambita today,” Rolando Roebuck said.

Rivlin recalled that the protests against the Board of D.C. came to her doorstep.

Democracy under fiscal control boards

Compared with all the boards that have been appointed in the United States since 1975, Puerto Rico’s is the one that has the most power over a territory. That power exacerbates given the colonial reality of the island, which has no representation in Congress. This makes Puerto Rico not fully comparable with a state, but neither with sovereign countries that have experienced debt crises such as Argentina or Greece. Several economists agree that the Puerto Rican government has more control over its macroeconomic policy than a state, which must adhere to US national policy, but that the island is much more limited in that regard if compared to a sovereign country.

For economist Joseph Stiglitz, one of the major concerns about the Fiscal Control Board imposed in Puerto Rico is that it implies the loss of “sovereignty.” “Changing from politicians to a Board could be good, if you had the right Board. But the risk is they have a Board appointed by Washington politicians. And if you look at Washington today, this is no guarantee for success. Rather it’s like a lottery,” the Nobel prize laureate said during his recent visit to San Juan.

On June 30, 2016, former President Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act, “PROMESA”, which imposed a Fiscal Control Board on the non-incorporated territory. PROMESA was based on the Pennsylvania Intergovernmental Cooperation Authority, the District of Columbia Control Board, and the Detroit bankruptcy, according to Spiotto, general manager of Chapman Strategic Advisors who testified in Congress during the 2015 discussion hearings on the the island’s fiscal crisis in support of the approval of the act.

During congressional hearings on the PROMESA act, deponents such as the Tea Party, former officials and investment fund managers, referred to the board as “a powerful fiscal control board”, which was one of the reasons they supported legislation. Due to the extensive power given to it by PROMESA, the entity that was named as the Financial Oversight and Management Board is known as the “Fiscal Control Board” by the people, the media, such as The New York Times and Caribbean Business, academics and economists; by defenders or detractors.

On May 3rd 2017, Puerto Rico became the first territorial jurisdiction to file for a sui generis bankruptcy in federal court. Debt negotiation of about $70 billion through a process similar to Chapter 9 bankruptcy will now be heard in court in a process overseen by Judge Laura Taylor Swain, and Puerto Rico will be represented by the seven-member Control Board appointed by Obama on August 31, 2016. During the bankruptcy process, the Board will continue its intervention in other areas, such as the budget. The entity, which does not respond to the federal government and sends annual reports to the Congress, gave 14 additional days to the government of Ricardo Rosselló to review the budget for fiscal year 2017-2018 submitted on May 1.

“When is a democratic justified in turning to non-democratic institutions?”, asks Kobes, a former student of Rivlin. In her doctoral thesis she explores the implications of fiscal control boards in the governance of local governments.

Kobes explains that specialized literature on the subject suggests that boards can provide expertise and credibility to governments that need access to resources. The disadvantage, however, is that the boards diminish sovereignty, empower external political actors and makes concessions favorable to the private market. She also says boards can function as “scapegoats” that implement unpopular policies that politicians are unwilling to impose.

Rivlin had a direct experience with the Board’s “scapegoat”-type role, when that entity closed a hospital in D.C..

“At the very end of my tenure, we looked at this hospital situation and we talked to the Mayor and the Council because we had restored their powers, and they said ‘we agree with you, you’ve got to close the hospital and you better do it before the Board goes; please do it before the Board goes out of business so they would blame you and not us.’ So we did it right I think. We did close the hospital, the inpatient facility, and we established a new fund to pay the hospital expenses of people who were not eligible for Medicaid,” Rivlin said.

One of the similarities D.C. had with Puerto Rico was its large deficit; the difference is that D.C. had no debt problems, Rivlin explained. Not all cities where a board has been appointed have declared bankruptcy. Another similarity is that in D.C., as in Puerto Rico, the control board that operated for 10 years (from 1995 to 2001) took control of several agencies.

“The Mayor no longer had responsibilities for the nine largest departments in the city. They reported to the Control Board and we had a Chief Management Officer who ran the city for the Mayor. We had the ability to sit beside the elected School Board and take over the schools and create our own board. So it was, (the D.C. Board) had a lot more power and authority (than Detroit) to act and had much more involvement in the management of the city,” John Hill recalled at his office in Detroit.

“The D.C. control board could pass legislation for the city of Washington D.C.. We never did but we could. We could knock out every piece of legislation. The control board could also submit its own budget for the city, it could hire or declare which government’s services were no longer needed. So it was a very powerful Control Board,” Hill said.

Compared with the experience of D.C., the commission that performs the functions of control board in Detroit “does not manage the city at all; it’s the mayor who runs the city,” Hill said hours before attending the monthly meeting of the Commission that day.

At the meeting there is a digital clock that marks the numbers in red. It is on the right side of the tables where the members of the Detroit Financial Review Commission sit in a large room. It’s February and this is their monthly meeting in a suite at Cadillac Place; a neoclassical 15-story building that once headquartered General Motors in the New Center neighborhood of Detroit, Michigan.

The meeting of the Detroit Financial Review Commission is public. Outside, where the temperature is at 34 degrees, there is no protest. At the entrance there are no police or checkpoints; nobody asks for an ID. At the end of the meeting people have two minutes to make comments. The clock, which had been stopped while the members of the Commission spoke, begins to blink until an alarm sounds. Public comments are always interrupted.

“It’s sort of a frustrating procedure because they don’t get any real satisfaction other than to be able to stand up and talk,” said Ron Rose, the Commission’s executive director.

“They provide us a small space to say something in a matter of two minutes. Who can say anything really substantial in two minutes, and specially when it is something so emotional and so deep?,” said Adela Nieves.

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Adela Nieves

The bittersweet taste of fiscal control boards

Ron Rose, a retired bankruptcy judge, was hired in 2015 as executive director of the Detroit Financial Review Commission. Two years later he is satisfied with the Commission’s approach to the Detroit fiscal crisis, but with one exception.

“The mayor is very excited and we (the Commission) are not. And after three years of balanced budgets, when the audited financial statements for fiscal year 2017 come out, we (the Commission) have to give up our rights and duties, unless they violate the terms of the statute… I would have preferred (the Commission) could have stayed for a longer period of time, because we had very large problems… Pensions are a financial problem. The other big problem in the city that the mayor has to deal with is that of the schools,” said Rose.

Kobes mentioned that the Control Board starts from the premise that the problems emanate from local governments who are not able to make the right decisions. “And that’s true in some cases. But I think it’s usually more of a mix, that they just do not have the funds, because they have a poor economy. Now, changing administration is not going to fix that. Likewise, there are external restrictions that do not have to do with local administration, such as the expenses they need to make, the limitation of taxes that do not allow them to raise more money or if there has been a decrease in aid. One thing that worries me about Control Boards is that they blame local politicians, when they really are not the source of the problem, and I think that leads to solutions that do not work, because until you do not deal with the problem adequately, you will not solve it. I think that in the long run that takes away local democracy, because it implies that local politicians are incapable, when they really could be part of the solution,” Kobes said.

What do you think about the exit of the Financial Review Commission? The CIJ asked Detroit Mayor Mike Duggan.

“It will end in 2018. It will not be until the beginning of 2018 that we make that decision, we must first have the budget (in December) of 2017. We are working on that, that is what we are trying to do,” said Duggan rushing out of the Commission meeting, in which he has a seat and vote.

In some cases, the State imposes the fiscal control board. In others, the cities or counties request the State intervention. And sometimes, they regret it.

Such is the case of Rhode Island, where the city of Central Falls requested aid from the state court for its financial problems and was put under receivership in May of 2010. This city has a little more than 19,000 inhabitants (60% Latinos) and its General Obligations debt reached almost $20 million. In response to the request for judicial administration, the Rhode Island legislature passed, and Gov. Donald Carcieri signed, a law allowing for progressive state intervention in its municipalities in crisis, such as Central Falls.

The law passed in Rhode Island was possibly an attempt to prevent municipalities from restructuring their debts “with tactics that might be unfriendly to the municipal market.” The City of Central Falls attempted to challenge the new statute, but a state court ordered keeping the constitutionality of the state-appointed administration. In November 2010, the new supervisory body exercised its power to dissolve the Central Falls council and replace it with a three-member “advisory council,” explains the book Municipalities in Distress?

In 2010, Central Falls faced insolvency due to strong state aid cuts, income shortfalls and lack of funds for about $80 million in pensions and retiree health benefits. In 2011 it declared bankruptcy, which assured access to the bond market but negatively affected the city. In 2012, it emerged from bankruptcy “with elected officials without power, with property owners facing tax hikes every year and retired public employees with pension cuts,” Reuters reported.

Originally, the PROMESA Act that imposed a Fiscal Control Board in Puerto Rico in 2016 applied to the territories of Guam, American Samoa, the Northern Mariana Islands and the U.S. Virgin Islands. But the U.S. Virgin Islands delegate to Congress, Stacey Plaskett, proposed an amendment for the law not to apply to those territories. The amendment was approved in June 2016 and was celebrated by Plaskett as a “significant victory.” However, these territories could be covered by PROMESA if their bondholders submit claims, according to Tom Bolt from the BoltNagi law firm.

Puerto Rico’ Board may reject budgets that do not meet the criteria of the fiscal plan and submit its own budget, has legislative veto power and could sanction or dismiss public officials. It has already approved government-submitted fiscal plans that include increases in the water bill starting January 2018, privatization of the Urban Train and the Highway Authority operations, and 11 critical infrastructure projects, whose main focus is natural gas and incineration. In March, the Board hired Natalie Jaresko as its executive director. The former Ukrainian finance minister will be chauffeured, escorted by security and earn $625,000 a year, nearly five times the salary of the executive director of the Detroit Financial Review Commission, Ron Rose, whose annual salary is $130,000, or more than twice of Kevyn Orr’s salary while he was Detroit’s Emergency Manager for $275,000 annually.

Fiscal Emergency Laws’ Mechanisms

 

Laura Moscoso and Dignelly Torres collaborated with this story.

This investigation is published in part with the support of the Ravitch Fiscal Reporting Program, at the City University of New York (CUNY) Graduate School of Journalism.