November 16, 2018
Good Morning! In this morning’s eBlog, we consider the seemingly unending fiscal challenge to fully come back from the nation’s largest ever chapter 9 municipal bankruptcy, then, we try to escape the early Winter blast by seeking el sol in Puerto Rico, where Governor Ricardo Rosselló Nevares is poised to sign a tax reform bill into law.
Moody Blues. Gov. Rick Snyder made a last-minute, personal appeal to keep Flint connected to the Detroit water system before it began using the Flint River for drinking water, former Flint Mayor Dayne Walling testified in Genesee District Court this week, telling Judge Jennifer Manley that the Governor had met privately with him and former Flint Emergency Manager Ed Kurtz in Detroit early in 2013, asking them to give Detroit the opportunity to make a best and final offer for a long-term water contract. That meeting came just days before the Mr. Kurtz, with Mayor Walling’s support, pushed ahead instead with plans to buy into the Karegnondi Water Authority (KWA) pipeline project to Lake Huron. The former Mayor has stated that he did not know emergency managers in Flint would go on to make separate decisions—decisions which led to the city using the Flint River as its source of drinking water until the KWA pipeline was put into service. He went on to testify that he alone had made the decision to use Flint River water, as he testified in preliminary examinations for four current and former officials with the Michigan Department of Environmental Quality. While Detroit’s best and final offer was known prior to Flint’s purchase of the Karegnondi water, the Governor’s involvement had not previously been acknowledged. However, under questioning by one of the Michigan Department of Environmental Quality defendants, Mr. Walling responded he had been involved in meetings prior to the City of Flint’s fatal decision—meetings which involved state officials, including Gov. Snyder—with the additional disclosures that Gov. Snyder had taken Mayor Walling and Emergency Manager Kurtz alone into a side room to ask that they consider remaining with Detroit, with the former Mayor testifying that Emergency Manager Kurtz, with the support of the Michigan Treasury Department, alone had the authority to act on behalf of the City of Flint—not the Mayor or other elected municipal leaders. By April of 2013, former Michigan State Treasurer Andy Dillon had approved the fateful go ahead.
Part of the reasoning appeared to be fiscal: if the City of Flint used the Flint River, the assumption was that would provide the city with millions of dollars during the construction of the Karegnondi line. Instead, it triggered a human and fiscal crisis for the City of Flint, Mr. Walling testified this week, telling the court Tuesday that he only learned of Flint’s plans to use the Flint River when he reviewed a new budget for the coming fiscal year and found no funding to continue water purchases from Detroit. From April of 2014 to October of the following year, Flint attempted to treat the river water; however, it encountered unacceptable levels of bacteria, lead, as well as chlorination byproducts. For the next year and a half, Flint sought in vain to address the bacteria, lead, and byproducts—even as Flint sought, repeatedly, for $30 million from the state—with Mr. Walling reminding the court the city had been effectively taken over by the State of Michigan via the imposition of an Emergency Manager.
Last month, residents and businesses affected by the lead-contaminated water crisis in Flint had asked a judge to reinstate Republican Gov. Rick Snyder and other Michigan officials as defendants in a class-action lawsuit, claiming that the Governor and his staff knew about health risks for months before making an official announcement: “The citizens of Flint were both forgotten and mistreated by those involved in the Flint water disaster. To this day, residents continue to suffer because of the reckless decisions of senior state and local officials.”
Not Just Like Flint. While we have noted the extraordinary fiscal recovery by Detroit from the largest chapter 9 municipal bankruptcy in U.S. history, the recovery is incomplete, and the Detroit Public Schools—the critical draw if families are to be encouraged to move from the suburbs into the city and fill its still vast areas of emptiness, Detroit will have to address its own grave drinking water issues. As Sarah Maslin Nir of the New York Times wrote this week: “For a year now, Marcel Clark, a Detroit police officer and father of three, has been filling a 50-gallon drum each week with purified water for his family to drink. Ever since he heard about the water contamination crisis in Flint, Mich., an hour’s drive away, he hasn’t trusted the aging copper and steel pipes in his house. He’s been talking to contractors about replacing them, and hopes to get the work done in the next few months. ‘As a responsible parent, I said to myself, let me go ahead and secure my family,’ said Mr. Clark, 48.” The issue, as we have previously noted, is in the Detroit Public Schools, where the water fountains in all 106 schools run by the Detroit Public Schools Community District have been dry since classes began last August, and where the Superintendent ordered them shut off as a pre-emptive measure, after testing revealed elevated levels of copper and lead in drinking water at some schools. In the wake of completing checks at 86 of the schools last month, officials announced that 57 of them had lead or copper levels exceeding EPA safety levels—checks which had been occurring after the tragedy of Flint had prompted Detroit officials to start testing school water supplies in 2016, or as DPS Superintendent Nikolai Vitti put it: “We are talking about Detroit now because we proactively tested all water sources, and defined the problem with a solution…I think large urban areas around the country have infrastructure as outdated as ours is, and they don’t know if there is lead or copper in the water because they are not testing it.” (Based on Detroit’s experience, Dr. Vitti has called for a nationwide requirement for water testing in schools; there is no such rule now.)
In the wake of the Flint crisis, the Michigan Department of Health and Human Services began testing children for elevated lead levels, finding, two years ago, higher levels of lead in children under the age of 6 than in any Michigan county—nearly 9 percent, compared with a statewide average of less than 4 percent. While Detroit officials and water quality experts believe the issue may simply be aging pipes—aging which, because pipe joints and other plumbing components often contain metals which can leach into the water over time, and where the cost of ripping out and replacing in a system which is just emerging from its own insolvency and emergency manager oversight, man, as DPS Superintendent Dr. Vitti put it: “This is troubling for Detroiters, because it’s just a long list of examples where it feels as if people are treated as if they are second-class citizens,” adding: “We tested and were transparent, and so the focus is on us.”
Now Detroit officials believe a $3 million project to put filtration systems in every school, financed mostly by philanthropic donations, which will provide for the installation of the first of 800 new “hydration stations,” will help—albeit not for parents who fear their children have already been exposed—or for city leaders who are worried these stories could discourage families from wanting to move into the city.
Motor City Hangover? Moody’s, moodily, at the end of last week, noted that, notwithstanding the influx of “affluent residents and large scale developments,” the Motor City is still characterized by “High debt and pension burden,” with the “citywide population declining and per capita income just slightly over half the national per capita income.” Even though the city is far less dependent on property taxes than most cities, the rating agency described the property tax as remaining “weak.” That is, notwithstanding the sparkling revival of a downtown too dangerous to walk around the block on the morning Kevyn Orr filed with the U.S. Bankruptcy Court, Moody’s noted the road back to full fiscal health is arduous. Indeed, even as the downtown, empty after dark on that first night in municipal bankruptcy, is now home to 10,000 new residents; however, Detroit’s population has continued to ebb: Moody’s wrote that more than 35,000 have exited, noting that the fiscal and governing challenge is not the then vacant and dangerous, but now vibrant downtown, but rather other parts of the city. Nevertheless, Moody’s remained upbeat, writing: “The trends, coupled with savings achieved through bankruptcy, have led to marked improvement in the Motor City’s financial position and credit quality.”
Detroit Chief Financial Officer John Hill noted the implementation of the city’s plan of debt adjustment has been a “work in progress: the city is coming back from a very hard bankruptcy, and everyone is actually surprised that we’re as far along as we are in getting out of oversight and making improvements in our credit rating that we have over the years.” The greater downtown area has experienced a 28 percent increase, or about 9,000 residents; however, that core downtown area makes up only seven of Detroit’s 143 square miles. It appears that there continues to be an exodus overall from the city. Moody’s believes that, thanks to numerous businesses relocating to the city, growth downtown will likely to continue fueling rising income tax collections—in a relatively rare municipality in that income tax revenues are a key municipal revenue source, and the city’s economy appears poised to benefit from its two most prominent redevelopment projects: Ford Motor Co.’s $740 million plan to redevelop the Michigan Central Depot and several nearby properties in Corktown, and Bedrock’s $1 billion development on the former site of Hudson’s store in downtown.
Moody’s also noted the city’s: Strategic Neighborhoods Fund, service improvements, blight remediation, and providing economic development and business incentives—or, as CFO Hill put it: he believes the Strategic Neighborhoods Fund will “bear a significant amount of fruit.” Through the fund, Detroit expects to invest more than $100 million, from a combination of financing through city, state and philanthropic arms, into 10 neighborhoods to improve redevelop parks, strengthen commercial corridors and rehabilitate housing, or, as he added: “The city is moving forward very well and making its own investment, but I think the larger community, both the business community and the philanthropic community, is making huge investments in the future of the city that impact neighborhoods as well.”
Moody’s was more moody with regard to the Detroit Public School Community District and its inability to address its capital needs. Even though DPS received a $617 million state aid package in 2016, it continues to experience elevated lead and copper drinking water levels in schools and other public in buildings, and it lacks the resources to address significant capital needs, even as DPS confronts more than $500 million in critical school repairs—or, as Moody’s put it: “Absent state support, or sizable philanthropic donations, the deteriorating facilities could become an increasing drag on the city’s revitalization efforts,” while CFO Hill added: “What we have been able to do in the past, the city has taken vacant school buildings and helped to remove them as blighted areas…That’s helped the school system to not have to maintain some of those vacant properties. So the city has been able to help.”
Mayhap ironically, the new report came just as departing Gov. Rick Snyder, speaking at a Detroit Economic Club meeting, spoke of the “absolutely incredible” progress Detroit has made since emerging from chapter 9 municipal bankruptcy. Now, with Governor-elect Gretchen Whitmer set to take the reins, it is not so clear the city is fully out of the fiscal woods: its property tax revenues remain weak, because, as Moody’s found, the “comeback” has yet to reach Detroit’s vast neighborhoods, so that: “Detroit is left with a combustible brew: a reliance on volatile revenue sources and growing fixed costs.” Nevertheless, the resolute CFO notes: the “property tax base is trending upward after a citywide reassessment lowered values to be more in line with market prices: “The city has turned the corner on the population declines of the past.” On the troubled public pension front, Moody’s found that the Duggan administration is working to address the looming resumption of normal pension payments in 2024, when the annual cost is estimated to be more than $143 million—that will be the year when the $816 million in “grand bargain” contributions to the city’s retirees from the state and philanthropic foundations expire. Having gained an okay from the Mayor and Council, CFO Hill has established a trust fund to store some $335 million over eight years in order to try and sustain pension promises.
Nevertheless, the city’s schools appear to be the most daunting fiscal challenge: Moody’s noted DPS “could also become a major drag on revitalization beyond downtown,” apprehensive about the unsustainability of downtown redevelopment absent quality public schools for workers filling once-vacant office space—a severe physical and fiscal challenge in a municipality where its reorganized public school district has no ability to issue debt to fix more than $500 million in capital improvement needs for more than 100 occupied school buildings spanning 10 million square feet, because the state DPS bailout bars DPS from accumulating any new capital debt until 2040.
Nevertheless, CFO Hill reminds us that the city’s municipal bond sale will mark the first time Detroit has entered the capital markets without the direct assistance of the State of Michigan since prior to state emergency financial intervention began in 2012.
Reforma de Impuestos. Governor Ricardo Rosselló Nevares of Puerto Rico will sign the tax reform bill into law, although there is still no certainty with regard to whether the PROMESA Oversight Board will endorse the law, because of the Board’s apprehensions related to the inclusion of amendments that would legalize slot machines outside casinos. Nevertheless, Gov. Rosselló Nevares, at a press conference, stated: “I’m going to sign it, because it’s a programmatic commitment,” adding that if the PROMESA Board does not endorse the bill, “those who make decisions in the government” must then focus on working on an initiative that can be approved by the body created by U.S. Congress. The Governor stressed that all the basic elements of the tax reform bill have the endorsement of La Fortaleza, the Legislature, and the Board. Credit for work, reduction of the tax on prepared foods and transactions between businesses (B2B) as well as reductions on income tax for corporations and individuals are among those “pillars.” These reductions in income taxes will not apply in the same way for those who are self-employed and small and medium businesses. The Governor indicated that the only element that causes doubts is that with regard to the impact that the legalization of the slot machines outside casinos would be with regard to the collections of the central government and public corporations. Specifically, the PROMESA Board has requested studies that certify that the legalization of these machines will not cannibalize the government’s collections, noting: “If there is an objection to the slot machines issue, I am sure that we who make decisions will sit at the table and, without rejecting other considerations, the issue (slot machines) can be considered at another time, so we can focus on the benefits (of the tax reform) now…if there is no objection to the slot machines, we will have a quick positive effect on the economy.”