Once & Future Cities

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eBlog, 7/29/16

In this morning’s eBlog, we consider the critical, successful first effort by the City of Detroit to issue full faith and credit municipal debt–an effort complicated by the still unsettled fiscal situation of Detroit’s public school system; we examine the next chapter in the Chris Christie saga and Atlantic City’s efforts to avoid a default and /or state takeover. Finally, we consider the governance and leadership challenges that might threaten Detroit’s emergence and return to being the nation’s center of innovation.

Returning to the Municipal Market. As we wrote in anticipation yesterday, Detroit issued its first post-municipal bankruptcy debt in the wake of last month’s unanimous approval by the Detroit City Council of the issuance of up to $660 million of refunding bonds (a tax-exempt issuance projected by the city to save an estimated $37 million and help pave the Motor City’s return to the municipal bond market after emerging from the largest municipal bankruptcy in American history.) The sale encountered strong investor demand—and the successful sale will achieve budget savings that will facilitate the Motor City’s ability to provide budgetary and property tax relief—as well as resources to put aside $30 million from a budget surplus to deal with a possible public pension funding shortfall of nearly $500 million. The success marked, ergo, Detroit’s first post-bankruptcy general obligation/distributable state aid backed bond sale issue, with Detroit CFO John Naglick noting: “We experienced broad and deep investor participation and the savings certainly (significantly) exceeded our expectations.” While the fiscally recovering city paid a penalty on the $615 million issue over comparably rated municipal securities compared to other municipalities and states, the sale benefited from strong demand. CFO Naglick described the successful sale as a vote of confidence in Detroit’s efforts to turn around its finances since emerging from the nation’s largest-ever municipal bankruptcy a year and a half ago. Without a doubt, a key part of the success must be attributed to the indirect state backing of the bonds—or, as fabulous Matt Fabian of Municipal Market Analytics described it: “[The sale] shows that there is a fair bit of faith in the state of Michigan…A program like Michigan’s Distributable State Aid (DSA) is what distressed or crippled governments use to get market access…The city is still relying on the state, and, in no way, is Detroit back. If these bonds had been unenhanced bonds from the city, it would have been a different story.” He added that the successful sale appeared to indicate both a lack of apprehension on the part of investors that Detroit could be driven back into chapter 9 municipal bankruptcy, as well as investor understanding that the city’s full faith and credit is distinct from the severe fiscal challenges to the Detroit Public School system, or, as another analyst noted: “The city is not the school district, and the city has shown that at least in the first bankruptcy that this type of debt has been protected.”

Life Preserver. Claiming he was “tired of this,” New Jersey Governor Chris Christie yesterday approved a $74 million loan to Atlantic City—warning the city’s leaders to accept the loan—and its terms—or face municipal bankruptcy. The terms of the loan, however, are steep: under the state’s terms, if the municipality is unable to pay it back, the state would be authorized to seize critical municipal assets, including Atlantic City’s water utility and its former airport, break union contracts, and assume major decision-making powers from the city’s government for five years. The terms of the loan grants the city until November to come up with a five-year plan to address its fiscal insolvency. The formal announcement of the loan means Atlantic City can avoid default on Monday and make payments on an additional $18.6 million owed in municipal debt service for the rest of this year; the funds will also be critical in enabling Atlantic City to devise a five-year financial plan. As we wrote yesterday, Atlantic City Mayor Don Guardian and City Council President Marty Small have vowed Atlantic City will have a plan to close a $100 million shortfall in next year’s budget in time for the state-imposed Nov. 3rd deadline. If Atlantic City fails to submit a plan by Nov. 3rd, or if the plan is rejected, the state can sell city assets. Indeed, Mayor Guardian yesterday released a statement saying the city will make payroll today, as well as Monday’s debt payment: “We anticipate that the bridge loan agreement with the state will be completed in short order and the funding required by the act will be put in place to cover operational expenses of the city.”

A Challenge to Innovation & Leadership. I noted a truly extraordinary phenomenon yesterday to a class I was teaching to a visiting cohort from China at George Washington University on Innovation, where I spoke of the remarkable movement of the Silicon Valley, this country’s center of innovation for the last quarter century, to Detroit, because of the recognition of the immense changes ahead from the development of self-driving cars. But, unlike the Silicon Valley Partnership, where the high-tech industry, 22 cities and counties, and my old alma mater, Stanford, and San Jose State University devote themselves, annually, to acting (and issuing a report) on the steps most critical to making the region the most vital and compelling location in the globe for innovative CEO’s to locate, the exceptional opportunity for Detroit to become the nation’s center of innovation, once again, could now be jeopardized by the region’s seeming inability to demonstrate governance leadership. There appears to be a growing rift between counties in the region—a governance rift which has undercut plans to place a 20-year transportation millage before Metro Detroit voters in November. The Regional Transit Authority (RTA) board yesterday rejected, on a 5-4 vote, putting a 1.2-mil tax on the November ballot in the wake of opposition from officials from Macomb and Oakland Counties. Their apprehensions related to whether each county would get its fair share of funding if the millage were approved, and if future votes would protect the interest of each county or just a few. The adverse vote now leaves uncertain the fate of critical funding for regional rapid transit, as well as a commuter rail line from Ann Arbor to Detroit, airport shuttle service, a universal fare card system, and other improvements. Paul Hillegonds, Chairman of the RTA’s board, said after the vote: “This board has gone as far as it can go” on the issue and now elected officials have “to figure it out,” even as he questioned whether county leaders have the political will to make necessary decisions so that a millage is not delayed for two to four years.

RTA officials from Macomb and Oakland counties were unified against the millage proposal, but had joined the board in approving the rest of a $4.6 billion regional transit plan; however, under the governance structure statute, placing a measure on the ballot from the RTA requires seven of nine votes: one from each county. Yesterday’s vote, thus, fell two votes short, with both pairs of Macomb and Oakland representatives voting against. Had it been adopted, the 20-year millage would have cost the owner of a $200,000 home about $120 annually. Now the time for the region’s future is short: the region faces an August 16 deadline to have the ballot language certified by county clerks to appear on the November ballot.

Post Chapter 9: Returning to the Municipal Market & Avoiding a State Takeover

In this morning’s eBlog, we consider the critical, first effort by the City of Detroit to issue full faith and credit municipal debt–an effort complicated by the  still unsettled fiscal  situation of Detroit’s public school system, and we examine Atlantic City’s efforts to—once again—avoid a state takeover.

To Market, to market…& the Ties that Bind. In the wake of last month’s unanimous approval by the Detroit City Council of the issuance of up to $660 million of refunding bonds to save an estimated $37 million and help pave the Motor City’s return to the municipal bond market after emerging from the largest municipal bankruptcy in American history (a successful sale is projected to generate savings of about $40 million that the city would use to provide budgetary and property tax relief)—and the Council’s further actions to put aside $30 million from a budget surplus to deal with a possible public pension funding shortfall of nearly $500 million; the city is set to issue full faith and credit municipal bonds today to refund up to $275 million of unlimited tax general obligation (utgo) bonds sold in 2014 and up to $385 million of limited tax GO bonds sold in 2010 and 2012—municipal bonds backed by state revenue earmarked for Detroit, which are to be issued through the Michigan Finance Authority (MFA) in an agreement led by underwriter Barclays—marking Detroit’s first GO bond issuance in the market since it exited the largest municipal bankruptcy in the nation’s history two and a half years ago. The $615 million refunding, which is expected to price as early as today, will test not only the implicit benefit of the value of the MFA authority, but, at the same time, the uncertainty created by the ongoing disruption to the security of similarly structured Detroit Public Schools (DPS) state-aid backed or so-called DSA (distributable state aid bonds) municipal bonds due in the wake of the DPS state takeover as it became insolvent—indeed, as our respected friends at Municipal Market Analytics (MMA) warned, these Motor City municipal bonds may incur “a larger-than-anticipated” penalty, even as Detroit CFO John Naglick attempted to make clear the significant distinctions between Detroit and DPS with regard to governing structures—and the fact that the city’s DSA bonds were protected during the city’s historic municipal bankruptcy. Moody’s and S&P affirmed the single-A to double-A ratings on Detroit DSA-backed bonds sold under the MFA’s local government loan program: S&P noted: “Given the double-barrel pledge, we rate the bonds to the stronger of the two pledges, which is the DSA revenue stream.” Nevertheless, MMA has noted that Detroit’s short-term progress since emerging from its historic municipal bankruptcy is insufficient to offset longer-term municipal investor risks, with fabulous Matt Fabian of MMA noting: “It’s clear that the state can’t be trusted with respect to its willingness to pay municipal bond holders, especially when it comes to (municipal) bonds held by Detroit…Remember that the city’s economic and financial future remains far from secure, and Detroit is at serious risk of relapsing into bankruptcy within the next 10 years: Buyers of the new bond series are thus betting directly that the state will change its tack and develop a willingness to pay city of Detroit bondholders in the future…[but] this is not an unreasonable speculation by risk-aggressive managers who have clearly communicated their plans to their own investors. However, this bond series should not be the province of traditional retail.” Ergo, the state aid statutory lien is central to the investment-grade ratings on the $615 million proposed sale—one which will unroll in four series:

  • a $247 million of taxable first lien limited tax GOs in a mix of term and serial maturities;
  • a $125 million taxable third-lien limited tax GO in a mix of serials and terms;
  • a $225 million fourth-lien tax-exempt unlimited tax GOs tranche with serial maturities; and
  • a final $18.1 million taxable fourth lien unlimited tax GO tranche in serial maturities.

Nevertheless, the sale is beset by apprehension with regard to the complex and unresolved fiscal status of the Detroit Public Schools (DPS) restructuring and the fate of the school systems’ municipal bonds—bonds secured by a state pledge, but under which the state funds now will go to a newly created district free of debt, even as the old DPS remains intact to continue collecting tax revenues to retire its debts. Indeed, S&P, in a quasi—scholarly action, recently downgraded DPS’s state aid bonds from 2011 and 2012 issuances, noting apprehensions about the potential fiscal impacts with regard to the new state legislation and potential disruptions of pledged state aid. Restructuring could disrupt pledged aid. (The MFA recently approved a $235 million financing to restructure the bonds.) , but final details have not been made available. Mr. Fabian notes it is clear the MFA will take action to restructure the bonds, adding, however, that absent more specifics, municipal bondholders holding the DPS bonds “are being presented with more anxiety than they probably bargained for when they bought those.” For his part, CFO John Naglick does not agree there is a correlation between Detroit’s refunding and the outstanding DPS bonds: “The distributable state aid pledged by the city is appropriated to the city under a different statute from the one under which state aid is appropriated to and pledged by school districts…Additionally, a significant portion of the DSA is allocated to the city by the Michigan constitution, not by [a state] statute. The bonds of the city and DPS are also issued under different statutes. Finally, in its [municipal] bankruptcy proceedings, the city did not impair, did not attempt to impair, and throughout that process treated as secured its DSA-backed debt.” Nevertheless, in its offering, the proposed sale lists nearly four pages of “risk factors” municipal bond investors might be advised to consider, including the warning that were Detroit to file again in the future for municipal bankruptcy protection, such a filing could have “significant adverse consequences affecting bondholders,” including “immediately delaying for an indefinite period of time payment on the bonds, modifying the maturity date, interest and payment terms and conceivably modifying the security for the principal amount.” Nevertheless, Moody’s and S&P last week affirmed the single-A to double-A ratings on Detroit municipal bonds backed by distributable state aid and sold under the MFA’s local government loan program; in addition, Detroit’s distributable state aid includes a portion of the 6% retail sales tax revenues collected across the state—of which the constitutional component is mandated by the Michigan state constitution and distributed on a per capita basis to townships, cities, and villages: it is not subject to reduction by the state legislature; in contrast, the statutory component of state aid is authorized by legislative action and distribution is subject to annual state appropriation by the state legislature.

Tempus Fugit. St. Francis, long ago, warned: “Time is round, and it rolls quickly.” So too for those gambling on Atlantic City’s future—and who cannot, like Donald Trump, simply declare bankruptcy and walk away from the famed boardwalk city—the time here with which to reckon is five days: that is, the city must come up with the means to meet a $3.4 million debt service payment by then or default—with the consequent urgency to reach agreement with the state on a bridge loan—a loan upon which the state last May agreed, as part of a recovery package to avoid an immediate default, but upon which the state has been characteristically slow to follow-up: it has only recently begun proposing terms to the city, according to Moody’s, where crack analyst Douglas Goldmacher noted a sign of how much Atlantic City need the loan occurred when the state had to step in to make an $8.5 million payment owed to the Atlantic City School District last week—a payment to be deducted from its final loan amount—with Mr. Goldmacher writing: “The city has requested, and the state has agreed, to a $74 million loan, but the terms have not been publicly announced and no formal agreement has been reached…The legislation did not outline the terms for the loan, leaving it to the state’s Division of Local Government Services to negotiate with Atlantic City management.” He added that negotiations with the state are underway, and, if the loan can be executed this week, it would help Atlantic City to avoid default next Monday and to make payments on an additional $18.6 million owed in municipal debt service for the rest of this year; he noted the funds could also help the city devise a five-year financial plan required by early November as part of the state rescue legislation, warning: “Absent any receipt of state support, we believe a default would likely set off a series of missed debt payments and revive the prospect of Atlantic City filing for municipal bankruptcy, or pursuing debt restructuring outside chapter 9 bankruptcy, which we would consider a distressed exchange.”

Mayor Don Guardian Tuesday evening noted the city is close to finalizing the loan, and City Council President Marty Small vowed Atlantic City will have a plan to close a $100 million shortfall in next year’s budget in time for a state-imposed Nov. 3rd deadline, albeit the city still may seek an extension. The state has said it will similarly step in and cover the city’s payroll or the pending $3.2 million bond payment, Atlantic City Mayor Don Guardian said on Tuesday. If Atlantic City fails to submit a plan by Nov. 3rd, or if the plan is rejected, the state can sell city assets, break union contracts and assume major decision-making powers from the city’s government for five years. Brian Murray, a spokesman for Governor Christie, said that there is nothing in the bill that would allow an extension. “The statute signed by the Governor is very clear that city officials had 150 days to develop a plan…There is nothing in the legislation or otherwise that provides for any waiting period regarding the city’s request for a bridge loan.” Similarly, a spokesman for Senate President Steve Sweeney also dismissed any notion of an extension: “It appears the government of Atlantic City is not concerned about its residents or its responsibility to govern…If the city was serious, they would have submitted a plan already. This financial crisis was well-known for years prior to the signing of the legislation. It’s time for action, not delays.”

Council President Small said the city will be ready with a plan within the state-imposed 150-day timeline, but blamed the state for a six-week delay in providing vital loan documents. She added Atlantic City did not receive bridge loan documents until two weeks ago, which hampered the process of working on the plan, noting: “The Governor signed the document of Memorial Day weekend…We’re just getting those documents.” Said documents relate to an agreement on a $74 million bridge loan which would allow Atlantic City to cover its expenses as it completes its plan to prevent the state takeover.

If the loan is not approved this week, the city could default on a $3.4 million debt service payment, according to a report by Moody’s Investors Service issued yesterday: “Absent any receipt of state support, we believe a default would likely set off a series of missed debt payments and revive the prospect of Atlantic City filing for bankruptcy, or pursuing debt restructuring outside bankruptcy, which we would consider a distressed exchange…A sign of how much the city needs the bridge loan came July 15th when the state stepped in to make an $8.5 million payment to the Atlantic City School District on behalf of the city. The payment will be deducted from the city’s final loan amount.”

Council President Small also expressed other frustrations with the state, noting that all of the ideas the city has come up with to balance the budget, such as adding a hotel room tax of $10 and a wage tax, have fallen on deaf ears in the state government: “The City of Atlantic City, as they say, is the golden goose…We’re responsible for a lot of projects and programs throughout the state…Well, the golden goose has a little paint chipping away. Now it’s time for them to help us out.” Nevertheless, and notwithstanding his frustrations, Councilman Small said that he is not giving up on the city that he was born and raised in: “Some people think that we’re wasting our time and that the state is going disapprove anything we give them…Well guess what, we’re going to die trying.”

In his assessment, Mr. Goldmacher also wrote that Atlantic City is also looking to tackle other municipal debt challenges including $228 million in bonds issued to cover tax appeal refunds incurred between 2010 and 2015, as well as an additional $165 million in refunds to Borgata Hotel Casino and MGM Mirage. Borgata and MGM Mirage have taken a combined $17 million credit against their 2016 year-to-date property taxes as partial payment for the owed refunds, according to Mr. Goldmacher, who notes: Atlantic City is responsible for any refunds owed on taxes paid to the city, the county and school district: Both the city and state are negotiating with the casinos to adjust future payments and make payment arrangements.” 

Getting Out of-and Into Municipal Bankruptcy

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eBlog, 7/27/16

In this morning’s eBlog, we consider the truly extraordinary recovery from the nation’s largest ever municipal bankruptcy in Detroit, where the city appears to be in the forefront of becoming the nation’s newest Silicon Valley: a center of innovation and technology—but one where the future—as with every city and county—will depend upon its ability to educate its next generation. Then we consider the state-local relationships that could constitute the blueprint for shaping Detroit’s emergence to being, once again, the nation’s motor city. Finally, with the Republican convention over in Cleveland, we consider the options under consideration for neighboring East Cleveland, a municipality awaiting  permission to file for chapter 9 municipal bankruptcy, but also whether its importuning of the City of Cleveland might obviate the need to seek federal municipal bankruptcy protection.  

The Motor City’s Kids’ Future. It is difficult to imagine a city or county building its future without addressing its next generation. Yet, in America, the governance and provision of education is a messy complex of state and local revenues—and governance. It has, of course, been further muddied in Detroit by the city’s bankruptcy—and the Detroit Public School system’s insolvency–even as it now appears the city is on the edge of becoming the nation’s new Silicon Valley. That is, even as automotive innovation is emerging in California’s Silicon Valley, where the innovative center of 22 cities and counties, Stanford, and San Jose State universities, and a host of corporations have long-held sway in the world of innovation; Bill Ford, Ford’s Executive Chair, today advises that Detroit now has the opportunity to become the country’s center when it comes to all things involving the movement of goods and people: “The way people move, the way goods move, the way health care is delivered…is going to change in a very short period of time…And I love the fact that Detroit can be and should be ground zero for this change.” Indeed, it seems the pace of partnerships between the automotive industry and Silicon Valley tech companies will continue to accelerate as the two industries work together to develop autonomous cars and reshape the automotive industry—or, as Mr. Ford notes: automakers face a stark choice: either join the game, or face the prospect of being left behind: “In Michigan and Detroit, we have more engineers here than any other state. We have a huge customer base here with (automakers) and tier one suppliers, and this should be mobility central. Not Silicon Valley. Not Austin, Texas. Not Boston.”

If anything, the Indy 500 pace of innovation in Detroit has been eye-snapping: earlier this month:

  • GM completed its acquisition of Cruise Automation, a 3-year-old San Francisco start-up, for an estimated $1 billion;
  • FCA reached a deal to build 100 Chrysler Pacifica hybrid minivans for Google’s Self-Driving Car Project in May, and
  • Mr. Ford announced two weeks ago it has invested $182 million to fund and collaborate on software development with San Francisco-based Pivotal. (Ford, reportedly, has also been in discussions with Google as well, and FCA’s partnership with Google is not exclusive.

Mr. Ford notes that the Motor City is a city where the cost of living is low, and entrepreneurs can make a difference: he describes the people who start new companies here as brave: “You guys want to be trailblazers and you guys want to be brave. You could go to Silicon Valley…and have a great life…But if you are successful here…people are really going to notice and they are going to love you for it and you are going to be part of something special.”

But the future depends upon the rising generation—ergo from whence will the talent critical to Detroit’s future arise? Some, clearly, will be imported from the Silicon Valley, but a vital part—if Detroit is to have a competitive future—will have to emerge from its currently insolvent (physically and fiscally) public school system. Thus, next November’s election of a new Detroit school board will be a key to Detroit’s ability to compete with the Silicon Valley. The race has attracted a, shall we say “huge,” field of candidates: 72 have filed to compete for seven seats—seats on a board in a city where municipal services had been failing, in a metropolitan region ranked 10th worst of 942 metro regions in the U.S.1 in a measure which considers both the number of units administering common services and each government’s related expenditures. As we had noted in our report: “Detroit, nearly encircling two failing municipalities, must redesign and coordinate and share services with other jurisdictions in the metropolitan area to both reduce costs and ensure far more effective delivery of essential services…the city’s 78,000 vacant structures and 60,000 vacant land parcels ‘present an ongoing public safety and public health concern,’ forcing the city, despite the signal loss of population, to provide and maintain services over its 139 square miles—an area that contains 78,000 abandoned and blighted structures, nearly half of which are thought dangerous, and 66,000 blighted and vacant lots which encourage fires and crime.” As we had opined, the exceptional challenge for the City of Detroit was not just to exit the largest municipal bankruptcy in the nation’s history, but also to ensure a post-bankruptcy growth plan. How can a city, after all, create a future without taking into consideration its own public school system? What could be more important not just to a city’s ability to invest in innovation, but also to attracting families to want to live within its boundaries?

Thus, if there is any good news, it is the plethora of candidates vying in November—a number which includes former board members, educators, and parents—with whomever the victors are who emerge responsible to select a superintendent for the new Detroit Public Schools Community District—to relieve the exceptional rhythm guitar playing, former U.S. Bankruptcy Judge Steven Rhodes. Their task will be vastly complicated by the complex navigation required to emerge from state control of the district under a series of emergency managers dating back seven years—and the existing state-approved rescue package, including fiscal oversight by the Detroit Financial Review Commission.

Downsizing to Rightsizing. Michigan’s economic development board this week approved an additional $17 million state investment in a project to transform Willow Run’s one-time World War II bomber plant into a hub for autonomous vehicle testing—where some $20 million of Michigan’s Strategic Fund investment in the American Center for Mobility will be used toward purchasing land at the site of the former General Motors powertrain plant, designing and constructing a high-speed loop test track, or, as John Maddox, president and CEO of the American Center for Mobility, out it: “We’re getting a lot of attention around the nation and really around the world, and that’s really because the state of Michigan is investing in this.” Steve Arwood, president and CEO of the Michigan Economic Development Corp. and Chairman of the Michigan Strategic Fund board, added that the state’s taxpayers’ vital investment in the facility is critical to maintaining Michigan’s stronghold in the development of autonomous vehicles, noting: “Ultimately it’s in the best interest of the state to preserve the future of our automotive industry.” The Center is aiming to complete a 335-acre test site that would include tunnels, bridges, traffic stops, suburban cul-de-sacs and city streets to test the driverless cars of tomorrow: an almost city of innovation where the autonomous vehicle nonprofit organization hopes to attract federal grants and additional private investment for automated driving technology at a site owned by RACER Trust, the entity set up in GM’s own 2009 bankruptcy to sell off land left vacant by closed and abandoned auto plants: Mr. Maddox reports an entity called the Willow Run Arsenal of Democracy, or WRAD, will purchase the land from RACER Trust, adding that Michigan’s risk-based investment in the infrastructure of building and testing autonomous vehicles keeps Michigan competitive with California and foreign countries racing to develop the technology.

Wherefore East Cleveland’s Future? With the RNC convention over in adjacent Cleveland—and still no word back from the State of Ohio with regard to authorizing East Cleveland to file for chapter 9 municipal bankruptcy, the small city may consider adopting an ordinance (#4-16) this week to commence the opening stages of annexation negotiation with Cleveland: Council President Thomas Wheeler said the Council will have a special meeting in the next week to vote on two ordinances: the first would declare East Cleveland’s intent to enter annexation talks with Cleveland and appoint three commissioners who were interviewed by council after an open application process; the second would require Mayor Gary Norton to deliver a letter to the Cleveland Foundation seeking funding for a financial study by the firm Conway MacKenzie, an adviser in Detroit’s bankruptcy. The study for the nearly insolvent municipality would cost approximately $50,000-70,000. Of course, it takes two to party, so any steps towards annexation would require reciprocation from the City of Cleveland—where, as one can imagine, the prospects of annexation might not hold great attraction.

For East Cleveland, the proposed ordinance would lay out some of the guidelines for such commissioners, including the process for requesting information from the city and the requirement that the selected commissioners should report to council every two weeks. Mayor Gary Norton said the appointments would be great progress on the annexation idea which has been discussed for years. 

Recovery Governing

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eBlog, 7/20/16

In this morning’s eBlog, we consider the ongoing recovery from the nation’s largest ever municipal bankruptcy in Detroit, where the city is demonstrating remarkable success in its effort to downsize: it has just completed its 10,000th demolition!  Then we review steps Mayor Duggan is proposing to adjust public safety pensions—the hard balancing between municipal resources versus benefits key to filling critical public safety slots even as it is struggling to address a pension shortfall.  Then we look south to the extraordinary governance challenge posed by the new PROMESA law: how will an unpaid oversight board working in  a U.S. territory  with its own Governor and legislature—where Spanish is the main language—and where the board members are unpaid—be able to succeed?

Downsizing to Rightsizing. Detroit Mayor Mike Duggan described the 10,000th demolition yesterday of an abandoned house in Detroit as a “remarkable accomplishment,” adding, however: “We’ve still got 30,000 to go: Every time one of these houses goes down, we raise the quality of life for everybody else in the neighborhood…And you look here, the beautiful houses of the families across the street. These are folks who stayed in the city, paid their taxes, kept their houses up and had to watch the blight spread. We’re finally starting to fight it effectively.” While it would seem strange for a municipal leader to celebrate the razing of homes, in Detroit we are discussing a city in which between 1972 and 2007, the city experienced an overall loss of 15,648 business establishments; the bankruptcies of General Motors and Chrysler: jobs left Detroit as auto plants moved to the suburbs and to other countries with globalization. Manufacturing jobs in the city fell to fewer than 27,000 in 2011 from about 296,000 in 1950. By the time the city filed for the largest municipal bankruptcy in U.S. history, the city’s density had declined to eight people per acre, down from 21 per acre in 1950. Thus it was that yesterday, Mayor Duggan marked a milestone in Detroit’s effort to rid itself of blight. City officials said the city is on target to tear down 5,000 blighted houses this year and 6,000 next year.

The razing is not, however, 100 percent smooth: the federal Office of Special Investigator General for the Troubled Asset Relief Program, which monitors the Hardest Hit Fund, is investigating the blight program with assistance from the FBI—an investigation for which Mayor Duggan has promised full cooperation: it appears that the investigation was triggered by last year’s near doubling of the average demolition price to $16,400 from $8,500-$10,000 under former Mayor Dave Bing. Mayor Duggan noted yesterday that the average cost for the 5,000 homes the city will tear down this year will be under $13,000, noting: “It took us a while to really get the hang of this, and I won’t tell you we’re perfect: But we’re moving much more efficiently than anybody else in the country, and for the folks on this block, I don’t think it could come too soon.” The Mayor said the rapid pace of blight removal has done more than improve quality of life in neighborhoods: he noted that structure fires have dropped by 25% in the city over the past two years, and a 2015 report found that in neighborhoods where abandoned homes have been removed, property values have risen citywide by more than $209 million.

Pensionary Recovery? Detroit Mayor Mike Duggan has announced plans to boost public safety pension contributions at the cost of hiring fewer firefighters: the move comes in the wake of the city’s difficulty in filling 100 fire department vacant slots: the city has only been able to fill 60; however, those empty spots have, in turn, freed up resources to help pay finance higher municipal contributions for public safety pensions. The new agreement provides for a 6% wage increase which will be directed to the firefighters’ legacy pensions pending the resolution of some technical issues: under the plan, firefighters licensed as medical first responders will also receive a 4% pay raise effective immediately—a raise in addition to 2.5% raises previously negotiated for 2016, 2017, and 2018, with Mayor Duggan noting: “This is the city and union coming together to help ensure our emergency personnel won’t face another pension shortfall.” Because under Detroit’s approved plan of debt adjustment to exit municipal bankruptcy, the pension changes still must be submitted to and approved by the Financial Review Commission, which must approve any collective bargaining agreements after determining that the city can fund the contracts without running a deficit. Detroit Finance Director John Naglick noted: “The DFD wage package still requires a number of approvals, but if put in place, the wage increases are budgeted as part of wages and benefits in the general fund: The number of filled fire fighter operations positions is below the budgeted amount and will fund these increases.” He also noted that Detroit has already begun to set aside additional funding for the legacy plans and has hired Cheiron as its actuarial consultant to help it develop a formal long-term funding plan: “The legacy plans were frozen as a result of the bankruptcy, and the vast majority of the participants are already in pay status…For that reason, we believe this will be a manageable issue that will not affect the city’s recovery.”

Actually, the pension contribution will matter: Detroit confronts nearly a $500 million pension shortfall that it must begin paying in 2024. Nevertheless, Moody’s was unmoody in upgrading the city’s credit rating to stable from positive, citing the strain of meeting the increase in pension costs related to the legacy plans which limits the prospects for upward rating movement at this time. Mayor Duggan had warned earlier this year, as we had noted, that consultants who advised the city through its municipal bankruptcy had miscalculated the pension deficit by the tidy sum of $490 million. Detroit’s plan of debt adjustment submitted to the U.S. Bankruptcy Judge Steven Rhodes, had proposed freezing Detroit’s legacy pension plans: the plan provided an initial funding infusion from the so-called “grand bargain” funded with help from the state and private entities. Under the plan, the city deferred contributions until payments resume in 2024. Now Mr. Naglick notes the size of the city’s looming payment is unclear, because the value of plan assets will change; however, the additional 6% contribution, which is based on firefighter payroll, will help ease the unfunded liabilities. (When Detroit came out of chapter 9 municipal bankruptcy in December of 2014, actuarial estimates in the city’s Plan of Adjustment projected a payment of $111 million in 2024. Last November, the system’s actuary raised the figure to $194.4 million.) Last month, the Detroit City Council approved the set aside of $30 million from a city budget surplus in order to enable it to address a potential public pension shortfall.

Guiding Puerto Rico’s Fiscal Future. Congressional leaders have named eight members who will serve on a legislative task force with the task of considering options to boost Puerto Rico’s economy: the Congressional Task Force on Economic Growth for Puerto Rico. The board will have the power to require balanced budgets and fiscal plans, as well as to file debt restructuring petitions on behalf of the commonwealth and its entities in a federal district court as a last resort, if voluntary negotiations fail. The task force, created as part of the new PROMESA law, as well as a separate seven-member oversight board, is divided evenly between House and Senate members, as well as Republicans and Democrats: the Senators who will serve on the task force: Sens. Orrin Hatch (R-Utah), Marco Rubio (R-Fla.), Robert Menendez (D-N.J.), and Bob Nelson (D-Fla.); House Members are: Puerto Rico Resident Commissioner Pedro Pierluisi, Reps. Nydia Velazquez (D-N.Y.), Tom MacArthur (R-N.J.), and Sean Duffy (R-Wis.). Senate Majority Leader Mitch McConnell (R-Ky.) said he was confident that Sens. Rubio and Hatch, whom he was responsible for naming to the task force, would “use their commonsense approach and deep policy backgrounds to help Puerto Rico and its citizens achieve long-term prosperity with a thriving economy.” House Speaker Paul Ryan (R-Wisc.) named the two Republicans, while House Minority Leader Nancy Pelosi (D-Ca.) named the two Democrats from the House. Speaker Ryan is also required to choose one of the eight task force members to serve as chair, but noted that Reps. Duffy and MacArthur are the leaders we need to make the right recommendations so Puerto Rico can create jobs and reboot its economy.”

The task force will be responsible for examining current federal law and programs as they relate to Puerto Rico to find if there are any current impediments they could impose on economic growth or healthcare coverage for the territory; the task force will also be responsible to explore possible improvements which could enhance job creation, reduce child poverty, and attract investment. Under the provisions, the task force is required to provide a status update on its work during the first fortnight of September—and a final report by the end of the year. The task force, however, is quite different than the heavy lifting to be imposed on the still unnamed PROMESA board created under the new law to oversee resolving Puerto Rico’s recovery from its virtual municipal bankruptcy—a quasi-volunteer, unpaid board which will confront far more intractable problems than previous oversight boards such as in New York City and Washington, D.C.—boards on which members were required to either live or work in the city. In stark contrast, under PROMESA, only one member must either live or work in Puerto Rico. Not only might there be a cultural and language challenge, but also a quasi-sovereign challenge: Puerto Rico is, after all, something between a municipality and a state: the U.S. territory will be represented by its Governor and legislature—both of which are, theoretically, directed to work with the as yet unnamed board. The new law will allow board members to be reimbursed for their expenses; it provides there will be paid staff members. For its part, Puerto Rico is also concerned with the PROMESA board. Governor Garcia Padilla’s Chief of Staff Grace Santana notes: “[T]he law will only achieve its stated goals if the members of the soon-to-be established Oversight Board are truly committed to the Commonwealth and its people.”

There will also be other questions based on previous federal takeovers: Would Congress, as it did in the case of D.C., assume responsibility to fund Puerto Rico’s underfunded employee pensions? Will Congress agree to increase the federal rate for Medicaid reimbursements? Will it agree to take over Puerto Rico’s courts and prisons?

Are there Alternatives to Municipal Bankruptcy?

 

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eBlog, 7/18/16

In this morning’s eBlog, even as neighboring Cleveland is hosting the GOP convention,  East Cleveland awaits  a response from the State of Ohio vis-à-vis its  authority to file for chapter 9 municipal bankruptcy, even as it also considers whether it might instead—if the City of Cleveland is willing—annex with Cleveland.  In Ohio, a state which has authorized municipal bankruptcy, there has never been one. Ohio may place East Cleveland on fiscal watch, and the state auditor may provide technical and support services to a municipality—a  watch triggered  by a  written request from the municipality or  by the state auditor. The existence of a fiscal emergency condition in Ohio is determined by the state auditor—and may be initiated by the Governor, a city or county’s presiding officer, or the state auditor upon the occurrence of which, a financial planning and supervision commission is created to intervene . Should there be an East Cleveland default, the state is authorized to create a financial planning and supervision commission to intervene in the city’s fiscal affairs.

Is there an Alternative to Municipal Bankruptcy? On June 23rd, the East Cleveland City Council issued a Press Release to begin a search for candidates who would be on the Annexation (Merger) Commission where three individuals would be named to lead negotiations with the City of Cleveland. This would lead to legislation to be adopted by Council once the three people have been identified. This is a major step in the process. The deadline for individuals that met the requirements to submit their resumes was last June17th. The deadline was extended from June 3rd. City Council is now in the process of reviewing resumes and will narrow their selection down to five people who will be interviewed by Council members. A backup group will also be selected should someone be unable to fulfil the obligations of the Commission through the process. The Annexation Commission’s goal will be to research, collaborate, negotiate, and make recommendations to City leaders. The other option that will be taking place is a feasibility study that will be conducted by Conway MacKenzie, a national financial and management consulting firm that specializes in crisis management and turnaround. Lastly, the City has also explored chapter 9 municipal bankruptcy as an option to secure the remaining few assets it has so that the city can continue to function while these solutions are being implemented. The City Council vows it will continue to update residents through community meetings and notifications.

Charting a City’s Post Municipal Bankruptcy Future Governance

In this morning’s eBlog, we consider the key actions taken yesterday by the Mayor and Council in San Bernardino to put a new charter before the city’s voters—a critical step towards a post municipal bankruptcy future.  

Charting a New Governance for a Post Municipal Bankruptcy Future. In our report on the critical factors and the fiscal challenges for local governments in the wake of the Great Recession, we noted that while considerable effort had been devoted to understanding macroeconomic trends, far less attention had been giving to understanding the recession’s impact at the municipal level. Thus, in our study of one of those six municipalities, San Bernardino, we noted: “In the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development, and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” Now, more than half a decade later, the San Bernardino City Council is poised to vote on a new governing document for the city. Yesterday, the Council, after adopting some amendments, agreed to vote early next month on a motion to set a date for the city’s voters to vote in November on the proposed new charter: one which includes major changes in which officials are elected and how they are authorized to govern the city. The amendments adopted yesterday will keep the election policy closer to the city’s current practice: first a primary election; subsequently, unless one candidate wins more than 50 percent of the vote, a runoff election between the top two vote recipients—instead of, as the committee had proposed, just one election in which the leading vote recipient was automatically elected. Councilman Fred Shorett, at the session, noted: “If we had (had) that in effect in 2013, we’d have a mayor who received only 20 percent of the vote — and it wouldn’t be the person sitting to my left (Mayor Carey Davis),” referring to an election in which (Mayor) Davis finished behind Wendy McCammack, but prevailed in the subsequent February runoff, adding: “When Mayor Davis ran, there were 11 candidates. You run the risk of a very, very low number of people (choosing the winner).” But, as part of the newly proposed charter, if approved by the city’s voters, the timing of San Bernardino’s elections will change: instead of primaries in November of odd-numbered years and runoffs the following February, the primary will match the state of California’s, presently in June, with any runoff in November of even-numbered years. That recommendation, from the city’s committee, appeared to stem from reviews of practices of other municipalities who had realized both lower costs and better voter turnouts. Indeed, the election change, proposed by Councilman Henry Nickel, was adopted unanimously; the Council also changed the proposed charter from saying certain officials would be “appointed” to “hired,” based on advice from the League of Women Voters. Another change would eliminate elections for city attorney, city clerk, and city treasurer; under the proposed new charter, the mayor and council would vote for the city attorney and city clerk. Nevertheless, this adopted change, proposed early in the charter review process, shows the difficulty of change: it is a proposal rejected by the city’s voters previously by opponents who claimed they wanted leaders directly accountable to the people. During consideration and markup, Councilmember Nickel also proposed an amendment to modify the proposed new charter to make the Mayor’s term two years instead of four, a change, he stated, that would mean that mayoral elections would be on the same day as elections for half of the council members, meaning those council members — but not others — must choose between seeking re-election or the citywide office, but his motion failed on a 3-3 tie, with Mayor Davis abstaining.

San Bernardino’s budget includes up to $150,000 to “educate” the public on the proposed changes to the charter; the next step is for the Council now to separately approve the details of that education — including the scope of the education, which, by law, cannot be advocacy, and the cost — in order for it to occur.

Remaking a City’s Fiscal Future

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eBlog, 7/13/16

In this morning’s eBlog, we consider the complex fiscal challenges confronting the Windy City, where we noted a few years ago in our report: Chicago, after a significant effort to remake itself into a global city, today confronts unprecedented challenges. The city took a serious turn for the worse during the first decade of the new century. The gleaming towers, swank restaurants, and smart shops remain, but Chicago is experiencing a decline different from other large cities. It is a troubled place, one falling behind its large urban brethren and presenting a host of challenges for Mayor Rahm Emanuel. Challenges confronting the city’s fiscal future are: schools, which one commentator cited as ‘almost insoluble;’ police—crime—gangs (also ‘almost insoluble’); infrastructure (on which the mayor has earned very high marks); pensions, where Chicagoans’ long-term debt and pension obligations per capita rose 185% since 2002—which are inextricably linked to the state; and bringing jobs back to Chicago. These challenges come as state and federal aid are reduced.” This morning we consider some of the ongoing fiscal challenges as the city OBM prepares a preliminary budget based on the requests submitted by the departments and the resources OBM expects will be available to fund those needs. This preliminary budget is used to inform the Annual Financial Analysis, which by Executive Order is issued on or before July 31st of each year. The Annual Financial Analysis presents an overview of the City’s financial condition, and it serves as the starting point for preparing next year’s budget. The document includes a historical analysis of the City’s revenue and expenditures; financial forecasts for the City’s major funds; and detailed analyses of the City’s reserves, capital program, debt, and pensions.

The Fiscally Windy City. Chicago’s long-term principal and interest payment schedule for the city’s general obligation debt swelled last year by about $1.7 billion, forcing Mayor Rahm Emanuel and his finance team to confront a severe liquidity problem even as it also was challenged by the state’s constitution as it sought to address longer term pension obligations and a liquidity crunch. Chicago published its 2015 comprehensive annual financial report or CAFR last Friday; it will soon release its annual financial analysis—which will include the fiscal gap the city must close ahead of the fall release of a 2017 budget as well as multi-year projections based on various revenue scenarios. It appears the city has made progress in reducing its structural budget deficit and reducing some of its pension liabilities—mostly via tax increases in a state where the Illinois Supreme Court has ruled the state constitution bars the city’s ability the alter benefits—meaning its net position for reporting purposes has deteriorated. Nevertheless, Chicago’s ending balance strengthened, allowing the administration to make good on its commitment to rely less on debt for operations. No doubt some of the urgency to act were spurred by Moody’s characteristically moody downgrades of the city’s General Obligation bonds, as well as water and wastewater credit ratings last year; the bad news is—as in most states—the city’s hands are tied absent state authority to address its pension challenges and the adoption of a state budget—or, as the ever prescient Richard Ciccarone, president of Merritt Research Services, put it: “We are a long way from the finish line…Investors will be watching closely to see whether the city is able to stay the course on the promises they’ve made to investors” about debt practices and aligning revenues with expenses.

Nevertheless, from a different perspective, key goals set by Mayor Emanuel to reverse the outflow of young professions appear to be succeeding: Despite the city of Chicago’s population loss over the past few decades, its economic trends have been generally more encouraging. Household income is an important indicator of Chicago’s fortunes relative to those of its suburbs. In 1990, median household income in the city was just 67% of the median household income in suburban Chicago. By 2010, this income ratio had climbed to 73%. Decomposing household income statistics by (self-reported) racial/ethnic group reveals that this trend was pervasive for the three largest groups: non-Hispanic white, black, and Hispanic. The ratio of city median income to suburban median income among white households experienced the greatest change; it rose from 77% in 1990 to 98% (near parity) in 2010. Moreover, these robust trends are enhanced by rising share of adults aged 25 and older who have attained at least a bachelor’s degree—those millennials the Mayor had sought to relocate from the city’s suburbs into the city: twenty-six years ago, among adults aged 25 and older, 19% of those residing in the city had attained a four-year college degree versus 28% of those residing in the suburbs; by 2010, Chicagoans in this age demographic had almost reached the same share in this regard as their suburban counterparts (33% for city residents versus 35% for suburban residents). The non-Hispanic whites again experienced the greatest change among the three largest racial/ethnic groups. In 1990, 29% of the white city population aged 25 and older had a four-year college degree—the same percentage as the white suburban population in this age demographic; however, by 2010, 55% of such white city dwellers had a bachelor’s degree, while 39% of their white suburbanite counterparts did. Between 1990 and 2010, the city’s black population also made substantial gains in education, as evidenced by the share of black adults aged 25 and older with a bachelor’s degree having risen from 11% to 17%. Moreover, it appears from new data examinations of specific neighborhoods that we can actually perceive how geographically concentrated the city’s gains in college-educated adults aged 25 and older have been: the gains have been highly concentrated in Chicago’s central business district and the surrounding areas, as well as the neighborhoods west of Chicago’s northern lakeshore: the Near South Side realized an increase in the share of adults with a four-year college degree climb from 9% in 1980 to 68% in 2010. In Chicago’s neighborhoods west of its northern lakeshore, the shares of the college-educated population there typically doubled or tripled between 1980 and 2010. One can see the importance of a long-term strategy—and appreciate how vital in not so far away Detroit the efforts of retired U.S. Bankruptcy Judge and now Detroit Public Schools Emergency Manager Steven Rhodes is to Detroit’s fiscal future.

Schooling on Debt. Mayor Emanuel, upon his election, had determined that a key to the city’s fiscal recovery was to lure young families with children back into the city—the very acute challenge today in Detroit. That meant signal investments in public safety and Chicago’s Public Schools, and its Park District—for which there has been a price: a total overlapping burden of $19.4 billion for a debt per capita figure of $7,211—or nearly a 33% debt per capita increase between FY2014 versus FY2006. Nevertheless, Mr. Ciccarone warns that the Chicago Public Schools, notwithstanding some assistance provided by the increasingly fiscally dysfunctional state to help CPS address a $1 billion deficit, could well force CPS to impose the legislature’s authorized $250 million in additional property taxes. But it is on the public pension front where the most challenge is: according to the city’s 2015 CAFR, Chicago’s net pension liability totaled $33.9 billion—including $18.6 billion of municipal employees’ fund liabilities, $2.5 billion of laborers’ fund liabilities, $9 billion of police fund liabilities, and $3.8 billion of firefighter fund obligations—the city’s first fiscal reporting on the figure based on actuarial reports from its four funds applying GASB’s new calculations for reporting purposes. The GASB changes do not impact funding or the size of the actuarially accrued unfunded liabilities—which were approximately $20 billion at the end of 2014, but as the ever insightful Mr. Ciccarone advises: “It provides a more vivid picture of the unfunded scale and scope of the liabilities and how they weigh down the balance sheet.” And that’s before next year, when the net police and fire figures are projected to worsen as the funds factor in changes recently approved by the Illinois General Assembly delaying a shift to an actuarial required contribution and extending deadline for reaching a 90% funded ratio. Nevertheless, CFO Brown reports Chicago will unveil a municipal employees’ fund fix this summer. Chicago closed out FY2015 with a total fund balance of $215 million, up $65 million from last fiscal year’s $150 million, dedicating a portion to cover operating expenses, such as judgments and union settlements, leaving an unassigned balance of $93 million. In addition, the city was successful in reducing other OPEB unfunded liabilities, primarily through phasing out most retiree healthcare subsidies. Of course, that phase out awaits a pending state constitutional challenge.