The Daunting Fiscal Challenges of Smaller, Poorer Municipalities

February 10, 2016. Share on Twitter

In this morning’s  blog post, we consider the growing fiscal and governing challenges of smaller cities with disproportionate lower income populations: here, Flint, Michigan, and Ferguson, Missouri–both smaller cities struggling with disproportionate levels of poverty. But there, as Robert Frost would have noted, their paths diverge. Because the fiscal disaster and human crisis from the lead poisoning for Flint’s children emerged from neglect and other state and federal failures–and because the crisis has put the city’s children at greatest risk–there seem to be signal federal and state efforts to make amends, including the provision of fiscal help. There is no such comparison in Ferguson, where the U.S. Justice Department yesterday filed suit against the city–a city characterized by disproportionately low incomes and race–but which has sought to fill its municipal coffers through the imposition of traffic fines levied disproportionately on those travelling into the city, rather than through more traditional and equitable means. There are two trends: the increasing fiscal disparities between municipalities in the U.S. as the concept of revenue sharing by the federal government and states has dissipated, and the growing apprehension over the cost of operating too many municipalities in metropolitan regions. 

Out Like Flint. Flint Michigan Mayor Karen Weaver has proposed a plan to replace the lead pipes in the city—pipes which have become a major health threat to the city’s future because of drinking water contamination and lead poisoning in the wake of a decision by a former gubernatorially appointed emergency manager, Darnell Earley, to begin pumping water from the Flint River to homes in what used to be one of the state’s largest cities two years ago. Her plan could be assisted by appropriations recommended this week by Gov. Rick Snyder. The hope is that replacing lead service lines would prove to be a key step to reducing the highest risk for lead to leach into the city’s drinking water—notwithstanding that there are other sources of lead in plumbing, including older soldered joints and fixtures containing leaded brass. Mayor Weaver noted: “We’ll let the investigations focus on who is to blame for Flint’s water crisis…I’m focused on solving it.” Mayor Weaver stated the $55 million project could begin by March: the goal is to replace an estimated 15,000 lead service lines within one year at no cost to homeowners: her plan is to target homes, but not schools, businesses, or other nonresidential sites—or, as she put it: “We are going to restore safe drinking water one house at a time, one child at a time until the lead pipes are gone.” The Mayor said the project would be a joint partnership between the National Guard and the city, but would require coordination with state government and funding from the Michigan Legislature.

Flint is the gritty rustbelt metropolis, where General Motors was founded in 1908, but which, since 2011, has been run by a series of state-appointed emergency managers: It has lost half its population since the 1960s, as GM cut its local workforce from 80,000 to around 5,000; fewer than 100,000 people now live there. More than 40% of the city’s mostly black population lives below the poverty line. Crime and unemployment rates are sky-high. Around 15% of Flint’s houses are abandoned. But for Flint, the stakes are higher: its tax base is most likely to erode—beginning with its property tax revenues, where as if the unacceptable levels of lead in the drinking water would not be sufficient to deter new homeowners from bolstering the city’s property tax revenues, some mortgage lenders are now warning home buyers in the city that they must prove there is no contamination at a property, or else they will not make a loan for its purchase. It is difficult to imagine a more immediate source of critical tax revenue erosion: now local real-estate agents and lenders must be apprehensive that the new limitation could be another punch in the gut of the city’s key tax revenues—revenues already on a long, downhill slide in the wake of the departure of major auto industry employers. Or, as Daniel Jacobs, an executive with Michigan Mutual, which recently issued a notice to its employees requiring that homes pass a water test before it will make a loan put it: “The tragedy in an already depressed community is now likely to see housing values plummet not only because of the hazardous water, but because folks cannot obtain financing.” Indeed, the Flint water contamination crisis and Detroit’s public school restructuring took center stage yesterday when Gov. Snyder presented his FY2017 budget—in which he told legislators he was “committed to providing critical investments needed for the Flint water crisis and Detroit Public Schools, while maintaining the long-term focus on the key priorities of education, job creation, health and human services, public safety and fiscal responsibility.” His budget seeks an additional $195 million to help restore safe drinking water to Flint—appropriations which would be in addition to the $37 million already approved from a supplemental budget action, bringing total state funding for Flint to $232 million, telling legislators the level includes the $37 million to help with water infrastructure; $15 million for food and nutrition; $63 million for the health and well-being of Flint children and other vulnerable residents; and $30 million to provide water bill payment relief for Flint. In addition, Gov. Snyder proposed that $50 million be set aside in a reserve fund for legislative oversight of the Flint programs after a six-to nine-month period, noting legislators would have the opportunity to assess where the resources could be deployed most effectively with good accountability, efficiency, and outcomes. Indeed, the proposal appears consistent with the levels Mayor Weaver reported yesterday, noting that her plan to remove and replace all lead water pipes in city homes carries a $55 million price tag. Gov. Snyder’s budget recommendation also seeks funding for statewide water infrastructure improvement. He introduced the creation of a commission to look at 21st century water infrastructure in his state of the state address earlier this year.

For a legislature already apprehensive about the distribution of annual appropriations, however, the Governor’s new requests might create some balancing issues—especially with the swelling costs for the struggling Detroit Public Schools’ (DPS) restructuring—for which the Governor is asking for $715 million from the legislature, stating yesterday: “The action plan here is to devote resources, not from the school aid fund, but instead use tobacco settlement proceeds at the rate of $72 million a year for 10 years to deal with the $515 million deficit and $200 million for additional investment.” In addition, he sought an additional $50 million to help with DPS current debt situation that, he said, is already reserved in the state’s 2016 budget supplemental. The governor is apprehensive DPS could be insolvent by this summer, urging state legislators to act swiftly, waring: “If we don’t, this is an issue that will be resolved in the court system where the outcomes can be much more devastating to the citizens of Michigan and other school districts in the state. The clock is ticking and action is required.”

Transferred Water Woes. Somehow it almost seems as if Detroit has channeled some of its fiscal woes north to Flint—yesterday Moody’s restored Detroit’s old water and sewer debt to an investment-grade rating for the first time since Detroit exiting municipal bankruptcy the city left bankruptcy a year ago last November. Ergo, yesterday, Moody’s upgraded the newly created Great Lakes Water Authority bonds—some the $5.5 billion of water and sewer revenue municipal bond debt—of the post-bankruptcy created regional authority (The water system treats water from Lake Huron, Lake St. Clair and the Detroit River and distributes treated water to a service area population of about 3.8 million. The sewer system treats and disposes of wastewater produced by a service area population of approximately 2.8 million.) to investment grade, with a stable outlook, with the rating agency recognizing that the new authority has assumed all the debt secured by the net revenues of the Detroit Water and Sewerage Department. The regional authority manages regional water and wastewater services, assets, and handles rate-setting responsibilities, even as Detroit retains control of water and sewer services within city limits. Under the terms of the lease, the regional authority has sole ownership interest in revenue generated by the combined regional and local system—or, as Moody’s observed: “This significantly limits the risk that a future bankruptcy filing by the city of Detroit or intensified fiscal pressure on the city in general would contribute to bondholder impairment with respect to the water revenue debt,” adding that the upbeat ratings also reflect the massive scale of water operations, as well as a customer base that extends beyond Detroit’ boundaries, very strong operational and fiscal management, healthy liquidity, and the expectation of stable or improved debt service coverage. Nevertheless, the ratings were tempered by what Moody’s characterized as the authority’s credit challenges, such as high leverage of pledged revenue, extensive capital needs, and labor market and demographic weaknesses. Under Detroit’s chapter 9 municipal bankruptcy plan of debt adjustment, the city had successfully sought to monetize its water and sewer assets: a key provision of the regional system’s 40-year lease with Detroit provides the Motor City will receive $50 million a year to overhaul its aging infrastructure as well as $4.5 million in assistance for low-income customers.

Recall. Michigan Governor Rick Snyder yesterday presented his budget—with the twin emergency focus on Flint and Detroit’s fiscally failing public schools even as the Michigan Board of State Canvassers three days’ ago approved a recall petition to force him out of office—with a statewide vote potentially as early as August 2nd, provided the requisite signatures are gathered by the deadline: The petition seeks the recall for moving the state School Reform Office to a department under the governor’s control; nine other petitions involving the Flint water crisis were rejected because of technical errors such as misspelled or omitted words. Almost as if Pandora’s box has been opened, Gov. Snyder is also likely to confront challenges in court: According to Great Lakes Law, lawsuits have been filed on three fronts: “class action citizen suits filed by environmental groups, class action and torts, coupled with constitutional claims against the governor, government investigations both state and federal, that may result in civil and criminal enforcement actions,” even though special legal protections make it difficult to hold governments liable for damages such as those filed by Flint residents.

The U.S. Sues Ferguson over Municipal Taxes and Charges. The U.S. Justice Department, in a lawsuit filed on Wednesday against the small city of Ferguson, Missouri, charged the municipality with regard to an effort to end an allegedly longstanding pattern of unconstitutional policing. The suit, coming in the wake of inability to reach a settlement with the city’s Mayor and Council, charges that the city’s police and court systems routinely violate the civil rights of the city’s black residents, in part to generate revenue from tickets, claiming in its suit that the city’s “routine violation of constitutional and statutory rights, based in part on prioritizing the misuse of law enforcement authority as a means to generate municipal revenue over legitimate law enforcement purposes, is ongoing and pervasive,” adding: Ferguson’s municipal code confers broad authority on the Court Clerk, including authority to collect all fines and fees, accept guilty pleas, sign and issue subpoenas, and approve bond determinations. The Court Clerk and assistant clerks routinely issue arrest warrants and perform other judicial functions without judicial supervision. As the number of charges initiated by Ferguson Police Department has increased in recent years, the size of the court’s docket has also increased. According to data the City reported to the Missouri State Courts Administrator, at the end of fiscal year 2009, the court had roughly 24,000 traffic cases and 28,000 non-traffic cases pending….In January 2013 the City Manager requested and secured City Council approval to fund additional assistant court clerk positions because “each month we are setting new all-time records in fines and forfeitures,” and the funding for the additional positions “will be more than covered by the increase in revenues.” The federal suit includes a count noting: “The City’s desire to generate revenue influences fine amounts. City officials have extolled that Ferguson’s preset fines are “at or near the top of the list” compared with other municipalities across a large number of offenses, and have cited these fine amounts—which were lowered during the pendency of the United States’ investigation—as one of several measures taken to increase court revenues. For violations that do not have preset fines, the siut noted: “Defendant has also taken measures to ensure fines are set sufficiently high for revenue purposes.”

Puerto Rico in the Twilight Zone. U.S. Senate Judiciary Committee Chairman Orrin Hatch (R-Utah) yesterday demanded Puerto Rico Gov. Alejandro Garcia Padilla provide detailed financial information by March 1st and stated he intends to come up with a plan to help the commonwealth by the end of March—relatively consistent with House Speaker Paul Ryan’s time frame, discussing his goals for a solution to Puerto Rico’s fiscal and debt crisis during a Finance Committee hearing on the President’s FY2017 budget with Treasury Secretary Jack Lew—with the Secretary making clear that any restructuring solution has to pass before Puerto Rico faces major bond payments in May and June—even as Mr. Hatch called the administration’s position an “unprecedented debt-restructuring authority” for Puerto Rico that would give “an explicit preference for public pension liabilities over debt issued by the Puerto Rican government, even though the territory’s constitution gives preference to some of [the] debt.” Chairman Hatch seems focused on requesting up-to-date details about the Territory’s three largest pension systems, stating he understands that the systems are only 4% funded and that the commonwealth-wide bankruptcy regime Treasury has floated would give preference to those unfunded liabilities.

The U.S. House Natural Resources Committee has scheduled a February 25th hearing at which Treasury Counselor Antonio Weiss has been asked to discuss an analysis of Puerto Rico, as the House presses to meet House Speaker Paul Ryan’s deadline of April 1st for the House to complete and send legislation to the Senate, with a focus on legislation authored by Rep. Sean Duffy (R-Wisc.) which would give the U.S. territory some sort of access to bankruptcy—as well as impose a financial stability council. Treasury Counselor Weiss last Friday, at a panel sponsored by the Bipartisan Policy Center, reported there have been “very positive discussions taking place on both sides of the aisle” in Congress, adding that there now seems to be greater agreement that any Congressional plan to help Puerto Rico avoid default and insolvency should include both restructuring and oversight. In his presentation last week, Mr. Weiss said the administration believes that restructuring of Puerto Rico’s debt could come through the Constitution’s Territorial Clause instead of through an addition to the U.S. bankruptcy code. (The clause in question reads: “Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.”) Mr. Weiss added that not all the territory’s debt would have to “be treated with a broad brush equally,” and that restructuring could take into account the many differences between Puerto Rico’s various debts, noting: “A special legislative act is required, tailored to the territories, consistent with Article 4 of the Constitution and that is neither for cities nor for states…It is on Congress recognizing the severity of this problem to agree in a bipartisan fashion on what those tools should be. It’s emergency legislation to deal with an emergency situation.”

Resident Commissioner Pedro Pierluisi, Puerto Rico’s sole representative in Congress, noted, in response to the emerging resolution, that he and other elected Puerto Rican leaders are concerned that any Congressional action not create a federal oversight authority that would impose too much control over the island’s municipalities: he said he would support an oversight authority as long as it respected Puerto Rico’s local governance, something both Republicans and Democrats have agreed is important to a final bill.

Balancing Power & Authority in Municipal Debt Restructuring

February 9, 2016. Share on Twitter

Spinning the Wheel in Atlantic City. In what Atlantic City Mayor Don Guardian warned could be a “devastating” fiscal blow to the city—already nearing running out of cash, the Borgata casino has notified the city it will stop making tax payments until the city turns over $62.5 million in court-ordered tax refunds. The tax payment is due next week, but is less than a third of what the city owes to the Borgata on tax appeals–appeals that the casino won by challenging the city’s property tax assessment—assessments that have diverged from actual values as the famed city’s gaming resorts have been challenged by increasing competition in the Northeast. The casino’s warning to the city came shortly after Superior Court Judge Julio Mendez granted a motion last Friday declaring that Atlantic City must pay the casino $62.5 million for tax years 2009-10 — payments that have already been ordered and upheld by previous court rulings, but not yet made. Judge Mendez provided a little leeway: in his ruling, he barred the casino from moving to seize any of Atlantic City’s assets to collect the judgment for at least 45 days in order to allow settlement talks; however, he permitted Borgata to stop making its current tax payments while the case remains unresolved.

The non-payment, according to Mayor Guardian, could force Atlantic City into municipal bankruptcy: he said he would try to enter into mediation with the casino’s owners and the state with regard to the unpaid debt, and expressed appreciation that Judge Mendez had temporarily barred the casino from going after the city’s assets: “Although there is no doubt that we owe Borgata money back from prior rulings, the question has always been how do we pay them back fair and reasonably given our current fiscal constraints?…Having Borgata exercise the option not to pay their first quarter taxes would be devastating to Atlantic City.” For its part, the casino’s owner noted the casino remains willing to negotiate with Atlantic City and the State of New Jersey in its oversight role of Atlantic City; however, he noted Atlantic City has yet to make a serious offer. In addition to the $62.5 million it is owed for tax years 2009-10, the Borgata reached a settlement with the city for tax years 2011-14 of $88.25 million, which was supposed to be paid by Dec. 31st of 2014. It was not. Both sides have continued to talk, but no agreement has been reached. Borgata’s general counsel, Joe Corbo, noted: “We did not come to this decision lightly…We have been tremendously patient, giving city officials every opportunity to pay the amounts we are owed, or to engage us in good-faith negotiations. But after years of delays and unsuccessful appeals by the city, we can wait no longer. We have a fiduciary duty to the shareholders of our parent companies to pursue collection of the amount we are owed, which currently stands at over $170 million with interest.”

Puerto Rico in the Twilight Zone. The U.S. House Natural Resources Committee House committee has scheduled a February 25th hearing at which Treasury Counselor Antonio Weiss has been asked to discuss an analysis of Puerto Rico, as the House presses to meet House Speaker Paul Ryan’s deadline of April 1st for the House to complete and send legislation to the Senate, with a focus on legislation authored by Rep. Sean Duffy (R-Wisc.) which would give the U.S. territory some sort of access to bankruptcy—as well as impose a financial stability council. Treasury Counselor Weiss last Friday, at a panel sponsored by the Bipartisan Policy Center, reported there have been “very positive discussions taking place on both sides of the aisle” in Congress, adding that there now seems to be greater agreement that any Congressional plan to help Puerto Rico avoid default and insolvency should include both restructuring and oversight. In his presentation last week, Mr. Weiss said the administration believes that restructuring of Puerto Rico’s debt could come through the Constitution’s Territorial Clause instead of through an addition to the U.S. bankruptcy code. The clause in question reads: “Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.”) Mr. Weiss added that not all the territory’s debt would have to “be treated with a broad brush equally,” and that restructuring could take into account the many differences between Puerto Rico’s various debts, noting: “A special legislative act is required, tailored to the territories, consistent with Article 4 of the Constitution and that is neither for cities nor for states…It is on Congress recognizing the severity of this problem to agree in a bipartisan fashion on what those tools should be. It’s emergency legislation to deal with an emergency situation.”

Resident Commissioner Pedro Pierluisi, Puerto Rico’s sole representative in Congress, noted, in response to the emerging resolution, that he and other elected Puerto Rican leaders are concerned that any Congressional action not create a federal oversight authority that would impose too much control over the island’s municipalities: he said he would support an oversight authority as long as it respected Puerto Rico’s local governance, something both Republicans and Democrats have agreed is important to a final bill.

Municipal Bankruptcy–Constitutional Challenges

February 8, 2016. Share on Twitter

“Progress is our most important product.” As former California Governor and President Ronald Reagan used to say in ads he did for General Electric, progress matters—especially for San Bernardino, the city in municipal bankruptcy longer than any other in U.S. history. San Bernardino, in its latest filing in U.S. Bankruptcy Court for the Central District of California, has reported progress: the bankrupt city has reached a tentative settlement agreement with pension bondholders in its Chapter 9 municipal bankruptcy, having reached a tentative agreement with the creditor holding its pension obligation bonds with regard to how the debt would be treated in the city’s plan of debt adjustment, reporting the agreement was reached last month and that it was working on document terms, which remain confidential for now. As in the Detroit bankruptcy, the role of a judicial mediator is proving invaluable. In this instance, Nevada Bankruptcy Judge Gregg W. Zive, appears to be playing a critical role in confidential mediation with the city, bond insurer, and bondholder—mediation which has been ongoing for nearly a year, according to the filing. San Bernardino had been planning to pay $655,000 plus interest on nearly $50 million in pension obligation bonds held by a Luxembourg-based bank (Erste Europaische Pfandbrief-und Kommunalkreditbank AG—EEPK), which had been at the forefront of opposing the city’s proposal to adjust more than $150 million in claims.

When San Bernardino first filed its plan of debt adjustment and its disclosure statement last May 29th, after nearly three years in bankruptcy, the plan had drawn objections from both Ambac Assurance Corp. and EEPK—with Ambac the bond insurer on the pension obligation bonds held by EEPK. Under the previous terms of San Bernardino’s plan of debt adjustment, holders of the $50 million of unsecured pension obligation bonds (POB) claims would have received payments of $655,000 plus interest over time, and holders of general unsecured claims between $130 million and $150 million would have received a pro rata share of $1.3 million after the plan became effective. But last December, in a filing with the U.S. bankruptcy court, Ambac Attorney Paul Kreller had questioned how the city was able to decide on what he termed its “draconian” plan of only paying 1 percent owed on the pension obligation bonds and general unsecured claims when its financial disclosures were what he termed so “murky.”

The disclosure of the agreement followed a unanimous vote by the new City Council to approve a settlement ending disputes involving more than $40 million in claims with the city’s firefighters, a move the city said it expected would advance its proposed plan of debt adjustment to exit municipal bankruptcy. As adopted, the settlement resolves nine years’ of claims against San Bernardino. It includes paying the firefighters $2.7 million to resolve claims over changes to the city’s pension policy and to settle lawsuits the firefighters pressed against the city after it filed for Chapter 9 bankruptcy protection. The agreement also provides for the firefighters’ union to be treated as an unsecured creditor which would receive $140,000, or 1 percent, on a $14 million claim in the city’s plan of debt adjustment. Amended disclosures documents are now due March 30, rather than Feb. 10, with opposition filings due April 13. The status hearing was postponed from Feb. 10 to April 27 at 1:30 p.m.

Puerto Rico in the Twilight Zone. While Puerto’s Rico’s Governor and other state and local elected leaders await U.S. House Speaker Paul Ryan’s (R-Wisc.) anticipated deadline of April 1st with regard to what authority or plan the House will settle upon with regard to the U.S. Territory, Representatives for Puerto Rico report the Territory intends to pursue its recently proposed debt exchange with holders of tax-supported debt. In the category of, when it rains it pours, moreover, Puerto Rico Gov. Alejandro García Padilla last Friday announced the declaration of a public health emergency over the mosquito-borne Zika virus, with 22 confirmed cases to date, including a pregnant woman. The virus, which has been particularly linked to microcephaly on newborns, or abnormal brain development, poses a threat not just for Puerto Rico residents, but also on its operating budget. In issuing his executive order, Gav. Padilla noted: “Our main objective is to ensure the security of Puerto Ricans, inform about the necessary prevention measures, following the recommendations of health experts.” The Health Department will hold an event today at the Puerto Rico Convention Center to provide local health professionals with more information not only on Zika, but also dengue and chikungunya, which are also carried by the same mosquito linked to Zika — the aedes aegypti. The Consumers Affairs Department has also ordered a temporary price freeze on products that help in preventing and fighting the disease. From the territory’s fiscal perspective, the public emergency constitutes a double fiscal whammy: it will impose significant, unbudgeted costs—even as it risks discouraging tourists from visiting the islands. The Centers for Disease Control & Prevention (CDC) recently issued a Zika-related travel alert on the Caribbean region, warning pregnant women and those planning to become pregnant against travel to the affected areas, including Puerto Rico. The government’s service line, 3-1-1, will be taking calls to provide information about the virus and log complaints about mosquito breeding sites.

The Commonwealth has repeatedly asked Congress to provide it or its authorities with restructuring capabilities, such as Detroit, Jefferson County, and San Bernardino have under Chapter 9 municipal bankruptcy; however, there has been little progress to date. Under the restructuring plan Puerto Rico announced last week, creditors holding $49.2 billion of tax-supported debt would be asked to exchange it for $26.5 billion of new, mandatorily payable so-called “Base Bonds” and $22.7 billion of Growth Bonds. There would be no interest payments on the Base Bonds until fiscal year 2018 and no principal payments until fiscal year 2021. In addition, the so-called Growth Bonds would only be payable if Puerto Rico were to surpass conservative revenue growth projections through real economic growth: the first payments on the Growth Bonds, if possible, would commence a decade after the close of the exchange offer. If Puerto Rico were to experience growth consistent with the U.S.’s projected growth over the next three decades, the creditors would be able to recover the full amount of their principal investments. Annual payments on the Growth Bonds would be capped at 15% of the commonwealth’s revenue. If it all worked, Puerto Rico’s debt service-to-revenue ratio on tax-supported debt would fall by more than 50 percent from its current 36% level.

Ms. Acosta Febo, President of the Puerto Rico Government Development Bank, said she and other commonwealth officials have had more conversations with creditors in the wake of last week’s meeting when the idea, which lays out a broad allocation of how much each class of creditor would receive, was proposed. At the same time, Puerto Rican leaders have also been trying to finalize a separate agreement with creditors for about $9 billion of Puerto Rico Electric Power Authority debt: a previously missed deadline for Puerto Rico’s lawmakers to pass legislation required under the potential agreement has been extended to next Tuesday. The negotiations have led Moody’s to be unmoody in noting that the extension of negotiations “suggest a consensual debt restructuring is still possible.” ‘Possible’ is increasingly the key term, as Puerto Rico officials have said that without solutions from those negotiations or Congressional action, the territory will default on its next major round of municipal bond payments due July 1st.

It Ain’t Over Until It’s Over. Jefferson County, prior to Detroit, the largest municipal bankruptcy in U.S. history, is finding that exiting municipal bankruptcy can take longer and be more trying (a pun) than getting into bankruptcy. Now the county will have to, some more than two years after its exit from municipal bankruptcy, appear before the 11th U.S. Circuit Court of Appeals to argue, once again, the soundness of its plan of debt adjustment – and why that plan should remain in force to protect bondholders. Jefferson County had asked to appear before the panel to appeal U.S. District Judge Sharon Blackburn’s ruling in September 2014, a ruling in which Judge Blackburn denied the county’s motion to strike down an appeal by a group of local ratepayers of the Jefferson County’s sewer system—ratepayers who have challenged Jefferson County’s plan of debt adjustment. The county had argued unsuccessfully that the ratepayers’ appeal was moot, because the bankruptcy plan was largely consummated in December 2013, when $1.8 billion of sewer system refunding warrants were sold to write down $3.2 billion of outstanding debt. Jefferson County’s attorneys believe an oral argument could be of assistance for the federal appellate judges, noting: “The constitutional, statutory, and equitable principles involved in this appeal are particularly important to governmental entities that may consider Chapter 9 relief now or in the future, as well as to the municipal debt market.” The 11th Circuit Court of Appeals has accepted numerous documents and court cases, including friend of the court briefs from municipal market organizations and Chapter 9 bankruptcy appeal rulings in Detroit and Stockton, California.

The challenge here is constitutional—and goes to the core of federalism. The Jeffco ratepayers are alleging the Jefferson County’s plan of debt adjustment violates the Tenth Amendment to the U.S. Constitution, under which powers not delegated to the United States by the Constitution are reserved to the States, respectively, or to the people. Thus, they contend, a provision in Jefferson County’s court-approved plan of debt adjustment could allow the federal bankruptcy court to set sewer system rates to service Jefferson County’s debt—a key provision in the city’s approved plan of debt adjustment because it guaranteed protection for the county’s municipal bondholders who participated in the 2013 refunding agreement—and allows the federal bankruptcy court in Alabama to maintain jurisdiction over Jefferson County’s plan of debt adjustment as long as the debt remains outstanding. Judge Blackburn, however, was troubled by the provision when she denied Jefferson County’s motion to dismiss the ratepayers’ appeal. Although Judge Blackburn said some parts of the county’s bankruptcy confirmation order “may be impossible to reverse,” she said the portion which cedes the county’s future authority to set sewer rates to the bankruptcy court is not one of those. Jefferson County has argued that the bankruptcy court is only a forum for bondholders to enforce the plan and related contracts, and not to set sewer rates.

Getting Schooled on Municipal Debt & Municipal Bankruptcy

February 5, 2016. Share on Twitter

Detroit’s Future. Detroit Mayor Mike Duggan yesterday laid down a gauntlet: Detroiters need to control the city’s schools if the state is really serious about wanting to see them turn around, he testified before the Senate Government Operations committee, as the legislature began debate over Gov. Rick Snyder’s $715 million debt relief plan for the nearly insolvent Detroit Public School (DPS) district—from which the Governor’s appointed state emergency manager, Darnell Earley, has just resigned. Gov. Rick Snyder’s plan relies on $715 million of state help: $515 million to eliminate DPS’ structural operating deficit, and help with overdue pension payments and unpaid bills, and another $200 million of start-up funding for the new operating entity—without which, the Governor’s office warns, DPS could be “virtually insolvent” by April. Sen. Geoff Hansen’s legislation would appropriate $250 million from Michigan’s general fund for the start-up costs; it would not, however, address the operating deficits.

The hearings mark the first steps toward advancing a plan that has failed to gain much traction since Gov. Snyder first unveiled a general outline last spring; the Governor is expected to add additional details on the funding scheme when he unveils his FY2017 budget recommendations next Wednesday—where the city’s schools will be fiscally pitted against the water contamination crisis in Flint, not to mention efforts to improve state pension funding. Gov. Rick Snyder’s plan relies on $715 million of state help: $515 million to eliminate DPS’ structural operating deficit, and help with overdue pension payments and unpaid bills, and another $200 million of start-up funding for a new operating entity—without which, the Governor’s office warns, DPS could be “virtually insolvent” by April. Sen. Committee Chair Hansen’s legislation would appropriate $250 million from Michigan’s general fund for the start-up costs; it would not, however, address the operating deficits.

The pending legislation would allow a new Detroit entity to be in charge of educating students and to continue to borrow and issue bonds for operating purposes on a longer-term basis. Instead of the typical ten-year term, borrowing terms would be stretched out to 25 years: DPS’ operating deficits have ballooned over the last four years to an expected $335 million at the end of this fiscal year from $83 million in 2012 as enrollment plummeted, according to the Citizens Research Council of Michigan, a superb, nonpartisan public affairs research organization. DPS began the current school year with legacy debts totaling almost $440 million. Moreover, in arithmetic terms, adding to DPS’s more recent fiscal deficit challenges is its heavy reliance on short-term notes to help with cash flow throughout the fiscal year. In FY2016, debt service payment obligations are projected to nearly triple to $2,982 per student from $1,105 last year, mainly because DPS pushed its 2015, $83 million cash-flow note repayment onto the current school year’s budget: the way DPS is set up today, debt service obligations compete directly with the critical resources that would otherwise go to classrooms to fund educational services—the services vital to beckoning young families with children to move into Detroit. That is, the City of Detroit’s continuing recovery is very much dependent on the kinds of rising property tax assessments that are very much at risk if families with school age children are discouraged.

Declining enrollment has been a key factor in slamming DPS’ balance sheet: a decade ago there were more than 127,000 students; this year, enrollment is 46,306. That combination has driven its general fund revenues down to $667 million this year from $1.13 billion in fiscal 2011. The payment mechanism under the restructuring proposal supported by Gov. Snyder is basically the same mechanism used in other debt-laden districts of the state, including nearby Highland Park, Inkster, and Buena Vista—where the state has permitted the local 18-mill school operating tax to be repurposed: instead of using it to fund the per pupil allowance, the funds were diverted to debt repayment. Currently the tax generates around $71 million per year.

In his testimony yesterday, Mayor Duggan noted that DPS is facing an historic crisis: The district is on track to run out of the fiscal resources it needs to operate by April—an insolvency which would force the system into chapter 9 municipal bankruptcy—a bankruptcy which would leave the state on the hook for billions of dollars in municipal debt backed by the state. The district has been under state oversight for the last seven years. The district’s debts include $1.5 billion of unlimited-tax general obligation bonds, $199 million in borrowing from the state’s School Loan Revolving Fund, and $259 million in limited-tax GO debt paid by district operating revenues, rather than a dedicated debt service levy. But the State—and Michigan municipal bondholders—have much at stake too: Unlike the city of Detroit, which emerged from Chapter 9 in 2014, nearly all of DPS’s debt is backed by the state under Michigan’s Qualified School Bond and Loan Program: That means that the state and its taxpayers could ultimately be on the hook for a good portion of DPS’s operating debt in a municipal bankruptcy.

Mayor Duggan asked senators to consider putting an elected school board in place right away with financial oversight, pointedly noting that after years under state-appointed emergency management, the district has seen debt increase and unimpressive academic results. Some state lawmakers have said that proposed Senate Bills 710 and 711 would help reduce the state’s losses and help the district get on track by means of state oversight to the district, and a state appropriation of more than $700 million to pay down debt and restructure. But Mayor Duggan responded: “The people of Detroit aren’t willing to accept the state’s standard. This isn’t right!”

Mayor Duggan warned that the legislation, at least from his vantage point, was insufficient to create an environment for long-term success; instead, he urged the creation of a Detroit Education Commission, which, he testified, would be made up of people the Mayor would appoint: the commission’s responsibility would be to analyze both public and charter schools based on academics and demand, noting that while many charter schools are succeeding, many are also failing; he added: “We have the lowest performing school district, and yet DPS is outperforming 24 charter schools.” He testified there are some neighborhoods in Detroit with far too many schools, and other neighborhoods with no schools, suggesting that a commission be given the authority to close schools and incentivize the opening of schools where they are needed to address these issues, adding that DPS cannot compete with the sporadic opening and closing of charter schools in neighborhoods where sometimes there is not even a need for another school.

During his testimony, Mayor Duggan further expressed apprehension about state control of local schools; he sharply questioned the performance of state-appointed emergency managers who have run the Detroit Public Schools and the Education Achievement Authority, which took over 15 of the district’s worst-performing schools in 2011: “The problem is that state control of local schools doesn’t work.” He asked legislators to restore authority to an elected school board, calling for an August election, and urged them to reconsider Gov. Rick Snyder’s call for a Detroit Education Commission that could open or close traditional or charter schools in the city, noting in comments after the hearing: “We’ve seen how the state has done in taking control of the schools in the city of Detroit…It’s been seven straight years of enrollment decline, deficits, and school closings. It’s time that Detroiters retake responsibility for the schools in our community.” He added that the lack of standardized oversight has led to haphazard decisions and inconsistent academics in Detroit, noting that more than 160 schools have opened or closed in Detroit in the past seven years, while district academics are the worst in the state, and that the city’s 24 charters schools have performed even worse.

Committee Chair Sen. Geoff Hansen’s bills would split Detroit Public Schools into two entities to help it avoid the system’s looming insolvency: One district would pay off existing debt, while a new Detroit Community Schools would be free to focus on operations and academics—a plan which would cost the State of Michigan about $715 million over the next decade—or, as Chairman Hansen put it yesterday: “The gravity of this situation is dire, and the consequences of inaction are very real: The sheer size of this debt far exceeds any other financially struggling district across the state.”

Under the proposed bills, Detroit voters would elect a new school board in November, but initial control would rest with an interim board appointed by the Governor and Mayor, which would select a superintendent. A financial review commission would have final say on most district decisions, including new contracts and collective bargaining agreements approved by the school board. The district would be mandated to meet several requirements to gain full autonomy, including deficit-free budgets for three consecutive years and ability to borrow in the municipal securities market. The proposed Michigan School Reform Office would also play a large role in determining whether there even ought to be a replacement of resigned, but unmissed Emergency Manager Darnell Early, as well as whether the current Education Achievement Authority should be disbanded. An intriguing statement from Mayor Duggan yesterday is that he said he would support an expanded role for the existing Detroit Financial Review Commission—created as part of the Grand Bargain which enabled Detroit to exit from the nation’s largest municipal bankruptcy, which was initially established to oversee city finances, noting: “If we could do this, give parents choice, give locals control of the public schools with the state making sure the budgets are balanced, I think we could have a quality system.”

Whatever final decisions emerge from the Gov. and Michigan legislature are certain to lead to a fiscal restructuring plan for the nearly insolvent Detroit Public Schools (DPS)—legislation vital not just to Detroit’s long-term fiscal recovery from the nation’s largest municipal bankruptcy, but also to the city’s sustainable future.

Defining the Fiscal Future of Schools, Cities, and U.S. Territories

February 3, 2016. Share on Twitter

Democracy. Elections, & Municipal Bankruptcy. In yesterday’s runoff elections in bankrupt San Bernardino, Bessine Littlefield Richard was easily elected to represent the 6th Ward on the City Council over Roxanne Williams, by an almost 2-to-1 margin, while incumbent Councilman Jim Mulvihill was re-elected over challenger Scott Beard in the 7th Ward based on final, unofficial results—albeit Mr. Beard has not yet conceded. Before the election, Ms. Littlefield Richard had garnered endorsements and financial support from a broad range of groups — from the police and fire unions to many of the city’s political heavyweights, including some who’ve sharply differed with each other on policy questions — but she said she would not be beholden to any of them. In the wake of the election, Councilmember Mulvihill, a certified city planner and urban planning professor at Cal State San Bernardino, said it was important to keep him on the council to stick to the plan of implementing a precarious bankruptcy exit plan. Last November in a then five-candidate race, Councilmember Mulvihill had finished first, while Mr. Beard edged third-place finisher Kim Robel, sending the two to yesterday’s runoff. The election results are not expected to become official until Lincoln’s birthday, a week from Friday, according to the Registrar of Voters. The newly elected council member is scheduled to be seated March 7. Ms. Littlefield Richard supervises a staff of 20 employees with San Bernardino County’s Workforce Development Department in Victorville.

Detroit’s Future. Even as hearings in the Michigan legislature to restructure Detroit’s schools (DPS) are poised to begin Thursday, Gov. Rick Snyder’s designated DPS Emergency Manager—the former Emergency Manager for Flint, Darnell Earley, has announced he will resign effective at the end of this month. This marks the second early departure for Mr. Earley: he was previously the state-appointed emergency manager of Flint during its controversial shift from Detroit’s regional water system to the Flint River—a switch with fatal human and fiscal consequences which will linger in some of Flint’s children for decades. The abrupt announcements came just before tomorrow’s scheduled hearings by the Michigan legislature on Gov. Rick Snyder’s proposed plans to restructure the nearly bankrupt Detroit Public School system. Senate Bills 710 and 711, sponsored by state Sen. Goeff Hansen (R-Hart), would split Detroit Public Schools into two entities, and would also change the legal structure of the school district’s outstanding debt, creating a lockbox to ensure that investors would be paid in full, and on time: under the proposed bill, the existing Detroit Public Schools entity would remain intact only for the purpose of collecting tax revenue until its outstanding debt is retired, while a new entity, the Detroit Community District, would operate the schools—all part of an effort by the state to convey to both Detroit and Michigan municipal bondholders that the state will make an extraordinary effort to avert any municipal bankruptcy by the Detroit Public School system—a system which has been under state oversight for the last seven years—and which has accumulated massive debts, including some $1.5 billion of unlimited-tax general obligation bonds, $199 million in borrowing from Michigan’s School Loan Revolving Fund, and $259 million in limited-tax GO debt paid by district operating revenues, rather than a dedicated debt service levy. The proposal by Gov. Snyder would include an appropriation of $715 million, with $515 million to eliminate the school system’s accumulated structural operating deficit and help with overdue pension payments and unpaid bills, and the remainder as start-up funding for the new operating entity—with the Gov.’s office warning that without action, DPS will be “virtually insolvent” by April.

It is uncertain either how quickly the legislature will act—or whether there will be consensus: Sen. Goeff Hansen, a veteran of four years’ service as a Hart Township supervisor, and the current Chair of the Senate Appropriations Subcommittee on K-12, School Aid, Education—as well as Assistant Senate Majority Leader, has proposed bills to appropriate $250 million from the state’s general fund for the start-up costs, but there appear to be no bills yet to address DPS’s operating deficits. Under Sen. Hansen’s proposed legislation, the new Detroit Community District would shift in 2017 to an elected board. Responsibility for the district’s $1.5 billion of unfunded pension liabilities would lie with the new district. The City of Detroit’s Financial Review Commission would have responsibility for overseeing the new school district’s finances.

Hearings before the state Senate’s Government Operations Committee are expected to continue for two weeks, with the Senator hoping his bill might mark a first step toward a long-term solution, noting: “Detroit is on the rebound, with a sound financial footing, improving economy and a rising population, but numerous efforts to improve K-12 education there have not worked.” Arithmetic will matter: DPS’ monthly expenses are projected, this month, to rise by $26 million to begin repaying cash flow notes issued to paper over operations—a level which is equal to about one-third of DPS’ monthly expenses, according to the mathematicians at Moody’s. Outgoing Emergency Manager Earley has warned that DPS will exhaust cash to maintain operations by April due to its debt overload.

So in Latin class, the words would be tempus fugit: time is flying, even as the proposed hearings will mark the first steps toward legislation and state appropriations since Gov. Snyder first unveiled a general outline nearly a year ago—a plan—with a budget match expected to be attached when the Governor proposes his FY2017 budget recommendations a week from today—budget recommendations which could pit Detroit’s school children versus Flint’s lead-threatened children. The state plan is expected to provide for a new Detroit public school system entity which would be in charge of educating students, and to continue to borrow and issue bonds for operating purposes on a longer-term basis. That will matter: this year, debt service payment obligations are projected to nearly triple to $2,982 per student from $1,105 last year in 2015, mainly because the district pushed its 2015, $83 million cash-flow note repayment onto the current school year’s budget. Just as negligence has put the children of Flint at risk, so too fiscal negligence has put Detroit’s children at risk—as increased debt service obligations compete directly with the fiscal resources critical to financing the education of the children who will define Detroit’s future—and drive families to either contemplate moving into—or out of—the city, where, as Moody’s has moodily noted, declining enrollment has already hurt DPS’s balance sheet and attendance—attendance which has declined more than one third in just the last five years.

There are risks and balances, because Detroit’s schools’ debt is backed by the state via Michigan’s Qualified School Bond and Loan Program—meaning, as the ever prescient Yvette Shields of the Bond Buyer writes: “That means that the state could ultimately be on the hook for a good portion of DPS’s operating debt in a municipal bankruptcy [Chapter 9], although the bankruptcy court would have the final word.”

Out Like Flint. Gov. Snyder is expected to propose $30 million in Michigan state funding to help pay the water bills of Flint’s residents confronted by the emergency over the city’s lead-contaminated water supply, with the Governor expected to brief Flint officials and pastors about the plan today–and outline it to the legislature next week as part of his FY’2017 budget proposal.

In Like Puerto Rico? House Natural Resources Committee Chair Rob Bishop (R-Utah) has announced he intends to begin drafting legislation intended to aid Puerto Rico in the near future in the wake of a hearing yesterday, which included testimony from several witnesses with histories of working with control boards. The goal is to meet House Speaker Paul Ryan’s (R-Oh.) March 31 deadline for House committees with jurisdiction over Puerto Rico to cobble together a legislative proposal—one which Chair Bishop yesterday said would involve Delegate Pedro Pierluisi (Puerto Rico), the U.S. territory’s sole representative in Congress—and a member of the Committee. Del. Pierluisi said he supports creating an independent financial control board to oversee Puerto Rico’s long-term financial plan, annual budgets, and efforts to complete accurate and timely financial information—adding, however, that if the Committee’s bill were to propose “to extinguish rather than enhance” Puerto Rico’s democracy at the local level, he would “do everything in [his] power to defeat it.” The sole pending legislation that appears to have any likelihood of garnering bipartisan support in the House is authored by Rep. Sean Duffy (R-Wis.), the Puerto Rico Financial Stability and Debt Restructuring Choice Act, which would provide public authorities in Puerto Rico with Chapter 9 municipal bankruptcy protection in exchange for Puerto Rico’s acceptance of oversight from a Presidentially-appointed five-member Financial Stability Council. Indeed, there appears to be consensus at the committee level that there should be—as there has been previously for New York City and Washington, D.C., some type of oversight authority; there has yet, however, been no consensus on just what specific powers such an authority should have. Former Washington, D.C. Mayor Anthony Williams, who had experience working with D.C.’s financial control board, yesterday stated that any discussions of restructuring the territory’s debt should follow a joint effort by Puerto Rico’s government and an appointed authority to put the commonwealth’s “basic housekeeping in order” by reforming key fiscal basics, such as Puerto Rico’s revenue collecting capabilities, adding that any federally-imposed authority should have to approve the Commonwealth’s financial plans and have goals of both achieving financial stability and a balanced budget for the Territory, adding that such an authority ought to be composed of no more than five to seven members who have the necessary experience to address Puerto Rico’s crisis—and that there would have to be some representatives on the panel who are Puerto Rican residents or of Puerto Rican ancestry.

Threats to San Bernardino’s Future. Francis Wilkerson, writing this week in Bloomberg [“The War in San Bernardino”] about the terrorist attack in San Bernardino last December—an attack which led GOP Presidential candidate Sen. Ted Cruz (R-Tx.) to claim: “This horrific murder underscores that we are in a time of war—” provoked Mr. Wilkerson to write that Sen. Cruz’s comments appear to find no such reflection in the bankrupt city. He wrote: “In long interviews with city leaders or short conversations with residents, none felt compelled to mention where he or she had been at the fateful hour. Some presidential candidates seem to view the attack in San Bernardino as evidence of an existential threat to the nation, and invoke it every chance they get. In San Bernardino, it hasn’t registered as an existential danger even to San Bernardino. It’s rarely mentioned.” Rather, as he recognizes, there are very real threats to the city’s future: “San Bernardino has long been at war, and losing. The steady erosion of the American working class, with a commensurate rise in local poverty, has been killing the city for decades. It is now emblematic of some of the nation’s most intractable problems – violent crime, drug addiction, joblessness, urban blight, political dysfunction, low-skill immigration, white flight, and widespread civic apathy. Like Detroit, the heaping culmination of those troubles ended in a municipal bankruptcy.” In his tour of the city with San Bernardino Police Department Lt. Richard Lawhead, he noted “a dozen prostitutes plied the streets 100 yards from a downtown school, walking, talking on phones, watching for signals from a man near the corner, assiduously avoiding eye contact with the occupants of the police car…working-class neighborhoods that had been commandeered by gangs and never relinquished.” Then he made a fascinating contrast:

The attack cast the city in a weirdly positive light. Famous for failure, San Bernardino unexpectedly basked in a glow of competence. The police rapidly tracked down the killers, cornered them and killed them, preventing a likely second round of mayhem.

He wrote that Lt. Lawhead was optimistic about the city’s future: “even a little infectious,” but then wrote that MIT economist David Autor had written him, via e-mail, “We have almost no firm knowledge of how to ‘turn around’ places in deep decline,” adding, “San Bernardino’s own efforts over the years have been flamboyantly luckless. Cited as an ‘All-American’ city in 1977, its long, ignominious skid reached a grim destination on Aug. 1, 2012, with Chapter 9 bankruptcy. Other battered cities have traveled a similar route. No one can be certain it’s the last stop.”

“If you were going to put something in a population to keep them down for generations to come, it would be lead.”

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February 1, 2016. Share on Twitter

Flint’s Future. “If you were going to put something in a population to keep them down for generations to come, it would be lead,” Dr. Mona Hanna-Attisha, MD, MPH program director for the pediatric residency at the Hurley Children’s Hospital at the Hurley Medical Center in Flint, Michigan warned, as the complex fiscal and human challenge confronting the city’s future—and the relative responsibilities of the federal and state governments are being debated. Dr. Hanna-Attisha is developing a new database of children under 6 who may have been exposed to lead in Flint’s water, a group she said she believed could number 8,000—in effect the guts of a tale about the failure of Michigan and the federal government to promptly address the crisis after it began nearly two years ago—a fateful delay, because of the threat that the youngest children in this city may have suffered irreversible damage to their developing brains and nervous systems from exposure to lead in their drinking water. According to the U.S. Public Health Service, 26 water samples, out of nearly 4,000 collected, contained lead at levels higher than 150 parts per billion—ten times higher than federally recommended limits.

A report four years ago by the Centers for Disease Control (“Low Level Lead Exposure Harms Children: A Renewed Call for Primary Prevention Report of the Advisory Committee on Childhood Lead Poisoning Prevention”) found that exposure to even low levels of lead can profoundly affect children’s growth, behavior, and intelligence over time: combined state, local, and federal failures might well now have so tainted and imperiled the city’s fiscal and human future, because studies have linked elevated lead levels in blood to learning disabilities, problems with attention and fine motor coordination, and even violent behavior—with younger children and fetuses the most vulnerable. To date, Gov. Rick Snyder and the Michigan legislature have appropriated $28 million in emergency appropriations for the city—funds to provide initial services, such as health assessments and home visits from nurses.

State testing of four water samples from three Flint schools last year found lead levels significantly exceeding federal drinking water safety standards in what should have been a federal-state wake-up call: Flint Community Schools Superintendent Bilal Tawwab notes that no one can accurately report how many of the city’s children have been affected at this point, but he notes: “we can’t write off a generation of kids.” If anything, children in Flint are likely more dependent on the city’s schools for water and public health than most cities: more than 80 percent of Flint’s school children qualify for free or reduced meals.

Re-Balancing Motor City Taxes. Detroit Mayor Mike Duggan is set this afternoon to announce details of the city’s annual proposed property assessment changes: the good news for most owners is that most can anticipate a reduction in assessments for nearly all city residential property owners. In addition, joined by Detroit’s CFO John Hill, chief assessor Gary Evanko and a Detroit City Council representative, Mayor Duggan will also discuss how property owners can challenge her or his proposed assessments. Today’s announcement will mark the second consecutive year Mayor Duggan has proposed reducing property assessments—reductions which, in total, are projected to save Detroit’s property owners some $10-$15 million—and begin to address a gap we had noted in our MacArthur report with regard to the significant discrepancies between assessments and actual property values—over assessments by an average of 65 percent, according to a review of state tax appeals—so high that the administrative court reduced Detroit property values at a far higher rate than neighboring communities and nearly 50 percent more than the surrounding Wayne County average. The Mayor’s proposal is consistent with recommendations from a report last year by the Lincoln Institute of Land Policy which had recommended reductions in the city’s property tax rates–the highest of any major U.S. city and more than double the average rate for neighboring cities (the home-owners rate is 69 mills, or $69 for every $1,000 of assessed value).

San Bernardino Election Day. You might be glued on elections tonight in Iowa, but there is an important election tomorrow in the bankrupt city of San Bernardino, where two seats on the City Council—that is enough seats to change the balance of political power in a municipal government in bankruptcy—at a time when critical political decisions will have to be made if the city is to finalize its plan of debt adjustment and obtain U.S. Bankruptcy Judge Meredith Jury’s green light to exit bankruptcy. The election comes because no candidate received more than the requisite 50 percent threshold in the race for the 6th Ward or 7th Wards last November—effectively leading to tomorrow’s Ground Hog Day runoff, where, to fill a vacancy in the 6th Ward, Bessine Littlefield Richard is running against Roxanne Williams. Ms. Littlefield Richard is a supervisor at San Bernardino County’s Workforce Development Department at the America’s Job Center training facility; Ms. Williams works in the central office of the San Bernardino Unified School District. In the 7th Ward, representing parts of the northern and central portions of the city, incumbent Councilman Jim Mulvihill will be challenged by businessman Scott Beard. Councilman Mulvihill is an urban planning professor at Cal State San Bernardino who was first elected in the 2013 recall election—a recall largely financed by Mr. Beard, the president of Rialto-based Gerald W. Beard Realty Inc.

Ms. Williams, who would be a newcomer to elected office, frames the race as her experience and specificity against what she has described as Ms. Littlefield Richard’s less-formed plans, noting that she has—on her website—a plan for the first 100 days and beyond, a plan which she unsurprisingly notes begins with public safety—especially in the wake of the events last December: she is proposing an increase in police and police patrols—and body cameras. For her part, challenger Littlefield Richard has also stressed public safety in her campaign—a campaign in which she has been endorsed by the unions representing police and firefighters, as well as by her predecessor and the two candidates she and Ms. Williams trounced in the November primary. Ms. Littlefield Richard has repeatedly emphasized her lifelong residence on the Westside and contrasted that with Ms. Williams, who moved to the 6th Ward shortly before the election—after running for the 3rd Ward City Council seat in 2013. Despite running to serve in the city now in municipal bankruptcy longer than any other city, neither runoff candidate appears to have devoted much time or focus on the city’s fiscal future.

Restructuring Puerto Rico’s Debts. The Puerto Rico government moved at the end of last week to try to restructure some $70 billion of public bonds: the U.S. territory offered a voluntary debt exchange to bondholders last Friday in a meeting in New York City, following up on what Government Development Bank President Melba Acosta Febo had said in December when he committed that Puerto Rico would propose a restructuring of its debt to its creditors before the end of January—leading to Puerto Rico Gov. Alejandro García Padilla’s confirmation last Thursday night that his government would propose a debt exchange on Friday to its creditors in a closed door meeting. The Wall Street Journal reported that Puerto Rico was seeking to exchange its debt for two new types of securities: one in which all interest and principal payments would be suspended for five years, at the end of which interest would rev up to 5% in 2021; in the other, payments would commence in 2021, but would be dependent on government revenues doing better than current projections. In the second security type, the island’s bondholders would receive up to 25% annually of revenues that exceed current projections. All municipal bondholders would receive both forms of bonds, with the value of the second type equal to the amount of impairment on the first type, and, according to local press reports, haircuts for Puerto Rico’s municipal bondholders would depend on what type of bond they held: those with general obligation bonds would experience smaller haircuts than those holding other sorts of municipal bonds: their bonds would be less impaired. The payments would come from a wide variety of revenue sources pooled together to enable payments of about $3 billion a year in interest and principal starting in 2018, according to El Vocero. The proposal, however, has yet to weather Puerto Rico’s legislature, according to the island’s House of Representatives President or the Chair of the Treasury and Finance Committee Rafael “Tatito” Hernández Montañez: Chair Montañez wryly noted: “The devil is in the details,” adding he was unfamiliar with the proposal Puerto Rico made to creditors in New York City.

Options for Averting Municipal Bankruptcy

January 28, 2016. Share on Twitter

Flint’s Future. The U.S. Senate expects to consider bipartisan legislation today to address the unsafe water crisis in Flint as part of a bipartisan bill on energy policy—during which Sens. Gary Peters and Debbie Stabenow (D-Mi.) are expected to offer an amendment aimed at protecting the water supply in Flint. The underlying bill would update building codes to increase efficiency, strengthen electric grid safety standards, and promote development of an array of energy forms, from renewables such as solar and wind power, to natural gas, hydropower and even geothermal energy—and would accelerate federal approval of projects to export liquefied natural gas to Europe and Asia and reauthorize a half-billion dollar conservation fund to protect parks, public lands, historic sites, and battlefields. The Senate action comes as Sen. Minority Whip Dick Durbin (D-Ill.) said as many as 7,000 children have been “poisoned because of lack of proper government oversight” in Flint, with Senate Minority Leader Harry Reid (D-Nev.) adding that Michigan Gov. Rick Snyder had tried to “save a few bucks with the water and, in the process, poisoned lots of people.”

Sen. Reid added, however, that he thought the Senate should focus on other municipal water supplies beyond Flint, noting: “We have a lot of communities around this country who have lead pipes, and a very deteriorating water system.” The federal action comes as, in Lansing, the Michigan Legislature is poised today to approve $28 million in additional funding to address the lead contamination of Flint’s water—appropriations which would include funds for more bottled water and filters and services to monitor for developmental delays in young children, as well as help the city with unpaid water bills and cover testing, monitoring, and other costs—the second round of state funding allocated since the lead contamination was confirmed in the fall in the wake of a decision by state regulators two years ago to allow Flint to not treat water for corrosion after the city switched its supply in 2014—a decision with likely fatal consequences because of the ensuing leaching of lead from old pipes into Flint’s drinking water. The action today comes a day after Gov. Rick Snyder promised he would seek more funding for Flint in his upcoming budget proposal. It also comes a day after the Governor named a group of 17 medical and field experts, including a doctor and Virginia Tech Professor Marc Edwards, who helped expose the Flint water contamination crisis, to a committee charged with identifying long-term solutions.

Spinning the Dial for Municipal Bankruptcy. New Jersey’s top elected officials Tuesday announced an agreement with Atlantic City Mayor Donald Guardian to allow increased state intervention in an effort to keep the municipality out of bankruptcy—an agreement proposed by Gov. Christie and backed by the city’s elected leaders under which the state would provide additional layers of state oversight and new revenue sources. Gov. Christie introduced the plan accompanied by New Jersey Senate President Steve Sweeney and Atlantic City Mayor Don Guardian; the Atlantic City Council passed a resolution late on Tuesday to support the new proposal. The dynamic duo said the new legislation would give the state increased power over Atlantic City finances, including restructuring municipal debt, changing collective bargaining agreements, and selling off city-owned assets: it would provide a five-year state takeover compared to the 15 years Sen. Sweeney had proposed.

With the state already effectively under some state control due to the Governor’s imposition of an emergency manager, Tuesday’s actions imposed a more sweeping state takeover. Gov. Christie said he wants action by the end of next month by the state legislature to allow the state to restructure the city’s debt and terminate municipal contracts, including with labor unions. Under the proposal, the state would control the city for five years, with authority to allow the state to dissolve city departments, consolidate and privatize municipal services, and sell city assets—all proposals which had been included in a recent report by the city’s state-imposed emergency manager, Kevin Lavin.

In addition, under the Governor and Presidential candidate’s new proposal, the state would reconsider a version of legislation that the Governor last month vetoed, legislation intended to boost cash flow and stabilize Atlantic City’s tax base with fixed payments in lieu of property taxes from its famed casinos. Gov. Christie did not say whether the takeover proposal would address $153 million Atlantic City owes the Borgata casino in tax refunds. (Atlantic City last month missed a $62 million tax refund payment owed to the Borgata on Dec. 19.)

The Governor’s action—and muted support by Mayor Guardian and the Council—came just as the Mayor had called for an City Council emergency meeting to consider whether to file for municipal bankruptcy—a decision which would have required a two-thirds’ approval to seek such authority from New Jersey’s Local Finance Board, which oversees the city’s budget. Mayor Guardian told his colleagues he could see “no human] way” Atlantic City could pay the $160 million of casino property tax appeals it owes to the Borgata Casino Hotel & Spa.

Mike Cerra, assistant executive director of the New Jersey League of Municipalities, called the agreement “a positive development” since neither a municipal bankruptcy nor long-term state takeover would be beneficial to the local governments in the state; he said a municipal bankruptcy would have sent negative message to the municipal bond markets that New Jersey would allow a distressed municipality to reach that stage of insolvency, noting: “Nothing good comes out of a bankruptcy for a local government: Neither a bankruptcy or a full state takeover were desirable options.” New Jersey, where a municipality may only file for chapter 9 municipal bankruptcy with state permission, has only had one city, Camden, previously file (in 1999, but the case was subsequently dismissed). The state’s Division of Local Government Services has that authority, as well as the authority to approve budgets for distressed localities to ensure they can pay their debts.

My Old Kentucky Home. With municipal bankruptcy an increasingly hot topic amongst state and local leaders across the country—and in the U.S. Territory of Puerto Rico, Kentucky State Rep. Brad Montell (R-Shelbyville) might want to be among those considering what is happening in New Jersey, as he is asking whether Kentucky should reconsider its municipal fiscal assistance and municipal bankruptcy laws and programs. Until last August, no Bluegrass city had ever filed for chapter 9 municipal bankruptcy in the state; counties are not permitted to file; two municipal entities—utility districts—have previously filed. As part of the look-back, Rep. Montell is wondering whether Kentucky should develop a program—perhaps similar to New Jersey’s—to assist fiscally distressed municipalities, noting: “It seems to me we need to have sort of a blueprint of what authority the state government has in these instances.” U.S. Bankruptcy Judge Alan C. Stout is currently considering whether to allow Hillview, the Louisville suburb of 9,000 to proceed with its case—a case triggered by the municipality’s loss and consequent $11.4 million legal judgment after losing a lawsuit to Truck America Training. House Concurrent Resolution 13, filed by Rep. Montell, said defaults and municipal bankruptcies in Alabama, California, Pennsylvania, and Rhode Island have increased awareness of municipal bankruptcy: his proposal would direct the Kentucky Legislative Research Commission to conduct a study of municipal bankruptcy, including laws, and prevention practices employed by other states.

Today, more than half of the states and the District of Columbia have implemented municipal debt supervision or restructuring mechanisms to assist municipalities: creating programs to offer assistance, refinancing, oversight, and other mechanisms to avoid default. Such state programs, moreover, appear to have been exceptionally successful in avoiding defaults or bankruptcies: municipal bankruptcy ace James Spiotto, with whom the National League of Cities worked for over a decade to secure Congressional approval and former President Reagan’s signing of municipal bankruptcy legislation, testified last month before the U.S. Senate Judiciary Committee that such state “second looks” appear to have been effective by a six-one margin in avoiding Chapter 9 bankruptcy in the 24 states which authorize a city, county, or other municipal entity to file.

Rep. Montell’s proposed study would include a review of other state laws, and the practices that they have employed in order to intervene in a city or county financial crisis, or, as he put it: “We just want to get some answers, and see how other states have handled this in case we need to take action next session.” His resolution also cites the possibility of credit rating downgrades for the entire state due to the unhealthy financial health of its governments, as another reason to study Chapter 9 further, adding that Kentucky should look at its bankruptcy law, because the budgets of cities, counties, and school districts could realize growing fiscal challenges due to their mandated costs to participate in state-run pension plans, along with other stressors such as labor costs, noting: “We want to get our financial house in order and I’m confident we will…That’s one reason we want to be on top of [the bankruptcy law] as well.”

In his testimony last month, Mr. Spiotto testified that effective programs aimed at avoiding municipal financial distress and bankruptcy have been “well demonstrated” by the Municipal Assistance Corporation for New York City in 1975, the Pennsylvania Intergovernmental Cooperation Authority for Philadelphia in 1991, and the District of Columbia Financial Responsibility and Management Assistance Authority for Washington, D.C. in 1995—adding that the states of Florida, Indiana, Michigan, Nevada, New Jersey, New York, North Carolina, Pennsylvania, and Rhode Island include a variation on a provision allowing for the appointment of a financial control board or commission, emergency managers, receivers, coordinators, or overseers for troubled local governments. Thus, unsurprisingly, the Kentucky League of Cities has said it supports Rep. Montell’s resolution, which could lead the state to institute an emergency assistance program.