Past & Future Municipal Bankruptcies: the Curious Role of States

eBlog
Share on Twitter
eBlog, 5/06/16

In this morning’s eBlog, we consider the likely municipal bankruptcy—the first in more than a year—and mayhap the first ever in Ohio—by East Cleveland. Then we turn to the fate of Atlantic City—and the most curious and damning role of the state. A suit raises serious allegations with regard to what might be deemed worse than ‘contributory negligence.’ Then we go to school in Lansing, where the state House and Senate are going to school over how to fiscally and physically fix the city’s broken public school system. We note the wonderful honor, yesterday, to be able to, in Chicago, meet with Judge Steven Rhodes’ substitute, U.S. Bankruptcy Judge Frank Bailey—who presided over Central Falls’ or Chocolateville’s chapter 9 municipal bankruptcy, as well as former Providence Mayor Angel Taveras—with whom are genius class of senior No. Virginia local government employees who wrote a GMU fiscal recovery guidebook, Financial Crisis Toolkit (created with digital tabs), had met in Providence—at the very night the decision not to file for municipal bankruptcy was made! Finally, we visit Lansing, where the future of Detroit’s kids and the city’s future with regard to its public schools is at stake. The complex business of public school finance draws at the intersections of state and local finance—and has immense operating and capital implications—not to mention political.

Teetering on the Edge of Municipal Bankruptcy. The City of East Cleveland has asked the State of Ohio—a step which, under Ohio’s municipal bankruptcy law (§133.36), requires approval of its municipal tax commission—to approve a petition for municipal bankruptcy. East Cleveland, which is a charter city of about 18,000 granted its authority under the home rule provisions of the Ohio constitution, has seen its population fall dramatically over the years, from 39,600 in 1970 to the most recent census figure of 17,843 for 2010—even as its minority population has grown to 94.5 percent. The city’s median household income of $20,660 is less than half the statewide $48,849—indeed, based on median taxable income, the East Cleveland school district, which includes a small portion of Cleveland Heights, has the highest poverty rate in Ohio: 42.1 percent versus 15.9 percent statewide. Worse, the rate for the city’s children in poverty is higher at 60.2 percent, nearly thrice the statewide rate of 22.7 percent. The median home value (county appraisals) is $36,900—and the city currently has a vacancy rate of 37.1 percent—more than thrice the statewide 11 percent. In short, East Cleveland is a municipality not just with a past history of fiscal challenges, but now a point of perhaps no return.

Formerly under a Commission and City Manager form of government, city residents and taxpayers, frustrated with that form of government in the wake of having two of its former commissioners charged with theft in office, and after a revolving door of city managers resulted in little stability and a reduction in services; Citizens for Sound Government, a group of East Cleveland residents, led a petition drive to elect a strong mayor and to create a five-member city council. Attorney Darryl E. Pittman, thus, became the first mayor to lead the city since 1908. Yet, during his second term, the Ohio State Auditor in the autumn of 1988 declared the municipality to be in a state of fiscal emergency in the wake of finding that the city’s water and sewer fund were found to have deficits in excess of $2 million. Subsequently, under the next Mayoral administration, the city increased its borrowing in an effort to recover from its fiscal emergency—a state in which it remained over the next eight years—culminating in the conviction on charges of racketeering and corruption of former Mayor Emmanuel Onunwor. Ergo, in his letter to Ohio Tax Commissioner Joseph Testa, current Mayor Gary Norton wrote, the city is in a trying effort to keep payroll going and to maintain services. Council President Thomas Wheeler said even if approved, filing for chapter 9 municipal bankruptcy would be a “Band-Aid” to keep the city going, not a solution. The Mayor, in his epistle, wrote that, based on the city’s fiscal projections, “the City will be unable to sustain basic fire, EMS, or rubbish collection services,” adding that the municipality’s Financial Recovery Plan, approved by the City Council, would have the effect of “decimating our safety forces.”

In Ohio, where no entity had previously filed for municipal bankruptcy protection, such a petition requires the approval of a municipality’s tax commission. While the Ohio Tax Commissioner’s office said it was preparing a response, it has yet to offer any public comment. For his part, Mayor Norton said that the municipal bankruptcy filing would be a temporary fix for the cost side of the city’s economic distress, but the real problem was with income—there simply, he warned—was insufficient revenue coming in to support the city—and that raising tax rates or imposing new fees would not provide an immediate solution. The request from the city can hardly come as a surprise to the state: State Auditor David Yost’s office last year had issued a statement that municipal bankruptcy or merging with the City of Cleveland were probably the most viable options for the city.

State Duplicity & Increasing Fear of Fiscal Contagion in New Jersey. Weeks of mounting political tension over how to save Atlantic City from financial collapse came to a head Thursday in a dramatic day at the Statehouse that ended with opposing sides once again pointing fingers at each other. State Assembly Speaker Vincent Prieto abruptly canceled an anticipated vote on his proposed and sponsored plan to provide a fiscal life-preserver to Atlantic City in the wake of realizing he lacked sufficient votes to get it passed. That opened the door to Gov. Chris Christie and New Jersey State Senate President Stephen Sweeney to declare it was time for Speaker Prieto to allow the Assembly to vote on their rival proposal: for the state to take over the city for five years—a plan the Senate has already approved—but which the Speaker opposes—with Sen. Sweeney noting: “I’ve had enough of this now…The Speaker proved he cannot pass his own bill,” warning that, otherwise, Atlantic City could face municipal bankruptcy in as little as 10 days, when they predict the local government will run out of money. Ramping up the ugly state war, Gov. Christie charged that Speaker Prieto’s opposition to the Senate plan had been “a waste of time and a waste of money and much too much drama,” with the former Presidential contender adding unironically: “Today we had a vanity exercise by politicians preening for higher office, rather than a solution for folks who really need it in Atlantic City.” In response, Speaker Prieto claimed he had a sufficient number in the House; however, four of his majority had been unable to “make it” to Trenton, adding that when he had asked his members of the Assembly for a show of hands whether they would support the Christie/Sweeney bill to impose a state takeover of Atlantic City: “Not one hand went up.” Ergo Speaker Prieto promised there would be another vote as early as next Wednesday on a new compromise bill—one to which, the Speaker said, he hoped the Senate President would be a party.

The Governor’s stance, however, is undercut by the apparent actions of the state—especially the New Jersey Department of Community Affairs. In a suit filed in Superior Court—with the Department of Community Affairs, the suit notes that “In 2013, the Local Finance Board again assessed the financial condition of {Atlantic} City as well as the good faith efforts of the City Administration in working with the State and determined that no additional regulatory conditions were necessary,” adding that the state had been “integrally involved in the financial decisions of the City and imbedded in its Fiscal operations…,” but that “[B]eginning in 2015, the Director of DGLS began a series of initiatives, ostensibly to aid the City of Atlantic City, but which ultimately would prove to be disastrous for the fiscal stability of the city.” The suit notes that the Department—for the 2015 city budget, “bypassed the governing body of the City of Atlantic City, and presented the 2015 Atlantic City budget directly to the Local Finance Board for approval and adoption…Through this unprecedented action, the DLGS deprived the City Council, as the elected representatives of the people of Atlantic City, the opportunity to have any input into the expenditures for Atlantic City for the upcoming budget year,” a budget in which DGLS, according to the claim, “inserted the sum of $33.5 million dollars in anticipated revenue,” the amount sufficient to achieve a balanced municipal budget—creating, understandably, the firm impression of a state commitment for that amount.

Indeed. DLGS Director Cunningham last September—in seemingly direct contradiction of claims by Gov. Christie—noted: “I feel the need to make sure that both the record and my colleagues on the Board know that the cooperative relationship that the Division has had with the City of Atlantic City in recent months, at least certainly during my tenure in this position. It’s been extraordinary.” Notwithstanding, however, the Twilight Zone state $33.5 million, has not only not been provided—but not even a bridge loan as requested by the City for that amount due to its reliance on that amount—or, as the suit notes: “By depriving the City of the requested information, the DGLS deliberately deprived the City of the tools necessary to fully comply with its own request. DGLS then used that deprivation against the City by asserting that the City failed to produce a plan.”

The suit has not been litigated, so the issue involves a the state’s judicial branch or third part of state government to weigh the demerits or merits with regard to the state’s contributory culpability, the outcome. By any measure, this goes to the issue of trust. A finding against the state, after all, would add to the increasing apprehension of fiscal contagion: some fiscal experts are warning that other New Jersey municipalities may experience municipal credit downgrades should Atlantic City become the first municipality since Fort Lee 78 years ago filed for chapter 9 municipal bankruptcy—even as Gov. Christie claimed that some Republicans believe that municipal bankruptcy may be the better option: “Bankruptcy is preferable to kicking the can down the road.” Credit rating agency S&P Wednesday noted that “a default or debt restructuring appears to be a virtual certainty even under the most optimistic circumstances.”

Detroit’s Kids’ Future. With the school year coming to a close in Detroit and the city’s public school system (DPS) beset by teacher sickouts and fiscal and physical insolvency—retired U.S. Bankruptcy Judge Steven Rhodes, at the behest of Gov. Rick Snyder, is once again stepping into the breach by accepting appointment to serve as DPS’ Emergency Manager—hopefully to end a year-long debate over the future of the recovering city’s public schools—schools whose fiscal future now appears transfixed between Republican lawmakers over the proliferation of charter schools and the amount of fiscal resources critical to help the state’s largest public school district avoid municipal bankruptcy. The Michigan House before dawn yesterday adopted a $500 million rescue plan—a plan which includes controversial provisions curtailing union rights and which would impose tougher anti-strike measures, measures without doubt triggered by the teacher-staged “sick-outs,” but a plan directly the obverse of Gov. Rick Snyder’s—a plan which proposes to pay off $515 million in DPS debt and provide a new, debt-free Detroit school district with another $200 million to anticipate continued declining enrollment.

Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) yesterday said the House plan was passed “under duress,” suggesting the House version would not receive a passing grade in the legislature, but noting: “We don’t do our best work at 4 in the morning.” The Senate-passed version establishes a Detroit Education Commission to regulate the opening of traditional public and charter schools in the city. Now, as the legislature debates — something community leaders have requested — Sen. Goeff Hansen, who represents Muskegon, Newaygo, and Oceana Counties, now notes: “We need Detroit to buy-in. This has to be Detroit’s solution.” Sen. Hansen has taken the lead in the Senate to overhaul Detroit’s broken school system. However, given the chasm between the House and Senate positions, if the House or the Senate were to fail to act on the other body’s proposed DPS package, legislative leaders would likely send negotiations into conference. Nevertheless, the ever-patient Judge Rhodes deemed the House plan “an important step in the right direction for Detroit and Detroit’s children;” however, he suggested the Senate’s plan would be better for the 45,786-student school system’s long-term viability, telling the Detroit News: “In order for the new district to be set up for success, it will need the $200 million that was originally advanced in the Michigan Senate’s bill package.” Similarly, Detroit Mayor Mike Duggan told The Detroit News that the House plan would “end up being a waste of $500 million” without restraints on the number of charter schools in the city, adding that the House version would continue the state’s track record of “abysmal results” for Detroit’s children following seven straight years of emergency management: “Instead of sitting down and working on a transition plan this time, last night was basically ‘throw up your arms and send it back…’ No reforms in place, not enough money. It’s disappointing.” House Republicans did not include the Senate-proposed commission in their plan in the wake of heavy charter school lobbying. It appears the battle in the city between public versus charter school advocates is reverberating in Lansing to the detriment of the city’s children. A 2014 City Council resolution prohibited the city’s land bank from selling any of DPS’ 77 vacant former school buildings to charter operators that directly compete with traditional public schools.

Thus, yesterday, Democrats and Detroit legislators united against the House plan, adopted to help DPS avert insolvency—but impose new limitations on collective bargaining rights and prolong state oversight. The House’s proposed funding, which would be drawn from Michigan tobacco settlement revenues, would help the district pay down about $467 million in debt over seven years and provide another $33 million to cover start-up costs and avoid potential cash flow problems in coming months. House Appropriations Chair Al Pscholka (R-Stevensville) noted that the full Legislature recently approved some nearly $49 million in stop-gap funding for DPS, adding the new plan would free up another $50 million in annual funding by helping the district avoid debt payments, with the Chairman noting: “There’s plenty of money there, and I think there’s enough to not only make them debt-free, but to help them going forward.” The state actions are critical, after all, not only to the educational rehabilitation of DPS, but also its physical collapse: as part of the $200 million in start-up costs, DPS would spend $75 million making immediate improvements to schools after city inspectors found mold and other dangers lurking in occupied buildings.

The House vote came with provisions which seemed in response to the week’s teacher so-called “sickouts,” by including tougher anti-strike policies designed to crackdown on the massive teacher sickouts that closed most DPS schools Monday and Tuesday—and deprived our conference session in Chicago yesterday of the formidable, if electronically musical, presence of retired U.S. Bankruptcy Judge and now DPS Emergency Manager Steven Rhodes. House Speaker Kevin Cotter noted: “There was a desire for accountability, and to say strikes are illegal in Michigan for teachers, but there are no teeth to it…So what we did in this package is beef it up so it can be enforced.” Indeed, House Republicans have been tracking Detroit teacher sickouts since last month, when 18 Detroit public schools were closed while educators protested in Lansing as the Governor unveiled his plan to bail out DPS; moreover, all 97 DPS schools have been closed at least two days over the past year due to the “sickouts,” amounting to 1.4 million hours of lost instruction time, according to data from House Republicans. Nevertheless, the ever optimistic Gov. Rick Snyder described the House plan as a sign of “positive progress,” adding, however, “there is still more [home]work to do.”

As the two versions await reconciliation, there is a discrepancy of over $200 million in funding and restoration of authority to DPS from the Detroit Financial Review Commission created in the wake of Detroit’s municipal bankruptcy. The House would change teacher pay to merit—as opposed to seniority, and would make so-called sickouts more difficult to call. The Senate version would provide for school board elections in November—and have the Detroit Financial Review Commission oversee schools and review contracts. It proposes creation of a Detroit Education Commission to regulate the opening of new traditional public or charter schools in the city, requiring that only high-performing charters could “replicate” without approval of a Mayor-appointed commission. And, it would create an A-F letter grading system to grade all traditional and charter schools in Detroit: consistently failing schools could face intervention or closure.

Twin Miracles?

eBlog
Share on Twitter
eBlog, 5/03/16

In this morning’s eBlog, we consider the very hard choices and issues that could harm Detroit’s full recovery from municipal bankruptcy: its desperately failing schools–and addressing delinquencies in long overdue water payments–an issue which was an exceptional challenge during the city’s municipal bankruptcy and now–because of the events in Flint–an issue with signal resonance. The teacher walkout in Detroit could risk the chances of a vital state aid package–perhaps threatening classes not just for the remainder of this academic year–but also any vibrant future vital to the city’s early success in luring new families back into the city. We also look at a critical deferred issue from Detroit’s bankruptcy: how to address those who stopped paying their water bills–already a hypersensitive political issue for the city south of Flint. Finally, we consider yesterday’s twin miracles on both sides of the Atlantic–one in Leicester City, England, and the other in Atlantic City. But while the former lit up the globe, the latter might have only put off a day of fiscal reckoning in the face of the obdurate unwillingness of New Jersey’s Governor to demonstrate leadership in helping Atlantic City avoid insolvency–an insolvency which could have contagious consequences for neighboring municipalities. 

Another Sick Day for DPS. Some 93 Detroit schools will not be open today—the second day of a teacher sickout for the Detroit Public Schools—meaning the system’s 47,000 students, the largest school district in the state of Michigan—will have lost more than one million hours of classroom instruction. It is unclear what the tipping point might be for DPS, but yesterday, Michigan House Speaker Kevin Cotter (R-Mount Pleasant) said: “At an absolutely critical time for a city on the path to recovery, Detroit’s next generation has now lost more than 1,000,000 instruction hours they will never recover to cheap political stunts.” Indeed, it is uninstructive to imagine how the teachers’ actions are playing in the legislature in Lansing at the very moment they are considering a $715 million aid package for DPS—or, as Senate Majority Leader Arlan Meekhof (R-West Olive) yesterday described it: it makes the “likelihood of reaching a long-term solution for DPS more challenging.” State Rep. Harvey Santana (D-Detroit) warned: “You’ve got teachers who are facing no pay, you’ve got kids suffering, and you’ve got philosophical and ideological arguments getting launched back and forth. In the meantime, the situation is turning into utter chaos, and there doesn’t seem to be any room for compromise.” Detroit Federation Teachers President Ivy Bailey yesterday described the situation as a lockout—not a sickout, adding to the non-constructive and unlearning unfolding of the crisis affecting not just the chances of state aid, but also the faltering chances for the city’s children’s future.

While the Detroit Public School system is separate from the city, it is integrally related and fiscally distressed; yet the fate of the public school system is intertwined with the city’s fiscal future. Not only is the quality of the system essential to attracting families to the region and to ensuring opportunities for the children of families who reside in the city, but also to attracting city employees for whatever the “new” Detroit is becoming: after all, in the post-bankruptcy municipality, leaders would be expected—if not required—to put their children into the public school system. Consequently, DPS’ financial soundness and integrity cannot be separated from Detroit’s future. In an uncanny parallel, Gov. Rick Snyder, three years ago, appointed Jack Martin to serve as Emergency Manager of Detroit Public Schools effective July 15, 2013—in effect creating the first state takeover of this school system with below average graduation rates, historically low standardized test scores, rapidly declining enrollment, and a deficit that had grown from $200 million to $327 in the wake of its first two years under state control: a public school system termed “A national disgrace,” by Dan Rather, beset by massive deficits and widespread corruption. Based upon the prior approval of the electors, DPS is authorized by law to levy $18 million for school operating purposes on all taxable non-homestead property—in effect sharing or competing over a recession-wracked tax base with the city. Today, of course, the ever so remarkable retired U.S. Bankruptcy Judge Steven Rhodes is serving as the Emergency Manager for DPS. On his broad shoulders lie critical hopes and fears about the city’s future.

Detroit Water. One of the lingering issue from Detroit’s municipal bankruptcy dealt with the provision of water—with numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom: could the city cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Today, it seems, that time has come: Detroit’s Water and Sewerage Department is set to begin this morning shutting off service to customers who have failed to pay their bills—after granting one additional day of grace: DWSD guesstimates about 20,000 of its customers have defaulted on their payments and face a shutoff this a.m., although the threats of the coming shutoff were prompting thousands of calls yesterday—and a veritable torrent of payments. A DSWD official described the process of shutting off service to customers with unpaid bills as equitable and reported it was city-wide, rather than being focus on any particular neighborhood or part of the city. In addition, the official reported the agency was not targeting customers who owe less than a $150 and are only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD is reminding its delinquent customers who are having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who are at 150 percent of the poverty level or below can receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. Under the “10/30/50” plan, customers pay a minimum of 10 percent of their past due amount, with the remaining amount to be paid over 12 to 24 months. The DWSD has about 200,000 customers, of which about 175,000 are residential—for whom the average bill is about $75.

Teetering on the Edge. There were two miracles of a sort yesterday: first, Atlantic City, N.J., averted default Monday by making a $1.8 million debt service payment. Mayor Donald Guardian had said last week he was considering not making the payment, but announced Monday morning that the city was going to meet the obligations even though the city is running low on cash. Second, Leicester City captured the championship of the English Premier League defying 5000-1 odds in nabbing perhaps the most prestigious football title in the world. Leicester is the city and unitary authority in the East Midlands of England; it is the county town of Leicestershire—about half the size of Detroit.

For Atlantic City, facing not incomparable odds, Mayor Don Guardian yesterday reported that: “After careful review of the city’s finances and taking into consideration other debt including bond ratings for Atlantic County and other municipalities in New Jersey as well as the effects on my own city, we’ve made the decision to pay our [municipal] bond payments as of 10:00 a.m. this morning of $1.8 million dollars.” The announcement came as the city—already under quasi state control of an emergency manager with most uncertain authority and with the state legislature so far unable to reach consensus how to assist the fabled casino city facing a $102 million budget deficit with more than $400 million in debt outstanding—thus appears to have put off its day of reckoning by avoiding default this month. Nevertheless, it faces $24 million of other debt service payments coming due for the rest of the fiscal year, including $1.6 million on June 1 and $41,000 in July, according to credit rating agency Moody’s. Atlantic City’s road to recovery then becomes even steeper and the odds—at least as they might be toted up at one of its remaining famed casinos—greater of a default: Atlantic City owes $3.6 million in August, $1.9 million in September, $70,000 in October, $9.3 million in November, and $7.1 million in December—or, as Mayor Guardian put it yesterday: “Financially, we are running on fumes…We really are teetering on the edge.”

The city’s decision to pay could be vital to the prevention of fiscal contagion—or, as the ever so insightful Assistant Director of the Bloustein Local Government Research Center described it yesterday: Atlantic City avoiding default is important for the credibility of other New Jersey municipalities looking to enter the bond market: “As much as Atlantic City is an outlier, a default would have stained the state’s reputation…It is important from a reputation standpoint as far as how the [municipal] bond market views us.”

Nevertheless, yesterday’s payment might only be buying a disappearing commodity: time; indeed, New Jersey Governor Chris Christie—in his own press conference yesterday—predicted Atlantic City would be unable to make its June debt service payment, adding that yesterday’s $1.8 million payment did not give him any additional confidence in the city government: “They will not have the money to make their June payments under current circumstances…Nobody should be taking any bows for making a $1.8 million dollar debt payment, which you were supposed to make.” For his part, Mayor Guardian yesterday continued to express his opposition to a state takeover: he urged state legislators to support House Speaker Vincent Prieto’s proposal, which would have a five-member planning committee develop a five-year financial plan and monitor if certain benchmarks were being reached.

The Peril of Twin Defaults

eBlog
Share on Twitter
eBlog, 5/02/16

In this morning’s eBlog, we consider the twin defaults in Puerto Rico and Atlantic City—as well as the ongoing precipitous challenge to the Detroit Public Schools—schools which will be closed today in the midst of its announced inability to meet payroll—potentially with signal longer term fiscal implications for the ongoing fiscal recovery of Detroit from the largest municipal bankruptcy in U.S. history. Because the quality of schools can have such profound implications for assessed property values—all eyes are on the blackboards in Michigan’s legislature as it tries to do the arithmetic so critical to Detroit’s ongoing recovery. The situation, moreover, is complicated—politically, physically, and fiscally because public school strikes are illegal in Michigan: ergo state lawmakers in Lansing have taken into consideration—in the wake of previous Detroit teacher sickout—consideration the tightening of the current legal definition in the state of what constitutes a strike.

No School Today, But What about Tomorrow? In the wake of Detroit Public Schools Emergency Manager Steven Rhodes’ notice over last weekend that DPS would be unable to make payroll on its $48.7 million in emergency state aid after Michigan state aid to the system runs out at the end of next month, DPS closed 93 of its 97 schools today in response to Detroit teachers’ union call for a district-wide sickout. Ivy Bailey, president of the 2,600-member Detroit Federation of Teachers stated: “No person should be asked to work without pay…This is the final straw.” The walkout occurred even as Judge Rhodes had warned that such a walkout risked his efforts in Lansing to convince the Michigan Legislature to approve a $715 million plan to rescue the 46,000-student DPS school district from financial collapse, stating: “A district-wide sickout will be counterproductive and detrimental to the efforts of everyone working to help the district.” The retired U.S. Bankruptcy Judge has repeatedly said he would not ask DPS employees to continue working without pay if the district became insolvent—making clear he was confident that the “Michigan Legislature understands the urgency of this situation and will act in a timely manner to ensure that operations of the school district continue uninterrupted.” But for teachers in the system, who met yesterday afternoon to mull over options, the non-payment would mean that some teachers who elect to have their checks spread out over the entire year would not be paid for work they have already done, according to Ms. Bailey, who noted to the Detroit News: “Detroit’s teachers deserve to be paid fairly for their work like every other working person…But Detroit Public Schools has just informed us that it cannot guarantee to pay these dedicated men and women for their work. This isn’t right. It isn’t fair,” comparing forcing employees to work without pay to a lockout. Asked if teachers would strike if no resolution were reached, Ms. Bailey made clear that all options were “on the table.”

New questions about district’s management under Judge Rhodes’ predecessors came to light recently when the school district disclosed to state officials that up to $30 million in federal aid earmarked for employee pensions was never sent to the state pension fund. Unpaid pension bills account for a projected $157 million of the $515 million in operating debt which Judge Rhodes is seeking to eliminate by means of his proposed financial rescue plan; start-up funds of $200 million would go toward a new debt-free Detroit school district.

For his part, Judge Rhodes is apprehensive that absent comprehensive action by the legislature, such as the comprehensive $715 million education reform package now under consideration by the Michigan House of Representatives, “there will be no funds available to pay any of our employees — those teachers on a 26-pay cycle included…There also will be no funds available for the district to conduct Summer School or provide the year-round special education services that a number of our students rely on.” Judge Rhodes added: “I urge our legislators to act thoughtfully, but with the urgency that this situation demands.”

Day I. Puerto Rico’s first significant step towards insolvency commences today when the Puerto Rico Government Development Bank (GDB), which provides liquidity to Puerto Rico’s government agencies, intends not to make most of a $422 million debt payment due today: last night Gov. Alejandro Garcia Padilla stated that, “Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice.” His choice, he said, would be against diverting funds critical for crucial health and public-safety services—thus triggering today a steep downhill fiscal path towards July 1—when the U.S. Territory’s major debt payment of nearly $2 billion in general obligation debt is due. Nevertheless, with Congress in recess this week, today’s non-payment sets in motion a significant increase in the island’s fiscal crisis. It comes in the wake of last month’s action by the legislature empowering the Governor to suspend debt payments to pay for essential public services pending some action by the U.S. Congress—e.g. marking the Territory’s first legislative step towards a likely default—as may be noted by the Puerto Rican government’s report that the GDB had $562 million available for paying debt as of April 1. Some expect this morning’s default to trigger creditor lawsuits—especially in the wake of last month’s filing in federal court by a group of hedge funds which own GDB bonds asking that the GDB be barred from allowing the withdrawal of funds. The see-saw battle between critical public services versus investors is imbalanced—with the Territory currently in debt to investors by about $70 billion. The GDB had reached an agreement late on the 29th with Puerto Rico’s state-chartered credit unions to exchange $33 million worth of debt due today for $33 million of debt due a year from now, but that left other $389 million still due this morning. In a speech last night, Gov. Padilla urged action by the absent Congress, noting: “Only a Congressionally approved restructuring process can provide a comprehensive solution.”

Twin Defaults. Almost like a parallel comet in the sky, Atlantic City Mayor Don Guardian is expected to announce as early as this morning whether his city will default on a $1.8 million municipal bond payment—should the city follow the path of Puerto Rico’s GDB decision, the city will become the first New Jersey municipality to default on its debt in some 78 years. The payment, technically, as in Puerto Rico, was supposed to be made yesterday, but the city, unlike Puerto Rico, gets an extra day since the payment date fell on a weekend; moreover, Atlantic City expects to receive its next tax payments today; however, the Mayor reports it is uncertain whether those payments will be sufficient to cover the bond payment.

The fateful day falls with another similarity: just as Puerto Rico was forced to act last night in the wake of inaction by Congress, so too Atlantic City has no choice but to act today as New Jersey’s Governor and legislature have been unable to reach agreement on any resolution. Should Atlantic City default today, it would become the first New Jersey municipality to do so since Fort Lee in 1938—a year before that municipality went into chapter 9 municipal bankruptcy. Indeed, as Standard & Poor’s Rating Services had noted at the beginning of this year: it seemed “inevitable” this day would come—absent either major improvements or a comprehensive state fiscal package. Or, as the Wall Street Journal notes: “Atlantic City’s credit rating has sunk so low that city officials and bankers say investors would likely reject any offers to buy new debt or refinance.” The brutal combination of seeming state dysfunction and high levels of per capita debt appear to have fiscally condemned Atlantic City—whose direct debt per capita in the wake of the collapse of its casino industry is nearly double that of Detroit: Atlantic City’s direct debt per capita is $6,867, versus $3,969 for Detroit. Median household incomes of the two cities are comparable—at just under $27,000, according to Merritt Research. Indeed, Atlantic City has fallen into a rare category of U.S. municipalities—well below 1%–which have credit have municipal credit ratings of BB-plus or below, according to Merritt Research. Moreover, the combination of the state’s apparent inability to fashion a rescue package and the increased discussion of default is scaring municipal bond investors whose holdings have traded for as little as 66 cents on the dollar in recent weeks, according to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website—a precipitous drop from close to 100 cents on the dollar early last year.

Might San Bernardino’s Exit from Municipal Bankruptcy Offer Lessons for Puerto Rico?

eBlog
Share on Twitter
eBlog, 4/29/16

In this morning’s eBlog, we consider the nearing end game of the longest municipal bankruptcy in U.S. history—with U.S. Bankruptcy Judge Meredith Jury noting the end is “in view.” We note, moreover, especially in view of the looming issues in Puerto Rico, the resolution emerging in San Bernardino as between the city’s retires and municipal creditors, and the resilience of the city despite these unprecedented fiscal challenges and still unsettled from its terrorism attack to persevere.

Emerging from the Longest Municipal Bankruptcy in American HistoryU.S. Bankruptcy Judge Meredith Jury Wednesday said San Bernardino’s exit from municipal bankruptcy is “in view,” at what was expected to be one of the final federal court hearings before the confirmation process begins. Judge Jury set a hearing for June 16th to discuss the third version of its disclosure statement, which she said will probably be noncontroversial — in no small part because nearly all the city’s creditors have already agreed to support it. At that hearing, Judge Jury said she would probably set a date about three months after that for the final stage of the city’s chapter 9 municipal bankruptcy—the longest process of any American city. In setting the date for the hearing, Judge Jury noted: “I appreciate all the progress the city has made. This case has gone at the speed it has to go. Now we have confirmation in view, and we’ll get there when we are supposed to get there. We are not Detroit; we are not Stockton; we came into this case in a very different posture, and therefore, the fact that it took much longer to get to confirmation was to be expected.”

Judge Jury added that only a few changes will be needed to the version of the plan of debt adjustment the city filed last month, noting San Bernardino will have to clarify how it will handle lawsuits of more than $1 million filed against it — personal injury claims and civil rights lawsuits, including the families of individuals killed by police officers prior to the chapter 9 municipal bankruptcy filing, as well as to resolve a number of issues with a committee representing retirees, leading City Attorney Gary Saenz to note San Bernardino could exit municipal bankruptcy by the end of the year.

Judge Jury has set a hearing 45 days ahead—a hearing which she said could serve as be the tentative confirmation hearing, albeit noting: “I don’t want to say for sure at this point that it is the ‘tentative confirmation hearing,’ because there are still a few issues to be resolved, but it seems like most of the larger issues have already been settled.” San Bernardino has reached agreements with all of its major creditors, which include its retirees, CalPERS, and its police and fire unions—with the final major settlement agreement reached with its pension obligation bondholders a month ago. The confirmation hearing, Mr. Saenz confirmed, was set for mid-September, after which, he noted, would come the confirmation effective date: “That could get us out of bankruptcy by the end of the calendar year.”

Counselor Saenz noted his appreciation of Judge Jury’s comments with regard to the long duration of the city’s case, because there had been so many comments made about how much longer it had taken San Bernardino than any other municipal bankruptcy in American history—it will surpass four years at the end of July. Mr. Saenz added that the reason it took longer is that the city worked to reach settlement agreements with all of the creditors, rather than springing cram-downs at the end: “We wanted to reach settlements ahead of time, rather than have long evidentiary hearings…I believe it was more cost-effective this way,” adding that negotiating agreements that both sides could agree to helped bring certainty for both sides, rather than rolling the dice on what the federal judge might decide.

In terms of the agreement with the city’s municipal bondholders, Mr. Saenz said San Bernardino was able to give its bondholders 40 cents on the dollar of what the city had been obligated to pay—as opposed to the 1% it had originally proposed, because the agreement will permit the city to stretch out payments over two decades: San Bernardino has drafted a 20-year business plan after determining it would be able to feasibly make those payments without the city ending up in municipal bankruptcy again down the road—leading him to note: “One [consideration] Judge Jury will look at is the feasibility of the confirmation plan…We believe we found a model that is dependable.” The pension obligation bond agreement continues a trend of a municipality’s bondholders faring worse than its retirees in municipal bankruptcy resolutions: under the plan of adjustment COMMERZBANK Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, agreed to drop their opposition to San Bernardino’s plan of debt adjustment—under which holders of $50 million in pension obligation bonds will receive payments equal to 40% of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.

The timing of the nearing resolution came against a backdrop yesterday of the arrest of three relatives of San Bernardino terrorist Syed Rizwan Farook—the three were charged yesterday in an alleged marriage-fraud scheme that was uncovered in the wake of December’s attack on a gathering of county employees—making clear the extraordinary situation for a municipality in bankruptcy—and the importance of chapter 9 in ensuring a municipality is able to provide essential, life-saving public services whilst in bankruptcy. The Islamic State had reported in a broadcast on al-Bayan Radio last December that the two main suspects in the San Bernardino shootings were “supporters” of their organization and called them martyrs.

In Like Flint? The U.S. Senate Environment and Public Works Committee yesterday approved (19-1) a $220 million assistance package for Flint—a key aid as the city struggles to address its unsafe, lead-tainted drinking water crisis and consequent apprehension about the impact of lead fear depreciating its assessed property values and, ergo, its property tax revenues vital to the city and its public schools. The bill would authorize $100 million in grants and loans to replace lead-contaminated pipes in Flint and other cities with lead emergencies, as well as $70 million toward loans to improve water infrastructure across the nation; it also would authorize $50 million to bolster lead-prevention programs and improve children’s health nationwide. It authorizes $300 million over five years to remove lead pipes from houses, schools and day care centers nationwide. In addition, it would mandate that EPA warn the public about high lead levels in drinking water if a state or locality fails to do so. The House has passed similar legislation. Chairman James Inhofe (R-Okla.) stated the measure builds on a similar 2014 law and would provide “needed investments in America’s infrastructure to support our communities and expand our economy.” Currently, nearly 1,500 water systems serving 3.3 million Americans have exceeded the EPA’s lead cap of 15 ppb at least once in the past three years. Indeed, if the state of Michigan’s newly proposed standard of 10 ppb were applied across the nation, that number would jump five-fold to more than 2,500 systems with 18.3 million customers according to the Associated Press’s analysis of federal data.

Driving a Municipality into Municipal Bankruptcy?

eBlog
Share on Twitter
eBlog, 4/28/16

In this morning’s eBlog, we consider the critical fiscal situation confronting Ferguson, Missouri—where the small municipality—confronted with seemingly prohibitive federal sanctions in the wake of the killing of Michael Brown, an unarmed man, by a police officer, in the wake of which there were riots and subsequent U.S. Justice Department sanctions imposed on the municipality—fiscal sanctions that risk the municipality’s viability.

Federally Driven Municipal Bankruptcy? Moody’s has further downgraded Ferguson, Missouri’s bond ratings into junk territory as the small city, amid tries to address the fiscal strains of dealing with fallout from the controversial 2014 fatal police shooting—the rating agency assigned the municipality a negative outlook in the wake of the city’s voters approving a sales tax for economic development, but voting down a property tax hike—meaning the city is likely to fall short of the revenues it projects it will need in the wake of the police shooting of Michael Brown in 2014. It seems the federally imposed fiscal penalties are further imbalancing the municipality’s chances of survival. The small city already faced imposing odds: Brookings analyst Elizabeth Kneebone last year had noted that at “the start of the 2000s, the five census tracts that fall within Ferguson’s border registered poverty rates ranging between 4 and 16 percent…However, by 2008-2012 almost all of Ferguson’s neighborhoods had poverty rates at or above the 20 percent threshold at which the negative effects of concentrated poverty begin to emerge.” But now, in the wake of voters’ approval of a 0.5% sales tax hike for economic development, but rejection of a proposed $0.40 per $100 of assessed value property tax hike that would have generated $640,000 annually, or 22.6% of the city’s projected budget deficit, the fiscal dilemma appears certain to deteriorate. The property tax increase would have cost about $76 annually for a home worth $100,000.

Ferguson, which has been experiencing a declining population, has average per family income of $36,645 annually. Thus, it can hardly seem surprising that its voters shot down a proposed $0.40 per $100 of assessed value property tax hike that would have generated $640,000 annually, or 22.6% of the city’s projected budget deficit. In contrast, voters approved the sales and use tax hike–expected to raise about $1 million per year, or 28.2% of the deficit. Ferguson operates on a $14.5 million budget. Thus the city’s leaders had warned both tax increases were needed to address the city’s deficit and the costs of compliance with the unfunded federally mandated police and municipal court reforms under a consent agreement the city recently reached with federal authorities.

As Moody’s moodily noted: “The downgrade reflects the continued pressure on the city’s finances from a persistent structural imbalance and incorporates the recently approved US Department of Justice consent decree, projected to increase annual general fund expenses over the next several years.” That pressure comes from the city’s projections that compliance with the federally-imposed implementation mandates could run as high as $1.5 million in the first year with costs falling under $1 million in subsequent years. Moody’s analysts further noted that, in the wake of the election: “both ballot measures were integral to city management’s proposed solution to close a large general fund budget gap that existed before accounting for the additional consent decree costs.” To make matters more fiscally grim, the credit rating agency expressed apprehension with regard to further credit erosion in the wake of the vote—as it will likely be forced to cut spending even further to meet the federally imposed penalties—with the agency apprehensive that the combination of unfunded federal mandates, reduced revenue, and substantial liabilities could lead not just to still further downgrades, but also potential default. City leaders say measures associated with the agreement will cost Ferguson $2.3 million over three years, including $1 million in year one—a seemingly overwhelming level for a municipality already facing a $2.9 million deficit due largely to fallout from the shooting, such as sales tax declines, skyrocketing legal costs, and the imposition of hundreds of thousands of dollars in court fines and fees from reforms already in place.

The pending FY’2017 budget calls for across-the-board pay cuts of 3 percent—but, in the wake of the voters’ actions, the city will likely be forced to lay off members of the police force, firefighters, and consider closure of a fire station—potentially imperiling the city’s implementation of the type of community policing mandated under the Justice Department settlement. Revenues to pay for requirements such as software and hiring of police record analysts would also be hard to come by. Indeed, the federal requirements could force the city into receivership or to file a chapter 9 petition, as provided for under Mo.Ann.Statute§91.730.

Post Municipal Bankruptcy Innovation

eBlog
Share on Twitter
eBlog, 4/27/16

In this morning’s eBlog, we consider—again—post-municipal bankrupt Detroit—as the city uses innovation in place of disproportionately reduced fiscal resources to address critically neglected areas for redevelopment. Ironically the lessons learned from this innovative experimentation might provide valuable fodder for city and county leaders across the country. We also—with D-Day looming for Puerto Rico and Congress set to leave town—consider the critical inaction and disagreement in Washington, D.C. over the fiscal fate of Puerto Rico. In some key ways, the inability to act serves to confirm how valuable chapter 9 municipal bankruptcy has worked. Finally, we look at the intersection of state politics—and its implications for the fiscal fate of Atlantic City.

Pink Post Municipal Bankruptcy. One of the hardest challenges for a municipality emerging from municipal bankruptcy is the comparative dearth of fiscal resources. So it is that Detroit is attempting to address a critical set of issues: how to revitalize neglected areas—which are extensive in a city with one-third of its former population in one the largest land areas of any city in the U.S. Such revitalization is critical both to enhanced assessed property values, but also to reducing crime. Ergo, the city is trying to act outside the box: it is adapting by lifting its development regulations—what developers might call outdated rules—to create zones, which the city calls “pink zones,” where red tape will be cut to help small developers and entrepreneurs open new businesses and revive aging commercial strips. The goal: to ease some of the constraints confronted by developers, from environmental impact statements to parking rules. Thanks to a grant from the John S. and James L. Knight Foundation, the Detroit planning department intends to recruit designers and planners to come up with a general framework for anyone who wants to start a new business or build in such areas: e.g. a process to accelerate development and maybe bubble up some innovation, or, as the city’s Planning Director Maurice Cox describes it: “You can create a great place, and you won’t have to go through months of red tape.” The innovative concept might have a second benefit: it will reduce city staff demands to enforce some of its rules.

Critical Inaction. U.S. Treasury Secretary Jack Lew yesterday warned that Congress is running out of time to act on Puerto Rico, telling Univision: “The crisis is now…There is an urgent need for Congress to act because the alternative to Congressional action…is chaos for 3.5 million Americans who call Puerto Rico home. That’s not acceptable.” The dire warning came as the U.S. Territory appears set to default on a payment of over $420 million which is due on Sunday. That precedes a multi-billion dollar payment due July 1st. Nevertheless, the Administration has not yet signed off on the House Natural Resources Committee legislation championed by House Speaker Paul Ryan(R-Wis.)—even as Congress is scheduled to break for a ten-day recess beginning this Friday. Notwithstanding the Treasury’s pressing, the Treasury has yet to come out in support of House Natural Resources Committee Chair Rob Bishop’s (R-Utah) draft bill, while Senate leaders appear to have no inclination to act until the House sends them a package. If anything, the delays appear to have spurred greater complications: the AFL-CIO and the Service Employees International Union, unsurprisingly, want any final legislation to protect pension and worker rights. The situation has reached a stage where every day of delay now means there will be less fiscal resources to divvy up amongst the island’s creditors. House Majority Leader Kevin McCarthy (R-Ca.) said yesterday that he does not see any way Congress can get a bill done by May 1st, but he thinks a bill could be wrapped up by July 1. The key is that every day of delay now means there will be not just a greater threat of the Zika virus in Puerto Rico taxing its diminishing resources, but also whatever fiscal resources will be remaining to be divvied up amongst thousands and thousands of creditors.

Wherefore Atlantic City? Somehow an entire city’s future has become a pawn to state politics—at an awful cost in both fiscal resources and the trust and respect of American voters. Carl Golden, who served as press secretary for former Govs. Thomas Kean (R-N.J.) and (as Communications Director) for Gov. Christie Whitman (R-N.J.) yesterday framed the fate of Atlantic City as part of the “ongoing confrontations between the Democratic leaders of the Senate and Assembly, while presumably over weighty matters of public policy, in reality mask an early political strategy designed to establish a frame of reference for the 2017 gubernatorial campaign,” describing it as “a calculated effort to tie Senate President Steve Sweeney (D-Gloucester) closely to Gov. Chris Christie, to portray him as a willing ally of a governor whose record and philosophy are anathema to Democrats and particularly to the long-time party activists who control the primary election process.” He wrote that “for [Senate President] Sweeney, the more he shares with [Gov.] Christie, the farther away he moves from the Democratic Party base—organized labor in general, public employee unions in particular, women, minorities, urban leaders, and advocates for a broad array of social-service programs which have been curtailed by the Governor.” Key: he wrote that “Their previous cooperation on other issues has been overshadowed by their disagreements over the proposed state assumption of Atlantic City government—a step supported by Sweeney and Christie but opposed by [Mayor] Prieto and city government…” noting the battles have been framed by “dueling press conferences, edgy language in news releases, and accusations of political gamesmanship.” Interestingly, he wrote there had been “speculation as well—not entirely misplaced—that resentment has been simmering in the Assembly over a feeling it’s been treated unfairly, that it’s been ignored while Christie and Sweeney strike deals and present them to the lower house for approval.”

Thus, the ugly head of politics—rather than the fiscal fate of Atlantic City—have loomed—or, as he wrote: “It was not altogether without credibility when Christie accused Prieto of doing the bidding of Jersey City Mayor Steve Fulop, a potential gubernatorial candidate, in blocking legislation for state involvement in Atlantic City in an attempt to deny union support to Sweeney. Whether the Governor’s implicit defense of Sweeney helped the Senate President or provided another opportunity to depict him as too cozy with the chief executive is open to debate.”

Further discussing the politicization of the looming municipal bankruptcy, he added: “It places Prieto—and, by extension, Fulop—squarely on the side of public-employee unions while serving as a subtle reminder that it was Sweeney who joined forces with the Governor in 2011 to muscle a series of pension-system reforms through the Legislature, including mandating an increase in employee contributions to the benefits system. The greater contributions and the freeze on cost-of-living adjustments (COLA) for retirees are all that remains of the reforms after the administration—with support from a Supreme Court ruling—failed to meet its funding obligations in their entirety.”

He notes that Sen. President Sweeney has sought to re-ingratiate himself with organized labor by proposing a state constitutional amendment to guarantee pension and benefits rights, while Mayor Prieto—perhaps focusing on moving from City Hall to the Statehouse—has also expressed his opposition to eliminating the state’s inheritance or estate taxes except as part of a larger package to increase the motor-fuels tax to replenish the state’s dwindling state Transportation Trust Fund. The two potential gubernatorial combatants—but current critical players in determining Atlantic City’s fiscal future—have met several times in unsuccessful efforts to resolve their differences. Thus, Mr. Golden wrote that the Speaker has “dismissed suggestions that gubernatorial politics underlie the impasse. Prieto, they say, is merely attempting to wield his power to protect the contractual rights of Atlantic City municipal workers as well as ensuring that the revenue stream from the estate and inheritance taxes continues to support programs to benefit middle class New Jerseyans,” adding—most critically: “Time, though, is short: Atlantic City and the trust fund are running out of money rapidly. Should the apparent governmental dysfunction continue and lead to a failure to resolve the problems, the North will point South, and the South will point North.

Municipal Bankruptcy Can Work!

eBlog
Share on Twitter
eBlog, 4/25/16

In this morning’s eBlog, we consider the track of post-municipal bankrupt Detroit—especially following the positive real estate changes—noting that while property taxes are less important to Detroit than most U.S. cities; nevertheless, they are a sign that—notwithstanding the terrible state of the city’s schools, all signs are that the city’s unrolling of its plan of debt adjustment helps us to appreciate how well put together it was…one might even say to those procrastinators in the Congress: municipal bankruptcy worked. Because, as we note, Congress is showing itself singularly unable to act on legislation to avert the onrushing fiscal crisis in Puerto Rico. Notwithstanding the leadership efforts of House Speaker Paul Ryan and House Natural Resources Committee Chair Rob Bishop in their efforts to coordinate with U.S. Treasury officials to address the nearing insolvency in Puerto Rico, the Senate has only been able to criticize—not act; and both Houses of Congress have made recess a priority over acting: Even with a critical deadline looming next Sunday, the House and Senate are firmly committed to their fifth recess of the young year. Finally, this morning, we look at efforts to undo a municipal part of the emerging, sharing economy in San Bernardino—where some unhappy citizens remain upset at the provisions in San Bernardino’s plan of debt adjustment provide for consolidating fire services with San Bernardino County.

Post Municipal Bankruptcy. Even though, unlike almost any other major U.S. city, property tax revenues are not the most important source of revenues to Detroit; the rapid appreciation in value seems to be a clear sign that the city’s plan of debt adjustment that permitted it to exit the longest municipal bankruptcy in history is working: Since January 2013, the for-sale inventory in the four-county Detroit metro region has fallen by 16.3%; demand among homebuyers is starting to outstrip supply locally: today in the metro area the time a home stays on the market has dropped by 33% from three years ago—and the median sale prices have climbed 85 percent in that period, from $80,000 to $148,000, according to Realcomp. During the foreclosure crisis, 30,000 or more homes were up for grabs at any one time. During the foreclosure crisis, Detroit had only eight people per acre, down from 21 per acre in 1950. Nevertheless, fiscal challenges remain: Detroiters who bought their homes at the height of the real estate market in the early to mid-2000s remain underwater or upside down: they still owe more on mortgages than their home is worth. But the tide is turning: There is a disparity between supply and demand, especially for homes valued under $250,000, according to data from Real Estate One. All signs appear strong: Real Estate One had more than twice as many showings (12,829) in February of this year than it did four years ago, the company said, and the company notes it is up 14 percent year-over-year. The company reports it has added more than 11% new real estate agents last year. While Detroit’s decline into municipal bankruptcy predated the housing crisis (the Citizens Research Council reported the overall loss of 15,648 business establishments from 1972 until 2007—before the severe 2008 recession, or the bankruptcies and subsequent recovery of General Motors and Chrysler and the restructuring of the automotive supplier network) when jobs left Detroit as auto plants moved to the suburbs and to other countries with globalization (manufacturing jobs in Detroit fell to fewer than 27,000 in 2011 from about 296,000 in 1950, leaving Detroit with eight people per acre, down from 21 per acre in 1950); nevertheless, the remarkable increase in aszsessed values woul seem a strong reaffirmation of not just the remarkable pressure and musical ear of U.S. (now retired) Bankruptcy Judge Steven Rhodes, but also the tenacity of former Emergency Manager Kevyn Orr.

Critical Inaction. Congress appears more and more certain to fail to act to address the Puerto Rico debt crisis before breaking for still another recess at the end of this week—even as the U.S. territory faces a looming default this Sunday, Mayday. Notwithstanding the strong leadership of House Speaker Paul Ryan (R-Wis.), House Natural Resources Committee Chair Rob Bishop (R-Utah), and the Treasury; U.S. Senate inaction and some Republican opposition to doing anything—combined with Congressional misperceptions that allowing Puerto Rico to receive some quasi bankruptcy relief would somehow open the doors to state bankruptcy—mean that the Puerto Rico Government Development Bank will almost surely default Sunday on a $422 million payment. The House Natural Resources Committee abruptly called off a markup two weeks ago due to a shaky vote count; the Committee has not rescheduled a new meeting since. If anything, however, the Senate outlook is worse—and more irresponsible. Key Senate Republicans and Democrats have expressed strong skepticism of the House—even as they have signally failed to offer any constructive alternative. Indeed, the Senate failure is fully bipartisan: Senate Minority Leader Harry Reid (D.-Nev.) said in a joint statement with Sens. Maria Cantwell (D-Wash.), Charles Schumer (D-N.Y.), Dick Durbin (D-Ill.), Bob Menendez (D-N.J.), Patrick Leahy (D-Vt.), Ron Wyden (D-Ore.), Elizabeth Warren (D-Mass.), Richard Blumenthal (D-Conn.), Kirsten Gillibrand (D-N.Y.), and Bill Nelson (D-Fla.) that the House bill “falls short.” While not offering their own proposal, the group stated: “We have concerns about whether the debt restructuring process provided for in the bill is workable, and we believe that — despite improvements — the oversight board has excessive powers and an unacceptable appointment structure.” Similarly, Sen. Finance Committee Chairman Orrin Hatch (R-Utah) last week told reporters the House bill was not “satisfactory…We’re not going to be able to pass it over here.” Indeed, it is clearer and clearer the Senate seems incapable of acting in any responsible way: even though Senators from both parties have introduced legislation to try to address the looming insolvency, Chairman Hatch has not even scheduled a markup.

Meanwhile, in Puerto Rico, the fiscal crisis appears to be accelerating—even as a desperate human health crisis threatens. The island is experiencing an outflow of population—an outflow which appears to be quickening—and dominated by those who are the highest educated and most able to afford the move. The economy is closing in on something close to a free fall: a major indicator is Puerto Rico’s Economic Activity Index, a monthly figure compiled by the Government Development Bank that tracks payrolls, cement sales, power production and gas consumption. In 2015, that index decreased 1.8 percent to the lowest in more than 20 years. That means Puerto Rico is experiencing not just a population decline, but also a surge in inequity: the island’s unemployment rate is more than twice that of the U.S. mainland, poverty is three times as severe (about 46.2 percent of Puerto Ricans live below the poverty line, compared with 14.8 percent in the U.S., according to Census Bureau data.), and assessed property values (he number of foreclosures is up 89% from 2008, according to data from the Commissioner of Financial Institutions of Puerto Rico.) are less than they were a decade and a half ago: so municipal revenues are collapsing, and the government’s future economic prospects are threatened. Added to the grim picture: tourism, a key source of the island’s economy where hotel occupancy is the strongest in a decade, is imperiled by an outbreak of the Zika virus. Thus, the island confronts a triple fiscal whammy: debt, a signal health care crisis, and a loss of its most critical work force.

On the debt front, in the wake of Governor Alejandro Garcia Padilla’s decision to have Puerto Rico issue $3.5 billion of municipal bonds two years ago, an amount believed at the time to be sufficient to tide the island over until last June, instead finds that Puerto Rico’s debt had escalated to $70 billion—or the equivalent of about $20,000 for every one of its 3.5 million residents. With Congress set to break without having taken any action, the stage appears increasingly ineviatable for defaults on Puerto Rico’s debts. Already full faith and credit municipal bonds backed by Puerto Rico’s full taxing power which mature in 2022 traded last week for only 57 cents on the dollar. For all the bitter whining by hedge fund lobbyists in Congress that the efforts led by Speaker Ryan and the House Natural Resources Committee would not provide them full restitution, Chairman Bishop’s proposed bill would provide them some.

Protest Vote Fails to Impede Progress on Exiting Municipal Bankruptcy. A preliminary count appears to indicate that an effort to undercut San Bernardino’s plan to exit the longest municipal bankruptcy in U.S. history has failed. The effort by city taxpayers to seek to reverse a parcel tax and the move to consolidate the city’s fire department with that of San Bernardino County shows 846 registered voters and 1,070 landowners formally protested—well short of the requisite amount (an election is only called if protests are received from 25 percent of either registered voters or landowners) needed to trigger an election—and clearing the way for the outsourcing and tax, which commences at $148 per parcel in the 2016-17 fiscal year and can go up as much as 3 percent per year, remain set to become effective July 1—and, critically, leave unmolested the city’s plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury. Nevertheless, the Local Agency Formation Commission, which oversees the process, will need to certify the results, according to its executive director, Kathleen Rollings-McDonald. Nevertheless, upset residents and landowners said at a protest hearing last Thursday that the form they received in the mail from the city was unclear or easy to mistake for junk mail: they accused the municipal officials behind the move of voter suppression. Notwithstanding opposition from nearly all of the 21 members of the public who spoke before Council at last Thursday’s hearing, Mayor Carey Davis said afterward that the move would benefit residents: “This,” Mayor Davis said, “helps the city to provide better fire service. It also gives us access to swift water rescue, maintenance for engines, CONFIRE (the county fire dispatch system), which will improve dispatch times.” The Mayor further reminded citizens that, because the city had been forced to close two fire stations as part of its proposed plan of debt adjustment, this would give residents access to county fire stations. The City Council, county Board of Supervisors and Local Agency Formation Commission for the county have approved the plan in a series of votes going back to August 2015, saying the move benefits the county and is vital to the city’s plan to exit bankruptcy.