The Costs & Challenges of Fiscal Deficits

October 10, 2014
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Invoking State Oversight. The New Jersey Local Finance Board has voted unanimously to place Newark’s finances under state supervision as part of Mayor Ras Baraka’s plan to close a $93 million deficit. The vote will permit the Garden State’s largest city to spread out $30 million of last year’s deficit over a decade. In addition, the Mayor will be cutting expenses such as travel, stationery, and software, as well as reducing the city’s payment into a state fund which administers public workers’ unemployment benefits. The action came in the wake of this week’s unanimous vote by the City Council to approve Mayor Baraka’s proposed $815 million budget, which also includes $10 million of state transitional aid. Mayor Baraka, speaking of the state action, said the oversight agreement was reached together by both the state and city in what he termed “amicable” efforts—with the fine print still to be completed: “It’s a partnership – we filed jointly…It’s the law. We had to get permission to spread the debt out. The law says if you do that, the state needs to come in and supervise that.’’ The Mayor stated that the state oversight could range from keeping an eye on Newark’s finances to state control over hiring and employees, as well as contracts. In a second vote by the Board yesterday, it authorized Newark to borrow $8.42 million to cover payments to residents who appeal their tax assessments. Newark will redirect $5 million from its housing authority to help settle debt as part of Mayor Baraka’s plan to close the municipality’s deficit without firing city employees. Funds held by the Newark Housing Authority will cover two principal and interest payments on city obligations.

Revenue Erosion? Fiscally challenged Puerto Rico’s revenues were 2% below projections for the first quarter of the fiscal year, Puerto Rico’s Treasury reported yesterday—but the projections were 4.4% above revenues over the comparable quarter last year—with the shortfall caused by a $27 million gap between actual and projected corporation revenues, $16 million less than expected in foreign corporation (Act 154) revenues, and $10 million less than anticipated for taxes on off-shore shipments of rum. Puerto Rico Treasury Secretary Melba Acosta Febo said the rum shortfall was because the reimbursement rate per gallon of rum had declined to $10.50 from $13.25 last year, noting: “It is expected that during this fiscal year, as in previous years, a tax extender will be approved retroactively and this excise tax reimbursement will be $13.25 per gallon.” In the first quarter the biggest exceedances compared with projections were foreign tax revenue, by $43 million and the “other” category, by $32 million. The biggest shortfalls compared to projections were corporation taxes by $33 million and individual income taxes by $26 million. In contrast, the island’s sales and use tax collections were $116 million, the highest for September since the tax was implemented in November of 2006. The commonwealth last year raised the rate to 6% from 5.5% last year at this point. After adjusting for the rate increase, the sales and use tax collections still went up by 8.7% from September 2013. The revenue numbers came in as Puerto Rico went to the market for the first time since it did its debt restructuring last June with the issuance of at least $620 million of notes by Puerto Rico’s Government Development Bank, including $560 million of tax-exempt municipal bonds due in June of 2015, priced to yield 7.75%―a steep borrowing cost―especially when compared to 13-month notes the territory issued in 2011 with a yield then of 1%. Like severely distressed municipalities on the mainland, the municipal market has extracted a significant toll—with its securities trading at distressed levels for about a year as the market remains apprehensive the commonwealth and its public agencies will be unable to repay $73 billion of obligations. An index that tracks the commonwealth’s economic activity has shrunk by nearly 20% since July 2006, according to the bank GDB, which handles the territory’s capital-markets transactions. Puerto Rico has not issued long-term debt since last March, when it issued $3.5 billion of 20-year GO bonds at an 8.73% yield.

The Architecture of Detroit’s Future. A stalled, but controversial jail project in downtown Detroit may be revived after neighboring Wayne County yesterday gave preliminary approval to restart construction for the project which has already cost $157 million—notwithstanding the opposition from billionaire and Motor City civic booster Dan Gilbert, founder and chairman of Quicken Loans Inc. based in downtown Detroit. The jail would replace two facilities nearby, but Mr. Gilbert has expressed concern the facility would impede revitalization of Detroit’s entertainment district. Nevertheless, Wayne County Commissioner Kevin McNamara said the project had come too far to turn back, and Commissioners voted 9-2 to keep going—with a final vote scheduled for next week. The project, on which $157 million has already been invested, was suspended a year ago last June, the same month Detroit filed for federal municipal bankruptcy protection, after a county report determined that the project would run $91 million over planned cost. The state has offered a former prison nine miles away in Detroit for a $1 annual lease as an alternative; however, with their vote this week, the commission effectively rejected that offer. The downtown project’s cost overruns had prompted a grand-jury investigation that ended in September with the indictment of three current and former county employees on charges of neglect of duty. Commissioners have indicated that the options would cost either $468 million or $488 million in new construction, depending on the size of the jail it chooses, and Wayne County could need to issue about $400 million of new municipal bonds in addition to its current correctional facilities related debt load, which includes $200 million of bonds sold in 2010 to fund the Gratiot jail. Commissioner Kevin McNamara said the project has come too far to turn back, reporting that “A judicial complex makes sense for a downtown area…You can’t walk away from $157 million.” Construction was suspended in June 2013 after a county report that the project would run $91 million over planned cost. The downtown project’s cost overruns had prompted a grand-jury investigation which culminated in September with the indictment of three current and former county employees on charges of neglect of duty. Yesterday’s vote appeared to end Mr. Gilbert’s efforts for an alternate plan: he had offered to buy land around the downtown site for $50 million and lead efforts to redevelop it with a hotel, housing, and retail space. (Mr. Gilbert owns 60 buildings in the downtown area, including nearby Greektown Casino-Hotel and parking structure.) Gilbert’s Rock Ventures, in a statement following yesterday’s vote, said: “Detroit has made some very short-sighted important decisions that have caused negative repercussions and cut off untold opportunity for many decades.” The statement referenced the building of the city’s three casinos in three different locations, locating the Renaissance Center on the waterfront and building a one-way people mover. “Critical decisions like the location of the jail cannot be measured solely by numbers on today’s spreadsheets…They must be measured through the prism of what opportunity, vision, and ultimate value would be created in an alternative scenario.” Nevertheless, as the saying goes, it might not be over until it’s over: Matt Cullen, president and CEO of Rock Ventures, told Crain’s doesn’t think the conversation about redeveloping at least the jail site is over. “We really think the discussion is just starting,” Cullen said Thursday in an interview with Crain’s: “We formally believe there’s a solution that accommodates everyone. The committee, today, acknowledged the key stakeholders were not at the table.” Cullen said Wayne County justice officials are now engaging the process to find the best solution for the site – whether that includes finishing the jail site at Gratiot, rehabbing the current jail near the site, or moving the jail elsewhere. “That site is compelling enough, as a gateway to Detroit, to make a very compelling investment and do something else with the jail.”


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