Social Media & Municipal Fiscal Distress, & How Do We Define a Municipality Eligible for Bankruptcy Protection?


January 20, 2014
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Social Media & Municipal Fiscal Distress. Wallet Hub, a Washington, D.C.-based social media company, allows people to search for and compare financial products and interact with a community interested in making what it deems “smarter financial decisions.” In the state and local sphere, the media company provides many kinds of state and local rankings, such as the “best places” to work, the best places to buy chili, the best places to get a divorce, etc. It does tax rankings, looking at a broad range of taxes, including property, income, sales, fuel, alcohol, and telecommunications taxes―but not cigarette taxes or corporate income or many other business taxes. The company reports it is designed to help people who are seeking to relocate for job opportunities to make the right decision. In our raising App age, then, its ranking of San Bernardino as last in its list of the 150 “Best and Worst Cities to Find a Job,” released by the financial information website is less than encouraging—albeit with more than 89,000 municipalities, it is difficult to comprehend an objective process to imagine that a social media site can really serve as an objective or precise tool to measure the unmeasurable. Nevertheless, utilizing metrics such as job opportunities, housing affordability, employment growth, median annual income, industry variety, safety, and the percentage of employed workforce living under the poverty line; the site awarded its quasi-booby prize to San Bernardino. In response, Mayor Carey Davis noted that the site’s rankings ought to come as little surprise, because the city’s municipal bankruptcy has garnered national attention: “I don’t know if it makes a lot of difference, because nationally there’s a recognition and acknowledgement (of the city’s situation)…I don’t know if this has any more impact than information already out there.” Moreover, after scanning the rankings, Mayor Davis said he had found a correlation among the states, with California the home of many cities ranked in the bottom half of the report, but only one in the top 20. In contrast, he added, nine of the top 20 are in Texas, suggesting, he notes, “[T]here’s more going on than what an individual city is doing,” that is that states can play a significant role in helping or hurting cities. In the case of California, he noted, it suggests that statewide factors — such as the dissolution of redevelopment agencies in California — played a significant role in cities’ job success. In fact, as we have noted, very much unlike Michigan or Rhode Island, but more like Alabama; California has contributed virtually no support to its singular number of cities that have filed for federal bankruptcy protection. Nevertheless, the rise of social media demonstrates an evolving arena which could and will affect state and local economies—and challenges to cities in fiscal distress. John Husing, chief economist for the Inland Empire Economic Partnership and an expert on the local economy, dismissed the list as “nonsense,” because he notes that we increasingly live in metropolitan economies: “If I live in San Bernardino, do I confine myself to San Bernardino to find a job? Of course not. Any one city is a piece of a much more complex area. It’s not important to look at particular cities. Does San Bernardino have economic problems? Yes. Enormous problems. But the ability to find jobs in the city is not one of them,” adding that Ontario, itself listed 115th, nevertheless was rated third, out of 150, for “fastest employment growth,” a subcategory within the report. John Andrews, economic development director for the city, said Ontario came off from double digit unemployment from 2013 to 2104. The latest unemployment figure for Ontario was at 8.2 percent, down from about 10 percent the year before, adding: “The bigger WalletHub survey (finding) is a very broad stroke, whereas, this smaller analysis just shows the employment growth we are seeing on the ground here in the city of Ontario: “We are all focused on attracting job opportunities so the region can thrive.” he added.

Democracy & Its Challenges to Recovery II. Because of the unique governance and federalism involved with municipal bankruptcy, where a city or county may only file for federal protection—and then only if it complies with the laws and procedures dictated by a state’s enabling act, each city or county’s situation can be unique. Such, indeed, is the case with the territory of Puerto Rico. Created by the Jones-Shafroth Act of 1917, the island territory with a population comparable to Oklahoma’s, but a GDP smaller than Kansas,’ the territory is fiscally teetering. The Act entitled Puerto Rico special tax status and granted Puerto Ricans U.S. citizenship. The tax incentives were key to the island’s ability to attract pharmaceutical, textile, and electronics companies; but Congress phased out the incentives from the mid-1990s to 2006, contributing not only to the loss of 80,000 jobs, but also an unrelenting contraction of the island’s economy, which has contracted every year except one since then, even as its poverty rate today is nearly twice that of Mississippi, the poorest state, at 14%. Unsurprisingly, jobs are disappearing: more Puerto Ricans are emigrating, and the tax base is disintegrating. The island’s population is headed toward a 100-year low by 2050. But it is a hybrid: it is neither a state, nor a municipality. Were it a municipality, it would have the option of bankruptcy—were it located in a state which authorized such a filing. The island, however, falls in the Twilight Zone. Now there are hard, hard questions about what its fiscal options are—fundamental questions. The old federal statute adopted by the 64th Congress provides (§2, chapter 145) that “Nothing contained in this Act shall be construed to limit the power of the legislature to enact laws for the protection of the lives, health, and safety of employees.” That writes almost as if it could be construed as a fiscal elixir, but we are in charted legislative seas. With its debt of $73 billion, its Government Development Bank experienced a liquidity meltdown of nearly 33% in December—so that the legislature’s newly enacted tax law is critical to the provision of some $2.2 billion. Puerto Rico faces the difficult prospect of boosting its economy while fixing its public finances. Since taking office in 2013, Governor Alejandro Garcia Padilla has acted to raise excise taxes and expand the sales tax base, to restructure public pensions, and reduce the deficit. Simultaneously, the territory has enacted tax incentives to improve revenues by seeking to lure non-residents to move to the island and invest. Now the question arises: with the island neither a state, nor a subset of a state which could enact legislation authorizing it to file for bankruptcy protection, could the territory rely on its enabling federal statute to take action to ensure governmental continuity? That question is increasingly urgent, as Moody’s at the end of October warned in its note, “Commonwealth Faces Narrowed Liquidity,” the Government Development Bank will have to find a way to refinance its loans to the Highways and Transportation Authority to shore up its liquidity, meaning that the government has to find a way for the Authority to pay off a large portion of the $2.2 billion it owes to the Bank. Last week, Puerto Rico Gov. Alejandro García Padilla signed a bill intended to accomplish just that: the legislation increases oil taxes, directing a portion of the new revenues to the Puerto Rico Infrastructure Finance Authority (PRIFA) to back the issuance of up to a $2.95 billion bond, so that, if successful, a portion of the issuance’s proceeds could be used by the Authority to pay off its $2.2 billion in debt to Bank—a critical step in enhancing the Bank’s liquidity—or, as Moody’s analyst notes: “The dwindling December net liquidity position underscores Puerto Rico’s continued reliance on actions such as the planned refinancing of GDB loans to the Highway and Transportation Authority…Failure to execute this planned transaction because of market access or other challenges would imperil Puerto Rico’s already precarious financial position.” For its part, the rating agency S&P is concerned that the government has made the territory eligible for the Public Corporations Debt Enforcement and Recovery Act, which is a bankruptcy process for public corporations’ debt. As a next step, Puerto Rico, as early as this month, plans to issue $2.9 billion of municipal bonds, with the proceeds intended to repay $2.2 billion that the territory’s highway authority borrowed from the Bank. But the investor base it the island’s bonds appears to be changing: as Bloomberg has noted, Puerto Rico is now turning to hedge funds, distressed-debt firms, and corporate high-yield funds―a turn that could well mean both greater risk and higher interest rates. Increasingly, it seems that Governor Padilla and the legislature will have to assess and interpret just what authority the federal government really granted it nearly a century ago to “enact laws for the protection of the lives, health, and safety of employees.”


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