Unrelenting Municipal Leadership Challenges

May 29, 2015
Visit the project blog: The Municipal Sustainability Project

Municipal Bankruptcy Fallout. Wayne County Executive Warren Evans, who, from his bird’s eye perspective from the county surrounding Detroit, and who has himself expressed grave concerns about his own county’s fiscal sustainability, also has to think about risks to other municipalities from Wayne County’s dire fiscal condition. Thus the Wayne County Treasurer’s Office will have to provide assurances that the funds the county borrows to cover the delinquent taxes it collects for local communities would not be subject to diminution should the county be forced to file for federal bankruptcy protection―an assurance, which will come in a bankruptcy opinion which combines county legal opinions with those of an outside firm—or, as Christa McLellan, Wayne County Deputy Treasurer puts it: “There was just a lot of reaction to the comments. … (Bond markets are) very sensitive to what’s in the papers.” With County Executive Evans acutely aware of the unprecedented costs of municipal bankruptcy, ergo, he is laser-focused on what is now believed to be a $52-million structural deficit in the county and its “grossly” underfunded pension system—the triggering apprehensions for his proposed recovery plan to preempt municipal bankruptcy—a plan which proposes $230 million in cuts over four years. But the threat of municipal bankruptcy has forced the County’s hand, as—in order to prevent any diversion of funds the county collects for other jurisdictions or which it borrows to provide funding through its delinquent tax revolving fund—it has been forced by Merrill Lynch, which underwrites Wayne County’s borrowing for the fund this year, to obtain a municipal bankruptcy opinion in order to demonstrate that the funds are safe, “because they can’t be diverted,” or, as Deputy Treasurer McLellan puts it: “The county is never at risk…It’s a very secure program…It’s really structured that whatever happens, we can repay the notes,” adding there is no danger to creditors in the delinquent property tax program, because the communities must repay the money. The effort allows the Treasurer’s office to take over delinquent property tax collections for communities each year and provides the communities with revenue which they would otherwise be trying to collect.

The Fine Art of Diplomacy in Municipal Bankruptcy. As we have noted previously, the costs—especially legal and consulting fees—of municipal bankruptcy are withering. Few seemed more aware of this than U.S. Bankruptcy Judge Steven Rhodes and his appointed federal mediator, Chief Judge Gerald Rosen—so that, as part of the mediated settlement in the largest municipal bankruptcy in U.S. history, Miller Buckfire, which served as a paid consultant to Detroit emergency manager Kevyn Orr throughout the course of Detroit’s bankruptcy, has now contributed $1 million to help pay the water bills for Detroit residents in danger of getting service shut off―the largest nonutility contribution to the Motor City’s The Heat and Warmth Fund (THAW) in the charity’s history—a contribution that was part of the mediated settlement worked out by Judge Rosen and which came in the wake of strong objections from Detroit Mayor Mike Duggan to the unbelievable fees levied by Miller Buckfire. With water service—now to be shared via a regional authority, also a part of the resolution—even if still not resolved—of the city’s plan of debt adjustment, there remains a crushing, but prohibitive need: more than 64,000 Detroiters, disproportionately elderly, cannot afford water to pay their utility bills—and the bulk are likely seniors.

Schooling Governance. If too many Motor City residents cannot afford water, the whole city cannot afford its current school system—which is insolvent—an insolvency which is imposing strains on the relationship between Michigan Governor Rick Snyder and Detroit Mayor Mike Duggan—especially with regard to the authority to make appointments to the Detroit school board. Mayor Duggan this week urged Gov. Snyder not to appoint members of the city’s school board, but rather to leave those decisions up to Detroit’s voters, noting that Detroit school parents have demonstrated for years, through their withdrawals of their kids from the city’s school system that they have no confidence in schools under state control. Instead, Mayor Duggan said he would prefer a financial review commission to monitor and act as a check on excessive spending and borrowing, not dissimilar to the oversight commission incorporated into Detroit’s plan of debt adjustment as part of the grand plan worked out by Judge Rosen, the Governor, and bipartisan leaders of the state legislature. Mayor Duggan would like to have the state empower the current school board to be responsible for paying down the Detroit Public School (DPS) system’s hundreds of millions in debts, and a new school board charged with moving Detroit’s schools forward; moreover, Mayor Duggan believes a Detroit Education Commission should be created to allow the city to manage and coordinate all schools in the city, both public and charter schools—an element on which he is agreement with Gov. Snyder: under their concept, such a commission would be able to hold both types of schools accountable, and the authority to shutter failing schools, but also the authority to determine where schools are opened and closed to prevent too many schools in some neighborhoods—and none in others, as well as coordinated citywide bus service to all students, in public or charter schools, with a common enrollment system for all. The Mayor cites his goal to be the establishment of order in a chaotic system—a system, he believes rendered more unstable by years of failed state oversight that led to devastating enrollment declines and insolvency — in a city where 95 schools have opened or closed in the last six years, urging a governmental system of coordination and stability necessary to encourage families to keep their kids in city schools, noting: “We’re becoming a community where if you’re born rich you die rich, and if you’re born poor, you die poor.” DPS today has only five schools which meet the state average in reading; only seven meet the average in math; the district has gone from 180,000 students to 47,000 over the last decade—a period during which its schools have dropped from 13th to 45th in statewide student achievement. Mayor Duggan’s position contrasts with Gov. Snyder’s, who is, instead, proposing that DPS be split in two, under which the new district would be created debt free—and focus on educating kids, instead of debt; the existing system would continue to collect the local millage in order to retire DPS’s debt. But, as Gov. Snyder has acknowledged, getting his potential package through the legislature will be more than academically challenging: “Helping pay for their debt is a huge issue and the whole governance question…It’s a challenge to say, ‘We’d like to pay your debts and not have a role in the governance of the district.’”

Pensionary Musings. As San Bernardino enters its long awaited municipal bankruptcy trial to seek U.S. Judge Meredith Jury’s ok for its proposed plan of debt adjustment—a plan which proposes substantial cuts in what it would pay its municipal bondholders and its retiree health care obligations—but, as in Stockton and Vallejo, no reductions in its pension obligation to CalPERS; nevertheless, the plan is quite different in that it seeks to address pensions in a quite different manner: by contracting out for fire, waste management, and other services; the city projects substantial savings via a singular reduction in its employee base—especially for fire protection—via shared services, contract services expected to reduce city pension costs. The plan also proposes additional pension savings which would be derived by means of a substantial increase in employee payments toward pensions and from a payment of only 1 percent on a $50 million bond issued in 2005 to cover pension costs. Or, as Councilmember Henry Nickel put it before the Council vote to approve the city’s plan of adjustment: “The justification from what I’m understanding from the plan — the justification for contracting is more or less to save the city from the pension obligation. Is that correct?” The question came based on one of the slides staff had created to help explain the complex plan: the slide noted: “CalPERS costs continue to escalate, making in-house service provision for certain functions unsustainable.”

In response to the query, City Manager Allen Parker responded: “[T]hat’s part of it,” but not the “entirety,” advising Councilmember Nickel that in addition to pension savings, contracting with a private firm for refuse collection now handled through a special fund is expected to yield a “$5 million payment up front” into the deficit-ridden city general fund, adding that the CalPERS safety rate for firefighters is between 45 and 55 percent of base pay, “so if you have a fireman making say $100,000 a year, there is another $50,000 a year that goes to CalPERS,” further explaining that an actuary had estimated that contracting for fire services could save the city $2 million a year in pension costs, so that the change could achieve an annual savings of $7 million or more. Moreover, unlike other unions, firefighters had not voluntarily agreed to accept either the suggested 10 percent pay cut or to forego merit increases. Indeed, fire and waste management are the biggest opportunities for savings and revenue among 15 options for contracting city services listed in San Bernardino’s plan of debt adjustment—the plan whose mandated submission date from Judge Jury is today. Under the plan, many city employees are expected to be rehired by contractors, with estimated annual savings for contracting five other services: business licenses $650,000 to $900,000, fleet maintenance $400,000, soccer complex management $240,000 to $320,000, custodial $150,000, and graffiti abatement $132,600.

San Bernardino plan to return to solvency
Indeed, pension obligations have been very much at the heart of San Bernardino’s municipal bankruptcy: after its chapter 9 filing, San Bernardino—unlike Stockton or Vallejo, became the first California municipality to omit its annual payments to CalPERS—an expensive omission, as that, under the city’s proposed plan of debt adjustment, would be repaid over two fiscal years with equal installments of about $7.2 million, including some $400,000 annually in penalties and interest at the end of the proposed repayment period. Or, as Mr. Parker further explicated last week: San Bernardino’s public pensions have an “unfunded liability” of $285 million, but are only 74 percent funded, adding that the proposed plan of debt adjustment would protect pension amounts already earned by city employees, even with a new employer, and, like the Stockton and Vallejo plans, are proposed that way in recognition that cities—as employers—can ill afford not to offer competitive benefits. Further, noting the very deep pockets of CalPERS, Mr. Parker added: “We naively thought we could negotiate more successfully, but that didn’t necessarily happen,” and that San Bernardino’s pockets were not remotely deep enough for what would have been a costly and lengthy legal battle with deep-pocketed CalPERS is said to be 8 to 10 percent below market because of low benefits. The bankrupt city stopped paying the employee CalPERS share and raised police and firefighters rates to 14 percent of pay. On the post retirement health care side, the plan proposes to reduce health payments from a maximum of $450 per month to $112 per month, saving $213,750 last year.

Underwater in Puerto Rico—and Washington, D.C. The U.S. territory of Puerto Rico—neither a state, nor a municipality, but home to millions of Americans, is caught in a legal twilight zone, because it lacks the authority of every U.S. corporation—municipal or private—to seek federal bankruptcy protection; nor is the territory, again because it is not a state, authorized by the federal municipal bankruptcy law to authorize its municipalities with authority to seek such protection. While legislation to grant such authority has been pending before the House Judiciary Committee (HR 870, the Chapter 9 Uniformity Act of 2015), the bill appears to be in perpetual suspension, with many members confusing municipal bankruptcy with a federal bailout—almost as if to demonstrate a bankruptcy of comprehension. After all, they would be hard pressed to find any pennies devoted by the federal government to “bail out” Jefferson County, Stockton, Detroit, etc.; albeit they would find it far easier to find spell out the bailouts for Chrysler and General Motors—two of the three very large corporations in the Detroit metropolitan area to file for bankruptcy in the wake of the Great Recession. Thus, instead of acting on legislation which would—at no cost to the federal taxpayers—allow a federal judge to oversee the creation, adjudication, and approval of a plan to adjust debts between all the islands creditors, the issue has instead become, as Bloomberg observes, a bonanza for Washington lobbyists, who are developing websites, creating advertisements, and lining up the support of conservative advocacy groups, with one group posturing: “Puerto Rico may soon reach a height of budget crisis that can be addressed only through a massive bailout package from the federal government.” A website set up by 60 Plus Association, a senior-citizen advocacy group, opposes the legislation, while still another, NoBailout4PR.org., posts: “Make no mistake: Extending Chapter 9 bankruptcy protection to Puerto Rico is not a way to avoid a bailout…It is a bailout.” The legislation which is diverting so many dollars to Washington lobbyists and campaign coffers would amend the Federal Bankruptcy Code to treat Puerto Rico as a state: that is, it would enable Puerto Rico—as all 50 states are authorized, the option to authorize its municipalities and public agencies to file for Chapter 9 protection. It would not obligate Congress to appropriate one thin dime. Indeed, as Bloomberg notes: “The lobbying efforts focus on Republicans, who control the House. BlueMountain, Franklin Resources Inc. and several other investment managers have hired former high-ranking Republican staffers from the House Financial Services Committee and Senate Banking Committee who now work at Venable LLP, a law and lobby firm, to defeat the bill, according to disclosure records….Others that oppose the legislation include Tea Party activists and the Alexandria, Virginia-based 60 Plus, which describes itself as a “seniors advocacy group with a free enterprise, less government, less taxes approach.” Mayhap ironically, the issue has attracted 35 asset managers who favor the legislation and who support the Puerto Rico Fiscal Stability Coalition, co-chaired by former Puerto Rico Governor Luis Fortuno. The coalition’s spokesman, Phil Anderson, is a former special assistant to former Vice President Dan Quayle, who is now president and a founder of Navigators Global LLC, a Washington-based lobbying group that has set up English- and Spanish-language websites and produced video ads targeting the Puerto Rican public and Congressional members and staff—a coalition which has gained support from a group which could never be characterized as supportive of taxpayer-backed bailouts, including Citizens Against Government Waste and Grover Norquist’s Americans for Tax Reform. Their spokesperson noted that allowing Puerto Rico entities to file for bankruptcy would prevent what Anderson calls the “potential collapse” of the $3.6 trillion municipal-bond market, about 40 percent of which is held directly by U.S. households. An orderly restructuring would allow debtors and creditors to settle the dispute without involving taxpayers: “What solution is in the best interest of the U.S. taxpayer and what’s the most conservative solution to apply to the problem.”

May 29, 2015

Running on Empty. The Just before leaving town for its Memorial Day recess, and with no funding solution in the tank, Congress extended spending authority until the end of July, just before its five week vacation. The stopgap and start funding renders states and local governments unable to sign long-term contracts—and sharply increases the cost of issuing long-term municipal bonds for infrastructure financing.

“I will be stunned if the Republicans deal with the Highway Trust Fund responsibly…It’s not going to happen,” U.S. Sen. Bob Corker (R-Tenn.), the former Mayor of Chattanooga, who last year proposed a 12 cent per gallon increase in the federal gasoline tax, told reporters at a breakfast session sponsored by the Christian Science Monitor this week, adding that the short-term HTF extension favored by some in Congress is “incredibly irresponsible.”

Who, exactly, is getting bailed out? For all the provisions in the Congressional Budget resolution and individual bills and vows that there shall be no municipal bailouts, no Member of the U.S. House or Senate has yet been able to cite any bailout to a state or local government. In fact, of course, the federal government is munificent when it comes to bailouts to non-municipal corporations—whether it was the bailouts to General Motors and Chrysler—two of the three iconic corporations that filed for federal bankruptcy protection in the wake of the Great Recession—but not to the third, the City of Detroit. In fact, for all the Congressional sturm and drang about opposition to the so far non-existent municipal bailouts, the evidence points to ever increasing federal bailouts of private, non-municipal corporations. Indeed, as you can see from the chart, the Federal Reserve Bank of Richmond notes that the federal government is most generous with bailouts to private corporations. In its conveniently updated and most aptly named Bailout Barometer, the Richmond Fed reports that 60 percent of the U.S. financial system’s loans are explicitly or implicitly backed by the federal government—a 45% increase since 1999. According to the Richmond Fed: Implicit guarantees effectively subsidize risk. Investors in implicitly protected markets feel little need to demand higher yields to compensate for the risk of loss. Implicitly protected funding sources are therefore cheaper, causing market participants to rely more heavily on them. At the same time, risk is more likely to accumulate in protected areas since market participants are less likely to prepare for the possibility of distress — for example, by holding adequate capital to cushion against losses, or by building safeguarding features into contracts — and creditors are less likely to monitor their activities. This is the so-called “moral hazard” problem of the financial safety net: The expectation of government support weakens the private sector’s ability and willingness to limit risk, resulting in excessive risk-taking…The Richmond Fed’s view is that the moral hazard from the [Too Big To Fail] problem is pervasive in our financial system: the U.S. government’s history of market interventions — from the bailout of Continental Illinois National Bank and Trust Company in 1984 to the public concerns raised during the Long-Term Capital Management crisis in 1998 — shaped market participants’ expectations of official support leading up to the events of 2007-08. According to Richmond Federal Reserve Bank estimates, the proportion of total U.S. financial firms’ liabilities covered by the federal financial safety net has increased by one-third since our first estimate in 1999: The safety net covered 60 percent of financial sector liabilities as of 2013. More than 40 percent of that support is implicit and ambiguous.

Municipal Compliance. Cleveland this week agreed, as part of a settlement with the Justice Department, to create new watchdogs, retrain its police officers, and collect and analyze reams of new data as part of a settlement to resolve federal allegations that its police routinely used excessive force. The Cleveland police department, which has become a flash point in the racially charged debate over police tactics, has agreed to follow some of the most exacting standards in the nation over how and when its officers can use force, and will accept close oversight to make sure those rules are not ignored, city and federal officials said Tuesday. The agreement is part of a settlement with the Justice Department over what federal officials have termed a pattern of unconstitutional policing and abuse, with the Department having determined that police officers in Cleveland used stun guns inappropriately, punched and kicked unarmed people, and shot at people who posed no threat. In addition, the federal investigators determined the incidents often went unreported and uninvestigated. Under the agreement, Cleveland has agreed to document every time officers so much as unholster their guns: police supervisors will investigate the uses of force in much the same way that officers investigate crimes, or, as the agreement reads: “A fundamental goal of the revised use of force policy will be to account for, review, and investigate every reportable use of force.” The new federal rules prohibit officers from using force against people simply for talking back or as punishment for running away. Pistol whipping is prohibited, as is firing warning shots. In addition, the city has agreed to allow an independent monitor to track its progress. If the city does not put into effect the changes called for in the settlement, a federal judge has the authority to mandate them. (Under the Obama administration, the Justice Department has opened nearly two dozen civil rights investigations into the practices of police departments. Many of the elements in the Cleveland settlement — improved training, better internal oversight and an independent monitor — have become standard.) The Cleveland settlement came out of negotiations that commenced last year in the wake of discussions with the Justice Department after investigators determined that police in Cleveland engaged in a pattern of excessive force, although the settlement still must be approved by a judge. According to the U.S. Justice Department, problems in Cleveland involved both police shootings and blows to the head; Justice Department officials also cited what they called excessive or retaliatory use of Tasers, chemical sprays, and fists—including the department’s use of force against mentally ill people. As resolved, the agreement calls for a series of compliance actions intended to respond to the federal findings:
• Cleveland police would be required to try to de-escalate situations before using force and be barred from using force in retaliation;
• Officers will not be allowed to take their weapons out of their holsters “unless the circumstances create a reasonable belief that lethal force may become necessary,” and every time an officer takes out her or his weapon, an officer would have to document it; and
• A newly created inspector general is charged to monitor the department, while a civilian would oversee its internal affairs unit.

Cleveland U.S. Attorney Steven Dettelbach has called the agreement “a national model for any police department ready to escort a great city to the forefront of the 21st century,” while Cleveland Mayor Frank Jackson called the agreement a “very positive result.” Mayor Jackson reports the agreement, which will be overseen by an independent, court-appointed monitor, was the result of a long-running collaboration between the Justice Department and the city. He added, however, that the agreement will be not only complex, but costly: Cleveland and its taxpayers city will have to spend millions of dollars over several years in order to comply with the terms of the consent decree, according to Matt Zone, the chairman of the Cleveland City Council’s public safety committee, and will have to adopt a new ordinance to ensure that the city’s police officers are not able to use race and class as profiling techniques in their traffic stops and investigations. Unsurprisingly, several members of Cleveland city council expressed concern about the cost of implementing the consent agreement—a cost not disclosed by federal government officials involved in the new mandate, but one estimated to be in the millions of dollars.

Wealth Disparities. Christopher Ingraham this week wrote about an issue which has been the subject of governance discussion in Europe: wealth inequality, where it has been highlighted in a huge new report from the Organization for Economic Cooperation and Development (OECD). What is the distinction between income versus wealth inequality? Income is the amount of money one earns from work and/or investments, but wealth is what one owns: one’s home, car, savings, retirement accounts, etc. The OECD report finds that the richest 10 percent of American households earn about 28 percent of the overall income pie. In contrast, he writes, the wealthiest 10 percent of U.S. households now own or hold 76 percent of all the wealth in the U.S.—a percentage far greater than the globe’s other rich nations. Mr. Ingraham explains this extraordinary disparity by writing: “Let’s imagine that there are just 100 people in the United States. The richest guy―and, yes, he’s probably a guy―owns more than one-third of the total wealth in this country. He’s got a third of all the property, a third of the stock market and a third of anything else that can be owned. Not bad…The next-richest four people together own 28 percent of all the stuff. Divvied up four ways, that’s still not too shabby. The next five people together own 14 percent of all the things, and the next 10 own another 12 percent…We’ve accounted for just 20 percent of the people, but nearly 90 percent of the total wealth. Ninety percent! …The next 20 percent of people have only nine percent of the wealth to split among them…The next 20 percent, the middle wealth quintile, only have three percent of the wealth to split 20 ways…” Then, as he writes: “Now we’ve reached the bottom 40 percent of Americans, but guess what? We’ve run out of stuff. Sorry guys, you get nothing. In fact,…this bottom 40 percent actually has an overall negative net worth, which means that they owe more money than they own…” Unsurprisingly, this wealth disparity is most unevenly distributed across the country—and, since the General Revenue Sharing program created under the administration of former President Richard Nixon—a program explicitly recognizing that wealth and opportunity were unequally distributed across states and local governments, so that the federal government—and states—had a role in recognizing and leavening these disparities―but which was abandoned under the Reagan administration, the very apprehensions discussed by former President Nixon and the leaders of the nation’s governors, state legislators, and city and county leaders of increased disparities are transpiring. As one can see from the map of Baltimore below, this accelerating fiscal disparity can have explosive consequences—especially when it is constructed on federal policies.

Senate Appropriators Approve 302(b) Allocations. Before leaving for recess, appropriators in Congress made progress on moving spending bills. The table above provides House and Senate 302(b) allocations for FY2016, per the $1.017 trillion discretionary cap set by the Budget Control Act (BCA).

New Reporting Mandates. The Securities and Exchange Commission this week approved the Municipal Securities Rulemaking Board’s (MSRB) proposal to collect additional post-trade data for its electronic municipal reporting service EMMA; the new data reporting requirements, which will become effective next May 23d (2016) are included in amendments to MSRB Rule G-14 on trade reporting and the MSRB’s facility for its Real-Time Transaction Reporting System (RTRS). The amendments will require dealers to report new information through the RTRS, such as whether a trade occurred on an alternative trading system or involved a non-transaction based fee. They also would eliminate the requirement for dealers to report the yield for trades with customers.

2015 Schedule
March 13th. State & Local Governments Securities (SLGS). Congress’s failure to act to increase the nation’s debt ceiling triggered a federal unfunded mandate: the cost of refinancing state and local bonds and securities to increase.
July 31st. The current federal surface transportation law expires; the federal highway trust fund is projected to be out of money by mid-summer; state and local governments have already begun to cut back on projects. To date, there has been no progress in Congress.
June. The Export-Import Bank, which helps finance overseas purchases of American exports, might shut in the face of opposition to its mission.
Sept. 30. The Children’s Health Insurance Program faces expiration.
October 1. Sequester set to trigger.
September-October. Default? The government’s borrowing limit was reinstated on March 16, although Congressional Budget Office projects the government will likely come up against the ceiling in September or early October.
State & Local Finance

Mapping Challenges to Fiscal Sustainability. As can be perceived from the map to the left here, the increasing disparity in wealth discussed above is demonstrative of growing fiscal disparities in cities and counties across the nation. The ongoing, persistent federal reductions by means of sequesters and squeezing out of domestic discretionary investment—and significant growth in federal tax expenditure subsidies to those in least need has, it appears, significant and growing geographic and governance implications. Federal housing assistance today is dominated by federal tax expenditures—not federal housing programs from HUD. One only need look at the graphic here of the sea of vacant homes and buildings in Baltimore to appreciate how it is undercutting critical property tax revenues to the city—even as it is imposing ever greater public safety costs on the city’s depleting fisc. According to Scott Calvert of the Wall Street Journal, nearly 17,000 homes, or about 8% of the city’s housing stock, are deemed unfit for habitation. But, as in Detroit, the fiscal challenge confronting Baltimore is not just those residences that have become uninhabitable, but rather those that are abandoned: because the city’s population has declined more than a third over the last six decades. Whether it be Baltimore, Detroit, San Bernardino, or a growing list of cities throughout the nation, it appears a growing list of urban areas are confronting the twin fiscal risks of widespread vacancies: a risk not just to property tax revenues, but also as these neighborhoods become at risk to become magnets for criminal activity. Baltimore’s experiences demonstrate the exceptional challenges to the Mayor and Council: Between 2010, when it started a new program, and 2013, Baltimore sold 410 vacant houses for rehab; yet, as Mr. Calvert writes, more than 40% do not have use-and-occupancy permits, more likely than not meaning the house is vacant: a target not for property tax revenue, but rather for criminal use. Nevertheless, he writes, Baltimore has taken a three-pronged approach to tackling vacancies: enforcing city code more stringently by levying fines and persuading judges to force auctions if owners do not renovate; demolishing more than 1,500 houses, with hundreds more to be razed in coming years; and marketing some of its own vacant inventory, which accounts for about 15% of the total―adding: “‘Baltimore officials deserve credit for a higher-than-50% success rate on vacant homes sold by the city,’ said Frank Alexander, an Emory University law professor who co-founded the Center for Community Progress, a nonprofit that advises local governments on addressing vacant properties. ‘But they cannot fail to deal with those for which there has been no progress.’” While he said he understands officials’ reluctance to take properties back, failing to do so means the problem continues. More than 800 of the city’s 16,745 vacant homes are in Sandtown-Winchester, the site of Mr. Gray’s arrest and some of the worst looting of the protests.

In 1964, in his State of the Union address, former President Lyndon Johnson said:
This administration today, here and now, declares unconditional war on poverty in America. I urge this Congress and all Americans to join with me in that effort.
It will not be a short or easy struggle, no single weapon or strategy will suffice, but we shall not rest until that war is won. The richest Nation on earth can afford to win it. We cannot afford to lose it. One thousand dollars invested in salvaging an unemployable youth today can return $40,000 or more in his lifetime.

Poverty is a national problem, requiring improved national organization and support. But this attack, to be effective, must also be organized at the State and the local level and must be supported and directed by State and local efforts.

For the war against poverty will not be won here in Washington. It must be won in the field, in every private home, in every public office, from the courthouse to the White House.
The program I shall propose will emphasize this cooperative approach to help that one-fifth of all American families with incomes too small to even meet their basic needs.
Our chief weapons in a more pinpointed attack will be better schools, and better health, and better homes, and better training, and better job opportunities to help more Americans, especially young Americans, escape from squalor and misery and unemployment rolls where other citizens help to carry them.

Very often a lack of jobs and money is not the cause of poverty, but the symptom. The cause may lie deeper — in our failure to give our fellow citizens a fair chance to develop their own capacities, in a lack of education and training, in a lack of medical care and housing, in a lack of decent communities in which to live and bring up their children.
But whatever the cause, our joint Federal-local effort must pursue poverty, pursue it wherever it exists — in city slums and small towns, in sharecropper shacks or in migrant worker camps, on Indian Reservations, among whites as well as Negroes, among the young as well as the aged, in the boom towns and in the depressed areas.

Is Chicago Contagious? Our admired friends at Municipal Market Analytics this week raised concerns with regard to whether Chicago’s recent downgrade might be contagious, affecting the cost of municipal borrowing for other cities—a risk you can see (below) that can already be tracked to New Jersey municipalities. As my esteemed MMA colleagues wrote: “That such an important, economically vibrant city such as Chicago is considered junk credit by one of the major rating agencies makes for a perception problem that all issuers may have to contend with, adding: “The pension drumbeat only grows louder as it is the city’s pension liabilities that drove the credit action…In the days after the Moody’s downgrade, we saw significant retail selling of the city’s debt—even of other Chicago credits that were not downgraded. Additionally, many of the state’s own credits began to widen as many investors looked to shed any Illinois exposure whatsoever. Then the real contagion began to occur as other municipal credits that also have large [public] pension liabilities began to cheapen as retail accounts sold those bonds as well…Most notable was New Jersey appropriation debt [please note MMA chart below] but we also saw cheapening for Pennsylvania, Connecticut, and Louisiana general obligation debt.

The Sharing/Disruptive Economy

As we observe the changing economy—what with the sharing economy, the impact of the internet on work hours and locations, we can anticipate it will lead to profound changes in transportation and housing. Because the internet is permitting more people to work from anywhere, anytime, the old model of cities and suburbs is becoming increasingly obsolete.

The Disruptive, but Sharing Economy: What’sApp? Do States & Local Governments Need New Rules for the Sharing/Disruptive Economy?

Playing by the Tarheel Rules. Airbnb has announced that, effective Monday, June 1, it will begin collecting and remitting sales and hotel occupancy taxes to North Carolina—and sales and hotel occupancy taxes in four of the state’s counties (all of No. Carolina’s 157 counties and municipalities levy a local occupancy tax of at least 1 percent.) The agreement follows in the wake of the Raleigh City Council decision last December to declare Airbnb illegal—an action which led Councilmember Mary Ann Baldwin to work with the sharing company, noting: “Airbnb is a popular piece of this new economy that tourists and prospective residents expect to see in modern cities.” The state action makes North Carolina only the second state in which Airbnb collects a statewide tax—Airbnb does collect and remit occupancy taxes on behalf of its guests in several municipalities, including: Washington, D.C., Chicago, San Francisco, Portland (Ore.), Malibu, and San Jose.

Shairing. Airbnb will begin collecting taxes on behalf of D.C. residents: under the voluntary agreement, the District joins a smattering of municipalities with which Airbnb has worked out tax agreements to share some of its revenues—revenues for an emerging platform under which thousands of Americans have become innkeepers—but innkeepers not subject to the same tax, insurance, or public safety standards as their business competitors. The agreement could mean significant additional revenues for the city; for Airbnb, the promise to remit that money straight to D.C. treasury could help legitimize a service which, in many places, is still not strictly legal. In the cities where Airbnb has agreed or been required to do collect, Airbnb will automatically collect the local hotel or transient occupancy taxes, which run from about 5 percent to 14.5 percent in the District, on every transaction. Airbnb will then pay the municipalities cities in a regular lump sum, but will not include details about individual hosts or guests. Airbnb began collecting these taxes in Portland, Ore., last July and in San Francisco last October. Between those two cities so far, the company says it has already paid about $5 million in taxes (it has not, however, agreed to collect and remit back taxes anywhere). It will also be collecting and remitting in San Jose, Chicago, and Amsterdam—cities comprising some of Airbnb’s largest markets. As an Airbnb spokesperson helps us to understand: “In many cases, these taxes were designed for hotels and folks with teams of lawyers and accountants, and the reality is that the person who’s renting out his basement in Cleveland Park once a month probably doesn’t have tax experts on payroll…You shouldn’t need a lawyer and a tax specialist if you want to rent out your house.” On the newly receiving end, Stephen Cordi, the deputy CFO for D.C. explains to us: “It’s undoubtedly true that people particularly at the bottom end of this probably didn’t know what to do.” he says. Airbnb hosts should have been registering with the city and collecting the tax, which supports both a convention center fund and the city’s general fund — and, ultimately, services like the fire and police departments. Under this agreement, he notes: “This will eliminate the need for them to do that,” adding that Airbnb, rather than the District, took the initiative, which now means Airbnb hosts have a formal mechanism for paying taxes on an activity—even though it is still not exactly recognized by D.C. law: the District has yet to pass new regulation that would formally legalize the kind of short-term rentals Airbnb has made possible—unlike some municipalities, including Portland and San Francisco, which have adopted new laws explicitly legalizing the activity under certain conditions. Interestingly enough, Airbnb’s initiative to become a corporate citizen could send shock waves to other vacation rental companies, such as VRBO, because, unsurprisingly, Airbnb would like its competitors to compete on a level playing field, so that the company does not confront a disadvantage in a market where other platforms offer untaxed homes which may then be more attractive to potential lodgers. My colleague, Philip Auerswald, an associate professor at George Mason who studies innovation and entrepreneurship, argues that cities really ought to be responding to the rise of companies like Airbnb by broadly rethinking where and how they collect tax revenue in the 21st century: “It’s not particularly interesting or insightful to say ‘since hotels are taxed this way, it’s only fair,’” he says. “That makes sense as long as you think that whatever the status quo is is where we want to end up.”

Fractional Jobs: No Benefits. Christopher Mims of the Wall Street Journal this week described the new, emerging sharing economy as “a hodgepodge of mostly unrelated but often lumped-together startups, many originating in Silicon Valley, that involve ‘sharing’ things like cars and homes…’ adding: “The first thing everyone misses about the sharing economy is that there is no such thing, not even if we’re being semantically charitable…Increasingly, the goods being ‘shared’ in the sharing economy were purchased expressly for business purposes, whether it’s people renting apartments they can’t afford on the theory that they can make up the difference on Airbnb, or drivers getting financing through partners of ride-sharing services Uber and Lyft to get a new car to drive for those same services….What’s more, many of the companies under this umbrella, like labor marketplace TaskRabbit, don’t involve ‘sharing’ anything other than labor. If TaskRabbit is part of the sharing economy, then so is every other worker in America: The only thing these companies have in common is that they are all marketplaces, though they differ widely in the amount of control they give their buyers and sellers…perhaps the worst offender in how it controls its labor force is Uber: Uber sets the prices that its drivers must accept, and has lately been in the habit of unilaterally squeezing drivers in two ways, both by lowering the rates drivers are paid per trip and increasing Uber’s cut of those wages,” leading Britain’s Financial Times Izabella Keminska to note: “The uncomfortable truth is that the sharing economy is a rent-extraction business of the highest middleman order.”

Mr. Mims writes that Uber has reported it is hiring 20,000 new drivers a month, and in this report it claims that in major U.S. cities, such as Los Angeles and Washington, D.C., drivers are averaging more than $17 an hour; however, as he notes: this data hardly reflects what Uber drivers actually make, because Uber does not include drivers’ expenses: it turns out that being an Uber driver pays about $10/hour—and there are no benefits….It isn’t minimum wage, but it’s a far cry from Uber’s previous claims about what drivers make, which reached the height of absurdity in May 2014, when the company claimed that the median income for drivers in New York was $90,000 a year. Months of investigation of that claim by journalist Alison Griswold yielded not a single driver in New York making that much.” Then he adds; “What this all means is simple: Uber and its kin Lyft, which is more generous with its drivers but has a similar business model, are remarkably efficient machines for producing near minimum-wage jobs. Uber isn’t the Uber for rides—it’s the Uber for low-wage jobs: There is much gnashing of teeth by critics over whether or not jobs for ride-sharing companies are ‘good’ jobs, but data from both Uber and Lyft show that more than 80% of their drivers have other jobs or are seeking other work, and Uber has said that 51% of its drivers are driving less than 15 hours a week…Ride-sharing companies, like many other firms in the ‘sharing economy,’ allow for a new kind of employment—sometimes called fractional employment—in which people can take on extra work when and if they need it. The key to fractional employment is flexibility for both these companies and their workers. Economically, these companies have been explicit that their business model doesn’t work if their ‘driver partners,’ who are currently independent contractors, are treated like employees…And this is the final and most important thing that both critics and boosters get wrong about the sharing economy: That in order for it to move forward, regulators must decide whether its employees are independent contractors or employees….”

While he writes that drivers for Uber and Lyft, mostly part-time, appear relatively satisfied because of the flexibility with which they can earn their wages, he notes they are quite obviously neither employees nor freelancers: “Like Schrödinger’s cat, neither alive nor dead, they confound conventional definitions,” adding: “The only way forward is something that has gotten far too little attention, called “dependent contractors.” In contrast with independent contractors, dependent contractors work for a single firm with considerable control over their work—as in, Lyft or Uber or Postmates or Instacart or any of a hundred other companies like them. This category doesn’t exist in current U.S. law, but it does exist in countries such as Germany, where dependent contractors get more protections than freelancers but are still distinct from full-time employees…The alternative is the underappreciated possibility that ride-sharing companies could cease to exist entirely, owing to a class-action lawsuit that almost certainly represents an existential threat to their business. http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/: This is a link to a PBS speculative report about white collar jobs that can be performed by robots: three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and horrors, attorneys.”
RDDII? http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/. The above is a link to a PBS speculative report about white collar jobs that can be performed by robots. Three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and, horrors, attorneys.

Fragmentation Index? According to crack researchers at the University of Illinois at Chicago, the Windy City metro area is the country’s most governmentally fragmented with its 1,550 local governments. Rebecca Hendrik of UIC, one of the authors, and dubbers of the so-called “fragmentation index,” which compares some 51 metropolitan regions of at least 51 million residents, reports that while such a panoply of municipalities is normally assumed to increase the cost of governance, it can also increase competition, and, thereby, drive down the cost of public services—as well as allow “people to choose a local government based on their values.” She asserts that it is rather special purpose districts, such as school districts, park and fire districts—many of which overlap municipal borders—which can prove “costly and confusing,” adding that “[m]ost local governments in metropolitan areas can’t function without affecting their neighbors: they either collaborate or compete: Collaboration is being promoted for efficiency, but we need to consider what conditions affect collaboration versus competition: competition and collaboration are related phenomena, not two ends of the same spectrum.”

Driving a Hard Bargain. The second day of testimony in Lyft’s hearing before the Pennsylvania Public Utility Commission’s administrative law judges dealt mainly with insurance issues, and how passengers would be protected in the event of an accident; however, in the midst of the trial, Administrative Law Judge Mary Long closed the courtroom so that Lyft’s director of public policy, Joseph Okpaku, could answer questions about the number of rides Lyft provided while it was under a cease-and-desist order. However, just as Uber’s attorney refused in its hearing earlier this month, Lyft attorney Adeolu Bakare claimed such information was proprietary: releasing it could put his company at a competitive disadvantage—in effect seemingly in direct conflict with a court order requiring the company to disclose the information, which was issued by the administrative law judges: indeed, at one point, Counsel Bakare sought to have information about Lyft’s insurance policy’s terms and conditions protected as well, but Judge Long told him not providing information about the policy would “almost certainly result in dismissal of your application,” albeit after the hearing, PUC spokeswoman Jennifer Kocher explained that the judges ruled to make that portion of the hearing private in order to receive the information and allow the hearing to move forward, not because the information was truly proprietary. Judge Long said she would issue a ruling on the protected information. Both the ride-sharing companies drove into the Steel City earlier this year, where they have not only tangled with each other, but also with the PUC: neither company had the proper licenses to operate in Allegheny County as an alternative to taxicabs, which led to proposed daily fines of $1,000 and cease-and-desist orders against the companies—instead each is operating under temporary authority in Allegheny County. In its hearing, Lyft’s attorney explained that Lyft’s insurance acts as excess to a driver’s personal policy, and would act as the primary policy if the driver’s personal insurance denied a claim, adding that there are three periods during which Lyft considers its insurance policy active: 1) when a driver has the app open, but does not have a passenger, 2) when the driver is en route to pick up a passenger, and 3) during the ride itself. But in response to the question with regard to how Lyft verifies its drivers have insurance coverage, the attorney responded that Lyft asks for proof of insurance in the form of the insurance card provided to drivers, but it does not further verify the policy.

Arrivaderci! An Italian court this week bid arrivaderci to unlicensed car-sharing services such as those offered by Uber, in another setback for the fast-growing U.S. car sharing service. The court in Italy’s business capital of Milan determined the Uber POP service, which links private drivers with passengers through a smartphone app, created “unfair competition,” and that the use of Uber POP was forbidden, as was the offering of paid car-ride services by unlicensed drivers in any other way. The court gave Uber 15 weeks to comply with the ruling or face a fine of 20,000 euros for each day’s delay in meeting the court ruling.

The Silver Tsunami. U.S. District Court Judge Kevin Castel this week held that the Empire State’s Constitution does not protect former city Bronx City councilman and state legislator Larry Seabrook’s pension from a $418,000 forfeiture judgment issued in the wake of his corruption conviction. Mr. Seabrook has been convicted on nine counts of corruption and wire fraud in Manhattan Federal Court in Manhattan in a case involving the “misdirection” of some $1.5 million of taxpayer funds which were supposed to go to community groups to his own pocket, according to U.S. Attorney Preet Bharara, who noted: “Today’s conviction ensures that the Councilman will pay for betraying the public trust. Rooting out public corruption and restoring the public’s faith in honest government remains a vital mission of this office.” Mr. Seabrook had argued in court that his pension was protected by a provision of the state Constitution barring public pensions from being “diminished or impaired;” however, Judge Castel wrote: “This section of the New York State Constitution yields to the federal forfeiture to the extent that the state provision purports to foreclose forfeiture of Seabrook’s pension benefits.”

Hooked Horns. The Texas Senate has voted to beef up (a terrible pun) the state’s underfunded retirement system for state employees by adding about $440 million to the program, with the bill increasing state employee contributions to the system to 9.5%―the equivalent of a 2 percent increase―as part of an effort to address an approximate $7 billion shortfall, after approving House Bill 9, which the House passed and sent to the Senate in April.

Ethics & Public Trust
From the Richmond Times Dispatch: “Successful government relies on trust. The breakdown of comity at all levels reflects the citizenry’s lack of confidence in institutions and individuals. Washington’s woes are well documented. Local jurisdictions suffer self-inflicted damage as well.”

Inexcusable behavior at City Council meetings
The Virginian-Pilot this week ran an editorial (please see below) on an issue key to public trust:

Decorum in city council chambers lately has reflected poorly on this region’s citizens. Perhaps when people speak to elected officials, they take a cue from online forums, where rants and attacks are de rigueur. Perhaps they see nothing wrong with booing, berating, hounding, even threatening those with different opinions.
In Norfolk, a resident regularly heckles Councilman Paul Riddick during the public comment portion of council meetings. Riddick last month lost his temper and told the man not to come within 5 feet.

Sadly, in Portsmouth, the attacks come from the dais as often as from the audience. Councilmembers have hurled insults and profanities as they criticized each other’s ideas.
Most of the time, their comments, however obnoxious, are protected by the First Amendment. Federal courts have ruled that comments sharply critical, even personal, about a city council or school board member are allowed under the Constitution.
Protected status doesn’t make such speech persuasive, however; often, it’s simply an embarrassment and a distraction that garners attention on TV and online.
Virginia Beach City Councilman Bobby Dyer says his city can do better. During the contentious budget hearings, residents compared the City Council to Nazis. Another made a racist remark to a councilwoman. One woman approached Councilwoman Rosemary Wilson and yelled that she was “coming after” her.
Dyer said he understands that some citizens are angry about the tax increase. They have every right to express their frustration. But there are ways to communicate that message respectfully, he said, proposing the council develop more guidelines “to make things easier in building bridges.”

According to the city’s rules of conduct, “Any person addressing the council shall confine himself to comments germane to the action under debate, avoid reference to personalities, and refrain from vulgarity or other breach of respect. For any failure to so conform, he shall be declared out of order by the presiding officer and shall forthwith yield the floor.”
The question is how much further the council can go in defining “breach of respect” and “reference to personalities.”

A federal court 14 years ago struck down a Virginia Beach School Board bylaw that prohibited personal attacks during public comments at meetings. The court ruled that the bylaw acted as a filter to screen out negative comments toward School Board members and the administration while allowing proponents to speak.

As the First Amendment Center explained in 2004, “Government officials may not silence speech because it criticizes them. They may not open a ‘public comment’ period up to other topics and then carefully pick and choose which topics they want to hear. They may not even silence someone because they consider him a gadfly or a troublemaker.”
But those constitutional rights aren’t absolute. Speakers can – and should – be silenced if they are disruptive.
As Beach Councilman John Moss noted, “a number of people went way, way over the line” in their comments to the council this spring. “It was way too personal.”
Councilmembers agreed to discuss possible solutions – asking speakers to affirm in writing the code of conduct, for example, or more aggressive use of a sergeant at arms.
Here’s the best idea of all: People – whether council member or citizen – should speak their mind, and mind their manners.

Untrustworthy Math? Jim Bacon, the fine writer of his Blog, “Bacon’s Rebellion,” this week wrote about the (see: “A Strike Force about as Effective as the Iraqi Army”) interparty feud from the Virginia gubernatorial election in 2013, when former Virginia Attorney General Ken Cuccinelli lost to now Gov. Terry McAuliffe by 56,000 votes in a gubernatorial race in which he was outspent by two to one, with Mr. Bacon asking: “Would $85,000 more in his campaign war chest have made a difference in the election?…Probably not — the number was a small fraction of the $21 million Cuccinelli spent — but it’s a point worth pondering, given news that the Conservative StrikeForce PAC has agreed to pay $85,000 and hand over fund-raising contact lists to Mr. Cuccinelli, according to the Washington Post.” He notes that Mr. Cuccinelli, in his suit, had accused the PAC of raising funds which were never delivered to his campaign, estimating that the group had succeeded in raising about $435,000 from emails using his name; thus, he alleged that he had received only $10,000. In fact, Mr. Bacon notes. between January 2013 and June 2014, according to Federal Election Commission records, Conservative StrikeForce raised more than $2.8 million overall, of which it paid only $82,000 toward candidates or campaign committees, unsurprisingly leading the former state Attorney General to note: “It’s just a thunderous precedent…to make it harder and more expensive to be deceitful and misleading with people in the political arena as far as donations go…In an already sour environment, people who think they’re supporting something they believe in are defrauded.” The Washington Post article provides no response from Arlington-based Conservative StrikeForce, its chairman, Dennis Whitfield, or its independent treasurer and outside consultant, Scott MacKenzie; but, as Mr. Bacon writes: “[A]n outside observer must wonder if this is a case of an opportunist mimicking the police and veteran fund-raising scams in a political context. In a similar case, the Post notes, a committee to recruit conservative physician Ben Carson to run in the 2016 presidential race spent $2.44 million to raise $2.4 million.” For his bottom line, Mr. Bacon writes that: “Maybe this was a case in which Conservative StrikeForce just wasn’t very effective at its job, which it defined on its website as raising small contributions for conservative candidates through mail, direct mail and telephone solicitations. Or maybe it was a cynical ploy for the organizers to pay themselves handsome salaries and perks. We don’t know. But, sad to say, in the wild, wild world of political financing, we’ll probably be reading about a lot more cases like this one.”

Daily Press Editorial: Running for public office takes courage, confidence and the committed support of family and friends. The endeavor is not easy — walking through neighborhoods and knocking on doors takes plenty of time and effort — nor is it cheap, since campaign signs do not grow on trees. So as we head down the stretch toward Election Day, we extend our gratitude to those who volunteered for the experience and seek a place in local government. And we encourage other civic-minded citizens to lend their time and talent to the calling of public service, since our communities will surely benefit as a result.

Bill Bolling, former—and now convicted—Governor Bob McDonnell’s lieutenant governor, and current Co-Chair of the Governor’s ethics commission, writes on his Facebook page:
“The public’s trust is hard to gain and easy to lose.”

May 26, 2015

How Can Municipalities Share in the Emerging, Sharing Economy


What Are the Signs of Municipal Fiscal Unsustainability?

Visit the project blog: The Municipal Sustainability Project 

The Trials & Tribulations of Sharing. Getting into municipal bankruptcy can be painfully easy; getting out is exceptionally painful and hard; and following through on one’s plan of debt adjustment can be equally challenging. Thus, metropolitan leaders in the Motor City region are racing to meet a mid-June deadline to complete and sign the dotted line to create a regional water authority — one of the final steps necessary to complete Detroit’s plan of debt adjustment. The plan, as approved by the U.S. bankruptcy court, included a key provision under which Detroit would lease its Water and Sewerage Department assets to a new Great Lakes Water Authority (GLWA) within 200 days. (Under the initial agreement, a six-person board was established for the GLWA, comprised of one member from each County, one from the State of Michigan and two from the City of Detroit. All board members were appointed by January 7, 2015. A “super majority” of five votes is required to approve major decisions, such as those involving rates, capital improvements and other matters as set forth by the Authority.) But sharing, it turns out, is a challenge: neighboring Macomb County Executive Mark Hackel is bridling about what he perceives as too tight a timeline. The proposal, which came from former Detroit Emergency manager Kevyn Orr—with strong support from Gov. Rick Snyder, was initially opposed by Macomb County and Oakland County Executive L. Brooks Patterson, who were concerned about what was perceived as a plan to force suburban ratepayers to subsidize city government operations and debt repayment. Nevertheless, under federal bankruptcy court mediation, an agreement was reached last September to create a new metropolitan authority, which would lease Detroit’s water and sewer infrastructure, with the proviso that the new authority’s $50 million annual lease payments to Detroit could be used only for water and sewer infrastructure improvements: they could not be used to support the city’s operating budget as Mr. Orr had originally proposed. Yet, as the Flag Day deadline draws nigh, city and suburban officials and a team of consultants are running up against it, as they are trying to finalize audits of the Detroit water system’s finances and its pension liabilities. Moreover, they are seeking to complete a financial feasibility study on the impact of the water authority making the annual lease payments to Detroit. Moreover, the pressure is coming from this weekend’s Mackinac Policy Conference, where planners hope to highlight Detroit successful emergence from the largest municipal bankruptcy in American history at a special panel discussion (“Detroit: Architects of Prosperity”) featuring Mr. Orr, retired U.S. Bankruptcy Judge Steven Rhodes, Ford Foundation President Darren Walker, and Chief U.S. District Court Judge Gerald Rosen, who served as the breakthrough mediator for Judge Rhodes. Under the plan, the Detroit Water and Sewerage Department will retain control of the Detroit’s water and sewer lines and become a retail-oriented city department focused on collecting bills, but to get there, some 150 local officials and consultants are working out details related to the pension liabilities of the Detroit water system and other long-term financial projections for the water authority, plus finite details of splitting the Detroit water department in half. That is: there is waning time, but a plethora of inconvenient details critical to meeting the deadline. It might help that all three levels of government are seeking to make this work: last February, U.S. District Judge Sean Cox, the mediator, ordered Detroit and its neighbors to convene confidential talks about the authority in the wake of criticism by county executives about the validity of the information the city provided on the water department: Judge Cox prohibited all parties from divulging information about the negotiations.

A Hard Trek Ahead. Cassie Macduff of the Press Enterprise has written a brief description of the exceptional challenging road San Bernardino has just entered, as it begins its long and expensive journey through the U.S. Bankruptcy court to seek Judge Meredith Jury’s approval of its proposed plan of debt adjustment. Ms. Macduff noted that San Bernardino is the poorest large city in California; it is the second poorest city in the nation, after Detroit. Its Parks and Recreation Department offers no youth recreation programs. It has no funds to buy books for its public library. Its police and firefighters have salaries lower than their peers in like-sized California cities. Its non-public-safety employees have gone without raises for a decade—or, as she wrote: “Any one of those points is cause for concern. Cities with high poverty and crime rates, like San Bernardino, need recreation programs to keep kids out of trouble. As for the library, if any city needs a vibrant one, San Bernardino does. Families who can’t afford to buy books to read to their toddlers need to be able to check them out of a library. Reading to children improves how they will do in school, putting them on the path to a productive life. People who don’t own computers need access to library computers to search job postings, fill out applications, write resumes and more. Libraries offer literacy programs for adults who can’t read. Reading skills enable them to get better jobs…”

Authorizing Municipal Bankruptcy: What Is or Could be the Role of States? With discussion underway in the Illinois Legislature about potential state legislation to authorize local governments to file for municipal bankruptcy (House Bill 298, endorsed by Illinois Gov. Bruce Rauner; CivicPartners LLC and Marc Joffe, an independent state and local government research analyst, after examining financial statements of all but the state’s smallest municipalities filed with the state controller, and considering government-wide unrestricted net position and general fund balances, determined that some 20 Illinois municipalities were distressed enough to qualify or be eligible for municipal bankruptcy under the proposed provisions Their analysis came as the legislation is currently under consideration by the House Rules Committee. In their report, after examining financial statements of all but the state’s smallest municipalities filed with the state controller, and considering government-wide unrestricted net position and general fund balances, the dynamic duo determined these municipalities were distressed enough to qualify or be eligible for municipal bankruptcy under the proposed provisions, and identified five of the more than 1500 municipalities in the Windy City metropolitan region as most vulnerable to a Chapter 9 filing, based on the financial measures coupled with additional evidence, such as negative auditor opinions or media reports. The common ingredient, according to Mr. Joffe, was fiscal mismanagement: “That’s one reason I felt strongly about highlighting those communities; there’s confirming evidence above the numbers…I’m not saying these are absolutely the five most likely cities to default or get a bankruptcy, but clearly they’re among a very small number of municipalities which are vulnerable to bankruptcy given their extremely bad position.” Mr. Joffe added: “A lot of times these things flow off the radar because they’re not rated.” Nevertheless, the legislative efforts to offer these municipalities a route to address their looming insolvencies have become enmired in the Illinois House Rules Committee, where, it seems, according to a spokesperson for House Speaker Michael Madigan (D-Chicago), the legislation has “failed to stir up enough support.” While Gov. Rauner has already cited the Chicago Public Schools as a possible candidate for municipal bankruptcy should the proposed enabling legislation be enacted. For his part, Mr. Joffe cited five municipalities: Dolton, Country Club Hills, Sauk Village, the Village of Maywood, and the City of Blue Island—with the most visible evidence, according to Mr. Joffe: “You can see property prices crater in a small area, and they have no margin of error they’re very vulnerable.” Dolton, south of Chicago with a population of 23,000, reported a small negative net unrestricted position in its 2013 finances and a general fund balance that was positive but well below Government Finance Officers Association guidelines that general fund balance should equal two months’ of expenditures. Dolton’s general fund balance would cover less than a month of expenditures, according to the report. Unsurprisingly, leaders of some of those cited municipalities see things differently, with one leader noting that at the time he took office in 2012, Dolton was “a poster child for bankruptcy…Mayor [Riley] Rogers inherited a nightmare,” but since his taking office, the village is now less than a year behind in its annual audits and expects to file its latest audit in August, adding that the municipality’s home-rule powers make a municipal bankruptcy unnecessary: “If we were in dire straits – which we are not – the board can raise real estate tax or a cigarette tax or motor fuel or a you-name-it tax that would assist in any financial woes which we would have.” The report also cites Maywood, a village of about 25,000 in Proviso Township in Cook County as a top municipal bankruptcy candidate: the municipality has a crime rate 1000 percent the statewide rate, has struggled for years with falling revenues, and has high unemployment: it has been unrated since 2011 when Moody’s withdrew its rating due to lack of timely information, and the village failed to file audited financial information from fiscal 2008 through 2013. Nevertheless, Maywood issued $16.8 million of unrated general obligation bonds earlier this year, promising as part of the issuance it would file annul audited financial statements.

The report says Sauk Village, another municipality in Cook County with average annual income of about 80% of the Illinois average, and which has an unrestricted net position of negative $36.7 million, a negative general fund balance, and currently has $2.1 million of interest costs, which account for more than 15 percent of revenue, according to the report, or, as Mr. Joffe wrote: “To the extent that interest expenses crowd out spending on resident priorities, political leaders have an incentive to default on debt obligations as a way to shift spending to more popular purposes.” The report also names Blue Island, still another small municipality in Cook County, this one with a population just under 24,000 with average income about 70% of the statewide average. The municipality has a general fund balance of negative $10.5 million with only $16.3 million in general fund revenue as of fiscal 2013, according to the report.  Nearby Country Club Hills, a municipality in Cook County, with a population just under 18,000, was the most delinquent in filing audited financial statements among all the municipalities Mr. Joffe reviewed: the municipality had not yet filed for FY2013: its FY2012 financial statements show a large negative general fund balance, leading the municipality’s auditor to say it could not verify the accuracy of the city’s statements, because the city did not maintain accurate accounting.

What Are a State’s Options? Illinois has not enacted legislation to permit its municipalities to file for chapter 9 municipal bankruptcy; it has two statutes to address distressed local governments: the Financially Distressed City Law and the Local Government Financial Planning and Supervision Act. While some municipalities have availed themselves of the former, it appears that no financially stressed municipality has ever sought to use the financial planning and supervision act. The quasi godfather of municipal bankruptcy knowledge and expertise, together with the exceptional fiscal wizards at the Chicago Civic Federation have been pressing for the creation of an early intervention program: that is, in what ought to be unsurprising, they believe it is critical to address fiscally faltering municipalities before they reach a crisis point—fully aware of the exceptional short and long-term costs to a municipality of going through municipal bankruptcy. Thus, they have proposed the creation of an Illinois Municipal Protection Authority: a quasi-judicial authority to help Illinois governments deal with pension-related and other fiscal burdens, not unlike New York’s early-intervention program: a fiscal scoring system that alerts the state of distress. For his part, Mr. Joffe says: “We hope that local leaders and active members of each community review the financial records we have referenced and begin to pursue policies that bring their municipalities back from the brink.”

Is There a chocolately, Post-Bankruptcy Fiscally Sustainable Path Forward? Moody’s has upgraded the general obligation rating of post municipal bankruptcy Central Falls, Rhode Island to Ba2 from Ba3, while maintaining a stable outlook. The move, which still leaves the bonds at speculative grade, affects $7 million of the city’s outstanding debt, but is, needless to write, as its Mayor James Diossa says: “[E]xciting news for the city and its residents who have worked hard to help the city recover from the corruption and mismanagement of the past…During my administration, Central Falls has seen several positive ratings and outlook upgrades that reflect the forward direction the city has taken. Gradually, we have achieved milestones like this ratings bump that will have longstanding effects on the future of the city.” The municipality, which we visited in its earliest days under a state appointed receiver—and about which we published a report and guidebook [Financial Crisis Toolkit (printable, created without digital tabs)], of just under 20,000 and walking distance from City Hall in East Providence, filed for Chapter 9 municipal bankruptcy in August 2011, reporting an $80 million unfunded pension liability. It exited 13 months later after exacting benefit cuts of up to 55% for its retirees—cuts which the state subsequently assisted in partially restoring. In its upgrade, Moody’s noted the upgrade “reflects a multi-year trend of favorable operating results [before capital transfers] since its emergence from Chapter 9…The bankruptcy process resulted in material financial relief to the city through a reduced labor force and restructured pension and [other post-employment benefits],” adding that Central Falls’ recent operating results have generally exceeded the projections of its plan of debt adjustment. Nevertheless, Moody’s moodily opined: “The city continues to face significant challenges, however, including high fixed costs [comprising pension, OPEB and debt service expenses], weak projected revenue growth, significant capital needs, and weak socioeconomic indicators,” adding that its rating also factors in the municipality’s “very narrow,” unrestricted operating reserve position at 2.9% of general fund revenues, driven largely by a requirement in the city’s bankruptcy recovery plan that most of the operating surpluses be transferred to a restricted capital fund through fiscal 2017. According to the rating agency, its rating also incorporates additional credit strength from the 2011 Rhode Island law creating a priority lien for GO bondholders that essentially set up Central Falls for a clean bankruptcy filing. The Moody’s outlook came more than two months after S&P had revised its long-term outlook on Central Falls to positive from stable while also affirming its junk-level BB long-term rating.

The Many Interlocking Parts Critical to a Sustainable Fiscal Future


May 22, 2015
Visit the project blog: The Municipal Sustainability Project

The Many Interlocking Parts Critical to a Sustainable Fiscal Future. The Wayne County Board last evening unanimously approved County Executive Warren Evans’ reorganization plan—a plan which will now give the green light to consolidate county departments and reduce the county’s structural debt by about 5 percent—a savings Mr. Evans believes vital to averting a potential state takeover if the county—which surrounds Detroit—is unable to make major changes. Thus these changes, adopted last night as a first step and abrupt change in fiscal direction, have critical implications for Detroit’s fiscal sustainability and recovery, as well as Wayne’s. Wayne’s structural debt is a toxic fiscal product of its underfunded pension system and a $100 million drop in annual property tax revenues since 2008. At the time Mr. Evans took office, Wayne County was on course to be insolvent by August of next year, according to an Ernst & Young audit: Wayne has, for years, run a structural deficit now estimated at $50 to $70 million. It has an accumulated deficit of roughly $161 million and a pension plan with a funded status that’s fallen to 45% from 95% ten years ago. Thus, the county’s elected leaders confront a hard fiscal road to sustainability ahead—and Detroit has, very much, a stake in that endeavor. The reorganization plan approved Thursday is part of a larger, structural recovery plan which Mr. Evans had unveiled in April. That plan proposes to eliminate the structural deficit by eliminating retiree health care, increasing employees’ retirement age, and making various pension changes. Under the plan adopted yesterday, the county would eliminate various departments and consolidate others as it begins its efforts to face down its $52 million structural general fund deficit. As County Executive Evans put it yesterday: “My team and I invested a great deal of time and thought into how the county should best serve our residents and businesses…It represents the ‘new Wayne County’ — how we need to work to provide services more efficiently and effectively.” Indeed, as Commissioner Tim Killeen (D-Detroit) said immediately prior to the vote: “This is the third reorganization that I’ve been here for, and I very much appreciate the negotiations, the coming together of minds (with the administration) on this…I think there was a lot more depth to this reorganization plan than I’ve seen in previous ones…I think overall it bodes well as the commission and the executive branch are trying to…get the county on a better path.” For his part, Mr. Evans notes: “(The plan) represents the ‘new Wayne County’ — how we need to work to provide services more efficiently and effectively for residents and businesses to live and grow.” Under the plan, the county will combine its Children and Family Services, Health and Human Services, and Veterans Services departments into a new department of Health, Veterans and Community Wellness. In addition, the plan also calls for shifting the Department of Economic Development Growth Engine’s functions to the Wayne County Economic Development Corp., a quasi-public agency—a move projected to eliminate 50 jobs. Nevertheless, getting there was not easy. Just as in San Bernardino, charter provisions hampered efforts: for instance, after county commissioners raised questions earlier this month about what they believed were potential violations of the county charter in the plan, Mr. Evans yesterday informed them that he and his staff had made some changes to address commissioners’ concerns: for example, the Senior Services Department was to be combined into the same department as Children and Family Services, Health and Human Services and Veterans Services, but, instead, the plan was revised so that senior services is to be reorganized into a separate department overseen by the director of the new health and community wellness department. Reversing fiscal directions and constructing a long term fiscal sustainability plan may be one of the greatest challenges of governance.

Indices of Municipal Recovery & The Challenge of Fiscal Sustainability

May 21, 2015
Visit the project blog: The Municipal Sustainability Project

Tapering Off? Detroit has one of the broadest tax bases of any city in the U.S.: its municipal income taxes constitute the city’s largest single source, contributing close to 21 percent of total revenue in 2012, or $323.5 million, the last year in which the city realized a general fund surplus. Thereafter, receipts declined each year through 2010, reflecting both a rate reduction mandated by the state and the recession. The declining revenues also reflected not just the significant population decline, but also the make-up of the decline: the census reported that one-third of current residents were under the poverty line and that the composition of businesses—unlike any other major city in the nation—was primarily made up of public organizations. Today, according to the Census, Detroit is still losing residents, but the exodus is tapering: Detroit’s population was 680,250 as of last summer, down an estimated 6,424 residents from the previous year—but a decline or outflow smaller than the previous year—when the drop was 10,072―and significantly lower than the annual average decline of 24,000 which Detroit experienced in the first decade of this century. Kurt Metzger, director emeritus of Data Driven Detroit, not only a demographer, but also the Mayor of Pleasant Ridge, notes that the influx is from young and older people moving in: Last year, Detroit issued 806 building permits for new construction, mostly for apartments, more than double the influx from the prior year. And, on the other side of the equation, the population outflow is slowing—or, as Mayor Metzger puts it: “There is just less housing available for those people who want to leave…If they haven’t left by now, they have decided to stay.” Detroit Mayor Mike Duggan sums it up: “It’s trending in the right direction…A number of people have decided to stay and see how things go…More people are staying in neighborhoods and more people are moving in.” Nevertheless, the Southeast Michigan Council of Governments has reported that the Motor City’s population is actually closer to 648,002 and the COG forecasts the population will continue to decline until 2030 when it would have about 610,000 residents.

Indeed, home sales in the four-county metro Detroit region inched up 1.4 percent year over year in April, while the median home sale prices climbed 18.9 percent, according to a report released this week. Farmington Hills-based Realcomp Ltd. II reported there were 4,004 home sales last month, compared to 3,947 in April of last year in Wayne, Oakland, Livingston and Macomb counties. Median sale prices rose from $121,900 in April 2014 to $145,000 last month. Oakland County had the greatest increase in home sales, rising 12.6 percent from 1,286 in April 2014 to 1,448, while Macomb had the second-highest increase of 7.3 percent, from 862 to 925 last month, according to Realcomp. Wayne County sales, however, fell 10.2 percent from 1,553 in April 2014 to 1,395 last month. In contrast, however, Wayne County sale prices rose 42.7 percent from $70,000 to $99,900.

Fire over Privatizing Essential Municipal Services. Despite the 6-1 affirmation by Mayor Davis and the City Council this week to contract out for fire and emergency response as part of San Bernardino’s proposed plan of debt adjustment—which is to be submitted to the U.S. Bankruptcy Court by Saturday, the proposal to do that is now drawing its own fire—not only from within the city, but also beyond its borders. The proposal, projected to save as much as $7―$10 million annually, depending on bids due in late yesterday and to be made public next week, has fired the head of Local Firefighters union 935 north to the state capitol in an effort to seek to preempt the proposal. Yet the proposed privatization has become a pivotal part of the city’s plan to successfully exit municipal bankruptcy—not only could it result in substantial operating and capital savings, but also the proposal could reduce some of its overbearing debt to the California Public Employees’ Retirement System, according to City Manager Parker—whose City Council endorsed plan for fiscal recovery and sustainability proposes that fire/emergency response and refuse services be the highest-priorities for outsourcing. With a demographic trend demonstrating that retirees are likely to live much longer than prior generations—but smaller municipal workforces in California municipalities, there is greater and greater awareness that California cities and counties are, increasingly, walking a fiscal tightrope where fiscal sustainability is increasingly at risk. That is not to say that contracting out will not create challenges: it would force recalibration of mutual aid decisions.

Moody Blues. Moody analysts Josellyn Yousef, David Strungis, Orlie Prince, and Naomi Richman this week reported that the sale of New Jersey state-enhanced municipal bonds for Atlantic City, would remove a “major short-term obstacle” for the fiscally distressed municipality, but warned the city still faces long-term risks due to “numerous financial challenges.” The warning came as the city was seeking to complete the sale of some $40.5 million in general obligation municipal bonds this week, a sale benefited under New Jersey’s Municipal Qualified Bond Act program (The state program, called the Municipal Qualified Bond Act program, gives Atlantic City bondholders protections similar to the distributable state aid bonds issued by Detroit, Michigan.) The proceeds of the sale are to be used to pay off a $40 million emergency state bridge loan due by the end of this week. In addition, Atlantic City is planning to issue $12 million of additional MQBA bonds by the beginning of August in order to make payments due on maturing bond anticipation notes. The sale, according to the dynamic Moody quartet should “should improve [Atlantic City’s] market access; however, the relatively narrow debt service coverage from state aid makes it unclear whether the city’s bonds would carry the MQBA program rating (A3 negative), or a somewhat lower rating.” Moreover, notwithstanding the relatively sunnier outlook, the quartet noted many financial and fiscal hurdles still confronting the city, including a $101 million budget gap for the fiscal year ending Dec. 30th, poor liquidity, and ongoing property tax appeals on casino properties. They also wrote that heavier municipal reliance on MQBA-enhanced debt could mark the beginning of some erosion in New Jersey state aid to help the city cover debt service, noting that since the state aid never reaches the city’s coffers, ‘the protection is similar to Detroit’s distributable state aid bonds that avoided payment interruption during its recent bankruptcy.’ Thus the credit rating agency warned that additional MQBA bond issuances by Atlantic City could actually undercut its debt service coverage levels: “If all of this debt is issued through the MQBA program, debt service coverage could decline to at or near one times qualified state aid depending on interest rates…The state Local Finance Board will only approve an MQBA bond issuance if revenues are at least sufficient to meet debt service.” With the city having acted last March on a short-term plan to address Atlantic City’s $101 structural deficit that included the potential of debt payment deferrals, Moody’s analysts noted that while some steps have already been taken, including $7 million in salary and wage savings from 195 layoffs; nevertheless, proposed bills to redirect $47.5 million of additional revenues from the Atlantic City Alliance Fund and Investment Alternative Tax remain stalled in the state legislature. As Mayor Don Guardian noted at our conference with the Volcker Alliance earlier this Spring at the New York Federal Reserve, the state action is critical: absent a significant liquidity infusion, debt service payments still remain highly susceptible to default in 2015—or, as the analysts put it this week: Atlantic City’s “future operations continue to face pressure from a large structural deficit.”

Unequal Odds. The Commonwealth of Puerto Rico has warned in its latest quarterly filing that it may place a moratorium on debt payments in FY2016 if the government is unable to enact a new tax plan and reduce its rate of spending growth to both balance the island’s budget and to begin to whittle away at its massive accumulated debt. Its combination of rising debt, sluggish economy, and falling population has lifted the yields on the Commonwealth’s debt above those of Greece amid growing uncertainty—and doubt—whether the Commonwealth can repay its debt on time and in full—and whether Congress will act to give the U.S. territory authority to renegotiate its debts in a U.S. bankruptcy court: because the island is not a state, there is no state to grant the territory—or its municipalities—authority to file for municipal bankruptcy and work out its debts through a plan of recovery under a federal court’s supervision. Thus, absent the kinds of legal and fiduciary protections available to all other Americans, the elected state and local leaders—and their citizens—increasingly confront a process likely to be far more uncertain and expensive: lawyers for all the different parties—bond holders, banks, bond insurance companies, and government entities—will probably have to rack up lots of billable hours as they seek the best outcome for their clients. Unsurprisingly, the territory’s many municipalities can hardly afford comparable legal representation, so that, absent Congressional action, there is a signal risk of municipal harm. In contrast, a group of 35 hedge funds have retained Morrison & Foerster, as well as Washington-based Robbins Russell Englert Orseck Untereiner & Sauber. That is, hedge funds and distressed-debt buyers, rather than the public, appear to have the upper hand. Indeed, for nearly two years, hedge funds and investors in riskier municipal debt have been purchasing Puerto Rico securities at distressed levels. There is no indication such purchases have anything to do with public purposes or the interests of the U.S. citizens. A group of 35 hedge funds, led by Fir Tree Partners and others, holds $4.5 billion of Puerto Rico debt: that is, these are businesses which purchased public debt at a discount, hoping to make a profit on Puerto Rico municipalities that can either avoid a default or that offer recover rates higher than what the hedge funds originally paid to own the bonds. Prices on Puerto Rico’s GO bonds maturing in July 2041 fell to as low at 55 cents on the dollar back in July 2014: now they are trading at about 66 cents, according to data compiled by Bloomberg.

A Legacy for a City’s Future

San Bernardino Clears Path for Trial. On a 6-1 vote, Mayor Carey Davis and the San Bernardino Council yesterday voted in support of the city’s proposed plan of debt adjustment, clearing the way for the plan to be submitted to U.S. Bankruptcy Judge Meredith Jury, and opening the door for a trial which could take as long as a year to resolve the competing claims of thousands upon thousands of the city’s creditors, as well as for the city to try and convince the federal court it has a viable, sustainable plan for its fiscal future. Indeed, yesterday’s vote is not even necessarily the final say: with the city’s plan not due to Judge Jury until Saturday, yesterday’s adoption of the plan paves the way for intense negotiations among creditors with the city—as any further agreements could reduce the extraordinary costs to the city and its taxpayers of pending long and complex litigation in the federal courtroom. Nevertheless, San Bernardino County Supervisor Josie Gonzalez, whose district covers most of San Bernardino, yesterday, in city council chambers, said: “I, no different from the people in this room, value this moment as part of what will become your legacy in great history…Do not think of yourselves today. Think of 25 or 30 years in the future, and let it be said that on May 18, 2015, the leadership of San Bernardino was strong, and honest, and ready to introduce the future.” In contrast, one resident saw it from a very opposite extreme: “Today is the day the City Council committed suicide for San Bernardino.” The proposal in the adopted plan to outsource the city’s fire department drew the greatest opposition.

Creating a Sustainable Future


May 18, 2015
Visit the project blog: The Municipal Sustainability Project

Architects of the Future. “We must be architects of a new beginning, and not slaves to the past,” San Bernardino Mayor Carey Davis stated Saturday in the wake of a presentation to the city’s strategic planning committee on the city’s current situation and possible future of the city’s proposed plan of debt adjustment—a plan which, unlike comparable plans in Detroit and Central Falls, Rhode Island, must be publicly approved before it can be submitted to the U.S. Bankruptcy Court next week. That is: there is a double approval process for a plan which is proposing significant changes in the way San Bernardino governs and which is proposing deep cuts and extensive restructuring. But it is also a plan, as in Detroit, Stockton, and Jefferson County, which is focused on the future. Nevertheless, the proposal received approval in advance of this afternoon’s vote by the City Council. Saturday’s session, at which representatives of business, education, religious and, other fields appointed by the Mayor to serve as a task force to decide upon a long-term strategic plan for the city, was a key step in trying to get broad community—in addition to Council, support. While the vote was advisory―another part of an effort to gather public input on the city’s plans―it appeared to demonstrate broad community report for the hard decisions and actions that lay ahead as the city proposes a plan to address its $20 million structural deficit and years of deferred maintenance that some project will cost some $200 million to address. The plan, which proposes extensive outsourcing, especially with regard to fire and refuse services—and a charter change, efforts to change that the city has previously, albeit unsuccessfully, provides an idea of how difficult a challenge lies ahead—even if the plan is approved by the City Council and, eventually, by the federal court. That is: it will be a plan of may complex provisions, changes in governance, new tax revenues—revenues counted on, but nevertheless dependent on the city’s voters—such as whether or not to renew the Measure Z sales tax in 2021―revenues the plan counts on to bring in $8.3 million annually.

Ojala! Puerto Rico’s leaders reached agreement Friday on a sweeping tax and spending plan that could result in a balanced budget for the U.S. Territory, albeit its implications, if this second such effort with the legislature were approved are uncertain. The agreement, framed by Gov. Alejandro García Padilla and legislators from his Popular Democratic Party, proposes more than a 50 percent increase in the territory’s sales and use tax, from the current 7 percent to 11.5 percent, out of which, about 90 percent of the revenues would go to the territory and just over 10 percent would go to the island’s municipalities—as a first step in a transformation of the Territory’s sales and use tax to a VAT or value added tax―a tax which would apply not just to goods, but also to services, except for health, education, prescription drugs, rent, mortgage payments, and utility payments. Junk credit-rated Puerto Rico faces a $191 million deficit in this year’s spending plan, and a nearing July 1 deadline by which to adopt its FY2016 budget. A planned sale of $2.9 billion of bonds backed by oil taxes hinges on achieving a balanced budget, a five-year financial framework and new revenue measures, according to its Government Development Bank: the Commonwealth and its agencies have $72 billion of debt. Lilliam Maldonado, a spokesperson for Puerto Rico House Representative Jesús Santa Rodriguez, said the revenue measures would bring in $1.5 billion per fiscal year. In addition, it appears there is growing consensus on other tax changes—plus some nearly $600 million in discretionary spending cuts. Despite the renewed effort between the Governor and key leaders in the legislature, the tentative, informal agreement faces a short time frame and any number of political obstacles—all pitted against a growing awareness that absent such extreme action, both the U.S. Territory and many, many of its cities could default. Thus, unsurprisingly, Senate President Eduardo Bhatia Thursday said: “May 14 will go down in history as the day that Puerto Rico began implementing a responsible budget.”

San Bernardino Prepares to Vote on a Plan of Debt Adjustment


May 15, 2015
Visit the project blog: The Municipal Sustainability Project

Getting Ready to Rumble. San Bernardino yesterday made public its proposed plan of debt adjustment (San Bernardino Plan of Recovery) for consideration by the Mayor and Council to consider and vote upon Monday—a plan under which the city proposes to severely reduce post-retirement health care benefits, contract out for key municipal services, including fire and waste disposal, and cut by 99 percent what it will pay on its $50 million obligation to its pension obligation bondholders. Under the proposed plan, of the city’s ten classes of creditors, the draft plan proposes to make full payment to CalPERS and full payment where required by the state constitution. Notwithstanding the deep cuts in personnel already made, the draft plan proposes the elimination of an additional 250 positions, and continued deferral of $200 million in essential capital maintenance and replacement of fleet vehicles. Even then, the plan notes a structural deficit of more than $20 million would remain in the city’s general fund. According to the draft plan, about $51.7 million of the $357.9 million in potential labor savings for FY2015 through FY2034 have already been implemented through negotiations and mediation. The document reports that the city’s retirees have agreed to a settlement, under which they will pay more for retiree health care through moving to a separate healthcare plan—a move the document reports would save the city $370,000 annually beginning next year—and a change the president of the city’s retirees’ association told the San Bernardino Sun was worth it to ensure their pension benefits remained intact: “The immediate concern was the agreement that the city had with CalPERS…And the retiree association’s first priority was the preservation of our CalPERS benefits that have been earned by the retirees over the past several decades.” Under the draft plan, each of the eight groups of creditors proposed to be impaired would be entitled to vote to accept or reject the plan; nevertheless, the draft plan makes clear the city would seek to have U.S. Bankruptcy Judge Meredith Jury impose its proposed plan.
In his cover memorandum to the Mayor and Council, City Manager Allen Parker and City Attorney Gary Saenz wrote: “As the Recovery Plan makes clear, our first priority has to be the delivery of adequate municipal services…the pain will be shared among all stakeholders; employees, retirees, citizens (in the form of impaired service levels until the City can retain its footing) and capital market creditors. Only by undertaking the difficult process of refashioning the City into a modern municipal corporation can we be successful in creating a solvent future.”

The plan proposes to continue—or increase—the city’s pace of outsourcing some essential public services, to rewrite the city’s charter, as well as to continue to reduce the size of the city’s workforce, noting: “Contracting out of various services currently being provided ‘in house’ by the City is a keystone of this Plan…These include, but are not limited to, fire suppression, EMT services, and solid waste management collection/disposal.” Much of the outsourcing is proposed to begin this year, according to the draft 77-page recovery plan, including business license administration, fleet maintenance, and other services. With regard to the charter, the plan refers to the “interim charter agreement” under which city officials have already agreed to work, adding that the city expects the Council-appointed charter review committee to draft a proposed new charter and “place such proposed new Charter before the voters on the November 2016 ballot (or earlier if possible).” (In California, state law restricts proposed charter amendments to the November ballot in even-numbered years.) The forecast portion of the document forecasts that police and firefighters will continue to receive salary increases of 3 percent annually—an issue on which the city is mandated by its charter, in order to comply with the requirement to continue paying the average of what 10 like-sized cities pay for those positions. Salary compensation for non-safety employees is forecast to grow by 2 percent annually. Under the proposed plan, holders of $50 million in pension obligation bonds would receive an unsecured note and be paid based on a reduced principal of $500,000. Payments on that principal would begin in the sixth year after the Plan of Adjustment became effective. No payments would be made on bonds and certificates of participation issued in 1996 and 1999, respectively, for five years. Then, based on a new maturity date of 2035, only the interest would be paid for years six through 10, then interest and principal would be repaid through the term of the lease.

The City Council meets Monday to vote on the plan, which will be item six on its agenda: Resolution of the Mayor and Common Council of the City of San Bernardino Authorizing the Implementation of the City’s Fiscal Recovery Plan, the Filing of the Chapter 9 Plan of Adjustment and Disclosure Statement, and the Filing of Related Documents (#3853).
As San Bernardino City Attorney Gary Saenz earlier noted: “[The proposed plan] treats our citizens much better than our municipal bondholders…We expect our plan is going to provide for a substantial impairment of those (outside-the-city) groups, all for the purposes of increasing our service levels for our citizens. For each dollar we don’t pay our pension obligation bondholders, we will have a dollar to provide services.” Thus, Monday, San Bernardino elected leaders—much like their colleagues in Jefferson County, Alabama, and in Stockton—rather than a state-appointed emergency manager—will determine the fate of the proposed plan of debt adjustment—in an open and public forum―based upon a chaotic process of citizen and business impute, and strategic planning sessions by its elected leadership. There has been nothing pretty about municipal democracy, but a profound difference than preemption of local governance and accountability.

Governance Challenges. In the documents released by the city yesterday, one can appreciate the scope of the challenges—both in average per capita incomes, which mean the city has a significantly poorer tax base from which to meet mandates obligating it to pay salaries equivalent to those of its surrounding, higher per capita income jurisdictions. In addition, as the document notes, while the city’s new Charter created the position of city manager, an important step toward a council-manager form of government, the new Charter continued provisions which impede the city manager from exercising full responsibility and authority for effectively and efficiently delivering services throughout the entire city organization. Specifically, the new City Charter:

• Did not formally establish a council-manager form of government for the City of San Bernardino. Unlike many city charters, no form of government was specifically stated.

• Designated the Mayor as the chief executive officer of the City (strong Mayor), with responsibility for general supervision of the police chief and fire chief. While the city manager was designated to have day-to-day supervision of these functions, the new Charter did not achieve the objective of having a city manager position with full responsibility for managing the City.

• Maintained three separate departments under the administrative and operational direction of three advisory bodies (Component Boards) appointed by the Mayor and Common Council, not the city manager. The Mayor, however, lacks the authority to remove members from each of these boards. As a result, the water utility, library and civil service functions are not accountable to the municipal operation.

• Retained the authority of the Mayor and Common Council to appoint and remove department heads, division heads, and all unclassified City employees. Only classified employees within city manager-directed departments may be removed upon the recommendation of the city manager, without the additional required consent of the Mayor and Common Council. Due to contradictions within the Charter, it is unclear whether the city manager can remove department or division (classified employees) heads without the expressed consent of the Mayor and Common Council.

An Ill Wind in the Windy City. Following in the wake of Tuesday’s credit rating downgrade of Chicago, Standard & Poor’s yesterday dropped the city two steps (from an A+ to an A-)—and warned of possible further downgrades, but seemingly not because of any actions or inactions by the city, but rather because of the adverse fiscal impact of Moody’s downgrade, which, S&P warned, could inflict liquidity pressures on the city, in part because, under some current agreements Chicago has with some of its banking institutions, those banks could call or demand some $2.2 billion in debt repayments. S&P credit analyst Helen Samuelson noted; “The rating action reflects our view that the city’s efforts are challenged by short-term interference that prevents a solid and credible approach at this time…That said, we recognize that the city has a diverse tax base and a management team that has good policies in place,” adding that: “These are an important foundation for any city that needs to address the challenges that this city is facing.” S&P reported it expects Mayor Emanuel’s administration to address the city’s liquidity pressures, either by means of full re-negotiations or through utilizing its own internal liquidity – but warned that: “If the city does need to access its own internal liquidity, at levels we feel compromise its overall liquidity strength, this could lead to further downgrades.” The issue is that the Tuesday downgrade by Moody’s opened the door in a way that permits the city’s banks which provide credit or serve as interest-rate swap counterparties to demand repayment of $600 million in short-term credit lines, $1.1 billion in floating-rate debt and swaps, and $500 million in sewer or water related floating-rate paper and swaps. Although no such demands have been made, Chicago leaders maintain the city has the requisite liquidity and reserves necessary to cover the costs. Chicago CFO Lois Scott yesterday noted: “The city of Chicago’s financial crisis is real, urgent, and has been decades in the making…The downgrade by Moody’s of the city’s credit – a decision they say was driven by the Illinois Supreme Court’s reversal of the state pension reform bill – has substantially magnified the city’s challenges and will add real costs to Chicago’s taxpayers…Standard & Poor’s noted today that their own downgrade is driven by the short-term pressures on the city’s fiscal position that were created by Moody’s actions earlier this week. However, unlike Moody’s, S&P recognizes the City’s efforts to not only address its legacy liabilities, but that it has the right tools in place to address the challenges it faces.”