Planning Municipal Fiscal Sustainability & Municipal Bankruptcy Simultaneously


May 4, 2015
Visit the project blog: The Municipal Sustainability Project

Abandoning the Ship? One of the greatest challenges in a municipal bankruptcy is to not only maintain essential public services, but also to ensure critical public services are incorporated in a municipality’s plan of debt adjustment. With growing uncertainty whether San Bernardino will be able to submit a plan of debt adjustment to U.S. Bankruptcy Judge Meredith Jury by its end-of-the-month deadline, the challenge of retaining the city’s complement of firefighters is at risk. As part of the city’s effort to get its budget under control, it had been reducing staffing in past years, and it has plans for “browning out” the equivalent of 1.5 of its 12 fire stations. Now, in the wake of changes adopted by the city last year to increase employee contributions to the California Public Employee Retirement System and an end to the 9-percent salary bump for police and fire employees (known as the employer paid member contribution benefit), San Bernardino is finding it increasingly difficult to hire faster than employees leave—especially firefighters: according to the city’s Human Resources Division, 10 firefighters have stopped working for the city in the past five months – more than the previous four years combined, and more than triple the average for 2005-2014, and nearly 10% of the department. Part of the problem is the difficult relationship between the city and its unions—part is the system which imposes such high costs on the city, because salaries for police and firefighters are mandated by the city charter to be the average of what 10 like-sized cities pay for the same positions, in this case larger cities with healthier tax bases. In addition, the resources syphoned from the city’s budget to address litigation have further eroded its fiscal capacity: as Councilmember Fred Shorett puts it: “Every step we take, we’re sued by fire (union leaders), but we need to be good stewards of the public’s money…It’s not that we’re attacking anyone. We’re in bankruptcy, and even if we weren’t in bankruptcy, we have a responsibility to be as efficient as possible.” Adding additional incentives for firefighters to consider other options, the city has been publicly seeking to contract with Cal Fire or the San Bernardino County Fire Department for months to provide fire services. The swirl has put the city in a bind, or as City manager Allen Parker puts it: “Do you fill vacancies or do you fill it through overtime?…“[it]takes a long time to fill a vacancy – six months or longer in both police and fire.” In the meantime, the situation has fiscal implications: San Bernardino’s spending on overtime for firefighters is on track to be between $6.8 million and $7 million this year—although as Mr. Parker says, that is roughly on track with previous years. According to the city’s Department of Human resources, the city’s firefighter turnover rate in the previous decade had been an unusually stable 2 percent for firefighters and 6 percent for police: not a single firefighter left in 2012, the year San Bernardino filed for municipal bankruptcy; only two left in 2013. In contrast, during the first year of the city’s bankruptcy, the city experienced about one in four employees leave citywide. Perhaps more seriously, turnover among executives – which exceeded 50 percent in 2013 – has long been abnormally high, averaging 24 percent since 2004, according to an analysis by Management Partners, the company San Bernardino hired to help them through the bankruptcy. In that decade, the city has had five city managers, police chiefs and Public Works directors; four finance directors and fire chiefs; the current interim fire chief, Chief George Waterhouse, started three months ago. He expects to learn when, and if, the city submits its Plan of Adjustment, whether he will stay past the beginning of the fiscal year July 1. For the city, with the increasing pressure to complete its plan of debt adjustment—but also to focus on its long-term fiscal sustainability—the costs of time and money invested in its employees is a critical factor. From the union’s perspective, it is about unwise use of the city’s resources: Fire union President Jeff English, in a written statement, claims the problem is mismanagement by Mayor Carey Davis’ administration: “San Bernardino has a management problem, not a money problem…The bureaucrats at City Hall continue to squander ever higher amounts of money on consultants and newly created six-figure administrative positions while deliberately starving the community of services, closing fire stations, continuing the elimination of fire department personnel and resources, to the detriment of all San Bernardino residents.” He claims that over the past year, police and fire budgets have decreased, while the city manager’s doubled and the mayor’s administrative budget increased 30 percent. According to the city’s budget, the city manager’s department is budgeted for nearly $1.4 million, an increase of about 30 percent—but when put in the context of the costs of managing municipal bankruptcy, not a surprising increase—especially when compared, for instance, to the enormous costs of Detroit’s Emergency Manager brought in to put together the Motor City’s 18-month long process.

The Big Squeeze. Moody’s has cut New Jersey’s credit rating―and placed seven municipalities and eleven 11 universities under review for possible downgrades in the wake of Gov. Chris Christie’s proposed budget for the upcoming state fiscal year. Analysts Elise Young and Romy Varghese, citing the potential for less state aid, downgraded state capitol Trenton one level on April 20th, prompting the city to delay a scheduled municipal bond sale. Moody’s also expressed apprehension about the potential impact of a judicial ruling which could mandate the Gov., to meet his promised commitment, take $3.4 billion out of his budget to put into the state’s deficient public pension system—or nearly a quarter of the state budget—an amount so significant it would likely impinge upon state aid to local governments. In response to a suit filed by New Jersey unions seeking to prevent him from shortchanging their pension funds to help close a state budget shortfall, Gov. Christie’s attorneys are scheduled to appear in state courts this month to defend decisions to pay $681 million of a planned $2.25 billion pension payment this fiscal year, and $1.3 billion of $3.1 billion for the year starting July 1.The state, last month, had its credit rating cut one level by Moody’s to A2, the sixth-highest rank, a reduction that meant the ninth downgrade under his administration. But in the wake of the state downgrade, Moody’s moodily lowered Trenton’s rating just four days later; now it is reviewing Asbury Park, Kearny, Newark, Paterson, Union City, and Weehawken, citing the state’s “constrained” finances and the risk of funding cuts. What’s at risk is some $115.6 million of transitional aid to distressed cities so far this year.

Sink or Swim. Struggling with one of the worst fiscal crises in its history, the U.S. territory of Puerto Rico’s Governor Alejandro Garcia Padilla said defaulting on the Commonwealth’s bonds would be a mistake. Puerto Rico, which has an estimated $38 billion to $54 billion of tax-supported debt, lost its investment grade ratings last year. The governor said that the commonwealth is facing the greatest fiscal and economic crisis of its modern history. Gov. Padilla, speaking to the territory’s legislature in the wake of their rejection of his proposed tax overhaul, said he would put together new steps to buck up the junk-rated island’s fiscal plight; he rejected the idea of not repaying its bonds, saying it would harm island residents, especially those who own such municipal bonds: “Sometimes we talk about the possibility of not paying our debts — this is folly,” he said in his annual State of the Commonwealth speech before a joint session of the legislature: “Don’t believe that we have only contracted debt with wealthy investors and foreigners. Our debt is also with Puerto Ricans who have put their savings in our bonds.” The legislature’s rejection has already garnered fiscal retribution, jeopardizing the prospects for a $2.9 billion municipal bond sale which authorities believe is critical to prevent insolvency within three months. The Territory’s Development Bank, which handles Puerto Rico’s debt sales, has warned that passage of the tax plan is essential to attracting investors to the planned bond deal. Proceeds of the debt would bolster the finances of the bank, which lends to the both the Territory and its municipalities. For his part, Governor Padilla rejected any consideration of default, stung by the defeat of his plan to increase revenue with a value added tax, ridiculed the idea of defaulting on the island’s debt; nevertheless, he called for talks with the Territory’s creditors, laying out an eight point agenda that included talks with the government’s creditors similar to those already underway between the Puerto Rico Electric Power Authority and its creditors” “Sometimes there is talk about the possibility of not paying [the debt] because people don’t want to. That is ridiculous…You have not only contracted debt with wealthy and foreign investors. Our debt is also with Puerto Ricans who have put their savings in our bonds. It is with the pensioners working here. It is with our credit, which is the future of our infrastructure of roads, ports, schools and hospitals, which we have to lift the country…” adding his priority would be “to protect the public welfare, the health of Puerto Ricans and public safety during a transition period in which all of the Commonwealth’s revenues very likely will be insufficient to meet all of our obligations.” The Governor added he would set up two groups to address the commonwealth’s crisis: one to focus on maintaining enough liquidity; a second reorganize the government to maintain essential services to citizens, smooth the functioning of the state, promote government efficiency, and stimulate economic growth. The other side of revenues confronting the Governor will be cuts—an agenda the Governor is expected to present within the next ten days. Schools could be a prime target: the current fiscal year’s budget had proposed the closure of close to 200 schools; the government has only closed 70, but the remainder appear certain to be closed soon. The situation, even as legislation in the U.S. Congress to provide Puerto Rico access to the U.S. Bankruptcy courts so that there could be an orderly and equitable process to adjust its unsustainable debts languishes.

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