The Teeter Totter between Voters & Municipal Fiscal Sustainability

eBlog

August 25, 2015

Averting Bankruptcy Dismissal. The San Bernardino City Council yesterday voted 4-3 to move ahead in transferring responsibility for fire and emergency protection to the San Bernardino County Fire Department—an action that automatically triggered a new, $142-per-year tax on every parcel in the city—with the Council’s vote corresponding to the bankrupt city’s plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury. Unsurprisingly, there has been strong citizen opposition to contracting out for fire services—and this is an election year. Nevertheless, city leaders made clear they believe San Bernardino’s credibility in the federal bankruptcy court, and its ability to obtain approval for its proposed plan of debt adjustment required it to be consistent—as well as referencing that between the reduced costs from contracting out and new tax revenues, the city would realize as much as $11-15 million in annual savings. In addition, City Attorney Paul Glassman had warned the Mayor and Council that if the city failed to meet the terms of its own proposed plan of debt adjustment, San Bernardino would risk having its bankruptcy dismissed by Judge Jury—a dismissal that would almost immediately jeopardize the city’s ability to continue to provide essential public services—or, as Mr. Glassman told the Council: “This would have a catastrophic effect on the city such that it could not go on as an ongoing entity.” Nevertheless, the close vote reflected apprehension from Councilmembers who expressed apprehension that the proposed changes might not only jeopardize public safety, but also hurt the city’s already suffering economy. Councilman John Valdivia, speaking against the measure, told his colleagues that his constituents were strongly opposed to the new tax, adding: “We’re not here to bail the city out, one more dime.” Councilman Henry Nickel, who together with Councilmember Valdivia and Councilman Benito Barrios, opposing the proposal, after the meeting warned that San Bernardino was losing what little goodwill it had from citizens who will be asked to approve other taxes as part of the recovery plan.

The bare majority gave the green light to authorize San Bernardino city staff to begin negotiating with San Bernardino County and the County Fire District over the terms of the annexation—at the end of which another City Council vote will follow—a process that City Manager Allen Parker told the elected leaders could take 60 days. Even if the proposal gets to the Local Agency Formation Commission (LAFCO) in 60 days, there would still be no guarantee it will be approved by July 2016, possibly meaning it might not receive formal approval until FY2017: the Commission will have to study the proposal, hold public meetings, and make decisions on it. So even though it will not be subject to a citizen vote in the county, it is not clear what citizens’ reactions and pressure on San Bernardino County elected officials might be. In addition, if 50 percent of registered voters in San Bernardino protest, the proposal would fail. Protests from 25 to 50 percent of voters (or at least 25 percent of the landowners, who also own at least 25 percent of the assessed land value within the city) would trigger an election, according to LAFCO annexation rules.

The Sharing Economy? As state and local leaders know, the art of legislating is not unlike making spaghetti, and so it is that state leaders in Lansing—as part of an effort to help finance Michigan’s transportation infrastructure—have been considering a proposal to help make whole Detroit’s single most important source of municipal revenue: its income taxes—taxes which in 2012 made up about 21 percent of the city’s total revenue. That requires addressing a persistent gap in the law which does not provide authority to require suburban employers of Detroit residents to collect and remit the city’s income taxes. According to the Citizen’s Research Council, in 2011, 38 percent of Detroit residents worked in the city, while 62 percent of city residents were employed in the suburbs. With the House considering surface transportation legislation the Michigan Senate approved last month—a major road funding proposal that could double fuel taxes over four years and eventually raise up to $1.7 billion a year in new revenue for infrastructure—the House has been considering, as part of such a measure—amending the legislation to include a provision to provide authority for new state legislation designed to help Detroit collect city income taxes from residents who commute to the suburbs—but only for Detroit: not for the other 21 municipalities which also rely on municipal income taxes: Albion, Battle Creek, Big Rapids, Detroit, Flint, Grand Rapids, Grayling, Hamtramck, Highland Park, Hudson, Ionia, Jackson, Lansing, Lapeer, Muskegon, Muskegon Heights, Pontiac, Port Huron, Portland, Saginaw, Springfield, and Walker. Under the pending proposal, on behalf of which Detroit Mayor Mike Duggan testified, suburban employers would be required to withhold Motor City income taxes from paychecks of Detroit residents—except for businesses with fewer than 10 employees and less than $500,000 in wages. An alternative would authorize the state to use audit and penalty procedures when it takes over Detroit’s income tax collection in 2016. The Republican-led House Tax Policy Committee has approved legislation which would require suburban employers to withhold Detroit city income taxes from residents’ paychecks, but the outcome will have to await full legislative consideration: The Senate was in session last week, but did not take attendance, votes or introduce bills. Neither the Senate nor the House is expected back in Lansing until after Labor Day.

Any final legislative action by the legislature next month could also face concerns by municipal leaders from the other 21 municipalities which levy personal income taxes—indeed, Grand Rapids Mayor George Heartwell last week made clear he was “flummoxed” that Grand Rapids and 20 other communities were omitted from the legislation, noting he was “caught off guard,” adding he thought “We (referring to all 22 cities) were all on the same page about this,” noting he had met with Detroit Mayor Mike Duggan and several of the other communities that charge an income tax about ways to make collection a requirement for suburban employers. Grand Rapids is one of the exceptions in Michigan in that it collects income tax at a rate of 1.5 percent for residents and 0.75 percent for nonresidents who work in the city. The majority of the 22 cities impose an income tax of 1 percent on residents and 0.5 percent on nonresidents. Detroit has the highest rate with its residents who live and work in the city paying 2.4 percent; nonresidents who work in the city pay 1.2 percent. Eric Lupher, President of the Citizens Research Council of Michigan, said his organization supports equality for all, suggesting that every one of the state’s 276 cities should require employers to withhold city income taxes from employees: “The solution to the problem at hand is if you live or work in a city, then employers need to withhold tax from you…It shouldn’t apply only to cities with populations of 600,000 or more (such as Detroit)…The other thing is we don’t want to create disincentives to living in the cities…Most of the Michigan cities are down-and-up cities. They all are trying to revitalize themselves and be attractive in getting people to move there.”

Holy Cosmos! Fitch became the second credit-rating agency this week to upgrade Wayne County, removing the County’s negative rating watch from some Wayne County municipal bonds and terming Wayne County’s rating outlook “stable,” adding that the County’s approval of a consent agreement with the state to address its financial emergency was a step not only towards improving the county’s credit, but also to improving Wayne County’s fiscal outlook. Under the terms of the agreement, Wayne County Executive Warren Evans is granted the powers of an emergency manager in contract talks with the county’s unions—and, should the two sides be unable to achieve a consensus in good-faith negotiations 30 days after the consent agreement went into effect, he is authorized to impose terms such as lower wages, pension cuts, and employee contribution increases—all as part of a state-local effort to address a $52 million structural deficit—a deficit triggered by a $100 million drop in annual property tax revenue since 2008. Adding to the deficit, the county still has to contend with a significantly underfunded public pension system—as much as $910.5 million, according to the latest actuarial reports.

First Chapter 9 since Detroit. Hillview, a small (pop. just over 8,000) home rule-class city in Bullitt County, Kentucky, about 17 miles south of Louisville, has filed for chapter 9 municipal bankruptcy in the first chapter 9 filing by a municipality since Detroit’s filing more than two years’ ago—making the small city the 65th to file for bankruptcy in more than six decades. The city in Bullitt County about 17 miles south of Louisville listed assets of under $10 million and liabilities between $50 million and $100 million in its bankruptcy petition. Kentucky is one of 12 states which conditionally authorize municipal bankruptcy; however, Kentucky counties are not authorized to file for municipal bankruptcy protection unless the state local debt officer and state local finance officer have first approved said county’s plan of debt adjustment. The legal action was triggered by an $11.4 million judgment against the city for breach of contract after years of protracted litigation over a land sale—and after the municipality had been unable to reach any settlement agreement. Truck America Training LLC prevailed (see City of Hillview v. Truck America Training, No. 2012-CA-001910-MR.) Court of Appeals, Kentucky, March 7, 2014.), gaining an $11.4 million judgment for breach of contract against the city over a land sale. The judgment became final last March, after the Kentucky Supreme Court declined to review the case. Hillview, in its bankruptcy filing, listed assets of under $10 million versus liabilities between $50 million and $100 million. The city’s unsecured claims include $1.39 million of outstanding general obligation bonds issued in 2010, and $1.78 million of debt which is part of a pool bond issued by the Kentucky Bond Corp. in 2010 and operated by the Kentucky League of Cities. The decision to opt for municipal bankruptcy came in the wake of the city’s decision not to accept Truck America’s most recent settlement offer of approximately 40 cents on the dollar. To put those numbers in context, Hillview had total revenues of $2.7 million in FY2014, and a fund balance of $659,723 at the end of the year, according to its 2014 audit. Moreover, in addition to the judgment accumulating interest at 12% per year, the audit determined that Hillview had no insurance coverage available for the breach of contract litigation. S&P, last February, had downgraded Hillview’s full faith and credit GO bonds four notches to BB-plus, citing the judgment, as well as fiscal apprehensions with regard to the municipality’s FY2014 audit. In its analysis, S&P had included an examination of whether the Hillview could issue municipal bonds to pay the Truck America judgment, noting: “We believe the city has legally available options apart from [municipal] bankruptcy.”

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