Advice & Consent

September 15, 2015

Motor City-County Bonds? Wayne County Executive Warren Evans has issued his first order under the County’s consent agreement with the State of Michigan—an order which requires all county employees to comply with the consent agreement and report any potential breaches to his office, and which requires all county departments to obtain permission from the Wayne County CFO prior to entering into any contracts which could be considered debt under the terms of the county’s consent agreement. (The decree requires Wayne to continue to make timely debt payments—and bars the county from filing for chapter 9 municipal bankruptcy while operating under the decree.) Mr. Evans’ order directs county workers to comply with the consent agreement and outlines protocols for breach: “The purpose of issuing this order is to ensure that county employees, elected officials, along with our contractors understand what is required while the consent agreement is in place.” The extraordinary fiscal authority comes as the County—of which Detroit is the seat—is grappling with a $52 million structural deficit, stemming from a $100 million drop in annual property tax revenues since 2008 and an underfunded pension system. The county’s primary pension plan is 45 percent funded and has a liability of $910.5 million, based on its latest actuarial valuation. That is, Wayne County and Detroit’s respective fiscal foundations are inextricably connected. Mr. Evans is seeking to fix the county’s finances under the consent agreement by reducing future pension obligations and retiree benefits and taking other actions to eliminate the structural deficit. Under the agreement, Mr. Evans and the county commission retain their powers and responsibilities: the unique agreement also grants Mr. Evans the power to impose contract terms with the county’s unions if they are unable to hammer out labor agreements after a month of good-faith negotiations—an avenue Mr. Evans has said repeatedly he prefers to reach agreements with the county’s unions at the bargaining table. Among the agreement’s provisions he has emphasized to Wayne County employees:
■All county contracts or agreements must include the requirements of Public Act 436 and the consent agreement.
■All county employees, elected officials or entities that have contracts with the county must inform the executive of any potential breach of the consent agreement.
■Before any contract is entered into that is considered debt under the consent agreement, a copy must be given to the county’s chief financial officer for approval.
In addition, the county has also put up a new web page so that citizens and taxpayers can follow and understand the issues. Mr. Evans noted: “The purpose of issuing this order is to ensure that county employees, elected officials, along with our contractors understand what is required while the consent agreement is in place…It is important for everyone to understand what to expect as we move together through this process to restore our financial health.”

The order which was approved by the County Board last month, comes as Mr. Evans is in the middle of a 30-day period of negotiations with county unions on new labor contracts. Should the negotiations produce no agreements, Wayne County—under the consent agreement with the state, is authorized to impose its own labor contracts. While the 12-page agreement with the State allows Wayne County to try to restructure some of its debt or reach settlements with creditors, it bars Wayne County from issuing any more municipal bonds without state permission. The consent agreement gives Wayne County until Jan. 31st to present the state with a plan for its abandoned jail project in downtown Detroit—an unfinished facility, which was financed with $200 million of municipal bonds. The forlorn project has been abandoned since 2013 due to cost overruns, but, under Wayne’s agreement with the state, Michigan will assume financial oversight over the project. It will be up to Michigan Treasurer Nick Khouri when to release Wayne County from the agreement—and, in any case, under its terms, Michigan will continue to monitor Wayne’s finances for two additional years following any release from the agreement by the state.

Perhaps unsurprisingly, however, the new consent agreement is already being tested: Wayne County is appealing a restraining order won by Wayne County Sheriff Supervisory Local 3317, which is seeking to block changes to sheriff deputies’ wages and benefits made under the county’s consent agreement. The County reports it will seek an emergency appeal of the ruling by Wayne Circuit Judge John Murphy after Wayne County Sheriff Supervisory Local 3317 petitioned the court for relief from changes to compensation the county imposed for command officers at the sheriff’s office—in effect, a challenge not just to Wayne County, but also to the State of Michigan.

Scrambling in Scranton. Even as agent from the Pennsylvania state Attorney General’s office yesterday showed Senior District Judge Richard Cashman slides of many of the artifacts that former Harrisburg Mayor Stephen Reed, who served for 28 years, is charged with illegally using public funds to purchase for museums which never materialized in a preliminary hearing on hundreds of criminal counts including theft, misapplication of government property, criminal solicitation, bribery and tampering with evidence; the losses created continue to wreak fiscal havoc. Elsewhere, yesterday, Scranton Mayor Bill Courtright announced the city likely will lease, rather than sell, its five parking garages and on-street parking meters to a nonprofit organization which will operate them. In addition, the city and financial consultant Henry Amoroso launched a new website, scrantonforward.org, to inform the public about the progress of Scranton’s recovery plan initiatives. Mayor Courtright, in announcing his plan to try to monetize the municipal garages, said the result likely would be a concession lease agreement with the nonprofit National Development Council: “We have taken a disciplined and focused approach to finding solutions to our financial challenges. Step-by-step we are restoring confidence and moving Scranton forward…I am confident that the steps we have taken will provide us with the best possible fit for our city, which will allow us to retain ownership of our parking assets while reducing the financial burden on the City.” The fiscal scrambling comes in the wake of a series of decisions by the City Council three years ago which led to the default by the Scranton Parking Authority (SPA) on payments owed under two loans, one issued in 2009 by Pennstar Bank and another in 2011 by Landmark Community Bank, as well as a June 2012 payment owed by the authority municipal parking bonds. The decision to default on the bank loans resulted in over two-years of litigation; the decision to miss the bond payment resulted in the court appointment of a receiver to oversee the operations of the authority. As Mayor Courtright puts it: “Since coming into office, our focus has been on getting Scranton’s finances back on track…We’ve been able to clear up the Pennstar and Landmark defaults, and now we’re progressing into responsibly monetizing the City’s parking assets so we can eliminate or significantly reduce the bad Parking Authority debt for which the City is now responsible.” Currently, the City must budget about $2.9 million a year to cover SPA-related costs. He said a responsible monetization will take the form of a lease concession, where the City will maintain ownership of valuable parking assets and control over key decisions while shifting burden of excessive debt payments off of Scranton taxpayers, or, as the city’s consultant put it: “Whenever the SPA (the parking authority) cannot make its debt service payments out of its own revenues, the City must make up the difference.” Scranton’s financial consultant, Henry Amoroso added: “The numbers speak for themselves…The City can’t continue to shoulder the burden of SPA-related costs. It’s unsustainable.”

The road back to fiscal sustainability has been steep: On August 23rd, 2012, the City of Scranton took its first step in restoring long term fiscal stability and repairing the City’s creditworthiness by adopting a new Recovery Plan that replaced the 2002 Recovery Plan with a new Recovery Plan to provide the fiscal framework for the City’s governing bodies to follow through 2015: the 2014 Budget called for a tax increase of 49.99%. Additionally, the City of Scranton has increased current refuse fees, which will allow the City to receive an additional $2.2 million dollars. Further revenue enhancements such as increasing the Rental Registration Fee will allow the City to receive an additional $300,000.

Under the new parking arrangement, the plan calls for the city to lease its parking system, to eliminate Scranton Parking Authority debt that the city guarantees, retain ownership of the parking assets, and eliminate a court-appointed receivership which has controlled the parking garages since a 2012 default of SPA debt by that authority and the city. Under the agreement, along with retaining ownership of garages and meters, Scranton will retain veto power over key public policy considerations during the term of the concession lease, such as rate setting and certain capital improvement projects. Upon closing of the transaction, Scranton will be able to retire most SPA debt and refinance leftover debt, called stranded debt, at more favorable rates and terms; the city also will have the opportunity to share in revenue generated from the concessionaire’s operation of Scranton’s parking system. Or, as Mayor Courtright noted, his administration previously cleared up two other related defaults of bank loans which stemmed from the SPA default and harmed Scranton’s creditworthiness: “We have taken a disciplined and focused approach to finding solutions to our financial challenges. Step-by-step we are restoring confidence and moving Scranton forward…I am confident that the steps we have taken will provide us with the best possible fit for our city, which will allow us to retain ownership of our parking assets while reducing the financial burden on the city.”

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