Fiscal & Physical Resiliency in the Wake of Terrorism

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December 8, 2015. Share on Twitter

Fiscal & Physical Resiliency. In its first public City Council meeting since the violent events last Thursday in San Bernardino when San Bernardino County employee Syed Rizwan Farook stormed the Inland Regional Center in San Bernardino with his wife Tashfeen Malik, killing 14 and injuring 21 others, Mayor Carey Davis stated: “Our community has proven that it will not be paralyzed by the acts that were committed that day…It is our hope and goal that our community remains united and calm as the investigation continues, and as we continue to recover from the loss and suffering generated from the events that unfolded that day.” The council had met in an emergency, closed session the night of the shooting.

The Council session began with prayers, praise for the city’s first responders, and declarations that San Bernardino would remain strong—as well as with comments by U.S. Rep. Pete Aguilar (D-Ca.), with all stressing that the city had not been beaten. Mayor Davis alluded to multiple signs of support for the families and victims, and he announced charity picnic and blood drive planned for December 19th. Each of the seven City Council members offered condolences, and added that the response by police, firefighters and others — and the acclaim they had received nationally — put a positive face on the city. Councilman Rikke Van Johnson noted: “San Bernardino has displayed in the past a resiliency unparalleled during times of adversity. We will once again…Because of the horrific events that occurred, Dec. 2, 2015 will be a day San Bernardino will forever remember. But I guarantee you this: San Bernardino will be better. San Bernardino will be united. Together, we will be San Bernardino Strong.” City Clerk Gigi Hanna told attendees that in addition to 10-foot boards covered with messages which were displayed at the meeting, a memorial book collecting residents’ thoughts, prayers, encouragement or remembrance after the attack would be bound and placed in the city’s archives.

The harder question now is whether and how the horrifying event might impact the city’s fiscal future as its current City Manager prepares to depart and as questions arise with regard to how perceptions about public safety might impact assessed property values. Indeed, at the close of the portion of the meeting devoted to the horrific events, the council turned to its fiscal future—beginning with an update on its ongoing chapter 9 municipal bankruptcy and the efforts staff is working on to pull together a plan of debt adjustment composed of budget reductions and tax increases. But, at least for last week, all hearts were with the victims, and all uncertainty was with regard to how those events might impact the city’s future.

The Motor City Road to Recovery. An uncharacteristically upbeat Moody’s yesterday reported that Detroit’s economic and fiscal health are stronger a year after the largest municipal bankruptcy in U.S. history, but warned that daunting challenges remain, noting that employment in the city is growing, and Detroit’s revenue estimates are ahead of projections with Thursday marking the city’s first year anniversary of exiting bankruptcy and beginning the implementation of its plan of debt adjustment. Nevertheless, Moody’s Assistant Vice President Matthew Butler wrote, Detroit faces serious public pension challenges and risks. Mr. Butler noted: “City leaders and management are taking aggressive steps to revitalize the economy and sustain the current positive trends…These efforts are aimed at generating much-needed revenue growth to meet notable expenditure obligations over the next eight years.” In its report, Moody’s noted that Detroit’s unemployment rate had declined to 11.5 percent in September from 16.3 percent a year earlier—and that employment could realize further improvement, especially noting General Motors’ plans to add 1,200 jobs at its Detroit-Hamtramck assembly plant—adding these trends need to accelerate and Detroit needs to generate new revenue over the next decade to pay for high fixed costs.

We can too easily forget that while municipal bankruptcy provides a means for a municipality to shed some of its debt in order to ensure continuity in the provision of essential public services, it comes at a burdensome cost—and leaves residual fiscal challenges.

In Detroit’s case, notwithstanding reductions in its public pension obligations, the city, still carries very substantial debt and is at the bottom of an upside down pyramid where retirees from a much larger workforce – and who are projected to realize longer lifespans – create a looming fiscal challenge – especially as the city must budget for its resumption of contributions to its pension funds in 2024. And those contributions have been re-estimated, as we have previously noted, so that what had been projected to be $111 million in 2024, now appears to be nearly 75 percent greater at as much as $195 million, according to Moody’s, or, as Mr. Butler wrote: “Favorable pension plan investment performance between now and 2023 would reduce projected pension cost…Conversely, the cost would be even higher if plan performance falls short of the 6.75% average annual investment return currently assumed by the pension plans, which has likely already occurred in 2015. In the absence of substantial economic expansion and revenue growth, the requirement to resume funding pensions from general operations risks posing serious financial challenges for Detroit.”

Detroit closed its most recent fiscal year with an estimated operating revenue exceeding budgeted revenue by 1 percent, according to the Detroit Financial Review Commission. Revised estimates in September indicate that fiscal 2016 revenue is on track to exceed budgeted revenue by nearly 3 percent. Nevertheless, Mr. Butler noted that Detroit’s “formidable challenge” is maintaining economic growth while meeting high fixed costs.

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