A Disparate Tale of Two Municipalities

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March 2, 2016. Share on Twitter

Federally Assisted Municipal Bankruptcy? Moody’s Investor Service has reduced Ferguson, Missouri’s credit rating from its junk-level status because of apprehensions about its solvency in the wake of the U.S. Justice Department suit against the city filed by the Attorney General on February 10th, accusing the city of policing and municipal court practices which the Department claims violate constitutional and federal civil rights. The suit was filed in the wake of the city’s rejection of a proposed negotiated consent decree which city leaders feared would force the municipality into insolvency—with the city having sought a modified version. The rating agency reported its downgrade came in the wake of apprehensions with regard to the potential fiscal uncertainty of the financial impact of litigation costs from the lawsuit and the cost to the city to comply and implement the proposed DOJ consent decree, noting: “We believe fiscal ramifications from these items will be significant and could result in insolvency…During the review period, we expect to obtain additional detail on the city’s current financial position, near and medium term cash flow projections, as well as financial strategies for addressing the consent decree-related costs.” The report underscored that even before accounting for costs associated with the Justice Department investigation, the city acknowledged its FY2016 budget could lead to insolvency if it failed to address deficits and rapidly dwindling reserves.

Moody’s is now on a watch alert to assess how two April ballot outcomes—one to raise Ferguson’s ad valorem taxes, and the second to introduce a new sales and use tax. In its ratings adjustment. Moody’s noted: “Passage of the April ballot initiatives is integral to the city’s proposed fiscal solution to close the existing budget gap. Absent passage of these initiatives, city management has indicated a balanced budget will be achieved with reductions in force.” The city has estimated it would cost between $2.1 million to $3.7 million to implement the consent decree reforms in the first year. City documents put the price tag at $1.8 million to $3 million in the third year and beyond. The city operates on a $14.5 million budget. Ferguson’s fiscal options are limited due to constrained revenue raising ability and its stagnant economy.

U.S. Attorney General Loretta Lynch had announced the lawsuit one day after the Ferguson City Council refused to adopt all terms of a consent decree reached after lengthy negotiations, notably rejecting a provision that would have applied the decree’s requirements to any policing entity. The city, which once had a healthy balance sheet and carried an Aa3 rating, has struggled to recover from reduced fine collections and other litigation—and came in the wake of a scathing federal investigation and report last March which concluded that the small city’s reliance on traffic and court-related fine revenues rather than general taxes on its own citizens, together with racial bias, constituted illegal practices. Since the events of last year, the city has implemented changes, limiting court fine collections and adopted policing changes; however, according to the U.S. Justice Department, those changes have been “insufficient to eliminate the pattern or practice of unconstitutional conduct and ensure it will not recur” absent a federally imposed decree.
Missouri local governments may file for Chapter 9 bankruptcy protection by an action of the local governing body without sign-off or approval from any other agency, although the city has not indicated plans to file. The city had stated that its leaders “recognize the seriousness of this report, as well as this overall challenging time in Ferguson. We continue to work hard to improve the financial condition of the city, and believe the passage of two ballot initiatives in the April 2016 election would help tremendously. We are continuing to explore all options to restore our financial health and long-term stability.” Under Missouri law (Mo. Ann. Stat. §427.100), any municipality or political subdivision authorized to levy taxes or to cause taxes to be levied may file a chapter 9 municipal bankruptcy petition.

Municipal Fiscal Recovery. Wayne County, Michigan’s largest municipality, which encompasses Detroit, and was feared just a year ago to be at its own risk of insolvency and municipal bankruptcy, is today, according to Wayne County Executive Warren Evans, heading in the right direction: deficits have been eliminated and the county has achieved a positive general fund balance—thanks, Chairman Evans notes, to county employees and retirees who “were required to make huge sacrifices,” adding he was pleased to report that “as a result of unprecedented cooperation and shared sacrifice, Wayne County finished its last fiscal year with a positive general fund balance,” in his first State of the County yesterday at the Detroit Film Theater. Although not nominated for an Oscar, Executive Evans noted: “Let me say that again, for the first time in eight years, the county finished a fiscal year in the black.” He said the county has reduced its health-care liabilities, cutting costs nearly 75% from $1.3 billion to $471 million, and noting, that without such action, costs would have ballooned to $1.8 billion by the end of last year. The challenges for the state’s largest jurisdiction have included its underfunded pension system and a drop in revenues from lower assessed property values as it struggled to avoid an emergency manager and chapter 9 municipal bankruptcy. Today, as the County Executive put it: the county’s fisc “has stabilized, it continues to improve, and that our best days lie ahead.”

Next up, Mr. Evans said he plans to organize a summit of elected officials, community leaders, leading economists, business leaders, and others in the coming weeks to develop an alternative to the system of local government funding, which depends on property taxes—a system which he described as “broken: Our system of funding local governments threatens the financial stability of counties and local municipalities…We cannot continue to under fund local governments. We need to start down the road to a solution.”

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