The Conflicting Roles & Challenges between States & Local Governments when Insolvency Threatens.

March 29, 2016

In this morning’s eBlog, we examine two different municipal fiscal futures: those of Detroit and Atlantic City. In the former, we observe a city intently focused on long-term fiscal solvency; in the latter we observe an increasingly dysfunctional state-local fiscal relationship—in a state where the kind of intense focus on the long-term solvency of its public pension solvency is almost the exact opposite of post municipal bankruptcy Detroit. As much as the U.S. House of Representatives Natural Resources Committee, in its emerging proposal to address the onrushing insolvency of Puerto Rico has maligned chapter 9 municipal bankruptcy, it seems clearer each day that the dedicated and unrelenting pressure of now retired U.S. Bankruptcy Judge Steven Rhodes has proven invaluable towards a long-term, fiscally sustainable future for Detroit. In New Jersey, however, the emerging battle over political power instead of the fiscal fate of a city scheduled to suspend many of its public services and operations appears to, once again, raise the issue: does or should a state take an adversarial or constructive role when a municipality (or public school system) faces insolvency and/or municipal bankruptcy?

Playing Politics with a City’s Future. With the clock winding down on Atlantic City’s solvency and the city set to suspend most municipal services beginning at the end of next week, New Jersey General Assembly members appear to be increasing their support for Speaker Vincent Prieto’s calls for Governor Chris Christie to negotiate with Assembly lawmakers with regard to the balance of power and authority Atlantic City would have with regard to bargaining contracts for Atlantic City employees. The issue has arisen in the wake of state Senate passage of a bill pending before the state House of separate casino industry related legislation which could have the effect of freeing up as much as $60 million to ensure continuity of public operations and services in the city—money which otherwise would have been used for casino marketing—legislation pressed for by Gov. Christie and Senate President Stephen Sweeney (D-Gloucester). Assemblywoman Valerie Vainieri Huttle (D-Englewood) yesterday noted: “The Governor would have everyone believe that the only way to save Atlantic City from insolvency is to trample public workers, strip residents of their right to a representative government, and sell off city assets, perhaps irrevocably.” Ergo, she said: “I commend Speaker Prieto for taking a measured and thoughtful approach to the situation and standing up against tremendous pressure while the Governor refuses to negotiate in good faith with one half of the state legislature.” Adding to the governance disagreement, Assemblyman Ralph Caputo (D-Essex) termed the Governor’s unwillingness to negotiate: “an ineffective and dangerous way to govern — especially at a critical moment.” The two General Assembly members, together with Essex County Assembly Democrats Ron Rice and John McKeon, expressed apprehension with regard not just to the Governor’s obstinacy, but also to the Governor’s recent agreement to a provision in the Senate-passed version of the casino tax bill which would allow the new agreement to be voided if the North Jersey casino referendum were to pass in November—leading Assemblyman Caputo to dub the Governor “hypocritical” for negotiating only with the Senate, while also saying that the opt-out provision could “threaten to destabilize Atlantic City’s tax base all over again.” Nevertheless, Gov. Christie has warned the General Assembly should “not play chicken” with him—or test his patience—stating, in a radio interview: “I will not change my view on this.”

Investing in a City’s Future. Detroit Chief Financial Officer John Hill yesterday said the Motor City could add as much as $30 million this fiscal year to pay into the city’s two pension funds, some 300 percent more than initially planned, noting: “It’s our expectation that…we’ll have an additional $20 million-$30 million that we’ll be able to set aside for the pension plans…We’ll know that in a few days as we’re finalizing the audit.” The surprising commitment revealed how hard the city has worked since Mayor Mike Duggan in his State of the City Address last month, as we had noted, reported that a $491 million pension problem had emerged. The $28 million payment is part of an overall plan to contribute as much as $70 million in the near-term to address the public pension shortfall that must be repaid starting in 2024. Mayor Duggan had blamed the shortfall on an unnamed bankruptcy consultant using outdated mortality tables to calculate life expectancy of city retirees. It seems the unexpected proclivity of state and local employees (and our readers) to live longer than we used to may be disruptive to the forensics of computing public pension liabilities. In response, Detroit, under Mayor Duggan’s proposal, would dip into a projected $44 million surplus this year and possibly use money from its projected 2015 surplus, Mr. Hill informed members of the Detroit Financial Review Commission, to remedy the fiscal problem, adding: “We’ll know in a few days as we are finalizing the audit…I think this says the city is committed to finding a way to meet its obligations to pensioners.” As part of that forensic effort, Detroit is close to hiring a firm to conduct pension and actuarial services—with Mr. Hill yesterday testifying: “The number is about $500 million higher than expected…What we really want to come out of this contract is what that range is going to be. We should know around September.”

Detroit recognized the fiscal problem last November when the Motor City’s pension fund actuary performed an updated mortality study—a study which concluded that instead of $111 million, starting in 2024, Detroit instead will need to pay $194.4 million: Detroit has a kind of pyramid problem: as its population dramatically declined—so too, especially in the wake of its bankruptcy—has its work force, so that today there are far fewer employees paying in to a retiree force that is not only large, but also living longer than had previously been expected: today Detroit has more than 25,000 retirees, active workers, and beneficiaries who receive benefits from the city’s pension funds, one representing police and fire personnel and a fund representing non-uniformed employees: the Police & Fire Retirement System is 88.9 percent funded; it has $3.1 billion in assets; the General Retirement System pension fund is 62.5 percent funded and has $2 billion in assets. Under the city’s approved plan of debt adjustment, Detroit agreed to fully fund both retirement systems commencing in 2024. In his budget address last month, Mayor Duggan had proposed a $1 billion balanced general fund budget for the 2016-17 fiscal year, including kicking in $10 million to the pension funds each year through 2020—in effect making a jumpstart from the plan of debt adjustment provisions under which Detroit was relieved of much of its contributions to the General Retirement System and Police and Fire Retirement System through 2023—with a substantial portion coming due in later years. But the $34.1 million surplus which Mr. Hill spoke of in the general fund yesterday has given the city an opportunity to be proactive.

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