Governance, Innovative Governance, & Fiscal Contagion

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eBlog, 4/11/16

In this morning’s eBlog, we think back about last week’s extraordinary World Affairs Conference at the University of Colorado that commenced with Apple co-founder Steve Wozniak wondering when computers will be able to surpass the human brain, and jazz musicians from all around the world to Law professors Sloan Speck (U. of Colorado) and Kirk Stark (UCLA) in a class where Professor Stark discussed his new paper about the critical role that regional local tax sharing might contribute to addressing growing income disparities: sometimes we forget the exceptional laboratories of governance that local leaders are—to this feeling I had as a speaker on a session called “Your Self-driving Car Hit My Self-driving Car”: where I was assailed by my younger co-panelists for suggesting that state and local leaders will have to consider safety and revenue implications and ordinances and laws: ‘You people, all you can think about is making laws and regulations and imposing taxes…’ although when I noted that the emergence of self-driving cars will offer invaluable resources for aging Americans no longer able to safely drive; I added that the question for states would be not how old should one be to obtain a license, but rather how young—posing for my skeptical colleagues the query as to their comfort level of five-year olds entrusted with the family car…they did grant that maybe we old fogies were not entirely to be dismissed…But even as I was participating in this international conference with tens of thousands of attendees and unique leaders from all around the world—and ending with Vice President Biden, the Default Clock continued to run in Atlantic City—actually worsened under the increasingly belligerent threats of Gov. Chris Christie—even as the city’s employees were essentially working for free—and as the debt clock wound down ever more quickly on Puerto Rico—with the U.S. House Natural Resources Committee constantly setting back its own clock as they increasingly have come to recognize just how hard this governance challenge is. Contemporaneously, if anything, the nearing cliff of insolvency in Atlantic City between the Governor, Mayor Don Guardian, and state legislative leaders has grown to encompass a union split within the state, creating, as one expert describes it, as “four dimensional chess.” Oh my.

War & Peace? The State of New Jersey has filed a lawsuit against the nearly insolvent Atlantic City, with the state seeking to recover more than $30 million which the state claims the city owes its school district. In a press conference last week, Gov. Chris Christie said that Atlantic City has used property tax collections earmarked for the public school system to fund city operations, adding that Atlantic City owes the school district nearly $34 million from now until June 30th, but that, due to its “irresponsibility,” the city has yet to pay the school district $8.4 million owed on April 1st and has only around $10 million in cash flow left, adding: “Today, at my direction, Education Commissioner [David] Hespe has filed a lawsuit to protect the property tax collections that rightfully belong to the Atlantic City School District…The action won’t fix the city’s own financial problems, but it will prevent them from making Atlantic City students and their families collateral damage to their reckless financial gains.” Gov. Christie, who had already effectively imposed state control over the city with his appointment of an emergency manager, made his comments as S&P lowered the Atlantic City Board of Education’s bond rating two notches due to liquidity concerns—reminding us of the DNA-like intertwined strands between cities and school systems. In response, Atlantic City Mayor Donald Guardian and City Council President Mary Small, at their responding press conference, unsurprisingly fired back at the Governor’s claims, noting that payments have been made on time under New Jersey state law and that the city’s schools are underfunded, with Mayor Guardian adding that the $34 million will be paid to the schools and will take priority over other payments: “They will be paid first…They are certainly more important than other payments that we have to make.”

Mayor Guardian also noted that the plans for the city to halt and substitute voluntary “non-essential” municipal services effective today for three weeks to avoid a default would be modified in response to unions agreeing to a 28-day pay cycle—a response which the Mayor said would keep Atlantic City’s cash flow running until June, effectively putting the day of reckoning off.

Meanwhile. Gov. Christie has been urging Assembly Speaker Vincent Prieto (D-Secaucus), to bring a state intervention bill to the floor opposed by Mayor Guardian: The governor wants the Legislature to pass a financial bailout bill that cedes key Atlantic City decision-making to Trenton: legislation which would empower New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years.

That effort appears to have gained little traction, even as Moody’s has now moodily downgraded the city even further, with Moody’s analyst Josellyn Yousef noting the downgrade reflects an expected loss to bondholders of up to 35% of principal due to “a very large structural deficit” with limited relief sources outside of state assistance, with Ms. Yousef noting: “The downgrade to Caa3 reflects the greater likelihood of default within the next year and higher probability of significant bondholder impairment given an ongoing political stalemate over an Atlantic City fiscal rescue package,” but also adding the prescient warning with regard to potential contagion: “The downgrade also incorporates renewed signals from the state that bondholders will face losses as part of a possible debt restructuring,” albeit she added that Atlantic City’s bond rating could be lifted Garden State legislators were to adopt legislation that increased revenues and “materially reduced” its deficit, adding that that the state giving an indication that bondholders will be paid in full even as fiscal recovery legislation is pending could also lead to an upgrade.
What If? My colleague from Rutgers Marc Pfeiffer has wondered what would happen if the city went into chapter 9 municipal bankruptcy—something no city in the state has done since the Great Depression—responding to his self-posed query: [W]e can’t quite predict what will happen…New Jersey has had a very favorable history of supporting it’s municipalities and their debt, so much so that the rating agencies and the bond markets recognize that and effectively give us some degree of extra credit when it comes to ratings, which results in some degree of lower interest rates compared to other entities. Because New Jersey has had this good reputation.” Nota bene: while we have often written about the threat of contagion with regard to municipal down-gradings and bankruptcy, unlike disease: there can be ‘good’ contagion. Nevertheless, Moody’s, in its report last week, noted that a recent comment by Gov. Christie about municipal bondholders making sacrifices “suggests the state may have reached the point of viewing a default as a desirable outcome,” albeit that such a default would negatively impact the credit of other distressed cities, citing Newark and Paterson by way of example, “because it calls into question the state’s future willingness to support these cities—” or, as Mr. Pfeiffer describes it: the Governor has not made it clear as to whether his policy about Atlantic City is a change in the state’s 70-or-so-year practice of making sure our cities are solvent and secure.”

Rolling the Dice on the Threat of Contagion. The Governor’s attack on Mayor Guardian and the City Council could have reverberations effecting other New Jersey municipalities—in rolling the dice on the related issue of gaming so critical to Atlantic City’s earlier fiscal solvency, the related actions and positions of the Governor with regard to gaming could fiscally impact other New Jersey municipalities. Gov. Christie has said he will oppose any new gambling in north New Jersey, the likely source of new cash for the likes of Monmouth Park, were Atlantic City to become insolvent and go into chapter 9 municipal bankruptcy. Yet, Gov. Chris Christie’s hardball negotiating position already threatens plans to fortify Monmouth’s horse-racing industry with new revenue. The Governor’s position, unsurprisingly, is stirring further disruption amongst state elected leaders: Sen. Jennifer Beck (R.-Monmouth County) last week noted: “I disagree with him on tying these two together…I understand that there’s negotiation going on around the Atlantic City takeover issue, but this is separate.” Our colleague, Marc Pfeiffer, a senior policy fellow and assistant director of Rutgers University’s Bloustein Local Government Research Center, notes: “Bond markets don’t like uncertainty and we’re nothing but uncertainty right now.”

But contagion, of course, can work two ways—like gambling. Atlantic City, a city which has wagered its modern fiscal fortunes and ills to the gaming industry—one which in New Jersey, according to the New Jersey Division of Gaming Enforcement, realized a 40 percent increase in profits last year, means there might, in fact, be signs of a turnaround—albeit, in Atlantic City, as Michael Busler, a professor of finance at Stockton University notes: “So there is a sign that things may have bottomed and started to go up again…The fly in the ointment there is Showboat and a part of Revel, which have been closed for some time, are scheduled to open this summer…The fear is that it doesn’t increase the market but, rather, the reopened casinos take revenue away from existing casinos.” That is a question upon which the voters will cast their ballots in November—when those ballots, after counting, could determine whether there will be new, competing casinos outside of Atlantic City—but ballots Gov. Christie has pledged to oppose unless his Atlantic City reforms are adopted by the legislature. Of course, at this point, it is increasingly difficult to determine—given the outgoing Governor’s ratings—whether his advocacy might do greater harm than help towards his position.

Waiting for Godot. Even as the U.S. House Natural Resources Committee is struggling to propose revised Puerto Rico fiscal reform legislation today and hold a hearing on it Wednesday, Puerto Rico’s lawmakers are working to exempt about 46 percent of the Commonwealth’s debt from the debt payment moratorium signed last week and in the wake of Puerto Rico House Rep. Rafael Hernández Montañez draft bill last week to change the U.S. territory’s moratorium law. Rep. Montañez, Chair of the House Treasury and Budget Committee, last Friday said he was confident his bill to amend the moratorium would pass, claiming he had a majority lined up and was seeking more: the legislation would exempt the commonwealth’s general obligation, guaranteed, and any securitized debt from eligibility for the payment moratorium: meaning, he said, this would mean that no moratorium could be placed on the debt of the Puerto Rico Sales Tax Finance Corp. (COFINA), COFIM, Municipal Finance Authority, Puerto Rico Electric Power Authority, and Puerto Rico Aqueduct and Sewer Authority.

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