Municipal Bankruptcy Can Work!

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eBlog, 4/25/16

In this morning’s eBlog, we consider the track of post-municipal bankrupt Detroit—especially following the positive real estate changes—noting that while property taxes are less important to Detroit than most U.S. cities; nevertheless, they are a sign that—notwithstanding the terrible state of the city’s schools, all signs are that the city’s unrolling of its plan of debt adjustment helps us to appreciate how well put together it was…one might even say to those procrastinators in the Congress: municipal bankruptcy worked. Because, as we note, Congress is showing itself singularly unable to act on legislation to avert the onrushing fiscal crisis in Puerto Rico. Notwithstanding the leadership efforts of House Speaker Paul Ryan and House Natural Resources Committee Chair Rob Bishop in their efforts to coordinate with U.S. Treasury officials to address the nearing insolvency in Puerto Rico, the Senate has only been able to criticize—not act; and both Houses of Congress have made recess a priority over acting: Even with a critical deadline looming next Sunday, the House and Senate are firmly committed to their fifth recess of the young year. Finally, this morning, we look at efforts to undo a municipal part of the emerging, sharing economy in San Bernardino—where some unhappy citizens remain upset at the provisions in San Bernardino’s plan of debt adjustment provide for consolidating fire services with San Bernardino County.

Post Municipal Bankruptcy. Even though, unlike almost any other major U.S. city, property tax revenues are not the most important source of revenues to Detroit; the rapid appreciation in value seems to be a clear sign that the city’s plan of debt adjustment that permitted it to exit the longest municipal bankruptcy in history is working: Since January 2013, the for-sale inventory in the four-county Detroit metro region has fallen by 16.3%; demand among homebuyers is starting to outstrip supply locally: today in the metro area the time a home stays on the market has dropped by 33% from three years ago—and the median sale prices have climbed 85 percent in that period, from $80,000 to $148,000, according to Realcomp. During the foreclosure crisis, 30,000 or more homes were up for grabs at any one time. During the foreclosure crisis, Detroit had only eight people per acre, down from 21 per acre in 1950. Nevertheless, fiscal challenges remain: Detroiters who bought their homes at the height of the real estate market in the early to mid-2000s remain underwater or upside down: they still owe more on mortgages than their home is worth. But the tide is turning: There is a disparity between supply and demand, especially for homes valued under $250,000, according to data from Real Estate One. All signs appear strong: Real Estate One had more than twice as many showings (12,829) in February of this year than it did four years ago, the company said, and the company notes it is up 14 percent year-over-year. The company reports it has added more than 11% new real estate agents last year. While Detroit’s decline into municipal bankruptcy predated the housing crisis (the Citizens Research Council reported the overall loss of 15,648 business establishments from 1972 until 2007—before the severe 2008 recession, or the bankruptcies and subsequent recovery of General Motors and Chrysler and the restructuring of the automotive supplier network) when jobs left Detroit as auto plants moved to the suburbs and to other countries with globalization (manufacturing jobs in Detroit fell to fewer than 27,000 in 2011 from about 296,000 in 1950, leaving Detroit with eight people per acre, down from 21 per acre in 1950); nevertheless, the remarkable increase in aszsessed values woul seem a strong reaffirmation of not just the remarkable pressure and musical ear of U.S. (now retired) Bankruptcy Judge Steven Rhodes, but also the tenacity of former Emergency Manager Kevyn Orr.

Critical Inaction. Congress appears more and more certain to fail to act to address the Puerto Rico debt crisis before breaking for still another recess at the end of this week—even as the U.S. territory faces a looming default this Sunday, Mayday. Notwithstanding the strong leadership of House Speaker Paul Ryan (R-Wis.), House Natural Resources Committee Chair Rob Bishop (R-Utah), and the Treasury; U.S. Senate inaction and some Republican opposition to doing anything—combined with Congressional misperceptions that allowing Puerto Rico to receive some quasi bankruptcy relief would somehow open the doors to state bankruptcy—mean that the Puerto Rico Government Development Bank will almost surely default Sunday on a $422 million payment. The House Natural Resources Committee abruptly called off a markup two weeks ago due to a shaky vote count; the Committee has not rescheduled a new meeting since. If anything, however, the Senate outlook is worse—and more irresponsible. Key Senate Republicans and Democrats have expressed strong skepticism of the House—even as they have signally failed to offer any constructive alternative. Indeed, the Senate failure is fully bipartisan: Senate Minority Leader Harry Reid (D.-Nev.) said in a joint statement with Sens. Maria Cantwell (D-Wash.), Charles Schumer (D-N.Y.), Dick Durbin (D-Ill.), Bob Menendez (D-N.J.), Patrick Leahy (D-Vt.), Ron Wyden (D-Ore.), Elizabeth Warren (D-Mass.), Richard Blumenthal (D-Conn.), Kirsten Gillibrand (D-N.Y.), and Bill Nelson (D-Fla.) that the House bill “falls short.” While not offering their own proposal, the group stated: “We have concerns about whether the debt restructuring process provided for in the bill is workable, and we believe that — despite improvements — the oversight board has excessive powers and an unacceptable appointment structure.” Similarly, Sen. Finance Committee Chairman Orrin Hatch (R-Utah) last week told reporters the House bill was not “satisfactory…We’re not going to be able to pass it over here.” Indeed, it is clearer and clearer the Senate seems incapable of acting in any responsible way: even though Senators from both parties have introduced legislation to try to address the looming insolvency, Chairman Hatch has not even scheduled a markup.

Meanwhile, in Puerto Rico, the fiscal crisis appears to be accelerating—even as a desperate human health crisis threatens. The island is experiencing an outflow of population—an outflow which appears to be quickening—and dominated by those who are the highest educated and most able to afford the move. The economy is closing in on something close to a free fall: a major indicator is Puerto Rico’s Economic Activity Index, a monthly figure compiled by the Government Development Bank that tracks payrolls, cement sales, power production and gas consumption. In 2015, that index decreased 1.8 percent to the lowest in more than 20 years. That means Puerto Rico is experiencing not just a population decline, but also a surge in inequity: the island’s unemployment rate is more than twice that of the U.S. mainland, poverty is three times as severe (about 46.2 percent of Puerto Ricans live below the poverty line, compared with 14.8 percent in the U.S., according to Census Bureau data.), and assessed property values (he number of foreclosures is up 89% from 2008, according to data from the Commissioner of Financial Institutions of Puerto Rico.) are less than they were a decade and a half ago: so municipal revenues are collapsing, and the government’s future economic prospects are threatened. Added to the grim picture: tourism, a key source of the island’s economy where hotel occupancy is the strongest in a decade, is imperiled by an outbreak of the Zika virus. Thus, the island confronts a triple fiscal whammy: debt, a signal health care crisis, and a loss of its most critical work force.

On the debt front, in the wake of Governor Alejandro Garcia Padilla’s decision to have Puerto Rico issue $3.5 billion of municipal bonds two years ago, an amount believed at the time to be sufficient to tide the island over until last June, instead finds that Puerto Rico’s debt had escalated to $70 billion—or the equivalent of about $20,000 for every one of its 3.5 million residents. With Congress set to break without having taken any action, the stage appears increasingly ineviatable for defaults on Puerto Rico’s debts. Already full faith and credit municipal bonds backed by Puerto Rico’s full taxing power which mature in 2022 traded last week for only 57 cents on the dollar. For all the bitter whining by hedge fund lobbyists in Congress that the efforts led by Speaker Ryan and the House Natural Resources Committee would not provide them full restitution, Chairman Bishop’s proposed bill would provide them some.

Protest Vote Fails to Impede Progress on Exiting Municipal Bankruptcy. A preliminary count appears to indicate that an effort to undercut San Bernardino’s plan to exit the longest municipal bankruptcy in U.S. history has failed. The effort by city taxpayers to seek to reverse a parcel tax and the move to consolidate the city’s fire department with that of San Bernardino County shows 846 registered voters and 1,070 landowners formally protested—well short of the requisite amount (an election is only called if protests are received from 25 percent of either registered voters or landowners) needed to trigger an election—and clearing the way for the outsourcing and tax, which commences at $148 per parcel in the 2016-17 fiscal year and can go up as much as 3 percent per year, remain set to become effective July 1—and, critically, leave unmolested the city’s plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury. Nevertheless, the Local Agency Formation Commission, which oversees the process, will need to certify the results, according to its executive director, Kathleen Rollings-McDonald. Nevertheless, upset residents and landowners said at a protest hearing last Thursday that the form they received in the mail from the city was unclear or easy to mistake for junk mail: they accused the municipal officials behind the move of voter suppression. Notwithstanding opposition from nearly all of the 21 members of the public who spoke before Council at last Thursday’s hearing, Mayor Carey Davis said afterward that the move would benefit residents: “This,” Mayor Davis said, “helps the city to provide better fire service. It also gives us access to swift water rescue, maintenance for engines, CONFIRE (the county fire dispatch system), which will improve dispatch times.” The Mayor further reminded citizens that, because the city had been forced to close two fire stations as part of its proposed plan of debt adjustment, this would give residents access to county fire stations. The City Council, county Board of Supervisors and Local Agency Formation Commission for the county have approved the plan in a series of votes going back to August 2015, saying the move benefits the county and is vital to the city’s plan to exit bankruptcy.

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