Hard Choices about a City’s future

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eBlog, 6/01/16

In this morning’s eBlog, we consider the dwindling fiscal options for East Cleveland’s future: would Cleveland—on the verge of hosting the Republican Presidential Convention—be willing to agree to a merger? If not, what are the options? Then we look at the surprising override in Springfield of Gov. Bruce Rauner’s veto of pension relief legislation to help the City of Chicago, raising the question whether such a delay mortgages the Windy City’s fiscal future.

Focusing on a City’s Future. East Cleveland leaders appear to have dropped their opposition to being annexed by neighboring Cleveland—a move which, if agreed to—would avoid filing for chapter 9 municipal bankruptcy—and mean the city’s residents could receive basic municipal services the city has been unable to afford for years. The shift appears to recognize the leadership of Mayor Gary Norton, who has sought a merger with Cleveland for several years, but been stymied by a City Council that believed the city could survive on its own. But City Council President Thomas Wheeler told the Associated Press that a merger with Cleveland appears unavoidable, stating: “I’ve got pride…I don’t want to merge. But we’re fighting to save an East Cleveland that no longer exists.” The small city East Cleveland was once a middle-class community of around 40,000 people. Oil baron John D. Rockefeller’s expansive estate was in East Cleveland. A millionaires’ row of mansions once lined Euclid Avenue, the main thoroughfare. The city is only 3.2 square miles, and about half of that is a park.

Today, the population is around 17,000, nearly half what it was in 1990; its median household income is less than half the statewide $48,000; it is a municipality in which some 1,000 homes have been demolished in recent years with the help of the Cuyahoga County land bank; nevertheless, some estimate there are at least 1,000 more which need to be razed, along with more than 140 apartment buildings. The municipality owes $3.5 million in past-due bills and has been unable to issue debt for capital improvement projects or anything else for years. The city workforce has been cut in half since 2010; nevertheless, it is barely able to make payroll every two weeks. According to Ohio Auditor Dave Yost, a merger with Cleveland is East Cleveland’s best hope. Mr. Yost placed East Cleveland back into fiscal emergency four years ago—subjecting the small city to state oversight of its finances and fiscal recovery plans. Auditor Yost has noted: “The bottom line is the bottom has fallen out of their revenue bucket…And I don’t see a way to repair that bucket.” Mr. Yost has asked the Ohio Legislature for $10 million to finance capital improvements, such as road repairs if East Cleveland and Cleveland agree to merge. City Council President Thomas Wheeler said the council is waiting for a consultant to report on any alternatives to a merger.

If officials from both cities move ahead, a merger could take months to complete. Under the process, City Councils from both municipalities must appoint three persons to a commission charged with working out the logistics of such a merger. In the end, if such a merger is agreed to, East Cleveland voters would first have to vote—then, if they approved such a merger, the Cleveland City Council would then vote to accept East Cleveland or to allow its own voters to decide the issue. Neither the Mayor nor Chair of the Cleveland City Council have made any public statements with regard to whether they might support such a merger.

The only other alternative—one which Mayor Norton reports he has also been exploring, would be to file for municipal bankruptcy—which, while permitted under Ohio law, would be a first. Mayor Norton believes that such a filing would give East Cleveland some breathing room under an unbiased federal bankruptcy judge to work out adjustments with the municipality’s creditors; however, Mr. Yost is less certain, noting: “Even if the payoff (by the municipality to its bondholders and other creditors) was a nickel on the dollar, I don’t know where they’d get the nickel.”

Mortgaging a City’s Future? The Illinois legislature has overridden Gov. Bruce Rauner’s veto of a bill to provide Chicago with financial relief in paying for police and fire pensions. With the legislature scheduled to adjourn today, the surprise action came nearly one year after the legislature had sent the bill to the Governor, but only a few days after Gov. Rauner vetoed it. The override means Chicago will be off the hook with regard to being forced to adopt a second consecutive property tax increase in the wake of last year’s record hike. For the Windy City’s taxpayers, the override is projected to save them $1 billion in police and fire pension costs in the short-term: the House voted 72-43 to override the Gov.’s veto of the savings plan, which would have mandated Chicago to pump $4.62 billion into retirement accounts for police officers and firefighters through 2020—an increase which Mayor Rahm Emanuel had warned would have triggered a $300 million property tax increase. But Gov. Rauner countered that shorting payments will cost an extra $18.6 billion in interest during the next four decades. Currently, the City’s police and fire funds are $12 billion short of what it would need to cover current and future obligations. Chronic underfunding over the decades is largely to blame, as it is responsible for the $111 billion shortfall Illinois faces in its state-employee accounts. Gov. Rauner had warned the legislation simply put off to a future day the pain accompanying fiscal balance.

For Chicago, the legislative action is projected to provide near-term relief to the city by reducing, at least for the near term how, the critical need to increase funding in the hundreds of millions to meet the city’s burgeoning public pension obligations; at the same time, it likely adds billions of dollars in long-term costs while the city’s pension debt continues to grow. Nonetheless, Mayor Rahm Emanuel stated: “I particularly want to thank the Democrats and Republicans in the General Assembly for putting politics aside and doing the right thing for Chicago taxpayers, and for our first responders…We in the city agreed to step up and finally do our part to responsibly fund these pensions, and I want to thank Springfield for doing their part as well.”

For his part, Gov. Rauner, who has sharply criticized Mayor Emanuel for not taking on the Chicago Teachers Union, stated: “Clearly, those who supported this measure haven’t recognized what happens when governments fail to promptly fund pension obligations…Instead of kicking the can down the road, local and state governments should instead focus on reforms that will grow our economy, create jobs and enable us live up to the promises we’ve made to police and firefighters,” adding that the “the cost to Chicago taxpayers” in the longer term would be “truly staggering.”

Protecting A City’s Future

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eBlog, 5/27/16

In this morning’s eBlog, we consider the vital role a city has to try to protect its most vulnerable citizens: its children—noting the essential role public safety plays in municipal trust and revenues—ergo, the continued high murder rate, especially of children, in the Motor City continues to present severe governance challenges to the city’s ongoing fiscal recovery. We look at yesterday’s action in Trenton, New Jersey, where—at long last—the legislature has adopted and sent to Gov. Chris Christie legislation to avert Atlantic City’s insolvency next month—albeit we await how the Governor will react—and the next steps as the city enters its most critical months of the year.

Protecting a City’s Children. In our report on Detroit, we had noted that, according to the census, 36 percent of its citizens were below the poverty level, and, the previous year, Detroit had “reported the highest violent crime rate for any U.S. city with a population over 200,000.” Writer Billy Hamilton had called the city “either the ghost of a lost time and place in America, or a resource of enormous potential.” Although Detroit’s crime statistics, like its finances, appear to be headed in the right direction, Forbes last fall noted that the city once again had topped Forbes’ list of America’s Most Dangerous Cities, citing 298 murders and intentional homicides in Detroit in 2014. Even though that was the lowest number in 47 years, according to statistics compiled by the Federal Bureau of Investigation and the Detroit Police Department, it still worked out to a murder rate of 43.5 per 100,000 residents, or approximately ten times the national average. The city’s overall rate of violent crime, including assault and robbery, was 1,989 per 100,000 residents, down from over 2,000 in 2013, but still more than five times the national average, which also has been falling for years. Now Detroit Mayor Mike Duggan, who was elected in 2013 and reclaimed full control over the city’s operations when it emerged from bankruptcy, has been going high-tech, urging businesses to install video cameras to give police a better picture of violent crimes and who’s committing them, noting: “I’m just so tired of every time you get this blurry image where you can’t tell who the person is.” Now, as 2016 nears the halfway point, Detroit’s list of child casualties grows, a problem underscored by two cases this week involving toddlers close to their third birthdays. It brings to eight the number of youths injured or killed by gunfire in Detroit in the past two months. Wayne County Prosecutor Kym Worthy, in announcing charges against two Wednesday, urged gun owners to secure their firearms and keep them unloaded around children. Ms. Worthy said the shootings of youth when they find weapons are “totally…absolutely preventable” and called for more criminal penalties where “negligible” gun ownership is at fault; she called for safety classes and local hospital officials to reach out to pediatricians about programs to educate parents about gun ownership. The flurry of cases involving children, especially, has residents and police upset and angry: Assistant Police Chief Steve Dolunt urged a change from the city’s violent culture, warning: “You gotta have a license to drive a car, but there’s no one to teach you to be a parent,” during a news conference yesterday, adding: “This (violence) is learned behavior.” A 2014 Detroit News investigation found nearly 500 Detroit children have died in homicides since 2000, and now the Detroit News staff writers James Dickson, Candice Williams, Oralandar Brand-Williams, and Mark Hicks note it appears to be continuing unabated. There were 298 murders and intentional homicides in Detroit in 2014, the lowest number in 47 years, according to statistics compiled by the Federal Bureau of Investigation and the Detroit Police Department—grim statistics that work out to a murder rate of 43.5 per 100,000 residents, which is still almost 10 times the national average. The city’s overall rate of violent crime, including assault and robbery, was 1,989 per 100,000 residents, down from over 2,000 in 2013, but still more than five times the national average, which also has been falling for years. Thus, Mayor Mike Duggan, who was elected in 2013 and reclaimed full control over the city’s operations when it emerged from municipal bankruptcy is laser focused on utilizing high-tech, urging city businesses to install video cameras to give police a better picture of violent crimes and who’s committing them. As the Mayor notes: “I’m just so tired of every time you get this blurry image where you can’t tell who the person is.” Mayor Duggan earlier this month announced plans for eight gas stations to install better lighting, high-resolution cameras, and license plate cameras with live feeds to Detroit police.

Life Buoy or Jewel in the Crown? The New Jersey legislature late yesterday passed and sent to Gov. Chris Christie legislation to keep Atlantic City from insolvency: the Assembly and Senate approved the measures by wide margins; Gov. Chris Christie, who earlier supported legislation allowing for an immediate state takeover of the city’s finances, has said the bill gives him the authority he needs, although he stopped short of saying whether he would sign the bill. For his part, Atlantic City Mayor Don Guardian used a Trumpian expression, calling the legislature’s action “huge: We want people to know the shore is open for business.” The bill, if signed into law, would give the city five months to draw up plans to balance its books over the next five years. New Jersey Assembly Speaker Vincent Prieto described the compromise as a signal improvement over an earlier Senate- and Christie-backed bill which would have imposed an immediate state takeover, although state Senate President Steve Sweeney criticized the delay and said he had sought unsuccessfully last summer to encourage the city to reorganize its finances, calling the long delay “very, very unnecessary,” especially since, as he noted: “A very similar offer was made last July, and it was rejected.” Under the legislation, Atlantic City will receive temporary loans of $30 million for the remainder of this year; $30 million to be applied to leftover FY2015 debt, and another $15 million for FY2017. The city also would be able to receive at least $120 million each year from casinos under a payment-in-lieu of taxes bill that would last for 10 years—and casinos would not be allowed to opt out of the PILOT plan, even if state voters authorize casinos in northern New Jersey. The compromise includes provisions to offer early retirement to the city’s workers and retain its collective bargaining rights. Finally, the package retains the Senate provisions to allow a state takeover of Atlantic City’s finances and major decision-making powers in just 150 days, including the right to unilaterally break union contracts, but only after its Community Affairs department determines that the plan Atlantic City comes up with is unworkable. Notably, the city would be barred from appealing such a determination to the courts before the state could take over. This means the city will have just five months in which to plug its more than $80 million budget deficit and prepare a five-year financial plan—or risk state intervention. Speaker Vincent Prieto described the final action as “something that gives them the tools to be able to be successful…This is something that now the administration of Atlantic City can roll up their sleeves with their workforce and I think we’re giving them an opportunity to again be the jewel of New Jersey.”

Both chambers of the legislature also passed a companion bill enabling Atlantic City’s eight remaining casinos to make fixed payments in lieu of property taxes (PILOT) for 10 years. The individual PILOT amount for each casino would be based on its share of total gambling revenue. The additional payments would be used to pay down Atlantic City’s debt through the reallocation of the receipts collected by the Casino Redevelopment Authority from the casino investment alternative tax. The bill differs from a previous version Gov. Christie vetoed last November, which would have directed the city’s casinos to contribute $30 million collectively to the city in 2016. Under the version agreed to yesterday, the program would not commence until next year. To date, all the city’s casinos have made their 2016 tax payments, except the Borgata, which is in litigation with the city over $170 million in tax refunds owed to the casino-hotel. Senate President Sweeney said the city’s recovery plan, at his insistence, could also authorize the use of early retirement programs for city workers to minimize the impact of workforce cuts—and that Atlantic City would be required to make full obligated payments to schools and Atlantic County, noting: “This plan gives Atlantic City the opportunity to do the job itself to prevent bankruptcy and make desperately-needed financial reforms…Along with the reforms, this plan will provide financial resources and the ability to access the financial markets, which is critically important for long-term fiscal health.”

The ever prescient Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, said that the new agreement should give Atlantic City officials sufficient resources to balance the city’s budget with revenue from the rescue package and the PILOT bill, noting the city will also likely seek additional savings from labor contract negotiations, shared services, and selling off city assets such as its former municipal airport, Bader Field, adding, however: “During these next five months the city has some substantial challenges.”

For his part, Gov. Christie said Wednesday night during a radio show that he will quickly decide whether to sign, noting: “All the authority I would need is in there.”

The Importance of Bipartisan Leadership in Averting Severe Human & Fiscal Distress

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eBlog, 5/26/16

In this morning’s eBlog, we applaud House Speaker Paul Ryan (R-Wisc.), House Natural Resources Committee Chair Rob Bishop’s (R-Utah), U.S. Treasury Secretary Jacob Lew, and House Minority Leader Nancy Pelosi (D-Ca.) for their leadership roles in contributing to the remarkably swift, bipartisan markup of legislation (PROMESA) to address Puerto Rico’s looming insolvency; and, we continue to follow the seemingly unrelenting challenge in Wayne County to emerge from its fiscal emergency consent agreement.

House Panel Forwards Puerto Rico Legislation. The House Natural Resources Committee yesterday voted 29-10 to send to the full House legislation, HR 5278, to address Puerto Rico’s debt crisis with solid bipartisan support, a strong sign the bill could move quickly through Congress ahead of a potential default by the territory on July 1. As reported, the bill would create a debt-restructuring process and name a seven-member financial control board, not the government elected by Puerto Rico, to determine whether and when to initiate court-supervised debt restructuring, and it would have the power to approve or reject budgets. The board would terminate after Puerto Rico regains the ability to borrow at reasonable interest rates and balances its budget for four consecutive years.to oversee the U.S. territory—not unlike previous control boards in New York City and Washington, D.C.—and similar to the oversight fiscal control board created as part of Detroit’s exit from the largest municipal bankruptcy in American history. The bipartisan vote came despite the strong opposition from some municipal bondholders, hedge funds, and unions: millions of dollars on television advertisements had been expended to defeat it. Chair Rob Bishop (R.- Utah) said he expects majorities of both parties to back the bill when it comes to the House floor when Congress returns the week after next, while in the Senate, Majority Leader Mitch McConnell (R.- Ky.) said Senators were “anxious to take up” whatever the House could pass. The White House supports the measure. The measure was opposed by both labor unions and Puerto Rican elected officials, as well as some House members, who claimed the bill would threaten creditors’ rights and create a potential precedent for distressed states—claims not only inconsistent with the dual sovereignty of the United States, but also because the legislation was done through the territories clause of the U.S. Constitution—or, as David Hammer, co-head of municipal bond portfolio management at Pacific Investment Management Co. put it: “This creates a clear firewall and ring-fences Puerto Rico from the broader muni market,” adding hat, moreover, the debt-restructuring mechanism would require Puerto Rico to cede more power to the federal government, noting: “That’s not something a state or local government would ever seek to do.”

The Committee rejected proposed amendments to delete language limiting Puerto Rico’s minimum wage, ease economic aid to the island, and ban the Federal Reserve from purchasing Puerto Rican bonds or paying down the commonwealth’s debt—as well as amendments focused on Puerto Rico’s constitutionally guaranteed debt. (Roughly $18 billion of the more than $70 billion in Puerto Rican municipal debt is backed by its constitution.) The committee also rejected an amendment from Rep. John Fleming (R-La.) that critics said would not give the board enough flexibility to properly sort out debt repayment priorities according to the Puerto Rican Constitution. The bill cleared committee with one significant change. The adopted amendment from Rep. Garret Graves (R-La.) mandates that no federal money can go to paying down or buying Puerto Rican debt or liability, which could help tamp down Republican fears of a potential bailout.

Pensionary Solvency. Wayne County, Michigan Executive Warren Evans has taken another step in pressing his commitment to take the county surrounding Detroit out of its emergency consent agreement by the end of this year by, yesterday, announcing the County will make an additional $14 million contribution toward its underfunded pension system—a contribution which will be in addition to the $63 million which the County is currently obligated to pay annually into its retirement fund, but falls short of the $19 million county officials originally anticipated they would be able to afford. In FY2014, Wayne’s pension audit revealed some $840.5 million of unfunded pension liabilities. According to Wayne County spokesman James Canning, last December officials determined the County could make a $10 million contribution into the pension fund from funds declared as surplus from its Delinquent Tax Revolving Fund and Property Forfeiture funds; in addition Wayne anticipated it could funnel another $9 million from fund balances—albeit, in the wake of a third-party administered study on its pension system conducted earlier this year, the County determined it would only be able to contribute an additional $4 million from the fund balances. When the County entered into the consent agreement, it faced an accumulated deficit of $82 million, a yearly structural deficit of $52 million, $1.3 billion in unfunded health care liabilities, and a pension fund that was underfunded by nearly $900 million. By last month, according to its CAFR, its FY15 year-ending accumulated deficit of more than $82 million had been eliminated and the books were closed with a $35.7 million unassigned surplus—albeit some $30 million of that was earmarked for specific uses, leaving Wayne County with a surplus of only $5.7 million.

Other key steps involved reductions in other post-employment benefits, where the County achieved reductions of about $850 million in unfunded liabilities—reducing its OPEB liability by 65%, and bringing the county’s pay-as-you-go contribution this year down more than 50 percent from $40.4 million to $17.6 million—savings achieved by switching some retirees to what the county deems more “cost-effective health plans and providing others with need-based stipends to purchase their own insurance.” Absent such changes, Wayne County had warned that the actuarial accrued liability was on track to rise to $1.8 billion.

The Import of Integrity to Municipal Solvency

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eBlog, 5/25/16

In this morning’s eBlog, we consider the ongoing struggle of the small municipality of Ferguson, Missouri to find the revenues to comply with onerous federal mandates—penalties that risk the municipality’s fiscal future. We watch and await the outcome of House Speaker Paul Ryan’s and House Natural Resources Committee Chair Rob Bishop’s (R-Utah) markup of legislation to address Puerto Rico’s looming insolvency; and, finally, we observe the desperate fiscal collapse of the small municipality of Opa-Locka, Florida—where a combination of seeming malfeasance and fiscal distress seems certain to force a choice between municipal bankruptcy or a state takeover.

Will the Federal Mandate Help or Hurt Municipal Solvency? Voters in Ferguson, Missouri will be forced back to the polls this summer by still another unfunded federal mandate: they will vote on whether or not pay a higher utility tax in order to raise still more revenues to address U.S. Justice Department unfunded mandates to revamp the city’s police department and municipal court system—with Mayor James Knowles III and the City Council meeting Sunday to consider whether to place a 2-percent increase in the city utility tax on the August ballot—a consideration to which they unanimously agreed, even as they voted to table a proposed property tax hike also intended to help meet the city’s financial obligation under the city’s imposed agreement with the Justice Department. The unique Sunday session was forced by yesterday’s St. Louis County election deadline for items to appear on the August 2nd. But their decision was not unanimous—as some councilmembers supported submitting both tax hikes to voters, even though city voters had, earlier this year, rejected a proposed property tax increase. Nevertheless, there was consensus that gaining approval of two tax increases in one election to satisfy not the city’s residents, but rather the federal government, would be an uphill battle. In addition, while the utility tax increase needs only simple-majority approval for passage, any property tax increase would require approval by two-thirds of voters.

Mayor Knowles noted that he believes voters would support a higher utility tax even if it would not end all the city’s budget problems, or, as he put it: “I think we can stop some of the bleeding and keep up services with the utility tax.” The city estimated a 33% utility tax hike from 6 to 8 percent would generate $700,000 in annual revenue; whereas the potential property tax hike increase would have raised $500,000 annually. The utility tax hike would, if approved, come on top of the half-cent municipal sales and use tax increase adopted last April for economic development. The exceptional challenge for the small municipality as it works to adopt its FY2017 budget by the end of next month is how to balance federal mandates versus maintaining current services and not laying off three firefighters. While the federal government does not worry itself about balancing the federal budget, such imbalance is not an option for states, counties, or cities. City leaders are crossing their fingers in hopes there might be some federal grant funds that would help to address some of the costs of meeting Justice Department requirements that mandate police staffing levels, including—as we have observed on the opposite end of the country in San Bernardino, transferring some emergency response dispatching to St. Louis County.

The Promise of PROMESA. House Natural Resources Committee Chair Rob Bishop (R-Utah) opened yesterday’s markup of (HR 5278), the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) by stating: “Puerto Rico is in the midst of a financial and economic crisis of historic proportions…Article IV of the U.S. Constitution states: ‘The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory and other Property belonging to the United States.’ Stating the obvious, Puerto Rico is an American territory. Therefore, Congress has the power to enact laws affecting Puerto Rico. However, with power comes responsibility. Power without responsibility leads to tyranny on one hand, or abject neglect on the other. For too long, Congress has neglected its duties under Article IV. Congress has sown the wind, and Puerto Rico has reaped the whirlwind. We have a constitutional, political, and moral imperative to act, and this Committee has done so. Given the crisis, the question before us today is whether we fulfill this constitutional responsibility. H.R. 5278, the Puerto Rico Oversight, Management and Economic Stability Act, or ‘PROMESA’ establishes an Oversight Board to work with the government of Puerto Rico. The Board will audit their finances, figure out the true asset picture, and develop fiscally responsible budgets to repay creditors and meet basic human needs. It will restore the island’s access to credit markets, and review laws, regulations, and expenditures to assure compliance with fiscal plans and fair treatment of investors…This bill is Puerto Rico’s last and best chance to get on sound financial footing and put its economy on the path to recovery and prosperity…”
The markup which the Chair expects to complete today, has gained bipartisan support: it would create a mechanism for Puerto Rico to restructure $72 billion in debt and establish a financial control board. With the Memorial Day recess, however, the Committee’s reported bill is unlikely to go to the full House until next month, after the Memorial Day recess.

The markup commenced even as Puerto Rico Gov. Alejandro García Padilla late Monday proposed a budget for the upcoming fiscal year with 86% less allocated to pay debt service than the approved current-year budget: he stated his budget includes $209 million for interest payments on Puerto Rico’s debt; however, his proposal does not provide for funding for principal payments in the coming fiscal year. His comments left uncertain the fiscal treatment of the U.S. territory’s public authorities, municipalities, or the Puerto Rico Sales Tax Finance Corp. (COFINA); their debt is not paid from the General Fund. Gov. Padilla said that his proposed spending level was $9.1 billion for the new fiscal year—a level which, he said, would not require any new borrowing or any tax increases; nor would it, he said, force reductions or eliminations of several programs, even as he proposed increases in the budget’s contributions to certain items such as the teachers’ and employees’ pension systems and the Puerto Rico Medical Center. The Governor’s remarks came even as the Puerto Rico House of Representatives voted overwhelmingly to override the Governor’s veto of the legislature’s rejection of an increase in business-to-business taxes from 4% to 11.5%–a vote the Puerto Rico Senate is expected to take up anon.

Nopealocka? In a city government close to insolvency, Opa-locka, Florida, City Finance Director Charmaine Parchment broke ranks and warned her supervisors the city will run out of money after its payroll next week and that its recovery plans will not be enough to save Opa-locka from insolvency. Ms. Parchment on Sunday emailed acting city manager Yvette Harrell to report that the small municipality’s budget deficit is three times larger than what the city has revealed to its taxpayers; she demanded that her name be removed from a city recovery plan submitted to the state, adding: “After the next payroll, the city will not be able to pay its bills.” Opa-locka, a small municipality inside Dade County of about 6,000 households, but with a vacancy rate nearing 15 percent, and where more than one-third of households are headed by a female householder with no husband present, and nearly 30 percent are non-families—and where nearly one-third of families fall below the poverty level, is a potpourri of Cuban, Dominican, and Haitian residents with very low per capita annual incomes. The foundering municipality operates under a commission/city manager form of government: incorporated in 1926, its city commission consists of the mayor and four commissioners, who are responsible for enacting ordinances, resolutions and regulations governing the city. In 2004 Opa-locka had the highest rate of violent crime for any city in the United States; in an editorial nearly a decade later, a Miami Herald editorial described the municipality as “crime-plagued” with a “steadily deteriorating” police department—a department which had decreased from 50 to 16. Nevertheless, Ms. Parchment’s email appears to present an even more depressing and urgent fiscal distress picture than what has been made publicly available by either the city’s elected or senior appointed officials—including City Manager David Chiverton, who pledged at a public meeting earlier this month that Opa-locka would have a balanced budget by the end of the fiscal year—a far cry from what Ms. Parchment instead estimated would will soon be a $4.5 million deficit. Now, with City Manager Chiverton an apparent target of an FBI investigation of bribery and kickback, the issue seems to be whether the municipality will be forced to seek chapter 9 municipal bankruptcy under Florida’s §218.01, or whether Gov. Rick Scott might, somewhat as in New Jersey, declare an emergency and impose a state takeover of the city (while utility and transportation districts in the state have filed for chapter 9, no municipality has). For months, Opa-locka’s elected officials have been alerted about the looming fiscal collapse, but the city fired former City Manager Steve Shiver last November in the wake of his alerting state officials about the mounting municipal debts that had reached $8 million. Similarly, a financial task force warned that the city would have to make drastic cuts. Nevertheless, as City Commissioner Terence Pinder stated: “They kept kicking the can down the road.”

The Route out of Municipal Bankruptcy

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eBlog, 5/2416
In this morning’s eBlog, we consider the late night “road to recovery” bipartisan, bicameral plan in the New Jersey legislature to avert insolvency in Atlantic City—albeit with an ominous silence from New Jersey Governor Chris Christie; we consider the legal challenge of hedge funds to Puerto Rico’s debt moratorium law; and we follow the surprisingly inclusive process of San Bernardino in obtaining citizen input and then approval of its plan of debt adjustment for the U.S. Bankruptcy Court.

A Lifebuoy for Atlantic City. In what Atlantic City last night described as “a road to recovery for Atlantic City,” New Jersey legislative leaders struck a compromise to address the nearly insolvent city—albeit, as Atlantic City Mayor Don Guardian described the agreement: “It’s going to be a tough road for us to meet.” Under the agreement, the state legislature would give Atlantic City 150 days to draft a five-year fiscal plan that includes a balanced budget in FY2017, and the state would provide the city with a state bridge loan to cover its fiscal meltdown in the meantime. In addition, the agreement includes a companion bill which incorporates elements of the so-called PILOT or payment in lieu of taxes legislation which would allow the city’s casinos to make fixed payments in lieu of property taxes and redirects $110 million in casino funds over 10 years to help Atlantic City pay debt and expenses. Under the new plan, the Commissioner of the Department of Community Affairs would approve or reject the city’s five-year plan after 150 days. If the city’s plan failed to achieve fiscal stability, the state takeover proposed by Sen. Sweeney would take effect. The compromise also provides authority for a state takeover if Atlantic City, at any point, fails to follow the five-year plan—although the legislation would permit Atlantic City the right to appeal the commissioner’s decisions to a Superior Court judge. The New Jersey Assembly Judiciary Committee unanimously advanced the legislation with one abstention; the Senate and General Assembly are scheduled to vote on the legislation Thursday. There has, as yet, been no comment from Gov. Chris Christie.

Atlantic City Mayor Don Guardian, who supports the new plan, said he would need time to come up with an exact figure after considering state aid, nevertheless noting the city would still be forced to make “drastic” budget cuts. In a statement, Council President Marty Small said the agreement would offer local officials the right to self-govern and would avoid disenfranchising the city’s residents, albeit adding: “However, a tall task remains in making the necessary cuts that will be extremely painful and tough.” The compromise agreement mandates that, in addition to a balanced budget, Atlantic City would be mandated to pay:
• the full amount in property taxes owed to the city’s school district and Atlantic County,
• schedule repayment of debts to the state, bondholders and other liabilities, and
• increase revenues.

Unsurprisingly, it is not yet clear how deeply the Mayor and Council will have to cut the city’s budget: according to the state, Atlantic City has $550 million in total debt. But the legislation does permit the city to offer early retirement incentives to public workers, possibly saving the city more than $5 million, according to Mayor Guardian. In addition, according to the Mayor, the city would also be mandated to restructure its bonded debt in order to reduce its annual debt service from $38 million to $5 million. The timing of the agreement—assuming, of course, that Governor Christie will support the package—is critical, as the incorporated securitized loan in it will be vital to allowing Atlantic City to continue to operate during the summer months and ensure that the all-important tourism season is not impacted by the threat of looming fiscal collapse. It remains unclear whether Gov. Chris Christie, who has twice rejected fiscal rescue plans for the city, would approve the legislation.

Vulture Challenge. Hedge funds Brigade Capital Management LLC, Tasman Fund LP, Claren Road Asset Management, Fore Multi Strategy Master Fund, Sola, Ultra Master, Solus Opportunities Fund, and four funds holding more than $750 million of Puerto Rico Government Development Bank debt have revived a suit in the U.S. District Court [3:16-cv-01610-FAB], accusing the government of Puerto Rico of “changing the rules of the game” by amending its debt payment moratorium law. The litigants argue that Puerto Rican statutes Law 21 and Law 40 violate the Contract and Takings Clauses of the United States Constitution and the Puerto Rico Constitution. The funds say they also violate the Commerce, Bankruptcy, and Supremacy Clauses of the U.S. Constitution, contravene Section 903(1) of the Bankruptcy Code, and unconstitutionally close the doors to the federal courts. The hedge funds, which had reached a preliminary agreement on a restructuring plan earlier this month, filed their amended complaint late last week requesting that portions of Puerto Rico’s commonwealth debt payment moratorium law be declared null and void—in effect seeking to preempt Law 21, which Puerto Rico Gov. Alejandro García Padilla signed last month, which provides him authority to suspend payments on debt backed by the Puerto Rican government, the Government Development Bank (GDB), and other public agencies through next January—and which imposes a stay on legal challenges to any debt moratoriums. Gov. Padilla made use of the new law early this month to institute a freeze on GDB principal payments due on the 2nd—a date on which the Bank paid about $23 million in interest; the bank had reached agreement with local credit unions that held some of the debt due that day. In addition, the hedge funds reached a preliminary agreement for restructuring the debt under which they would accept what are termed “face discount notes” equal to 47% of the original notes’ value: the notes would pay 5% interest, though some of that interest would be paid through new notes until FY2020, and, in addition, provide for entering into a 30 day forbearance from taking actions against the GDB, according to the amended complaint. The apple cart, however, was upset, according to the litigants, when the legislature on May 5th adopted a revision of its moratorium law. The revised legal complaint charges that the revised law provides that local depositors and creditors will have better recoveries than non-local depositors and creditors and directs the receiver to “preserve and prioritize the safety, soundness and stability of depository financial institutions and their deposits,” and provides that debts owed to Puerto Rico resident institutional holders of GDB bonds would be preferred. In response, Puerto Rico Gov. García Padilla noted; “A small group of Wall Street hedge funds and vulture funds yesterday filed a lawsuit in federal court seeking to hinder the provision of services that Puerto Ricans receive from the government. This will affect the ability of the commonwealth to have police on the streets, teachers in schools, and nurses in hospitals…The economy of the island will not survive additional austerity measures and certainly not survive the commonwealth having to close in order to pay billions of dollars in bonds maturing this year. We will vigorously defend our limited legal tools and will not tolerate being placed in a legal-straitjacket.”

The Last Full Measure? With U.S. Bankruptcy Judge Meredith Jury having imposed a Memorial Day deadline for San Bernardino to submit its plan of debt adjustment, the San Bernardino City Council has voted 6-1 to approve its plan, with only Councilman John Valdivia in opposition. Notwithstanding, City Attorney Gary Saenz warned the city’s creditors will still be able to object to its provisions, and advised the city will continue to negotiate in efforts to avoid expensive litigation. Counselor Saenz indicated he hoped Judge Jury would render her decision in about a year. San Bernardino County Supervisor Josie Gonzales, who represents much of the City of San Bernardino, told the Mayor and Council: “I, no different from the people in this room, value this moment as part of what will become your legacy in great history…Do not think of yourselves today. Think of 25 or 30 years in the future and let it be said that on May 18, 2015, the leadership of San Bernardino was strong, and honest, and ready to introduce the future.”

The plan, which details proposed reductions to creditors — including the investors who hold nearly $50 million in pension obligation bonds, whose principal is slated to be reduced to only $500,000 — and internal changes that the city’s consultants and others say will allow it to deliver services for less, was put together by experts hired by the City, notes “strongly and clearly that San Bernardino must address the reform of its system of governance and management. San Bernardino is an outlier in comparison to other cities of its population size in the State as it does not employ a true Council/Manager form of government. It also has an elected City Attorney, a peculiarity shared by only eleven other cities in California (mainly very large cities), and an unusual and unwieldy Charter. All of this has led the Core Team to recommend that the existing Charter be repealed and replaced with a Charter that clearly spells out responsibilities for policy (Mayor and Common Council) and administration and management (city manager) so the government can operate effectively and efficiently. The current Charter so impairs the operation of the City that it has been forced to seek an interim operating agreement (see Attachment I) even to be able to develop and implement this Plan. This fact was dramatically illustrated by a strategic planning committee which unanimously told the Mayor, majority of the Common Council, City Attorney and City Manager, that operations and management needs fundamental reform. The City intends to establish a Charter committee to draft a new Charter and place that new City Charter on the November 2016 ballot for consideration by the voters, or sooner if possible.”

Nevertheless, putting Humpty Dumpty back together again entails hard political choices, so, unsurprisingly, the Council heard testimony from those bitterly opposed to the plan—especially with regard to the provision to outsource the city’s fire and refuse services—or, as one citizen put it: “Today is the day the City Council committed suicide for San Bernardino.” The plan, which lays out proposed reductions to creditors — including the investors who hold nearly $50 million in pension obligation bonds, whose principal is slated to be reduced to only $500,000 — and internal changes which San Bernardino’s consultants and others claim will allow it to deliver services for less, proposes to make employees a priority over outside groups, because the city wants to ensure it can keep a workforce. The plan also proposes full payment of the city’s obligations to CalPERS, some $14 million, making the state public pension agency one of the city’s only creditors not to be substantially impaired in the city’s plan.

In a key step, the city had shared its proposed plan with what it described as a “core group” of citizens chosen to represent various communities in the city, many of whom spoke in support of it before the Council.

Last Full Measures

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eBlog, 5/23/16

In this morning’s eBlog, we discuss a critical challenge to Detroit’s long-term emergence from municipal bankruptcy–its public pension challenge. We continue to follow the status of the recently drafted bipartisan legislation to address the looming insolvency of the U.S. territory of Puerto Rico; and we look at the challenges to public school financing which would appear to make municipal bankruptcy not the most effective avenue in Detroit or Chicago. 

The Last, Full Measure? Detroit has taken a key step to addressing a significant, nearly $200 million threat to its full emergence from the nation’s largest municipal bankruptcy: the city is inching nearer to determining how to address a hole in its public pension obligations—a hole much larger than it had anticipated as part of its plan of debt adjustment—and a hole discovered subsequently when the city determined some of its bankruptcy advisers had used outdated life-expectancy tables in projecting the city’s total pension obligation.

The challenge of any city’s plan of debt adjustment relies, after all, on 30 year projections—not just of spending, which can be largely controlled, but also revenues. Detroit’s pension funds, for instance, assume its pension funds’ assets will earn 6.75% a year on its investments settled on by former emergency manager Kevyn Orr and pension officials in the city’s bankruptcy mediation talks. Today, however, that appears to have been a bar too optimistic; thus a lower average rate of return over the next several years could further inflate the city’s pension fund obligations starting in 2024 and beyond.

Unlike an annual budget, specifying long-term obligations in an era when retirees are living longer than previous generations has been—and will be—an exceptional challenge. To help, Detroit last March put out RFP’s seeking national firms with expertise in public pension plans to advise the city on how best to address its $195-million payment to the city’s two pension plans that comes due in 2024, under terms of the city’s approved plan of debt adjustment. That plan, which the U.S. Bankruptcy Court approved in December of 2014, included assumptions that the city would have two years in which to make to make payments to its two pension plans, the General Retirement System and the Police and Fire Retirement System—that is enough time so that increasing recovery tax revenues would enable a resumption of deposits into the funds, so that the city could begin making pension payments with a $112.6 million installment in 2024. Using a kind of forensic accounting, however, the city determined the actuarial assumptions used in its plan of debt adjustment were inaccurate and outdated; the city reports that actuarial reports last year by the Gabriel, Roeder, Smith & Co. firm project the Motor City may have to pay $491 million over a 30-year period commencing in 2024, including the $195-million payment the first year—marking a severe fiscal blow to the city’s recovering budget equal to about 8% of its general fund—potentially forcing the diversion of critical investment in essential services. Mayor Mike Duggan now says Detroit’s pension adviser will help determine whether it would be wisest to direct resources directly to the pension funds, set it aside to pay into the funds later, or use other alternatives: “We’re doing two things: We’re developing a plan to start making supplemental contributions to the pension funds, so we get ahead of the problem that’s facing us in 2024, and we’re working on our legal options…We’re working on both options intensely…One way or another, we’re going to make sure the pensions are properly funded.”

One still open option, to which Mayor Duggan had alluded in his State of the City speech last February, would be to sue Detroit’s bankruptcy consultants, noting they had been paid $177 million and ended up leaving the city with a $491-million hole in pension funding—an option under review by the city’s Law Department. Detroit officials have told the Financial Review Commission, the oversight fiscal review board created as part of the city’s approved exit from municipal bankruptcy, to monitor the city’s fiscal conditions and actions, that Detroit could end up paying $30 million to the pension funds through an amendment to the 2016-17 budget, three times what it had initially proposed, using the city’s budget surplus. Mayor Duggan has been prescient in warning that the long-term impact of an estimated $491-million pension shortfall could force the city into unmanageable, ballooning payments to the city’s two pension funds beginning in 2024.

A second, but key related governance challenge will be the evolving role of the Financial Review Commission, created as part of the plan of debt adjustment, and granting significant oversight authority—including a final say on the city’s budget for years to come. Executive Director Ronald Rose, in an interview with the Detroit Free Press said original forecasts submitted in the city’s municipal bankruptcy showed the city paying roughly $92 million into the pension funds from now through 2024, plus help from the proceeds from the so-called grand bargain, a plan in which $816 million was donated by foundations, the Detroit Institute of Arts, and the state to the two pension funds to stave off any potential selling of DIA artwork. Now city officials are considering paying between $60 million and $70 million more over the next four years in an effort to help make up part of the expected shortfall, according to Mr. Rose—albeit those numbers are not expected to be finalized until the new consultant hired by the city has an opportunity to test the assumptions made by Gabriel, Roeder, Smith in its reports last fall. Gabriel, Roeder, Smith is also expected to provide the pension funds a new valuation report by next month that comes up with an updated estimate of the city’s unfunded pension liability. Ergo, according to Mr. Rose, he is uncertain what kind of projections they are going to make, meaning it will likely not be until November that the city will have sufficient information to set its pension payments over the next four years in its long-term budget. Nevertheless, Mr. Rose noted the Financial Review Commission is comfortable with Detroit’s approach to assessing its new pension obligations, telling the Free Press: “I think the city is approaching it in exactly the right way…I think it’s facing up to the issue. There is not any denial. It’s facing a difficult problem and the mayor clearly understand it in total and is reacting to it.”

The Promise of Promesa. The House Natural Resources Committee will meet tomorrow to vote on the recently revised Puerto Rico PROMESA legislation, H.R. 5278, to help the U.S. territory address it roughly $70 billion in debt and $46 billion in unfunded pension liabilities. The introduction of the bill after difficult negotiations with the Treasury makes clear the path forward will encounter numerous challenges—from hedge funds and others. Even Rep. Pedro Pierluisi, Puerto Rico’s non-voting member of Congress, has noted the new bill “is not perfect,” but rather the product of bipartisan compromise. The timeline is tight, however: Congress is scheduled to meet only 16 days between now and July 1st, when Puerto Rico has a $2 billion debt payment due, roughly $800 million of which is for general obligation bonds backed by Puerto Rico’s Constitution. Absent Congressional action and the President’s signature, Puerto Rico will default on the July 1 payment.

Schooling on Municipal Bankruptcy. The marvelous Chicago Civic Federation teaches us that the Chicago Public Schools face a potentially devastating financial crisis, including a current unbalanced fiscal budget, in no small part, because of reliance on the dismal hope that the State of Illinois would provide $480 million for pension relief; ergo, it now has a pending FY2017 budget that may have a gap of as much as $1 billion or more. The system has an ongoing structural deficit due to the CPS’s pension funding crisis, increases in long-term liabilities, decreases in general state aid, employee compensation increases, and operational problems—including a cash flow crisis, repeated use of one-time revenues to balance its budget, and the depletion of its reserve funds. The Federation notes that in recent years, CPS has been able to use budget gimmicks to achieve short-term balance at the cost of long-term financial stability. Now, however, CPS has run out of ways to delay its day of fiscal reckoning—unlike in nearby Detroit, however, filing for chapter 9 municipal bankruptcy protection is not an option: Illinois, like an overwhelming majority of states, does not authorize municipal bankruptcy. Indeed, as the Federation notes, “Since 1954, only four school districts have filed for bankruptcy: San Jose, California; Copper River School District, Alaska; Richmond Unified School District, California; and Chilhowee School District, Missouri. In these cases, chapter 9 has been used primarily as a tool to assist in bringing parties to a negotiated settlement.

Part of the distinct challenge as municipal bankruptcy relates to public school systems is that under current law (municipal bankruptcy), the jurisdiction of the federal bankruptcy court is limited to debt adjustment: the federal bankruptcy court has no jurisdiction over other matters, such as operations or academic issues—issues, as we have noted in this eBlog, which are often critical factors in developing a plan of debt adjustment. (This is, of course, especially important when one recognizes that not so very far away, the now retired U.S. Bankruptcy Judge Steven Rhodes who presided over the nation’s largest municipal bankruptcy is serving as the Emergency Manager for the virtually insolvent Detroit Public School System.) The Dean of municipal bankruptcy, Jim Spiotto, notes that public school districts facing fiscal crises historically have been restructured and refinanced under local or state supervision—whether in Philadelphia, Los Angeles, or Detroit—no doubt in some significant part because, unlike municipalities, state funding for public school districts is tightly entwined with public school finance in the U.S. Mr. Spiotto notes that state supervision allows for a more comprehensive approach to recovery than municipal bankruptcy: it enables the supervisory authority to undertake budget adjustments, modify personnel practices, make curriculum revisions, and to revise operating standards and processes—more comprehensive actions essential to ensuring not just longer term solvency, but also teaching ability. Moreover, state intervention (except, maybe, in nearby Kansas) has a longstanding track record of resolving school district financial crises.

In the case of the Chicago Public Schools, Wizard Spiotto argues that the best approach to developing a solution to CPS’ fiscal crisis would be to establish a Local Government Protection Authority (LGPA)—a quasi-judicial body to provide a supervised forum to assist the CPS Board and administration in finding solutions to stabilize the District’s finances. Such solutions would include consideration of options such as expenditure reductions, revenue enhancements, employee benefit changes, labor contract negotiations, and debt adjustment. Plans facilitated by an LGPA would be an alternative to bankruptcy, allowing key stakeholders to negotiate a workable fiscal solution. If the stakeholders could not find a solution, the LGPA would be empowered to enforce a binding resolution of outstanding issues.

The Long & Challenging Road to Recovery from Municipal Bankruptcy

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eBlog, 5/20/16

In this morning’s eBlog, we discuss the bipartisan, House-Administration breakthrough and introduction of bipartisan legislation to address the nearing insolvency of the U.S. territory of Puerto Rico; and we look at charter revisions—revisions we suggested years ago—which could be vital to a post-bankrupt San Bernardino, and, lastly, we consider obstinate challenges—in the form of deep pockets of poverty—in post municipal bankruptcy Detroit.

The Promise of Promesa. Congressional leaders, on a bipartisan basis, are lining up in support of the proposed legislation to avert a July insolvency in Puerto Rico, with the newly revised PROMESA bill from the House Natural Resources Committee gaining the backing of Speaker Paul Ryan (R-Wis.) and Minority Leader Nancy Pelosi (D-Ca.), as well as the White House, with House Speaker Ryan yesterday noting he was confident a majority of House Republicans would back the measure, which could reach the House floor at the beginning of June, and that: “We got this bill exactly where we wanted it.” Minority Leader Pelosi and U.S. Treasury Secretary Jack Lew characterized the measure as one they can support, and Ranking House Natural Resources Committee Member Rep. Raúl Grijalva (D-Ariz.) described the bill as imperfect, but said it is critically needed, noting that while there were aspects of the bill that concerned him, he was “more concerned about the humanitarian crisis unfolding on the island.” House Natural Resources Committee Chair Rob Bishop (R-Utah) said his committee would likely take up the measure next week, but that consideration by the full House would have to wait until after the Memorial Day recess. As drafted, the revised bill would establish a fiscal control board to steer the U.S. territory’s debt and finances in order to restructure Puerto Rico’s $72 billion in debt. Nevertheless, the bill still confronts hurdles: it must get through the amendment process in Committee and then the House floor—and all that before the Senate even begins consideration. For his part, U.S. Treasury Secretary Lew warned: “Congress must stand firm and resist calls from financial interests to undermine this effort every step of the way — in committee, on the House floor and in the Senate.”

San Bernardino Proposes a New City Charter. The San Bernardino City Council has voted 5-2 to ask the city’s voters to approve a proposed, new city charter—a charter which will include all the reforms a committee believes will help streamline municipal governance, but which would also mandate the city to have its own police department—barring any outsourcing. In the wake of two hearings before Council, the Council expects to vote by August 12th, especially since that is the deadline set for submitting the new charter on the November 8th ballot. In our case study on the city, the city in municipal bankruptcy longer than any other city in U.S. history, we noted that, in the estimation of most individuals, a key challenge for the city was in its charter, about which we wrote: “Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.”

The new charter is the outcome of a two-year process by a nine-member charter review committee: the revised version is a slimmed down 12-pager, a quarter the size of its predecessor: it proposes a city council-city manager structure. The revised charter, reflecting issues raised in our Center’s report on San Bernardino, relates to the provisions of the city’s proposed plan of debt adjustment, which “made clear the city’s need to streamline governance and operations,” according to the 24-page report presented to the City Council by the charter review committee. The report notes that decades of questionable management and inefficiency were the result of the San Bernardino’s “antiquated” charter, which “complicates daily management and generally neutralizes executive authority.” Under the proposed charter, the positions of city clerk, city attorney, and city treasurer would no longer be elected: the city clerk and city attorney would be appointed by the City Council. Other parts of the city’s governance structure would remain largely the same, including its ward system, the number of wards in the city, and the terms or length of service the mayor and each council member could stay in office. The mayor would continue as a full-time elected position; water board commissioners and library board members would retain their independence.

An issue in the revised charter which drew an adverse response from the Council was the absence of language requiring the city to have its own police department—an omission with which the majority of council members took issue: Councilman Henry Nickel said he did not want the charter committee’s last two years of work be in vain, and wanted to ensure voters approve the new charter by including a provision mandating the city have its own police department, stating: “I think there can be some reasonable, modest revisions we can make to make sure this is palatable to the citizens we represent…I think there’s some fine-tuning we need to do.” Councilmember Fred Shorett warned that any stalling or further revisions to the charter could potentially delay the process and tie the hands of future council members, telling his colleagues: “The public needs to get engaged…It’s time for us to roll up our sleeves and get this on the ballot.” Former Mayor Pat Morris urged the Council to approve the charter as presented: “This is your opportunity to approve their work and move it to the electorate for a vote. I urge you to do it without alteration, or to amend or add to or delete from this recommended new charter…If you do that, you open it up to the allegation that it has been politically massaged,” adding that any changes to the new charter could eliminate future councils from acting in a flexible way to best manage the resources of the city.

Nevertheless, the majority appeared intent on insisting that the city have its own police department: But the council majority stood firm. Councilwoman Virginia Marquez said: “I believe we need a municipal police department. I don’t know what the big deal is,” even as the president of the San Bernardino Police Officers Association, Steve Desrochers, praised the change, advising the Councilmembers: “That was something that we had requested and worked for…I want to thank the council. I think it was forward-looking and it’s going to improve the morale, at least at the Police Department.” He noted he had pushed for the provision prohibiting outsourcing as well as one that would require police compensation to be average, similar to Section 186 of the current charter, which sets pay as the average of 10 like-sized cities. He added that the police union would remain neutral on the proposed charter for now, but said the document was important and that the time had come to change it; however, City Attorney Gary Saenz said the requirement for an in-house Police Department might hold the city back in the future, even though there had not been here any plans to outsource it in the foreseeable future—adding that he was unaware of any other city that required a city-run police force.

For the most part, the charter revision committee had sought to base the new charter on what its members perceived as successful in other cities, but the committee had retained some unusual provisions — including the autonomous water and library boards — to avoid a fight when the peculiarity did not seem to be causing any problems, according to Mr. Saenz said: “Rather than having that resistance to the charter, since that did not seem to be one of the pressing issues in the last decade or so, they thought let’s avoid that issue.”

Challenges to Recovery in the Motor City. Stephen Henderson, the Detroit Free Press Editorial Page Editor yesterday wrote a searing piece about the way poverty is changing and deepening in post-bankrupt Detroit—comparing what he is observing to the depth of poverty he had observed in central Kentucky, and places deep in Appalachia, adding that it was not the “depth of Kentucky poverty in the early 1990s that struck me. It was the isolation that accompanied it. Deep in coal country, it’s just difficult for the poor who live there to even get to a place where things are better. Rough topography cultural estrangement, public policy — it all created a wicked recipe for inter-generational poverty.” After which he wrote that in present day Detroit, poverty is changing, and deepening in the city in ways that reminded him of what he had experienced so many years ago in Kentucky: “For many of the poor here [Detroit], the city is becoming an economic chasm that’s largely cut off from areas where there’s more opportunity. Higher-paying jobs, better schools, or the means to access those kinds of opportunities, are all moving farther away from the city’s deepest pockets of poverty…It’s also lurking just beneath stories about entire areas of the city where there are no longer any quality school options — like far northwest, where a single, low-performing charter high school is the only choice residents have…Deep urban poverty in places like Detroit is beginning to resemble, to me, rural poverty like Kentucky. It’s a story I’ve been telling for a while — dropping into speeches and columns. Now, with the help of some numbers from the Brookings Institution in Washington, I’m able to make that about more than anecdotes. (He was referring to a new study by Brookings, “U.S. concentrated poverty in the wake of the Great Recession”), in which the authors wrote how, in Detroit and other urban areas across the country, there has been a dramatic increase in “concentrated poverty,” defined as the percentage of the poor who live in neighborhoods whose poverty levels are at least 20%, and which, in too many cases higher than 40%, writing that: “In a way, it’s a measure of isolation — how packed poor people are in areas where there aren’t people of more means nearby. According to Brookings, 64% of poor people in metro Detroit live in areas like that today, up from 54% of poor people back in 2000.” He closed by writing: “And if you try to find other areas to compare with Detroit with regard to that kind of concentrated, or isolated, poverty, many rural areas — in Michigan as well as Kentucky — leap out…County-level data in Michigan, for instance, ranks Wayne, home to Detroit, as having the fifth-highest concentrated poverty level.”

The Late Night Promise of PROMESA

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eBlog II, 5/19/16

In this morning’s (egad) 2nd eBlog, we discuss last night’s late breakthrough and introduction of bipartisan legislation, the promise of PROMESA, to address the nearing insolvency of the U.S. territory of Puerto Rico:

The Promise of Promesa. House Speaker Paul Ryan (R-Wis.) and the White House reached agreement late last evening on legislation, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), H.R. 5278 [Click here to view the legislative text.]. Bill sponsor Rep. Sean Duffy (R-WI), Committee on Natural Resources Chairman Rob Bishop (R-UT), and cosponsor Rep. Jim Sensenbrenner (R-WI) issued the following statements: “Years of disastrous polices have completely wrecked Puerto Rico’s economy. As a result, the island and its millions of American citizens face a humanitarian crisis. That’s why we must allow for a responsible restructuring for Puerto Rico’s debt, and do it without using Wisconsin taxpayer dollars for a bailout,” Rep. Duffy said; Chairman Bishop: “Tonight we introduced legislation to responsibly address the crisis in Puerto Rico. The revised bill incorporates technical refinements and input from all stakeholders. Any future changes will be done in public committee meetings,” and Rep. Sensenbrenner added: “Tonight’s introduction of PROMESA is the first step toward fixing years of irresponsible budgeting and putting Puerto Rico’s economy back on track. It’s a smart and fiscally prudent bill that will positively impact millions of hardworking American citizens without wasting taxpayer dollars.” The bill is expected to have the support of the White House, House Minority Leader Nancy Pelosi (D.-Ca.), although it remains uncertain how much majority support in the House. A key, unresolved issue relates to the appointment of a seven member financial control board, but the bill achieved compromises on the earlier sticky points with regard to the U.S. territory’s constitutional priorities with regard to pension and municipal bond obligations. Notwithstanding earlier accusations that any legislative package would amount to a bailout, the legislation does not commit a single federal dollar—just as no federal dollars were involved in the resolution of Detroit’s, Stockton’s, or any other municipal bankruptcy. The bill provides for the appointment of a financial oversight board—not unlike previous boards named for New York City and the District of Columbia—but no names have yet been selected. The intent of the bill is to chart a path towards reducing the territory’s nearly overwhelming debt burden—a level of debt which today is consuming nearly 33% of Puerto Rico’s revenues—and to have President Obama sign the bill well before July 1st.

How Timing Matters in Matters of Municipal Insolvency

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eBlog, 5/19/16

In this morning’s eBlog, we are apprehensive about the inability of Congress to act on legislation to ward off Puerto Rico’s fast approaching insolvency. Each day of delay now could be marked in Puerto Rican lives lost to the Zika virus and to ever steeper costs for the U.S. territory to get back on its feet. Then we look at and wonder has Detroit reached its population nadir? Has Detroit reached its turnaround point? Does this demonstrate its plan of debt adjustment to bring it out of the nation’s longest municipal bankruptcy has worked? If so, wouldn’t it offer Congressional and Treasury leaders some helpful information as they continue to disagree how to deal with Puerto Rico? And, finally, we look at the seeming state dysfunction in New Jersey, wondering if Gov. Chris Christie and state legislative leaders can resolve their differences and agree upon a plan that will assure Atlantic City’s fiscal future—and protect other municipalities across the state from fiscal distress contagion.

Frittering Precious Time Critical to Puerto Rico. Rep. Xavier Becerra (D-Ca.), head of the House Democratic Caucus Tuesday warned that the draft House Natural Resources Committee bill to address Puerto Rico’s onrushing insolvency would need significant changes in order to gain bipartisan support—even as the first Zika-related microcephaly case acquired on U.S. soil was reported in Puerto Rico as concerns grow over an outbreak of the mosquito-borne virus in the U.S. territory: Puerto Rico Health Secretary Ana Rius reported that a fetus turned over by an unidentified Puerto Rican woman to U.S. health officials had severe microcephaly and tested positive for Zika. House Speaker Paul Ryan (R-Wis.) has been pressing hard to work with the Treasury to try to find a bipartisan block to get a bill through Congress to staunch the fiscal bleeding and avert a fiscal implosion by July—clearly understanding that every day of delay now will deplete critical resources. Yet those efforts have fallen in the face of demands that no bill should lower Puerto Rico’s minimum wage—or subject Puerto Rican pensions to “disproportionate” reductions—even though, of course, every day of delay in acting is rapidly depleting and accelerating the island’s fast dwindling resources. On the other side, the Speaker has been confronted by members on his own side of the aisle falsely claiming the proposed legislation would be a “bailout.” The inability to gain either a majority or bipartisan bill, notwithstanding the patient efforts of House Natural Resources Committee Chair Rob Bishop (R-Utah), has also been complicated by the insistence by House Minority Whip Steny Hoyer (D-Md.) that even though Speaker Ryan has been making a “sincere effort,” Democrats cannot support the proposed creation of an independent oversight or control board with the power to “supplant” the island’s elected officials, stating: “The oversight board needs to be configured in a way that does not treat Puerto Rico as less than we would want to treat Maryland,” perhaps overlooking the ways in which Detroit, Central Falls, and other cities on the mainland have emerged from severe fiscal crises through the appointment of emergency managers who have preempted elected leaders who bore significant responsibility for the insolvency of their respective jurisdictions. Every day of Congressional delay, of course, means the cost for Puerto Rico to recover fiscal stability will be much harder—and will come with even steeper losses to its millions of municipal bondholders in every state throughout the nation.

Has Detroit Reached Its Nadir? For the first time since before the Civil War, Detroit is no longer among the nation’s 20 most populous cities: the city realized a net loss of some 3,107 residents last year according to data released by the Census Bureau yesterday—bringing the population to approximately a third of its 1950 population of just under two million. In its descent into the nation’s largest ever municipal bankruptcy, Detroit had become a patchwork of an estimated 40,000 abandoned lots and structures: between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base. Nevertheless, the pace of population decline is ebbing—the new census numbers demonstrate the smallest decline in decades. In 1940, Detroit was the fourth largest city behind New York, Chicago, and Philadelphia; but now, Kurt Metzger, a demographer and director emeritus of Data Driven Detroit, predicts Detroit will see a population increase this year—in large part because of the pace of new development and other quality of life improvements. Mayor Mike Duggan said city data shows population growth this year, primarily on the city’s west and southwest sides, along with downtown and Midtown, adding: “We are at a real historic point…I do believe in the last year we have started to grow,” making clear that he believes his success as Mayor will be measured in large part by whether he can attract new residents—making more clear than ever the huge stake the city has in early resolution of the physically and fiscally failing Detroit Public School system. Ironically, Mr. Metzger points out, that another reason for the demographic turnaround could also be attributed to the lack of opportunity for many of the city’s poor residents who may want to move unable to do so because of rising housing prices in the inner-ring suburbs.

While the turnaround appears to demonstrate the success of the city’s plan of debt adjustment (Detroit issued 913 permits for new construction last year, up from 806 the previous year, according to the Southeast Michigan Council of Governments. And about 1,400 formerly vacant houses are now occupied under sales by the Detroit Land Bank since May 2014, according to city officials), it also indicates the titanic change that demographics can affect politically: as the city’s population declined precipitously from 1.8 million in 1950—when it held 29 percent of the state’s population—so too its political power not only in Lansing, but also in the nation’s capital has ebbed. Today its population is less than 7 percent of Michigan’s. All of which emphasizes Mayor Duggan’s intense focus on improving quality of life and educational and employment opportunities in the city—and, mayhap, demonstrates both the improvements the city has accomplished and the changing demographic trends, including new jobs and more development. As Lyke Thompson, director of Wayne State University’s Center for Urban Studies, yesterday noted: it is a crucial time for Detroit and its leaders to focus on creating jobs and improving education.

Could Today Be D-Day for Atlantic City? If So, Is It Too Late? After months of arguing over whose plan is best, New Jersey state Senate President Stephen Sweeney (D-Gloucester) and Assembly Speaker Vincent Prieto (D-Hudson), in the wake of sessions with other top Democratic lawmakers last week to discuss an agreement to help avert an insolvency and municipal bankruptcy, claim they have a draft rescue package ready; however, no bill has been introduced. There does, however, appear to be an emerging consensus on an approach under which Mayor Don Guardian and the City Council would be granted a grace period of 150 days in which to carve deeply into the current budget—or face a state takeover—or at least a greater state takeover than the current quasi state takeover, where the state-imposed emergency manager has not appeared to have made any unique contributions or decisions with regard to the city’s future. For his part, Mayor Guardian seems to be copacetic with regard to the emerging resolution. Because it is Atlantic City, however, there are, of course, wild cards: where is Governor Chris Christie? And has it become too late for the state to step in to avert a municipal bankruptcy? Timothy Little, an analyst with S&P, worries that “should extraordinary state intervention occur in Atlantic City, we are not confident that it would be sufficient to prevent impairment of the city’s debt obligations.”

Is Michigan’s Model for Intergovernmental Finance Broken?

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eBlog, 5/18/16

In this morning’s eBlog, we applaud the exceptional municipal leadership of Central Falls Mayor James Diossa who has presided over a truly remarkable fiscal recovery from his very small city’s municipal bankruptcy; we look at the depressing challenges to the physical, educational, and fiscal solvency of the Detroit Public Schools—even as Michigan’s legislative leaders hope to better educate themselves on the idyllic retreat on Mackinaw Island. We wonder if the end game is nearing in Atlantic City; and we are in some awe as Wayne County Executive Warren Evans begins a statewide tour to learn and try to better understand growing fiscal disparities—an emerging issue to which governors, state legislators, Congress, and even the Administration appear disinterested.

Chocolateville. Central Falls, Rhode Island Mayor James A. Diossa has introduced a proposed $18.01 million budget for FY’17 fiscal year, which would, if adopted, for the first time in a decade, lower the city’s residential property tax rate. Wow! His budget proposal incorporates a one percent reduction in proposed spending: under his proposal, the residential tax rate would be reduced to $26.69 from $27.63, a decrease of 3.4 percent. The small, but densely populated city of just under 20,000—taking up about one square mile, emerged from municipal bankruptcy in 2012. Its first day in municipal bankruptcy occurred on the very day our George Mason class of senior employees of No. Virginia local governments met at City Hall with Judge Robert Flanders, who had been appointed by the then-Governor to serve as the quasi-Emergency Manager to steer the city out of chapter 9 municipal bankruptcy. Mayor Diossa has also proposed a one percent decrease in spending, noting: “Fiscally, we’ve been able to carefully plan and monitor and be responsible and transparent about the budget process. The city is doing much better fiscally,” adding that the budget proposal would provide relief to taxpayers who, over many years, have been taxed due to a court-approved five-year plan of debt adjustment.

The median income for a household in the city is just over $22,628, but approximately 26 percent of families and 29 percent of its population fall below the poverty line, including 40.8% of those under age 18 and 29.3% of those age 65 or over. Mayor Diossa’s FY2017 budget is the last under the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Frank Bailey, which called for a minimum four percent residential property tax increase each year. However, due to the city’s post-bankruptcy record of fiscal responsibility, CAO/CFO Leonard Morganis, who was charged by the court with monitoring implementation of the five-year plan of debt adjustment, approved the proposed lowering of the residential tax rate. As Mayor Diossa noted: “We’ve been very careful with our budget…It shows the city has come a long way…Every resident in Central Falls has had to do more with less and I think we have to do more with less.”

In addition to lowering the residential property tax rate, the Mayor’s proposed budget would provide for increasing the homestead exemption by 15%, increasing the senior citizen homeowner tax exemption by 25%, increasing the veterans’ exemption by 25%, and freezing the car tax rate. Additionally, his proposal calls for freezing the city’s commercial tax rate and tangible tax, which officials say should encourage economic development and provide predictability for local businesses. Mayor Diossa also believes the budget proposal would prove beneficial to Central Falls residents of all ages, from seniors to children: it includes youth investments, such as increased after-school programming and renovated space for the Innovation Lab in partnership with the Central Falls School District and Rhode Island College. His proposal also calls for $100,000 in funding for the Dexter and Broad street commercial corridor, façade improvements, and $600,000 for the Central Falls Redevelopment Agency; $200,000 for roadwork improvements, $200,000 for sidewalk repair and replacement, conversion of city streetlights to energy-efficient LED technology, and improvements at the Illinois Street Park and other recreational areas throughout the square-mile city.

Mayor Diossa notes that his budget proposal would provide relief to taxpayers who over many years have been taxed due to the U.S. bankruptcy court-approved five-year bankruptcy plan of debt adjustment. His budget proposal marks the last under the U.S. Bankruptcy court-approved plan, which called for a minimum four percent residential property tax increase each year. It also marks the first year the municipality had authority to set its own property tax rate. As Mayor Diossa noted: “We’ve been very careful with our budget…It shows the city has come a long way…Every resident in Central Falls has had to do more with less, and I think we have to do more with less.” The budget includes an additional $100,000 to other post-employment benefits, or OPEB, trust to match the city’s initial allocation last year. Mayor Diossa also submitted, for the second straight year, 107% of its actuarially required contribution to the city’s wobbly pension plan. The budget also calls for a 3.4% reduction in the city’s mill rate. Central Falls, Rhode Island’s poorest city with 19,000 residents in one square mile seven miles north of Providence, cited an $80 million unfunded pension liability in its bankruptcy filing. According to the Mayor, Central Falls has increased its pension funding level from 14% in 2010 to 22%. Its goal is to achieve 60% funding within 10 years.

In addition to lowering the residential property tax rate, his proposal calls for:
• increasing the homestead exemption by 15 percent,
• increasing the senior citizen homeowner tax exemption by 25 percent,
• increasing the veterans’ exemption by 25 percent,
• freezing the car tax rate, and,
• freezing the city’s commercial tax rate and tangible tax, which officials say should encourage economic development and provide predictability for local businesses.

The budget proposes $600,000 for the Central Falls Redevelopment Agency, $200,000 for roadwork improvements, $200,000 for sidewalk repair and replacement, conversion of city streetlights to energy-efficient LED technology, and improvements at the Illinois Street Park and other recreational areas throughout the square-mile city. The remarkable turnaround comes in the wake of then-Governor Lincoln Chaffee’s appointment of former Rhode Island Supreme Court Justice Robert Flanders as receiver in the wake of its filing for municipal bankruptcy protection in August of 2011, reporting an $80 million unfunded pension liability. In one of Judge Flanders’ earliest actions, he imposed benefit cuts of up to 55% for retirees—albeit these reductions were subsequently modified by the former Chafee administration. It is special for the eBlog, of course, because our distinguished class of senior Northern Virginia leaders had visited with Judge Flanders on the city’s first day in municipal bankruptcy, and, subsequently, written the GMU Financial Crisis Toolkit (created with digital tabs).

The Breaching of Public Trust & Pensions. U.S. Attorney Barbara McQuade may go after the state pensions of 13 former and current Detroit Public School officials after they have been sentenced for their crimes in a $2.7 million bribery scheme, although a spokesperson for her office reports the federal government still does not have legal standing to request the forfeiture of their pensions. A spokesperson added, however: “[O]nce the defendant has been sentenced and restitution ordered by the district judge, the government can and will take steps to enforce the restitution order, which may include garnishment of their pensions.” An unlucky number, thirteen, of school administrators face federal charges or have accepted plea agreements in connection with a scheme uncovered by an FBI investigation into the near-insolvent DPS: five of the 13 DPS officials retired from the district this spring in the wake of being criminally charged last March.

The U.S. Attorney’s office is seeking full restitution from all 13 defendants in the case, as well as school supplies vendor Norman Shy, who is accused of paying $908,518 in exchange for $5 million in business with his company, Allstate Sales. (Mr. Shy has pleaded guilty in the case: he was ordered to repay DPS $2,768,846.23 in restitution. A key factor in these decisions is that Michigan is one of a few states which has a pension forfeiture law for public employees: under Michigan law, a public employee or retiree convicted of a felony arising out of official duties “is considered to have breached the public trust” and may have his or her rights to a vested retirement benefit in forfeited. The statute, enacted twelve years ago, provides that a felony can be defined as misusing public funds or resulting from the receipt of a bribe or other financial benefit in that person’s capacity as a public employee.

A State Seminar on Debt & Insolvency. Michigan House Speaker Kevin Cotter plans to hold a session and votes during the legislature’s annual policy conference on Mackinac Island in June to give state legislators more time to settle and resolve the Detroit Public School debt issues. It appears the time away from Lansing will be vital to negotiating a compromise on legislation to overhaul DPS, as well as to make adjustments to a state budget with unanticipated revenue shortfalls. Speaker Cotter’s office announced the schedule change shortly after state economists yesterday agreed the state needs to scale back spending plans by $460 million in the current and upcoming fiscal years because of an unexpected decline in revenue. But as they used to recite in schools in Rome: tempus fugit (time flies): If the legislature is unable to reach resolution on the budget by the end of this month, the Senate will put off final votes until the week of June 6th. All of this comes as the Senate continues to struggle how to respond to House passage two weeks ago of a $500 million Detroit Public Schools debt relief plan—and as retired U.S. Bankruptcy Judge and DPS Emergency Manager Steven Rhodes faces a tight schedule to ensure the city’s schools can be fiscally and physically safe to open for the fast approaching new school year.

Running on Fumes—or Can Atlantic City Control Its Own Destiny? Atlantic City Mayor Don Guardian reported that the virtually insolvent municipality still had the fiscal resources to pay its bills this week: the city made its $8.5 million school tax payment last Friday and on Monday paid surrounding Atlantic County $7 million—funds owed for quarterly property taxes. And Atlantic City reports it has enough money to make a $7 million payroll payment June 3rd, as well as a $1.5 million bond payment due June 1st. These fiscal resources come—notwithstanding broken state promises of $33.5 million from a state relief package—in significant part thanks to Atlantic City workers’ agreement to be paid monthly to avoid a municipal government shutdown. Thus, with the Governor still focused on a state takeover and the legislature still considering options for a compromise, the city seems to endure in a Rod Serling fiscal Twilight Zone: it has $550 million in debt and a $100 million budget deficit. On Monday, Assembly Speaker Vincent Prieto reported: “We’re working on details…Wait till the final product, and you’ll see. Hopefully it’s going to be something fair, that Atlantic City actually has an opportunity to really have control of its own destiny.” The inability of the state to act, meanwhile, is imposing statewide costs: Standard & Poor’s has revised its view of the support system for New Jersey local governments to “strong” from “very strong” due to the state’s seeming inability to address Atlantic City’s financial crisis, noting that in the nearly half-year since Gov. Christie vetoed aid to Atlantic City, no progress on a plan to reduce the city’s budget deficit and no agreement addressing the city’s unfunded tax appeals has been passed, so that S&P’s Timothy Little wrote big: “In our opinion, these issues indicate a change in what has historically been very strong state support of its distressed entities…We maintain the view that should extraordinary state intervention occur in Atlantic City, we are not confident that it would be sufficient to prevent impairment of the city’s debt obligations.”

Is Michigan’s Model for Intergovernmental Finance Broken? Wayne County Executive Warren Evans today begins a statewide tour, a tour he calls: “Investing in Michigan Communities: Finding Fair Funding for Strong, Successful Communities,” beginning not in Trenton, New Jersey, but Trenton, Mi., to begin a discussion about innovative ways to fund communities. In the wake of his first visit today, he will meet with six other communities’ mayors, township supervisors, commissioners, city council members, and decision makers throughout the year to identify viable solutions to fix what he fears is the state’s broken model for funding local governments. These visits, or summits, have been designed to educate participants about the history of the current funding system, tell stories of how the current model is hurting local communities, examine past proposals to fix the system, and begin discussions on possible fiscal solutions. He begins this morning in Taylor, a city of about 63,000 in Wayne County, where Mayor Rick Sollars will be the featured elected official. As part of this ground-up initiative, Mr. Evans has assembled a team of research and policy institutions, many of whom or which have already been exploring options for addressing local finance issues, including the Michigan State University Extension Center for Local Government Finance and Policy, MML (the terrific Michigan Municipal League), the Citizens Research Council of Michigan—which was so invaluable a resource to us when we did our report on Detroit’s bankruptcy, the Michigan Association of Counties, and the Southeast Michigan Council of Governments. In announcing the tour, Mr. Evans noted: “For years, it’s been hard to pin down an agreement around the best solutions to fix local funding…Now, more than ever, municipalities are finding the cost-cutting measures they’ve taken are not enough to meet the long-term needs for their residents. It’s a struggle for many to properly fund basic services like police, fire, road, and infrastructure repairs. The tour will also take this leader to Grand Rapids, Michigan’s Upper Peninsula, Lansing, Traverse City, Flint, and Southeast Michigan.