What Are the End Games in East Cleveland, Atlantic City, & Puerto Rico?

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eBlog, 5/13/16

In this morning’s eBlog, we wonder if the end game is nearing in East Cleveland—and what lessons might be learned with regard to growing fiscal disparities—and where municipal bankruptcy falls short. We observe the hint of an end game in Atlantic City—and muse about apprehensions about fallout or municipal contagion from the almost certain state takeover of Atlantic City. Finally, we try to update readers on the evolving efforts in the U.S. House of Representatives by House Speaker Paul Ryan to help Puerto Rico—watching, at the same time, for what the looming U.S. Supreme Court decision on Puerto Rico expected the day before the U.S. territory is projected to default on as much as $1.9 billion might mean to the efforts in Congress.

A City on the Brink. The City of East Cleveland has scheduled a public meeting for next Thursday to discuss finances, potentially filing for municipal bankruptcy, and updates on a potential East Cleveland-Cleveland merger. The session is scheduled in the wake of Ohio Tax Commissioner Joe W. Testa’s notification to the City with regard to a list of items the city must prepare before requesting approval of its request to file for chapter 9 municipal bankruptcy. The reply came as the city is considering what such a filing might mean with regard to a possible merger with the City of Cleveland—a merger which would require a comparable, detailed fiscal plan, similar to one required for federal bankruptcy court. Either would require legal assistance—in effect draining away already diminishing fiscal resources. In East Cleveland’s case, the decision how to proceed is further complicated in that chapter 9 is a federal tool to permit a municipality to address debt—something which East Cleveland hath not: its problem is insufficient and eroding revenue, so that its ability to finance essential services, such as police and fire, is increasingly at risk. However, Council President Thomas Wheeler notes that municipal bankruptcy would protect the city’s assets, so that it can make payroll: East Cleveland currently struggles to make its $250,000 payroll every two weeks. Chapter 9 would also provide some options to renegotiate contracts that were made in “better times,” as well as address some of the city’s looming liabilities from pending suits against the city.

Indeed, East Cleveland currently struggles to make its $250,000 payroll every two weeks. That means, too, that with an eroding population and average annual family income of about $20,000 and nearly a 50 percent poverty rate, the option of raising taxes—as the U.S. Justice Department had insisted upon for Ferguson, Missouri, could be a self-defeating effort. East Cleveland’s fiscal slide has been such that it has not had a bond rating since 1988. The other option—a merger with the City of Cleveland—could be considered next week, when the Council will consider an ordinance to enter negotiation for annexation with Cleveland and to appoint three commissioners to represent the city in negotiations. There are, however, according to Cleveland Council President Kevin Kelley, no comparable efforts in Cleveland—although the state appears willing to appropriate as much as $10 million to facilitate such a merger. Council President Kelley seems uncertain what the impact of a municipal bankruptcy filing by East Cleveland would have on the discussions of a potential merger.

The End Game for Atlantic City? Senate President Steve Sweeney and Assembly Speaker Vincent Prieto came together behind the scenes yesterday and are, reportedly, close to resolving the crisis in Atlantic City—with the only—but very large only—risk that New Jersey Governor and VP aspirant Chris Christie might not sign it. With the end game nearing and a state takeover of the city increasingly likely, Atlantic City’s employees—where police and firefighters comprise two-thirds of the city’s payroll and command generous salaries, are evincing a willingness to make concessions—unsurprising concessions in the wake of Gov. Christie’s claim that Atlantic City had not “addressed the rich benefits and the salaries of the police and fire departments,” apparently savoring the power he would gain in a takeover, which would grant the state power to tear up their contracts: police officers and firefighters make up two-thirds of the city’s salary cost, according to a May 6 city employee list, and there are 418 public safety workers who earn more than $92,000 in base salary. But the potential savings might turn out to be less: of the reductions in the city’s budget under Mayor Don Guardian since last year, nearly $12 million has come from public safety — more than any other department — according to former emergency manager Kevin Lavin’s final report. In fact, the 2014 Hanson Report reported that “right-sized” police and fire departments for the city should include 285 police officers (there are now 282) and 180 firefighters (there are now 227, but the city only pays for 143 thanks to a federal grant). As for benefits, last year Atlantic City went to arbitration with International Association of Fire Fighters Local 198, the city’s the firefighters union, over the very same benefits the state has criticized the city for not reducing. The city’s position going in was to cut salaries and eliminate terminal leave, longevity and education incentives in their entirety, taking the position “the city cannot and will not be able to afford the extravagant benefits currently provided in the collective negotiations agreement,” according to the procedural background in the arbitration award. In the outcome, an arbitrator froze education and longevity pay for current firefighters, and eliminated the longevity benefit for firefighters hired after January 2012. In addition, terminal leave payouts were capped at $15,000 for firefighters hired after January 2010—changes that Mayor Guardian described Trump-like as “huge savings,” adding that the city was “looking for the same type of reductions in the police department.”

Contagion? In its “Issuer in Depth” update Wednesday, Moody’s looked at a related, key issue: contagion fallout for other New Jersey municipalities, commenting that “While Atlantic City is an extreme case and no other New Jersey municipality is currently facing such acute financial pressure, the state’s posture toward Atlantic City reduces the likelihood that it would unconditionally rescue other financially distressed cities. While the state has no legal obligation to support Atlantic City’s general obligation (GO) bonds, its historically strong support for local governments has bolstered the credit quality of financially weak municipalities in the past: Moody’s incorporated a potential change in the state’s perspective in a credit review of seven distressed cities last year. Going forward, the rating agency expects its ratings process to further consider the potential impact from a change in state oversight, noting: “This applies regardless of whether or not default is accompanied by Chapter 9 bankruptcy. A default can occur outside of bankruptcy and can take the form of a voluntary restructuring with bondholders.” The report notes that under the proposed state takeover bill that passed the New Jersey Senate, the state would be able to file for bankruptcy protection on behalf of the city with approval from the legislative Joint Budget Oversight Committee. In both cases, the city would also need to meet a number of preconditions under the Bankruptcy Code, including insolvency.

Puerto Rico. Work on Puerto Rico legislation in the U.S. House of Representatives has stalled yet again; however leaders in both parties insist they can see the finish line. House Natural Resources Committee Chairman Rob Bishop (R-Utah) said a markup is still on track for next week. The legislation, which House Speaker Paul Ryan (R-Wisc.) has been pressing for, also appears to have garnered bipartisan support, albeit House Minority Leader Nancy Pelosi (D-Ca.) said Democrats were unable to back the bill they saw Tuesday evening, but were committed to crafting a workable alternative, noting: “We were disappointed that the bill we saw yesterday wasn’t something we could support. And so another few days of back and forth, I think, will produce something that we can take to the floor…It absolutely must happen.” The difficulty has been to try to find a fine balance between establishing a financial control board, such as was previously created for both New York City and Washington, D.C., in return for allowing the island to restructure its $70 billion in debt. Remaining obstacles to agreement include proposals in the bill to allow a lower minimum wage to young workers in the U.S. territory. Nevertheless, House Natural Resource Committee Chairman Bishop believes there will “be a majority of Republicans and a majority of Democrats voting for it,” adding the effort “rises above a partisan bill.”

Here Come the Judges. The leadership efforts to assist Puerto Rico by Speaker Paul Ryan and Minority Leader Nancy Pelosi could be jolted by parallel action by the third branch, the Supreme Court, which could rule as early as the end of next month—the day before Puerto Rico faces a $1.9 billion debt payment that its Governor has said it cannot afford—on the validity of a Puerto Rico law which would allow Puerto Rico to restructure the portion of its debt issued by public agencies—or as much as $20 billion, in a bankruptcy-like process.[The Commonwealth of Puerto Rico v. Luis M. Sanchez and Jaime Gomez Vasquez] where the question before the Court is whether the Commonwealth of Puerto Rico and the federal government are separate sovereigns for purposes of the Double Jeopardy Clause of the United States Constitution. The pending House proposal would preempt the Recovery Act, the Puerto Rican restructuring law that was thrown out in U.S. courts prior to Puerto Rico’s appeal to the Supreme Court to reinstate it. Thus, a Supreme Court ruling could change the political dynamics for Congress by resurrecting a law that is viewed by those opposing the Ryan-Bishop bill as even less palatable. That is, were the Supreme Court to, in effect, reinstate the Recovery Act, the Bishop proposal might be perceived by hedge funds and other opponents to the pending bill to be the ‘lesser of two evils,’ because a reinstituted Recovery Act would allow Puerto Rico to restructure debt at public utilities like power authority PREPA and water authority PRASA—and maybe even expand the authority to cover other debts. Some commentators and tea leaf readers conjecture that last March’s oral arguments strongly hinted the Justices could uphold the law—effectively ramping up pressure on creditors heretofore opposed to the Ryan-Bishop efforts to reverse field and press for prompt passage of the soon to be revised PROMESA legislation, because of the perception the emerging federal legislation would provide more protections for municipal bondholders than the Recovery Act.

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