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.”

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