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.”

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