Constructing Post Municipal Bankruptcy City Futures

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eBlog, 6/29/16

In this morning’s eBlog, we welcome Sen. Majority Leader Mitch McConnell’s leadership in taking up the House-passed PROMESA legislation today in the full Senate; Detroit gets a green light to refinance debt, enabling it to issue its first post-municipal bankruptcy general obligation debt; San Bernardino adopts its annual operating budget, marking its first steps towards a post-municipal bankruptcy fiscal sustainability; and Atlantic City hosts a public meeting to explain the steps it is taking to avoid a state takeover.

Puerto Rico: Ensuring Essential Public Services. The Senate will begin debate this morning on the House-passed PROMESA—with a final vote possible by this afternoon. Majority Leader Mitch McConnell (R-Ky.) started the process for consideration by filing for cloture late yesterday, so he will need 60 votes to bar any filibuster. U.S. Treasury Secretary Jack Lew is warning the Senate that any delay in acting on the House-passed PROMESA legislation to avert insolvency could carry severe repercussions for the U.S. territory, advising Senators that if Congress fails to pass a bill by July 1, a torrent of litigation from creditors could put the territory’s public services at risk. Puerto Rico has $2 billion in debt payments due, and government officials have warned they have insufficient funds, leading the Secretary to warn: “In the event of default, and if creditor lawsuits are successful, a judge could immediately order Puerto Rico to pay creditors over essential services such as health, education, and public safety…This could force Puerto Rico to lay off police officers, shut down public transit, or close a hospital.” Sec. Lew added that were Congress to miss the July 1 deadline and pass something retroactively, it would be unable to halt such a judge’s order, meaning the island’s essential public services would be at risk: “Doing nothing now to end the debt crisis will result in a chaotic, disorderly unwinding with widespread consequences…Some well-funded creditors are working hard to delay legislative action this week, even if it comes at the expense of the Puerto Rican people.”

A Motor City Thumbs Up! The Detroit Financial Review Commission, the nine-member Financial Review Commission, created nearly two years ago to ensure the City of Detroit is meeting statutory requirements, and to review and approve the city’s four-year financial plan created as part of its plan of debt adjustment, and to establish programs and requirements for prudent fiscal management, yesterday provided an all clear to proceed with a refunding of $660 million of general obligation debt—a key step which Detroit Finance Director John Naglick described as the last step in the process for the city to return to the municipal bond market: he anticipates a late July, early August issuance date. Yesterday’s approval clears the deck for Detroit to issue its first full faith and credit debt since exiting the largest municipal bankruptcy in U.S. history a little over a year and a half ago—with the projected savings estimated by Director Naglick to be as much as $40 million—savings which he said the city would use to provide budget and property tax relief. Detroit will refund up to $275 million of unlimited tax GO bonds the city sold in 2014, and as much as $385 million of limited tax GO bonds sold in 2010 and 2012. The bonds were issued through the Michigan Finance Authority and carry a backing of the city’s state distributable aid—in Michigan, a municipality can only pledge such distributable state aid on municipal bonds issued by the Michigan Finance Agency. Mr. Naglick added that the projected interest rate savings on the limited tax general obligation bonds will benefit Detroit’s general fund budget by as much as $15 million, while savings on the backed by the pledge of the issuer (generally a city or municipality) to raise taxes, without limit, to service the debt until it is repaid. Because of this feature, unlimited tax bonds may have higher credit ratings and offer lower yields than other comparable municipal bonds of the same maturity. The unlimited tax or UTGO bonds of $24 million, according to Mr. Naglick, will be used to lower the debt millage on the city’s property owners.

Roadmap to Sustainability. The Mayor and Council of San Bernardino have unanimously adopted a balanced budget for FY2016-17—a budget which, in stark contrast to recent years, includes no layoffs, or, as Councilwoman Virginia Marquez said after the vote: “Tonight really marks the first step in the right direction…Since the bankruptcy, we’ve lost a lot of great people. I’m glad to see that this year there are no layoffs needed.” As adopted, the operating budget (the capital budget is to be adopted later this summer) provides 752 employees—some 67 fewer than last fiscal year, but the difference is attributed to the city’s outsourcing of fire and refuse services—steps taken as part of the city’s plan of debt adjustment. In another sign of the city’s fiscal turnaround and steps towards sustainability, the budget includes $400,000 to finance step increases. City Manager Mark Scott presented the budget alongside an extensive list of items not included in the budget that could be wanted, including master plans for street lights and street paving, additional Code Enforcement Staffing and an expansion of the Quality of Life Team. He’ll bring groups of those suggestions to the City Council for possible addition later. Also coming up for discussion later are several items included in the budget that some council members indicated they might not approve. That includes $150,000 for “education” related to a proposed ballot measure to replace the city charter. The cost might be less than that, Mr. Scott said, once a potential expert in ballot item education — which is closely limited by law to prohibit advocacy in favor of the item — and Council members have the chance to approve or not approve the specifics once they are selected: “You’re not locking yourself into anything with your vote today,” Mr. Scott said. The budget projects $112.76 million in general fund revenue and $112.52 million in expenditures, a small surplus.

Betting on one’s City’s Future. Atlantic City Mayor Don Guardian yesterday reported that the city has hired public finance attorneys to restructure some of its $240 million of outstanding bond debt: the attorneys have been brought on to work on reducing the city’s debt load, much of which it took on to pay back casinos which had prevailed over the city on property tax appeals. The attorneys will be a key part of the city’s last gulp effort to put together a fiscal recovery/sustainability plan prior to October 1—where failure would doom the city to a state takeover. The Mayor and Council, at a public meeting last night, made clear the city will be seeking some assistance from surrounding Atlantic County. At the session, Councilman Kaleem Shabazz noted: “Bankruptcy scares investors away. It chills financial markets. Bankruptcy doesn’t solve our problems,” adding as a reminder, moreover, that whether or not the city can even seek municipal bankruptcy is a state rather than the city’s final decision. Thus, he noted: “Atlantic City is a functional, contributing part of the economic engine of the state, so we have to work together.”

For his part, Mayor Guardian spoke about steps the city has taken or is planning, including that the city will ask private companies for bids to see if they could save money on certain services, including trash and recycling, payroll, and towing. He said the city had also asked Atlantic County about sharing senior citizen transportation and some other services.

In describing actions the city has taken to ensure it can control its own destiny, he added the city has increased a number of fees, including for parking meters, which are expected to bring in nearly $800,000 this year, and double that amount next year. (The city’s fiscal year follows the calendar year.) Mayor Guardian said that since he took office in January of 2014, the city had reduced its workforce by 28 percent to 904 as of the end of April, with more employees leaving at the end of this week. The city will also receive $1.7 million for properties it auctioned off on June 23rd and, potentially, another $5 million combined for two other properties.

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