Is San Bernardino in the Home Stretch?

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eBlog, 6/20/16

In this morning’s eBlog, we welcome the good news that as San Bernardino holds its FY2017 budget hearing tonight, it will hear of an unexpected budget surplus, creating the option to finance municipal bankruptcy related services—and, lo and behold—compliment the city’s pending plan of debt adjustment.

The Last Full Measure? The San Bernardino City Council is scheduled to review the bankrupt city’s proposed FY2017 budget this evening—as it closes out a year in which revenues exceeded projections, even as spending was less than budgeted—so that, tonight, the Council will consider a motion to move some $2 million of the unexpected surplus into the fund the city has set up to finance municipal bankruptcy related services. The current, adopted budget had been projected to achieve a surplus of $18,608 by the end of the fiscal year; however, that is now projected to grow to a surplus of $12 million—with the savings attributed primarily to the city’s large numbers of vacancies, according to the Finance Department, but also from a number of one-time moves, including a franchise fee of $5 million for the sale of the San Bernardino’s Integrated Waste Management operation, as well as: some $3.2 million in greater sales and use tax revenues than projected; $600,000 in higher utility user’s tax revenues, and $1.2 million in higher than projected transient occupancy tax revenues—with the transient occupancy tax revenue 46 percent higher than the city had projected and some 20 percent over last year, reflecting increased occupancy at nearly all hotels and motels.

Is the End in Sight? The good news on the budget front compliments the city’s Recovery Plan, which, as of mid-May, rests on four key areas of change and improvement by the City, all aimed at improving the fiscal position of the organization: 1) Efficiency improvements – largely regionalizing or contracting for services; 2) Debt and Other Post-Employment Benefits (OPEB) restructuring; 3) New revenue and tax increases / extensions; and 4) Organizational improvements. In the wake of the city’s adoption of its plan of debt adjustment or Recovery Plan, San Bernardino has posted on its municipal bankruptcy site the table below [http://www.ci.san-bernardino.ca.us/home_nav/chapter_9_bankruptcy/default.asp], which provides a summary of where the City currently stands with respect to the major elements of the Plan. This Table is based on Table 1 – Cost Savings and Revenue Enhancement Actions and Estimates (General Fund) in the May 2015 Recovery Plan. The table shows for each opportunity area the estimated economic benefit, a summary of actions taken towards implementation and the currently anticipated economic benefit either realized or planned. Of note is that implementation is complete or underway on all actions targeted for 2015. In addition, implementation of several elements targeted for 2016 are already underway.

Cost Savings and Revenue Opportunities Estimated Ongoing (Annual) Savings unless otherwise noted Status 
Efficiency Improvements    
Regionalize or Contract fire and EMS services $7,000,000 – 10,000,000 Implementing – Council voted to annex into San Bernardino County Fire District. Local Agency Formation Commission (LAFCO) assessed and approved annexation, subject to conditions of approval, which included an annual parcel tax of $148.32, and protest hearing/votes. Less than 5% of landowners and registered voters submitted protest votes, moving the annexation forward to the implementation stage. Based on LAFCO and City estimates net economic benefit to the City ranges from $7.4 to $12.0 million annually of which approximately $7.4 million is expected to come from landowners new parcel tax contribution. The higher savings estimate includes resumption of payments for facilities maintenance, equipment replacement and overhead support eliminated from City budget.
Contract business license administration $650,000 to $900,000 Pending – Organizational analysis recommending moving function to Finance completed. RFP in development. Will be complete in 2016.
Contract fleet maintenance $400,000 Pending – 2016
Contract soccer complex management and maintenance  $240,000 to $320,000 Completed. The City has contracted for the operation of the complex by a private vendor effective October 1, 2015. Annual savings are estimated at $300,000. Private vendor has begun a $1M renovation and established a new National Premiere Soccer League team.
Contract custodial maintenance $150,000 Pending – 2016
Contract graffiti abatement $132,600 Pending – 2016
Implement other efficiency improvements $1,000,000 or more Completed. Right of way maintenance and street-sweeping are being implemented with solid waste contracting.
Health care savings (retirees) Up to $60 million in total savings Completed. Actuarial report is being finalized.
Debt Restructuring    
General Secured Bond Obligations $487,450 Implementing – Agreement has been reached. Documentation is underway.
General Unsecured Bond Obligations – Pension Obligation Bonds Up to all but 1% of obligation or approximately $95 million Implementing – City has reached agreement with creditor. Obligation reduced from $95.8 million to $50.7 million. Annual payments reduced from $3.3 to $4.7M per year to $1.0 to $2.5M per year
Restructuring of other creditor obligations Up to $4,300,000 in total savings Pending – Tentative agreement reached with holder of $527,490 lease purchase obligation
New Fee Revenue and Tax Adjustments  
Seek reauthorization of the Measure Z sales tax in 2021 (requires voter approval) $8,300,000 Pending – 2021. Police resources plan for rebuilding police capacity and improving public safety adopted by City Council
Perform a transient occupancy tax (TOT) audit $200,000 Pending – 2016
Collect new waste management franchise fee (once service has been contracted) $5,000,000 Completed. Council approved a contract with Burrtec. Service began April 1, 2016. Paid a $5M one-time fee plus will increase annual franchise payment to $5M from $2.2M. Sale of equipment nets City $12M.
Increase waste management franchise fee  $2,800,000 Completed. Will increase annual franchise payment to $5M from $2.2M.
Implement water/sewer utilities franchise fee  $1,050,000 Completed. New agreement adopted by City and Water Department.
Update master fees and charges schedule $200,000 Pending – 2016
Implement program for collecting street sweeping parking violations $200,000 Pending. Will be done in conjunction with move to private vendor – 2016
Implement compensation adjustments for all City employees $400,000 and growing (2% adjustment for non-safety employees) Completed. Agreements have been reached with all employee bargaining groups.
Provide resources to Charter Task Force and schedule election to consider revised Charter $150,000 (one time cost) Pending. A new draft charter is under development and has been reviewed at public meetings. Charter Committee to provide recommendations to Council in May and anticipate November 2016 election. Costs have been less than estimated
Organizational Improvements Ongoing Costs Implementation Schedule
Implement strategic planning initiatives $1,000,000 to $3,000,000 depending on timing and ability to fund Pending. Have completed Police Five Year Resources Plan which calls for additional investment of from $6.7M to $13.3M in annual funding over next five years starting in July 2016. Current model can only fund a portion of total needed
Rebuild corporate support functions $100,000 with a one-time cost of $500,000 Pending. Organizational reviews in process and have preliminary observations and recommendations for Finance, Human Resources and Information Technology

The third amended Disclosure Statement, Plan for the Adjustment of Debts and revised/new exhibits were filed with the bankruptcy court on May 27, 2016.

 

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Movong toward Municipal Bankruptcy’s Endgame

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eBlog, 6/17/16

In this morning’s eBlog, we consider the final stages of the process for exiting the longest chapter 9 municipal bankruptcy in U.S. history in San Bernardino, California; and we briefly review action relating to Puerto Rico yesterday by the House Financial Services Committee.

The Last Full Measure? The City of San Bernardino yesterday began the last full measure down the road towards a confirmation hearing to exit the longest municipal bankruptcy in history by October: the first of what could be multiple hearings on whether to confirm the city’s proposed plan of debt adjustment, approval of which by the federal court is the prerequisite for the city. That hearing has been scheduled for October 14th; albeit that process is unlikely to be smooth, as could be seen in a hearing before U.S. Bankruptcy Judge Meredith Jury yesterday involving the final objecting creditor, the Big Independent Cities Excess Pool, or BICEP, which raised objections in the federal courtroom to San Bernardino’s disclosure statement—which, in addition to the all-important Plan of Debt Adjustment, are the prerequisites for Judge Jury’s confirmation. The Pool is a group of six mid-sized cities which provide liability claim pool coverage, including for an unspecified number of civil rights creditor claims against San Bernardino, claims that total more than $1 million. San Bernardino’s plan of debt adjustment filing with the federal court includes a section which the city told Judge Jury was word-for-word the position of BICEP—eliciting unhappiness from the Judge, who yesterday said: “This is extraordinary, and I had never seen anything like it…where an objecting creditor is given the full opportunity to say whatever they wanted. The opponent adopted their language verbatim. And yet they’re still crying.” In response, an attorney representing the pool responded there was a simple explanation for that: The city was not testifying the truth with regard to the language being verbatim: “We gave them language. They did not put it in…They have misled the court today to our detriment. That’s not the only place.” These are not soothing words to a federal bankruptcy judge. San Bernardino’s bankruptcy attorney told the court that most of BICEP’s statement was included in the city’s filing; however, he added: “It is true we changed some of the language where we thought either was not true or did not make sense, but then we sent it back to BICEP and said, ‘Here’s what we’re proposing to put in.’” Then he told Judge Jury: “We did not receive a response back, nor did BICEP raise in any objection (in their filing);” in response to which Judge Jury suggested San Bernardino file the disclosure statement with the original language from BICEP, add a section explaining their disagreement, and work together with BICEP to include a summary paragraph saying that there is a disagreement, noting: “What they (the people with the claims against the city) need to know is that there is a dispute about how this is going to work, and they can’t count on it, if they happen to be in that class of more than a million, other than the city will pay what it promises for the unsecured class,” adding she would decide whether to favor the city or BICEP on that point before confirming the city’s proposed plan of debt adjustment. In San Bernardino’s proposed plan of debt adjustment, unsecured claims would receive 1 cent for every dollar owed, under the city’s bankruptcy plan. The next step for San Bernardino will begin next month when it will mail ballots to creditors seeking their approval of the proposed plan. Creditors will have until Sept. 2 to return those ballots.

Protecting Puerto Rico. The House Financial Services Committee yesterday unanimously approved the U.S. Territories Investor Protection Act of 2016 (H.R. 5322), which would amend the Investment Company Act of 1940 to terminate an exemption for companies located in Puerto Rico, the Virgin Islands, and any other possession of the United States—that is, that key sponsor Rep. Nydia M. Velázquez (D-N.Y.) believes would close a legal loophole that allowed broker-dealers to defraud Puerto Rico investors and extend to the U.S. territory of Puerto Rico the same protections under the Investment Company Act of 1940 as those afforded to investors residing on the U.S. mainland. Rep. Velázquez contends that, under a loophole in the Investment Company Act of 1940, some broker-dealers underwrote Puerto Rico municipal bonds and then repackaged them into mutual funds and sold them to Puerto Rican investors without disclosing the risks in some cases—an arrangement permitted under Puerto Rico law due to an exemption in the 1940 act, but barred in the U.S. mainland. Rep. Velázquez told her colleagues the situation has been compounded by Puerto Rico’s debt crisis, noting: “Retirees and other vulnerable citizens are being fleeced because of this outdated exemption in federal investment law: this bill would ensure statutory parity by ending this practice,” noting further that when the exemption was codified in 1940, Puerto Rico and other U.S. territories were considered to be physically located too far away for the Investment Act protections to be enforced. Since then, however, Hawaii and Alaska—U.S. states farther away from the mainland than Puerto Rico, have been granted statehood and, ergo, been beneficiaries of the protections granted in the 1940 Act, leading Rep. Velasquez to note: “It is absurd to suggest that we are unable to have a robust financial regulatory presence in Puerto Rico for geographical reasons,” she said. “All this exemption does today is enrich large financial companies at the expense of vulnerable retirees and working families.”

The Challenge of Tax Subsidies in Municipal Fiscal Recovery

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eBlog, 6/16/16

In this morning’s eBlog, we consider the fiscal balancing challenges in Detroit as it emerges from the largest municipal bankruptcy in the nation’s history: how does it deal with the expiration of a key state tax break that has been successful in drawing higher income families and investment to its downtown? How does it balance equity in dealing with a state program that has been effective in revitalizing the city’s heart, but has provided benefits to those least in need—but not to those in greatest need?

Taxing Challenges to Detroit’s Future. At a time when Mayor Mike Duggan and the Detroit City Council have so far led a stirring physical and fiscal revival out of the largest municipal bankruptcy in American history—two issues challenge the ongoing recovery: 1) will the state bailout of the Detroit Public Schools inspire sufficient confidence in the city’s public schools (and charter schools) so that families not only do not leave, but also that there are incentives for other young families to move in, and, 2) how to deal with the expiring Neighborhood Enterprise Zone (NEZ) tax incentives program, which appears to have played a key role in drawing professionals to downtown and Midtown Detroit. Mike Wilkinson, writing for Bridge Magazine, noted that this state tax incentive, which appears to have been strikingly effective in filling high-rise downtown condos, is not permanent—raising two difficult questions: equity and the downtown’s future. The stakes are significant: yesterday, Realcomp Ltd reported that Metro Detroit experienced record median home sale prices in May: the number of sales reached a 10-year high, in the latest year-over-year figures; median home and condominium sales jumped 8 percent and sale prices increased 3.8 percent in Wayne, Oakland, Macomb, and Livingston counties. At the time Detroit filed for chapter 9 municipal bankruptcy, the city today was home to an estimated 40,000 abandoned lots and structures. Indeed, between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base.

Detroit, which had been hemorrhaging population for decades, but which has one of the broadest tax bases of any city in the U.S., has been using the NEZ program aggressively—and with impressive results: a renaissance of development and reinvestment downtown and other neighborhoods near the city’s core. Now, however, with hundreds of NEZ units set to expire this year and next, there is increased apprehension with regard to whether the lapse might reverse this tide of human and capital investment in the city core. That is: when condo tax bills that have been artificially reduced to as little as $500 annually revert to their assessed level of $12,000: what will happen? Mr. Wilkinson, writing about an interview he did with the author of a Michigan State graduate doctoral study on the issue, wrote said author told him: “If you start taxing them on what their (properties are) worth, they’re not going to stay,” leading him to wonder, however, if the city opts to further extend generous tax subsidies to new(er) Detroiters living in some of the city’s most expensive homes, “what message does that send to ordinary residents of more modest means, people taxed on the full value of their properties for decades? After all, the city’s high assessments, combined with the city’s high tax rate, are why so many longtime residents have been unable to pay their tax bills.”

Michigan’s NEZ program has been around for more than two decades. When it began, it targeted new construction and building rehabilitation. For new construction, the owner would receive up to 15 years of tax relief, paying half the statewide average millage rate. This year, that amounts to less than 17 mills, a startling 75 percent discount from the 69 mills that most Detroit homeowners without an abatement would pay.

The program is not unique to Detroit: more than 14,600 residential properties in 26 municipalities have been the beneficiaries of state-sanctioned NEZ tax subsidies since 1993, designed to encourage residential development in financially distressed communities; however, the vast bulk, close to 90 percent, have been issued in Detroit to incentivize new construction throughout the city and the rehabilitation of older buildings. Moreover, the City of Detroit and some other communities have also been innovative in finding ways to extend the program to existing homeowners, so that if a homeowner invests as little as $500 in improvements, she or he is eligible.

That raises taxing issues of equity, however: he notes that some 5,000-square-foot mansions in gated communities with personal boat docks along the Detroit River assessed at values in excess of $800,000 year pay less than $5,000 in taxes, even as less than a mile away Detroit homeowners with properties assessed at only $30,000 are paying more than $1,500 a year in taxes.

Gary Evanko, the Motor City’s chief assessor concurs that too many properties are assessed too low, even as many more are assessed too high, deeming the question about the future of the NEZ program as something which merits special attention. The challenge of expiring tax incentives is not unique to Detroit—as Mark Skidmore, an economics professor at Michigan State University put it: when a business which has been the beneficiary of tax subsidies watches the end nearing, it seeks to renegotiate, obtain an extension, or threaten to depart. So, as Mr. Wilkinson writes: “That same dynamic could play out with residential properties in struggling cities: The question is: what will the city of Detroit do? Will they…extend the abatements for fear of losing the people, or will it make them pay the full rate?”

In Detroit, as in every metropolitan area, the challenge of setting property tax rates is competitive: each jurisdiction watching its neighbors for bragging rights with regard to which has the lowest—even as there is recognition that families with children sometimes find the assessment of such a jurisdiction’s public schools a greater determinant in where the family would like to live. So it is in Detroit that, at 69 mills for owner-occupied homes and condos, the city’s tax rate can generate a bill of as much as $7,000 for homes worth $200,000—in contrast, in the Detroit suburb of Troy, a home assessed at the same $200,000 would mean a property tax bill of just over half: $3,700.

For owners of rehabilitated buildings, the NEZ program works differently: owners pay the full property tax rate; however the assessment is frozen at the share of the building’s value before renovations. So that, for instance, in downtown Motown at the Book Cadillac, which underwent extensive renovation and emerged as a mix of hotel rooms, condos and restaurants, that meant valuing refurbished condo units at their assessed value pre-chapter 9—meaning that today’s posh condo owners are the beneficiaries of assessments frozen for 15 years at $3,026, or roughly 1 percent of the $290,000 cost of purchase in 2008—or an annual property tax of less than $500—that is unless you are a lucky reader who happens to own one of Book Cadillac’s three-story penthouse units, then your assessment is frozen at $3,000—one of more than 3,000 municipal tax subsidies for rehabbed buildings and some nearly 3,900 for new construction. Because these tax breaks are time limited; however, and many of the NEZ tax subsidies offered to new and current homeowners are maturing, there are two issues: what will happen as these subsidies phase out: will higher income owners move out of the downtown? And, second, what is the equity in a city with such a disproportionate number of low-income families?

The Delicate Rebalancing of State versus Local Authority

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eBlog, 6/15/16

In this morning’s eBlog, we consider the delicate re-balancing of a state-local relationship in New Jersey with its takeover of distressed Atlantic City—and apprehensions about potential wash-over effects or fiscal distress contagion on neighboring jurisdictions. But we also note that Atlantic City is not yet ready to concede to the state takeover. So we observe this awkward balance of power. We watch and await Senate action—with time running out—on the House-passed, bipartisan legislation PROMESA bill—where the clock is ticking down with regard both to the U.S. territory’s looming insolvency, but also to Congress’ long summer recess. Finally, we observe the municipal fiscal risk of walking away from one’s municipal financial obligations in the Virginia municipality of Buena Vista.

The Delicate Balance. A key issue in severe municipal fiscal distress is the state-local relationship: what legal rights and authority exist for the municipality? What rights and authority might be preempted by the state? What actions might be critical to prevent contagion—or the risk of fiscal distress to neighboring municipalities? And, finally, what is the end game? As we could observe in Atlantic City, where Ed Sasdelli, the fiscal monitor appointed by the State of New Jersey, last Friday stated he will depart at the end of this month—after five years’ of service—the most significant reason is that, under the state takeover legislation, the state monitor position will have to be full-time—and the ramp-up will be especially critical: under the takeover legislation Gov. Chris Christie signed into law last month, Atlantic City is mandated to draft a five-year fiscal plan that includes a balanced FY2017 budget; moreover, if the city fails to submit a plan—or if the plan it submits is deemed insufficient, the State of New Jersey can sell city assets, break union contracts, and assume major decision-making powers from the Mayor and Council. As part of the takeover package, the state provided a $60 million bridge loan and granted a grace period of five months to balance a more than $80 million budget deficit and prepare a sustainable five-year financial plan or face state intervention that allows New Jersey’s Local Finance Board to alter outstanding debt and municipal contracts. Ergo, unsurprisingly, Mr. Sasdelli noted: “I think that’s going to require much more than 18 hours a week from the state monitor.” According to the state, Atlantic City has $550 million in total debt and a budget deficit topping $100 million before state aid. The new state appointment comes as Atlantic City is working to close a $44 million budget gap as part of its five-year fiscal plan to avoid the takeover. Add another fly to the ointment: Atlantic City Mayor Don Guardian had wanted Mr. Sasdelli, in addition to New Jersey Local Government Services Director Tim Cunningham and the Department of Community Affairs Commissioner Charles Richman, to serve on the city’s fiscal plan committee, but was advised that “none of them would be permitted to join us because it would be a conflict of interest.”

Making Up Is Hard To Do. Even as this delicate shifting of power is underway, however, Atlantic City remains in an independent mode: the City Council has voted 6-3 vote to hire the municipal bond counsel firm of Manimon & Scotland to battle the proposed state takeover of the municipality, with Joseph Baumann, the chairman of the firm, noting his key focus will be on refinancing or restructuring Atlantic City’s $240 million bonded debt as well as $170 million in tax refunds owed to the Borgata casino. The virtually bankrupt city is paying the firm $180,000, according to Mr. Baumann, who notes “We will be involved in looking to address all of their debt issues…We’re looking forward to the challenge and hope we can make a difference.” As the ever experienced Marc Pfeiffer of the Bloustein Local Government Research Center advises: Mr. Bauman’s firm is reputed to be one of the best, if not the best in the state—and he comes with previous experience on municipal fiscal distress issues that should help address a complex, intergovernmental workout which will involve some taxable and non-taxable debt, some state intercept debt (“qualified bonds”), and possibly some use of Atlantic County’s strong position to act as a guarantor of city debt to improve its bond ratings and lower its interest rate cost.

Getting Ready to Rumble. U.S. Senate Finance Committee Chairman Orrin Hatch (R-Utah), chair of the committee of jurisdiction, yesterday indicated he believed the Senate would act on the House-passed, bipartisan Puerto Rico PROMESA legislation, although he said he was considering offering changes—even as he told reporters he did not think it is the “solution.” His announcement came as Senate Majority Leader Mitch McConnell—in the wake of a briefing on the bill by House Natural Resources Committee Chairman Rob Bishop (R-Utah), told reporters: “We’ll be taking up the House bill sometime before the end of the month.” That leaves little time to shepherd legislation through the Senate, conference with the House, and get the final bill to the President before July 1, when Puerto Rico faces a deadline on a $1.9 billion debt payment. Senate Majority Leader Mitch McConnell (R-Ky.) has not yet said when he might schedule the House bill for Senate debate. Chairman Hatch noted: “If we think we can improve it (the House-passed bill), we’re going to try to.” The problem is the clock: not only is there a default looming on July 1st, but also the House and Senate are scheduled to break in mid-July until September. Chairman Bishop said GOP senators seemed “up to speed” on the House-passed bill, adding that GOP senators had questioned if there are any taxpayer funds included in the House Puerto Rico bill—in response to which Chairman Bishop made “very clear this was not a bailout,” even as he warned: “If you don’t do anything you’re going to have a bailout.”

Trouble in Buena Vista. The issuer of nearly $9.2 million in municipal debt, the small municipality of Buena Vista, Virginia, has been sued by the insurer of its municipal bonds, ACA Financial Guaranty Corp, in the wake of the municipality walking away from a $9.2 million debt on its municipal golf course. ACA has been making insurance payments on the bond interest on municipal bonds used issued in 2005 to insure bonds used to finance the Vista Links course: when the city defaulted two years ago, the insurer stepped in this week, asking the Buena Vista Circuit Court to order the city to resume payments. Should the municipality refuse that would tee up foreclosure proceedings on the golf course and the buildings that house City Hall and the Buena Vista Police Department, buildings which the municipality had pledged as collateral when the bonds were issued. Even though ACA had indicated its reluctance to actually seize possession of city hall, the firm’s attorney said that remains an option—with provisions in its suit detailing how the city would not be able to find a new home for its evicted governmental offices without the permission of ACA, should the firm prevail in court. Clearly, however, the company would prefer not to own and operate a golf course: instead it is seeking that the “City Council should honor its promises and pay back the money it borrowed. Even the city has to pay its debts.” In retrospect, it seems the city made a risky fiscal gamble more than a decade ago that municipal revenue from the course, along with the residential and commercial development that the city imagined it might generate would be sufficient to help Buena Vista pay off the lease revenue bonds used to fund the initiative. However, not only did the venture struggle financially, but the Great Recession inflicted telling fiscal blows; thus, under a post-recession agreement five years ago, ACA agreed to allow the city to make half payments through this year—when the unpaid balance was to be added to the end of the bonds’ lifespan. However, a year and a half ago, the Buena Vista City Council voted to stop making payments: city officials have said that while they are no longer able to survive financially under the terms of the municipal bond agreements, they are open to a settlement of some kind with ACA. But it appears they have exhausted the patience of their lender.

When Governance Fails

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eBlog, 6/14/16

In this morning’s eBlog, we consider the state actions in Florida—a state grieving over the horrible events which transpired in Orlando—to take over the small city of Opa-locka—where severe fiscal and ethical lapses have left the city in a state of financial emergency. The challenge for Governor Rick Scott will be to ensure the accountability of the persons he appointed to take over the small city.

In the wake of declaring the City of Opa-locka in a state of financial emergency on June 1st, Florida Gov. Rick Scott has appointed nine people to take charge of the small municipality’s finances—a quasi-oversight board, of which six of the appointees are high-level state employees, including Governor Scott’s Chief Inspector General, Melinda Miguel. Designating the small city of about 16,000 to be in such an emergency triggers its eligibility for state assistance, including loans—but also means Opa-locka is barred from issuing any debt absent gubernatorial approval. Likewise, should the city opt to seek chapter 9 municipal bankruptcy, such a move would require the Governor’s signature. No Gator city has ever sought municipal bankruptcy; two utility districts and two transportation districts have. In addition, Florida laws dealing with severe municipal distress are unique in that, in certain situations, such a city’s municipal bondholders may bring an action to compel the municipal governing body to perform a ministerial action it has refused to undertake, such as refusing to collect taxes or fees, or—in the event of filing for chapter 9 municipal bankruptcy, to continue to receive payment on municipal bonds to which statutory liens apply. [§132.43]. Going forward, the city is barred from issuing any municipal debt or any other kind of long-term debt without Gov. Scott’s approval while it remains in an emergency. Opa-locka currently has total long-term debt outstanding of $11.6 million, including $6.56 million of revenue bonds and state loans, according to its most recent audit; a financial assessment conducted by Miami-Dade County Auditor Cathy Jackson determined that the municipality had used debt service reserves, general contingency funds, and other restricted monies in violation of debt covenants and various agreements. The fiscal descent follows years of struggling to balance the municipality‘s budget, which has been losing revenues from plunging property tax receipts and major breakdowns in the city’s ability to collect water and sewer revenues.

Even as the state undertook a takeover of the city, acting City Manager Yvette Harrell had brought on former CFO Ezekial Orji, directing him to help root out serious breakdowns in the city’s budget—not exactly a new face: his assignment is to serve as a key point person between the city and the governor’s oversight board. It appears a troubling assignment: it seems Mr. Orji has his own troubled fiscal record with Opa-locka, having in previous employment with the city steered tens of thousands in taxpayer dollars to a close friend and contractor who had been charged with taking more than $700,000 in kickbacks—all actions which he had failed to disclose. Unsurprisingly, the appointment of Mr. Orji’s appointment, even as the city is under FBI investigation in a corruption probe into kickback schemes involving both elected and appointed municipal officials hardly bodes well for the city’s citizens, taxpayers, or bondholders. City Manager Harrell has defended her decision, responding that Mr. Orji was neither charged nor sanctioned during the county ethics investigation in 2012 and that she had cleared his hiring with the state before he arrived at the end of last month, telling the Miami Herald “There was no red flag.” However, it seems unclear whether Ms. Harrell had disclosed this history to the Governor’s office; now it matters less because Mr. Orji abruptly resigned when the media released the sordid history of his disservice to the municipality; City Manager Harrell advised the media Mr. Orji had resigned because of problems he perceived in working with the state oversight board, adding she regretted that “he was unable to work for us.” And someone needs to work—and quickly: Finance Director Charmaine Parchment has warned that the city will run out of money by the end of this month—raising questions with regard to the implications for the small municipality’s 170 employees—who are already reduced to 32-hour work weeks.

Gov. Rick Scott, in declaring the city in a state of financial emergency, has appointed nine members to a state oversight board which will have final say over the city’s budget over the next five years, headed up by Florida Inspector General Melinda Miguel.

Other members are:

▪ Christian Weiss, Policy Coordinator, Executive Office of Governor Rick Scott

▪ Kim Mills, Director of Auditing, Florida Housing Finance Corporation

▪ Andrew Collins, Chief of Financial Monitoring and Accountability, Florida Department of Economic Opportunity

▪ Angela Knecht, Program Administrator, Florida Department of Environmental Protection

▪ Marie Walker, Director of Auditing, Florida Department of Revenue

▪ J.D. Patterson, Jr., Former Director of the Miami-Dade Police Department (Retired)

▪ Vernita Nelson, Assistant City Manager, City of Miami Gardens

The Hard Balancing Choices in Public School Finance

 

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eBlog, 6/13/16

In this morning’s eBlog, we consider the unique state perspective on the challenges of public school finance—something which has bedeviled Kansas, but here we look at the unique political challenges for Michigan legislators to act to avoid letting the Detroit Public School System go into municipal bankruptcy: the challenge for Michigan Governor Ric Snyder is to somehow convince members of the state’s House and Senate to appropriate funds that might otherwise have gone to their own Districts to, instead, go to DPS. Then we turn to the fate of the House-passed bipartisan legislation to address Puerto Rico’s looming insolvency—and how and when the Senate will act with time running out. 

Learning about the Importance of Getting it Right. Daniel Howes, the very insightful editor from the Detroit News, in his column on Friday, “Bankruptcy for DPS threatens cascading risks,” wrote that “All it took was a few texts from Kevyn Orr…to confirm Gov. Rick Snyder’s worst fears: A chapter 9 bankruptcy of Detroit Public Schools risked establishing a precedent, the city’s former emergency manager told the Governor, that could expose taxpayers to billions of dollars in creditor and pension liabilities — and the possibility that a federal court could order the state to raise taxes to pay them.” The result, Gov. Snyder therefore warned state legislators, would be a financial and political cataclysm: absent sufficient votes to pass the $617 million rescue package for DPS, the Governor would, once again, have been forced – as he had years ago when he first appointed Mr. Orr to put Detroit into bankruptcy and then steer the city through the largest municipal bankruptcy in U.S. history. Moreover, the Governor warned legislators that the fiscal carnage or failure would not necessarily stop at Detroit’s city limits: “School districts across the state would be tempted to follow DPS’ path in an effort to shed liabilities on their books, effectively dumping them on Michigan taxpayers and creating a civic firestorm that would be difficult to control.”

The hard issue, after all, for state legislators, was to agree to spend more than $600 million in state revenues to go to Detroit’s schools—that is: a challenge more difficult, politically, because it meant asking House and Senate members to find a way to take state funds from their own districts to send to Detroit. Thus, the warning from Gov. Snyder that a failure to appropriate a significant aid package could risk putting the state on the hook for as much as $2 billion to $3.5 billion in liabilities—or the equivalent of a cut of $3,000 in state aid for every public school student. In addition, the Governor reminded his colleagues in the House and Senate that a new municipal bankruptcy in Detroit for its school system could hurt the state retirement system, because it includes Detroit teachers. He added, finally, that failure to act would jeopardize Michigan’s credit ratings. That is, such a filing would likely risk fiscal contagion: it could raise the cost of capital borrowing for virtually every city, county, and public school district in the state. Mr. Howes noted: “More precisely, Orr advised the governor that bankruptcy lawyers likely would advance a go-for-broke argument seeking to establish that states could be ordered to raise revenue to pay creditors and satisfy unfunded liabilities.”

Finally, Mr. Howes wrote what I found the most profound: “The city’s bankruptcy was neither easy nor free of confrontation. Memories dim. Chapter 9 was disruptive; it required sacrifice; it challenged labor and the municipal bureaucracy in ways they had never been challenged before; and it cost the city something in the neighborhood of $180 million in fees to shed $7 billion in liabilities, refinance another $3 billion more and renegotiate all of its union contracts.”

Oye! The U.S. Senate expects to take up the PROMESA Puerto Rico bill passed by the House and vote by the end of this month or in early July—an effort facilitated by House action last week to provide a procedure for Senate Majority Leader Mitch McConnell (R-Ky.) to bring the measure, S. 2328, up before the full Senate without having to go through committees. Moreover, with Senate Majority Whip Sen. John Cornyn (R-Tx.) advising his colleagues that the House-passed bill is the only alternative to what otherwise would become a large, taxpayer-funded bailout. Senate Finance Committee Chairman Orrin Hatch (R-Utah) said the Senate would have to support the bill if the House passed it, even though he said he does not “think it’s a very good bill in many ways.” Moreover, no Senator seems to have been able to come up with an alternative proposal which has garnered any interest or support: and all appear acutely aware that, as they use to say in Rome, tempus fugit: the Senate has quite simply run out of time to consider any significant alternatives between today and the July 1 deadline when Puerto Rico faces a nearly $2 billion debt payment deadline. If there is one fly in the ointment, it is Vermont’s Sen. Bernie Sanders (I-Vt.), who has threatened to filibuster the bill. Sen. Sanders introduced an alternate bill, The Puerto Rico Humanitarian Relief Act last Thursday in which he proposes to create a seven-member Reconstruction Finance Corporation of Puerto Rico and provide that U.S. territories be included under the Chapter 9 municipal bankruptcy title. The public corporation would be a restructuring agency with authority to lend to Puerto Rico and facilitate debt restructuring for the commonwealth. His bill would also appropriate $10.8 billion to the commonwealth over five years to help modernize infrastructure as well as extend Chapter 9 bankruptcy protections to the island. In introducing his bill and opposition to the House-passed bill, Sen. Sanders said: “The more we learn about the disastrous House bill to address the crisis in Puerto Rico, the worse it becomes. It is bad enough for Republicans in Congress (and apparently the Treasury, White House, and House Democrats) to take away the democratic rights of U.S. citizens living in Puerto Rico by setting up a neocolonial control board empowered with the authority to slash pensions, fire teachers, and close hospitals. But to ask Puerto Rican taxpayers to pay $370 million to create an unelected control board stacked with right-wing Republicans is beyond insulting. Mexico is not going to pay for Donald Trump’s unnecessary wall and, if I have anything to say about it, the people of Puerto Rico will not pay for this outrageous control board. This is just one more reason why I will do everything I can to defeat this legislation in the Senate and fight for an alternative bill that will allow Puerto Rico to grow its economy, create good jobs, expand its tax base and pay back its debt in a way that is fair and just.” Nonetheless, it seems most unlikely Sen. Sanders would be able to gain the requisite 41 votes he would need to block cloture in the Senate. And it comes in the wake of overwhelming, bipartisan action in the House. Puerto Rico’s own nonvoting Member of Congress, Commissioner Pedro Pierluisi noted to his colleagues that the House-passed bill accomplished the first step in dealing with an emergency: to stabilize the solution: “Without PROMESA, the Puerto Rico government is likely to collapse, participants in public pension plans will be terribly harmed, and many bondholders could lose their investments: PROMESA is in the interest of all stakeholders.”

The Governing Challenge in Averting Insolvency

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eBlog, 6/10/16
In this morning’s eBlog, we consider the bipartisan legislation overwhelming passed by the U.S. House of Representatives last night to address Puerto Rico’s looming insolvency—and a related U.S. Supreme Court decision; then we look at the almost Detroit Public Schools filing for chapter 9 municipal bankruptcy. It almost seems as if these events and actions were staged just for my fine graduate class on public policy process.

 

Oye! The House last evening passed and forwarded to the Senate legislation to address Puerto Rico’s looming insolvency on a bipartisan 297-127 vote: Speaker Paul Ryan (R-Wi.) and Minority Leader Nancy Pelosi (D-Ca.) took to the House floor to urge support for the legislation, with Speaker Ryan noting: “The Puerto Rican people are our fellow Americans. They pay our taxes. They fight in our wars…We cannot allow this to happen.” The bill now heads to the Senate, where there is little evidence Senators are eager to remake the bill wholesale, particularly as conditions on the island continue to worsen. The only amendment to fail was one offered by Democrats that would have struck a provision of the bill permitting Puerto Rican employers to pay workers under 25 years old less than the minimum wage. The legislation is critical as Puerto Rico—being neither a municipality, nor a state, falls into a Twilight Zone in terms of authority to address an insolvency. Puerto Rico has defaulted on three classes of municipal bonds, including last month when it missed most of a $422 million payment, and faces $2 billion in payments on July 1 that the island’s governor said cannot be paid. That final vote on the amendment was 196 in favor to 225 against. Puerto Rico’s government has begun defaulting on $70 billion in debts, and has warned it could run out of cash this summer.

In pressing for the vote, the Speaker warned that pressure would mount on Congress to spend money rescuing the territory if it could not arrest its economic decline, telling his colleagues: “This bill prevents a bailout. That’s the entire point…if we do not pass this bill…there will be no other choice.” Anne Krueger, a former IMF economist who led a detailed review of Puerto Rico’s economy, has warned: “Come July 1, if nothing is done, Puerto Rico will technically be bankrupt…Assets will be tied up in courts. It is very likely that essential services will have to be suspended.”

As drafted, the House-passed legislation does not commit a single federal dollar to Puerto Rico. The legislation creates a federal oversight board—whose members will be appointed by Congress and President Obama, and not the governor—to determine whether and when to initiate court-supervised debt restructuring: it charges the board with the responsibility to determine the hierarchy of municipal debt obligations and encourages it to respect the existing legal framework, which places constitutionally backed general obligation debt above pension liabilities. The board terminates after Puerto Rico regains the ability to borrow at reasonable interest rates and balances its budget for four consecutive years. Congressional leaders and the Treasury hope the bill will avert a long, expensive courtroom battle between hedge funds and the federal government—a battle that could harm investment in the U.S. territory’s economic future and undercut its ability to provide essential public services (servicing Puerto Rico’s current debt burden today absorbs approximately 30 percent of the Commonwealth’s revenues)—especially as Puerto Rico is now at the forefront of the Zika virus. While critics have falsely warned the bill could set a precedent for distressed states to seek similar relief, the dual sovereignty created by the founding fathers—or statesmen—in the U.S. Constitution clearly undercuts such claims: Congress granted U.S. citizenship in 1917 under the Jones-Shafroth Act to residents of Puerto Rico, which was seized in the Spanish-American War of 1898. The U.S. gave the territory the right to elect its own governor in 1947.

 Republicans have been concerned that the language would allow the to-be appointed oversight board to elevate pensions above the island’s full faith and credit general obligation municipal bond debt: Rep. John Fleming (R-La.) submitted an unsuccessful amendment to require compliance with the legal hierarchy, calling the statutory use of the word “respect” a “weasel word.”

Hear Ye! By coincidence, the U.S. Supreme Court chimed in almost simultaneously in a 6-2 decision (Commonwealth of Puerto Rico v. Sanchez Valle et al., (2016), No. 15-108, involving a simple criminal prosecution for firearms sales, but also the related governance issue of the Commonwealth’s autonomy—a case in which attorneys for Puerto Rico argued that it should be able to try two men who already had pleaded guilty in federal court. Justice Elena Kagan, writing for the majority, said that would amount to double jeopardy, writing: “There is no getting away from the past…Because the ultimate source of Puerto Rico’s prosecutorial power is the federal government…the Commonwealth and the United States are not separate sovereigns.” Reasoning that even though Congress, in 1950, gave Puerto Rico the authority to establish its own government under its own constitution, that did not, in and of itself, break the chain of command that originates with Congress. As a result, the majority determined, the Commonwealth should be treated the same as other U.S. territories. While the 50 states and even Indian tribes enjoy sovereign powers that preceded the union or were enshrined in the U.S. Constitution, Justice Kagan wrote, Puerto Rico in 1952 “became a new kind of political entity, still closely associated with the United States, but governed in accordance with, and exercising self-rule through, a popularly ratified constitution,” adding that Puerto Rico’s Constitution, significant though it is, does not break the chain.” Justice Ruth Bader Ginsburg went further in her concurrence, suggesting that the high court should hear a case that tests whether states and the federal government should remain able to try defendants for the same crime.

During oral argument last January, a majority of Justices appeared to side with the Obama administration, which argued that, as a territory of the United States, Puerto Rico cannot try the gun dealers after federal courts have acted, with Asst. Solicitor General Nicole Saharsky arguing: “Congress is the one who makes the rules.” The majority appeared to agree: Justice Kagan, writing for the majority, noted: “If you go back, the ultimate source of authority is Congress.” Nevertheless, in their dissent, Justices Stephen Breyer and Sonia Sotomayor stood by Puerto Rico — with Justice Breyer writing that if the court ruled against it, “that has enormous implications” for setting back the U.S. territory’s legal status: “Longstanding customs, actions and attitudes, both in Puerto Rico and on the mainland, uniformly favor Puerto Rico’s position — that it is sovereign, and has been since 1952, for purposes of the double jeopardy clause.” Justice Sotomayor, whose parents were born in Puerto Rico, said during oral argument that the island is an “estado libre asociado” Ironically the case was the first of two involving Puerto Rico to come before the high court this term. The Court is also re weighing the Commonwealth’s effort to restructure part of its $70 billion public debt, an issue addressed last evening by the House: a federal appeals court blocked the restructuring because of conflicts with U.S. bankruptcy laws.

Schooling for What If & Municipal Bankruptcy. With uncertainty whether the Michigan legislature would be able to pass and send legislation to him before the Detroit Public Schools exhausted all its cash—and before the legislature completed its session, Gov. Rick Snyder’s administration had commenced discussion with regard to drafting a chapter 9 municipal bankruptcy filing for DPS—in some apprehension of a wave of vendors’ and employees’ suits against DPS—the city’s public school system foundering in more than $515 million in outstanding operating debt: key staff worked with attorneys on a possible DPS chapter 9 bankruptcy, and Gov. Snyder had exchanged text messages with his former law school colleague and appointee as Detroit’s Emergency Manager, Kevyn Orr, who had, as we have catalogued, served as Emergency Manager in charge of both taking Detroit into municipal bankruptcy, and then piloting it through its successful emergence and approval of its plan of debt adjustment. Michigan State Treasurer Nick Khouri recently estimated the DPS would need $65 million for capital costs, including deferred maintenance and upgraded security equipment; $125 million for cash flow needs due to the timing of school aid payments and other startup expenses; and $10 million for academic programming. Now, in the wake of partisan action on which we reported yesterday, DPS will be able to make payroll, pay vendors, and purchase supplies this summer to prepare for school this fall. Logistically, the new school district will be created by July 1: retired U.S. Judge Steven Rhodes, DPS’s emergency manager appointed by Gov. Snyder and now serving as DPS’ transition manager, is working with state administrators to implement the new agreement.