The Hard Challenges of Fiscal Recovery

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eBlog, 7/05/16

In this morning’s eBlog, we focus—again—on the ongoing efforts to protect the health and safety of the citizens of Flint, Michigan, and the so far remarkable fiscal recovery of Detroit’s surrounding county of Wayne, which was itself on the brink of insolvency. We note that East Cleveland deferred a Council vote last night on whether to seek annexation with Cleveland.

In Like Flint. The Great Lakes Water Authority (GLWA) board yesterday voted to extend its emergency service agreement with the city of Flint for an additional year without an increase in charges through the term of the agreement. The GLWA was created in November of 2014 to provide water and waste water services to 126 municipalities in seven Southeastern Michigan counties, and which, commencing this year, assumed operational, infrastructure improvements, environmental compliance and budget-setting responsibilities for the regional water and sewage treatment plants, major water transmission mains and sewage interceptors, and related facilities, leases these facilities from the City of Detroit for an allocation of $50 million per year to fund capital improvements for the City of Detroit retail system and/or debt obligations. GLWA also funds a Water Residential Assistance Program to assist low-income residential customers throughout the system. The GLWA board includes one representative each from Oakland, Macomb, and Wayne counties, as well as two representatives from the City of Detroit, and one from the State of Michigan to represent customer communities outside the tri-county area. GLWA CEO Sue McCormick noted: “This tragedy continues to increase costs for a city that is experiencing a public health emergency, and we want to reassure residents the GLWA will not increase costs to them through the term of the city’s agreement with us. As a larger, established system, we have the ability to hold the line on charges for Flint in light of the public health situation they are facing.” (Flint’s water supply was switched from the Detroit water authority to the Flint River to cut costs in 2014 in anticipation of an eventual move to the Karegnondi Water Authority, when it starts taking water from Lake Huron. Just when Flint will start receiving water from Karegnondi is uncertain: it was expected to be by the end of this summer, but now Karegnondi is not expected to be operational until next summer; Flint’s connection to it will come sometime after that.

Batman. Wayne County, the most populous in Michigan, with nearly 2 million, where the county seat is Detroit, nearly followed Detroit into insolvency, but now, in the wake of cutting retiree health-care bills, public pension benefits, labor costs, it has earned higher ratings from credit rating agencies: Fitch Ratings last month raised it four levels to BB+—one step below investment grade, and Moody’s and S&P also raised their outlooks. The County now projects that by the end of this fiscal year, the government expects to have a surplus of $67.6 million, compared to a deficit of $146 million in FY2013—or, as County Executive Warren Evans put it: “We had to agree on the size of the problem before we could agree on how to fix it…We did a good job assessing our debt and making stakeholders aware of the situation.” A financial review from auditing firm Ernst & Young, coupled with research from a group put together during Mr. Evans’ transition into office, determined that among the major issues the county confronted were dealing with a $70-million deficit, and pension funding at 45%, down from 95% just a decade earlier. Nevertheless, the road to recovery is pock-marked with potholes: the county still has a junk-level grade from all three major rating companies. Moreover, it faces a shrinking population and an unemployment rate in May that was 5.7 percent, a full percentage point higher than the national rate. Wayne also confronts new costs as it plans to issue municipal debt to finance a jail (in Detroit)—in addition to the debt service it is already paying on some $200 million of municipal bonds issued six years ago for a new facility which was halted midway through construction because of cost overruns: some of that debt service is supported by a federal interest subsidy—a subsidy under review by the Internal Revenue Service. In addition, a judge has ordered improvements at Wayne’s existing jail after finding that Wayne County neglected maintenance. Nevertheless, compared to 2015, when Gov. Rick Snyder was contemplating the appointment of an Emergency Manager for the county, Mr. Evans’ recovery plan, a plan which included cutting future pension and health-care benefits for retirees and 5 percent across-the-board wage cuts (designed to save $230 million over four years), earned the county a consent agreement with the state that left it in charge of its own destiny, but it required officials to work together to turn around the county’s finances, eventually paving the way for Mr. Evans to reach agreements with 11 employee unions that cut its unfunded liabilities for retiree health-care benefits. S&P notes that today Wayne County still faces challenges including a “weak tax base,” but if the county keeps up its improvements, it may work its way back to investment grade. Or, as S&P credit analyst John Sauter put it: “They’re in much better shape, but the question is whether they can keep up and stay there.”

Annexation or Municipal Bankruptcy? The Mayor and Council of East Cleveland last night voted to table until the 19th a vote on proposed ordinance 04-16, an ordinance declaring the desire of the City Council of East Cleveland to enter into negotiations with the City of Cleveland for annexation by Cleveland (for corporate municipal purposes only). If adopted, the ordinance would trigger the appointment of three Commissioners to represent East Cleveland—as well as a letter from Mayor Norton to the Cleveland Foundation pledging his support and cooperation for a fiscal analysis and report by Conway Mackenzie, Inc. Interestingly, that would defer the vote to the middle of the RNC Convention in Cleveland.

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