Recovery Governing

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eBlog, 7/20/16

In this morning’s eBlog, we consider the ongoing recovery from the nation’s largest ever municipal bankruptcy in Detroit, where the city is demonstrating remarkable success in its effort to downsize: it has just completed its 10,000th demolition!  Then we review steps Mayor Duggan is proposing to adjust public safety pensions—the hard balancing between municipal resources versus benefits key to filling critical public safety slots even as it is struggling to address a pension shortfall.  Then we look south to the extraordinary governance challenge posed by the new PROMESA law: how will an unpaid oversight board working in  a U.S. territory  with its own Governor and legislature—where Spanish is the main language—and where the board members are unpaid—be able to succeed?

Downsizing to Rightsizing. Detroit Mayor Mike Duggan described the 10,000th demolition yesterday of an abandoned house in Detroit as a “remarkable accomplishment,” adding, however: “We’ve still got 30,000 to go: Every time one of these houses goes down, we raise the quality of life for everybody else in the neighborhood…And you look here, the beautiful houses of the families across the street. These are folks who stayed in the city, paid their taxes, kept their houses up and had to watch the blight spread. We’re finally starting to fight it effectively.” While it would seem strange for a municipal leader to celebrate the razing of homes, in Detroit we are discussing a city in which between 1972 and 2007, the city experienced an overall loss of 15,648 business establishments; the bankruptcies of General Motors and Chrysler: jobs left Detroit as auto plants moved to the suburbs and to other countries with globalization. Manufacturing jobs in the city fell to fewer than 27,000 in 2011 from about 296,000 in 1950. By the time the city filed for the largest municipal bankruptcy in U.S. history, the city’s density had declined to eight people per acre, down from 21 per acre in 1950. Thus it was that yesterday, Mayor Duggan marked a milestone in Detroit’s effort to rid itself of blight. City officials said the city is on target to tear down 5,000 blighted houses this year and 6,000 next year.

The razing is not, however, 100 percent smooth: the federal Office of Special Investigator General for the Troubled Asset Relief Program, which monitors the Hardest Hit Fund, is investigating the blight program with assistance from the FBI—an investigation for which Mayor Duggan has promised full cooperation: it appears that the investigation was triggered by last year’s near doubling of the average demolition price to $16,400 from $8,500-$10,000 under former Mayor Dave Bing. Mayor Duggan noted yesterday that the average cost for the 5,000 homes the city will tear down this year will be under $13,000, noting: “It took us a while to really get the hang of this, and I won’t tell you we’re perfect: But we’re moving much more efficiently than anybody else in the country, and for the folks on this block, I don’t think it could come too soon.” The Mayor said the rapid pace of blight removal has done more than improve quality of life in neighborhoods: he noted that structure fires have dropped by 25% in the city over the past two years, and a 2015 report found that in neighborhoods where abandoned homes have been removed, property values have risen citywide by more than $209 million.

Pensionary Recovery? Detroit Mayor Mike Duggan has announced plans to boost public safety pension contributions at the cost of hiring fewer firefighters: the move comes in the wake of the city’s difficulty in filling 100 fire department vacant slots: the city has only been able to fill 60; however, those empty spots have, in turn, freed up resources to help pay finance higher municipal contributions for public safety pensions. The new agreement provides for a 6% wage increase which will be directed to the firefighters’ legacy pensions pending the resolution of some technical issues: under the plan, firefighters licensed as medical first responders will also receive a 4% pay raise effective immediately—a raise in addition to 2.5% raises previously negotiated for 2016, 2017, and 2018, with Mayor Duggan noting: “This is the city and union coming together to help ensure our emergency personnel won’t face another pension shortfall.” Because under Detroit’s approved plan of debt adjustment to exit municipal bankruptcy, the pension changes still must be submitted to and approved by the Financial Review Commission, which must approve any collective bargaining agreements after determining that the city can fund the contracts without running a deficit. Detroit Finance Director John Naglick noted: “The DFD wage package still requires a number of approvals, but if put in place, the wage increases are budgeted as part of wages and benefits in the general fund: The number of filled fire fighter operations positions is below the budgeted amount and will fund these increases.” He also noted that Detroit has already begun to set aside additional funding for the legacy plans and has hired Cheiron as its actuarial consultant to help it develop a formal long-term funding plan: “The legacy plans were frozen as a result of the bankruptcy, and the vast majority of the participants are already in pay status…For that reason, we believe this will be a manageable issue that will not affect the city’s recovery.”

Actually, the pension contribution will matter: Detroit confronts nearly a $500 million pension shortfall that it must begin paying in 2024. Nevertheless, Moody’s was unmoody in upgrading the city’s credit rating to stable from positive, citing the strain of meeting the increase in pension costs related to the legacy plans which limits the prospects for upward rating movement at this time. Mayor Duggan had warned earlier this year, as we had noted, that consultants who advised the city through its municipal bankruptcy had miscalculated the pension deficit by the tidy sum of $490 million. Detroit’s plan of debt adjustment submitted to the U.S. Bankruptcy Judge Steven Rhodes, had proposed freezing Detroit’s legacy pension plans: the plan provided an initial funding infusion from the so-called “grand bargain” funded with help from the state and private entities. Under the plan, the city deferred contributions until payments resume in 2024. Now Mr. Naglick notes the size of the city’s looming payment is unclear, because the value of plan assets will change; however, the additional 6% contribution, which is based on firefighter payroll, will help ease the unfunded liabilities. (When Detroit came out of chapter 9 municipal bankruptcy in December of 2014, actuarial estimates in the city’s Plan of Adjustment projected a payment of $111 million in 2024. Last November, the system’s actuary raised the figure to $194.4 million.) Last month, the Detroit City Council approved the set aside of $30 million from a city budget surplus in order to enable it to address a potential public pension shortfall.

Guiding Puerto Rico’s Fiscal Future. Congressional leaders have named eight members who will serve on a legislative task force with the task of considering options to boost Puerto Rico’s economy: the Congressional Task Force on Economic Growth for Puerto Rico. The board will have the power to require balanced budgets and fiscal plans, as well as to file debt restructuring petitions on behalf of the commonwealth and its entities in a federal district court as a last resort, if voluntary negotiations fail. The task force, created as part of the new PROMESA law, as well as a separate seven-member oversight board, is divided evenly between House and Senate members, as well as Republicans and Democrats: the Senators who will serve on the task force: Sens. Orrin Hatch (R-Utah), Marco Rubio (R-Fla.), Robert Menendez (D-N.J.), and Bob Nelson (D-Fla.); House Members are: Puerto Rico Resident Commissioner Pedro Pierluisi, Reps. Nydia Velazquez (D-N.Y.), Tom MacArthur (R-N.J.), and Sean Duffy (R-Wis.). Senate Majority Leader Mitch McConnell (R-Ky.) said he was confident that Sens. Rubio and Hatch, whom he was responsible for naming to the task force, would “use their commonsense approach and deep policy backgrounds to help Puerto Rico and its citizens achieve long-term prosperity with a thriving economy.” House Speaker Paul Ryan (R-Wisc.) named the two Republicans, while House Minority Leader Nancy Pelosi (D-Ca.) named the two Democrats from the House. Speaker Ryan is also required to choose one of the eight task force members to serve as chair, but noted that Reps. Duffy and MacArthur are the leaders we need to make the right recommendations so Puerto Rico can create jobs and reboot its economy.”

The task force will be responsible for examining current federal law and programs as they relate to Puerto Rico to find if there are any current impediments they could impose on economic growth or healthcare coverage for the territory; the task force will also be responsible to explore possible improvements which could enhance job creation, reduce child poverty, and attract investment. Under the provisions, the task force is required to provide a status update on its work during the first fortnight of September—and a final report by the end of the year. The task force, however, is quite different than the heavy lifting to be imposed on the still unnamed PROMESA board created under the new law to oversee resolving Puerto Rico’s recovery from its virtual municipal bankruptcy—a quasi-volunteer, unpaid board which will confront far more intractable problems than previous oversight boards such as in New York City and Washington, D.C.—boards on which members were required to either live or work in the city. In stark contrast, under PROMESA, only one member must either live or work in Puerto Rico. Not only might there be a cultural and language challenge, but also a quasi-sovereign challenge: Puerto Rico is, after all, something between a municipality and a state: the U.S. territory will be represented by its Governor and legislature—both of which are, theoretically, directed to work with the as yet unnamed board. The new law will allow board members to be reimbursed for their expenses; it provides there will be paid staff members. For its part, Puerto Rico is also concerned with the PROMESA board. Governor Garcia Padilla’s Chief of Staff Grace Santana notes: “[T]he law will only achieve its stated goals if the members of the soon-to-be established Oversight Board are truly committed to the Commonwealth and its people.”

There will also be other questions based on previous federal takeovers: Would Congress, as it did in the case of D.C., assume responsibility to fund Puerto Rico’s underfunded employee pensions? Will Congress agree to increase the federal rate for Medicaid reimbursements? Will it agree to take over Puerto Rico’s courts and prisons?

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