Might there Be a Federal Role in Causing Severe Municipal Fiscal Distress?

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eBlog, 8/23/16

In this morning’s eBlog, we revisit Ferguson, Missouri—a small municipality in St. Louis County struggling to recover from racial violence and an expensive U.S. Justice Department imposition of subsequent unfunded fiscal mandates. Yesterday, a federal judge found the city’s school board election system biased against black voters. The judge’s findings and a Moody’s downgrade combine to raise questions with regard to the municipality’s solvency: has the U.S. Justice Department unintentionally made the small city a candidate for municipal bankruptcy? It brings back to mind, in addition, an old question: are there too many municipalities in St. Louis County? Can we afford so many? Could a municipality dissolve itself? Then we turn to archipelago of the U.S. Virgin Islands—seemingly a hop, skip, and a jump from Puerto Rico, where the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities put still another U.S. territory at risk of insolvency.

Public Schools & Arithmetic. U.S. District Judge Rodney Sippel yesterday, writing that “The ongoing effects of racial discrimination that have long plagued the region, and the District in particular, have affected the ability of African-Americans to participate equally in the political process,” ruled that Ferguson, Missouri’s school board elections are biased against black voters. The suit, filed by the American Civil Liberties Union, claimed that the Ferguson-Florissant School District makes it unlawfully difficult for black candidates to win positions on the school board. Voters in the district elect school board members at large, rather than on a ward or sub-district basis, a process, Judge Sippel wrote, which has reduced black representation. Currently, three out of seven board members are black, a ratio that reflects the demographics of the city, the school district has argued. Black students make up four-fifths of the 13,200-student population. During the trial, a demographer demonstrated that Ferguson’s black population is concentrated and politically unified enough to affect results if the FFSD were divided into voting districts: black voters would constitute a majority in four out of seven of those theoretical districts. U.S. District Judge Rodney W. Sippel said that while he does not see evidence of intentional discrimination, there is a more subtle “complex interaction” of political processes that deter black voters from electing the candidates of their choice, writing: “Rather, it is my finding that the cumulative effects of historical discrimination, current political practices, and the socioeconomic conditions present in the District impact the ability of African-Americans in (the school system) to participate equally in Board elections.” The Ferguson-Florissant district serves about 11,200 students in parts of 11 municipalities. About 80 percent of those students are black, and 12 percent are white. District residents are nearly evenly split between black and white. (The ACLU filed the lawsuit on behalf of the Missouri National Association of the Advancement of Colored People in the wake of protests over the shooting.) The court decision comes in the wake of Moody’s placing the city’s already junk-level rating on review for downgrade because of threats to the city’s solvency—with the downgrade of the city’s general obligation rating reflecting “the continued pressure on the city’s finances from a persistent structural imbalance and incorporating the recently approved U.S. Department of Justice (DOJ) consent decree, projected to increase annual General Fund expenses over the next several years. The downgrade also took into consideration the outcome of an April 5 ballot election, in which voters rejected a proposed property tax hike (but approved a sales tax for economic development). Both ballot measures were integral to city management’s proposed solution to close a large General Fund budget gap that existed before accounting for the additional consent decree costs. Moody’s had acted after the U.S. Justice Department filed a lawsuit in February, marking the latest setback in Ferguson’s struggle to recover from a controversial police shooting in 2014. The Justice Department accused Ferguson of policing and municipal court practices that violate constitutional and federal civil rights. The credit rating company had noted that its rating concerns had been driven by the uncertainty of the potential financial impact of litigation costs from the lawsuit and the price tag for implementing the proposed DOJ consent decree: “We believe fiscal ramifications from these items will be significant and could result in insolvency.”

Is there Promise from PROMESA? Fitch ratings has reduced the U.S. Virgin Islands’ bond ratings to junk level, citing the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities. Fitch noted that the enactment of the PROMESA legislation for neighboring Puerto Rico could open the door for a comparable restructuring of the Virgin Island’s debt. The territory, where the author trained for his Peace Corps service in Liberia, West Africa, is comprised of a number of islands in the Caribbean not far from Puerto Rico. The islands cover just under 134 square miles and boast a population of just over 100,000. Tourism is the primary economic activity, with the manufacture of rum a significant sector. The islands are classified as a non-self-governing territory—one which since 1954 has held five constitutional conventions—with its most recent, its fifth, adopting in 2009 a proposed Constitution—one rejected by Congress the following year, with Congress urging the convention to reconvene to address the concerns Congress and the Obama Administration had with the proposed document. The convention subsequently reconvened in October of 2012, but was not able to produce a revised Constitution before its October 31 deadline. In its ratings, Fitch downgraded the Virgin Island’s gross receipts tax bonds, affecting $722 million in debt; Fitch also downgraded the territory’s senior lien matching fund revenue bonds to BB from BBB and subordinate lien matching fund revenue bonds to BB from BBB-minus. In amounts of debt, the former affected $773 million and the latter affected $428 million. Fitch also downgraded the Virgin Islands’ issuer default rating to B-plus from BB-minus. In its release, Fitch noted that the Virgin Islands plans to sell $217 million in gross receipts taxes bonds, $126 million in senior lien matching fund bonds, and $69 million in subordinate lien matching fund bonds near the end of next month—noting that the U.S. territory has a “severely unbalanced operating budget” and multiple years of borrowing to fund operating needs—and is expected to feature ongoing budget imbalances: its debt burden has increased, and its unfunded public pension liability has increased at a faster pace.

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