Monitoring Municipal Fiscal Stress

eBlog, 11/17/16

Good Morning! In this a.m.’s eBlog, we consider the evolving state takeover of Atlantic City, with the appointment by the state of what Mayor Don Guardian deemed the “occupation force.” We consider the role of the state and mechanisms for a state takeover—as well as the options for the municipality. Then we look west to an innovative state-local tax collection sharing effort between the State of Michigan and City of Detroit—mayhap appropriate in the emerging sharing economy; then west where, in the wake of municipal elections in post-chapter 9 Stockton, the newly elected Mayor begins thinking about the city’s further post municipal bankruptcy fiscal future. Then we swing back southeast to the historic small city of Petersburg, Virginia—where a private team has been hired to try to pilot the city—and the region—out of near insolvency. Then we look north, to the land of the incomparable Don Boyd of the Rockefeller Institute, who yesterday was a host to a fascinating session with New York Assistant Comptroller Tracey Hitchen Boyd who discussed with us the Empire State’s “groundbreaking Fiscal Stress Monitoring System to identify local governments and school districts experiencing financial strain.” Finally, with winter beginning to bite, we seek warmth in the Caribbean, venturing back to Puerto Rico, where the Puerto Rico Oversight Board created under the new PROMESA law preps for its meeting tomorrow—a meeting that will come during transition periods of administrations both in the federal and Puerto Rican governments—adding still greater challenges to the U.S. territory’s transition.

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State Preemption of a Municipality? The twilight period during which Atlantic City has awaited its state takeover now appears to be over, or, as Mayor Don Guardian posed it, the “occupation force” of a “governor we don’t like” has been named. New Jersey has tasked Jeffrey Chiesa, a longtime ally and associate of Gov. Chris Christie—indeed, an associate the Governor once named to fill in as one of the state’s U.S. Senators in the wake of the death of former U.S. Sen. Frank Lautenberg, and who also served as New Jersey’s Attorney General, to serve as the “director’s designee” to execute the state takeover of Atlantic City, from which position he will report to New Jersey’s Department of Community Affairs, under the leadership of Tim Cunningham, the Director of New Jersey’s Local Finance Board. In this new capacity, Mr. Chiesa will have far-reaching powers, including the authority to unilaterally hire, fire, eliminate departments and authorities, sell assets, terminate union contracts, and veto any action by City Council, according to the state’s Municipal Stabilization and Recovery Act. In its release, the New Jersey Department of Community Affairs said Mr. Chiesa would use his authority “judiciously.”

In the statement, Mr. Chiesa said: “It is my hope to work together with firm conviction and not disrupt the democratic process…I am committed to improving essential government and community services for the people of the Atlantic City…“I will listen to the people and work hand in hand with local stakeholders to create solutions that will prevent waste and relieve generations of taxpayers from the burden of long-term debt. We will put Atlantic City back on a path to fiscal stability.”

With regard to governance, the Department said Atlantic City Mayor and City Council will “maintain day-to-day municipal functions.”  Mr. Chiesa’s role will be to oversee “fiscal recovery efforts, ” with the release from the Department noting his immediate steps would include entering into PILOT (payment in lieu of taxes) agreements with casinos, ensuring that debt service and county and school payments are made on time, in addition to exploring “right-sizing the City’s work force.” What and how Atlantic City’s elected government leaders will do—and what they may do could now be the outcome of the third branch of the state’s government: the courts, especially in the wake of Mayor Guardian’s making clear yesterday that the city was poised to go to court to block any actions by the state that it regards as civil rights violations. Early yesterday, Mayor Guardian said the city would go to court if the state takes actions “we see as unconstitutional.”

The road ahead promises to be steep: the state takeover comes with the Governor potentially leaving to join the new Trump Administration; Atlantic City has a roughly $100 million annual budget deficit and about $500 million in total debt. The city’s ratable base has declined from $20 billion in 2010 to $6 billion today as the casino town faced more competition in neighboring states: five of the city’s famed boardwalk casinos have closed since 2014—with significant implications for unemployment, per capita income, and assessed property values.

State Preemption. In the wake of last week’s state Local Finance Board vote to usurp major decision-making powers from Atlantic City’s elected leaders week, Local Government Services Director Timothy Cunningham noted: “The simple fact is Atlantic City cannot afford to function the way it has in the past…I look forward to meeting with Mayor Guardian and members of the City Council and starting the process of bringing this great city back to financial stability. It is my hope to work together with firm conviction and not disrupt the democratic process.”

As we have previously noted, the Board’s vote for the takeover came in the wake of the state Department of Community Affairs Commissioner Charles Richman rejecting the city’s fiscal-recovery plan last week—a plan which the Department criticized, because it failed to balance the city’s 2017 budget, ran a five-year shortfall of $106 million, and did not accurately estimate cost and revenue projections. In addition, the Department expressed concerns over the Bader (airport) Field sale, calling the water authority’s plan to issue $126 million in low-interest, long-term bonds to pay for the land “dubious at best.”

The Sharing Economy? The State of Michigan Tuesday committed to begin processing Detroit city business tax returns for the first time next January, enhancing a state-local partnership between the Motor City and the Michigan Department of Treasury that began last year with individual income tax returns and which will extend to business returns starting with the 2016 tax year. Under the new partnership, any business required to withhold city income taxes and any taxpayer who files under Detroit’s corporate partnership and fiduciary rules will be affected by the change: it will allow corporate filers to electronically submit their returns and use other online department services. In addition, partnership and fiduciary filers will submit their returns to the Treasury Department. As part of the reforms, the State’s handling of individual tax returns will allow filers to electronically submit both city and state returns. (Detroit residents pay a 2.4 percent individual income tax rate, while nonresidents pay a 1.2 percent rate. Detroit’s business income tax rate is 2 percent.)

Taking Stock in Stockton. In his first public comments since last week’s election, Mayor Anthony Silva this week said “the hate and the political battles” must end “if Stockton is truly going to heal and move forward.” Noting that: “Stockton is still a divided city,” the new Mayor said: “We have a new mayor, and he is now my mayor.” The outgoing Mayor spoke for five minutes at this week’s City Council meeting, the first such meeting since his lopsided loss last week to City Councilman Michael Tubbs. He graciously added: “I would expect anyone out there who claims to be my friend or one of my supporters not to participate in any sort of hate against the new mayor and to allow him the opportunity to lead.” (Mayor-elect Tubbs will take office January 1st.) Mayor Silva added: “I want you to pray and root for his success. Mayor-elect Tubbs, you have my support and you have my commitment for a smooth transition during the next month and a half. Congratulations.” The Mayor-elect did not refer to the outgoing Mayor’s comments during his own public remarks; rather he said Stockton has much to be grateful for as Thanksgiving approaches, referring especially to voters’ approval in the election of a one-quarter-cent sales and use tax to benefit Stockton’s library and recreation services: “Think of the gifts the voters gave us…That shows me that the residents in the city of Stockton are ready to get to work, that they want to be part of the solution. I think that bodes well for us at the end of this year as we move forward to next year.” (The Mayor-elect won his election by a 70-30 margin.) He added: “In Stockton, we love diversity. We don’t tolerate bigotry. If you’re LGBT, if you’re Muslim, if you’re undocumented, if you’re documented, if you’re immigrant, Stockton is your home, we love you, you’re part of our community.” Outgoing Mayor Silva noted that he had sent a text message to Councilmember Tubbs immediately after the election, and added that the two had “a great meeting” post-election meeting—a meeting he noted which “was important…because four years ago I never got a text message or a phone call or an email from my opponent (then-Mayor Ann Johnston), and then when I reached out to her I still never got one.” He added: “I would never wish this same action upon anyone, and Mayor-elect Tubbs and the new City Council do not deserve this type of hate, either.”

Addressing Municipal Dysfunction. Robert Bobb, the former Richmond, Virginia city manager whose consulting team has been hired on for hundreds of thousands of dollars by the nearly insolvent small, but historic city of Petersburg, Virginia told the City Council this week “There’s a lot of work to do, a lot of clean-up to do. We’re at it every day…There are a lot of dedicated people here who are working hard to help us.” Nevertheless, the challenge is significant: Mr. Bobb estimated the city has just $78,000 in cash in the wake of a debt payment due; yet it confronts critical payments to select vendors; a mandatory $427,000 payment to the school system; and tomorrow’s payroll—and that is after an unexpected fiscal gift: some $1.3 million that the team was able to scrounge up working with the administration of Virginia Gov. Terry McAuliffe and the Virginia Resources Authority from unused municipal bonds dating back to 2013. The challenge is made greater, moreover, in a city where nearly half the city’s children are estimated to live below the federal poverty line, according to U.S. Census data. Mr. Bobb also warned the Council that he remains unable to ascertain how much of the $18 million backlog in past-due bills the city owes that Virginia state officials identified over the summer has been resolved. About $10 million in accounts payable bills remain outstanding; however, there are many other categories of expenses. Moreover, as Nelsie Birch, Petersburg’s deputy interim City Manager and acting Finance Director noted: “That’s only for bills we’ve received,” adding that as of earlier this week there was more than $1 million in the city’s checking account, but “it’s more than spoken for,” noting that payroll costs about $1 million every two weeks. Unsurprisingly, the Council voted unanimously to allow the city manager to make the moves necessary to secure the funding. In addition, the Council authorized acting City Manager to move forward and secure $6.5 million in short-term financing to help Petersburg remain operating through the end of the year, with part of those funds to go toward a lump-sum payment of $1.2 million due by mid-December to help settle a lawsuit filed against the city by the regional South Central Wastewater Authority—where the municipality has been delinquent since last May, threatening the budgets of the other municipalities in its region. Petersburg has agreed to address its outstanding balance within two years, according to the statement, albeit how it will do so is something which remains to be resolved.

Good Gnus, Bad Gnus. Mr. Bobb advised the Council that his team’s fiscal analysis had, to date, discovered both good and bad news: in the latter category, among the most disappointing findings, they determined that a $92,000 cut made this year to the city’s Department of Social Services had triggered a loss of $600,000 in state funds needed to help Petersburg’s most vulnerable residents—especially its children. On the good gnus side, he told them that the dismissal of the South Central region’s lawsuit would clear the path for the city to move forward with short-term solutions that would offer his group the time and space to implement long-term plans to move the city back towards solvency, noting that the city, for the first time since the beginning of the fiscal year, had posted its current fiscal year budget online. However, he also reported that it was not just the city’s taxpayers who had been left in the fiscal dark in recent months: the municipality’s department heads had been operating without spending plans revised to address the $12 million in cuts made by the City Council last September to balance the budget for the first time in nearly a decade. The report, however, also advised Councilmembers that the City Council had voted to approve road projects Petersburg could not afford and that the city’s decentralized system of paying for goods and services was such that finance workers hoping to avoid further overspending could not see what resources had been committed until the office received an invoice. That meant, the team reported to the elected leaders, Petersburg will need to defer some past priorities, including postponing some utility upgrades such as water tank upgrades and overhauling sewage main and lines; museum and golf course upgrades; replacing City Hall; and planned work on other city facilities.

Early Fiscal Storm Warnings. New York Assistant Comptroller Tracey Hitchen Boyd this week, in a communication to New York local elected leaders, wrote that since the state, three years ago, had implemented a “groundbreaking Fiscal Stress Monitoring System to identify local governments and school districts experiencing financial strain,” the state had received suggestions from local leaders on ways to enhance that system, so that the state has opened a comment period to enhance the state’s ability to provide an early fiscal warning to local leaders in order to provide an opportunity to take corrective actions. The program, now in its fourth year, aims to provide an early warning of fiscal problems to local officials and citizens so that corrective actions can be taken before a true financial crisis occurs. The state is completing its fourth year of such reviews, evaluating every city, county, town, village, and school district based on a series of standard financial indicators. Each entity is scored annually to determine if, according to the measures, it falls within one of three levels of fiscal stress. The System also evaluates the general environmental factors affecting municipalities, or, as Ms. Boyd wrote: “We are completing our fourth year of FSMS reviews, evaluating every city, county, town, village, and school district based on a series of standard financial indicators. Each entity is scored annually to determine if, according to the measures, they are in one of three levels of fiscal stress. The System also evaluates the general environmental factors affecting municipalities.”

Federal Preemption. The Puerto Rico Oversight Board has scheduled its first session in Puerto Rico for tomorrow, with the meeting set outside of Fajardo, Puerto Rico. While the session will be by invitation only, it is scheduled to be streamed online at www.oversightboard.pr.gov, and to be followed by a press conference. It follows two earlier meetings convened in New York City. At this week’s session, the agenda includes a presentation by Conway MacKenzie Inc. on the government’s liquidity; a presentation by the Puerto Rico Aqueduct and Sewer Authority; public testimony on Puerto Rico’s proposed fiscal plan; and the creation of procedures to approve transactions of the board’s “covered entities.” The session comes as the U.S. territory confronts a $3 billion cash shortfall in its current fiscal year—having disclosed that sum yesterday as part of its report it will be presenting to the PROMESA Board tomorrow—with that tidy sum coming due next February—assuming that would be the proximate date of the lifting of the current debt payment moratorium, but also optimistically assumes Puerto Rico will not have reached agreements with its creditors by that date: the tidy sum, after all, represents nearly 33% of Puerto Rico’s current approved fiscal year budget. Moreover, the island faces some $2.2 billion in municipal bond debt service between then and the end of its fiscal year—not to mention some nearly $850 million in unpaid municipal debt service. The territory’s government has sought to address its growing financial crisis via any number of avenues, including the deferral of payments to suppliers and the deferral of tax payments; however, it is running out of fiscal options.

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