The Many & Daunting Challenges of Municipal Bankruptcy

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eBlog, 12/30/16

Good Morning! In this a.m.’s eBlog, we consider the retirement of an exceptional public leader, retired U.S. Bankruptcy Judge Steven Rhodes, who presided over Detroit’s largest in U.S, history chapter 9 municipal bankruptcy and then went on to accept the unforgiving position of emergency manager for the Detroit Public Schools—a key role in the ongoing challenges to recovery from the nation’s largest ever municipal bankruptcy. Then we head into the gale of the Northeaster to New Jersey’s Atlantic City—as the state slowly begins to unroll the mechanics of its takeover of the fiscally insolvent municipality, before finally heading to the warmer West Coast, where San Bernardino leaders are preparing for the restoration of municipal authority and coming back from the nation’s longest-ever chapter 9 municipal bankruptcy.

Retirement after Extraordinary Work.  Electronic rhythm guitar player and retired U.S. bankruptcy judge Steven Rhodes, to whom Michigan Gov. Rick Snyder presented the challenge of becoming emergency manager, an offer he accepted, came out of retirement, and became the school district’s fifth emergency manager—with the official title “transition manager”—on March 1 for a salary of $18,750 a month. Now, nearly 10 months later, a Detroit district plagued by about $515 million in operating debt has been replaced with a new, debt-free Detroit district, courtesy of a $617 million bailout for which Judge Rhodes had lobbied the Republican-led Legislature. But the legacy of Judge Rhodes, who is set to depart tomorrow, remains to be fully appreciated. Judge Rhodes, who presided over Detroit’s chapter 9 municipal bankruptcy before leaving to accept the Governor’s appointment to serve as the emergency manager for the Detroit Public Schools system—a position in which he served for about 10 months to be in charge of the state’s largest school district during one of its most tumultuous periods—and during which, last June, the state created, in effect, a dual system of charter and public schools. At the inception of this harrowing task, he inherited a school system collapsing from a string of teacher sick-outs that closed dozens of schools, sparked a lawsuit, and from a system of unsafe public buildings. As we have previously posted, the legislature and Governor had enacted a $617-million financial rescue package which created the new district to replace the old Detroit Public Schools—even as it created a separate system of charter schools—and put Judge Rhodes in charge of overseeing the complex task of overseeing the new, 45,000 student district. He leaves, unsurprisingly, with a system in fiscally and physically significantly improved condition—helping, in his final chapter of public service, to help bring in additional fiscal resources via the sale of more than a dozen small, unused parcels of land for $3 million to Olympia Development, the developer of the new Little Caesars Arena in Detroit, and future home to the Red Wings and Pistons. In addition, the school district agreed to sell its license for the radio station at the Detroit School of Arts to Detroit Public Television in an agreement valued at $9 million, pending regulatory approval. (Detroit Public TV already pays the district for being able to operate the station, WRCJ-FM (90.9). Under the agreement, the station will stay in the district. (Students will have enhanced opportunities to learn about broadcasting as a result of the deal, according to DPS officials.) As part of the transition, Judge Rhodes has transferred authority to a seven-member elected public school board which will take office in January, making it the first school board with any significant decision-making power since 2009, when a series of state-appointed emergency managers began controlling the district.

In an interview with the Detroit Free Press, Judge Rhodes said that at the “very highest level, the most challenging part of the job for me was the politics of it. Because, as a judge, I was never involved in politics. We had a fixed process. We engaged that process, the process concluded with a result, and we moved on. But here, there are political considerations to everything, and I was not prepared for that.” In response to a follow-up question with regard to the greatest challenges of his emergency position, Judge Rhodes responded: “What surprised and disappointed me the most was the level of antagonism between Detroit on one side and the rest of the state and Lansing on the other side. Each side has predisposed views of the other side that are not based on fact, and that are not only unproductive, but counterproductive, and are not in the best interest of the children in the city. Both sides need to find very specific ways and methods to break through that, and they need to do it very soon.”

Now, he notes, the newly elected school board will have to take “very specific actions to reach out to decision- and policy-makers in Lansing to work with them on achieving Detroit’s goals, to educate them on where DPSCD is, the progress it has made, and how it’s going to make progress in the future. And it has to do that outreach in a spirit of collaboration, cooperation, and reaching out for help, and with the assumption that people in Lansing want to help, not with the assumption that they are anti-Detroit.” He added that the school board will also have to do something few other school boards in the U.S. must: it will have to carve out a constructive relationship with the Detroit Financial Review Commission (FRC): “I hope and expect that the board’s relationship will simply continue the relationship that I and the staff here have already established, which is a cooperative, collaborative working relationship that recognizes our autonomy, (and) at the same time recognizes the value that the FRC brings to enhancing the credibility of DPSCD…We have an example, a concrete example, of how the work of the FRC benefited DPSCD financially. It was the adviser that the FRC retained that helped us to identify a health insurance provider that was more comprehensive and less money.

Arithmetic. As to the new system’s fiscal viability, Judge Rhodes noted: “It’s better than where I hoped it would be. My goal was to have a balanced budget for this year, meaning revenues equaling expenditures. It turned out, through the hard work of the staff, and selling certain assets that we were not using and would never use, we actually will have a surplus this year, which we will use to create a much-needed fund balance…It’s not as much of a fund balance as we need, but it’s a really good start, and not one that I would have predicted or foreseen when we were putting our budget together last spring. (The school district has a $48.2-million projected fund balance, or reserve fund. It’s roughly $650-million, the FY2017 budget is balanced.) With regard to the system’s fiscal stability going forward, Judge Rhodes noted: “I’m confident that we are in a position to maintain a balanced budget going forward. I think there are also opportunities to increase the fund balance, which is something we should be doing. There are aspects of school finance, however, that do concern me. In order to achieve academic success, which is our goal, as it is every school district’s, funding provided by the Legislature has to recognize two fundamental distinctions between Detroit and other school districts. No. 1 is that 60 percent of our students live in poverty, which means it’s more challenging to educate them, and therefore more expensive to educate them. And you can attribute those expenses to enhanced reading services, enhanced wraparound services, and enhanced truancy and attendance services.

He noted a second, distinguishing factor and challenge: “A second factor (is) our special needs and special education children. We have a higher percentage than other districts. They are of course more expensive to educate, and in some cases, significantly more expensive to educate. And I don’t want to give the impression that we don’t want those students. We do, we absolutely do. They are as entitled to an education as any other child. But the reality is they are more expensive to educate. While some of that difference is made up by federal grants, it’s not all of it. And so, that puts an extra strain on the budget….School funding is based now, generally speaking, on the concept that equality is equity. We give the same amount for every child in the state. The problem is equality is not equity, or I should say is not always equity. In this case, it’s not.”

The State of the City. As the State of New Jersey takeover of Atlantic City continues to unroll, it appears one of the final actions of 2016 will be a state imposed mandate to the city for an across-the-board pay cut, a 15-step salary guide with pay capped at $90,000, increased health-care contributions from employees, and the imposition of 12-hour work shifts for police officers.  The orders by Mr. Chiesa, the quasi-ruler of the city, appear to be the beginning of what will be a more comprehensive effort on how part to address the city’s $500 million of debt–with Mr. Chiesa indicating he now intends to meet with all of the groups involved. In an email to members obtained by the Press of Atlantic City, union President Matt Rogers recapped a meeting the union delegation had the day before yesterday with representatives from the state who are in command of Atlantic City as part of the state takeover. Among the state’s emerging demands are an across-the-board pay cut, a 15-step salary guide with pay capped at $90,000, increased health-care contributions from union members, and tasking officers to work 12-hour shifts. It seems that some of the state’s demands were similar to a new contract the city and union had already agreed upon; however, the state had refused to approve. It appears the state will insist upon the layoff of an additional to 250 members. The actions mark some of the first under the reign of former New Jersey Attorney General Jeffrey Chiesa as he has insisted upon meeting with all of the groups involved in the city’s budget and vital operations prior to focusing on addressing the city’s $500 million of debt.

Prepping to Exit Chapter 9. As San Bernardino prepares to exit municipal bankruptcy—the nation’s longest ever—next month, City Manager Mark Scott reports he will be meeting with Mayor Carey Davis and the City Council, as well as his key managers to put together an action-focused work plan, noting: U.S. Bankruptcy Judge Meredith Jury will put out a “written ruling on January 27, and then there will be several months of paperwork before we officially exit bankruptcy.” Ergo, his goal is to be ready by that date in the wake of approval of its plan of debt adjustment under which the beleaguered city eliminated some $350 million in one-time and ongoing expenditures—a goal immeasurably helped by city voter approval last November of a new charter—albeit a charter which still awaits approval by California Secretary of State Alex Padilla, paving the way for the city to transition from a strong mayor council-manager form of governance—and one without an elected city attorney—which the manager described as one which led to multiple agendas and infighting which had contributed to pushing “the city into bankruptcy. No one was working together.” Under the newly adopted charter, the mayor will have a tiebreaker vote except when it comes to appointing or removing the city attorney, city manager, or city clerk positions, at which point, the mayor would have one vote. Indeed, as part of his agreement to work for the city, Mr. Scott informed the city’s elected officials he was unwilling to stay at San Bernardino long-term absent adoption of a new charter, noting: “I was not interested in working in such a confusing form of government for long…I wanted to help, but it was contingent on the charter being able to pass. The pre-existing form of governance was unrecognizable to anyone who studied government.”

If it can be deemed easy to slide into municipal bankruptcy, getting out and long-term recovery is a challenge—one which will require innovative policies to attract new economic growth via zoning and land use policies that attract investment in key locations—a challenge made more difficult in the city’s case not only because of its bankruptcy, but also because of last year’s terrorism incident—one which could hardly be expected to serve as an incentive for new families or businesses. Another critical hurdle is the city’s 34% poverty rate–the highest of any large city in the state, along with the worst homicide rate per capita in the state. Thus, unsurprisingly, Mr. Scott notes that San Bernardino will be fiscally solvent before it is service level solvent: he has predicted the city’s police service levels will be where they should be in a few years; however, it will probably take a decade for parks and recreation to reach pre-bankruptcy levels; moreover, the city is in no position to issue new capital debt, because it lacks the requisite fiscal resources to pay bondholders.  

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The Challenges of Fiscal Disparities

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eBlog, 12/29/16

Good Morning! In this a.m.’s eBlog, we consider Detroit’s ongoing challenges to recovery from the nation’s largest ever municipal bankruptcy—a city unbailed out by the federal government, but which, as we noted earlier this week, Detroit News editorial writer Daniel Howes described as “perceptively changing,” especially as we write this rainy morning with regard to its thousands of abandoned homes and buildings. Then we turn to Virginia’s Petersburg, the historic city which danced on the edge of municipal bankruptcy—threatening the solvency of regional public utilities—as it faces challenges to its future. Finally, we look at the newly released census figures to better grasp the scope of fiscal disparities in the State of Ohio—especially with regard to the fiscally depleted municipality of East Cleveland.

Unbuilding & Rebuilding a City’s Future. In the final week of the year, Detroit neared the razing of an industrial building which once covered an entire city block—marking the razing of some 3,130 structures razed this year, bringing the total razed since the city emerged from chapter 9 bankruptcy to around 10,700 over the last three years—with the vast bulk of those owned by Detroit’s Land Bank Authority. Nevertheless, giving some idea of the vast scope of the city’s challenge, its blight task force in 2014 had projected that the city would need to tear down 40,000—and that some 38,000 others were at risk of collapse. Indeed, still today, many blocks in the city have more abandoned houses and empty lots than lived-in homes, a scar reminding us of the exodus of whites and much of the black middle class from the city: an exodus of more than half the city’s population since the 1950’s. In 1950, there were 1,849,568 people in Detroit, but, by 2010, there were 713,777. The city today is home to an estimated 40,000 abandoned lots and structures. Between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base. Thus, as Detroit Mayor Mike Duggan has stated, he believes the mass demolitions are necessary for Detroit if it is to attract families to city neighborhoods and staunch the decades of population loss.

Detroit Fire Investigations Division Capt. Winston Farrow adds that the removal of dangerous buildings and empty houses is vital to public safety and the quality of life in Detroit: “It eliminates the opportunities for criminals to set fires in vacant houses…The problem was more just the sheer numbers of dwellings that we had.” In another sign that the strategy is working, the average sale prices of over 100 houses sold in Detroit has increased over the past three years, according to the Land Bank.

Nevertheless, the challenge to the city’s future remains: the Detroit News quoted the owner of 3D Wrecking, Sheila Davenport: “You can tear down a house on one block and go back several months later and where houses were occupied (they) are now abandoned and need to be demolished…It just seems like it never ends.” And, of course, it is a costly process; on average, the city expends $12,616 to knock down a house—a process made fiscally easier through the receipt of more than $128 million in federal funds over the past three years—with another $130 million in the pipeline—along with $40 million from the city’s general fund set aside for further demolitions. (Federal funding had been temporarily halted earlier this year, but resumed after an audit determined demolition costs above a federal cap of $25,000 per house were redistributed to 350 other properties to have those houses appear to meet the cap.)

Syncopating Time. Notwithstanding the cold rain falling in Petersburg this morning, work has finally commenced to restore one of the city’s highest-profile landmarks after months of delay caused by the city’s budget crisis—with the construction to repair a nearly 180-year-old clock tower and roof, a $1.2 million project financed by the Virginia Resource Authority—financed, according to a city spokesperson who stated the VRA municipal bond was “approved prior to the financial crisis.” The work—to properly coordinate the clocks on the clock tower, had been deferred last year when the city discovered its fiscal cupboards were bare—even as city officials had been ordered to close the building two years because of structural problems with the historic edifice—during which time Circuit Court jury trials were temporarily moved to the Dinwiddie County Circuit Courthouse. But it is now in a different courthouse where the U.S. Fourth Circuit Court of Appeals is weighing a lawsuit over a Petersburg Bureau of Police policy concerning social media which could result in a finding that would cost the fiscally challenged municipality millions of dollars after a federal court ruled that a lower court must decide whether the city government can be held liable for damages in the case. In its ruling, the court determined that the police department’s social media policy, put in place in 2013, violated employees’ First Amendment free speech rights. Moreover, the federal judges ordered the case be sent back to U.S. District Court in Richmond to determine whether “the city may also be held liable for the injuries that were caused by the applications of that policy.” The case arose two years ago last March, when two former Petersburg police officers claimed they were unjustly punished for posting comments on Facebook which criticized the department for promoting officers they considered too inexperienced. Their comments were reported to former Police Chief John I. Dixon III. The two officers were found to have violated a policy that Chief Dixon had instituted in April of 2013—a policy which prohibited department employees from giving out information “that would tend to discredit or reflect unfavorably upon the [department] or any other City of Petersburg department or its employees,” according to the appeals court opinion. The two officers were reprimanded and placed on probation—ergo, because they were on probation, they were barred from taking a test to qualify for promotion to sergeant. In addition, the officers had also been investigated over allegations of misconduct, which they claimed were filed in retaliation after the police department learned of their intent to file suit. The appeals court, however, has upheld the district court’s ruling that those investigations were not retaliatory, because “each arose from discrete allegations of misconduct” not related to the Facebook postings or the social media policy. For a municipality on the edge of chapter 9, the stakes on this appeal are high: the two officers are seeking compensatory damages of $2 million, plus punitive damages amounting to $350,000, plus attorney fees.

Ohio Fiscal Disparities. It was a generation ago that Congress eliminated the General Revenue Sharing program signed into law by former President Richard Nixon to address signal fiscal disparities. Today, it is possible to see how significant those disparities are becoming. According to the latest estimates available from the U.S. Census Bureau, median family incomes in Ohio cities range from $221,148 in the Columbus suburb of New Albany to $30,411 in East Cleveland, the city unbalanced between its waiting for Godot efforts to file for chapter 9 municipal bankruptcy or a response to its efforts to become part of the City of Cleveland. The new Census figures make clear the extraordinary fiscal disparities in the state: after New Albany, the rest of the top five in Ohio are: Indian Hill near Cincinnati ($208,158), the Cleveland suburb of Pepper Pike ($162,292), and two Columbus suburbs: Powell at ($147,344) and Dublin ($139,860). The statistics are from surveys conducted from 2011 through 2015 and released this month—the latest estimates available from the U.S. Census Bureau for smaller areas.

The See-Saw of Municipal Fiscal Solvency

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eBlog, 12/27/16

Good Morning! In this a.m.’s eBlog, we consider the remarkable turnaround in fiscal fortunes in Detroit—a city unbailed out by the federal government, but now, as Detroit News editorial writer Daniel Howes writes, is “perceptively changing,” albeit, interestingly in light of the President-elect’s choice to be the new Secretary of Education, the state of Detroit’s public schools “burdens an already difficult financial picture.” Then we turn to the challenge of trying (in the frigid Winter no less!) to describe fiscal contagion from the insolvent East Cleveland, before finally trying to escape the cold by journeying south to Puerto Rico to explore the worsening demographic trends and their implications for the changing administrations both in Washington, D.C. and Puerto Rico.

Winnerville? Daniel Howes, an editor for the Detroit News, in his editorial “Loserville,” wrote that two years “after Detroit emerged from the largest municipal bankruptcy in the nation’s history, the city America gave up for dead is showing that it is anything but,” writing that vacant space downtown is “is growing increasingly hard to find,” a stark contrast from the city’s first day of municipal bankruptcy when I was specifically warned not to walk from my downtown hotel to the Governor’s Detroit offices to meet Kevyn Orr, the then newly named Emergency Manager. Thus, Mr. Howes writes:

He tempered his column by noting that violent crime continues to be an issue in parts of the city—and that neighborhood revitalization “lags the pace set by downtown,” adding that the “exodus from Detroit Public Schools burdens an already difficult financial picture,” albeit writing that Detroit’s makeover is “a process, not a destination with guaranteed arrival,” indeed, comparing it the comparable (and related) comeback of the auto industry—albeit with the profound difference that the latter was bailed out—something Detroit was not, noting: “Detroit’s automakers, effectively a ward of the federal government at the outset of the Obama administration, are closing an eight-year span their leaders used to re-engineer companies that tottered on the edge of collapse on Election Day 2008…Eight years later, at least two of Detroit’s three automakers — as well as many of its suppliers—are emerging as players to be reckoned with in both the traditional car and truck business as well as the emerging mobility space. Loserville? Hardly…The creation of the American Center for Mobility at Willow Run and the Michigan Legislature’s move to enact the most far-reaching autonomous-vehicle laws in the country underscore the state’s bid to become the nation’s epicenter of mobility development and testing.”

Loserville? Fiscal Contagion? Just as the flu can be contagious, so too municipal fiscal distress does not necessarily stop at municipal borders. So it is that a growing number of residents of Forest Hill, a twenty-five acre historic neighborhood spanning parts of Cleveland Heights and East Cleveland, Ohio, founded by John D. Rockefeller and a seeming stark contrast from the virtually bankrupt East Cleveland, are upset by the increasing number of long-abandoned homes in both municipalities: assessed property values are tanking, and there is increasing apprehension at the seeming inability of the municipality to provide even basic services. There is also a sense that East Cleveland’s possible merger with Cleveland will not happen soon enough (if ever) to help Forest Hill’s issues: incorporating as a village would take cooperation from both cities, several voter elections, and the approval of Cuyahoga County. Similarly, there are no answers to the questions of where tax dollars would come from to hire police, firefighters, and provide basic, essential public services. Ironically, the neighborhood hosts municipally influential citizens—or at least formerly so, including East Cleveland’s recalled Mayor Gary Norton, the city’s new mayor Cheryl Stephens, and former Mayor Ed Kelley. The silence of the State of Ohio must weigh heavily on their hopes for the New Year.

Unfeliz Navidad? Puerto Rican demographer Raul Figueroa released information this morning that if the current demographic trends in the U.S. territory continue, by 2020, citizens older than 60 will—for the first time ever—surpass the number of those under 18, writing that between July of 2015 and July of this year, some 60,000 island residents had departed—and that this year marked the first in which the number of deaths exceeded the number of births. He noted increasing apprehensions of an increasing schism for the young generation—whose most productive members have “established themselves outside of the U.S. territory” and are forming families there, while their counterparts who have stayed behind are, increasingly, becoming caught up in criminal activities. Thus, he wrote, “Only a significant reduction in emigration or increase in immigration could reverse this demographic trend…it will be necessary to search for a strategy to permit and facilitate strategies to create employment opportunities.” Indeed, island economists like Elías Gutiérrez and José Alameda have expressed apprehension that the island is converting into a “gueto” of the poor and aged, likening it to a “Greek tragedy.” Mr. Gutiérrez added that the middle class has receded on “every front.” He noted, too, that the increasing demographic imbalance will increase the public pension imbalance: as the young flee, fewer will be paying in, while the number of retirees will continue to grow.

The demographic pressures on the island’s fiscal challenges come as soon-to-depart Puerto Rico Gov. Alejandro García Padilla released more pessimistic figures for the next decade—as he cast increasing doubt with regard to the viability of a negotiated debt solution—explaining that his updated projection of Puerto Rico’s financial shortfall over the next decade would be $8.8 billion worse than its forecast of just two months ago, when he had submitted a 10-year fiscal plan to the PROMESA Puerto Rico Oversight Board—a plan in which the government had projected that if the government stayed on its then current fiscal course—its so-called “Baseline”—it would be short some $58.7 billion, that is, in an ever accelerating state of debt. Moreover, in a revision released yesterday, that figure had increased by nearly $10 billion to $67.5 billion—the deficit reduction target the outgoing administration estimated it would have to achieve in reductions to achieve a balanced budget by 2026. That is, the debt situation has reached such an extreme that even were all its $35 billion in debt service to be magically eliminated, the island would still be overburdened with debt.

The newly released baseline also uncovers a related fiscal challenge which the new one does: what are the fiscal implications on Puerto Rico’s economy? The government’s new baseline projects government spending cuts would lead to a more negative nominal gross national product trajectory over the next decade, with the nominal, annual GNP shrinking by 1.03 percent instead of the previously projected growth from the October plan—even as the revised assumptions about economic growth and inflation added some $3.4 billion to the new baseline compared to the October baseline. The tab? The revised projections over the next decade project $232 billion in government spending, but only $165 billion in revenue—with the difference to be bridged by unspecified budget cuts.

The revised projections come as the PROMESA Oversight Board has commenced its discussions with creditors as part of its mission, similar to a chapter 9 municipal bankruptcy, to achieve a negotiated and consensual debt cut under Title VI of the new PROMESA law. But, to Gov. Padilla, the increasingly deteriorating fiscal and economic projections over the next decade mean that “that a comprehensive restructuring under Title III (the debt restructuring title) of PROMESA is inevitable.” Yet this all comes in the midst of changing administrations in Washington, D.C. and against an encroaching deadline: under the new federal law, creditors’ rights to sue have only been suspended until the middle of February. Ergo, Gov. Padilla’s office notes: “If Puerto Rico does not seek Title III protection before the termination of the claims on February 15, 2017, the government will run out of money and essential services will be severely affected.”

Who’s at Risk of Defaulting?

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eBlog, 12/16/16

Good Morning! In this a.m.’s eBlog, we consider the challenge to state and local leaders arising from both the Federal Reserve’s decision to increase interest rates, apprehensions about growing state budget gaps—and the respective implications for city and county credit ratings—as well, of course, to the incoming Trump administration and next Congress’ proposals on federal tax reform where—as under former President Ronald Reagan, the authority of state and local governments to issue tax exempt municipal bonds is expected to come under challenge—as is the deductibility of state and local taxes. Moreover, with the Federal Reserve’s decision to raise interest rates, those increases could boost mortgage rates—adversely impacting assessed property values—putting cities, counties, and school districts into distinctly uncomfortable territory. Then we turn to the frigid weather in East Cleveland, where the city’s insolvency has let to increasing service insolvency and an inability to clear the city’s roads—threatening the capacity and ability to provide emergency public services. Then we follow the nation’s frigid weather east to Shenandoah, where the fiscally beset municipality of Petersburg, Virginia was hit yesterday by a 4th U.S. Circuit decision, even as S&P Credit granted it a small Yuletide respite. Finally, we venture back west to Chicago, where Municipal Market Analytics helps us to try to untangle the fiscal arithmetic so burdening the Chicago Public Schools.

Nota bene: We wish all readers a well-deserved holiday to you and your loved ones; we will resume the week after next.

Who’s at Risk of Default? Municipal Market Analytics this week, drawing from compiled data, noted that the trend of annually declining defaults is over—breaking a six-year trend—and warning that it “expects that issuer-credit quality has begun to erode,” describing the ominous trend as not only a factor of more “aggressive/permissive” underwriting standards, but also the risk created by growing state budget gaps—gaps which are likely to result in a double fiscal whammy for municipalities, counties, and school districts of reduced local aid—as well as less state public infrastructure investment. MMA suggests “municipal default activity will increase in 2017.”

Brrr! Municipal insolvency, as we have previously noted, often involves service insolvency. Thus it is that many side streets in the insolvent municipality of East Cleveland are complete sheets of ice—and have been so for an entire week, because the city does not have any working snow plows, leading one constituent to liken living in the city to being in the “Ice Age.” With bitter cold from the lake snow, which has been falling in heavy bands, neither of the municipality’s two salt trucks are working, leading some city officials to opine that the money spent on the recent special recall election could have been better used to fix the salt trucks. With one resident noting that “It is very precarious until you get into Cleveland or until you get into Cleveland Heights,” residents can easily make out the boundary where East Cleveland ends and Cleveland Heights begins: on the latter side, the streets are totally cleared. Ice free and this is all “full of ice.” One beleaguered resident noted: “I really hope that we can one day join with Cleveland…That is the only answer.”

Teeter Tottering in Petersburg. The fiscally struggling, historic Virginia municipality of Petersburg was on a teeter totter yesterday, after the 4th U.S. Circuit Court of Appeals yesterday ruled that the city’s police department’s policy barring its employees from criticizing the department on social media was unconstitutional (for further details, please see this morning’s Little Legalities in the eGnus), because its social media policy constituted a “virtual blanket prohibition” on all speech critical of the department and was “unconstitutionally overbroad,” but as the city was removed by S&P Global Ratings from Credit Watch.  In its decision, the court acknowledged a city’s need for discipline, but found that the policy and the disciplinary actions taken pursuant to it would, if upheld, lead to an utter lack of transparency in law enforcement operations that the First Amendment cannot countenance. (The suit had been filed after two of the city’s officers were placed on probation for discussing on Facebook their concerns about inexperienced officers being promoted and leading the department’s training programs: the department’s policy prohibited employees from posting anything that would “tend to discredit or reflect unfavorably” upon the agency—something the court held the police cannot be allowed to do.) In its ratings change, S&P, nevertheless, maintained its junk BB ratings on Petersburg’s general obligation bonds: the city has just over $55 million general obligation, full faith and credit bonds and Qualified Zone Academy bonds outstanding. S&P analyst Timothy Little wrote: “We removed the rating from CreditWatch due to the city securing $6.5 million in cash-flow notes…The negative outlook reflects the extreme uncertainty regarding the city’s ability to return to structural balance and what will likely be persistently very weak liquidity in a difficult budgetary environment,” adding that: “In our opinion, the interest rate is high compared to other non-distressed entities that annually place TANs, further underscoring the fiscal distress of the city.” The continued fiscal distress hinged on the city’s ongoing inability to balance its budget, in the main part because municipal property and other taxes have been less than projected, while expenditures for public safety and health and welfare have exceeded the city’s budget by $2.5 million, according to S&P. (A Virginia technical assistance team reported that general fund expenditures exceeded revenue by at least $5.3 million in FY 2016, and identified a structural imbalance with Petersburg’s FY2017 budget—leading to a state estimate that the city has $18.8 million in unpaid obligations to external entities and internal loans, including repayment of the TANs. S&P further noted that even though the city’s economy is diverse, its 27.5% poverty rate is more than double the statewide level—meaning it bears disproportionate fiscal challenges.

Pixie Dust? Municipal Market Analytics this week inquired into the harsh realities of determining interest rates with regard to municipalities in fiscal straits seeking to go to market (not to buy a fat pig!), focusing on the Chicago Public Schools—suggesting that investors in the school district’s new capital improvement tax bonds should seriously consider the bond-holder settlements in Detroit—and the ongoing legal battles in Puerto Rico—in trying to determine what interest rate would constitute sufficient compensation for the legal and credit uncertainties present in a muni transaction, suggesting: “Basically, rather than use its traditional alternative revenue bond security (which entails a pledge of state aid backstopped by an unlimited property tax), CPS is directly pledging its new limited property tax levy solely for the benefit of bondholders.” Theoretically, MMA notes, the new municipal security (rated A by Fitch and BBB by Kroll) insulates municipal bondholders from CPS’s not very investor friendly credit rating and profile—especially its very high unfunded public pension liability, but then wrote: “However, the real perceived strength here is the durability of the structure, or persistence of regular debt service payments, in a hypothetical (and currently not-permitted) municipal bankruptcy. This durability relies upon legal opinions that conclude that the new bond obligations would be considered backed by special revenues and therefore bond-holders would not see their lien impaired.” However, MMA noted, such reliance might not be something upon which to hang one’s Santa stocking, writing: “The aspiration of the structure is to insulate the bondholders from the fiscal troubles of the district, although the repayment schedule suggests that the district may have taken a more short-term view of the soundness of the transaction given the back-loaded principal. The main trouble with the transaction lies not with the documents but with the assumption—generally implicit, yet quite explicit in the opinions—that the fiscally distressed district will unconditionally continue to abide by, and not challenge the provisions of the indentures or ‘use or claim the right to use’ the capital improvement tax revenues. In other words, to rely on the willingness of CPS not to act exactly like every recent distressed city (and territory) in invading, capturing, and re-purposing every bondholder asset within and beyond easy reach. Even constitutional bond protections have fallen victim to debtor challenges during government disruption. So for this security to function fully as described, CPS would need to experience a Goldilocks bankruptcy the likes of which the municipal market has not seen in decades.” Thus, MMA, in a Yule gifted insight, strongly encourages potential muni investors to carefully unwrap the seasonal gift to determine whether it is really of better credit quality than CPS’ alternative revenue bonds, and “to be avoided by accounts who consider a CPS municipal bankruptcy to be likely or even unavoidable.”

The Avoidance of Fiscal Contagion

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eBlog, 12/15/16

Good Morning! In this a.m.’s eBlog, we consider the role of leaders appointed or named by municipalities with regard to the integrity of coming back from chapter 9 municipal bankruptcy or insolvency; then we turn to some of the critical factors which have played key roles in San Bernardino’s emergence from the nation’s longest municipal bankruptcy, before, finally, heading into the frigid physical gale and fiscal maelstrom of Atlantic City to consider not only the challenge for a state in taking over a municipality—but also the challenge of avoiding fiscal distress contagion.

Doubting Governance. The Detroit News, in its analysis of state and federal court records, tax filings, and interviews; reported that said analysis raised questions about the ability of some Detroit Development Authority (DDA) members to oversee one of the largest publicly subsidized downtown construction projects since Detroit emerged from chapter 9 municipal bankruptcy. The paper’s analysis also revealed a shortcoming of the city’s appointment process—noting it omitted any requirement for DDA members to undergo criminal or financial background checks, despite the fact that the Motor City’s DDA has approved some $250 million in taxes on Little Caesars Arena, even as the DDA is “dominated by tax delinquents with financial problems and in some cases criminal records,” according to public records.

As in most cities, the arena is being financed via the issuance of municipal bonds, under an agreement approved three years ago, where municipal taxes are to be dedicated to paying off $250 million worth of bonds issued by a branch of state government financed by the Michigan Treasury department—a department which has charged a number of DDA members of being tax delinquents. The paper adds that a majority of those appointed have a “history of financial issues,” including more than $500,000 in state and federal tax debt, according to public records. The News noted that details about the DDA members’ financial history offered some insight into a municipal public authority which all too often operates in secret—in this instance an authority whose members are appointed by the Mayor, approved by the City Council, and who then work with professional staff from the nonprofit Detroit Economic Growth Corp.; however, unlike almost every municipal or county public authority, the DDA board does not post agendas, minutes, or accurate meeting schedules; its members are not required to submit to a criminal or financial background check. (Members on the board are not compensated.) Indeed, Mayor Mike Duggan’s chief of staff Alexis Wiley, responding to inquiries by the News, said: “Really, every single person on the board has served the city of Detroit well…They’ve had personal financial challenges, but they have displayed good judgment as board members.” Malinda Jensen, the Detroit Economic Growth Corp.’s senior vice president of board administration and governmental affairs, in a statement to the News, noted: “The public funds contributing to the repayment of construction bonds to build the downtown arena come from a dedicated stream of revenue authorized by state law, approved by the DDA board as a whole, ratified by several votes of the full City Council…audited by independent accountants, and safeguarded in the terms of the sale of the bonds to financial institutions…Those funds are very well protected.” She added: “No individual on the board has any direct ability to access any public funds, and all decisions of the DDA are by majority votes in a public meeting,” adding that the DDA has a quarter-century of clean audits by an independent certified public accounting firm, she said. And DDA members are barred from voting on issues in which they have a direct financial interest, Ms. Jensen added, noting: “We all were impacted in some way through this financial crisis…I’d be curious about what some of that had to do with some of the reports you are hearing on some of these individuals.”

Would that governance and personal integrity were so simple, but, in this case, it turns out that two DDA members with a history of financial problems are also high-ranking members of the Mayor’s administration, with one running Detroit’s neighborhoods department—in this case a long-time municipal employee who has worked for every Mayoral administration since former Mayor Coleman Young, but who has also filed for bankruptcy, lost a home to foreclosure, and failed to pay $250,691 in state and federal taxes, according to public records—and served two years in federal prison in the wake of being found guilty in 1984 of receiving more than $16,000 in illegal payoffs from a sludge-hauling company—at the very time he was serving as Detroit’s Director of the city’s ill-fated Water and Sewerage Department. The paper notes that his colleague at City Hall, Corporation Counsel Melvin “Butch” Hollowell, has faced his own series of state and federal tax liens over the most recent five years: he has been accused of failing to pay more than $60,000 in federal and state taxes, although he has, according to public records, this year managed to pay off all of the debt. The News quoted University of Virginia Law School tax expert George Yin about its findings with regard to the troubled financial records of DDA members, and their fiscal integrity as it relates to their public responsibilities to oversee publicly funded sports arenas—to which Mr. Yin responded: “Given the kind of doubtful or questionable nature of public subsidies for these facilities, you want the people making decisions to be people whose judgment has been proven to be right over and over again.”

The Precipitous Road to Bankruptcy’s Exit Ramp. The City of San Bernardino, once the home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad—yesterday, some twenty-two years later, received a report from the Inland Valley Development Agency’s annual review that, for the first time, it has more than restored all of the jobs and economic impact lost when the base closed: indeed, the review found that the 14,000-acre area of the former base now employs 10,780 people and is responsible for an economic output of $1.89 billion, surpassing the totals lost when the base closed in 1994. What has changed is the nature of the jobs: today these are predominantly logistics, with Amazon’s 4,200 employees and Stater Bros. Markets’ 2,000 employees accounting for more than half of the total. Economist John Husing, whose doctoral thesis studied the economic impact of Norton Air Force Base, yesterday told the San Bernardino Sun: “The jobs that have come in are comparable or better than the jobs that were lost…Because of the spending pattern difference between civilians and military personnel, you only needed 75 percent of the number of people working there to replace the economic impact,” adding that that was because much of the spending by Norton’s employees was at the on-base store, so the money did not recirculate into the local economy—adding that that job total does not include an additional 5,000 part-time jobs created by Amazon and Kohl’s during the Christmas shopping season; nor does it include an additional 5,000 indirect jobs that help build nearly $1.9 billion of total economic benefit. Moreover, with the exception of the San Bernardino International Airport itself (the fourth-largest source of jobs in the project area, with 1,401), the major employers are not directly tied to the former role of the base. Nevertheless, as Mr. Burrows noted: it took planning and preparation to get those companies to come to San Bernardino: “Without a lot of inducement from us—infrastructure, roadway improvements, Mountain View Bridge, for example, we wouldn’t have those jobs…“It’s been a longtime strategic effort, and we’re very pleased that we’re seeing some results.” Mr. Burrows added, moreover, that the Inland Valley Development Agency has more projects (and more jobs) in the works for 2017, including continued infrastructure work and a focus on workforce development: “We’re particularly going to focus on our K-12 schools, San Bernardino Valley College, and the (San Bernardino) Community College District in making sure we’re doing more on the workforce development side.” To do so will be a regional effort, via the agency—which is composed of representatives from San Bernardino County and the cities of Colton, Loma Linda, and San Bernardino—who are responsible for the development and reuse of the non-aviation portions of the former Norton Air Force Base. San Bernardino Mayor Carey Davis noted the Development Authority’s “development of the Norton Air Force Base has proven to be a great asset to the San Bernardino community. We have positively impacted the economy with the creation of jobs and new business,” adding it was “a fine example of the progress we have made in rebuilding San Bernardino.”

Fiscal Distress Contagion & State Preemption. The Atlantic City Council had a quick meeting yesterday in the wake of the state pulling two ordinances for further review—measures which would have raised rates and revised regulations for Boardwalk trams and adopted a redevelopment plan for Atlantic City’s midtown area, with the state asking the Council to pull the ordinances “indefinitely,” according to Council President Marty Small. Subsequently, Timothy Cunningham, the Director of the New Jersey Division of Local Government Services Director and the quasi-takeover manager of the city government, said his agency has had insufficient time to review the ordinances, stating:  “We’ll just revisit them in the new year…I don’t think there’s any objection to them. Just not enough time to fully vet them.” The statement reflects the post-state takeover governance and preemption of local authority. In this case, the issue in question relates to proposed tram rules, including increasing fares to $4 one way and $8 all day in the summer, and $3 one way and $6 all day in the off season—compared to $2.25 one way and $5.50 for an all-day pass. The ordinance would also have allowed the trams to carry advertisements—from which, according to sponsor Councilman Jesse Kurtz, the city would receive half the revenue from the ads.

Nevertheless, the discordant governance situation and unresolved insolvency of the city do not, at least according to Moody’s analyst Douglas Goldmacher, appear to be contagious, with the analyst writing there is only a “relatively mild” chance that the massive fiscal and governance problems of Atlantic City will contaminate Atlantic County: “While Atlantic City remains the largest municipality in the county and its casinos are currently the largest taxpayers, the county’s dependence on Atlantic City’s tax revenues continues to decline.” Moreover, he wrote: “State law offers considerable protection from the city’s financial trauma, and the county has demonstrated a history of strong governance.” Mr. Goldmacher added that the neighboring county has managed to partially offset Atlantic City’s declining tax base and gambling activity with growth in other municipalities—with Atlantic City’s share of the county tax base less than half what it was at its peak of 39% in 2007. The report notes that the county also benefits from a New Jersey statute which insulates the county from the city’s fiscal ills, because cities are required to make payments to counties and schools prior to wresting their share—noting that Atlantic City has never missed a county tax payment and was only late once—and, in that situation, only after special permission was granted in advance. Thus, Mr. Goldmacher wrote: “While Atlantic City has endured political gridlock, the county has achieved structural balance and demonstrated stability through budgeting accuracy, strong reserves and contingency plans…The county also has substantial fund balance and other trust funds and routinely prepares multiple budgets and tax schedules to account for Atlantic City’s uncertain fate.”

Double Transitions & The Challenges of Fiscal Governance

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eBlog, 12/14/16

Good Morning! In this a.m.’s eBlog, we consider the dual transition periods for the U.S. and Puerto Rican governments as they change administrations in the midst of Puerto Rico’s insolvency. President-elect Trump has devoted little focus on the U.S. territory’s fiscal and health care crisis—and governance on the island is about to change too in the wake of the election last month of Governor-elect Ricky Rossello, who won with 41% of the vote in a four-way race.

Puerto Rico Governor Alejandro García Padilla, who has 18 days left in office, yesterday affirmed that it will require creativity to pull Puerto Rico out of its fiscal and political crisis—and that it would also mean the territory must file for restructuring as soon as possible. He added that the federal government would have to be a critical partner if the commonwealth is to resolve its fiscal crisis. He noted that even though the new PROMESA law offered the island a legal structure to restructure its public debt, he noted that the new federal statute “interfiere con la Constitución de Puerto Rico al extremo de que permite una junta no electa imponer un plan fiscal y controlar los presupuestos bajo ese plan”—that is that the PROMESA law provided for an unelected group to impose its authority, adding that even though the U.S. Supreme Court had recognized the “political reality and the changed law” in the territory, he  noted that for many in Puerto Ricans, PROMESA has created an unconstitutional intrusion. Thus, he urged that “no crisis should go to waste,” so that an important part of any fiscal solution will hinge on the commonwealth filing for restructuring “now;” because, he warned: “The chaos of costly, protracted litigation that would ensue if the commonwealth does not seek restructuring can easily be avoided with swift, decisive action within the next two months,” referring to the expiration of the stay on litigation” imposed by PROMESA until Feb. 15th, at which point, he added: the “commonwealth will face a cash deficit of over $3 billion that would likely force a government shutdown…There should be no excuse to force Puerto Rico to depression economics.”

He insisted on the importance of Congress and the Administration’s commitment of economic assistance—including equal treatment of Puerto Ricans with regard to Medicare and Medicaid. The Governor’s remarks came as a double transition is underway—both in Washington, D.C. and in Puerto Rico—and where the incoming Trump Administration has, so far, been silent with regard to PROMESA’s implementation and next steps—and as the current PROMSEA oversight board is currently reviewing Puerto Rico’s fiscal plan in order to determine whether and how to file debt restructuring petitions on behalf of the territory and its entities in federal district court if voluntary negotiations with the islands creditors fail.

Driving Out of Municipal Bankruptcy

eBlog, 12/11/16

Good Morning! In this p.m.’s eBlog, we consider the economic resurgence of post-bankrupt Detroit, using human and, increasingly, artificial intelligence to focus on the city’s future. Then we head to East Cleveland, where, in the wake of the narrowest of recalls of both the Mayor and Council President in an insolvent municipality—the question is what (and whether) its fiscal future might be. Then we head to the snowy north, where Michigan House Speaker Kevin Cotter has issued a dire warning of many municipal bankruptcies unless there is a state-local plan to address its seemingly unpayable public pension obligations. Then, we zoom East as the State of New Jersey begins to fill in the blanks with regard to how it is and will be implementing its state takeover of Atlantic City. Finally, we head south to the fiscally beleaguered city of Petersburg to observe both the near-term fiscal actions to address its insolvency and ask what will ensue.

Detroit: a Resurgent Home of Innovation. Detroit, an early home of the automobile (I have a photo of my two grandfathers in the first automobile ever on the Ann Arbor campus of the University of Michigan), and now recovering from the largest chapter 9 bankruptcy in history, is one of the nation’s foremost cities in investing strategically in the future. Using its history with the automobile industry and its web of universities, the city appears to be at the forefront now of connecting artificial intelligence (AI) to the industry—a strategic investment in its future. Spatial Labs Inc., an artificial intelligence (AI) company which was founded in Cincinnati, but which has opted to keep its headquarters in Detroit, is one of 12 startups which was part of the Techstars Mobility accelerator program last summer in Detroit—a startup round of $2 million led by Serra Ventures of Champaign, Ill., and joined by Connectic Ventures of Covington, Ky.; the M25 Group of Chicago; Fulcrum Equity Partners of Atlanta; and Caerus Investment Partners of Chicago. Spatial, last September, had announced a development agreement with Ford Motor Co. at the Techstars Demo Day. As part of its participation in the program, Spatial received $20,000 in equity funding from Techstars and $100,000 from Detroit-based Fontinalis Partners LLC. Spatial CEO Lyden Faust told Crains: “We didn’t expect to move to Detroit, but personally, I’ve loved being here, and there are so many more opportunities here compared to Cincinnati.” The company was offered space at Ford Field by Ted Serbinski, managing director of the Techstars program in Detroit, and received a grant, which Mr. Faust said the company will use to hire several data scientists and ramp up marketing. Spatial’s co-founder and chief technology officer is Will Kiessling, who had been lead engineer and technologist at GE Aviation in Evandale, Ohio, from 2007 to last January—there he was used to managing huge amounts of data during engine development and testing, which he likened as bringing “the same logic to remote test jet engines as it is to remote test cities: Billions of people interact with maps across multiple devices every day. Bringing social context to maps using Spatial’s patent-pending technology will improve map usability in many industries, including travel, real estate and automotive.” With the rise of AI and machine learning and the shift to mobility and location, Spatial is at the intersection of a massive shift in the industry. And Detroit seems to be working hard to be first in the right lane.

Michigan Municipalities on the Brink. Michigan House Speaker Kevin Cotter (R-Mt. Pleasant), in an Op Ed for the Detroit News, wrote:

Many local communities in Michigan are drowning in debt and on the brink of bankruptcy, and yet almost no one is talking about it. Even fewer people are working on a plan to try to fix it…This is unacceptable and could have dire consequences for every Michigan resident. Something needs to be done now, before disaster strikes.

Reforming retirement systems is a controversial topic, but inaction is simply not an option. We recently made some waves by starting the discussion in the Michigan House, and it is my hope that we all continue that conversation into the new year. Debating the problem openly and honestly is an important first step, but we need to go further and find a permanent solution. It is well past time to put people over politics and do the right thing.

For decades, bad deals were made all over the state, handing out generous and unrealistic health care benefits left and right. Those debts are now weighing down our local governments, which is why we don’t have as many police officers on the streets as we could have and why our fire protection is spread thinner than it could be. This isn’t just a problem on a spreadsheet; you and I are still paying for those deals today in very real ways.

Local governments are struggling to make their payments on this debt, and they are falling further behind every year. A few are on the brink of bankruptcy, and many more will be there soon. Municipal bankruptcies mean fewer police, holes in fire coverage, and a busy signal when you dial 911. Imagine what happened in Detroit a few years ago happening in Kalamazoo, Jackson or Midland. Think of it happening in your city.

Bankruptcy also means former employees with retirement benefits could lose them all. Bankruptcy courts end deals like that with no recourse, and retirees are an easy target for them. Local governments, police and firefighter unions and politicians from both parties publicly agreed we need to solve this crisis now to prevent deep and destructive cuts in our cities and to save the retirements our first responders are planning on.

Our plan asked local public employees to contribute just 20 percent toward their own retirement healthcare plan, the same percentage state employees have been contributing for years. That is still far better than what private sector employees receive. We went further and completely eliminated our own coverage in the state Legislature when I took office six years ago, because it was the right thing to do.

That plan didn’t have the support to pass before our current term ends, but having everyone acknowledge the problem together is a great first step. We’ve heard their constructive criticism, but now we need to hear their ideas. Our committees won’t have the chance to hear from the thousands of police recruits and trainee firefighters who were never hired over the years because of busted budgets. Our representatives will never hear from the people who have died because of slow emergency response times due to budget cuts.

Denial is no longer an alternative, but bankruptcy unfortunately is. Our plan was the only plan out there to save our cities, protect critical services and guarantee first responder benefits for life. Now we need a new plan, and a better plan.

State Governance in Municipal Insolvency. In the wake of the Atlantic City’s Municipal Utilities Authority’s Nov. 28 special meeting; in particular, its vote to give outgoing members a $3,000 ‘gift’ in addition to their regular compensation and benefits package, as we have previously noted, Jeff Chiesa, who is heading up the state’s takeover of the boardwalk city has announced New Jersey will use its new power over the municipality to veto the water authority’s decision to give its board members $3,000 gifts, with his spokesperson noting: “The Division of Local Government Services rejects the action taken at the Atlantic City.” The statement from Mr. Chiesa’s office noted: “This action is further evidence of the MUA’s disregard for the ratepayers they serve, and clearly demonstrates the authority does not understand the severity of the city’s financial condition.” Local Government Services Director—along with Mr. Chiesa—made clear they will also review the remainder of the MUA board meeting minutes, making clear the breadth of authority granted to the state under its takeover powers—including the ability to hire or fire employees, sell city assets, or break union contracts. The state power, moreover, reaches farther to the authority to veto the minutes of municipal governmental meetings. 

What’s Next for Governance in an Insolvent Municipality? Recalled East Cleveland Mayor Gary Norton has now provided details of the city’s handover of power in the wake of his narrow loss in last week’s recall election by twenty votes—along with City Council President Thomas Wheeler. The Mayor stated: “Because that election is so close, we will hold off until December 27th and wait the 21 days to ensure East Cleveland that the election results are final, the election results are certified, and the appropriate individuals enter the mayor’s office and leave council or stay on council.” Should a recount find that Council President Wheeler was not, in fact, recalled, he would become Mayor; if he does not and the current results stand, Council Vice President Brandon King will be mayor until next year’s regular mayoral election. Outgoing Mayor Norton said the government’s business will continue without interruption while the mayor’s office and any openings on council are filled. At the press conference, Council Vice President Brandon King was asked about the status of the city proposed merger with Cleveland—a proposal both Mayor Norton and Council President Wheeler had supported. In response, he noted: “I think when you look at that issue, that’s something that is not over and it will continue to be discussed. And I think that’s probably going to be my only comment on that.” To continue, however, the Mayor and Council will have to act: The ordinance appointing commissioners to study annexation expired before the City of Cleveland chose its representatives. Indeed, according to a Cleveland city council spokesperson, the city has not received a new list of merger commissioners, so East Cleveland’s newly constituted Council would have to pass a new ordinance to restart the merger process. East Cleveland has been in fiscal emergency since 2012. 

Back to a City’s Viable & Fiscally Stable Future. Just as once stagecoaches carry Wells Fargo safe boxes were once guarded by tough characters, like Wyatt Earp, armed with sawed-off shotguns loaded with deadly buckshot to fend off attacks from dastardly outlaws; now it appears that Wells Fargo might pay a favor back: it has agreed to provide a loan of some $6.5 million to the small, insolvent municipality of Petersburg, Virginia—a decision arrived at in the wake of steep municipal budget cuts, tax increases, and greater financial vigilance.  Interim City Manager Tom Tyrrell announced that the city was approved for the loan by Wells Fargo—a loan carrying an interest rate of 4.5 percent, but where the repayment of all principal and interest is due by next October. City Manager Tyrell, in a press release, noted: “This is part of the plan to provide short-term financing to allow city functions to continue. It is not an infusion of cash to pay off past obligations…We will pay our past obligations and will announce our program to accomplish those payments as Phase Two of our Fiscal Stability Plan.” The loan comes in the wake of efforts to secure one that commenced last summer after the lender who previously had provided short-term revenue anticipation notes declined to lend the municipality funds. Thus, last September, as we have previously noted, the City Council had adopted a package of budget cuts and tax increases recommended by consulting firm PFM Group as a way to reassure potential lenders that Petersburg was working seriously to remedy its fiscal plight—and, subsequently, hired another consulting firm, the Robert Bobb Group—headed by former Richmond City Manager Robert Bobb, to take over operation of the city government. The Wells Fargo loan will not address the roughly $19 million the city owes in past-due payments left over from its FY2016 fiscal year; however, according to the city: “It does give us enough breathing room to continue to meet our current expenditures…[It is a] short-term loan [that] allows us to pay our current fiscal 2017 expenses while meeting city payroll, current debt financing and emergency first responder services.” Indeed, Mr. Bobb noted: “We are still in a crisis mode, and this is not the time to interpret short-term financing as a long-term accomplishment.” His company noted that its focus for the next few months will remain on maintaining normal municipal operations and delivering essential public services while reinforcing city finances. Next year, the plan is to commence on “Phase Two,” in which the goal will be to begin paying down longer-term debt and past-due bills.