TheExceptional Governing Challenges on Roads to Fiscal Recovery

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eBlog, 12/02/16

Good Morning! In this a.m.’s eBlog, we consider the hard role to recovery not just from San Bernardino’s longest-ever municipal bankruptcy, but also the savage terrorist attack a year ago. Then we venture East to observe the evolving state role in New Jersey’s takeover of Atlantic City, where the new designee named by Gov. Chris Christie, Jeffrey Chiesa, yesterday introduced himself to residents and taxpayers, but offered little guidance about exactly how he will usurp the roles of the Mayor and City Council in governing and trying to get the famed boardwalk city out of insolvency and back to fiscal stability. Finally, we look north to the metropolitan Hartford, Connecticut region, where the municipalities in the region are seeking to work out fiscal mechanisms to address Hartford’s potential municipal bankruptcy in order to ensure no disruption of metropolitan water and sewer services—a different, but in this case critical element of a “sharing economy.”  

The Jagged Road to Chapter 9 Recovery. It was one year ago today that terrorists struck in San Bernardino—the city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, marking, then, a day of 14 deaths—with victims caught in the crossfire of gun shots and carnage in the wake of the wanton attack by Syed Rizwan Farook and Tashfeen Malik—and a horror still not over, as it will be another nine months before the trial against Enrique Marquez Jr., who has been charged with buying some of the weapons which were used in the attack, commences in September—months after the beleaguered city anticipates exiting from bankruptcy. Because the shootings took place at a San Bernardino County facility in San Bernardino, the long-term recovery has been further complicated from a governance perspective: many of the shooting survivors are accusing San Bernardino County of cutting off much-needed support for the survivors of the attack, including refusing to approve counseling or antidepressant medication. Others, who were physically wounded are seeking, so far unsuccessfully, to get surgeries and physical therapy covered. The San Bernardino County Board of Supervisors earlier this week convened a closed-door session at which survivors said they felt betrayed and abandoned, left to deal with California’s complicated workers’ compensation program without guidance or help. Their health insurers will not cover their injuries because they occurred in a workplace attack. Congressman Pete Aguilar (D-Ca.), whose district includes San Bernardino, reports that his hometown had been added to a list of cities with which people are familiar for a terrible reason, such as Littleton, Colo., or Newtown, Conn. Nevertheless, he is defiant, insisting “We will not be defined by this tragedy.”

However, murder rates in the city have been climbing: the city of just over 200,000 is grappling with a spike in violent crime, homicides especially: to date, this year, the city has reported 49 killings, already more than last year’s total, which included the terrorist victims—its homicide rate tops that of Chicago, which has become the poster child for big-city violent crime and is on pace for more than 600 killings this year. San Bernardino Police Chief Jarrod Burguan, however, said the crime wave is not unique to the chapter 9 municipality—a currently bankrupt city where empty storefronts and pawn shops have long lined downtown streets. Nevertheless, Brian Levin, a criminal justice professor at California State University, San Bernardino, who studies hate crimes, yesterday noted: “we’re a better community now, even though we’re hurt.” Professor Levin is one who, in the days and weeks which ensued after the mass tragedy, met with faith leaders, law enforcement, and families of the victims—where he discovered a unity of shock and shared pain. Today, he notes: “The attack will always be a part of our history…But here’s the thing: so will the heroics of those police officers and first responders and medical staff, and so will the grace of the families. We’re writing the rest of the history. The bastards lost.” Now the city awaits early next year for emerging not just from the physical tragedy, but also the longest chapter 9 municipal bankruptcy ever.  

Atlantic City Blues.  Jeffrey Chiesa, a former New Jersey Attorney General, U.S. Senator, and, now, Governor Chris Christie’s designee to run the state takeover of Atlantic City, yesterday introduced himself at a City Council meeting and took questions from city taxpayers and residents. He provided, however, in this first public meeting no details on plans to address either the city’s fiscal plight—or its interim governance. He reported the State of New Jersey does not yet have a plan to address the city’s $100 million budget hole, much less to pay down the Atlantic City’s $500 million debt, noting: “It has been two weeks…My plan is to do what I think is necessary to create a structural financial situation that works not for six months, not for a year, but indefinitely so that this place can flourish in a way that it deserves to flourish.” He noted he and his law firm will be paid hourly for their work, albeit he did not report what that hourly rate will be—especially as the state retention agreement remains incomplete, albeit promising: “We’ll make sure that’s available once it’s been finalized.” Related to governance, he noted that—related to his state-granted authority to sell city assets, hire or fire workers or break union contracts, among other powers—he would listen to residents and stakeholders before making major decisions: “What this designation has done is consolidate authority, per the legislation, in the designee to make those decisions…That does not mean that I’m not listening. That does not mean I’m pretending I have all the answers without consulting with other people.” Describing the seaside city as a “jewel” and “truly unique,” he added that he understood concerns about an outsider overseeing the city: “I know that most of you don’t know who I am…All I can do is be judged by my actions and the decision that I make, and I hope you give me time to do that.” He did say that he would have to move swiftly to address immediate issues, likely referring to reaching agreements with casinos to make payments in lieu of property taxes, and then focusing on the city’s expenses—noting: “That timeframe is pretty compressed…So we will take the steps we need to take.”

Fiscally Hard for Hartford. As we have recounted in the fiscally strapped municipality of Petersburg, Virginia, municipal fiscal insolvency cannot occur in a geographic vacuum: whether in Detroit—or as we note above today, in San Bernardino, fiscal insolvency has repercussions for adjacent municipalities. So too in Hartford, the Metropolitan District Commission (MDC) completed its planned $173 million municipal bond sale late last week, temporarily ending the controversy over a $5.5 million reserve fund. Under the provisions, that fund would be paid by seven of the eight MDC municipalities to cover the sewage fee for the second half of 2017 if the City of Hartford is unable to contribute its share, as it has indicated it will be unable to do. Ergo, it means that adjacent Windsor, the first English settlement in the state which abuts Hartford on its northern border, with a population of under 30,000 would contribute over $700,000, with East Hartford contributing about $900,000. The other group members in the metro region, Bloomfield, Newington, Rocky Hill, West Hartford, and Wethersfield, would pay the remaining $900,000, proportionately. One outcome of this watery alliance and experience is that the MDC will, when the state legislature convenes next February, propose two laws to avoid the necessity for a reserve fund in the future, with MDC Chairman William DiBella suggesting that the eight member municipalities be required to set aside as untouchable the percentage of their property taxes the cities and towns already know they will owe to the MDC for sewage services. (Currently, property taxes go into the municipalities’ general funds, and the cities extract the sewage fee when it is due, provided the funds are, in fact, available; however, like water at the tap, that has not always been the experience.) In effect, the consortium is recommending a selves-imposed budgeting municipal mandate, with Chairman DiBella noting: “Every town would have to do it. That way, one town can’t stiff us. You wouldn’t have to go out and borrow money or take charity and hope you get it back.” As the Chairman noted: “We never had a problem like this…Who thought a town would go bankrupt? With the proposed law, if a town were to go bankrupt, the sewage fund would be in a dedicated account and can’t be reached,” or touched in a bankruptcy proceeding. Another potential resolution would be to allow the MDC to borrow money over a long-term for operating expenses. The MDC would then be able to pay Hartford’s $5.5 million bill and look for a city reimbursement in other ways.

There has been increased pressure for a resolution—especially in the wake of municipal bond holders of the MDC, holders who, last week, made clear to the authority they would not buy its municipal bonds if a reserve fund was not put into place. That appeared to be a key incentive for the board’s action earlier this week for the MDC board, including representatives of all eight municipal members, to vote unanimously to adopt the water and sewer service provider’s 2017 budget, which contains the unwelcome “bail-out” fund for Hartford—albeit Chair DiBella said there would be no guarantee the agency could cover a Hartford default or continue operating or pay the bondholders. A key part of the incentive to try to work together relates to potential fiscal contagion: because of concerns over Hartford’s finances and fiscal condition, credit rating agencies have recently downgraded MDC’s bond rating from AA+ to AA, a downgrade expected to cost the agency and its member towns an estimated $500,000 in a higher interest rate for the bonds. The towns, unsurprisingly, are apprehensive the credit rating agencies will now consider changing their credit ratings. In contrast, creating the reserve fund would keep MDC’s credit rating where it is: thus, MDC officials hope that passing the two proposed laws would prompt the credit rating agencies to return its rating to AA+.

 

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