The Import of Accurate Municipal Revenue Projections in Addressing Municipal Insolvency

eBlog, 1/12/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges to Detroit’s long-term recovery from the nation’s largest chapter 9 municipal bankruptcy, before turning to the small Virginia municipality of Petersburg as it struggles to not just avoid bankruptcy, but rather to right its ship of state—both by its elected and appointed leaders.

Detroit Coming Back. Detroit, as we noted in our original report on the city, is quite different than most U.S. municipalities and, indeed, from other cities in Michigan in that its revenues, from taxes and state-shared revenues are higher than those of any other large Michigan municipality on a per capita basis, in part reflecting its reliance on a significantly broader tax base than most cities in the country: property taxes, income taxes, utility taxes, casino wagering taxes, and state-shared revenues. The property tax accounted for 13.3 percent of Detroit’s revenues in 2012, even though the city had the highest property taxes among big cities in the U.S. But it was the 22 percent decline in those revenues over the decade preceding its collapse into the nation’s largest-ever chapter 9 bankruptcy that appeared to precipitate the state takeover via the appointment by Governor Rick Snyder of an emergency manager to steer the city into—and then out of chapter 9 municipal bankruptcy. The exhaustion of the city’s revenues reflected the overall loss of 15,648 business establishments between 1972 and 2007—that is, even before the massive impact of the Great Recession, or the bankruptcies and subsequent recovery of General Motors and Chrysler and the restructuring of the automotive supplier network—companies bailed out by the federal government, unlike Detroit.

Today, still, despite its lower reliance on property tax revenues, the track of those revenues can reflect the city’s fiscal direction. Indeed, the city’s housing market faces numerous challenges as the city seeks to carve out a path toward less blight, increased housing preservation, and a better functioning residential mortgage market. Zillow reports that median sale prices for metro Detroit homes and condominiums rose 7.2 percent last month compared to the year before: the median home value in Detroit is $37,000, reflecting home values which have gone up even more, by 8.5% over the past year, according to Zillow, which predicts they will rise 4.2% within the next year. At the same time, the percent of Detroit homeowners underwater on their mortgages is 0.4%, some four times higher than Detroit Metro area; the median rent price in Detroit is $750, or about 75% of the Detroit Metro median of $1,050; nevertheless, sale prices across the city have continued to grow, while both the number and share of underwater loans has continued to decline. The average household equity for all Detroit loans reached 29 percent in Q4 2015; the shares of loans in serious delinquency, foreclosure, or REO (property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction) in Detroit are on pace to fall below pre-crisis levels. The data demonstrate a particularly sharp decline in the share of REOs.

However, sales of single family homes in the city in 2015 (about 18,522) dropped about 18% from the previous year, even as Detroit’s median rent stabilized at around $756 a month in December 2015. Unemployment fell again in the early months of last year, and labor force size edged up as well, according to the Detroit Housing Tracker (the Detroit Housing Tracker monitors the latest development in the Detroit housing and community development arena and is updated quarterly: the publication has two sections in which it presents comprehensive market indicators including sales prices and volumes, rental prices, household equity level, delinquencies and foreclosures.) In comparison, in the surrounding four-county area of Oakland, Wayne, Macomb, and Livingston counties, median sale prices jumped from $149,200 in December 2015 to $159,900 in December 2016. According to Realcomp Ltd. II, last month’s figures fall in line with the general trends of 2016: the number of on-market listings in the four-county region last month declined nearly 43 percent year-over-year, from 19,634 to 11,255; however, sales prices in all four of the surrounding counties increased, on average, by 10%.

In Overtime. The city of Petersburg, Virginia added another hefty bill to its payment list after a class-action lawsuit (Thomas Ewers, et al, vs. the City of Petersburg Bureau of Police) between members of the Bureau of Police and the city was settled last week, with the settlement agreement mandating the virtually insolvent municipality to make a payment of $1.35 million in recompense for law enforcement officers’ unpaid overtime. Of that amount, the City of Petersburg will have to pay $800,000, while the Virginia Division of Risk Management will chip in the remaining $550,000. For its part, Petersburg city spokesman Clay Hamner this week reported that that part of Petersburg’s payment is expected to come via a short-term $6.5 million loan secured by Petersburg from Wells Fargo last month; other funds could potentially come from the sale of the city’s municipal water and wastewater assets—especially in the wake of an unsolicited purchase proposal last month by Aqua Virginia, Inc., leading the city to advertise for competing bids. According to the city’s press release, the settlement applies to all current and former law enforcement officers employed between Jan. 11, 2013 and June 24, 2016, by the Bureau of Police at the rank of lieutenant or below who were denied overtime or other wage-related payments. The settlement came as the city’s expensive fiscal turnaround consultants reported the city’s fiscal condition remains, reporting that the fiscal plan Petersburg has been working from since the City Council’s first attempt to strip $12 million from an outsized budget last September no longer reflects its fiscal realities: some elements of those decisions, such as slashing funding for schools, canceling a youth summer program, and boosting trash fees, would provide savings; however, not every plan materialized, according to the consultant’s analysis. Moreover, when combined with the municipality’s past-due payments to companies taken from the current year’s budget for last year’s bills, the consultant’s reported the Council, next week, will likely be forced to take further actions to reduce spending or find other revenues—and will have to include a partial restoration of a 10 percent reduction in municipal worker salaries targeted toward making whole the city’s public safety workers, with Nelsie Birch, Petersburg’s interim finance director, advising: “The reduction of salaries has done significant damage to the city.”

It seems that the employee turnover and overtime costs have soared even as morale plummeted since the austerity measure was implemented: police, firefighters and emergency communications workers would see their pay rates restored this spring if the council approves the consultant’s plan. That would be important: the city’s violent crime rate is nearly 400% higher than the statewide average. On the upside, the consultant reported that of the $18.8 million that state auditors estimated Petersburg owed to vendors as of last July 1, only $6 million to $7 million remains overdue. That might help as, next month, the city is inviting about 400 of its creditors to meet for discussions relating to past-due bills, and inviting interested buyers to consider purchasing city-owned property—with both city employees and the city’s consultants taking inventory: counting cars, combing through old equipment, and tracking every nickel spent for a dime that could be saved. The consultant addressed one key issue of concern: its current inability by its tax assessors and collectors to provide administrators with accurate revenue projections.

At the same time, the consultants expressed apprehension that city council members must learn to demand that expenses not exceed revenues: in the municipality’s FY2016 books, Petersburg had a $9 million structural imbalance in the general fund used to cover the city’s day-to-day operations: the city had $67 million to work with and spent $76 million. Finally, the consultant noted what he believes to be the source of Petersburg’s fiscal crisis: for too many years (dating back to 2009) the city has spent more than it had, propping up shortfalls from a rainy day fund which had long since evaporated. In response, interim City Manager Tom Tyrrell said the Mayor and Councilmembers could meet with officials one-on-one or in pairs to discuss the details ahead of next week’s votes to balance the current year’s budget—with such sessions not triggering Virginia’s Freedom of Information Act. Under the law, an in-person or electronic meeting of three members of a public body constitutes a quorum.

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