On the Hard Roads of Fiscal Recovery

eBlog

Good Morning! In this a.m.’s eBlog, we consider the growing, remarkable fiscal recoveries in post-bankruptcy Detroit and formerly insolvent Atlantic City, before turning to the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy.

Pacing a City’s Economic Recovery. JP Morgan Chairman and Chief Executive Officer yesterday described the city of Detroit’s economic recovery as one which has moved faster than expected—indeed, so much so that the giant financial institution today will announce it is expanding its investment in the city over the next two years, bringing the total effort to $150 million by 2019—some two years ahead of schedule. Mr. Dimon credited the city’s economic progress to strong collaboration between civic, business, and nonprofit leadership, as well as improving economic conditions in the city. If anything, over the last three years, the bank has become an enthusiastic partner in the Motor City’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy via investing more than $107 million in loans and grants to enhance the city’s remarkable progress in implementing its plan of debt adjustment and achieving the goal of complete restoration of its fiscal autonomy. JP Morgan’s investments have included $50 million in community development financing, $25.8 million to revitalize neighborhoods, $15 million for workforce development, $9.5 million for small business expansion, and $6.9 million in additional investments. In addition, Morgan appears to be ready for more, with the bank’s future investments likely to focus on:

  • further revitalizing Detroit’s neighborhoods,
  • strengthening the city’s workforce system, and
  • helping minority-owned small businesses grow.

Indeed, Mr. Dimon noted: “Detroit’s resurgence is a model for what can be accomplished when leaders work together to create economic growth and opportunity…This collaboration allowed us to speed up our investment and extend our commitment over the next two years. Going forward, I hope business, government and nonprofit leaders will see Detroit’s comeback as a shining example of how to put aside differences and work to find meaningful and innovative solutions to our most pressing economic problems.” For his part, Detroit Mayor Mike Duggan called JPMorgan Chase “a true partner” in the city’s work to restore economic growth and opportunity, noting that Morgan’s investments “have enabled thousands of Detroiters to receive training and created new opportunities for entrepreneurs and revitalized neighborhoods. There is more work to do, and I hope our continued partnership will build a thriving economy for all Detroiters.”

Indeed, the giant financial institution has extended its fiscal commitment: it plans to make investments of about $30 million focused on creating livable, inclusive, and sustainable neighborhoods. Officials report that will include preparing residents with the skills needed for high-paying careers and providing small businesses with capital. In addition, JPMorgan Chase officials said they will invest about $13 million re-paid loans paid back into two community development investment funds with which the bank has partnered in the community: Invest Detroit and Capital Impact Partners. This post-municipal bankruptcy investment in Detroit has been key, city officials, report to enabling Detroit to test solutions, adapt programs, and even find models that could be applied to other cities. For instance, the city’s Motor City Mapping project, Detroit’s comprehensive effort to digitize Detroit’s property information and create clear communication channels back and forth between the public, the government, and city service providers, has provided JP Morgan with insights how blight mapping can be applied in other cities to bring community partners together to fight blight—the bank has already shared the mapping technology in Cleveland, Columbus, and Cincinnati.

Is Atlantic City like Dracula? New Jersey State Senator Jim Whelan (D-Northfield), the former Mayor of Atlantic City and previous teacher in the city’s public school system, yesterday noted: “I always say Atlantic City is like Dracula—you can’t kill it, no matter how hard we try.” Indeed, the city’s gleaming casinos are turning profits, and plans have recently been announced to embark upon a $375 million renovation and reopening of the Trump Taj Mahal by Hard Rock casino; Stockton University just broke ground on a satellite campus. A luxury apartment complex, the first to be constructed in Atlantic City in decades, is underway. With upgrades in the city’s credit rating, a city that was on the brink of chapter 9 bankruptcy and taken over by the state is, today, on the road to recovery. The fiscal recovery comes in the wake of a decade which featured a 50 percent drop in the city’s casino revenues, witnessed the closure of nearly half of the casinos, and loss of 10,000 jobs, a loss which triggered a massive spike in home foreclosures—indeed losses which so imperiled the city’s fisc that the state took over the city. But this week, with a new playground ready for when the local elementary school lets out and a reduction in property taxes, there is a note of fiscal optimism. David G. Schwartz, an Atlantic City native, who currently serves as the Director of the Center for Gaming Research at the University of Nevada, Las Vegas, described it this way: “I think we are definitely into the next phase of the city’s history…Atlantic City has faced adversity before, and it has always moved forward–even though it sometimes took a few decades.”

My distinguished colleague, Marc Pfeiffer, the Assistant Director of the Bloustein Local Government Research Center in New Jersey, who, after a brief 37-year career in New Jersey local government administration, and a mere 26 years of service in New Jersey’s Division of Local Government Services, described the remarkable fiscal turnaround this way:

“The state is proceeding with its low-key recovery approach, working hand-in-hand with Mayor Guardian’s administration and the City Councilinsofar as politically feasible, and when not, pushing ahead using the authority in the law.  A few fits and starts with some challenges along the way, but it is a generally forward, positive trajectory. The recent Superior and Appellate decisions affirmed (or until appealed to the Supreme Court) the validity of New Jersey’s authority under the law, which eliminated the uncertainty of the last year. That’s good.  Jeff Chiesa’s team can now work with the city’s administration to make the changes which have long been discussed: reducing costs, modifying service levels and workforce size, in order to meet the city’s needs today given its new and evolving economy.”

In answer to the query what still remains to be addressed, he noted that the hard political issue of payments in lieu of taxes is being challenged by the neighboring County Executive and mayors of surrounding jurisdictions.  He reports that finding a “chunk of money to bring down long-term debt” to enable reductions in the city’s property tax is still a challenge—as is the enduring question with regard to how to address the water authority: how can it be monetized and meet the city’s interest in not losing ownership of it.  

From a governance perspective, he notes that the State of New Jersey had managed to keep all these issues relatively low-key: negotiations have been undertaken far from the public spotlight—mayhap depriving the public of critical information, but, at the same time, facilitating fiscal progress in avoiding the once, seemingly certain municipal bankruptcy.

Importantly, he adds that Atlantic City’s evolving economy cannot be ignored: “We’ve seen new investment and construction; new market rate rentals, South Jersey Gas moving its headquarters to Atlantic City; there is a new Stockton State University campus, and the pending revitalization and reopening of the shuttered Taj Mahal as a Hard Rock casino: “casino gaming revenues are up as we slide into the prime season.” Finally, he writes: “We seem to be getting to the point of ‘right-sizing’ the city, both economically and governmentally…which may be complicated by the pending elections—where the issue will be the upcoming primary battle to determine who will run against Mayor Guardian this fall.

Could There Be Promise in PROMESA? PROMESA Puerto Rico Oversight Board Chair José Carrión has advised the Governor Rosselló that the board has deferred until a week from Monday for either the board approving the Governor’s budget or notifying the Governor of violations and providing a description of corrective actions, writing: “We have received a working draft of the proposed budget, and are reviewing the submission and its completeness…The board will provide the Governor an additional 14 days to amend and improve the submission before it approves it or identifies violations.” The Governor’s working draft has yet to be made public; and constructing it will be perilous: according to the PROMESA board-certified fiscal plan, as of mid-March the Board expects the Governor to add nearly $924 million in revenues and cut $951 million in expenses from Puerto Rico’s All Government Activities budget—changes in a deteriorating economy the equivalent of nearly 10% of the Commonwealth’s budget.

Dr. José G. Caraballo, a professor in the Department of Business Administration at the University of Puerto Rico at Cayey, who also serves as the Director of the Census Information Center at the University, this week provided some perspective—or what he called “conjectures” with regard to the cause of what he called Puerto Rico’s “unsustainable indebtedness,” noting one hypothesis is that a “bloating” government inflated the government payroll, increasing the need to borrow. That perspective is valuable: for instance, he writes: “Even when there is no academic study showing that the payroll is payable or not, the proportion of government employees to the overall population aged 16 and older was lower in 2001 than in 1988, when there were no debt problems. In fact, the ratio of government workers to the population, ages 16-64, in 2013 was 10.3 percent in the U.S. and 11.2 percent in Puerto Rico, reducing the validity of this claim.”

Addressing the hypothesis that reckless and corrupt administrations had caused Puerto Rico’s fiscal and debt crisis, he noted: “I acknowledge that fiscal mismanagement has exacerbated this crisis, but there are studies showing that the (low) quality of administrators was similar from 1975-2000, and there is no evidence that the corruption of the 2000s was worse than the corruption in the 1970s or 1980s, when there was no debt crisis,” adding that “debt (measured in the correct way, either adjusted for inflation or as a share of gross domestic product) actually decreased from over the decade from 1977-1987.”  

Finally, he turned to an underlying issue: the disparate treatment of Puerto Rico created by §936 of the Internal Revenue Code—under which the industrial incentives provided to Puerto Rico were stripped, undercutting the island’s economy and disadvantaging it compared to other Caribbean nations: he noted that the proportion of manufacturing left the U.S. territory without any substitutable economic strategy, reduced government revenues, and increased Puerto Rico’s dependency on external funding—noting that in 1995, manufacturing represented 42% of Puerto Rico’s GDP, creating more than 30% of the local bank deposits and generating 17% of the total direct employment. Thus, he added; “It is far from a coincidence that when the transition period of the §936 ended in 2006, Puerto Rico entered the largest economic depression in more than 100 years. I verified the relationship between this deindustrialization and indebtedness with advanced statistical methods in a recent paper.”

Dr. José G. Caraballo offered that Congress could include Puerto Rico in the Guam-Northern Mariana Islands Visa Waiver Program—a change which he suggested would draw more tourists from Asia; remove the federal navigation acts which force Puerto Ricans to exclusively contract expensive U.S. vessels; implement new industrial policies; or provide parity in the distribution of Medicare and Medicaid assistance.

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