September 18, 2019
Good Morning! In this morning’s eBlog, we consider renewed efforts to eliminate blight in Detroit, as the Motor City prepares to issue debt to finance the capital costs of razing abandoned homes; then we head east to consider the efforts underway in Congress to amend the PROMESA law in a way that might reform the governance and pave the way for something closer to a chapter 9 municipal bankruptcy plan of debt adjustment. ne option Congress might consider to change the Jones-Shafroth Act in a way that might better enable the U.S. Territory of Puerto Rico to restructure its debt.
Blight Elimination in the Motor City? Detroit Mayor Mike Duggan is pitching a $250 million municipal bond issue for city voters to help eliminate Detroit’s blight by the middle of 2025, with his plan coming as the last of $265 million in federal assistance to raze blighted homes in Detroit winds down, leaving the city at the what the Mayor described as a “halfway point,” with nearly 19,000 more vacant houses to demolish or restore. “We feel like we have an obligation as a city to get every abandoned house out of every neighborhood,” Duggan told The Detroit News. “This is the proposal that will do this. We’re confident this will get the blight finally erased.” The mayor first revealed the concept during a keynote address at the Mackinac Policy Conference in May. The proposal is expected to be referred to a City Council subcommittee this week for review. The language has to be submitted to the Wayne County Clerk’s Office by mid-December to appear on the March 10 ballot. Mayor Duggan said the 30-year municipal bond would aid the Motor City in tearing down thousands more homes, and, because the city has paid off other municipal bond debts, it believes it can issue the new bonds without raising taxes.
The city exited bankruptcy in 2014 with a plan to shed $7 billion in debt and invest another $1.7 billion into service upgrades over a decade. Of those funds, about $50 million annually are allocated for blight. According to city officials, Detroit has paid off past general fund bond debt ahead of schedule because revenues have been running higher than projections made during its landmark bankruptcy. This allows the city to seek out the bond for blight reduction without raising taxes above the current tax rate of 9 mills. “We are fully confident that the taxes will never need to go up even if there is a recession or other market change,” Detroit’s Chief Financial Officer Dave Massaron said. “We built this very conservatively to protect taxpayers.”
CFO Massaron said officials are confident the long-term tax rate will not exceed 9 mills. Under state law, the levy has to be set at a level sufficient to pay off the debt. The average taxable value for residential property in Detroit is $19,100, which at 9 mills is $171.90 per year. The city’s financial reserves and its December return to the bond markets capital investment have earned it higher marks among rating agencies, increasing the city’s ability to borrow and at lower rates.
Nevertheless, Detroit’s borrowing capacity remains limited, and, as Matt Fabian of Municipal Market Analytics put it: the elected leaders of the city must carefully weigh whether a bond for demolition is the best way to commit its taxpayers in the longer term, noting that cities and counties which emerge from chapter 9 municipal bankruptcy have a higher risk of economic backsliding—noting that any county or city emerging from a chapter 9 municipal bankruptcy with fewer assets than it had going in, “needs to be very careful with how it spends: It’s not a typical reason that cities borrow, so it does suggest that maybe the city is not yet ready to act like a traditional city…Cities don’t typically borrow for blight, but cities don’t typically have the blight that Detroit has…It isn’t magic…If you’re spending on one thing, you’re not spending on something else.”
However, CFO Massaron said Detroit has nearly $675 million in capital borrowing capacity for this kind of debt, noting: “After issuing the blight bonds, the city would have nearly $450 million to invest in other capital items throughout the city…We believe that leaves more than enough for the city’s capital needs.”
For his part, Mayor Duggan said he first considered the bond several years ago when the city assumed its first wave of federal Hardest Hit Fund money would be expiring. That assumption, mayhap fortunately for the city, proved overly pessimistic: instead, the federal government approved $175 million more for Detroit’s program.
Unsurprisingly, the Mayor reported he was grateful to the U.S. Treasury Department for allocating funding for five years to attack the city’s blight. But the remaining funds have been allocated, those demolitions are taking place, he said, and “Now, we have to finish the job.”
As part of the proposal, the Mayor will seek support from the City Council to support a plan to allocate an average of $15,000 to $20,000 per house for renovation, when it is determined to be feasible, sparing some of Detroit’s blighted properties from being razed. Detroit The city estimates there are about 7,000 blighted houses that can be saved without a subsidy, but up to another 2,000 others which cannot.
Councilwoman Raquel Castañeda-López said she is concerned that the bond proposal lacks the funding ability to assess each house for potential, noting, in a statement: “Although blighted, Detroit’s housing stock is still unmatched with its historic homes: Notably, for the homes that must be demolished, there has been no conversation around deconstruction…While a small industry, deconstruction has the potential to employ more people, preserve salvageable architectural materials and to lessen the health and environmental impact of demolition.”
Federal program rules required that blighted houses to be torn down and the effort was limited to neighborhoods that were at least 70% occupied. But under the Detroit’s rules, according to Mayor Duggan, the effort will be able to touch all areas of Detroit and use some of the bond funds to renovate properties, or, as he put it: “Now, without having to deal with the restriction of the federal rules—assuming Council goes along with this, we’re going to have 1,000 to 2,000 houses that we put $20,000 into and we save them…Every chance we can to move a family into a house instead of leaving a hole in the neighborhood, that’s going to be the goal,” as he added that the federal government also took the position that the city could not give a local preference. But now, Detroit also expects to hire more city-based and minority-owned firms.
Council President Pro Tem Mary Sheffield said she wants to ensure voters are educated about the proposal before it reaches the ballot, noting: “I have serious concerns about equity and inclusion with respect to contracts and employment as well as access to opportunity and ownership after demolition.” Demolition today, she added, is not considered construction and is not subject to an executive order that outlines hiring requirements for Detroiters. Her office, she said, is working to change that through a proposed local hiring ordinance: “We must have guarantees that Detroiters benefit from the use of their tax dollars and that the goal is to truly improve the quality of life of residents and not lead to another urban renewal which amounted to urban removal in the past…I firmly believe tearing down homes is not building up neighborhoods.”
Since it launched in spring 2014, Detroit’s controversial demolition program has been the focus of several state and local reviews and a federal criminal probe after concerns were raised in 2015 over rising costs and bidding practices. Indeed, a federal investigation last Spring secured guilty pleas from two men over bid-rigging as part of a lengthy criminal investigation into the demolition program. Moreover, a federal watchdog is in the midst of an audit for the risk of contaminated soil in Detroit and Michigan for federally funded demolition work. But the U.S. Department of Justice has signaled it does not expect to bring additional charges against public officials for wrongdoing in the federal blight aid effort.
The controversial history of the program, however, could make a bond a tough sell for some voters, Fabian said. “To me, it would make it a harder tax increase to swallow for your average city taxpayer,” he said. “Hopefully they are careful when paying for blight remediation because of the history.” Lifelong southwest Detroit resident Tom Fayz said he’s supportive of plans to further beautify his city. In his neighborhood, there are several abandoned apartment buildings that have attracted squatters and crime. “I would definitely support a bond,” said Fayz, 76, a member of the Springdale Woodmere Block Club. “To bring the money back into neighborhoods instead of dropping it at Downtown Detroit, yes. If there’s a bond available, we need to use it in the neighborhoods.”
During his March budget presentation to council, Duggan noted the city this year is transitioning from a demolition effort controlled by the Detroit Land Bank Authority to a city-administered program. When the federal government set up the Hardest Hit Fund program, it insisted agencies outside city government run them, he noted. In Detroit’s case, Duggan said, that “was a terrible mistake.”
The city has had a procurement department of about 50 people, and it just added about 10 more to handle its demolition efforts, Massaron said. Meanwhile, the land bank had just four employees to execute the massive program when it first began, according to the Mayor, who noted: “They didn’t have the infrastructure to do it, and I pushed them to move faster than they were ready.”
Since the Spring of 2014, Detroit has razed more than 19,000 structures. Of those, more than 12,000 have come down with federal Hardest Hit Fund dollars, according to the land bank. Going forward, according to Mayor Duggan, the land bank will focus on what it was intended to manage: Detroit’s vacant property—or, as Mayor Duggan put it: “The land bank should have never been in the demolition business…It’s got 90,000 parcels to manage,” adding that if the bond issuance does not proceed, it would likely take the city another decade or more to tear down the remaining houses: “We don’t see an opportunity in Washington, D.C. or Lansing right now to get a new significant chunk of funds. So our reality is this: We either solve the problems ourselves or let it sit until Washington or Lansing helps…We just don’t feel like the problem could wait. I don’t know anybody who doesn’t think we need to spend this kind of money to finish the job.”
Providing a Road Map to Fiscal Recovery? U.S. House Natural Resources Committee Chairman Raul Grijalva (D-Az.) yesterday said he will propose substantial changes to the PROMESA law which currently serves as a guide for the quasi-chapter 9 means to set a plan of debt adjustment. Speaking in San Juan on Sunday as he prepared to return to Washington, D.C. from Puerto Rico, the Chairman said that next month he will present a draft proposal. Among the changes to the current law, the Chairman said he would propose the creation of a reconstruction coordinator to oversee Puerto Rico’s fiscal and physical recovery from 2017’s devastating Hurricane Maria; a public audit of Puerto Rico’s debt; and federal funding for the Oversight Board, whose budget currently comes from Puerto Rico’s government. The Chair added: “Because of the federal funding, it gives Congress and its investigative processes many more entry points for checks and balances.” He added that he will also propose that new language be added to define essential benefits, and that protections be added for education, health care, and pension security.
The Chairman’s comments come after, last week, new Governor Wanda Vazquez spent last week in Washington, DC, meeting with Democratic and Republican leaders and other government officials in an attempt to “restore the credibility” of the island’s government after former Governor Ricardo Rossello’s ouster and a series of scandals. Hostility to the PROMESA Oversight Board was a main theme among the protesters who drove the former Governor from office this past summer.
As part of his changes, Chair Grijalva indicated he will also, in his draft legislation, define essential services and order an audit of Puerto Rico’s debt as part of the PROMESA Act, according to Margarita Varela-Rosa, a staff member in the Committee’s Office of Insular Affairs. Ms. Varela-Rosa added that one proposed amendment would designate pensions, along with education, healthcare, and public safety as essential services. (The FY2019 federal budget for the PROMESA Board totaled $64.75 million.) It appears that Chair Grijalva also wants to legislatively address reconstruction efforts in Puerto Rico in the wake of massive destruction caused by Hurricane Maria in 2017: after hearing from residents during his most recent trip to Puerto Rico, Chairman Grijalva is considering community-based oversight of federal and local efforts.