Feliz Ano Nuevo!

December 31, 2019

Good Morning! In this morning’s eBlog, we consider the remarkable fiscal recovery of Detroit via its so-called “Grand Bargain,” before we jet south to try to elude winter’s cold in the U.S. Territory of Puerto Rico.

The Fall & Rise of the Motor City. The first decade of the 2000s in Detroit ended with a financial reckoning for hometown automakers General Motors and Chrysler Group as they went through swift bankruptcy reorganizations and got federal bailouts. The second decade of the 2000s in Detroit was in many ways defined by the financial reckoning at Detroit’s City Hall, its public school district and, to a lesser extent, Wayne County. Neighborhood abandonment and blight in the first decade of this century led to the loss of more than a quarter-million Detroit residents, accelerating an already dwindling property tax base, emptying out schools and storefronts and leaving the city services more reliant on income and gambling taxes. The city of Detroit’s fiscal problems came to a head in the spring of 2012 when then-Gov. Rick Snyder’s administration declared a financial emergency in Michigan’s largest city, leading to a consent agreement with then-Mayor Dave Bing and City Council, which resisted the state’s takeover. In March of 2013, with the consent agreement failing and the city inching closer to insolvency, Former Governor Rick Snyder hired Jones Day bankruptcy attorney Kevyn Orr to serve as Detroit’s emergency manager, effectively sidelining former Mayor Bing and the Detroit City Council; by the following July, Mr. Orr, on the 18^th, filed in the U.S. bankruptcy Court for the largest chapter 9 municipal bankruptcy in American history, with $18 billion in debt.

Detroit’s bankruptcy revolved around the city’s inability to deliver basic services because of legacy costs stemming from a $1.4 billion bad pension debt deal from former Mayor Kwame Kilpatrick’s era and budget-busting pension and retiree health care costs. The city’s creditors wanted a fire sale on priceless city-owned art at the Detroit Institute of Art—a world-renowned collection borne from Detroit’s automotive heyday in the first half of the 20th Century. In an effort to resolve the chapter 9 municipal bankruptcy quickly and establish the fiscal foundation for a fiscal rebound, the parties reached a so-called “grand bargain,” one in which philanthropic foundations and the State of Michigan pooled together a $816 million commitment to partially address Detroit’s imperiled pension obligations, in key part to ensure that no retiree would fall below the poverty line, in exchange for shielding the city’s first-class art collection at the Detroit Art Institute from the city’s creditors—an agreement which relieved Detroit from the obligation to make full pension payments, except to those who would otherwise fall below the federal poverty level for a decade, permitting the City of Detroit to shed $7 billion in debt and freeing up some $1.4 billion over the ensuing decade—funds vital for the city to reinvest in critical services.

While the city was reorganizing in bankruptcy court, Detroit Public Schools was piling up more operating debt under state emergency management. In June 2016, the Michigan Legislature approved a $617 billion bailout of the state’s largest school system and created a new debt-free district. The out-of-court reorganization was modeled after GM’s 2009 bankruptcy. Wayne County also wrestled with a financial crisis over the past decade. In 2015 and 2016, County Executive Warren Evans’ administration erased an $82 million structural deficit. By 2018, CEO Evans had found a solution to the County and City signal challenge: a half-built county jail on the eastern edge of downtown Detroit—a municipal facility which his predecessor, Bob Ficano, had abandoned, but only after the issuance of some $150 million worth of municipal bonds—at which point, Wayne County worked out an agreement with Dan Gilbert’s Rock Ventures to construct a new county jail on the eastern edge of the Motor City’s downtown and raze the partially completed “fail jail.” Now, in the wake of a decade of false starts, that site is envisioned as a satellite campus for University of Michigan graduate programs.

Who is on First in Puerto Rico? U.S. Federal District Court Judge Laura Taylor Swain has set a new target date of next month to complete negotiations and present her with an amended report on the status of negotiations between the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) Fiscal Oversight Board and the U.S. territory’s municipal bondholders in this quasi-chapter 9 municipal bankruptcy case, requesting the mediation team at the end of last week to provide her with an amended quasi-plan of chapter 9 plan of debt adjustment or resolution by no later than February 10^th. Similarly, the judge presiding over the cases of Title III of Puerto Rico said that the parties involved in the debt renegotiation process will have about 11 days after the presentation of the amended report, or until the day before George Washington’s birthday, to submit its comments. Understandably, Judge Swain needs sufficient time in which to evaluate the mediators’ proposal during the general hearing on March 4^th, with her decision coming in response to an urgent request that the Title III Case Mediation Team made last Monday with the objective that the PROMESA Board, the U.S. Territory of Puerto Rico, and the creditor groups can continue the negotiations this month: in principle, Judge Swain approved the request the same day, but, at the end of last week, Judge Swain extended her decision to indicate to the mediators that the amended report must be submitted by the established date, whether or not there is an agreement between the parties. The pressure comes in the wake of her pressure last year for the parties to enter into a mediation process with regard to the validity of part of the island’s public debt and questions of the creditors to the Board; however, given the seeming inability of the parties to achieve an agreement; Judge Swain asked Judge Barbara J. Houser, who chairs the Mediation Team, to submit a report to establish which disputes could be settled—and which would have to be litigated in court; last month, on the 11^th, Judge Swain presided over the general hearing of the Title III cases; a first mediation report was discussed there—at which point it had been agreed there would be an amended report by next week—a deadline which has since been postponed one month; Judge Houser suggested that Judge Swain allow the disputes which seek to invalidate part of the public debt of Puerto Rico and other similar debts which, at present, are suspended, to continue their course. Thus, with Judge Swain’s order, the automatic suspension of litigation will continue until March 11. In the litigation schedule proposed by Judge Houser, a schedule which will now be subject to the general hearing scheduled for March; likely making for a busy schedule, as that is similar to the time table proposed for the resolution of the dispute over the municipal bonds of the Highway and Transportation Authority, where the issue relates to the demand which seeks to invalidate certain General Obligation bonds as well as part of the debt of the Public Buildings Authority until June 2020; unless an agreement is reached, both issues would be deferred likely to a year from next June, effectively deferring the presentation of an amended adjustment plan for the government and the consequent confirmation process. Judge Taylor Swain last Friday asked the Mediation Team on Friday to present, no later than February 10, the amended report on the negotiation process to restructure the island’s public debt.

Judge Swain said that the parties involved in the debt renegotiation process will have approximately days after the presentation of the amended report, or until February 21st, to submit its comments, clearing the path for Judge Swain to be able to evaluate the mediators’ proposal during the general hearing scheduled for March 4, with Judge Swain’s decision a response to an urgent request that the Title III Case Mediation Team made last Monday with the objective that the PROMESA Board, Puerto Rico, and the creditor groups can continue the conversations this month. It appears, in principle, that Judge Swain approved the request the same day, albeit, at the end of last week, she extended her decision to indicate to the mediators that the amended report must be submitted by the established date, whether or not there is an agreement between the parties.

Given, however, that the parties do not seem to be able to reach an understanding, Judge Swain has asked Judge Barbara J. Houser, who chairs the Mediation Team, to submit a report to establish which disputes could be agreed upon, and which would have to be litigated in court, after, last month, as she presided over the general hearing of the Title III cases and a first mediation report was discussed, there was agreement that there would be an amended report by January 10, a deadline now postponed one month. In sum, Judge Houser suggested that Judge Swain allow the disputes which seek to invalidate part of the public debt of Puerto Rico, as well as other related suits, which, at present, are suspended, to continue their course, meaning that the automatic suspension of litigation will continue until March 11th. In the litigation schedule proposed by Judge Houser—litigation which would now be subject to the general hearing scheduled for March, it was proposed that the dispute regarding the municipal bonds of the Highway and Transportation Authority, would begin to air in March, as well as the demand which seeks to invalidate certain General Obligation bonds and part of the debt of the Public Buildings Authority.

Unless an agreement occurs, both litigation would postpone the presentation of an amended adjustment plan for the government and the consequent confirmation process, probably, until 2021.

The Challenge of Municipal Fiscal Recovery

Christmas Eve, 2019

Good Morning! In this morning’s eBlog, we consider the remarkable fiscal recovery of Petersburg, Virginia.

In the Commonwealth of Virginia, one of our founding states, the state does not specifically authorize municipal bankruptcy—indeed, only one entity, an economic development authority, ever even tried to file such a petition. The municipality, as with all in Virginia, But that does not mean some municipalities in the state have not been on the precipice of insolvency. Indeed, as we have previously noted, Petersburg, one of the nation’s oldest cities, and one which due to its geography, played a critical role in both the American Revolutionary War and the Civil War, a municipality of about 32,000, is a city with a unique industrial past in part because of its geographical location at the nexus of the Upper Appomattox Canal Navigation System to the James River—giving the city a vital role. During the Civil War, Petersburg was key to Union plans to capture Richmond and vanquish the rebel foes; the city was also significant in that it was home to one of the nation’s oldest black settlements at Pocahontas Island, where two Baptist churches are among the oldest black congregations and churches in our country. The city remains a vital transportation cog today of automobile and train routes.

Like other municipalities in the state, Petersburg is barred from incurring debt exceeding 10 percent of the value of its assessed property—and, in certain instances, Virginia allows for the appointment of a receiver with respect to revenue bonds. Three years ago, a state team of auditors spent most of the summer of 2016 identifying the city’s unpaid obligations, leading to a determination that Petersburg’s fiscal crisis was the result of years of mismanaged budgets, inconsistent reporting of expenditures and revenue, and a lack of liquid cash. In recognition—and mayhap apprehension that an insolvency could adversely state credit, the Commonwealth stepped in, albeit with the former State Finance Director noting: “Right now, the city is a separate entity from the state, and they are in charge of this. I am not…I can provide assistance, and that’s it.”

Currently, the Virginia Commission on Local Government ranks Petersburg as the third-most fiscally stressed locality in Virginia, with the ranking based on fiscal stress—a means adopted three decades ago to assess or measure fiscal stress. Nevertheless, as Delegate Chris Jones (R-Suffolk), Chair of the House Appropriations Committee, has recently noted, “all the things that we consider responsible accounting” have not been followed by Petersburg, which “causes me or anyone to pause and think: How did this get this bad without anyone knowing about it?” Indeed, last week, Chair Jones appointed Del. R. Steven Landes (R-Augusta) to head up a subcommittee to study states dealing with fiscally stressed localities and come up with solutions if a fiscal situation similar to that in Petersburg should occur elsewhere in Virginia, noting: “We want to do our due diligence to see if there is legislation we might have to put in place to give authority to the state in certain circumstances to potentially take action…Right now, we don’t have the authority to do this, which is why I thought it is important to have this subcommittee between now and January and then begin the process to come up with some legislation.” Chairman Jones emphasized that the legislature will look primarily for proposals aimed at protecting the state’s interests and not those of the troubled localities, noting: “We are elected to represent our citizens at the state level, and we have our AAA bond rating to consider.”

Municipal Accountability? Virginia’s Auditor of Public Accounts, Martha Mavredes, has long since reviewed a range of potential measures to give the commonwealth a stronger role in monitoring localities for fiscal stress; in addition, she has recommended that the state build on information which local governments in the state already submit to her office each year, rather than add new mandates or responsibilities. At present, Virginia mandates that cities, counties and towns of more than 3,500 people submit an audit to her office each year. Delegate Landes said his Committee also will look into what the state can do to shorten its response time when a locality is heading toward a fiscal cliff, noting: “We want to make sure that audit information is getting to the money committees and the administration, because we would much rather be kept abreast sooner rather than later;” nevertheless, he added that a state bailout for Petersburg is out of the question: “I’m not aware where the state has ever stepped in to provide a locality a bailout…“I don’t see that happening.” It appears that, at least in the legislature, there is some apprehension that a state bailout would create a precedent for other communities, so the state is in a fiscal and governance Twilight Zone in recognition that any action it takes vis-à-vis Petersburg will likely have ramifications for other local governments.

Taking the Fiscal & Governance Reins. Now Petersburg’s municipal leadership has announced a financial milestone, as the city’s interim City Manager Dironna Moore Belton has acted in a way few appointed city or county ever wish to: cuts in municipal services, including fire and police, and cuts in school funding—in a municipality with some of the lowest performing schools in the Commonwealth; cuts in public safety in a city with an unusually high rate of violent crime, closing museums in one of the nation’s most historic cities, and cutting pay. If one thinks about it: all of the fiscal and governance actions a municipality must take—and the very obverse of the fiscal irresponsibility of the current Congress and President. But unlike President Trump and Congress, fiscal inaction and irresponsibility ion the case of Petersburg would lead to the unthinkable in just about a month: total collapse.

Already, some fire and rescue equipment has been repossessed; the city’s trash hauler is threatening to stop pickup. Indeed the fiscal collapse is one which Virginia Finance Secretary Ric Brown has described as one which in his 46 years minding state ledgers in various roles, he has never seen anything like it, noting: “As a rule, most Virginia localities are in pretty good shape.”

Because the Commonwealth has no mechanism in state law to help Petersburg and is a state which does not allow a municipality to file for bankruptcy, the onus falls on a city or county; ergo, for City Manager Belton, her task was to make the Council confront this dire state if fiscal despair and act.

Now, as she prepares to see what Santa might leave in her stocking on the morrow, she has already found a little fiscal gift from St. Nick: Petersburg’s credit rating has increased from BB+ to BBB- under S&P Global credit agency, restoring the city’s  back to investment grade, signaling to investors that the city has a low chance of defaulting on its loans, or, as Mayor Samuel Parham put it: “In 2008, cities across the country faced a severe economic downturn which resulted in a loss of economic activity, jobs and drops in revenues…Fortunately, at that time, Peterbsburg maintained a strong fund balance which shielded us from the impact of the downturn initially.” However, Petersburg’s fund balance dropped from more than $15 million, to about $6 million in 2011; the fund balance continued to drop for six years, totaling $23 million in lost funds, with Petersburg $8 million in the red by 2016—or, as the Mayor described it: “The signs were there, but, unfortunately, actions were not taken by prior administrations and prior Councils to head this beast early on,” leading, as we have previously noted, the Petersburg City Council to hire the Robert Bobb Group, which helped to stabilize the city’s finances, renegotiated debts, and restructured the city’s management structure for “greater executive oversight to key areas.” Or, as Mayor Parham described it: Petersburg has focused on its budgeting process for the past two years, adding that the city has been able to pay off all of its debts to outstanding vendors such as the Appomattox Regional Water Authority, Riverside Regional Jail, and Petersburg Public Schools. The Mayor added that Petersburg has been able to add $1 million to its fund balance over the past few years, echoing S&P’s comments that the city’s budgetary performance has improved over the past two fiscal years due to: improved internal controls, cost-cutting measures which included a significant reduction in employee staffing levels, and reduced annual debt service payments in FY2018 following a debt restructuring: actions which resulted in operating surpluses in recent years as well as a balanced budget with conservative assumptions.

Nevertheless, notwithstanding the rating upward bump, City Manager Aretha Ferrell-Benavides said there is still work to be done, noting her goal is to get the city’s fund balance to $10 million, 10% of its total fund: “For the first time in years we actually had a cash flow…And that was very impressive when they saw where we were versus where we came from.” She noted that the city’s collection rates were a huge part of that increase: “When I arrived here, we were around a 60% collection rate on a good day; we have now boasted an 80 to 95% collection rate.” That matters, as the city’s FY2019-20 budget shows that it receives 44% of its budgeted $76 million in revenue from property taxes, 19% from other local taxes, and 5% for charges and services. The city did report a dip in water and sewer collections for the month of October, reporting residential collection rate of 51% and an industrial collection rate of just 37%–numbers which, unsurprisingly, the City Manager and Finance Director Patrice Elliott said were not acceptable: “November and December are low collection months traditionally. At the same time, we had a multiple-day holiday and bills were due the last day of the month…We had large lines Dec. 1, because people didn’t focus on the holiday season in paying bills.”

The Steep Governance Road to Recovery from the Largest Municipal Bankruptcy in U.S. History

December 19, 2019

Good Morning! In this morning’s eBlog, we consider the remarkable fiscal recovery of the Motor City from the biggest chapter 9 municipal bankruptcy in American history.

Nearly sixteen and a half years after filing for the largest municipal bankruptcy in U.S. history, a day when the hotel clerk advised me I could not walk the one mile to the Governor’s Detroit offices to meet with Kevyn Orr, who had similarly arrived the previous evening at the behest of then Governor Rick Snyder, and after I had assured him I was a strong walker—only to hear him respond I would be killed if I did; I made the walk and listened to someone who had, the previous evening, kissed his spouse and two small tots and flown to the Motor City to take upon his shoulders the task of unravelling the largest municipal bankruptcy ever. I asked what his very first actions had been: he responded: 1) sending an email to every employee to advise them that he would be filing in the federal court house that morning for chapter 9 when it opened, that he had emailed every employee of the city to advise them of his plans—and that the most critical priorities were to make sure every streetlight and traffic light was working—and that every 911 call received an immediate response; he said the rest would be a longer process.

At a time where the federal government seems to demonstrate little capacity not to shut down, his actions demonstrated that the most vital and critical level of government in our country is city and county: the levels, which simply cannot shut down, and, therefore, require a governance process to protect all citizens.

Now, some five years after gaining approval for its plan of debt adjustment to exit municipal bankruptcy, Detroit is on track to post a fifth balanced budget and grow its rainy day fund, evidence that as it carries out its plan of debt adjustment: it is working and keeping the city on a fiscally responsible path. Nevertheless, as Detroit CFO Dave Massaron this week warned, as the city looks ahead to the next five years, it needs to be ready for an economic contraction; therefore, in an interview, he said the goal is to position Detroit to keep spending within its revenues, while maintaining services at a level that allows the city to continue to grow: “At the end of the day, when people focus on the bankruptcy and the five years out, a lot of people will focus on just the balance sheet, but what we have to remember is that over 200,000 people left the city between 2010 and 2013…They left because the city had a service insolvency.”

Indeed, a successful exit from chapter 9 municipal bankruptcy is not equivalent to a vibrant economy; thus, in a recent Moody’s report, the rating agency listed Detroit as of one of two of the weakest big cities in the U.S. when it comes to preparedness for a recession. (Chicago was the other.) Moody’s rates Detroit’s general obligation bonds Ba3, three notches below investment grade; while S&P Global Ratings last February upgraded the city’s general obligation ratings to BB-minus, three notches away from investment grade, noting: the city’s “debt burden is still above average even after the deleveraging in bankruptcy,” with Moody’s analyst David Levett writing: “That is something that weighs on the credit profile given that there are still capital needs on the tax base.” CFO Massaron responded that Moody’s moody report should not come as a surprise: “The city went bankrupt five years ago; coming out of bankruptcy the plan of adjustment is a 10-year plan…So there is a 10-year journey to get back into a position where the city has the same level in strength in its credit as other cities.” Thus, the Motor City continues to build up its rainy day fund, and Mayor Mike Duggan’s administration intends to propose a budget that makes an additional deposit into the fund in fiscal 2020. The city has doubled the size of its rainy day fund to better prepare for any economic downturn — the fund is now about 10% of the general fund, up from 5%. The city had a general fund balance of $611.2 million at the end of fiscal 2018; it reported a $73 million total fund deficit at the end of fiscal 2013. Fiscal 2019 fund balance expected to be larger, pending completion of the audit.

In it moody report, Moody’s gave recognition to Detroit’s progress in the last five years, writing that the Motor City has taken steps to prepare for a potential downturn: establishing an irrevocable trust to smooth spikes in pension contributions, developing a capital improvement plan which identifies a variety of sources to finance capital investments, and continuing to increase its already strong reserves—or, as CFO Massaron put it: “There is a ten-year journey to get back into a position where the city has the same level in strength in its credit as other cities.” Indeed, Moody’s reported that the steps “are all positive” for the city’s credit profile, noting: “If these trends continue, Detroit’s overall preparedness for a future recession will be more in line with major city peers.” To which CFO Massaron noted: “The sobering part of the report is that it reminds us of all the work that is left to do.”

That is, the road back will remain steep: beginning in about seven years, Detroit’s expenditures will exceed revenues, according to the city’s fiscal 2020 long-term forecast report; thus, the CFO reported that the key to avoiding that problem is economic growth and development. Indeed, since my dark days that marked the most extraordinary fiscal and governance recovery, an influx of affluent residents and large-scale developments has transformed Detroit’s downtown: the core downtown, once unsafe to even walk, today accounts for just 6% of the city’s population: it has added almost 1,000 residents since 2010, and the greater downtown area has added about 9,000 residents, according to Moody’s.

Nevertheless, as in all cities, in Detroit, it is a different story in other parts of the city. The CFO noted Detroit has built a baseline budget to provide those services and remains on pace to achieve its $1.7 billion spending goal for city services by the 10th anniversary of its chapter 9 bankruptcy exit. The city’s investments have helped improved tax collection to over 89% in FY2019 from 69% in fiscal 2014; nevertheless, the CFO noted: “That is what we have to continue to work for: At the end all of these service improvements we have made need to last through the highs and lows in order to make the city long-term financially stable.” This focus is also the way Detroit is going to be able achieve a second goal: getting its municipal bond ratings back to investment grade: “The way we think we will do it is if we continue to make investments in city services, infrastructure and in the residents that live here…We are going to continue to make targeted investments in an efficient way so we can build our tax base and get back there.” Thus, he noted that blight reduction would be a necessary precursor to increasing taxable values in outlying neighborhoods. Indeed, analyst Levitt wrote: “The city has definitely made strides in terms of services, so I think capital is the next piece after addressing service needs.”

But the cost of blight elimination is politically and budgetarily hard: last month, Mayor Duggan was unable to gain City Council approval to put a $250 million blight municipal bond on the March ballot, albeit CFO Massaron said the city plans to continue to work on a bond proposal, noting: “It is incumbent upon the administration to design and develop a proposal that meets the concerns of council and we haven’t done that yet…The fact that we have market access, and we proved that last December, is a good way for us to fund capital going forward and way for us to fund other blight-related activities.” In this instance, the municipal bonds would have been sold on the city’s own credit and would be repaid with an existing 9-mill property tax over about 30 years. CFO Massaron has said the city’s improved credit profile allows it to borrow. Yet another challenge comes in 2023, when Detroit must begin, under its approved plan of debt resolution, making full yearly contributions toward two city retirees’ pension funds, with municipal credit rating agencies and municipal analysts having written that this scheduled spike in pension payments is the most material credit pressure facing the city. (Detroit’s approved chapter 9 plan of adjustment froze the city’s legacy pension plans and provided an initial funding infusion from the so-called “grand bargain” funded with help from the state and private entities. The city received a funding holiday, but payments resume in 2024. Or as the Moody analyst put it: “The city has fairly significant fixed costs with pension payments, and that is something they will have to absorb in their budget: it is something they have done a lot of planning around, so they have a strategy:” Detroit is putting aside funds in a Retiree Protection Fund to meet the increase in pension payments of nearly $100 million more than initial post-chapter 9 bankruptcy estimates beginning in fiscal 2024: that fund is on track to grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. Or, as CFP Masseron put it: “We know there will be a greater need in the future for payments because we did not meet the actuarial measuring plan of adjustment rate of return [of 6.75%],” adding that the retirement systems have not yet established funding policies for the annual required contributions that resume in FY2024:  “Depending on amortization period selected the obligation of the general fund may increase in 2024, and, if that happens, the city will have to set aside more funding so that it’s in position to meet that obligation.” In addition to accelerating the timeline for the city’s blight removal program, the blight municipal bond would have also freed up the general funds dedicated to blight abatement for the retiree fund.

Balancing Religion & Pensions in a U.S. Territory

December 12, 2019

Good Morning! In this morning’s eBlog, we consider the challenge to pensions for teachers at Catholic schools in Puerto Rico.

Federalism, Territories, & Pensions. Puerto Rico Attorney General Noel J. Francisco has urged the U.S. Supreme Court to invalidate the decision of Puerto Rico’s Supreme Court in the matter of the pending challenge related to teacher pensions at Catholic schools in Puerto Rico to the Puerto Rico court system, whilst the federal government on Monday urged the U.S. Supreme Court to invalidate the decision of the Supreme Court of Puerto Rico in the matter of the teachers’ pensions at Catholic schools in Puerto Rico. In an amicus brief, the territory’s Attorney General recommended that the case be returned not only to the highest state forum, but also to the Court of First Instance, writing, in his motion: “This court (United States Supreme Court) must grant the petition (of certiorari submitted by the Catholic Church of Puerto Rico), render the decision of the Supreme Court of Puerto Rico void and return the case for applicable considerations, including for consideration of the jurisdiction of the Court of First Instance to enter the order in question.” Here this motion arose from a petition made by the U.S. Supreme Court last June 24th to express himself on the issue with regard to the controversy between the Catholic Church of Puerto Rico and the pensioned teachers—and in the wake of the federal government’s issuance of an opinion that favors the Catholic Church in its appeal.

Should the court accept the request, the legal process between the Catholic Church and the pensioned teachers would have to be re-started, taking into consideration the order that the court would finally issue—that is, whether or not the U.S. Supreme Court must accept the suggestion.

Here the petition or demand came from teachers of several Catholic colleges for the payment of pensions that the Archdiocese of San Juan alleges cannot be paid, since the Trust of the Employee Pension Plan of Catholic Schools became insolvent: the original claim of the over 200 employees of Catholic schools, in June of 2016, for more than $ 50 million. In response, the Archdiocese of San Juan went to the U.S. Supreme Court, last January, in an effort to revoke a decision of the Supreme Court of Puerto Rico, which determined that at the time of the demand of the teachers, there was only one corporation that represents the entire Catholic Church in Puerto Rico, not recognizing the legal personality of each component, so that the entire entity was responsible for paying teachers. In response, the Archdiocese of San Juan and the five dioceses in Puerto Rico claimed that said decision violates the right of the religious institution to organize, as each of them responds independently to the Vatican.

To prepare its report, attorneys with the Justice Department interviewed lawyers in the Catholic Church in Puerto Rico and teachers in late August. The analysis issued by Attorney General Francisco includes a strong criticism of the reasoning that prevailed in the decision of the Puerto Rico Supreme Court: indeed, among his accusations, he states that the decision of the Supreme Court of Puerto Rico was “inconsistent” with the Freedom of Expression Clause of the U.S. Constitution in deciding that all Catholic entities in Puerto Rico re under a single legal structure, noting: “As a result, each Catholic entity in Puerto Rico, no matter how separate or autonomous within the structure of the church, can occupy the assets it has, or which are dedicated to its mission to meet the debts of any other Catholic entity, including the three Catholic schools involved in litigation,” adding that the Supreme Court of Puerto Rico did not cite any “neutral state law” governing corporations, while relying on the special presumption of a provision dating back to the Treaty of Paris of 1898. The analysis further noted that, understanding that it had no basis of neutral principles, the decision of the Supreme Court of Puerto Rico “constitutes a discrimination of a (religious) denomination and violates the Free Expression Clause of the First Amendment,” and finds that the Supreme Court of Puerto Rico over-extended a decision of a 1908 case, when only the Diocese of San Juan existed in Puerto Rico, applying it to the present, where, today, there is an archdiocese and five dioceses.

Attorney General Francisco noted that “Although the opinion of the Supreme Court of Puerto Rico contains some ambiguous and conflicting passages, multiple features of this case confirm that the court’s decision, as written, established different rules for the Catholic Church,” subsequently noting that the “the decision of the Supreme of Puerto Rico is wrong for a simple and fundamental reason: As it is written, it rests on a legal reasoning only applicable to the Roman Catholic Church. And the precedents of this court leave no doubt that the Constitution prohibits discrimination against religious denominations.”

At the same time, the federal government’s representative expressed apprehension that the decision of the Supreme Court of Puerto Rico “has serious practical implications, not only in this case, but in future cases involving Catholic entities in Puerto Rico,” as another hearing at the U.S. Supreme Court next January could provide additional grounds to invalidate the decision of the Supreme Court of Puerto Rico and return the case to the Puerto Rico courts. Attorney General  Francisco also recommended that another option for the U.S. Supreme Court would be to accept the appeal of the Catholic Church of Puerto Rico for a plenary review, albeit acknowledging that the case includes procedural matters, facts that are complex, and that the file before its consideration is in a preliminary stage, but indicates that in the past they have resolved in other cases even if they are those same conditions to “correct serious violations of constitutional principles,” adding that: “Given the gravity of the constitutional claim in this case, it would be appropriate for this court to follow the same course.”

The Once & Future Motor City?

December 9, 2019

Good Morning! In this morning’s eBlog, we consider serious fiscal challenges confronting Detroit, some five years after the Motor City entered its proposed plan of chapter 9 plan of debt adjustment (in re City of Detroit, Case no. 13-5384, October 14, 2014).

On September 25, 2014, in accordance with §9(6)c of PA 436, the Detroit City Council voted unanimously to remove the city’s Emergency Manager as of the Effective Date of the Plan of Adjustment. By a letter to the Governor, the Mayor approved of the Council’s vote on the same day, and, on November 12, 2014, the United States Bankruptcy Court for the Eastern District of Michigan Southern Division entered an order confirming the Eighth Amended Plan for the Adjustment of Debts of the City of Detroit: the effective date of the Bankruptcy Order was December 10, 2014, and Kevyn Orr resigned as Emergency Manager the same day, thereby effectively returning the Motor City to local control.

But exiting municipal bankruptcy is a governing, fiscal, and, in the case of Detroit, physical challenge: the real property tax paid by homeowners is not a major source of city revenue. Unlike other cities, real property tax revenues combined on residential, commercial, industrial, and residential property make up only about 13 percent of Detroit’s general fund budget. The income tax, casino tax, utility tax, state revenue sharing and other revenues are the city’s major revenue sources. Thus, property taxes contribute $133 million to total general fund revenues of more than $1 billion.

And, despite their relative size, nearly one in four Detroit homeowners owes more in delinquent property taxes than they did three years ago despite being a part of a county program designed to help them get out of debt and avoid foreclosure, according to a Detroit News analysis. The payment plans, with lower interest rates and an extended five-year repayment deadline, were a solution devised by officials, including Mayor Mike Duggan, to help homeowners out of danger in the midst of Detroit’s record-setting tax foreclosure crisis. However, an investigation by the Detroit News determined that the plans, enacted in state law in 2015, have kept thousands of homeowners in a payment plan the News described as “purgatory” which would likely lead to the loss of their homes without more help; moreover, lost revenues from abolishing the real property tax on homeowners would have to be replaced in the city budget.

Fiscal Bumps Too.  Moreover, other local governments share in the city’s property tax revenues, such as the Detroit Public Schools, Wayne County, and Wayne County Community College: ergo, their lost revenue would have to be replaced. (Wayne County is Michigan’s first “charter county,” with a home rule charter determining its structures within limits set in Michigan state law and its constitution. Most Michigan county governments are structured according to state law, without a locally adopted charter.)  

In its review of some of the first homeowners to enroll in Wayne County’s low-interest payment plans, the News analysis shows almost 40%, nearly 4,700 homes, have either been foreclosed or are off their plans and at risk of foreclosure next year, as of mid-September (the analysis tracked the progress of nearly 12,000 properties with about $68 million in property tax debt over the last three years), noting that just under a quarter, or about 2,700 of the properties the News followed, have more debt than they did three years ago—with, in many cases, after owners fell behind on additional tax bills.

Nevertheless, Wayne County Treasurer Eric Sabree, Mayor Duggan, and residents appear to like the plan—the Interest Reduction Stipulated Payment Agreement (IRSPA)—the plan intended to keep families in their homes–plans, outlined in Michigan state law, which impose a discounted 6% interest on property tax debt instead of up to 18% Wayne County normally bills. Indeed, it appears the plans have helped dramatically reduce Detroit’s foreclosures from a record high in 2015 of 9,111 occupied homes to 514 this year, equivalent to a 94% decrease, according to city data. However, some fear this is all simply putting off the date for thousands of potential foreclosures as deadlines expire.

Part of the challenge is that in a major city where close to one third of its residents fall below the federal poverty level, the mechanism of low interest loans was not a solution to alleviate the debts in the nation’s poorest big city, where more than a third of its citizens fall below the federal poverty level. Indeed, former Wayne County Chief Deputy Treasurer David Szymanski, who had worked with the state legislature to create the low-interest payment plans, noted: “We did what we could at the time…We thought (the payments) were much more manageable…and people would be able to get out from under the debt…We are seeing the unintended consequences today. We certainly didn’t want it to be a Band-Aid.”

Last October, Mayor Duggan and Treasurer Sabree publicly acknowledged the plans were not working for some; they proposed state legislation, which would expand an existing tax break for low-income families to forgive, retroactively, much of what homeowners owe for past years. Mayor Duggan’s staff said it ran an analysis, concluding the city needed to act; however, unsurprisingly, critics insist the new program is inadequate, given the existing tax break—which now only erases the current year’s property tax bill — is unknown to most residents: only about 1,200 of the 11,100 homeowners currently on IRSPA payment plans had the tax break in 2018 or 2019, even after the city’s bolstered education efforts, according to The Detroit News analysis, which noted that of the 12,000 properties it has tracked since August of 2016, 13% have been foreclosed, some nearly 1,600 homes, while another 35%, or about 4,200, still had debt, but were no longer on any payment plans as of last September—and, of those, about 3,100 had debt that would put them at risk of foreclosure next year; nearly 31% of the 12,000 properties are still on IRSPAs, but many of those owners are struggling too. Only 1 in 5 are on track to pay off the debt within the original five years they were given, based on the rate they have paid and added new debt over the last three years. The average debt owed on those properties that were still on plans is $4,300, down from $6,300 in August 2016. 

Treasurer Sabree last month ran his own analysis, determining that there has been improvement: noting: “Given that, according to your numbers, more than 87% of Detroit owner-occupied homes that were subject to foreclosure have not been foreclosed, we believe that IRSPA has been successful for Detroit homeowners…The primary goals for the IRSPA included reducing the displacement of homeowners and reducing the number of owner occupied properties being foreclosed…Given that, according to your numbers, more than 87% of Detroit owner-occupied homes that were subject to foreclosure have not been foreclosed, we believe that IRSPA has been successful for Detroit homeowners.”

One fly in the intended ointment appears to have been that when Motor City homeowners leave the plans, their interest rate pop back up to 18% retroactively on all debt, unless they successfully reapply for another IRSPA plan. (Homeowners are limited to two plans). While the interest and fines collected by the Treasurer’s office are deposited into Wayne County’s Delinquent Tax Revolving Fund, which, beginning five years ago was used by Wayne County to balance its budget; this year, county operations used $17.41 million from the fund and expect to reduce that to $15.09 million next year, according to County officials. University of Michigan Professor Margaret Dewar, who has studied tax foreclosure for a decade and a half, said the plans were an important effort to stall the foreclosure crisis, but that concerns remain, noting: “If it was a viable way of dealing with the problem, (the numbers) would be much better: They need to come up with better solutions…It’s not OK to have that many people in jeopardy of losing their houses still.” (Wayne County generally seizes properties after a property tax bill goes unpaid for three years.)

Racial Impact? Detroit’s ongoing tax foreclosure crisis appears to have abetted the reduction in the percentage of African Americans who own their own homes to a level lower than in any other state in the nation: to 40% from just over 50% nineteen years ago—a distressing turnaround in a city which once had one of the highest rates of black homeownership in the nation. Indeed, Chairman Willie Donwell, who chairs the Board which reviews applications for Detroit’s poverty tax exemption program, said he was not surprised so few are able to keep up with payments, noting that older housing stock, combined with low-wage jobs, creates a debt cycle, noting he has seen people often resort to payday loans to pay for a new water heater or other major expenses, while struggling to keep a home out of foreclosure: “Who knows how long it will be to get out of that cycle?…I feel we did waste time (with the payment plans). We are kind of at a tipping point of trying to save people’s homes from foreclosure or a lot more homes will be going on the demolition list.”

No doubt contributing to the governance challenge is the lack of information and understanding: many low-income homeowners would likely not have owed the bulk of their property tax bills has they known about and understood Detroit’s poverty tax exemption, much less the application process—a critical vacuum, as the property tax break, allowed by state law, either exempts a homeowner from paying taxes or reduces the bill by half—a process finally made easier to understand after, in response to a legal challenge, the city made more accessible in a court settlement last year with the ACLU of Michigan; however, that exemption cannot be applied to past years. Moreover, thousands of Motor City homeowners still struggle with debt from inflated taxes that were levied years before the state seized oversight and ordered a reappraisal which had not been properly done for more than half a century—as monthly accruing interest has compounded that inflated debt.

Trying to Balance Imbalances. Nevertheless, the concept of retroactively correcting tax bills has so far failed to attract the support of Mayor Duggan. Treasurer Sabree last year suggested that a retroactive poverty tax exemption would not be fair to homeowners who paid, but this summer reversed himself and said he was supportive of the proposal. Wayne County Executive Warren Evans has said he would support a retroactive poverty tax exemption—even as Michael Steinberg, a former legal director at the ACLU of Michigan, who along with other groups sued Detroit and Wayne County over inflated assessments and to increase access to the tax break, noted: “(City and county officials) aren’t willing to make people whole for a problem they are responsible for.”

Claims against the Wayne County were thrown out of court; nevertheless, Detroit settled with the ACLU, promising to improve access to the poverty tax break. Last month, Mayor Duggan, Treasurer Sabree, and County Executive Evans announced a compromise plan with a delightful pun: “Pay as You Stay,”—a plan which would erase a significant portion of tax debt for the poorest: those who qualify—by applying for the existing poverty tax exemption—would have their interest and fees waived; the remainder of their debt would be capped at 10% of their home’s taxable value. The owners who qualify would have to pay the bill within three years with no interest charges, or risk having to pay the full amount they owed, if the proposed legislation passes in a Republican controlled Legislature. 

Such a plan, if implemented, could dramatically cut many homeowners’ debts—for instance, one family’s would drop from its current $6,400 to $1,160—or, as Detroit CFO David Massaron out it: “The idea is to drive the debt down to something that is manageable,” adding that no one believed the low-interest payment plans were a “silver bullet.” Nevertheless, he believes Pay as You Stay would help relieve the debt burden while being fair to those who paid their bills. (The proposed legislation is currently pending before a House committee in Lansing.) The city has pledged to educate residents about the new plan: recently it sent letters to 188,000 households urging owners who qualify to apply for the poverty tax exemption. 

Fiscal Contagion? It appears that Wayne County’s foreclosure crisis has had a deep effect on Detroit, driving down the city’s home ownership—and added to its blight: Detroit experienced more than 65,000 mortgage foreclosures between 2005 and 2015, with subprime mortgages contributing to some of the highest levels in the nation, even as many more properties would eventually be lost to tax foreclosure. Indeed, nearly one-third of city properties have been seized for unpaid property taxes since 2008, according to a Detroit News analysis—or, approximately 125,000 unique parcels, including houses, businesses, and vacant lots: indeed, many were foreclosed more than once—a tragedy which has led to thousands of Detroit residents losing their homes, ending Detroit’s long-time status as a majority homeowner city: the beginning of the crisis was in 2008, with the national housing meltdown; it peaked four years ago with nearly 25,000 city properties tax foreclosed just that year. 

The Impact of Rising Sea Levels of Cities & Will there be another federal government shutdown?

December 6, 2019

Good Morning! In this morning’s eBlog, we consider some of the physical and fiscal challenges created by climate change for American municipalities, this time in the U.S. territory of Puerto Rico.

Rising Sea Levels. The Salinas of Cabo Rojo, Puerto Rico, affected by the increase in sea level due to climate change, would be declared in a state of emergency by municipal ordinance, Mayor Roberto “Bobby” Ramírez Kurtz said this week. This National Wildlife Refuge, established in 1974, comprises 1,856 acres of lagoons, salt marshes, seagrass beds, mangrove forest, xeric forest, coral reefs and uplands. The name Cabo Rojo, or red cape, is derived from the rust-red limestone cliffs that overlook the white beaches and clear, calm waters of Bahia Sucia (Dirty Bay). Located in the southwest corner of Puerto Rico, these coastal ecosystems provide important habitat for native shorebirds and for migratory birds traveling along the Atlantic flyway. Like much of Puerto Rico, long before the island became a U.S. territory, it was inhabited by the aboriginal Araucos people, who began extracting salts from the salt flats in AD 700. Upon their arrival to Puerto Rico in the 16th century, the Spanish took over salt extraction using the local Tainos people for slave labor. Today, the landscape is still used for commercial salt extraction by a private operator, though the property is owned and operated by the U.S. Fish and Wildlife Service. Mayor Ramírez Kurtz said that the Municipal Legislature is considering declaring an emergency in the area, in an attempt to expedite projects to control seawater intrusion and mitigate its adverse effects, noting: “We cannot stand idly by. What is happening in Las Salinas is a disaster and, if left unattended, will bring many consequences.”

After the passage of hurricanes Irma and María, in 2017, and recent events of strong swells, the dunes which prevented sea water from easily entering Las Salinas were undermined—thereby allowing sea water to freely enter and reach the curds, where a local company extracts salt and merchandise—meaning this vital industry, which has been in operation since 1511, remains practically closed—with adverse implications for both jobs and municipal revenues. Mayor-or Alcalde Ramírez Kurtz is waiting for the Bureau of Emergency Management and Disaster Management to issue an emergency certification for Las Salinas, as promised by Commissioner Carlos Acevedo; however, as of yesterday, Commissioner Acevedo said the certification was still “under legal evaluation” by the Department of Public Security, albeit promising that the certification would be delivered to the Mayor.

With an emergency certification, Cabo Rojo could process permits before the Department of Natural and Environmental Resources via expedited means, to develop mitigation projects in Las Salinas, albeit the City Council would have to document the damage with photos and videos, and ask a licensed engineer to propose a possible temporary solution—similar to the type of certification which was issued by the Bureau, late last August for the Ocean Park community in San Juan, due to a severe coastal erosion problem. Commissioner Carlos Acevedo noted: “In addition to the case of Ocean Park, this administration has not granted similar certifications. However, the Department of Natural and Environmental Resources is waiting for the Municipality of Arroyo to submit a plan to meet a request submitted for that purpose.” Mayor Ramírez Kurtz noted that, given the situation in Las Salinas, he was urgently seeking a meeting and “interest” by the U.S. Army Corps of Engineers, FEMA, and the Puerto Rico Central Office of Recovery, Reconstruction and Resilience:  “They have to help us in this disaster process. There is no turning back with this. We have to move fast because we are facing a consequence of climate change.”

Late for an important date!  Congress is racing the clock as they rush to prevent another shutdown poised to start in two weeks: even though the House and Senate have until Dec. 20 to get a final. Delaying appropriations bill to the President for the federal fiscal year which began last October 1, House and Senate negotiators say they really have just a matter of days to reach a deal on the fiscal bills to prevent having to approve another stopgap measure, or a continuing resolution (CR). Senate Appropriations Committee Chairman Richard Shelby (R-Ala.) noted the next few days would be “crucial” as House and Senate lawmakers have struggled to make progress this week: “We’ve talked a lot and not done a lot. We’ve just got a few days; I’m not as optimistic as I was Sunday when I came back here.” The snag in the ointment, unsurprisingly, appears to be the proposed border wall with Mexico: negotiators have been swapping offers. The GOP-controlled Senate included $5 billion for the wall in its Department of Homeland Security appropriations bill, while the House included no new funding in its omnibus appropriations bill. (Beyond haggling over the amount of new, borrowed funding a wall, there also appears to be a rolling debate over Immigration and Customs Enforcement beds and President Trump’s authority to reallocate national defense appropriations to the border wall: indeed, reports surfaced Wednesday that the President would refuse to sign appropriations bills funding bills absent gaining some funding for the wall. Eric Ueland, the White House director of legislative affairs, declined to say whether the President would sign a fiscal 2020 package if it did not include a new measure for DHS: “The President has laid out from the beginning of the year in his budget his priorities, we believe that bringing all 12 bills through is important.” Senate Minority Leader Charles Schumer (D-NY) warned Republicans that a wall was a “non-starter for Democrats” and that drawing red lines on the border could result in “another Trump shutdown: We had hoped the President had learned his lesson, but it appears a year after losing the same battle, the President is considering a repeat of history.” Republicans, however, say Democrats are trying to break a two-year budget deal by including restrictions on President Trump’s ability to shift money to the wall in the appropriations bills. Senate Majority Leader Mitch McConnell (R-Ky.) stated: “We’re stalled. We’re stalled because the agreement that we all reached in the summer has not been honored by the other side.”

Congress has three options if it is going to avoid a shutdown of the federal government (an option not available to cities and counties): complete agreement on the 12 FY2020 appropriations bills, pass another stopgap bill, or some combination of both. However, Rep. Mark Meadows (R-N.C.), a close ally of the President, said President Trump would sign a stopgap measure if necessary and was more focused on whether any new agreements in the FY2020 bills would clash with a top-line spending deal struck over the summer. Specifically, he said, obstacles centered around abortion issues and President Trump’s use of emergency powers to transfer defense funds for the wall: “If Speaker Nancy Pelosi is backing off that commitment, then there is a problem, because that’s a poison pill: “We’re looking for clarity from the Speaker and U.S. Treasury Secretary Mnuchin as to what was agreed to.”

Climate Change:What Might Be some of the Fiscal and Physical Challenges for State & Local Leaders?

December 12, 2019

Good Morning! In this morning’s eBlog, we consider some of the physical and fiscal challenges created by climate change for American municipalities, this time in the U.S. territory of Puerto Rico.

Rising Sea Levels. The Salinas of Cabo Rojo, Puerto Rico, affected by the increase in sea level due to climate change, would be declared in a state of emergency by municipal ordinance, Mayor Roberto “Bobby” Ramírez Kurtz said this week. This National Wildlife Refuge, established in 1974, comprises 1,856 acres of lagoons, salt marshes, seagrass beds, mangrove forest, xeric forest, coral reefs and uplands. The name Cabo Rojo, or red cape, is derived from the rust-red limestone cliffs that overlook the white beaches and clear, calm waters of Bahia Sucia (Dirty Bay). Located in the southwest corner of Puerto Rico, these coastal ecosystems provide important habitat for native shorebirds and for migratory birds traveling along the Atlantic flyway. Like much of Puerto Rico, long before the island became a U.S. territory, it was inhabited by the aboriginal Araucos people, who began extracting salts from the salt flats in AD 700. Upon their arrival to Puerto Rico in the 16th century, the Spanish took over salt extraction using the local Tainos people for slave labor. Today, the landscape is still used for commercial salt extraction by a private operator, though the property is owned and operated by the U.S. Fish and Wildlife Service. Mayor Ramírez Kurtz said that the Municipal Legislature is considering declaring an emergency in the area, in an attempt to expedite projects to control seawater intrusion and mitigate its adverse effects, noting: “We cannot stand idly by. What is happening in Las Salinas is a disaster and, if left unattended, will bring many consequences.”

After the passage of hurricanes Irma and María, in 2017, and recent events of strong swells, the dunes which prevented sea water from easily entering Las Salinas were undermined—thereby allowing sea water to freely enter and reach the curds, where a local company extracts salt and merchandise—meaning this vital industry, which has been in operation since 1511, remains practically closed—with adverse implications for both jobs and municipal revenues. Mayor-or Alcalde Ramírez Kurtz is waiting for the Bureau of Emergency Management and Disaster Management to issue an emergency certification for Las Salinas, as promised by Commissioner Carlos Acevedo; however, as of yesterday, Commissioner Acevedo said the certification was still “under legal evaluation” by the Department of Public Security, albeit promising that the certification would be delivered to the Mayor.

With an emergency certification, Cabo Rojo could process permits before the Department of Natural and Environmental Resources via expedited means, to develop mitigation projects in Las Salinas, albeit the City Council would have to document the damage with photos and videos, and ask a licensed engineer to propose a possible temporary solution—similar to the type of certification which was issued by the Bureau, late last August for the Ocean Park community in San Juan, due to a severe coastal erosion problem. Commissioner Carlos Acevedo noted: “In addition to the case of Ocean Park, this administration has not granted similar certifications. However, the Department of Natural and Environmental Resources is waiting for the Municipality of Arroyo to submit a plan to meet a request submitted for that purpose.” Mayor Ramírez Kurtz noted that, given the situation in Las Salinas, he was urgently seeking a meeting and “interest” by the U.S. Army Corps of Engineers, FEMA, and the Puerto Rico Central Office of Recovery, Reconstruction and Resilience:  “They have to help us in this disaster process. There is no turning back with this. We have to move fast because we are facing a consequence of climate change.”