From the Ashes of Municipal Bankruptcy

September 17, 2018

Good Morning! In this morning’s eBlog, we report, again, on the remarkable fiscal and neighborhood recovery of Detroit—a demonstration of how chapter 9 municipal bankruptcy can lay the foundation for extraordinary fiscal and physical recovery. Then we look south to consider a new strategic plan for Puerto Rico—a U.S. territory surely on notice that it cannot count on FEMA in a major, life-threatening disaster.  

The Phoenix of American Cities? Detroit, the once and mayhap future automobile capital of the U.S. and one-time Motown music capital, filed for the nation’s largest ever chapter 9 municipal bankruptcy five years and two months ago in the wake of a loss of more than a million residents, cuts in state aid, and collapsing real estate values—forcing the city to borrow to meet its operating costs. It came in the wake of the city experiencing periodic episodes of corruption and mismanagement for years—a critical consequence of this former great American industrial city’s dysfunction had been its erosion as a core for jobs: employment had fled the urban core, at a time it was rising in the metropolitan area—even as other cities were seeing something of a city-center revival. The Motor City’s ability to borrow in the municipal markets was exhausted after years of issuing long-term debt to pay its operating bills: the city had listed liabilities in excess of $17 billion—equal to $25,000 for every remaining resident. In his report, the city’s Emergency Manager, Kevyn Orr, described the city as “dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption.” For residents, escaping these debts and physical deterioration accompanied by high violent crime rates and unperforming schools meant moving to the suburbs: of the 264,209 households in Detroit, only 9.2% were married couple families with children under 18; another 78,438 households, or nearly 30%, were families headed by women.

Now, as the ever insightful Daniel Howes of the Detroit News has written, the city’s neighborhoods are in play: he wrote: “Three months after Ford Motor Co. confirmed plans to convert Corktown’s dilapidated Michigan Central Depot into its center for mobility and self-driving vehicle development, a consortium backed by $50 million from the Kresge Foundation is planning a cradle-to-career educational complex on the campus of Marygrove College at Wyoming and McNichols.” He was referring to the city’s historic district near downtown, one of the city’s oldest neighborhoods—and one listed on the National Register of Historic Places. It is not just an old part of the city, but one which gained its heritage in the middle of the last century when, in the wake of the Great Irish Potato Famine in the 1840’s, the great Irish migration to the U.S. made Detroit the city with the largest new home—with many Irish settling on the west side of the city; they were primarily from County Cork, and thus the neighborhood came to be known as Corktown. Kresge’s CEO, Rip Rapson, at the end of last week answered “unequivocally ‘yes.’ The time for the pivot to the neighborhoods is now,” in what he deemed an “an unprecedented model of neighborhood revitalization.”

A critical element to this revitalization could come from the physically and fiscally depleted Detroit Public Schools—so physically dangerous and unperforming that they served to discourage families with children from wanting to live in the city; yet, now, as Mr. Howes wrote: “The symbolism is striking. The Detroit Public Schools Community District board, burdened with a legacy of underperforming schools and labor troubles, is wagering it can create a new model for traditional public education by partnering with the University of Michigan’s School of Education, Starfish Family Services, and Marygrove to teach local students and teach their teachers…Borrowing from the residency programs used in medical education, the Ann Arbor university founded 201 years ago in Detroit would leverage its reputation and expertise in what University President Mark Schlissel calls “teamwork in service to the public.” That is, the effort is to anchor community redevelopment, as Chicago did, by education: the Detroit Public School District would operate a K-8 school and a high school carved from the former Bates Academy on the east edge of campus, while the University of Michigan would operate an undergraduate “residency” program for aspiring teachers.

Mr. Howes went on to write that, even as Detroit’s downtown and Midtown attract billions in private investment, especially from mortgage mogul Dan Gilbert and the Ilitch family to big corporate relocations and small business investment, neighborhood residents and the civic groups representing them have continued to ask: ‘what about us?’ The answer, it seems, is driving in: the Ford Motor Co. reports it will invest $740 million to build out the Corktown campus. Kresge is spearheading numerous community initiatives. A JPMorgan Chase program continues to invest in small-business creation.

On the elected front, Mayor Mike Duggan, seeking re-election, has made neighborhood revitalization a key issue in his campaign for, as Mr. Howe noted, two reasons: “It’s politically potent in a city that struggled for decades to provide basic services, and, second, it’s the next obvious step in the city’s revitalization: Reinvesting in downtown and Midtown, essentially the spine of Detroit, helps bolster tax base, fuel economic activity, and create tax-paying jobs. Reinvesting in neighborhoods and improving traditional public education strengthens community and gives Detroiters a reason to stay, to reap the benefits of rising property values.”

Kresge CEO Rip Rapson, a critical player in Detroit’s physical and fiscal recovery, notes: “What this town needs to be shown again and again is you can take big ideas and make them real…So many people are waiting to see efforts like this fail.” The heart, as Mr. Howes noted, of the so-called “P-20 Partnership” is Detroit’s reconstituted public school district, a campaign backed by Kresge’s contributions, the University of Michigan’s commitment to train teachers to teach Detroit’s youth— and the courage of its leadership to develop a new model for educating the city’s kids, right in the heart of a neighborhood.”

A new Strategic Plan for Puerto Rico? While FEMA has approved a new document for emergency response for Puerto Rico, it is a plan with a critical MIA: municipios—and this with time uncertain, as Hurricane Isaac is lurking in the Caribbean and FEMA is caught in a quagmire over the President’s assertion that fewer than 50 lives were lost in Puerto Rico from Hurricane Maria. FEMA’s Deputy Federal Coordinating Officer in Puerto Rico, Justo “Tito” Hernández has asserted that the “The Strategic Plan was revised. And we are already doing exercises based on the plan. That is already finished,”in an interview with El Nuevo Día, claiming the changes are intended to correct errors which were made before, during, and after the hurricane. In addition, the document already required amendments, in line with federal regulations. (As a rule, the Strategic Plan is modified every five years; the current one was created in October of 2014 and revised after Hurricane Maria.) Yet, even though this plan for the Commonwealth is ready, the Emergency Management Plan for each municipio has yet to be certified by the Puerto Rico State Agency for Emergency and Disaster Management or FEMA, according to Commissioner Carlos Acevedo, who noted: “The plans, I am waiting for the company (hired to develop them) to deliver them to me. And they should be handing me the plans tomorrow (today).” However, both Governor Ricardo Rosselló Nevares and Commissioner Acevedo have pointed out, in separate interviews, that the government is prepared to face the challenges of the new hurricane season. Gov. Rosselló Nevares stated that now the “people” have an emergency plan, noting there have been workshops “throughout Puerto Rico on how to develop those personal emergency plans,” that changes were made at federal, state, and municipal levels regarding the distribution of food and medication, and that another “public health response” will be implemented. Nevertheless, Gov. Rosselló Nevares recognized that the island’s infrastructure, including the homes of thousands of families that still have blue tarps on their roofs and the power grid, remain vulnerable, stating: “It is no less true that, although there are parts that are more robust, it is a somewhat more fragile (power) grid. Therefore, we want to change and transform it,” he added, referring to the process he has begun to privatize PREPA, the Electric Power Authority: “There are significant improvements, particularly in the area of preparation, but without a doubt, Puerto Rico remains vulnerable, particularly in the infrastructure area.” The Governor added that this scenario will require quick action to transform the power grid and “a bit of luck that an event like María or even a lower-category one, does not impact Puerto Rico, again, and further collapse areas that are already vulnerable.” In addition, he noted, that already, unlike last year, when the government contacted the American Public Power Association with a month of delay after the cyclone, agreements with energy companies have been reached, albeit noting that other initiatives “take time, but are being executed,” and that 64 people are being trained to exercise “very particular functions” amid any new emergency.

With regard to addressing the dysfunction of the government during Maria, the Governor said that “people have been trained based on these new protocols.” Even so, emergency management experts have indicated that unsettled issues in critical areas with regard to the Commonwealth’s role in future emergencies remain: the preparation that the government claims has been questioned by the former executive Director of the former State Office for Emergency and Disaster Management, Epifanio Jiménez, who reiterated that the problem after Maria was the lack of implementation of the existing plans—or, as he put it: “They’re using Maria’s category 5 as a pretext—which is true, it’s a precedent—but they use it as an excuse to justify the collapse of agencies and agency leaders because, when Hurricane Georges hit, the leaders knew their work and the island recovered after 32 days.”

A simple look at the 2014 Strategic Hurricane Plan, which experts say was not followed, reveals that the Health, Family, Emergency Management Agency, and General Services Administration (SGA) departments, among other government agencies, failed in their respective functions before, during, and after the hurricane; moreover, if all of these agencies had fulfilled their responsibilities, fatalities estimated today at 2,975 (except by the White House) would have been avoided, according to the study by the Milken Institute of the George Washington University.

The Strategic Plan is governed by the National Incident Management System (NIMS), which establishes and defines the entire procedure for emergency management. It is backed by Presidential orders. FEMA develops the plan, theoretically in partnership with state authorities—clearly part of the challenge, as Puerto Rico is in a quasi-twilight zone between being a state or a municipality. This matters, because such a plan is intended to detail the function of what is called the Emergency Support Function, which is nothing more than the function that each agency will have before, during, and after an emergency.

Some of the Changes. The NMEAD Commissioner (Negotiator for the Management of Emergencies and Administrator for Disasters) Carlos Acevedo, said that now the Department of Family Affairs has a list of vulnerable groups. He added that the emergency management center integrated the private sector, and even had training. However, according to Mr. Jiménez:  “That is nonsense,” recalling that the private sector was already integrated into emergencies, because there must be agreements with agencies. To avoid the collapse of communications, Commissioner Acevedo said they now have a voice and data satellite system. The Telecommunications Regulatory Board and the NMEAD have a list of radio amateurs to use analog communication, if necessary, he added, albeit noting: “That has to be refined, and the JRT has to make sure that the private sector responds.” Moreover, Commissioner Acevedo said the services of cell phone companies, which also collapsed in the wake of the hurricane, is an issue that remains in the hands of the private sector. Finally, he noted he has also held meetings with the directors of hospitals and dialysis centers on the island, stressing that each party has increased its capacity to provide services.

Motor City Comeback

September 14, 2018

Good Morning! In this morning’s eBlog, we report Congressional agreement to avert a shutdown, and we report on the remarkable cash purchases of homes in the Motor City, marking mayhap the most dramatic mark yet of Detroit’s Phoenix-like recovery from the nation’s largest ever municipal bankruptcy.  

Keeping the Federal Government Open. The House and Senate yesterday reached agreement to avert a federal government shutdown by passing a large package of appropriations bills, as well as a continuing resolution which will, if signed by the President, fund the rest of the federal government through Pearl Harbor Day, December 7th. The package would keep the government funded past Oct. 1, the deadline for Congress to act. House Appropriations Committee Chair Rodney Frelinghuysen (R-N.J.) reported that the respective House and Senate bodies had completed work on the Defense and Labor, Health and Human Services and Education annual spending bills—bills which in this case represent the bulk of federal discretionary spending: combined, they total $786 billion, nearly two-thirds of all discretionary appropriations. The anticipation is that by including the continuing resolution (CR) in the package, it will make it less likely the President will make good on threats to shut down the federal government over border wall funding, albeit, last week, the President stated: “If it happens, it happens. If it’s about border security, I’m willing to do anything.”  

Motor City Comeback. There is stunning fiscal reversal of fortune in Detroit, where, after, decades ago, families fled the city, and suburban families wanted no part of moving in from the suburbs—contributing to what triggered the largest chapter 9 municipal bankruptcy in U.S. history, suddenly buyers appear to be home shopping—and shopping to purchase homes in Detroit with cash. It seems that affordable housing process, higher income buyers, and growing investor interest—with the investors smelling signal profits from flipping—have made cash deals more common. For the city, a relatively unique one in that it relies on income taxes more than most cities, the impact on assessed property taxes will be icing on the fiscal cake. In the first half of this calendar year, nearly 90% of all single-family and condo purchases were made with cash—more than triple the national average. One cause is that the median price in the first part of this year was only $32,428—which, albeit 20% higher than in the first half of this year: and it seems to be a heck of a bargain: ATTOM Data reports the national median price is $234,000.

So many purchasers are buying for investment purposes: renovating and flipping distressed homes, some as—some as large as 4,200 square feet and with architectural significance—in Detroit’s downtown area and historic neighborhoods. But in older neighborhoods near the regional Federal Reserve offices and the Detroit Institute of Art, home buyers looking to buy those renovated homes—often affluent young professionals or empty-nesters—may also face challenges in getting a mortgage, because those properties are difficult to appraise. Lenders have a challenge in determining the value of a newly renovated home in a neighborhood otherwise filled with distressed properties, because there are few comparable sales to benchmark against. That also makes payments in cash a likely option.

In effect, for the Motor City, this could be a phoenix moment of its fiscal and physical recovery: Quicken Loans is working with Home Depot and the Detroit Land Bank Authority to return Detroit’s vast stock of vacant, abandoned, and foreclosed property to productive use. Under the city’s “Rehabbed and Ready” program, the Authority selects properties in its inventory for Home Depot to rehab; Quicken preapproves interested buyers for mortgage financing; and the homes are purchased—all part of an effort to stabilize the market and create comparable sales to help future buyers.

Quicken Loans Community Fund Vice President of strategic investments, Laura Grannemann, noted: “Tax foreclosure is a force that has generated blight, increased speculation, and driven property values down…But by creating strategically placed sales, it has a ripple effect across the community and allows other individuals to refinance their home and get some equity out or to sell that home and buy a new one.”

Popping the Cork in Corktown?

August 14, 2018

Good Morning! In this morning’s eBlog, we consider some of the fiscal and physical challenges and changes to one of Detroit’s oldest neighborhoods, Corktown, before venturing to the warm Caribbean waters to witness incipient signs of fiscal and physical revival in Puerto Rico.

Motor City Revitalization. The City of Detroit, first settled in 1701 by French colonists, was the first European settlement above tidewater in North America, founded as a New France fur trading post, before becoming, by 1920, a world-class industrial powerhouse and the fourth-largest U.S. city. One might describe it as a unique municipal center of nations, as the first Europeans to settle there were French traders and colonists from the colony of La Loisiane, today’s New Orleans—traders who were forced to vie with the powerful Five Nations of the League of the Iroquois—setting the stage for what became the Beaver Wars in the 17th century. The greater Detroit metropolitan region of those times flourished as a center of the nation’s fur trade, so that the Crown’s administration of New France offered free land to colonists as a means to attract families to the region—a perennial challenge, and one of the city’s greatest fiscal challenges today. It was in late 1760 that Fort Detroit was surrendered to the British, in the wake of the fall of Quebec—so that control not just of the Detroit region, but of all French territory east of the Mississippi River, was formally transferred to England via the 1763 Treaty of Paris. By 1760, a British census counted 2,000 hardy souls in the city in the wake of the Seven Years’ War—a head count which, as would happen in this century, dropped 30% by 1773, a decade after the English had reserved the territory, under the Royal Proclamation Act of 1763 for the Indians—land eleven years later transferred to Quebec. In a census taken during the American Revolution, Detroit’s population had soared to 2,144, making the city the third-largest city in the Province of Quebec.

Today, Corktown is the oldest surviving neighborhood in Detroit, with the neighborhood named for its early Irish immigrants, who by the early 1850s, made up half of the residents of the 8th Ward (which contained Corktown), but it is a part of the city which has been reduced in size over the years by dint of numerous urban renewal projects, the construction of light industrial facilities, and the construction of the Lodge Freeway. What remains of the residential section is listed on the National Register of Historic Places. It is a neighborhood slated for change in this time of radical changes wrought by the emergence of the self-driving car era—so the Ford Motor Co.’s plans to renovate the historic Michigan Central Depot has raised apprehensions with regard to the potential impact such a large-scale project could have on the area and surrounding neighborhoods with regard to affordability and diversity—enough of a concern that Detroit’s leaders and officials have commenced what is to be a yearlong process to gather feedback from the community regarding the future of the neighborhood. That municipal effort is coming in tandem with a separate effort by Ford to collect input on its proposed plans to revitalize its iconic 100-plus-year-old historic building.

Officials with the city and Ford say they are committed to working with the community as they navigate their plans. The company, on June 20th, had announced its intentions to purchase the abandoned Michigan Central Station, a hulk of a building just blocks from where Kevyn Orr had his office on his first day as the City’s Emergency Manager charged with taking Detroit into the nation’s largest ever chapter 9 municipal bankruptcy—and fashioning a plan of adjustment to be approved by the U.S. Bankruptcy Court. That 18-story building, which starred as a set piece for the flick Batman v. Superman, has been described as representing a “deep, complex wound…a physical reminder of what the city was, and what it many thought it would never be again.”

Simultaneously, the city is seeking to create a strategic framework for the Greater Corktown neighborhood to address the area’s potential for growth, even as it seeks to preserve its heritage and integrity, officials say—a framework which is to detail both a short-term implementation plans and long-term goals for the neighborhood’s development: Detroit’s Planning and Development Department expects, before the month is out, an RFP for a consultant to conduct a series of community meetings in Greater Corktown, with said selection to be announced by the end of next month: the study itself is projected to lead to a recommendations of a final framework in a year.

Not Self-Driving. The city’s plans for Greater Corktown, just one of the city neighborhoods in various stages of planning, was in the planning stage prior to Ford’s depot announcement, creating some governing challenges, or, as John Sivills, the project manager with Detroit’s Planning and Development Department, put it: “The Ford announcement certainly does add a great sense of urgency to it so we can have a plan in place rather than tail-wagging-dog scenario.” That is, as he added: “That the city can have a plan in place such as bring in Ford and provide for inclusionary growth.” Similarly, his colleague, Steve Lewis, central design director for Planning and Development, noted that Detroit’s plan will craft “a vision for the future of the neighborhood that either by optics or by reality is not seen as being dictated by Ford.” Their study is expected to address challenges and opportunities for a number of issues, including zoning, landscape, historic preservation, and housing development.

Will They Drive in Tandem or Self-Drive? Ford is planning to create a 1.2 million-square-foot campus with its anchor at the Michigan Central Depot, with plans to occupy the depot by 2022: the project will include the Grand Hall, which will be open to the public, along with retail space: the 18-story tower will have office space as well as residential space on the top two floors. In addition, Ford intends to develop other buildings on the campus, including the former Detroit Public Schools Book Depository, where Ford plans to house its autonomous vehicle business on the Corktown campus. Ford is, at the same time, seeking community engagement for its Corktown expansion, with the company asserting: “Detroit and Corktown, North Corktown, there’s opportunity and so much potential, and they’re already doing such amazing work that Ford can really just be a platform to shed a light on the work that they’re doing…Maybe help them scale.”

Indeed, scale, as in any city, is an issue: because of the large-scale of the project, it falls under the city’s Community Benefits Ordinance, one approved by Detroit voters in November of 2016, which targets developments worth at least $75 million, if the development gets $1 million or more in property tax abatements or $1 million or more in value of city property sale or transfer: under said ordinance, a neighborhood advisory council is assembled to provide feedback in meetings during the ensuing two months, with the advisory council subsequently working with Ford to create a community benefits agreement.

To date, Detroit City Council President Brenda Jones has selected Hubbard-Richard resident Aliyah Sabree, a Judge in the 36th District Court; City Councilwoman Janee Ayers chose Sheila Cockrel, a Corktown resident and former Councilwoman. The community elected Jerry Paffendorf, co-owner of Loveland Technologies, and Heather McKeon, an interior designer with Patrick Thompson Design. The Detroit Planning and Development Department will name four appointees, and City Councilwoman Raquel Castañeda-López will name one appointee.

Concurrently, Ford has feedback boards and comment boxes in its Ford Resource and Engagement Center, where questions posed include: “Where do you go to get ___ in your neighborhood (nails, hair, dry cleaning, etc.?); What are the top three things you want to see changed in your neighborhood?”; and “Who is an unsung hero, organization and/or business in your neighborhood?” The company reports that it has already received feedback from excitement to issues of apprehension on issues ranging from housing, to jobs, to traffic, and to culture,” adding: “We really love that the community values the diversity of the neighborhoods from Corktown, North Corktown, and Southwest Detroit. We’re really understanding the importance of that. We’re also understanding the importance of workforce. Recognizing that there’s not only potential construction jobs, but also long-term what are some ways we can build a pipeline or clear pathways for some of the other jobs that may be available in the future. Technology jobs, things of that nature. Jobs around (electric and autonomous vehicles.).”

Some have criticized aspects of the Community Benefits Ordinance and the Neighborhood Advisory Council process. Alina Johnson, a resident of the nearby Hubbard-Richard neighborhood, which will also be impacted by Ford’s project, said she feels residents should be trained in advance on advisory council work in order to be most effective on a tight timeline—or, as she put it: “Right now, the main concern is making sure that the folks who have been selected will be able to be inclusive and able to communicate to the public and serve everyone and not necessarily their community in terms when they’re discussing benefits by those impacted by the train station development.”

Blowing Fiscally Back. Despite a double fiscal and physical whammy of hurricanes, and being in the beginning of this year’s hurricane season, Puerto Rico FY’2017 General Fund revenue came in 1.5% higher than budgeted: total revenue was $9.31. Puerto Rico Secretary of Treasury Teresita Fuentes noted: “The level and behavior of tax collections during the past fiscal year in comparison with other years is considered unusual due to the economic effect of hurricanes passing through the island.” That is a sharp fiscal blowback to FAFAA Executive Director Gerardo Portela Franco’s warning last December 5th that he expected Puerto Rico’s fiscal year General Fund revenues to be 25% less than budgeted.  Secretary Fuentes reported that unexpectedly high revenues from April to June had allowed the government to exceed the budgeted number, while Puerto Rico Secretary of the Interior Raul Maldonado noted: “To a large extent the [revenue] increase is attributed to the temporary economic activity of companies associated with recovery tasks and the flow of insurer and federal government money after the hurricanes.” He noted that the greatest increase was derived from the island’s corporate income tax—some $260 million; however, Puerto Rico’s sales and use tax revenues returned $26 million less than projections from the start of the year. Secretary Fuentes said that many businesses had either been closed or had operated partially in the weeks following Hurricane Maria and that in the period the sales tax on restaurant food was temporarily eliminated; however, the sales and use tax revenue rebounded in the last quarter, with Secretary Fuentes pointing in particular to hardware stores and department store sales.

Back to Escuela.  Puerto Rico Governor Ricardo Rosselló Nevares has announced the territory will provide more than 2,000 regular slots to temporary teachers—a step by which he hopes to alleviate the recurring challenge of recruiting educators at each school start—as teachers are often attracted to more generous salaries and benefits on the mainland.  His stated goal is for these educators to be recruited under 10-month contracts by September:We are going to make an effort to convert thousands of temporary places in permanent seats in the education system.” The Governor noted that his action is intended to make it possible to clarify the system and end current uncertainties which have left teachers in the dark with regard to whether she or he still has a job—an apprehension not just of teachers, but also parents, who are confronting their own choices with September looming.

Two years ago, in the midst of an election year, the Governor acted to convert some 1,519 temporary teachers to become full-time employees, noting, then: “You have teachers who were not sure, and now they are going to have certainty, and you have a school system that did not have visibility, now we are building that visibility,” adding that, in his view, this governing decision would not have an adverse impact on Puerto Rico’s budget—and, ergo, not trigger PROMESA Oversight Board fiscal preemption: “If there is any philosophical consideration that they may have, that is another thing. For us, it gives certainty to the system, particularly in the area of needs that we are going to have to supply.” The Governor explained that the measure was possible thanks to two fundamental actions: the creation of an electronic platform which has facilitated the ability of Education Secretary Julia Keleher to assess where staff is needed, especially with regard to what levels and subjects: that is, via the human resources platform, the Secretary can assess, as the Governor noted, the educational organization of each campus, including how many teachers are transient and what subjects they teach. This could be a valuable fiscal step, because online registration will facilitate the ability to confirm the number and location of students—a critical step for the completion of the school consolidation process.

Sec. Keleher has explained that the system will take into account, first, the educators who occupy places where recruitment has proved difficult, such as Special Education, English, and Math—noting the human and fiscal challenges: “You have to honor the transient teacher. It does not seem fair or correct in terms of the reality we want to offer. This is not a good deal for a person who is giving 100% for their students: The Secretary noted the determination is aligned with the anticipated tax revenues. Her request, this year, is for over 5,500 transitory positions—or, as she notes: “The idea is to have the teachers ready for the start of classes, the week before they know where they are going.” Puerto Rico’s statute 85-2018, the Law on Educational Reform “establishes that the Department, in areas of difficult recruitment such as teachers of English, Mathematics, Physics and Chemistry, will promote the permanence of the same within the term of one year, if fiscal availability of the square and of being the same vacancy.”

The Complex Challenges of Implementing a Municipal Bankruptcy Plan of Debt Adjustment

July 31, 2018

Good Morning! In this morning’s eBlog, we consider post-chapter 9 municipal bankruptcy challenges for the City of Detroit, before turning to learn about good gnus from Puerto Rico.

The Steep Route of Chapter 9 Debt Adjustment. Direct Construction Services, minority-owned firm, which has participated in Detroit’s federally funded demolition program, is suing Mayor Mike Duggan, the city’s land bank, and Detroit’s building authority as well as high-ranking officials from each division—alleging racial discrimination and retaliation. The suit asks the court to award damages and declare the actions of the city, its land bank and building authority as “discriminatory and illegal.” The suit alleges that some contractors had been asked to change bidding and cost figures “to reflect compliance” under the federal demolition Hardest Hit Fund guidelines. Filed in federal court, it charges that Service’s managing member, Timothy Drakeford, was treated unfairly based on his race and that officials in the program conspired to have him suspended for refusing to falsify documents and for cooperating with federal authorities. Mr. Drakeford, who is barred from bidding on federally funded demolition work, is also suing for breach of contract and discrimination against black contractors. The suit charges that some contractors, including Mr. Drakeford, had been asked to change bidding and cost numbers “to reflect compliance” under the federal Hardest Hit Fund guidelines; indeed, the suit alleges it was subsequently suspended—not because of the quality of its work, but rather “because of the refusal to change numbers in bid packages.” The suit adds: “This case arises because of defendants’ breach of contract, concert of action, due process violations, and discrimination on the grounds of race in its implementation of the Hardest Hit Homeowner demolition program, including failure to timely pay black contractors in comparison to their white counterparts, improper and disparate discipline and retaliation.”

This issues here are not new—and have previously been the focus of FBI, state, and city investigations, especially over bidding practices and rising costs. As we have previously noted, the city’s plan of debt adjustment efforts to raze abandoned homes was a particular focus—a program through which federal assistance was misappropriated while the city worked to demolish homes after its bankruptcy—in that case involving federal funds allocated via the Michigan State Housing Development Authority. The suit contends that Direct Construction was awarded three contracts for demolition work by the land bank, and asserts that payments were delayed and harder to obtain from the land bank than for “larger white companies,” such as Adamo and Homrich, two firms awarded the largest percentage of the work to date. The suit asserts Direct Construction was under contract for several demolition packages, but still has not been paid, and references in excess of $143,000 in unpaid invoices, noting: This “repetitive process has gone on for over a year now, with no success,” contending that it had been performing work on two contracts which it had been awarded for a total of 48 homes—before, on December 19, 2016, being hit with an “immediate stop work order” from the land bank, without explanation. A year ago in February, Direct received a letter regarding an Office of Inspector General report, which suggested that photographs submitted for repayment of sidewalk work had been falsified and that the company would not be compensated—a letter followed up the next month by a notice of suspension. (Direct was among a few businesses suspended last year on claims of manipulating sidewalk repair photographs to obtain payment.)

Detroit Corporation Counsel Lawrence Garcia yesterday noted: “The Office of Inspector General found that not only did Mr. Drakeford personally manipulate a photo of a demolition site to conceal tires that had not been removed from the lot, but also gave information that was not truthful to the OIG’s investigators. For the penalties issued with respect to these matters, the Detroit Land Bank, the DBA and the city followed the recommendations of the independently appointed inspector general…These facts more than justify the city’s actions.” Indeed, that office, at the request of the land bank, had initiated investigations in December of 2016 into allegations that sidewalk repair photographs were being doctored. (The land bank mandates that its contractors to take “before and after” photographs of sidewalks, drive approaches, neighboring residences, and surrounding areas to document conditions.) The Office, the following February, flagged Direct Construction over five of its submitted photographs, concluding the photos had been modified to disguise incomplete work; it recommended the company be barred from doing work in the city’s demolition program until at least 2020. (The Michigan State Housing Development Authority began placing greater emphasis on sidewalk replacement photographs in October of 2016, when a new set of practices went into place—at a point in time when federally funded demolition had been suspended for two months after a review by the Michigan Homeowner Assistance Nonprofit Housing Corp.).

Since Mayor Duggan’s election in 2013, the city has razed nearly 13,000 homes—a task that has fiscal and physical consequences—reducing assessed property values and property taxes, but also leaving medical scars: over that time, the percentage of children 6 and younger with elevated lead levels rose from 6.9% in 2012 to 8.7% in 2016, according to state records. Early last year, the land bank repaid $1.37 million to address improper expenses identified by auditors for the state. The land bank last summer reached a settlement with state housing officials to pay $5 million to resolve a dispute over invoices the state determined to be improperly submitted. Detroit’s administration has claimed the city has been transparent with its demolition program and cooperated fully with all inquiries.

Good Gnus. In Puerto Rico, Governor Ricardo Rosselló Nevares and the Labor Secretary Carlos Saavedra are celebrating a turnaround in employment in the U.S. territory: between May and June, some 11,000 people joined the island’s labor market, dropping Puerto Rico’s unemployment rate to its lowest level in half a century. Gov. Rosselló Nevares yesterday reported the unemployment rate to be 9.3%, the lowest rate in the last 50 years, noting: “On this occasion, unemployment drops and the participation rate increases are all numbers going in the right direction.” Sec. Saavedra explained the increase between May and June reflects summer employment programs, but at a level considerably better than in previous years, especially in the commercial and self-employment sectors—and, as he noted: “We have seen a substantial increase in self-employment,” apparently reflecting many involved with repairs and reconstruction for damage caused by Hurricane María, especially electricians, and builders. Economist Juan Lara explained that jurisdictions which have suffered deep economic declines as a result of a natural disaster experience a period of rebound that leads to growth, but cautioned: “[T]his can hardly be maintained in the long-term without a change in the economic model.” He estimated that in the next five or six years, federal investments could keep the economy in positive territory, noting: “The important thing is to remember that these funds do not last forever and that the economy needs sustained redevelopment.”

For his part, Gov. Rosselló stressed that the current economic improvement is occurring without the federal government having released a penny of the more than $1.8 billion in promised HUD assistance. Nevertheless, there can be little question but that the more than $3 billion in insurance claims already paid, according to according to Iraelia Pernas, the Executive Director of the Puerto Rico Insurance Companies Association have had a positive, if one-time, impact. Similarly, the island is anticipating, in August, a large CDBG grant.

Gov. Rosselló Nevares attributed the jobs upturn, interestingly, to emigration: many who were unemployed left Puerto Rico for the mainland, even as he reported the total number of citizens employed has increased, as well as the labor participation rate (not seasonally adjusted), which rose from 40.5% in May to 41.1% last month. percent in June. In the first months following Hurricane María, nearly 200,000 people left Puerto Rico. Many, however, have returned.

Informacion Mejor? PROMESA Oversight Board Executive Director Natalie Jaresko has reported the Board “welcomes the publication” of fiscal information mandated by the Board, after, on July 10th, the Board had sent a letter to FAFAA Executive Director Gerardo Portela Franco, complaining of a failure to submit documents, including documents comparing the General Fund budget to actual spending; PayGo balances; and public employee payroll, headcount, and attendance. The board said that, according to the approved quasi-plan of debt adjustment, the first two documents had been due on May 31st, and the third on June 30th. FAFAA released the PayGo report on July 17, and the other two reports last Friday.  Ms. Jaresko wrote: “The Oversight Board welcomes the publication of the General Fund to Actual Report, the Human Resources Report and the Payroll Report: Full monthly public reporting is essential to increase transparency of government finances, increase accountability, and monitor compliance and progress as per the fiscal plan and budget objectives in order to eliminate Puerto Rico’s structural deficits…The Oversight Board is committed to continuing this important work of monitoring full compliance by the government with reporting requirements, in order to achieve PROMESA’s mandate of restoring fiscal responsibility and market access to Puerto Rico.”

Municipal Fiscal Distress & State Oversight.

June 18, 2018

Good Morning! In this morning’s eBlog, we consider a new study assessing the potential role of property tax assessments in Detroit’s historic chapter 9 municipal bankruptcy; then we observe, without gambling on the odds, the slow, but steady progress back to self-governance in Atlantic City, and weaning off of state fiscal oversight; before, finally noting the parallel efforts to exit state oversight in Flint, Michigan—where the proximate cause of the city’s fiscal and physical collapse occurred under a quasi-state takeover.

Foreclosing or Creating a City’s Fiscal Recovery? One in 10 Detroit tax foreclosures between 2011 and 2015 were caused by the city’s admittedly inflated property assessments, a study by two Chicago professors has concluded. Over-assessments causing foreclosure were concentrated in the city’s lowest valued homes, those selling for less than $8,000, and resulted in thousands of Detroit homeowners losing their properties, according to the study: “Taxed Out: Illegal property tax assessments and the epidemic of tax foreclosures in Detroit,” which was written by  Bernadette Atuahene and Christopher Berry. Chicago-Kent Law School Professor Atuahene noted: “The very population that most needs the city to get the assessments right, the poorest of the poor, are being most detrimentally affected by the city getting it wrong: “There is a narrative of blaming the poor that focuses on individual responsibility instead of structural injustice. We are trying to change the focus to this structural injustice.” (Professor Atuahene is also a member of the Coalition to End Unconstitutional Tax Foreclosures.) Their study came as the Wayne County Treasurer has foreclosed on about 100,000 Detroit properties for unpaid property taxes for the period from 2011 through 2015, about a quarter of all parcels, as the Motor City suffered the after-effects of population decline, the housing market crash, and the Great Recession.

Professors Atuahene and Berry acknowledged many factors can trigger tax foreclosure, estimating that the number of foreclosures was triggered by over-assessments, in part by calculating the foreclosure rate if all properties were properly assessed. The study also controlled for properties various purchase prices, neighborhoods and sale dates.

Detroit Mayor Mike Duggan has, as we have noted, acknowledged such over assessments; yet he has made clear accuracy has improved with double-digit reductions over the last four years—and completed the first comprehensive such assessment two years ago for the first time in more than half a century. The city’s Deputy Chief Financial Officer, Alvin Horhn, last week stated he had not reviewed the study; however, he noted that “most of their assumptions rely on data that does not meet the standards of the State Tax Commission and would not be applicable under Michigan law,” a position challenged by Professor Atuahene, who had previously stated the data does comply with the law, noting: “We believe the citywide reappraisal has been an important part of the major reduction in the number of foreclosures occurring in the city, which continue a steady decline and will provide a solid foundation for future growth: The number of foreclosures of owner occupied homes, specifically, has gone down by nearly 90% over the past few years.”

The city’s authority to foreclose, something which became a vital tool to address both property tax revenues and crime in the wake of the city’s chapter 9 municipal bankruptcy, was enabled under former Gov. John Engler 29 years ago under a statewide rewrite of Michigan’s property tax code: changes made in an effort to render it faster and easier to return delinquent properties to productive use. On a related issue, the Motor City is currently facing a lawsuit by the American Civil Liberties Union of Michigan—a suit which maintains the city’s poverty tax exemption, which erases property taxes for low-income owners, violated homeowner’s due process rights because of its convoluted application process, arguing that the practice violates the federal Fair Housing Act by disproportionately foreclosing on black homeowners. However, the Michigan Court of Appeals has upheld a ruling by Wayne County Judge Robert Colombo, dismissing Wayne County from the lawsuit, ruling the suit should have been brought in front of the Michigan Tax Tribunal. 

Pole, Pole. In Bush Gbaepo Grebo Konweaken, Liberia, a key Gbaepo expression was “pole, pole” (pronounced poleh, poleh), which roughly translated into ‘slowly, but surely’—or haste makes waste. It might be an apt expression for Atlantic City Mayor Frank Gilliam as the boardwalk city has resumed control back from the state to forge its own fiscal destiny—presumably with less gambling on its fiscal future. In his new $225 million budget, the Mayor has proposed to keep property taxes flat for the second consecutive year, and is continuing, according to the state’s Department of Community Affairs, charged with the municipality’s fiscal oversight and providing transitional assistance, to note that the Mayor and Council President Marty Small’s announcement demonstrated that “an understanding of the issues that Atlantic City faces, and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Under Mayor Frank Gilliam’s proposed $225 million budget, property taxes would remain flat for a second straight year, there would be some budget cuts, as well as savings realized from municipal bond sales to finance pension and healthcare obligations from 2015. The Mayor also was seeking support for capital improvements, additional library funding, and one-time $500 stipends for full-time municipal employees with salaries below $40,000. The ongoing fiscal recovery is also benefitting from state aid: the state Department of Community Affairs reported the state is providing $3.9 million in transitional aid, a drop from the $13 million awarded to the City of Trenton in 2017 and $26.2 million from 2016. Last year Atlantic City adopted a $222 million budget, which lowered taxes for the first time in more than a decade. The Department’s spokesperson, Lisa Ryan, noted: “Yesterday’s announcement by Mayor Gilliam and Council President [Marty] Small demonstrates city officials are showing an understanding of the issues that Atlantic City faces and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Gov. Phil Murphy scaled back New Jersey’s intervention efforts in April with the removal of Jeffrey Chiesa’s role as state designee for Atlantic City. Mr. Chiesa, a former U.S. Senator and New Jersey Attorney General, was appointed to the role by former Gov. Chris Christie after the state takeover took effect.

Not in Like Flint. The Flint City Council was unable last week to override Mayor Karen Weaver’s veto of its amendments to her proposed budget: the Council’s counter proposal had included eight amendments to the Mayor’s $56 million proposed budget for 2018-2019—all of which Mayor Weaver vetoed in the wake of CFO Hughey Newsome’s concerns. The situation is similar to Atlantic City’s, in that this was Flint’s first budget to be considered and adopted in the wake of exiting state oversight. Mayor Weaver advised her colleagues: “This is a crucial time for the City of Flint: this is the first budget we are responsible for since regaining control…I am proud of the budget that I submitted, and I have full faith in the City’s Chief Financial Officer. Just as I have the right to veto the budget, the City Council has the right to override that veto. It is my hope that they would strongly consider my reasons for vetoing and that the Council and I can work together to create a budget that can sustain the City for years to come.” Her veto means the budget will be before the Council for a final vote in order to have it in place for the new fiscal year beginning on the first of next month.

Among the Council proposals the Mayor rejected was employee benefits, including a proposed pay raise for the City Clerk of $20,000, the creation of a new deputy clerk position, a new parliamentarian position, and full health benefits for part-time employees. Or, as CFO Newsome noted: “The risk these added costs could pose on the city’s budget is not in the best interest of the city nor the citizens of Flint,”  as he expressed disappointment over the time wasted on arguing over what amounted to $55,000 in the Mayor’s budget, especially when the city was currently tackling bigger fiscal challenges, such as its $271 million unfunded pension liability and keeping the city’s water fund out of red ink, noting: “These are things that we are looking at, and during all of these [budget] proceedings so little attention was paid to that.”

That is to note that while sliding into chapter 9 municipal bankruptcy, or, as in Atlantic City, state oversight, can be easy; the process of extricating one’s city is great: there is added debt. Indeed, Flint remains in a precarious fiscal position, confronted by serious fiscal challenges in the wake of its exit from state financial receivership the month before last. Key among those challenges are: employee retirement funding and the aging, corroded pipes (with a projected price tag of $600 million) which led to the city’s drinking water crisis and state takeover.

On the public pension front, in the wake of state enactment of public pension reforms at the end of 2017 which mandate that municipalities report underfunded retirement benefits, Flint reported a pension system funded at only 37% and zero percent funding of other post-employment retirement benefits, which, according to the state Treasury report, Flint does not prefund.

The proposed budget assumes FY2019 general fund revenues of approximately $55.8 million, of which $4.7 million is expected to come from property taxes. This would be an increase of about $120,000; Flint’s critical water fund will have a $4 million surplus at the end of FY2018; however, CFO Newsome warned the fund will fall into the red within the next five years if it fails to bring in more money.

Motor City Rising

June 1, 2018

Good Morning! In this morning’s eBlog, we consider the remarkable turnaround of Detroit—a city which, when I inquired on its very first day in chapter 9 municipal bankruptcy, for walking directions from my hotel to the Governor’s Detroit office—in response to which I was told the one mile route was not doable—not because I would be too physically challenged,  but rather because I would be slain. Yet now, as the  fine editorial writers for the Detroit News, Daniel Howes and Nolan Finley, wrote: “A regional divide that appeared to be healing since Detroit’s historic bankruptcy is busting wide open over a plan for regional transit, exposing anxiety that the city is prospering at the expense of the suburbs,” noting that the trigger is a is a proposed millage to fund expansion of the Regional Transit Authority of Southeast Michigan, a $5.4 billion plan that would seem to promise an exceptional reshaping of the metro region—indeed: a reversal a what had been a decades-long shift of the economy from downtown Detroit to is suburbs: an exodus that contributed to a wasteland and the nation’s largest ever chapter 9 municipal bankruptcy.” Or, as they wrote: “That battle reveals growing suburban resentments over the region’s shifting economic fortunes: decades-long capital flow is reversing directions as more jobs and tax revenue flee the ‘burbs for a rejuvenated downtown.”

Mr. Finley noted that Mayor Mike Duggan, this week, told him: “I can’t explain why Oakland and Macomb (suburban counties) are doing what they’re doing” three weeks ago Microsoft brought 400 employees from Southfield into the city of Detroit. And last week, Tata Technologies said they were moving 200 people from Novi and into Detroit. Google is in the process of moving people from Birmingham into the city of Detroit.” What the Mayor was alluding to was a u-turn from a decade of moderate and upper income families leaving Detroit for its suburban counties in the days when former Mayor Coleman Young had advised criminals to “hit Eight Mile” has the relationship between the Metro Motor City’s regional leaders become so difficult in the wake of the unexpected reverse exodus: this time from Detroit’s suburbs back into the city. Billions in private sector investment, spearheaded by Dan Gilbert’s Quicken Loans Inc., the Ilitch family, and growing enthusiasm among other business leaders to be part of the city’s post-chapter 9 municipal bankruptcy have been changing demographic and economic patterns.

As the city continues under decreasing state oversight to carry out its judicially approved plan of debt adjustment, Mayor Duggan notes: “Expectations are rising.” This, after all, is not a City Hall bound mayor, but rather what the editors described as a “short, stocky, balding white guy who is no stranger to block after block of dilapidated houses—and who was reelected to a second term with an amazing 72% of the vote in a city where slightly more than 82% of the voters are black—and where, when he took office, there were about 40,000 abandoned homes. He is not a stay at City Hall type fellow either—rather an inveterate inspector of this mammoth rebuilding of an iconic city, who listens—and with his cell phone—takes action immediately in response to constituents concerns. After all, as the Mayor notes: “Expectations are rising…People are putting more demands on me and more demands on the administration, and I think that’s a really good thing and that will keep us motivated to work hard.”

Already, the urban wasteland is changing—almost on a daily basis: already, under a city program which supports renovation over demolition to try to preserve the mid-century architectural character of neighborhoods, that number of abandoned homes has been halved—with many of the units set aside for affordable housing. In his State of the City address this year, Mayor Duggan said he wants 8,000 more homes demolished, 2,000 sold, another 1,000 renovated and 11,000 more boarded up by the end of next year.

On that first day of the nation’s largest ever municipal bankruptcy, Kevin Orr, whom the Governor had tapped to become the Emergency Manager for Detroit, had flown out from the Washington, D.C. region, and told me his first actions were to email every employee of Detroit that he would be filing that morning in the U.S. Bankruptcy Court, but that he expected every employee to report to work—and that the most critical priorities were that every traffic and street light work—and that there be a professional, courteous, and prompt response to every 911 call.  

That was a challenge—especially for a municipality in bankruptcy, but, by 2016, the city had completed a $185 million streetlight repair project; 911 response times have been reduced from 50 minutes in 2013 to 14.5 minutes last year, and ambulance response times fell from 20 minutes in 2014 to the national average of 8 minutes this year.

As we have previously noted, two months ago, just three and a half years after Detroit emerged from chapter 9, the city has exited from state oversight; its homeless population has, for the third consecutive year, declined—and, its unemployment rate, which had peaked during the fiscal crisis at 28%, is now below 8%. No wonder the suburbs are becoming fiscally jealous. And the downtown, which was unsafe for pedestrians when the National League of Cities hosted its annual meeting there in the 1980’s and on the city’s first day in bankruptcy, has been transformed into a modern, walkable metropolis.

Nevertheless, the seeming bulldog, relentless leader has refused to sugarcoat the fiscal and physical challenge—or, as he puts it: “I don’t spend a lot of time promising. I just say, here’s what we’re doing next and here’s why we’re doing it and then we do what we say…Over time, you don’t restore trust by making more promises; you restore trust by actually doing what you said you were going to do.”

Mr. Finley wrote that the Mayor, deemed a “truth teller” by Detroit Housing Director Arthur Jemison, has been direct in confronting the city’s harsh legacy of racist policies after the Great Depression lured thousands upon thousands of African-Americans north in the early decades of the 20th century to work in auto factories—luring them to a city at a time when Federal Housing Administration guidelines barred blacks in the city from obtaining home mortgages and even led to the construction in 1941 of a wall bordering the heavily African-American 8 Mile neighborhood to segregate it from a new housing development for whites.

Aaron Foley — the 33-year-old author of How to Live in Detroit Without Being a Jackass, noted: “When you deliver that kind of message about this is why black people are on this side of the wall in 8 Mile versus the other side of the wall, that gets people talking: This is a history that we all know in Detroit, and for the city government to acknowledge that in the way that it did on that platform, it did resonate.”

Mayor Duggan’s concern for Detroit’s people—and not forcing low-income families out, is evidenced too by his words: “Every single time that we had a building where the federal [housing] credits were expiring and people were going to get forced out of their affordable units, I had to sit down for hours with the building owner to convince them why those who stayed were entitled to be there, and I thought: I need to do just one speech and explain that this is the right thing to do…Since then there’s been just great support for the direction we’re going in the city. We have very little pushback now from our developers over making sure that what they’re doing is equitable.”

Innovative, but Challenging Paths to Exiting Municipal Bankruptcy

May 25, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s has upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes. Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by former U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs. CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, the Bureau determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow. He has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates, or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, while according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing. 

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, more than three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the state has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • Effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date to have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $ 25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló Nevares, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

Ending the Long Delay? The Federal Emergency Management Agency (FEMA) yesterday announced it is accelerating community disaster loans to help Puerto Rico muncipios mitigate the loss of income due to natural disasters, the Government of Puerto Rico reaffirmed that, for the time being, as well as the approval of another $39 million in loans from the CDL program for the municipalities of Aguadilla, Cabo Rojo, Canóvanas, Carolina, Manatí, Mayagüez, Peñuelas, and Orocovis—with the approvals coming in the wake of  last month’s approvals for Bayamón, Caguas, Humacao, Juncos, Ponce, Toa Baja, and Trujillo Alto—meaning that, in total, FEMA has, to date, distributed at least $92.8 million for municipalities on the island and $371 million for the U.S. Virgin Islands, as part of the $4.9 billion loan passed by Congress to help local governments recover. At the same time, the U.S. territory’s Treasury Secretary Raúl Maldonado reported: “The administration (of Puerto Rico) has been very successful in lowering operational costs and achieving an increase in collections.” The new loans will offer access to the Puerto Rican Government through March of 2020, as Secretary Maldonado considers that it may be useful in case of another disaster or a drop in the income of public corporations.

Nevertheless, because Puerto Rico—unlike other U.S. states, is also under the authority of the PROMESA Board, it appears that Gov. Ricardo Rosselló’s budget will have to be revised and may be rejected if proposed labor reforms do not satisfy the Board—with Board Executive Director Natalie Jaresko, in the wake of the Governor’s release of his proposed $8.73 billion general fund budget to the Legislature Tuesday night dictating that the future of the budget is linked to the legislature’s approval of at-will employment. Her statement came after the Governor and the board had announced an agreement on a compromise on reforming labor practices as well as agreeing to other changes in the Board-certified fiscal plan. In exchange for the Board waiving its demands for the abolition of the Christmas bonus and reduction of the island’s mandatory 27 days of vacation and sick leave, Gov. Rosselló agreed to bring at-will employment to the territory by repealing Law 80 from 1976—a concession which Director Jaresko described this agreement as an “accommodation.” Earlier this week, Director Jaresko said that the first step for Gov. Rosselló should be to resubmit a fiscal plan consistent with the new agreement with the Board, followed by a resubmitted budget consistent with the new plan, adding she anticipated these actions should all be completed by the end of June: the agreed-to changes to the fiscal plan are expected to reduce the 30 year surplus to $35 billion from $39 billion in the April certified fiscal plan, according to Director Jaresko, who noted that most of the surplus is expected to be used for debt payment. From the Governor’s perspective, he noted: “The approval of the agreed budget makes it easier for Puerto Rico to be in a stronger position to renegotiate the terms of the debt. We have significantly improved the management and controls over the cash flow of the General Fund. Contrary to the past, there is now visibility on how cash flows in government operations. At present Puerto Rico has robust and reliable cash balances.” Finally, she stated she expected it would take 12 to 18 months for the Board to create a plan of adjustment on the debt and pensions for the central government—a plan which would likely take the Title III bankruptcy court several more months to confirm.