Trying to Recover on all Pistons

07/19/17

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Good Morning! In this a.m.’s eBlog, we look back at the steep road out of the nation’s largest ever municipal bankruptcy—in Detroit, where the Chicago Federal Reserve and former U.S. Chief Bankruptcy Judge Thomas Bennett, who presided over Jefferson County’s chapter 9 municipal bankruptcy case, has noted: “[S]tates can have precipitating roles as well as preventative roles” in work he did for the Chicago Federal Reserve. Indeed, it seems the Great Recession demarcated the nation’s states into distinct fiscal categories: those with state oversight programs which either protected against or offered fiscal support to assist troubled municipalities, versus those, such as Alabama or California—with the former appearing to aid and abet Jefferson County’s descent into chapter 9 bankruptcy, and California, home to the largest number of chapter 9 bankruptcies over the last two decades, contributing to fiscal distress, but avoiding any acceptance of risk. Therefore, we try to provide our own fiscal autopsy of Detroit’s journey into and out of the nation’s largest municipal bankruptcy.

I met in the Governor’s Detroit offices with Kevyn Orr, whom Governor Rick Snyder had asked to come out from Washington, D.C. to serve as the city’s Emergency Manager to take the city into—and out of chapter 9 municipal bankruptcy: the largest in American history. Having been told by the hotel staff that it was unsafe to walk the few blocks from my hotel to the Governor’s Detroit offices on the city’s very first day in insolvency—a day in which the city was spending 38 cents on every dollar of taxes collected from residents and businesses on legacy costs and operating debt payments totaling $18 billion; it was clear from the get go, as he told me that early morning, there was no choice other than chapter 9: it was an essential, urgent step in order to ensure the provision of essential services, including street and traffic lights, emergency first responders, and basic maintenance of the Motor City’s crumbling infrastructure—especially given the grim statistics, with police response times averaging 58 minutes across the city, fewer than a third of the city’s ambulances in service, 40% of the city’s 88,000 traffic lights not working, “primarily due to disrepair and neglect.” It was, as my walk made clear, a city aptly described as: “[I]nfested with urban blight, which depresses property values, provides a fertile breeding ground for crime and tinder for fires…and compels the city to devote precious resources to demolition.” Of course, not just physical blight and distress, but also fiscal distress: the Motor City’s unbalanced fiscal condition was foundering under its failure to make some $108 million in pension payments—payments which, under the Michigan constitution, because they are contracts, were constitutionally binding. Nevertheless, in one of his early steps to staunch the fiscal bleeding, Mr. Orr halted a $39.7 million payment on $1.4 billion in pension debt issued by former Detroit Mayor Kwame Kilpatrick’s administration to make the city pension funds appear better funded than they really were; thus, Mr. Orr’s stop payment was essential to avoid immediate cash insolvency at a moment in time when Detroit’s cash position was in deepening debt. Thus, in his filing, Mr. Orr aptly described the city’s dire position and the urgency of swift action thusly: “Without this, the city’s death spiral I describe herein will continue.”

Today, the equivalent of a Presidential term later, the city has installed 65,000 new streetlights; it has cut police and emergency responder response times to 25% of what they were; it has razed 11,847 blighted buildings. Indeed, ambulance response times in Detroit today are half of what they were—and close to the national average—even as the city’s unrestricted general fund finished FY2016 fiscal year with a $143 million surplus, 200% of the prior fiscal year: as of March 31st, Detroit sported a general fund surplus of $51 million, with $52.8 million more cash on hand than March of last year, according to the Detroit Financial Review Commission—with the surplus now dedicated to setting aside an additional $20 million into a trust fund for a pension “funding cliff” the city has anticipated in its plan of debt adjustment by 2024.  

Trying to Run on all Pistons. The Detroit City Council has voted 7-1 to approve a resolution to allow the Motor City to realize millions of dollars in income tax revenues from its National Basketball Association Pistons players, employees, and visiting NBA players—with such revenues dedicated to finance neighborhood improvements across the Motor City, under a Neighborhood Improvement Fund—a fund proposed in June by Councilwoman (and ordained Minister) Mary Sheffield, with the proposal coming a week after the City Council agreed to issue some $34.5 million in municipal bonds to finance modifications to the Little Caesars Arena—where the Pistons are scheduled to play next season. Councilwoman Sheffield advised her colleagues the fund would also enable the city to focus on blight removal, home repairs for seniors, educational opportunities for young people, and affordable housing development in neighborhoods outside of downtown and Midtown—or, as she put it: “This sets the framework; it expresses what the fund should be used for; and it ultimately gives Council the ability to propose projects.” She further noted the Council could, subsequently, impose additional limitations with regard to the use of the funds—noting she had come up with the proposal in response to complaints from Detroit constituents who had complained the city’s recovery efforts had left them out—stating: “It’s not going to solve all of the problems, and it’s not going to please everyone, but I do believe it’s a step in the right direction to make sure these catalyst projects have some type of tangible benefits for residents.”

Detroit officials estimate the new ordinance will help generate a projected $1.3 million annually. In addition, city leaders hope to find other sources to add to the fund—sources the Councilmember reports, which will be both public and private: “We as a council are going to look at other development projects and sources that could go into the fund too.” As adopted, the resolution provides: “[I]t is imperative that the neighborhoods, and all other areas of the City, benefit from the Detroit Pistons’ return downtown …In turn, the City will receive income tax revenue, from the multimillion dollar salaries of the NBA players as well as other Pistons employees and Palace Sports & Entertainment employees.” The Council has forwarded the adopted proposals to Mayor Duggan’s office for final consideration and action. The proposed new revenues—unless the tax is modified or rejected by the Mayor—would be dedicated for use in the city’s Neighborhood Improvement Fund in FY2018—with decisions with regard to how to allocate the funds—by Council District or citywide—to be determined at a later date. The funds, however, could also be used to address one of the lingering challenges from the city’s adopted plan of debt adjustment from its chapter 9 bankruptcy: meeting its public pension obligations when general fund revenues are insufficient, “should there be any unforeseen shortfall,” as the resolution provides.

This fiscal recovery, however, remains an ongoing challenge: Detroit CFO John Hill laid up the proverbial hook shot up by advising the Council that the reason the city reserved the right to use the Pistons tax revenue to cover pension or debt obligation shortfalls was because of the large pension obligation payment the city will confront in 2024: “We knew that in meeting our pensions and debt obligation in 2024 and 2025 that those funds get very tight: If this kind of valve wasn’t there, I would have a lot of concerns that in those years its tighter and we don’t get revenues we expect we don’t get any of those funds to meet those obligations.”

But, as in basketball, there is another side: at the beginning of the week, the NBA, Palace Sports & Entertainment, and Olympia Entertainment were added to a federal lawsuit—a suit filed in late June by community activist Robert Davis and Detroit city clerk candidate D. Etta Wilcox against the Detroit Public Schools Community District. The suit seeks to force a vote on the $34.5 million public funding portion of the Pistons’ deal, under which Detroit, as noted above, is seeking to capture the school operating tax, the proceeds of which are currently used to service $250 million of bonds DDA bonds previously issued for the arena project in addition to the $34.5 million of additional bonds the city planned to issue for the Pistons relocation.

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The Key Lessons Learned after a Decade of Municipal Bankruptcies

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eBlog, 04/07/17

Good Morning! In this a.m.’s eBlog, we consider Detroit’s first steps to address the blight which crisscrossed the city leading to its municipal bankruptcy. Then we look to New Hampshire to assess whether the state legislature will preempt municipalities’ authority to set election dates. Then we slip south to assess fiscal developments in the efforts to recover from insolvency in Puerto Rico. Finally, we assess and consider some of the broader issues related to municipal bankruptcy.

Post Chapter 9 Recovery. One of Detroit’s first tests with regard to whether it can find new use for the vast stretches of land it cleared of blight went into effect this week when development teams announced by  Mayor Mike Duggan, along with partners: The Platform, a Detroit-based firm, and Century Partners announced they would be investing an estimated $100 million to rehab the architectural jewels in the city’s downtown—the Fisher and Albert Kahn buildings, with the two organizations declaring they will take the lead in overhauling 373 parcels of vacant land and houses in the Fitzgerald neighborhood on the northwest side, where they will coordinate with other firms on a $4 million development plan to rehab 115 vacant homes over two years, create a two-acre park, and landscape 192 vacant lots—with the work occurring in neighborhoods wherein the Detroit Land Bank took control of most of the properties and razed some abandoned homes. Mayor Duggan and other officials described the plan as a kind of reverse gentrification—or, as Mayor Duggan framed it: “We are going to keep the families here while improving the neighborhoods,” making his announcement on an empty lot which is scheduled to become a city park and include a greenway path to nearby Marygrove College: the city leaders hope to transform the neighborhood into a “Blight-Free Quarter Square Mile,” and, if the model works, seek to propagate it other neighborhoods.

Granite State Preemption or Cure? House Speaker Shawn Jasper wants to give New Hampshire towns that postponed their municipal elections due to a snowstorm a way out of facing potential lawsuits from voters who may have been disenfranchised. Speaker Jasper had proposed letting towns ratify the results of their elections by holding another vote, offering a bill to give towns which moved Election Day the option of letting townspeople vote to ratify, or confirm, the results on May 23rd. However, in the wake of about five hours of testimony, the House Election Law Committee voted 10-10 on the Jasper plan, so that a tie vote killed the Speaker’s amendment, leaving 73 towns on their own to address potential legal problems resulting from their decisions to hold their elections on days other than March 14th. The fiscal blizzard in the Granite State now depends upon whether state legislators determine whether or not a special election is needed with regard to those results. New Hampshire Deputy Secretary of State David Scanlan noted: “The concept is not entirely new…what is different is that it is applying to an entire class of towns that decided to postpone.”

In the past, the Legislature has voted to “cure” individual election defects. Speaker of the House Shawn Jasper, (R-Hudson, N.H.) noted: “Well, the fact that a bunch of towns moved the day of their town election was unprecedented…And so as a result of doing that, those towns that moved had to start bending other laws to make other issues related to the election work…The Legislature is just granting the authority to allow the towns to correct any defects that may exist,” he added, listing changed time listings, lack of proper notice, and absentee ballot date issues as possible defects in the process. All of those questions, of course, have fiscal consequences—or, as Atkinson Town Administrator Alan Phair put it; “Well, I don’t know the exact cost, what it would be, but I do know that in our case we certainly don’t have the money budgeted to (hold a special election), because we obviously just budgeted for one election…We would certainly go considerably over and have to find the money elsewhere to do it.” Under the proposed amendment, towns and school districts which postponed would hold a hearing, at which the respective governing body would vote on whether to hold a special election with one question: whether or not to ratify results, where a “no” vote would kick out anyone elected in a postponed vote, while nullifying warrant articles, with elected roles to be appointed until the next election. Salem Town Manager (Salem is a town of just under 30,000 in Rockingham County) Leon Goodwin said his elected leaders were of the opinion that its postponement was legal, so that the municipality is moving forward on projects voted on last month, noting: We’re moving on as if the votes were accepted even though there is a cloud hanging over us from Concord,” adding that town counsel advised the town moderator that it was legal to move elections. Yet, even as he remained confident the election issue will be resolved, he cautioned that the town has not budgeted for an additional election; Windham (approximately 14,000) Town Manager David Sullivan said the municipality’s town Counsel would sign off on the town’s fire truck bond, notwithstanding bond counsel elsewhere in the state advising that ratification of the elections would be necessary.

Municipal authority to act has been hampered by different state House and Senate approaches: while the two bodies have been moving on parallel tracks in the wake of state officials’ questioning the authority of town moderators to reschedule the March 14 voting sessions of their town meetings, the Senate this week passed SB 248, a bill introduced to ratify actions taken at the rescheduled meetings; however, the bill passed with a committee amendment which deletes all of the original language and provides instead for the creation of a committee to “study the rescheduling of elections.” Senators acknowledged that the bill was not likely to pass through the House in that form—asserting the intent was simply to get a bill to the House for further work. Subsequently, a floor amendment was introduced to restore the bill’s original language, ratifying all actions taken at the rescheduled meetings; however, that amendment failed on a party-line vote, with all nine Democrats voting in favor and all fourteen Republicans voting against, leaving most unclear how this could have become a partisan issue. The question comes down to what level of control local officials should have over local elections. The Speaker described the outcome thusly: “I think it was a case of 10 people (on the committee) thinking that what happened was legal;” however, he maintained that the postponed votes were not legal, adding: “The sad thing is that for school districts with bond issues that passed in those meetings, I don’t see a path forward for them,” adding: “I think if you’re afraid of snowstorms, you ought to move your meetings, probably to May,” noting that state officials are forbidden by law from moving state primary and general elections, as well as the first-in-the-nation presidential primary. Unsurprisingly, town moderators and attorneys who work with them on municipal bond issues disagreed with the Speaker’s interpretation that the postponed elections were illegal and his belief that the only way to rectify the issue was for them to act to individually ratify them, with many arguing they acted legally under a state law which allows them to postpone and reschedule the “deliberative session or voting day” of a town meeting to another day; however, the Speaker maintains that law applies only to town meetings, while town elections are governed under a different statute, which provides: “All towns shall hold an election annually for the election of town officers on the second Tuesday in March.” He also noted that the state’s official political calendar, which has the force of law, states that town elections must be held on March 14, adding: “Without trying to place blame, laws are sometimes very confusing if you look only at parts of them,” noting: “I don’t believe for one second that moving the election was legal.”

The Speaker added that still another state law provides that at special town meetings, no money may be raised or appropriated unless the number of ballots cast at the meeting is at least half the number of those on the checklist who were eligible to vote in the most recent town meeting, albeit adding that such meetings do not apply to the current situation, because they are not elections. The state’s Secretary of State said that after three weeks of research, he was able to report on voter turnout at town elections for the past 11 years, advising that 210 towns held elections in March, and 137 of them “followed the law” by holding their elections on March 14th, while 73 towns had postponed their elections by several days. Now Speaker Jasper asks: “Why would we give over 300 individual moderators the ability to do that when our Secretary of State doesn’t have the ability to do that for a snowstorm in our general election or our presidential primary?” The Speaker notes: “I think we need to provide a way to ensure that we don’t clog up the courts, and we don’t have people spend a lot of their own money to fight this, and the towns don’t have to spend a lot of money fighting it.”

Un-positive Credit Rating for Puerto Rico. Moody’s Investors Service has lowered the credit ratings on debt of the Government Development Bank and five other Puerto Rico issuers, with a total of approximately $13 billion outstanding, and revised down the Commonwealth’s fiscal outlook, and the outlooks for seven affiliated obligors linked to the central government to negative from developing, with the downgrades reflecting what the agency described as “persistent pressures on Puerto Rico’s economic base that indicate a diminishing perceived capacity to repay,” noting that while it continues to “believe that essentially all of Puerto Rico’s debt will be subject to default and loss in a broad restructuring, the securities being downgraded face more severe losses than we had previously expected, in the light of Puerto Rico’s projected economic pressures. For this reason, we downgraded to C from Ca not only the senior notes issued by the now defunct Government Development Bank, but also bonds issued by the Puerto Rico Infrastructure Financing Authority and backed by federal rum tax transfer payments, the Convention Center District Authority’s hotel occupancy tax-backed bonds, the Employees Retirement System’s bonds backed by government pension contributions, and the 1998 Resolution bonds of the Puerto Rico Highways and Transportation Authority.”

Puerto Rico Governor Rossello late Wednesday said that the U.S. territory’s fiscal plan, approved by the PROMESA Board, does not contemplate any double taxation, adding that, between the increase in the property tax and the reduction of expenses in the municipalities, he favored the latter as a measure to compensate for the absence of the state subsidy of $350 million. He reiterated that, as a substitute for these funds, the properties which are not currently paying taxes to the Centro de Recaution de Ingresos Municipales (CRIM: the Municipal Revenue Collection Center) should be identified, because they are not included in their registry. The Governor also stressed that the economic outcome of these two fiscal initiatives is still being evaluated, albeit he estimated that they could generate about $100 million, noting: “Whatever the differential after that for the municipalities, there are two mechanisms that can be worked: One, a mechanism to seek an additional source of income, or, two, to avail cuts…The central government has taken the cutting position. We are already establishing a protocol to cut in the agencies, to consolidate, to eliminate the expenses that are not necessary, to go from 131 to between 35 to 40 agencies. That has been our action. The municipalities—now we will have a conversation with our technical team—will have several options: ‘either cut as did the central government or seek mechanisms to raise more funds or impose taxes.’” Currently, mayors evaluate to increase the arbitrage of the real property to 11.83% or to 12.83% in all the municipalities; the concept is for members of the Executive to offer assistance to do the modeling. Thus, the president of the board of CRIM, Cidra Mayor Javier Carrasquillo, said CRIM will be “sensitive to the reality of the pockets of Puerto Ricans: We have to be cautious and responsible in the recommendation that we are going to make…There is nothing definitive yet. There are recommendations.” The Governor noted that the PROMESA Board approved fiscal plan approved last month does not contemplate an increase in property taxation, asserting it was “false to imply that our fiscal plan entails an increase in the rate or a double rate on properties,” albeit recalling that the disappearance of $350 million in transfers to municipalities begins on July 1, when the fiscal year begins, promising it will be done progressively, so that in the next budget (2017-2018) $175 million disappear, and the remaining $175 million, the next fiscal year, describing it as a “two-year fade out.” Unsurprisingly, he did not specify when or how the plan would fiscally benefit this island’s municipalities, stating: “We have already been able to have pilot efforts to identify different municipalities where 60% of their properties are not being assessed…We are going to commit ourselves so that all these properties are in the system.”

The End of a Chapter 9 Era? Municipal bankruptcy is a rarity: even notwithstanding the Great Recession which produced a significant number of corporate bankruptcies—and federal bailouts to large for-profit corporations and quasi-federal corporations, such as Fannie Mae; the federal government offered no bailouts to cities or counties. Yet from one of the nation’s smallest cities, Central Falls, to major, iconic cities such as Detroit and Jefferson County, the nation experienced a just-ended spate, before—with San Bernardino’s exit last month, the likely closure of an era—even as we await some resolution of the request by East Cleveland to file for chapter 9 municipal bankruptcy. The lessons learned, compiled by the nation’s leading light of municipal bankruptcy, therefore bear consideration. Jim Spiotto, with whom I had the honor and good fortune over nearly a decade of effort leading to former President Reagan’s signing into law of the municipal bankruptcy amendments of 1988, offers us a critical guide of ten lessons learned:

  1. Do not defer funding of essential services and infrastructure: Detroit is a wake- up call for others that there is never a good reason to defer funding of essential services and infrastructure at an acceptable level. If you do, Detroit’s fate will be yours.
  2. Labor and pension contracts under state constitutional and statutory provisions should not be interpreted as a mutual suicide pact: It appears one of the reasons why resolution of pension and labor costs was not achieved in Detroit prior to filing Chapter 9 was the belief of the workers and retirees that, under the Michigan constitution, those contractual rights could not be impaired or diminished to any degree. This position failed to take into consideration that the municipality can only pay that which it has revenues to pay and, in an eroding declining financial situation, there will never be sufficient funds to pay all obligations, especially those that may be unaffordable and unsustainable.
  3. Don’t question that which should be beyond questioning and is needed for the long-term financial survival of the municipality: A dedicated source of payment, statutory lien or special revenues established under state law must be honored and should not be contested. Capital markets work effectively when credibility and predictability of outcome are clear and unquestioned. Current effort to pass new legislation (California SB222 and Michigan HB5650) to grant statutory first lien on dedicated revenues. Further, as noted in the Senate Report for the 1988 Amendments to the Bankruptcy Code and Chapter 9 “Section 904 [of Chapter 9 limiting the jurisdiction and power of the Bankruptcy Court] and the tenth amendment prohibits the interpretation that pledges of revenues granted pursuant to state statutory or constitutional provisions to bondholders can be terminated by filing a Chapter 9 proceeding”. This follows the precedent from the 1975 financial distress of New York City and the State of New York’s highest court ruling the state imposed moratorium was unconstitutional given the constitutional mandate to pay available revenues to the general obligation bondholders. See Flushing Nat. Bank et. al. v. Mun. Assistance Corp. of New York, 40 N.Y.S.2nd 731, 737-738 (N.Y. 1976). Just as statutory liens and special revenues, there is a strong argument that state statutory and constitutional mandated payments (mandated set asides, priorities, appropriations and dedicated tax revenue payments) should not and cannot be impaired, limited, modified or delayed by a Chapter 9 proceeding given the rulings of the Supreme Court in the Ashton and Bekins cases and the prohibitions of Sections 903 and 904 of Chapter 9 of the Bankruptcy Code.
  4. Debt adjustment is a process, but a recovery plan is a solution: As noted above, while Detroit has proceeded with debt adjustment which provides some additional runway so it can take takeoff in a recovery, such plan is not the cure for the systemic problem. Rather, the plan provides additional breathing room so that the municipality, through its Mayor and its elected officials, may proceed with a recovery plan, reinvest in Detroit, stimulate the economy, create new jobs, clear and develop blighted areas and raise the level of services and infrastructure to that which is acceptable and attract new business and new citizens.
  5. Successful plans of debt adjustment have one common feature: virtually all significant issues have been settled and resolved with major creditors: While the Detroit Plan started with sound and fury between the emergency manager and creditors and what they would receive, in the end, similar to what occurred in Vallejo, Jefferson County and even in Stockton (with one exception), major creditors ultimately reached agreement and supported the Plan of Debt Adjustment that allowed the municipality to move forward, confirm the Plan and begin its journey to recovery.
  6. One size does not fit all: There are many ways to draft a plan of debt adjustment and sometimes the more creative, the better. As noted above, traditionally major cities of size with significant debt did not file Chapter 9. They refinanced their debt with the backing of the state which reduced their future borrowing costs and allowed them to recover by having the liquidity and the reduced costs necessary to deal with their financial difficulties. Detroit chose a different path.
  7. A recovery plan must provide for essential services and infrastructure: “Best interest of creditors” and “feasibility” can only mean an appropriate reinvestment in the municipality through a recovery plan where there is funding of essential services and infrastructure at an acceptable level to stimulate the municipality’s economy to attract new employers and taxpayers thereby increasing tax revenues and addressing the systemic problem. While no plan of debt adjustment is perfect or assured, there should be, as the Bankruptcy Court in Detroit throughout the case pointed out, a plan to show the survivability and future success of the City.
  8. Confirmation of a plan of debt adjustment is only the beginning of the journey to financial recovery, not the end: It is important to recognize, as noted above, that Chapter 9 is a process, not a solution. The recovery plan, which will take dedication and effort by the elected officials of the City along with residents, public workers and other creditors is the only way to achieve success. It is measured not by months, but by years, and by the constant vigilance to ensure that the systemic problem is addressed effectively in a permanent fix.

What Could Be the State Role in Averting Municipal Fiscal Distress & Bamkruptcy?

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eBlog, 1/27/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenge in Petersburg, Virginia—and the role of the Commonwealth of Virginia. Because, in our federal system, each state has a different blueprint with regard to whether a municipality is even allowed to file for chapter 9 municipal bankruptcy (only 18), and because there is not necessarily rhyme nor reason with regard to fiscal oversight and response mechanisms—as we have observed so wrenchingly in the forlorn case of East Cleveland—the role of states appears to be constantly evolving. So it is this a.m. that we look to Virginia, where the now insolvent municipality of Petersburg had routinely filed financial information with the Virginia auditor of public accounts—but somehow the accumulating fiscal descent into insolvency never triggered alarm bells.   

Virginia Auditor Martha Mavredes this week, testifying before the House Appropriations Committee, told Chairman S. Chris Jones (R-Suffolk) it was “just hard for us to really get our minds around how that was missed,” telling the committee the state currently has no requirement for municipalities to furnish the kind of comprehensive information that would trigger awareness of insolvency; there appears to be no mechanism for the Commonwealth to step in and help. Indeed, that was the very purpose of Chairman Jones to call for the hearing: he wants to better understand options Virginia might consider to not just create some kind of trip wire, but, mayhap more importantly, to act on provisions which could avert future such municipal insolvencies. Auditor Mavredes indicated to the Committee she is scrambling to scrabble together some kind of tripwire or early warning system that would flag financial problems in Virginia’s municipalities at an earlier stage, telling the committee she is using a system devised by the state of Louisiana to help Virginia identify cities and counties in dire fiscal straits. Thus she plans to create a database of all localities in the commonwealth to rate or score their relative fiscal health. Under what she is proposing, her office will approach cities that show warning signs in order to assess more information. Her real issue, she told the committee, is what fiscal assistance tools might be available—or as she put it: the “piece I can’t solve right now is what kind of assistance might be there” once such problems come to light.” Virginia, like a majority of states, has no provision for the state to step in if a locality goes into default. Indeed, it was the thoughtful step of Virginia’s Finance Secretary Ric Brown, who took the unusual step last year to investigate Petersburg’s finances, which led him to discover the city had some $18 million in unpaid bills, an unbalanced budget, and a fiscal practice of papering over deficits with short-term borrowing—a practice that not only jeopardized the city’s bond rating, but also affected the cost of borrowing for the regional public utility. Secretary Brown stressed the need for training local elected officials about budgeting and best practices, and he suggested a program to allow outside management firms to help get cities on a better fiscal foundation. Interestingly, the Committee might want to avail itself of the pioneering work underway by the irrepressibly insightful Don Boyd of the Rockefeller Institute of Government to assess state responses to municipal fiscal distress, seeking to answer the kinds of thoughtful queries Secretary Brown is asking. In a chart for Rockefeller, we tried our own answer:

Understanding Municipal Fiscal Stress

Assessing State Responses to Growing Municipal Fiscal Distress and Insolvency:

  • The Ostriches (head in the sand): Do Nothings/modified harm: e.g. Illinois
  • Denigrators (Alabama is a prime example: when Jefferson County requested authority to raise its own taxes, the Legislature refused, forcing the county into chapter 9 bankruptcy);
  • Learners (Rhode Island is a very good candidate here—in the wake of Central Falls, the state evolved into a much more constructive partnership;
  • Thinkers (I put Colo. & Minn. here—especially because both seem to recognize potential benefits of tax sharing & innovation in intergovernmental fiscal policy);
  • Preemptors (Michigan, because it provides for the usurpation of any local authority through the appointment of an Emergency Manager); New Jersey seems to be fitting in with that category re: Atlantic City;
  • Substitutors: Pa.: Act 47
  • Maybe Do-Nothings: Ohio, even though it authorizes municipal bankruptcy, appears to have been totally non-responsive the petition by East Cleveland to file—and has appeared to play no role in the so-far dysfunctional discussions between Cleveland and East Cleveland).

Are American Cities at a Financial Brink?

eBlog, 1/13/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and physical challenges to the City of Flint, Michigan in the wake of the disastrous state appointment of an Emergency Manager with the subsequent devastating health and fiscal subsequent crises, before turning to a new report, When Cities Are at the Financial Brink” which would have us understand that the risk of insolvency for large cities is now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” before briefly considering the potential impact on every state, local government, and public school system in the country were Congress to adopt the President-elect’s proposed infrastructure plan; then we consider the challenge of aging: what do longer lifespans of city, county, and state employees augur for state and local public pension obligations and credit ratings?

Not In Like Flint. Residents of the City of Flint received less than a vote of confidence Wednesday about the state of and safety of their long-contaminated drinking water, precipitated in significant part by the appointment of an Emergency Manager by Governor Rick Snyder. Nevertheless, at this week’s town hall, citizens heard from state officials that city water reaching homes continues to improve in terms of proper lead, copper, alkaline, and bacteria levels—seeking to describe Flint as very much like other American cities. The statements, however, appeared to fall far short of bridging the trust gap between Flint residents and the ability to trust their water and those in charge of it appears wide—or, as one Flint resident described it: “I’m hoping for a lot…But I’ve been hoping for three years.” Indeed, residents received less than encouraging words. They were informed that they should, more than 30 months into Flint’s water crisis, continue to use filters at home; that it will take roughly three years for Flint to replace lead water service lines throughout the city; that the funds to finance that replacement have not been secured, and that Flint’s municipal treatment plants needs well over $100 million in upgrades: it appears unlikely the city will be ready to handle water from the new Karegnondi Water Authority until late-2019-early 2020. The state-federal presentation led to a searing statement from one citizen: “I’ve got kids that are sick…My teeth are falling out…You have no solution to this problem.”

Nevertheless, progress is happening: in the last six months of water sampling in Flint, lead readings averaged 12 parts per billion, below the federal action level of 15 ppb, and down from 20 ppb in the first six months of last year. Marc Edwards, a Virginia Tech researcher who helped identify the city’s contamination problems, said: “Levels of bacteria we’re seeing are at dramatically lower levels than we saw a year ago.” However, the physical, fiscal, public trust, and health damage to the citizens of Flint during the year-and-a-half of using the Flint River as prescribed by the state-appointed Emergency Manager has had a two-fold impact: the recovery has been slow and residents have little faith in the safety of the water. Mayor Karen Weaver has sought to spearhead a program of quick pipeline replacement, but that process has been hindered by a lack of funding.

State Intervention in Municipal Bankruptcy. In a new report yesterday, “When Cities Are at the Financial Brink,” Manhattan Institute authors Daniel DiSalvo and Stephen Eide wrote the “risk of insolvency for large cities in now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” adding that “states…should intervene at the outset and appoint a receiver before allowing a city or other local government entity to petition for bankruptcy in federal court—and writing, contrary to recent history: “Recent experiences with municipal bankruptcies indicates that when local officials manage the process, they often fail to propose the changes necessary to stabilize their city’s future finances.” Instead, they opine in writing about connections between chapter 9, and the role of the states, there should be what they term “intervention bankruptcy,” which could be an ‘attractive alternative’ to the current Chapter 9. They noted, however, that Congress is unlikely to amend the current municipal bankruptcy chapter 9, adding, moreover, that further empowering federal judges in municipal affairs “is sure to raise federalism concerns.” It might be that they overlook that chapter 9, reflecting the dual sovereignty created by the founding fathers, incorporates that same federalism, so that a municipality may only file for chapter 9 federal bankruptcy if authorized by state law—something only 18 states do—and that in doing so, each state has the prerogative to determine, as we have often noted, the process—so that, as we have also written, there are states which:

  • Precipitate municipal bankruptcy (Alabama);
  • Contribute to municipal insolvency (California);
  • Opt, through enactment of enabling legislation, significant state roles—including the power and authority to appoint emergency managers (Michigan and Rhode Island, for instance);
  • Have authority to preempt local authority and take over a municipality (New Jersey and Atlantic City.).

The authors added: “The recent experience of some bankrupt cities, as well as much legal scholarship casts doubt on the effectiveness of municipal bankruptcy.” It is doubtful the citizens in Stockton, Central Falls, Detroit, Jefferson County, or San Bernardino would agree—albeit, of course, all would have preferred the federal bailouts received in the wake of the Great Recession by Detroit’s automobile manufacturers, and Fannie Mae and Freddie Mac. Similarly, it sees increasingly clear that the State of Michigan was a significant contributor to the near insolvency of Flint—by the very same appointment of an Emergency Manager by the Governor to preempt any local control.

Despite the current chapter 9 waning of cases as San Bernardino awaits U.S. Bankruptcy Judge Meredith Jury’s approval of its exit from the nation’s longest municipal bankruptcy, the two authors noted: “Cities’ debt-levels are near all-time highs. And the risk of municipal insolvency is greater than at any time since the Great Depression.” While municipal debt levels are far better off than the federal government’s, and the post-Great Recession collapse of the housing market has improved significantly, they also wrote that pension debt is increasingly a problem. The two authors cited a 2014 report by Moody’s Investors Service which wrote that rising public pension obligations would challenge post-bankruptcy recoveries in Vallejo and Stockton—perhaps not fully understanding the fine distinctions between state constitutions and laws and how they vary from state to state, thereby—as we noted in the near challenges in the Detroit case between Michigan’s constitution with regard to contracts versus chapter 9. Thus, they claim that “A more promising approach would be for state-appointed receivers to manage municipal bankruptcy plans – subject, of course, to federal court approval.” Congress, of course, as would seem appropriate under our Constitutional system of dual sovereignty, specifically left it to each of the states to determine whether such a state wanted to allow a municipality to even file for municipal bankruptcy (18 do), and, if so, to specifically set out the legal process and authority to do so. The authors, however, wrote that anything was preferable to leaving local officials in charge—mayhap conveniently overlooking the role of the State of Alabama in precipitating Jefferson County’s insolvency.  

American Infrastructure FirstIn his campaign, the President-elect vowed he would transform “America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains with a deficit-neutral plan targeting substantial new infrastructure investments,” a plan the campaign said which would provide maximum flexibility to the states—a plan, “American Infrastructure First” plan composed of $137 billion in federal tax credits which would, however, only be available investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Left unclear is how such a plan would impact the nation’s public infrastructure, the financing of which is, currently, primarily financed by state and local governments through the use of tax-exempt municipal bonds—where the financing is accomplished by means of local or state property, sales, and/or income taxes—and some user fees. According to the Boston Federal Reserve, annual capital spending by state and local governments over the last decade represented about 2.3% of GDP and about 12% of state and local spending: in FY2012 alone, these governments provided more than $331 billion in capital spending. Of that, local governments accounted for nearly two-thirds of those capital investments—accounting for 14.4 percent of all outstanding state and local tax-exempt debt. Indeed, the average real per capita capital expenditure by local governments, over the 2000-2012 time period, according to the Boston Federal Reserve was $724—nearly double state capital spending. Similarly, according to Census data, state governments are responsible for about one-third of state and local capital financing. Under the President-elect’s proposed “American Infrastructure First” plan composed of $137 billion in federal tax credits—such credit would only be available to investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Similarly, because less than 2 percent of the nation’s 70,000 bridges in need of rebuilding or repairs are tolled, the proposed plan would be of no value to those respective states, local governments, or users. Perhaps, to state and local leaders, more worrisome is that according to a Congressional Budget Office 2015 report, of public infrastructure projects which have relied upon some form of private financing, more than half of the eight which have been open for more than five years have either filed for bankruptcy or been taken over by state or local governments.

Moody Southern Pension Blues. S&P Global Ratings Wednesday lowered Dallas’s credit rating one notch to AA-minus while keeping its outlook negative, with the action following in the wake of Moody’s downgrade last month—with, in each case, the agencies citing increased fiscal risk related to Dallas’ struggling Police and Fire Pension Fund, currently seeking to stem and address from a recent run on the bank from retirees amid efforts to keep the fund from failing, or, as S&P put it: “The downgrade reflects our view that despite the city’s broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, expected continued deterioration in the funded status of the city’s police and fire pension system coupled with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant and negatively affects Dallas’ creditworthiness.” S&P lowered its rating on Dallas’ moral obligation bonds to A-minus from A, retaining a negative outlook, with its analysis noting: “Deterioration over the next two years in the city’s budget flexibility, performance, or liquidity could result in a downgrade…Similarly, uncertainty regarding future fixed cost expenditures could make budgeting and forecasting more difficult…If the city’s debt service, pension, and OPEB carrying charge elevate to a level we view as very high and the city is not successful in implementing an affordable plan to address the large pension liabilities, we could lower the rating multiple notches.” For its part, Fitch Ratings this week reported that a downgrade is likely if the Texas Legislature fails to provide a structural solution to the city’s pension fund problem. The twin ratings calls come in the wake of Dallas Mayor Mike Rawlings report to the Texas Pension Review Board last November that the combined impact of the pension fund and a court case involving back pay for Dallas Police officers could come to $8 billion—mayhap such an obligation that it could force the municipality into chapter 9 municipal bankruptcy, albeit stating that Dallas is not legally responsible for the $4 billion pension liability, even though he said that the city wants to help. The fund has an estimated $6 billion in future liabilities under its current structure. In testimony to the Texas State Pension Review Board, Mayor Rawlings said the pension crisis has made recruitment of police officers more difficult just as the city faces a flood of retirements.

 

What Is the State Role in Municipal Solvency/Recovery?

 

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eBlog, 11/21/16

Good Morning! In this a.m.’s eBlog, we consider the state role in addressing municipal fiscal distress and bankruptcy: what are the different models—and how are they working? Then we consider one especially dysfunctional model: Ohio, where the City of East Cleveland could find its two Mayoral candidates in municipal jail before the voters go to the polls early next month. From thence, we strike east to consider this month’s elections in Massachusetts on charter schools—examining an issue that goes to the heart not only of state local relations and authority, but also to the potential impact on municipal assessed property values. What may be learned? Finally, we wish readers a Happy Thanksgiving!

What Is the State Role in Municipal Solvency/Recovery? Under our country’s system of dual federalism created by the founding fathers, while federal law authorizes municipalities to file for chapter 9 bankruptcy, a city, county, or school district may only do so if authorized by a state. Today, only 18 of the 50 states provide such authority. Ergo, one of the issues we have sought to consider through this eBlog has been the evolving State role in municipal distress in a field of seeming constant flux. This month, for instance, we experienced the uncertain governance situation in New Jersey in the wake of the state takeover of the City of Atlantic City—a state takeover in which the process and how it will play out could be further impacted by the potential selection by President-elect Trump of New Jersey Governor Chris Christie, who might be a potential Cabinet or other senior advisor to the President-elect.

Actual governance has shifted from local accountability to the state’s Division of Local Government Services—but with the state already having imposed a state emergency manager in the city, what the new state takeover means continues to be uncertain. In Ohio, which authorizes chapter 9 municipal bankruptcy, the City of East Cleveland’s request to do so appears to be on the desk of Rod Serling in the Twilight Zone: there has simply been no response of any kind. Similarly, in California, state policies have clearly contributed to some of the fiscal distress that led Stockton and San Bernardino into chapter 9 municipal bankruptcy, but the state played absolutely no role in helping either Stockton or San Bernardino to emerge. Michigan, a state which has been deeply enmeshed in municipal fiscal distress—albeit not necessarily in a constructive manner—has acted in different ways—going from its imposition of an emergency manager—a process with deadly consequences in Flint, but seemingly key to Detroit’s turnaround. Alabama, by refusing to allow Jefferson County to raise its own taxes, directly aided and abetted the County’s chapter 9 municipal bankruptcy. Rhode Island, on the day of Central Falls’ chapter 9 filing—the very day Providence, the state’s capitol city, was itself poised on the rim of filing, but opted not to—and the state, thanks to the exceptional ingenuity of its then Treasurer (now Governor), created an ingenious model of creating teams of city managers and retired state legislators to act in teams to offer assistance to cities in danger of insolvency—so that there was a team effort before—instead of after such a precipitous event.

Part of what has made this effort to assess what is happening in the arena of severe municipal fiscal challenges and bankruptcy so much more difficult is the surprise that, in the wake of recovery from the Great Recession, one would have assumed severe municipal fiscal distress and insolvency would have dissipated. It has not. What has changed? Why are States not reacting more uniformly? With only 18 states permitting municipal bankruptcy, what state models exist which offer a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion? What is a state’s role in recovery from a chapter 9 municipal bankruptcy? What is a state’s role in addressing increasing fiscal disparities?

Ungoverning in a Fiscal Twilight Zone. In East Cleveland, Ohio, the mall city which is seeking authority from the State of Ohio to file for chapter 9 bankruptcy—a plea to which it remains unclear whether there will ever be a response, and where there have been on and off discussions with adjacent Cleveland about a consolidation of the two municipalities; the city’s election day activities provide a sense of the increasing dysfunctional nature of the small city: it was, after all, on election day this month at Mayfair Elementary School where both candidate Devin Branch and current Mayor Gary Norton were working the polls trying to convince registered voters to go with their respective causes. Mayor Norton was pressing potential voters not to recall him at the city’s upcoming election on December 8th; Devin Branch was going door-to-door to obtain the 550 requisite signatures to ensure the recall would officially be on the ballot. Their respective efforts, however, came up against each other when they encountered each other going after the same person and their battle became an event where they pressed their respective clip boards in front of registered voters—leading to a confrontation so that Mayor Norton decided to order the Chief of Police and a squad of police to arrest Mr. Branch. Moreover, dissatisfied with the police response, Mayor Norton then ordered his personal lawyer, Willa Hemmons, to issue a warrant for the arrest of Mr. Branch. Thus, in an insolvent municipality, several squads of police and detectives were directed to make the arrest of Devin Branch last Thursday. Mr. Branch was arrested and placed in East Cleveland’s jail; last Friday, Judge William Dawson opened the door for his release after posting bond. This morning, Judge Dawson will hear from both men, albeit, what the voters and city’s taxpayers will hear seems unlikely to be enlightening for the city’s fiscal future.

Schooled in Fiscal Solvency? Massachusetts voters this month overwhelmingly rejected a major expansion of charter schools, rejecting Question 2 by nearly a 2-1 margin, in what was perceived as a significant setback for Governor Charlie Baker, who had aggressively campaigned for the referendum, saying it would provide a vital alternative for families trapped in failing urban schools. As proposed, the measure would have allowed for 12 new or expanded charters per year, adding significantly to the existing stock of 78 charters statewide. Had the measure been approved, it would have—as state-imposed charter schools in Detroit are, shifted thousands of dollars in state aid from public to charter schools—shifting as much as an estimated $451 million statewide this year. During the campaign, opponents such as Juan Cofield, president of the New England Area Council of the NAACP, warned that charters were creating a two-tiered system, draining money from the traditional schools that serve the bulk of black and Latino students, telling voters “a dual school system is inherently unequal.” Worcester Mayor Joseph Petty, an opponent, noted: “Here in Worcester we will spend $24.5 million dollars on charter schools in our city…that is money that could be used to hire more teachers, improve our facilities, and invest in our students,” in effect underscoring the reason municipal leaders in the Bay State opposed the measure: their apprehension with regard to the fiscal impact on cities, towns, and school districts when more children attend charter schools. Had the measure been adopted, district schools would have received less money: the money to educate a child would have followed the child: over time, expanding access to charter schools could cost local property taxpayers more, since district schools will need more funding, forcing local elected leaders to either raise property taxes more, or cut public services. Indeed, opponents of charter school expansion claimed, based on state data, that school districts would have lost some $450 million this year to charter school tuition, even after accounting for state reimbursements.

Unsurprisingly, ergo, municipal officials generally opposed expanding charter schools, with the mayors of Springfield, Boston, Chicopee, Holyoke, Northampton, Pittsfield, Westfield, and West Springfield all coming out publicly opposed. Geoff Beckwith, the Executive Director of the Massachusetts Municipal Association, said the current funding system is already difficult for cities and towns to deal with, noting that, for one, the formula transferring money from district to charter schools does not take into account the fact that many of a school’s costs are fixed and do not vary by child, noting that with regard to the fiscal impact on cities, towns and school districts: “You have to a have a classroom, you have to heat the building, you still have principals…It’s extremely hard for communities to actually cut costs…The only thing they can do is cut back on the overall quality of the programming they’re offering the vast majority of kids who stay behind in the regular public school system.” Ergo, he noted: “Until the financing system is fixed, the ballot question providing for the expansion of charter schools would exacerbate and deepen the financial trouble that these local school systems are dealing with…And the communities that are most impacted by charter school expansion are in most cases the most financially challenged communities.” (Unsurprisingly, the Massachusetts Municipal Association board voted unanimously to oppose the ballot question.) Indeed, Moody’s reported the rejection to be a credit positive for the Commonwealth’s urban local governments: “It will allow those cities and towns to maintain current financial operations without having to adjust to increased financial pressure from charter school funding.” According to Moody’s, since the last charter school expansion in 2010, cities such as Boston, Fall River, Lawrence, and Springfield have experienced significant growth in charter school assessments, averaging 83% due to increasing charter school enrollment. To which, Moody’s notes: “So far, the growing cost of charter schools on municipalities has not been a direct credit challenge; rather the effect is more indirect because Massachusetts school districts are integrated within cities and towns with relatively healthy credit profiles.” The agency went on to write: “Education in the commonwealth is a primary budget item within a municipality’s overall budget, which allows city budgets to absorb some of the education financial stress with other municipal sources….This integration is a key distinction from school districts in other states that operate separately from the communities they serve.”

What Is the Role of A State When a Municipality Nears Insolvency?

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eBlog, 9/21/16

In this morning’s eBlog, we consider the difficult challenge for a state when one of its municipalities is on the brink of insolvency—and where its authority to file for chapter 9 municipal bankruptcy is uncertain—and the kinds of hard questions about its future. As we are noting, part of fiscal federalism involves signal differences in laws and authorities—on a state-by-state basis, with regard to options for municipalities on the brim of insolvency. Because only 18 states specifically provide authority to municipalities, that leaves a signal void in the remaining states and leaves those states in more awkward positions when a municipality within its borders likely will not be able, on its own, to avoid insolvency. Mayhap appropriately, we then delve further south to Jefferson County, Alabama, where the state’s actions were the critical lever to pushing the county into municipal bankruptcy—and where the County’s appeal efforts have been stymied for years.  

What Is a State to Do? The Richmond Free Press this morning ran an editorial about the foundering and near insolvency of the City of Petersburg, the small, independent city in Virginia, where the median income for a household in the city is under $29,000, and where the City Council this month adopted most of a package of tax increases and budget cuts, but rejected a proposal to close one of the city’s four fire stations—and where, it seems clear, the Commonwealth of Virginia is most unlikely to offer any fiscal relief. At heart, we noted, the Council was really holding a hearing about whether the small municipality has a future. Thus, this a.m., the editorial noted: “We remember the chilling headline in a New York newspaper when the Big Apple was facing bankruptcy…It was 1975, and President Gerald Ford declared he would veto any legislation calling for a federal bailout of New York City. The headline in the New York Daily News — ‘FORD TO CITY: DROP DEAD.’” Then the editorial noted that when Virginia Governor Terry McAuliffe was asked by a reporter earlier this month if there were plans to propose legislation to help financially stricken Petersburg, “the governor’s reply was a tad bit better than President Ford’s to New York City, but it may have had the same result: ‘I’m sure we’re not going to see legislation proposed to deal with this situation…We have no authority to give any money. But we do have the authority to send our team in to help get the books together, get the finances together…Our team has been here, they’ve been staying here, and we want to give all the assistance we can.’” However, as the editorial notes: “Clearly, the city needs technical experts in a lot of fields, including the state’s audit team. But it needs a lot more than that.”

The editorial adds that the state audit team learned, and disclosed in a public meeting, that Petersburg’s fiscal abyss was deeper hole than originally thought: it had about $14 million in unpaid bills as of June 30th: the auditors determined the municipality had been spending far more than it was bringing in nearly every year since 2012; the state team determined the city was planning to sink even deeper into red ink in its FY’2017 budget: that approved budget calls for the city to spend $12.5 million more than it expects to receive in revenue. The state team provided recommendations, such as pursue short-term financing to help meet immediate needs, but, as the editorial notes, “But so far, that has not worked, because the city is in such bad fiscal condition.” The editorial notes that state lawmakers, including House Majority Leader Kirk Cox (R-Colonial Heights), said a bailout for Petersburg was highly unlikely, in part, because it would set a bad precedent.

Caught between a Rock & a Hard Place: Virginia does not specifically authorize its municipal entities to file a petition for chapter 9 municipal bankruptcy—and only one entity, has ever attempted to file—an economic development authority, but its case was dismissed in 2001. The Virginia Constitution bars a city or town from incurring debt exceeding 10 percent of the assessed value of properties within its boundaries (see Virginia Constitution, article VII, §10); ergo, the editorial asks: “So what’s Petersburg to do?” Noting that the small municipality has slashed spending, including a $3.4 million cut to the city’s public schools budget, cut pay for its employees, frozen hiring, and raised taxes on everything from cigarettes, meals and lodging taxes to personal property taxes to bring the current budget into balance—but left untouched most of the $14 million in debt from previous years.”

It seems like a hot potato for Virginia lawmakers who appear to be apprehensive that the small municipality’s fiscal crisis could create a precedent for other cities, towns, or counties to seek bailouts from the state, or, as Del. R. Steven Landes (R-Augusta), Chairman of a newly formed task force studying the impact of fiscally stressed localities on the state and how to deal with such situations, put it: “I just hope we are not heading down this road where we are digging the state into a hole.” The Delegate’s question came in the wake of this week’s report to the legislature by Virginia’s Secretary of Finance Richard D. Brown on the city’s struggle to regain its financial footing, before members of the House of Delegates Appropriations Committee—even as Delegate Landes said that as far as he understood, Petersburg has not asked the state for financial help during its crisis. The audit findings presented by Sec. Brown had identified a projected $12 million budget deficit for the current fiscal year and found that by last June 30th, Petersburg had incurred $18.8 million in bills, of which $14.7 million were mostly unpaid obligations to “external entities” such as contractors, vendors, and a state agency. Secretary Brown alerted the committee to a looming October 1st payment deadline for $1.4 million owed to the Virginia Resources Authority, a premier funding source for local government infrastructure financing through bond and loan programs, reporting this was “a principal-and-interest payment,” adding that he would have to “take certain steps to intercept aid” from the state to Petersburg to make sure those payments are made, adding: “The state has never had to do that with our localities, so I think that this is a precedent that nobody really wants. That is why it is important for us to not even have to go there,” he testified, assuring the Committee members his department has provided “only technical assistance” to the city.

Unsurprisingly, some of the state lawmakers disbelieve the state’s aid has stopped there. Delegate Landes followed up: “You mentioned that we are not providing any direct financial assistance, but indirectly we are: Your time, your staff’s time and all these state agencies that are helping them move forward, it cost the Commonwealth money. Other localities have gotten into difficulties, and I don’t recall that we provided this kind of involvement…We are trying to help Petersburg on the school end, providing additional resources for their school system, and if they can’t pay their bills, how are they going to pay their superintendent?” Committee Chairman S. Chris Jones (R-Suffolk), said that although he agreed with Secretary Brown’s decision to intervene, he was concerned about Petersburg’s outstanding obligations to the Virginia Resources Authority: “We got to figure out what change we need to make from a state’s perspective; we need to protect ourselves…VRA debt can be an issue that can affect our bottom line. We cannot allow that to occur. It’s very distressing when you see what has occurred, and hopefully (the city) will continue to try to — in a very straightforward way — to deal with the issues.” To which, Secretary Brown responded that “[W]e wrestle with it, too,” but ultimately the state is tied to the city in terms of some of the debt obligations: “We can run, but we can’t hide from that. From my standpoint, it is better to be involved and help them over that hump…I have no intention to stay there long-term, but the consequences for the Commonwealth by not being involved, at this stage in the game with this critical Oct. 1 time frame on debt, is probably much worse than being involved.”

What is a County to do? The federal appeals court overseeing Jefferson County’s chapter 9 municipal bankruptcy appeal has, once again, delayed the case, with the previously scheduled December 12th arguments deferred by the 11th U.S. Court of Appeals to an uncertain future date—still another in a long, and increasingly costly, series of delays—of which there have been six so far this year. Jefferson County Commission President Jimmie Stephens noted: “It is very unusual to have this many delays, and I have expressed my frustration to counsel…Our team is ready and eager to have our day in court. We stand at their mercy.” Commission President Stephens has not addressed questions with regard to what these judicial delays are costing the county. Jefferson County exited Chapter 9 bankruptcy in December 2013, after selling $1.8 billion in sewer warrants to write down $1.4 billion of the sewer system’s debt. The plan of adjustment gives bondholders the right to go back to the bankruptcy court if the county fails to enact sewer system rate increases that service the debt. After the plan was implemented, a group of local ratepayers filed an appeal before U.S. District Judge Sharon Blackburn in the Northern District of Alabama. County attorneys argued that the appeal should be struck down, saying that it became moot when the plan of adjustment was implemented with the sale of new debt. In October 2014, Judge Blackburn rejected the county’s mootness contention, and ruled that she could consider the constitutionality of the plan—a decision Jefferson County appealed, and on which it now seems waiting for Godot.  

 

Bump in the San Bernardino Road to Bankruptcy Exit?

 As we have noted and explored in this eBlog, the diverse ways in which those states which authorize municipalities to file for municipal bankruptcy can have distinct repercussions. In Detroit and Central Falls, Rhode Island, for instance, the state enabling laws provide for the appointment of a receiver or emergency manager—effectively suspending or preempting the roles of such a city or county’s elected leaders, as happened in both cities. In contrast, in California, Alabama, and some other states, elected officials remain in charge. Thus, we observe different processes and different kinds of challenges. The issue, moreover, is, to some extent, at the heart of discussions in the U.S. House of Representatives and U.S. Senate this month, as the two bodies near House Speaker Paul Ryan’s deadline at the end of this month to act on some mechanism to address the nearing insolvency of the U.S. territory of Puerto Rico.

Jeopardizing a City’s Plan of Debt Adjustment? The San Bernardino City Council Monday night voted 4-3 to delay making a final decision to confirm the city’s plan to annex the city’s fire service into a county fire protection district and add a parcel tax, potentially undercutting a critical provision of its proposed plan of debt adjustment and undercutting its ability to exit from the longest municipal bankruptcy in U.S. history. The Council could revisit the issue at its March 21 meeting; however, the very official action to debate and delay approval clearly creates doubts with regard to whether there will be majority support. Rejection of the deal would mark a significant setback for the city’s efforts to exit chapter 9 municipal bankruptcy: its mark a reversal of the 4-3 vote last August to approve the change to consolidate firefighting responsibility in San Bernardino County and impose a $148 FY16-17 parcel tax, with the subsequent annual increases of up to 3 percent annually. Moreover, because of last Fall’s elections, the makeup of the City Council when it votes in March will be altered: current Councilmember Rikke Van Johnson, who has been a strong advocate of the annexation plan, will have retired: he will be replaced by newly-elected Councilwoman Bessine Littlefield Richard, who has yet to take a public position on the critical issue. Moreover, Councilman Jim Mulvihill, who offered the motion for delay, just re-elected last month, raised his own questions with regard to the viability and benefits of the agreement at the hearing, noting: “This is the first time we’re seeing these specific numbers — it’s a whole new ballgame…We’re being sold a bill of goods…From the public’s point of view, they save no money.” Councilmember Mulvihill said, in doing the math, the projected savings of $7 million to $8 million in the first year of the annexation would be essentially equivalent to the $7.4 million tax parcel owners in the city would have to start paying—and that the agreement would last “in perpetuity.” (Albeit, it is hard to conceive of an annexation that would be other than in perpetuity.)

In response, the city’s consultant on the issue, Andrew Belknap of Management Partners, testified that annexation, by its nature, is “in perpetuity,” although, he told the Mayor and Council that a vote could be taken to un-annex. Mr. Belknap added that the numbers before the Council were the same ones the Local Agency Formation Commission used when it last January had unanimously approved the plan—a plan under which San Bernardino parcel owners would have to pay a new tax, but under which San Bernardino’s general fund would save at least $7 million annually—even as it offered the city’s citizens and homeowners improved fire and emergency medical services. In addition, San Bernardino City Attorney Gary Saenz warned that a Council decision to renege on the plan—a plan incorporated in the city’s plan of debt adjustment, adopted on a 6-1 vote by the Council last May—could well jeopardize its ability to emerge from municipal bankruptcy, advising Councilmembers: “First, if this plan passes, the everyday constituent will be safer,” referring to a saved step in the dispatch process, new money for equipment maintenance, and use of a county fire station in addition to the municipally operated stations, and, as he put it: “Second, this will be cheaper… (and) we’ll apply the savings to other types of services, including police, so they will have improved police and fire services.” Councilman John Valdivia, however, claimed the annexation plan would have the opposite effect: “Politics will be removed and annihilated, which is really what the mayor and some here want. Response times will be longer, taxes will be higher, and fire stations in minority communities are still going to be shuttered and closed.” In response, Mr. Saenz said that neither he, the city attorney, nor Councilmembers were fire protection experts, but that those who were — including San Bernardino’s fire chief and fire union — favored the plan. Councilman Fred Shorett, who has been a long-time advocate of outsourcing the city’s Fire Department, said the plan was important. Residents would vote down the new tax if they had the chance, he said, but they also want service the city cannot afford—adding: “They can’t have a free lunch.” he said.

The issue could be further roiled were more than 50 percent of the city’s registered voters—a very high bar—were to return a letter saying they are protesting the decision. An election will be called if protest is received from at least 25 percent, but less than 50 percent of the registered voters, or if 25 percent to 100 percent of the number of landowners — who own at least 25 percent of the total land value — submit written protest.