Amazonian Recovery

May 18, 2018

Good Morning! In this morning’s eBlog, we take a fiscal perspective on post-chapter 9 Detroit and its income and property taxes; then we dip south to assess the seemingly interminable governing challenge with regard to whom is in charge of restoring fiscal solvency in Puerto Rico.   

The Challenging Road to Recovery. Last January, Detroit failed to make the Amazon cut to make the finalists: Sandy Baruah, president and CEO of the Detroit Regional Chamber, who was on the fateful call, nevertheless described feedback from Amazon, describing the “creativity, the regional collaboration, the quality of the bid document, the international partnership with Windsor, all of that got incredibly high marks,” adding that: “We were good, but we weren’t good enough on the talent front.” The noted urban writer Richard Florida tweeted that he believed Amazon missed the mark on Detroit, if talent was the disqualifying factor—he, after all, early on, had identified Detroit as a sleeper candidate for HQ2, with a top three of greater Washington, D.C.; Chicago; and Toronto, noting that Detroit has more tech workers than many on the list, including Pittsburgh, Indianapolis, and Columbus—and that the city has access to major public research universities, not to mention its international partnership with Windsor, Ontario, in Canada gave the bid an international quality that only Toronto’s bid could match. Indeed, Mr. Florida had suggested that Detroit’s elimination was due to outdated perceptions of the Motor City’s economy, talent, and overall livability.

Nevertheless, Detroit’s near miss—when added to the city’s exit at the end of last month from state fiscal oversight, is a remarkable testament to Detroit, that, less than five years after filing for the largest municipal bankruptcy in American history, came so close to making the cut, so successfully has it overcome the adverse repercussions of nearly six decades of economic decline, disinvestment, and chapter 9 municipal bankruptcy. State officials praised the city for fiscal gains that came quicker than many anticipated after its Chapter 9 exit in December 2014. The city shed $7 billion of its $18 billion in debts during the 18-month bankruptcy. Last year, the city’s income tax take rose by 8%–and assessed property values rose for the first time in nearly two decades.

No doubt the auto industry has played a driving role: in the emerging age of self-driving cars, a recent report by real estate services giant CBRE which evaluated the top 50 U.S. metro areas in the country in terms of tech talent ranked Detroit 21st, ahead of several cities which made the Amazon cut, including Philadelphia, Los Angeles, Pittsburgh, Indianapolis, Nashville, and Miami. Indeed, remarkably, on a percentage basis, Detroit has as many tech jobs in its metro as Washington, D.C., and Boston. The report also found that Detroit’s millennial population with college degrees grew by just under 10% between 2010 and 2015, more than double the national average of 4.6% and equivalent to rates in the Bay Area (9.5%) and Atlanta (9.3%).

Nevertheless, the Motor City continues to face taxing challenges—including a less than effective record, until recently, of collecting income and property taxes it was owed under existing law—and of improving its school system: a vital step if the city is to draw young families with kids back into the city. Moreover, it still needs to reassess its municipal tax policies: its 2.4% income tax is double that paid by non-residents working in the city. That is not exactly a drawing card to relocate from the suburbs.

The Uncertain Promise of PROMESA. While the PROMESA Oversight Board has requested Puerto Rico to amend its recommended budget, Puerto Rico has responded it would prefer to negotiate, because it understands that resorting to the Court “is not an alternative.” Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, made clear, moreover, that there would be is no change of position with regard to the Board’s demand for reducing pensions or vacation and sick leave, much less eliminating the Christmas bonus. Nevertheless, the Commonwealth appears to be of the view that its differences with the PROMESA Board are “are minimal,” despite the Board’s rejection, last week, of Governor Ricardo Rosselló’s proposed budget—a rejection upon which the Board suggested that cuts in public pensions and the elimination of the mandatory Christmas bonus had not been incorporated. The Board also noted the omission of funds finance Social Security for police officers. Secretary Rosario Cortés noted: “The Governor called to the Board to sit down and review those points they exposed, as long as they do not interfere with the Governor’s public policy. In the coming days, Gov. Rosselló and his team will be responding to each of the Board’s points and providing information that supports each of the Government’s positions: The Government is open to dialogue in order to reach consensus that does not interfere or contravene those public policy positions that the Governor has already expressed; specifically: no cuts in pensions or eliminating the Christmas bonus and reducing sick leave.”

He acknowledged that the dispute could end up in Court, as PROMESA Board Executive Director, Natalie Jaresko, has warned: “Yes, certainly, they have not only resorted to Court in the past, but they have also said it is a possibility. We understand that it is not an alternative, it would delay the fiscal recovery of Puerto Rico and would require investing resources that are scarce at the moment: They made some observations, and we are willing to look at them,” adding that the work teams of the Governor and the Board are communicating and sharing information: “Dialogue continues and, along the way, we hope to reach a consensus that will avoid setbacks and reaching the courts.”

Who Is Governing? Precisely, Director Jaresko also acknowledged that not amending the budget would delay the renegotiation of Puerto Rico’s debt, warning that if the Rosselló administration does not act, the PROMESA Board will proceed to preempt its governance authority and power as provided by the PROMESA law, which authorizes the Board to amend the U.S. territory’s budget and submit its own version to the Legislature for approval—albeit, it rattles one’s fiscal imagination that Puerto Rican legislators could conceivably want to do so.

Nevertheless, the Board has advised Gov. Rosselló that his recommended budget does not reflect what is established in the fiscal plan: regarding the General Fund, the recommended budget represents about $200 million in expenses on the certified income projection; in addition, the budget information does not include public corporations or similar dependencies—meaning that Director Jaresko is of the view that the draft budget omits some 60% of the public spending. Thus, she has threatened that the Governor has until high noon on Tuesday to correct the ‘deficiencies,’ or risk the Board preempting its governing authority.  

Nevertheless, Puerto Rico’s fiscal position appears to be on the upswing: as of last week, revenues were 7% ahead of its July 2017 forecasts; last month’s revenues came in 18% stronger than projected. Notwithstanding the physical and fiscal impact of Hurricane Maria on Puerto Rico’s economy, Puerto Rico’s central bank account, the Treasury Singular Account, held $2.65 billion as of last Friday—some $211 million more than the government had anticipated last July according to information posted on the MSRB’s EMMA.

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Intergovernmental Federalism Fiscal Recovery Challenges

March 26, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal challenges to Connecticut’s capitol city of Hartford, and the fiscal challenges bequeathed to the Garden State by the previous gubernatorial administration, before wondering about the level of physical and fiscal commitment of the U.S. to its U.S. territory of Puerto Rico.

Capitol & Capital Debts. The Hartford City Council is scheduled to vote today on whether to approve an agreement between the city and the state on a fiscal arrangement under which the state would pay off Hartford’s general obligation debt of approximately $550 million over the next two decades as part of the consensus seemingly settled as part of the Connecticut state budget—an agreement under which the state would assume responsibility to finance Hartford’s annual debt payments, payments projected to be in excess of $56 million by 2021, while the city would continue to make payments on its new minor league ballpark, about $5 million per year—a fiscal pact described by Hartford Mayor Luke Bronin as the :”[K]ind of long-term partnership we’ve been working for, and I’m proud that we got it done.” Mayor Bronin is pressing Council to vote before April Fool’s Day, which happens to be the city’s deadline for its next debt payment: if executed by then, the state would pay the $12 million which Hartford currently owes, under the provisions in the current state fiscal budget which, when adopted, had pledged tens of millions of dollars in additional fiscal assistance to the state capitol, fiscal assistance regarded as vital to avert a looming chapter 9 municipal bankruptcy—and, under which, similar in a sense to New Jersey’s Atlantic City, the aid provided included the imposition of state oversight. The effect of the state fiscal assistance meant that in the  current fiscal year, Connecticut would assume responsibility for Hartford’s remaining debt of $12 million; in addition, the state is to provide Hartford another $24 million to help close the city’s current budget deficit—and, in future years, assume the city’s full debt payment. The agreement provides that the state could go further and potentially finance additional subsidies to the city. Mayor Bronin had sought approximately $40 million in extra aid each year, in addition to the $270 million the city already receives—albeit, the additional state aid comes with some fiscal strings attached: a state oversight board, as in Michigan and New Jersey, is authorized to restrict how the municipality may budget, and finance: contracts and other documents must be run by the panel, and the board will have final say over new labor agreements and any issuance of capital debt. Going further, under the provisions, even if the oversight board were to go out of existence, Hartford’s fiscal authority would still be subject to state oversight: e.g. if the city wished to make its required payment to the pension fund, such payment(s) would be subject to oversight by both the Connecticut Treasurer and the Secretary of Connecticut’s Office of Policy and Management—where a spokesperson noted: “Connecticut cannot allow a city to default on its bond obligations or financially imperil itself for the foreseeable future: This action will ultimately best position Hartford to move into a better financial future.”

Mayor Bronin, in reflecting on the imposition of state fiscal oversight, noted that while the state assistance would help offset Hartford’s escalating deficits, deficits now projected to reach $94 million by 2023, noted: “This debt transaction does not leave us with big surpluses: “We’re looking to achieve sufficient stability over the next five years, and we can use that period to focus on growth.” Hartford Council President Glendowlyn Thames likewise expressed confidence, noting: “This plan is really tight, and it’s just surviving: We have to focus on an economic development strategy that gets us to the point where we’re thriving.”

State Fiscal Stress. For its part, with less than a week before the state enters its final fiscal quarter, the Connecticut legislature still has its own significant state debt issue to resolve—with Gov. Dannel P. Malloy warning he still expects the state legislature will honor a new budget control it enacted last fall to help rebuild the state’s modest emergency reserves, stating: “I don’t think I have given up any hope, or all hope” that legislators will close the $192 million projected shortfall in the fiscal year which ends June 30th; however, the Governor also said legislative leaders professed commitment to both write and commit to a new, bipartisan budget may be waning, stating: “The grand coalition seems to be fraying, and I think that’s what gives rise to the inability to respond to the budget being out of balance,” he said, referencing last October’s grand bargain under which there was bipartisan agreement on a new, two-year plan to balance state finances—an agreement achieved in a process excluding the Governor, who, nevertheless, signed the budget to end the stalemate, despite what he had described as significant flaws, including a reliance on too many rosy assumptions, hundreds of millions of dollars swept from off-budget and one-time sources, as well as unprecedented savings targets the administration had to achieve after the budget was in force. Indeed, meeting that exacting target is proving elusive: the fiscal gap in January exceeded $240 million in January, before declining to the current $192 million: it has yet to meet the critical 1% of the General Fund threshold—a threshold which, if exceeded, mandates the Comptroller to confirm, and triggers a requirement for the Governor to issue a deficit-mitigation plan to the legislature within one month.

The new state local fiscal oversight arrangement provides that, even if the state oversight board goes away, the city’s fiscal practices would remain subject to state oversight—where any perceived failures would subject the city fiscal scrutiny by the Connecticut Treasurer and the Secretary of Connecticut’s Office of Policy and Management, a spokesperson for which noted: “Connecticut cannot allow a city to default on its bond obligations or financially imperil itself for the foreseeable future: This action will ultimately best position Hartford to move into a better financial future.” Hartford City Council President Glendowlyn Thames asserted her confidence with regard to the contract, but noted more work needed to be done: “This plan is really tight, and it’s just surviving: We have to focus on an economic development strategy that gets us to the point where we’re thriving.”

Post Christie Garden State? New Jersey Gov. Phil Murphy, in his first post Chris Christie fiscal challenge is targeting state tax incentives as a potential source of revenue for the cash-starved state, noting, in his first fiscal address earlier this month that $8 billion in corporate state tax credits approved by the New Jersey Economic Development Authority under former Gov. Chris Christie had made the state’s fiscal cliff even steeper to scale, noting that one of his first fiscal actions was to sign an executive order directing the state Comptroller’s office to audit the New Jersey Economic Development Authority’s tax incentive programs, dating back to 2010 (the current program is set to expire in 2019), describing the programs as “massive giveaways, in many cases imprecisely directed, [which] will ultimately deprive us of the full revenues we desperately need: “These massive giveaways, in many cases imprecisely directed, will ultimately deprive us of the full revenues we desperately need to build a stronger and fairer economic future,” as the new Governor was presenting his $37.4 billion budget to the Garden State state legislature, noting: “We were told these tax breaks would nurse New Jersey back to health and yet our economy still lags.” Under his Executive Order the Gov., in January, had directed Comptroller Philip James Degnan to examine the Grow New Jersey Assistance Program, the Economic Redevelopment and Growth Grant Program, and other programs which have existed under the NJEDA since 2010 when former Gov. Christie assumed office: the audit is aimed at comparing the economic impact from projects that received the tax breaks with the jobs and salaries they created: it is, as a spokesperson explained: “[A]n important opportunity to evaluate the effectiveness of the State’s existing incentive programs.” New Jersey Policy Perspective, in its perspective, notes that the $8.4 billion of tax breaks NJEDA approved under former Gov. Christie compared to $1.2 billion of subsidies awarded during the previous decade, subsidies which the organization frets have hampered New Jersey’s fiscal flexibility to fund vital investments such as transportation and schools. Indeed, a key fiscal challenge for the new Governor of a state with the second lowest state bond rating—in the wake of 11 downgrades under former Gov. Christie, downgradings caused by rising public pension obligations and increasing fiscal deficits—will be how to fiscally engineer a turnaround—or, as Fitch’s Marcy Block advises: “It’s always a good idea for a new administration to see what the tax incentives program is like and what potential revenue they are missing out on,” after Fitch, last week, noted that the new Governor’s budget proposes $2 billion in revenue growth, including $1.5 billion from tax increases,” adding that the Governor’s proposed plan to readjust the Garden State’s sales and use tax back up to 7% from the 6.625% level it dropped to under former Gov. Christie was a “positive step” which would provide $581 million in additional revenue, even though it would impose strict fiscal restraints: “These increased revenues would go to new spending and leave the state with still slim reserves and reduced flexibility to respond to future economic downturns through revenue raising: The state has significant spending pressures, not only due to the demands of underfunded retiree benefit liabilities, but also because natural revenue increases resulting from modest economic growth in recent years have gone primarily towards the phased-in growth in annual pension contributions.”

For his part, Gov. Murphy has emphasized that while he opposes many of the state tax expenditures doled out by the former Christie administration, a $5 billion incentives program that the NJEDA’s Grow New Jersey Program is offering Amazon to build its planned second headquarters in Newark would be a positive for the state. (Newark is on Amazon’s short list of 20 municipalities it is considering for a new facility that could house up to 50,000 employees: the city is offering $2 billion in tax breaks of its own to create $7 billion in total subsidies.) The Governor noted a win here would be “a transformative moment for our state: It could literally spur billions of dollars in new investments, in infrastructure, in communities and in people,” as he noted that the Commonwealth of Massachusetts has grown jobs at a rate seven times greater than New Jersey in recent years, despite only spending $22,000 in economic incentives per job compared to $160,000 for each job in New Jersey, noting that other priorities beyond taxes are important to lure businesses, such as investments in education, workforce housing, and infrastructure: “Even with these heralded gifts, our economic growth has trailed almost every other competitor state in the nation in literally almost every category: “Massachusetts and our other competitor states are providing businesses a greater value for money and with that value in hand they are cleaning our clocks.”

Free, Free at Last? Announcing that “We’ve reached an agreement that is beneficial both for the taxpayer and for the people of Puerto Rico,” referring to a pact that is to lead to the release of some held up $4.7 billion in federal disaster recovery assistance reached between Puerto Rico Gov. Ricardo Rossello and U.S. Treasury Secretary Steven Mnuchin, the pair has announced at the end of last week agreement on the release of some $4.7 billion in disaster recovery loans which Congress had signed off on six months ago—but funds which Sec. Mnuchin had delayed releasing on account of disagreement over the terms of repayment, describing it as a “super-lien” Community Disaster Loan. After a meeting between the two, the new, tentative agreement would allow Puerto Rico access to the fiscal assistance once the cash balance in its treasury falls below $1.1 billion—a level more than the Secretary’s initial request of $800 million. (As of March 9th, U.S. territory had about $1.45 billion in cash.) The agreement ended half a year of tense negotiations over what were perceived as discriminatory loan conditions compared to the terms under which federal assistance had been provided to Houston and Florida in the wake of the hurricanes. Indeed, Gov. Rossello had written to Congress that the Treasury was demanding that repayment of those loans be given the highest priority, even over the provision of essential emergency services in Puerto Rico—even as the Treasury was proposing to bar Puerto Rico’s eligibility for future loan forgiveness. Under the new agreement, the odd couple have announced that the revised agreement would grant high priority to repayment of the federal loans—not above the funding of essential services, but presumably above the more than $70 billion Puerto Rico owes to its municipal bondholders. From his perspective, Sec. Mnuchin noted: “We want to make sure that the taxpayers are protected: It’s not something we’re going to do for the benefit of the bondholders, but it is something we would consider down the road for the benefit of the people if it’s needed,” opening the previously slammed door for access by Puerto Rico to the full amount approved by Congress, more than double the amount the Trump Administration had sought to impose. Nevertheless, notwithstanding the agreement, the terms must still be agreed to by Puerto Rico’s legislature, the PROMESA oversight board, and the federal court overseeing the quasi-chapter 9 bankruptcy proceedings. Under the terms of the agreement, Puerto Rico may borrow up to $4.7 billion if its cash balances fall below $1.1 billion. (Puerto Rico’s central bank account had $1.45 billion as of March 9th.) Governor Rosselló described the federal loan as one which will have a “super lien: There will be a lien within the Commonwealth, but it won’t be a lien over the essential services…I think both of our visions are aligned. We both want the taxpayer to be protected, but we also want the U.S. citizen who lives in Puerto Rico to have guaranteed essential services. And both of those objectives were agreed upon,”  noting that the U.S. government frequently forgives these types of loans. For his part, Secretary Mnuchin said the topic of loan forgiveness would be dealt with later “based on the facts and circumstances at the time,” and that, if and when the topic came up, the Treasury would consult with FEMA, the Congressional leadership and the administration, noting: “It’s not something we’re going to do for the benefit of bondholders, but it is something we would consider down the road for the benefit of the people of Puerto Rico.” The discussions come as the Commonwealth continues in the midst of its Title III municipal-like bankruptcy process affecting more than $50 billion of Puerto Rico’s $72 billion of public sector debt—with a multiplicity of actors, including: Puerto Rico’s legislature, the PROMESA Oversight Board, and Title III Judge Laura Taylor Swain. Under the terms, Puerto Rico would be allowed to draw upon the money repeatedly, as needed, according to Gov. Rossello, who noted that the U.S. Virgin Islands has already taken four draws totaling $200 million. The access here would be to fiscal resources available until March 2020.

Municipio Assistencia. In addition to the federal terms worked out for the territory, the new terms also provide that the U.S. Treasury will be making loans available for up to $5 million to every Puerto Rico municipality. FEMA is planning to make more than $30 billion available for rebuilding, while HUD is considering grants of more than $10 billion—leading Sec. Mnuchin to add: “There’s a lot of money to be allocated here, and I think it is going to have an enormous impact on the economy here: I think we are well on the path to a recovery of the economy here.” The Secretary added he would be returning to Puerto Rico on a quarterly basis to meet with the Governor, assess progress, and examine the island’s economy. His announcement came as the federal government is scaling back the number of contractors working on Puerto Rico’s electrical grid—critical work on an island where, still today, an estimated 100,000 island residents still lack power, with, last week, the U.S. House Oversight and Government Reform Committee hearing testimony from U.S. officials about bureaucratic challenges to power-restoration efforts, leading to bipartisan questioning about the drawdown of personnel there by the U.S. Army Corps of Engineers. The Corps, which brought in Fluor and PowerSecure as contractors to spearhead reconstruction of damaged transmission and distribution lines, has already reduced the number of contract workers by nearly 75%, according to tweets from the official Army Corps Twitter account, even as nearly 100,000 customers still lack service. Worse, of the restoration challenge remaining, the bulk is projected to fall mostly on Puerto Rico’s bankrupt public power utility, PREPA, especially after, last week, Fluor halted its subcontract efforts. Despite the Corps pledge to “do all possible work with the funds available” before the contractors leave Puerto Rico, access to vital construction materials, such as concrete poles, transformers and conductors were in short supply, and the Army Corps struggled to purchase and transport materials quickly enough, hindered, no doubt, in part by the discriminatory shipping rules (the Jones Act), increasingly forcing linemen to scrounge for replacement parts. The Corps has acknowledged the supply shortages, noting that natural disasters last year in Texas, Florida, and California strained supplies of construction materials across the U.S. Twelve Democratic Senators have written to Army Corps officials to inquire whether keeping its contractors in place would accelerate the timetable for power restoration—PREPA, last week, reported last week that 32% of the 755 towers and poles that were downed by Hurricane Maria still have not been repaired, and that, of 1,238 damaged conductors and insulators, 28% have not. Rep. Jenniffer González-Colón, Puerto Rico’s Republican delegate to Congress, in a letter to Army Corps officials last week, wrote: “The average citizen on the street in those communities cannot tolerate even the perception that at this point we will begin to wind down the urgent relief mission and that the process of finishing the job will slow down.”

A Steely Road to the Fiscal Future

March 5, 2018

Good Morning! In this morning’s eBlog, we consider the Steel City’s long road back to fiscal recovery after 14 years of state fiscal oversight.

Is the Steel City Back? Pittsburgh Mayor Bill Peduto hails: “Pittsburgh is back!” The great American steel city, the subject of our Center’s report years ago, “The Great Challenge Facing America’s Cities,” in which we described the fiscal challenges of Detroit, Chicago, San Bernardino, Calif., Pittsburgh, Providence, R.I. and Baltimore to provide insights for municipalities that may face financial struggles in the future, has emerged from more than a decade of state oversight. The Mayor’s exaltation comes in the wake of Gov. Tom Wolf’s declaration that the Steel City has become the state’s second municipality to emerge from Pennsylvania’s Act 47 program, enabling the Mayor to exult “We are now a city that is financially solvent. We’ve changed our habits and we have safeguards in place to assure we won’t fall into our previous bad habits.” The road back from the precipice of chapter 9 municipal bankruptcy involved laying off nearly 500 employees, including 100 police officers, the closure of recreation centers, and the elimination of key municipal services, including mounted police patrols to saltboxes. The Pennsylvania Intergovernmental Cooperation Authority (ICA), which has been the supervisory authority for the state, has asked the city for $37,000 to help pay off outstanding bills, and is seeking legislative approval to terminate its operations; the authority is also marking this final chapter by taking steps to dissolve itself, ending fourteen years as the state created fiscal oversight agency, together with the Pennsylvania Department of Community and Economic Development to help Pittsburgh avoid chapter 9 municipal bankruptcy—together with the state’s so-called Act 47 coordinators, who, last November, had recommended the city’s release from state oversight since December of 2003). The Authority’s Chair, B.J. Leber, noted: “No. 1, Act 47 is going away: It just doesn’t make sense for us to exist beyond Act 47, either from a logistical standpoint or a community-needs standpoint.”

Exiting state oversight, as we have observed in neighboring New Jersey, is not easily accomplished: the Steel City has been under state oversight ; thus, at least one ICA board member disagrees that Pittsburgh is ready to leave fiscal oversight: Michael Danovitz, the ICA’s longest-serving board member, said the city has not demonstrated a pattern of consistently paying into underfunded employee pension plans, noting: “I don’t believe the work of the ICA is done…This was the first year where they put in enough money to match the outflow of the pensions. One year doesn’t make a pattern.” Last year, Mayor Peduto’s administration had pledged pension payments of $232 million more than state minimums as part of a five-year spending plan approved by the ICA and the state’s Act 47 team. (Under Pennsylvania law, the ICA must remain in place until the later of Act 47 oversight ending or June 30, 2019): Chair Leber said the ICA board has asked the Legislature to amend the law so it can end at the same time as Act 47.

Unlike in the neighboring Garden State, Pittsburgh’s intergovernmental relationship with the state has been much more harmonious: Finance Director Sam Ashbaugh praised the ICA: “We’ve had a very productive and effective working relationship with the new board since they’ve been in place: I think they recognize the financial improvements that the city has enacted.” Yet, even though Pittsburgh is still able to finance its capital budget via its reserve fund, which is in no danger of running out, it still confronts both capital budget and pension challenges, including the priority of finding a long-term solution for dealing with landslides—or, as the Mayor put it: “We came to realize that there were no quick fixes, and we had run out of borrowing room…for us, being in Act 47 for 14 years, meant making difficult decisions to become financially solvent. It definitely had its costs: Our workforce took it on the chin, going without pay raises, and our infrastructure suffered without our ability to borrow,” adding: “We were still in the throes of pension liability.” If anything, the fiscal challenge is made greater by the demographic reality: the city’s population has dropped from 700,000 in 1960 to about 304,000 today.

Measuring State Fiscal Recovery Oversight. Pennsylvania’s fiscal oversight program has shown a mixed picture: the municipality of Aliquippa, just over 21 miles from Pittsburgh, has been under Act 47 for 30 years; it is currently on its sixth recovery program: like Scranton and Chester, which joined in 1992 and 1995, respectively, the success record is mixed, or, as Villanova Professor David Fiorenza put it: “The program was successful for Pittsburgh, especially if I compare it to cities such as Chester.” Approximately 30% of the Act 47 municipalities have been from the Allegheny area.

Pittsburgh’s 2014 fiscal recovery plan had proposed the elimination of operating deficits in the baseline multi-year financial projection, while preserving basic services, in order to avoid the necessity for cash-flow borrowings; the plan also focused on buffering against unanticipated revenue shortfalls or expenditure increases. The fiscal plan sought to gradually reduce the city’s debt in order to: provide greater fiscal capacity to finance daily operations; direct more funding to the city’s capital budget, with priority to roads, bridges, police and fire stations and other core infrastructure; and gradually increase pension fund contributions to actuarially recommended levels. As of the end of 2016, the city’s unassigned fund balance was 17.7% of its operating expenditures, higher than the 16.7% level the Government Finance Officers Association recommends. Pittsburgh two years ago refined its revenue forecasting methods and began subscribing to an external data analytics firm, through which the city receives city and county-level economic indicators including non-farm wages, gross county product, retail sales, and city employment throughout the year. Moody’s rates the city’s general obligation bonds A1. Fitch Ratings and S&P rate them AA-minus and A-plus, respectively. Moody’s unmoodily notes: “Pittsburgh has a favorable credit position, given strong financial results through fiscal 2016.” Or, as the Mayor puts it: “We are now a city that is financially solvent. We’ve changed our habits.”

That does not, however, mean the city’s leaders can rest: the city’s fund balance as a percent of operating revenues (18.4%) falls short of the U.S. median for the rating category (32%), according to Moody’s, although Moody’s reports the fund balance has improved considerably since 2012; nevertheless, the credit rating agency notes that Pittsburgh’s debt and pension liabilities are “somewhat elevated.” The recovery also comes with new fiscal challenges: the Steel City’s police union is demanding the city renegotiate its current agreement, retroactive to 2015, with FOP President Robert Swartzwelder citing a contract provision which authorizes renegotiations in the wake of Act 47 oversight—a factor which the Mayor notes he expects to “happen with all the unions.” That is, recovery brings its own fiscal challenges—including on the capital front—which, for a municipality, like Rome, of hills and rivers, means budgeting for the capital and maintenance costs of some 450 bridges. The Mayor’s proposed FY2018 budget and five-year plan assumes the city would issue $60 million a year in new debt beginning next year to fund capital projects—part of an aggressive fiscal effort to reduce out-year debt service by FY2022 below the 12% target in the debt policy (The Steel City’s debt policy requires contracting with an independent financial advisor when issuing debt; issuing debt only for capital projects included in the capital program; it limits usage of tax revenue anticipation notes; limits its tax-supported debt service to 17% of general fund revenues; and establishes a 10-year goal of reducing this ratio to 12%.)

An Amazonian Fiscal Future? The former steel city has become, today, a center of higher ed: there are ten universities within the city limits, while the University of Pittsburgh Medical Center and Highmark anchor a thriving healthcare industry. Amazon, Google, and Uber, among other companies, have added jobs in the region. Pittsburgh remains in the competition to secure Amazon’s second world headquarters, in no small part in the wake of its focus on arts and culture with a 14-block district which encompasses restaurants, retail shops, art galleries, public parks with art installations and many theaters.

The Steep & Winding Road Out of Municipal Bankruptcy and State Oversight

February 26, 2018

Good Morning! In this morning’s eBlog, we consider the hard road out of chapter 9 municipal bankruptcy and state oversight.

Motor City Races to Earn the Checkered Flag. Detroit Mayor Mike Duggan last Friday presented his proposed annual budget to the City Council, informing Councilmembers that, if approved, his $2 billion budget would be the keystone for formal exit from Michigan state oversight: that is, he advised he believed it would lay the ground work for ending the Financial Review Commission created in the wake of the city’s chapter 9 municipal bankruptcy: “Once we get this budget passed, we have the opportunity to get out from active state oversight…I don’t have enough good things to say about how the administration and Council has worked together.” As we had noted last month, Michigan Treasurer Nick Khouri, the Chair of the state oversight commission, made clear that the trigger to such an exit would be for the city to post its third straight budget surplus—with the Treasurer noting: “I think everyone, including me, has just been impressed with the progress that’s been made in the city of Detroit, both financially and operationally.”

For Detroit to fully emerge from the nation’s largest ever municipal bankruptcy, it must both comply with the provisions of the federal chapter 9 bankruptcy code, which provides that the debtor must file a plan (11 U.S.C. §941); neither creditors nor the U.S. Bankruptcy Court may control the affairs of a municipality indirectly through the mechanism of proposing a plan of adjustment of a municipality’s debts that would in effect determine the municipality’s future tax and/or spending decisions: the standards for plan confirmation in municipal bankruptcy cases are a combination of the statutory requirements of 11 U.S.C. §943(b) and portions of 11 U.S.C. §129. Key confirmation standards provide that the federal bankruptcy court must confirm a plan if the following conditions are met: the plan complies with the provisions of title 11 made applicable by sections 103(e) and 901;the plan complies with the provisions of chapter 9; all amounts to be paid by the debtor or by any person for services or expenses in the case or incident to the plan have been fully disclosed and are reasonable; the debtor is not prohibited by law from taking any action necessary to carry out the plan; except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that on the effective date of the plan, each holder of a claim of a kind specified in section 507(a)(1) will receive on account of such claim cash equal to the allowed amount of such claim; any regulatory or electoral approval necessary under applicable non-bankruptcy law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval; and the plan is in the best interests of creditors and is feasible.

Unlike in a non-municipal corporate bankruptcy (chapter 11), where the requirement that the plan be in the “best interests of creditors,” means in the “best interest of creditors” if creditors would receive as much under the plan as they would if the debtor were liquidated; under chapter 9, because, as one can appreciate, the option of Detroit to sell its streets, ambulances, and other publicly owned municipal assets is simply not an option, in municipal bankruptcy, the “best interests of creditors” test has generally been interpreted to mean that the plan must be better than other alternatives available to the creditors. It is not, in a sense, different from a Solomon’s Choice (Kings 3:16-28): that is, in lieu of the alternative to municipal chapter 9 bankruptcy of permitting each and every creditor to fend for itself, the federal bankruptcy court instead seeks to interpret what is in the “best interests of creditors” as a means to balance a reasonable effort by the municipality against the obligations it has to its retirees, municipal duties, service obligations, and its creditors—albeit, of course, leaving the door open for unhappy parties to object to confirmation, (see, viz. 11 U.S.C. §§ 901(a), 943, 1109, 1128(b)). The statute provides that a city or municipality may exit after a municipal debtor receives a discharge in a chapter 9 case after: (1) confirmation of the plan; (2) deposit by the debtor of any consideration to be distributed under the plan with the disbursing agent appointed by the court; and (3) a determination by the court that securities deposited with the disbursing agent will constitute valid legal obligations of the debtor and that any provision made to pay or secure payment of such obligations is valid. (11 U.S.C. §944(b)). Thus, the discharge is conditioned not only upon confirmation, but also upon deposit of the consideration to be distributed under the plan and a court determination of the validity of securities to be issued. (The Financial Review Commission is responsible for oversight of the City of Detroit and the Detroit Public Schools Community District, pursuant to the Michigan Financial Review Commission Act (Public Act 181 of 2014); it ensures both are meeting statutory requirements, reviews and approves their budgets, and establishes programs and requirements for prudent fiscal management, among other roles and responsibilities.)

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved from its last place ranking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining to 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he added. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the resources allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge, and East English Village; and boosting animal control so it can operate seven days a week.

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said it is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirementCouncilman Scott Benson said the Mayor presented a “conservative fiscal budget” which allows Detroit to live within its means. The Councilmember said prior to the meeting that he had hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals, “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.

That early checkered flag for the Motor City ought to help salve the city’s reputational wounds in the wake of the KO administered to the city’s bid to host Amazon. Indeed, as Quicken Loans Chairman Dan Gilbert wrote, it was Detroit’s negative reputation, not a lack of talent which knocked it out of the running for an Amazon headquarters, as he tweeted to the 60-plus member bid committee who crafted Detroit’s bid: “We are all disappointed,” referring to the city’s failed bid to make the cut for the top 20 finalists. Nevertheless, Mr. Gilbert urged members not to accept the “conventional belief” that Detroit had fallen short because of its challenges with regional transportation and attracting talent; rather, he wrote, the “elephant in the room” was the nasty reputation associated with the post-bankruptcy city’s 50-plus years of decline: “Old, negative reputations do not die easily. I believe this is the single largest obstacle that we face…Outstanding state-of-the-art videos, well-packaged and eye-catching proposals, complex and generous tax incentives, and highly compelling and improving metrics cannot, nor will not overcome the strong negative connotations that the Detroit brand still needs to conquer.” Regional leaders had been informed that Detroit’s bid had failed to move on because of inadequate mass transit and questionable ability to attract talent.

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved for its last place raking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he said. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the money allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge and East English Village, and boosting animal control so it can operate seven days a week. 

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said Detroit is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirementCouncilman Scott Benson said the mayor presented a “conservative fiscal budget” that allows Detroit to live within its means, having said, prior to the meeting, that he hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals. “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.