A Tale of Two Cities

July 3, 2018

Good Morning! In this morning’s eBlog, we consider a tale of two cities connected by geography and history, but divided by a fiscal chasm.

A Fiscal Dividing Line. Mayor Kevin Mumpower was reelected in a unanimous Council vote, Tuesday, to serve a second, consecutive term as Mayor of Bristol, Virginia, an independent, border municipality in southern Virginia of just over 17,000, where, on Thursday, the Council has scheduled a work session to complete its review of applicants for boards and commissions. The Council’s first regularly scheduled meeting is scheduled for next Tuesday. The city is twinned with its neighbor, Bristol, Tennessee, which has a larger population of over 27,000. The twin cities’ heritage dates back more than 250 years to when Evan Shelby came to the area in 1766—an area once inhabited by Cherokee Indians. At first, Mr. Shelby had settled his family at Big Camp Meet—the current day site of the twin border cities, but a site then which Shelby had renamed Sapling Grove, where he built a in 1774 on a hill overlooking what is today downtown Bristol, but which was then a key stop on an expanding nation’s road West for early American explorers such as Daniel Boone and George Rogers Clark—a fort known as Shelby’s Station. Nearly a century later, in 1853, Joseph Anderson, when surveyors projected a junction of two railroad lines at the Virginia-Tennessee state line, Reverend James King conveyed much of his acreage to his son-in-law, Joseph R. Anderson, who then laid out the original town of Bristol, Tennessee/Virginia. About that time, Samuel Goodson, who owned land adjoining the original town of Bristol at the Virginia-Tennessee border, with Beaver Creek serving as the dividing line between the two colonies, began a development known as Goodsonville; however, he was unable to incorporate Bristol across the state lines of Tennessee and Virginia. Three years later, in 1856, Goodsonville and the original Bristol, Virginia were merged to form the composite town of Goodson, Virginia—the very year when the Virginia and Tennessee Railroads reached the cities, with, ergo, two depots, one in Bristol, Tennessee, and the other in Goodson, Virginia; albeit the depot located in Goodson continued to be referred to as Bristol, Virginia. Thirty-four years later, Goodson, Virginia once again took the name Bristol. In 1998, Congress declared Bristol the “Birthplace of Country Music,” in recognition of its contributions to early country music recordings and influence.

Contiguous to the Virginia Bristol is Tennessee, Bristol, with a slightly greater population of around 25,000, has a median income for a household in the city just over $30,039. Nevertheless, despite their abutments, the twin municipalities have starkly different fiscal situations—with the southern twin in Tennessee in fiscal health, but its northern Virginia twin in a near fiscal crisis, seemingly overwhelmed with debt—even after assistance from the Commonwealth of Virginia helped avert deep cuts in funding for the municipality’s public schools. At present, it appears that interest payments by the city are on a course to consume as much as a quarter of the city’s operating budget—or, as City Manager Randall Eads put it: “We’re about as low as you can go and not have cuts to services…We are truly rebuilding this city from the foundation up.”

While the Commonwealth of Virginia does not specifically authorize chapter 9 municipal bankruptcy, the state’s courts, six years ago, ruled that “local governing bodies have only those powers expressly granted, those necessarily or fairly implied from expressly granted powers, and those that are essential and indispensable” (see Sinclair v. New Cingular Wireless PCS, 283 Va. 567,576 (Va. 2012), the state’s Dillon Rule compounds the fiscal quandary, providing that if “[T]here is a reasonable doubt about whether legislative power exists, the doubt must be resolved against the local governing body.”

Nevertheless, as the Commonwealth’s Auditor of Public Accounts, Martha Mavredes notes: “The state takes great pride in fiscal soundness and when localities start to falter, that reflects poorly on the state.” Indeed, as we have previously noted, the Commonwealth, two years ago, as Petersburg teetered on the verge of insolvency, had tasked Ms. Mavredes to develop a municipal fiscal early-warning system—a system which, in its first report, put Bristol, along with Petersburg, at the head.

Manager Eads noted: “One of the biggest things we have to overcome as a city is our demographics,” referring to the fiscal challenge in a municipality where nearly a quarter of its residents are in poverty, with more than 40% on some of government assistance, and more than 80% of its school population eligible. That is, it has become clear to Mr. Eads that a new fiscal approach will be necessary.

A Tale of Two Cities. In one area where distinguishing one Bristol from another is enabled by small brass plaques embedded down the center line of State Street which have “Tennessee” on one side and “Virginia” on the other, the twin, bi-state municipalities share a library and an emergency dispatch system; they have connected water systems, and they share payments for the electric bills to finance the neon signs over State Street, which read: “A good place to live.” The twin cities’ city halls are just blocks apart.

However, as we know, looks can be deceiving. Here, the issue of waste appears to have precipitated the fiscal parting of ways: the Virginia Bristol’s old landfill reached capacity about two decades ago; so the municipality opted to construct a new one in a 20-acre limestone pit—one in which the walls were porous. In order to prevent seepage of dangerous chemicals, the city had to purchase a new lining for the landfill walls nearly every other year‒at a cost of $1.2 million each time. That meant, with fees insufficient to cover operating and maintenance costs, the municipality was adding to its debt: currently, Bristol is trying to finance more than $30 million in debt from the landfill, forcing the city to write off $22 million siphoned from the general fund to cover expenses.

Even as unanticipated expenses have soared, the city’s tax base has eroded, hard hit by the collapse of the coal industry, especially in the wake of one of the nation’s largest coal companies, Alpha Natural Resources, headquartered in the city, filing for bankruptcy twelve years ago—at almost the same time as Ball Corp. moved its metal lid-making plant to Mexico. A commercial area developed just off I-81 in the 1990s began to sour. The combination appeared to contribute to the consequent closure of Bristol Mall.

Looking for a fiscal and commercial recovery, the city’s leaders opted to try to enter the commercial real estate business, creating The Falls, intended to be a $260 million hub of restaurants and shops—albeit without, mayhap, closely examining how such a commercial development would be affected by an even larger such development in adjacent Tennessee—where the Tennessee General Assembly had enacted legislation intended to assist its border cities compete with rivals in other states. Because the Volunteer State has no personal income tax, but it has sales tax of up to 9.75%, or nearly double Virginia’s, the difference appears to have been an important factor in providing incentives for those who reside near the border between the two states to opt to reside in Tennessee, but shop in Virginia. The new law allowed developers who built retail within 15 miles of a border to recoup some of the sales and use tax, making projects more attractive.

That led one entrepreneur, Steve Johnson to purchase a 200-acre piece of property, valued at close to $250 million, called The Pinnacle, a complex made up of a million square feet of shops and restaurants, anchored by a Bass Pro Shop, CarMax, Marshalls, and a Belk department store. Unsurprisingly, local Bristol, Virginia officials asked Mr. Johnson to consider developing The Falls instead, pressing the Virginia Legislature to enact provisions for sales and use tax revenue rebates for project developers. In the meantime, Mr. Johnson decided developing the site would be too expensive to level and grade, the roads were too small, and the location was just wrong. Undeterred, the city found another developer, so that, today, The Pinnacle counts nearly 70 merchants, while The Falls has fewer than 10. Thus, instead of helping the city deal with its landfill debt burden, The Falls has significantly added to the fiscal quandary, adding nearly $48 million to the city’s debt—and its political dissatisfaction.

Indeed, unsurprisingly, voters tossed all five Councilmembers from office, electing a slate which included two write-in candidates—and a Council which, early last year, hired a new City Attorney, Randall Eads, who had been a criminal defense attorney, perhaps a key factor in a region which has experienced a plague of methamphetamines and prescription drug abuse. Within six months, the Council removed the then city manager and asked Mr. Eads to step in—perhaps a step that opened his eyes to how grave the city’s physical and fiscal challenges were. In a city beset by such serious drug abuse, one of his first challenges was where to host the perpetrators: the city’s jail, after all, had a capacity of 67 inmates, but, in March, 240 prisoners: the escalating drug crisis meant overcrowding in the municipal jail, and unanticipated costs for those who could not be squeezed in at a regional holding facility at a cost of $38 per inmate per day.

That forced Mr. Eads to see if he could find a way to reduce the inmate population, leading him to propose an alternative punishment program for nonviolent offenders, one which would help them find work and subject them to regular drug testing. Simultaneously, Mr. Eads has been replacing city department heads and working to build morale; he has even been paying for staff picnics out of his pocket. However, it seems as if he has been trying to climb out of a sand hole: absent fiscal changes, the municipality anticipates it will soon face a $2.4 million annual shortfall in debt service payments.

But just on the other side of the state line, in another Bristol City Hall (Tennessee), Bristol City Manager Bill Sorah, who has previous experience in the Virginia Bristol, notes the legal distinctions, especially the differences in the constitutional status of each city: The Commonwealth of Virginia is the only state in which municipalities are independent entities: they are not incorporated as art of the surrounding county. In contrast, Tennessee’s Bristol is a unit of the surrounding Sullivan County: ergo, it faces no problem with inmate overcrowding, no criminal courts to finance, no jail, and no public school system. It has the legal authority denied its counterpart to annex land—authority unavailable on the other side of the border, where Virginia has had a moratorium on annexation for nearly four decades—one the General Assembly recently extended to 2024.

Searching for fiscal solutions. Earlier this year, Virginia Auditor Mavredes granted Bristol $100,000 to hire a consultant to help determine potential fiscal solutions—help which Manager Eads is sure to appreciate—or, as he put it: “We’re in it…so now we’ve got to fix it.” Thus, the city has jacked up fees at the landfill and is pressing ahead with The Falls, and is focusing on putting together a fiscal blueprint to pay down debt and build cash reserves. Indeed, rather than let his city go to pot, he is even entertaining the potential lease from local investors to purchase the shuttered Bristol Mall: the investors are interested in financing a local start-up, Dharma Pharmaceuticals, which wants to convert the vast facility into an operation producing cannabidiol, the marijuana derivative which the Commonwealth Virginia recently approved for treating certain illnesses—meaning the abandoned Penney and Belk buildings could go to pot.

With city’s fiscal year beginning at the end of this week, city leaders have been looking ahead: Mayor Kevin Mumpower outlined his short-term priorities at the beginning of this week’s City Council meeting, and City Manager Randy Eads reported he had an agenda, but would defer presenting it until after the meeting. Mayor Mumpower said many of his goals focus on the city’s long-term fiscal fortunes: “We don’t want the city to ever get to the place it got two years ago. We want it stable and moving forward, so we’re going to look at the charter, see what we can do to refine it and maybe present a few things to the state legislature to draft for us to solidify the city’s financial footing…We know future Councils can undo what we do, but, the way I look at it, that’s on them. Our responsibility is to try to do the right thing.”

The Mayor noted that this could turn out to be a lengthy, detailed process to determine reasonable thresholds so that, in the future, there would be fiscal strictures on borrowing. He reported that his second priority would be promoting economic development and hiring an economic development coordinator—someone with a focus on attracting new businesses to the city. He described a third priority to develop a program to provide inmates job opportunities in order to reduce recidivism and the city’s expensive jail population, noting: “We want to establish that inmate work release program. That is going to be a home run if Randy [Eads], the Sheriff and the Commonwealth’s Attorney can figure this out: We’ve already had several meetings about how we would train these inmates, get them certified, give them a skill set so they’re employable. That would save the city $500,000 to $750,000 a year—that one goal. If that’s successful, it would be a really big deal for the city.”

A second is completion of a state-funded study of the city’s solid waste landfill operations, with that coming as the Council had just voted to increase residential trash collection by $4 per month in order to help offset operating costs, or, as the Mayor put it: “We need to figure out what we’re going to do with our last big albatross: We’re subsidizing the landfill $500,000 this year—it was $1 million—but we’ve done that at the expense of the community.” Finally, Mayor Mumpower reported his last priority would be to establish restricted funds where funds would be set aside for specific needs, including key capital needs such as a fire truck, a school building fund, and another exclusively to pay down debt service: “We need to have money set aside only for those purchases so we don’t have to worry about where those funds are coming from.”

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The Raceway to Recovery

Taking the Checkered Flag. Detroit, on the verge of posting its third consecutive balanced budget, appears on course to exit state oversight as early as next year in the wake of yesterday’s Comprehensive Annual Financial Report (CAFR) demonstrating the Motor City has steadied its finances after emerging more than three years ago from the largest municipal bankruptcy in U.S. history. The state’s Detroit Financial Review Board could vote to waive its authority over the city as early as next month, according to Detroit Chief Financial Officer John Hill, who noted: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.” The CAFR, officially released Wednesday, appears to support the city’s hopes to soon regain full authority over its own finances: The report notes that Detroit ended its FY2017 with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million—even better than the city had originally projected: it ended its most recent fiscal year with a $63 million surplus—as well as a general fund unassigned fund balance of $169 million, better than 15% increase from the previous fiscal year, leading CFO Hill, as he prepares to present the results to the commission at a meeting later this month, to note: “It allows us to have a really good base of information as we are going into our budget process…It also gives us a chance to address some of the items that are identified as things we need to work on.” Mr. Hill added that Detroit has demonstrated vast improvements in its financial health, citing credit rating agency upgrades from rating agencies, a higher employment rate, and enhanced assessed property values: “I have to say that certainly there has been a positive impact from the financial review commission oversight: It’s been a real constructive process where the city has excelled.”

For his part, Mayor Mike Duggan noted that a third straight balanced budget proves his administration, in partnership with the City Council can “effectively manage the city’s finances: “This is another big step forward and helps set the stage for the end of the active state financial oversight,” as the Mayor preps to present the new budget later this month. Detroit Financial Review Commission member “Ike” McKinnon also credited the leadership role Mayor Duggan deserved for with getting the city’s finances back on track: “I remember when Mike Duggan took over as Mayor, we certainly had some hope and thoughts that things would happen…I did not know that it would happen this quickly. This says a lot about what he’s doing and certainly working with the state.”

The state’s financial review commission could vote to waive its authority over the city as early as next month, according to Mr. Hill. Zin any event, even if it does not, Detroit would no longer require the state board’s approval on budgeting or contracts, as it has since exiting chapter 9 municipal bankruptcy. As Mr. Hill put it: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.”

Key highlights of Detroit’s CAFR include the Motor City ending FY2017 fiscal year with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million. (The City had projected a $51 million surplus for FY2017). Detroit’s general fund unassigned fund balance will be $169 million, a $26 million increase from the previous fiscal year, according to the report. 

Detroit has also reported improvements in its management of $100 million in federal grants with no questioned costs resulting from audits, for the second consecutive year—after, two years ago, the city had federal funding for blight demolition funding suspended for two months due to procedural errors. Thus, hopes are high for the release from state oversight, albeit, concerns remain with regard to the looming 2024 pension payment and subsequent debt restructuring the following year. Mr. Hill notes: “I am sure that the FRC, as well as the city–because we are dealing with those issues, will be looking at those two items to make sure that plans are in place, money has been put aside, and the budget is able to absorb the additional costs that will come in those years.” Detroit is confronted by challenges to amortize debt payments on roughly $630 million of B notes that would see payments jump from $60 million to $120 million by 2025—notes issued as part of the implementation of Detroit’s chapter 9 municipal bankruptcy plan of debt adjustment—notes which are unsecured. Indeed, pending before the City Council is a proposal pending to dedicate $50 million from the city coffers to pay begin paying off the debt. Going forward, according to Mr. Hill, the strategy would be to dedicate a combination of restructuring some of the debt as well as paying it off, with the effort to address pension obligations a critical component to shoring up Detroit’s long-term fiscal health. The Motor City’s  long-term funding model approved by the City Council to modify its pension provisions which established the Retiree Protection Trust Fund, and deposited $105 million–$90 million from amounts reserved in FY2016 and 2017, plus $15 million appropriated in Fiscal 2018—and, for FY2018-2021 including the addition of an additional $115 million, contemplates another $115 million from FY2022–FY2023.

The Steep & Ethical Challenges in Roads to Fiscal Recovery

October 17, 2017

Good Morning! In today’s Blog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in American history; then we turn to the Constitution State, Connecticut, as the Governor and State Legislature struggle to reach consensus on a budget, before, finally, returning to Petersburg, Virginia to try to reflect on the ethical dimensions of fiscal challenges.

Visit the project blog: The Municipal Sustainability Project 

The Motor City Road to Recovery.  The City of Detroit has issued a request seeking proposals to lead a tender offer and refunding of its financial recovery municipal bonds with the goal of reducing the costs of its debt service, with bids due by the end of next week, all as a continuing part of its chapter 9 plan of debt adjustment. The city has issued $631 million of unsecured B1 and B2 notes and $88 million of unsecured C notes. The bulk of the issuance is intended to secure the requisite capital to pay off various creditors, via so-called term bonds, 30-year municipal debt at a gradually sliding interest rate of 4% for the first two decades, and then 6% over the final decade, as the debt is structured to be interest-only for the first 10 years, before amortizing principal over the remainder of the term, with the city noting: “It is the city’s goal to alleviate the significant escalation of debt service during the period when principal on the B Notes begins to amortize, and that any transaction resulting from this RFP process be executed as early as possible in the first quarter of 2018.” According to Detroit Finance Director John Naglick, “Those bonds are traded very close to par, because people view them as very secure…Those bondholders feel really comfortable because they see the intercept doing what it was designed to do.” The new borrowing is the city’s third since its exit from chapter 9 municipal bankruptcy, with the prior two issued via the Michigan Finance Authority. Last week the city announced plans to utilize the private placement of $125 million in municipal bonds, also through the Michigan Finance Authority, provided the issuance is approved by both the Detroit City Council and the Detroit Financial Review commission, with the bonds proposed to be secured by increased revenues the Motor City is receiving from its share of state gas taxes and vehicle registration fees.

Fiscal TurmoilConnecticut Gov. Dannel Malloy yesterday released his fourth fiscal budget proposal—with the issuance coming as he awaits ongoing efforts by leaders in the state legislature attempting to reach consensus on a two-year state budget, declaring: “This is a lean, no-frills, no-nonsense budget…Our goals were simple in putting this plan together: eliminate unpopular tax increases, incorporate ideas from both parties, and shrink the budget and its accompanying legislation down to their essential parts. It is my sincere hope this document will aid the General Assembly in passing a budget that I can sign into law.” The release came as bipartisan leaders from the state legislature were meeting for the 11th day behind closed doors in a so far unrewarding effort to agree on a budget to bring to the Governor—whose most recent budget offer had removed some of the last-minute revenue ideas included in the Democratic budget proposal. Nevertheless, that offer gained no traction with Republican legislators: it had proposed cuts in social services, security, and clean energy—or, as the Governor described it: “This is a stripped down budget.” Specifically, the Governor had proposed an additional $144 million in spending cuts from the most recent Democratic budget proposal, including: nearly $5 million from tax relief for elderly renters; $5.4 million for statewide marketing through the Department of Economic and Community Development; $292,000 in grants for mental health services; $11.8 million from the Connecticut Home Care Program over two years, and; about $1.8 million from other safety net services. His proposed budget would eliminate the state cellphone tax and a statewide property tax on second homes in Connecticut, as proposed by the Democrats; it also proposes the elimination of the 25 cent fee on ridesharing services, such as Uber and Lyft, and it reduces the amount of money Democrats wanted to take from the Green Bank, which helps fund renewable energy projects. His proposal also recommends cutting about $3.3 million each year from the state legislature’s own budget and eliminates the legislative Commissions for women, children, seniors, and minority communities—commissions which had already been reduced from six to two over the past two years. The Governor’s revised budget proposal would cut the number of security staff at the capitol complex to what it was before the metal detectors were implemented—proposed to achieve savings of about $325,000 annually, and the elimination of the Contracting Standards Board, which the state created a decade ago in response to two government scandals—here for a savings of $257,000.

For the state’s municipalities, the Governor’s offer proposes phasing in an unfunded state mandate that municipalities start picking up the normal cost of the teachers’ pension fund: Connecticut municipalities would be mandated to contribute a total of about $91 million in the first year, and $189 million in the second year of the budget—contributions which would be counted as savings for the state—and would be less steep than Gov. Malloy had initially proposed, but still considerably higher than many municipalities may have expected. Indeed, Betsy Gara, the Executive Director of the Council for Small Towns, described the latest gubernatorial budget proposal as a “Swing and a miss: The revised budget proposal continues to shift teachers’ pension costs to towns in a way that will overwhelm property taxpayers,” adding that if the state decides to go in this direction, they will be forced to take legal action, because requiring towns to pick up millions of dollars in teachers’ pension costs without any ability to manage those costs going forward is ‘simply unfair.’” Moreover, she noted, it violates the 2008 bond covenant.

In his revised new budget changes, Gov. Malloy has proposed cutting the Education Cost Sharing grant, reducing magnet school funding by about $15 million a year, and eliminating ECS funding immediately for 36 communities. The proposal to eliminate the ECS funding would likely encounter not just legislative challenges, but also judicial: it was just a year ago that a Connecticut judge’s sweeping ruling had declared vast portions of the state’s educational system as unconstitutional, when Superior Court Judge Thomas Moukawsher ruled that Connecticut’s state funding mechanism for public schools violated the state’s constitution and ordered the state to come up with a new funding formula—and mandated the state to set up a mandatory standard for high school graduation, overhaul evaluations for public-school teachers, and create new standards for special education in the wake of a lawsuit filed against the state in 2005 by a coalition of cities, local school boards, parents and their children, who had claimed Connecticut did not give all students a minimally adequate and equal education. The plaintiffs had sought to address funding disparities between wealthy and poor school districts.

Nevertheless, in the wake of a week where the state’s Democratic and Republican legislative leaders have been holed up in the state Capitol, without Gov. Malloy, combing, line-by-line, through budget documents; they report they have been discussing ways to not only cover a projected $3.5 billion deficit in a roughly $40 billion two-year budget, but also to make lasting fiscal changes in hopes of stopping what has become a cycle of budget crises in one of the nation’s wealthiest states—or, as House Speaker Joe Aresimowicz, (D-Berlin) put it: “I think what we’ve done over the last few days has been a really good step forward, and I think we’re moving in the right direction,” even as Senate Republican Leader Len Fasano said what the Governor put forward Monday will not pass the legislature: “It is obvious that the governor’s proposal, including his devastating cuts to certain core services and shifting of state expenses onto towns and cities, would not pass the legislature in its current form. Therefore, legislative leaders will continue our efforts to work on a bipartisan budget that can actually pass.”

Getting Schooled on Budgeting & Debt. Even as the Governor and legislature appear to be achieving some progress, the Connecticut Education Association (CEA) is suing the state over Gov. Dannel Malloy’s executive order which cuts $557 million in school funding from 139 municipalities: Connecticut’s largest teachers union has filed an injunction request in Hartford Superior Court, alleging the order violates state law. (The order eliminates education funding in 85 cities and towns and severely cuts funding in another 54 communities.) The suit contends that without a state budget, Gov. Malloy lacks the authority to cut education funding. The municipalities of Torrington, Plainfield, and Brooklyn joined the initial filing. Association President Sheila Cohen noted: “We can’t sit by and watch our public schools dismantled and students and teachers stripped of essential resources…This injunction is the first step toward ensuring that our state lives up to its commitment and constitutional obligations to adequately fund public education.”

Governance in Fiscal Straits? Connecticut Attorney General George Jepsen has questioned the legality of Governor Malloy’s executive order, and Connecticut Senate Republican Leader Len Fasano (R-North Haven) noted: “I think the Governor’s order is in very serious legal trouble.” Nevertheless, the Governor, speaking to reporters at the state capitol, accused the CEA of acting prematurely: “Under normal circumstances, those checks don’t go out until the end of October…Secondarily, they’ll have to handle the issue of the fact that we have a lot less money to spend without a budget than we do with a budget…Their stronger argument might be that we can’t make any payments to communities in the absence of a budget. That one I would be afraid of.”

Municipal Fiscal Ethics? Forensic auditors from PBMares, LLP publicly went over their findings from the forensic audit they conducted into the City of Petersburg, Virginia’s financial books during a special City Council meeting. Even though the audit and its findings were released last week, John Hanson and Mike Garber, who were in charge of the audit for PBMares, provided their report to Council and answered their questions, focusing especially on what they deemed the “ethical tone” of the city government, saying they found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time…The culture led employees to do things they might not otherwise do.” They noted misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. In response, several Council Members asked whether if some of the employees who admitted to misconduct could be named. Messieurs Garber and Hanson, however, declined to reveal names in public, but said they could discuss it in private with City Manager Aretha Ferrell-Benavides, albeit advising the City Council that the ethical problems seemed to be more “systemic,” rather than individual, adding: “For instance, we looked at fuel data usage…And we could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.”

In response to apprehensions that the audit was insufficient, the auditors noted that because of the city’s limited budget, the scope of PBMares’ work could only go so far. Former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more for a city which had hovered on the brink of chapter 9 municipal bankruptcy. However, Mr. Hanson noted that while the transgressions would have normally fallen under a conflict of interest policy, such was the culture in Petersburg that the city’s employees either did not know, or were allowed to ignore those policies: “When I asked employees what their conflict of interest or gifts and gratuity policy is, people couldn’t answer that question because they didn’t know.”

 

Fiscal & Physical Hurricanes

September 8, 2017

Good Morning! In this a.m.’s Blog, we consider the increasing risk of Hartford going into municipal bankruptcy, the Nutmeg State’s fiscal challenge—and whether the state’s leaders can agree to a bipartisan budget; then we consider some of the anomalies as the Commonwealth of Virginia tests out its new fiscal stress oversight program; finally, we observe that fearful transit of Hurricane Irma, one of the most powerful hurricanes ever recorded, as it roared through the U.S. Territories of the Virgin Islands and Puerto Rico, where we feared for lives and physical and fiscal safety.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of Chapter 9. Hartford Mayor Luke Bronin fired a warning shot across the bow yesterday at the state legislature and Governor Dannel Malloy, notifying the parties the city would be seeking permission to file for chapter 9 municipal bankruptcy if the city is unable to obtain the requisite funds it needs to continue to operate by early November, in a letter also signed by Hartford Treasurer Adam Cloud and Council President Thomas “TJ” Clarke II.  In the state, where Bridgeport filed in 1991 (the case was dismissed the same year), the statute §7-566) provides that a municipality may only file for chapter 9 protection with the express prior written consent of the governor—at which point, if given, the governor must submit a report to the Treasurer and General Assembly. In his sharply worded epistle to Gov. Malloy and House and Senate leaders, Mayor Bronin cautioned: “If the state fails to enact a budget and continues to operate under the governor’s current executive order, the city of Hartford will be unable to meet its financial obligations in approximately 60 days.” Thus, while the state’s budget stalemate constitutes a fiscal threat to many Connecticut cities, it has posed exceptional problems for Hartford: projections show the capital city, facing a $65 million deficit this year, will run into cash-flow issues in November and December, including a $39.2 million end-of-year shortage. The fiscal hurricane came as Gov. Malloy yesterday unveiled new budget proposals intended to restore funding for municipalities and reject major education cuts planned for October 1, as Democrats and Republicans met in an attempt to reach common ground. However, Mayor Bronin warned that the “extraordinary measures” other towns are considering in response to the state’s ongoing budget gridlock—layoffs, cuts to services and drawing from rainy day funds—are actions Hartford has taken already, noting the city last year laid off 40 workers and cut millions from city departments—and dipped into Hartford’s rainy-day fund to help offset deficits. Notwithstanding, the city still had to borrow millions in June to help pay its bills: “For the past year, we have highlighted the urgency of Hartford’s fiscal crisis: The time has come to decide, together, what future we want for our capital city,” he wrote, urging legislators to embrace a “farsighted, collaborative approach” that includes giving Hartford more than the minimum amount of state aid it needs: he has requested at least $40 million more this year. Mayor Bronin also encouraged lawmakers “create a mechanism” to allow Hartford to achieve “fair labor contracts that truly reflect the city’s ability to pay,” and to “join us in insisting that bondholders and other stakeholders participate in the solution: “You could fail to adopt a budget, or write off Hartford’s problem as unsolvable—requiring a Chapter 9 Bankruptcy filing in the coming weeks.” Noting he wants to avoid chapter 9, the Mayor added: “A well-planned bankruptcy is a tool that can be used to address long-term liabilities like debt and pension obligations…“I think there’s a reality that Hartford needs real and major restructuring that could be accomplished in a bankruptcy: “It could be accomplished outside of a bankruptcy, but I think as days go by it becomes more likely that Hartford will be going bankrupt.” If there might be some light at the end of the fiscal tunnel, it was Connecticut House Majority Leader Matthew Ritter’s statement: “I would agree with the mayor that it does not help Hartford to give them well short of what they need, because then they’re just back in a hopeless scenario next spring: The goal is not to put Band-Aids on this. The goal is to try to begin structural reforms… Moody’s, last month, had warned Hartford was rapidly approaching debt repayment deadlines: “the city’s path to fiscal sustainability will likely require debt restructuring along with some combination of labor concessions, other expenditure cuts and new revenues,” with bills coming due for $3.8 million this month, and $26.9 million next month in October. Hartford’s leaders yesterday stressed they want a long-term solution to Hartford’s problems—or, as the Mayor put it; “We’re not interested in patches. We’re not interested in a short-term bailout…We’re not interested in Band-Aids. And we’re not interested in leaving this problem for future legislatures or future mayors…We’re interested in fixing this.”

Nevertheless, the challenge of obtaining state fiscal assistance will be hampered by the state’s own fiscal challenges: Connecticut has operated under Gov. Malloy’s executive orders since July 1, while the state legislature is still working out a biennial budget for FY2018 and 2019—efforts the Governor expects to result in a new compromise budget by today: under his most recent executive order, however, state aid for Hartford is down nearly 25% from last year—leaving the city to confront a nearly $50 million deficit for FY2018 and projecting that to grow to about $83 million next fiscal year. According to Mayor Bronin, one option would be for the state to provide the city with “just enough additional assistance” to avoid short-term liquidity problems without the structural overhaul and the necessary investment to reinvigorate the city—or, as he wrote: “This might be the path of least resistance, but it’s also the path that leads to a less competitive Connecticut,” adding that failure to adopt a budget or writing off Hartford as a lost cause would force a municipal bankruptcy filing. A third option, according to the Mayor, would be a “farsighted, collaborative approach,” which would include reimbursing the city for its disproportionate share of non-taxable property‒or about half of overall property; enable relief for the city in labor contracts; and forcing bondholders and other stakeholders to the table. Thus, he noted, he would prefer an avenue other than municipal bankruptcy.

Is There a Mother Hubbard Problem? Even as Hartford is desperately seeking state aid to avoid filing for bankruptcy, the state has its own serious fiscal challenges: it faces a biennial revenue gap of up to $5 billion, and municipal bond rating agencies have slammed it with six downgrades over the last year and a half. State legislative leaders claim they will have an idea of whether is light at the end of the proverbial tunnel by next week when they will be voting on a partisan or a bipartisan budget next week: Republican legislative leaders have been pressing their Democratic colleagues to make changes they assert would improve future budgets, but do not necessarily make it easier to close the current $3.5 billion budget deficit: most of the changes the Republicans had wanted to make in the state’s relationship with its labor unions foundered in the wake of the $1.57 billion concession package approved in a mostly party line vote. Republican lawmakers insist they have revised their budget proposals to reflect the new labor agreement; however, they are not ready to release them to the public, much less share them with Democratic legislative leaders. Senate President Martin Looney (D-New Haven), said the “significant unanswered question” is how Republican legislators close the gap between their original proposals and the labor agreement: “We hope to get all of these issues resolved, so at least we will know where we stand in relation to each other,” adding there are hopes of a vote in both chambers next week: as of today, there is no certainty with regard to whether the budget would pass, or, as House Speaker Joe Aresimowicz (D-Berlin) noted, it is worth trying to reach a bipartisan deal, “but in the end I don’t know if the differences are too large to overcome,” adding they cannot just pass a budget with the votes in either chamber, because any such budget also must pass muster with the Governor, who has not even been complimentary of his own party’s efforts to put together a budget. Senate Republican President Len Fasano (R-North Haven) said in order for there to be any progress on closing Connecticut’s $3.5 billion budget gap, there first has to be agreement over structural changes, such as a spending and a bonding cap, deeming it “an appetizer to the main meal: “You’ve got to get through this,” before you start talking about the budget numbers. Democratic legislative leaders agreed they share an interest in structural changes, but are not in agreement with how Republican lawmakers want to implement some of them.

Not So Fiscally Rich in Richmond? Or Whoops! Richmond, Virginia—notwithstanding a 25% poverty level, has been in the midst of a building boom; it has reported balancing its budget, and that it holds a savings reserve of $114 million—in addition to which, the state has logged budget surpluses in each of its most recent fiscal years; it currently has an AA rating from the three major credit rating, each of which reports that the former capital of the Confederacy has a modestly growing tax base, manageable municipal debt, and a long-term stable outlook—albeit with disproportionate levels of poverty. Nevertheless, State Auditor Martha S. Mavredes, according to a recent state report distributed within government circles, including the Virginia Municipal League and the Virginia Association of Counties, has cited the municipalities of Richmond and Bristol as failing to meet the minimum standard for financial health:

In the case of Richmond, according to the report, the city scored less than 16 on the test for the past two fiscal years—a score which Auditor Mavredes described as indicating severe stress in her testimony last month before the General Assembly’s Joint Subcommittee on Local Government Fiscal Stress, noting that the test was applied for fiscal years 2014, 2015, and 2016. The fiscal test is based on information contained in annual audited financial reports provided by each locality—except the municipalities of Hopewell and Manassas Park have stopped providing reports—with the fiscal stress rankings based on the results of ten ratios which primarily rely on revenues, expenses, assets, liabilities, and unused savings: the test weighs the level of reserves and a municipality’s ability to meet liabilities without borrowing, raising taxes, or withdrawing from reserves—as well as the extent to which a locality is able to meet the following fiscal year’s obligations without changes to revenues or expenses: Richmond’s score was near 50 in FY2014, but fell below 16 in FY2015  and to 13.7 in FY2016. Thus, even though Virginia has no authority to intervene in local finances, the new fiscal measuring system has created a mechanism to help focus fiscal attention in advance of any serious fiscal crisis.

It turns out the municipality with the biggest red flag, initially known as City A, is Bristol, an independent city of around 18,000—the twin city of Bristol, Tennessee, just across the state line, which runs down the middle of its main street: State Street. Bristol, more than a week ago, acknowledged the city is in communication with the Virginia auditor’s office to determine her audit designated Bristol with a score below 5 on a scale which uses any number below 16 as a sign of potential distress. That audit also showed City B, which fell from a score just below 50 in 2014 to below 14 the next two years, to be state capitol Richmond.

Asked about Richmond’s precipitous fiscal fall under the scale, Auditor Mavredes said that the high score for 2014 was incorrect, because of a keyboard error by her office. Instead of a steep fall, “it’s more of a flat line,” she added. Timely financial reporting has been a consistent concern for the city, which has been late in filing its CAFR for three years, although Richmond Mayor Levar Stoney has vowed to file it on time this year—and the Auditor’s office, which compiles an annual financial report for localities, is still awaiting Richmond’s fy2016 information.

The Virginia Association of Counties confirmed that Richmond County, on the Northern Neck, and Page County, with a slowing population of about 24,000 and county seat is Luray in the northern Shenandoah Valley, were two flagged by the system for what Auditor Mavredes deemed “consistently low scores:” 5.9 in 2014, 8.2 in 2015, and 7.3 last year. Page, as County B, declined from 21 in 2014 to about 15.5 in 2015, and 11.1 in 2016. Dean A. Lynch, the Virginia Association of Counties Executive Director, said both counties are “very aware” of the concerns the auditor raised. Notwithstanding, he noted that VACo believes some differences among localities stem from how they report their financial results: “We’re trying to get a group to meet with (the auditor) so we can all get on the same page,” noting, for example, the initial assessment shows Fairfax and Stafford, both fairly wealthy counties, with relatively low scores. VaCo officials believe that has less to do with their financial condition than how they report school system debt and assets—a contention with which Auditor Mavredes agrees, so she is not concerned by the scores, because she recognizes the local government is reporting the debt, while the school system is showing the assets. She also notes that some localities might show high scores, even though they have small budgets: for example, Nottoway County scored the best among counties in the new system at 98.1 last year, leading the Auditor to note: “Some localities are very debt-averse…Some of it is just the choices they’ve made in regard to the locality. They might not have many resources, but they have managed well with the resources they’ve had.” Vaco Director Lynch notes that the larger issue of fiscal stress for rural localities, such as Richmond County and Page, is the amount of money they are required to pay as their match for state funding of public education and other services, as well as their ability to generate it: “They do feel they are having a tough time in meeting some of their core services: I think if you go back and talk to Page County and Richmond County, they have trouble meeting the match that is required. It’s a state funding issue.”

Peligroso. Cataloged by the National Hurricane Center as an “extremely dangerous: cyclone, Hurricane Irma, slammed its way through northern Puerto Rico, with the Category 5 phenomenon lashing Puerto Rico with sustained maximum winds at 185 mph: by early this morning, the Aqueduct and Sewer Authority confirmed that about 80,000 people have no water—by 10:53 p.m., Irma’s eye was located at latitude 19.4 degrees north and longitude 66.8 degrees west: about 85 miles from San Juan—a half hour after some 22 hospitals had lost power, according to the Director of the State Agency for the Management of Emergencies, Abner Gomez. By yesterday morning, more than a million were without electricity.

The PROMESA fiscal oversight board yesterday reported it was working for the federal government to accelerate assistance to Puerto Rico: Gov. Ricardo Rosselló rejected that claim, stressing that no member of the Board has communicated with him to make himself available: “Yo sé que los mejores intereses de todo el mundo están en el pueblo Puerto Rico”: I know that the best interests of the whole world are in the town of Puerto Rico.  So far I have not had personal communication (with members of the PROMESA Board), but we certainly give the invitation to anyone who wants to collaborate. For its assumption, including the members of the Board.” Board Chair José Carrión told the media that he worked “closely with Governor Rosselló to coordinate support for Puerto Rico after the hurricane, asserting: “We have approached the federal government to activate Title V of PROMESA,” which Mr. Carrión asserted provides authority under Title to speed up assignments after a disaster. Similarly, in a written statement, the Board’s Executive Director, Natalie Jaresko, noted: “We have approached the federal government to activate Title V of PROMESA, which allows the Board to work with agencies to accelerate activation of allocations and loans after a disaster…We expect residents of Puerto Rico to remain safe during hurricane Irma and that any damage to the island due to the hurricane will be minimal.”

Puerto’s Rico’s first recovery focus in the wake of Irma will be on the island of Culebra, with a population of around 1,000. Generally, it appears, the worst fears were not realized: the hurricane (Humacao) spared much of the eastern region of Puerto Rico: there was one tree fall reported—even as there were a reported 500 refugees between the villages of Utuado, Lares, Adjuntas, Jayuya and Ciales.  By 8, last evening, there were approximately 77,000 subscribers without water service, as Irma’s eye passed just north of Puerto Rico—leaving some 868,846 without power—just hours after U.S. Health and Human Services Secretary Tom Price had declared a public health emergency in Puerto Rico and the US Virgin Islands to facilitate the provision of federal services.

The Art of State Fiscal Intervention

08/08/17

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Good Morning! In this a.m.’s blog, we consider the political and fiscal challenges to recovery for a municipality with disproportionate levels of crime and low income—but aided by state intervention.

Ending the Fiscal Siege of Petersburg. More than a century ago, from June 9, 1864, to March 25, 1865, during the American Civil War, the Richmond–Petersburg Campaign was torn by a series of battles around Petersburg, Virginia. In the past few years, the battle waged has been fiscal rather than physical for the independent city of about 32,420, where, last year, Virginia Finance Secretary Ric Brown, in providing a fiscal update, based on a state audit of the city’s books dating to 2012, had reported the municipality was facing a $12 million budget gap—and nearly $19 million in unpaid bills. But now, Sec. Brown has just announced that the small municipality’s bond rating outlook has been upgraded from “negative” to “stable,” confirming the value of the Commonwealth’s fiscal intervention. S&P’s announcement, coming nearly one year of weathering one of the lowest possible municipal bond ratings, led Mayor Samuel Parham to note: “We are proud of everyone’s efforts who made this positive reassessment possible.” But it is one small, fiscal step: At last week’s session, the City Council agreed to develop a deficit-reduction plan at its next meeting, scheduled for a week from Thursday: more fiscal work portends in the wake of last month’s action by the Council to approve a salary cut for the city’s 600 full-time employees: layoffs of staff and other austerity measures are now a real possibility.

That fiscal endeavor will proceed under a newly appointed City Manager, Aretha R. Ferrell-Benavides, who was appointed last month to be responsible for the day-to-day operations of the city and report directly to the City Council. She does not come unprepared for the task, having served as the interim city manager, where she was put in the awkward role of informing the City Council and a packed hall of residents about the requisite critical cuts to city services and reduced funding for the city’s schools—already among the lowest-performing in the Commonwealth—as well as cuts to fire and police services in a city which has an unusually high rate of crime: some 87% higher than in comparison to the Virginia mean and are 35% higher than the national mean. With regard to violent offenses, Petersburg, has a rate that is 313% higher than the Virginia average; its property crime is 63% higher than the statewide mean. Nearly 30% of the city’s residents live in poverty, more double the statewide rate, and the city has a disproportionate percentage of its population older than 65.  As the population has declined from its peak in 1980, it has also aged — more than 15 percent of residents are 65 or older, vs. 13 percent statewide., and 22% higher than the country’s average—all steps necessary she warned, because, otherwise, Petersburg had about a month before it would confront the unthinkable: total collapse—it was a fiscal state which Virginia Finance Secretary Ric Brown noted to be unlike anything he had ever observed in his 46 years minding state ledgers in various roles.

In describing its upgrade to a “stable” outlook, Standard and Poor’s states that a “stable” outlook means the rating is unlikely to change. This is a slight improvement from a “negative” outlook. Standard and Poor’s Primary Credit Analyst, Timothy Barrett, said that the city had “taken several key steps toward financial recovery, including repaying a portion of past due obligations in addition to creating a viable plan to strengthening budgetary flexibility and liquidity, supported by some recently adopted financial policies.”

Petersburg Finance Director Blake Rane notes that the improved fiscal outlook will enhance the city’s fiscal “flexibility: It’s clear [the city] has changed trajectory in the past year, to a point where there is no risk beyond what the “BB” already says,” adding: “It’s really hard to move Standard and Poor’s [rating], and get the kind of movement we did.” In its report, Standard and Poor’s noted Petersburg has “taken several key steps toward financial recovery, including repaying a portion of past due obligations in addition to creating a viable plan to strengthening budgetary flexibility and liquidity, supported by some recently adopted financial policies.”

Notwithstanding the good gnus, Petersburg’s leaders recognize this is no time to let up: Despite the good news,  interim Finance Director Nelsie Birch and the other city officials recognize much fiscal effort remains: “It should help the investment community have confidence that the city is moving in the right direction, though we are still non-investment grade credit.” Until the city restores its fund balance, which would require at least $7.7 million dollars, the city’s credit rating will have to await a boost to investment grade—some two notches higher than its current grade—meaning it must pay higher interest rates for capital investment and borrowing than most Virginia municipalities.

Rising from Municipal Bankruptcies’ Ashes

07/24/17

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Good Morning! You might describe this a.m.’s e or iBlog as The Turnaround Story, as we consider the remarkable fiscal recovery in Atlantic City and observe some of the reflections from Detroit’s riot of half a century ago—a riot which presaged its nation’s largest chapter 9 bankruptcy, before we assess the ongoing fiscal turmoil in the U.S. territory look at Puerto Rico.

New Jersey & You. Governor Chris Christie on Friday announced his administration is delivering an 11.4% decrease in the overall Atlantic City property tax rate for 2017—a tax cut which will provide an annual savings of $621 for the City’s average homeowner, but which, mayhap more importantly, appears to affirm that the city’s fiscal fortunes have gone from the red to the black, after, earlier this month, the City Council accepted its $206 million budget with a proposed 5% reduction in the municipal purpose tax rate, bringing it to about $1.80 per $100 of assessed valuation. Atlantic City’s new budget, after all, marks the first to be accepted since the state took over the city’s finances last November; indeed, as Mayor Don Guardian noted, the fiscal swing was regional: the county and school tax rates also dropped—producing a reduction of more than 11%—and an FY2018 budget $35 million lower than last year—and $56 million below the FY2016 budget: “We had considerably reduced our budget this year and over the last couple of years…I’m just glad that we’re finally able to bring taxes down.” Mayor Guardian added the city would still like to give taxpayers even greater reductions; nevertheless, the tax and budget actions reflect the restoration of the city’s budget authority in the wake of last year’s state takeover: the budget is the first accepted since the state took over the city’s finances in November after the appointment last year of a state fiscal overseer, Jeff Chiesa—whom the Governor thanked, noting:

“Property taxes can be lowered in New Jersey, when localities have the will and leaders step in to make difficult decisions, as the Department of Community Affairs and Senator Jeff Chiesa have done…Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents. Annual savings of more than $600 for the average household is substantial money that families can use in their everyday lives. This 11.4% decrease is further proof that what we are doing is working.”

Contributing to the property tax rate decrease is a $35-million reduction in the City’s FY2017 budget, which, at $206.3 million, is about 25% lower than its FY2015 budget, reflecting reduced salaries, benefits, and work schedules of Atlantic City’s firefighters and police officers, as well as the outsourcing of municipal services, such as trash pickup and vehicle towing to private vendors. On the revenue side, the new fiscal budget also reflects a jackpot in the wake of the significant Borgata settlement agreement on property tax appeals—all reflected in the city’s most recent credit upgrade and by Hard Rock’s and Stockton University’s decisions to make capital investments in Atlantic City, as well as developers’ plans to transform other properties, such as the Showboat, into attractions intended to attract a wider variety of age groups to the City for activities beyond gambling—or, as the state-appointed fiscal overseer, Mr. Chiesa noted: “The City is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the City’s residents and businesses.

The Red & the Black. Unsurprisingly, there seems to be little agreement with regard to which level of government merits fiscal congratulations. Atlantic City Mayor Guardian Friday noted: “We had considerably reduced our budget this year and over the last couple of years…“I’m just glad that we’re finally able to bring taxes down.” Unsurprisingly, lame duck Gov. Christie credited the New Jersey Department of Community Affairs and Mr. Chiesa, stating: “Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents.” However, Tim Cunningham, the state director of local government services, earlier this month told the Mayor and Council the city and its budget were moving in the “right direction,” adding hopes for the city’s fiscal future, citing Hard Rock and Stockton University’s investment in the city; while Mr. Chiesa, in a statement, added: “The city is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the city’s residents and businesses.”

Do You Recall or Remember at All? Detroit Mayor Mike Duggan, the white mayor of the largest African-American city in America, last month spoke at a business conference in Michigan about the racially divisive public policies of the first half of 20th century which helped contribute to Detroit’s long, painful decline in the second half of the last century—a decline which ended in five torrid nights and days of riots which contributed to the burning and looting of some 2,509 businesses—and to the exodus of nearly 1.2 million citizens. The Mayor, campaigning for re-election, noted: “If we fail again, I don’t know if the city can come back.” His remarks appropriately come at the outset of this summer’s 50th anniversary of the summer the City Detroit burned.

Boston University economics Professor Robert Margo, a Detroit native who has studied the economic effects of the 1960’s U.S. riots, noting how a way of life evaporated in 120 hours for the most black residents in the riot’s epicenter, said: “It wasn’t just that people lived in that neighborhood; they shopped and conducted business in that neighborhood. Overnight all your institutions were gone,” noting that calculating the economic devastation from that week in 1967 was more than a numbers exercise: there was an unquantifiable human cost. That economic devastation, he noted, exacerbated civic and problems already well underway: job losses, white flight, middle-income black flight, and the decay and virtual wholesale abandonment of neighborhoods, where, subsequently, once-vibrant neighborhoods were bulldozed, so that, even today, if we were to tour along main artery of the riot, Rosa Parks Boulevard (which was 12th Street at the time of the riots), you would see overgrown vacant lots, lone empty commercial and light industrial buildings, boarded-up old homes—that is, sites which impose extra security costs and fire hazards for the city’s budget, but continue to undercut municipal revenues. Yet, you would also be able to find evidence of the city’s turnaround: townhouses, apartments, and the Virginia Park Community Plaza strip mall built from a grassroots community effort. But the once teeming avenue of stores, pharmacies, bars, lounges, gas stations, pawn shops, laundromats, and myriad of other businesses today have long since disappeared.

In the wake of the terrible violence, former President Lyndon Johnson created the Kerner Commission, formally titled the National Advisory Commission on Civil Disorders, to analyze the causes and effects of the nationwide wave of 1967 riots. That 426-page report concluded that Detroit’s “city assessor’s office placed the loss—excluding building stock, private furnishings, and the buildings of churches and charitable institutions—at approximately $22 million. Insurance payouts, according to the State Insurance Bureau, will come to about $32 million, representing an estimated 65 to 75 percent of the total loss,” while concluding the nation was “moving toward two societies, one black, one white—separate and unequal.” Absent federal action, the Commission warned, the country faced a “system of ’apartheid’” in its major cities: two Americas: delivering an indictment of a “white society” for isolating and neglecting African-Americans and urging federal legislation to promote racial integration and to enrich slums—primarily through the creation of jobs, job training programs, and decent housing. In April of 1968, one month after the release of the Kerner Commission report, rioting broke out in more than 100 cities across the country in the wake of the assassination of civil rights leader Martin Luther King, Jr.

In excerpts from the Kerner Report summary, the Commission analyzed patterns in the riots and offered explanations for the disturbances. Reports determined that, in Detroit, adjusted for inflation, there were losses in the city in excess of $315 million—with those numbers not even reflecting untabulated losses from businesses which either under-insured or had no insurance at all—and simply not covering at all other economic losses, such as missed wages, lost sales and future business, and personal taxes lost by the city because the stores had simply disappeared. Academic analysis determined that riot areas in Detroit showed a loss of 237,000 residents between 1960 and 1980, while the rest of the entire city lost 252,000 people in that same time span. Data shows that 64 percent of Detroit’s black population in 1967 lived in the riot tracts. U. of Michigan Professor June Thomas, of the Alfred Taubman College of Architecture and Urban Planning, wrote: “The loss of the commercial strips in several areas preceded the loss of housing in the nearby residential areas. That means that some of the residential areas were still intact but negatively affected by nearby loss of commercial strips.” The riots devastated assessed property values—creating signal incentives to leave the city for its suburbs—if one could afford to.

On the small business side, the loss of families and households, contributed to the exodus—an exodus from a city of 140 square miles that left it like a post WWII Berlin—but with lasting fiscal impacts, or, as Professor Bill Volz of the WSU Mike Ilitch School of Business notes: the price to reconstitute a business was too high for many, and others simply chose to follow the population migration elsewhere: “Most didn’t get rebuilt. They were gone, those mom-and-pop stores…Those small business, they were a critical part of the glue that made a neighborhood. Those small businesses anchored people there. Not rebuilding those small businesses, it just hurt the neighborhood feel that it critical in a city that is 140 square miles. This is a city of neighborhoods.” Or, maybe, he might have said: “was.” Professor Thomas adds that the Motor City’s rules and the realities of post-war suburbanization also made it nearly impossible to replace neighborhood businesses: “It’s important to point out that, as set in place by zoning and confirmed by the (city’s) 1951 master plan, Detroit’s main corridors had a lot of strip commercial space that was not easily converted or economically viable given the wave of suburban malls that had already been built and continued to draw shoppers and commerce…This, of course, all came on top of loss of many businesses, especially black-owned, because of urban renewal and I-75 construction.”

Left en Atras? (Left Behind?As of last week, two-thirds of Puerto Rico’s muncipios, or municipalities, had reported system breakdowns, according to Ramón Luis Cruz Burgos, the deputy spokesman of the delegation of the Popular Democratic Party (PPD) in the Puerto Rico House Of Representatives: he added that in Puerto Rico, a great blackout occurs every day due to the susceptibility of the electric power system, noting, for instance, that last month, for six consecutive days, nearly 70 percent of Puerto Rico’s municipalities had problems with electricity service, or, as he stated: “In Puerto Rico we have a big blackout every day. We have investigated the complaints that have been filed at the Autoridad de Energía Eléctrica (AEE) for blackouts in different sectors, and we conclude that daily, two-thirds of the island are left without light. This means that sectors of some 51 municipalities are left in the dark and face problems with the daily electricity service.”

It seems an odd juxtaposition/comparison with the events that triggered the nation’s largest ever chapter 9 municipal bankruptcy in Detroit—even as it reminds us that in Puerto Rico, not only is the Commonwealth ineligible for chapter 9 municipal bankruptcy, but also its municipalities. Mr. Cruz Burgos noted that reliability in the electric power system is one of the most important issues in the economic development of a country, expressing exasperation and apprehension that interruptions in service have become the order of the day: “Over the last two months, we have seen how more than half of the island’s villages are left dark for hours and even for several days, because the utility takes too long to repair breakdowns,” warning this problem will be further aggravated during the month of August, when energy consumption in schools and public facilities increases: “In the last two months, there are not many schools operating and the use of university facilities is also reduced for the summer vacation period. In addition, many employees go on vacation so operations in public facilities reduce their operation and, therefore, energy consumption.”

Jose Aponte Hernandez, Chair of the International and House Relations Committee, blamed the interruptions on the previous administration of Gov. Luis Fortuno, claiming: it had “abandoned the aggressive program of maintenance of the electrical structure implemented by former Gov. Luis Fortuna, claiming: “In the past four years the administration of the PPD did not lift a finger to rehabilitate the ESA structure. On the contrary, they went out of their way to destroy it in order to justify millionaire-consulting contracts. That is why today we are confronting these blackouts.”

The struggle for basic public services—just as there was a generation ago in Detroit, reflect the fiscal and governing challenge for Puerto Rico and its 88 municipalities at a time when non-Puerto Rican municipal bondholders have launched litigation in the U.S. Court of Federal Claims to demand payment of $3.1 billion in principal and interest in Puerto Rico Employment Retirement System bonds (In Altair Global Credit Opportunities Fund (A), LLC et al. v. The United States of America)—the first suit against the U.S. government proper, in contrast to prior litigation already filed against the Puerto Rico Oversight Board, with the suit relying on just compensation claims and that PROMESA is a federal entity. Here, as the Wizard of chapter 9 municipal bankruptcy, Jim Spiotto, notes, the key is whether the PROMESA board was acting on behalf of the federal government or on behalf of Puerto Rico—adding that he believes it was acting for Puerto Rico and, ergo, should not be considered part of the federal government, and that the U.S. Court of Federal Claims may find that the federal government’s actions were illegal. Nevertheless, the issue remains with regard to whether the bonds should be paid from the pledged collateral—in this case being Puerto Rico employer contributions. (The Altair complaint alleges that the PROMESA Board is a federal entity which has encouraged, directed, and even forced Puerto Rico to default on its ERS bonds—a board created by Congress which has directed the stream of employer contributions away from the bondholders and into the General Fund, according to these bondholders’ allegations.

On the Hard Roads of Fiscal Recovery

eBlog

Good Morning! In this a.m.’s eBlog, we consider the growing, remarkable fiscal recoveries in post-bankruptcy Detroit and formerly insolvent Atlantic City, before turning to the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy.

Pacing a City’s Economic Recovery. JP Morgan Chairman and Chief Executive Officer yesterday described the city of Detroit’s economic recovery as one which has moved faster than expected—indeed, so much so that the giant financial institution today will announce it is expanding its investment in the city over the next two years, bringing the total effort to $150 million by 2019—some two years ahead of schedule. Mr. Dimon credited the city’s economic progress to strong collaboration between civic, business, and nonprofit leadership, as well as improving economic conditions in the city. If anything, over the last three years, the bank has become an enthusiastic partner in the Motor City’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy via investing more than $107 million in loans and grants to enhance the city’s remarkable progress in implementing its plan of debt adjustment and achieving the goal of complete restoration of its fiscal autonomy. JP Morgan’s investments have included $50 million in community development financing, $25.8 million to revitalize neighborhoods, $15 million for workforce development, $9.5 million for small business expansion, and $6.9 million in additional investments. In addition, Morgan appears to be ready for more, with the bank’s future investments likely to focus on:

  • further revitalizing Detroit’s neighborhoods,
  • strengthening the city’s workforce system, and
  • helping minority-owned small businesses grow.

Indeed, Mr. Dimon noted: “Detroit’s resurgence is a model for what can be accomplished when leaders work together to create economic growth and opportunity…This collaboration allowed us to speed up our investment and extend our commitment over the next two years. Going forward, I hope business, government and nonprofit leaders will see Detroit’s comeback as a shining example of how to put aside differences and work to find meaningful and innovative solutions to our most pressing economic problems.” For his part, Detroit Mayor Mike Duggan called JPMorgan Chase “a true partner” in the city’s work to restore economic growth and opportunity, noting that Morgan’s investments “have enabled thousands of Detroiters to receive training and created new opportunities for entrepreneurs and revitalized neighborhoods. There is more work to do, and I hope our continued partnership will build a thriving economy for all Detroiters.”

Indeed, the giant financial institution has extended its fiscal commitment: it plans to make investments of about $30 million focused on creating livable, inclusive, and sustainable neighborhoods. Officials report that will include preparing residents with the skills needed for high-paying careers and providing small businesses with capital. In addition, JPMorgan Chase officials said they will invest about $13 million re-paid loans paid back into two community development investment funds with which the bank has partnered in the community: Invest Detroit and Capital Impact Partners. This post-municipal bankruptcy investment in Detroit has been key, city officials, report to enabling Detroit to test solutions, adapt programs, and even find models that could be applied to other cities. For instance, the city’s Motor City Mapping project, Detroit’s comprehensive effort to digitize Detroit’s property information and create clear communication channels back and forth between the public, the government, and city service providers, has provided JP Morgan with insights how blight mapping can be applied in other cities to bring community partners together to fight blight—the bank has already shared the mapping technology in Cleveland, Columbus, and Cincinnati.

Is Atlantic City like Dracula? New Jersey State Senator Jim Whelan (D-Northfield), the former Mayor of Atlantic City and previous teacher in the city’s public school system, yesterday noted: “I always say Atlantic City is like Dracula—you can’t kill it, no matter how hard we try.” Indeed, the city’s gleaming casinos are turning profits, and plans have recently been announced to embark upon a $375 million renovation and reopening of the Trump Taj Mahal by Hard Rock casino; Stockton University just broke ground on a satellite campus. A luxury apartment complex, the first to be constructed in Atlantic City in decades, is underway. With upgrades in the city’s credit rating, a city that was on the brink of chapter 9 bankruptcy and taken over by the state is, today, on the road to recovery. The fiscal recovery comes in the wake of a decade which featured a 50 percent drop in the city’s casino revenues, witnessed the closure of nearly half of the casinos, and loss of 10,000 jobs, a loss which triggered a massive spike in home foreclosures—indeed losses which so imperiled the city’s fisc that the state took over the city. But this week, with a new playground ready for when the local elementary school lets out and a reduction in property taxes, there is a note of fiscal optimism. David G. Schwartz, an Atlantic City native, who currently serves as the Director of the Center for Gaming Research at the University of Nevada, Las Vegas, described it this way: “I think we are definitely into the next phase of the city’s history…Atlantic City has faced adversity before, and it has always moved forward–even though it sometimes took a few decades.”

My distinguished colleague, Marc Pfeiffer, the Assistant Director of the Bloustein Local Government Research Center in New Jersey, who, after a brief 37-year career in New Jersey local government administration, and a mere 26 years of service in New Jersey’s Division of Local Government Services, described the remarkable fiscal turnaround this way:

“The state is proceeding with its low-key recovery approach, working hand-in-hand with Mayor Guardian’s administration and the City Councilinsofar as politically feasible, and when not, pushing ahead using the authority in the law.  A few fits and starts with some challenges along the way, but it is a generally forward, positive trajectory. The recent Superior and Appellate decisions affirmed (or until appealed to the Supreme Court) the validity of New Jersey’s authority under the law, which eliminated the uncertainty of the last year. That’s good.  Jeff Chiesa’s team can now work with the city’s administration to make the changes which have long been discussed: reducing costs, modifying service levels and workforce size, in order to meet the city’s needs today given its new and evolving economy.”

In answer to the query what still remains to be addressed, he noted that the hard political issue of payments in lieu of taxes is being challenged by the neighboring County Executive and mayors of surrounding jurisdictions.  He reports that finding a “chunk of money to bring down long-term debt” to enable reductions in the city’s property tax is still a challenge—as is the enduring question with regard to how to address the water authority: how can it be monetized and meet the city’s interest in not losing ownership of it.  

From a governance perspective, he notes that the State of New Jersey had managed to keep all these issues relatively low-key: negotiations have been undertaken far from the public spotlight—mayhap depriving the public of critical information, but, at the same time, facilitating fiscal progress in avoiding the once, seemingly certain municipal bankruptcy.

Importantly, he adds that Atlantic City’s evolving economy cannot be ignored: “We’ve seen new investment and construction; new market rate rentals, South Jersey Gas moving its headquarters to Atlantic City; there is a new Stockton State University campus, and the pending revitalization and reopening of the shuttered Taj Mahal as a Hard Rock casino: “casino gaming revenues are up as we slide into the prime season.” Finally, he writes: “We seem to be getting to the point of ‘right-sizing’ the city, both economically and governmentally…which may be complicated by the pending elections—where the issue will be the upcoming primary battle to determine who will run against Mayor Guardian this fall.

Could There Be Promise in PROMESA? PROMESA Puerto Rico Oversight Board Chair José Carrión has advised the Governor Rosselló that the board has deferred until a week from Monday for either the board approving the Governor’s budget or notifying the Governor of violations and providing a description of corrective actions, writing: “We have received a working draft of the proposed budget, and are reviewing the submission and its completeness…The board will provide the Governor an additional 14 days to amend and improve the submission before it approves it or identifies violations.” The Governor’s working draft has yet to be made public; and constructing it will be perilous: according to the PROMESA board-certified fiscal plan, as of mid-March the Board expects the Governor to add nearly $924 million in revenues and cut $951 million in expenses from Puerto Rico’s All Government Activities budget—changes in a deteriorating economy the equivalent of nearly 10% of the Commonwealth’s budget.

Dr. José G. Caraballo, a professor in the Department of Business Administration at the University of Puerto Rico at Cayey, who also serves as the Director of the Census Information Center at the University, this week provided some perspective—or what he called “conjectures” with regard to the cause of what he called Puerto Rico’s “unsustainable indebtedness,” noting one hypothesis is that a “bloating” government inflated the government payroll, increasing the need to borrow. That perspective is valuable: for instance, he writes: “Even when there is no academic study showing that the payroll is payable or not, the proportion of government employees to the overall population aged 16 and older was lower in 2001 than in 1988, when there were no debt problems. In fact, the ratio of government workers to the population, ages 16-64, in 2013 was 10.3 percent in the U.S. and 11.2 percent in Puerto Rico, reducing the validity of this claim.”

Addressing the hypothesis that reckless and corrupt administrations had caused Puerto Rico’s fiscal and debt crisis, he noted: “I acknowledge that fiscal mismanagement has exacerbated this crisis, but there are studies showing that the (low) quality of administrators was similar from 1975-2000, and there is no evidence that the corruption of the 2000s was worse than the corruption in the 1970s or 1980s, when there was no debt crisis,” adding that “debt (measured in the correct way, either adjusted for inflation or as a share of gross domestic product) actually decreased from over the decade from 1977-1987.”  

Finally, he turned to an underlying issue: the disparate treatment of Puerto Rico created by §936 of the Internal Revenue Code—under which the industrial incentives provided to Puerto Rico were stripped, undercutting the island’s economy and disadvantaging it compared to other Caribbean nations: he noted that the proportion of manufacturing left the U.S. territory without any substitutable economic strategy, reduced government revenues, and increased Puerto Rico’s dependency on external funding—noting that in 1995, manufacturing represented 42% of Puerto Rico’s GDP, creating more than 30% of the local bank deposits and generating 17% of the total direct employment. Thus, he added; “It is far from a coincidence that when the transition period of the §936 ended in 2006, Puerto Rico entered the largest economic depression in more than 100 years. I verified the relationship between this deindustrialization and indebtedness with advanced statistical methods in a recent paper.”

Dr. José G. Caraballo offered that Congress could include Puerto Rico in the Guam-Northern Mariana Islands Visa Waiver Program—a change which he suggested would draw more tourists from Asia; remove the federal navigation acts which force Puerto Ricans to exclusively contract expensive U.S. vessels; implement new industrial policies; or provide parity in the distribution of Medicare and Medicaid assistance.