On the Hard Roads of Fiscal Recovery

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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.

Exiting State Fiscal Oversight–After Emerging from Municipal Bankruptcy

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eBlog, 04/28/17

Good Morning! In this a.m.’s eBlog, we consider the consider the unique fiscal challenge confronting Detroit: how does it exit from Michigan state oversight?  

What Is Key to the Windy City’s Future? Detroit Mayor Mike Duggan testifying: “It’s gonna happen!” before a Michigan state House panel, advised legislators that the Motor City could meet requirements to end the state’s financial oversight next year; at the same time, he urged the lawmakers to do something about the city’s high auto insurance costs. He noted that Detroit has paid $7 billion of its $18 billion in debt and obligations after emerging from chapter 9 municipal bankruptcy in 2014, in an effort to demonstrate why such oversight ought no longer to fiscally oversee the city. The state-appointed Financial Review Commission—which oversees all major Detroit operations and labor contracts—was created amid the nation’s largest ever municipal bankruptcy to ensure the city’s recovery was well handled. But now, the Mayor testified, state oversight is interfering, instead of helping, because all major city and labor contracts are delayed 30 days awaiting for approval from the state oversight commission. He and John Walsh, Gov. Rick Snyder’s Director of Strategy, told lawmakers on the House committee that the city’s “grand bargain” agreement to devote hundreds of millions of dollars in state and private philanthropy aid, in part to alleviate some pension cuts to city retirees, has helped with trimming unemployment, slowed population losses, and encouraged development projects. Mr. Walsh, a former state representative from Livonia who played a key role in securing the $195 million in state aid for Detroit, said the city is “well managed,” noting: “It wasn’t just broke. It was broken.” Now, Mr. Walsh said the city is on its way to better times. As evidence of the city’s recovery, Mayor Duggan stressed to lawmakers that thousands of street lights have been installed, blighted houses have been demolished, emergency response times have improved, and buildings revitalized. Nevertheless, the Mayor continued his lobbying of lawmakers to address high auto insurance costs, warning: “If you can’t afford the car insurance, you either drive to work illegally or you lose your job…People are being ripped off,” he said, because of rising health care costs associated with auto insurance—which, he warned, hikes overall rates. Mr. Walsh testified that the economic health of Metro Detroit affects the entire state, because it accounts for 44 percent of Michigan’s total sales and income tax revenue. “All in all, I think it was a very successful effort. There are plenty of challenges ahead to be sure.” Mayor Duggan made the comments just a day after the filing deadline for the mayoral election—an election for which an even dozen challengers have already submitted petitions, while the only other certified candidate on the ballot than the incumbent is Michigan State Senator Coleman Young II, the son of the city’s first black mayor.

As evidence of the city’s recovery, Mayor Duggan noted that Detroit’s ambulance response time dipped below the national average last week for the first time in at least a decade, as he was speaking before a House committee in Lansing with regard to the critical “Grand Bargain” which marked the keystone to the city’s gaining former U.S. Bankruptcy Judge Steven Rhodes’ approval of the city’s plan of debt adjustment to exit chapter 9 bankruptcy. Testifying that the average response time for the city’s emergency medical services was 7 minutes and 58 seconds last week, a response time besting the national EMS average, Mayor Duggan noted: “We did it in a boring way,” telling the panel his administration hired more emergency medical technicians and improved maintenance to make sure ambulances work properly. He did not remind them that at no point during the city’s largest in American history chapter 9 bankruptcy had there been any disruption in 9-1-1 service, but did testify that average EMS response times in Detroit were close to 20 minutes for life-threatening calls subsequently, when he first took office in 2014—a time when the city had six EMS rigs, compared to the 37 which are in service during peak times today. The Mayor added the city is on track to deliver its third balanced budget this June, setting the stage for an exit in early 2018 from state oversight under the Detroit Financial Review Commission—which was adopted to monitor the city’s post-bankruptcy finances. The commission would not dissolve, however, and it could resume oversight in the event the city’s finances worsen.

Municipal Fiscal Accountability

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eBlog, 03/31/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Atlantic City after its “lost decade,” before venturing inland to one of the nation’s oldest cities, Wilkes-Barre, Pennsylvania (founded in 1769) as it confronts the challenges of an early state intervention program, and, finally, to Southern California, where the City of Compton faces singular fiscal distrust from its citizens and taxpayers.  

A Lost Fiscal Decade? Atlantic City’s redevelopment effort appears to be gathering momentum following a “lost decade” which featured the closing of five casinos, a housing crisis and major recession, according to a new report released by the South Jersey Economic Review, with author Oliver Cooke writing: “The fact remains that Atlantic City’s redevelopment will take many years…The impact of the local area’s economy’s lost decade on its residents’ welfare has been stark.” The study finds the city to be in recovery—to be stable, but that it is still in critical condition with some work to do.  Nevertheless, its vital signs from developers and its improving economy are all good: that is, while the patient may not regain all its previous strength and capability,  it can thrive: it is “over(cost),” and needs to lose some of the fat it built up by going on a (budget) diet—a road to recovery which will remain steep and tortuous, because it lacks the fiscal capacity it had 15 or 20 years ago—and has to slim down to reflect it.  That is, the city will have to stress itself more in order to get better.  

The analysis, which was conducted in conjunction with the William J. Hughes Center for Public Policy at Stockton University, notes that vital signs from developers and its improving economy are in good condition—maybe even allowing the city to thrive, even if it is unable to regain all its previous strength and fiscal capacity—put in fiscal cookbook terms: Atlantic City is over(cost)weight and needs to lose some of the fat it built up by going on a (budget) diet.  The report also noted that Atlantic City is on track with some positive developments, including the decision at the beginning of this month by Hard Rock International to buy and reopen the closed Trump Taj Mahal property, as well as a recent $72 million settlement with the Borgata Hotel Casino & Spa related to $165 million in owed tax refunds. Mr. Cooke also highlighted other high-profile projects underway, including the reopening of the Showboat casino by developer Bart Blatstein and a $220 million public-private partnership for a new Stockton University satellite residential campus. Nonetheless, he warned that Atlantic City still faces a deep fiscal challenge in the wake of the loss to the city’s metropolitan area of more than 25,000 jobs in the last decade—and its heavy burden of $224 million in municipal bond debt, tied, in large part, to casino property tax appeals. Ultimately, as the ever insightful Marc Pfeiffer of the Bloustein Local Government Research Center and former Deputy Director with the state Division of Local Government Services, the city’s emergence from state control and fiscal recovery will depend on the nuances of the that relationship and whether—in the end—the state imposed Local Finance Board acts with the city’s most critical interests at heart.  

Don’t Run Out of Cash! Wilkes-Barre, first incorporated as a Borough in 1806, is the home of one of Babe Ruth’s longest-ever home runs. It became a city in 1871: today it is a city of over 40,000, but one which has been confronted by constant population decline since the 1930s: today it is less than half the size it was in 1940 and around two-thirds the size it was in 1970. It is a most remarkable city, made up of an extraordinary heritage of ethnic groups, the largest of which are: Italian (just over 25%), Polish (just under 25%), Irish (21%), German (17.9%) English (17.1%) Welsh (16.2%) Slovak (13.8%); Russian (13.4%); Ukranian (12.8%); Mexican (7%); and Puerto Rican (6.4%). (Please note: my math is not at fault, but rather cross-breeding.) Demographically, the city’s citizens and families are diverse: with 19.9% under the age of 18, 12.6% from 18 to 24, 26.1% from 25 to 44, 20.8% from 45 to 64, and 20.6% who are 65 years of age or older. The city has the 4th-largest downtown workforce in the state of Pennsylvania; its family median income is $44,430, about 66% of the national average, and an unemployment rate of just under 7%. The municipality in 2015 had a poverty rate of 32.5%, nearly double the statewide average. Last year, the City of Wilkes-Barre was awarded a $60,000 grant through the Pennsylvania Department of Economic Development (DCED) Early Intervention Program (EIP) to develop a fiscal, operational and mission management 5 year plan for the city—from which the city selected Public Financial Management (PFM) as its consultant to assist in working with the city on its 5 year plan—and from which the city has since received PFM’s Draft Financial Condition Assessment and Draft Financial Trend Forecasting related to the city’s 5 year plan. As part of the intervention, two internal committees were created to develop new sources of revenue for the city. The Revenue Improvement Task Force is comprised of employees from Finance, Tax, Health, Code, and Administration and was directed to analyze and improve upon existing revenue streams; the Small Business Task Force was designed to develop guidance for those interested in opening small businesses in Wilkes-Barre and is comprised of employees from Zoning, Health, Code, Licensing, and Administration. Overall, Mayor Anthony “Tony” George and his administration are confident that they have made significant progress is restoring law and order via the city’s goals of strengthening intergovernmental relationships, improving public safety, fixing infrastructure, fighting blight, restoring and improving city services and achieving long-term economic development.

Nevertheless, the quest for fiscal improvement and reliance on consultants has proven challenging: some of PFM’s proposed options to address city finances have caused a stir. City council Chairwoman Beth Gilbert and City Administrator Ted Wampole, for instance, agreed privatizing the ambulance and public works services as a cost-saving measure was one of the most drastic steps proposed by The PFM Group of Philadelphia, with Chair Gilbert noting: “I stand vehemently against any privatization of any of our city services, especially as an attempt to save money;” she warned the city could end up paying more for services in the long run, and residents could receive less than they get now—adding: “If privatization is on the table, then so is quality.” The financial consultant hired last year for $75,000 to assist the city with developing a game plan to fix its finances under the state’s Early Intervention Program was scheduled to present the options at a public meeting last night at City Hall. PFM representatives, paid from the combination of a $60,000 state grant and $15,000 from the city, have appeared before council several times since December.

Gordon Mann, director of The PFM Group, last night warned: “If the gunshot wound to the city’s financial health doesn’t kill it, the cancer will: both need to be treated, but not at the same time…You need to address the bullet wound, and you need to put yourself in the position to address the cancer.” Mr. Mann, at the meeting, provided an update on where the city stands and where it’s going if nothing is done to address the municipality’s structural problems of flat revenues and escalating expenses for pensions, payroll and long-term debt; then he identified a number of steps to stabilize the city and balance its books, beginning with: “Don’t run out of cash,” and “[D]on’t bother playing the blame game and pointing the finger at prior administrations either,…It may not be your fault, but it is your problem.”

Wilkes Barre is not unlike many of Pennsylvania’s 3rd class cities (York, Erie, Easton, etc.), all in varying degrees of fiscal distress, albeit with some doing better than others. The municipal revenues derived from the property tax and earned income tax will simply not sustain a city like Wilkes Barre—that it, unless and until the state’s municipalities have access to collective bargaining/binding arbitration and pension reform: the current, antiquated revenue options leave the state’s municipalities caught between a rock and a hard place. Worse, mayhap, is the increasing rate of privatization—where an alarming trend across the Commonwealth of communities selling off assets (water, sewer, parking, etc.), more often than not to plug capital into pensions, is, increasingly, leaving communities with no assets and with no pension reform facing the same issue in the future. 

Not Comping Compton: Corruption & Fiscal Distress. In Compton, California, known as the Hub City, because of its location in nearly the exact geographical center of Los Angeles County, the City of Compton is one of the oldest cities in the county and the eighth to incorporate.  The city traces its roots to territory settled in 1867 by a band of 30 pioneering families, who were led to the area by Griffith Dickenson Compton—families who had wagon-trained south from Stockton, California in search of ways to earn a living other than in the rapidly depleting gold fields, but where, the day before yesterday, the city’s former deputy treasurer was arrested for allegedly stealing nearly $4 million from the city. FBI agents arrested Salvador Galvan of La Mirada on Wednesday morning, as part of a federal criminal complaint filed Tuesday, alleging that, for six years, Mr. Galvan skimmed about $3.7 million from cash collected from parking fines, business licenses, and city fees: an audit found discrepancies ranging from $200 to $8,000 per day. Mr. Galvan, who has been an employee of the city for twenty-three years, has been charged with theft concerning programs receiving federal funds. If convicted, he could face up to five years in prison. As Joseph Serna and Angel Jennings of the La Times yesterday wrote: “The money adds up to an important chunk of the budget in a city once beset with financial problems and the possibility of [municipal] bankruptcy.” Prosecutors claim that one former city employee saw all these payments as an opportunity, alleging that the former municipal treasurer, over the last six years, skimmed more than $3.7 million from City Hall, taking as much as $200 to $8,000 a day—small enough, according to federal prosecutors, to avoid detection, even as Mr. Galvan’s purchase of a new Audi and other upscale expenses on a $60,000 salary, raised questions.

The arrest marks a setback for the Southern California city which has prided itself in recent years for its recovery from some of the crime, blight, and corruption which had threatened the city with municipal insolvency—or, as Compton Mayor Aja Brown noted: the allegations “challenge the public’s trust.”  Mayor Brown noted the wake-up call comes as the city has been working in recent months to improve financial controls and create new processes for detecting fraud—even as some of the city’s taxpayers question how the city could have missed such criminal activity for so many years. The Los Angeles County Sheriff’s Department had arrested Mr. Galvan last December in the wake of City Treasurer Doug Sanders’ confirmation with regard to “suspicious activity” in a ledger discovered by one of his employees: his position in the city involved responsibility for handling cash: as part of his duties, he collected funds from residents paying their water bills, business licenses, building permits, and trash bills. According to reports, Mr. Galvan maintained accurate receipts of the cash he received for city fees, but he would submit a lower amount to the city’s deposit records and, ultimately, on the deposit slips verified by his supervisors and the banks, according to federal prosecutors. Indeed, an audit which compared a computer-generated spreadsheet tracking money coming in to the city with documents Mr. Galvan prepared made clear that he had commenced skimming cash in 2010—starting slowly, at first, but escalating from less than $10,000 to $879,536 by 2015, a loss unaccounted for in the city’s accounting system. While Mr. Galvan faces a maximum of 10 years in federal prison, if convicted, the city faces a trial of public trust—or, as Mayor Brown, in a statement, notes: “Unfortunately, the actions of one employee can challenge the public’s trust that we strive daily as a City to rebuild…The alleged embezzlement and theft of public funds is an egregious affront to the hard-working residents of Compton as well as to our dedicated employees. The actions of one person does not represent our committed City employees who — like you — are just as disappointed.”

States & Municipal Accountality

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eBlog, 2/06/17

Good Morning! In this a.m.’s eBlog, we consider the new municipal accountability system proposed by Connecticut Gov. Daniel Malloy to create a new governance mechanism which could trigger early state intervention, then we head west to consider whether Detroit voters will re-elect Mayor Mike Duggan to a second term.  

Municipal Accountability, or “Preventing a Train Wreck.” Connecticut Governor Daniel P. Malloy, noting that “Our towns and cities are the foundation of a strong and prosperous state,” said: “Healthy, vibrant communities—and thriving urban centers in particular—are essential for our success in this global economy…In order to have vibrant downtowns, retain and grow jobs, and attract new businesses, we need to make sure all of our municipalities are on solid fiscal ground or on the path to fiscal health.” Ergo, the Governor has proposed a new municipal accountability system intended and designed to provide early intervention for the Nutmeg State’s cities and towns before they slip into severe fiscal trouble—a signal contrast to, for instance, New Jersey—where, as we have noted, such intervention is after the fact; Alabama, where the state not just refused to act, but actually facilitated Jefferson County’s chapter 9 municipal bankruptcy by barring the city from raising its own revenues; California, where the state has absented itself from playing any role in responding to municipal bankruptcy or fiscal distress—and Michigan, where the state acts early to intervene through the appointment of Emergency Managers—albeit such intervention has, as we have observed in the instances of the City of Flint and the Detroit Public Schools contributed to not just worsening the fiscal crises, but also endangered human lives—especially of young children and their futures.

Gov. Malloy’s proposal would create:

  • a four-tier ranking for municipalities in fiscal or budgetary distress,
  • an enhanced state evaluation of local fiscal issues, and
  • a limit on annual property tax increases for cities and towns deemed at greatest risk of fiscal insolvency.

Currently, Connecticut’s chief budget and policy planning agency, the Office of Policy and Management, routinely reviews annual audits for all municipalities. Under Gov. Malloy’s new proposal, which will be outlined in greater detail the day after tomorrow in Gov. Malloy’s new state biennial budget plan, OPM and a new state review board will have added responsibilities to review local bond ratings, budget fund balances, mill rates, and state aid levels—all with a goal of creating a new, four-tiered municipal fiscal early warning system focused on the identification of municipalities confronting fiscal issues well before their problems approach the level of insolvency. Under his proposal, Connecticut cities and towns with the most severe challenges and risks would be assigned to a higher tier—a tier in which there would be increased state focus and, if the system works, greater state-local collaboration. As proposed, a municipality might be assigned to one of the first three tiers if it has a poor fund balance or credit rating, or if it relies on state aid for more than 30 percent of its revenue needs. In such tiers, the state’s cities and towns would face additional reporting requirements. Moreover, cities and towns in Tiers 2 and 3 would be barred from increasing local property tax rates by more than 3 percent per year. For cities and towns in the lowest fiscal category, the fourth tier, the state would also impose a property tax cap. For these municipalities, the state review board could:

  • Intervene to refinance and otherwise restructure local debt;
  • Serve as an arbitration board in labor matters;
  • Approve local budgets;
  • And appoint a manager to oversee municipal government operations.

The system proposes some flexibility: for instance, a municipality would be assigned to a lowest tier, Tier 4, only if it so requested from the state, or if two-thirds of the new state review board deemed such a ranking necessary, according to Governor Malloy—who estimated that about 20 to 25 of the state’s 188 municipalities might be assigned any tier ranking under his proposal, who described those municipalities which might act to seek to work more closely with the state as ones confronted by “pockets of poverty.”

In response, Connecticut Conference of Municipalities Executive Director Joe DeLong said the Connecticut municipal association appreciated the Governor’s efforts to foster dialogue and had “no issue” with his proposals, but said they should be accompanied by other changes, noting: “The overreliance on property taxes, especially in urban areas where most of the property is tax exempt continues to be a recipe for disaster…Oversight without the necessary structural changes, only insures that we will recognize an impending train wreck more quickly. It does not prevent the wreck.”

This Is His City. Detroit Mayor Mike Duggan this weekend vowed to “fight the irrational closing” of a number of public schools in the city, as he initiated his re-election campaign—and, mayhap, cast a swipe at President Trump’s Education Secretary cabinet choice. Making clear that he would not be running what he termed a “victory lap campaign,” he vowed he would seek to change the recovering city’s focus towards “creating a city where people want to raise their families,” vowing to work hand-in-hand with the Detroit Public Schools Community District School Board in the wake of the Michigan School Reform Office’s recent decision to close low-performing public schools in Detroit and another elsewhere in the state—a state action which could shutter as many as 24 of 119 city schools at the end of this academic year, and another 25 next year if they remain among the state’s lowest performers for another year, based on state rankings released this month which mark consistently failing schools for closure. Mayor Duggan added that he had called Gov. Rick Snyder at the end of last week to tell him the closure is “wrong” and that the school reform office efforts are “immoral, reckless…you have to step in.” Mayor Duggan noted that “[R]eform means first you work with the teachers in the school to raise that performance at that school; second you don’t close the school until you’ve created a quality alternative…Neither one of those has happened here.” The Mayor met yesterday with the school board leadership, and has noted that Gov. Snyder had originally taken the position that closure of the city’s schools would create a legal issue, adding: “You do not have a legal right to have no schools when the children have no reasonable alternative nearby…I’m going to be working with the Detroit public schools…We want to start by sitting down together with the Governor and coming up with a solution. That’s going to be the first order of business.”

Detroit Public Schools Community District School Interim Superintendent Alycia Meriweather thanked Mayor Duggan over the weekend, saying: “As stated multiple times, we do not agree with the methodology, or the approach the (state school reform office) is using to determine school closures, and we are cognizant of the fact that all of the data collected is entirely from the years the district was under emergency management…Closing schools creates a hardship for students in numerous areas including transportation, safety, and the provision of wrap around services…As a new district, we are virtually debt free, with a locally elected board; we deserve the right to build on this foundation and work with our parents, educators, administrators, and the entire community to improve outcomes for all of our children.”

Ms. Ivy Bailey, the President of the Detroit Federation of Teachers, which represents about 3,000 city educators, noted: “The bottom line is this is his city…We don’t want the schools to close.” Ms. Bailey said the newly elected school board had just taken office and needs to be given an opportunity “to turn things around.” A representative for Gov. Snyder could not be immediately reached Saturday, nor could Detroit School Board President Iris Taylor.

Last week, Mayor Duggan picked up petitions to run for re-election, joining 14 others, according to records provided by the city’s Department of Elections. None of the prospective candidates have turned in signatures yet for certification. The filing deadline is April 25. The primary is August 8. The Mayor, when asked who his biggest competition is in the race, said only: “[T]his is Detroit, there’s always an opponent.” “There will be a campaign,” he said. “This is Detroit.”

Mayor Duggan comes at his re-election campaign to be the city’s first post chapter 9 leader after being schooled himself in hard knocks: in his first campaign, he had been knocked off the ballot when it was determined he had failed to meet the city’s one year residency requirement; ergo, he had run as a write-in candidate, and, clearly, run effectively: he received 45 percent of the vote in the primary, and had then earned 55 percent of the vote to become the Motor City’s first post-municipal bankruptcy Mayor. Thus, in his re-election effort, he has been able to point to milestones from his first term, including:

  • the installation of 65,000 new LED street lights,
  • improved police and EMS response times,
  • new city buses as well as added and expanded routes,
  • the launch of the Detroit Promise, a program to provide two years of free college to graduates of any city high school,
  • several major automotive manufacturing centers and suppliers,
  • and a new Little Caesars Arena which will be the future home of the Detroit Red Wings and Detroit Pistons,
  • The relocation by Microsoft (announced Friday) to downtown Detroit in the One Campus Martius building early next year,
  • The results, to date, of the city’s massive blight demolition program—a program which has led to the razing of nearly 11,000 houses, primarily with federal funding, since 2014 (albeit a program which has been the subject of a federal criminal investigation and other state, federal and local reviews after concerns were raised in the fall of 2015 over soaring costs and bidding practices.) Officials with the city and Detroit Land Bank Authority, which oversees the program, have defended the effort, and, last week, Mayor Duggan said an ongoing state review of the program’s billing practices turned up $7.3 million in what the state contends are improper costs. Ergo, Detroit will pay back $1.3 million of that total, but the remaining $6 million—mainly tied to a controversial set-price pilot in 2014—will go to arbitration.

Emerging from Municipal Bankruptcy: a Rough Ride

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eBlog, 1/04/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges for the U.S. city emerging from the nation’s largest ever municipal bankruptcy, Detroit; then we veer into the warm Caribbean waters to observe the first days of the new administration of Gov. Ricardo Rosselló in Puerto Rico—where his new administration must adjust to coming to terms with its own PROMESA oversight board.

A New Detroit? The city emerging from the largest ever municipal bankruptcy is witnessing a string of major construction projects, from a massive hockey arena and street car line downtown to the resurrection of the Wayne County jail project: changes which will reshape the Motor City’s downtown in 2017—a level of activity and investment which seemed most improbable as the city shrunk and then dissolved into chapter 9 municipal bankruptcy. Today, the construction detours and closed sidewalks seem to offer a welcome sign of a new era for many who live and work near downtown. According to recent statistics, office vacancies in the downtown area are at their lowest point in a decade, and now the addition of the city’s new rail line could open demand in the New Center area, as well as increase demand for office space in neighborhoods near downtown such as Corktown and Eastern Market. Notwithstanding, the Detroit Financial Review Board, created as part of Detroit’s plan of debt adjustment to secure the U.S. bankruptcy court’s approval to exit bankruptcy, in its most recent oversight report, noted that the city continues to confront an unexpected gap in its public pension obligations and the absence of a long-term economic plan, reporting in its fourth annual report that could leave the city vulnerable to further fiscal challenges.(The next certification is due by October 1, 2017: under the plan of debt adjustment stipulations, the review board is charged with reviewing and approving annual four-year financial plans.) Both previous such plans have been approved. The most recent plan, submitted at the end of November, projects a general fund surplus of at least $41 million for FY2016, based on budget projections; Detroit expects to finish the current fiscal year with a general fund surplus of about $30 million. Nevertheless, the city faces a double-barreled fiscal challenge: its public pension liabilities and high costs of borrowing. Because its junk territory credit ratings from Moody’s and S&P, Detroit is forced it to pay disproportionately higher interest rates on its bonds.

With regard to its pension liabilities, where Detroit’s plan of debt adjustment approved by now retired U.S. Bankruptcy Judge Steven Rhodes left intact public safety monthly checks, but imposed a 4.5% cut on general employees—and reduced or eliminated post-retirement (OPEB) benefits, as part of a mechanism to address some $1.8 billion in post-retirement obligations, the approved plan nevertheless suspended the COLa’s only until 2024—so a longer term liability of what was originally projected to be $111 million pends. (Indeed, the city’s pension agreement withstood a challenge last Fall when a federal appeals court ruled in favor of Detroit in a lawsuit by city retirees whose pensions were cut as part of the city’s approved plan of debt adjustment, after some retirees had sued, claiming they deserved the pension which was promised before the city filed for bankruptcy in 2013, with U.S. Judge Alice Batchelder of the 6th Circuit Court of Appeals noting it was “not a close call.”)

But, as Shakespeare would put it: ‘There’s the rub.” Detroit’s actuaries, in their 2015 actuarial valuation reports, projected the liability in FY2024 and beyond to be nearly $200 million, based upon a thirty year amortization, with level principal payments and declining interest payments; however, as we have previously noted, those estimates were based upon optimistic estimates of assumed rates of return of 6.75 percent. In response, Detroit set aside $20 million from this year’s FY2016 fund balance, $10 million from its FY2016 budgeted contingency fund, and added an additional $10 million for each of the next three fiscal years—or, as Detroit Finance Director John Naglick told the Bond Buyer: “The city has six fiscal years to make an impact and close the gap on the [pension] underfunding. We don’t want to create such a cliff in 2024 where there is a big budget shock…The reality is to find those kind of monies over the next six fiscal years will cause some tradeoff in services.” Director Naglick added that last month Detroit completed an updated decade-long plan to update its approved plan of debt adjustment, adding: “The 10-year model will show the FRC that this incremental funding can be folded into the budget, but we aren’t naïve, it will also create some disruption in services to accommodate that…Think of it as a master plan on how we are going to make this stable.” Nevertheless, Mr. Naglick’s challenge will be hard: Moody’s last summer warned that the city’s “very weak economic profile” makes it susceptible to future downturns and population loss—threatening its ability “to meet its requirement to resume pension funding obligations in fiscal 2024.” Detroit’s next deadline looms: The City must submit its FY18-FY21 Four-Year Financial Plan to the Financial Review Commission by the statutory deadline of March 23rd.

Puerto Rico: A New Chapter? The new Governor of Puerto Rico, Ricardo Rosselló, yesterday, in the wake of his swearing in, acted straightaway on his first day in office to cut government spending and revenues, amid greater urgency to take steps to avoid a massive out-migration and end ten years of economic recession, and increase efforts to stem vital population losses which in 2013 alone witnessed some 74,000 Puerto Ricans leave the island. The new governor has already signed five executive orders, cutting annual agency spending by 20 percent, encouraging asset privatization, and proposing a zero based budgeting standard. Efforts like these, if actually implemented (a crippling risk in the context of historical Puerto Rico governance), could represent strides towards achieving fiscal solvency and help lay the groundwork for economic recovery. Governor Rosselló directed his agency heads to implement zero-based budgeting, under which agency heads start with a $0 and only adds to it when they can provide a justification for particular programs. Gov. Rosselló also created a Federal Opportunity Center attached to the governor’s office. The center will provide technical and compliance assistance to the office to make programs eligible for federal funds. For the new Governor, the three keys to recovery appear to be: how to revive the economy, fix the territory’s fiscal situation, and address the public debt.

The key, many believe, would be to opt for Title VI of the new PROMESA law, the voluntary restructuring portion. A growing concern is to create job opportunities—with one leader noting: “Many will leave if they cannot find jobs to search off the island for a better quality of life: our cities have to be habitable and safe…it has to be a place where the world wants to come to live…” Governor Rosselló also signed six executive orders, directing his department heads to cut 10 percent in spending from the current budget and to reduce the allocations for professional services by a similar amount—with even deeper cuts in other hiring; he imposed a freeze on new hires, noting: “We do not come to merely administer an archaic and ineffective scaffolding: Ours will be a transformational government.” Nevertheless, his task could be frustrated by the Puerto Rico House, where, yesterday, El Vocero reported that Puerto Rico House of Representatives President Carlos Méndez Núñez had told the newspaper last weekend that the legislature would cut Puerto Rico’s sales and use tax rate and the oil tax rate, reversing steps by the prior governor and legislature over the last four years. Governor Rosselló also pledged to work with the PROMESA Oversight Board in a collaborative way, as he departed the island to meet with members of the new Congress in Washington, D.C., where he planned to lobby for statehood for the U.S. territory.

With new administrations in San Juan and Washington, Gov. Rosselló will also have to work out a relationship with the PROMESA board, as the absence of cash to pay debt service, combined with the current payment moratoriums and federal stay on bondholder litigation appear destined to be extended deep into the year, albeit some anticipate that under the incoming Trump administration, one which will have much closer ties to creditor groups than the outgoing Obama administration, could lead to efforts to restart formal bondholder negotiations—negotiations which could become a vehicle by means of which creditors would increase their investment in Puerto Rico risks, by means of new loans and/or partial restructuring of liabilities in ex-change for a settlement which would be intended to improve long term municipal bond-holder recoveries and, most critically, work to enhance the price evaluations of Puerto Rico’s general obligation municipal bonds. Nevertheless, the territory’s structural, long-term budget deficit of nearly $70 billion over the next decade risks crowding out any medium-term payment of debt service absent serious spending reform as well as public pension reform—especially because of the ongoing outflow of young persons seeking better economic opportunities on the mainland.

The Avoidance of Fiscal Contagion

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eBlog, 12/15/16

Good Morning! In this a.m.’s eBlog, we consider the role of leaders appointed or named by municipalities with regard to the integrity of coming back from chapter 9 municipal bankruptcy or insolvency; then we turn to some of the critical factors which have played key roles in San Bernardino’s emergence from the nation’s longest municipal bankruptcy, before, finally, heading into the frigid physical gale and fiscal maelstrom of Atlantic City to consider not only the challenge for a state in taking over a municipality—but also the challenge of avoiding fiscal distress contagion.

Doubting Governance. The Detroit News, in its analysis of state and federal court records, tax filings, and interviews; reported that said analysis raised questions about the ability of some Detroit Development Authority (DDA) members to oversee one of the largest publicly subsidized downtown construction projects since Detroit emerged from chapter 9 municipal bankruptcy. The paper’s analysis also revealed a shortcoming of the city’s appointment process—noting it omitted any requirement for DDA members to undergo criminal or financial background checks, despite the fact that the Motor City’s DDA has approved some $250 million in taxes on Little Caesars Arena, even as the DDA is “dominated by tax delinquents with financial problems and in some cases criminal records,” according to public records.

As in most cities, the arena is being financed via the issuance of municipal bonds, under an agreement approved three years ago, where municipal taxes are to be dedicated to paying off $250 million worth of bonds issued by a branch of state government financed by the Michigan Treasury department—a department which has charged a number of DDA members of being tax delinquents. The paper adds that a majority of those appointed have a “history of financial issues,” including more than $500,000 in state and federal tax debt, according to public records. The News noted that details about the DDA members’ financial history offered some insight into a municipal public authority which all too often operates in secret—in this instance an authority whose members are appointed by the Mayor, approved by the City Council, and who then work with professional staff from the nonprofit Detroit Economic Growth Corp.; however, unlike almost every municipal or county public authority, the DDA board does not post agendas, minutes, or accurate meeting schedules; its members are not required to submit to a criminal or financial background check. (Members on the board are not compensated.) Indeed, Mayor Mike Duggan’s chief of staff Alexis Wiley, responding to inquiries by the News, said: “Really, every single person on the board has served the city of Detroit well…They’ve had personal financial challenges, but they have displayed good judgment as board members.” Malinda Jensen, the Detroit Economic Growth Corp.’s senior vice president of board administration and governmental affairs, in a statement to the News, noted: “The public funds contributing to the repayment of construction bonds to build the downtown arena come from a dedicated stream of revenue authorized by state law, approved by the DDA board as a whole, ratified by several votes of the full City Council…audited by independent accountants, and safeguarded in the terms of the sale of the bonds to financial institutions…Those funds are very well protected.” She added: “No individual on the board has any direct ability to access any public funds, and all decisions of the DDA are by majority votes in a public meeting,” adding that the DDA has a quarter-century of clean audits by an independent certified public accounting firm, she said. And DDA members are barred from voting on issues in which they have a direct financial interest, Ms. Jensen added, noting: “We all were impacted in some way through this financial crisis…I’d be curious about what some of that had to do with some of the reports you are hearing on some of these individuals.”

Would that governance and personal integrity were so simple, but, in this case, it turns out that two DDA members with a history of financial problems are also high-ranking members of the Mayor’s administration, with one running Detroit’s neighborhoods department—in this case a long-time municipal employee who has worked for every Mayoral administration since former Mayor Coleman Young, but who has also filed for bankruptcy, lost a home to foreclosure, and failed to pay $250,691 in state and federal taxes, according to public records—and served two years in federal prison in the wake of being found guilty in 1984 of receiving more than $16,000 in illegal payoffs from a sludge-hauling company—at the very time he was serving as Detroit’s Director of the city’s ill-fated Water and Sewerage Department. The paper notes that his colleague at City Hall, Corporation Counsel Melvin “Butch” Hollowell, has faced his own series of state and federal tax liens over the most recent five years: he has been accused of failing to pay more than $60,000 in federal and state taxes, although he has, according to public records, this year managed to pay off all of the debt. The News quoted University of Virginia Law School tax expert George Yin about its findings with regard to the troubled financial records of DDA members, and their fiscal integrity as it relates to their public responsibilities to oversee publicly funded sports arenas—to which Mr. Yin responded: “Given the kind of doubtful or questionable nature of public subsidies for these facilities, you want the people making decisions to be people whose judgment has been proven to be right over and over again.”

The Precipitous Road to Bankruptcy’s Exit Ramp. The City of San Bernardino, once the home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad—yesterday, some twenty-two years later, received a report from the Inland Valley Development Agency’s annual review that, for the first time, it has more than restored all of the jobs and economic impact lost when the base closed: indeed, the review found that the 14,000-acre area of the former base now employs 10,780 people and is responsible for an economic output of $1.89 billion, surpassing the totals lost when the base closed in 1994. What has changed is the nature of the jobs: today these are predominantly logistics, with Amazon’s 4,200 employees and Stater Bros. Markets’ 2,000 employees accounting for more than half of the total. Economist John Husing, whose doctoral thesis studied the economic impact of Norton Air Force Base, yesterday told the San Bernardino Sun: “The jobs that have come in are comparable or better than the jobs that were lost…Because of the spending pattern difference between civilians and military personnel, you only needed 75 percent of the number of people working there to replace the economic impact,” adding that that was because much of the spending by Norton’s employees was at the on-base store, so the money did not recirculate into the local economy—adding that that job total does not include an additional 5,000 part-time jobs created by Amazon and Kohl’s during the Christmas shopping season; nor does it include an additional 5,000 indirect jobs that help build nearly $1.9 billion of total economic benefit. Moreover, with the exception of the San Bernardino International Airport itself (the fourth-largest source of jobs in the project area, with 1,401), the major employers are not directly tied to the former role of the base. Nevertheless, as Mr. Burrows noted: it took planning and preparation to get those companies to come to San Bernardino: “Without a lot of inducement from us—infrastructure, roadway improvements, Mountain View Bridge, for example, we wouldn’t have those jobs…“It’s been a longtime strategic effort, and we’re very pleased that we’re seeing some results.” Mr. Burrows added, moreover, that the Inland Valley Development Agency has more projects (and more jobs) in the works for 2017, including continued infrastructure work and a focus on workforce development: “We’re particularly going to focus on our K-12 schools, San Bernardino Valley College, and the (San Bernardino) Community College District in making sure we’re doing more on the workforce development side.” To do so will be a regional effort, via the agency—which is composed of representatives from San Bernardino County and the cities of Colton, Loma Linda, and San Bernardino—who are responsible for the development and reuse of the non-aviation portions of the former Norton Air Force Base. San Bernardino Mayor Carey Davis noted the Development Authority’s “development of the Norton Air Force Base has proven to be a great asset to the San Bernardino community. We have positively impacted the economy with the creation of jobs and new business,” adding it was “a fine example of the progress we have made in rebuilding San Bernardino.”

Fiscal Distress Contagion & State Preemption. The Atlantic City Council had a quick meeting yesterday in the wake of the state pulling two ordinances for further review—measures which would have raised rates and revised regulations for Boardwalk trams and adopted a redevelopment plan for Atlantic City’s midtown area, with the state asking the Council to pull the ordinances “indefinitely,” according to Council President Marty Small. Subsequently, Timothy Cunningham, the Director of the New Jersey Division of Local Government Services Director and the quasi-takeover manager of the city government, said his agency has had insufficient time to review the ordinances, stating:  “We’ll just revisit them in the new year…I don’t think there’s any objection to them. Just not enough time to fully vet them.” The statement reflects the post-state takeover governance and preemption of local authority. In this case, the issue in question relates to proposed tram rules, including increasing fares to $4 one way and $8 all day in the summer, and $3 one way and $6 all day in the off season—compared to $2.25 one way and $5.50 for an all-day pass. The ordinance would also have allowed the trams to carry advertisements—from which, according to sponsor Councilman Jesse Kurtz, the city would receive half the revenue from the ads.

Nevertheless, the discordant governance situation and unresolved insolvency of the city do not, at least according to Moody’s analyst Douglas Goldmacher, appear to be contagious, with the analyst writing there is only a “relatively mild” chance that the massive fiscal and governance problems of Atlantic City will contaminate Atlantic County: “While Atlantic City remains the largest municipality in the county and its casinos are currently the largest taxpayers, the county’s dependence on Atlantic City’s tax revenues continues to decline.” Moreover, he wrote: “State law offers considerable protection from the city’s financial trauma, and the county has demonstrated a history of strong governance.” Mr. Goldmacher added that the neighboring county has managed to partially offset Atlantic City’s declining tax base and gambling activity with growth in other municipalities—with Atlantic City’s share of the county tax base less than half what it was at its peak of 39% in 2007. The report notes that the county also benefits from a New Jersey statute which insulates the county from the city’s fiscal ills, because cities are required to make payments to counties and schools prior to wresting their share—noting that Atlantic City has never missed a county tax payment and was only late once—and, in that situation, only after special permission was granted in advance. Thus, Mr. Goldmacher wrote: “While Atlantic City has endured political gridlock, the county has achieved structural balance and demonstrated stability through budgeting accuracy, strong reserves and contingency plans…The county also has substantial fund balance and other trust funds and routinely prepares multiple budgets and tax schedules to account for Atlantic City’s uncertain fate.”

The Daunting Road to Recovery from the Nation’s Longest Ever Municipal Bankruptcy

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eBlog, 12/09/16

Good Morning! In this a.m.’s eBlog, we look back on the long and rocky road from the nation’s longest municipal bankruptcy back to solvency taken by the City of San Bernardino, a city in a Dillon Rule state, which we described in our original study as the former gateway from the East to Midwest of the L.A. basin and former home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad, but which in the 1990’s, with the departure of those industries and employees, fell into hard times. By the advent of the Great Recession, 46% of its residents were on some form of public assistance—and nearly one-third below the poverty line. By FY2012, the city faced a $45 million deficit; its fund balance and reserves were exhausted—leading the city to file for chapter 9 municipal bankruptcy (note California codes §§53760, 53760.1, 53760.3, 53760.5, and 53760.7—and where, effective on the first day of this year, new statutory state language specifically created a first lien priority for general obligation debt issued by cities, counties, schools, and special districts, so long as the debt was secured by a levy of ad valorum taxes pursuant to California’s Constitution.) As we have noted, in the 18 states which authorize chapter 9 filings, states have proscribed strikingly different legal mechanisms relating to the state role—varying from a state takeover, such as we have described in the case of the nation’s largest municipal bankruptcy in Detroit, but to a very different regime in Jefferson County and San Bernardino—where the elected municipal officials not only remained in office, but here the respective states—if anything—contributed to the severity of the fiscal challenges. Then we turn to what might be Congress’ last day in town this year—and whether funding to help the City of Flint might be enacted: Will Congress pass and send to the President a bill to provide emergency assistance to Flint?

Back to a City’s Viable Future. San Bernardino leaders this week issued a detailed statement on the arduous road to recovery they have travelled and what they intend for the road ahead, albeit noting the city is already well along its own blueprint for its recovery, as it awaits formal approval from U.S. Bankruptcy Judge Meredith Jury from its chapter 9 municipal bankruptcy early next year. In its statement, San Bernardino reported it had implemented about 70 percent of its recovery plan. That’s turned once-dire projections for the future upside down—a virtual u-turn from when the city’s fiscal analysts three years ago projected that in FY2023, the city would have a deficit of $360 million if dramatic changes were not achieved. But today, the city instead projects an unallocated cash balance for FY2023 of $9.5 million, or, as the statement reads: “Now, the city is on the cusp of emerging from bankruptcy as a changed city with a brighter future.” The municipal statement is primarily focused on the governance and fiscal changes made to create a virtual u-turn in the city’s fiscal ship of state since entering what became the nation’s longest municipal bankruptcy—a change in fiscal course without either state aid or state imposition of an emergency manager or a state takeover. The statement notes: “Given the emergency nature of its filing, it took the city several months to assess its financial condition—until April 2013, at which time the city adopted a final budget for fiscal years 2012-13 and 2013-14…The city’s initial financial assessment, however, only reflected further concern over its financial future. In September 2013, Mayor [Pat] Morris announced that absent fundamental modernization and change the city faced a 10-year deficit of a staggering $360 million. The future of San Bernardino looked bleak.”

The statement itemized what appeared to be the key steps to recovery, including achieving labor agreements—agreements which resulted in savings in excess of $100 million, and involved the termination of virtually all health insurance subsidies coverage for employees and retirees, writing that the city calculated the resulting savings to amount to about $44 million for retirees and $51 million for current employees. The statement notes some $56 million in other OPEB changes. A key—and hard-fought change—was achieved by contracting out for essential public services, with one of the most hard fought such changes coming from the annexation agreement with the San Bernardino County Fire Protection District: an agreement under which the county assumed responsibility for fire and emergency medical response—a change projected to save San Bernardino’s budget nearly $66 million over the next two decades just in public pension savings, but also as much as $5 to $6 million in its annual operating budget—and that is before adding in the parcel tax revenues which were incorporated in that agreement. San Bernardino also switched to contracting out for its trash and recycling—an action with a one-time franchise payment of $5 million, but increased estimated annual revenues of approximately $5 million to $7.6 million. The switch led to significant alterations or contracting out for an increasing number of municipal services. Or, as the paper the city released notes: “Modern cities deliver many services via contracts with third-party providers, using competition to get the best terms and price for services…The city has entered into a number of such contracts under the Recovery Plan.”

Governance. The city paper writes that the voters’ approval of a new city charter will allow San Bernardino to eliminate ambiguous lines of authority which had created a lack of authority, or, as U.S. Bankruptcy Judge Meredith Jury put it earlier this week: “(City officials) successfully amended their charter, which will give them modern-day, real-life flexibility in making decisions that need to be made…There was too much political power and not enough management under their charter, to be frank, compared to most cities in California.”

Rechartering San Bernardino’s Public Security. San Bernardino’s Plan of Debt Adjustment calls for increasing investment into the Police Department through a five-year Police Plan—a key step, as a study commissioned to consider the city’s public safety found the city to be California’s most dangerous municipality based on crime, police presence, and other “community factors.” The study used FBI data and looked at crime rates, police presence, and investment in police departments as well as community factors including poverty, education, unemployment, and climate: The report found a high correlation between crime rates and poverty—with San Bernardino’s poverty rate topping 30.6 percent. Thus, in the city’s Police Plan portion of its plan of adjustment, the report notes:  “The Mayor, Common Council, and San Bernardino’s residents agree that crime is the most important issue the city faces,” the city says in the Police Plan, submitted to the federal bankruptcy court as part of its plan. The plan calls for $56 million over five years to add more police, update technology, and replace many of the Police Department’s aging vehicles.

The Cost of Fiscal Inattention. Unsurprisingly, the fiscal costs of bankruptcy for a city or county are staggering. The city estimates that the services of attorneys and consultants will cost at least $25 million by the time of the city’s projected formal emergence from chapter 9 next March—albeit those daunting costs are a fraction of the $350 million in savings achieved under the city’s pending plan of debt adjustment—savings created by the court’s approval of its plan to pay its creditors far less than they would have otherwise been entitled: as little as 1 cent on the dollar owed, in many instances. Or, as the city’s statement wryly notes: “In addition, the city’s bankruptcy has allowed the city a reprieve during which it was able to shore up its finances, find greater cost and organizational efficiencies and improve its governance functions…Thus, all told, while the city’s exit from bankruptcy will have been a hard-fought victory, it was one that was critical and necessary to the city’s continued viability for the future.”

Out Like Flint. The House of Representatives on what it hopes to be its penultimate day yesterday approved two bills which, together, would authorize and fund $170 million for emergency aid to Flint and other communities endangered by contaminated drinking water. The emergency assistance came by way of a stopgap spending bill to keep the federal government operating next April in a bipartisan 326-96 vote and, separately, a water infrastructure bill which directs how the $170 million package should be spent by a 360-61 vote. Nevertheless, the aid for the city is not certain in the U.S. Senate: some have vowed to stop it, at least in part because the bill includes a controversial drought provision which would boost water deliveries to the San Joaquin Valley and Southern California.