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

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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.