Innovative, but Challenging Paths to Exiting Municipal Bankruptcy

May 25, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s has upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes. Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by former U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs. CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, the Bureau determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow. He has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates, or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, while according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing. 

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, more than three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the state has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • Effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date to have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $ 25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló Nevares, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

Ending the Long Delay? The Federal Emergency Management Agency (FEMA) yesterday announced it is accelerating community disaster loans to help Puerto Rico muncipios mitigate the loss of income due to natural disasters, the Government of Puerto Rico reaffirmed that, for the time being, as well as the approval of another $39 million in loans from the CDL program for the municipalities of Aguadilla, Cabo Rojo, Canóvanas, Carolina, Manatí, Mayagüez, Peñuelas, and Orocovis—with the approvals coming in the wake of  last month’s approvals for Bayamón, Caguas, Humacao, Juncos, Ponce, Toa Baja, and Trujillo Alto—meaning that, in total, FEMA has, to date, distributed at least $92.8 million for municipalities on the island and $371 million for the U.S. Virgin Islands, as part of the $4.9 billion loan passed by Congress to help local governments recover. At the same time, the U.S. territory’s Treasury Secretary Raúl Maldonado reported: “The administration (of Puerto Rico) has been very successful in lowering operational costs and achieving an increase in collections.” The new loans will offer access to the Puerto Rican Government through March of 2020, as Secretary Maldonado considers that it may be useful in case of another disaster or a drop in the income of public corporations.

Nevertheless, because Puerto Rico—unlike other U.S. states, is also under the authority of the PROMESA Board, it appears that Gov. Ricardo Rosselló’s budget will have to be revised and may be rejected if proposed labor reforms do not satisfy the Board—with Board Executive Director Natalie Jaresko, in the wake of the Governor’s release of his proposed $8.73 billion general fund budget to the Legislature Tuesday night dictating that the future of the budget is linked to the legislature’s approval of at-will employment. Her statement came after the Governor and the board had announced an agreement on a compromise on reforming labor practices as well as agreeing to other changes in the Board-certified fiscal plan. In exchange for the Board waiving its demands for the abolition of the Christmas bonus and reduction of the island’s mandatory 27 days of vacation and sick leave, Gov. Rosselló agreed to bring at-will employment to the territory by repealing Law 80 from 1976—a concession which Director Jaresko described this agreement as an “accommodation.” Earlier this week, Director Jaresko said that the first step for Gov. Rosselló should be to resubmit a fiscal plan consistent with the new agreement with the Board, followed by a resubmitted budget consistent with the new plan, adding she anticipated these actions should all be completed by the end of June: the agreed-to changes to the fiscal plan are expected to reduce the 30 year surplus to $35 billion from $39 billion in the April certified fiscal plan, according to Director Jaresko, who noted that most of the surplus is expected to be used for debt payment. From the Governor’s perspective, he noted: “The approval of the agreed budget makes it easier for Puerto Rico to be in a stronger position to renegotiate the terms of the debt. We have significantly improved the management and controls over the cash flow of the General Fund. Contrary to the past, there is now visibility on how cash flows in government operations. At present Puerto Rico has robust and reliable cash balances.” Finally, she stated she expected it would take 12 to 18 months for the Board to create a plan of adjustment on the debt and pensions for the central government—a plan which would likely take the Title III bankruptcy court several more months to confirm.

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Becoming Positively Moody in Detroit

May 24, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s on Tuesday upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes.  Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by retired U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, however, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs.

CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, which determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, who, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow, has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates; or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing.  

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the stated has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan municipality to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $ 125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

What Are the Fiscal Conditions & Promises of Recovery?

March 30, 2018

Good Morning! In this morning’s eBlog, we consider the potential impact of urban school leadership; then we try to assess the equity of federal responses to hurricanes, before trying to understand and assess the status of the ongoing quasi chapter 9 municipal bankruptcy PROMESA deliberations in the U.S. territory of Puerto Rico.

Schooled in Municipal Finance? As we wrote, years ago, in our studies on Central Falls, Detroit, San Bernardino, and Chicago; schools matter: they determine whether families with kids will want to live in a central city—raising the issue, who ought to be setting the policies for such schools. In its report, five years ago, the Center for American Progress report cited several school districts like Chicago, Philadelphia, Baltimore—but not Detroit, were examples of municipalities where mayoral governance of public schools has had some measure of success in improving the achievement gap for students, or, as the Center noted: “Governance constitutes a structural barrier to academic and management improvement in too many large urban districts, where turf battles and political squabbles involving school leaders and an array of stakeholders have for too long taken energy and focus away from the core mission of education.” In the case of Detroit, of course, the issue was further addled by the largest municipal bankruptcy in the nation’s history and the state takeover of the Motor City’s schools.

Thus, interestingly, the report stated “mayoral accountability aims to address the governing challenges in urban districts by making a single office responsible for the performance of the city’s public schools. Citywide priorities such as reducing the achievement gap receive more focused attention.” In fact, many cities and counties have independent school boards—and there was certainly little shining evidence that the state takeover in Detroit was a paradigm; rather it appeared to lead to the creation of a quasi apartheid system under which charter schools competed with public schools to the detriment of the latter.

In its report, the Center finds: “[T]he only problem is this belief about mayoral control of schools has not worked well for Detroit. It has done just the opposite since the 1999 state takeover of the schools under former Gov. John Engler, which allowed for the mayor of Detroit to make some appointments to the school board. Since the state took over governance of the schools, when it was in a surplus, the district has been on a downward spiral with each year returning ballooning deficits under rotating state-appointed emergency managers. The district lost thousands of students to suburban schools as corruption and graft also became a hallmark of a system that took away resources that were meant to educate the city’s kids. Such history is what informs the resistance to outside involvement with the new Detroit Public Schools Community District that is now under an elected board with Superintendent Nikolai Vitti. His leadership is being received as a breath of fresh air as he implements needed reforms. That is what is now fueling skepticism and reservation about Mayor Mike Duggan’s bus loop initiative to help stem the tide of some 30,000 Detroit students he says attend schools in the suburbs.” Because of the critical importance to Detroit of income taxes, Mayor Duggan has always had a high priority of sending a message to families about the quality of the Motor City’s schools.  Superintendent Vitti noted that previous policies had “favored charter schools over traditional public schools.” Superintendent Vitti said he believes this issue is less about mayoral control than the Mayor Duggan’s leadership efforts to entice families with children back to the city, adding that he is not really concerned about mayoral control of the schools, noting: “I have no evidence or belief that the mayor is interested in running schools…I honestly believe the Mayor’s intent is to recruit students back to the city.”

Double Standards? The Capitol Hill newspaper, Politico, this week published an in-depth analysis of the seeming discriminatory responses to the federal responses to the savage hurricanes which struck Houston and Puerto Rico., reporting that while no two hurricanes are exactly alike, here, nine days after the respective hurricanes struck, “FEMA had approved $141.8 million in individual assistance to Hurricane Harvey victims, versus just $6.2 million for Hurricane Maria victims,” adding that the difference in response personnel mirrored the discriminatory responses, reporting there were 30,000 responders in Houston versus 10,000 in Puerto Rico, adding: “No two hurricanes are alike, and Harvey and Maria were vastly different storms that struck areas with vastly different financial, geographic and political situations. But a comparison of government statistics relating to the two recovery efforts strongly supports the views of disaster-recovery experts that FEMA and the Trump administration exerted a faster, and initially greater, effort in Texas, even though the damage in Puerto Rico exceeded that in Houston: Within six days of Hurricane Harvey, U.S. Northern Command had deployed 73 helicopters over Houston, which are critical for saving victims and delivering emergency supplies. It took at least three weeks after Maria before it had more than 70 helicopters flying above Puerto Rico; nine days after the respective hurricanes, FEMA had approved $141.8 million in individual assistance to Harvey victims, versus just $6.2 million for Maria victims. The periodical reported that it took just 10 days for FEMA to approve permanent disaster work for Texas, but 43 days for the Commonwealth of Puerto Rico.  Politico, in an ominous portion of its reporting, notes: “[P]residential leadership plays a larger role. But as the administration moves to rebuild Texas and Puerto Rico, the contrast in the Trump administration’s responses to Harvey and Maria is taking on new dimensions. The federal government has already begun funding projects to help make permanent repairs to Texas infrastructure. But, in Puerto Rico, that funding has yet to start, as local officials continue to negotiate the details of an experimental funding system that the island agreed to adopt after a long, contentious discussion with Trump’s Office of Management and Budget. The report also notes: “Seventy-eight days after the two hurricanes, FEMA had received 18 percent more applications from victims of Maria than from victims of Harvey, but had approved 13 percent more applicants from Harvey than from Maria. At the time, 39 percent of applicants from Harvey had been approved compared with just 28 percent of applicants from Maria.”

Finally, the report notes that, as of last week,  six months after Hurricane Harvey, Texas was already receiving federal dollars from FEMA for more than a dozen permanent projects to repair schools, roads, and other public infrastructure which were damaged by the storm, while in Puerto Rico, FEMA has, so far, “not funded a single dollar for similar permanent work projects.”

Elected versus Unelected Governance. Puerto Rico Gov. Ricardo Rosselló yesterday reported he was rejecting the PROMESA Oversight Board’s “illegal” demands for labor law reforms and a 10% cut in pension outlays, stating: “The Board pretends to dictate the public policy of the government, and that, aside from being illegal, is unacceptable.” Gov. Rosselló was responding to demand letters from the Board for changes to the fiscal plans he had submitted, along with the Puerto Rico Electric Power Authority, and the Puerto Rico Aqueduct and Sewer Authority earlier this month. Gov. Rosselló noted that §205 of the PROMESA statute allows the Board to make public policy recommendations, but not to set policy, adding that the PROMESA Board’s proposed mandates would make it “practically impossible” to increase Puerto Rico’s minimum wage, as he contemplated the Board’s demand of a $1.58 billion cut in government expenditures, nearly 10% more than he had proposed, and adding he would be “tenaz” (tenacious) in opposing the proposed 10% cut in public pension outlays demanded by the PROMESA Board—with the political friction reflecting governing apprehension about the potential impact on employment at a time when Puerto Rico’s unemployment rate is more than 300% higher than on the mainland—and, because of perceptions that such decisions ought to be reflective of the will of the island’s voters and taxpayers, rather than an outside board.

Who’s on First? The governance challenge in Puerto Rico involves federalism: yesterday, House Natural Resources Committee Chair Rob Bishop (R-Utah), criticized the Puerto Rico Oversight Board and the Governor over their failure to engage with bondholders in restructuring the Commonwealth’s debt, writing to PROMESA Board Chairman José Carrión: “The Committee has been unsatisfied with the implementation of PROMESA and the lack of respect for Congressional requirements of the fiscal plan…And now, due to intentional misinterpretations of the statute, the promise we made to Puerto Rico may take decades to fulfill,” adding he had become “frustrated” with the Board’s unwillingness to engage in dialogue and reach consensual restructuring agreements with creditors: he noted that both the Rosselló administration and the PROMESA Board must show “much greater degrees of transparency, accountability, goodwill and cooperation,”  amid seemingly growing apprehensions on his part that Puerto Rico government costs will increase, even as its population is projected to decline, and that he was becoming increasingly concerned with the “extreme amount” being spent on Title III bankruptcy litigation. He said that Board should make sure it is the sole legal representative of Puerto Rico in these cases—and asked that the PROMESA Board define what constitutes “essential public services” in Puerto Rico: “I ask that you adhere to the mandates of PROMESA and work closely with creditors and the Puerto Rican government as you finalize and certify the fiscal plans…“My committee will be monitoring your actions closely; and as we near the two-year anniversary of the passage of PROMESA, an oversight hearing on the status of achieving PROMESA’s goals will likely be merited.”

For its part, the PROMESA Oversight Board has rejected fiscal plans presented by Gov. Ricardo Rosselló and the island’s two public authorities and has demanded the territory reduce public pensions by 10% , writing, this week, three letters outlining its demands for changes in fiscal plans submitted this month by the central government, Puerto Rico Electric Power Authority, and Puerto Rico Aqueduct and Sewer Authority. Under the PROMESA statute, the federal court overseeing the quasi-chapter 9 municipal bankruptcy is mandated to accept the fiscal plans, including their allotments for debt—plans which the PROMESA Board has demanded, as revised, be submitted by 5 p.m. next Thursday. The Board is directed there should be no benefit reductions for those making less than $1,000 per month from a combination of their Social Security benefits and retirement plans and that employees should be shifted from a defined-benefit plan to a defined-contribution plan by July 1st of next year; it directed that police, teachers, and judges under age 40 should be enrolled in Social Security and their pension contributions be lowered by the amount of their Social Security contribution, directing this for the PREPA, PRASA, Teachers, Employees, and Judiciary retirement systems. In its letter concerning the central government, the PROMESA Board directed Gov. Rosselló to make many changes: some require more information; some are “structural” changes focused on reforming laws to make the economy more vibrant; at least one adds revenues without requiring a greater burden; and many of them require greater tax burdens, or assume lower tax revenues or higher expenditures—noting that any final plan, to be approved, should aim at achieving a total $5.66 billion in agency efficiency savings through FY2023, but that Puerto Rico’s oil taxes should be kept constant rather than adjusted each year.

The Board directed that a single Office of the CFO should be created to oversee the Department of the Treasury, Office of Management and Budget, Office of Administration and Transformation of Human Resources, General Services Administration, and Fiscal Agency and Financial Advisory Authority—adding that Puerto Rico will be mandated to convert to legally at-will employment by the end of this year, reduce mandatory vacation and sick leave to a total of 14 days immediately, and add a work requirement for the Nutritional Assistance Program by no later than Jan. 1st, 2021—and that any increase in the minimum wage to $8.25 must be linked to conditions—and, for Puerto Ricans 25 or younger, such an increase would only be permitted if and when Puerto Rico eliminated the current mandatory Christmas bonus for employers.

State Oversight & Severe Municipal Distress

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eBlog, 04/24/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: when and how will it emerge from state oversight? Then we spin the tables to see how Atlantic City is faring to see if it might be on the shores of fiscal recovery; before going back to Detroit to assess the math/fiscal challenges of the state created public school district; then, still in Detroit, we try to assess the status of a lingering issue from the city’s historic municipal bankruptcy: access to drinking water for its lowest income families; before visiting Hartford, to try to gauge how the fiscally stressed central city might fare with the Connecticut legislature. Finally, we revisit the small Virginia municipality of Petersburg to witness a very unique kind of municipal finance for a city so close to insolvency but in need of ensuring the provision of vital, lifesaving municipal services. 

Fiscal & Physical Municipal Balancing. Michigan Deputy Treasurer Eric Scorsone is predicting that by “early next year, Detroit will be out of state oversight,” at a time when the city “will be financially stable by all indications and have a significant surplus.” That track will sync with the city’s scheduled emergence from state oversight, albeit apprehension remains with regard to whether the city has budgeted adequately  to set funds aside to anticipate a balloon pension obligation due in 2024. Nevertheless, Mr. Scorsone has deemed the Motor City’s post-bankruptcy transformation “extraordinary,” describing its achievements in meeting its plan of debt adjustment—as well as complying with the Detroit Financial Review Commission—so well that the “city could basically operate on its own.” He noted that the progress has been sufficient to permit the Commission to be in a dormancy state—subject to any, unanticipated deficits emerging. The Deputy Treasurer credited the Motor City’s strong management team under CFO John Hill both for the city’s fiscal progress, but also for his role in keeping an open line of communication with the state oversight board; he also noted the key role of Mayor Mike Duggan’s leadership for improving basic services such as emergency response times and Detroit’s public infrastructure. Nevertheless, Detroit remains subject to the state board’s approval of any contracts, operating or capital budgets, as well as formal revenue estimates—a process which the Deputy Treasurer noted “allows the city to stay on a strong economic path…[t]hese are all critical tools,” he notes, valuable not just to Detroit, but also to other municipalities an counties to help ensure “long term stability.”

On the Shore of Fiscal Recovery. S&P Global Ratings, which last month upgraded Atlantic City’s general obligation bond rating two notches to CCC in the wake of the city’s settlement with the Borgata Casino, a settlement which yielded the city some $93 million in savings, has led to a Moody’s rating upgrade, with the credit rating agency writing that Atlantic City’s proposed FY2017 budget—one which proposes some $35.3 million in proposed cuts, is a step in the right direction for the state taken-over municipality, noting that the city’s fiscal plan incorporates a 14.6% cut in its operating budget—sufficient to save $8 million, via reductions in salaries and benefits for public safety employees, $6 million in debt service costs, and $3 million in administrative expenses. Nevertheless S&P credit analyst Timothy Little cautioned that pending litigation with regard to whether Atlantic City can make proposed police and firefighter cuts could be a fly in the ointment, writing: “In our view, the proposed budget takes significant measures to improve the city’s structural imbalance and may lead to further improved credit quality; however, risks to fiscal recovery remain from pending lawsuits against state action impeding labor contracts.” The city’s proposed $206.3 million budget, indeed, marks the city’s first since the state takeover placed it under the oversight of the New Jersey’s Local Finance Board, with the state preemption giving the Board the authority to alter outstanding debt, as well as municipal contracts. Mr. Little wrote that this year will mark the first fiscal year of the agreed-to payment-in-lieu-of-taxes (PILOT) program for casino gaming properties—a level set at $120 million annually over the next decade—out of which 10.4% will go to Atlantic County. Mr. Little also notes that the budget contains far less state financial support than in previous years, as the $30 million of casino redirected anticipated revenue received in 2015 and 2016 will be cut to $15 million; moreover, the budget includes no state transitional aid—denoting a change or drop of some $26.2 million; some of that, however, will be offset by a $15 million boost from an adjustment to the state Consolidated Municipal Property Tax Relief Act—or, as the analyst wrote: “Long-term fiscal recovery will depend on Atlantic City’s ability to continue to implement fiscal reforms, reduce reliance on nonrecurring revenues, and reduce its long-term liabilities.” Today, New Jersey state aid accounts for 34% of the city’s $206.3 million in budgeted revenue, 31% comes from casino PILOT payments, and 27% from tax revenues. S&P upgraded Atlantic City’s general obligation bond rating two notches to CCC in early March after the Borgata settlement yielded the city $93 million in savings. Moody’s rates Atlantic City debt at Caa3.

Schooled on Bankruptcy. While Detroit, as noted above, has scored high budget marks or grades with the state; the city’s school system remains physically and fiscally below grade. Now, according to the Michigan Department of Education, school officials plan to voluntarily shutter some of the 24 city schools—schools targeted for closure by the state last January, according to State Superintendent Brian Whiston, whose spokesperson, William DiSessa, at a State Board of Education meeting, said:  “Superintendent Whiston doesn’t know which schools, how many schools, or when they may close, but said that they are among the 38 schools threatened for closure by the State Reform Office earlier this year.” Mr. DiSessa added that “the decision to close any schools is the Detroit Public School Community District’s to make.” What that decision will be coming in the wake of the selection of Nikolai Vitti, who last week was selected to lead the Detroit Public Schools Community District. Mr. Vitti, 40, is currently Superintendent of the Duval County Public Schools in Jacksonville, Florida, the 20th largest district in the nation; in the wake of the Detroit board’s decision last week to enter into negotiations with Mr. Vitti for the superintendent’s job, Mr. Vitti described the offer as “humbling and an honor.” The school board also voted, if Mr.Vitti accepts the offer, to ask him to begin next week as a consultant, working with a transition team, before officially commencing on July 1st. The School Board’s decision, after a search began last January, marks the most important decision the board has made during its brief tenure, in the wake of its creation last year and election last November after the Michigan Legislature in June approved $617-million legislation which resolved the debt of Detroit Public Schools via creating the new district, and retaining the old district for the sole purpose if collecting taxes and paying off debt.

The twenty-four schools slated for closure emerged from a list of 38 the State of Michigan had targeted last January—all from schools which have performed in the bottom 5 percent of the state for at least three consecutive years, according to the education department. The Motor City had hoped to avoid any such forced state closures—hoping against hope that by entering last month into partnership negotiations with the Michigan State Superintendent’s office, and working with Eastern Michigan University, the University of Michigan, Michigan State University, and Wayne State University, the four institutions would help set “high but attainable” goals at the 24 Detroit schools to improve academic achievement and decrease chronic absenteeism and teacher vacancies. The idea was that those goals would be evaluated after 18 months and again in 36 months, according to state officials. David Hecker, president of the American Federation of Teachers Michigan, noted that he was not aware which schools might be closing or how many; however, he noted that whatever happens to the teachers of the closing schools would be subject to the collective bargaining agreement with the Detroit Federation of Teachers. “If any schools close, it would absolutely be a labor issue that would be governed by the collective bargaining agreement as to how that will work … (and) where they will go,” Mr. Hecker said. “We very strongly are opposed to any school closing for performance reasons.”

Thirsty. A difficult issue—among many—pressed upon now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 municipal bankruptcy came as the Detroit Water and Sewer Department began shutting off water service to some of nearly 18,000 residential customers with delinquent accounts. Slightly less than a year ago, in the wake of numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom, the issue was again raised: what authority did the city of Detroit have to cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Thus it was that Detroit’s Water and Sewerage Department began shutting off service to customers who had failed to pay their bills—with, at the time, DWSD guesstimating about 20,000 of its customers had defaulted on their payments, and noting that the process of shutting off service to customers with unpaid bills was designed to be equitable and not focused on any particular neighborhood or part of the city—and that the agency was not targeting customers who owed less than a $150 and were only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD was reminding its delinquent customers who were having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who were at 150 percent of the poverty level or below could receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. This week, DWSD is reporting it has resumed shutoffs in the wake of sending out notices, adding the department has payment and assistance plans to help those with delinquent accounts avoid losing service. Department Director Gary Brown told the Detroit Free Press that everyone “has a path to not have service interruption.” Indeed, it seems some progress has been achieved: the number of families facing shutoffs is down from 24,000 last April and about 40,000 in April of 2014, according to The Detroit News. In 2014, DWSD disconnected service to more than 30,000 customers due to unpaid bills, prompting protests over its actions. Nonetheless, DWSD began the controversial practice of shutting off water service again this week, this time to some of the nearly 18,000 residential customers with delinquent accounts, in the wake of notices sent out 10 days earlier, according to DWSD Director Gary Brown. Nevertheless, while 17,995 households are subject to having their water turned off, those residents who contact the water department prior to their scheduled shutoffs to make a payment or enter into an assistance plan will avoid being cut off—with experience indicating most do. And, the good gnus is that the number of delinquent accounts is trending down from the 24,302 facing a service interruption last April, according to DWSD. Moreover, this Solomon-like decision of when to shut off water service—since the issue was first so urgently pressed in the U.S. Bankruptcy Court before Judge Rhodes—has gained through experience. DWSD Director Brown reports that once residents are notified, about 90 percent are able to get into a plan and avoid being shut off, and adding that most accounts turned off are restored within 24 hours: “Every residential Detroit customer has a path not to be shut off by asking for assistance or being placed into a payment plan…I’m urging people not to wait until they get a door knocker to come in and ask for assistance to get in a payment plan.” A critical part of the change in how the city deals with shutoffs comes from Detroit’s launch two years ago of its Water Residential Assistance Program, or WRAP, a regional assistance fund created as a component of the Great Lakes Water Authority forged through Detroit’s chapter 9 municipal bankruptcy: a program designed to help qualifying customers in Wayne, Oakland, and Macomb counties who are at or below 150 percent of the federal poverty level—which equates to $36,450 for a family of four—by covering one-third of the cost of their average monthly bill and freezing overdue amounts. Since a year ago, nearly $5 million has been dedicated to the program—a program in which 5,766 Detroit households are enrolled, according to DWSD, with a retention rate for those enrolled in the program of 90 percent. DWSD spokesperson Bryan Peckinpaugh told the Detroit News the department is committed to helping every customer keep her or his water on and that DWSD provides at least three advance notifications encouraging those facing a service interruption to contact the department to make payment arrangements, adding that the outreach and assistance efforts have been successful, with the number of customers facing potential service interruption at less than half of what it was three years ago.

Fiscally Hard in Hartford. Hartford Mayor Luke Bronin has acknowledged his proposed $612.9 FY2018 budget includes a nearly $50 million gap—with proposed expenditures at $600 million, versus revenues of just over $45 million: a fiscal gap noted moodily by four-notch downgrades to the Connecticut city’s general obligation bonds last year from two credit rating agencies, which cited rising debt-service payments, higher required pension contributions, health-care cost inflation, costly legal judgments from years past, and unrealized concessions from most labor unions. Moody’s Investors Service in 2016 lowered Hartford GOs to a junk-level Ba2. S&P Global Ratings knocked the city to BBB from A-plus, keeping it two notches above speculative grade. Thus, Mayor Bronin, a former chief counsel to Gov. Daniel Malloy, has repeated his request for state fiscal assistance, noting: “The City of Hartford has less taxable property than our suburban neighbor, West Hartford. More than half of our property is non-taxable.” In his proposed “essential services only” budget, Mayor Bronin is asking the Court of Common Council to approve an increase of about $60 million, or 11%, over last year’s approved budget—with a deadline for action the end of next month. An increasing challenge is coming from the stressed city’s accumulating debt: approximately $14 million, or 23%, of that increase is due to debt-service payments, while $12 million is for union concessions which did not materialize, according to the Mayor’s office. Gov. Malloy’s proposed biennial budget, currently in debate by state lawmakers, proposes $35 million of aid to Hartford. Unsurprisingly, that level is proving a tough sell to many suburban and downstate legislators. On the other hand, the Mayor appears to be gaining some traction after, last year, gaining an agreement with the Hartford Fire Fighters Association that might save the city $4 million next year: the agreement included changes to pension contributions and benefits, active and retiree health care, and salary schedules. In addition, last month, Hartford’s largest private-sector employers—insurers Aetna Inc., Travelers Cos. and The Hartford—agreed to donate $10 million per year to the city over five years. Nonetheless, rating agencies Moody’s and S&P have criticized the city for limited operating flexibility, weak reserves, narrowing liquidity, and its rising costs of debt service and pension obligations. Gurtin Municipal Bond Management went so far as to deem the city a “slow-motion train wreck,” adding that while the quadruple-notch downgrades had a headline shock effect, the city’s fundamental credit deterioration had been slow and steady. “The price impact of negative headlines and credit rating downgrades can be swift and severe, which begs the question: How should municipal bond investors and their registered investment advisors react?” Gurtin’s Alex Etzkowitz noted, in a commentary. “The only foolproof solution is to avoid credit distress in the first place by leveraging independent credit research and in-depth, ongoing surveillance of municipal obligors.”

Fighting for a City’s Future. The small city of Petersburg. Virginia, is hardly new to the stress of battle. It was there that General Robert E. Lee’s men fought courageously throughout the Overland Campaign, even as Gen. Lee feared he confronted a campaign he feared could not be won, warning his troops—and politicians: “We must destroy this Army of Grant’s before he gets to the James River. If he gets there, it will become a siege, and then it will be a mere question of time.” Yet, even as he wrote, General Ulysses S. Grant’s Army of the Potomac was racing toward the James and Petersburg to wage an attack on the city—a highly industrialized city then of 18,000 people, with supplies arriving from all over the South via one of the five railroads or the various plank roads. Indeed, Petersburg was one of the last outposts: without it, Richmond, and possibly the entire Confederacy, was at risk. Today, the city, because of the city’s subpar credit rating, is at fiscal risk: it has been forced to beg its taxpayers to loan it funds for new emergency vehicles—officials are making a fiscal arrangement with private citizens to front the cost for new emergency vehicles, and offering to put up city hall as collateral for said arrangement, as an assurance to the lenders they will be paid back. The challenge: the police department currently needs 16 new vehicles, at a cost of $614,288; the fire department needs three new trucks, at a cost of $2,145,527. Or, as Interim City Manager Tom Tyrrell notes: “Every single day that a firefighter rolls out on a piece of equipment older than he is, or a police officer responds to an emergency call in a car with 160,000 miles on it, are days we want to avoid…We want to get this equipment as soon as possible.” Interim City Finance Director Nelsie Birch has included in the upcoming fiscal year budget the necessary funds to obtain the equipment—equipment Petersburg normally obtains via lease agreements with vendors, but which now, because of its inability to access municipal credit markets due to its “BB” credit rating with a negative outlook, makes it harder than ever to find any vendor—or, as Manager Tyrrell puts it: “We went out four different times…We solicited four different times to the market, and were unsuccessful in getting any parties to propose.” He added that when soliciting these types of agreements, you solicit “thousands of people.” Notwithstanding that the funds for the vehicles is already set aside in the upcoming budget, city officials have been unable to find anyone willing to enter into a lease agreement with the city because of the city’s financial woes.

Last week, the City Council authorized Mr. Tyrrell to “undertake emergency procurement action” in order for the lease of necessary fire and police vehicles, forcing Mr. Tyrrell and other officials to seek private funds to get the equipment—that is, asking individual citizens who have the financial means to put up money for the fire and police vehicles—or, as Mr. Tyrrell puts it: “We’ve reached out to four people, who are interested and capable,” noting they are property owners in Petersburg who will remain anonymous until the deal is closed, describing it thusly: “[This agreement] is outside the rules, because we couldn’t get a partner inside the rules.” Including in this proposed fiscal arrangement: officials must put up additional collateral, in addition to the cars themselves, and in the form of city-owned property—with the cornerstone of the proposal, as it were, being Petersburg City Hall, or, as Mr. Tyrrell notes: “What they’re looking for is some assurance that no matter what happens, we’re going to pay the note…It’s not a securitization in the financial sense, as much as it is in the emotional sense: they know that the city isn’t going to let it go.” He adds, the proposed financial arrangement will be evaluated in two areas: the interest rate and how fast the deal can close, adding: “Although it’s an emergency procurement, we still want to get the best deal we can.”

Unrelenting Municipal Leadership Challenges

May 29, 2015
Visit the project blog: The Municipal Sustainability Project

Municipal Bankruptcy Fallout. Wayne County Executive Warren Evans, who, from his bird’s eye perspective from the county surrounding Detroit, and who has himself expressed grave concerns about his own county’s fiscal sustainability, also has to think about risks to other municipalities from Wayne County’s dire fiscal condition. Thus the Wayne County Treasurer’s Office will have to provide assurances that the funds the county borrows to cover the delinquent taxes it collects for local communities would not be subject to diminution should the county be forced to file for federal bankruptcy protection―an assurance, which will come in a bankruptcy opinion which combines county legal opinions with those of an outside firm—or, as Christa McLellan, Wayne County Deputy Treasurer puts it: “There was just a lot of reaction to the comments. … (Bond markets are) very sensitive to what’s in the papers.” With County Executive Evans acutely aware of the unprecedented costs of municipal bankruptcy, ergo, he is laser-focused on what is now believed to be a $52-million structural deficit in the county and its “grossly” underfunded pension system—the triggering apprehensions for his proposed recovery plan to preempt municipal bankruptcy—a plan which proposes $230 million in cuts over four years. But the threat of municipal bankruptcy has forced the County’s hand, as—in order to prevent any diversion of funds the county collects for other jurisdictions or which it borrows to provide funding through its delinquent tax revolving fund—it has been forced by Merrill Lynch, which underwrites Wayne County’s borrowing for the fund this year, to obtain a municipal bankruptcy opinion in order to demonstrate that the funds are safe, “because they can’t be diverted,” or, as Deputy Treasurer McLellan puts it: “The county is never at risk…It’s a very secure program…It’s really structured that whatever happens, we can repay the notes,” adding there is no danger to creditors in the delinquent property tax program, because the communities must repay the money. The effort allows the Treasurer’s office to take over delinquent property tax collections for communities each year and provides the communities with revenue which they would otherwise be trying to collect.

The Fine Art of Diplomacy in Municipal Bankruptcy. As we have noted previously, the costs—especially legal and consulting fees—of municipal bankruptcy are withering. Few seemed more aware of this than U.S. Bankruptcy Judge Steven Rhodes and his appointed federal mediator, Chief Judge Gerald Rosen—so that, as part of the mediated settlement in the largest municipal bankruptcy in U.S. history, Miller Buckfire, which served as a paid consultant to Detroit emergency manager Kevyn Orr throughout the course of Detroit’s bankruptcy, has now contributed $1 million to help pay the water bills for Detroit residents in danger of getting service shut off―the largest nonutility contribution to the Motor City’s The Heat and Warmth Fund (THAW) in the charity’s history—a contribution that was part of the mediated settlement worked out by Judge Rosen and which came in the wake of strong objections from Detroit Mayor Mike Duggan to the unbelievable fees levied by Miller Buckfire. With water service—now to be shared via a regional authority, also a part of the resolution—even if still not resolved—of the city’s plan of debt adjustment, there remains a crushing, but prohibitive need: more than 64,000 Detroiters, disproportionately elderly, cannot afford water to pay their utility bills—and the bulk are likely seniors.

Schooling Governance. If too many Motor City residents cannot afford water, the whole city cannot afford its current school system—which is insolvent—an insolvency which is imposing strains on the relationship between Michigan Governor Rick Snyder and Detroit Mayor Mike Duggan—especially with regard to the authority to make appointments to the Detroit school board. Mayor Duggan this week urged Gov. Snyder not to appoint members of the city’s school board, but rather to leave those decisions up to Detroit’s voters, noting that Detroit school parents have demonstrated for years, through their withdrawals of their kids from the city’s school system that they have no confidence in schools under state control. Instead, Mayor Duggan said he would prefer a financial review commission to monitor and act as a check on excessive spending and borrowing, not dissimilar to the oversight commission incorporated into Detroit’s plan of debt adjustment as part of the grand plan worked out by Judge Rosen, the Governor, and bipartisan leaders of the state legislature. Mayor Duggan would like to have the state empower the current school board to be responsible for paying down the Detroit Public School (DPS) system’s hundreds of millions in debts, and a new school board charged with moving Detroit’s schools forward; moreover, Mayor Duggan believes a Detroit Education Commission should be created to allow the city to manage and coordinate all schools in the city, both public and charter schools—an element on which he is agreement with Gov. Snyder: under their concept, such a commission would be able to hold both types of schools accountable, and the authority to shutter failing schools, but also the authority to determine where schools are opened and closed to prevent too many schools in some neighborhoods—and none in others, as well as coordinated citywide bus service to all students, in public or charter schools, with a common enrollment system for all. The Mayor cites his goal to be the establishment of order in a chaotic system—a system, he believes rendered more unstable by years of failed state oversight that led to devastating enrollment declines and insolvency — in a city where 95 schools have opened or closed in the last six years, urging a governmental system of coordination and stability necessary to encourage families to keep their kids in city schools, noting: “We’re becoming a community where if you’re born rich you die rich, and if you’re born poor, you die poor.” DPS today has only five schools which meet the state average in reading; only seven meet the average in math; the district has gone from 180,000 students to 47,000 over the last decade—a period during which its schools have dropped from 13th to 45th in statewide student achievement. Mayor Duggan’s position contrasts with Gov. Snyder’s, who is, instead, proposing that DPS be split in two, under which the new district would be created debt free—and focus on educating kids, instead of debt; the existing system would continue to collect the local millage in order to retire DPS’s debt. But, as Gov. Snyder has acknowledged, getting his potential package through the legislature will be more than academically challenging: “Helping pay for their debt is a huge issue and the whole governance question…It’s a challenge to say, ‘We’d like to pay your debts and not have a role in the governance of the district.’”

Pensionary Musings. As San Bernardino enters its long awaited municipal bankruptcy trial to seek U.S. Judge Meredith Jury’s ok for its proposed plan of debt adjustment—a plan which proposes substantial cuts in what it would pay its municipal bondholders and its retiree health care obligations—but, as in Stockton and Vallejo, no reductions in its pension obligation to CalPERS; nevertheless, the plan is quite different in that it seeks to address pensions in a quite different manner: by contracting out for fire, waste management, and other services; the city projects substantial savings via a singular reduction in its employee base—especially for fire protection—via shared services, contract services expected to reduce city pension costs. The plan also proposes additional pension savings which would be derived by means of a substantial increase in employee payments toward pensions and from a payment of only 1 percent on a $50 million bond issued in 2005 to cover pension costs. Or, as Councilmember Henry Nickel put it before the Council vote to approve the city’s plan of adjustment: “The justification from what I’m understanding from the plan — the justification for contracting is more or less to save the city from the pension obligation. Is that correct?” The question came based on one of the slides staff had created to help explain the complex plan: the slide noted: “CalPERS costs continue to escalate, making in-house service provision for certain functions unsustainable.”

In response to the query, City Manager Allen Parker responded: “[T]hat’s part of it,” but not the “entirety,” advising Councilmember Nickel that in addition to pension savings, contracting with a private firm for refuse collection now handled through a special fund is expected to yield a “$5 million payment up front” into the deficit-ridden city general fund, adding that the CalPERS safety rate for firefighters is between 45 and 55 percent of base pay, “so if you have a fireman making say $100,000 a year, there is another $50,000 a year that goes to CalPERS,” further explaining that an actuary had estimated that contracting for fire services could save the city $2 million a year in pension costs, so that the change could achieve an annual savings of $7 million or more. Moreover, unlike other unions, firefighters had not voluntarily agreed to accept either the suggested 10 percent pay cut or to forego merit increases. Indeed, fire and waste management are the biggest opportunities for savings and revenue among 15 options for contracting city services listed in San Bernardino’s plan of debt adjustment—the plan whose mandated submission date from Judge Jury is today. Under the plan, many city employees are expected to be rehired by contractors, with estimated annual savings for contracting five other services: business licenses $650,000 to $900,000, fleet maintenance $400,000, soccer complex management $240,000 to $320,000, custodial $150,000, and graffiti abatement $132,600.

San Bernardino plan to return to solvency
Indeed, pension obligations have been very much at the heart of San Bernardino’s municipal bankruptcy: after its chapter 9 filing, San Bernardino—unlike Stockton or Vallejo, became the first California municipality to omit its annual payments to CalPERS—an expensive omission, as that, under the city’s proposed plan of debt adjustment, would be repaid over two fiscal years with equal installments of about $7.2 million, including some $400,000 annually in penalties and interest at the end of the proposed repayment period. Or, as Mr. Parker further explicated last week: San Bernardino’s public pensions have an “unfunded liability” of $285 million, but are only 74 percent funded, adding that the proposed plan of debt adjustment would protect pension amounts already earned by city employees, even with a new employer, and, like the Stockton and Vallejo plans, are proposed that way in recognition that cities—as employers—can ill afford not to offer competitive benefits. Further, noting the very deep pockets of CalPERS, Mr. Parker added: “We naively thought we could negotiate more successfully, but that didn’t necessarily happen,” and that San Bernardino’s pockets were not remotely deep enough for what would have been a costly and lengthy legal battle with deep-pocketed CalPERS is said to be 8 to 10 percent below market because of low benefits. The bankrupt city stopped paying the employee CalPERS share and raised police and firefighters rates to 14 percent of pay. On the post retirement health care side, the plan proposes to reduce health payments from a maximum of $450 per month to $112 per month, saving $213,750 last year.

Underwater in Puerto Rico—and Washington, D.C. The U.S. territory of Puerto Rico—neither a state, nor a municipality, but home to millions of Americans, is caught in a legal twilight zone, because it lacks the authority of every U.S. corporation—municipal or private—to seek federal bankruptcy protection; nor is the territory, again because it is not a state, authorized by the federal municipal bankruptcy law to authorize its municipalities with authority to seek such protection. While legislation to grant such authority has been pending before the House Judiciary Committee (HR 870, the Chapter 9 Uniformity Act of 2015), the bill appears to be in perpetual suspension, with many members confusing municipal bankruptcy with a federal bailout—almost as if to demonstrate a bankruptcy of comprehension. After all, they would be hard pressed to find any pennies devoted by the federal government to “bail out” Jefferson County, Stockton, Detroit, etc.; albeit they would find it far easier to find spell out the bailouts for Chrysler and General Motors—two of the three very large corporations in the Detroit metropolitan area to file for bankruptcy in the wake of the Great Recession. Thus, instead of acting on legislation which would—at no cost to the federal taxpayers—allow a federal judge to oversee the creation, adjudication, and approval of a plan to adjust debts between all the islands creditors, the issue has instead become, as Bloomberg observes, a bonanza for Washington lobbyists, who are developing websites, creating advertisements, and lining up the support of conservative advocacy groups, with one group posturing: “Puerto Rico may soon reach a height of budget crisis that can be addressed only through a massive bailout package from the federal government.” A website set up by 60 Plus Association, a senior-citizen advocacy group, opposes the legislation, while still another, NoBailout4PR.org., posts: “Make no mistake: Extending Chapter 9 bankruptcy protection to Puerto Rico is not a way to avoid a bailout…It is a bailout.” The legislation which is diverting so many dollars to Washington lobbyists and campaign coffers would amend the Federal Bankruptcy Code to treat Puerto Rico as a state: that is, it would enable Puerto Rico—as all 50 states are authorized, the option to authorize its municipalities and public agencies to file for Chapter 9 protection. It would not obligate Congress to appropriate one thin dime. Indeed, as Bloomberg notes: “The lobbying efforts focus on Republicans, who control the House. BlueMountain, Franklin Resources Inc. and several other investment managers have hired former high-ranking Republican staffers from the House Financial Services Committee and Senate Banking Committee who now work at Venable LLP, a law and lobby firm, to defeat the bill, according to disclosure records….Others that oppose the legislation include Tea Party activists and the Alexandria, Virginia-based 60 Plus, which describes itself as a “seniors advocacy group with a free enterprise, less government, less taxes approach.” Mayhap ironically, the issue has attracted 35 asset managers who favor the legislation and who support the Puerto Rico Fiscal Stability Coalition, co-chaired by former Puerto Rico Governor Luis Fortuno. The coalition’s spokesman, Phil Anderson, is a former special assistant to former Vice President Dan Quayle, who is now president and a founder of Navigators Global LLC, a Washington-based lobbying group that has set up English- and Spanish-language websites and produced video ads targeting the Puerto Rican public and Congressional members and staff—a coalition which has gained support from a group which could never be characterized as supportive of taxpayer-backed bailouts, including Citizens Against Government Waste and Grover Norquist’s Americans for Tax Reform. Their spokesperson noted that allowing Puerto Rico entities to file for bankruptcy would prevent what Anderson calls the “potential collapse” of the $3.6 trillion municipal-bond market, about 40 percent of which is held directly by U.S. households. An orderly restructuring would allow debtors and creditors to settle the dispute without involving taxpayers: “What solution is in the best interest of the U.S. taxpayer and what’s the most conservative solution to apply to the problem.”

eNews
May 29, 2015

Running on Empty. The Just before leaving town for its Memorial Day recess, and with no funding solution in the tank, Congress extended spending authority until the end of July, just before its five week vacation. The stopgap and start funding renders states and local governments unable to sign long-term contracts—and sharply increases the cost of issuing long-term municipal bonds for infrastructure financing.

“I will be stunned if the Republicans deal with the Highway Trust Fund responsibly…It’s not going to happen,” U.S. Sen. Bob Corker (R-Tenn.), the former Mayor of Chattanooga, who last year proposed a 12 cent per gallon increase in the federal gasoline tax, told reporters at a breakfast session sponsored by the Christian Science Monitor this week, adding that the short-term HTF extension favored by some in Congress is “incredibly irresponsible.”

Who, exactly, is getting bailed out? For all the provisions in the Congressional Budget resolution and individual bills and vows that there shall be no municipal bailouts, no Member of the U.S. House or Senate has yet been able to cite any bailout to a state or local government. In fact, of course, the federal government is munificent when it comes to bailouts to non-municipal corporations—whether it was the bailouts to General Motors and Chrysler—two of the three iconic corporations that filed for federal bankruptcy protection in the wake of the Great Recession—but not to the third, the City of Detroit. In fact, for all the Congressional sturm and drang about opposition to the so far non-existent municipal bailouts, the evidence points to ever increasing federal bailouts of private, non-municipal corporations. Indeed, as you can see from the chart, the Federal Reserve Bank of Richmond notes that the federal government is most generous with bailouts to private corporations. In its conveniently updated and most aptly named Bailout Barometer, the Richmond Fed reports that 60 percent of the U.S. financial system’s loans are explicitly or implicitly backed by the federal government—a 45% increase since 1999. According to the Richmond Fed: Implicit guarantees effectively subsidize risk. Investors in implicitly protected markets feel little need to demand higher yields to compensate for the risk of loss. Implicitly protected funding sources are therefore cheaper, causing market participants to rely more heavily on them. At the same time, risk is more likely to accumulate in protected areas since market participants are less likely to prepare for the possibility of distress — for example, by holding adequate capital to cushion against losses, or by building safeguarding features into contracts — and creditors are less likely to monitor their activities. This is the so-called “moral hazard” problem of the financial safety net: The expectation of government support weakens the private sector’s ability and willingness to limit risk, resulting in excessive risk-taking…The Richmond Fed’s view is that the moral hazard from the [Too Big To Fail] problem is pervasive in our financial system: the U.S. government’s history of market interventions — from the bailout of Continental Illinois National Bank and Trust Company in 1984 to the public concerns raised during the Long-Term Capital Management crisis in 1998 — shaped market participants’ expectations of official support leading up to the events of 2007-08. According to Richmond Federal Reserve Bank estimates, the proportion of total U.S. financial firms’ liabilities covered by the federal financial safety net has increased by one-third since our first estimate in 1999: The safety net covered 60 percent of financial sector liabilities as of 2013. More than 40 percent of that support is implicit and ambiguous.

Municipal Compliance. Cleveland this week agreed, as part of a settlement with the Justice Department, to create new watchdogs, retrain its police officers, and collect and analyze reams of new data as part of a settlement to resolve federal allegations that its police routinely used excessive force. The Cleveland police department, which has become a flash point in the racially charged debate over police tactics, has agreed to follow some of the most exacting standards in the nation over how and when its officers can use force, and will accept close oversight to make sure those rules are not ignored, city and federal officials said Tuesday. The agreement is part of a settlement with the Justice Department over what federal officials have termed a pattern of unconstitutional policing and abuse, with the Department having determined that police officers in Cleveland used stun guns inappropriately, punched and kicked unarmed people, and shot at people who posed no threat. In addition, the federal investigators determined the incidents often went unreported and uninvestigated. Under the agreement, Cleveland has agreed to document every time officers so much as unholster their guns: police supervisors will investigate the uses of force in much the same way that officers investigate crimes, or, as the agreement reads: “A fundamental goal of the revised use of force policy will be to account for, review, and investigate every reportable use of force.” The new federal rules prohibit officers from using force against people simply for talking back or as punishment for running away. Pistol whipping is prohibited, as is firing warning shots. In addition, the city has agreed to allow an independent monitor to track its progress. If the city does not put into effect the changes called for in the settlement, a federal judge has the authority to mandate them. (Under the Obama administration, the Justice Department has opened nearly two dozen civil rights investigations into the practices of police departments. Many of the elements in the Cleveland settlement — improved training, better internal oversight and an independent monitor — have become standard.) The Cleveland settlement came out of negotiations that commenced last year in the wake of discussions with the Justice Department after investigators determined that police in Cleveland engaged in a pattern of excessive force, although the settlement still must be approved by a judge. According to the U.S. Justice Department, problems in Cleveland involved both police shootings and blows to the head; Justice Department officials also cited what they called excessive or retaliatory use of Tasers, chemical sprays, and fists—including the department’s use of force against mentally ill people. As resolved, the agreement calls for a series of compliance actions intended to respond to the federal findings:
• Cleveland police would be required to try to de-escalate situations before using force and be barred from using force in retaliation;
• Officers will not be allowed to take their weapons out of their holsters “unless the circumstances create a reasonable belief that lethal force may become necessary,” and every time an officer takes out her or his weapon, an officer would have to document it; and
• A newly created inspector general is charged to monitor the department, while a civilian would oversee its internal affairs unit.

Cleveland U.S. Attorney Steven Dettelbach has called the agreement “a national model for any police department ready to escort a great city to the forefront of the 21st century,” while Cleveland Mayor Frank Jackson called the agreement a “very positive result.” Mayor Jackson reports the agreement, which will be overseen by an independent, court-appointed monitor, was the result of a long-running collaboration between the Justice Department and the city. He added, however, that the agreement will be not only complex, but costly: Cleveland and its taxpayers city will have to spend millions of dollars over several years in order to comply with the terms of the consent decree, according to Matt Zone, the chairman of the Cleveland City Council’s public safety committee, and will have to adopt a new ordinance to ensure that the city’s police officers are not able to use race and class as profiling techniques in their traffic stops and investigations. Unsurprisingly, several members of Cleveland city council expressed concern about the cost of implementing the consent agreement—a cost not disclosed by federal government officials involved in the new mandate, but one estimated to be in the millions of dollars.

Wealth Disparities. Christopher Ingraham this week wrote about an issue which has been the subject of governance discussion in Europe: wealth inequality, where it has been highlighted in a huge new report from the Organization for Economic Cooperation and Development (OECD). What is the distinction between income versus wealth inequality? Income is the amount of money one earns from work and/or investments, but wealth is what one owns: one’s home, car, savings, retirement accounts, etc. The OECD report finds that the richest 10 percent of American households earn about 28 percent of the overall income pie. In contrast, he writes, the wealthiest 10 percent of U.S. households now own or hold 76 percent of all the wealth in the U.S.—a percentage far greater than the globe’s other rich nations. Mr. Ingraham explains this extraordinary disparity by writing: “Let’s imagine that there are just 100 people in the United States. The richest guy―and, yes, he’s probably a guy―owns more than one-third of the total wealth in this country. He’s got a third of all the property, a third of the stock market and a third of anything else that can be owned. Not bad…The next-richest four people together own 28 percent of all the stuff. Divvied up four ways, that’s still not too shabby. The next five people together own 14 percent of all the things, and the next 10 own another 12 percent…We’ve accounted for just 20 percent of the people, but nearly 90 percent of the total wealth. Ninety percent! …The next 20 percent of people have only nine percent of the wealth to split among them…The next 20 percent, the middle wealth quintile, only have three percent of the wealth to split 20 ways…” Then, as he writes: “Now we’ve reached the bottom 40 percent of Americans, but guess what? We’ve run out of stuff. Sorry guys, you get nothing. In fact,…this bottom 40 percent actually has an overall negative net worth, which means that they owe more money than they own…” Unsurprisingly, this wealth disparity is most unevenly distributed across the country—and, since the General Revenue Sharing program created under the administration of former President Richard Nixon—a program explicitly recognizing that wealth and opportunity were unequally distributed across states and local governments, so that the federal government—and states—had a role in recognizing and leavening these disparities―but which was abandoned under the Reagan administration, the very apprehensions discussed by former President Nixon and the leaders of the nation’s governors, state legislators, and city and county leaders of increased disparities are transpiring. As one can see from the map of Baltimore below, this accelerating fiscal disparity can have explosive consequences—especially when it is constructed on federal policies.

Senate Appropriators Approve 302(b) Allocations. Before leaving for recess, appropriators in Congress made progress on moving spending bills. The table above provides House and Senate 302(b) allocations for FY2016, per the $1.017 trillion discretionary cap set by the Budget Control Act (BCA).

New Reporting Mandates. The Securities and Exchange Commission this week approved the Municipal Securities Rulemaking Board’s (MSRB) proposal to collect additional post-trade data for its electronic municipal reporting service EMMA; the new data reporting requirements, which will become effective next May 23d (2016) are included in amendments to MSRB Rule G-14 on trade reporting and the MSRB’s facility for its Real-Time Transaction Reporting System (RTRS). The amendments will require dealers to report new information through the RTRS, such as whether a trade occurred on an alternative trading system or involved a non-transaction based fee. They also would eliminate the requirement for dealers to report the yield for trades with customers.

2015 Schedule
March 13th. State & Local Governments Securities (SLGS). Congress’s failure to act to increase the nation’s debt ceiling triggered a federal unfunded mandate: the cost of refinancing state and local bonds and securities to increase.
July 31st. The current federal surface transportation law expires; the federal highway trust fund is projected to be out of money by mid-summer; state and local governments have already begun to cut back on projects. To date, there has been no progress in Congress.
June. The Export-Import Bank, which helps finance overseas purchases of American exports, might shut in the face of opposition to its mission.
Sept. 30. The Children’s Health Insurance Program faces expiration.
October 1. Sequester set to trigger.
September-October. Default? The government’s borrowing limit was reinstated on March 16, although Congressional Budget Office projects the government will likely come up against the ceiling in September or early October.
State & Local Finance

Mapping Challenges to Fiscal Sustainability. As can be perceived from the map to the left here, the increasing disparity in wealth discussed above is demonstrative of growing fiscal disparities in cities and counties across the nation. The ongoing, persistent federal reductions by means of sequesters and squeezing out of domestic discretionary investment—and significant growth in federal tax expenditure subsidies to those in least need has, it appears, significant and growing geographic and governance implications. Federal housing assistance today is dominated by federal tax expenditures—not federal housing programs from HUD. One only need look at the graphic here of the sea of vacant homes and buildings in Baltimore to appreciate how it is undercutting critical property tax revenues to the city—even as it is imposing ever greater public safety costs on the city’s depleting fisc. According to Scott Calvert of the Wall Street Journal, nearly 17,000 homes, or about 8% of the city’s housing stock, are deemed unfit for habitation. But, as in Detroit, the fiscal challenge confronting Baltimore is not just those residences that have become uninhabitable, but rather those that are abandoned: because the city’s population has declined more than a third over the last six decades. Whether it be Baltimore, Detroit, San Bernardino, or a growing list of cities throughout the nation, it appears a growing list of urban areas are confronting the twin fiscal risks of widespread vacancies: a risk not just to property tax revenues, but also as these neighborhoods become at risk to become magnets for criminal activity. Baltimore’s experiences demonstrate the exceptional challenges to the Mayor and Council: Between 2010, when it started a new program, and 2013, Baltimore sold 410 vacant houses for rehab; yet, as Mr. Calvert writes, more than 40% do not have use-and-occupancy permits, more likely than not meaning the house is vacant: a target not for property tax revenue, but rather for criminal use. Nevertheless, he writes, Baltimore has taken a three-pronged approach to tackling vacancies: enforcing city code more stringently by levying fines and persuading judges to force auctions if owners do not renovate; demolishing more than 1,500 houses, with hundreds more to be razed in coming years; and marketing some of its own vacant inventory, which accounts for about 15% of the total―adding: “‘Baltimore officials deserve credit for a higher-than-50% success rate on vacant homes sold by the city,’ said Frank Alexander, an Emory University law professor who co-founded the Center for Community Progress, a nonprofit that advises local governments on addressing vacant properties. ‘But they cannot fail to deal with those for which there has been no progress.’” While he said he understands officials’ reluctance to take properties back, failing to do so means the problem continues. More than 800 of the city’s 16,745 vacant homes are in Sandtown-Winchester, the site of Mr. Gray’s arrest and some of the worst looting of the protests.

In 1964, in his State of the Union address, former President Lyndon Johnson said:
This administration today, here and now, declares unconditional war on poverty in America. I urge this Congress and all Americans to join with me in that effort.
It will not be a short or easy struggle, no single weapon or strategy will suffice, but we shall not rest until that war is won. The richest Nation on earth can afford to win it. We cannot afford to lose it. One thousand dollars invested in salvaging an unemployable youth today can return $40,000 or more in his lifetime.

Poverty is a national problem, requiring improved national organization and support. But this attack, to be effective, must also be organized at the State and the local level and must be supported and directed by State and local efforts.

For the war against poverty will not be won here in Washington. It must be won in the field, in every private home, in every public office, from the courthouse to the White House.
The program I shall propose will emphasize this cooperative approach to help that one-fifth of all American families with incomes too small to even meet their basic needs.
Our chief weapons in a more pinpointed attack will be better schools, and better health, and better homes, and better training, and better job opportunities to help more Americans, especially young Americans, escape from squalor and misery and unemployment rolls where other citizens help to carry them.

Very often a lack of jobs and money is not the cause of poverty, but the symptom. The cause may lie deeper — in our failure to give our fellow citizens a fair chance to develop their own capacities, in a lack of education and training, in a lack of medical care and housing, in a lack of decent communities in which to live and bring up their children.
But whatever the cause, our joint Federal-local effort must pursue poverty, pursue it wherever it exists — in city slums and small towns, in sharecropper shacks or in migrant worker camps, on Indian Reservations, among whites as well as Negroes, among the young as well as the aged, in the boom towns and in the depressed areas.

Is Chicago Contagious? Our admired friends at Municipal Market Analytics this week raised concerns with regard to whether Chicago’s recent downgrade might be contagious, affecting the cost of municipal borrowing for other cities—a risk you can see (below) that can already be tracked to New Jersey municipalities. As my esteemed MMA colleagues wrote: “That such an important, economically vibrant city such as Chicago is considered junk credit by one of the major rating agencies makes for a perception problem that all issuers may have to contend with, adding: “The pension drumbeat only grows louder as it is the city’s pension liabilities that drove the credit action…In the days after the Moody’s downgrade, we saw significant retail selling of the city’s debt—even of other Chicago credits that were not downgraded. Additionally, many of the state’s own credits began to widen as many investors looked to shed any Illinois exposure whatsoever. Then the real contagion began to occur as other municipal credits that also have large [public] pension liabilities began to cheapen as retail accounts sold those bonds as well…Most notable was New Jersey appropriation debt [please note MMA chart below] but we also saw cheapening for Pennsylvania, Connecticut, and Louisiana general obligation debt.

The Sharing/Disruptive Economy

As we observe the changing economy—what with the sharing economy, the impact of the internet on work hours and locations, we can anticipate it will lead to profound changes in transportation and housing. Because the internet is permitting more people to work from anywhere, anytime, the old model of cities and suburbs is becoming increasingly obsolete.

The Disruptive, but Sharing Economy: What’sApp? Do States & Local Governments Need New Rules for the Sharing/Disruptive Economy?

Playing by the Tarheel Rules. Airbnb has announced that, effective Monday, June 1, it will begin collecting and remitting sales and hotel occupancy taxes to North Carolina—and sales and hotel occupancy taxes in four of the state’s counties (all of No. Carolina’s 157 counties and municipalities levy a local occupancy tax of at least 1 percent.) The agreement follows in the wake of the Raleigh City Council decision last December to declare Airbnb illegal—an action which led Councilmember Mary Ann Baldwin to work with the sharing company, noting: “Airbnb is a popular piece of this new economy that tourists and prospective residents expect to see in modern cities.” The state action makes North Carolina only the second state in which Airbnb collects a statewide tax—Airbnb does collect and remit occupancy taxes on behalf of its guests in several municipalities, including: Washington, D.C., Chicago, San Francisco, Portland (Ore.), Malibu, and San Jose.

Shairing. Airbnb will begin collecting taxes on behalf of D.C. residents: under the voluntary agreement, the District joins a smattering of municipalities with which Airbnb has worked out tax agreements to share some of its revenues—revenues for an emerging platform under which thousands of Americans have become innkeepers—but innkeepers not subject to the same tax, insurance, or public safety standards as their business competitors. The agreement could mean significant additional revenues for the city; for Airbnb, the promise to remit that money straight to D.C. treasury could help legitimize a service which, in many places, is still not strictly legal. In the cities where Airbnb has agreed or been required to do collect, Airbnb will automatically collect the local hotel or transient occupancy taxes, which run from about 5 percent to 14.5 percent in the District, on every transaction. Airbnb will then pay the municipalities cities in a regular lump sum, but will not include details about individual hosts or guests. Airbnb began collecting these taxes in Portland, Ore., last July and in San Francisco last October. Between those two cities so far, the company says it has already paid about $5 million in taxes (it has not, however, agreed to collect and remit back taxes anywhere). It will also be collecting and remitting in San Jose, Chicago, and Amsterdam—cities comprising some of Airbnb’s largest markets. As an Airbnb spokesperson helps us to understand: “In many cases, these taxes were designed for hotels and folks with teams of lawyers and accountants, and the reality is that the person who’s renting out his basement in Cleveland Park once a month probably doesn’t have tax experts on payroll…You shouldn’t need a lawyer and a tax specialist if you want to rent out your house.” On the newly receiving end, Stephen Cordi, the deputy CFO for D.C. explains to us: “It’s undoubtedly true that people particularly at the bottom end of this probably didn’t know what to do.” he says. Airbnb hosts should have been registering with the city and collecting the tax, which supports both a convention center fund and the city’s general fund — and, ultimately, services like the fire and police departments. Under this agreement, he notes: “This will eliminate the need for them to do that,” adding that Airbnb, rather than the District, took the initiative, which now means Airbnb hosts have a formal mechanism for paying taxes on an activity—even though it is still not exactly recognized by D.C. law: the District has yet to pass new regulation that would formally legalize the kind of short-term rentals Airbnb has made possible—unlike some municipalities, including Portland and San Francisco, which have adopted new laws explicitly legalizing the activity under certain conditions. Interestingly enough, Airbnb’s initiative to become a corporate citizen could send shock waves to other vacation rental companies, such as VRBO, because, unsurprisingly, Airbnb would like its competitors to compete on a level playing field, so that the company does not confront a disadvantage in a market where other platforms offer untaxed homes which may then be more attractive to potential lodgers. My colleague, Philip Auerswald, an associate professor at George Mason who studies innovation and entrepreneurship, argues that cities really ought to be responding to the rise of companies like Airbnb by broadly rethinking where and how they collect tax revenue in the 21st century: “It’s not particularly interesting or insightful to say ‘since hotels are taxed this way, it’s only fair,’” he says. “That makes sense as long as you think that whatever the status quo is is where we want to end up.”

Fractional Jobs: No Benefits. Christopher Mims of the Wall Street Journal this week described the new, emerging sharing economy as “a hodgepodge of mostly unrelated but often lumped-together startups, many originating in Silicon Valley, that involve ‘sharing’ things like cars and homes…’ adding: “The first thing everyone misses about the sharing economy is that there is no such thing, not even if we’re being semantically charitable…Increasingly, the goods being ‘shared’ in the sharing economy were purchased expressly for business purposes, whether it’s people renting apartments they can’t afford on the theory that they can make up the difference on Airbnb, or drivers getting financing through partners of ride-sharing services Uber and Lyft to get a new car to drive for those same services….What’s more, many of the companies under this umbrella, like labor marketplace TaskRabbit, don’t involve ‘sharing’ anything other than labor. If TaskRabbit is part of the sharing economy, then so is every other worker in America: The only thing these companies have in common is that they are all marketplaces, though they differ widely in the amount of control they give their buyers and sellers…perhaps the worst offender in how it controls its labor force is Uber: Uber sets the prices that its drivers must accept, and has lately been in the habit of unilaterally squeezing drivers in two ways, both by lowering the rates drivers are paid per trip and increasing Uber’s cut of those wages,” leading Britain’s Financial Times Izabella Keminska to note: “The uncomfortable truth is that the sharing economy is a rent-extraction business of the highest middleman order.”

Mr. Mims writes that Uber has reported it is hiring 20,000 new drivers a month, and in this report it claims that in major U.S. cities, such as Los Angeles and Washington, D.C., drivers are averaging more than $17 an hour; however, as he notes: this data hardly reflects what Uber drivers actually make, because Uber does not include drivers’ expenses: it turns out that being an Uber driver pays about $10/hour—and there are no benefits….It isn’t minimum wage, but it’s a far cry from Uber’s previous claims about what drivers make, which reached the height of absurdity in May 2014, when the company claimed that the median income for drivers in New York was $90,000 a year. Months of investigation of that claim by journalist Alison Griswold yielded not a single driver in New York making that much.” Then he adds; “What this all means is simple: Uber and its kin Lyft, which is more generous with its drivers but has a similar business model, are remarkably efficient machines for producing near minimum-wage jobs. Uber isn’t the Uber for rides—it’s the Uber for low-wage jobs: There is much gnashing of teeth by critics over whether or not jobs for ride-sharing companies are ‘good’ jobs, but data from both Uber and Lyft show that more than 80% of their drivers have other jobs or are seeking other work, and Uber has said that 51% of its drivers are driving less than 15 hours a week…Ride-sharing companies, like many other firms in the ‘sharing economy,’ allow for a new kind of employment—sometimes called fractional employment—in which people can take on extra work when and if they need it. The key to fractional employment is flexibility for both these companies and their workers. Economically, these companies have been explicit that their business model doesn’t work if their ‘driver partners,’ who are currently independent contractors, are treated like employees…And this is the final and most important thing that both critics and boosters get wrong about the sharing economy: That in order for it to move forward, regulators must decide whether its employees are independent contractors or employees….”

While he writes that drivers for Uber and Lyft, mostly part-time, appear relatively satisfied because of the flexibility with which they can earn their wages, he notes they are quite obviously neither employees nor freelancers: “Like Schrödinger’s cat, neither alive nor dead, they confound conventional definitions,” adding: “The only way forward is something that has gotten far too little attention, called “dependent contractors.” In contrast with independent contractors, dependent contractors work for a single firm with considerable control over their work—as in, Lyft or Uber or Postmates or Instacart or any of a hundred other companies like them. This category doesn’t exist in current U.S. law, but it does exist in countries such as Germany, where dependent contractors get more protections than freelancers but are still distinct from full-time employees…The alternative is the underappreciated possibility that ride-sharing companies could cease to exist entirely, owing to a class-action lawsuit that almost certainly represents an existential threat to their business. http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/: This is a link to a PBS speculative report about white collar jobs that can be performed by robots: three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and horrors, attorneys.”
RDDII? http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/. The above is a link to a PBS speculative report about white collar jobs that can be performed by robots. Three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and, horrors, attorneys.

Fragmentation Index? According to crack researchers at the University of Illinois at Chicago, the Windy City metro area is the country’s most governmentally fragmented with its 1,550 local governments. Rebecca Hendrik of UIC, one of the authors, and dubbers of the so-called “fragmentation index,” which compares some 51 metropolitan regions of at least 51 million residents, reports that while such a panoply of municipalities is normally assumed to increase the cost of governance, it can also increase competition, and, thereby, drive down the cost of public services—as well as allow “people to choose a local government based on their values.” She asserts that it is rather special purpose districts, such as school districts, park and fire districts—many of which overlap municipal borders—which can prove “costly and confusing,” adding that “[m]ost local governments in metropolitan areas can’t function without affecting their neighbors: they either collaborate or compete: Collaboration is being promoted for efficiency, but we need to consider what conditions affect collaboration versus competition: competition and collaboration are related phenomena, not two ends of the same spectrum.”

Driving a Hard Bargain. The second day of testimony in Lyft’s hearing before the Pennsylvania Public Utility Commission’s administrative law judges dealt mainly with insurance issues, and how passengers would be protected in the event of an accident; however, in the midst of the trial, Administrative Law Judge Mary Long closed the courtroom so that Lyft’s director of public policy, Joseph Okpaku, could answer questions about the number of rides Lyft provided while it was under a cease-and-desist order. However, just as Uber’s attorney refused in its hearing earlier this month, Lyft attorney Adeolu Bakare claimed such information was proprietary: releasing it could put his company at a competitive disadvantage—in effect seemingly in direct conflict with a court order requiring the company to disclose the information, which was issued by the administrative law judges: indeed, at one point, Counsel Bakare sought to have information about Lyft’s insurance policy’s terms and conditions protected as well, but Judge Long told him not providing information about the policy would “almost certainly result in dismissal of your application,” albeit after the hearing, PUC spokeswoman Jennifer Kocher explained that the judges ruled to make that portion of the hearing private in order to receive the information and allow the hearing to move forward, not because the information was truly proprietary. Judge Long said she would issue a ruling on the protected information. Both the ride-sharing companies drove into the Steel City earlier this year, where they have not only tangled with each other, but also with the PUC: neither company had the proper licenses to operate in Allegheny County as an alternative to taxicabs, which led to proposed daily fines of $1,000 and cease-and-desist orders against the companies—instead each is operating under temporary authority in Allegheny County. In its hearing, Lyft’s attorney explained that Lyft’s insurance acts as excess to a driver’s personal policy, and would act as the primary policy if the driver’s personal insurance denied a claim, adding that there are three periods during which Lyft considers its insurance policy active: 1) when a driver has the app open, but does not have a passenger, 2) when the driver is en route to pick up a passenger, and 3) during the ride itself. But in response to the question with regard to how Lyft verifies its drivers have insurance coverage, the attorney responded that Lyft asks for proof of insurance in the form of the insurance card provided to drivers, but it does not further verify the policy.

Arrivaderci! An Italian court this week bid arrivaderci to unlicensed car-sharing services such as those offered by Uber, in another setback for the fast-growing U.S. car sharing service. The court in Italy’s business capital of Milan determined the Uber POP service, which links private drivers with passengers through a smartphone app, created “unfair competition,” and that the use of Uber POP was forbidden, as was the offering of paid car-ride services by unlicensed drivers in any other way. The court gave Uber 15 weeks to comply with the ruling or face a fine of 20,000 euros for each day’s delay in meeting the court ruling.

The Silver Tsunami. U.S. District Court Judge Kevin Castel this week held that the Empire State’s Constitution does not protect former city Bronx City councilman and state legislator Larry Seabrook’s pension from a $418,000 forfeiture judgment issued in the wake of his corruption conviction. Mr. Seabrook has been convicted on nine counts of corruption and wire fraud in Manhattan Federal Court in Manhattan in a case involving the “misdirection” of some $1.5 million of taxpayer funds which were supposed to go to community groups to his own pocket, according to U.S. Attorney Preet Bharara, who noted: “Today’s conviction ensures that the Councilman will pay for betraying the public trust. Rooting out public corruption and restoring the public’s faith in honest government remains a vital mission of this office.” Mr. Seabrook had argued in court that his pension was protected by a provision of the state Constitution barring public pensions from being “diminished or impaired;” however, Judge Castel wrote: “This section of the New York State Constitution yields to the federal forfeiture to the extent that the state provision purports to foreclose forfeiture of Seabrook’s pension benefits.”

Hooked Horns. The Texas Senate has voted to beef up (a terrible pun) the state’s underfunded retirement system for state employees by adding about $440 million to the program, with the bill increasing state employee contributions to the system to 9.5%―the equivalent of a 2 percent increase―as part of an effort to address an approximate $7 billion shortfall, after approving House Bill 9, which the House passed and sent to the Senate in April.

Ethics & Public Trust
From the Richmond Times Dispatch: “Successful government relies on trust. The breakdown of comity at all levels reflects the citizenry’s lack of confidence in institutions and individuals. Washington’s woes are well documented. Local jurisdictions suffer self-inflicted damage as well.”

Inexcusable behavior at City Council meetings
The Virginian-Pilot this week ran an editorial (please see below) on an issue key to public trust:

Decorum in city council chambers lately has reflected poorly on this region’s citizens. Perhaps when people speak to elected officials, they take a cue from online forums, where rants and attacks are de rigueur. Perhaps they see nothing wrong with booing, berating, hounding, even threatening those with different opinions.
In Norfolk, a resident regularly heckles Councilman Paul Riddick during the public comment portion of council meetings. Riddick last month lost his temper and told the man not to come within 5 feet.

Sadly, in Portsmouth, the attacks come from the dais as often as from the audience. Councilmembers have hurled insults and profanities as they criticized each other’s ideas.
Most of the time, their comments, however obnoxious, are protected by the First Amendment. Federal courts have ruled that comments sharply critical, even personal, about a city council or school board member are allowed under the Constitution.
Protected status doesn’t make such speech persuasive, however; often, it’s simply an embarrassment and a distraction that garners attention on TV and online.
Virginia Beach City Councilman Bobby Dyer says his city can do better. During the contentious budget hearings, residents compared the City Council to Nazis. Another made a racist remark to a councilwoman. One woman approached Councilwoman Rosemary Wilson and yelled that she was “coming after” her.
Dyer said he understands that some citizens are angry about the tax increase. They have every right to express their frustration. But there are ways to communicate that message respectfully, he said, proposing the council develop more guidelines “to make things easier in building bridges.”

According to the city’s rules of conduct, “Any person addressing the council shall confine himself to comments germane to the action under debate, avoid reference to personalities, and refrain from vulgarity or other breach of respect. For any failure to so conform, he shall be declared out of order by the presiding officer and shall forthwith yield the floor.”
The question is how much further the council can go in defining “breach of respect” and “reference to personalities.”

A federal court 14 years ago struck down a Virginia Beach School Board bylaw that prohibited personal attacks during public comments at meetings. The court ruled that the bylaw acted as a filter to screen out negative comments toward School Board members and the administration while allowing proponents to speak.

As the First Amendment Center explained in 2004, “Government officials may not silence speech because it criticizes them. They may not open a ‘public comment’ period up to other topics and then carefully pick and choose which topics they want to hear. They may not even silence someone because they consider him a gadfly or a troublemaker.”
But those constitutional rights aren’t absolute. Speakers can – and should – be silenced if they are disruptive.
As Beach Councilman John Moss noted, “a number of people went way, way over the line” in their comments to the council this spring. “It was way too personal.”
Councilmembers agreed to discuss possible solutions – asking speakers to affirm in writing the code of conduct, for example, or more aggressive use of a sergeant at arms.
Here’s the best idea of all: People – whether council member or citizen – should speak their mind, and mind their manners.

Untrustworthy Math? Jim Bacon, the fine writer of his Blog, “Bacon’s Rebellion,” this week wrote about the (see: “A Strike Force about as Effective as the Iraqi Army”) interparty feud from the Virginia gubernatorial election in 2013, when former Virginia Attorney General Ken Cuccinelli lost to now Gov. Terry McAuliffe by 56,000 votes in a gubernatorial race in which he was outspent by two to one, with Mr. Bacon asking: “Would $85,000 more in his campaign war chest have made a difference in the election?…Probably not — the number was a small fraction of the $21 million Cuccinelli spent — but it’s a point worth pondering, given news that the Conservative StrikeForce PAC has agreed to pay $85,000 and hand over fund-raising contact lists to Mr. Cuccinelli, according to the Washington Post.” He notes that Mr. Cuccinelli, in his suit, had accused the PAC of raising funds which were never delivered to his campaign, estimating that the group had succeeded in raising about $435,000 from emails using his name; thus, he alleged that he had received only $10,000. In fact, Mr. Bacon notes. between January 2013 and June 2014, according to Federal Election Commission records, Conservative StrikeForce raised more than $2.8 million overall, of which it paid only $82,000 toward candidates or campaign committees, unsurprisingly leading the former state Attorney General to note: “It’s just a thunderous precedent…to make it harder and more expensive to be deceitful and misleading with people in the political arena as far as donations go…In an already sour environment, people who think they’re supporting something they believe in are defrauded.” The Washington Post article provides no response from Arlington-based Conservative StrikeForce, its chairman, Dennis Whitfield, or its independent treasurer and outside consultant, Scott MacKenzie; but, as Mr. Bacon writes: “[A]n outside observer must wonder if this is a case of an opportunist mimicking the police and veteran fund-raising scams in a political context. In a similar case, the Post notes, a committee to recruit conservative physician Ben Carson to run in the 2016 presidential race spent $2.44 million to raise $2.4 million.” For his bottom line, Mr. Bacon writes that: “Maybe this was a case in which Conservative StrikeForce just wasn’t very effective at its job, which it defined on its website as raising small contributions for conservative candidates through mail, direct mail and telephone solicitations. Or maybe it was a cynical ploy for the organizers to pay themselves handsome salaries and perks. We don’t know. But, sad to say, in the wild, wild world of political financing, we’ll probably be reading about a lot more cases like this one.”

TIME TO STEP UP
Daily Press Editorial: Running for public office takes courage, confidence and the committed support of family and friends. The endeavor is not easy — walking through neighborhoods and knocking on doors takes plenty of time and effort — nor is it cheap, since campaign signs do not grow on trees. So as we head down the stretch toward Election Day, we extend our gratitude to those who volunteered for the experience and seek a place in local government. And we encourage other civic-minded citizens to lend their time and talent to the calling of public service, since our communities will surely benefit as a result.

Bill Bolling, former—and now convicted—Governor Bob McDonnell’s lieutenant governor, and current Co-Chair of the Governor’s ethics commission, writes on his Facebook page:
“The public’s trust is hard to gain and easy to lose.”

12.24.13

T’was the Day before Christmas…Chief U.S. District Judge Gerald Rosen, who is coordinating an unprecedented quintet of federal judges appointed to help mediate between the Motor City’s creditors, last week warned the city and others failure to attend today’s Christmas Eve session “shall be grounds for the imposition of immediate sanctions, including entry of a default judgment.” Continue reading