The Human & Fiscal Challenges of Recovery

November 3, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal recovery of Michigan municipalities; the City of Detroit’s efforts to upgrade the quality of rental housing, and the ongoing fiscal and human plight of the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Royal R-O-L-A-I-D-S. Michigan State officials Wednesday released Royal Oak Township, a suburb of Detroit and a charter township of Oakland County with a population as of the 2010 census of 2,419, from its consent agreement, with Michigan Treasurer Nick Khouri stating the Oakland County township is now free of the fiscal agreement under which the state placed it three years ago to resolve a financial emergency: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” He added that progress has been made since 2014 to resolve issues that led to a financial emergency for the Oakland County community, for example, noting that today the township has a general fund balance of $920,000 instead of a deficit—and that police and fire services are improved. Township Supervisor Donna Squalls says the community has been able to work with the state and “enact reforms to ensure our long-term fiscal sustainability. Royal Oak Township’s financial emergency resulted in an assets deficit of nearly $541,000 for its 2012 budget year. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever: The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” For his part, State Treasurer Khouri noted the township was the last remaining Michigan municipality operating under a fiscal consent agreement: over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements in response to fiscal and financial improvements and operational reforms. The Treasurer stated only three communities: Ecorse, Flint, and Hamtramck remain under state oversight through a Receivership Transition Advisory Board.

Protecting the Motor City’s Renters. The Detroit City Council this week voted unanimously to update its rental regulations, am update which included the enactment of rules to bar landlords from collecting rent on units which have not passed city inspections. Under the current ordinance, housing units are supposed to be registered and have passed city inspections by obtaining a certificate of compliance prior to being available for rental purposes; however, before they can be rented out. However, city officials admit they have permitted most landlords to ignore those rules for more than a decade—rules adopted to ensure compliance with safety regulations, especially lead poisoning prevention efforts, for which inspections are a part of obtaining a certificate of compliance. Or, as Councilman Andre Spivey put it: “We hope it will improve the quality of life in our neighborhoods and entire city.” However, some landlords have claimed that enforcing inspections with the threat of rent being withheld would discourage the incentive to provide rental housing opportunities in the city—already a challenge because of apprehensions about crime and the quality of public schools—with some even vowing to sue the city. Last year, just 4,174 addresses were registered and inspected—less than 3 percent of the Motor City’s estimated 140,000 rental units—and more than 20 percent below the number registered a decade ago. Indeed, last year, the Detroit News reported that only one of every 13 eviction cases was filed on an address legally registered with the city—with the paper reporting that families facing eviction in homes that were never inspected by the city and had numerous problems, including: lack of heat, hazardous electric systems, missing windows, and rodent infestation.

Under the updated regulations, to be phased in over the next six months, tenants who live in rentals which have not passed city inspections would be given the option to could put their rent in an escrow account for 90 days. If the landlord, by the end of such period, had failed to obtain a city certificate, the renter will be able to keep the money. Subsequently, a tenant would be permitted to continue to put rent in escrow if the landlord does not comply, while the city would hire a third-party company to manage the escrow fund. The new escrow provision will be phased in, and each neighborhood will have different deadlines. Renters who are escrowing their payments will also have the right to “retain possession of the rental property,” according to the updated regulations.

A Motor City of Dreams? Meanwhile, yesterday, Renu Zaretsky, writing for the Tax Policy Center, “Transformational Brownfield of Dreams in a Motor City,” about the role of fiscal tax policy in revitalizing two Michigan cities, noted that the city’s famed Renaissance Center had been constructed to revitalize Detroit in the wake of the 1967 riots—with Henry Ford II, in 1971, convincing dozens of businesses to invest in the $350 million project; however, she noted: the hoped-for transformation never took place, leading to the collapse of the Center’s assessed property value—and crushing hopes for the city’s fiscal revival. Yet, today, Detroit and the state of Michigan seem poised to invest half a trillion dollars to try once again to revitalize the recovering downtown—a downtown in which developer Dan Gilbert, the founder of Quicken Loans, is investing to transform via 3.2 million square feet of office, residential, and retail space, including a skyscraper and 900 apartments—albeit, Mr. Gilbert is seeking tax incentives to support the effort, claiming taxpayer subsidies are “essential,” for not only this project, but also other investment in the city. Under his proposal, he would to put up a total of $1.9 billion, with about $500 million up-front: in return, he is seeking the leverage of additional funding from a newly amended state tax incentive program—under which he anticipated some $557 million over the next three and a half decades, based on new state legislation Gov. Rick Snyder signed last summer to amend the state’s Brownfield Redevelopment Financing Act of 1996: under the state’s current statute, brownfield developers could recoup limited construction costs (such as demolition, site preparation, and infrastructure improvements) via tax increment financing; however, under his new proposal, the state would directly subsidize construction costs that directly benefit an eligible property—with the municipal bonds backed by Michigan state sales and income taxes generated during on-site construction, as well as 50 percent of state income and withholding taxes from those who will live and work on the sites in the future, as well as the added property tax revenue. The Detroit Brownfield Redevelopment Authority would issue municipal bonds to finance the project, with the bond payments secured by some $229.6 million in property tax revenues, $18.2 million from construction site state income taxes, $1.6 million from city income taxes, and $307.9 million from state income taxes paid by future workers and residents. She notes that Mr. Gilbert promises this project would attract 2,122 residents who would pay monthly rents ranging from $2,287 to $3,321 and create 8,500 direct permanent jobs, including 5,400 office jobs paying an annual average of $85,000 and 1,700 retail and service positions paying $25,000—with Michigan reimbursed via captured state and municipal income taxes over the next two decades.  

As we have noted—and she writes: this is a fiscal dare: notwithstanding its fiscal recovery, the Motor City still has the highest rate of concentrated poverty among the 25 most populous metro areas in the U.S.; its median household income is about $26,000; and its unemployment rate was 9.6% in July. That is: this is a gamble in an area in the downtown where—on the day Detroit filed for chapter 9 municipal bankruptcy, the hotel clerk told me it was unsafe for me to walk to the Governor’s Detroit offices—about a half mile away—to meet with Kevin Orr on his very first morning as the Governor’s appointed Emergency Manager. Now, nearly a decade later, the fiscal challenge—and risk—is whether new state tax expenditures which benefit developers could succeed in boosting Detroit’s recovering revenues.

Physical & Fiscal Destruction. Hurricane Maria left no equina or corner of Puerto Rico untouched: the cataclysmic storm meted out systemic physical and fiscal devastation to the U.S. territory and to the lives and livlihoods of its 3.4 million American citizens. This morning, more than five weeks later, too many residents still lack safe and clean drinking water, access to food, and communications. Power, and transportation links are only partially restored. While tens of thousands of public servants and volunteers are now hard at work restoring those essential needs and unblocking constraints from logistics to information flow, the contrast with the federal responses in Houston and Florida have become even more stark. It means Puerto Rico’s leaders face two simultaneous challenges: addressing people’s most urgent physical needs, and laying the foundations for the direction of the medium- and long-term recovery and reconstruction efforts ahead.

In a way similar to Detroit, Puerto Rico confronts a legacy of debt and economic uncertainty, but, as we have noted above; the physical and fiscal devastation might offer a historic opportunity to reimagine Puerto Rico’s future. Yet, how the island’s fiscal and physical reconstruction is conceived and implemented will determine the future of the island: it will be the architecture of Puerto Rico’s physical and civic infrastructure for the next half century, or, as Puerto Rico’s Economic Secretary Manuel Laboy said recently: “We have this historic opportunity: Instead of going with incremental changes, we can go and push the envelope to really transform the infrastructure. That is the silver lining opportunity that we have.” After all, Hurricane Maria exacerbated the considerable challenges already confronting Puerto Rico: a massive public finance debt crisis and migration flows which have witnessed a dramatic outflow of the island’s population: an outflow of more than 10%–but an unbalanced 10%, as the outflow has been characterized disproportionately by being both younger and more educated, meaning Puerto Rico has disproportionately greater low-income and elderly citizens in need of greater fiscal assistance, even as those most valuable to a vibrant economy has become smaller.

The fiscal and human challenge, this, will be for its leaders not to employ the paper towels thrown at them by President Trump, but rather to leverage its considerable natural assets: its central location in the Caribbean region, its hard-working and resourceful residents, its mostly mild climate, and its development-friendly topography. Indeed, many agencies involved in the reconstruction are rightly conducting a “needs assessment” to align their aid efforts. Equally important to medium- and long-term reconstruction is an “asset map” to ensure that Puerto Rico’s strengths, resources, and opportunities are taken into account when imagining the future potential of the island. At the same time, as part of rebuilding, its leaders will need to anticipate that global warming means that more category 4 and 5 storms are certain in the future—so that rebuilding what was is not a constructive option: there will have to be innovation to creating a resilient infrastructure for power, water and sanitation, communications and transportation.

But, again as in Detroit, the physical, governance, and fiscal reform process which Puerto Rico’s new administration has promised must remain front and center: how can Puerto Rico restore its own fiscal and political solvency—a challenge hardly enhanced in the wake of criticism of the Puerto Rico Electric Power Authority’s (PREPA) now-canceled contract with Whitefish Energy Holdings: the territory must create transparent budgets and plans with regard to how recovery funding is allocated—as well as complete its exploration how citizen panels and consultations to review different design options and careful procurement, oversight, and reporting mechanisms can earn respect and support—not only from its citizens and taxpayers, but also from the PROMESA Oversight Board: a transparent procurement system which can assess the myriad offers that will come in to ensure that the legacies created are cost-effective and the best options for the people and the island. 

Puerto Rico’s Municipalities or Muncipios. Unsurprisingly, the fiscal crisis which has enveloped most of Puerto Rico’s municipalities has multiplied after the passage of Hurricane Maria. The economic burden to respond to the emergency situation has undermined efforts to refills depleted coffers, meaning that the municipal executives of the Popular Democratic Party (PDP), grouped under the Association of Mayors, have not ruled out imposing austerity measures in addition to those applied last year—or, as Association President Rolando Ortiz, the Mayor of Cayey, put it:I am sure that all municipalities are exposed to having to reduce working hours or eliminate places permanently, because we are all exposed to lack of income.” According to reports from El Nuevo Día from last August, some 15 municipalities had to cut working hours of their employees—in some municipalities up to 50%, including in the towns of Vieques, Toa Baja, Las Piedras, and Cabo Rojo. The physical and fiscal devastation comes in the wake of fiscal declines of the municipalities in the past decades after assuming burdens imposed by the Commonwealth, such as mandated increases in contributions to the Retirement Systems, the subsidy to the Government Health Plan, and the reduction in the government contribution. Even though the municipalities have been unable to generate specific data on the economic impact that the municipalities have suffered in the wake of Maria’s impact, Mr. Ortiz emphasized that the blow has been severe: the mayors have had to assume recovery and first response tasks which were not budgeted, such as the collection and disposition of debris and the purchase and supply of diesel and gasoline. Notwithstanding that some of the funds will be reimbursed by the Federal Emergency Management Agency (FEMA), such funding will not represent an automatic improvement in the coffers. As Mr. Ortiz notes: “Before the hurricanes Irma and María, 40 municipalities were about to close their operations. With this impact we have had, we have almost two months of zero commercial economic activity…it makes the fiscal situation precarious.” One of the most serious fiscal claims of the mayors has been for the return of $ 350 million in revenue from contributions that the central government has proposed to cut to municipal assistance in the next fiscal year—with the Mayors meeting yesterday in San Juan to discuss the economic and social situation of each of the associated municipalities in the wake of the storms, where they agreed that the urgency of water and food supplies and the restoration of basic services persists—and that they could not “validate” the claim of Puerto Rico’s Aqueduct and Sewer Authority that 82 percent of subscribers have service. Mayor Marcelo Trujillo of Humacao noted: “If electricity does not arrive, the municipality will go bankrupt, given the case that we depend on 13 industries, trade, and hospitals that we have that are working halfway,” adding that some of the businesses in his city which are open, are only partly operating—while the municipality’s largest shopping center remains shuttered—depriving the community of tax revenues, earned income, and hop—and meaning, as he reported, that the municipality has been unable to restore operations, because the Casa Alcaldía (town hall) suffered damages that prevent work from there. 

His colleague, the Mayor of Comerío, José A. Josian Santiago, noted: “As of July 1 of next year, my budget goes down from 60 percent from $10 million to $4 million, which would mean that, at this time of crisis, I have to leave 200 employees out of a total of 300. How am I going to operate? How will I respond to the emergency?” He noted that the current situation of Comerío is complicated, because, in addition to the lack of basic services, citizens have no way to obtain money for the purchase of food and basic necessities, because banks and ATM’s are closed: “It is a fatigue for my team, as for the people, to be every day trying to survive. A country cannot establish that as a condition of life. There is no way to sentence the communities of our municipalities to survive every day.”

The Price of Solvency. Even as Puerto Rico is struggling to recover without anything comparable to the federal assistance rendered to Houston and Florida, the PROMESA federal oversight board has given the U.S. territory about seven weeks to revise its financial recovery plan to account for the devastating damage suffered in Hurricane Maria, raising the possibility the territory will need to impose deeper losses on owners of its $74 billion debt. The panel earlier this week mandated that Puerto Rico will need to seek approval for any contract over $10 million, significantly expanding its supervision—a step taken in the wake of PREPA’s decision to grant a critical $300 million rebuilding contact to a small Montana company which had just two full-time employees before beginning its work in Puerto Rico. With Maria wreaking an estimated $95 billion in physical devastation, Puerto Rico’s municipal bonds have tumbled on speculation that investors will be forced to accept even steeper concessions than previously anticipated: the territory’s main operational account, which receives most of its public funds and covers most of its expenses, is now projected to report a deficit of $2.4 billion by the end of this year—a deficit exploded not just by the storm devastation, but also by Maria’s toll on the government’s tax collections—or, as PROMESA Board Executive Director Natalie Jaresko put it: “The devastation has affected millions of lives, decimated critical infrastructure, made revenue collections almost impossible…In light of this new reality, we must work urgently towards revising the certified fiscal plans.” The commonwealth and PREPA have been ordered to submit to the federal board their updated fiscal plans by Dec. 22nd. It is unclear, however, whether the PROMESA Board has fully taken into account the demographic changes caused by the physical storm: The revisions need to take into account the anticipated population loss because of Maria, with Hunter College’s Center for Puerto Rican Studies estimates Puerto Rico will lose 14 percent of its population by 2019 because of the storm.

Director Jaresko told the PROMESA Board the hurricane left several variables that will affect the amount of revenues available and spending that will be necessary in the next few years, meaning that the territory’s fiscal recovery plan should show that structural balance should be achieved by FY2022, so that, according to the schedule discussed by the Board, it will seek draft fiscal plans from the commonwealth government, PREPA, and the Puerto Rico Aqueduct and Sewer Authority by Dec. 22nd, aiming to have approved fiscal plans for these entities by Ground Hog Day. The Board plans to adopt certified plans by March 16th, after holding two public meetings in Puerto Rico and one in New York City to receive public comment on the revision to the fiscal plans: these are tentatively scheduled for Nov. 16, 28, and Dec. 4.

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The Leadership Challenges on the Road to Fiscal and Physical Recovery

September 29, 2017

Good Morning! In today’s Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico; Hartford’s steep fiscal challenges; and Detroit’s ongoing road to fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal Safety Net? The White House yesterday announced President Trump had agreed to waive the Jones Act, which will temporarily lift shipping restrictions on Puerto Rico and enable the hurricane-ravaged island to receive necessary aid; however, the waiver from the shipping law, which mandates that only American-made and-operated vessels may transport cargo between U.S. ports, will only last for 10 days, after which the equivalent of a 20 percent tax will be reimposed. The delayed U.S. response to the save U.S. citizens compared unfavorably to the response to save and protect foreign citizens in Haiti seven years ago, when the U.S. military mobilized as if it were going to war—with the U.S. military, in less than 24 hours, and before first light, already airborne, on its way to seize control of the main airport in Port-au-Prince. Within two days, the Pentagon had 8,000 American troops en route; within two weeks, 33 U.S. military ships and 22,000 troops had arrived. By contrast, eight days after Hurricane Maria ripped across neighboring Puerto Rico, just 4,400 service members were participating in federal operations to assist the devastated U.S. citizens, according to a briefing by an Army general yesterday, in addition to about 1,000 Coast Guard members.

The seemingly inexplicable delay in waiving the Jones Act—temporarily—was due to opposition of the waiver by the Department of Homeland Security, which had argued that a federal agency may not apply for a waiver unless there is a national defense threat (as, apparently, there might have been in Houston and Florida). Sen. John McCain (R-Az.) has, for years, sought to repeal this discriminatory law: The 1920 Jones Act requires that goods shipped between U.S. ports be carried by vessels 1) built in the U.S., 2) majority-owned by American firms, and 3) crewed by U.S. citizens.

Key House and Senate members, since Monday, had been pressing for a one-year waiver from the rules in order to help accelerate deliveries of food, fuel, medical, and other critical supplies to Puerto Rico, especially with current estimates that Puerto Rico could be without power for six months. On Wednesday, 45 U.S. Senate and House Members had signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement. U.S. Rep. Nydia Velázquez (D.-N.Y.) warned: “If President Trump doesn’t swiftly deploy every available resource that our country has, then he has failed the people of Puerto Rico – and this will become his Katrina.” The temporary suspension of the onerous and discriminatory Jones law came only in the wake of a fierce backlash against the Trump administration for its inexplicable delay in not immediately lifting the federal law for Puerto Rico, especially after it issued a two-week waiver for Texas and Florida in response to Hurricanes Harvey and Irma. Nevertheless, San Juan Mayor Carmen Yulín Cruz praised the administration’s decision: she said it could help bring down the cost of emergency medical and other supplies, as well as vital construction materials by nearly 33 percent. Nevertheless, she warned there are still thousands of containers sitting idle at the ports of San Juan, a problem she blamed on “jurisdictional” and bureaucratic issues.

The belated Presidential action came as Puerto Rico continued to suffer the after effects of Hurricane Maria: Puerto Rico Electric Power Authority Executive Director Ricardo Ramos Rodríguez warned it could take PREPA as much as half a year to restore electricity.

Meanwhile, it appears the PROMESA Oversight Board is ready to revise the amount of debt to be paid in the next nine years. The Board is scheduled to meet today in New York City to revise the March-approved fiscal plan: the current Board fiscal plan specifies there should be enough funds to pay approximately 24% of the debt; however, it appears the Board will have little choice today but to revise every fiscal plan. Clearly none of the previous underlying assumptions can hold, and now the Board will have to await the actions and finding of the Federal Emergency Management Agency, while the Treasury Department will have to work with Puerto Rico to settle on a massive restructuring—or, as Puerto Rico House Representative Rafael Hernández Montañez put it: “We can’t have money spent on corporate lawyers and PowerPoint producing technocrats while funding is needed for immediate reconstruction efforts.” While FEMA has committed to paying for 100 percent of the costs of some work, on others, it is mandating a match of 20% to 25% of the costs for other work—a match which appears out of reach for the most savagely damaged municipalities or municipios—now confronted not just by enormous new capital and operating demands, but also by sharply reduced revenues.

Wednesday morning, the PREPA Bondholders Group offered up to $1.85 billion in debtor in possession loans to the authority. According to the group, part of the package would be a new money loan of up to $1 billion. Another part would be their possible acceptance of an $850 million in DIP notes in exchange for $1 billion in outstanding bonds owed to them—or, as the Group noted: “The new funding would allow PREPA to provide the required matching funds under various grants from the Federal Emergency Management Agency.” In response, PREPA’s Natalie Jaresko said: “We welcome and appreciate the expression of support from creditors…The Board will carefully consider all proposals in coordination with the government, but it is still very early as we begin to navigate a way forward following the catastrophic impact Hurricane Maria had on the island.”

The existing fiscal PREPA plan specifies there should be enough funding to pay about 24% of the debt due over the next decade; that, however, has raised questions with regard to the underlying assumptions of the Board, especially with regard to when FEMA will complete its work on the island.

Rafael Hernández Montañez, a member of Puerto Rico’s House, noted that Hurricane Maria put Puerto Rico’s territory-wide and municipal governments in very difficult financial situations. While FEMA has committed to paying for 100% of the costs of some work, he notes that the federal relief agency is still mandating a government match of 20% to 25% of the costs for other work: “It’s going to be a huge effort to cover that 20% with the government’s unbalanced budget,” adding that the hurricane will also lead to reduced revenues for the local governments.

On Wednesday, 145 U.S. Representatives and Senators signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement–the same day as the PREPA Bondholders Group offer. 

The Category 4 Maria destroyed Puerto Rico’s electrical grid; it left the island desperately short of food, clean water, and fuel—and sufficient shipping options, notwithstanding the claim from the Department of Homeland Security that: “Based on consultation with other federal agencies, DHS’s current assessment is that there is sufficient numbers of U.S.-flagged vessels to move commodities to Puerto Rico.” Thus DHS opposed a waiver of the Jones Act (Under the Jones Act federal cabotage rules, the entry of merchandise into Puerto Rico can only be made on US flag and crew ships – the most expensive fleet in the world.), which has been suspended in past natural disasters, to allow less expensive, foreign-flagged ships bring in aid. Former President George W. Bush suspended the Act after Hurricane Katrina in 2005, and President Barack Obama suspended it after superstorm Sandy in 2012. In a letter to the Department of Homeland Security, Sen. McCain criticized the department for waiving the Jones Act in the wake of hurricanes Harvey and Irma, but not for Puerto Rico. The Senator, who has long sought a repeal of the Jones Act, noted: “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster: Now, more than ever, it is time to realize the devastating effect of this policy and implement a full repeal of this archaic and burdensome Act.”  Only the Department of Defense may obtain a Jones Act waiver automatically, which it did to move petroleum products from Texas after Hurricane Harvey. The White House is expected to send Congress a request for a funding package for Puerto Rico in the next few weeks, a senior congressional aide said.

The Road to Hartford’s Default. Citing deep cuts to higher education, sharp reductions in aid to distressed communities, and unsound deferrals of public pension payments, Connecticut Gov. Dannel Malloy yesterday made good on his pledge to veto the budget that legislature, earlier this month, had adopted, deeming it: “unbalanced, unsustainable, and unwise,” adding his apprehension that were it to be implemented, it would undermine the state’s long-term fiscal stability and essentially guarantee the City of Hartford’s chapter 9 municipal bankruptcy. His veto came as the Governor and top legislators continued bipartisan talks in an attempt to reach a compromise; however, despite legislative attempts to pass a bill to increase the hospital provider tax to 8 percent, a 25 percent increase over the current level, the legislature will not meet today. In his executive order, the Governor allowed key stated services to remain operating; however, he ordered steep cuts to municipalities and certain social service programs: under his orders, approximately 85 communities would see their education cost sharing grants, the biggest source of state funding for public education in Connecticut, cut to zero next month—no doubt a critical element provoking the Connecticut Council of Small Towns, which represents more than 100 of the state’s smallest communities, to seek an override in a special session the week after next in order to avoid local property tax increases. Nevertheless, Gov. Malloy stood strongly against the Republican plan and a potential override, stating: “This budget adopts changes to the state’s pension plan that are both financially and legally unsound…This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature.” He added his apprehensions that the changes proposed to the state’s pension system could expose Connecticut taxpayers to potentially costly litigation down the road: “Prior administrations and legislatures have, over decades, consistently and dangerously underfunded the state’s pension obligations,’’ a strategy, he noted, which he said has led to crippling debt and limited the state’s ability to invest in transportation, education, and other important initiatives. Nonetheless, Republican leaders urged the Governor to sign the two-year, $40.7 billion budget, saying it makes significant structural changes, such as capping the state’s bonding authority and limiting spending. Fiscally conservative Democrats who bolted to the Republican side had criticized a Democratic budget proposal which had proposed new taxes on vacation homes, monthly cellphone bills, and fantasy sports betting, as well as increased taxes on cigarettes, smokeless tobacco, and hotel room rates.

House Republican leader Themis Klarides (R-Derby) warned she and her colleagues will try to override the veto—a steep challenge, as in Connecticut, that requires a two-thirds vote in each chambers, meaning 101 votes in the House and 24 in the Senate. The crucial Republican amendment passed with 78 votes in the House and 21 in the Senate—well short of the override margin in both chambers. The action came as S&P Global Ratings this week lowered Hartford’s credit rating, writing that its opinion “reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty,” albeit noting that the city could still avoid chapter 9 municipal bankruptcy by restructuring its debts. The agency wrote: “In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing. Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default. The mayor’s public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty.” Hartford’s fiscal plight is, if anything, made more dire by the fiscal crisis of Connecticut, which is still without a budget—and where the Legislature has under consideration a budget proposal from the Governor to slash state aid to the state’s capitol city of Hartford—where the Mayor notes that even were the state to make the payments it owes, Hartford would still be unable to pay its debts—so that S&P dropped the city’s credit rating from B- to C—a four-notch downgrade, writing: “The downgrade to ‘CC’ reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty.”

The Steep Recovery Road. Almost three years after exiting chapter 9 bankruptcy, Detroit is meeting its plan of debt adjustment, but still confronts fiscal challenges to a full return to the municipal market, even as it nears its exit from Michigan state oversight next year. Detroit’s Deputy Chief Financial Officer and City Finance Director, John Hill, this week noted that while the Motor City recognizes that any debt the city plans to issue will still need a security boost from a quality revenue stream and some enhancement, such as a state intercept, Detroit’s plan of debt adjustment did not assume the need for market access in a traditional and predictable way, without added security layers, for at least a decade. That assessment remains true today, as Detroit nears its third anniversary from its exit from the nation’s largest ever municipal bankruptcy. With chapter 9, Mr. Hill adds: “Everything that we have been able to do since exiting bankruptcy has an attached revenue stream to it: You secure it, and bond lawyers agonize over how that will be protected in the unlikely event of another bankruptcy, because everyone has to ask the question now. Then there is a strong intercept mechanism that goes to a trustee like U.S. Bank where the bondholders now know this is absolutely secure.”

Municipal Market Analytics partner Matt Fabian notes that Detroit continues to struggle with challenges which predate its chapter 9 bankruptcy, adding the city is unlikely to regain an ability to access the traditional municipal markets on its own in the near-to-medium term: “They don’t have traditional reliable access where if they need to go to the market, you can predict with certainty that they will and they will be within a generally predictable spread,” adding that reestablishing its presence in the traditional market is important, because it indicates whether bondholders have confidence in the city as a going concern. In fact, Detroit has adopted balanced budgets for two consecutive years; it is on a fiscal path to exiting Michigan Financial Review Commission oversight, and the city ended FY2016 with a $63 million surplus in its general fund; however, Detroit’s four-year fiscal forecast shows an annual growth rate of only about 1%.

The city’s public pension obligations, mayhap the thorniest issue in cobbling together its plan of debt adjustment, are to be met per its economic plan, via a balloon payment.  Mr. Fabian notes that the Motor City’s recovery plan and future revenue growth is complicated by the need to set aside from surpluses an additional $335 million between Fy2016 and Fy2023 to address that significant, unfunded pension liability, worrying that while the plan is “fiscally responsible;” nevertheless, it comes “at the expense of using these funds for reinvestment and service improvement.”

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health and Naglick says it shows the city has recognized the need to tackle it. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund, said Detriot CFO John Naglick, will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. “More importantly, the growing contributions each year from the general fund to the trust will build budget capacity to make the increased contributions in future years,” he said.

Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million. Pension woes aren’t the only challenge the city faces. Fabian said that economic development has been limited to the city’s downtown and midtown areas. The rest of Detroit’s neighborhoods haven’t fared so well.

Dan Loepp, the president and CEO of Blue Cross Blue Shield of Michigan, and Gerry Anderson, the Chairman and CEO of DTE Energy, are regarded to be among the important business leaders in Detroit, two key sectors of the Motor City’s economy, who see Detroit’s fiscal and economic trajectory as intertwined with the future of their companies; they  have headquarters in downtown and employ thousands of people including Detroiters—companies which had been making conscious and deliberate investments in the city. Asked recently to offer their perspectives about where Detroit is headed and how to include the many who are left out of the recovery, Mr. Loepp responded: “I’m a native Detroiter, and I lead a company that’s been a business resident of Detroit for nearly 80 years. I remember how uneasy it felt to be in Detroit when the national economy collapsed 10 years ago. It was hard and scary…From then to now, I strongly believe Detroit’s comeback is one of the best stories in America. The downtown is pulsing with growth and action. You’ve got business and residential development that has connected the river to Midtown and is now expanding into neighborhoods.” He added Detroit today is clear of debt and venture capital flowing backed by a city leadership which is “working well together, noting Detroit today is “now positioned to compete and win investment and jobs against any city in the country. All of this is great for Detroit.”

Notwithstanding, he warned that challenges remain: “The bankruptcy, while hard, gave the city’s leadership a clean slate to solve challenges faced by residents. The Mayor and council are working together on issues like lighting, infrastructure, zoning, and demolition…the Mayor, especially, has spent considerable energy advocating for the people of Detroit—doing things like making sure new housing developments hold space for working people of all incomes. This will promote a stronger, more diverse Detroit…Institutional issues, like improving the city’s schools and making neighborhoods safer for city residents, will take time to solve. They will take a constant, steady focus. And they need people within state and local government to work hand-in-hand with people from the neighborhoods to do the tough labor of finding sustainable solutions.” Nevertheless, he cautioned that the Motor City’s recovery is incomplete without participation of the majority: “Detroit can’t truly ‘come back’ if people living in the city are left behind. We need to always make sure there is a focus on people and that we make people a priority. Schools need to be improved. Transit needs to be addressed in a comprehensive way. Employment opportunities and housing need to be part of the master plan.”

Post Municipal Bankruptcy Leadership

08/07/17

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Good Morning! In this a.m.’s blog, we consider the fiscal challenge as election season is upon the Motor City: what kind of a race can we expect? Then we observe the changing of the guard in San Bernardino—as the city’s first post-chapter 9 City Manager settles in as she assumes a critical fiscal leadership role in the city emerging from municipal bankruptcy. Third, we consider the changing of the fiscal guard in Atlantic City, as outgoing (not a pun) Gov. Chris Christie begins the process of restoring municipal authority. Then we turn to what might be a fiscal turnaround underway in Puerto Rico, before, fourth, considering the special fiscal challenge to Puerto Rico’s municipios—or municipalities.

Post Municipal Bankruptcy Leadership. Detroit Mayor Mike Duggan, the city’s first post-chapter 9 mayor, has been sharing his goals for a second term, and speaking about some of his city’s proudest moments as he seeks a high turnout at tomorrow’s primary election mayoral primary election‒the first since the city exited municipal bankruptcy three years ago, noting he is: “very proud of the fact the unemployment rate in Detroit is the lowest it has been in 17 years: today he notes there are 20,000 more Detroiters working than 4 years ago. In January 2014, there were 40,000 vacant houses in the city, and today 25,000. We knocked down 12,000 and 3,000 had families who moved in and fixed them up,” adding: “For most Detroiters, that means the streetlights are on, grass is cut in the parks, busses are running on time, police and ambulances showing up in a timely basis and trash picked up and streets swept.” Notwithstanding those accomplishments, however, he confronts seven contenders—with perhaps the signal challenge coming from Michigan State Senator Coleman Young, Jr., whose father, Coleman Young, served as Detroit’s first African-American Mayor from 1974 to 1994. Mr. Young claims he is the voice for the people who have been forgotten in Detroit’s neighborhoods, noting: “I want to put people to work and reduce poverty of 48% in Detroit. I think that’s atrocious. I also want mass transit that goes more than 3 miles,” adding he is seeking ‘real change,’ charging that today in Detroit: “We’re doing more for the people who left the city of Detroit, than the people who stayed. That’s going to stop in a Young administration.” Remembering his father, he adds: “I don’t think there will ever be another Coleman Young, but I am the closest thing to him that’s on this planet that’s living.” (Other candidates in tomorrow’s non-partisan primary include Articia Bomer, Dean Edward, Curtis Greene, Donna Marie Pitts, and Danetta Simpson.)  

According to an analysis by the Detroit News, voters will have some interesting alternatives: half of the eight candidates have been convicted of felony crimes involving drugs, assault, or weapons—with three charged with gun crimes and two for assault with intent to commit murder, albeit, some of the offenses date back as far as 1977. (Under Michigan election law, convicted felons can vote and run for office, just as long as they are neither incarcerated nor guilty of crimes breaching public trust.

Taking the Reins.  San Bernardino has named its first post-chapter 9 bankruptcy city manager, selecting assistant City Manager and former interim city manager, Andrea Miller, to the position—albeit with some questions with regard to the $253,080 salary in a post-chapter 9 recovering municipality where the average household income is less than $36,000 and where officials assert the city’s budget is insufficient to fully address basic public services, such as street maintenance or a fully funded police department. Nevertheless, Mayor Cary Davis and the City Council voted unanimously, commenting on Ms. Miller’s experience, vision, and commitment to stay long-term, or, as Councilman Fred Shorett told his colleagues: “As the senior councilmember—I’ve been sitting in this dais longer than anybody else—I think we’ve had, if we count you twice, eight city managers in a total of 9 years: We have not had continuity.”  However, apprehension about continuity as the city addresses and implements its plan of debt adjustment remains—or, as Councilmember John Valdivia insisted, there needs to be a “solemn commitment to the people of San Bernardino” by Ms. Miller to serve at least five years, as he told his colleagues: “During Mayor (Carey) Davis’ four years in office, the Council is now voting on the third city manager: San Bernardino cannot expect a successful recovery with this type of rampant leadership turnover at City Hall…Ms. Miller is certainly qualified, but I am concerned that she has already deserted our community once before.” Ms. Miller was the city’s assistant city manager in 2012, when then-City Manager Charles McNeely abruptly resigned, leaving Ms. Miller as interim city manager to discover that the city would have to file for chapter 9 bankruptcy—a responsibility she addressed with aplomb: she led San Bernardino through the first six months of its municipal bankruptcy, before leaving without removing “interim” from her title, instead assuming the position of executive director of the San Gabriel Valley Council of Governments.

Ms. Miller noted: “I would remind the Council that I was here as your interim city manager previously, and I did not accept the permanent appointment, because I felt like I could not make that commitment given some of the dynamics…(Since then) this Council and this community have implemented a new city charter, the Council came together in a really remarkable way and had a discussion with me that we had not been able to have previously: You committed to some regular discussion about what your expectations are, you committed to strategic planning. And so, with all those things and a strategic plan that involves all of us in a stronger, better San Bernardino, yes I can make that commitment.” Interestingly, the new contract mandates at least two strategic planning sessions per year—and, she told the Council additional sessions would probably be wise. The contract the city’s new manager signed is longer than the city’s most recent ones—mayhap leavened by experience: the length and the pay are higher than the $248,076 per year the previous manager received. Although Ms. Miller is not a San Bernardino resident, she told the Mayor and Council she is committed to the city and said the city should strive to recruit other employees who do live in the city.

Not Gaming Atlantic City’s Future. New Jersey Governor Chris Christie’s administration last week announced it had settled all the remaining tax appeals filed by Atlantic City casinos, ending a remarkable fiscal drain which has contributed to the city’s fiscal woes and state takeover. Indeed, it appears to—through removal of fiscal uncertainty and risk‒open the door to the Mayor and Council to reduce its tax rate over the long-term as the costs of the appeal are known and able to be paid out of the bonds sold earlier this year—effectively spinning the dial towards greater fiscal stability and sustainability. Here, the agreements were reached with: Bally’s, Caesars, Harrah’s, the Golden Nugget, Tropicana, and the shuttered Trump Plaza and Trump Taj Mahal: it comes about half a year in the wake of the state’s tax appeal settlement with Borgata, under which the city agreed to pay $72 million of the $165 million the casino was owed. While the Christie administration did not announce dollar amounts for any of the seven settlements announced last week, it did clarify that an $80 million bond ordinance adopted by the city will cover all the payments—effectively clearing the fiscal path for Atlantic City to act to reduce its tax rate over the long term as the costs of the appeal are known and can be paid out of the municipal bonds sold earlier this year.  

In these tax appeals, the property owners have claimed they paid more in taxes than they should have—effectively burdening the fiscally besieged municipality with hundreds of millions in debt over the last few years as officials sought to avoid going into chapter 9 municipal bankruptcy. Unsurprisingly, Gov. Christie has credited the state takeover of Atlantic City for fostering the settlements, asserting his actions were the “the culmination of my administration’s successful efforts to address one of the most significant and vexing challenges that had been facing the city…Because of the agreements announced today, casino property tax appeals no longer threaten the city’s financial future.” The Governor went on to add that his appointment of Jeffrey Chiesa, the former U.S. Senator and New Jersey Attorney General to usurp all municipal fiscal authority in Atlantic City when, in his words, Atlantic City was “overwhelmed by millions of dollars of crushing casino tax appeal debt that they hadn’t unraveled,” have now, in the wake of the state takeover, resulted in the city having a “plan in place to finance this debt that responsibly fits within its budget.” The lame duck Governor added in the wake of the state takeover, the city will see an 11.4% drop in residents’ overall 2017 property tax rate. For his part, Atlantic City Mayor Don Guardian described the fiscal turnaround as “more good news for Atlantic City taxpayers that we have been working towards since 2014: When everyone finally works together for the best interest of Atlantic City’s taxpayers and residents, great things can happen.”

Puerto Rican Debt. The Fiscal Supervision Board in the U.S. territory wants to initiate a discussion into Puerto Rico’s debt—and how that debt has weighed on the island’s fiscal crisis—making clear in issuing a statement that its investigation will include an analysis of the fiscal crisis and its taxpayers, and a review of Puerto Rico’s debt and issuance, including disclosure and sales practices, vowing to carry out its investigation consistent with the authority granted under PROMESA. It is unclear, however, how that report will mesh with the provision of PROMESA, §411, which already provides for such an investigation, directing the Government Accounting Office (GAO) to provide a report on the debt of Puerto Rico no later than one year after the approval of PROMESA (a deadline already passed: GAO notes the report is expected by the end of this year.). The fiscal kerfuffle comes as the PROMESA Oversight Board meets today to discuss—and mayhap render a decision with regard to furloughs and an elimination of the Christmas bonus as part of a fiscal oversight effort to address an expected cash shortfall this Fall, after Gov. Ricardo Rosselló, at the end of last month, vowed he would go to court to block any efforts by the PROMESA Board to force furloughs, apprehensive such an action would fiscally backfire by causing a half a billion dollar contraction in Puerto Rico’s economy.

Thus, we might be at an OK Corral showdown: PROMESA Board Chair José Carrión III has warned that if the Board were to mandate furloughs and the governor were to object, the board would sue. As proposed by the PROMESA Board, Puerto Rican government workers are to be furloughed four days a month, unless they work in an excepted class of employees: for instance, teachers and frontline personnel who worked for 24-hour staffed institutions would only be furloughed two days a month, law enforcement personnel not at all—all part of the Board’s fiscal blueprint to save the government $35 million to $40 million monthly.  However, as the ever insightful Municipal Market Advisors managing partner Matt Fabian warns, it appears “inevitable” that furloughs and layoffs would hurt the economy in the medium term—or, as he wrote: “To the extent employee reductions create a protest environment on the island, it may make the Board’s work more difficult going forward, but this is the challenge of downsizing an over-large, mismanaged government.” At the same time, Joseph Rosenblum, the Director of municipal credit research at AllianceBernstein, added: “It would be easier to comment about the situation in Puerto Rico if potential investors had more details on their cash position on a regular basis…And it would also be helpful if the Oversight Board was more transparent about how it arrived at its spending estimates in the fiscal plan.”

Pensiones. The PROMESA Board and Puerto Rico’s muncipios appear to have achieved some progress on the public pension front: PROMESA Board member Andrew Biggs asserts that the fiscal plan called for 10% cuts to pension spending in future fiscal years, while Sobrino Vega said Gov. Ricardo Rosselló has promised to make full pension payments. Natalie Ann Jaresko, the former Ukraine Minister of Finance whom former President Obama appointed to serve as Executive Director of PROMESA Fiscal Control Board, described the reduction as part of the fiscal plan that the Governor had promised to observe: the fiscal plan assumed that the Puerto Rican government would cut $880 million in spending in the current fiscal year. Indeed, in the wake of analyzing the government’s implementation plans, the PROMESA Board appeared comfortable that the cuts would save $662 million—with the Board ordering furloughs to make up the remaining $218 million. The fiscal action came as PROMESA Board member Carlos García said that the board last Spring presented the 10 year fiscal plan guiding government actions with certain conditions, Gov. Rosselló agreed to them, so that the Board approved the plan with said conditions, providing that the government achieve a certain level of liquidity by the end of June and submit valid implementation plans for spending cuts. Indeed, Puerto Rico had $1.8 billion in liquidity at the end of June, well over the $291 million that had been projected, albeit PROMESA Board member Ana Matosantos asserted the $1.8 billion denoted just a single data point. Ms. Jaresko, however, advised that this year’s government cuts were just the beginning: the Board fiscal plan calls for the budget cuts to more than double from $880 million in this year, to $1.7 billion in FY 2019, to $2.1 billion in FY2020.  No Puerto Rican government representative was allowed to make a presentation to the board on the issue of furloughs.

Not surprisingly, in Puerto Rico, where the unemployment rate is nearly triple the current U.S. rate, the issue of furloughs has raised governance issues: Sobrino Vega, the Governor’s chief economic advisor non-voting representative on the PROMESA Oversight Board, said there was only one government of Puerto Rico and that was Gov. Rosselló’s, adding that under §205 of PROMESA, the board only had the powers to recommend on issues such as furloughs, noting: “We can’t take lightly the impact of the furloughs on the economy,” adding the government will meet its fiscal goals, but it will do it according its own choices, but that the Puerto Rican government will cooperate with the Board on other matters besides furloughs. His statement came in the wake of PROMESA Board Chair José Carrión III’s statement in June that if Puerto Rico did not comply with a board order for furloughs, the Board would sue.

Cambio?  Puerto Rico Commonwealth Treasury Secretary Raul Maldonado has reported that Puerto Rico’s tax revenue collections last month were was ahead of projections, marking a positive start to the new fiscal year for an island struggling with municipal bankruptcy and a 45% poverty rate. Secretary Maldonado reported the positive cambio (in Spanish, “cambio” translates to change—and may be used both to describe cash as well as change, just as in English.): “I think we are going to be $20 to $30 million over the forecast: For July, we started the fiscal year already in positive territory, because we are over the forecast. We have to close the books on the final adjustment but we feel we are over the budget.” His office had reported the revenue collection forecast for July, the start of Puerto Rico’s 2017-2018 fiscal year, was $600.8 million: in the previous fiscal year, Puerto Rico’s tax collections exceeded forecasts by $234.9 million, or 2.6%, to $9.33 million, with the key drivers coming from the foreign corporations excise tax, the sales and use tax, and the motor vehicle excise tax. Sec. Maldonado, who is also Puerto Rico’s CFO, reported that each government department is required to freeze its spending and purchase orders at 95% of the monthly budget, noting: “I want to make sure that they don’t overspend. By freezing 5%, I am creating a cushion so if there is any variance on a monthly basis we can address that. It is a hardline budget approach but it is a special time here.” Sec. Maldonado also said he was launching a centralized tax collection pilot program, with guidance from the U.S. Treasury—one under which three large and three small municipalities have enrolled in an effort to assess which might best increase tax collection efficiency while cutting bureaucracy in Puerto Rico’s 78 municipalities, noting: “We are going to submit the tax reform during August, and we will include that option as an alternative to the municipalities.”

Rising from Municipal Bankruptcies’ Ashes

07/24/17

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Meeting Post-Bankruptcy Pension Obligations

07/14/17, le Jour de Bastille!

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Good Morning! In this a.m.’s eBlog, we consider a vote by the Detroit City Council to approve a resolution allowing for the city to realize millions of dollars in income taxes from its NBA Pistons players, employees, and visiting NBA players to fund neighborhood improvements in the post-chapter 9 municipal bankruptcy city. We also make public our new guidebook: “Changing Landscapes in Constituent Communication: A Guidebook for Elected Leaders,” as well as our new prezi: a visual feast for Virginia’s elected leaders on the changing means to hear from and communicate to constituents. Please view at: https://fiscalbankruptcy.wordpress.com/the-reports/.

Trying to Run on all Pistons. The Detroit City Council has voted 7-1 to approve a resolution to allow the Motor City to realize millions of dollars in income tax revenues from its National Basketball Association Pistons players, employees, and visiting NBA players—with such revenues dedicated to finance neighborhood improvements across the Motor City, under a Neighborhood Improvement Fund—a fund proposed in June by Councilwoman (and ordained Minister) Mary Sheffield, with the proposal coming a week after the City Council agreed to issue some $34.5 million in municipal bonds to finance modifications to the Little Caesars Arena—where the Pistons are scheduled to play next season. Councilwoman Sheffield advised her colleagues the fund would also enable the city to focus on blight removal, home repairs for seniors, educational opportunities for young people, and affordable housing development in neighborhoods outside of downtown and Midtown—or, as she put it: “This sets the framework; it expresses what the fund should be used for; and it ultimately gives Council the ability to propose projects.” She further noted the Council could, subsequently, impose additional limitations with regard to the use of the funds—noting she had come up with the proposal in response to complaints from Detroit constituents who had complained the city’s recovery efforts had left them out—stating: “It’s not going to solve all of the problems, and it’s not going to please everyone, but I do believe it’s a step in the right direction to make sure these catalyst projects have some type of tangible benefits for residents.”

Detroit officials estimate the new ordinance will help generate a projected $1.3 million annually. In addition, city leaders hope to find other sources to add to the fund—sources the Councilmember reports, which will be both public and private: “We as a council are going to look at other development projects and sources that could go into the fund too.” As adopted, the resolution provides: “[I]t is imperative that the neighborhoods, and all other areas of the City, benefit from the Detroit Pistons’ return downtown …In turn, the City will receive income tax revenue, from the multimillion dollar salaries of the NBA players as well as other Pistons employees and Palace Sports & Entertainment employees.” The Council has forwarded the adopted proposals to Mayor Duggan’s office for final consideration and action. The proposed new revenues—unless the tax is modified or rejected by the Mayor–would be dedicated for use in the city’s Neighborhood Improvement Fund in FY2018—with decisions with regard to how to allocate the funds–by Council District or citywide—to be determined at a later date. The funds, however, could also be used to address one of the lingering challenges from the city’s adopted plan of debt adjustment from its chapter 9 bankruptcy: meeting its public pension obligations when general fund revenues are insufficient, “should there be any unforeseen shortfall,” as the resolution provides.

Getting into and out of Municipal Bankruptcy

07/10/17

Good Morning! In this a.m.’s eBlog, we consider the exceptional fiscal challenge to post-chapter 9 Detroit between building and razing the city; then we head East to Hartford, where the Governor and Legislature unhappily contemplate the Capital City’s fiscal future—and whether it will seek chapter 9 bankruptcy, before finally returning the key Civil War battlefield of Petersburg, Virginia—where a newly brought on Police Chief mayhap signals a turnaround in the city’s fiscal future.  

Raising or Razing a Municipality? Detroit, founded on July 24th in 1701 by Antoine de la Mothe Cadillac, the French explorer and adventurer, went on to become one of the country’s most vital music and industrial centers by the early 20th century; indeed, by the 1940’s, the Motor City had become the nation’s fourth-largest city. But that period might have been its apogee: the combination of riots and industrial restructuring led to the loss of jobs in the automobile industry, and signal white flight to the suburbs; since reaching a peak of 1.8 million in the 1950 census, Detroit’s population has declined precipitously: more than 60%.  Nevertheless, it is, today, the nation’s largest city on the U.S.—Canada border, and, with the imminent completion of the Gordie Howe Bridge to Canada, the city—already the anchor of the second-largest region in the Midwest, and the central city of a metro region of some 4.3 million Americans at the U.S. end of the busiest international crossing in North America; the question with regard to how to measure its fiscal comeback has been somewhat unique: it has been—at least up until currently, by the number of razed homes. Indeed, one of former Mayor Dave Bing’s key and touted programs was his pledge to raze 10,000 homes—a goal actually attained last year under Mayor Mike Duggan—under whose leadership some 11,500 homes have been razed. Mayor Duggan reports his current goal is to raze another 2,000 to 4,000 annually—so that, today, the city is host to the country’s largest blight-removal program—a critical component of Detroit’s future in a municipality which has experienced the loss of over one million residents over the last six decades—and where assessed property values of blighted and burned homes can be devastating to a municipality’s budget—and to its public schools. Worse, from a municipal governing perspective, is the challenge: how do the cities’ leaders balance helping its citizens to find affordable housing versus expenditures to raze housing—especially in a city where so many homeowners owed more than their homes were worth after the 2008 housing collapse?

Mayor Duggan’s response, moreover, has attracted the focus of multiple investigations, including federal subpoenas into bidding practices and the costs of demolitions—even as a separate grand jury has been reported to have subpoenaed as many as 30 contractors and Detroit municipal agencies, and Michigan officials have sought fines, because contractors mishandled asbestos from razed homes. Mayhap even more challenging: a recent blight survey by Loveland Technologies, a private company which maps the city, questions whether demolition is even keeping pace with blight in Detroit: the report indicates that vacancies in neighborhoods targeted for demolition have actually increased 64% over the last four years.

Hard Fiscal Challenges in Hartford: Is there a Role for the State? The Restructuring of Municipal Debt. Connecticut Gov. Daniel Malloy stated that the state would be willing to help the City of Hartford avoid chapter 9 municipal bankruptcy—but only if the city gets its own financial house in order, with his comments coming in the wake of the decision by Mayor Luke Bronin to hire an international law firm with expertise in municipal bankruptcies—with the Mayor making clear the city is also exploring other fiscal alternatives. Gov. Malloy has proposed offering millions more in state aid to the capital city in his budget proposal, to date, the state legislature, already enmired in its own, ongoing budget stalemate—has not reacted. Thus, the Governor noted: “I don’t know whether we can be all things to all people, but I think Hartford has to, first and foremost, help itself…But we should play a role. I think we need to do that not just in Hartford, but in Bridgeport and New Haven, and other urban environments and Waterbury. There’s a role for us to play.” The stakes are significant: Hartford is trying to close a $65 million fiscal gap—a gap which, should it not be able to bridge, would mean the city would have to seek express, prior written consent of the Governor to file a municipal bankruptcy petition (Conn. Gen. Stat.§7-566)—consent not yet sought by the city—or, as the Governor put it on Friday: “There’s no request for that…I don’t think they’re in a position to say definitively what they are going to do. I’m certainly not going to prejudge anything. That should be viewed as a last resort, not as a first.”

House Speaker Joe Aresimowicz (D-Berlin and Southington) and a former Member of the Berlin Council, reports the legislature could vote as early as a week from tomorrow on a two-year, $40 billion state budget, albeit some officials question whether a comprehensive agreement could be reached by that date, after the legislature has missed a series of deadlines, including the end of the legislative session on June 7th, not to mention the fiscal year of June 30th.  Meanwhile, the city awaits its fiscal fate: it has approved a budget of nearly $613 million, counting on nearly half the funds to come from the state; meanwhile, the city has hired the law firm of Greenberg Traurig to begin exploration of the option of filing for bankruptcy—or, as Mayor Bronin noted: “One important element of any municipal restructuring is the restructuring of debt…They will be beginning the process of reaching out to bond holders to initiate discussion about potential debt restructuring.”

Municipal Physical & Fiscal Safety. The fiscally challenged municipality of Petersburg, Virginia has brought on a new Chief of Police, “Kenny” Miller, a former Marine with 36 years of law enforcement experience.  Chief Miller views his new home as an “opportune place to give back” after a “blessed” career with one of Virginia’s largest police agencies—in the wake of serving 34 of his 36 years as an officer with the Virginia Beach Police Department. Chief Miller, who was sworn in last Friday afternoon, in the wake of a national search, noted: “You got to get out there and engage people…If people see that you care, they know you care. You can’t police inside of a building,” adding: “Engagement means working with the community…Solving problems together. People that live in the communities know the problems better than I do just passing through…We need to break down some barriers and get some trust going.” Chief Miller commences in his new role as the historic city seeks to turn around a fiscal and leadership crisis—one which left some parts of city government in dysfunction. The police department has had its own woes—including the Police Department, where, a year and a half ago, former Petersburg Chief John I. Dixon III acknowledged, after weeks of silence, that an audit of the department’s evidence and property room turned up $13,356 in missing cash related to three criminal cases—a finding which led former Petersburg Commonwealth’s Attorney Cassandra Conover to ask Virginia State Police to investigate “any issues involving” the police department that had come to her attention through “conversations and media reports” of alleged police misconduct or corruption—an investigation which remains ongoing. But the new Chief will face a different kind of fiscal challenge in the wake of the resignations of 28 sworn officers who have resigned in the last nine months after the city’s leaders imposed an across-the-board 10 percent pay cut for the city’s nearly 600 full-time workforce a year ago—and dropped 12 civilians from emergency communications positions. Nevertheless, Chief Miller said he was attracted to Petersburg because “the job was tailor-made for me. It’s a city on the rise, and I wanted to be part of something good…I don’t do it for the money. I’ve been blessed. I want to give back, (and) Petersburg is the opportune place to give back…The community members and the city leadership team are all working together to bring Petersburg to a beginning of a new horizon: “So why not be a part of that great opportunity?”

Chief Miller enters the job as Petersburg is straining to overcome a fiscal and leadership crisis that left some parts of city government in dysfunction; moreover, the police department has had its own woes. Seventeen months ago, former Petersburg police Chief John I. Dixon III acknowledged after weeks of silence that an audit of the department’s evidence and property room turned up $13,356 in missing cash related to three criminal cases. That led former Petersburg Commonwealth’s Attorney Cassandra Conover to ask the Virginia State Police to investigate “any issues involving” the police department which had come to her attention through “conversations and media reports” of alleged police misconduct or corruption. Nevertheless, Chief Miller reports he was “intrigued” by those officers who stayed with the force in spite of the pay cut “and showed virtue with respect to policing: Policing isn’t something that you do, it’s what you are: There are men and women there who really care about the city, and (those) people stayed.” He adds, he was attracted to Petersburg, because “the job was tailor-made for me. It’s a city on the rise, and I wanted to be part of something good…I’m now in my 36th year in law enforcement…And I don’t do it for the money. I’ve been blessed. I want to give back, (and) Petersburg is the opportune place to give back. The community members and the city leadership team are all working together to bring Petersburg to a beginning of a new horizon: So why not be a part of that great opportunity?” According to an announcement of his appointment as Petersburg’s Chief on Virginia Beach’s Facebook page: “[H]is connection with multiple civic leaders and groups throughout the city have forged and strengthened deep bonds between the Virginia Beach community and the police department.”

Exiting State Fiscal Oversight–After Emerging from Municipal Bankruptcy

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eBlog, 04/28/17

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

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

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