A Tale of Two Cities

July 3, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Fiscal & Legal Challenges of Smaller Municipalities

eBlog

March 28, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal, physical, intergovernmental, and legal challenges to Flint, Michigan—as too many parties seek to plead innocent to state actions, which have wreaked such devastating fiscal and physical costs. Then we head east to one of the nation’s oldest municipalities, Bristol, Virginia, which appears to be on the precipice of chapter 9 municipal bankruptcy.

Fiscal Fraud & Unfiscal Federalism? Andy Arena, the FBI Detroit office’s former director, and lead investigator into the City of Flint’s water crisis, this week testified before the Michigan Senate Appropriations Subcommittee on General Government that he has launched a new probe amid allegations of “financial fraud” and “greed” as critical factor behind the fateful decision years ago to switch the city’s water source, stating: “Without getting too far into depth, we believe there was a significant financial fraud that drove this,” adding that the alleged scheme benefited “individuals.” Or, as he testified: “I believe greed drove this.”

His testimony came as Michigan Attorney General Bill Schuette continued the investigation he started in the wake of Gov. Rick Snyder’s declaration, two years ago, of a state of emergency in the wake of the severe and life threatening lead water contamination, as the criminal probe, which has already led to charges against 15 local and state officials—charges resulting in four plea deals and preliminary exams involving six defendants, including state Health and Human Services Director Nick Lyon and Chief Medical Executive Eden Wells continue. Now, the investigation is focusing on the potential motivation behind the decision to switch the City of Flint from the Detroit area water system to the new Karegnondi Water Authority—a decision which, when Flint opted to join the regional authority, had terminated its arrangement with the Detroit water system and opened the fateful portals to drawing water from the Flint River as an interim source, e.g. the dreadful step which resulted in contaminated drinking water and calamitous drops in assessed property values—not to mention grave governing questions with regard to the culpability of state appointed emergency managers preempting local elected leaders. (Within 17 months, the decision, made while the city was run by state-appointed emergency managers, was reversed after outbreaks of Legionnaires’ and increased levels of bacteria, total trihalomethanes and lead were found in water. Five years ago, in March, Flint’s City Council members voted 7-1 to join a new regional provider, rather than remain a customer with the Detroit system—as it had for decades. Three days earlier, Flint Emergency Manager Ed Kurtz had approved the agreement, notwithstanding then-State Treasurer Andy Dillon’s skepticism with regard to whether the new regional authority made financial sense.).

Last week, when Sen. Mike Nofs (R-Battle Creek) asked whether the probe involved local, state, and federal entities, Mr. Arena responded: “It kind of cuts across all lines right now…I don’t know that they were working so much in concert, but the end game was people were trying to make money in different ways.” He reiterated that his FBI team has been heading the Flint criminal investigation for more than two years; however, he testified he was uncertain when it might end, adding: “We’re moving at lightning speed…I can assure everyone here that we are working as quickly as we possibly can: Our bottom line is we want justice for the people of Flint, and we have to do that methodically.” Unsurprisingly, he did not detail what “justice” might mean: would it mean reparations for the fiscally and physically devastated city and its taxpayers?

The case, as we have previously written, commenced after the Governor, five years’ ago, preempted all municipal authority via the appointment of Ed Kurtz as the city’s Emergency Manager, effectively preempting any municipal authority for the brewing fiscal, physical, and health catastrophe; Mr. Kurtz, in this preemptive capacity then signed off on the fateful order in June of 2013 to allow the “upgrading of the Flint Water Plant to ready it to treat water from the Flint River to serve as the primary drinking water source for approximately two years and then converting to KWA delivered lake water,” a source which the city used from April of 2014 until October 2015, when the city was reverted to the Detroit system in the wake of an outbreak of Legionnaires’ cases and evidence of elevated levels of lead in the city’s children—a most ill omen, as it signaled to parents the prohibitive cost of health and safety to continue to reside in the city—and the unlikelihood of any ability to sell their homes at any kind of a reasonable price. Mayhap worse, last October, a federal judge dismissed objections by Flint’s City Council and paved the way for Flint officials to move forward with a long-term contract with the Detroit area Great Lakes Water Authority—a position supported by Mayor Karen Weaver as vital to avert chapter 9 municipal bankruptcy. Thus, Mayor Weaver, Gov. Snyder, and the EPA supported a proposed 30-year agreement with the Great Lakes Water Authority—a position on which the Flint City Council did not agree—leading to a successful suit by the Michigan Department of Environmental Quality to compel approval of the agreement.

Concurrently, in a related trial on these physical and fiscal event, before a Genesee District Court Judge in a trial where the state’s Chief Medical Officer has been charged with crimes related to the Flint water crisis, a researcher, Virginia Tech Professor Marc Edwards, testified before Genesee District Court Judge William Crawford yesterday that Dr. Eden Wells had sought to “get to the truth of the matter,” and that had seen no evidence of Dr. Wells having committed crimes during her preliminary examination on potential charges including involuntary manslaughter.(Prosecutors charge that Dr. Wells, a member of Gov. Snyder’s cabinet, failed to protect the health and welfare of Flint area residents, including victims of Legionnaires’ disease outbreaks in the Flint area while the city used the Flint River as its water source in parts of 2014 and 2015: Dr, Wells is charged with attempting to withhold funding for programs designed to help the victims of the water crisis and with lying to an investigator about material facts related to a Flint investigation by the Michigan Attorney General’s Office.) 

Professor Edwards is among those who believe that Flint’s switch to river water without proper treatment to make it less corrosive triggered both elevated lead and increased Legionella bacteria in large buildings in Flint at the time, adding that he disagreed with the approach taken by the Flint Area Community Health and Environment Partnership, which contracted with the state to find the root cause of the Legionella outbreaks, which officials have reported lead to the deaths of at least a dozen people in Genesee County while the river was in use. Thus, Professor Edwards notes, instead of focusing on the potential for the bacteria in water filters, state fiscal resources would have been put to better use if directed to investigate cases tied to large buildings, particularly hospitals, where his own testing showed very high levels were present. Moreover, in response to the query whether Dr. Wells did anything to discourage his research, Prof. Edwards responded: “To the contrary. She seemed interested, and she encouraged it.”

The Fiscally Desperate State of a Small Municipality. Far to the east of Flint, in one of the nation’s oldest municipalities, Bristol, Virginia, a municipality which, in 1880, had a population of 1,562—a population which gradually grew to 19,042 in 1980, before waning to 16,060 by 2016. The area of what is, today, Bristol, was once inhabited by early Americans, Cherokee Indians, with the name, according to legend, because numerous deer and buffalo met there to feast in the canebrakes; it was subsequently renamed the site Sapling Grove, and then, in 1890, finally settled upon as Bristol. It used to have a fort on a hill overlooking what is now downtown Bristol: it marked an important stopping-off place for notables, including Daniel Boone and George Rogers Clark, as well as hundreds of pioneers, who found Bristol, a former trading post, way station, and stockade, to be a cornerstone to opening up a young nation to the West.  Now, a Virginia Auditor of Public Accounts (APA) new report has found the municipality may require state fiscal assistance to address its significant debt tied to The Falls development and landfill operations—having, at the end of last week, in its fiscal distress monitoring report of local governments, assessed the small city as scoring poorly on a set of financial metrics, including debt overload, cash flow issues, revenue shortfalls, deficit spending, billing issues, and a lack of qualified staff. The small municipality today has a median household income of $27,389. Approximately 13.2% of families and 16.2% of the population fall below federal poverty levels–including 25.8% of those under age 18. The Auditor’s report notes: “During follow-up with the City of Bristol, we observed two primary issues that we concluded are contributing to a situation of fiscal distress at the city: issues specific to the operational sustainability of its solid waste disposal fund and the debt and future revenues related to The Falls commercial development project,” positions which Bristol City Manager Randy Eads noted “exactly” portrayed the city’s financial problems, as opposed to preliminary findings released last year which included some incorrect information. Specific findings found that the city does not have unrestricted reserves to use for a revenue shortfall or unforeseen situations, and that the city is not in the “most desirable” position to meet its fiscal obligations without obtaining additional revenues.

As part of the report, the APA issued written notification to Gov. Ralph Northam, the General Assembly’s money committees, the Secretary of Finance, and city officials detailing these specific issues and recommending that Bristol may warrant further assistance from the state to help assess and stabilize areas of concern—with such potential state assistance including an independent consultant reviewing the viability of landfill operations and developing long-range financial forecasts for revenue—each items sought by the city. Or, as Manager Eads noted: “That’s something we requested from the APA. It’s our understanding there’s $500,000 the state has set aside to help low-scoring localities with some of their financial issues…We requested funds for a detailed financial analysis of the landfill and requested funds for a financial planning firm to help us with a three-, five- and 10-year financial forecast.” Manager Eads reports he plans to meet with Virginia legislators to seek support. Bristol’s solid waste fund has $33.5 million in long-term bond debt; the municipality’s general fund continues to transfer funds to pay bills, according to the report. The report notes that city officials completed a significant refinancing of all short-term debt earlier this year; however, debt remains a challenge: “However, the city’s increasing debt service costs continue to be a concerning factor, as Bristol’s ability to pay the debt service will be contingent upon sufficient future revenues received from The Falls project,” according to the report. The auditor’s office notes the city is entitled to additional sales tax revenues under provision of a state law, but notes “Bristol continues to experience some uncertainty with its long-term revenue stream and future growth after all phases of The Falls project are implemented.”

Fiscal & Physical Storms

September 6, 2017

Good Morning! In this a.m.’s Blog, we consider the new state fiscal oversight program in Virginia; then we move west to the Motor City, where November’s election will test voters’ perception of the fiscal state of post-chapter 9 Detroit. Then we veer back East to the Nutmeg state—a state whose state fiscal problems could wreak havoc with its municipalities. Finally, with Hurricane Irma, one of the most fearsome hurricanes ever recorded, bearing down this a.m. on the U.S. Territories of the Virgin Islands and Puerto Rico, we fear for lives and physical and fiscal safety.

Visit the project blog: The Municipal Sustainability Project 

Not So Fiscally Rich in Richmond? Richmond, Virginia—notwithstanding a 25% poverty level, has been in the midst of a building boom; it has reported balancing its budget, and that it holds a savings reserve of $114 million—in addition to which, the state has logged  budget surpluses in each of its most recent fiscal years; it currently has an AA rating from the three major credit rating, each of which reports that the former capital of the Confederacy has a modestly growing tax base, manageable municipal debt, and a long-term stable outlook—albeit with disproportionate levels of poverty. Nevertheless, State Auditor Martha S. Mavredes, according to a recent state report distributed within government circles, including the Virginia Municipal League and the Virginia Association of Counties, has cited the municipalities of Richmond and Bristol as failing to meet the minimum standard for financial health. In the case of Richmond, according to the report, the city scored less than 16 on the test for the past two fiscal years—a score which Auditor Mavredes described as indicating severe stress in her testimony last month before the General Assembly’s Joint Subcommittee on Local Government Fiscal Stress, noting that the test was applied for fiscal years 2014, 2015, and 2016. The fiscal test is based on information contained in annual audited financial reports provided by each locality—except the municipalities of Hopewell and Manassas Park have stopped providing reports—with the fiscal stress rankings based on the results of ten ratios which primarily rely on revenues, expenses, assets, liabilities, and unused savings: the test weighs the level of reserves and a municipality’s ability to meet liabilities without borrowing, raising taxes, or withdrawing from reserves—as well as the extent to which a locality is able to meet the following fiscal year’s obligations without changes to revenues or expenses: Richmond’s score was near 50 in FY2014, but fell below 16 in FY2015  and to 13.7 in FY2016. Thus, even though Virginia has no authority to intervene in local finances, the new fiscal measuring system has created a mechanism to help focus fiscal attention in advance of any serious fiscal crisis.

Whereto the Motor City? Edward Isaac Dovere, writing for Politico, reported that in a new POLITICO-Morning Consult poll, only 27% of Motor City residents reported they had a very or somewhat favorable view of Detroit, compared with a quarter of respondents who said they had an unfavorable view; only 5% said they considered Detroit very safe: 41% responded they considered it very unsafe. The fear factor—in addition to apprehension about the city’s school options—appear to be discouraging young families: the keys to the city’s hope for a vibrant fiscal future.  Those keys are vital, as Detroit’s population appears to be continuing to decline. About the Mayor, he writes: “There’s no mystique to what he’s doing, or why people seem to want four more years of him, he and his aides say. A big part of whatever success he’s had is just showing up, after decades when his predecessors didn’t: ‘In Detroit,’ said Duggan’s campaign manager Rico Razo, ‘people just want a response.’”

Nutmeg or Constitution State Blues. Connecticut, which was designated the Constitution State by the General Assembly in 1959, albeit according to others the “Nutmeg State,” because its early inhabitants had the reputation of being so ingenious and shrewd that they were able to make and sell wooden nutmegs—is certainly in some need today of fiscal shrewdness. Connecticut Comptroller Kevin Lembo has warned Gov. Dannel Malloy that unless the legislature acts swiftly to enact a budget, the “inability to pass a budget will slow Connecticut’s economic growth and will ultimately lead to the state and its municipalities receiving downgrades in credit ratings that will cost taxpayers even more,” adding that the state, which is currently in fiscal limbo, operating under Gov. Malloy’s executive orders since the beginning of July, otherwise confronts a $93.9 million FY2018 deficit—adding: the state’s economy “continues to post mixed results across an array of key economic indicators: These results do not indicate that the state can grow its way out of the current revenue stagnation.” Making sure there is appreciation that the state inaction would affect far more than just the state, he added: “The inability to pass a budget…will ultimately lead to the state and its municipalities receiving downgrades in credit ratings.” The dire warning comes as the state’s 169 towns, one borough, and nineteen chartered cities are caught in the middle—and fearing an outcome, as Gov. Malloy has proposed in his biennial budget for the legislature to cut local funding by $650 million—and mandate municipalities ante up $400 million annually for public pension contributions for the state’s teachers.

The holdup in state aid to local governments comes as both state and local borrowing costs are suffering: Moody’s has hit the state with three credit downgrades, so that for local governments—even as their state aid is delayed and uncertain, their municipal bond interest rates are climbing. Indeed, Moody has deemed Gov. Malloy’s modified executive order a credit negative for local governments, because it reduces total aid to municipalities by nearly 40% from fy2017 levels: that order, issued last month, reduces the largest source of state municipal aid, the state’s education cost sharing, by $557 million relative to the last fiscal year. Thus, Controller Lembo warns that the inability to set a state budget can only aggravate state and local fiscal conditions, noting: “This problem is exacerbated each month as potential sources of additional revenue are foregone due to the absence of the necessary changes to the revenue structure.”  That is aggravated by higher state expenditures: the Comptroller noted that state expenditures through the first month of the state’s fiscal year were more than 10% higher than last year, a double-digit increase he attributes to rising fixed costs, including debt and public pension obligations. If anything, the woeful fiscal situation could be exacerbated by preliminary data indicating that the state lost 600 jobs in July, a disheartening downturn after the last fiscal year when the state had posted 11,600 new payroll jobs; indeed, during the last period of economic recovery, employment growth averaged over 16,000 annually.

Physical & Fiscal Storm. President Trump yesterday declared a state of emergency in Puerto Rico and ordered that federal assistance be provided to local authorities. Gov. Ricardo Rossello, early this morning warned: “The day has arrived,” as Hurricane Irma neared landfall, registering sustained winds of 185 miles per hour, far greater than levels measured under Hurricane Harvey in Houston. The Governor stated: “We want to make sure that in those areas of high vulnerability people can mobilize to one of our shelters; we are still preparing for what could be a catastrophic event.” The Governor called on anyone living in flood areas to seek refuge in each of a relative or friend or one of the shelters enabled. Already this a.m., the number of refugees in Puerto Rico due to the hurricane rose to 707, distributed in schools operating in the 13 police areas. The San Juan area commander, Colonel Juan Cáceres, said there are six shelters open the San Juan, noting: “In addition to staff working 12-hour shifts, area commanders are divided into two work shifts: 6:00 am to 6:00 pm and vice versa. We will be patrolling and doing surveillance work as long as the weather permits and in the commercial areas that are still selling merchandise to protect consumers.” The city’s security plan will emphasize traffic control and direction: The refugees were not only Puerto Ricans, but also tourists. By the time you read this post, the territory is expected to experience the physical intensity of Irma, a category 5 hurricane with winds of 185 miles per hour. For a territory already in severe fiscal distress, the storm promises dire fiscal and physical challenges.

 

Measuring Municipal Fiscal Distress

August 29, 2017

Good Morning! In this a.m.’s Blog, we consider the new Local Government Fiscal Distress bi-cameral body in Virginia and its early actions; then we veer north to Atlantic City, where both the Governor and the courts are weighing in on the city’s fiscal future; before scrambling west to Scranton, Pennsylvania—as it seeks to respond to a fiscally adverse judicial ruling, then back west to the very small municipality of East Cleveland, Ohio—as it awaits authority to file for chapter 9 municipal bankruptcy—and municipal elections—then to Detroit’s ongoing efforts to recover revenues as part of its recovery from the nation’s largest municipal bankruptcy, before finally ending up in the Windy City, where the incomparable Lawrence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System.  

Visit the project blog: The Municipal Sustainability Project 

Measuring Municipal Fiscal Distress. When Virginia Auditor of Public Accounts Martha S. Mavredes last week testified before the Commonwealth’s new Joint House-Senate Subcommittee on Local Government Fiscal Stress, she named Bristol as one of the state’s four financially distressed localities—a naming which Bristol City Manager Randy Eads confirmed Monday. Bristol is an independent city in the Commonwealth of Virginia with a population just under 18,000: it is the twin city of Bristol, Tennessee, just across the state line: a line which bisects middle of its main street, State Street. According to the auditor, the cities of Petersburg and Bristol scored below 5 on a financial assessment model that uses 16 as the minimum threshold for indicating financial stress, with Bristol scoring lower than Petersburg. One other city and two counties scored below 16. For his part, City Manager Eads said he and the municipality’s CFO “will be working with the APA to determine how the scores were reached,” adding: “The city will also be open to working with the APA to address any issues.” (Bristol scored below the threshold the past three years, dropping to 4.25 in 2016. Petersburg had a score of 4.48 in 2016, when its financial woes became public.) Even though the State of Virginia has no authority to directly involve itself in a municipality’s finances (Virginia does not specifically authorize its municipal entities to file for chapter 9 municipal bankruptcy, certain provisions of the state’s laws [§15.2-4910] do allow for a trust indenture to contain provisions for protecting and enforcing rights and remedies of municipal bondholders—including the appointment of a receiver.), its new system examines the Comprehensive Annual Financial Reports submitted annually and scores them on 10 financial ratios—including four that measure the health of the locality’s general fund used to finance its budget. Manager Eads testified: “At the moment, the city does not have all of the necessary information from the APA to fully address any questions…We have been informed, by the APA, that we will receive more information from them the first week of September.” He added that the city leaders have taken steps to bolster cash flow and reserves, while reducing their reliance on borrowing short-term tax anticipation notes. In addition, the city has recently began implementing a series of budgetary and financial policies prior to the APA scores being released—steps seemingly recognized earlier this summer when Moody’s upgraded the city’s outlook to stable and its municipal bond rating to Baa2 with an underlying A3 enhanced rating, after a downgrade in 2016. Nevertheless, the road back is steep: the city still maintains more than $100 million in long-term general obligation bond debt with about half of it tied to The Falls commercial center in the Exit 5 area, which has yet to attract significant numbers of tenants.

Fiscal Fire? The State of New Jersey’s plan to slash Atlantic City’s fire department by 50 members was blocked by Superior court Judge Julio Mendez, preempting the state’s efforts to reduce the number of firefighters in the city from 198 to 148. The state, which preempted local authority last November, has sought to sharply reduce the city’s expenditures: state officials had last February proposed to move the Fire Department to a less expensive health plan and reduce staffing in the department from 225 firefighters to 125. In his ruling, however, Judge Mendez wrote: “The court holds that the (fire department’s union) have established by clear and convincing evidence that Defendants’ proposal to reduce the size of the Atlantic City Fire Department to 148 firefighters will cause irreparable harm in that it compromises the public safety of Atlantic City’s residents and visitors.” Judge Mendez had previously granted the union’s request to block the state’s actions, ruling last March that any reduction below 180 firefighters “compromises public safety,” and that any reduction should happen “through attrition and retirements.”

Gov. Christie Friday signed into law an alternative fiscal measure for the city, S. 3311, which requires the state to offer an early-retirement incentive program to the city’s police officers, firefighters, and first responders facing layoffs, noting at the bill signing what he deemed the Garden State’s success in its stewardship of the city since November under the Municipal Stabilization and Recovery Act, citing Atlantic City’s “great strides to secure its finances and its future.” The Governor noted a drop of 11.4 percent in the city’s overall property-tax rate, the resolution of casino property-tax appeals, and recent investments in the city. For their parts, Senate President Steve Sweeney and Assemblyman Vince Mazzeo, sponsors of the legislation, said the new law would let the city “reduce the size of its police and fire departments without jeopardizing public safety,” adding that the incentive plan, which became effective with the Governor’s signature, would not affect existing contracts or collective bargaining rights—or, as Sen. Sweeney stated: “We don’t want to see any layoffs occur, but if a reduction in workers is required, early retirement should be offered first to the men and women who have served the city.” For his part, Atlantic City Mayor Don Guardian said, “I’m glad that the Governor and the State continue to follow the plan that we gave them 10 months ago. As all the pieces that we originally proposed continue to come together, Atlantic City will continue to move further in the right direction.”

For its part, the New Jersey Department of Community Affairs, which has been the fiscal overseer of the state takeover of Atlantic City, has touted the fiscal progress achieved this year from state intervention, including the adoption of a $206.3 million budget that is 20 percent lower than the city’s FY2015 budget, due to even $56 million less than 2015 due to savings from staff adjustments and outsourcing certain municipal services. Nevertheless, Atlantic City, has yet to see the dial spin from red to black: the city, with some $224 million in bonded debt, has deep junk-level credit ratings of CC by S&P Global Ratings and Caa3 by Moody’s Investors Service; it confronts looming debt service payments, including $6.1 million owed on Nov. 1, according to S&P.

Scrambling in Scranton. Moody’s is also characteristically moody about the fiscal ills of Scranton, Pennsylvania, especially in the wake of a court decision barring the city from  collecting certain taxes under a state law—a decision Moody’s noted  “may reduce tax revenue, which is a vital funding source for the city’s operations.” Lackawanna County Court of Common Pleas Judge James Gibbons, at the beginning of the month, in a preliminary ruling against the city, in response to a challenge by a group of eight taxpayers, led by Mayoral candidate Gary St. Fleur, had challenged Scranton’s ability to levy and collect certain taxes under Pennsylvania’s Act 511, a state local tax enabling act. His preliminary ruling against the city affects whether the Home Rule Charter law supersedes the statutory cap contained in Act 511. Unsurprisingly, the City of Scranton has filed a motion for reconsideration and requested the court to enable it to appeal to the Commonwealth Court of Pennsylvania. The city, the state’s sixth-largest city (77,000), and the County seat for Lackawanna County is the geographic and cultural center of the Lackawanna River valley, was incorporated on St. Valentine’s Day 161 years ago—going on to become a major industrial city, a center of mining and railroads, and attracted thousands of new immigrants. It was a city, which acted to earn the moniker of the “Electric City” when electric lights were first introduced in 1880 at Dickson Locomotive Works. Today, the city is striving to exit state oversight under the state’s Act 47—oversight the municipality has been under for a quarter century.

Currently, Moody’s does not provide a credit rating for the city; however, Standard and Poor’s last month upgraded the city’s general obligation bonds to a still-junk BB-plus, citing revenue from a sewer-system sale, whilst Standard and Poor’s cited the city’s improved budget flexibility and liquidity, stemming largely from a sewer-system sale which enabled the municipality to retire more than $40 million of high-coupon debt. Moreover, Scranton suspended its cost-of-living-adjustments, and manifested its intent to apply a portion of sewer system sale proceeds to meet its public pension liabilities. Ergo, Moody’s writes: “These positive steps have been important for paying off high interest debt and funding the city’s distressed pension plans…While these one-off revenue infusions have been positive, Scranton faces an elevated fixed cost burden of over 40% of general fund revenues…Act 511 tax revenues are an important revenue source for achieving ongoing, balanced operations, particularly as double-digit property tax increases have been met with significant discontent from city residents. The potential loss of Act 511 tax revenues comes at a time when revenues for the city are projected to be stagnant through 2020.”

The road to municipal fiscal insolvency is easier, mayhap, because it is downhill: Scranton fiscal challenges commenced five years ago, when its City Council skipped a $1 million municipal bond payment in the wake if a political spat; Scranton has since repaid the debt. Nevertheless, as Moody’s notes: “If the city cannot balance its budget without illegally taxing the Scranton people, it is absolute proof that the budget is not sustainable…Scranton has sold off all its public assets and raised taxes excessively with the result being a declining tax base and unfriendly business environment…The city needs to come to terms with present economic realities by cutting spending and lowering taxes. This is the only option for the city.”

Scranton Mayoral candidate Gary St. Fleur has said the city should file for Chapter 9 municipal bankruptcy and has pushed for a related ballot measure. Combined taxes collected under Act 511, including a local services tax that Scranton recently tripled, cannot exceed 1.2% of Scranton’s total market value.  Based on 2015 market values, according to Moody’s, Scranton’s “511 cap” totals $27.3 million. In fiscal 2015 and 2016, the city collected $34.5 million and $36.8 million, respectively, and for 2018, the city has budgeted to receive $38 million.  The city, said Moody’s, relied on those revenues for 37.7% of fiscal 2015 and 35.9% of fiscal 2016 total governmental revenues. “A significant reduction in these tax revenues would leave the city a significant revenue gap if total Act 511 tax revenues were decline by nearly 25%,” Moody’s said.

Heavy Municipal Fiscal Lifting. Being mayor of battered East Cleveland is one of those difficult jobs that many people (and readers) would decline. If you were to motor along Euclid Avenue, the city’s main street, you would witness why: it is riddled with potholes and flanked by abandoned, decayed buildings. Unsurprisingly, in a city still awaiting authorization from the State of Ohio to file for chapter 9 municipal bankruptcy, blight, rising crime, and poor schools, have created the pretext for East Clevelanders to leave: The city boasted 33,000 people in 1990; today it has just 17,843, according to the latest U.S. Census figures. Nevertheless, hope can spring eternal: four candidates, including current Mayor Brandon L. King, are seeking the Democratic nomination in next month’s Mayoral primary (Mayor King replaced former Mayor Gary Norton last year after Norton was recalled by voters.)

Motor City Taxing. Detroit hopes to file some 700 lawsuits by Thursday against landlords and housing investors in a renewed effort to collect unpaid property taxes on abandoned homes that have already been forfeited; indeed, by the end of November, the city hopes to double the filings, going after as many as 1,500 corporations and investors whose abandonment of Detroit homes has been blamed for contributing to the Motor City’s blight epidemic: Motor City Law PLC, working on behalf of the city, has filed more than 60 lawsuits since last week in Wayne County Circuit Court; the remainder are expected to be filed before a Thursday statute of limitations deadline: the suits target banks, land speculators, limited liability corporations, and individuals with three or more rental properties in Detroit: investors who typically purchase homes at bargain prices at a Wayne County auction and then eventually stop paying property tax bills and lose the home in foreclosure: the concern is that unscrupulous landlords have been abusing the auction system. The city expects to file an additional 800 lawsuits over the next quarter—with the recovery effort coming in the wake of last year’s suits by the city against more than 500 banks and LLCs which had an ownership stake in houses that sold at auction for less than what was owed to the city in property taxes. Eli Savit, senior adviser and counsel to Mayor Mike Duggan, noted that those suits netted Detroit more than $5 million in judgments, even as, he reports: “Many cases are still being litigated.” To date, the 69 lawsuits filed since Aug. 18 in circuit court were for tax bills exceeding $25,000 each; unpaid tax bills for less than $25,000 will be filed in district court. (The unpaid taxes date back years as the properties were auctioned off by the Wayne County Treasurer’s Office between 2013 and 2016 or sent to the Detroit Land Bank Authority, which oversees demolitions if homes cannot be rehabilitated or sold.) The suits here indicate that former property owners have no recourse for lowering their unpaid tax debt, because they are now “time barred from filing an appeal” with Detroit’s Board of Review or the Michigan Tax Tribunal; Detroit officials have noted that individual homeowners would not be targeted by the lawsuits for unpaid taxes; rather the suits seek to establish a legal means for going after investors who purchase cheap homes at auction, and then either rent them out and opt not to not pay the taxes, or walk away from the house, because it is damaged beyond repair—behavior which is now something the city is seeking to turn around.

Local Government Fiscal Protection? Just as the Commonwealth of Virginia has created a fiscal or financial assessment model to serve as an early warning system so that the State could act before a chapter 9 municipal bankruptcy occurred, the fiscal wizard of Illinois, the incomparable Chicago Civic Federation’s Laurence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System (CPS): it would be responsible to assist the CPS board and administration in finding solutions to stabilize the school district’s finances. The $5.75 billion CPS proposed budget for this school year comes with two significant asterisks: 1) There is an expectation of $269 million from the City of Chicago, and 2) There is an expectation of $300 million from the State of Illinois, especially if the state’s school funding crisis is resolved in the Democrats’ favor.

Nevertheless, in the end, CPS’s fiscal fate will depend upon Windy City Mayor Rahm Emanuel: he, after all, not only names the school board, but also is accountable to voters if the city’s schools falter: he has had six years in office to get CPS on a stable financial course, even as CPS is viewed by many in the city as seeking to file for bankruptcy (for which there is no specific authority under Illinois law). Worse, it appears that just the discussion of a chapter 9 option is contributing to the emigration of parents and students to flee to suburban or private schools.

Thus, Mr. Msall is suggesting once again putting CPS finances under state oversight, as it was in the 1980s and early 1990s, recommending consideration of a Local Government Protection Authority, which would “be a quasi-judicial body…to assist the CPS board and administration in finding solutions to stabilize the district’s finances.” Fiscal options could include spending cuts, tax hikes, employee benefit changes, labor contract negotiations, and debt adjustment. Alternatively, as Mr. Msall writes: “If the stakeholders could not find a solution, the LGPA would be empowered to enforce a binding resolution of outstanding issues.” As we noted, a signal fiscal challenge Mayor Emanuel described was to attack crime in order to bring young families back into the city—and to upgrade its schools—schools where today some 380,000 students appear caught in a school system cracking under a massive and rising debt load.  

Far East of Eden. East Cleveland Mayor Gary Norton Jr. and City Council President Thomas Wheeler have both been narrowly recalled from their positions in a special election, setting the stage for the small Ohio municipality waiting for the state to—in some year—respond to its request to file for chapter 9 municipal bankruptcy to elect a new leader. Interestingly, one challenger for the job who is passionate about the city, is Una H. R. Keenon, 83, who now heads the city school board, and campaigning on a platform of seeking a blue-ribbon panel to examine the city’s finances. Mansell Baker, 33, a former East Cleveland Councilmember, wants to focus on eliminating the city’s debt, while Dana Hawkins Jr., 34, leader of a foundation, vows to get residents to come together and save the city. The key decisions are likely to emerge next month in the September 12 Democratic primary—where the winner will face Devin Branch of the Green Party in November. Early voting has begun.