Fiscal & Physical Hurricanes

September 8, 2017

Good Morning! In this a.m.’s Blog, we consider the increasing risk of Hartford going into municipal bankruptcy, the Nutmeg State’s fiscal challenge—and whether the state’s leaders can agree to a bipartisan budget; then we consider some of the anomalies as the Commonwealth of Virginia tests out its new fiscal stress oversight program; finally, we observe that fearful transit of Hurricane Irma, one of the most powerful hurricanes ever recorded, as it roared through the U.S. Territories of the Virgin Islands and Puerto Rico, where we feared for lives and physical and fiscal safety.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of Chapter 9. Hartford Mayor Luke Bronin fired a warning shot across the bow yesterday at the state legislature and Governor Dannel Malloy, notifying the parties the city would be seeking permission to file for chapter 9 municipal bankruptcy if the city is unable to obtain the requisite funds it needs to continue to operate by early November, in a letter also signed by Hartford Treasurer Adam Cloud and Council President Thomas “TJ” Clarke II.  In the state, where Bridgeport filed in 1991 (the case was dismissed the same year), the statute §7-566) provides that a municipality may only file for chapter 9 protection with the express prior written consent of the governor—at which point, if given, the governor must submit a report to the Treasurer and General Assembly. In his sharply worded epistle to Gov. Malloy and House and Senate leaders, Mayor Bronin cautioned: “If the state fails to enact a budget and continues to operate under the governor’s current executive order, the city of Hartford will be unable to meet its financial obligations in approximately 60 days.” Thus, while the state’s budget stalemate constitutes a fiscal threat to many Connecticut cities, it has posed exceptional problems for Hartford: projections show the capital city, facing a $65 million deficit this year, will run into cash-flow issues in November and December, including a $39.2 million end-of-year shortage. The fiscal hurricane came as Gov. Malloy yesterday unveiled new budget proposals intended to restore funding for municipalities and reject major education cuts planned for October 1, as Democrats and Republicans met in an attempt to reach common ground. However, Mayor Bronin warned that the “extraordinary measures” other towns are considering in response to the state’s ongoing budget gridlock—layoffs, cuts to services and drawing from rainy day funds—are actions Hartford has taken already, noting the city last year laid off 40 workers and cut millions from city departments—and dipped into Hartford’s rainy-day fund to help offset deficits. Notwithstanding, the city still had to borrow millions in June to help pay its bills: “For the past year, we have highlighted the urgency of Hartford’s fiscal crisis: The time has come to decide, together, what future we want for our capital city,” he wrote, urging legislators to embrace a “farsighted, collaborative approach” that includes giving Hartford more than the minimum amount of state aid it needs: he has requested at least $40 million more this year. Mayor Bronin also encouraged lawmakers “create a mechanism” to allow Hartford to achieve “fair labor contracts that truly reflect the city’s ability to pay,” and to “join us in insisting that bondholders and other stakeholders participate in the solution: “You could fail to adopt a budget, or write off Hartford’s problem as unsolvable—requiring a Chapter 9 Bankruptcy filing in the coming weeks.” Noting he wants to avoid chapter 9, the Mayor added: “A well-planned bankruptcy is a tool that can be used to address long-term liabilities like debt and pension obligations…“I think there’s a reality that Hartford needs real and major restructuring that could be accomplished in a bankruptcy: “It could be accomplished outside of a bankruptcy, but I think as days go by it becomes more likely that Hartford will be going bankrupt.” If there might be some light at the end of the fiscal tunnel, it was Connecticut House Majority Leader Matthew Ritter’s statement: “I would agree with the mayor that it does not help Hartford to give them well short of what they need, because then they’re just back in a hopeless scenario next spring: The goal is not to put Band-Aids on this. The goal is to try to begin structural reforms… Moody’s, last month, had warned Hartford was rapidly approaching debt repayment deadlines: “the city’s path to fiscal sustainability will likely require debt restructuring along with some combination of labor concessions, other expenditure cuts and new revenues,” with bills coming due for $3.8 million this month, and $26.9 million next month in October. Hartford’s leaders yesterday stressed they want a long-term solution to Hartford’s problems—or, as the Mayor put it; “We’re not interested in patches. We’re not interested in a short-term bailout…We’re not interested in Band-Aids. And we’re not interested in leaving this problem for future legislatures or future mayors…We’re interested in fixing this.”

Nevertheless, the challenge of obtaining state fiscal assistance will be hampered by the state’s own fiscal challenges: Connecticut has operated under Gov. Malloy’s executive orders since July 1, while the state legislature is still working out a biennial budget for FY2018 and 2019—efforts the Governor expects to result in a new compromise budget by today: under his most recent executive order, however, state aid for Hartford is down nearly 25% from last year—leaving the city to confront a nearly $50 million deficit for FY2018 and projecting that to grow to about $83 million next fiscal year. According to Mayor Bronin, one option would be for the state to provide the city with “just enough additional assistance” to avoid short-term liquidity problems without the structural overhaul and the necessary investment to reinvigorate the city—or, as he wrote: “This might be the path of least resistance, but it’s also the path that leads to a less competitive Connecticut,” adding that failure to adopt a budget or writing off Hartford as a lost cause would force a municipal bankruptcy filing. A third option, according to the Mayor, would be a “farsighted, collaborative approach,” which would include reimbursing the city for its disproportionate share of non-taxable property‒or about half of overall property; enable relief for the city in labor contracts; and forcing bondholders and other stakeholders to the table. Thus, he noted, he would prefer an avenue other than municipal bankruptcy.

Is There a Mother Hubbard Problem? Even as Hartford is desperately seeking state aid to avoid filing for bankruptcy, the state has its own serious fiscal challenges: it faces a biennial revenue gap of up to $5 billion, and municipal bond rating agencies have slammed it with six downgrades over the last year and a half. State legislative leaders claim they will have an idea of whether is light at the end of the proverbial tunnel by next week when they will be voting on a partisan or a bipartisan budget next week: Republican legislative leaders have been pressing their Democratic colleagues to make changes they assert would improve future budgets, but do not necessarily make it easier to close the current $3.5 billion budget deficit: most of the changes the Republicans had wanted to make in the state’s relationship with its labor unions foundered in the wake of the $1.57 billion concession package approved in a mostly party line vote. Republican lawmakers insist they have revised their budget proposals to reflect the new labor agreement; however, they are not ready to release them to the public, much less share them with Democratic legislative leaders. Senate President Martin Looney (D-New Haven), said the “significant unanswered question” is how Republican legislators close the gap between their original proposals and the labor agreement: “We hope to get all of these issues resolved, so at least we will know where we stand in relation to each other,” adding there are hopes of a vote in both chambers next week: as of today, there is no certainty with regard to whether the budget would pass, or, as House Speaker Joe Aresimowicz (D-Berlin) noted, it is worth trying to reach a bipartisan deal, “but in the end I don’t know if the differences are too large to overcome,” adding they cannot just pass a budget with the votes in either chamber, because any such budget also must pass muster with the Governor, who has not even been complimentary of his own party’s efforts to put together a budget. Senate Republican President Len Fasano (R-North Haven) said in order for there to be any progress on closing Connecticut’s $3.5 billion budget gap, there first has to be agreement over structural changes, such as a spending and a bonding cap, deeming it “an appetizer to the main meal: “You’ve got to get through this,” before you start talking about the budget numbers. Democratic legislative leaders agreed they share an interest in structural changes, but are not in agreement with how Republican lawmakers want to implement some of them.

Not So Fiscally Rich in Richmond? Or Whoops! 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.

It turns out the municipality with the biggest red flag, initially known as City A, is Bristol, an independent city of around 18,000—the twin city of Bristol, Tennessee, just across the state line, which runs down the middle of its main street: State Street. Bristol, more than a week ago, acknowledged the city is in communication with the Virginia auditor’s office to determine her audit designated Bristol with a score below 5 on a scale which uses any number below 16 as a sign of potential distress. That audit also showed City B, which fell from a score just below 50 in 2014 to below 14 the next two years, to be state capitol Richmond.

Asked about Richmond’s precipitous fiscal fall under the scale, Auditor Mavredes said that the high score for 2014 was incorrect, because of a keyboard error by her office. Instead of a steep fall, “it’s more of a flat line,” she added. Timely financial reporting has been a consistent concern for the city, which has been late in filing its CAFR for three years, although Richmond Mayor Levar Stoney has vowed to file it on time this year—and the Auditor’s office, which compiles an annual financial report for localities, is still awaiting Richmond’s fy2016 information.

The Virginia Association of Counties confirmed that Richmond County, on the Northern Neck, and Page County, with a slowing population of about 24,000 and county seat is Luray in the northern Shenandoah Valley, were two flagged by the system for what Auditor Mavredes deemed “consistently low scores:” 5.9 in 2014, 8.2 in 2015, and 7.3 last year. Page, as County B, declined from 21 in 2014 to about 15.5 in 2015, and 11.1 in 2016. Dean A. Lynch, the Virginia Association of Counties Executive Director, said both counties are “very aware” of the concerns the auditor raised. Notwithstanding, he noted that VACo believes some differences among localities stem from how they report their financial results: “We’re trying to get a group to meet with (the auditor) so we can all get on the same page,” noting, for example, the initial assessment shows Fairfax and Stafford, both fairly wealthy counties, with relatively low scores. VaCo officials believe that has less to do with their financial condition than how they report school system debt and assets—a contention with which Auditor Mavredes agrees, so she is not concerned by the scores, because she recognizes the local government is reporting the debt, while the school system is showing the assets. She also notes that some localities might show high scores, even though they have small budgets: for example, Nottoway County scored the best among counties in the new system at 98.1 last year, leading the Auditor to note: “Some localities are very debt-averse…Some of it is just the choices they’ve made in regard to the locality. They might not have many resources, but they have managed well with the resources they’ve had.” Vaco Director Lynch notes that the larger issue of fiscal stress for rural localities, such as Richmond County and Page, is the amount of money they are required to pay as their match for state funding of public education and other services, as well as their ability to generate it: “They do feel they are having a tough time in meeting some of their core services: I think if you go back and talk to Page County and Richmond County, they have trouble meeting the match that is required. It’s a state funding issue.”

Peligroso. Cataloged by the National Hurricane Center as an “extremely dangerous: cyclone, Hurricane Irma, slammed its way through northern Puerto Rico, with the Category 5 phenomenon lashing Puerto Rico with sustained maximum winds at 185 mph: by early this morning, the Aqueduct and Sewer Authority confirmed that about 80,000 people have no water—by 10:53 p.m., Irma’s eye was located at latitude 19.4 degrees north and longitude 66.8 degrees west: about 85 miles from San Juan—a half hour after some 22 hospitals had lost power, according to the Director of the State Agency for the Management of Emergencies, Abner Gomez. By yesterday morning, more than a million were without electricity.

The PROMESA fiscal oversight board yesterday reported it was working for the federal government to accelerate assistance to Puerto Rico: Gov. Ricardo Rosselló rejected that claim, stressing that no member of the Board has communicated with him to make himself available: “Yo sé que los mejores intereses de todo el mundo están en el pueblo Puerto Rico”: I know that the best interests of the whole world are in the town of Puerto Rico.  So far I have not had personal communication (with members of the PROMESA Board), but we certainly give the invitation to anyone who wants to collaborate. For its assumption, including the members of the Board.” Board Chair José Carrión told the media that he worked “closely with Governor Rosselló to coordinate support for Puerto Rico after the hurricane, asserting: “We have approached the federal government to activate Title V of PROMESA,” which Mr. Carrión asserted provides authority under Title to speed up assignments after a disaster. Similarly, in a written statement, the Board’s Executive Director, Natalie Jaresko, noted: “We have approached the federal government to activate Title V of PROMESA, which allows the Board to work with agencies to accelerate activation of allocations and loans after a disaster…We expect residents of Puerto Rico to remain safe during hurricane Irma and that any damage to the island due to the hurricane will be minimal.”

Puerto’s Rico’s first recovery focus in the wake of Irma will be on the island of Culebra, with a population of around 1,000. Generally, it appears, the worst fears were not realized: the hurricane (Humacao) spared much of the eastern region of Puerto Rico: there was one tree fall reported—even as there were a reported 500 refugees between the villages of Utuado, Lares, Adjuntas, Jayuya and Ciales.  By 8, last evening, there were approximately 77,000 subscribers without water service, as Irma’s eye passed just north of Puerto Rico—leaving some 868,846 without power—just hours after U.S. Health and Human Services Secretary Tom Price had declared a public health emergency in Puerto Rico and the US Virgin Islands to facilitate the provision of federal services.

Advertisements