Municipal Moral & Fiscal Obligations

07/27/17

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Good Morning! In today’s iBlog, we consider the state & local fiscal challenge fiscal in the event of a moral obligation pledge failure; the ongoing, long-term revival and recovery of Detroit from the largest municipal bankruptcy in American history, and the revitalization fiscal challenges in Atlantic City and Puerto Rico.

A Fiscal Bogie or a Moral Municipal Bond? Buena Vista, Virginia, a small, independent city located in the Blue Ridge Mountains of Virginia with a population of about 6,650, where the issue of its public golf course became an election issue—with the antis winning office and opting not to make the bond payments on the course they opposed—rejecting a moral obligation pledge on what has become a failed economic development project, as the city’s elected leaders chose instead to focus—in the wake of the Great Recession—on essential public services, putting the city in a sub par fiscal situation with Vista Links, which was securing the bonds, according to Virginia state records. The company, unsurprisingly,  has sued to get the monies it was promised—potentially putting at risk the city’s city hall and other municipal properties which had been put up as collateral. Buena Vista City Attorney Brian Kearney discerns this to be an issue of a moral obligation bond, rather than a general obligation municipal bond, so that “[W]e could not continue to do this and continue to do our core functions.” In the wake of the fiscal imbroglio, the Virginia Commission on Local Government (COLG)—which provides an annual fiscal stress study‒ended up playing a key role in the Petersburg effort in the General Assembly—finding that very poor management had led to an $18 million hole.

Here, the municipality’s default triggered negotiations with bond insurer, ACA Financial Guaranty Corp., which led to a forbearance agreement—one on which the city subsequently defaulted—triggering the Commonwealth of Virginia  to bar financing backup to the city from the state’s low-cost municipal borrowing pool, lest such borrowing would adversely impact the pool’s credit rating—and thereby drive up capital borrowing costs for cities and counties all across the state. In this instance, the Virginia Resources Authority refused to allow Buena Vista to participate in the Virginia Pooled Financing Program to refinance $9.25 million of water and sewer obligations to lower debt service costs—lest inclusion of such a borrower from the state’s municipal pool would negatively impact the pool’s offering documents—where some pooled infrastructure bonds, backed by the Commonwealth’s moral obligation pledge, are rated double-A by S&P Global Ratings and Moody’s Investors Service.

Seven years ago, the municipality entered into a five-year forbearance agreement with bond insurer ACA Financial Guaranty Corp.—an agreement which permitted Buena Vista to make 50% of its annual municipal bond payments for five years—an agreement on which Buena Vista defaulted when, two years ago, the City Council voted against inclusion of its FY 2015 budgeted commitment to resume full bond payments. That errant shot triggered UMB Bank NA to file a lawsuit in state court in 2016 in an effort to enforce Buena Vista’s fiscal obligation. In response, the municipality contended the golf course deal was void, because only four of the city’s seven council members had voted on the bond resolution and related agreements—which included selling the city’s interest in its “public places,” arguing that Virginia’s constitution mandates that all seven council members be present to vote on the golf course deal, because the agreement granted a deed of trust lien on city hall, police, and court facilities which were to serve as collateral for the bonds.

Subsequently, last March 22nd, the city filed a motion to dismiss the federal suit for failure to state a claim—a claim on which U.S. District Judge Norman K. Moon held a hearing last Friday—with the municipality arguing that the golf course’s lease-revenue debt is not a general obligation. Therefore, the city appears to be driving at a legal claim it has the right to stop payment on its obligation, asserting: “The city seeks to enforce the express terms of the bonds, under which the city’s obligation to pay rent is subject to annual appropriations by the City Council, and ceases upon a failure of appropriations.” Moreover, pulling another fiscal club from its bag, the city claimed the municipal bonds here are not a debt of the city; rather, the city has told the court that the deed of trust lien for the collateral backing the bonds is void. That is an assertion which ACA, in its motion to dismiss, deemed an improper attempt to litigate the merits of the suit at the pleading stage, noting: “Worse, the city wants this court to rule that the city only has a ‘moral obligation’ to pay its debts, and that [ACA’s] only remedy upon default is to foreclose on a fraction of the collateral pledged by the city and the Public Recreational Facilities Authority of the city of Buena Vista….If adopted, this court will be sending a message to the market that no lender should ever finance public projects in Virginia because municipalities: (a) have unbridled discretion to not repay loans; and (b) can limit the collateral that can be foreclosed upon.” In a statement subsequently, ACA added: “It’s unfortunate that Buena Vista’s elected officials have forced ACA into court after recklessly choosing to have the city default on $9.2 million in debt even though the city has ample funds to make the payments that are owed…This is particularly troubling, because ACA spent years negotiating in good faith after the city claimed financial hardship, and even provided a generous forbearance agreement that reduced payments by 50% starting in 2011…After the city defaulted on that deal in 2014, it offered ACA only pennies on the dollar, while seeking to be absolved of all future burdens of this financing. Left with no reasonable alternative, we must look to the court for an equitable and fair outcome.”

In the nonce, as its legal costs mount, Buena Vista’s access to the municipal credit markets has not only adversely affected its ability to borrow from state financing programs, but also there is growing apprehension there could be implications for other local governments and potentially the Commonwealth of Virginia. Virginia Finance Secretary Ric Brown, when this issue first cropped up, had written previous Buena Vista Mayor Mike Clements: “This ability cannot be jeopardized or put at risk by permitting a defaulting locality to participate in a state pool financing program such as the VPSA: The Commonwealth certainly expects localities to do what is necessary to meet their debt obligations and to protect Virginia localities’ reputation for fiscal discipline.” (Virginia’s Commission on Local Government has revealed that 53% of Virginia’s counties and cities are experiencing above average or high fiscal stress.).

Motor City Recovery. Louis Aguilar of the Detroit News this week reported that Detroit is expected to grow by some 60,000 residents by 2040—growth which would mark the first time Detroit’s population will have increased since the 1950s, according to a study by the Urban Institute, “Southeast Michigan Housing Futures,” which notes that Detroit will finally end its decades-long loss of residents. Xuan Liu, manager of research and data analysis for the Southeast Michigan Council of Governments, said the study builds on recent analyses done by SEMCOG, the Michigan Department of Transportation, and the University of Michigan: “It is a reflection of both the improvements we’ve seen in the city and the changing demographic trends.” The report indicates the region’s population base will include a larger percentage of residents over the age of 65 who are more inclined to remain where they are; the population increase in population will be influenced by the continued inflow of young adults and a small but steady rise of the Latino population. The study warns these changes will present major challenges, including the doubling of senior-headed households over the next three decades: by 2040, the study projects these households will make up 37% of the region’s households versus 22% in 2010; it adds that African-American households in the Detroit metro area disproportionately suffered from the effects of the housing crisis:  African-American homeownership rates dropped from a higher than the national average in 1990 and 2000 to be in line with the national average by 2014. Interestingly, it projects that the demand for rental housing is expected to grow throughout the region, with aging households likely comprising the bulk of this net growth as established renter households age—but warning that the region, and Michigan more broadly, lack affordable rental housing for low-income households. Overall, the Metro Detroit region is expected to gain approximately 380,000 households by 2040, according to the study.

For the Motor City, the report found that by 2016, Detroit’s population had slowed to its lowest pace in decades, according U.S. Census data: as of one year ago, Detroit’s population was 672,795, a loss of 3,541 residents—a decline comparable to the previous year: between 2000 to 2010, Detroit was losing more than 23,700 annually, on average, according to the Southeast Michigan Council of Governments; in the first decade of this century, the region lost 372,242 jobs, its population shrank by 137,375; and inflation-adjusted personal income retreated from 13.7% above the U.S. average to 4.8% below in 2010.

A Bridge to Tomorrow? The Detroit City Council this week okayed the $48 million agreement to open the way for the sale of city-owned property and streets in the path of the new Gordie Howe International Bridge to Canada—with the agreement also incorporating provisions to help residents living near the Delray neighborhood where the bridge will be located. Under the pact, the city will sell 36 city-owned parcels of land–land which Windsor-Detroit Bridge Authority Director of Communications Mark Butler siad was needed for the Gordie Howe bridge project. Courtesy of Windsor-Detroit Bridge Authority noted: “The funding relates to activities in advance of the P3 partner coming on board…As a normal course of business, WDBA, either directly or through the Michigan Department of Transportation, is providing funds to Detroit for property, assets, and services. The city in turn, is using those funds to purchase or swap homes outside of the project footprint, job training etc.” The bridge authority, a Canadian Crown corporation, will manage the Public-Private Partnership procurement process; the authority will also responsible for project oversight, including the actual construction and operation of the new crossing—whilst Canadian taxpayers will be fronting the funding to pay for the deal under an arrangement with the State of Michigan—under which there will be no cost or financial liability to Michigan or to Michigan taxpayers: Canada plans to recoup its money through tolls after the bridge is constructed. The Motor City will sell 36 city-owned parcels of land, underground assets, and approximately 5 miles of city owned streets needed for the bridge project. Under the agreement, the underlying property has been conveyed to the State of Michigan, but Canada is providing the funds. The bridge authority is expected to select a contractor for the project at the end of this year; construction will begin sometime next year.

Is There a Promise of Revitalization? The PROMESA Board this week appointed Noel Zamot to serve as Revitalization Coordinator for the U.S. territory—with Governor Ricardo Rosselló concurring the appointment would benefit Puerto Rico’s ability to compete—a key issue for any meaningful, long-term fiscal recovery. He added: “With over 25 years of experience in the aerospace and defense industry, we are convinced that Mr. Zamot will contribute to our economic development agenda and increase Puerto Rico’s competitiveness.” The federal statute’s Title V provided for such an appointment, a key part to any post chapter 9 plan of debt adjustment. Direct. PROMESA Board Chair José Carrión III noted: “Noel Zamot’s successful career and multifaceted experience interfacing between the government and the private sector in critical defense infrastructure areas will allow him to hit the ground running to foster strategic infrastructure investment expeditiously.” Mr. Zamot noted: “I am honored by this opportunity to serve and give back to Puerto Rico, my birthplace, and contribute to its success…Over more than two decades of professional experience, I have seen firsthand how investments in infrastructure can have a catalyzing effect on economic growth and prosperity.”

New Jersey & You. With major new developments under construction, renewed investor interest, and a slowly diversifying economy, it appears Atlantic City might be moving more swiftly from the red to the black—at a key point in political time, as voters in the city and New Jersey head to the polls next November for statewide and municipal elections—and, potentially, the end of state oversight of the city. Moreover, two new major projects are set to open next year, mayhap setting the stage for the city’s fiscal recovery—but also economic revitalization. Some of the stir relates to the purchase and $500 million renovation of the former Trump Taj Mahal Casino Resort—an opening projected to bring thousands of jobs and a strong brand to the city’s famed boardwalk. But mayhap the more promising development will be the completion of the $220 million Atlantic City Gateway project: a 67,500 square foot development which will serve as a new campus for Stockton University, including an academic building and housing for 500 students, and the new South Jersey Gas headquarters: the company believes its cutting-edge headquarters will trigger recruitment and growth, as it is projected to bring 15,000 square feet of new retail to the boardwalk.  

Interestingly, what has bedeviled the city, low land prices‒at their lowest in decades, is now attracting successful developers, who have been buying up buildings: commercial real estate brokers note an uptick in leasing activity since the Gateway project was announced: the promise of jobs, residents, and revenue no longer overwhelmed by the gaming industry appears to be remaking the city’s image and adding to its physical and fiscal turnaround. Bart Blatstein, CEO of Tower Investments, notes: “Of course I see upside. This is what I do for a living. And it’s incredible–the upside in Atlantic City is like nowhere else I’ve seen in my 40-year career. Atlantic City is a great story. It’s got a wonderful new chapter ahead of it.”

The Delicate Rebalancing of State versus Local Authority

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eBlog, 6/15/16

In this morning’s eBlog, we consider the delicate re-balancing of a state-local relationship in New Jersey with its takeover of distressed Atlantic City—and apprehensions about potential wash-over effects or fiscal distress contagion on neighboring jurisdictions. But we also note that Atlantic City is not yet ready to concede to the state takeover. So we observe this awkward balance of power. We watch and await Senate action—with time running out—on the House-passed, bipartisan legislation PROMESA bill—where the clock is ticking down with regard both to the U.S. territory’s looming insolvency, but also to Congress’ long summer recess. Finally, we observe the municipal fiscal risk of walking away from one’s municipal financial obligations in the Virginia municipality of Buena Vista.

The Delicate Balance. A key issue in severe municipal fiscal distress is the state-local relationship: what legal rights and authority exist for the municipality? What rights and authority might be preempted by the state? What actions might be critical to prevent contagion—or the risk of fiscal distress to neighboring municipalities? And, finally, what is the end game? As we could observe in Atlantic City, where Ed Sasdelli, the fiscal monitor appointed by the State of New Jersey, last Friday stated he will depart at the end of this month—after five years’ of service—the most significant reason is that, under the state takeover legislation, the state monitor position will have to be full-time—and the ramp-up will be especially critical: under the takeover legislation Gov. Chris Christie signed into law last month, Atlantic City is mandated to draft a five-year fiscal plan that includes a balanced FY2017 budget; moreover, if the city fails to submit a plan—or if the plan it submits is deemed insufficient, the State of New Jersey can sell city assets, break union contracts, and assume major decision-making powers from the Mayor and Council. As part of the takeover package, the state provided a $60 million bridge loan and granted a grace period of five months to balance a more than $80 million budget deficit and prepare a sustainable five-year financial plan or face state intervention that allows New Jersey’s Local Finance Board to alter outstanding debt and municipal contracts. Ergo, unsurprisingly, Mr. Sasdelli noted: “I think that’s going to require much more than 18 hours a week from the state monitor.” According to the state, Atlantic City has $550 million in total debt and a budget deficit topping $100 million before state aid. The new state appointment comes as Atlantic City is working to close a $44 million budget gap as part of its five-year fiscal plan to avoid the takeover. Add another fly to the ointment: Atlantic City Mayor Don Guardian had wanted Mr. Sasdelli, in addition to New Jersey Local Government Services Director Tim Cunningham and the Department of Community Affairs Commissioner Charles Richman, to serve on the city’s fiscal plan committee, but was advised that “none of them would be permitted to join us because it would be a conflict of interest.”

Making Up Is Hard To Do. Even as this delicate shifting of power is underway, however, Atlantic City remains in an independent mode: the City Council has voted 6-3 vote to hire the municipal bond counsel firm of Manimon & Scotland to battle the proposed state takeover of the municipality, with Joseph Baumann, the chairman of the firm, noting his key focus will be on refinancing or restructuring Atlantic City’s $240 million bonded debt as well as $170 million in tax refunds owed to the Borgata casino. The virtually bankrupt city is paying the firm $180,000, according to Mr. Baumann, who notes “We will be involved in looking to address all of their debt issues…We’re looking forward to the challenge and hope we can make a difference.” As the ever experienced Marc Pfeiffer of the Bloustein Local Government Research Center advises: Mr. Bauman’s firm is reputed to be one of the best, if not the best in the state—and he comes with previous experience on municipal fiscal distress issues that should help address a complex, intergovernmental workout which will involve some taxable and non-taxable debt, some state intercept debt (“qualified bonds”), and possibly some use of Atlantic County’s strong position to act as a guarantor of city debt to improve its bond ratings and lower its interest rate cost.

Getting Ready to Rumble. U.S. Senate Finance Committee Chairman Orrin Hatch (R-Utah), chair of the committee of jurisdiction, yesterday indicated he believed the Senate would act on the House-passed, bipartisan Puerto Rico PROMESA legislation, although he said he was considering offering changes—even as he told reporters he did not think it is the “solution.” His announcement came as Senate Majority Leader Mitch McConnell—in the wake of a briefing on the bill by House Natural Resources Committee Chairman Rob Bishop (R-Utah), told reporters: “We’ll be taking up the House bill sometime before the end of the month.” That leaves little time to shepherd legislation through the Senate, conference with the House, and get the final bill to the President before July 1, when Puerto Rico faces a deadline on a $1.9 billion debt payment. Senate Majority Leader Mitch McConnell (R-Ky.) has not yet said when he might schedule the House bill for Senate debate. Chairman Hatch noted: “If we think we can improve it (the House-passed bill), we’re going to try to.” The problem is the clock: not only is there a default looming on July 1st, but also the House and Senate are scheduled to break in mid-July until September. Chairman Bishop said GOP senators seemed “up to speed” on the House-passed bill, adding that GOP senators had questioned if there are any taxpayer funds included in the House Puerto Rico bill—in response to which Chairman Bishop made “very clear this was not a bailout,” even as he warned: “If you don’t do anything you’re going to have a bailout.”

Trouble in Buena Vista. The issuer of nearly $9.2 million in municipal debt, the small municipality of Buena Vista, Virginia, has been sued by the insurer of its municipal bonds, ACA Financial Guaranty Corp, in the wake of the municipality walking away from a $9.2 million debt on its municipal golf course. ACA has been making insurance payments on the bond interest on municipal bonds used issued in 2005 to insure bonds used to finance the Vista Links course: when the city defaulted two years ago, the insurer stepped in this week, asking the Buena Vista Circuit Court to order the city to resume payments. Should the municipality refuse that would tee up foreclosure proceedings on the golf course and the buildings that house City Hall and the Buena Vista Police Department, buildings which the municipality had pledged as collateral when the bonds were issued. Even though ACA had indicated its reluctance to actually seize possession of city hall, the firm’s attorney said that remains an option—with provisions in its suit detailing how the city would not be able to find a new home for its evicted governmental offices without the permission of ACA, should the firm prevail in court. Clearly, however, the company would prefer not to own and operate a golf course: instead it is seeking that the “City Council should honor its promises and pay back the money it borrowed. Even the city has to pay its debts.” In retrospect, it seems the city made a risky fiscal gamble more than a decade ago that municipal revenue from the course, along with the residential and commercial development that the city imagined it might generate would be sufficient to help Buena Vista pay off the lease revenue bonds used to fund the initiative. However, not only did the venture struggle financially, but the Great Recession inflicted telling fiscal blows; thus, under a post-recession agreement five years ago, ACA agreed to allow the city to make half payments through this year—when the unpaid balance was to be added to the end of the bonds’ lifespan. However, a year and a half ago, the Buena Vista City Council voted to stop making payments: city officials have said that while they are no longer able to survive financially under the terms of the municipal bond agreements, they are open to a settlement of some kind with ACA. But it appears they have exhausted the patience of their lender.