Public Trust, Public Safety, & Municipal Fiscal Sustainability: Has the Nation Experienced the Closing of its Chapter on Municipal Bankruptcies?

 

Share on Twitter

eBlog, 04/20/17

Good Morning! In this a.m.’s eBlog, we consider the unique and ongoing fiscal and physical challenges confronting Flint, Michigan in the wake of the drinking water crisis spawned by a state-appointed Emergency Manager, before heading far west to assess San Bernardino’s nearing formal exit from chapter 9 municipal bankruptcy—marking the last municipality to exit after the surge which came in the wake of the Great Recession.

Public Trust, Public Safety, & Due Diligence. Flint, Michigan Mayor Karen Weaver has recommended Flint continue obtaining its drinking water via the Detroit Great Lakes Water Authority (GLWA), reversing the position she had taken a year ago in the wake of the lead-contaminated drinking water crisis. Flint returned to the Detroit-area authority which sends water to Flint from Lake Huron in October of 2015 after the discovery that Flint River water was not treated with corrosion control chemicals for 18 months. Mayor Weaver said she believed residents would stick with a plan to draw from a pipeline to Lake Huron which is under construction; however, she said she had re-evaluated that decision as a condition of receiving $100 million in federal funding to address the manmade disaster, noting that switching the city’s water source again might prove too great a risk, and that remaining with Detroit’s water supply from Lake Huron would cost her citizens and businesses less. Last year, Mayor Weaver had stated that the city’s nearly 100,000 residents would stay with a plan to draw from a Karegnondi Water Authority pipeline to Lake Huron—a pipeline which remains under construction, noting, then, that switching water sources would be too risky and could cause needless disruptions for the city’s residents—still apprehensive about public health and safety in the wake of the health problems stemming from the decision by a state-imposed Emergency Manager nearly three years ago to switch and draw drinking water from the Flint River, as an interim source after deciding to switch to the fledgling Genesee County regional system and sever its ties to the Detroit system, now known as the regional Great Lakes Water Authority. Even today, federal, state, and local officials continue to advise Flint residents not to drink the water without a filter even though it complies with federal standards, as the city awaits completion of the replacement of its existing lead service lines—or, as Mayor Weaver put it: “At the end of the day, I believe this is the best decision, because one of the things we wanted to make sure we did was put public health first,” at a press conference attended by county, state, federal and Great Lakes authority officials, adding: “We have to put that above money and everything else. That was what we did. And what didn’t take place last time was public health. We’ve done our due diligence.” The 30-year contract with the Great Lakes authority keeps Flint as a member of the Karegnondi authority—a decision supported by the State of Michigan, EPA, and Genesee County officials, albeit the long-term contract still requires the approval of the Flint City Council and Flint Receivership Transition Advisory Board, a panel appointed by Gov. Rick Snyder charged with monitoring Flint’s fiscal conditions in the wake of the city’s emergence from a state-inflicted Emergency Manager two years ago.

City Councilman Eric Mays this week said he will be asking tough questions when he and his eight other colleagues will be briefed on the plan. There is also a town hall tonight in Flint to take public comments. Councilman Mays notes he is concerned the city may be “giving up ownership” in the new Genesee regional authority, something he opposes, adding he would be closely scrutinizing what he deems a “valuable asset to the city.” Mayor Weaver has said she personally wanted to review the earlier decision in the wake of last month’s receipt from the Environmental Protection Agency of $100 million to assist the city to address and recover from the drinking water disaster that took such a human and fiscal toll. (EPA is mandating that Flint provide a 30-day public comment period.) Mayor Weaver notes she anticipates some opposition, making clear any final decision will depend upon “public feedback and public opinion.” Currently, the city remains under contract to make $7 million in annual municipal bond payments over 28 years to the Karegnondi Water Authority (KWA); however, the Great Lakes authority said it would pay a $7 million “credit” for the KWA debt as long as Flint obligates itself to make its debt service payments. There is, at least so far, no indication with regard to how any such agreement would affect water rates. That matters, because, according to the Census Bureau, the city’s median household income is $7,059, significantly lower than the median Michigan-wide household income, and some $11,750 less than U.S. median household income. The GLWA said Flint customers would save a projected $1.8 million over 30 years compared with non-contractual charges they would have paid otherwise; in return, the Flint area authority would become a back-up system for the Detroit area authority, saving it an estimated $600 million over prior estimates and ensuring Metro Detroit communities would still receive water in the event of an interruption in Great Lakes authority service.

Robert Kaplan, the Chicago-based EPA’s acting regional administrator, said he signed off on the deal because the agency believes it protects the health of residents: “What’s best for public health is to stay on the water that’s currently being provided.” Jeff Wright, the KWA’s chief executive and drain commissioner of Genesee County, said the recommended plan not only would allow Flint to remain with the Genesee regional system, but also to be a back-up water supply, which, he noted, “is critically important to the safety of Flint’s residents who have not had a back-up system since the beginning of the Flint water crisis,” adding: “Whether (or not) Flint ultimately chooses high-quality Lake Huron water delivered through the newly constructed KWA pipeline, the highest quality treated water from Genesee County’s Water Treatment Plant or any other EPA-approved alternative, we will continue to assist Flint residents as they strive to recover from the Flint Water Crisis.” 

Keeping the Detroit system. The Great Lakes Water Authority Has embraced Mayor Weaver’s recommendation, with CEO Sue McCormick noting: “Flint residents can be assured that they will continue to receive water of unquestionable quality, at a significant cost savings.” Michigan Senate Minority Leader Jim Ananich (D-Flint) noted: “It provides us a long-term safe water source that we know is reliable. KWA could do the same thing, but this is an answer to help deal with one of the major parts of it,” adding the recommended move to stay on Detroit area water is “another example of the emergency manager sort of making a short-term terrible decision that’s cost us taxpayers half a billion dollars, if not more.” Emergency managers appointed by Snyder decided with the approval of the Flint City Council to switch to the Flint River water in part to save money. Flint officials said they thought Detroit water system price hikes were too high. For more than a year, the EPA has delayed any switch to KWA because of deficiencies including that the Flint treatment plant is not equipped to properly treat water. Staying with the Great Lakes authority may be an initial tough sell because of the city’s history, Mayor Weaver warned, but she is trying to get residents to move on. A town hall is scheduled for this evening at House of Prayer Missionary Baptist Church in Flint for public feedback. “I can’t change what happened,” Mayor Weaver said. “All I can do is move forward.”

Moody Blues in San Bernardino? As San Bernardino awaits its final judicial blessing from U.S. Bankruptcy Judge Meredith Jury of its plan of debt adjustment to formally exit chapter 9 municipal bankruptcy, Moody’s has issued a short report, noting the city will exit bankruptcy with higher revenues and an improved balance sheet; however, the rating agency notes the city will confront significant operational challenges associated with deferred maintenance and potential service shortfalls—even being so glum as to indicate there is a possibility that, together with the pressure of its public pension liabilities, the city faces continued fiscal pressures and that continued financial distress could increase, so that a return to municipal bankruptcy is possible. Moody’s moody report notes the debt adjustment plan is forcing creditors to bear most of the restructuring challenge, especially as Moody’s analyzes the city’s plan to favor its pension obligations over bonded municipal debt and post-retirement OPEB liabilities. Of course, as we noted early on, the city’s pension liabilities are quite distinct from those of other chapter 9 municipalities, such as Detroit, Central Falls, Rhode Island, and Jefferson County. Under the city’s plan, San Bernardino municipal bondholders are scheduled to receive a major buzz cut—some 45%, even as some other creditors whom we have previously described, are scheduled (and still objecting) to receive as little as a 1% recovery on unsecured claims. Thus, Moody’s concludes that the Southern California city will continue to have to confront rising pension costs and public safety needs. Moody’s adjusted net pension liability will remain unchanged at $904 million, a figure which dwarfs the projected bankruptcy savings of approximately $350 million. The California Public Employees’ Retirement System also recently reduced its discount rate, meaning the city’s already increasing pension contributions will rise even faster. Additionally, Moody’s warns, a failure to invest more in public safety or police could exacerbate already-elevated crime levels. That means the city will likely be confronted by higher capital and operating borrowing costs, noting that, even after municipal debt reductions, the city might find itself unable to fund even 50 percent of its deferred maintenance. 

However, as San Bernardino’s Mayor Davis has noted, the city, in wake of the longest municipal bankruptcy in American history, is poised for growth in the wake of outsourcing fire services to the county and waste removal services to a private contractor, and reaching agreements with city employees, including police officers and retirees, to substantially reduce healthcare OPEB benefits to lessen pension reductions. Indeed, the city’s plan of adjustment agreement on its $56 million in pension obligation bonds—and in significant part with CalPERS—meant its retirees fared better, as Moody’s has noted, than the city’s municipal bondholders to whom San Bernardino committed to pay 40 percent of what they are owed—far more than its early offer of one percent. San Bernardino’s pension bondholders succeeded in wrangling a richer recovery than the city’s opening offer of one percent, but far less than CalPERS, which received a nearly 100 percent recovery. (San Bernardino did not make some $13 million in payments to CalPERS early in the chapter 9 process, but subsequently set up payments to make the public employee pension fund whole.) The city was aided in those efforts in the wake of U.S. Bankruptcy Judge Meredith Jury’s ruling against the argument made by pension bond attorneys: in the wake of the city’s pension bondholders entering into mediation again prior to exit confirmation, substantial agreement was achieved for those bondholders—bondholders whose confidence in the city remains important, especially in the wake of the city’s subsequent issuance of $68 million in water and sewer bonds at competitive interest rates—with the payments to come from the city’s water and sewer revenues, which were not included in the chapter 9 bankruptcy. The proceeds from these municipal bonds were, in fact, issued to provide capital to meet critical needs to facilitate seismic upgrades to San Bernardino’s water reservoirs and funding for the first phase of the Clean Water Factor–Recycled Water Program.

The Art & Commitment of Municipal Fiscal Recovery

eBlog, 04/11/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery of the city of Flint, Michigan, before heading east to one of the smallest municipalities in America, Central Falls, Rhode Island, as it maintains its epic recovery from chapter 9 municipal bankruptcy, before finally turning south to assess recent developments in Puerto Rico. We note the terrible shooting yesterday at North Park Elementary School in San Bernardino; however, as former San Bernardino School Board Member Judi Penman noted, referring to the police department: “It is one of the most organized and well-prepared police departments around, and they are well prepared for this type of situation.” Indeed, even if sadly, the experience the city’s school police department gained from coordinating with the city’s police department in the wake of the December 2, 2015 terrorist attack appeared to enhance the swift and coordinated response—even as calls came in yesterday from the White House and California Gov. Jerry Brown to offer condolences and aid, according to San Bernardino Mayor Carey Davis.

Could this be a Jewel in the Crown on Flint’s Road to Fiscal Recovery? In most instances of severe municipal fiscal distress or bankruptcy, the situation has been endemic to the municipality; however, as we have noted in Jefferson County, the state can be a proximate cause. Certainly that appears to have been the case in Flint, where the Governor’s appointment of an emergency manager proved to be the proverbial straw that broke the camel’s back at an exceptional cost and risk to human health and safety. The fiscal challenge is, as always, what does it take to recover? In the case of Flint, the city’s hopes appear to depend upon the restoration of one of the small city’s iconic jewels: the historic, downtown Capitol Theatre—where the goal is to restore it to its original glory, dating back to 1928, when it opened as a vaudeville house: it was listed on the National Register of Historic Places in 1985, but has been empty now for more than a decade—indeed, not just empty, but rather scheduled to become still another parking lot. Instead, however, the property will undergo a $37 million renovation to become a 1,600-seat movie palace and performance venue, which will provide 28,000 square feet of ground-floor retail and second-floor office space; an additional performance space will be created in the basement for small-scale workshops, experimental theater, and other performances. Jeremy Piper, chairman of the Cultural Center Corp., a Flint lawyer, will manage the new performing arts venue in the cultural center; he will also serve as co-chair of a committee that is raising the last $4 million of the $37 million needed to bring the theater back to life. The goal and hope is that the renovated theater will, as has been the experience in other cities, such as New York City’s Lincoln Center for the Performing Arts, help serve as a foundation for Flint’s fiscal and physical recovery. The new theater is intended to become the focal point of 12,000, 13,000, or 14,000 people coming into downtown Flint for a performance and then going out for dinner—that is, to benefit and revive a downtown economy. Indeed, already, the venture firm SkyPoint is planning to open a large fine-dining restaurant on the ground floor and mezzanine timed to the rejuvenated theater’s reopening—SkyPoint Ventures being the company co-founded by Phil Hagerman, the CEO of Flint-based Diplomat Pharmacy Inc., and his wife, Jocelyn, whose Hagerman Foundation (the author, here, notes his middle name, derived from his great grandfather, is Hagerman) donated $4 million toward the Capitol’s renovation. In 2016, the Flint-based C.S. Mott Foundation announced a grant of $15 million for the Capitol Theatre project as part of $100 million it pledged to the city in the wake of the water crisis. The project also received $5.5 million from the Michigan Strategic Fund.

The ambitious effort comes as Michigan has paid $12 million to outside attorneys for work related to the Flint drinking water crisis, but out of which nearly 30% has gone to pay criminal and civil defense attorneys hired by Gov. Rick Snyder—an amount expected to climb as the lead poisoning of Flint’s drinking water has proven to be devastating for Flint and its children, but enriching for the state’s legal industry: Jeffrey Swartz, an associate professor at Western Michigan University-Cooley Law School, notes: “It’s a lot of money…I can see $10 million to $15 million being eaten up very quickly.” He added, moreover, that the state is still “on your way up the slope” in terms of mounting legal costs. The approved value of outside legal contracts, not all of which has been spent, is at least $16.6 million, adding that the Michigan Legislature may want to appoint a commission to review the appropriateness of all outside legal bills before they are approved for payment: already, Gov. Rick Snyder’s office has spent a combined $3.35 million for outside criminal and civil defense lawyers; the Michigan Department of Environmental Quality has spent $3.65 million; the Department of Health and Human Services has spent $956,000; and the Treasury Department has spent $35,555, according to figures released to the Free Press. In addition, the state has paid $340,000 to reimburse the City of Flint for some of its civil and criminal legal defense costs related to the drinking water crisis, which a task force appointed by Gov. Snyder has said was mainly brought on by mistakes made at the state level. Yet to be equitably addressed are some $1.3 million in Flint legal costs. Michigan Attorney General Bill Schuette, whose investigation is still ongoing, has charged 13 current or former state and municipal officials, including five from the Dept. of Environmental Quality, the Dept. of Health and Human Safety, the City of Flint, and two former state-appointed emergency managers who ran the city and reported to the state’s Treasury Department; no one, however, from Gov. Snyder’s office has been charged.

The Remarkable Recovery of Chocolateville. Central Falls, Rhode Island Mayor James A. Diossa, the remarkable elected leader who has piloted the fiscal recovery of one of the nation’s smallest cities from chapter 9 municipal bankruptcy, this week noted: “Our efforts and dedication to following fiscally sound budgeting practices are clearly paying off, leaving the City in a strong position. I would like to personally thank the Council and Administrative Financial Officer Len Morganis for their efforts in helping to lead the comeback of this great City.” The Mayor’s ebullient comments came in the wake of credit rating agency Standard and Poor’s rating upgrade for one of the nation’s smallest cities from “BB” to “BBB,” with S&P noting: “Central Falls is operating under a much stronger economic and management environment since emerging from bankruptcy in 2012. The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections.”

One of the nation’s smallest municipalities (population of 19,000, city land size of one-square-mile), Central Falls is Rhode Island’s smallest and poorest city—and the site of a George Mason University class project on municipal fiscal distress—and guidebook for municipal leaders. Its post-bankruptcy recovery under Mayor Diossa has demonstrated several years of strong budgetary performance, and has “fully adhered to the established post-bankruptcy plan,” or, as Mayor Diossa put it: “S&P’s latest ratings report is yet another sign of Central Falls’ turnaround from bankruptcy.” Mr. Morganis noted: “The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections,” adding that the credit rating agency’s statement expressed confidence that strong budgetary performance will continue post Rhode Island State oversight. S&P, in its upgrade, credited Mayor Diossa’s commitment to sound and transparent fiscal practices, noting the small city has an adequate management environment with improved financial policies and practices under their Financial Management Assessment (FMA) methodology—and that Central Falls exhibited a strong budgetary performance, with an operating surplus in the general fund and break-even operating results at the total governmental fund level in FY2016. Moreover, S&P reported, the former mill town and manufacturer of scrumptious chocolate bars has strong liquidity, with total government available cash at 28.7% of total governmental fund expenditures and 1.9 times governmental debt service, along with a strong institutional framework score. Similarly, Maureen Gurghigian, Managing Director of Hilltop Securities, noted: “A multi-step upgrade of this magnitude is uncommon: this is a tribute to the hard work of the City’s and the Administrative Finance Officer’s adherence to their plan and excellent relationship with State Government.” The remarkable recovery comes as one of the nation’s smallest cities heads towards a formal exit from chapter 9 municipal bankruptcy at the end of FY2017. S&P, in its upgrade, noted the city is operating under a “much stronger economic and management environment,” in the wake of its 2012 exit from municipal bankruptcy, or, as Mayor Diossa, put it: “Obviously we’ve had a lot of conversations with the rating agencies, and I was hoping we’d get an upgrade of at least one notch…When we got the triple upgrade, first, I was surprised and second, it reaffirmed the work that we’re doing. Our bonds are no longer junk. We’re investment level. It’s like getting good news at a health checkup.”  S&P, in its report, noted several years of sound budgeting and full adherence to a six-year post-bankruptcy plan which state-appointed receiver and former Rhode Island Supreme Court Justice Robert Flanders crafted. The hardest part of that recovery, as Judge Flanders noted to us so many years ago in City Hall,was his swift decision to curtail the city’s pension payments—cuts of as much as 55 percent—a statement he made with obvious emotion, recognizing the human costs. (Central Falls is among the approximately one-quarter of Rhode Island municipalities with locally administered pension plans.) Unsurprisingly, Mayor Diossa, maintains he is “fully committed” to the fiscal discipline first imposed by Judge Flanders, noting the municipality had a general fund surplus of 11% of expenditures in FY2016, and adding: “That reserve fund is very important.” He noted Central Falls also expects a surplus for this fiscal year, adding that the city’s expenses are 3% below budget, and that even as the city has reduced the residential property tax rate for the first time in a decade, even as it has earmarked 107% of its annual required contribution to the pension plan and contributed $100,000 toward its future OPEB liability.

The End of an Era? Mayor Diossa, recounting the era of chapter 9 bankruptcies, noted Pennsylvania’s capital, Harrisburg, in 2011; Jefferson County, Alabama; Stockton, Mammoth Lakes and San Bernardino, California; and Detroit: “I think Central Falls is a microcosm of all of them…I followed Detroit and heard all the discussions. They had the same issues that we had…sky-high costs, not budgeting appropriately,” adding his credit and appreciation—most distinctly from California—of the State of Rhode Island’s longstanding involvement: “The state’s been very involved,” commending Governors Lincoln Chafee and Gina Raimondo. Nevertheless, he warns: fiscal challenges remain; indeed, S&P adds: “The city’s debt and contingent liability profile is very weak…We view the pension and other post-employment benefit [OPEB] liabilities as a credit concern given the very low funded ratio and high fixed costs…They are still a concern with wealth metrics and resources that are probably below average for Rhode Island, so that’s a bit of a disadvantage…That adds more importance to the fact that they achieved an investment-grade rating through what I think is pretty good financial management and getting their house in order.” The city’s location, said Diossa, is another means to trumpet the city.

The Uncertainties of Fiscal Challenges. Natalie Jaresko is the newly named Executive Director of the PROMESA federal control board overseeing Puerto Rico’s finances, who previously served during a critical time in Ukraine’s history from 2014 to 2016 as it faced a deep recession, and about whom PROMESA Board Chair Jose Carrion noted: “Ukraine’s situation three years ago, like Puerto Rico’s today, was near catastrophic, but she worked with stakeholders to bring needed reforms that restored confidence, economic vitality and reinvestment in the country and its citizens. That’s exactly what Puerto Rico needs today;” came as Ms. Jaresko yesterday told the Board that with the tools at its disposal, Puerto Rico urgently needs to reduce the fiscal deficit and restructure the public debt, “all at once,” while acknowledging that the austerity measures may cause “things to get worse before they get better.” Her dire warnings came as the U.S. territory’s recovery prospects for the commonwealth’s general obligation and COFINA bonds continued to weaken, and, in the wake of last week’s moody Moody’s dropping of the Commonwealth’s debt ratings to its lowest rating, C, which equates with a less than 35% recovery on defaulted debt. Or, as our respected colleagues at Municipal Market Analytics put it: “[T]he ranges of potential bondholder outcomes are much wider than those, with a materially deeper low-end. For some (or many) of the commonwealth’s most lightly secured bonds (e.g., GDB, PFC, etc.) recoveries could hypothetically dip into the single digits. Further, any low end becomes more likely the longer Puerto Rico’s restructuring takes to achieve as time:

1) Allows progressively more negative economic data to materialize, forcing all parties to adopt more conservative and sustainable projections for future commonwealth revenues;

2) Allows local stakeholder groups—in particular students and workers—to organize and expand nascent protest efforts, further affecting the political center of gravity on the island;

3) Worsens potential entropy in commonwealth legislative outcomes;

4) Frustrates even pro-bondholder policymakers in the US Congress, which has little interest in, or ability to, re-think PROMESA and/or Federal aid compacts with the commonwealth.”

On the other hand, the longer the restructuring process ultimately takes, the more investable will be the security that the island borrows against in the future (whatever that is). So while the industry in general would likely benefit from a faster resolution that removes Puerto Rico from the headlines, the traditional investors who will consider lending to a “fixed” commonwealth should prefer that all parties take their time. Finally, if bleakly, MMA notes: “In our view, reliable projections of bondholder recovery impossible, and we fail to understand how any rating agency with an expected loss methodology can rate Puerto Rico’s bonds at all…Remember that the Governor’s Fiscal Plan, accepted by the Oversight Board, makes available about a quarter of the debt service to be paid on tax-backed debt through 2027, down from about 35% that was in the prior plan that the Board rejected. As we’ve noted before, the severity of the proposal greatly reduces the likelihood that an agreement will be reached with creditors by May 1 (when the stay on litigation ends), not only increasing the prospect of a Title III restructuring (cram down) un-der PROMESA, but also a host of related creditor litigation against the plan itself and board decisions both large and small. The outcomes of even normal litigation risks are inherently unpredictable, but the prospects here for multi-layered, multi-dimensional lawsuits create a problem several orders of magnitude worse than normal.

The Key Lessons Learned after a Decade of Municipal Bankruptcies

Share on Twitter

eBlog, 04/07/17

Good Morning! In this a.m.’s eBlog, we consider Detroit’s first steps to address the blight which crisscrossed the city leading to its municipal bankruptcy. Then we look to New Hampshire to assess whether the state legislature will preempt municipalities’ authority to set election dates. Then we slip south to assess fiscal developments in the efforts to recover from insolvency in Puerto Rico. Finally, we assess and consider some of the broader issues related to municipal bankruptcy.

Post Chapter 9 Recovery. One of Detroit’s first tests with regard to whether it can find new use for the vast stretches of land it cleared of blight went into effect this week when development teams announced by  Mayor Mike Duggan, along with partners: The Platform, a Detroit-based firm, and Century Partners announced they would be investing an estimated $100 million to rehab the architectural jewels in the city’s downtown—the Fisher and Albert Kahn buildings, with the two organizations declaring they will take the lead in overhauling 373 parcels of vacant land and houses in the Fitzgerald neighborhood on the northwest side, where they will coordinate with other firms on a $4 million development plan to rehab 115 vacant homes over two years, create a two-acre park, and landscape 192 vacant lots—with the work occurring in neighborhoods wherein the Detroit Land Bank took control of most of the properties and razed some abandoned homes. Mayor Duggan and other officials described the plan as a kind of reverse gentrification—or, as Mayor Duggan framed it: “We are going to keep the families here while improving the neighborhoods,” making his announcement on an empty lot which is scheduled to become a city park and include a greenway path to nearby Marygrove College: the city leaders hope to transform the neighborhood into a “Blight-Free Quarter Square Mile,” and, if the model works, seek to propagate it other neighborhoods.

Granite State Preemption or Cure? House Speaker Shawn Jasper wants to give New Hampshire towns that postponed their municipal elections due to a snowstorm a way out of facing potential lawsuits from voters who may have been disenfranchised. Speaker Jasper had proposed letting towns ratify the results of their elections by holding another vote, offering a bill to give towns which moved Election Day the option of letting townspeople vote to ratify, or confirm, the results on May 23rd. However, in the wake of about five hours of testimony, the House Election Law Committee voted 10-10 on the Jasper plan, so that a tie vote killed the Speaker’s amendment, leaving 73 towns on their own to address potential legal problems resulting from their decisions to hold their elections on days other than March 14th. The fiscal blizzard in the Granite State now depends upon whether state legislators determine whether or not a special election is needed with regard to those results. New Hampshire Deputy Secretary of State David Scanlan noted: “The concept is not entirely new…what is different is that it is applying to an entire class of towns that decided to postpone.”

In the past, the Legislature has voted to “cure” individual election defects. Speaker of the House Shawn Jasper, (R-Hudson, N.H.) noted: “Well, the fact that a bunch of towns moved the day of their town election was unprecedented…And so as a result of doing that, those towns that moved had to start bending other laws to make other issues related to the election work…The Legislature is just granting the authority to allow the towns to correct any defects that may exist,” he added, listing changed time listings, lack of proper notice, and absentee ballot date issues as possible defects in the process. All of those questions, of course, have fiscal consequences—or, as Atkinson Town Administrator Alan Phair put it; “Well, I don’t know the exact cost, what it would be, but I do know that in our case we certainly don’t have the money budgeted to (hold a special election), because we obviously just budgeted for one election…We would certainly go considerably over and have to find the money elsewhere to do it.” Under the proposed amendment, towns and school districts which postponed would hold a hearing, at which the respective governing body would vote on whether to hold a special election with one question: whether or not to ratify results, where a “no” vote would kick out anyone elected in a postponed vote, while nullifying warrant articles, with elected roles to be appointed until the next election. Salem Town Manager (Salem is a town of just under 30,000 in Rockingham County) Leon Goodwin said his elected leaders were of the opinion that its postponement was legal, so that the municipality is moving forward on projects voted on last month, noting: We’re moving on as if the votes were accepted even though there is a cloud hanging over us from Concord,” adding that town counsel advised the town moderator that it was legal to move elections. Yet, even as he remained confident the election issue will be resolved, he cautioned that the town has not budgeted for an additional election; Windham (approximately 14,000) Town Manager David Sullivan said the municipality’s town Counsel would sign off on the town’s fire truck bond, notwithstanding bond counsel elsewhere in the state advising that ratification of the elections would be necessary.

Municipal authority to act has been hampered by different state House and Senate approaches: while the two bodies have been moving on parallel tracks in the wake of state officials’ questioning the authority of town moderators to reschedule the March 14 voting sessions of their town meetings, the Senate this week passed SB 248, a bill introduced to ratify actions taken at the rescheduled meetings; however, the bill passed with a committee amendment which deletes all of the original language and provides instead for the creation of a committee to “study the rescheduling of elections.” Senators acknowledged that the bill was not likely to pass through the House in that form—asserting the intent was simply to get a bill to the House for further work. Subsequently, a floor amendment was introduced to restore the bill’s original language, ratifying all actions taken at the rescheduled meetings; however, that amendment failed on a party-line vote, with all nine Democrats voting in favor and all fourteen Republicans voting against, leaving most unclear how this could have become a partisan issue. The question comes down to what level of control local officials should have over local elections. The Speaker described the outcome thusly: “I think it was a case of 10 people (on the committee) thinking that what happened was legal;” however, he maintained that the postponed votes were not legal, adding: “The sad thing is that for school districts with bond issues that passed in those meetings, I don’t see a path forward for them,” adding: “I think if you’re afraid of snowstorms, you ought to move your meetings, probably to May,” noting that state officials are forbidden by law from moving state primary and general elections, as well as the first-in-the-nation presidential primary. Unsurprisingly, town moderators and attorneys who work with them on municipal bond issues disagreed with the Speaker’s interpretation that the postponed elections were illegal and his belief that the only way to rectify the issue was for them to act to individually ratify them, with many arguing they acted legally under a state law which allows them to postpone and reschedule the “deliberative session or voting day” of a town meeting to another day; however, the Speaker maintains that law applies only to town meetings, while town elections are governed under a different statute, which provides: “All towns shall hold an election annually for the election of town officers on the second Tuesday in March.” He also noted that the state’s official political calendar, which has the force of law, states that town elections must be held on March 14, adding: “Without trying to place blame, laws are sometimes very confusing if you look only at parts of them,” noting: “I don’t believe for one second that moving the election was legal.”

The Speaker added that still another state law provides that at special town meetings, no money may be raised or appropriated unless the number of ballots cast at the meeting is at least half the number of those on the checklist who were eligible to vote in the most recent town meeting, albeit adding that such meetings do not apply to the current situation, because they are not elections. The state’s Secretary of State said that after three weeks of research, he was able to report on voter turnout at town elections for the past 11 years, advising that 210 towns held elections in March, and 137 of them “followed the law” by holding their elections on March 14th, while 73 towns had postponed their elections by several days. Now Speaker Jasper asks: “Why would we give over 300 individual moderators the ability to do that when our Secretary of State doesn’t have the ability to do that for a snowstorm in our general election or our presidential primary?” The Speaker notes: “I think we need to provide a way to ensure that we don’t clog up the courts, and we don’t have people spend a lot of their own money to fight this, and the towns don’t have to spend a lot of money fighting it.”

Un-positive Credit Rating for Puerto Rico. Moody’s Investors Service has lowered the credit ratings on debt of the Government Development Bank and five other Puerto Rico issuers, with a total of approximately $13 billion outstanding, and revised down the Commonwealth’s fiscal outlook, and the outlooks for seven affiliated obligors linked to the central government to negative from developing, with the downgrades reflecting what the agency described as “persistent pressures on Puerto Rico’s economic base that indicate a diminishing perceived capacity to repay,” noting that while it continues to “believe that essentially all of Puerto Rico’s debt will be subject to default and loss in a broad restructuring, the securities being downgraded face more severe losses than we had previously expected, in the light of Puerto Rico’s projected economic pressures. For this reason, we downgraded to C from Ca not only the senior notes issued by the now defunct Government Development Bank, but also bonds issued by the Puerto Rico Infrastructure Financing Authority and backed by federal rum tax transfer payments, the Convention Center District Authority’s hotel occupancy tax-backed bonds, the Employees Retirement System’s bonds backed by government pension contributions, and the 1998 Resolution bonds of the Puerto Rico Highways and Transportation Authority.”

Puerto Rico Governor Rossello late Wednesday said that the U.S. territory’s fiscal plan, approved by the PROMESA Board, does not contemplate any double taxation, adding that, between the increase in the property tax and the reduction of expenses in the municipalities, he favored the latter as a measure to compensate for the absence of the state subsidy of $350 million. He reiterated that, as a substitute for these funds, the properties which are not currently paying taxes to the Centro de Recaution de Ingresos Municipales (CRIM: the Municipal Revenue Collection Center) should be identified, because they are not included in their registry. The Governor also stressed that the economic outcome of these two fiscal initiatives is still being evaluated, albeit he estimated that they could generate about $100 million, noting: “Whatever the differential after that for the municipalities, there are two mechanisms that can be worked: One, a mechanism to seek an additional source of income, or, two, to avail cuts…The central government has taken the cutting position. We are already establishing a protocol to cut in the agencies, to consolidate, to eliminate the expenses that are not necessary, to go from 131 to between 35 to 40 agencies. That has been our action. The municipalities—now we will have a conversation with our technical team—will have several options: ‘either cut as did the central government or seek mechanisms to raise more funds or impose taxes.’” Currently, mayors evaluate to increase the arbitrage of the real property to 11.83% or to 12.83% in all the municipalities; the concept is for members of the Executive to offer assistance to do the modeling. Thus, the president of the board of CRIM, Cidra Mayor Javier Carrasquillo, said CRIM will be “sensitive to the reality of the pockets of Puerto Ricans: We have to be cautious and responsible in the recommendation that we are going to make…There is nothing definitive yet. There are recommendations.” The Governor noted that the PROMESA Board approved fiscal plan approved last month does not contemplate an increase in property taxation, asserting it was “false to imply that our fiscal plan entails an increase in the rate or a double rate on properties,” albeit recalling that the disappearance of $350 million in transfers to municipalities begins on July 1, when the fiscal year begins, promising it will be done progressively, so that in the next budget (2017-2018) $175 million disappear, and the remaining $175 million, the next fiscal year, describing it as a “two-year fade out.” Unsurprisingly, he did not specify when or how the plan would fiscally benefit this island’s municipalities, stating: “We have already been able to have pilot efforts to identify different municipalities where 60% of their properties are not being assessed…We are going to commit ourselves so that all these properties are in the system.”

The End of a Chapter 9 Era? Municipal bankruptcy is a rarity: even notwithstanding the Great Recession which produced a significant number of corporate bankruptcies—and federal bailouts to large for-profit corporations and quasi-federal corporations, such as Fannie Mae; the federal government offered no bailouts to cities or counties. Yet from one of the nation’s smallest cities, Central Falls, to major, iconic cities such as Detroit and Jefferson County, the nation experienced a just-ended spate, before—with San Bernardino’s exit last month, the likely closure of an era—even as we await some resolution of the request by East Cleveland to file for chapter 9 municipal bankruptcy. The lessons learned, compiled by the nation’s leading light of municipal bankruptcy, therefore bear consideration. Jim Spiotto, with whom I had the honor and good fortune over nearly a decade of effort leading to former President Reagan’s signing into law of the municipal bankruptcy amendments of 1988, offers us a critical guide of ten lessons learned:

  1. Do not defer funding of essential services and infrastructure: Detroit is a wake- up call for others that there is never a good reason to defer funding of essential services and infrastructure at an acceptable level. If you do, Detroit’s fate will be yours.
  2. Labor and pension contracts under state constitutional and statutory provisions should not be interpreted as a mutual suicide pact: It appears one of the reasons why resolution of pension and labor costs was not achieved in Detroit prior to filing Chapter 9 was the belief of the workers and retirees that, under the Michigan constitution, those contractual rights could not be impaired or diminished to any degree. This position failed to take into consideration that the municipality can only pay that which it has revenues to pay and, in an eroding declining financial situation, there will never be sufficient funds to pay all obligations, especially those that may be unaffordable and unsustainable.
  3. Don’t question that which should be beyond questioning and is needed for the long-term financial survival of the municipality: A dedicated source of payment, statutory lien or special revenues established under state law must be honored and should not be contested. Capital markets work effectively when credibility and predictability of outcome are clear and unquestioned. Current effort to pass new legislation (California SB222 and Michigan HB5650) to grant statutory first lien on dedicated revenues. Further, as noted in the Senate Report for the 1988 Amendments to the Bankruptcy Code and Chapter 9 “Section 904 [of Chapter 9 limiting the jurisdiction and power of the Bankruptcy Court] and the tenth amendment prohibits the interpretation that pledges of revenues granted pursuant to state statutory or constitutional provisions to bondholders can be terminated by filing a Chapter 9 proceeding”. This follows the precedent from the 1975 financial distress of New York City and the State of New York’s highest court ruling the state imposed moratorium was unconstitutional given the constitutional mandate to pay available revenues to the general obligation bondholders. See Flushing Nat. Bank et. al. v. Mun. Assistance Corp. of New York, 40 N.Y.S.2nd 731, 737-738 (N.Y. 1976). Just as statutory liens and special revenues, there is a strong argument that state statutory and constitutional mandated payments (mandated set asides, priorities, appropriations and dedicated tax revenue payments) should not and cannot be impaired, limited, modified or delayed by a Chapter 9 proceeding given the rulings of the Supreme Court in the Ashton and Bekins cases and the prohibitions of Sections 903 and 904 of Chapter 9 of the Bankruptcy Code.
  4. Debt adjustment is a process, but a recovery plan is a solution: As noted above, while Detroit has proceeded with debt adjustment which provides some additional runway so it can take takeoff in a recovery, such plan is not the cure for the systemic problem. Rather, the plan provides additional breathing room so that the municipality, through its Mayor and its elected officials, may proceed with a recovery plan, reinvest in Detroit, stimulate the economy, create new jobs, clear and develop blighted areas and raise the level of services and infrastructure to that which is acceptable and attract new business and new citizens.
  5. Successful plans of debt adjustment have one common feature: virtually all significant issues have been settled and resolved with major creditors: While the Detroit Plan started with sound and fury between the emergency manager and creditors and what they would receive, in the end, similar to what occurred in Vallejo, Jefferson County and even in Stockton (with one exception), major creditors ultimately reached agreement and supported the Plan of Debt Adjustment that allowed the municipality to move forward, confirm the Plan and begin its journey to recovery.
  6. One size does not fit all: There are many ways to draft a plan of debt adjustment and sometimes the more creative, the better. As noted above, traditionally major cities of size with significant debt did not file Chapter 9. They refinanced their debt with the backing of the state which reduced their future borrowing costs and allowed them to recover by having the liquidity and the reduced costs necessary to deal with their financial difficulties. Detroit chose a different path.
  7. A recovery plan must provide for essential services and infrastructure: “Best interest of creditors” and “feasibility” can only mean an appropriate reinvestment in the municipality through a recovery plan where there is funding of essential services and infrastructure at an acceptable level to stimulate the municipality’s economy to attract new employers and taxpayers thereby increasing tax revenues and addressing the systemic problem. While no plan of debt adjustment is perfect or assured, there should be, as the Bankruptcy Court in Detroit throughout the case pointed out, a plan to show the survivability and future success of the City.
  8. Confirmation of a plan of debt adjustment is only the beginning of the journey to financial recovery, not the end: It is important to recognize, as noted above, that Chapter 9 is a process, not a solution. The recovery plan, which will take dedication and effort by the elected officials of the City along with residents, public workers and other creditors is the only way to achieve success. It is measured not by months, but by years, and by the constant vigilance to ensure that the systemic problem is addressed effectively in a permanent fix.

Municipal Fiscal Accountability

Share on Twitter

eBlog, 03/31/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Atlantic City after its “lost decade,” before venturing inland to one of the nation’s oldest cities, Wilkes-Barre, Pennsylvania (founded in 1769) as it confronts the challenges of an early state intervention program, and, finally, to Southern California, where the City of Compton faces singular fiscal distrust from its citizens and taxpayers.  

A Lost Fiscal Decade? Atlantic City’s redevelopment effort appears to be gathering momentum following a “lost decade” which featured the closing of five casinos, a housing crisis and major recession, according to a new report released by the South Jersey Economic Review, with author Oliver Cooke writing: “The fact remains that Atlantic City’s redevelopment will take many years…The impact of the local area’s economy’s lost decade on its residents’ welfare has been stark.” The study finds the city to be in recovery—to be stable, but that it is still in critical condition with some work to do.  Nevertheless, its vital signs from developers and its improving economy are all good: that is, while the patient may not regain all its previous strength and capability,  it can thrive: it is “over(cost),” and needs to lose some of the fat it built up by going on a (budget) diet—a road to recovery which will remain steep and tortuous, because it lacks the fiscal capacity it had 15 or 20 years ago—and has to slim down to reflect it.  That is, the city will have to stress itself more in order to get better.  

The analysis, which was conducted in conjunction with the William J. Hughes Center for Public Policy at Stockton University, notes that vital signs from developers and its improving economy are in good condition—maybe even allowing the city to thrive, even if it is unable to regain all its previous strength and fiscal capacity—put in fiscal cookbook terms: Atlantic City is over(cost)weight and needs to lose some of the fat it built up by going on a (budget) diet.  The report also noted that Atlantic City is on track with some positive developments, including the decision at the beginning of this month by Hard Rock International to buy and reopen the closed Trump Taj Mahal property, as well as a recent $72 million settlement with the Borgata Hotel Casino & Spa related to $165 million in owed tax refunds. Mr. Cooke also highlighted other high-profile projects underway, including the reopening of the Showboat casino by developer Bart Blatstein and a $220 million public-private partnership for a new Stockton University satellite residential campus. Nonetheless, he warned that Atlantic City still faces a deep fiscal challenge in the wake of the loss to the city’s metropolitan area of more than 25,000 jobs in the last decade—and its heavy burden of $224 million in municipal bond debt, tied, in large part, to casino property tax appeals. Ultimately, as the ever insightful Marc Pfeiffer of the Bloustein Local Government Research Center and former Deputy Director with the state Division of Local Government Services, the city’s emergence from state control and fiscal recovery will depend on the nuances of the that relationship and whether—in the end—the state imposed Local Finance Board acts with the city’s most critical interests at heart.  

Don’t Run Out of Cash! Wilkes-Barre, first incorporated as a Borough in 1806, is the home of one of Babe Ruth’s longest-ever home runs. It became a city in 1871: today it is a city of over 40,000, but one which has been confronted by constant population decline since the 1930s: today it is less than half the size it was in 1940 and around two-thirds the size it was in 1970. It is a most remarkable city, made up of an extraordinary heritage of ethnic groups, the largest of which are: Italian (just over 25%), Polish (just under 25%), Irish (21%), German (17.9%) English (17.1%) Welsh (16.2%) Slovak (13.8%); Russian (13.4%); Ukranian (12.8%); Mexican (7%); and Puerto Rican (6.4%). (Please note: my math is not at fault, but rather cross-breeding.) Demographically, the city’s citizens and families are diverse: with 19.9% under the age of 18, 12.6% from 18 to 24, 26.1% from 25 to 44, 20.8% from 45 to 64, and 20.6% who are 65 years of age or older. The city has the 4th-largest downtown workforce in the state of Pennsylvania; its family median income is $44,430, about 66% of the national average, and an unemployment rate of just under 7%. The municipality in 2015 had a poverty rate of 32.5%, nearly double the statewide average. Last year, the City of Wilkes-Barre was awarded a $60,000 grant through the Pennsylvania Department of Economic Development (DCED) Early Intervention Program (EIP) to develop a fiscal, operational and mission management 5 year plan for the city—from which the city selected Public Financial Management (PFM) as its consultant to assist in working with the city on its 5 year plan—and from which the city has since received PFM’s Draft Financial Condition Assessment and Draft Financial Trend Forecasting related to the city’s 5 year plan. As part of the intervention, two internal committees were created to develop new sources of revenue for the city. The Revenue Improvement Task Force is comprised of employees from Finance, Tax, Health, Code, and Administration and was directed to analyze and improve upon existing revenue streams; the Small Business Task Force was designed to develop guidance for those interested in opening small businesses in Wilkes-Barre and is comprised of employees from Zoning, Health, Code, Licensing, and Administration. Overall, Mayor Anthony “Tony” George and his administration are confident that they have made significant progress is restoring law and order via the city’s goals of strengthening intergovernmental relationships, improving public safety, fixing infrastructure, fighting blight, restoring and improving city services and achieving long-term economic development.

Nevertheless, the quest for fiscal improvement and reliance on consultants has proven challenging: some of PFM’s proposed options to address city finances have caused a stir. City council Chairwoman Beth Gilbert and City Administrator Ted Wampole, for instance, agreed privatizing the ambulance and public works services as a cost-saving measure was one of the most drastic steps proposed by The PFM Group of Philadelphia, with Chair Gilbert noting: “I stand vehemently against any privatization of any of our city services, especially as an attempt to save money;” she warned the city could end up paying more for services in the long run, and residents could receive less than they get now—adding: “If privatization is on the table, then so is quality.” The financial consultant hired last year for $75,000 to assist the city with developing a game plan to fix its finances under the state’s Early Intervention Program was scheduled to present the options at a public meeting last night at City Hall. PFM representatives, paid from the combination of a $60,000 state grant and $15,000 from the city, have appeared before council several times since December.

Gordon Mann, director of The PFM Group, last night warned: “If the gunshot wound to the city’s financial health doesn’t kill it, the cancer will: both need to be treated, but not at the same time…You need to address the bullet wound, and you need to put yourself in the position to address the cancer.” Mr. Mann, at the meeting, provided an update on where the city stands and where it’s going if nothing is done to address the municipality’s structural problems of flat revenues and escalating expenses for pensions, payroll and long-term debt; then he identified a number of steps to stabilize the city and balance its books, beginning with: “Don’t run out of cash,” and “[D]on’t bother playing the blame game and pointing the finger at prior administrations either,…It may not be your fault, but it is your problem.”

Wilkes Barre is not unlike many of Pennsylvania’s 3rd class cities (York, Erie, Easton, etc.), all in varying degrees of fiscal distress, albeit with some doing better than others. The municipal revenues derived from the property tax and earned income tax will simply not sustain a city like Wilkes Barre—that it, unless and until the state’s municipalities have access to collective bargaining/binding arbitration and pension reform: the current, antiquated revenue options leave the state’s municipalities caught between a rock and a hard place. Worse, mayhap, is the increasing rate of privatization—where an alarming trend across the Commonwealth of communities selling off assets (water, sewer, parking, etc.), more often than not to plug capital into pensions, is, increasingly, leaving communities with no assets and with no pension reform facing the same issue in the future. 

Not Comping Compton: Corruption & Fiscal Distress. In Compton, California, known as the Hub City, because of its location in nearly the exact geographical center of Los Angeles County, the City of Compton is one of the oldest cities in the county and the eighth to incorporate.  The city traces its roots to territory settled in 1867 by a band of 30 pioneering families, who were led to the area by Griffith Dickenson Compton—families who had wagon-trained south from Stockton, California in search of ways to earn a living other than in the rapidly depleting gold fields, but where, the day before yesterday, the city’s former deputy treasurer was arrested for allegedly stealing nearly $4 million from the city. FBI agents arrested Salvador Galvan of La Mirada on Wednesday morning, as part of a federal criminal complaint filed Tuesday, alleging that, for six years, Mr. Galvan skimmed about $3.7 million from cash collected from parking fines, business licenses, and city fees: an audit found discrepancies ranging from $200 to $8,000 per day. Mr. Galvan, who has been an employee of the city for twenty-three years, has been charged with theft concerning programs receiving federal funds. If convicted, he could face up to five years in prison. As Joseph Serna and Angel Jennings of the La Times yesterday wrote: “The money adds up to an important chunk of the budget in a city once beset with financial problems and the possibility of [municipal] bankruptcy.” Prosecutors claim that one former city employee saw all these payments as an opportunity, alleging that the former municipal treasurer, over the last six years, skimmed more than $3.7 million from City Hall, taking as much as $200 to $8,000 a day—small enough, according to federal prosecutors, to avoid detection, even as Mr. Galvan’s purchase of a new Audi and other upscale expenses on a $60,000 salary, raised questions.

The arrest marks a setback for the Southern California city which has prided itself in recent years for its recovery from some of the crime, blight, and corruption which had threatened the city with municipal insolvency—or, as Compton Mayor Aja Brown noted: the allegations “challenge the public’s trust.”  Mayor Brown noted the wake-up call comes as the city has been working in recent months to improve financial controls and create new processes for detecting fraud—even as some of the city’s taxpayers question how the city could have missed such criminal activity for so many years. The Los Angeles County Sheriff’s Department had arrested Mr. Galvan last December in the wake of City Treasurer Doug Sanders’ confirmation with regard to “suspicious activity” in a ledger discovered by one of his employees: his position in the city involved responsibility for handling cash: as part of his duties, he collected funds from residents paying their water bills, business licenses, building permits, and trash bills. According to reports, Mr. Galvan maintained accurate receipts of the cash he received for city fees, but he would submit a lower amount to the city’s deposit records and, ultimately, on the deposit slips verified by his supervisors and the banks, according to federal prosecutors. Indeed, an audit which compared a computer-generated spreadsheet tracking money coming in to the city with documents Mr. Galvan prepared made clear that he had commenced skimming cash in 2010—starting slowly, at first, but escalating from less than $10,000 to $879,536 by 2015, a loss unaccounted for in the city’s accounting system. While Mr. Galvan faces a maximum of 10 years in federal prison, if convicted, the city faces a trial of public trust—or, as Mayor Brown, in a statement, notes: “Unfortunately, the actions of one employee can challenge the public’s trust that we strive daily as a City to rebuild…The alleged embezzlement and theft of public funds is an egregious affront to the hard-working residents of Compton as well as to our dedicated employees. The actions of one person does not represent our committed City employees who — like you — are just as disappointed.”

Fiscal & Service Solvency

eBlog

Share on Twitter

eBlog, 03/10/17

Good Morning! In this a.m.’s eBlog, we consider the long-term recovery of Chocolateville, or Central Falls, Rhode Island—one of the smallest municipalities in the nation; then we head West, even as no longer young, to consider the eroding fiscal situation confronting California’s CalPERS’ pension system, before, finally considering how Congress and the President, in trying to replace the Affordable Care Act, might impact Puerto Rico’s fiscal and service-related insolvency.

The Long & Exceptional Fiscal Road to Recovery. It was nearly five years ago that I sat with my class in a nearly empty City Hall in Central Falls, or Chocolateville, Rhode Island, the small (one square mile former mill town of indescribably delicious chocolate bars) with the newly appointed Judge Robert Flanders on his first day of the municipality’s chapter 9 municipal bankruptcy after his appointment by the Governor: a chapter 9 bankruptcy which that very same evening so sobered the City of Providence and its unions that their contemplation of filing for chapter 9 was squelched—and the State initiated its own unique sharing commitment to create teams of city managers, state legislators and others to act as intervention advisory teams so that no other municipality in the state would fall into insolvency. Our visit also led to our publication of a Financial Crisis Toolkit, which we promptly shared with municipal leaders across the State of Michigan at the Michigan Municipal League’s annual meeting in Detroit.
Today, it is Mayor James Diossa who has earned such deserved credit for what he describes as the “efforts and dedication to following fiscally sound budgeting practices,” efforts which, he said, “are clearly paying off, leaving the city in a strong position.” In the school of municipal finance, those efforts were rewarded with the credit rating elevation in its long-term general obligation rating three notches to BBB from BB, with credit analyst Victor Medeiros describing the fiscal recovery as one where, today, the city is “operating under a much stronger economic and management environment since emerging from bankruptcy in 2012…The city has had several years of strong budgetary performance, and has fully adhered to the established post-bankruptcy plan….The positive outlook reflects the possibility that strong budgetary performance could lead to improved reserves in line with the city’s new formal reserve policy.” The credit rating agency added that the city’s fiscal leadership had succeeded in ensuring strong liquidity, assessing total available cash at 28.7% of total governmental fund expenditures and nearly twice governmental debt service, leading S&P to award it a “strong institutional framework score.” That score should augur well as the city seeks to exit state oversight a year from next month: a path which S&P noted could continue to improve if it can build and sustain its gains in reserves and adhere to its successful financial practices, particularly after the city exits state oversight, or, as S&P put it: “Improving reserves over time would suggest that the city can position itself to better respond to the revenue effects of the next recession,” noting, however, the exceptional fiscal challenge in the state’s poorest municipality.

 

How Does a Public Pension System Protect against Insolvency? In California, the Solomon’s Choice awaits: what does CalPERS do when retiree of one of its members is from a municipality which has not paid in? In this case, one example is a retiree of a human services consortium which had closed with nearly half a million dollars in arrears to CalPERS. The conundrum: what is fair to the employee/retiree who fully paid in, but whose government or governmental agency had not? Or, as Michael Coleman, fiscal policy adviser for the League of California Cities, puts it: “Unless something is done to stem the mounting costs or to find ways to fund those mounting costs for employees, then the only recourse, beyond reducing service levels to unsustainable levels, is going to be to cut benefits for retirees,” an action which occurred for the first time last year, when CalPERS took such action against the tiny City of Loyalton, a municipality originally known as Smith’s Neck, but a name which the city fathers changed during Civil War—incorporated in 1901 as a dry town, its size was set at 50.6 square miles: it was California’s second largest city after Los Angeles. Today, Loyalton, the only incorporated city in Sierra County, helps us to grasp what can happen to public pension promises when there are insufficient resources: what will give? The answer, as Richard Costigan, Chair of CalPERS’ finance and administration committee puts it: “We end up being the bad person, because if the payments aren’t coming in, we’re left with the obligation to reduce the benefit, as we did in Loyalton…Otherwise the rest of the people in the system who have paid their bills would be paying for that responsibility.”
As all, except readers of this blog, are getting older (and, hopefully, wiser), cities, counties, states, and other municipal entities confront longer lifespans, so that, similar to the fiscal chasm looming in California, the day could be looming that what was promised thirty years ago is not fiscally available. In the Golden State, CalPERS has been paying benefits out faster that it has been gathering them, leading, at the end of last year, the state agency to reduce the assumed return on its investments to 7 percent from 7.5 percent—an action which, in turn, will requisition higher annual contributions from municipal and county governments, actions mandated by its fiduciary responsibility. While the state agency does not negotiate or set benefits, it does manage them on behalf of local governments, most of which are fulfilling their obligations.

 

Unpromising Turn. The PROMESA oversight board, deeming Puerto Rico’s liquidity to be critically low, has demanded the U.S. territory immediately adopt emergency spending cuts, writing to Gov. Ricardo Rosselló in an epistle that unless the government immediately adopted emergency measures, it could be insolvent in a “matter of months,” suggesting the government consider the immediate implementation of furloughs of most executive branch employees for four days each month, and teachers and other emergency personnel positions, such as law enforcement, two days a month; the Board urged Puerto Rico to put in place comparable furlough measures in other government entities, such as public corporations, authorities, and the legislative and judicial branches, in addition to recommending cutting spending for professional service contract expenditures by half. In addition, threatening public service solvency, the PROMESA Board directed the reduction of healthcare costs by negotiating drug pricing and rate reductions for health plans and providers. Mayhap most, at least from a governing perspective, critically, the PROMESA the board called for the Fiscal Agency and Financial Advisory Administration to implement a new liquidity plan by immediately controlling all Puerto Rico government accounts and spending, writing: “Given Puerto Rico’s lack of normal capital market access and our need to focus on a sustainable restructuring of debt is neither practical nor prudent to address this cash shortfall with new short-term borrowing,” warning Puerto Rico could face a cash deficit of about $190 million by the start of the new fiscal year, and that the Employment Retirement System and the Teachers Retirement System funds will be insolvent by the end of the calendar year. Adding to the threatening fiscal situation, Puerto Rico anticipates the loss of some $800 million in Affordable Care Act funding in the coming fiscal year.

 

Doctor Needed. As the U.S. House of Representatives reported out of two committees, yesterday, legislation to partially replace the Affordable Care Act, bills which, as introduced by the House Republicans—with the blessing of the Trump White House, omitted Puerto Rico, raising the specter that Congress could also fail to fund the U.S. territory’s Children’s Health Insurance Program, omissions Gov. Rosselló’s representative in Washington, D.C. warned might have implications threatening the reauthorization of the Children’s Health Insurance Program (CHIP), which could happen this summer, attributing  Puerto Rico’s exclusion from the two initial bills seeking to repeal and replace Obamacare—the first aimed at granting tax credits instead of direct subsidies, and the other which seeks to convert Medicaid in the states into a plan of block grants, like in the Island—to its colonial status: “As a territory, Puerto Rico isn’t automatically included in health reform legislation. It already happened with Obamacare. The Republican plan is a reform bill for the 50 states.” Indeed, Governor Rosselló’s fiscal plan complied with the PROMESA Oversight Board’s mandate to exclude any extensions of the nearly $1.2 billion in Medicaid funds currently granted under the Affordable Care Act, funds which could be depleted by the end of this year—and without any explanation for such clear discrimination against U.S. citizens.

The Roads out of Municipal Bankruptcy

Share on Twitter

eBlog, 2/24/17

Good Morning! In this a.m.’s eBlog, we consider the post-chapter 9 municipal bankruptcy trajectories of the nation’s longest (San Bernardino) and largest (Detroit) municipal bankruptcies.

Exit I. So Long, Farewell…San Bernardino City Manager Mark Scott was given a two-week extension to his expired contract this week—on the very same day the Reno, Nevada City Council selected him as one of two finalists to be Reno’s City Manager—with the extension granted just a little over the turbulent year Mr. Scott had devoted to working with the Mayor, Council, and attorneys to complete and submit to U.S. Bankruptcy Judge Meredith Jury San Bernardino’s proposed plan of debt adjustment—with the city, at the end of January, in the wake of San Bernardino’s “final, final” confirmation hearing, where the city gained authority to issue water and sewer revenue bonds prior to this month’s final bankruptcy confirmation hearing—or, as Urban Futures Chief Executive Officer Michael Busch, whose firm provided the city with financial guidance throughout the four-plus years of bankruptcy, put it: “It has been a lot of work, and the city has made a lot of tough decisions, but I think some of the things the city has done will become best practices for cities in distress.” Judge Jury is expected to make few changes from the redline suggestions made to her preliminary ruling by San Bernardino in its filing at the end of January—marking, as Mayor Carey Davis noted: a “milestone…After today, we have approval of the bankruptcy exit confirmation order.” Indeed, San Bernardino has already acted on much of its plan—and now, Mayor Davis notes the city exiting from the longest municipal bankruptcy in U.S. history is poised for growth in the wake of outsourcing fire services to the county and waste removal services to a private contractor, and reaching agreements with city employees, including police officers and retirees, to substantially reduce healthcare OPEB benefits to lessen pension reductions. Indeed, the city’s plan agreement on its $56 million in pension obligation bonds—and in significant part with CalPERS—meant its retirees fared better than the city’s municipal bondholders to whom San Bernardino committed to pay 40 percent of what they are owed—far more than its early offer of one percent. San Bernardino’s pension bondholders succeeded in wrangling a richer recovery than the city’s opening offer of one percent, but far less than CalPERS, which received a nearly 100 percent recovery. (San Bernardino did not make some $13 million in payments to CalPERS early in the chapter 9 process, but did set up payments to make the public employee pension fund whole; the city was aided in those efforts as we have previously noted after Judge Jury ruled against the argument made by pension bond attorneys two years ago. After the city’s pension bondholders entered into mediation again prior to exit confirmation, substantial agreement was achieved for th0se bondholders, no doubt beneficial at the end of last year to the city’s water department’s issuance of $68 million in water and sewer bonds at competitive interest rates in November and December—with the payments to come from the city’s water and sewer revenues, which were not included in the bankruptcy. The proceeds from these municipal bonds will meet critical needs to facilitate seismic upgrades to San Bernardino’s water reservoirs and funding for the first phase of the Clean Water Factor–Recycled Water Program.

Now, with some eager anticipation of Judge Jury’s final verdict, Assistant San Bernardino City Attorney Jolena Grider advised the Mayor and Council with regard to the requested contract extension: “If you don’t approve this, we have no city manager…We’re in the midst of getting out of bankruptcy. That just sends the wrong message to the bankruptcy court, to our creditors.” Ergo, the City Council voted 8-0, marking the first vote taken under the new city charter, which requires the Mayor to vote, to extend the departing Manager’s contract until March 7th, the day after the Council’s next meeting—and, likely the very same day Mr. Scott will return to Reno for a second interview, after beating out two others to reach the final round of interviews. Reno city officials assert they will make their selection on March 8th—and Mr. Scott will be one of four candidates.

For their part, San Bernardino Councilmembers Henry Nickel, Virginia Marquez, and John Valdivia reported they would not vote to extend Mr. Scott’s contract on a month-to-month basis, although they joined other Councilmembers in praising the city manager who commenced his service almost immediately after the December 2nd terrorist attack, and, of course, played a key role in steering the city through the maze to exit the nation’s longest ever municipal bankruptcy. Nevertheless, Councilmember Nickel noted: “Month-to-month may be more destabilizing than the alternative…Uncertainty is not a friend of investment and the business community, which is what our city needs now.” From his perspective, as hard and stressful as his time in San Bernardino had to be, Mr. Scott, in a radio interview while he was across the border in Reno, noted: “I’ve worked for 74 council members—I counted them one time on a plane…And I’ve liked 72 of them.”

Exit II. Detroit Mayor Mike Duggan says the Motor City is on track to exit Michigan state fiscal oversight by next year , in the wake of a third straight year of balancing its books, during his State of the City address: noting, “When Kevyn Orr (Gov. Rick Snyder’s appointed Emergency Manager who shepherded Detroit through the largest chapter 9 municipal bankruptcy in U.S. history) departed, and we left bankruptcy in December 2014, a lot of people predicted Detroit would be right back in the same financial problems, that we couldn’t manage our own affairs, but instead we finished 2015 with the first balanced budget in 12 years, and we finished 2016 with the second, and this year we are going to finish with the third….I fully expect that by early 2018 we will be out from financial review commission oversight, because we would have made budget and paid our bills three years in a row.”

Nonetheless, the fiscal challenge remains steep: Detroit confronts stiff fiscal challenges, including an unexpected gap in public pensions, and the absence of a long-term economic plan. It faces disproportionate long-term borrowing costs because of its lingering low credit ratings—ratings of B2 and B from Moody’s Investors Service and S&P Global Ratings, respectively, albeit each assigns the city stable outlooks. Nevertheless, the Mayor is eyes forward: “If we want to fulfill the vision of a building a Detroit that includes everybody, we have to do a whole lot more.” By more, he went on, the city has work to do to bring back jobs, referencing his focus on a new job training program which will match citizens to training programs and then to jobs. (Detroit’s unemployment rate has dropped by nearly 50 percent from three years ago, but still is the highest of any Michigan city at just under 10 percent.) The Mayor expressed hope that the potential move of the NBA’s Detroit Pistons to the new Little Caesars Arena in downtown Detroit would create job opportunities for the city: “After the action of the Detroit city council in support of the first step of our next project very shortly, the Pistons will be hiring people from the city of Detroit.” The new arena, to be financed with municipal bonds, is set to open in September as home to the Detroit Red Wings hockey team, which will abandon the Joe Louis Arena on the Detroit riverfront, after the Detroit City Council this week voted to support plans for the Pistons’ move, albeit claiming the vote was not an endorsement of the complex deal involving millions in tax subsidies. Indeed, moving the NBA team will carry a price tag of $34 million to adapt the design of the nearly finished arena: the city has agreed to contribute toward the cost for the redesign which Mayor Duggan said will be funded through savings generated by the refinancing of $250 million of 2014 bonds issued by the Detroit Development Authority.

Mayor Duggan reiterated his commitment to stand with Detroit Public Schools Community District and its new school board President Iris Taylor against the threat of school closures. His statements came in the face of threats by the Michigan School Reform Office, which has identified 38 underperforming schools, the vast bulk of which (25) are in the city, stating: “We aren’t saying schools are where they need to be now…They need to be turned around, but we need 110,000 seats in quality schools and closing schools doesn’t add a single quality seat, all it does is bounce children around.” Mayor Duggan noted that Detroit also remains committed to its demolition program—a program which has, to date, razed some 11,000 abandoned homes, more than half the goal the city has set, in some part assisted by some $42 million in funds from the U.S Department of Treasury’s Hardest Hit Funds program for its blight removal program last October, the first installment of a new $130 million blight allocation for the city which was part of an appropriations bill Congress passed in December of 2015—but where a portion of that amount had been suspended by the Treasury for two months after a review found that internal controls needed improvement. Now, Major Duggan reports: “We have a team of state employees and land bank employees and a new process in place to get the program up and running and this time our goal isn’t only to be fast but to be in federal compliance too.” Of course, with a new Administration in office in Washington, D.C., James Thurber—were he still alive—might be warning the Mayor not to count any chickens before they’re hatched.

Post Chapter 9 Challenges

eBlog, 2/22/17

Good Morning! In this a.m.’s eBlog as we remember the first President of our country,  we consider the accomplishments and challenges ahead for the city recovering from the largest ever municipal bankruptcy; then we visit the historic Civil War city of Petersburg, Virginia—as it struggles on the edge of fiscal and physical insolvency; from thence, we roll the dice to witness a little fiscal Monopoly in the state-taken over City of Atlantic City, before finally succumbing to the Caribbean waters made turbulent by the governance challenges of a federal fiscal takeover of the U.S. territory of Puerto Rico, before considering whether to take a puff of forbidden weed as we assess the governing and fiscal challenges in San Bernardino—a city on the precipice of emerging from the longest municipal bankruptcy in American history.   

State of a Post Chapter 9 City. Pointing to FY2015 and 2016 balanced budgets, Detroit Mayor Mike Duggan, in his fourth State of the City address, pointed to the Motor City’s balanced budgets for FY2015 and 2016 and said the city’s budget will be balanced again at the close of this fiscal year in June—progress he cited which will help the city emerge from state get oversight and back to “self-determination” by 2018. Mayor Duggan cited as priorities: job training, affordable housing, and rebuilding neighborhoods, orating at the nonprofit human rights organization Focus: HOPE on Oakman Boulevard on the city’s northwest side, where residents and others for decades have received critical job training. Mayor Duggan was not just excited about what he called the transformation of city services and finances in a city that exited municipal bankruptcy three years ago, but rather “what comes next,” telling his audience: “We’ve improved the basic services, but if we’re going to fulfill a vision of building a Detroit that includes everybody, then we’ve got to do a whole lot more…You can’t have a recovery that includes everyone if there aren’t jobs available for everyone willing to work.” Ergo, to boost job opportunities, Mayor Duggan announced a new initiative, “Detroit at Work,” which he said would help connect the Motor City’s job seekers with employers, deeming it a portal which would provide a “clear path to jobs.” He also discussed his administration’s program to help city youth secure jobs and the Detroit Skilled Trades Employment Program, a recent partnership with local unions to increase Detroit membership and boost job opportunities.

With regard to neighborhoods, Mayor Duggan touted his Neighborhood Strategic Fund, his initiative to encourage neighborhood development, especially in wake of the exceptional success of Detroit’s new downtown: this fund allocates $30 million from philanthropic organizations toward development, commencing with the engagement of residents in the areas of Livernois/McNicols, West Village, and in southwest Detroit to create revitalized and walkable communities—under the city’s plan to align with the city’s vision for “20-minute neighborhoods” to provide nearby residents with close, walkable access to grocery stores and other amenities—or, as Mayor Duggan noted: “If we can prove that when you invest in these neighborhoods, the neighborhoods start to come back. The first $30 million will only be the beginning. I want everybody to watch…If we prove this works…then we go back for another $30 million and another $30 million as we move across the neighborhoods all through this city.”

In a related issue, the Mayor touted the return of the Department of Public Works’ Street Sweeping Unit, which is preparing to relaunch residential cleanings for the 2017 season, marking the first time in seven years for the program. On the affordable housing front, Mayor Duggan addressed affordable housing, saying that future projects will ensure such housing exists in all parts of the city, referencing a new ordinance, by Councilwoman Mary Sheffield, which seeks to guarantee that 20 percent of the units in new residential projects which receive financial support from the city will be affordable: “We are going to build a city where there is a mix of incomes in every corner and neighborhood and we’re going to be working hard.”

But in his address—no doubt with his re-election lurking somewhere behind his words, Mayor Duggan reflected not just on his successes, but also some missteps, including his administration’s massive federally funded demolition program, now the focus of a federal probe and state and city reviews: that initiative has been successful in the razing of nearly 11,000 abandoned homes since the spring of 2014, but has also triggered federal and state investigations over spiraling costs and bidding practices: an ongoing state review of the program’s billing practices turned up $7.3 million in what the State of Michigan deems “inappropriate” or “inaccurate” costs: the vast majority in connection with a controversial set-price bid pilot in 2014 designed to quickly bring down big bundles of houses—an initiative over which Mayor Duggan has so far rejected the state’s assertion that about $6 million tied to costs of the pilot were inappropriate. Thus, yesterday, he conceded that the federal government’s decision to suspend the demolition program for 60 days beginning last August had been warranted, but noted the city has since overhauled procedures and made improvements to get the program back on track, so that, he said, he is confident the city will raze an additional 10,000 homes in the next two years.

For new initiatives, Mayor Duggan said the Detroit Police Department will hire new officers, and invest in equipment and technology, and he announced the launch of Detroit Health Department’s Sister Friends program, a volunteer program to provide support to pregnant women and their families. On the school front, the Mayor noted what he deemed a “complete alliance” between his office and the new Detroit Public Schools Community District school board, saying the city has joined the Board in its attempt to convince the state’s School Reform Office not to close low-performing schools. (As many as 24 of 119 city schools could potentially be shuttered as soon as this summer.) In a hint of the state-local challenge to come, Mayor Duggan said: “The new school board hasn’t had an opportunity to address the problem…We have 110,000 schoolchildren in this city, which means we need 110,000 seats in quality schools. Closing a school doesn’t add a quality seat. All it does is bounce our children around from place to place. Before you close a school, you need to make sure there’s a better alternative.”

Fiscal & Physical Repair. In a surprising turn of events in Virginia, the Petersburg City Council accepted a motion by Councilman Charlie Cuthbert to postpone the vote on moving forward with the bids for Petersburg’s aging water system, after the Council had been scheduled to vote on whether to move forward with the bids the city had received from Aqua Virginia and Virginia American Water Company to purchase the nearly insolvent city’s water and wastewater system. While the vote, by itself, would not have authorized such a sale, it would have paved the way for formal consideration of such proposals. Under his motion, Councilman Cuthbert outlined a plan to delay the vote, so the Council and the City would have more time to consider options, in part through the formation of a seven person committee, which would be separate from the one the Robert Bobb Group, which is currently overseeing the city in place of the Mayor and Council, has been proposing. Mayhap unsurprisingly, citizens’ reactions to a potential sale has been negative; thus there was approbation when Councilmember Cuthbert’s motion passed—even as it appears many citizen/tax/ratepayers appeared to be hoping for the bids to be scrapped entirely: many had spoken in strong opposition, and there were numerous signs held up in chambers for the Mayor and Council to read: “Listen to us for once, do not sell our water,” or, as one citizen told the elected officials: “We have a choice to make: to make the easy, wrong decision, or the hard, right decision,” as he addressed the Council. The city’s residents and taxpayers appear to want other options to be explored, with many citing reports of Aqua Virginia having trouble with the localities with which it holds contracts.

On the fiscal front, many citizens expressed apprehension that any short-term profit the city would realize by selling its system would be paid back by the citizens in the form of rate-hikes by Aqua Virginia or Virginia American, or as one constituent said: “Never have I seen private industry interested in what the citizens want…They’re going to come in here and raise the rates.” Interim City Manager Tom Tyrell had begun the meeting by giving a presentation outlining the problems with the system. Due to past mismanagement and a lack of investment over decades, the Petersburg water system is in urgent need of upgrades. Tyrell outlined certain deficiencies, such as water pumps that need replacing, and pipes nearly blocked by sediment build up. The water quality has never come into question, but Mr. Tyrell said that the system is very close to needing a complete overhaul: the projected cost needed to get the system completely up to standard is about $97 million. Mr. Tyrell stressed that water rates will need to increase whether or not the city sells the system, going over Petersburg’s water rates, which have been relatively low for many years, ranking near the lowest amongst municipalities across the Commonwealth of Virginia. Even if the rates were to double, he told citizens, the rates still would still not be in the top 15 amongst Virginia localities. The Council had received two unsolicited bids for the system in December, one from Aqua Virginia, a second from the Virginia American Water Company. The Robert Bobb Group recommended to the Council that it move forward to examine the detailed proposals in order to “keep all options open.” The cost of moving forward with the proposals will cost approximately $100,000, which includes the cost of examining each proposal. Thus, the Robert Bobb Group recommended that the Council put together a citizens’ advisory group as an outside adviser group. The council gave no timetable on when they will officially vote to see if the bids will go forward. The people who will make up the seven person committee were not established.

Monopoly Sale. Atlantic City has sold two of its Boardwalk properties and several lots along the Inlet for nearly $6 million, closing on three properties at the end of last week, according to city officials—meaning that a Philadelphia-based developer has gained control of five waterfront properties since 2015. His purchases, he said, reflect his belief in Atlantic City’s revival. Mayor Don Guardian reported the city had received wire transfers for the former Boardwalk volleyball court on New Jersey Avenue ($3.8 million), Garden Pier ($1.5 million) and 12 lots bordered by the Absecon Inlet, Oriental Avenue and Dewey Place ($660,000), according to Atlantic City Planning and Development Director Elizabeth Terenik, all part of a way to raise money for the insolvent municipality – and to spur redevelopment, or, as Ms. Terenik noted: “The effort was part of the Guardian administration’s initiative to leverage underutilized or surplus public lands for economic development and jobs, and to increase the ratable base.” How the new owner intends to develop the properties or use them, however, is unclear—as is the confusing governance issue in a city under state control. The Inlet lots were sold in a city land auction last summer, purchased through an entity called A.C. Main Street Renaissance, according to city officials: the Atlantic City Council approved the auction and voted to name the purchaser, conditional redeveloper of Garden Pier and the volleyball court last year. Unsurprisingly, Council President Marty Small deemed the sales as great news for the city, saying they would bring revenue, jobs, and “new partners to the Inlet area…This instills investor confidence…It lets me know that we made the right decision by going out to auction for land and getting much-needed revenue for the city.”

Paying the Piper. Atlantic City has also announced its intention to issue $72 million in municipal bonds to pay for its tax settlement with the Borgata casino, securing the funds to cover its property tax refunds by borrowing though New Jersey’s Municipal Qualified Bond Act (MQBA), according to Lisa Ryan, a spokeswoman for the New Jersey Department of Community Affairs, which is overseeing the state takeover which took effect last November, with her announcement coming just a week after the state announced it had struck a deal for Atlantic City to pay less than half of the $165 million it owes the Borgata in tax appeals from 2009 to 2015, or, as Ms. Ryan noted: “Qualified bonds will be issued in one or more tranches to achieve the settlement amount…The parties are confident in the City’s ability to access the capital market and raise the necessary amount needed to cover the financing,” albeit adding that the city’s borrowing costs would not be known until the sale. (The Garden State’s MQBA is a state intercept program which diverts a municipality’s qualified state aid to a trustee for debt service payments.) Prior to the New Jersey’s state takeover of Atlantic City, city officials had proposed paying $103 million for a Borgata settlement through MQBA bonding as part of a five-year rescue plan—a plan which the state’s Department of Community Affairs had rejected.

As the state taken over city struggles to adjust, Mayor Don Guardian, in a statement, noted: “I’m glad the state is seeing the wisdom in what we proposed in our fiscal plan back in November…I applaud them for getting the actual amount due upfront lower, even though they have had over two years to do it. It remains to be seen how the other $30 million will be taken care of, but the quicker we can get this issue off the table, the quicker we can move forward tackling the remaining legacy debt.” Atlantic City last utilized New Jersey’s state credit enhancement program in May of 2015 to pay off an emergency $40 million loan and retire $12 million of maturing bond anticipation notes, paying a substantial fiscal penalty for a $41 million taxable full faith and credit general obligation municipal bond sale to address its loan payment with Bank of America Merrill Lynch pricing the bonds to yield at 7.25% in 2028 and 7.75% in 2045. Today, the city, under state control, is seeking to recover from five casino closures since 2014, closures which have bequeathed it with $224 million in outstanding municipal bond debt—debt sufficient according to Moody’s to have saddled the city with some $36.8 million in debt service last year.

Grass Fire? Two separate groups have now filed lawsuits challenging San Bernardino’s Measure O, the initiative citizens approved last November to allow marijuana dispensaries in the city—a measure yet to be implemented by the city—and one which now, according to City Attorney Gary Saenz, will almost surely be further delayed because of the suit. Should Measure O be struck down, the related, quasi-backup Measure N, a second marijuana initiative San Bernardino voters approved last November, but which received fewer votes, would pop up, as it were. The twin suits, one filed by a group of marijuana-related entities, the second by interested property owners in San Bernardino, challenge Measure O on multiple grounds, including the measure’s language determining where dispensaries may operate in the city. One suit charges: “The overlay zones together with the parcel numbers and the location criteria limit the locations within the City of San Bernardino where marijuana businesses may be permitted to only approximately 3 to 5 parcels of land within the entire city, and all of these parcels of land are either owned or controlled by the proponents of Measure O…The locations of these 3 to 5 parcels of land, furthermore, are incompatible for a medical marijuana business by virtue of the locations and surrounding land uses and for this reason are in conflict with the City of San Bernardino General Plan.” Unsurprisingly, Roger Jon Diamond, the attorney for the proponents of Measure O, disputes that number and predicts the challenge will fail, noting that thirteen marijuana dispensaries and related groups that describe themselves as non-profits are operating in San Bernardino or which have invested substantial sums of money in plans to operate in San Bernardino. The soon to be out of chapter 9 municipal bankruptcy city, prior to citizen adoption of Measure O, means, according to Counselor Diamond, that the dispensaries have been operating illegally, or as he put it: “There’s a concept in the law called clean hands: If you don’t have clean hands, you can’t maintain a lawsuit…Here we have people who don’t qualify (to operate a dispensary in their current location), complaining that they would not become legal under the new law. It sounds like sour grapes.”

The second, related suit, filed earlier this month, calculates a somewhat higher (not a pun) number of eligible locations—between three to twelve, but makes the same observation regarding physical location: “We think there is a financial interest in the people who wrote it up,” said Stephen Levine of Milligan, Beswick Levine & Knox: “We don’t think that is fair, because it was so narrowly constricted. Zoning by parcel numbers is a highly unusual practice in California. Let’s include Colorado and Washington State in there, too; they don’t use parcel numbers for this.” (Measure O restricts marijuana businesses to marijuana business overlay districts, which are identified by parcel number, and further prohibits the businesses from being within 600 feet of schools or residentially zoned property.) In this case, Mr. Levine is representing a consortium of property owners calling themselves AMF as well as Wendy McCammack, a business owner and former San Bernardino Councilmember. According to Mr. Levine, the plaintiffs’ interest is in possible changes in assessed property values due to the location of the dispensaries.

Getting High on the City Agenda. The City Council last week, in a closed session, discussed the lawsuit in closed session; however, City Attorney Saenz reported he was unaware aware of the lawsuit and had yet to decide upon a response to either, noting: “We haven’t totally assessed the merits of the lawsuit, nor how we’ll respond.” Nevertheless, the lawsuits’ arguments appear likely to interfere with the city’s process of incorporating Measure O into the development code and beginning to issue permits, or, as Mr. Saenz notes: “It (the AMF lawsuit) very much calls into question the validity of Measure O…Being a city of very limited resources, we don’t want to expend resources on an implementation that’s never going to occur. That would be a waste of resources.” The suits will also complicate governance: last month the city, on its website, and in a letter to interested parties, said it would provide an update in March on when the marijuana measure would be implemented: “City departments are in the process of integrating the provisions of Measure O into the City’s existing Development Code, developing procedures for receiving applications, and identifying provisions that may require interpretation and clarification prior to implementation…The San Bernardino Development Code and Measure O are both complex legal regulatory frameworks and it will require time to properly implement this new law.”

Governance & Challenges. Puerto Rico Gov. Ricardo Rosselló has arrived in Washington, D.C., where he will meet with his colleagues at the National Governors Association and join them at the White House tomorrow; he will also dine with Vice President Mike Pence this week. Last week, in Puerto Rico, he had hosted Chairman Sean Duffy (R-Wisc.), of the House Financial Services Subcommittee on Housing & Insurance, and an author of the Puerto Rico Oversight, Management and Economic Stability Act – in San Juan.  Chairman Duffy told the Governor he is available to amend PROMESA to ensure that the PROMESA oversight board treats Puerto Rico fairly, according to an office press statement. The lunch this week might occasion an interesting discussion in the wake of the Governor’s claim that the PROMESA Oversight Board’s plans for austerity may violate federal law: the Governor’s Chief of Staff, William Villafañe, this week stated: “The Fiscal Supervision Board officials cannot act outside of the law that created the body. If the board were to force the implementation of a fiscal plan that affects people’s essential services, it would be acting contrary to the PROMESA law.” His complaints appear to signify an escalation of tensions between the U.S. territory and the PROMESA Board: Mr. Villafañe added: “The [PROMESA] board is warned that it must act in conformance with the law…The commitment of Governor Ricardo Rosselló is to achieve economies that allow government efficiency, doing more with fewer expenses, without affecting essential services to the people and without laying off public employees.” If anything, Mr. Villafañe added fuel to his fire by criticizing the Board’s new interim executive director, Ramón Ruiz Comas, in the wake of Mr. Ruiz’ radio statement this week that if Gov. Rosselló did not present an acceptable fiscal plan by the end of February, the PROMESA Board would provide its own—and the plan would be deemed the legally, binding plan—in reaction to which, Mr. Villafañe had responded: “To make expressions prejudging a fiscal plan proposal that the board has not yet seen demonstrates on the part of the board improvisation and lack of a collaborative attitude for the benefit of the Puerto Rican people,” adding that “The board must be aware that the federal Congress will supervise the board.” He went on to say that when the Governor presents a fiscal plan, Congress will be aware of the way the board evaluates it.

Mr. Villafañe’s complaints and warnings extend tensions between the board and the U.S. territory: even before the Governor took office in January, a Rosselló official complained that the board was seeking a $2 billion cut in spending. On Feb. 13 the governor rejected the board’s claimed right to review bills before they are submitted to the Puerto Rico legislature. On Jan. 18 the board sent a letter to Gov. Rosselló stating that spending cuts and/or tax raises equaling 44% of the general fund would have to be made in the next 18 months. At its Jan. 28 meeting, board chairman José Carrion, for emphasis, said twice that some governor-proposed changes to the board’s Jan. 18 proposals may be OK, “as long as the ultimate fiscal plan is based on solid savings and revenue projections, a once and done approach, and not simply on hope or predictions that various changes will generate more revenues in the future.”