Physical & Fiscal Storms

September 20, 2017

Good Morning! In today’s Blog, we consider the fiscal challenge confronting the small Virginia municipality of Pound; then we turn to the fiscal and physical storms pounding the U.S. Territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Pound fiscally pounded. The Council of the small Virginia Town of Pound, the original home of former U-2 pilot Gary Powers, with a population under 1,200, where the median income for a household is under $30,000, confronted by an inability to make payroll and pay other bills due has unanimously agreed in an emergency meeting to borrow enough to pay employees, but not any other outstanding obligations. The Mayor and interim Town Manager George Dean advised the Council that resources in the general fund get low about this time every year; this year, he noted, however, the town has experienced some unanticipated expenditures; thus it needed to tap into its line of credit. As factors, Manager Dean identified unbudgeted overtime, especially in the police department, as the single biggest problem.  He added: “I did not budget to have a chief of police and an assistant police chief in the office side by side,” adding the town could not sustain the current level of overtime. In response, Councilman Terry Short said that with eight officers, there should be no need for overtime, asking how the officers are receiving more overtime than is budgeted. The Manager responded: “You have to ask him,” referring to Chief Tony Baker—which unsurprisingly led Councilman Clifton Cauthorne to note that the town manager is in charge of the finances. But Manager Dean was clear: “I’m not telling the Chief of Police how to run his department: You all need to address that.”  But Councilmember Short noted that when four full-time officers are receiving more than 100 hours of overtime, “we’ve got a problem.”  Town clerk and bookkeeper Jenny Carter, however, said the Police Department was not the only position drawing overtime out of the general fund, telling Council her position also is paid through that account, and she logs considerable overtime, because the office is so understaffed. She had four meetings last month, Ms. Carter noted, and it took 23 and a half hours to type up all those minutes. So, how much was budgeted, Councilman Danny Stanley asked. Eight hours, Ms. Dean responded. While there was some discussion that the seasonal financial crush should ease when the town converts to a twice-annually billing cycle, Ms. Carter said she was confident that will resolve matters in the future; however, she also suggested Council consider increasing the town’s line of credit—a suggestion Councilmember Cauthorne was quick to oppose, noting: “I feel that is like giving a drunk more booze,” adding this was not the first year the town has run into this fiscal problem—or, as one of his colleagues added: “[it] just continues to snowball,” overspending every year, robbing Peter to pay Paul, borrowing money it does not have and without a method to pay it back. Asked how much the town has repaid of its original debt, Ms. Dean said the town still owes the bank about $65,000, adding the town has access to roughly $35,000 available of a $100,000 line of credit, while Ms. Carter said the town is negative $24,500 in the general fund, with open payables of almost another $10,000. If the Council is going to put any more on the line of credit, Councilman Cauthorne made clear he wants to revisit automatic spending cuts—reminding his colleagues that Pound had adopted a plan in 2014 to trigger automatic cuts if the town ever reached $55,000 of its line of credit—an action the Council rescinded a year later.

Councilmember Short said the town’s internal controls require use of time cards, and other kinds of time sheets have not been approved, moving to mandate immediately that all employees use time cards as required by Pound’s internal controls policy: he further noted that the town has a budget and has policies and procedures to control operations, adding: “All we have to do is follow it. It’s that simple.” Council unanimously endorsed requiring time cards as per existing policy. Councilmember Short then moved that all overtime require approval of the town manager, including the police force, but Manager Dean immediately objected, stating: “That’s not going to work,” adding he was not going to comply and Council would have to figure out who was going to tell the police chief, adding: “I am not in control of the chief of police’s overtime hours…He works for you…We’ve got a financial problem here and we’ve got to do something about it: the Council is being asked to borrow money to pay for bills which “we are not controlling.” With regard to employees spending more money than is budgeted, he added: “I don’t know of any business that works like that. If they do, it ain’t long before they are out of business…” He noted they are obligating all taxpayers in the town when they sign contracts borrowing money and citizens are financially obligated to repay that money if the town goes under.

Fiscal & Physical Storms. Promesa Oversight Board Executive Director Natalie Jaresko, in an interview with the Bond Buyer, warned that Puerto Rico is confronted by what this morning could be the strongest hurricane to ever hit the U.S. territory, further decimating public utilizes and forcing the virtually insolvent government to rebuild dozens of communities. But she also said she anticipated Puerto Rico’s fiscal ability to make its requisite municipal bond payments should improve after nine years, expressing optimism with regard to Puerto Rico’s future and the PROMESA board’s relationship with the government of Gov. Ricardo Rosselló—albit, she added, the next few years of reform will inevitably be tough: the PROMESA Board does not expect Puerto Rico to return to nominal gross national product growth until FY2022 and inflation-adjusted growth until FY2024, adding that by the end of the next decade, she anticipates Puerto Rico’s economy to be growing, noting: “In the years 11 to 40 there’s bound to be more cash in all the estimates available for debt service: So creditors shouldn’t only focus on the 10 years.” She added that the Board is working on a “plan of adjustment” for the debt, as provided under PROMESA, albeit she was uncertain when the plan would be publicly released. With regard to timing, she said, in the interview, that Judge Swain has said she plans to rule by mid-December on the dispute between the Puerto Rico Sales Tax Financing Corp. (COFINA) and Puerto Rico over the ownership of sales tax proceeds allotted for the former. Once this is done, she noted, Puerto Rico may pay some of the debt due this fiscal year, adding that work on restructuring all of Puerto Rico’s public sector debt is proceeding simultaneously on three tracks: in negotiations, in the private mediation process overseen by Barbara Houser, and in the Title III litigation process overseen by Judge Swain. She added that the PROMESA Board is working with PREPA and parts of Gov. Rosselló’s administration to adopt a new fiscal plan for PREPA, noting that lowering Puerto Rico’s electric rates would be a vital step for enhancing the economy—albeit Hurricane Maria appears to have very different implications.

With regard to the relationship between the PROMESA Board and the Governor, the Director was generally positive, adding she said she was satisfied with government’s progress in releasing financial information to the board, noting that the Rosselló administration is providing the PROMESA board a report comparing budgeted to actual spending department by department, as well as weekly reports on cash and liquidity, adding that Puerto Rico is moving towards better accounting practices.

Interestingly, the Director said the experience she gained from her service as the Minister of Finance for Ukraine from 2014–2016, taught her “implementation is everything.” Last month, she said, a lack of implementation plans had led the PROMESA Board to order Puerto Rico to institute furloughs, noting: “There are governments aplenty that can adopt plans, adopt laws, have full commitment and desire to change but implementation at an agency level in a bureaucracy is extremely difficult: that is the key to success,” adding that she believes the Rosselló administration has been “committed” to the fiscal plan: “If you take the case of right-sizing the government, I have no doubt there is a desire and intent and it is part of the public campaign of the governor to right-size the government. So I don’t think there’s not an alignment in the goal.” Nevertheless, as she put it—and as we have learned from Pound: “[T]he devil will be in the details of the implementation and enforcement of the fiscal plan, and that is the biggest lesson learned [from the Ukraine.]” to execute cuts in an agency, the agency can run out of money eight or nine months into the fiscal year, she said. “Then the agency usually turns to the central government for an additional allocation to continue operations…“There is a general fatigue among creditors [with Puerto Rico’s continuing problems] and I understand that because they have been dealing with these problems for years. But the problems that grew didn’t evolve overnight and didn’t evolve over one year and resolving them is also going to take time.”

It is unclear what level of fiscal planning will be sufficient today as Hurricane Maria, bringing sustained winds of 160 miles per hour (mph) appears relentlessly approaching—with the government insisting its the priority is to save lives, even as it continues to deal with the after effects of Hurricane Irma, which passed tens of miles above the north coast. The National Weather Service warned: “It is catastrophic in every way, winds, rain and storm surge. We are talking about an extremely dangerous event.” Along with winds of 160 mph and even higher gusts, Maria was predicted to bring 12 to 18 inches of rain, and up to 25 inches for isolated areas in Puerto Rico: the storm surge is estimated from 6 to 9 feet, with large breaking waves that could reach 25 feet. Governor Ricardo Rosselló Nevares urged citizens and families to seek save havens to prevent the loss of human lives: “We have not experienced an event of this magnitude in our modern history…An event like this has never happened before. Maria is predicted to be the worst atmospheric event in a century in Puerto Rico, and, if we do not take precautions, we will have loss of lives that we could have avoided.” The Governor noted that yesterday afternoon residents had already begun to move in five communities which are threatened due to their location in flood-prone areas: Juana Matos, in Cataño; Playita, in Salinas; Amelia, in Guaynabo; Islote, in Arecibo, and Palo Seco, in Toa Baja: by yesterday afternoon, there was clearance and authorization for opening 499 shelters, 49 more than for Hurricane Irma: the Gov. noted: “The main goal is to save lives. If you are in a flood area, your life is in danger. If you live in a wooden home, your life is in danger.” Already, from the previous Hurricane Irma 27 municipalities in Puerto Rico have already been declared disaster areas. Thus, even as Maria roars in, there are still many, many customers without power, homeless citizens, houses without walls, trees lying on power lines, and debris accumulated along the roads.

At the request of the Puerto Rican government, President Trump had already authorized a new emergency declaration before the arrival Maria: Puerto Rico FEMA Director Alejandro de la Campa indicated that he had requested more equipment from the US Department of Defense: “We are asking for more ships, and the aircraft carrier (available for the emergency) has moved to be in a safe area… And ships with helicopters that we will use in case of evacuation or search and rescue are still in the area.” Nevertheless, due to the fragility of the infrastructure of the Puerto Rico Electric Power Authority (PREPA), the Governor anticipates Puerto Rico will be without power after the passage of Maria: “No one in Puerto Rico should expect to have power on the days following María. The time it will take us to fix (the damage caused by the hurricane) remains to be seen.” PREPA Executive Director Ricardo Ramos noted that the total recovery of the system after the passage of Hurricane Hugo in 1989 took about six months. One especially cruel threat will be water: Elí Díaz, the Executive Director of the Puerto Rico Aqueduct and Sewer Authority, noted: “If there is damage to large generators, there will be no power generation, therefore, our facilities will not have power to operate,” adding that there are approximately 1,300 generators which received preventive maintenance since the beginning of the hurricane season, but they are not enough for their 4,000 facilities, including pumping stations. By yesterday afternoon, they managed to prepare 110 tanker trucks, more than double those used during Irma, and are already managing imports from the port of Jacksonville in agreement with private companies. He added that since last Sunday, the levels of the Carraízo and La Plata dams have been gradually dropped to about three meters in order to prevent them from having to open the emergency flood gates.

For his part, last evening, President Trump tweeted his support: “Puerto Rico being hit hard by new monster Hurricane. Be careful, our hearts are with you-will be there to help!” The eye of the hurricane passed near or over St. Croix last night, prompting U.S. Virgin Islands Gov. Kenneth Mapp to insist that people remain alert. St. Croix was largely spared the widespread damage caused by Hurricane Irma on the chain’s St. Thomas and St. John islands just two weeks ago; however, this time, the island would experience five hours of hurricane force winds, Mapp warned: “For folks in their homes, I really recommend that you not be in any kind of sleepwear: Make sure you have your shoes on. Make sure you have a jacket around.”

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On the Edge of Municipal Fiscal Cliffs

September 20, 2017

Good Morning! In today’s Blog, we consider the upcoming challenge for voters in Detroit—with a Mayoral election around the bend—and the city aspiring to be in the competition for selection by Amazon as its second site. Then we look at the physical and fiscal storm threats to Puerto Rico, before finally looking back at post-riot Ferguson, Missouri.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of a Fiscal State/Local Cliff.  The Latin incantation, “Speramus meliora; resurget cineribus,or, translated: “We hope for better things; it will arise from the ashes,” is Detroit’s motto: it came from a French Roman Catholic priest, Father Gabriel Richard, who was born in France in 1767 and moved to Baltimore in 1792 to teach math. Reassigned to do missionary work, he moved first to Illinois and later to Detroit, where he was the assistant pastor at St. Anne’s Church—a church founded in 1701 and possibly the oldest continuously operating Roman Catholic parish in the U.S. Two hundred twelve years ago, on June 11th, a fire destroyed nearly all of then-Detroit, just weeks before the Michigan Territory was established. Today, nearly three years after the once-great city, the “arsenal of democracy” during World War II and home of the world’s most innovative manufacturers, emerged from the nation’s largest ever chapter 9 bankruptcy, national interest in Detroit has waned: in some ways, it has become a tale of two cities: One a city still mired in poverty and unemployment; one an emerging vibrant metropolis and global self-driving car center. And all this is occurring as the voters prepare to re-elect Mike Duggan—whose most profound achievement has been to raze much of the city, after first being elected in a write-in campaign. But, last month, voters in the primary gave him 68% of the votes—likely foretelling November’s re-election—in a campaign against the son of Coleman Young, Detroit’s first black mayor. Almost more than any other city in the nation, Detroit is not just a city emerging from the ashes, but also a city of profound racial transition: Over the past forty-year, Detroit has undergone a racial transformation: from 70% white in the 1960s to just 10% today. The Detroit News described the Mayor’s self-referral as a “metrics nut:” describing cabinet meeting room as one blanketed in graphs charting the city’s employment, ambulance delivery and crime rates, among other statistics. “The police are going to show up in under 14 minutes; the ambulance is going to show up in under 8 minutes; the grass is going to be cut in the parks every 10 to 12 days—it just is.” The paper notes that: “City employees who do not meet these targets do not last long.”  But, as the city’s emergency manager charged by Gov. Snyder with taking the Motor City into chapter 9 bankruptcy and then out noted to me on that very first morning, the critical distinction between municipal and corporate bankruptcy is to ensure the streetlights, traffic lights, police and fire are working. That has been an ongoing, post-plan of debt adjustment priority, and, the numbers have continued to improve: today police response times are down from an average of 40 minutes to 13.

Mayhap a far greater governance challenge, however, has been to reverse the flight of residents from the city—flight which bequeathed 40,000 abandoned properties—properties which could become havens for crime, paid no property taxes, and adversely affected the assessed values of neighboring properties in one of the nation’s largest—by land area of 139 square miles—a city once the home to 1.8 million—thrice today’s population. Or, as David Schleicher of Yale Law School described the city: it “is just too big,” to accommodate “the expense of providing services.” The Mayor has sought to “right-size,” as it were, by means of razing abandoned homes, in part via the expansion of the Detroit Land Bank, a quasi-governmental authority which now owns 96,000 properties across the city—most of them acquired through foreclosure because of unpaid taxes. Thus, the land bank has succeeded in centralizing the city’s control over abandoned and vacant properties; Detroit has replaced an antiquated registry scattered across 83 data sets, and erased liens and back taxes as a means to facilitate the clearing and demolition or restoration of properties. Since his election, the city has focused on the highest density districts, where the city has demolished 11,900 residential properties. The results indicate that the demolition of a blighted property increases the value of a nearby home by 4.2%, according to one study. And the pace has been unprecedented—indeed, so fast there have been allegations of improper contract awards; there has been a federal investigation; and Michigan’s state housing agency suspended funds for two months, after a state audit found improper controls in place. Land bank officials, including the director of demolitions, have resigned. Mayor Duggan, who has not been a subject of the investigation, blames the mistakes on a desire to increase the pace of demolitions, but acknowledges that regulators were right to rap his knuckles.

Under the program there has been, consequently, a high pace of tax foreclosures—the main pipeline for properties which end up in the land bank’s possession: under Michigan law, owners who do not pay taxes after three years lose their property—properties last comprehensively reassessed decades before market values plummeted, meaning many are set too high. Between 2006 and 2012, median sale prices for city houses fell from $70,000 to $16,200; thus, the owner of a house worth $15,000 could owe $3,000 in property taxes. The state-mandated interest rate on property-tax debt is 18% per year. Thus, an update completed at the beginning of this calendar year should lead to lower bills, but it will not be retroactive; thus, up to 53,000 properties will receive foreclosure notices this autumn. While not every foreclosed property will necessarily end up lost, tax foreclosures, driven by government policy rather than market forces, could force out longtime residents, ironically exacerbating the very problem the Mayor is focused upon: even as the demolition drive has already cost the city’s taxpayers some $162 million, the average back taxes for homes put up for auction are $7,700—much less than the cost of demolition. Or, as Michele Oberholtzer, Director of the Tax Foreclosure Prevention Project puts it: “It’s like an auto-immune disorder: We penalize people for not paying, and then we end up paying more for the punishment.” Nevertheless, Mayor and candidate Duggan believes that at the current pace of demolitions, he can clear the city’s long-standing blight within five years—mayhap paving the way for a smaller but much more vibrant city.

Fiscal Hurricane. With still another hurricane bearing down on Puerto Rico (damages caused by Hurricane Irma are estimated at more than $600 million), a fiscal storm appears in the offing after, yesterday, an agreement among Senate Finance Committee leaders to push this month the reauthorization of the Children’s Health Insurance Program for five years raised doubts about with regard to whether Medicaid funds to stabilize the finances of the Puerto Rican health system could be included in that legislation: according to the agreement between the Chairman, Republican Orrin Hatch (R-Utah), and Ranking Member Ron Wyden (D-Oregon), that program would be refinanced for another five years; however, the agreement did not include funds to close the so-called “abyss” in Medicaid funds, which would reach $ 369 million this fiscal year and then rise to about $ 1.2 billion that has been asked annually for reimbursement under the Affordable Care Act, or, as former Puerto Rico Governor Aníbal Acevedo Vilá, who was representing Gov. Ricardo Rosselló, noted: “From what I’ve been told, we are not included.” His statement came as Gov. Rosselló arrived last night in Washington, D.C. along with former Governors Acevedo Vilá and Alejandro García Padilla to meet with House Minority Leader Nancy Pelosi (D-Ca.), as the Senate Finance Committee hurries to approve the reauthorization of the CHIP program before the law expires at the end of this month. Chairman Hatch, however, has indicated that his intention is that the reauthorization of the program not increase the federal deficit—an intention which could singularly complicate the mission—even as House Speaker Paul Ryan (R-Wis.) earlier this year had told resident commissioner, Jennifer Gonzalez, that CHIP’s reauthorization was the ideal vehicle for legislating new Medicaid allocations, due to the depletion of Affordable Care Act funds in April. (For the current fiscal year, Puerto Rico’s allocation is $172 million. Meanwhile, there are already 12 Puerto Rican municipalities within  the  federally declared disaster zone: the first ones were the municipalities of Vieques and Culebra. Yesterday, Adjuntas, Canóvanas, Carolina, Guaynabo, Juncos, Loíza, Luquillo, Orocovis, Patillas and Utuado were added—with Gov. Rosselló making the announcement yesterday accompanied by FEMA Administrator William Long,  albeit the Governor added: “This does not imply that the list of municipalities is finished, it´s not over. This simply implies that as we receive  information (from the affected municipalities) and we send it to the federal government, then, we are able make these declarations.”

Good Gnus. Puerto Rico’s median household income climbed 7.8% from 2015 to 2016 according to the U.S. Census Bureau American Community Survey statistics, with the survey showing that mean household income was up 2.3% after inflation—a stark contrast with the generally negative economic data coming out of Puerto Rico. For example, Puerto Rico’s economic activity index declined 2.1% in July from a year earlier, according to a report from the Government Development Bank for Puerto Rico: according to the U.S. Bureau of Labor Statistics’ household survey, total employment in August on the island was down 0.25% from a year earlier. According to its survey of workplaces, total employment was down 1.1%. In addition, the American Community Survey showed that net migration to the rest of the United States increased to 67,000 in 2016 from an average of 44,400 per year from 2006 to 2015—that is nearly 50%. Data from the Puerto Rico Ports Authority show that the average net migration was 65,700 per year from 2006 to 2015. The difference may reflect that some Puerto Ricans migrate to countries beside the U.S., according to Mario Marazzi, executive director for the Puerto Rico Statistics Institute.

Coming Back. Moody’s has revised upwards its credit rating for Ferguson, Missouri in the wake of efforts to recover fiscally from the aftermath of a controversial police shooting, the rating agency has revised the city’s outlook on its junk-level Ba3 general obligation rating to positive from negative. The city lost its investment grade rating as it dealt with the aftermath of the August 2014 fatal shooting of Michael Brown, an unarmed African-American, by a white police officer. The shooting led to local protests and a federal probe in the city of about 21,000 just northwest of St. Louis. The city faced rising legal expenses as it dealt with a federal probe into policing and court tactics and then the costs of a settlement, and took a hit on sales and other taxes. The city has also lost a chunk of court-fine related revenue it relied on as the state government cracked down on local government use of fine levies to balance budgets. After spending cuts and other management efforts, the city is expected to begin to shore up its balance sheet as voter approved tax revenues flow into city coffers. “The positive outlook reflects the likelihood the city’s materially improved fiscal condition will continue over the next two years, especially because new taxes implemented during fiscal years 2016 through 2018 will lead to the greater likelihood of operating surpluses and improving reserve levels,” Moody’s noted, as it affirmed the B1 rating on the city’s 2013 certificates of participation and the B2 rating on its 2012 COPs: the upgrade reflects Ferguson’s current fiscal condition in the wake of several years of rapidly declining reserves and uncertainty for further operating declines; it incorporates a moderately sized tax base with a trend of declining assessed valuation, below average resident wealth, and above average yet manageable debt burden. The agency notes that the rating remains challenged by ebbing reserves and the costs of federal consent decree measures which contributed to operating deficits in fiscal 2014 through 2017; the city anticipates a $312,000 deficit for FY 2017, but, with fully phased in, voter approved taxes coming in next year, the FY2018 budget estimates a $48,000 general fund surplus. From a high in fiscal 2013, the general fund balance declined to $3.6 million or 33.5% of revenues from $10.5 million. Reserve levels remain healthy on a relative basis compared to its peer group but the city’s operating flexibility is notably narrower than it has been. The city is working towards meeting milestones and establishing policies as required in its 2016 Department of Justice consent decree. Consent decree annual expenses have declined to $500,000 from projections of $700,000 to $1.5 million. Tax hikes are projected to generate an additional $2.9 million in annual revenue for the general fund in FY2018.

The Political & Fiscal Challenges of Recovery

September 19, 2017

Good Morning! In today’s Blog, we consider the uncertain fiscal outlook for Hartford – and Connecticut, the ongoing recovery in Detroit from the nation’s largest municipal bankruptcy, municipal fiscal erosion in Pennsylvania, and some of the fiscal and physical impacts of Hurricane Irma on Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of a Fiscal State/Local Cliff. Connecticut lawmakers passed a $40.7 billion two-year state budget early on Saturday; however, Governor Dannel Malloy could veto the legislation and leave the state racing toward severe spending cuts next month. The budget uncertainty came as the state’s capitol city Hartford is approaching debt repayment deadlines this month and next—and now the state budget uncertainty is becoming a major threat to the city; Moody’s noted: “The city owes $3.8 million in September, followed by $26.9 million in October,” with October the “heaviest debt service month this year,” apparently the result of the city’s borrowing $20 million last April to cover its cash flow problems.  Thus, with the Legislature and Gov. Dannel Malloy unable to agree on a balanced state budget, the credit rating agency notes this could be a potentially huge problem for Hartford, writing: “Approximately half of the city’s general fund revenues are derived from state aid, leaving Hartford heavily exposed to the state’s budget delay: If the delay continues, Hartford is in danger of depleting its already weak reserves between now and the end of this calendar year.” And this could become a municipal fiscal cancer—not just for Hartford, but also Bridgeport and New Haven. Mayor Luke Bronin noted: “The absence of a state budget significantly exacerbates Hartford’s fiscal crisis and accelerates our cash flow challenge.” While Gov. Malloy has issued a temporary plan to cover for the lack of a state budget, that plan would sharply cut state aid to cities and towns. Mayor Bronin said that plan, if continued through the rest of FY2018, would mean Hartford “would face a shortfall of about $100 million out of a municipal budget of $329 million.” Thus, he noted: “While we’re focused on managing our liquidity and maintaining basic services, there’s obviously no way to manage a shortfall of that magnitude indefinitely…We are exploring all of our options to restructure Hartford’s obligations and put our Capital City on a sustainable path.” Moody’s, in its assessment, described Hartford’s “path to fiscal sustainability” as one “likely require debt restructuring along with some combination of labor concessions, other expenditure cuts, and new revenues,” albeit not opining on whether debt restructuring to extend the city’s repayment schedule or bankruptcy would be the likelier outcome, but noting that the city’s debt service costs are expected to “ramp up” from $44 million in the current fiscal year to $57 million in 2018-19, and will then continue to grow almost steadily through 2020-21. Thus, Av Harris, a legislative aide to Bridgeport Mayor Joseph P. Ganim, warned Bridgeport, which had filed for chapter 9 municipal bankruptcy in 1991 (§7-566), worried: “The major impacts haven’t hit yet,” referring to apprehension with regard to the potential fallout if the city does not receive the first big installment in state school aid, noting that state aid represents about 40% of Bridgeport’s current $550 million city budget. Nearby, New Haven Mayor Toni Harp has ordered city agencies to come up with budget cutting contingency plans in case the General Assembly fails to pass a state budget by September. The Mayor said additional spending reductions would be needed to avoid local tax increases, in the event the state budget impasse continues. (New Haven’s Board of Aldermen adopted a $539.9 million city budget on June 6.) Mayor Harp has said New Haven is hoping to receive at least the $30 million in state aid that it got in the fiscal year that ended June 30, and is looking to get an additional $18 million in promised state funding, adding that failure to get that money would put New Haven in a short-term cash crisis.

Observers were surprise that the Republican-backed budget won prevailed in a legislature narrowly controlled by Democrats; yet the fiscal outcome remains uncertain, as Gov. Malloy has said he would veto the bills as they first passed through the Senate before moving to the House of Representatives, noting: “The amended budget that passed in the Senate today is unbalanced, and if it were to reach my desk I would veto it,” last Friday night, stating that the budget “relies on too many unrealistic savings, it contains immense cuts to higher education, and it would violate existing state contracts with our employees, resulting in costly legal battles for years to come.” The passage came with the state budget action two months’ overdue and, currently under emergency control: Under the Governor’s executive order, some schools and cities would see state aid slashed after October 1 unless a budget is enacted before then—burdened by some $73 billion of pension and debt obligations, high taxes, out-migration, and falling revenues—and under a now lame duck governor. Now the legislature has sent him a budget which contains provisions he says he cannot abide, including reductions to the University of Connecticut. Under the proposed budget, general fund appropriations would grow 3.5 percent in FY 2018 to $18.5 billion and 0.6 percent in FY2019 to $18.6 billion; the transportation fund, the next largest, would grow by about 11 percent over the two years, according to the legislature’s Office of Fiscal Analysis (OFA); the bill would also limit general obligation bond allocations to $2 billion a year beginning in fiscal 2018, then apply that same cap to issuances and spending starting in fiscal 2019.  

The budget, if agreed to, It would establish a Municipal Accountability Review Board to allow state oversight of fiscally troubled cities, potentially including its capital city, Hartford, with former U.S. Comptroller General and now gubernatorial candidate David Walker stating: “I think (Malloy) is likely to put the ball back in the court of the state Legislature…I think the last thing we need right now is to increase taxes.” Nevertheless, on Saturday, Gov. Malloy described the GOP budget package as “unbalanced” and “unrealistic: If the responsible solution I negotiated with Democrats isn’t going to pass, then it is incumbent on the legislature to reach a new agreement soon—one that is realistic and, ideally, bipartisan.” Nevertheless, State Rep. Cristin McCarthy Vahey (D-Fairfield) was one of six House Democrats to break ranks, called for a bipartisan fix to the state’s fiscal woes: “We all await the Governor’s next steps and will go forward from there…The challenges confronting us were a long time in the making. We need to figure out a solution working together as leaders. I support every effort that will bring us closer to the kind of compromise we need to successfully adopt a state budget.” However, Senate President Pro Tempore Martin Looney (D-New Haven) said Gov. Malloy has given his assurances that he would immediately veto what is a “short-sighted” budget that undercuts collective bargaining and public education, noting: “So much for allegedly responsible and realistic budgeting,” adding there was a “substantial danger” that no budget gets passed by Oct. 1, defaulting to the Governor’s cuts: “I think we have to look forward rather than backward and keep our focus on getting a budget.”

It seems an irony that both Republican gubernatorial hopefuls who spoke at yesterday’s rally could become casualties of the proposed elimination of the decade-old Connecticut Citizens’ Election Program, which was adopted after the resignation and imprisonment of former Gov. John Rowland for corruption. Under the program, candidates for governor are eligible for $1.4 million in public funds in the primary and $6.5 million in the general election. (They must raise $250,000 in increments of $100 or less to qualify.) One such candidate, State Rep. Prasad Srinivasan (R-Glastonbury), who has already raised the requisite $250,000—and who voted for the budget, noted: “It’s going to be a different ballgame for all of us…Is this a perfect budget? The answer is, no. Is it a good budget? Yes. We have lived in excess all of these years.” Candidate Walker said if publicly-funded elections, which could cost more than $40 million in 2018, were eliminated, he would be able to more than make up for it, adding, however, that to be fair to those gubernatorial candidates who are far along in qualifying, the subsidy should be kept for the state’s highest office. Mr. Walker is running against House Speaker Joe Aresimowicz (D-Berlin).

The Steep Road to Chapter 9 Recovery. Detroit Mayor Mike Duggan likens the gathering regional bid to land Amazon’s second headquarters to delivering Detroit Super Bowl XL more than a decade ago; however, the, as a Detroit News editorial by the ever insightful Daniel Howes noted: “It’s not even close. The hunt for Amazon is far larger, far more competitive and far more likely to tax the ability of just about anyone to corral business, political and civic leaders around a deadline measured in weeks, not years. (The deadline is Oct. 19 to proffer a plan to compete for a $5 billion investment worth 50,000 jobs.) Mayor Mike Duggan noted that with fewer than five weeks to put together its proposal: “We’re up against really tough competition from really good cities.” Or, as the editorial notes: “Yes, we are—as Detroit Regional Chamber CEO Sandy Baruah learned this week when he flew to Toronto for a speech on trade between Canada and the United States. On the minds of the Canadian CEOs: luring Amazon’s massive economic play north of the border, no mean feat in the era of Trump.” Nonetheless, as the editorial added: “That’s not deterring Detroit’s mayor, facing re-election. It’s not deterring Quicken Loans Inc. Chairman Dan Gilbert, who quickly accepted Mayor Duggan’s offer to chair the regional effort to prepare an Amazon bid. And it’s not deterring local and state politicians, or a business community that is far more active in economic development efforts than their predecessors a decade ago…It shouldn’t: In fundamental ways, this region is different than the one industrialist Roger Penske shepherded through the process of bidding for a Super Bowl (at the personal request of Bill Ford Jr., whose family owns the Lions). It’s more competent, more confident and often more regionally cooperative. It has witnessed the deep costs of division and political corruption, of big business that worries more about bragging rights with competitors than being competitive. It’s tasted the ignominy of financial dissolution, and seen how private capital can breed renewal: Weathering the near-collapse of two Detroit automakers, the Great Recession, and the largest municipal bankruptcy in American history can do that. Seeing the crucial importance of individual leaders in a broader mosaic of leadership can, too. So can national embarrassment.”

Southeast Michigan is legendary for parochial infighting pitting city against suburb, for measuring solutions to difficult civic problems in decades, not years, for fixating on why change cannot happen instead of pushing to make it happen. Which raises a critical point that will be answered by the success of Gilbert & Co. to rally disparate leaders quickly around a cohesive bid: Were the speed and decisiveness of the auto restructuring, of the city’s financial workout, of the revitalization of downtown just historical aberrations? 

Or are they harbingers of a can-do future liberated from the confrontational zero-sum game that helped drive Detroit and its hometown auto industry to the edge of complete financial collapse? Look, no one should kid themselves: For a bid that seeks access to regional transit with connections to an international airport, the region that put America on wheels is woefully behind. For a bid that aims to create a second headquarters hub for one of 21st-century America’s iconic corporate brands, southeast Michigan isn’t too far removed from the stain of bankruptcy, municipal and corporate.

How indelible are those stains, if at all?

We’re about to find out.

“This is a no-lose proposition for southeast Michigan,” according to CAO Baruah of the Chamber. “Best case is we prevail under some very heavy competition. Even if we don’t win, but come close. It’s still a win for us. We learn how to do this well.” Whatever happens, business and political leaders arguably are more aligned around the economic way forward than any time in decades. The Democratic mayor of Detroit and the Republican governor coalesce around common problems, and more often than not so do their respective lawmakers.

Business leaders are more predisposed to dig into civic problems, with a dozen or so of their top leaders coming together in a new, still-unnamed group to champion reform. For the first time in a decade or more, Detroit’s automakers are led by longtime Michiganders — Mary Barra at General Motors Co. and Bill Ford and Jim Hackett at Ford.

Poverty declined and incomes rose last year in the Motor City, marking the first significant income increase recorded by the U.S. Census Bureau since the 2000 census, with Detroiters’ median household income up last year by 7.5% to $28,099 in 2016, according to U.S. Census’ American Community Survey estimates; ergo poverty dropped 4 percentage points to 35.7%‒the lowest level in nearly a decade—perhaps offering

Keystone Municipal Fiscal Erosion. Hazleton a small city of just over 25,000 in Luzerne County, is the county’s second largest city and the seventeenth largest city in the Keystone State—it was incorporated as a  borough 160 years ago, and then as a city on December 4, 1891. Now, Department of Community and Economic Development Secretary Dennis Davin has signed documents declaring Hazleton a “financially distressed” municipality under the state’s Act 47, effectively providing the Department the ability to solicit proposals on behalf of the city for professional management services. Mayor Jeff Cusat and City Council President Jack Mundie have been notified: the development puts the city in a position to apply for a $850,000 no-interest emergency loan that the state would make available via a revolving fund; Pennsylvania officials anticipate receiving a loan request from the city, since a consultative report that the Department prepared last month projects that Hazleton will face a $895,267 cash-flow shortage by the end of the year: a cash flow analysis projects $9,782,659 in expenses outpacing $8,887,392 in revenue for the year, according to the report—a report which unsurprisingly concludes: “This clearly is not fiscally sustainable, and it is projected that an extraordinary cash flow deficit will continue to exist.” Secretary Davin will have the final say whether to grant a loan to Hazleton; prior to that, she noted the City Council must adopt a resolution in support of the funding.

Council President Jack Mundie said that although he believes the city would have avoided Act 47 if the Mayor had followed the Council’s budget, the declaration leaves the city with little choice but to participate in the program. The city would have realized about $500,000 had the Mayor followed through with a plan to sell delinquent taxes to a collection agency and accepted another $220,000 payment from Hazleton City Authority in advance of land it expects to sell as the state looks to extend Route 424 into Humboldt Industrial Park. Mayor Cusat, however, has opposed paying fees related to the tax sale and has said he has seen no evidence that the land sale would take place this year to justify accepting the upfront payment—and, he has warned on several occasions that cash-flow issues put the city at risk of missing payroll; ergo, he believes it vital for the city to secure an emergency loan so that it may continue meeting payroll. He believes the city can make payroll on October 6th, provided the municipality takes advantage of a 30-day grace period for paying health insurance, explaining that is the date “when our quarterly health insurance payment is due, which is approximately $300,000. The only chance we have of making the Oct. 6 payroll is if I do not pay health insurance and I take advance of the 30-day grace period.” Council President Mundie added that he also does not want to see city workers go unpaid.

The $850,000 loan resolution was, thus, placed on yesterday’s meeting agenda: an offer Council President Mundie believed to be hard to refuse: “It’s payable over 10 years; there’s no interest; and payments are once a year: How can you refuse that money?” And, as Mayor Cusat noted: The city would confront severe repercussions if Council did not approve the loan resolution: “If they don’t pass it, the state has notified me that it’s almost guaranteed the city will be sent into immediate receivership—which has only happened once in the history of Pennsylvania: “I’m hoping that Council finally realizes how serious this problem is and agrees to the resolution,” adding there is a time element: the process for securing emergency funds could take up to 30 days, leaving no room for delays.  He also cited a recently released Communities in Crisis report prepared by Pennsylvania Economy League, “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” which he views as “critical” of Act 47: the report found that tax burdens have grown for all types of municipalities since 1990, even as municipal tax bases have been steadily shrinking since 1970: the report states that:

  • only one of the 14 municipalities which have participated in Act 47 had a tax base in 2014 that was at least on par with the tax base for communities that never participated;
  • that the tax burden for most Act 47 municipalities increased at a rate higher than non-Act 47 municipal averages; and
  • that six boroughs that exited Act 47 between 1990 and 2007 had tax bases that were significantly below the non-Act 47 borough average for 2014.

Or, as the report concludes: “This indicates that Act 47 was not successful in restoring tax base value to the boroughs that exited the program.” Thus, unsurprisingly, Council President Mundie fears the program would result in tax increases and the sale or lease of municipal authority assets—which the Council does not support, or, as he put it: “The state is going to force us into doing things we don’t want to do…I think [it] wants to sell the water and sewer (authorities).”  For his part, Mayor Cusat said the declaration of distress should not come as a surprise: when, previously, he tried to get the city to participate in the Early Intervention Program, he said that he learned the city had met two criteria to meet distressed status, ergo: “I’ve been warning council of this for the past year and a half, that we were headed in this direction: It shouldn’t come as a shock that Secretary Davin signed the documents.”

Shutting the Spigot? But tempus fugit: Pennsylvania state officials who confirmed Hazleton’s participation in Act 47 are expressing apprehensions with regard to how the House Republican’s fund transfers could impact the business community, specifically pointing to the removal of money from the Act 47 Revolving Aid Fund, a step which, if enacted, could pull the fiscal safety net out from under the state’s distressed communities: “Without this funding, cities would have a much more difficult time exiting Act 47,” according to Secretary Davin.

The Pennsylvania Economy League reports that fiscal decay has accelerated in all sizes of municipalities throughout the in its new report: “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” a report which examines 2,388 of the state’s 2,561 municipalities where consistent data existed from 1970, 1990, and 2014, considering, as variables, the available tax base per household, as well as the tax burden, a percentage of the tax base taken in the form of taxes to support local government services‒after which the municipalities were then divided into five quintiles, from  the wealthiest and most fiscally healthy to the most distressed—with Philadelphia and Pittsburgh excluded due to their size and tax structure. The League found that the tax burden has grown on average for all municipalities since 1990, but that the tax base has fallen, on average, in the state’s municipalities since 1970. In addition, the study determined that municipalities in Pennsylvania’s Act 47 distressed municipality program generally performed worse than average despite state assistance.

The study also found that communities which finance their own local police force, as opposed to those which rely solely on Pennsylvania State Police coverage, had double the municipal tax burden and ranked lower. (Readers can find the report in its entirety on the Pennsylvania Economy League’s website.) The League’s President, Chairman Greg Nowak, noted: “The first part of understanding and doing something about a crisis is understanding what it is,” adding that clearly the League believes the state’s local governments are in a fiscal crisis, comparing the new report to one the League released in 2006, which had warned of oncoming fiscal distress—a report, he noted, which had not galvanized either the state or its municipalities to take action. Gerald Cross, the Executive Director for Pennsylvania Economy League Central, said the study also found that tax bases in cities largely remained stagnant even as the local tax burden increased from 1990 to 2014, noting that all the state’s cities were in bottom-quintile rankings in 2014—and that while tax base generally grew in boroughs and first-class townships, the tax burden there also grew from 1990 to 2014; he added that the trend for second-class townships was mixed: while the tax base increased and more second-class townships moved into healthier quintiles, the tax burden also climbed from 1990 to 2014. Or, as Kevin Murphy, the President of the Berks County Community Foundation put it: “Pennsylvania’s system of local governments is broken and is harming the people living in our communities: It’s a system that was created here in Harrisburg [the state capitol], and it is Harrisburg which needs to fix it.” Pennsylvania has 4,897 local governments, including 1,756 special districts, cities, towns, and first, second, and third class townships.

Physical & Fiscal Destruction. Municipal fiscal analysts are apprehensive that Hurricane Irma’s physical and fiscal impact on Puerto Rico’s economy may be worse, because of the U.S. territory’s physical, fiscal, and capital debt—or, as Howard Cure of Evercore Wealth Management described it: “Entities that suffer a natural disaster need a strong balance sheet to take care of immediate clean-up and assessment needs until funding from the federal government and insurance companies becomes available.” The island lacks the requisite resources to recover on its own in the wake of a decade of fiscal deterioration—and now it is seemingly transfixed in the middle of a decade of fiscal decline, even as it is attempting to restructure its roughly $69 billion of public sector debt—and restore electricity to some 70% of the Puerto Ricans in the wake of Irma. Mr. Cure described Puerto Rico’s need to repair its power and water systems to be made more vital in the wake of many years of neglect, warning: Irma’s damage “could expedite the downward spiral of the economy and could cause even more of the workforce to leave.” Moody’s Investors Service senior credit officer Rick Donner added in his own fiscal apprehensions, writing: “Reports of widespread power outages that may persist for weeks in Puerto Rico following Hurricane Irma highlight longstanding liquidity pressures and an aging infrastructure that have beleaguered [the Puerto Rico Electric Power Authority] for many years: Long-term power outages will have negative impacts on PREPA’s revenues and will pose added challenges in Puerto Rico’s overall recovery from this natural disaster; Any damage from the storm will also add to the stress related to PREPA’s recent default and could impact ultimate recovery for bondholders.” Some fiscal and physical help could come from the PROMESA Oversight Board, where Executive Director Natalie Jaresko said, “We are working closely with Gov. Rosselló to coordinate support for Puerto Rico in the aftermath of the storm. We have also reached out to the federal government to activate Title V, which allows the board to work with agencies to accelerate the deployment of grants and loans following a disaster.”

The Sinking Ships of States?

September 15, 2017

Good Morning! In this a.m.’s Blog, we consider the ongoing recovery in Detroit from the nation’s largest ever municipal bankruptcy, the unrelenting fiscal challenges for Flint; who voters in the fiscally insolvent municipality of East Cleveland will elect, the steep fiscal erosion for Pennsylvania’s local governments, and the uncertain fiscal outlook for Hartford.

Visit the project blog: The Municipal Sustainability Project 

The Steep Road to Chapter 9 Recovery. Poverty declined and incomes rose last year in the Motor City, marking the first significant income increase recorded by the U.S. Census Bureau since the 2000 census, with Detroiters’ median household income up last year by 7.5% to $28,099 in 2016, according to U.S. Census’ American Community Survey estimates; ergo poverty dropped 4 percentage points to 35.7%‒the lowest level in nearly a decade—perhaps offering a boost to Mayor Mike Duggan’s reelection hopes in November.  Despite the gains, however, Detroit is still the city with the greatest level of poverty in the country—and a city where racial income disparities continue to fester: income data indicates that the incomes of Hispanic and white Detroit residents grew significantly compared to blacks, who make up 79 percent of the city, according to Kurt Metzger, a demographer and director emeritus of Data Driven Detroit, or, as Mr. Metzger writes: “Overall it’s a great story for Detroit…But when you look beneath the surface, we still have a lot of issues. There is a constant narrative out there: Are all boats rising together?” Mayor and candidate for re-election Mike Duggan has made clear he understands there is more work to do: noting that forty-four people graduated last month from the Detroit At Work job training program, which launched last February and from which half have already received job offers, the Mayor told the Detroit News: “Income goes up when one, there is a job opportunity and two, when you have the skills to take advantage of it: As we raise the skills of our residents we will raise the standard of living.” Nevertheless, he added: “Nobody is celebrating a (35.7) percent poverty rate, but the progress is important and it took us years to get here.”

If one looks farther ahead, there might be even more hope: the new data found that fewer of Detroit’s children are living in poverty: the under 18 poverty rate has declined about 14 percent to its lowest level since 2009—albeit still over 50 percent, with the decline attributed to higher numbers of jobs, and, ergo, greater incomes, with Xuan Liu, the manager of research and data analysis for the Southeast Michigan Council of Governments noting that with more residents of the city working (the unemployment rate dropped nearly 25% from 20.6% to its lowest level (16.5%) since 2009), or, as Mr. Liu noted: “Eight years after Great Recession, (census) data is finally show some significant economic benefits for more Detroiters.”

Notwithstanding that good news, it has not been city-wide, but rather concentrated: the city’s 2016 median income remains 14.6% lower today than what residents were earning a decade ago: just $32,886 adjusted for inflation, and while the new census figures show some economic improvements in Detroit, a recent Urban Institute report finds the recovery is not even through the city, noting that tax subsidies and investments are disproportionately favoring downtown and Midtown, with the bulk of the recovery along Detroit River, the Central Businesses District and Lower Woodward Corridor—or, as Mr. Metzger noted, the Motor City still faces a challenge if all of its citizens and families are to participate in the recovery: he notes the 2016 income data shows the gains were realized by Hispanic and white residents, but not for blacks, or as he described it: “The people who are ready and able to take advantage of the turnaround are doing it but those who aren’t, haven’t.” Detroit’s Workforce Development Board has set an employment goal of an additional 40,000 residents to find jobs in the next five years.

Not in like Flint. Unlike Detroit, Flint realized no change in poverty or income: the city so fiscally and physically mismanaged by the State of Michigan via its appointment of a gubernatorial Emergency Manager remains the poorest city in the nation amongst all cities with populations over 65,000: the city’s poverty rate last year was 44.5%; median household income was $25,896—less than half Macomb County’s median household income of $60,143.

Vote! Brandon King is a step closer to remaining Mayor of East Cleveland. Mr. King won the Democratic primary in East Cleveland, with 44.3% of the 1,760 citizens who voted, so that he has narrowed the field: he will continue to defend his seat in November against activist Devin Branch, who is running as a Green Party candidate, after beating out three other candidates for the nomination: former Councilman Mansell Baker, school board President Una Keenon, and community leader Dana Hawkins Jr. Ms. Keenon was the runner-up with 30.3 percent of the vote: she previously served as East Cleveland’s judge. The incumbent, who became Mayor last December after a contentious recall election ousted former Mayor Gary Norton Jr. and Council President Thomas Wheeler, leading to two vacancies on City Council, which council members Barbara Thomas and Nathaniel Martin filled with Mr. Branch and Kelvin Earby—appointees Mr. King decided to be “unlawful,” claiming there were insufficient elected leaders to choose the members, so that he usurped that authority and then appointed his own: Christopher Pitts and Ernest Smith. Unsurprisingly, a lawsuit regarding the appointments is now before the Ohio Supreme Court, even as the city’s petition for chapter 9 remains before the State of Ohio. November will bring elector contests in Ward 3 and for two at-large seats. Notwithstanding that the small municipality of 18,000 is in a state of fiscal emergency, Mayor King has pivoted away from former Mayor Norton’s strategy of trying to merge the city with Cleveland or declare the city in chapter 9 bankruptcy: instead he and the rest of the Democratic candidates want to focus on economic development.

Keystone Municipal Fiscal Erosion. The Pennsylvania Economy League reports that fiscal decay has accelerated in all sizes of municipalities throughout the in its new report: “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” a report which examines 2,388 of the state’s 2,561 municipalities where consistent data existed from 1970, 1990, and 2014, considering, as variables, the available tax base per household, as well as the tax burden, a percentage of the tax base taken in the form of taxes to support local government services‒after which the municipalities were then divided into five quintiles, from  the wealthiest and most fiscally healthy to the most distressed—with Philadelphia and Pittsburgh excluded due to their size and tax structure. The League found that the tax burden has grown on average for all municipalities since 1990, but that the tax base has fallen, on average, in the state’s municipalities since 1970. In addition, the study determined that municipalities in Pennsylvania’s Act 47 distressed municipality program generally performed worse than average despite state assistance.

The study also found that communities which finance their own local police force, as opposed to those which rely solely on Pennsylvania State Police coverage, had double the municipal tax burden and ranked lower. (Readers can find the report in its entirety on the Pennsylvania Economy League’s website.) The League’s President, Chairman Greg Nowak, noted: “The first part of understanding and doing something about a crisis is understanding what it is,” adding that clearly the League believes the state’s local governments are in a fiscal crisis, comparing the new report to one the League released in 2006, which had warned of oncoming fiscal distress—a report, he noted, which had not galvanized either the state or its municipalities to take action. Gerald Cross, the Executive Director for Pennsylvania Economy League Central, said the study also found that tax bases in cities largely remained stagnant even as the local tax burden increased from 1990 to 2014, noting that all the state’s cities were in bottom-quintile rankings in 2014—and that while tax base generally grew in boroughs and first-class townships, the tax burden there also grew from 1990 to 2014; he added that the trend for second-class townships was mixed: while the tax base increased and more second-class townships moved into healthier quintiles, the tax burden also climbed from 1990 to 2014. Or, as Kevin Murphy, the President of the Berks County Community Foundation, put it: “Pennsylvania’s system of local governments is broken and is harming the people living in our communities: It’s a system that was created here in Harrisburg [the state capitol], and it is Harrisburg which needs to fix it.” Pennsylvania has 4,897 local governments, including 1,756 special districts, cities, towns, and first, second, and third class townships.

The Sinking Ship of State? Notwithstanding Gov. Dannel Malloy’s warning before dawn this morning that “The urgency of the present moment cannot be overstated,” the state’s legislators went home in the wake of failing to approve a two-year, $41 billion budget which would have created an array of new taxes and fees, but avoided any increase in the sales or income tax. Thus, in the wake of all-day fiscal marathon, Republicans sent their members home in a chaotic ending, blaming the inability of the other side had failed to marshal the requisite votes: House Speaker Joe Aresimowicz, after the Connecticut Senate had earlier given final legislative approval to a package of concessions expected to cover $1.5 billion of the estimated $5 billion state budget deficit through June of 2019, noted that still to be completed, however, is work on the rest of the budget, with the focus on financial aid to cities and towns (the biggest chunk of spending): he add ed that the detailed legal language in the budget, which had been delayed all day long, would not be ready until at least 6 a.m. this morning—with the Senate scheduled to convene at high noon. Notwithstanding the fiscal chaos, Senate Pro Tem leader Martin Looney (New Haven) said the Senate would convene at high noon today to vote on the budget, noting: “The problem is it’s not fully drafted… and what we agreed upon with the governor had not been fully reduced to language that everyone had signed off on: We didn’t have a hold-up in the Senate. We were ready to go forward,’’ raising the possibility that the House could vote later today.

Unsurprisingly, the sticking point appears to be taxes: A big problem appears to have stemmed from a proposal to tax vacation homes—a proposal which encountered opposition among Democrats, because non-residents cannot be taxed differently than residents of Connecticut. Negotiators had been relying on the tax to generate $32 million per year, fiscal resources which would not be available without support from moderate Democrats. The Democratic plan would add new taxes on cellphone bills and vacation homes, along with higher tax rates on hospitals, cigarettes, smokeless tobacco, and hotel rooms—and in an overnight development, a $12 surcharge on all homeowners’ insurance policies statewide for the next five years was proposed in order to help residents with crumbling concrete foundations. (Connecticut homeowners have been grappling for years with problems, and government officials have been unable to reach a comprehensive solution—mayhap Harvey and Irma have sent a physical fiscal message: more than 500 homeowners in 23 towns have filed complaints with the state; however Gov. Malloy fears that more than 30,000 homes could be at risk. The emerging fiscal compromise would also add new taxes on: ride-sharing services, non-prescription drugs, and companies that run fantasy sports gambling. In addition, the package includes more than $40 million as a set aside as part of a multi-pronged effort to help Hartford avert chapter 9 municipal bankruptcy—as well as increased funding for municipalities, even as it avoids deep cuts in public education which had been promised by Gov. Malloy via an executive order to trigger effective October 1st, warning: “The urgency of the present moment cannot be overstated: Local governments, community providers, parents, teachers and students—all of them are best served by passing a budget, and passing it now.”

The fiscal roilings came in the wake of Moody’s statement earlier in the week that Hartford’s “precarious liquidity position could result in insufficient cash flow to meet upcoming debt obligations…Additionally, the city has debt service payments in every month of the fiscal year, compounding the possibility of default at any time.” Interestingly, Gov. Malloy, earlier this week, noted that municipal bondholders and unions hold the key to whether Hartford would file for chapter 9 bankruptcy: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues…on the other hand, if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided.”

On the Steep Edge of Chapter 9

September 12, 2017

Good Morning! In this a.m.’s Blog, we consider the increasing risk of Hartford going into municipal bankruptcy, the Nutmeg State’s fiscal challenge—and whether the state’s leaders can agree to a bipartisan budget; then we consider the ongoing fiscal challenges to Detroit’s comeback from the nation’s largest ever chapter 9 municipal bankruptcy: the road is steep.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of Chapter 9. Connecticut legislators plan to move forward with a state budget vote this week—one which is not expected to include a sales and use take hike and which may not get much support from their Republican colleagues. In his declaration, last week, Hartford Mayor Luke Bronin, in warning the city may be filing for chapter 9 municipal bankruptcy within sixty days pending state budget action, noted Hartford “believes that a restructuring of its outstanding bond indebtedness will be necessary to assure the fiscal stability of the city in the future regardless of any funding received from the State.” Nevertheless, as Municipal Market Analytics noted: “It’s unclear that the city will be able to satisfy the standard conditions for entry into bankruptcy protection such as proving itself insolvent,” albeit MMA noted that in the absence of a state bailout cash, the city will unable to make payments to its bondholders, nevertheless, noting that Connecticut fiscal changes enacted last summer “would reasonably allow the city to refinance its outstanding debt under provisions that not only purport to provide a statutory lien to bondholders, but also allow principal to be back-loaded and extended for 30 years. Under Connecticut law, municipalities may secure refunding bonds with a statutory lien if they provide for such in the resolution. MMA adds that even without a lien, Hartford “could also refinance, at a minimum, approximately 80% of its outstanding general obligation debt covered by bond insurance policies,” noting that “While this would not eliminate principal currently owed, it would avoid the expense of a chapter 9 bankruptcy.” However, as William Faulkner used to write of the “odor of verbena,” the reputation of chapter 9 can create contagion: MMA notes that “some municipal investors will still not loan capital to Bridgeport for its attempted bankruptcy filing twenty-six years ago.” Thus there is apprehension in the state house that Connecticut’s own interest rates could be adversely affected were Hartford to default or file for chapter 9—adding that such a filing would thus have fiscal adverse reverberations for the state, but also undermine business complacency about remaining in the city: “It is hard to expect that declaring bankruptcy would help the city retain its current employers or attract new ones. Amazon is unlikely to locate its headquarters in a bankrupt city.” Unsurprisingly, Connecticut legislators may be considering some sort of fiscal evaluation model like Virginia’s as a quasi- oversight and/or restructuring regime for local governments.

Meanwhile Connecticut House Speaker Joe Aresimowicz (D-Berlin) said a proposal to raise the sales and use tax as high as 6.85% has been removed from the Democratic budget proposal after facing strong opposition from moderates in his party, as the Speaker’s draft budget proposal sought to close a two-year $3.5 billion deficit, advising his colleagues: “The Senate was not comfortable with that, so it was our opinion as House Democrats that we would drop that off of our proposal in an effort to come to an agreement that would pass in both chambers.’’ Nevertheless, a proposal to raise the sales tax on restaurant meals to 7% remains under consideration—drawing strong opposition from the Farmington-based Connecticut Restaurant Association, and raising apprehensions from the industry, because it was unclear exactly which meals would be covered by the increased tax—even as restaurants now confront stiffer competition from ready-made meals at supermarkets, raising questions with regard to the definition of food and beverage—something to be resolved, according to officials, by the Connecticut Department of Revenue Services.

The fiscal dilemma has, moreover, not just been between the parties, but also between Gov. Malloy and Democrats, with the Governor opposed to many of the tax hikes they have proposed, albeit late last week he said he would agree to a small sales tax increase. Nevertheless, even as state Democratic leaders were still working on a budget agreement with the Governor, separate, simultaneous talks with Republicans broke down yesterday. While Republicans indicated they would not rule out further negotiations, the breakdown appears to be taxing: Gov. Malloy is still seeking tax increases on hospitals, cigarettes, smokeless tobacco, e-cigarettes, and real estate transactions—leading Republicans to charge that Democrats are unwilling to address major, long-term structural changes which would include spending and bonding caps, along with changing the prevailing wage for labor on municipal projects that unions and many Democrats have strongly opposed for years, or, as House Republican Leader Themis Klarides (R.-Seymour) noted: “It is very clear they have no interest in changing the way the State of Connecticut works…They want to fix it for this week, for next month, for next year. They do not want to fix this problem that has been a spiraling problem…“This might as well be Irma: I have more confidence on where Irma is going than where the state is going, based on the destruction they have left in their wake.’’

Republicans plan to release a revised budget proposal today, among which some of Gov. Malloy’s proposals could be included as part of a budget proposal House Democrats plan to consider Thursday, including an expansion of the state’s bottle bill to include juices, teas, and sports drinks. When consumers fail to return their bottles, the nickel deposit is kept by the state. As a result, the state expects to collect an additional $2.8 million starting on Jan. 1, and then another $7.4 million in the second year of the two-year budget from unclaimed deposits. The legislature appears fiscally anxious as Gov. Malloy’s October 1 deadline approaches—the date on which he is set to invoke large cuts: under his revised executive order, 85 communities would receive no educational cost-sharing funds; 54 towns would receive less money.

Nevertheless, the Governor and legislature are working in fiscal quicksand: Gov. Malloy, a Democrat, has been running the state by executive order since July 1st: he and the legislature remain at odds over a biennial spending plan while the Governor is proposing to raise the conveyance tax on real estate transactions, which he projects would bring in an expected $127 million more to the state over two years. However, the proposal comes as sources late yesterday reported that Alexion Pharmaceuticals Inc. will today announce that its corporate headquarters is moving from New Haven to Boston as part of a major “restructuring.” The state has provided Alexion with more than $26 million in state assistance to remain in Connecticut, so the announcement is likely to be a double fiscal whammy: not only will the company move, but also it plans to announce significant layoffs, renewing debate with regard to how the state can remain economically competitive. (Alexion had moved to New Haven early last year from Cheshire with a $6 million grant from the state, and a subsidized $20 million loan which will be fully forgiven if Alexion has 650 workers in Connecticut by 2017.) On average, Alexion had 827 employees in the state this year through June 30. Alexion also was offered tax credits, which could be worth as much as $25 million as part of the Malloy administration’s so-called “First Five” program. Alexion had located in a newly constructed 14-story building in downtown New Haven as part of an urban revitalization project intended to tie two sections of the city together—thus Alexion’s move was key to the completion of the first phase of the project. Gov.  Malloy noted: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues.” In releasing his proposed a $41 billion state budget, the Governor said that if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues.” The Governor added: “There is an issue that Hartford has done some pretty stupid things over the years, and that bondholders and bond rating agencies tolerated that stupidity: And if there’s going to be relief, it has to be comprehensive in nature.” With Hartford Mayor Luke Bronin having, as we previously noted, warned that Hartford would file for chapter 9 municipal bankruptcy absent critical support from the state, labor unions, and its bondholders, the Mayor has been pressing for an additional $40 million from the state to avoid bankruptcy—even as the Governor and state legislative leaders claim the state budget provides enough to Hartford—or, in the Governor’s words: “presents the opportunity to help Hartford.” The budget proposal also calls for a four-tiered municipal board to oversee Hartford and other distressed cities. Gov. Malloy, a lame duck, ergo with waning political power, confronts an evenly divided state Senate, and a narrowly divided state House (79-72), so balancing the deck of the fiscal Titanic between revenues and expenditures—and addressing long-term capital and public pension obligations is an exceptional fiscal challenge. The Governor’s budget proposals would also repeal the back-to-school sales tax holiday and increase the cigarette tax by 45 cents to $4.35 per pack, effective the end of next month, as well as increase the conveyance tax on real estate sales.

Leaving Chapter 9 Is Uneasy. Detroit is finding that returning to access traditional capital markets is a challenge: notwithstanding significant downtown economic progress, that progress has been mostly in the increasingly vibrant downtown and Midtown areas. Significant parts of the 139-square mile city continue to struggle with pre-chapter 9 challenges, even as the narrow relief window for the city’s public pension obligations is winnowing, effectively imposing increasing fiscal pressure—especially in the wake of the city’s general fund revenues coming up short for FY2016: Detroit’s four-year fiscal forecast predicts an annual growth rate of approximately 1%. Thus, with its plan of debt adjustment requiring annual set-asides from surpluses of an additional $335 million (between FY16 and FY23) to address those obligations, that has cut into fiscal resources vital to reinvestment and improvement in public services—especially in outlying neighborhoods. Nevertheless, Detroit Future City reports that the annual decline in the city’s population of 672,000 has been slowing. Indeed, job growth has been above the nationwide average since 2010, and that growth appears to be in higher paying jobs of over $40 thousand per year, implying that the job growth is targeted at educated or skilled workers—a key development to encouraging migration to the city—where the 25-34 year-old population has grown by 10 thousand since 2011. Notwithstanding, however, more than 40% of Detroit’s population lives in poverty, nearly triple the statewide rate—and a rate which appears to have some correlation with violent crime. Thus, even though the city has made some progress in reducing overall violent crime, murders have still been rising—albeit at a 2.4% rate. Nevertheless, perceptions matter: a recent Politico-Morning Consult poll reported that 41% of Detroit residents said they consider the city very unsafe. Moreover, in a city where only 78.3% of students graduate high school and just 13.5% of those that reside in Detroit have a bachelor’s degree—half the national rate, the number of families with children has declined by more than 40%. Thus, unsurprisingly, with housing and blight still a problem, the city’s vacancy rate is close to 30%, and some 80,000 met or were expected to soon meet the definition of blight. Worse: some 8,000 properties are scheduled to enter the foreclosure auction process this year.

Fiscal & Physical Hurricanes

September 8, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

Not So Fiscally Rich in Richmond? Or Whoops! Richmond, Virginia—notwithstanding a 25% poverty level, has been in the midst of a building boom; it has reported balancing its budget, and that it holds a savings reserve of $114 million—in addition to which, the state has logged budget surpluses in each of its most recent fiscal years; it currently has an AA rating from the three major credit rating, each of which reports that the former capital of the Confederacy has a modestly growing tax base, manageable municipal debt, and a long-term stable outlook—albeit with disproportionate levels of poverty. Nevertheless, State Auditor Martha S. Mavredes, according to a recent state report distributed within government circles, including the Virginia Municipal League and the Virginia Association of Counties, has cited the municipalities of Richmond and Bristol as failing to meet the minimum standard for financial health:

In the case of Richmond, according to the report, the city scored less than 16 on the test for the past two fiscal years—a score which Auditor Mavredes described as indicating severe stress in her testimony last month before the General Assembly’s Joint Subcommittee on Local Government Fiscal Stress, noting that the test was applied for fiscal years 2014, 2015, and 2016. The fiscal test is based on information contained in annual audited financial reports provided by each locality—except the municipalities of Hopewell and Manassas Park have stopped providing reports—with the fiscal stress rankings based on the results of ten ratios which primarily rely on revenues, expenses, assets, liabilities, and unused savings: the test weighs the level of reserves and a municipality’s ability to meet liabilities without borrowing, raising taxes, or withdrawing from reserves—as well as the extent to which a locality is able to meet the following fiscal year’s obligations without changes to revenues or expenses: Richmond’s score was near 50 in FY2014, but fell below 16 in FY2015  and to 13.7 in FY2016. Thus, even though Virginia has no authority to intervene in local finances, the new fiscal measuring system has created a mechanism to help focus fiscal attention in advance of any serious fiscal crisis.

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

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

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

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

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

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

Fiscal & Physical Storms

September 6, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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