Fiscal Challenges Key to Municipalities’ Futures

eBlog, 04/26/17

Good Morning! In this a.m.’s eBlog, we consider the kinds of fiscal challenges key to a municipality’s future—focusing on the windy city of Chicago, before examining the complex federalism issues conflicting the U.S. Territory of Puerto Rico’s efforts to return to solvency—and deal with a Congressionally-imposed oversight board.

What Is Key to the Windy City’s Future? Chicago, the third most populous city in the U.S. with 2.7 million residents, is one which, when Mayor Rahm Emanuel was first elected, was what some termed a “time bomb:” He took office to find a $635 million operating deficit. However, he did take office as the city’s demographics were recovering from the previous decade—a decade which witnessed an exodus of 200,000, and the loss of 7.1% of its jobs—creating an exceptional fiscal challenge. At his inception as Mayor, the city confronted a debt level of $63,525 per capita—so deep that one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Chicago then had an unemployment rate of 11.3%. The then newly-elected Mayor was confronted by a Moody’s downgrade of  Chicago’s $8.2 billion of general obligation and sales tax backed bonds with a three-level downgrade—and a bleak warning that the Windy City could face further adverse ratings actions absent progress in confronting growing unfunded pension liabilities, adding that the city’s $36 billion retirement-fund deficit and “unrelenting public safety demands” on the budget would, absent significant growth in the city’s operating revenues, increasingly strain the city’s operating budget, as pension outlays competed with other spending priorities, including “debt service and public safety.” Thus at a session last week moderated by former Crain’s Chicago Business Publisher David Snyder, a key focus was: what makes a city attractive to a corporation looking to relocate? Mr. Snyder provided some background and context for that discussion, noting how the makeup of the corporate community in Chicago has changed since the 1980s, when Chicago’s economy was driven by large public corporations. He said that the era of the large corporation is over: today healthcare and logistics firms lead the way, with private or family-held middle-market businesses driving growth in the Chicago region and an entrepreneurial culture experiencing a renaissance; while John Lothian, the Executive Chairman of John J. Lothian & Co., provided an overview of the extraordinary technology changes which he believes fundamentally altered how the financial sector in Chicago operates. He noted that today, getting hired in the Windy City more often than not requires a degree in science, technology, engineering, or mathematics—a change which has closed off jobs from young people, who used to join the sector as runners, gaining experience and contacts. He also noted that Chicago, a world-class city, is now not just competing with New York City, but also in a global competition with other cities around the globe. The stock yards of old—cattle—have been transformed into shares of corporations. Providing some scope to this urban transformation, Dr. Caralynn Nowinski Collens, Chief Executive Officer of UI Labs, a tech accelerator for digital manufacturing, noted that a decade and a half ago, there was virtually no tech scene, funding, or support: students graduating from Illinois schools with technology degrees had to leave the state to pursue their careers. In contrast, she noted, today there are over 100 incubators and accelerators and 300 corporate R&D centers in Chicago; there are 275 digital startups every year. No sector of the city’s economy is growing more rapidly; indeed, today Chicago has the third fastest growing tech sector in the nation. Dr. Collens said that Chicago’s economic diversity and legacy of industry make it an excellent place for the technology industry to flourish as its legendary older industries have become among the world’s most sophisticated, noting, however, that there are many challenges which could put a snag in the Windy City’s aspirations to become the digital industrial center of the world—specifically noting that the importance of getting young Windy Cityites to focus on the threat of the displacement of jobs by automation, in order to enable the city to become a global leader in technological innovation and, thereby, economic growth.

Another speaker, Jerry Szatan, the founder of site selection consulting firm Szatan & Associates, came at the issue of municipal fiscal stability from a different perspective: he noted that risk and higher municipal taxes no longer are such key factors that can lead a company to flee a municipality. Instead, he said, the critical issue is talent: he noted that all corporate headquarters need highly skilled, educated, and creative professionals, and that there are only so many cities in the U.S. where such a wide talent pool exists. Unsurprisingly, Chicago, he noted, is one—stating that the diversity of the residents of Chicago is very important for corporations, particularly those with an international workforce; second, he noted that connectivity is crucial, citing the city’s international airport at O’Hare with being a critical asset, as well as the city’s dense downtown—which he noted facilitates interactions between coworkers and peers in other industries. Mr. Szatan balanced his enthusiasm with fiscal warnings: noting that corporations are risk averse, he warned against Chicago’s fiscal instability and the possibility of higher taxes. Mr. Szatan’s perspective was shared by Chicago Civic Federation Chairman Kent Swanson, who noted that Chicago has the infrastructure assets, educated workforce, and international appeal of a global city, but not at the steep price of a New York or a San Francisco. Thus, he said, office space costs are much more competitive, thereby more attractive to startups and smaller businesses. Ergo, he noted, he perceives the recent movement of headquarters to Chicago as a microcosm of what is happening across the world as people move from smaller cities to the cores of large cities. A third speaker, Chicago Planning and Development Commissioner David Reifman, noted that despite the fiscal challenges of the State of Illinois, there appears to be a commitment to address the state’s public pension crisis and improve the state’s dysfunctional funding and financial practices—and he extolled the city’s efforts to attract corporations, particularly via amenities in near proximity to downtown, such as an expanded O’Hare, new transit stations, and enhanced service on the Chicago Transit Authority, as well as programs to leverage high-density investments in the downtown area to generate funding for underdeveloped areas.

The Complexity of Federalism & Addressing Insolvency. The Justice Department has confirmed to D.C.-based Commissioner Jenniffer Gonzalez that it will review and send Puerto Rico’s Governor, Ricardo Rosselló, an assessment/evaluation of amendments to the U.S. territory’s pending amendments to the upcoming plebiscite on alternative status, with the confirmation coming as Puerto Rico’s main opposition party, the Popular Democratic Party, has voted to boycott the plebiscite scheduled for June 11th. The proposed plebiscite, the revised language of which the ruling New Progressive Party rejected last Sunday, appears to have exacerbated tensions between Puerto Rico House Minority Leader Rafael Hernández Montañez and three House Representatives. It comes as Gov. Ricardo Rosselló and the NPP legislators had approved a ballot that just had options for independence and statehood—and as Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, yesterday warned of the possible elimination of the Christmas bonus and the reduction of the work week for Puerto Rico’s employees as still being a possibility if Puerto Rico is unable to cut spending as contemplated in the plan approved by the PROMESA Oversight Board–with the Board, when it approved the plan last month, warning that by July 1st’s commencement of the new fiscal year, there appeared to be a gap of $190 million to close: to cure said fiscal gap, the Board has proposed to reduce the work week of public employees and eliminate the Christmas bonus—an option the government rejected; nevertheless, it looms in the event Puerto Rico is unable to achieve the projected savings—leading Secretary  Rosario Cortés to say: “If we meet these metrics, there’ll be no reduction of the work week. But, if we fail, the (PROMESA) Board has established it can do it automatically. (That is), if we don’t get the savings, it’ll mean reduction of work week and full elimination of the Christmas bonus.” As part of the legislative package of measures submitted by the Executive, House Bill 938 would seek savings with a cutback on spending and efficiencies totaling $1.623 billion, with the proposal including savings of $434 million for mobility, a hiring freeze, and leveling of benefits; $439 million in “government transformation” via consolidations, public-private alliances and efficiencies; and $750 million in reduced subsidies. The Puerto Rican House of Representatives had been anticipated to consider the bill yesterday; however, the House leadership decided to allow for additional time to hear leaders from unions representing public employees, after the former marched to the Capitol in defense of the rights of their members.

Unsurprisingly, the political dynamics of changing administrations in the nation’s capital have added to the fiscal challenges—mayhap best illustrated by a Trump administration Deputy U.S. Attorney General writing the ballot options are unfair, and that he would not recommend the U.S. Congress release federal money allotted for the plebiscite with the planned ballot choices—triggering a response from Puerto Rico legislators, who voted to revise the language to add a third option: remaining a “territory.” However, unsurprisingly, Puerto Rico’s PDP party has argued that Puerto Rico is more than a territory of the United States, thus it has objected to this ballot language. Members of the party wanted to have part of the current name of Puerto Rico, “Estado Libre Asociado,” be the option rather than “territory.” (The former can be translated as “Free Associated State,” though it is usually translated as “commonwealth.”). Thus, over the weekend, the PDP’s Governing Board, General Council, and General Assembly voted against participating in the plebiscite because of the use of the term “territory” on the ballot. In addition, the Puerto Rico Independence Party has also said it would boycott the plebiscite. Nevertheless, notwithstanding that the review process may take a few weeks, Commissioner Gonzalez believes the federal government will end up confirming a status consultation, noting: “They are waiting to be sent documents related to the plebiscite that have not yet been delivered, according to the Commissioner in the wake of a conference call with interim federal Secretary of Justice, Jesse Panuccio. Governor Rosselló had requested a response by April 22nd, with the hope that that would leave time for the House Appropriations committees to authorize the $2.5 million disbursement allowed by federal law to hold the consultation for June 11; that delivery of the $ 2.5 million is conditional, however, on receipt of a formal opinion from the US Attorney General in order to determines that the electoral ballot, the educational campaign of the State Commission of Elections, and the materials related to the plebiscite comply with the constitutional, legal, and public policy norms of the federal government.

Meanwhile, Puerto Rico’s Treasury announced that March revenues exceeded budgeted projections for the month by 7.1%, noting that through the first nine months of the fiscal year, the territory’s General Fund revenues ran 4.1% ($250 million) above projections, with the key contributor being Puerto Rico’s corporate income tax, which added 86.8% more than budgeted, or $130.4 million. Similarly, a separate tax on non-Puerto Rico based corporations’ income (Act 154) continued to outperform last month, coming in 9.8% higher or $18 million more than projected. Last Friday the Bureau of Labor Statistics announced improved employment statistics for Puerto Rico from its household survey: according to the survey, the total number of Puerto Ricans employed increased in March by 0.7% from February and 0.4% from March 2016, while the island’s unemployment rate dipped 0.5% in March from February, with the March rate tying the statistic’s low point since June of 2008, when it was 11.4%. The BLS employment survey showed continued contractions, with total nonfarm employment down by 0.2% since February and 0.3% since March 2016. The employer survey indicated that Puerto Rico’s private sector employment in March was little changed from February, but has slipped 1% since a year ago March. (The discrepancy in the direction of the household and establishment surveys may be because the former includes agricultural and self-employed workers, while the latter does not.)

Death Comes to the Archbishop? Meanwhile, the Puerto Rico Commission for the Comprehensive Audit of the Public, which is charged with reviewing the legality of Puerto Rico’s debt died Wednesday; however, it appears on the road to recovery in the wake of Gov. Ricardo Rosselló’s signing a measure terminating the Puerto Rico Commission for the Comprehensive Audit of the Public Credit, after the measure was approved by the Puerto Rico Senate and House of Representatives. Governor Rosselló and legislators from his New Progressive Party said it should be up to the legal system to pass judgment on the validity of various bonds, and that the audit commission’s work was interfering with negotiations seeking to restructure Puerto Rico’s debt. Demonstrations outside Puerto Rico’s capitol building on Monday and Tuesday had apparently failed to sway Senators and Representatives inside as they debated and then voted against keeping it. (The commission was set up by the Puerto Rico legislature in July 2015 to examine the circumstances surrounding the issuance of the debt—especially to identify invalid debt.) Some members believed it was opening doors to municipal bondholder claims against those who prepared official statements or others involved with such bond issues. Since then, the group has released two “pre-audits” which raised questions with regard to the legality of much of Puerto Rico’s municipal debt.

What Lessons Can State & Local Leaders Learn from Unique Fiscal Challenges?

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eBlog, 04/25/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenges in Michigan and how the upswing in the state’s economy is—or, in this case, maybe—is not helping the fiscal recovery of the state’s municipalities. Then we remain in Michigan—but straddle to Virginia, to consider state leadership efforts in each state to rethink state roles in dealing with severe fiscal municipal distress. Finally, we zoom to Chicago to glean what wisdom we can from the Godfather of modern municipal bankruptcy, Jim Spiotto: What lessons might be valuable to the nation’s state and local leaders?  

Fiscal & Physical Municipal Balancing I. Nearly a decade after the upswing in Michigan’s economic recovery, the state’s fiscal outlook appears insufficient to help the state’s municipalities weather the next such recession. Notwithstanding continued job growth and record auto sales, Michigan’s per-capita personal income lags the national average; assessed property values are below peak levels in 85% of the state’s municipalities; and state aid is only 80% of what it was 15 years ago.  Thus, interestingly, state business leaders, represented by the Business Leaders for Michigan, a group composed of executives of Michigan’s largest corporations universities, is pressing the Michigan Legislature to assume greater responsibility to address growing public pension liabilities—an issue which municipal leaders in the state fear extend well beyond legacy costs, but also where fiscal stability has been hampered by cuts in state revenue sharing and tax limitations. Michigan’s $10 billion general fund is roughly comparable to what it was nearly two decades ago—notwithstanding the state’s experience in the Great Recession—much less the nation’s largest ever municipal bankruptcy in Detroit, or the ongoing issues in Flint. Moreover, with personal income growth between 2000 and 2013 growing less than half the national average (in the state, the gain was only 31.1%, compared to 66.1% nationally), and now, with public pension obligations outstripping growth in personal income and property values, Michigan’s taxpayers and corporations—and the state’s municipalities—confront hard choices with regard to “legacy costs” for municipal pensions and post-retirement health care obligations—debts which today are consuming nearly 20 percent of some city, township, and school budgets—even as the state’s revenue sharing program has dropped nearly 25 percent for fiscally-stressed municipalities such as Saginaw, Flint, and Detroit just since 2007—rendering the state the only state to realize negative growth rates (8.5%) in municipal revenue in the 2002-2012 decade, according to numbers compiled by the Michigan Municipal League—a decade in which revenue for the state’s cities and towns from state sources realized the sharpest decline of any state in the nation: 56%, a drop so steep that, as the Michigan Municipal League’s COO Tony Minghine put it: “Our system is just broken…We’re not equipped to deal with another recession. If we were to go into another recession right now, we’d see widespread communities failing.” Unsurprisingly, one of the biggest fears is that another wave of chapter 9 filings could trigger the appointment of the state’s ill-fated emergency manager appointments. From the Michigan Municipal League’s perspective, any fiscal resolution would require the state to address what appears to be a faltering revenue base: Michigan’s taxable property is appreciating too slowly to support the cost of government (between 2007 and 2013, the taxable value of property declined by 8 percent in Grand Rapids, 12% in Detroit, 25% in Livonia, 32% in Warren, 22% in Wayne County values, and 24% in Oakland County.) The fiscal threat, as the former U.S. Comptroller General of the General Accounting Office warned: “Most of these numbers will get worse with the mere passage of time.”

Fiscal & Physical Municipal Balancing II. Mayhap Michigan and Virginia state and local leaders need to talk:  Thinking fiscally about a state’s municipal fiscal challenges—and lessons learned—might be underway in Virginia, where, after the state did not move ahead on such an initiative last year, the new state budget has revived the focus on fiscal stress in Virginia cities and counties, with the revived fiscal focus appearing to have been triggered by the ongoing fiscal collapse of one of the state’s oldest cities, Petersburg. Thus, Sen. Emmett Hanger (R-Augusta County), a former Commissioner of the Revenue and member of the state’s House of Delegates, who, today, serves as Senate Finance Co-Chair, and Chair of the Health and Human Services Finance subcommittee, has filed a bill, SJ 278, to study the fiscal stress of local governments: his proposal would create a joint subcommittee to review local and state tax systems, as well as reforms to promote economic assistance and cooperation between regions. Although the legislation was rejected in the Virginia House Finance Committee, where members deferred consideration of tax reform for next year’s longer session, the state’s adopted budget does include two fiscal stress preventive measures originally incorporated in Senator Hanger’s proposed legislation—or, as co-sponsor Sen. Rosalyn Dance (D-Petersburg), noted: “Currently, there is no statutory authority for the Commission on Local Government to intervene in a fiscally stressed locality, and the state does not currently have any authority to assist a locality financially.” To enhance the state’s authority to intervene fiscally, the budget has set guidelines for state officials to identify and help alleviate signs of financial stress to prevent a more severe crisis. Thus, a workgroup, established by the auditor of public accounts, would determine an appropriate fiscal early warning system to identify fiscal stress: the proposed system would consider such criteria as a local government’s expenditure reports and budget information. Local governments which demonstrate fiscal distress would thence be notified and could request a comprehensive review of their finances by the state. After a fiscal review, the commonwealth would then be charged with drafting an “action plan,” which would provide the purpose, duration, and anticipated resources required for such state intervention. The bill would also give the Governor the option to channel up to $500,000 from the general fund toward relief efforts for the fiscally stressed local government.

Virginia’s new budget also provides for the creation of a Joint Subcommittee on Local Government Fiscal Stress, with members drawn from the Senate Finance Committee, the House Appropriations, and the House Finance committees—with the newly created subcommittee charged to study local and state financial practices, such as: regional cooperation and service consolidation, taxing authority, local responsibilities in state programs, and root causes of fiscal stress. Committee member Del. Lashrecse Aird (D-Petersburg) notes: “It is important to have someone who can speak to first-hand experience dealing with issues of local government fiscal stress…This insight will be essential in forming effective solutions that will be sustainable long-term…Prior to now, Virginia had no mechanism to track, measure, or address fiscal stress in localities…Petersburg’s situation is not unique, and it is encouraging that proactive measures are now being taken to guard against future issues. This is essential to ensuring that Virginia’s economy remains strong and that all communities can share in our Commonwealth’s success.”

Municipal Bankruptcy—or Opportunity? The Chicago Civic Federation last week co-hosted a conference, “Chicago’s Fiscal Future: Growth or Insolvency?” with the Federal Reserve Bank of Chicago, where experts, practitioners, and academics from around the nation met to consider best and worst case scenarios for the Windy City’s fiscal future, including lessons learned from recent chapter 9 municipal bankruptcies. Chicago Fed Vice President William Testa opened up by presenting an alternative method of assessing whether a municipality city is currently insolvent or might become so in the future: he proposed that considering real property in a city might offer both an indicator of the resources available to its governments and how property owners view the prospects of the city, adding that, in addition to traditional financial indicators, property values can be used as a powerful—but not perfect—indicators to reflect a municipality’s current situation and the likelihood for insolvency in the future. He noted that there is considerable evidence that fiscal liabilities of a municipality are capitalized into the value of its properties, and that, if a municipality has high liabilities, those are reflected in an adjustment down in the value of its real estate. Based upon examination, he noted using the examples of Chicago, Milwaukee, and Detroit; Detroit’s property market collapse coincided with its political and economic crises: between 2006 and 2009-2010, the selling price of single family homes in Detroit fell by four-fold; during those years and up to the present, the majority of transactions were done with cash, rather than traditional mortgages, indicating, he said, that the property market is severely distressed. In contrast, he noted, property values in Chicago have seen rebounds in both residential and commercial properties; in Milwaukee, he noted there is less property value, but higher municipal bond ratings, due, he noted, to the state’s reputation for fiscal conservatism and very low unfunded public pension liabilities—on a per capita basis, Chicago’s real estate value compares favorably to other big cities: it lags Los Angeles and New York City, but is ahead of Houston (unsurprisingly given that oil city’s severe pension fiscal crisis) and Phoenix. Nevertheless, he concluded, he believes comparisons between Chicago and Detroit are overblown; the property value indicator shows that property owners in Chicago see value despite the city’s fiscal instability. Therefore, adding the property value indicator could provide additional context to otherwise misleading rankings and ratings that underestimate Chicago’s economic strength.

Lessons Learned from Recent Municipal Bankruptcies. The Chicago Fed conference than convened a session featuring our former State & Local Leader of the Week, Jim Spiotto, a veteran of our more than decade-long efforts to gain former President Ronald Reagan’s signature on PL 100-597 to reform the nation’s municipal bankruptcy laws, who discussed finding from his new, prodigious primer on chapter 9 municipal bankruptcy. Mr. Spiotto advised that chapter 9 municipal bankruptcy is expensive, uncertain, and exceptionally rare—adding it is restrictive in that only debt can be adjusted in the process, because U.S. bankruptcy courts do not have the jurisdiction to alter services. Noting that only a minority of states even authorize local governments to file for federal bankruptcy protection, he noted there is no involuntary process whereby a municipality can be pushed into bankruptcy by its creditors—making it profoundly distinct from Chapter 11 corporate bankruptcy, adding that municipal bankruptcy is solely voluntary on the part of the government. Moreover, he said that, in his prodigious labor over decades, he has found that the large municipal governments which have filed for chapter 9 bankruptcy, each has its own fiscal tale, but, as a rule, these filings have generally involved service level insolvency, revenue insolvency, or economic insolvency—adding that if a school system, county, or city does not have these extraordinary fiscal challenges, municipal bankruptcy is probably not the right option. In contrast, he noted, however, if a municipality elects to file for bankruptcy, it would be wise to develop a comprehensive, long-term recovery plan as part of its plan of debt adjustment.

He was followed by Professor Eric Scorsone, Senior Deputy State Treasurer in the Michigan Department of Treasury, who spoke of the fall and rise of Detroit, focusing on the Motor City’s recovery—who noted that by the time Gov. Rick Snyder appointed Emergency Manager Kevyn Orr, Detroit was arguably insolvent by all of the measures Mr. Spiotto had described, noting that it took the chapter 9 bankruptcy process and mediation to bring all of the city’s communities together to develop the “Grand Bargain” involving a federal judge, U.S. Bankruptcy Judge Steven Rhodes, the Kellogg Foundation, and the Detroit Institute of Arts (a bargain outlined on the napkin of a U.S. District Court Judge, no less) which allowed Detroit to complete and approved plan of debt adjustment and exit municipal bankruptcy. He added that said plan, thus, mandated the philanthropic community, the State of Michigan, and the City of Detroit to put up funding to offset significant proposed public pension cuts. The outcome of this plan of adjustment and its requisite flexibility and comprehensive nature, have proven durable: Prof. Scorsone said the City of Detroit’s finances have significantly improved, and the city is on track to have its oversight board, the Financial Review Commission (FRC) become dormant in 2018—adding that Detroit’s economic recovery since chapter 9 bankruptcy has been extraordinary: much better than could have been imagined five years ago. The city sports a budget surplus, basic services are being provided again, and people and businesses are returning to Detroit.

Harrison J. Goldin, the founder of Goldin Associates, focused his remarks on the near-bankruptcy of New York City in the 1970s, which he said is a unique case, but one with good lessons for other municipal and state leaders (Mr. Goldin was CFO of New York City when it teetered on the edge of bankruptcy). He described Gotham’s disarray in managing and tracking its finances and expenditures prior to his appointment as CFO, noting that the fiscal and financial crisis forced New York City to live within its means and become more transparent in its budgeting. At the same time, he noted, the fiscal crisis also forced difficult cuts to services: the city had to close municipal hospitals, reduce pensions, and close firehouses—even as it increased fees, such as requiring tuition at the previously free City University of New York system and raising bus and subway fares. Nevertheless, he noted: there was an upside: a stable financial environment paved the way for the city to prosper. Thus, he advised, the lesson of all of the municipal bankruptcies and near-bankruptcies he has consulted on is that a coalition of public officials, unions, and civic leaders must come together to implement the four steps necessary for financial recovery: “first, documenting definitively the magnitude of the problem; second, developing a credible multi-year remediation plan; third, formulating credible independent mechanisms for monitoring compliance; and finally, establishing service priorities around which consensus can coalesce.”

Addressing Municipal Fiscal Distress

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eBlog, 04/05/17

Good Morning! In this a.m.’s eBlog, we consider some unique efforts to address municipal fiscal distress by the Illinois Legislature, based upon tag team efforts by the irrepressible fiscal tag team of Jim Spiotto and Laurence Msall of the Chicago Civic Federation. The effort matters, especially as the Volker Alliance’s William Glasgall, its Director of State and Local Programs, has raised issues and questions vis-à-vis state roles relating to addressing severe municipal fiscal distress. As we have noted—with only a minority of states even authorizing municipal bankruptcy, there are significant differences in state roles relating to severe municipal fiscal distress and insolvency. Thus, this Illinois initiative could offer a new way to think about state constructive roles. Then we turn to Ferguson, Missouri to assess its municipal election results—and its remarkable, gritty fiscal recovery from the brink of insolvency.

Addressing Municipal Fiscal Distress. The Illinois Legislature is considering House Bill 2575, the Illinois Local Government Protection Authority Act, offered by Rep. David Harris (R-Arlington Heights), which would establish an Authority for the purpose of achieving solutions to financial difficulties faced by units of local government, creating a board of trustees, and defining the Authority’s duties and powers, including the ability to obtain the unit of local government’s records—and to recommend revenue increases. The legislation provides for a petition process, whereby certain entities may petition the Authority to review a unit of local government; it also sets forth participation requirements. The effort comes in the wake of distressed local governments struggling under the weight of pension, healthcare, and other debts: it would propose this new, special authority for fiscal guidance to fiscally strapped local units of government, but without mandating severe budget cuts—or, as Rep. Harris described it: a “cooperative effort between the state and financially unit of local government…(one which) involves local elected officials and local governmental bodies and taxpayers, workers, and business entities developing a plan of financial recovery — is the best way to find a permanent solution to current financial challenges.” According to the Chicago Civic Federation, which asserts the intent is to help the state’s municipalities recover without being forced into chapter 9 municipal bankruptcy, such an authority could be valuable—especially in a state which, like the majority of states, does not generally permit a city, county, or other municipal entity to file for bankruptcy. Under the proposal, nine trustees would oversee the new authority, including four appointed by the Illinois Municipal League; the Governor, Speaker of the House, and Minority Leader, and their state Senate counterparts would each appoint one member: the new authority would rely on the Illinois Comptroller’s office to provide reports and some operational support; the legislation would also set a fee schedule to enable coverage of its administrative costs.

The exceptional leader of the Federation, Laurence Msall, noted: “The LGPA would serve as a resource to assist distressed municipalities in making determinations as to what essential governmental services are sustainable and affordable and what combination of revenue increases and service cuts, and other actions would be necessary to ensure fiscal sustainability and access to critical services.” Under the proposed legislation, a municipality could petition the authority to intervene; but also, the Illinois Comptroller, a public pension fund, or even a large creditor owed a substantial debt could. The proposal would authorize a municipality to petition too—provided it committed to participate—and provided it met specific criteria, including inadequate liquidity, overdue debt, weak pension funding ratios, or signal budget imbalances. If triggered, the suggested new authority would be authorized to recommend budget cuts, tax increases, and/or pension funding actions: as proposed, the authority would be charged with reviewing whether the city, county, or other unit of government should:

  • try to negotiate a debt restructuring,
  • explore public-private partnerships, or
  • asset sales and consolidation.

The authority would be authorized to consider potential pension reforms, such as whether the municipality should offer more corporate-style retirement plans, as well as whether it should establish a trust to fund its OPEB post-retirement healthcare obligations.

The proposed legislation authorizes authority to set fiscal targets; it offers the option for the proposed new authority to serve as a mediator in negotiations between a municipality and debtors, to endorse tax increases—increases which might trigger a public referendum, and issue recommendations to the Illinois state government with regard to the diversion of funds to address specific municipal funding mandates—granting authority too to seek declaratory and injunctive relief with regard to the exercise of its powers and implementation of its findings and recommendations. Finally, as a last resort, the authority could recommend pursuit of chapter 9 municipal bankruptcy. The nation’s architect of the federal municipal chapter 9 municipal bankruptcy law, Jim Spiotto, notes: “This municipal protection authority concept could be the means of providing state and local government cooperation and oversight while allowing the municipality, its elected officials, workers and unions, creditors and bondholders to have a means of participation with a definitive end result.” For his part, Mr. Msall described the rationale as vital to establishing “a systematic means of evaluating and assisting these governments,” instead of taking on municipal fiscal distress on a case-by-case effort, noting that “The Civic Federation is very concerned about the financial condition of many local governments in the state of Illinois, and many of them which will not be able to seek assistance unless there is the creation of this authority.”

& The Winner is: Ferguson, Missouri voters have reelected incumbent Mayor James Knowles III to a third term in the municipality’s first mayoral election since protests erupted there three years ago in the wake of one of the city’s white police officer’s shooting of an unarmed black 18-year-old—a shooting which ignited a national protest and led to a federal Justice Department intervention and harsh fiscal penalties for the nearly insolvent municipality. Mayor Knowles won by a 56%–44% margin against Councilwoman Ella Jones, who is black, in a small municipality which was once an overwhelmingly white “sundown town” where, until the 1960s, African-Americans were banned after dark. Perhaps ironically, the Mayor’s reelection followed just one day in the wake of U.S. Attorney General Gen. Jeff Sessions’ order that the U.S. Justice Department review its existing consent decrees with municipal police departments—the agreement in Ferguson, imposed under the Obama administration, imposed unfunded federal mandates, including demands to levy new taxes. In its report, the Obama Justice Department had alleged that the Ferguson Police Department and the City of Ferguson relied on unconstitutional practices in order to balance the city’s budget through racially motivated excessive fines and punishments, so that former U.S. Attorney General Eric Holder stated the federal government would use its authority to dismantle the Ferguson Police Department—a threat, which at the time, Ferguson’s then-Mayor had warned could mark the first time in the nation’s history that the federal government might force a municipality into municipal bankruptcy, and led credit rating agency Moody’s to place the municipality’s municipal bond rating on review for downgrade because of threats to the city’s solvency—with the downgrade of the city’s general obligation rating reflecting what the credit rating agency described as “the continued pressure on the city’s finances from a persistent structural imbalance and incorporating the recently approved U.S. Department of Justice (DOJ) consent decree, projected to increase annual General Fund expenses over the next several years,” in the wake of Moody’s assessment after the U.S. Justice Department lawsuit against the small city, noting its downgrade then had reflected concerns related to the uncertainty of the potential financial impact of litigation costs from the federal lawsuit and the price tag for implementing the proposed DOJ consent decree, writing: “We believe fiscal ramifications from these items will be significant and could result in insolvency.”

Indeed, the Justice Department’s unfunded federal mandates included federally imposed financial penalties, and the mandate to levy new, municipal taxes: leading to voter approval of a utility tax hike projected to generate $700,000 annually—an increase which Mayor Knowles, at the time, described as a critical vote, because, had the measure failed, the city’s police force’s authorized number would have been cut to 44, and firefighter jobs would also have been cut; he had warned, in addition, that the vote was intended to make clear the city was fiscally viable. So, today, in the wake of resignations and elections, Ferguson features three black council members, a black police chief, and a black city manager—and, in the interim, Mayor Knowles has survived a recall attempt (in 2015), noting in a Facebook post during the campaign that he wanted to follow the example set by former President Abraham Lincoln: “For those familiar with history, during the Civil War, Lincoln was often criticized by people on both sides of the issues of slavery and the war because of his even-handedness and his resistance to the pressures of radicals on both sides. He knew radicalism, even after the war, would further divide us, which it has for generations.”

Mayor Knowles’ challenger, Councilmember Jones, ran, because, she said, it was “time for Ferguson to unite and become one Ferguson, and we cannot move forward under the leadership that we are under at this point,” harshly criticizing the U.S. Attorney General’s move to review the city’s consent decree—one which Mr. Sessions had previously claimed was based on a report that was “anecdotal” and “not so scientifically based,” with Councilmember Jones warning that the Attorney General’s action was “not going to help Ferguson at all,” adding: “We need that consent decree in order to keep Ferguson moving forward.” Nevertheless, the gritty, can-do leadership of the city’s elected officials appears to have defied the odds: City Manager De’Carlon Seewood recently wrote that in the wake of a “drastic decline” in revenue, “the city’s operating budget is beyond lean. It’s emaciated.”

 

What Is a State’s Role in Averting Municipal Fiscal Contagion?

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eBlog, 9/28/16

Good Morning! In this a.m.’s eBlog, we consider, again, the risk of municipal fiscal contagion—and what the critical role of a state might be as the small municipality of Petersburg, Virginia’s fiscal plight appears to threaten neighboring municipalities and utilities: Virginia currently lacks a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion. Nor does the state appear to have any policy to enhance the ability of its cities to fiscally strengthen themselves. Then we try to go to school in Detroit—where the state almost seems intent on micromanaging the city’s public and charter schools so critical to the city’s long-term fiscal future. Then we jet to O’Hare to consider an exceptionally insightful report raising our age-old question with regard to: are there too many municipalities in a region? Since we’re there, we then look at the eroding fiscal plight of Cook County’s largest municipality: Chicago, a city increasingly caught between the fiscal plights of its public schools and public pension liabilities.  From thence we go up the river to Flint, where Congressional action last night might promise some fiscal hope—before, finally, ending this morn’s long journey in East Cleveland—where a weary Mayor continues to await a response from the State of Ohio—making the wait for Godot seem impossibly short—and the non-response from the State increasingly irresponsible.

Where Was Virginia While Petersburg Was Fiscally Collapsing? President Obama yesterday helicoptered into Fort Lee, just 4.3 miles from the fiscally at risk municipality of Petersburg, in a region where Petersburg’s regional partners are wondering whether they will ever be reimbursed for delinquent bills: current regional partners to which the city owes money include the South Central Wastewater Authority, Appomattox River Water Authority, Central Virginia Waste Management, Riverside Regional Jail, Crater Criminal Justice Academy, and Crater Youth Care Commission. Acting City Manager Dironna Moore Belton has apparently advised these authorities to expect a partial payment in October—or as a spokesperson of a law firm yesterday stated: “The City appears committed to meeting its financial obligations for these important and necessary services going forward and to starting to pay down past due amounts dating back to the 2016 fiscal year…We appreciate the plan the city presented; however we have to reserve judgment until we see whether the City follows through on these commitments.” One option, it appears, alluded to by the Acting City Manager would be via a tax anticipation note. Given the municipality’s virtual insolvency, however, such additional borrowing would likely come at a frightful cost.

The municipality is caught in a fiscal void. It appears to have totally botched the rollout of new water meters intended to reduce leakage and facilitate more efficient billing. It appears to be insolvent—and imperiling the fiscal welfare of other municipalities and public utilities in its region. It appears the city has been guilty of charges that when it did collect water bills, it diverted funds toward other activities and failed to remit to the water authority. While it seems the city has paid the Virginia Resources Authority to stave off default, questions have arisen with regard to the role of the Commonwealth of Virginia—one of the majority of states which does not permit municipalities to file for chapter 9 bankruptcy. But questions have also arisen with regard to what role—or lack of a role—the state has played over the last two fiscal years, years in which the city’s auditor has given it a clean signoff on its CAFRs; and GFOA awarded the city its award for financial reporting. There is, of course, also the bedeviling query: if Virginia law does not permit localities to go into municipal bankruptcy, and if Petersburg’s insolvency threatens the fiscal solvency of a public regional utility and, potentially, other regional municipalities, what is the state role and responsibility—a state, after all, which rightly is apprehensive that is its coveted AAA credit rating could be at risk were Petersburg to become insolvent.

In this case, it seems that Petersburg passed the Virginia State Auditor’s scrutiny because (1) it submitted the required documents according to the state’s schedule, regardless of whether or not the numbers were correct; (2) the firm used by the city was probably out of its league. (It appears Petersburg used a firm that specialized in small town audits); (3) the City Council apparently did not focus on material weaknesses identified by the private CPA (nor did the State Auditor). The previous city manager, by design, accident, or level of competence, simply did not put up much of a struggle when the Council would amend the budget in mid-year to increase spending—a task no doubt politically challenging in the wake of the Great Recession—a fiscal slam which, according to the State Auditor’s presentation, devastated the city’s finances, forcing the city in a posture of surviving off cash reserves. (http://sfc.virginia.gov/pdf/committee_meeting_presentations/2016%20Interim/092216_No2b_Mavredes_SFC%20Locality%20Fiscal%20Indicators%20Overview.pdf). Now, in the wake of fiscal failures at both levels of government, the Virginia Senate Finance Committee last week devoted a great deal of time discussing “early warning systems,” or fiscal distress trip wires which would alert a state early on of impending municipal fiscal distress. Currently, in Virginia, no state agency has the responsibility for such an activity. That augurs ill: it means the real question is: is Petersburg an anomaly or the beginning of a trend?

The challenge for the state—because its credit rating could be adversely affected if it fails to act, and Petersburg’s fiscal contagion spreads to its regional neighbors and public utilities, a larger question for the Governor and legislators might be with regard to the state’s strictures in Virginia which bar municipal bankruptcy, bar annexation, prohibit local income taxes, cap local sales tax, and have been increasing state-driven costs for K-12, line-of-duty, water and wastewater, etc.

Who’s Governing a City’ Future? Michigan Attorney General Bill Scheutte yesterday stated the state would close poorly performing Detroit schools by the end of the current academic year if they ranked among the state’s worst in the past three years in an official legal opinion—an opinion contradictory to a third-party legal analysis that Gov. Rick Snyder’s administration had said would prevent the state from forcing closure any Detroit public schools until at least 2019, because they had been transferred to a new debt-free district as part of a financial rescue package legislators approved this year—a state law which empowers the School Reform Office authority to close public schools which perform in the lowest five percent for three consecutive years. Indeed, in his opinion, Attorney General Scheutte wrote that enabling the state’s $617 million district bailout specified Detroit closures should be mandatory unless such closures would result in an unreasonable hardship for students, writing: “The law is clear: Michigan parents and their children do not have to be stuck indefinitely in a failing school…Detroit students and parents deserve accountability and high performing schools. If a child can’t spell opportunity, they won’t have opportunity.” The Attorney General’s opinion came in response to a request by Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) as part of the issue with regard to whether the majority in the state legislature, the City of Detroit, or the Detroit Public Schools ought to be guiding DPS, currently under Emergency Manager retired U.S. Bankruptcy Judge Steven Rhodes would best serve the interest of the city’s children. It appears, at least from the perspective of the state capitol, this will be a decision preempted by the state, with the Governor’s School Reform Office seemingly likely to ultimately decide whether to close any number of struggling schools around the state—a decision his administration has said would likely be made—even as the school year is already underway—“a couple of months” away. The state office last month released a list of 124 schools that performed in the bottom 5 percent last year, on which list more than a third, 47, were Detroit schools.

Nevertheless, the governance authority to so disrupt a city’s public school system is hardly clear: John Walsh, Gov. Snyder’s director of strategic policy, had told The Detroit News that the state could not immediately close any Detroit schools, citing an August 2nd legal memorandum Miller Canfield attorneys sent Detroit school district emergency manager Judge Rhodes, a memorandum which made clear that the transferral of Detroit schools to a new-debt free district under the provisions of the state-enacted legislation had essentially reset the three-year countdown clock allowing the state to close them—a legal position the state attorney general yesterday rejected, writing: a school “need not be operated by the community district for the immediately preceding three school years before it is subject to closure.” Michigan State Rep. Sherry Gay-Dagnogo (D-Detroit) reacted to the state opinion by noting it would not give Detroit’s schools a chance to make serious improvements as part of so-called “fresh start” promised by the legislature as part of the $617 million school reform package enacted last June, noting that she believes the timing of its release—just one week before student count day—is part of an intentional effort to destabilize the district: “We could possibly lose students, because parents are afraid and confused, that’s what this is all about…They want the district to implode…They want to completely remake public education, and implode the district to charter the district. There’s big money in charter schools…This is about business over children.”

Are There Too Many Municipalities? Can We Afford Them All? The Chicago Civic Federation recently released a report, “Unincorporated Cook County: A Profile of Unincorporated Areas in Cook County and Recommendations to Facilitate Incorporation,” which examines unincorporated areas in Cook County—a county with a population larger than that of 29 individual states—and the combined populations of the seven smallest states—a county in which there are some 135 incorporated municipalities partially or wholly within the county, the largest of which is the City of Chicago, home to approximately 54% of the population of the county. Approximately 2.4%, or 126,034, of Cook County’s 5.2 million residents live in unincorporated areas of the County and therefore do not pay taxes to a municipality. According to Civic Federation calculations, Cook County spends approximately $42.9 million annually in expenses related to the delivery of municipal-type services to unincorporated areas, including law enforcement, building and zoning and liquor control. Because the areas only generate $24.0 million toward defraying the cost of these special services, County taxpayers effectively pay an $18.9 million subsidy, even as they pay taxes for their own municipal services. The portion of Cook County which lies outside Chicago’s city limits is divided into 30 townships, which often divide or share governmental services with local municipalities. Thus, this new report builds on the long-term effort by the Federation in the wake of its 2014 comprehensive analysis of all unincorporated areas in Cook County as well as recommendations to assist the County in eliminating unincorporated areas. .In this new report, the Federation looks at the $18.9 million cost to the County of providing municipal-type services in unincorporated areas compared to revenue generated from the unincorporated areas, finding it spent approximately $18.9 million more on unincorporated area services than the total revenue it collected in those areas in FY2014, including nearly $24.0 million in revenues generated from the unincorporated areas of the county compared to $42.9 million in expenses related to the delivery of municipal-type services to the unincorporated areas of the county—or, as the report notes: “In sum, all Cook County taxpayers provide an $18.9 million subsidy to residents in the unincorporated areas. On a per capita basis, the variance between revenues and expenditures is $150, or the difference between $340 per capita in expenditures versus $190 per capita in revenues collected. The report found that in that fiscal year, Cook County’s cost to provide law enforcement, building and zoning, animal control and liquor control services was approximately $42.9 million or $340.49 per resident of the unincorporated areas. The following chart identifies the Cook County agencies that provide services to the unincorporated areas and the costs associated with providing those services. The county’s services to these unincorporated areas are funded through a variety of taxes and fees, including revenues generated from both incorporated and unincorporated taxpayers to fund operations countywide: some revenues are generated or are distributed solely within the unincorporated areas, such as income taxes, building and zoning fees, state sales taxes, wheel taxes (the wheel tax is an annual license fee authorizing the use of any motor vehicle within the unincorporated area of Cook County). The annual rate varies depending on the type of vehicle as well as a vehicle’s class, weight, and number of axles. Receipts from this tax are deposited in the Public Safety Fund. In FY2014 the tax generated an estimated $3.8 million., and business and liquor license fees, but the report found these areas also generated revenues from the Cook County sales and property taxes, which totaled nearly $15.5 million in revenue, noting, however, those taxes are imposed at the same rate in both incorporated and unincorporated areas and are used to fund all county functions. With regard to revenues generated solely within the unincorporated areas of the county, the Federation wrote that the State of Illinois allocates income tax funds to Cook County based on the number of residents in unincorporated areas: if unincorporated areas are annexed to municipalities, then the distribution of funds is correspondingly reduced by the number of inhabitants annexed into municipalities. Thus, in FY2014, Cook County collected approximately $12.0 million in income tax distribution based on the population of residents residing in the unincorporated areas of Cook County. The report determined the Wheel Tax garnered an estimated $3.8 million in FY2014 from the unincorporated areas; $3.7 million from permit and zoning fees (including a contractor’s business registration fee, annual inspection fees, and local public entity and non-profit organization fees (As of December 1, 2014, all organizations are required to pay 100% of standard building, zoning and inspection fees.). The County receives a cut of the Illinois Retailer’s Occupation Tax (a tax on the sale of certain merchandise at the rate of 6.25%. Of the 6.25%, 1.0% of the 6.25% is distributed to Cook County for sales made in the unincorporated areas of the County. In FY2014 this amounted to approximately $2.8 million in revenue. However, if the unincorporated areas of Cook County are annexed by a municipality this revenue would be redirected to the municipalities that annexed the unincorporated areas.) Cook County also receives a fee from cable television providers for the right and franchise to construct and operate cable television systems in unincorporated Cook County (which garnered nearly $1.3 million in revenue in FY2104). Businesses located in unincorporated Cook County pay an annual fee in order to obtain a liquor license that allows for the sale of alcoholic liquor. The minimum required license fee is $3,000 plus additional background check fees and other related liquor license application fees. In FY2014 these fees generated $365,904. Finally, businesses in unincorporated Cook County engaged in general sales, involved in office operations, or not exempt are required to obtain a Cook County general business license—for which a fee of $40 for a two-year license is imposed—enough in FY2014 for the county to count approximately $32,160 in revenue.

Who’s Financing a City’s Future? It almost seems as if the largest municipality within Cook County is caught between its past and its future—here it is accrued public pension liabilities versus its public schools. The city has raised taxes and moved to shore up its debt-ridden pension system—obligated by the Illinois constitution to pay, but under further pressure and facing a potential strike by its teachers, who are seeking greater benefits. The Chicago arithmetic for the public schools, the nation’s third-largest public school district is an equation which counts on the missing variables of state aid and union concessions—neither of which appears to be forthcoming. Indeed, this week, Moody’s, doing its own moody math, cut the Big Shoulder city’s credit rating deeper into junk, citing its “precarious liquidity” and reliance on borrowed money, even as preliminary data demonstrated a continuing enrollment decline drop of almost 14,000 students—a decline that will add fiscal insult to injury and, likely, provoke potential investors to insist upon higher interest rates. According to the Chicago Board of Education, enrollment has eroded from some 414,000 students in 2007 to 396,000 last year: a double whammy, because it not only reduces its funding, but likely also means the Mayor’s goal of drawing younger families to move into the city might not be working. In our report on Chicago, we had noted: “The demographics are recovering from the previous decade which saw an exodus of 200,000. In the decade, the city lost 7.1% of its jobs. Now, revenues are coming back, but the city faces an exceptional challenge in trying to shape its future. With a current debt level of $63,525 per capita, one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Nevertheless, unemployment is coming down (11.3% unemployment, seasonally adjusted) and census data demonstrated the city is returning as a destination for the key demographic group, the 25-29 age group, which grew from 227,000 in 2006 to 274,000 by end of 2011.) Ergo, the steady drop in enrollment could signal a reversal of those once “recovering” demographics. Or, as Moody’s notes, the chronic financial strains may lead investors to demand higher interest rates—rates already unaffordably high with yields of as much as 9 percent, according to Moody’s. Like an olden times Pac-Man, principal and interest rate costs are chewing into CPS’s budget consuming more than 10 percent of this year’s $5.4 billion budget, or as the ever perspicacious Richard Ciccarone of Merritt Research Services in the Windy City put it: “To say that they’re challenged is an understatement…The problems that they’re having poses risks to continued operations and the timely repayment of liabilities.” Moody’s VP in Chicago Rachel Cortez notes: “Because the reserves and the liquidity have weakened steadily over the past few years, there’s less room for uncertainty in the budget: They don’t have any cash left to buffer against revenue or expenditure assumptions that don’t pan out.” And the math threatens to worsen: CPS’ budget for FY2016-17 anticipate the school district will gain concessions from the union, including phasing out CPS’ practice of covering most of teachers’ pension contributions—a phase-out the teachers’ union has already rejected; CPS is also counting on $215 million in aid contingent on Illinois adopting a pension overhaul—the kind of math made virtually impossible under the state’s constitution, r, as Moody’s would put it: an “unrealistic expectations.” Even though lawmakers approved a $250 million property-tax levy for teachers’ pensions, those funds will not be forthcoming until after the end of the fiscal year—and they will barely make a dent in CPS’s $10 billion in unfunded retirement liabilities.

Out Like Flint. The City of Flint will continue to receive its water from the Great Lakes Water Authority for another year, time presumed to be sufficient to construct a newly required stretch of pipeline and allow for testing of water Flint will treat from its new source, the Karegnondi Water Authority (KWA). The decision came as the Senate, in its race to leave Washington, D.C. yesterday, passed legislation to appropriate some $170 million—but funds which would only actually be available and finally acted upon in December when Congress is scheduled to come back from two months’ of recess—after the House of Representatives adopted an amendment to a water projects bill, the Water Resources Development Act, which would authorize—but not appropriate—the funds for communities such as Flint where the president has declared a state of emergency because of contaminants like lead. Meanwhile, the Michigan Strategic Fund, an arm of the Michigan Economic Development Corp., Tuesday approved a loan of up to $3.5 million to help Flint finance the $7.5-million pipeline the EPA is requiring to allow treated KWA water to be tested for six months before it is piped to Flint residents to drink. While the pipeline connecting Flint and Lake Huron is almost completed, the EPA wants an additional 3.5-mile pipeline constructed so that Flint residents can continue to be supplied with drinking water from the GLWA in Detroit while raw KWA water, treated at the Flint Water Treatment Plant, is tested for six months. The Michigan Department of Environmental Quality is expected to pay $4.2 million of the pipeline cost through a grant, with the loan covering the balance of the cost. Even though the funds the Strategic Fund has approved is in the form of a loan, with 2% interest and 15 years of payments beginning in October of 2018, state officials said they were considering various funding sources to repay the loan so cash-strapped Flint will not be on the hook for the money. Time is of the essence; Flint’s emergency contract for Detroit water, which has already been extended, is currently scheduled to end next June 30th.  

Waiting for Godot. Last April 27th, East Cleveland Mayor Gary Norton wrote to Ohio State Tax Commissioner Joseph W. Testa for approval for his city to file chapter 9 bankruptcy: “Given East Cleveland’s decades-long economic decline and precipitous decrease in revenue, the City is hereby requesting your approval of its Petition for Municipal Bankruptcy. Despite the City’s best Efforts, East Cleveland is insolvent pursuant…Based upon Financial Appropriations projections for the years 2016, 2017, 2018 and 2019, the City will be unable to sustain basic Fire, Police, EMS or rubbish collection services. The City has tried to negotiate with its creditors in good faith as required by 11 U.S.C. 109. It has been a somewhat impracticable effort. The City’s Financial Recovery Plan, approved by the City Council, the Financial Commission and the Fiscal Supervisors, while intended to restore the City to fiscal solvency, will have the effect of decimating our safety forces. Hence, our goal to effect a plan that will adjust our debts pursuant to 11 U.S.C. 109 puts us in a catch-22 that is unrealistic. This is particularly true now that petitions for Merger/Annexation with the City of Cleveland have been delayed by court action in the decision of Cuyahoga County Common Pleas Judge Michael Russo, Court Case No. 850236.” Mayor Norton closed his letter: “Thank you for your prompt consideration of this urgent matter.” He is still waiting.