Measuring Municipal Fiscal Distress

August 29, 2017

Good Morning! In this a.m.’s Blog, we consider the new Local Government Fiscal Distress bi-cameral body in Virginia and its early actions; then we veer north to Atlantic City, where both the Governor and the courts are weighing in on the city’s fiscal future; before scrambling west to Scranton, Pennsylvania—as it seeks to respond to a fiscally adverse judicial ruling, then back west to the very small municipality of East Cleveland, Ohio—as it awaits authority to file for chapter 9 municipal bankruptcy—and municipal elections—then to Detroit’s ongoing efforts to recover revenues as part of its recovery from the nation’s largest municipal bankruptcy, before finally ending up in the Windy City, where the incomparable Lawrence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System.  

Visit the project blog: The Municipal Sustainability Project 

Measuring Municipal Fiscal Distress. When Virginia Auditor of Public Accounts Martha S. Mavredes last week testified before the Commonwealth’s new Joint House-Senate Subcommittee on Local Government Fiscal Stress, she named Bristol as one of the state’s four financially distressed localities—a naming which Bristol City Manager Randy Eads confirmed Monday. Bristol is an independent city in the Commonwealth of Virginia with a population just under 18,000: it is the twin city of Bristol, Tennessee, just across the state line: a line which bisects middle of its main street, State Street. According to the auditor, the cities of Petersburg and Bristol scored below 5 on a financial assessment model that uses 16 as the minimum threshold for indicating financial stress, with Bristol scoring lower than Petersburg. One other city and two counties scored below 16. For his part, City Manager Eads said he and the municipality’s CFO “will be working with the APA to determine how the scores were reached,” adding: “The city will also be open to working with the APA to address any issues.” (Bristol scored below the threshold the past three years, dropping to 4.25 in 2016. Petersburg had a score of 4.48 in 2016, when its financial woes became public.) Even though the State of Virginia has no authority to directly involve itself in a municipality’s finances (Virginia does not specifically authorize its municipal entities to file for chapter 9 municipal bankruptcy, certain provisions of the state’s laws [§15.2-4910] do allow for a trust indenture to contain provisions for protecting and enforcing rights and remedies of municipal bondholders—including the appointment of a receiver.), its new system examines the Comprehensive Annual Financial Reports submitted annually and scores them on 10 financial ratios—including four that measure the health of the locality’s general fund used to finance its budget. Manager Eads testified: “At the moment, the city does not have all of the necessary information from the APA to fully address any questions…We have been informed, by the APA, that we will receive more information from them the first week of September.” He added that the city leaders have taken steps to bolster cash flow and reserves, while reducing their reliance on borrowing short-term tax anticipation notes. In addition, the city has recently began implementing a series of budgetary and financial policies prior to the APA scores being released—steps seemingly recognized earlier this summer when Moody’s upgraded the city’s outlook to stable and its municipal bond rating to Baa2 with an underlying A3 enhanced rating, after a downgrade in 2016. Nevertheless, the road back is steep: the city still maintains more than $100 million in long-term general obligation bond debt with about half of it tied to The Falls commercial center in the Exit 5 area, which has yet to attract significant numbers of tenants.

Fiscal Fire? The State of New Jersey’s plan to slash Atlantic City’s fire department by 50 members was blocked by Superior court Judge Julio Mendez, preempting the state’s efforts to reduce the number of firefighters in the city from 198 to 148. The state, which preempted local authority last November, has sought to sharply reduce the city’s expenditures: state officials had last February proposed to move the Fire Department to a less expensive health plan and reduce staffing in the department from 225 firefighters to 125. In his ruling, however, Judge Mendez wrote: “The court holds that the (fire department’s union) have established by clear and convincing evidence that Defendants’ proposal to reduce the size of the Atlantic City Fire Department to 148 firefighters will cause irreparable harm in that it compromises the public safety of Atlantic City’s residents and visitors.” Judge Mendez had previously granted the union’s request to block the state’s actions, ruling last March that any reduction below 180 firefighters “compromises public safety,” and that any reduction should happen “through attrition and retirements.”

Gov. Christie Friday signed into law an alternative fiscal measure for the city, S. 3311, which requires the state to offer an early-retirement incentive program to the city’s police officers, firefighters, and first responders facing layoffs, noting at the bill signing what he deemed the Garden State’s success in its stewardship of the city since November under the Municipal Stabilization and Recovery Act, citing Atlantic City’s “great strides to secure its finances and its future.” The Governor noted a drop of 11.4 percent in the city’s overall property-tax rate, the resolution of casino property-tax appeals, and recent investments in the city. For their parts, Senate President Steve Sweeney and Assemblyman Vince Mazzeo, sponsors of the legislation, said the new law would let the city “reduce the size of its police and fire departments without jeopardizing public safety,” adding that the incentive plan, which became effective with the Governor’s signature, would not affect existing contracts or collective bargaining rights—or, as Sen. Sweeney stated: “We don’t want to see any layoffs occur, but if a reduction in workers is required, early retirement should be offered first to the men and women who have served the city.” For his part, Atlantic City Mayor Don Guardian said, “I’m glad that the Governor and the State continue to follow the plan that we gave them 10 months ago. As all the pieces that we originally proposed continue to come together, Atlantic City will continue to move further in the right direction.”

For its part, the New Jersey Department of Community Affairs, which has been the fiscal overseer of the state takeover of Atlantic City, has touted the fiscal progress achieved this year from state intervention, including the adoption of a $206.3 million budget that is 20 percent lower than the city’s FY2015 budget, due to even $56 million less than 2015 due to savings from staff adjustments and outsourcing certain municipal services. Nevertheless, Atlantic City, has yet to see the dial spin from red to black: the city, with some $224 million in bonded debt, has deep junk-level credit ratings of CC by S&P Global Ratings and Caa3 by Moody’s Investors Service; it confronts looming debt service payments, including $6.1 million owed on Nov. 1, according to S&P.

Scrambling in Scranton. Moody’s is also characteristically moody about the fiscal ills of Scranton, Pennsylvania, especially in the wake of a court decision barring the city from  collecting certain taxes under a state law—a decision Moody’s noted  “may reduce tax revenue, which is a vital funding source for the city’s operations.” Lackawanna County Court of Common Pleas Judge James Gibbons, at the beginning of the month, in a preliminary ruling against the city, in response to a challenge by a group of eight taxpayers, led by Mayoral candidate Gary St. Fleur, had challenged Scranton’s ability to levy and collect certain taxes under Pennsylvania’s Act 511, a state local tax enabling act. His preliminary ruling against the city affects whether the Home Rule Charter law supersedes the statutory cap contained in Act 511. Unsurprisingly, the City of Scranton has filed a motion for reconsideration and requested the court to enable it to appeal to the Commonwealth Court of Pennsylvania. The city, the state’s sixth-largest city (77,000), and the County seat for Lackawanna County is the geographic and cultural center of the Lackawanna River valley, was incorporated on St. Valentine’s Day 161 years ago—going on to become a major industrial city, a center of mining and railroads, and attracted thousands of new immigrants. It was a city, which acted to earn the moniker of the “Electric City” when electric lights were first introduced in 1880 at Dickson Locomotive Works. Today, the city is striving to exit state oversight under the state’s Act 47—oversight the municipality has been under for a quarter century.

Currently, Moody’s does not provide a credit rating for the city; however, Standard and Poor’s last month upgraded the city’s general obligation bonds to a still-junk BB-plus, citing revenue from a sewer-system sale, whilst Standard and Poor’s cited the city’s improved budget flexibility and liquidity, stemming largely from a sewer-system sale which enabled the municipality to retire more than $40 million of high-coupon debt. Moreover, Scranton suspended its cost-of-living-adjustments, and manifested its intent to apply a portion of sewer system sale proceeds to meet its public pension liabilities. Ergo, Moody’s writes: “These positive steps have been important for paying off high interest debt and funding the city’s distressed pension plans…While these one-off revenue infusions have been positive, Scranton faces an elevated fixed cost burden of over 40% of general fund revenues…Act 511 tax revenues are an important revenue source for achieving ongoing, balanced operations, particularly as double-digit property tax increases have been met with significant discontent from city residents. The potential loss of Act 511 tax revenues comes at a time when revenues for the city are projected to be stagnant through 2020.”

The road to municipal fiscal insolvency is easier, mayhap, because it is downhill: Scranton fiscal challenges commenced five years ago, when its City Council skipped a $1 million municipal bond payment in the wake if a political spat; Scranton has since repaid the debt. Nevertheless, as Moody’s notes: “If the city cannot balance its budget without illegally taxing the Scranton people, it is absolute proof that the budget is not sustainable…Scranton has sold off all its public assets and raised taxes excessively with the result being a declining tax base and unfriendly business environment…The city needs to come to terms with present economic realities by cutting spending and lowering taxes. This is the only option for the city.”

Scranton Mayoral candidate Gary St. Fleur has said the city should file for Chapter 9 municipal bankruptcy and has pushed for a related ballot measure. Combined taxes collected under Act 511, including a local services tax that Scranton recently tripled, cannot exceed 1.2% of Scranton’s total market value.  Based on 2015 market values, according to Moody’s, Scranton’s “511 cap” totals $27.3 million. In fiscal 2015 and 2016, the city collected $34.5 million and $36.8 million, respectively, and for 2018, the city has budgeted to receive $38 million.  The city, said Moody’s, relied on those revenues for 37.7% of fiscal 2015 and 35.9% of fiscal 2016 total governmental revenues. “A significant reduction in these tax revenues would leave the city a significant revenue gap if total Act 511 tax revenues were decline by nearly 25%,” Moody’s said.

Heavy Municipal Fiscal Lifting. Being mayor of battered East Cleveland is one of those difficult jobs that many people (and readers) would decline. If you were to motor along Euclid Avenue, the city’s main street, you would witness why: it is riddled with potholes and flanked by abandoned, decayed buildings. Unsurprisingly, in a city still awaiting authorization from the State of Ohio to file for chapter 9 municipal bankruptcy, blight, rising crime, and poor schools, have created the pretext for East Clevelanders to leave: The city boasted 33,000 people in 1990; today it has just 17,843, according to the latest U.S. Census figures. Nevertheless, hope can spring eternal: four candidates, including current Mayor Brandon L. King, are seeking the Democratic nomination in next month’s Mayoral primary (Mayor King replaced former Mayor Gary Norton last year after Norton was recalled by voters.)

Motor City Taxing. Detroit hopes to file some 700 lawsuits by Thursday against landlords and housing investors in a renewed effort to collect unpaid property taxes on abandoned homes that have already been forfeited; indeed, by the end of November, the city hopes to double the filings, going after as many as 1,500 corporations and investors whose abandonment of Detroit homes has been blamed for contributing to the Motor City’s blight epidemic: Motor City Law PLC, working on behalf of the city, has filed more than 60 lawsuits since last week in Wayne County Circuit Court; the remainder are expected to be filed before a Thursday statute of limitations deadline: the suits target banks, land speculators, limited liability corporations, and individuals with three or more rental properties in Detroit: investors who typically purchase homes at bargain prices at a Wayne County auction and then eventually stop paying property tax bills and lose the home in foreclosure: the concern is that unscrupulous landlords have been abusing the auction system. The city expects to file an additional 800 lawsuits over the next quarter—with the recovery effort coming in the wake of last year’s suits by the city against more than 500 banks and LLCs which had an ownership stake in houses that sold at auction for less than what was owed to the city in property taxes. Eli Savit, senior adviser and counsel to Mayor Mike Duggan, noted that those suits netted Detroit more than $5 million in judgments, even as, he reports: “Many cases are still being litigated.” To date, the 69 lawsuits filed since Aug. 18 in circuit court were for tax bills exceeding $25,000 each; unpaid tax bills for less than $25,000 will be filed in district court. (The unpaid taxes date back years as the properties were auctioned off by the Wayne County Treasurer’s Office between 2013 and 2016 or sent to the Detroit Land Bank Authority, which oversees demolitions if homes cannot be rehabilitated or sold.) The suits here indicate that former property owners have no recourse for lowering their unpaid tax debt, because they are now “time barred from filing an appeal” with Detroit’s Board of Review or the Michigan Tax Tribunal; Detroit officials have noted that individual homeowners would not be targeted by the lawsuits for unpaid taxes; rather the suits seek to establish a legal means for going after investors who purchase cheap homes at auction, and then either rent them out and opt not to not pay the taxes, or walk away from the house, because it is damaged beyond repair—behavior which is now something the city is seeking to turn around.

Local Government Fiscal Protection? Just as the Commonwealth of Virginia has created a fiscal or financial assessment model to serve as an early warning system so that the State could act before a chapter 9 municipal bankruptcy occurred, the fiscal wizard of Illinois, the incomparable Chicago Civic Federation’s Laurence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System (CPS): it would be responsible to assist the CPS board and administration in finding solutions to stabilize the school district’s finances. The $5.75 billion CPS proposed budget for this school year comes with two significant asterisks: 1) There is an expectation of $269 million from the City of Chicago, and 2) There is an expectation of $300 million from the State of Illinois, especially if the state’s school funding crisis is resolved in the Democrats’ favor.

Nevertheless, in the end, CPS’s fiscal fate will depend upon Windy City Mayor Rahm Emanuel: he, after all, not only names the school board, but also is accountable to voters if the city’s schools falter: he has had six years in office to get CPS on a stable financial course, even as CPS is viewed by many in the city as seeking to file for bankruptcy (for which there is no specific authority under Illinois law). Worse, it appears that just the discussion of a chapter 9 option is contributing to the emigration of parents and students to flee to suburban or private schools.

Thus, Mr. Msall is suggesting once again putting CPS finances under state oversight, as it was in the 1980s and early 1990s, recommending consideration of a Local Government Protection Authority, which would “be a quasi-judicial body…to assist the CPS board and administration in finding solutions to stabilize the district’s finances.” Fiscal options could include spending cuts, tax hikes, employee benefit changes, labor contract negotiations, and debt adjustment. Alternatively, as Mr. Msall writes: “If the stakeholders could not find a solution, the LGPA would be empowered to enforce a binding resolution of outstanding issues.” As we noted, a signal fiscal challenge Mayor Emanuel described was to attack crime in order to bring young families back into the city—and to upgrade its schools—schools where today some 380,000 students appear caught in a school system cracking under a massive and rising debt load.  

Far East of Eden. East Cleveland Mayor Gary Norton Jr. and City Council President Thomas Wheeler have both been narrowly recalled from their positions in a special election, setting the stage for the small Ohio municipality waiting for the state to—in some year—respond to its request to file for chapter 9 municipal bankruptcy to elect a new leader. Interestingly, one challenger for the job who is passionate about the city, is Una H. R. Keenon, 83, who now heads the city school board, and campaigning on a platform of seeking a blue-ribbon panel to examine the city’s finances. Mansell Baker, 33, a former East Cleveland Councilmember, wants to focus on eliminating the city’s debt, while Dana Hawkins Jr., 34, leader of a foundation, vows to get residents to come together and save the city. The key decisions are likely to emerge next month in the September 12 Democratic primary—where the winner will face Devin Branch of the Green Party in November. Early voting has begun.

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How Do State & Local Leaders Confront & Respond to Significant Population Declines?

eBlog, 04/21/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: how does it deal with the fiscal challenges—challenges also confronting cities such as Cleveland, Philadelphia, Toledo, Dayton, Baltimore, and Philadelphia—which are experiencing significant population declines? What to do with vacant lots which no longer bring in property tax revenues—but enhance criminal proclivities?  

Fiscal & Physical Municipal Balancing. While Detroit has emerged fiscally from the nation’s largest ever municipal bankruptcy, it continues to be fiscally and governmentally bedeviled by the governance challenge of such a significant population contraction—it is, after all, a city of about 132 square miles, dotting with neighborhoods which have become splotches of vacant lots and abandoned homes: post-bankrupt Detroit, with neighborhoods that have been gradually emptying out, in a physical sense, is a shadow of its former self, with a population nearly 60% smaller than it was in 1950, but with a stock of some 40,000 abandoned homes and vacant lots—space which brings in no property taxes, but can breed crime and safety costs for the city: between 1978 and 2007, Detroit lost 67% of its business establishments and 80% of its manufacturing base. This untoward, as it were, “ungrowth” has come even as the city has spent $100 million more, on average, than its revenues since 2008: Census figures inform us that more than one in three of the city’s citizens fall below the poverty level—ranking the Motor City, along with Cleveland, Dayton, Toledo, Philadelphia, and Baltimore, as cities realizing major depopulation. Thus, while downtown Detroit today is gleaming towers along a vibrant waterfront, one need not drive far from the internationally acclaimed Detroit Institute of Arts to witness neighborhoods which are nearly abandoned as residents continue to move to the suburbs. Thus, with some of the fiscal issues effectively addressed under the city’s approved plan of debt adjustment, Detroit is commencing a number of initiatives to try to address what might be deemed its physical devastation—a challenge, in some ways, more complex than its finances: How does an emptier city restore blighted neighborhoods and link the islands of neighborhoods which have been left? Or, mayhap better put: how does the city re-envision and rebuild?

Here it seems the city is focused on four key initiatives: draw new families into the city (look at Chicago and how Mayor Emanuel succeeded); convert vacant lots from crime havens to community gardens; convert vast empty spaces to urban farms; devise a strategy to fill empty store fronts; and, again as did Mayor Emanuel, create a strategy to bring back young families with children to live in the city.

Already, Detroit’s downtown core is a new world from my first visit when the National League of Cities convened its annual meeting there in the 1980’s—a time when at the front desk of the hotel I was staying, the attendant told me that even though I could see the convention site from the hotel, it would be a grave risk to life and limb to even think about taking the bus or walking—a situation unchanged on a similar day, Detroit’s very first day in chapter 9 bankruptcy, when I had proposed setting out to walk to the Governor Rick Snyder’s Detroit office to meet just-appointed Emergency Manager Kevyn Orr. Today, the revived downtown has attracted young people, often in redeveloped historic buildings; but that emerging vibrancy does not include housing options for people at different stages of life. Thus, the city is making an effort to offer more differentiated housing options, including townhouses, apartments, carriage homes and more—as well as housing for seniors. Or, as Melissa Dittmer, director of architecture and design for Bedrock LLC, the company leading the development, notes with regard to an initiative just outside of downtown: “For so long, Detroit had a low-self-confidence issue and was willing to take just about” any residential development: “Now the city of Detroit has crossed a threshold. We can do better.”

Outside of the downtown area, one sample neighborhood, Fitzgerald, today has 131 vacant houses and 242 vacant lots; but the city’s Director of Housing and Revitalization, Arthur Jemison, notes these lots need not be filled with houses; instead, the city is moving to invest more than $4 million into the neighborhood to renovate 115 homes, landscape 192 vacant lots, and create a park with a bicycle path, or, as Mr. Jemison notes: “We can’t possibly rebuild every vacant lot with new construction…What we can do is rehabilitate a whole lot of houses, and we can have an intentional landscape scene. The landscape is important, because frankly, if it’s done and managed well, it’s inexpensive and people like it.”

But the comprehensive effort also recognizes the city does not need additional housing stock: it needs less; so it has unearthed a program, RecoveryPark Farms, to construct greenhouses on a 60-acre plot, a plot which until recently represented two dozen blighted blocks on Detroit’s east side. This unique project has diverse goals: it eliminates breeding territory for crime, eliminates blight, and creates opportunities for the unemployed, especially ex-offenders and recovering addicts. The program’s CEO Gary Wozniak, who spent more than three years in federal prison, notes farming offers a career with a lower bar for hiring and gives immediate feedback because “plants grow relatively quickly, so people can start to feel really good about building skill sets. Plus, Detroit has a lot of land.” Already, its harvests are purchased by some of Detroit’s top restaurants on a year-round basis, or, as CEO Wozniak put it: “What we’re doing is commercial-scale agriculture in an urban environment.”

On Detroit’s first day of bankruptcy, the walk from my downtown hotel to the Governor’s uptown office almost seem to resemble post-war Berlin: empty, abandoned buildings and storefronts. Thus, another post-bankruptcy challenge has been how to fill the vacant storefronts along Detroit’s half-abandoned commercial corridors—and, here, a partnership between the City of Detroit and other economic-development organizations, Motor City Match, works to create links between selected landlords and new small businesses, with a goal of converting blighted commercial districts to make them both more livable and more effective at providing job opportunities for residents—or, as Michael Forsyth, Director of small-business services at the Detroit Economic Growth Corp., notes: Motor City Match “helps get businesses from ideas to open.” The program awards $500,000 in grants every quarter, assisting businesses in completing a business plan, finding a place to open, and renovating office space: its CEO, Patrick Beal, CEO of the Detroit Training Center, received $100,000 during the first round of the program and matched it with a $100,000 loan. Now, with the help of Motor City Match, the company has trained more than 5,000 Detroiters in construction, heavy-equipment operation and other skills.

Finally, again as with Mayor Emanuel, the City respects the importance of children—meaning it must focus on public safety, and schools—governance challenges of the first order, especially as we have been long-writing, the parallel financial insolvency of the Detroit public schools. Thus, Ethan Lowenstein, the Director of the Southeast Michigan Stewardship Coalition, is working with educators and local organizations in the region to help young people address environmental challenges in their communities, noting that families with children “leave because they don’t see the strength in their community and they don’t feel recognized as someone who has knowledge.” Mr. Lowenstein is seeking to reverse the city’s depopulation trend by working with the Detroit Public Schools. At two schools he works with in southwest Detroit, he says, students were on a walk around their community and noticed tires were being illegally dumped. The schools helped the students and worked with community members to identify areas with illegally dumped tires, and eventually the tires were recycled into doormats.  

In recovery from chapter 9 bankruptcy, sometimes the fiscal part can seem easy compared to the human dimension.

Addressing Municipal Fiscal Disparities

eBlog, 03/01/17

Good Morning! In this a.m.’s eBlog, we consider the dire stakes for Chicago’s kids if the State of Illinois continues to be unable to get its fiscal act together; then we admire the recent wisdom on fiscal disparities among municipalities in Massachusetts and Connecticut by the ever remarkable Bo Zhao of the Federal Reserve Bank of Boston.

Bad Fiscal Math.  Chicago Public School CEO Forrest Claypool Monday warned the public schools in the city could be forced to close nearly three weeks early and that summer school programs could be cut if the district does not receive a fast-tracked, favorable preliminary ruling from a Cook County judge in the near future, stating: “These possibilities are deeply painful to every school community.” Mr. Claypool, a former Chief of Staff to Mayor Daley, in an epistle to families with children in the city’s school system, warned the school year could end June 1st instead of June 20th without action; moreover, he noted that CPS’s summer school could be eliminated for all elementary and middle-school students, except those in special education programs, as he sought to increase pressure on Gov. Bruce Rauner and the Illinois legislature to help, warning success would depend on the courts or what has been billed as a “grand bargain” in the state capitol of Springfield to resolve Illinois’ record budget impasse. The CEO’s actions were not coordinated with Mayor Rahm Emanuel, who campaigned hard in his first term to extend the year for CPS students—a campaign in which the Mayor sought to reverse what we had termed as a “time bomb,” how to reverse the tide of an exodus of 200,000 citizens and make the city a key demographic destination for the 25-29 age group—i.e., meaning a critical commitment to public schools and safety. Now the state’s inability to act on a budget threatens both: the city’s School Board earlier this month accused the state of employing “separate and unequal systems of funding for public education in Illinois” in its lawsuit filed against both Gov. Rauner and the Illinois State Board of Education, describing its suit as the “last stand” for a cash-strapped district which is “on the brink,” seeking to have Judge Franklin Ulyses Valderrama of the Cook County Chancery Division issue a preliminary injunction which would prevent the state from “continuing to fund two separate but massively unequal systems of education,” noting it intends to present its case for an injunction to the court on Friday. In addition to seeking judicial relief, the System, in its judicial filing, noted that reductions in summer school programs and the academic year could save about $96 million; however, a shortened school year could violate Illinois state requirements with regard to the length of the public school year.

Without any doubt, the threatened disruption is undermining the trust of teachers, students, taxpayers, and parents with regard to the system’s future—brought on here by the awkward math of Gov. Rauner’s veto last December of a measure which would have provided CPS with $215 million in state aid—a measure the Governor argued was contingent on Democratic leaders agreeing to broader state public pension reforms. The ante was upped further at the beginning of the week, when Illinois Secretary of Education Beth Purvis said that instead of threatening cuts to the school year, CPS should focus on pushing legislation to overhaul the state’s education funding formula, stating: “I hope that they would really look seriously at not cutting days from the school year…I think people need to understand that the CPS board adopted a budget with a $215 million hole in it. Why is the governor being held responsible for that instead of the CPS board?” Even as the city sought to pressure the state, however, the Chicago Teachers Union this week issued a statement accusing Mayor Emanuel and the school board of playing politics instead of turning to solutions to help schools such as raising taxes, with union President Karen Lewis stating: “The Mayor is behaving as if he has zero solutions is incredibly irresponsible…Rahm wants us to let him off the hook for under-funding our schools and instead wait for the Bad Bargain to pass the Senate or [Gov.] Rauner’s cold, cold heart to melt and provide fair funds.” For those kids imagining an earlier summer break, CEO Claypool would not say when the district would make a final decision to shorten the school year, noting: “We think it would be wrong to prematurely set a final date for a decision when we still have the opportunity to prevent a shorter school year.”

Revenue Sharing. Bo Zhao, the extraordinary writer for the Boston Federal Reserve who authored the very fine piece: “Walking a Tightrope: Are U.S. State and Local Governments on A Fiscally Sustainable Path?” has now completed another piercing study regarding municipal fiscal disparities: “From Urban Core to Wealthy Towns,” looking at fiscal disparities amongst municipalities in Connecticut, and comparing state policies and practices there with Massachusetts, noting: “Fiscal disparities occur when economic resources and public service needs are not evenly distributed across localities. There are equity concerns associated with fiscal disparities. Using a cost-capacity gap framework and a newly assembled data set, this article is the first study to quantify non-school fiscal disparities across Connecticut municipalities. It finds significant non-school fiscal disparities, driven primarily by the uneven distribution of the property tax base while cost differentials also play an important role. State non-school grants are found to have a relatively small effect in offsetting municipal fiscal disparities.

Unlike previous research focused on a single state, this article also conducts a cross-state comparison. It finds that non-school fiscal disparities in Connecticut are more severe than those in Massachusetts, and non-school grants in Connecticut are less equalizing than those in Massachusetts. This article’s conceptual framework and empirical approach are generalizable to other states and other countries.” Writing that his is the first article to quantify non-school fiscal disparities across the Nutmeg State, he notes they are “driven primarily by the uneven distribution of the property tax base, while cost differentials also play an important role,” as he assesses fiscal disparities amongst the state’s 169 municipalities, writing: “There is recent evidence that this longtime state neglect may have exacerbated non-school fiscal disparities…If state aid formulae are based only on local revenue raising-capacity and ignore cost disparities, they would not fully offset fiscal disparities.” This leads him to note: “Urban core municipalities exhibit the highest average per capita cost, mainly because they have the highest unemployment rate and population density, and the most jobs per capita…This means that nearly one-fifth of Connecticut residents live in the highest cost environments.” In contrast, he notes that “wealthier-property rural towns have the lowest average per capita municipal cost—more than 25 percent lower than the urban core municipal cost.” A key part of the fiscal challenge, he writes, is that in the state, the property tax is the only “tax vehicle authorized for municipal governments and virtually the only own-source revenue available to support the local general fund,” adding that the property tax makes up some 94 percent of own source general fund revenue. All of which led Mr. Zhao to assess or measure what he defines as the “Municipal Gap,” or the difference between municipal cost versus municipal capacity: a measure which he finds demonstrates that “a significant share of Connecticut municipalities and populations face municipal gaps”…with urban core municipalities confronting a gap of as much as $1,000 per capita.

Turning to the state role in addressing fiscal disparities, he notes that non-school grants in the state “do not have an explicit equalization goal.” Such grants are broadly spread, and not “well targeted to fiscally disadvantaged municipalities,” indeed, describing the gap as “very wide,” and noting that a comparison with neighboring Massachusetts would better enable Connecticut law and policy makers to better understand the “relative severity of Connecticut municipal fiscal disparities.” While noting that unlike many other states, neither of these two New England states have active county governments, so that municipalities bear much greater responsibilities for a wide range of public services—and property taxes are almost their sole source of municipal revenues, he distinguishes Connecticut’s greater municipal fiscal disparities in that it has a larger share of its population living in what he terms “smallest-gap” municipalities. Finally, he distinguishes the respective state roles by noting that Massachusetts has a “more explicit equalization goal and its main distribution formula directly considers the differences across municipalities in revenue-raising capacity.”

Who’s at Risk of Defaulting?

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eBlog, 12/16/16

Good Morning! In this a.m.’s eBlog, we consider the challenge to state and local leaders arising from both the Federal Reserve’s decision to increase interest rates, apprehensions about growing state budget gaps—and the respective implications for city and county credit ratings—as well, of course, to the incoming Trump administration and next Congress’ proposals on federal tax reform where—as under former President Ronald Reagan, the authority of state and local governments to issue tax exempt municipal bonds is expected to come under challenge—as is the deductibility of state and local taxes. Moreover, with the Federal Reserve’s decision to raise interest rates, those increases could boost mortgage rates—adversely impacting assessed property values—putting cities, counties, and school districts into distinctly uncomfortable territory. Then we turn to the frigid weather in East Cleveland, where the city’s insolvency has let to increasing service insolvency and an inability to clear the city’s roads—threatening the capacity and ability to provide emergency public services. Then we follow the nation’s frigid weather east to Shenandoah, where the fiscally beset municipality of Petersburg, Virginia was hit yesterday by a 4th U.S. Circuit decision, even as S&P Credit granted it a small Yuletide respite. Finally, we venture back west to Chicago, where Municipal Market Analytics helps us to try to untangle the fiscal arithmetic so burdening the Chicago Public Schools.

Nota bene: We wish all readers a well-deserved holiday to you and your loved ones; we will resume the week after next.

Who’s at Risk of Default? Municipal Market Analytics this week, drawing from compiled data, noted that the trend of annually declining defaults is over—breaking a six-year trend—and warning that it “expects that issuer-credit quality has begun to erode,” describing the ominous trend as not only a factor of more “aggressive/permissive” underwriting standards, but also the risk created by growing state budget gaps—gaps which are likely to result in a double fiscal whammy for municipalities, counties, and school districts of reduced local aid—as well as less state public infrastructure investment. MMA suggests “municipal default activity will increase in 2017.”

Brrr! Municipal insolvency, as we have previously noted, often involves service insolvency. Thus it is that many side streets in the insolvent municipality of East Cleveland are complete sheets of ice—and have been so for an entire week, because the city does not have any working snow plows, leading one constituent to liken living in the city to being in the “Ice Age.” With bitter cold from the lake snow, which has been falling in heavy bands, neither of the municipality’s two salt trucks are working, leading some city officials to opine that the money spent on the recent special recall election could have been better used to fix the salt trucks. With one resident noting that “It is very precarious until you get into Cleveland or until you get into Cleveland Heights,” residents can easily make out the boundary where East Cleveland ends and Cleveland Heights begins: on the latter side, the streets are totally cleared. Ice free and this is all “full of ice.” One beleaguered resident noted: “I really hope that we can one day join with Cleveland…That is the only answer.”

Teeter Tottering in Petersburg. The fiscally struggling, historic Virginia municipality of Petersburg was on a teeter totter yesterday, after the 4th U.S. Circuit Court of Appeals yesterday ruled that the city’s police department’s policy barring its employees from criticizing the department on social media was unconstitutional (for further details, please see this morning’s Little Legalities in the eGnus), because its social media policy constituted a “virtual blanket prohibition” on all speech critical of the department and was “unconstitutionally overbroad,” but as the city was removed by S&P Global Ratings from Credit Watch.  In its decision, the court acknowledged a city’s need for discipline, but found that the policy and the disciplinary actions taken pursuant to it would, if upheld, lead to an utter lack of transparency in law enforcement operations that the First Amendment cannot countenance. (The suit had been filed after two of the city’s officers were placed on probation for discussing on Facebook their concerns about inexperienced officers being promoted and leading the department’s training programs: the department’s policy prohibited employees from posting anything that would “tend to discredit or reflect unfavorably” upon the agency—something the court held the police cannot be allowed to do.) In its ratings change, S&P, nevertheless, maintained its junk BB ratings on Petersburg’s general obligation bonds: the city has just over $55 million general obligation, full faith and credit bonds and Qualified Zone Academy bonds outstanding. S&P analyst Timothy Little wrote: “We removed the rating from CreditWatch due to the city securing $6.5 million in cash-flow notes…The negative outlook reflects the extreme uncertainty regarding the city’s ability to return to structural balance and what will likely be persistently very weak liquidity in a difficult budgetary environment,” adding that: “In our opinion, the interest rate is high compared to other non-distressed entities that annually place TANs, further underscoring the fiscal distress of the city.” The continued fiscal distress hinged on the city’s ongoing inability to balance its budget, in the main part because municipal property and other taxes have been less than projected, while expenditures for public safety and health and welfare have exceeded the city’s budget by $2.5 million, according to S&P. (A Virginia technical assistance team reported that general fund expenditures exceeded revenue by at least $5.3 million in FY 2016, and identified a structural imbalance with Petersburg’s FY2017 budget—leading to a state estimate that the city has $18.8 million in unpaid obligations to external entities and internal loans, including repayment of the TANs. S&P further noted that even though the city’s economy is diverse, its 27.5% poverty rate is more than double the statewide level—meaning it bears disproportionate fiscal challenges.

Pixie Dust? Municipal Market Analytics this week inquired into the harsh realities of determining interest rates with regard to municipalities in fiscal straits seeking to go to market (not to buy a fat pig!), focusing on the Chicago Public Schools—suggesting that investors in the school district’s new capital improvement tax bonds should seriously consider the bond-holder settlements in Detroit—and the ongoing legal battles in Puerto Rico—in trying to determine what interest rate would constitute sufficient compensation for the legal and credit uncertainties present in a muni transaction, suggesting: “Basically, rather than use its traditional alternative revenue bond security (which entails a pledge of state aid backstopped by an unlimited property tax), CPS is directly pledging its new limited property tax levy solely for the benefit of bondholders.” Theoretically, MMA notes, the new municipal security (rated A by Fitch and BBB by Kroll) insulates municipal bondholders from CPS’s not very investor friendly credit rating and profile—especially its very high unfunded public pension liability, but then wrote: “However, the real perceived strength here is the durability of the structure, or persistence of regular debt service payments, in a hypothetical (and currently not-permitted) municipal bankruptcy. This durability relies upon legal opinions that conclude that the new bond obligations would be considered backed by special revenues and therefore bond-holders would not see their lien impaired.” However, MMA noted, such reliance might not be something upon which to hang one’s Santa stocking, writing: “The aspiration of the structure is to insulate the bondholders from the fiscal troubles of the district, although the repayment schedule suggests that the district may have taken a more short-term view of the soundness of the transaction given the back-loaded principal. The main trouble with the transaction lies not with the documents but with the assumption—generally implicit, yet quite explicit in the opinions—that the fiscally distressed district will unconditionally continue to abide by, and not challenge the provisions of the indentures or ‘use or claim the right to use’ the capital improvement tax revenues. In other words, to rely on the willingness of CPS not to act exactly like every recent distressed city (and territory) in invading, capturing, and re-purposing every bondholder asset within and beyond easy reach. Even constitutional bond protections have fallen victim to debtor challenges during government disruption. So for this security to function fully as described, CPS would need to experience a Goldilocks bankruptcy the likes of which the municipal market has not seen in decades.” Thus, MMA, in a Yule gifted insight, strongly encourages potential muni investors to carefully unwrap the seasonal gift to determine whether it is really of better credit quality than CPS’ alternative revenue bonds, and “to be avoided by accounts who consider a CPS municipal bankruptcy to be likely or even unavoidable.”

State Preemption of a Municipality: Moving into Uncharted Territory

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eBlog, 11/10/16

Good Morning! In this a.m.’s eBlog, we consider yesterday’s granting of authority for a state takeover of the City of Atlantic City by the New Jersey Local Finance Board—a state takeover which will likely be impacted by Tuesday’s Presidential election—as New Jersey Governor Chris Christie appears to be a potential Cabinet or other senior advisor to President-elect Donald Trump. Actual governance will shift from local accountability to the state’s Division of Local Government Services—marking the second state takeover of a municipality in New Jersey’s history. Then we consider an election result in post-chapter 9 Detroit affecting future community development, before trying to become schooled with regard to the downgrading of Chicago’s Public Schools—a downgrading that could undercut some of Mayor Rahm Emanuel’s leadership efforts to draw young families into the nation’s third largest city.

State Preemption of a Municipality? In the wake of yesterday’s 5-0 vote by the New Jersey Local Finance Board, Gov. Chris Christie’s administration was granted the authority to immediately seize control of financially distressed Atlantic City, with the unanimous vote paving the way for a five-year state takeover—a takeover Governor Christie referred to as the best way to keep the city from becoming the first New Jersey municipality since 1938 to go into chapter 9 municipal bankruptcy. By way of the vote, the state usurped the authority to assume key functions usually controlled by local elected leaders: renegotiating union contracts, hiring and firing employees, and selling municipal assets. The right to wrest governance authority was power included under the Municipal Stabilization and Recovery Act approved by New Jersey lawmakers last May when Atlantic City was given 150-days to craft an acceptable rescue plan to avert a June default. The action, which City Council President Marty Small described as “definitely a sad day in the history of Atlantic City,” marks the first state takeover of a municipality since New Jersey took over Camden more than a decade ago. The New Jersey Local Finance Board, however, did not grant the state the authority to file for chapter 9 municipal bankruptcy on behalf of the city. Under the terms of the state preemption, Timothy Cunningham, the Director of the Division of Local Government Services, will assume responsibility during the takeover—albeit he indicated he was uncertain what duties or responsibilities would remain with the city’s elected local leaders—describing the decision as moving into “unchartered territory,” as well as an “unbelievable responsibility.” The decision continues to leave murky the exact role of the emergency management team.

Yesterday’s developments mark an escalation of state preemption of local authority which commenced six years ago when the Governor announced the state was taking over the city’s tourism district and installing a state monitor. Last year, the Governor appointed an emergency management team. It seems very unclear what the role of those state appointees was—albeit it seems clear they were not accountable to the taxpayers of Atlantic City and, seemingly, were not held to any accountability to the Governor. The situation will now likely be further muddled by the likely role of Governor Christie in the new Trump Administration—meaning Lt. Governor Kim Guadagno would become Governor. Nevertheless, Moody’s Investor Services, in the wake of the state decision, termed the takeover a “credit positive,” because the state will be able to ensure the city’s debt payments due on the first and fifteenth of next month will be made. Notwithstanding the state takeover, the state preemption creates uncertainty with regard to whether Atlantic City can meet its upcoming debt service requirements: Atlantic City made its $9.4 million November 1 bond payment and next owes $2.3 million on the first of December—and then $4.8 million on December 15th, according to Moody’s Investors Service.

Community Development in the Motor City. Detroit voters approved a ballot measure, Measure B, backed by some union and business groups which will require developers of major projects to engage residents to negotiate jobs, affordable housing, or other benefits, according to unofficial election results, but rejected Proposal A, a competing grassroots plan which would have further increased the benefits to residents. The prevailing version, Proposal B, which was earlier approved by Detroit’s City Council, earned adoption by a 53 percent to 47 percent margin: the new ordinance makes Detroit the first city in the nation with such a sweeping requirement, according to Detroit Councilman Scott Benson, who worked on the community benefits agreement for more than a year with consultation from stakeholders. Councilmember Benson noted: “The city of Detroit is the tip of the spear when it comes to community benefits: We are the only city to have a CBA that’s going to be enacted that’s structured this way. The only one in the country.” The ordinance is set to take effect at the beginning of next year. The battle over the benefits plan had sharply divided voters: developers and unions opposed it, claiming it would be a “jobs killer” that will drive away much-needed development in the city. The community-led Proposal A would have required more enforcement and larger investments by developers. According to unofficial results, 54 percent of voters turned it down. Proposal B will require developers to provide community benefits for projects worth at least $75 million or for those that would expand or renovate structures where a developer seeks city-owned land or tax breaks of at least $1 million. Under the proposal, a neighborhood advisory council will be established for areas affected by development with appointments from the city’s planning director and in consultation with the council.

Failing Municipal Grades. S&P Global Ratings yesterday downgraded the Chicago Board of Education’s credit rating to B from B-plus with a negative outlook, with analyst Jennifer Boyd writing: “The rating action reflects our view of the district’s continued weak liquidity in its most recent cash flow forecast and reliance on cash flow borrowing, combined with the increased expenditures in the district’s new labor contract that exacerbate the district’s structural imbalance challenges.” The lowered grade came at a bad time: Chicago Public Schools has been planning the sale of millions of dollars of long-term municipal bonds next week—bonds which will now be much more costly to the city. The rating agency noted, in its downgrade, CPS’s reliance on short-term borrowing to cover daily expenses, plus $55 million in costs added to this year’s budget by the recent agreement with the Chicago Teachers’ Union, noting, “The Board’s extremely weak cash position is a significant credit weakness, in our view.” For its part, CPS, among other assumptions in its budget this year, has been optimistically assuming the state legislature will come through with $215 million in aid, warning it will cut that amount from schools if that assistance fails to materialize. CPS’s chief financial officer yesterday said “CPS continues to make important strides in improving the district’s financial stability,” and that CPS would continue to press for an overhaul of Illinois’ education funding formula, which he said would “lay the groundwork for fiscal stability” at CPS and other school systems. However, S&P warned there was at least a 33% chance of another downgrade within the next year—with the credit warnings coming at a most inopportune time: CPS is scheduled to sell roughly $420 million in bonds to refinance some of its old debts along with what S&P described as “computer servers and equipment.” For its part, Fitch Ratings noted: “The lack of an adequate financial cushion leaves CPS ill-prepared to withstand even a moderate economic downturn.” With Mayor Rahm Emanuel’s key focus on schools and public safety as essential to bringing young families into the city, the fresh downgrade as well as a recent one from Moody’s cannot be good news—and it appears to undercut CPS’ claims that the nation’s third largest public school district is on better fiscal footing with the help of additional state aid and a property tax levy. In its own report card, Fitch reported that its B-plus rating for CPS reflects what it termed “chronic structural imbalance, slim reserves, and a weak liquidity position which are exacerbated by rising long-term liability costs, a historically acrimonious labor relationship, and the lack of an independent ability to raise revenues.” All of this marks a distinct setback to the recent CPS efforts to obtain a passing credit grade in the wake of a one-time increase in state aid, passage of a $250 million property tax levy for teachers’ pensions, and $81 million drawn from its nearly drained reserves. Moreover, CPS has been relying on $215 million in state aid for teachers’ pensions—based on optimistic assumptions that the legislature will act on pension reforms in its next session—and that such reforms would not be found unconstitutional.

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.

 

What Is a State’s Role When a Municipality Can No Longer Provide Essential Public Services?

eBlog, 9/27/16

Good Morning! In this a.m.’s eBlog, we consider 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 be spreading to 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. Then we journey to Atlantic City, where a comparable fiscal challenge—but in a state with a much longer history of state-local consideration—appears on the verge of a total state takeover: we ask whether the city’s end is nigh: will the state, in fact, take it over? Then we turn to the school yards in Chicago, where a threatened teacher strike augurs fiscal downgrades and worse fiscal math for Chicago Public Schools—a city beleaguered by this year’s terrible increase in murders and now unsettling math.

When It Rains, It Pours. The small Virginia municipality of Petersburg, near insolvency–or its tipping point, uncertain of what role the Commonwealth of Virginia will take in a state where, were the city to file a chapter 9 municipal bankruptcy petition, its municipal bondholders holding bonds to which statutory liens have attached would continue to receive payments on those bonds, [§15.2-5358], now is confronted by the filing of two similar lawsuits, accusing the city of repeated failures to meet payment due dates. The fiscal crisis is finally forcing the State of Virginia to contemplate what role it might have to take—a role which would set a precedent in a state which does not specifically authorize its municipal entities to file for municipal bankruptcy—and where the only such petition filed—by an economic development authority—was dismissed. The likely mechanism that will leave the state little alternative but to act is likely to be the filing of two lawsuits against the city over past-due payments—suits alleging similar accusations of repeated failures to meet payment due dates even before Petersburg’s fiscal problems evolved into a crisis: the South Central Wastewater Authority last week filed a lawsuit against the city, seeking more than $1 million and the appointment of a receiver to make sure the money the authority says it is owed is not spent by the city on other things, with the suit alleging: “Since 2011, city officials have failed to regularly and timely bill and collect monies for wastewater services and have failed to make payments due and owing to South Central.”

The second suit, filed last month by a road paving company, alleges that Petersburg failed to make payments on time for the company’s work repaving U.S. Route 460 East—a contract which specified that the company would receive payment within 30 days of the work being billed. In its filing, however, the company noted that its bills were paid late and that many times “those checks bore dates that made it appear they had been issued on time pursuant to the contract terms, even though delivery did not occur until weeks or months later.” The company’s corporate credit manager and chief financial officer met in July 2015 with Petersburg’s then Finance Director to discuss the problems—in the wake of which the city proposed a very delayed schedule—late enough that the company halted work on the project. The suit charges it has been left with an unpaid balance of about $214,000, so that it is seeking payment of that balance plus interest of 1 percent per month. For its part, the South Central Wastewater Authority alleges a similar pattern of late payments stretching back to mid-2011: “Since 2011, city officials have failed to regularly and timely bill and collect monies for wastewater services and have failed to make payments due and owing to South Central…This failure by Petersburg became sustained and serious beginning in the middle of 2012 and has become chronic and severe since…Despite continuous communication and extraordinary forbearance by [South Central] regarding Petersburg’s payment practices, which only resulted in repeated assurances of payment followed by more broken commitments, Petersburg has now altogether ceased making payments.” The suit charges the city is delinquent by $1.2 million, excluding penalty fees. Another $410,000 came due on the first of this month, according to the lawsuit. Because the Authority, moreover, provides wastewater treatment for the municipalities of Petersburg and Colonial Heights, and the counties of Chesterfield, Dinwiddie, and Prince George; and because Petersburg uses about half of the wastewater plant’s capacity, South Central’s complaint notes that  if Petersburg continues to fail to make payments, the authority will have to ask the other municipalities to pay higher rates, or it may be forced to shut down the treatment plant—a shutdown which, the utility notes, “would endanger public health and require an alternate means of treatment to prevent the flow of untreated wastewater directly into the Appomattox River…Planning, permitting, financing and construction of new facilities would take years. The scale and seriousness of this crisis cannot be overstated.” Indeed, the scale and complexity of the growing list of creditors of the municipality unearthed by auditors last summer determined Petersburg owed a total of about $3.4 million to six regional organizations: South Central, the Appomattox River Water Authority, the Central Virginia Waste Management Authority and Riverside Regional Jail, Crater Youth Care and the District 19 Community Services Board. It has become increasingly apparent that Petersburg’s fiscal problems have become contagious to adjacent municipalities and essential public services, so that, increasingly, the Commonwealth of Virginia will be forced to act.

Indeed, Virginia Secretary of Finance Richard D. Brown last week briefed members of the General Assembly’s Finance Committees on his department’s effort to help Petersburg figure out how to close its $12 million budget gap and generate enough cash flow to both keep the city government operating and to begin to pay down a debt that has ballooned to nearly $19 million. But, as it has become apparent the city likely will simply be unable to get out by itself, its fiscal collapse risks spreading—as can be noted from the impact of its non-payment to a regional facility—adjacent municipalities, it would appear the Governor and Virginia legislature will have little choice but to both act on measures to protect the state’s AAA credit rating, but also to prevent the fiscal distress from spreading. The Virginian Commission on Local Government, which has measured local fiscal distress in the state for three decades: notes in its stress index measures cities’ and counties’ revenue capacity, revenue effort, and median household income: it ranks Petersburg as the third-most fiscally stressed locality in Virginia—behind Emporia and Buena Vista.

The increasing apprehension in Richmond has led the Chairman of the House Appropriations Committee, Del. S. Chris Jones (R-Suffolk) to ask: “How did this get this bad without anyone knowing about it?” It also triggered his appointment last week of Del. R. Steven Landes (R-Augusta) to head a subcommittee to study states dealing with fiscally stressed localities and come up with solutions if a situation similar to that in Petersburg were to occur elsewhere in Virginia—or, as the Chairman put it: “We want to do our due diligence to see if there is legislation we might have to put in place to give authority to the state in certain circumstances to potentially take action…Right now, we don’t have the authority to do this, which is why I thought it is important to have this subcommittee between now and January and then begin the process to come up with some legislation.” In doing so, the Chairman emphasized that the state legislature will look primarily for proposals aimed at protecting the state’s interests—not those of the troubled localities, stating: “We are elected to represent our citizens at the state level, and we have our AAA bond rating to consider.” For his part, Chairman Landes said his committee will also examine the state’s options with regard to steps it could take to shorten its response time when a locality is heading toward the fiscal cliff, noting: “We want to make sure that audit information is getting to the money committees and the administration, because we would much rather be kept abreast sooner rather than later,” even as he vowed that a “bailout” for Petersburg is out of the question, noting: “I’m not aware where the state has ever stepped in to provide a locality a bailout…I don’t see that happening.”

Balancing on the Prick of the NeedleWhile it seems clear that neither the Governor nor the Legislature have much willingness to either grant municipal bankruptcy or provide significant fiscal assistance; nevertheless, there appears to be recognition that should Petersburg default, it would have implications for other municipalities in the state, especially if there were a default—such a default—increasingly possible in Petersburg’s case, because it is unclear how Petersburg, by Saturday, will come up with a $1.4 million principal-and-interest payment owed to the Virginia Resources Authority, a premier funding source for local government infrastructure financing through bond and loan programs. Under Virginia’s intercept provision, the Commonwealth is authorized to seize dollars it directs to localities for services, such as for schools, police and welfare, and use them, instead, to make scheduled payments on bonds to avoid default.

Interim City Manager Dironna Moore Belton acknowledged in an email last week that in order to secure short-term financing and bring long-term stability to the city, it cannot default on its loan payments. But Ms. Belton did not provide any specifics about from where she would take these dollars: “The city regularly collects revenues which go toward paying obligations…(and) has set aside dollars from incoming revenue to make the VRA payment;” however, in light of the $1.2 million lawsuit filed last week by the South Central Wastewater Authority, calls for the city to file for chapter 9 municipal bankruptcy have grown louder at public meetings and on internet message boards. However, as one expert commentator warns: “The state’s position is that Petersburg has dug themselves into a very unusual hole, and that they are going to have to take some very stringent and even draconian steps to get their house in order.” It is no longer certain, however, that the municipality has the capacity to get out by itself—indeed, it seems that, more likely than not, its fiscal tribulations will, increasingly, adversely affect neighboring public utilities and jurisdictions. According to Secretary Brown, the possibility of the city defaulting on bond payments is very real—a default which would leave the municipality with few alternatives—to which the Secretary remarked: “Some say that if it’s gotten to the point where they can’t operate, they should look at their charter and un-incorporate.” Such incorporation, however, would be a version of passing the buck—after all: which government would then be responsible for not only providing essential public services, but also paying off the growing mountain of municipal debts?

Thirsty City. Just as the provision of drinking water was a difficult issue in Detroit’s chapter 9 municipal bankruptcy, and has become so in Petersburg, so too the issue has arisen in San Bernardino, where the city’s municipal water department has announced water bills will increase by an average of $3.50 starting in October—with some of the increased  costs triggered by a state mandated water reduction goal of 28% this past summer—even as the utility notes the importance of conserving water during winter months: the Board of Water Commissioners, which is responsible for water rates in the city, voted unanimously to impose the higher rates, the first increase in four years; the city has approved further increases to go into effect next July 1st and in the subsequent July 1st of 2018. Again, just as in Detroit, virtually all who attended the session and vote came away angry—as the city water department’s General Manager put it: “For all of us, the last thing we want to do is cause economic distress to people…But we need to take care of what we’ve got, or we’re going to end up spending more in the future.” Since the city’s last rate increase, the water department has had to deal with California’s historic drought; the rising cost of imported water; new water quality regulations; and other expenses. Cost-cutting efforts include operating with fewer employees than in 2007, requiring employees to pay for a larger portion of their benefits, and securing as much as $350,000 in rebates from Southern California Edison, according to the water department. According to the water department website, the average water bill in San Bernardino, will be just under $50 per month, higher than average in adjacent Riverside and Redlands, but less than in Colton, Rialto, the East Valley Water District, the Cucamonga Valley Water District, the West Valley Water District and Fontana. Unlike Detroit, where one of the most difficult issues for then U.S. Bankruptcy Judge Steven Rhodes was how to balance the critical public health and safety issues related to water versus affordability; that question appears not to have arisen in San Bernardino.

Can a City Maintain its Sovereignty? Just as the question of sovereignty for a municipality in Virginia has become an issue, so too the question of whether the State of New Jersey will take over Atlantic  City and dissolve its sovereignty, after the New Jersey Division of Local Government Services notified Atlantic City that it has until Monday to comply with the terms of a $73 million state loan or face the possibility of default, warning that, because the city is in violation of its loan terms, it must act swiftly to “cure the breach.” As part of its effortsd to cure that “breach,” Atlantic City has reached an agreement with its water utility to purchase its old municipal airport property in a deal that officials of the city hope will help it avoid a state takeover. The Municipal Utilities Authority, which provides Atlantic City’s drinking water and is financially independent from the city, plans to purchase the 143-acres of the former Bader Field airport for at least $100 million through bonding, officials announced at a press conference yesterday, with Mayor Donald Guardian touting the partnership as a way of maintaining both the city and utility’s “sovereignty” while also helping the city dig its way out of more than $500 million of total debt. Mayor Guardian said he hopes the agreement, one which still needs city council and state approval, prevents New Jersey’s Local Finance Board from taking action after it violated the terms of a $73 million bridge loan that called for dissolving the MUA. Nevertheless, the New Jersey Department of Community Affairs declined to comment on whether the Local Finance Board would accept the Atlantic City MUA plan—a key apprehension after that Board last Thursday had imposed a deadline of next Monday to fix a breach of a condition on its $73 million bridge loan or face a possible default where the state could seek full repayment and withhold state aid—indeed, under the terms of last July’s loan agreement mandating the city needed to dissolve the MUA by September 15th, the state could demand full repayment of the $73 million loan and withhold state aid if the city were unable to avert a default by the October 3 deadline. For his part, MUA Executive Director Bruce Ward said the authority will get an agreement with the city before deciding how to proceed with the property. Mr. Ward added that floating a bond for the Bader Field purchase is attainable and that the MUA has advisors who will help strategize the borrowing. The MUA has $15.7 million in annual revenues with $16.6 million of net water revenue debt outstanding, according to Moody’s Investors Service.

Learning about Debt—or Failing Grades? Moody’s yesterday awarded a failing credit grade to Chicago Public Schools, downgrading CPS’ bond rating further into junk status, lowering its view of the school system’s debt one notch to a B3 rating, citing a variety of factors, including CPS’ reliance on short-term borrowing, a “deepening structural deficit,” and a budget “built on unrealistic expectations” of help from a state government with money woes of its own. If there could be fiscal insult to financial injury, it arrived yesterday when CPS announced budgets at about 300 schools would lose a total of $45 million because of enrollment declines, and the Chicago Teachers Union said its members authorized a strike if contract talks break down. Unsurprisingly, that led the ever so moody Moody’s to warn that its debt rating could decline even further—a downgrade that would make the school district’s borrowing more expensive, even as CPS’ Board is set to vote Wednesday on the system’s $338 million capital budget—a budget projected to swell amid plans to borrow up to $945 million in long-term debt for a variety of other school infrastructure projects. For its part, the union yesterday announced that more than 95% of members who submitted a ballot last week voted in favor of authorizing a strike, easily crossing the requisite 75% threshold: CTU’s House of Delegates will meet Wednesday to discuss a possible strike date which could come as soon as October 11th—a strike, were it to occur, which added to Moody’s fiscal moodiness, as it noted CPS’ “increasingly precarious liquidity position and acute need for cash flow borrowing to support ongoing operations…The downgrade is also based on CPS’s deepening structural deficit, with budgets that are built on unrealistic expectations of assistance from the State of Illinois, which faces its own financial challenges. The rating also incorporates escalating pension contribution requirements, strong employee bargaining groups that impede cost cutting efforts, and elevated debt service expenses.” (CPS is offering raises in a new multi-year contract offer but it wants to phase out the $130 million annual tab for covering 7% of teachers’ 9% pension contribution. The union argues that the contract offer results in a pay cut and is strike-worthy.)