Fiscal & Physical Sustainability in the Face of the Fiercest of Physical & Human Storms

September 22, 2017

Good Morning! In today’s Blog, we consider the physical and fiscal storm threats to Puerto Rico, before finally looking back at post-riot Ferguson, Missouri and its ensuing fiscal state.

Visit the project blog: The Municipal Sustainability Project 

Fiscal & Fiscal Storm. Hurricane Maria, the most powerful storm to make a direct hit on the U.S. Territory of Puerto Rico in almost a century, has devastated—physically and fiscally the island: it knocked out all electricity, deluged muncipios with flash floods and mudslides—with the storm following in the wake of Hurricane Irma. Thousands of residents fled the winds and rain, as Gov. Ricardo Rosselló warned he could not be certain of the storm-worthiness of structures intended to offer shelter. In the capital of San Juan, tree trunks and electricity poles had snapped like twigs, obstructing major highways—that is obstructing those not already flooded. There was widespread devastation in muncipios. Gov. Rosselló estimated there were at least $1 billion in damages to the island—and that was in the wake of the earlier hurricane which Moody’s Investors Service Vice President Richard Donner had stated would damage many of the Puerto Rico Electric Power Authority’s transmission lines, meaning that not only would the public authority be forced to use its little remaining cash on repairs, it would also suffer reduced income from the electrical outages. Bondholders will be ever farther back in the line.

Mayor Félix Delgado of Cataño, on the northern coast, told a San Juan radio station that the storm had destroyed 80 percent of the homes in the Juana Matos neighborhood—fortunately all had been evacuated. FEMA Director Brock Long said that the U.S. Virgin Islands and Puerto Rico had very fragile power systems, thus electricity was expected to remain out for a very long time. Indeed, the storm laid bare Puerto Rico’s fragile infrastructure, exacerbating fiscal and physical challenges—especially for the fiscally insolvent state-owned Puerto Rico Electric Power Authority (PREPA), knocking out all the work PREPA had completed in the wake of the earlier Hurricane Irma—and exacerbating the question with regard to how Puerto Rico, already in quasi chapter 9 bankruptcy, could conceivably finance the requisite comprehensive repairs. Before that, PREPA and the Governor confront the urgent challenge of restoring potable water and electricity: President Elí Díaz Atienza of the Aqueduct and Sewer Authority said that the agency’s communications systems had gone down and that he was unable to check on plants and offices. Puerto Rico’s Emergency Manager Director Abner Gomez’s stated that this would be an unprecedented challenge; President Trump declared Puerto Rico a disaster zone and ordered federal assistance.  

For the U.S. territory already in quasi-bankruptcy, the devastation raised hard questions with regard to how PREPA, especially, will be able to generate revenues to meet its already overwhelmed debts. Even though, as Gov. Rosselló said, Puerto Rico had updated its building codes about six years ago; nevertheless, many traditional dwellings, the Governor said, “had no chance.” Nevertheless, he noted: “There is no hurricane stronger than the people of Puerto Rico.”

Still, even assessing the extent of the damage has been fraught with uncertainty: dozens of the island’s muncipios remained isolated and without communication in the wake of the Category 4 storm with 155 mph winds, forcing the imposition of a 6 p.m. to 6 a.m. curfew imposed by the Governor. Fabulous Matt Fabian of Municipal Market Analytics noted that the damage wrought by Maria could factor into future decisions by the PROMESA control board with regard to what payments might eventually go to Puerto Rico’s municipal bondholders, asking rhetorically: “Why would a court decide ‘yes, investors, you should take more money off the island?” (The PROMESA Board is currently trying to assess what portion of the Puerto Rico’s current obligations to investors or holders in its municipal bonds must be paid.)

How Hard the Road to Recovery Is. Not far from the Missouri courthouse where a white former police officer had been acquitted in the shooting death of a black man, a federal judge said in a hearing that officials in the suburb of Ferguson had made “good progress” since 2014, even as barricades and yellow police tape surrounded the court house, evidence of the protests that have been going on since Jason Stockley was found not guilty in the 2011 shooting death of Anthony Lamar Smith. Actually, per capita income has declined almost 6 percent; yet the mood was more hopeful inside the courtroom of U.S. District Judge Catherine Perry, who is overseeing the federal consent decree struck last year between the City of Ferguson and the U.S. Justice Department related to unconstitutional policing practices which came to light three years ago in the wake of a white police officer shooting and killing an 18-year-old black man, Michael Brown. In the hearing, Jude Volek of the Justice Department’s Civil Rights Division, testified the Justice Department was committed to seeing reforms through in Ferguson, adding that Ferguson had made “good faith” efforts to meet the demands of the consent decree, which, as we had noted at the time, came in the wake of the Justice Department report finding that the city had treated residents as sources of revenue rather than as citizens to be protected.

The court heard further testimony that Ferguson had rescinded ordinances, made “really incredible progress” on its use-of-force policies thanks to Ferguson Police Commander Frank McCall, boosted assistance and support for officers in dealing with the stress of their jobs, taken “really proactive steps” on officer pay, and put in place a new judge who brought a “fresh approach” to the city’s municipal court—a court which, nevertheless, is confronted by a backlog of “thousands of cases,” cases predating Mr. Brown’s 2014 death. The city’s attorney, Apollo Carey, admitted in his testimony that Ferguson had a large backlog of cases, testifying the city needed to prioritize its work on the backlogged boxes of files to determine whether there is “good cause” to continue prosecuting the cases when outstanding arrest warrants could carry significant repercussions for citizens accused of minor violations. Mr. Carey noted Ferguson has 42 police officers and wants to round that number up to 50.

In the hearing, Natashia Tidwell, the court-appointed monitor overseeing the implementation of the consent decree, agreed that the city had made progress on municipal court reform, calling the new municipal judge a “breath of fresh air” who obviously had “empathy” for the individuals appearing before him; however, she testified that thousands of citizens still had warrants out and “could be living in constant fear” that they would be arrested. Judge Perry, at the end of the hearing, said she believed progress is being made. But whether fiscal progress is being made seems to be a different question—one not before the Judge. The city,which, twenty-seven years ago was a middle class suburban enclave north of St. Louis with a population about three-quarters white, by 2000, was roughly split between black and white with an unemployment rate of 5%. That has continued to shift, so that by 2010, the population was two-thirds black, unemployment had exceeded 13%, and the number of residents living in poverty had doubled in a decade. The city’s population has declined by just under 6 percent since 2000; and estimated median income has dropped by nearly 2o%.

 

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Addressing Municipal Fiscal Distress

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eBlog, 04/05/17

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

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

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

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

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

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

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

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

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