The Precipitous Chapter 9 Road to Recovery

January 3, 2018

Good Morning! In this a.m.’s Blog, we consider the fiscal, scholastic, and governing challenges of the city emerging from the largest chapter 9 municipal bankruptcy in U.S. history.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery.  After years of failed leadership, financial mismanagement, quasi-chapter 9 municipal bankruptcy which led to a state takeover; the state of Detroit’s Public Schools Community District remains vital to encouraging young families to move back into the city—especially in the wake, last month, of DPS failing to meet critical deadlines necessary to be eligible for vital state aid.  (In 2016, Michigan enacted a $617 million DPS bailout, as we have previously noted.) That action separated the district’s debt from a new district that could start fresh. Now, renewed state intervention would be a critical fiscal step backwards; thus it is fortunate that Superintendent Nikolai Vitti appears to be on top of the situation: he warns that disciplinary action will follow in the wake of DPS’ failure to meet these deadlines, making it critical the Superintendent can trust his staff. It is especially vital now in the wake of a second credit rating upgrade—with the report card having recorded, last month, that DPS that Detroit Public Schools had lost out on $6.5 million in fiscal assistance to whittle down its old debt, because DPS officials had failed to turn in paperwork homework on time, according to Superindent Vitti (Michigan reimburses its public school districts for debt loss under Public Act 86 if they met the Aug. 15 deadline; thus, Superindent Vitte, on Monday, reported: “At this point, Detroit Public Schools is not eligible for the $6.5 million-dollar reimbursement from the state…After speaking with state officials, the available funds have already been disbursed to other qualifying entities. However, we will continue to petition the state to receive the reimbursement.”

Under the agreement, Detroit’s old district is still obligated to pay down its past operating debt; thus, the system’s failure to meet two deadlines last year cost not $6.5 million in aid from the state to help pay down its debt, but also a loss of public trust and confidence. As Superintendent Vitte noted last month: “At this point, Detroit Public Schools is not eligible for the $6.5 million-dollar reimbursement from the state: After speaking with state officials, the available funds have already been disbursed to other qualifying entities.” According to Superintendent Vitti, former CFO Marios Demetriou received the documents, but never completed them or sent them to the state. Even though the missed payout from the state is not expected to harm the day-to-day operations of the new district, it appears to curry a D grade; more importantly, it delays repayment of DPS’ legacy debt—or, as Superintendent Vitti notes: it is “unacceptable….The inability to submit the reimbursement form on time is a vestige of the past that continues to haunt the district…This is directly associated with the need for stronger leaders, systems, and processes. The individuals who were closest to the responsibility to submit the form will no longer be with the district.”

The unscholarly missteps appear to have contributed to ongoing doubts about the city’s fiscal acumen: The Motor City’s credit ratings remain deep in junk-bond territory, even after S&P Global Ratings last month upgraded Detroit’s credit rating from B to B+, while Moody’s last October had lifted its to B1 in the wake of the city’s launch of a new web portal to improve investor access to its financial data and bond offerings, Stephen Winterstein, a Managing Director and chief municipal fixed income strategist at Wilmington Trust Investment Advisors, Inc. to note he was “really optimistic about what they have been doing in terms of disclosure and the investor website is definitely a move in the right direction: The road to recovery is a long one, and I think that Detroit is doing the right things.”

Since exiting from the largest chapter 9 municipal bankruptcy in American history just three years ago last month, Detroit has issued debt twice: in August 2015 with $245 million of local government loan program revenue bonds, and in August 2016 with a $615 million general obligation/distributable state aid backed bond sale—albeit both issuances were via the Michigan Finance Authority, with the first enhanced with a statutory lien and intercept feature on the city’s income taxes. CFO John Naglick said that Detroit is also close to deciding on the underwriting team for a request for proposals it launched in October to find banks to lead a tender offer and refunding of its unsecured financial recovery municipal bonds with the aim of lowering its costs and easing a future escalation of debt service. For its part, S&P, in its upgrade, cited positive momentum the city is building with regard to stabilizing its operations and being better prepared to address future significant increases in pension contributions—or, as the agency noted: “We believe the city’s financial position is now more transparent compared with recent years, as is Detroit’s long-term financial strategy, which relies on fairly conservative growth assumptions…We also believe that the city has a stronger capacity to service its debt obligations than in years past.” Indeed, Detroit’s credit ratings are the highest since March of 2012, just over a year before Kevin Orr filed for chapter 9 bankruptcy in July of 2013. Nevertheless, Detroit’s credit rating remains deep in junk territory and vulnerable to another recession, say market participants. Or, as Michigan Attorney General and gubernatorial Bill Scheutte notes: “We still believe Detroit faces a long path that will require years of prudent decision-making from management and the avoidance of major economic shocks before its debt makes sense for investors looking for high-quality municipal exposure…The city still has an abundance of extremely high-risk characteristics and speculative-grade qualities that investors should be very cognizant of and understand what they are taking on.” Notwithstanding, Detroit appears to be on course to exit state oversight this year: it has presented deficit-free budgets for two consecutive years, enabling it to exit from oversight by the Financial Review Commission oversight; it ended FY2016 with a $63 million surplus; Detroit’s four-year forecast predicts an anemic annual growth rate of only about 1%; thus, any adverse public school news could have repercussions.

 

Advertisements

Getting Schooled on Disaster

December 15, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report on continuing, discouraging blocks to Puerto Rico’s fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery. Detroit’s Cerveny – Grandmont neighborhood, where median household income has declined by 5 percent since 2000 and average household incomes are under $38,000—and median home sale prices are just over $51,000, this week was one of 10 areas in the Motor City yesterday was cited in a report, “Reset, Rethink, Rebuild: A Shared Vision of Performing Schools in Quality Buildings for Every Child in Detroit”  a study about neighborhoods, educational opportunity, and the conditions of public school buildings, as one of ten neighborhoods wherein it is nearly impossible to find a quality school. Indeed, the report determined that the problem is deeper than just those 10 neighborhoods: Only 20 percent of the children enrolled in a public school in the city, whether charter or traditional public, are attending a quality school: a discouraging, failing grade with implications for both assessed property values and Detroit’s budget. Chris Uhl, the Executive Director of the eastern region for IFF, which published the study, noted: “The fact that four out of five kids in this city” are not attending a quality school “is pretty horrifying to me…that…should catalyze action.” The report notes that nearly half of the space in school buildings in the city is underutilized. A key recommendation of the report was that greater coordination is needed between leaders of the Detroit Public School System and the authorizers of charter schools—presumably including the current U.S. Secretary of Education. (Currently, only Grand Valley State University and Central Michigan University are authorized to open new charters in the city, but there are a number of other authorizers with schools in the city.)  IFF’s recommendations are similar last week’s report by the Coalition for the Future of Detroit Schoolchildren.

In its report, the IFF identified quality schools using Michigan’s less than clear, but outdated quality schools color-coded accountability system–a system due to be replaced next year: a part of that old system provided for the assignment of five colors, based on how well students achieved academic goals. Of the city’s 178 general education public schools, just 2.4% received the equivalent of an A.  The report makes clear that the steep road back from the nation’s largest municipal bankruptcy requires a greater focus on the next generation’s future: schools good enough to attract families back into the city—attracted by a good school to enroll their children. Today, too few of them exist—or, as the report notes: Detroit needs nearly 70,000 more seats available in quality schools to ensure that every child has access to such a school. Tonya Allen, President and CEO of the Skillman Foundation, which funded the research, noted: “We’re not meeting the demand, which leaves us vulnerable to leakages: for students to leave the city to go to school in the suburbs.”

A Taxing Recovery? Just as Puerto Ricans were treated unequally by the federal response to hurricane devastation compared to Houston and Florida, so too there is apprehension that the tax “reform” legislation nearing completion in Congress—especially as there is growing apprehension that Congress could move towards adopting a territorial tax system for businesses—that is a new tax system which would treat Puerto Rico as a foreign country with respect to the numerous foreign subsidiaries of U.S. corporations which operate there. Puerto Rico Secretary of Economic Development and Commerce Manuel Laboy Rivera is apprehensive that subsidiaries of U.S. corporations which receive favorable treatment under current federal law could find the emerging federal tax reform would impose a new 20 percent federal excise tax on all pharmaceuticals, medical devices, and other products shipped to the mainland—that is a new, discriminatory tax—which would be in addition to the Jones Act provisions which render Puerto Rico unable to compete fairly vis-à-vis other Caribbean competitor nations—even as Puerto Rico is subject to the federal minimum wage and other federal regulations involving workplace safety and environmental protection. Indeed, last December, a bipartisan congressional task force had recommended changes in the tax treatment of the U.S. territory with the Congressional Task Force on Economic Growth writing: “Puerto Rico is too often relegated to an afterthought in Congressional deliberations over federal business tax reform legislation. The task force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform.” Among the recommendations: a modification of the federal child tax credit to include the first and second children of families living in Puerto Rico, not just the third as specified under current law; the report also recommended making permanent the so-called rum cover-over payments to the governments of Puerto Rico and the U.S. Virgin Islands. The task force, however, was divided with regard to whether to fully expand the eligibility of Puerto Rican families for the Earned Income Tax Credit. The report recommended that a domestic business production credit known as Section 199 that has covered Puerto Rico since 2006 should be maintained as long as Section 199 continues. Now, however, that credit has been targeted for elimination in the pending tax reform negotiations as they enter their final hours. Under the discriminatory treatment, for federal tax purposes, Puerto Rico is considered outside the U.S. tax code, even though for virtually all other issues the island is treated as a domestic part of the U.S. For the purposes of federal tax reform, however, Senate Finance Committee Chair Orrin Hatch (R-Utah) said during the Finance Committee’s deliberations that Puerto Rico’s tax issues would be handled in separate legislation. So, it seems that for Hurricane Maria ravaged Puerto Rico, where 20% to 40% of all businesses are at risk of being shuttered in the wake of the hurricane and its ensuing devastation for the economy because of challenges ranging from the lack of electricity to loss of inventory, physical damage to their facilities, business interruption, and lack of capital; the message from Congress is to wait for next year.

House Ways and Means Committee Chairman Kevin Brady (R-Tx.) has informed reporters that he and other lawmakers are considering several options for Puerto Rico—especially in the wake of meeting with Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Representative in Congress, to discuss her request to consider making Puerto Rico an economic opportunity zone or empowerment zone—provisions adopted by Congress to abet economic recovery in hard-hit cities and counties. Thus, a change would be to treat Puerto Rico similarly—as if it were, gasp, a part of the United States for federal tax purposes and eligible for the same treatment. Likewise, tax reform could have been a vehicle for Congress to eliminate or reduce the discriminatory 20% excise tax on goods from Puerto Rico—a tax which undercuts Puerto Rico’s ability to compete with Cuba, and other countries in the region.

Even as the tax reform-deficit/debt increase legislation has swiftly moved towards the President’s desk, in New York, U.S. Judge Laura Taylor Swain, presiding over Puerto Rico’s quasi-chapter 9 case, heard from attorneys for the Employees Retirement System and the Puerto Rico Oversight Board—with the critical issue what claims of Puerto Rico’s bondholders are valid. PROMESA Oversight Board attorney Steven Weise said the 2008 Financing Statements governing Puerto Rico’s municipal bonds did not provide bondholders any collateral, arguing that the bondholders’ written arguments quoted from legal rulings about “security agreements,” but that what is allowed in these agreements are not allowed in Financing Statements—adding that the system’s legal name changed in the last several years, but that bondholders had failed to properly follow-up on this development—a failure which meant, at least as he argued, that the system should not be legally obligated to pay interest on the municipal bonds—even as Bruce Bennett, representing bondholders, told Judge Swain the bondholders had a lien on employer contributions, based on multiple commitments, arguing that the 2008 Financing Statements gave the bondholders the lien. He said errors in the document were not of such gravity to merit undercutting to undercut the bondholders’ claims—and adding that the Spanish name of the system had not changed, and that the change in the English name was just a translation change—a change without legal significance. Moreover, he noted, that along with the Financing Statements, a parallel “security agreement” had been created in 2008 and this perfected the lien; further, he argued, the 2015 and 2016 Financing Statements also assured the bondholders’ lien on the employer contributions.

Where Are the Lights? U.S. Army Corps of Engineers Lieutenant General Todd Semonite, the commanding General and Chief Engineer for the Corps reports that Puerto Rico’s electrical grid is unlikely to be fully restored until the end of May, a far more pessimistic timeline that suggested by Puerto Rico Governor Ricardo Rossello, who Wednesday stated he expects Puerto Rico’s electric grid to reach 75 percent of customers by the end of January—and 95 percent by the end of February—and 100 percent by the end of May. Adding to the dissonance, the Puerto Rico Electric Power Authority last month pledged service would reach 95 percent of customers by the end of this month—even though, as of Wednesday, just 61 percent of electricity had been restored.  

Catalysts to Fiscal Recoveries

November 10, 2017

Good Morning! In today’s Blog, we consider the ongoing challenges to Detroit’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy; the State of Michigan’s winnowing down of municipalities under state oversight; and the ongoing physical and fiscal challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Reframing the Motor City’s Post Chapter 9 Future. Nolan Finley, a wonderful contributor to the editorial page of the Detroit News, this week noted “elections are a wonderful catalyst for refocusing priorities, as evidenced by the just-completed Detroit mayoral campaign, which moved the city’s comeback conversation away from the downtown development boom and centered it on the uneven progress of the neighborhoods. Never before has such an intense spotlight shown on the places where most Detroit voters actually live.” He attributed some of the credit to the loser in this week’s mayoral election, challenger Coleman Young II, who forced Mayor Mike Duggan to defend his record on improving quality of life in the neighborhoods. He perceptively wrote that while candidate Young’s ugly “Take back the Motherland” rallying cry was dispiriting, it spoke to the governing challenge the newly, re-elected Mayor confronts, writing: “Detroit is not a city united. It must become one. There were too many skirmishes along the racial divide in this mayoral contest. The old city versus suburb story line was replaced by a neighborhood versus downtown narrative, but both are code for black versus white. Four years ago, Duggan’s election as Detroit’s first white mayor in 40 years suggested much of the city was ready to stop looking back at its dark and divisive past and begin focusing on a brighter future.” Now, he wrote, after Mayor Duggan focused his first term on meeting the city’s plan of debt adjustment, and trying to improve the quality of life for residents—and as developers are beginning to add community projects to their downtown portfolios, “too many in the neighborhoods feel as if their lives are not getting better, or at least not fast enough.” Thus, he noted, Mayor Duggan needs to redouble his efforts to restore the city’s residential communities, and push ahead the timetable: “Four years from now, Detroit cannot still be wearing the mantle of America’s most violent city.” He added that while Mayor Duggan has little—too little—authority to address education in Detroit; nevertheless—just as his colleague Rahm Emanuel, the Mayor of Chicago recognized, needs to strongly back Detroit Public School Superintendent Nikolai Vitti’s efforts to rapidly boost the performance of the Detroit Public Schools Community District: it is a key to bringing young families back into the city. And, Mr. Finley wrote, the mayor “must also find a way to connect the neighborhoods to downtown, to instill in all residents a sense of ownership and pride in the rejuvenation of the core city. That means getting way better at inclusion. Downtown’s comeback must be more diverse, and include many more of the people who have grown up and stayed in the city. Encouraging and supporting more African-American entrepreneurs is a great place to begin breaking down the perception that downtown is just for white people: Detroit needs more diversity everywhere in the city, both racial and economic,” referring especially to young millennials who are steeped in social justice and imbued with the obsession to give back that marks their generation. “They are committed Detroiters. And they deserve to be appreciated for their contributions, not made to feel guilty or viewed as a threat to hard-won gains.”

Free, Free at Last. Michigan State officials have released Royal Oak Township, a municipality of about 2,500 just north of Detroit, from its consent agreement: Michigan Treasurer Nick Khouri said the Oakland County municipality has resolved its financial emergency and is ready to emerge from the state oversight imposed since 2014, stating: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” The township’s financial emergency resulted in an assets FY2012 deficit of nearly $541,000. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever…The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” Treasurer Khouri also said the township was the last Michigan remaining municipality following a consent agreement: Over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements because of fiscal and financial improvements and operational reforms. The Treasurer noted that today only three communities, Ecorse, Flint, and Hamtramck, remain under state oversight through a Receivership Transition Advisory Board.

Preempting Authority. House Natural Resources Committee Chair Rob Bishop (R—Utah) this week said the PROMESA Oversight Board should be granted even more power to preempt the authority of the government of Puerto Rico, stating: “Today’s testimony will inform the work of Congress to ensure the Oversight Board and federal partners have the tools to coordinate an effective and sustained recovery,” in a written statement after a hearing of the House Committee on Natural Resources: “It is clear that a stronger mechanism will be necessary to align immediate recovery with long-term revitalization and rebuilding.” Chairman Bishop added: “This committee will work to ensure [the Puerto Rico Oversight Board] has the tools to effectively execute that mission and build a path forward for this island and its residents.” The Board was created last year to oversee fiscal management by the island government, which had said more than $70 billion of debt was unpayable under current economic conditions. Since the hurricane, the Board has clashed with the territorial government over leadership at the power utility. During the hearing the board’s Executive Director, Natalie Jaresko, said the ability of Puerto Rico’s government to repay its debt was “gravely worse” than it was before Hurricane Maria, which arrived Sept. 20. By the end of December, the Board plans to complete a 30 year debt sustainability analysis with Puerto Rico’s government, she said: “After the hurricane, it is even more critical that the Board be able to operate quickly and decisively…to avoid uncertainty and lengthy delays in litigation, Congressional reaffirmation of our exercise of our authority is welcome.” On Oct. 27, the board had filed a motion in the Title III bankruptcy case for the Puerto Rico Electric Power Authority (PREPA) seeking the court’s permission to appoint Noel Zamot as the authority’s new leader. The government of Gov. Ricardo Rosselló has made it clear that it intends to challenge this motion. The court is scheduled to hold a hearing on the matter on Monday, November 13th.

In calling for more board power, Chairs Bishop and Jaresko probably were at least partly referring to the struggle over PREPA’s leadership. They may also want the Board’s power augmented in other ways: the Board has already announced that it will be creating five-year fiscal plan for Puerto Rico’s government and for its public authorities this winter. Puerto Rico’s government will have substantial needs for federal aid in the coming years, Ms. Jaresko said. Congress plans to tie this aid to the government following the Board’s fiscal plan and this would be appropriate, she said. “Before the hurricanes, the board was determined that Puerto Rico and its instrumentalities could achieve balanced budgets, work its way through its debt problems, and develop a sustainable economy without federal aid,” Ms. Jaresko said in her written testimony. “That is simply no longer possible. Without unprecedented levels of help from the United States government, the recovery we were planning for will fail.” She also said that over the next 1.75 years Puerto Rico’s government will need federal help closing a gap of between $13 billion and $21 billion for basic services. She added the federal government should change tax laws to benefit the island: “The representatives of the Financial Oversight and Management Board (FOMB) who appeared before the House Committee on Natural Resources insist on jeopardizing the necessary resources for the payment of pensions and job stability,” Gov. Rosselló testified in his written statement, adding to that the testimony of Ms. Jaresko and Mr. Zamot “evidenced ignorance about the recovery process in Puerto Rico, presenting incorrect figures relating to the existing conditions on the island,” adding: “I again invite the FOMB to collaborate so that the government of Puerto Rico, together with the support of the federal government, facilitates the fastest possible recovery of our island.” He noted that such assistance should not depend on the Board “assuming the administrative role” which belongs to the elected government of Puerto Rico.

Sanctioned Discrimination. The endorsement that the House Ways and Means Committee effectively incorporated in its “tax reform” legislation reported out of Committee this week appears to discriminate against Puerto Rico, imposing a tariff on the products which Puerto Rico exports to the mainland—threatening to deal a devastating blow to Puerto Rico’s industrial base at the very moment in time the territory is striving to recover from the already disparate hurricane recovery blows. According to economists Joaquín Villamil: “None of these measures, nor the repatriation of profits, the corporate rate and the 20% tax on imports is positive for the island…The companies are not going to pay a 4% royalty to Puerto Rico and a 20% tax to bring their product to the United States. They will leave the island, especially if the tax rate is lowered there.” Mr. Villamil added: “If that happens, 21% of the income received by the Puerto Rican Treasury is eliminated,” he added, referencing P.L. 154, the statute which established a 4% tax on sales of an operation in Puerto Rico to its parent company in the mainland. In its markup, yesterday, the House Ways and Means Committee left almost intact §4303 which establishes a 20% tariff on all imported goods for resale by companies and businesses in the United States. Moreover, the disposition forces multinationals with operations in places such as the U.S. territory of Puerto Rico to repatriate their income to the U.S. What that means is that the production of drugs, medical devices, and many other goods in Puerto Rico is done on U.S. soil; however, for federal tax purposes, Puerto Rico is deemed an international jurisdiction—or, as economist Luis Benítez notes: “This (House Ways and Means bill) generates greater uncertainty about what the economic future of the island should be: with this, the figure of the controlled foreign corporation (CFC) loses the competitive advantage it had (under §936).” He noted that by reducing the corporate rate to multinationals operating in Puerto Rico, the benefit of giving them tax exemptions at the local level is also reduced, as is the case of Law 73 on Industrial Incentives: via the elimination of §936, Puerto Rico, as a place to do business, went from competing with the continental U.S. to competing with countries such as Singapore and Ireland, adding that now a reduction in the corporate rate would cause Puerto Rico not only to compete with the rest of the world, but with jurisdictions on the mainland: “I think that if I were the Secretary of the Treasury, I would tremble with this situation.”

In Puerto Rico, he estimates manufacturing employs approximately 75,000 people directly—a number which rises to 250,000 when indirect and induced jobs are calculated, adding that even though the manufacturing sector has shrunk in the past years, the productive and contributory base rests on that activity, adding that: “As much as it is said that they do not pay taxes, this sector contributes 33% of the revenues…As long as jobs are lost there, the treasury will erode,” noting that the industrial sector plays such a large role in Puerto Rico’s economy that no other sector of the service economy can counterbalance it. He worries that if Congress fails to address the apparent discrimination, the chances that the PROMESA Board and the government of Puerto Rico can put together an economic recovery plan is minimal: “These are implications for all of Puerto Rico: It is difficult to think about options, because if this is approved, it would be disastrous, because of everything that has happened after Hurricane Maria.”

Last night, the former president of the Association of Certified Public Accountants, Kenneth Rivera Robles, who has been part of several lobbying delegations to Washington, remained relatively optimistic that the project language will be amended.

President Woodrow Wilson signed the Jones-Shafroth Act into law on March 2, 1917, with the law providing U.S. citizenship to Puerto Rico’s citizens, granting civil rights to its people, and separating the Executive, Judicial, and Legislative branches of its government. The statute created a locally elected bicameral legislature with a House and Senate—but retained authority for the Governor and the President of the United States to have the authority to veto any law passed by the legislature. In addition, the statute granted Congress the authority to override any action taken by the Puerto Rico legislature, as well as maintain control over fiscal and economic matters, including mail services, immigration, defense, and other basic governmental matters. 

Fiscal & Physical Storms

September 6, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

 

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.

Getting into and out of Municipal Bankruptcy

07/10/17

Good Morning! In this a.m.’s eBlog, we consider the exceptional fiscal challenge to post-chapter 9 Detroit between building and razing the city; then we head East to Hartford, where the Governor and Legislature unhappily contemplate the Capital City’s fiscal future—and whether it will seek chapter 9 bankruptcy, before finally returning the key Civil War battlefield of Petersburg, Virginia—where a newly brought on Police Chief mayhap signals a turnaround in the city’s fiscal future.  

Raising or Razing a Municipality? Detroit, founded on July 24th in 1701 by Antoine de la Mothe Cadillac, the French explorer and adventurer, went on to become one of the country’s most vital music and industrial centers by the early 20th century; indeed, by the 1940’s, the Motor City had become the nation’s fourth-largest city. But that period might have been its apogee: the combination of riots and industrial restructuring led to the loss of jobs in the automobile industry, and signal white flight to the suburbs; since reaching a peak of 1.8 million in the 1950 census, Detroit’s population has declined precipitously: more than 60%.  Nevertheless, it is, today, the nation’s largest city on the U.S.—Canada border, and, with the imminent completion of the Gordie Howe Bridge to Canada, the city—already the anchor of the second-largest region in the Midwest, and the central city of a metro region of some 4.3 million Americans at the U.S. end of the busiest international crossing in North America; the question with regard to how to measure its fiscal comeback has been somewhat unique: it has been—at least up until currently, by the number of razed homes. Indeed, one of former Mayor Dave Bing’s key and touted programs was his pledge to raze 10,000 homes—a goal actually attained last year under Mayor Mike Duggan—under whose leadership some 11,500 homes have been razed. Mayor Duggan reports his current goal is to raze another 2,000 to 4,000 annually—so that, today, the city is host to the country’s largest blight-removal program—a critical component of Detroit’s future in a municipality which has experienced the loss of over one million residents over the last six decades—and where assessed property values of blighted and burned homes can be devastating to a municipality’s budget—and to its public schools. Worse, from a municipal governing perspective, is the challenge: how do the cities’ leaders balance helping its citizens to find affordable housing versus expenditures to raze housing—especially in a city where so many homeowners owed more than their homes were worth after the 2008 housing collapse?

Mayor Duggan’s response, moreover, has attracted the focus of multiple investigations, including federal subpoenas into bidding practices and the costs of demolitions—even as a separate grand jury has been reported to have subpoenaed as many as 30 contractors and Detroit municipal agencies, and Michigan officials have sought fines, because contractors mishandled asbestos from razed homes. Mayhap even more challenging: a recent blight survey by Loveland Technologies, a private company which maps the city, questions whether demolition is even keeping pace with blight in Detroit: the report indicates that vacancies in neighborhoods targeted for demolition have actually increased 64% over the last four years.

Hard Fiscal Challenges in Hartford: Is there a Role for the State? The Restructuring of Municipal Debt. Connecticut Gov. Daniel Malloy stated that the state would be willing to help the City of Hartford avoid chapter 9 municipal bankruptcy—but only if the city gets its own financial house in order, with his comments coming in the wake of the decision by Mayor Luke Bronin to hire an international law firm with expertise in municipal bankruptcies—with the Mayor making clear the city is also exploring other fiscal alternatives. Gov. Malloy has proposed offering millions more in state aid to the capital city in his budget proposal, to date, the state legislature, already enmired in its own, ongoing budget stalemate—has not reacted. Thus, the Governor noted: “I don’t know whether we can be all things to all people, but I think Hartford has to, first and foremost, help itself…But we should play a role. I think we need to do that not just in Hartford, but in Bridgeport and New Haven, and other urban environments and Waterbury. There’s a role for us to play.” The stakes are significant: Hartford is trying to close a $65 million fiscal gap—a gap which, should it not be able to bridge, would mean the city would have to seek express, prior written consent of the Governor to file a municipal bankruptcy petition (Conn. Gen. Stat.§7-566)—consent not yet sought by the city—or, as the Governor put it on Friday: “There’s no request for that…I don’t think they’re in a position to say definitively what they are going to do. I’m certainly not going to prejudge anything. That should be viewed as a last resort, not as a first.”

House Speaker Joe Aresimowicz (D-Berlin and Southington) and a former Member of the Berlin Council, reports the legislature could vote as early as a week from tomorrow on a two-year, $40 billion state budget, albeit some officials question whether a comprehensive agreement could be reached by that date, after the legislature has missed a series of deadlines, including the end of the legislative session on June 7th, not to mention the fiscal year of June 30th.  Meanwhile, the city awaits its fiscal fate: it has approved a budget of nearly $613 million, counting on nearly half the funds to come from the state; meanwhile, the city has hired the law firm of Greenberg Traurig to begin exploration of the option of filing for bankruptcy—or, as Mayor Bronin noted: “One important element of any municipal restructuring is the restructuring of debt…They will be beginning the process of reaching out to bond holders to initiate discussion about potential debt restructuring.”

Municipal Physical & Fiscal Safety. The fiscally challenged municipality of Petersburg, Virginia has brought on a new Chief of Police, “Kenny” Miller, a former Marine with 36 years of law enforcement experience.  Chief Miller views his new home as an “opportune place to give back” after a “blessed” career with one of Virginia’s largest police agencies—in the wake of serving 34 of his 36 years as an officer with the Virginia Beach Police Department. Chief Miller, who was sworn in last Friday afternoon, in the wake of a national search, noted: “You got to get out there and engage people…If people see that you care, they know you care. You can’t police inside of a building,” adding: “Engagement means working with the community…Solving problems together. People that live in the communities know the problems better than I do just passing through…We need to break down some barriers and get some trust going.” Chief Miller commences in his new role as the historic city seeks to turn around a fiscal and leadership crisis—one which left some parts of city government in dysfunction. The police department has had its own woes—including the Police Department, where, a year and a half ago, former Petersburg Chief John I. Dixon III acknowledged, after weeks of silence, that an audit of the department’s evidence and property room turned up $13,356 in missing cash related to three criminal cases—a finding which led former Petersburg Commonwealth’s Attorney Cassandra Conover to ask Virginia State Police to investigate “any issues involving” the police department that had come to her attention through “conversations and media reports” of alleged police misconduct or corruption—an investigation which remains ongoing. But the new Chief will face a different kind of fiscal challenge in the wake of the resignations of 28 sworn officers who have resigned in the last nine months after the city’s leaders imposed an across-the-board 10 percent pay cut for the city’s nearly 600 full-time workforce a year ago—and dropped 12 civilians from emergency communications positions. Nevertheless, Chief Miller said he was attracted to Petersburg because “the job was tailor-made for me. It’s a city on the rise, and I wanted to be part of something good…I don’t do it for the money. I’ve been blessed. I want to give back, (and) Petersburg is the opportune place to give back…The community members and the city leadership team are all working together to bring Petersburg to a beginning of a new horizon: “So why not be a part of that great opportunity?”

Chief Miller enters the job as Petersburg is straining to overcome a fiscal and leadership crisis that left some parts of city government in dysfunction; moreover, the police department has had its own woes. Seventeen months ago, former Petersburg police Chief John I. Dixon III acknowledged after weeks of silence that an audit of the department’s evidence and property room turned up $13,356 in missing cash related to three criminal cases. That led former Petersburg Commonwealth’s Attorney Cassandra Conover to ask the Virginia State Police to investigate “any issues involving” the police department which had come to her attention through “conversations and media reports” of alleged police misconduct or corruption. Nevertheless, Chief Miller reports he was “intrigued” by those officers who stayed with the force in spite of the pay cut “and showed virtue with respect to policing: Policing isn’t something that you do, it’s what you are: There are men and women there who really care about the city, and (those) people stayed.” He adds, he was attracted to Petersburg, because “the job was tailor-made for me. It’s a city on the rise, and I wanted to be part of something good…I’m now in my 36th year in law enforcement…And I don’t do it for the money. I’ve been blessed. I want to give back, (and) Petersburg is the opportune place to give back. The community members and the city leadership team are all working together to bring Petersburg to a beginning of a new horizon: So why not be a part of that great opportunity?” According to an announcement of his appointment as Petersburg’s Chief on Virginia Beach’s Facebook page: “[H]is connection with multiple civic leaders and groups throughout the city have forged and strengthened deep bonds between the Virginia Beach community and the police department.”

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.