Federalism, Governance, & Bankruptcy

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eBlog, 2/15/17

Good Morning! In this a.m.’s eBlog, we consider the evolving governance challenge in New Jersey and the state takeover of fiscally troubled Atlantic City—a breach into which it appears the third branch of government—the judiciary—might step. Next, we turn to whether governmental trust by citizens, taxpayers, and voters can be exhausted–or bankrupted–as the third branch of government, the judiciary–as in the case of New Jersey–could determine the fate of the former and current mayors of the fiscally insolvent municipality of Petersburg, Virginia. Finally, we try to get warm again by visiting Puerto Rico—where the territorial status puts Puerto Rico between a state and a municipality—what Rod Serling likely would have deemed a fiscal Twilight Zone—further complicated by language barriers—and, in a country where the federal government may not authorize states to file for bankruptcy protection, in a governance challenge with a new Governor. No doubt, one can imagine if Congress appointed an oversight board to take over New Jersey or Illinois or Kansas, the ruckus would lead to a Constitutional crisis.

We Await the Third Branch. The first legal action challenging the State of New Jersey’s takeover of Atlantic City finances will be decided at the local level in the wake of U.S. District Court Judge Renee Marie Bumb’s decision to remand the case back to Atlantic County Superior Court. The case involves a lawsuit from the union representing Atlantic City firefighters which alleges state officials are unlawfully seeking to lay off 100 firefighters and alter the union’s contract; Judge Bumb held that the federal court lacks jurisdiction, since the complaint does not assert any federal claims, thereby granting International Association of Firefighters Local 198’s “emergency motion” to remand the lawsuit to New Jersey state court, saying it was inappropriate for the defendants to remove the action to federal court. Thus, the case will revert to New Jersey Superior Court Judge Julio Mendez, who temporarily blocked the state-ordered firefighter cuts at the beginning of the month. The case involves the suit filed by the International Association of Fire Fighters, Local 198, and the AFL-CIO challenging the state’s action to proceed with 100 layoffs and other unilateral contract changes under New Jersey’s Municipal Stabilization and Recovery Act—the legislation enacted last November in the wake of the New Jersey Local Finance Board’s rejection of Atlantic City’s rescue plan. The suit claims the act violates New Jersey’s constitution. This legislation, which was implemented last November after the New Jersey’s Local Finance Board rejected an Atlantic City rescue plan, empowers the state alter outstanding Atlantic City debt and municipal contracts. Prior to Judge Mendez’s Ground Hog Day ruling, the state was planning to set up changes to the firefighters’ work schedule, salaries, and benefits commencing by cutting the 225-member staff roughly in half beginning in September.

Hear Ye—or Hear Ye Not. A hearing for the civil case brought against Petersburg Mayor Samuel Parham and Councilman and former Mayor W. Howard Myers is set for tomorrow morning. Both men are defendants in a civil court case brought about by members of registered voters from the fifth and third wards of Petersburg. Members of the third and fifth wards signed petitions to have both men removed from their positions. The civil case calls for both Parham and Myers to be removed from office due to “neglect, misuse of office, and incompetence in the performance of their duties.” The purpose of hearing is to determine trial date, to hear any motions, to determine whether Mayors Parham and Myers will be tried separately, and if they want to be tried by judge or jury. James E. Cornwell of Sands Anderson Law Firm will be representing messieurs Myers and Parham. (Mr. Cornwell recently represented the Board of Supervisors in Bath County, Virginia, where the board was brought to court over a closed-doors decision to cut the county budget by $75,000 and eliminate the county tourism office.) The City Council voted 5-2 on Tuesday night to have the representation of Mr. Myers and Mayor Parham be paid for by the city. Mayor Parham, Vice Mayor Joe Hart, Councilman Charlie Cuthbert, former Mayor Myers, and Councilman Darrin Hill all voted yes to the proposition, while Councilwoman Treska Wilson-Smith and Councilwoman Annette Smith-Lee voted no. Mayor Parham and Councilmember Hill stated that the Council’s decision to pay for the representation was necessary to “protect the integrity of the Council,” noting: “It may not be a popular decision, but it’s [Myers and Parham] today, and it could be another council tomorrow.” Messieurs Hill and Parham argued that the recall petition could happen to any member of council: “[The petitions] are a total attack on our current leadership…We expect to get the truth told and these accusations against us laid to rest.” The legal confrontation is further muddied by City Attorney Joseph Preston’s inability to represent the current and former Mayors, because he was also named in the recall petition, and could be called as a witness during a trial.

Federalism, Governance, & Hegemony. Puerto Rico Gov. Ricardo Rosselló has said that he is setting aside $146 million for the payment of interest due on general obligation municipal bonds, noting, in an address to the Association of Puerto Rico Industrialists, that he plans to pay off GO holders owed $1.3 million, because the Commonwealth defaulted on its payment at the beginning of this month, so, instead, he said the interest would be drawn from “claw back” funds, a term the government uses to describe the diversion of revenue streams which had supported other municipal bonds. Now the Governor has reported the $146 million would be held in an account at Banco Popular, ready to be used to meet subsequent general obligation payments to bondholders—noting that the funds to be used had not been “destined” to be used for essential services for Puerto Rico’s people; the Governor did not answer a question as to which bond revenues were being clawed back; however, his announcement creates the potential to partially address the nearly 9 month default on a $779 million payment.

But mayhap the harder, evolving governance issue is the scope of the PROMESA Board to “govern” in Puerto Rico: the statute Congress enacted and former President Obama signed does not vest authority in the PROMESA Oversight Board to review all legislation introduced by the current administration before its approval—thus, the growing perception or apprehension is the implication that Congress has created an entity which is violating the autonomy of the Government of Puerto Rico. It is, for instance, understood that Congress and the President lack the legal or Constitutional authority to take over the State of Illinois—a state which, arguably—has its own serious fiscal disabilities. Thus, it should come as no surprise that Gov. Rosselló’s administration is feeling besieged by disparate treatment at the receipt of a letter sent by the PROMESA Board at the beginning of this month—an epistle in which Board Chair José B. Carrión requested that the Puerto Rican Government discuss with the Board the implications of any new legislation before submission, citing §§204, 207, and 303 of PROMESA as part of the “many tools that can be deployed in terms of legislation.” Unsurprisingly, Elías Sánchez Sifonte, Gov. Rosselló’s representative to the Board, wrote that the Board’s “request to preliminarily review all legislation, as a right they can exercise, is not considered in PROMESA, and it violates the autonomy of the Government of Puerto Rico,” noting that Governor Rosselló’s administration “is working and will continue to work in cooperation with the Oversight Board on all issues” considered under PROMESA. Nevertheless, in the epistle, Mr. Sifonte wrote that “nowhere” in §204 is there any mention that the Government of Puerto Rico must submit its legislation for revision, rather: “It only requires that the legislation be submitted to the Board after it has been properly approved,” even as Mr. Sifonte acknowledged in the letter that after the Fiscal Plan has been certified, the Commonwealth must forward any adopted legislation to the PROMESA Board, accompanied by a cost estimate and a certification stating if it is consistent with the fiscal plan. Moreover, Mr. Sifonte added, because there is currently no fiscal plan, such a certification is not applicable, although a cost estimate is—the deadline for the fiscal plan is February 28th at the latest.

Moreover, according to Mr. Sifonte, “[o]nce the Plan is certified, every piece of legislation to be submitted will be consistent with the Fiscal Plan and will be accompanied by the proper certification, which, in his view, means that it should be protected from Board review, according to the Congressional report that gave way to PROMESA, adding that his purpose in communicating was to “help” both Puerto Rico and the PROMESA Board understand and respect each other’s authority—or, as he noted: “PROMESA’s broad powers are recognized, and we recognize all of the Board’s powers contained within the law. What shouldn’t happen is for them to want to go further, despite those extensive powers, and occupy a space that belongs to the officials elected by the people, because then that would in fact infringe upon the full democracy of our country,” adding that “the administration’s intention is not to interfere with the Oversight Board while the members carry out their mission under the federal statute, but the letter seeks to clarify “the autonomy of Puerto Rico’s Government, which is safeguarded under PROMESA.” The letter also states that the Government’s interpretation of PROMESA is based on Section 204(a)(6), which establishes that the Oversight Board may review legislation before it is approved “only by request of the Legislature.” Finally, Mr. Sifonte addressed a fundamental federalism apprehension: referencing §207 of PROMESA, which establishes that “the territory” cannot issue, acquire, or modify debt, he wrote that Puerto Rico has not issued, nor does it intend to issue any debt, referencing the Puerto Rico Financial Emergency & Fiscal Responsibility Act, and emphasizing this statute marks a change in public policy, with the intention of paying the creditors, just as Governor Rosselló this month had announced. Finally, he noted: the “inappropriateness” of the Chairman’s proposition, where—under the protection of §303 of PROMESA—he tells the Government that “the compliance measures under PROMESA should be a last resort and hopefully won’t be necessary,” noting that that provision “expressly says that the Government of Puerto Rico retains the duty to exercise political power or the territory’s governmental powers.”

Are American Cities at a Financial Brink?

eBlog, 1/13/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and physical challenges to the City of Flint, Michigan in the wake of the disastrous state appointment of an Emergency Manager with the subsequent devastating health and fiscal subsequent crises, before turning to a new report, When Cities Are at the Financial Brink” which would have us understand that the risk of insolvency for large cities is now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” before briefly considering the potential impact on every state, local government, and public school system in the country were Congress to adopt the President-elect’s proposed infrastructure plan; then we consider the challenge of aging: what do longer lifespans of city, county, and state employees augur for state and local public pension obligations and credit ratings?

Not In Like Flint. Residents of the City of Flint received less than a vote of confidence Wednesday about the state of and safety of their long-contaminated drinking water, precipitated in significant part by the appointment of an Emergency Manager by Governor Rick Snyder. Nevertheless, at this week’s town hall, citizens heard from state officials that city water reaching homes continues to improve in terms of proper lead, copper, alkaline, and bacteria levels—seeking to describe Flint as very much like other American cities. The statements, however, appeared to fall far short of bridging the trust gap between Flint residents and the ability to trust their water and those in charge of it appears wide—or, as one Flint resident described it: “I’m hoping for a lot…But I’ve been hoping for three years.” Indeed, residents received less than encouraging words. They were informed that they should, more than 30 months into Flint’s water crisis, continue to use filters at home; that it will take roughly three years for Flint to replace lead water service lines throughout the city; that the funds to finance that replacement have not been secured, and that Flint’s municipal treatment plants needs well over $100 million in upgrades: it appears unlikely the city will be ready to handle water from the new Karegnondi Water Authority until late-2019-early 2020. The state-federal presentation led to a searing statement from one citizen: “I’ve got kids that are sick…My teeth are falling out…You have no solution to this problem.”

Nevertheless, progress is happening: in the last six months of water sampling in Flint, lead readings averaged 12 parts per billion, below the federal action level of 15 ppb, and down from 20 ppb in the first six months of last year. Marc Edwards, a Virginia Tech researcher who helped identify the city’s contamination problems, said: “Levels of bacteria we’re seeing are at dramatically lower levels than we saw a year ago.” However, the physical, fiscal, public trust, and health damage to the citizens of Flint during the year-and-a-half of using the Flint River as prescribed by the state-appointed Emergency Manager has had a two-fold impact: the recovery has been slow and residents have little faith in the safety of the water. Mayor Karen Weaver has sought to spearhead a program of quick pipeline replacement, but that process has been hindered by a lack of funding.

State Intervention in Municipal Bankruptcy. In a new report yesterday, “When Cities Are at the Financial Brink,” Manhattan Institute authors Daniel DiSalvo and Stephen Eide wrote the “risk of insolvency for large cities in now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” adding that “states…should intervene at the outset and appoint a receiver before allowing a city or other local government entity to petition for bankruptcy in federal court—and writing, contrary to recent history: “Recent experiences with municipal bankruptcies indicates that when local officials manage the process, they often fail to propose the changes necessary to stabilize their city’s future finances.” Instead, they opine in writing about connections between chapter 9, and the role of the states, there should be what they term “intervention bankruptcy,” which could be an ‘attractive alternative’ to the current Chapter 9. They noted, however, that Congress is unlikely to amend the current municipal bankruptcy chapter 9, adding, moreover, that further empowering federal judges in municipal affairs “is sure to raise federalism concerns.” It might be that they overlook that chapter 9, reflecting the dual sovereignty created by the founding fathers, incorporates that same federalism, so that a municipality may only file for chapter 9 federal bankruptcy if authorized by state law—something only 18 states do—and that in doing so, each state has the prerogative to determine, as we have often noted, the process—so that, as we have also written, there are states which:

  • Precipitate municipal bankruptcy (Alabama);
  • Contribute to municipal insolvency (California);
  • Opt, through enactment of enabling legislation, significant state roles—including the power and authority to appoint emergency managers (Michigan and Rhode Island, for instance);
  • Have authority to preempt local authority and take over a municipality (New Jersey and Atlantic City.).

The authors added: “The recent experience of some bankrupt cities, as well as much legal scholarship casts doubt on the effectiveness of municipal bankruptcy.” It is doubtful the citizens in Stockton, Central Falls, Detroit, Jefferson County, or San Bernardino would agree—albeit, of course, all would have preferred the federal bailouts received in the wake of the Great Recession by Detroit’s automobile manufacturers, and Fannie Mae and Freddie Mac. Similarly, it sees increasingly clear that the State of Michigan was a significant contributor to the near insolvency of Flint—by the very same appointment of an Emergency Manager by the Governor to preempt any local control.

Despite the current chapter 9 waning of cases as San Bernardino awaits U.S. Bankruptcy Judge Meredith Jury’s approval of its exit from the nation’s longest municipal bankruptcy, the two authors noted: “Cities’ debt-levels are near all-time highs. And the risk of municipal insolvency is greater than at any time since the Great Depression.” While municipal debt levels are far better off than the federal government’s, and the post-Great Recession collapse of the housing market has improved significantly, they also wrote that pension debt is increasingly a problem. The two authors cited a 2014 report by Moody’s Investors Service which wrote that rising public pension obligations would challenge post-bankruptcy recoveries in Vallejo and Stockton—perhaps not fully understanding the fine distinctions between state constitutions and laws and how they vary from state to state, thereby—as we noted in the near challenges in the Detroit case between Michigan’s constitution with regard to contracts versus chapter 9. Thus, they claim that “A more promising approach would be for state-appointed receivers to manage municipal bankruptcy plans – subject, of course, to federal court approval.” Congress, of course, as would seem appropriate under our Constitutional system of dual sovereignty, specifically left it to each of the states to determine whether such a state wanted to allow a municipality to even file for municipal bankruptcy (18 do), and, if so, to specifically set out the legal process and authority to do so. The authors, however, wrote that anything was preferable to leaving local officials in charge—mayhap conveniently overlooking the role of the State of Alabama in precipitating Jefferson County’s insolvency.  

American Infrastructure FirstIn his campaign, the President-elect vowed he would transform “America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains with a deficit-neutral plan targeting substantial new infrastructure investments,” a plan the campaign said which would provide maximum flexibility to the states—a plan, “American Infrastructure First” plan composed of $137 billion in federal tax credits which would, however, only be available investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Left unclear is how such a plan would impact the nation’s public infrastructure, the financing of which is, currently, primarily financed by state and local governments through the use of tax-exempt municipal bonds—where the financing is accomplished by means of local or state property, sales, and/or income taxes—and some user fees. According to the Boston Federal Reserve, annual capital spending by state and local governments over the last decade represented about 2.3% of GDP and about 12% of state and local spending: in FY2012 alone, these governments provided more than $331 billion in capital spending. Of that, local governments accounted for nearly two-thirds of those capital investments—accounting for 14.4 percent of all outstanding state and local tax-exempt debt. Indeed, the average real per capita capital expenditure by local governments, over the 2000-2012 time period, according to the Boston Federal Reserve was $724—nearly double state capital spending. Similarly, according to Census data, state governments are responsible for about one-third of state and local capital financing. Under the President-elect’s proposed “American Infrastructure First” plan composed of $137 billion in federal tax credits—such credit would only be available to investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Similarly, because less than 2 percent of the nation’s 70,000 bridges in need of rebuilding or repairs are tolled, the proposed plan would be of no value to those respective states, local governments, or users. Perhaps, to state and local leaders, more worrisome is that according to a Congressional Budget Office 2015 report, of public infrastructure projects which have relied upon some form of private financing, more than half of the eight which have been open for more than five years have either filed for bankruptcy or been taken over by state or local governments.

Moody Southern Pension Blues. S&P Global Ratings Wednesday lowered Dallas’s credit rating one notch to AA-minus while keeping its outlook negative, with the action following in the wake of Moody’s downgrade last month—with, in each case, the agencies citing increased fiscal risk related to Dallas’ struggling Police and Fire Pension Fund, currently seeking to stem and address from a recent run on the bank from retirees amid efforts to keep the fund from failing, or, as S&P put it: “The downgrade reflects our view that despite the city’s broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, expected continued deterioration in the funded status of the city’s police and fire pension system coupled with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant and negatively affects Dallas’ creditworthiness.” S&P lowered its rating on Dallas’ moral obligation bonds to A-minus from A, retaining a negative outlook, with its analysis noting: “Deterioration over the next two years in the city’s budget flexibility, performance, or liquidity could result in a downgrade…Similarly, uncertainty regarding future fixed cost expenditures could make budgeting and forecasting more difficult…If the city’s debt service, pension, and OPEB carrying charge elevate to a level we view as very high and the city is not successful in implementing an affordable plan to address the large pension liabilities, we could lower the rating multiple notches.” For its part, Fitch Ratings this week reported that a downgrade is likely if the Texas Legislature fails to provide a structural solution to the city’s pension fund problem. The twin ratings calls come in the wake of Dallas Mayor Mike Rawlings report to the Texas Pension Review Board last November that the combined impact of the pension fund and a court case involving back pay for Dallas Police officers could come to $8 billion—mayhap such an obligation that it could force the municipality into chapter 9 municipal bankruptcy, albeit stating that Dallas is not legally responsible for the $4 billion pension liability, even though he said that the city wants to help. The fund has an estimated $6 billion in future liabilities under its current structure. In testimony to the Texas State Pension Review Board, Mayor Rawlings said the pension crisis has made recruitment of police officers more difficult just as the city faces a flood of retirements.

 

What Is the State Role in Municipal Solvency/Recovery?

 

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eBlog, 11/21/16

Good Morning! In this a.m.’s eBlog, we consider the state role in addressing municipal fiscal distress and bankruptcy: what are the different models—and how are they working? Then we consider one especially dysfunctional model: Ohio, where the City of East Cleveland could find its two Mayoral candidates in municipal jail before the voters go to the polls early next month. From thence, we strike east to consider this month’s elections in Massachusetts on charter schools—examining an issue that goes to the heart not only of state local relations and authority, but also to the potential impact on municipal assessed property values. What may be learned? Finally, we wish readers a Happy Thanksgiving!

What Is the State Role in Municipal Solvency/Recovery? Under our country’s system of dual federalism created by the founding fathers, while federal law authorizes municipalities to file for chapter 9 bankruptcy, a city, county, or school district may only do so if authorized by a state. Today, only 18 of the 50 states provide such authority. Ergo, one of the issues we have sought to consider through this eBlog has been the evolving State role in municipal distress in a field of seeming constant flux. This month, for instance, we experienced the uncertain governance situation in New Jersey in the wake of the state takeover of the City of Atlantic City—a state takeover in which the process and how it will play out could be further impacted by the potential selection by President-elect Trump of New Jersey Governor Chris Christie, who might be a potential Cabinet or other senior advisor to the President-elect.

Actual governance has shifted from local accountability to the state’s Division of Local Government Services—but with the state already having imposed a state emergency manager in the city, what the new state takeover means continues to be uncertain. In Ohio, which authorizes chapter 9 municipal bankruptcy, the City of East Cleveland’s request to do so appears to be on the desk of Rod Serling in the Twilight Zone: there has simply been no response of any kind. Similarly, in California, state policies have clearly contributed to some of the fiscal distress that led Stockton and San Bernardino into chapter 9 municipal bankruptcy, but the state played absolutely no role in helping either Stockton or San Bernardino to emerge. Michigan, a state which has been deeply enmeshed in municipal fiscal distress—albeit not necessarily in a constructive manner—has acted in different ways—going from its imposition of an emergency manager—a process with deadly consequences in Flint, but seemingly key to Detroit’s turnaround. Alabama, by refusing to allow Jefferson County to raise its own taxes, directly aided and abetted the County’s chapter 9 municipal bankruptcy. Rhode Island, on the day of Central Falls’ chapter 9 filing—the very day Providence, the state’s capitol city, was itself poised on the rim of filing, but opted not to—and the state, thanks to the exceptional ingenuity of its then Treasurer (now Governor), created an ingenious model of creating teams of city managers and retired state legislators to act in teams to offer assistance to cities in danger of insolvency—so that there was a team effort before—instead of after such a precipitous event.

Part of what has made this effort to assess what is happening in the arena of severe municipal fiscal challenges and bankruptcy so much more difficult is the surprise that, in the wake of recovery from the Great Recession, one would have assumed severe municipal fiscal distress and insolvency would have dissipated. It has not. What has changed? Why are States not reacting more uniformly? With only 18 states permitting municipal bankruptcy, what state models exist which offer a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion? What is a state’s role in recovery from a chapter 9 municipal bankruptcy? What is a state’s role in addressing increasing fiscal disparities?

Ungoverning in a Fiscal Twilight Zone. In East Cleveland, Ohio, the mall city which is seeking authority from the State of Ohio to file for chapter 9 bankruptcy—a plea to which it remains unclear whether there will ever be a response, and where there have been on and off discussions with adjacent Cleveland about a consolidation of the two municipalities; the city’s election day activities provide a sense of the increasing dysfunctional nature of the small city: it was, after all, on election day this month at Mayfair Elementary School where both candidate Devin Branch and current Mayor Gary Norton were working the polls trying to convince registered voters to go with their respective causes. Mayor Norton was pressing potential voters not to recall him at the city’s upcoming election on December 8th; Devin Branch was going door-to-door to obtain the 550 requisite signatures to ensure the recall would officially be on the ballot. Their respective efforts, however, came up against each other when they encountered each other going after the same person and their battle became an event where they pressed their respective clip boards in front of registered voters—leading to a confrontation so that Mayor Norton decided to order the Chief of Police and a squad of police to arrest Mr. Branch. Moreover, dissatisfied with the police response, Mayor Norton then ordered his personal lawyer, Willa Hemmons, to issue a warrant for the arrest of Mr. Branch. Thus, in an insolvent municipality, several squads of police and detectives were directed to make the arrest of Devin Branch last Thursday. Mr. Branch was arrested and placed in East Cleveland’s jail; last Friday, Judge William Dawson opened the door for his release after posting bond. This morning, Judge Dawson will hear from both men, albeit, what the voters and city’s taxpayers will hear seems unlikely to be enlightening for the city’s fiscal future.

Schooled in Fiscal Solvency? Massachusetts voters this month overwhelmingly rejected a major expansion of charter schools, rejecting Question 2 by nearly a 2-1 margin, in what was perceived as a significant setback for Governor Charlie Baker, who had aggressively campaigned for the referendum, saying it would provide a vital alternative for families trapped in failing urban schools. As proposed, the measure would have allowed for 12 new or expanded charters per year, adding significantly to the existing stock of 78 charters statewide. Had the measure been approved, it would have—as state-imposed charter schools in Detroit are, shifted thousands of dollars in state aid from public to charter schools—shifting as much as an estimated $451 million statewide this year. During the campaign, opponents such as Juan Cofield, president of the New England Area Council of the NAACP, warned that charters were creating a two-tiered system, draining money from the traditional schools that serve the bulk of black and Latino students, telling voters “a dual school system is inherently unequal.” Worcester Mayor Joseph Petty, an opponent, noted: “Here in Worcester we will spend $24.5 million dollars on charter schools in our city…that is money that could be used to hire more teachers, improve our facilities, and invest in our students,” in effect underscoring the reason municipal leaders in the Bay State opposed the measure: their apprehension with regard to the fiscal impact on cities, towns, and school districts when more children attend charter schools. Had the measure been adopted, district schools would have received less money: the money to educate a child would have followed the child: over time, expanding access to charter schools could cost local property taxpayers more, since district schools will need more funding, forcing local elected leaders to either raise property taxes more, or cut public services. Indeed, opponents of charter school expansion claimed, based on state data, that school districts would have lost some $450 million this year to charter school tuition, even after accounting for state reimbursements.

Unsurprisingly, ergo, municipal officials generally opposed expanding charter schools, with the mayors of Springfield, Boston, Chicopee, Holyoke, Northampton, Pittsfield, Westfield, and West Springfield all coming out publicly opposed. Geoff Beckwith, the Executive Director of the Massachusetts Municipal Association, said the current funding system is already difficult for cities and towns to deal with, noting that, for one, the formula transferring money from district to charter schools does not take into account the fact that many of a school’s costs are fixed and do not vary by child, noting that with regard to the fiscal impact on cities, towns and school districts: “You have to a have a classroom, you have to heat the building, you still have principals…It’s extremely hard for communities to actually cut costs…The only thing they can do is cut back on the overall quality of the programming they’re offering the vast majority of kids who stay behind in the regular public school system.” Ergo, he noted: “Until the financing system is fixed, the ballot question providing for the expansion of charter schools would exacerbate and deepen the financial trouble that these local school systems are dealing with…And the communities that are most impacted by charter school expansion are in most cases the most financially challenged communities.” (Unsurprisingly, the Massachusetts Municipal Association board voted unanimously to oppose the ballot question.) Indeed, Moody’s reported the rejection to be a credit positive for the Commonwealth’s urban local governments: “It will allow those cities and towns to maintain current financial operations without having to adjust to increased financial pressure from charter school funding.” According to Moody’s, since the last charter school expansion in 2010, cities such as Boston, Fall River, Lawrence, and Springfield have experienced significant growth in charter school assessments, averaging 83% due to increasing charter school enrollment. To which, Moody’s notes: “So far, the growing cost of charter schools on municipalities has not been a direct credit challenge; rather the effect is more indirect because Massachusetts school districts are integrated within cities and towns with relatively healthy credit profiles.” The agency went on to write: “Education in the commonwealth is a primary budget item within a municipality’s overall budget, which allows city budgets to absorb some of the education financial stress with other municipal sources….This integration is a key distinction from school districts in other states that operate separately from the communities they serve.”

The Importance of Bipartisan Leadership in Averting Severe Human & Fiscal Distress

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eBlog, 5/26/16

In this morning’s eBlog, we applaud House Speaker Paul Ryan (R-Wisc.), House Natural Resources Committee Chair Rob Bishop’s (R-Utah), U.S. Treasury Secretary Jacob Lew, and House Minority Leader Nancy Pelosi (D-Ca.) for their leadership roles in contributing to the remarkably swift, bipartisan markup of legislation (PROMESA) to address Puerto Rico’s looming insolvency; and, we continue to follow the seemingly unrelenting challenge in Wayne County to emerge from its fiscal emergency consent agreement.

House Panel Forwards Puerto Rico Legislation. The House Natural Resources Committee yesterday voted 29-10 to send to the full House legislation, HR 5278, to address Puerto Rico’s debt crisis with solid bipartisan support, a strong sign the bill could move quickly through Congress ahead of a potential default by the territory on July 1. As reported, the bill would create a debt-restructuring process and name a seven-member financial control board, not the government elected by Puerto Rico, to determine whether and when to initiate court-supervised debt restructuring, and it would have the power to approve or reject budgets. The board would terminate after Puerto Rico regains the ability to borrow at reasonable interest rates and balances its budget for four consecutive years.to oversee the U.S. territory—not unlike previous control boards in New York City and Washington, D.C.—and similar to the oversight fiscal control board created as part of Detroit’s exit from the largest municipal bankruptcy in American history. The bipartisan vote came despite the strong opposition from some municipal bondholders, hedge funds, and unions: millions of dollars on television advertisements had been expended to defeat it. Chair Rob Bishop (R.- Utah) said he expects majorities of both parties to back the bill when it comes to the House floor when Congress returns the week after next, while in the Senate, Majority Leader Mitch McConnell (R.- Ky.) said Senators were “anxious to take up” whatever the House could pass. The White House supports the measure. The measure was opposed by both labor unions and Puerto Rican elected officials, as well as some House members, who claimed the bill would threaten creditors’ rights and create a potential precedent for distressed states—claims not only inconsistent with the dual sovereignty of the United States, but also because the legislation was done through the territories clause of the U.S. Constitution—or, as David Hammer, co-head of municipal bond portfolio management at Pacific Investment Management Co. put it: “This creates a clear firewall and ring-fences Puerto Rico from the broader muni market,” adding hat, moreover, the debt-restructuring mechanism would require Puerto Rico to cede more power to the federal government, noting: “That’s not something a state or local government would ever seek to do.”

The Committee rejected proposed amendments to delete language limiting Puerto Rico’s minimum wage, ease economic aid to the island, and ban the Federal Reserve from purchasing Puerto Rican bonds or paying down the commonwealth’s debt—as well as amendments focused on Puerto Rico’s constitutionally guaranteed debt. (Roughly $18 billion of the more than $70 billion in Puerto Rican municipal debt is backed by its constitution.) The committee also rejected an amendment from Rep. John Fleming (R-La.) that critics said would not give the board enough flexibility to properly sort out debt repayment priorities according to the Puerto Rican Constitution. The bill cleared committee with one significant change. The adopted amendment from Rep. Garret Graves (R-La.) mandates that no federal money can go to paying down or buying Puerto Rican debt or liability, which could help tamp down Republican fears of a potential bailout.

Pensionary Solvency. Wayne County, Michigan Executive Warren Evans has taken another step in pressing his commitment to take the county surrounding Detroit out of its emergency consent agreement by the end of this year by, yesterday, announcing the County will make an additional $14 million contribution toward its underfunded pension system—a contribution which will be in addition to the $63 million which the County is currently obligated to pay annually into its retirement fund, but falls short of the $19 million county officials originally anticipated they would be able to afford. In FY2014, Wayne’s pension audit revealed some $840.5 million of unfunded pension liabilities. According to Wayne County spokesman James Canning, last December officials determined the County could make a $10 million contribution into the pension fund from funds declared as surplus from its Delinquent Tax Revolving Fund and Property Forfeiture funds; in addition Wayne anticipated it could funnel another $9 million from fund balances—albeit, in the wake of a third-party administered study on its pension system conducted earlier this year, the County determined it would only be able to contribute an additional $4 million from the fund balances. When the County entered into the consent agreement, it faced an accumulated deficit of $82 million, a yearly structural deficit of $52 million, $1.3 billion in unfunded health care liabilities, and a pension fund that was underfunded by nearly $900 million. By last month, according to its CAFR, its FY15 year-ending accumulated deficit of more than $82 million had been eliminated and the books were closed with a $35.7 million unassigned surplus—albeit some $30 million of that was earmarked for specific uses, leaving Wayne County with a surplus of only $5.7 million.

Other key steps involved reductions in other post-employment benefits, where the County achieved reductions of about $850 million in unfunded liabilities—reducing its OPEB liability by 65%, and bringing the county’s pay-as-you-go contribution this year down more than 50 percent from $40.4 million to $17.6 million—savings achieved by switching some retirees to what the county deems more “cost-effective health plans and providing others with need-based stipends to purchase their own insurance.” Absent such changes, Wayne County had warned that the actuarial accrued liability was on track to rise to $1.8 billion.

What Are the End Games in East Cleveland, Atlantic City, & Puerto Rico?

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eBlog, 5/13/16

In this morning’s eBlog, we wonder if the end game is nearing in East Cleveland—and what lessons might be learned with regard to growing fiscal disparities—and where municipal bankruptcy falls short. We observe the hint of an end game in Atlantic City—and muse about apprehensions about fallout or municipal contagion from the almost certain state takeover of Atlantic City. Finally, we try to update readers on the evolving efforts in the U.S. House of Representatives by House Speaker Paul Ryan to help Puerto Rico—watching, at the same time, for what the looming U.S. Supreme Court decision on Puerto Rico expected the day before the U.S. territory is projected to default on as much as $1.9 billion might mean to the efforts in Congress.

A City on the Brink. The City of East Cleveland has scheduled a public meeting for next Thursday to discuss finances, potentially filing for municipal bankruptcy, and updates on a potential East Cleveland-Cleveland merger. The session is scheduled in the wake of Ohio Tax Commissioner Joe W. Testa’s notification to the City with regard to a list of items the city must prepare before requesting approval of its request to file for chapter 9 municipal bankruptcy. The reply came as the city is considering what such a filing might mean with regard to a possible merger with the City of Cleveland—a merger which would require a comparable, detailed fiscal plan, similar to one required for federal bankruptcy court. Either would require legal assistance—in effect draining away already diminishing fiscal resources. In East Cleveland’s case, the decision how to proceed is further complicated in that chapter 9 is a federal tool to permit a municipality to address debt—something which East Cleveland hath not: its problem is insufficient and eroding revenue, so that its ability to finance essential services, such as police and fire, is increasingly at risk. However, Council President Thomas Wheeler notes that municipal bankruptcy would protect the city’s assets, so that it can make payroll: East Cleveland currently struggles to make its $250,000 payroll every two weeks. Chapter 9 would also provide some options to renegotiate contracts that were made in “better times,” as well as address some of the city’s looming liabilities from pending suits against the city.

Indeed, East Cleveland currently struggles to make its $250,000 payroll every two weeks. That means, too, that with an eroding population and average annual family income of about $20,000 and nearly a 50 percent poverty rate, the option of raising taxes—as the U.S. Justice Department had insisted upon for Ferguson, Missouri, could be a self-defeating effort. East Cleveland’s fiscal slide has been such that it has not had a bond rating since 1988. The other option—a merger with the City of Cleveland—could be considered next week, when the Council will consider an ordinance to enter negotiation for annexation with Cleveland and to appoint three commissioners to represent the city in negotiations. There are, however, according to Cleveland Council President Kevin Kelley, no comparable efforts in Cleveland—although the state appears willing to appropriate as much as $10 million to facilitate such a merger. Council President Kelley seems uncertain what the impact of a municipal bankruptcy filing by East Cleveland would have on the discussions of a potential merger.

The End Game for Atlantic City? Senate President Steve Sweeney and Assembly Speaker Vincent Prieto came together behind the scenes yesterday and are, reportedly, close to resolving the crisis in Atlantic City—with the only—but very large only—risk that New Jersey Governor and VP aspirant Chris Christie might not sign it. With the end game nearing and a state takeover of the city increasingly likely, Atlantic City’s employees—where police and firefighters comprise two-thirds of the city’s payroll and command generous salaries, are evincing a willingness to make concessions—unsurprising concessions in the wake of Gov. Christie’s claim that Atlantic City had not “addressed the rich benefits and the salaries of the police and fire departments,” apparently savoring the power he would gain in a takeover, which would grant the state power to tear up their contracts: police officers and firefighters make up two-thirds of the city’s salary cost, according to a May 6 city employee list, and there are 418 public safety workers who earn more than $92,000 in base salary. But the potential savings might turn out to be less: of the reductions in the city’s budget under Mayor Don Guardian since last year, nearly $12 million has come from public safety — more than any other department — according to former emergency manager Kevin Lavin’s final report. In fact, the 2014 Hanson Report reported that “right-sized” police and fire departments for the city should include 285 police officers (there are now 282) and 180 firefighters (there are now 227, but the city only pays for 143 thanks to a federal grant). As for benefits, last year Atlantic City went to arbitration with International Association of Fire Fighters Local 198, the city’s the firefighters union, over the very same benefits the state has criticized the city for not reducing. The city’s position going in was to cut salaries and eliminate terminal leave, longevity and education incentives in their entirety, taking the position “the city cannot and will not be able to afford the extravagant benefits currently provided in the collective negotiations agreement,” according to the procedural background in the arbitration award. In the outcome, an arbitrator froze education and longevity pay for current firefighters, and eliminated the longevity benefit for firefighters hired after January 2012. In addition, terminal leave payouts were capped at $15,000 for firefighters hired after January 2010—changes that Mayor Guardian described Trump-like as “huge savings,” adding that the city was “looking for the same type of reductions in the police department.”

Contagion? In its “Issuer in Depth” update Wednesday, Moody’s looked at a related, key issue: contagion fallout for other New Jersey municipalities, commenting that “While Atlantic City is an extreme case and no other New Jersey municipality is currently facing such acute financial pressure, the state’s posture toward Atlantic City reduces the likelihood that it would unconditionally rescue other financially distressed cities. While the state has no legal obligation to support Atlantic City’s general obligation (GO) bonds, its historically strong support for local governments has bolstered the credit quality of financially weak municipalities in the past: Moody’s incorporated a potential change in the state’s perspective in a credit review of seven distressed cities last year. Going forward, the rating agency expects its ratings process to further consider the potential impact from a change in state oversight, noting: “This applies regardless of whether or not default is accompanied by Chapter 9 bankruptcy. A default can occur outside of bankruptcy and can take the form of a voluntary restructuring with bondholders.” The report notes that under the proposed state takeover bill that passed the New Jersey Senate, the state would be able to file for bankruptcy protection on behalf of the city with approval from the legislative Joint Budget Oversight Committee. In both cases, the city would also need to meet a number of preconditions under the Bankruptcy Code, including insolvency.

Puerto Rico. Work on Puerto Rico legislation in the U.S. House of Representatives has stalled yet again; however leaders in both parties insist they can see the finish line. House Natural Resources Committee Chairman Rob Bishop (R-Utah) said a markup is still on track for next week. The legislation, which House Speaker Paul Ryan (R-Wisc.) has been pressing for, also appears to have garnered bipartisan support, albeit House Minority Leader Nancy Pelosi (D-Ca.) said Democrats were unable to back the bill they saw Tuesday evening, but were committed to crafting a workable alternative, noting: “We were disappointed that the bill we saw yesterday wasn’t something we could support. And so another few days of back and forth, I think, will produce something that we can take to the floor…It absolutely must happen.” The difficulty has been to try to find a fine balance between establishing a financial control board, such as was previously created for both New York City and Washington, D.C., in return for allowing the island to restructure its $70 billion in debt. Remaining obstacles to agreement include proposals in the bill to allow a lower minimum wage to young workers in the U.S. territory. Nevertheless, House Natural Resource Committee Chairman Bishop believes there will “be a majority of Republicans and a majority of Democrats voting for it,” adding the effort “rises above a partisan bill.”

Here Come the Judges. The leadership efforts to assist Puerto Rico by Speaker Paul Ryan and Minority Leader Nancy Pelosi could be jolted by parallel action by the third branch, the Supreme Court, which could rule as early as the end of next month—the day before Puerto Rico faces a $1.9 billion debt payment that its Governor has said it cannot afford—on the validity of a Puerto Rico law which would allow Puerto Rico to restructure the portion of its debt issued by public agencies—or as much as $20 billion, in a bankruptcy-like process.[The Commonwealth of Puerto Rico v. Luis M. Sanchez and Jaime Gomez Vasquez] where the question before the Court is whether the Commonwealth of Puerto Rico and the federal government are separate sovereigns for purposes of the Double Jeopardy Clause of the United States Constitution. The pending House proposal would preempt the Recovery Act, the Puerto Rican restructuring law that was thrown out in U.S. courts prior to Puerto Rico’s appeal to the Supreme Court to reinstate it. Thus, a Supreme Court ruling could change the political dynamics for Congress by resurrecting a law that is viewed by those opposing the Ryan-Bishop bill as even less palatable. That is, were the Supreme Court to, in effect, reinstate the Recovery Act, the Bishop proposal might be perceived by hedge funds and other opponents to the pending bill to be the ‘lesser of two evils,’ because a reinstituted Recovery Act would allow Puerto Rico to restructure debt at public utilities like power authority PREPA and water authority PRASA—and maybe even expand the authority to cover other debts. Some commentators and tea leaf readers conjecture that last March’s oral arguments strongly hinted the Justices could uphold the law—effectively ramping up pressure on creditors heretofore opposed to the Ryan-Bishop efforts to reverse field and press for prompt passage of the soon to be revised PROMESA legislation, because of the perception the emerging federal legislation would provide more protections for municipal bondholders than the Recovery Act.

So It Turns Out Chapter 9 Municipal Bankruptcy Can Work!

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eBlog, 4/15/16

In this morning’s eBlog, we continue to follow the unprecedented leadership efforts of House Speaker Paul Ryan—working with U.S. Treasury officials to address the nearing insolvency in Puerto Rico—where the Speaker confronts misinformation and a heavy lobbying campaign to mislead and delay final consideration. The Speaker and Minority Leader Nancy Pelosi are meeting with their respective caucuses in hopes of moving the proposed legislation to the full House by next week. If anything, the leadership by bipartisan House leaders surely contrasts with New Jersey, where Atlantic City is on a timeline to insolvency not very different than Puerto Rico, but where little consensus appears with regard to the most effective resolution. Finally, we look back to where it all began—in a sense—Orange County—the first municipality in the nation to file for chapter 9 municipal bankruptcy after the adoption of the 1988 municipal bankruptcy law, P.L. 100-597. Orange County’s fiscal collapse, moreover, because the County—at the time—was managing a pooled fund for over 200 California municipal school districts, cities, and counties, provided the first test with regard to whether the new federal law would work—or fail. There is nothing like the test of time.

Governing Amid Bankruptcy Misconceptions. House Speaker Paul Ryan has scheduled a policy meeting this morning in an effort to overcome resistance to the bill authored by House Natural Resources Committee Chairman Rob Bishop (R-Utah) as he seeks to gain sufficient support to get the bill reported to the full House, with the Speaker warning the Chairman “did not have votes on the other side of the aisle going into the markup.” Chairman Bishop and other sponsors of the bill will brief House Republicans this morning—emphasizing that—contrary to claims made by some Members and lobbyists for hedge funds—that the bill was specifically designed to prevent any federal bailout, with the Speaker adding that “the direction we’re headed with an oversight board” will help members appreciate and better understand the fiscal commitment. Part of the challenge is coming from Members such as Rep. Tom McClintock (R-Ca.), who warned his colleagues the bill was a bailout and warned it would lead other states to demand the same treatment—demonstrating both a lack of understanding of the outcome of the municipal bankruptcies in Orange County (please see below), Stockton, and San Bernardino in his home state—in no case has there been any bailout—and demonstrating an inability to understand the dual sovereignty of the U.S. Constitution. Indeed, Speaker Ryan has warned that absent swift action to address Puerto Rico’s looming insolvency, the federal government would be forced into a costly federal bailout, noting: “The need for Puerto Rico legislation is to bring order to chaos, and my number one priority as Speaker of the House with respect to this issue is to keep the American taxpayer away from this: there will be no taxpayer-funded bailout down the road.”

On the other side of the aisle, House Minority Leader Nancy Pelosi (D., Ca.) yesterday said Democrats have made “some substantial progress” working with Republicans and the Treasury Department to iron out her party’s remaining concerns with the bill, adding: “At the end of the day, any bill must have restructuring that works, an oversight board that is respectful of the people of Puerto Rico and does not undermine the restructuring part of the bill and does not contain extraneous provisions that harm working people.”

New Jersey & You. Atlantic City, facing insolvency—but less constructive state leadership—has made a $4.25 million payment to its school district in order to ensure its public schools remain open and the teachers paid. The payment came in the wake of a suit filed last week by the New Jersey Department of Education to force the fiscally beleaguered municipality to make all payments due the school district through July, some $34 million, or about $8.5 million per month. The school board did not support the lawsuit, noting that it had been working with the city to resolve their financial problems. A hearing on that suit is scheduled for Tuesday. The added costs and disruption from the state came as New Jersey Senate President Steve Sweeney (D-Gloucester) has proposed an alternative proposal aimed at saving Atlantic City from insolvency—one which proposes additional benchmarks for the city over and above what he had previously proposed. The revised compromise would allow Atlantic City:
• 130 days to address its $102 million deficit; and
• Mandate that the city, which is close to running out of cash flow, cut its current spending per capita from $6,700 to $3,500.

Failure to meet these conditions would trigger House action on the Senate-passed bill which would authorize New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for as long as five years. In his statement, Senate President Sweeney noted: “This plan gives Atlantic City the opportunity to use all the tools at their disposal to finally reduce spending and reform government operations before the state asserts control over its municipal finances.” Unsurprisingly, Sen. Sweeney not only omitted mention the state role in naming an emergency manager for the city and that individual’s responsibility—nor what constructive suggestions he could contribute—even as the city has implemented a 28-day pay period suspension to allow time for May tax revenue to arrive to fund the next paychecks for city employees. The House Leader’s pressure adds to the increasing pressure from Gov. Chris Christie, who has warned he will not sign a companion bill that provides payments-in-lieu of tax (PILOT) funds from casinos absent this state takeover power.

In contrast, State Assembly Speaker Vincent Prieto (D-Secaucus) has, as we have noted, proposed Christie-opposed legislation which would create a quasi-financial control board, not dissimilar to that being proposed for Puerto Rico—and similar to ones utilized years ago in New York City and Washington, D.C.—under which a five-member committee would assume increased control if certain benchmarks were not met within a year. Speaker Prieto noted that Sen. Sweeney’s proposal was a “step toward compromise,” but still has collective bargaining concerns. For his part, the beleaguered Atlantic City Mayor Don Guardian responded that Speaker Prieto’s bill is “the most pragmatic” approach, adding: “We have enormous problems with legacy costs and debt service from previous tax appeals and other debts that must be addressed over the long-term…I am completely open to compromise and working together to find a solution, but it must be within a reasonable and practical framework.”

The End of the Beginning. With Orange County, Ca., on the verge of making its final payments based upon its plan of debt adjustment from its 1994 municipal bankruptcy—a municipal bankruptcy triggered by a devastating loss of nearly $1.64 billion on derivative investments—those payments will clear its slate and restore the county’s ability to devote its full budget to the county’s future—rather than the devastating financial investments it made more than two decades ago in derivatives that cost it in excess of $1.6 billion—and, because there were also pooled funds from other municipalities in southern California (The investment pool consisted of funds from the county as well as approximately 240 other local agencies, including school districts, cities, and special districts). The insolvency had risked much greater fiscal disasters. Orange County entered municipal bankruptcy after its investment pool reported the losses from highly leveraged positions that unraveled when interest rates rose. The county’s filing for chapter 9—the first filing in the wake of municipal bankruptcy amendments signed into law by former California Governor and U.S. President Ronald Reagan—was met at the time by consternation by the nation’s cities’ leaders. But the chapter 9 ensured there was no interruption of essential public services—and that a lesson was learned: Orange County Executive Frank Kim yesterday said the municipal bankruptcy experience “has made us more conservative in terms of being very careful to not issue debt where we don’t have to.” Orange County currently has plans to issue $68 million for a central utility upgrade at the end of May, according to Suzanne Luster, public finance director. The proceeds will be used to upgrade the heating and cooling infrastructure that supports the civic center campus, the Orange County Jail, and federal and state buildings. County supervisors will vote May 10 on that bond sale, which would be its first long-term debt issuance in 10 years.

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eBlog, 4/14/16

In this morning’s eBlog, we continue to follow the unprecedented efforts involving the Treasury and the House Leadership to address the nearing insolvency in Puerto Rico—where, despite significant progress towards reporting legislation critical to the U.S. territory’s fiscal and human safety, the unprecedented constitutional, legal, and political challenges are putting House Speaker Paul Ryan (R-Wis.), a Democratic administration, and Puerto Rican leaders in untested and shark-infested waters as they are seeking to construct a package the House could act on as early as next week that would be critical to avoiding a human and fiscal catastrophe. The contrast in the U.S. House of Representatives with the growing governance dysfunction in New Jersey over the fiscal fate of Atlantic City is palpable. There, rather than working together to fashion governance solutions, the state’s inability to lay out a constructive fiscal blueprint in the face of rapidly falling assessed property values risks signal fiscal contagion to other municipalities across the state. Meanwhile, in Michigan, importantly, despite all the Congressional finger-pointing in Washington, D.C. in efforts to shift the blame for the steep federal cuts in clean and safe drinking water funding, and thanks to the unique role contributed by Virginia Tech, we are seeing real progress in Flint according to new tests this week of its drinking water, albeit, unsurprisingly, not at the rate residents and state officials had hoped. Unsurprisingly, we have observed no constructive efforts in Congress to address a human health threat not just to Flint, but also to other cities, towns, and counties across the country with regard to safe drinking water.

Flint’s water system. Flint is not yet in like Flint: while the city has been reconnected to its traditional source for nearly six months now, new test results this week have not resulted in the rate of improvement residents and government officials had hoped for: despite indications of improvement, lead contamination is still at levels beyond what is accepted under federal standards—even as the system’s rebound from an 18-month stretch of using the corrosive Flint River has been slowed due to low water usage by city residents, according to the findings of a new round of sampling conducted by Virginia Tech researchers who first identified the city’s lead contamination problems last summer. Last month, the Va. Tech team returned to 174 of the 269 homes previously tested to assess the progress—and is now proposing a new flushing program to increase water flow and, hopefully, speed up improvements to the municipality’s water system. While, according to EPA standards, the drinking water safety has increased nearly 25 percent, the quality still means, according to Virginia Tech’s Marc Edwards, who leads the research team, that he recommends all homes still be considered at risk — even those that may have shown low lead levels in the past. Water advisories remain in place urging residents not to drink the water, but allowing them to use it for bathing and showering. An added impediment to recovery, ironically, may be due to Flint residents using so little water: the water pipeline system was designed to service far more residents than it now serves, so that low usage is, in effect, limiting the amount of corrosion controls and chlorine making its way through home plumbing—in effect reducing those chemical additions aimed at reducing lead and bacteria. According to the EPA last week, particulate lead — small scales that are flaking off damaged underground pipes — is an ongoing concern, so that the system remains “unstable.” That means, according to Mr. Edwards: “We have learned in the past few months it’s probably going to take months or years to get these deposits out of the pipes and clean these pipes out.”

Waiting for Godot. Despite the exceptional, bipartisan work and leadership from House Speaker Paul Ryan (R-Wis.) and the Treasury, the House Natural Resources Committee yesterday indefinitely delayed acting on the pending draft legislation to address Puerto Rico’s looming insolvency. Nevertheless, the Committee members and senior Treasury Department officials made clear they intend to continue to try to address the concerns raised about the measure and revise provisions in order to be able to report the bill in a way that could earn passage by the full House. Just as 99 years ago when the U.S. Senate was debating whether and how to bring Puerto Rico into the union, still today, as my friend and supreme municipal bankruptcy expert Jim Spiotto puts it: “[T]here was, at our nation’s founding, no precedent for a dual sovereign passing a law regulating the bankruptcy of the other.” The Committee is leading in not just uncharted waters, but waters where lurking hedge fund lobbyists—in an election year, are roiling the waters.

As drafted, the proposed legislation would create an oversight board, not unlike those used previously for both New York City and Washington, D.C., which would have the power to require Puerto Rico to balance its budgets, address the island’s pension liabilities, and file restructuring petitions on behalf of the commonwealth and its entities; under the draft, the board would be authorized to formulate a restructuring plan and negotiate with creditors. The Committee is drafting the legislation under the Constitution’s Territorial Clause. In his testimony yesterday, U.S. Treasury Counselor Antonio Weiss made clear there was bipartisan support for the Committee’s bill, noting there had been “significant progress in designing the elements of the bill,” albeit adding “more work is required to ensure a responsible solution to the escalating crisis in Puerto Rico,” adding that the nearly round-the-clock discussions would resume immediately after the hearing and would include Treasury officials along with House Natural Resources Committee Chair Rob Bishop (R-Utah) and his staff, adding: “The time to act is now. We are past every deadline.”

Key issues: Under a collective action clause, the majority of creditors in number and two-thirds of creditors in dollar amount of a particular class voting would be authorized to bind hold-outs to a restructuring plan. The two thirds agreement was intended to balance creditor interests who did not want to be unfairly bound in restructuring discussions while freeing Puerto Rico and its authorities from needing to secure too great a percentage to move forward with restructuring. Counselor Weiss indicated that the collective action clause could impose “an unworkable, mandatory process that will only delay the ability to reach a solution,” adding that a temporary moratorium on litigation over the debt of Puerto Rico and its authorities that the bill contains to give breathing room for restructuring may be too limited. (The moratorium would apply retroactively to actions begun on or before Dec. 18, 2015 and would continue until the earlier of Feb. 15, 2017, or the date that the first restructuring case is filed.) Counselor Weiss said: “A stay must…allow for a transition without interruption from voluntary negotiations to a period of restructuring, if needed. There is a risk the stay may terminate prior to the commencement of a restructuring, resulting in a chaotic race to the courthouse.”

In addition, there remains a governance issue: the draft would require at least five votes of the proposed seven-member oversight board to authorize the filing of a bankruptcy petition on behalf of the commonwealth or one of its authorities—raising issues with regard to whether such a super-majority would be too high a hurdle.

Unsurprisingly, there were also criticisms from some Committee members with regard to their opposition to the existing chapter 9 municipal bankruptcy law under which a federal bankruptcy judge can approve a voluntary restructuring under a voluntary plan of debt adjustment under which there is a so-called “cram down,” which some on the Committee mis-characterized as “a framework of bankruptcy [which would] result in a bailout.” Similarly, another Committee member claimed the proposed bill could have a wider effect, asking “If we rewrite these laws for Puerto Rico, why wouldn’t we also rewrite them for states?” It seems that the unique system of dual sovereignty created by the nation’s founding fathers in Philadelphia has been less than well understood by some Members of the U.S. Congress.

House Speaker Paul Ryan this week, in contrast, applauded the bill, noting: “Congress has a Constitutional and financial responsibility to bring order to the chaos that is unfolding in the U.S. territory — chaos that could soon wreak havoc on the American [municipal] bond market.” The Speaker added that the draft legislation would hold “the right people accountable for the crisis…and…Just as important for the long-term, this bill protects American taxpayers from bailing out Puerto Rico.”

The bill proposes seven instead of five Presidentially appointed members of the oversight board. It also broadens the number of people who would be recommending potential members. The President would now choose two individuals from those recommended by the House speaker, two from the Senate majority leader, one from the House minority leader, and one from the Senate minority leader. At least one of the two individuals chosen from the speaker’s list must have a primary residence or place of business in Puerto Rico. The earlier proposed process, which would have only had recommendations from leaders in the majority, was seen as too partisan. The draft bill also eliminates a provision from the earlier version which gave the oversight board power to unilaterally implement recommendations and binding regulations. Rep. Pierluisi said the earlier provisions were “clearly inappropriate and anti-democratic.”

The draft bill adds a collective action clause under which a majority of creditors in a given class would be provided a vote on debt restructuring, and it retains provisions giving the board power to approve a fiscal plan and budget for the Commonwealth if Puerto Rico’s government cannot create one which is acceptable. Under the draft bill, as long as the oversight board remained in operation, the territory could not, without oversight board approval, issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to its debt. On the public pension front, if the oversight board were to find Puerto Rico’s pension system was “materially underfunded,” it could mandate an independent actuary to evaluate the fiscal and economic impacts of its cash flows. In addition, the draft would permit the Governor, subject to the approval of the board, to designate a period of up to five years when employers in Puerto Rico must pay employees under the age of 25 as of the date of enactment a wage of at least $4.25 an hour.

New Jersey & You. The see-saw battle in New Jersey over the fiscal fate of Atlantic City continued between the State Assembly and Gov. Chris Christie yesterday, with the Assembly Budget Committee grilling the Christie administration with regard to a greater takeover than that which the state has held for nearly the past seven years. The House seems to be moving towards offering the beleaguered city up to 130 days before it would agree to the Governor’s proposed takeover. Increasingly, state leaders appear apprehensive that the city’s fiscal woes are contagious—a fear likely increased in the wake of RealtyTrac’s release of data yesterday that surrounding Atlantic County had the highest foreclosure rate of any major U.S. metropolitan area in the first quarter of 2016: according to data RealtyTrac released yesterday, one in every 106 housing units in Atlantic County had a foreclosure filing in the first quarter, compared to a nationwide rate of one filing per 459 homes: the closure of four Atlantic City casinos two years ago has been a key factor in the loss of jobs and homes. The county experienced the highest metro foreclosure rate for all of 2015. The RealtyTrac data listed Trenton, New Jersey’s capital city, with the second-highest metro foreclosure rate in the nation in the first quarter and Baltimore third. These latest released figures come in the wake—for the beleaguered city—of a drop in assessed property values from 2010-2015 of more than 50 percent: last year, the city would have needed to raise its property tax rates by 53.4 percent to balance its budget—an increase not just politically undoable, but also one which likely would have exacerbated the problem.

With the current governance and fiscal battle now at the state level, State Senate President Stephen Sweeney (D-Gloucester) and Gov. Chris Christie have been pressing the House to agree to state takeover legislation—that is virtually a complete state preemption of local authority, as opposed to the existing imposition of a state emergency manager. Or, as Sen. Sweeney put it: “For, years the Atlantic City government has made bold assertions regarding its ability to solve the problem…Despite those assertions, no solutions have ever been implemented in a material way. Our proposal gives the city one last chance.” In contrast, the House is proposing a compromise, under which the city would be given through the end of this summer to try to turn its fiscal condition around—a position which the House has honeyed by offering Atlantic City a bridge loan from the state if they would accept this offer. House Assembly Leader Lou Greenwald (D-Camden) noted; “Bankruptcy and financial ruin cannot be options for Atlantic City…Under this plan, the city will be able to maintain local control and will be given the summer to implement a legally binding, realistic, and responsible financial recovery plan.”

House Speaker Vincent Prieto remains dissatisfied, noting that no state proposal yet has resolved the “concerns about eviscerating collective bargaining, fair labor practices, and the civil liberties of the people of Atlantic City.” He is opposed to a mandatory breakup of union contracts.

For his part, Mayor Don Guardian notes that while he is applauding the “beginnings of a compromise,” the city confronts “enormous problems with legacy costs and debt service from previous tax appeals and other debts that must be addressed over the long-term,” adding he remains “completely open to compromise and working together to find a solution, [albeit one which] must be within a reasonable and practical framework…” noting he inherited, with his election, significant legacy costs and debt service from prior tax appeals and other debt.