Disparate Fiscal Solvency Challenges

06/23/17

Good Morning! In this a.m.’s eBlog, we consider the serious municipal fiscal challenges in Ohio, where the decline in coal-fired power has led Adams County auditor David Gifford to warn that if its existing power plants close, the county could be forced to raise its property tax rates at least 500% in order to make its requisite school district bond interest payments. Then we turn to the steep fiscal trials and tribulations of implementing San Bernardino’s post-chapter 9 exit, before finally considering the governing challenges affecting the City of Flint’s physical and fiscal future, and then to the criminal charges related to Flint’s fiscal and moral insolvency. Finally, we turn to the potential for a new fiscal chapter for the nearly insolvent Virginia municipality of Petersburg.

Fiscal Municipal Distress in Coal Country. While President Trump has stressed his commitment to try to protect the U.S. coal industry, less attention has been focused on the municipal fiscal challenges for local elected leaders. For instance, in Adams County, Ohio, where the median income for a household is about $33,000, and where approximately 20% of families fall below the federal poverty line, the county, with a population near 22,000, has been in fiscal emergency for more than two years—making it one of 23 such jurisdictions in the state.  But now its auditor, David Gifford, warns that if its coal-fired power plants close, the county could be forced to raise the property tax by at least 500% in order to make the bond payments on its public school districts debt. (In Ohio, when so designated, the average time a municipality spends in fiscal emergency averages about five years.) Since 1980, when the state auditor was empowered to place municipalities in fiscal emergency, Ohio has declared and released 54 communities—with time spent in fiscal emergency averaging five years, albeit the Village of Manchester in Adams County (approximately 2,000 residents) holds the record for time spent in fiscal emergency — nearly 20 years and still counting. Over the past five years, some 350 coal-fired generating units have closed across the country, according to the Energy Information Administration: closures, which have cost not just jobs, but key tax revenues vital to municipal solvency. It is uncertain whether any actions by the White House could make coal viable as a source of energy generation; it is clear that neither the Trump Administration, nor the State of Ohio appear to have put together fiscal options to address the resulting fiscal challenges. Ohio Municipal League Director Kent Scarrett, in testimony before the Ohio Legislature last February, on behalf of the League’s 733 municipal members, in which close to 90% of Ohio’s citizens live, reminded legislators that “a lack of opportunity to invest in critical infrastructure projects” and “the myriad of challenges that present themselves as a result of the escalating opioid epidemic,” would require “reigniting the relationship between the state and municipalities.” 

Post Municipal Bankruptcy Challenges. San Bernardino Mayor Carey Davis this Wednesday declared the city’s municipal bankruptcy process officially over, noting San Bernardino had come “to the momentous exit from that process,” a five-year process which resulted in the outsourcing of its fire department to San Bernardino County, contracting out waste removal services, and reductions in healthcare benefits for retirees and current employees to lessen the impact on pensions. Mayor Davis noted: “The proceedings guided us through a process of rebuilding and restructuring, and we will continue to rebuild and create systems for successful municipal operations,” as the City Council confronted by what City Manager Mark Scott warned was “without a doubt among the lowest in per capita revenues per capita and in city employees per capita,” yet still confronted by what he described as:  “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Nevertheless, the Council adopted its first post-chapter 9 budget—a budget which is projected to achieve a surplus of $108,000, sufficient to achieve a 15% reserve. To give a perspective on the fiscal challenge, Mr. Scott warned the Mayor and City Council: “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Adding that San Bernardino’s property values and business spending are lower than other cities, contributing to its low revenue, he added: “At the same time, it costs roughly the same to repair a street in Rancho Cucamonga as in San Bernardino: California’s tax system rewards wealth.”

Nevertheless, even though San Bernardino’s plan of debt adjustment calls for minimal revenue growth over the next two decades, he advised that the plan is focused on making the city more attractive. Ergo, he proposed three criteria: 1) urgent safety concerns, including the relocation of City Hall to address unreinforced masonry concerns; 2) restoration of public safety, 30 new police officers, vehicle and safety equipment replacement, radio maintenance, and a violence intervention initiative; 3) greater efficiencies, via information technology upgrades, and economic development and revenue growth—to be met by hiring a transportation planner, associate planner, grant-writing, and consulting. In addition to the operating budget, the manager also focused on the city’s capital budget, proposing significant investment for the next two to three years. Some of these increased costs would be offset by reducing the city’s full-time city employees by about 4%. Nevertheless, the Manager noted: “The community’s momentum is clearly increasing, and we are building internal capacity to address our management challenges…We look forward to the next year and to our collective role in returning this city to a more prosperous condition.”

Under its plan of debt adjustment, San Bernardino began making distributions to creditors this month: Mayor Carey Davis noted: “From the beginning, we understood the time, hard work, sacrifice and commitment it would take for the city to emerge from the bankruptcy process,” in asking the Council to adopt the proposed $160 million operating budget and a $22.6 million capital budget.

Moody Blues. The fiscal challenge of recovering from municipal bankruptcy for the city was highlighted last April when Moody’s Investors Service analysts had warned that the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Meredith Jury would “lead to a general fund unallocated cash balance of approximately $9.5 million by fiscal 2023, down from a $360 million deficit the city projected in 2013 for the fiscal years 2013-23,” adding, however, that the city still faces hurdles with pensions, public safety, and infrastructure. Noting that San Bernardino’s plan of debt adjustment provided more generous treatment of its pension obligations than its municipal bondholders—some of its unsecured creditors will receive as little as 1% of what they are owed—and the city’s pension obligation bondholders will take the most severe cuts—about 60%–or, as Moody’s moodily noted: “The [court-approved] plan calls for San Bernardino to leave bankruptcy with increased revenues and an improved balance sheet, but the city will retain significant unfunded and rapidly rising pension obligations…Additionally, it will face operational challenges associated with deferred maintenance and potential service shortfalls…which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.”

The glum report added that San Bernardino’s finances put its aging infrastructure at risk, noting the deferral of some $180 million in street repairs and $130 million in deferred facility repairs and improvements, and that the city had failed to inspect 80 percent of its sewer system, adding: “Cities typically rely on financing large capital needs with debt, but this option may no longer exist for San Bernardino…Even if San Bernardino is able to stabilize its finances, the city will still face a material infrastructure challenge.”  Moody’s report added: “Adjusted net pension liability will remain unchanged at $904 million, a figure that dwarfs the projected bankruptcy savings of approximately $350 million.”

Justice for Flint? Michigan Attorney General Bill Schuette has charged Michigan Health and Human Services Director Nick Lyon with involuntary manslaughter and misconduct in office, making the Director the fifth state official, including a former Flint emergency manager and a member of Gov. Rick Snyder’s administration, to be confronted with involuntary manslaughter charges for their alleged roles in the Flint water contamination crisis and ensuing Legionnaire’s disease outbreak which has, to date, claimed 12 lives, noting: “This is about people’s lives and families and kids, and it’s about demonstrating to people across the state—it doesn’t matter who you are, young, old, rich, poor, black, white, north, south, east, west. There is one system of justice, and the rules apply to everybody, whether you’re a big shot or no shot at all.” To date, 12 people have died in the wake of the switch by a state-appointed Emergency Manager of the city’s drinking water supply to the Flint River—a switch which led to an outbreak of Legionnaires’ disease that resulted in those deaths. Flint Mayor Karen Weaver, in response, noted: “We wanted to know who knew what and when they knew it, and we wanted someone to be held accountable. It’s another step toward justice for the people Flint,” adding that: “What happened in Flint was serious: Not only did we have people impacted by lead poisoning, but we had people who died.”

In making his charges, Attorney General Schuette declined to say whether he had subpoenaed Governor Rick Snyder—with the charges coming some 622 days after Gov. Snyder had acknowledged that Flint’s drinking water was tainted with lead—and that the state was liable for the worst water tragedy in Michigan’s history—a tragedy due, in no small part, from the state appointment of an emergency manager to displace the city’s own elected leaders.

The state Attorney General has charged HHS Director Lyon in relation to the individual death of Robert Skidmore, who died Dec. 13, 2015, “as a result of [Mr.] Lyon’s failure to warn the public of the Legionnaires’ outbreak; the court has also received testimony that the Director “participated in obstructing” an independent research team from Wayne State University which was investigating the presence of Legionella bacteria in Flint’s water. In addition, four defendants who have been previously charged, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality drinking water Director Liane Shekter-Smith, DEQ drinking water official Stephen Busch, and former City of Flint Water Department manager Howard Croft, each now face additional charges of involuntary manslaughter in Mr. Skidmore’s death—bringing, to date, 15 current or former Michigan or Flint city officials to have been charged.

Attorney General Scheutte, at a press conference, noted: “Involuntary manslaughter is a very serious crime and a very serious charge and holds significant gravity and weight for all involved.” He was joined by Genesee County Prosecutor David Leyton, Flint Water Investigation Special Prosecutor Todd Flood, and Chief Investigator Andrew Arena. (In Michigan, involuntary manslaughter is punishable by up to 15 years in prison and/or a $7,500 fine.) The announcement brings to 51 the number of charges leveled against 15 current and former local and state leaders as a result of the probe during which 180 witnesses have been interviewed—and in the wake of the release this week of an 18-page interim investigation report, which notes: “The Flint Water Crisis caused children to be exposed to lead poisoning, witnessed an outbreak of Legionnaires’ disease resulting in multiple deaths, and created a lack of trust and confidence in the effectiveness of government to solve problems.”

A New City Leader to Take on Near Insolvency. Petersburg, Virginia has hired a new City Manager, Aretha Ferrell-Benavides, just days after consultants charged with the fiscal challenge of extricating the city from the brink of municipal bankruptcy advised the Mayor and Council the municipality needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies: increased taxes, they warned, would not do the trick; rather, in the wake of a decade of imbalanced budgets that drained the city’s rainy day funds, triggered pay cuts, disrupted the regional public utility, and forced steep cuts in public school funding, the city needed a new manager. Indeed, on her first day, Ms. Ferrell-Benavides said: “To have the opportunity to come in and make a difference in a community like this, it’s worth its weight in gold.” The gold might be heavy: her predecessor, William E. Johnson III, was fired last year as the city fiscally foundered—leading Mayor Sam Parham to note: “We’re looking forward to a new beginning, better times for the city of Petersburg.”

Manager Ferrell-Benavides won out in a field of four aspirants, with Mayor Parham noting: “She was definitely head and shoulders above the other candidates…She had clear, precise answers and a 90-day plan of action,” albeit that plan has yet to be shared until after she meets with department heads and residents in order to get a better understanding of the city’s needs. Nevertheless, City Councilman Charles Cuthbert noted: “Her energy and her warm personality and her expressions of commitment to help Petersburg solve its problems stood out…My sense is that she truly views these problems as an opportunity.” In what will mark a fiscal clean slate, Manager Ferrell-Benavides will officially begin on July 10th, alongside a new city Finance Director Blake Rane, and Police Chief Kenneth Miller, who is coming to Petersburg from the Virginia Beach Police Department. She brings considerable governmental experience, including more than 25 years of work in government for the State of Maryland, the Chicago Public Housing Authority, the City of Sunnyvale, Calif.; and Los Alamos, New Mexico—in addition to multiple jobs with the District of Columbia.

 

The Fiscal Imbalances & Human & Fiscal Consequences of Fiscal Distress

06/16/17

Good Morning! In this a.m.’s eBlog, we consider the lessons learned from Flint—lessons not unrelated to the largest municipal bankruptcy in U.S. history in Detroit.

Michigan Attorney General Bill Scheutte, stating “People have died because of the decisions people made, has charged five Michigan state employees with involuntary manslaughter over their actions and involvement with Flint’s lead-contaminated water, including Nick Lyon, the Director of the Michigan Department of Health and Human Services, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality Drinking Water Chief Liane Shekter-Smith, state Water Supervisor Stephen Busch, and former Flint Water Department Manager Howard Croft. The quintet is accused of failing to alert the public about an outbreak of Legionnaires’ disease in the Flint area related to its contaminated drinking water—contamination which was suspected in the 12 deaths, Legionnaires’ disease sickening 79 others, and near insolvency of the City of Flint. Mr. Scheutte has not ruled out potential charges against Michigan Governor Rick Snyder, and he announced a new list of charges in a sweeping investigation that has already led to cases against 13 officials

Mayor Karen Weaver, in the wake of the press conference, noted: “It’s terrible what has occurred, but it’s a good day for the people of the city of Flint…We’ve had people die as a result of this water crisis. And for justice to be had is wonderful.”

Attorney General Bill Schuette, at the press conference, stated that the state’s health Director had failed to protect the residents of Flint, resulting in the death of at least one person, 85-year-old Robert Skidmore of Genesee Township. He also charged Michigan’s Chief medical officer, Dr. Eden Wells, with obstruction of justice and lying to a police officer, noting: “People have died because of the decisions people made…There are two types of people in the world: Those who give a damn and those who don’t. This is a case where there has been willful disregard.”

Mr. Scheutte’s charges mark the first time investigators have drawn a direct link between the acts of state government officials in Flint’s water contamination crisis and the deaths of residents which followed. Since 2014, when this city switched water suppliers, partly to save money, the water has been linked to the lead poisoning of children and the deaths of 12 people and 79 other residents of the city sickened by Legionnaires’ disease in 2014-15, which experts have linked to the contaminated water after the city, on the directions of the Governor’s then appointed Emergency Manager, Darnell Earley, switched to Flint River water in April of 2014.

At the press conference, Attorney General Schuette indicated he has not ruled out possible charges against the Governor. His actions came in the wake of his earlier charges of obstruction of justice against Michigan’s chief medical officer, Dr. Eden Wells, charged with obstruction of justice and lying to a police officer, noting: “People have died because of the decisions people made,” so that his actions were critical to the restoration of trust and accountability. “There are two types of people in the world: Those who give a damn and those who don’t. This is a case where there has been willful disregard” for the health and safety of others, Flood said.

The charges against Mr. Earley, the gubernatorially appointed former emergency manager on whose watch the city switched to Flint River water, include false pretenses, conspiracy to commit false pretenses, misconduct in office and willful neglect of duty while in office—charges which a carry a sentence of up to 20 years in prison. Attorney General Schuette noted: “The health crisis in Flint has created a trust crisis in Michigan government.”

Governor Snyder issued a statement of support for Mr. Lyons and Dr. Wells; he appeared critical of the legal process, noting that other state employees had been charged more than a year ago, but had yet to have their cases tried in court: “That is not justice for Flint, nor for those who have been charged.”

The state actions do not address the fundamental underlying fiscal issue of equity—or what Grand Rapids Mayor Rosalynn Bliss notes is the state’s broken state system of funding municipalities, or, as she told her colleagues at the Mackinac Policy Conference the week before last, she had been forced to adopt more local taxes and cut staff in order to make up for consistent cuts in state revenue sharing. Noting a lack of any fiscal bridge to address fiscal disparities, she told her colleagues that even as her city’s population has continued to grow towards the 200,000 mark, it has been forced to cut its staff by 25% since 2005: she reported the city has 100 fewer police officers now than there were 15 years ago—meaning that during Grand Rapids’ budget discussions this year, the city’s voters and taxpayers, to bridge gaps in state funding, agreed to taxes for public safety, streets, and parks. She described this “shift to the local units, because people care about their local services and what’s available to them, because we know that’s what makes cities great. That’s what attracts families to want to live in cities and businesses to move to cities: people want to live in safe neighborhoods. They want to drive on streets where the tires don’t pop from potholes. They want to be able to walk to a park that’s safe where their kids can play on a playground. Where the swimming pool is actually open. Those are decisions we grapple with at the local level every single day. And the decisions being made in Lansing impact every single city, including Grand Rapids…People move to Michigan for the quality of life – but funding issues can impact what services cities are able to provide to residents that they value…Long-term, relying on local taxes to keep up quality of life initiatives isn’t the answer: It’s inequitable, not every city has those resources.”

In Michigan, a municipal financial emergency is defined as a state of receivership. The state’s financial  emergency status, along with the Emergency Financial Manager was first created in in 1988, but replaced in 2011, and then, in 2012, voters replaced that with Public Law 436, the Local Financial Stability and Choice Act, which includes several triggers for a preliminary review:

  • board requesting a review via resolution,
  • local petition of 5 percent of gubernatorial election voters requesting one,
  • creditor’s written request,
  • missed payroll,
  • missed pension payments,
  • deficit-elimination plan breach or lack of such a plan within 30 days after its due day,
  • a legislative request.

The Indelicate Challenge of Restoring Political Authority in the Wake of Municipal Insolvency

Good Morning! In this a.m.’s eBlog, we consider the historic Civil War municipality of Petersburg’s, Virginia’s steps back to solvency and restoration of municipal control, and then to the indelicate imbalance of fiscal power in Puerto Rico—and whether the federal preemption might be causing more fiscal damage to its fiscal future.

Returning to Solvency. The Petersburg, Virginia City Council last night approved its FY2018 budget, a budget which includes outsourcing jobs—with more than a dozen city employees slated to lose their jobs as a result. The new municipal budget includes an increase in water rates—an increase of nearly 15%–an increase the city’s elected officials deemed necessary in order to finance needed repairs, as well as to update its systems for billing and collections—and to cover its past due arrears of $1.9 million. The session came as the Council began discussions with regard to hiring a new city manager and police chief—and whether to beef up is personal property tax enforcement: the city estimates it could be losing as much as $7 million annually from inadequate collection efforts. The actions by the Mayor and Council reflect a restoration of municipal authority in the wake of state intervention.

The Unpromise of PROMESA? Neither the government of Puerto Rico, nor the PROMESA Oversight Board has been able to state how much in municipal bond interest payments will be made for the next fiscal year—even as the gates of the University of Puerto Rico have been locked, depriving the U.S. territory of the jewel in its crown. The University, which has relied upon 30% of its financing from the government—financing critical to Puerto Rico’s hopes to keep its most promising future generation on the island, rather than incentivized to leave for New York City or Miami—increasingly threatening to leave behind an older and less educated population, more dependent on governmental services, but less able to pay taxes. However, as the PROMESA Board struggles over its preemptive decision with regard to what percent of Puerto Rico’s debt obligations to its municipal bondholders should be mandated, (according to the Board’s March approved fiscal plan, the bonds most closely associated with Puerto Rico’s government would pay $404 million in debt service in the coming fiscal year—approximately one-eighth of the $3.28 billion debt service due), the question with regard to investing in Puerto Rico’s fiscal and physical future remains murky—indeed, murky enough that the balance between Puerto Rico’s $404 million in debt service costs versus investments in its future has been left hanging.

Part of the challenge of preemptive governance is, as we perceived in the first instance of the Michigan takeover of Flint, that there can be signal human and fiscal damage to life, property, and fiscal solvency. Thus, the imbalance where the federal takeover under PROMESA, the Act intended to serve as the fiscal guide through FY2026, is to what extent disinvestment in Puerto Rico’s physical infrastructure and its municipalities might aggravate, rather than restore the territory’s solvency and create a fiscal foundation for its future. And that future is at stake—a future where the gates of its premier university are locked, and where demographers report the loss of population of 61,874 in one year—and where last Sunday’s plebiscite witnessed a drop of more than 50% in voter participation, with markedly reduced percentages in Puerto Rico’s 78 municipalities—where participation was 23%, less than a third the level of 1998. Demographer Raúl Figueroa noted: “The population is declining…To give people an idea, from 2015 to 2016, the loss of population was 61, 874,” adding that every year between 1% and 2% of the population is lost. The Mayors of Yauco (a municipality which lost nearly 10% of its population over the last decade) and Ponce, Puerto Rico’s second largest city, known as the City of Lions (population of 194,636), founded in 1692, an important trading and distribution center, as well as a key port of entry—indeed, one of the busiest ports in the Caribbean, which has seen a 9.36% decline in its population—a decline which Mayor Maria Mayita Meléndez, attribute to emigration: Mayor Meléndez notes that since 2006, more than 25,000 Puerto Ricans have left Ponce.

Getting Back in like Flint

Good Morning! In this a.m.’s eBlog, we consider the lessons learned from Flint—lessons that were not unrelated to the largest municipal bankruptcy in U.S, history in Detroit.

Immunity for State & Municipal Employees: What Does it Mean in Flint? U.S. Judge Judith Levy, in her 101-page decision this week, held that Flint and Michigan employees can be sued over the city’s lead water contamination; however, she found that Michigan Governor Rick Snyder and the State of Michigan have governmental immunity. The ruling came in response to a suit brought by a resident of Flint, against Gov. Snyder and 13 other public officials. Judge Levy dismissed many of the counts; however, she concurred that Flint resident Shari Guerin, who had brought the suit against the city and the other public officials, had had both her and her child’s “bodily integrity” unknowingly exposed by the dangerous levels of lead in Flint’s drinking water—levels of which the state was aware, but had hidden from the public. Indeed, the Judge wrote: “The conduct of many of the individual governmental defendants was so egregious as to shock the conscience.” Despite dismissing the charges against the Governor, the Michigan Departments of Environmental Quality and Health and Human Services—and the city’s water treatment plant operator, Judge Levy found that some key state leaders, including the state’s Chief Medical Executive and Health and Human Services Director could be sued in their individual capacities—and that Flint officials have no state governmental immunity, writing: “As this case highlights, the more governmental actors that are involved in causing a massive tort in Michigan, the less likely it is that state tort claims can proceed against the individual government actors given the way the state immunity statutes operate…Because the harm that befell plaintiffs was such a massive undertaking, and took so many government actors to cause, the perverse result is that none can be held responsible under state tort law.”

A Vicious Fiscal Whirlpool? For the city, the severe water contamination had not just physical fiscal implications, but also fiscal ones. Indeed, one of the plaintiffs was one of nearly 8,000 homeowners who was in danger of losing homes under tax foreclosure proceedings (Real property tax delinquency in the state entails a three-year forfeiture and foreclosure process)—proceedings which had been scheduled to commence last week until the Flint City Council approved a one-year moratorium—a moratorium which covered residents with two years of unpaid water and sewer bills going back to June 2014. While that temporary reprieve is in question, confronting an unknown outcome before the state-appointed Receivership Transition Advisory Board, which has monitored Flint’s finances since the city’s emergence from state oversight in two years ago last April—and is scheduled to vote on the moratorium at its June meeting; the outstanding water liens and inability to collect have further emptied the city’s coffers—even as, unsurprisingly, assessed property values  have become the latest fiscal hardship as an impoverished Flint still reels from a lead-in-water crisis which was first publicly acknowledged less than two years ago.

According to a recent Michigan State University study, “Flint Fiscal Playbook: An Assessment of the Emergency Manager Years, 2011-2015),” Flint has lost nearly 75 percent of its tax base—and of that base, assessed property valuations reeled to a 50 percent drop from $1.5 billion to $750 million.  Thus, unsurprisingly, more than 100 residents showed up at this week’s Council meeting—understandably upset that they face foreclosure even as they have been confronted by bills for drinking water, which they could neither drink, nor use in any way that might jeopardize the health and safety of their children. Those citizens received a temporary, one-year reprieve from the city—but the reprieve implies greater fiscal challenges to the city.

With liabilities high and revenues and property taxes struggling, Flint Mayor Karen Weaver reports that Flint has trimmed $2 million in annual garbage collection expenses by rebidding the service; expects to cut annual water expenses to $12 million from $21 million; and, due to federal grants, is hiring 33 more firefighters. The city is proceeding with a $37 million renovation of the Capitol Theatre downtown, seeking to create a central, historic space which could enhance the downtown—or, as the Mayor puts it: “I don’t think people should take their eyes off Flint.”

But assessing the dimensions of this disaster, created in no small part under the state’s original takeover of the city via the appointment of the emergency manager who had made the fatal decisions to change the city’s sourcing of drinking water, also includes looking back to the critical governmental decisions—especially Flint’s opting to abandon reliance on the  Karegnondi Water Authority (KWA) and instead rely upon the Great Lakes Water Authority (GLWA), a regional water authority created as part of Detroit’s chapter 9 plan of debt adjustment—meaning Flint’s citizens will keep drawing Detroit water from their taps—or, as the Mayor put it: “Staying with our water source gives us reassurance our water is good…It gets us out of our $7 million (annual) debt to the KWA. We did not have the finances to be able to do that.” Under the city’s 30-year agreement with the  30-year deal with GLWA, the city will receive a $7 million annual credit equal to its annual municipal bond payment to KWA for as long as Flint remains current with scheduled debt service. In addition, the agreement also enables the city to redirect water plant improvements to upgrading the city’s water distribution system—or, as Mayor Weaver notes: “We have pipes going into the ground now (referring to the planned replacement of lead service lines).We’re addressing this water crisis. The water quality is better. There are some good things going on.”

Mayor Weaver notes Flint has cut its $2 million in annual garbage collection expenses by rebidding the service; the city expects to cut annual water expenses to $12 million from $21 million; and the city continues to work with the Governor to address the public health concerns associated with the Flint water crisis. To try to become an economic magnet or hub, rather than a city to be avoided, the city is focused on a $37 million renovation of the Capitol Theatre, creating a central, historic space which could draw folks to events, restaurants, and bars. As the Mayor puts it: “I don’t think people should take their eyes off Flint…They should know the rest of the story. One of the things I’ve learned is we were going to get more done if we work together. If people are going to help you, why would you not sit down and work things out?”

A Hole in Puerto Rico’s Fiscal Safety Net: Should Congress Amend Chapter 9 Municipal Bankruptcy?

eBlog

Good Morning! In this a.m.’s eBlog, we consider the growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy—but we especially focus on the fiscal plight of the territory’s many, many municipalities—or muncipios, which, because Puerto Rico is not a state, do not have access to chapter 9 municipal bankruptcy .   

Tropical Fiscal Typhoon. When former President Ronald Reagan signed Public Law 100-597, legislation authorizing municipal into law 29 years ago, no one was contemplating a U.S. territory, such as Puerto Rico—so that the federal statute, in coherence and compliance with the concepts of dual sovereignty, which served as the unique foundation of the nation, provided that a city, county, or other municipality could only file for chapter 9 if authorized by state law—something a majority of states have not authorized. Unsurprisingly, none of us contemplated or thought about U.S. territories, such as Puerto Rico, Guam, etc.: Puerto Rico is to be considered a state for purposes of the bankruptcy code, except that, unlike a state, it may not authorize its municipalities (and by extension, its utilities) to resolve debts under Chapter 9 of the code. Ergo, no municipio in Puerto Rico has access to a U.S. bankruptcy court, even as 36 of the island’s 78 muncipios have negative budget balances; 46% are experiencing fiscal distress. Their combined total debt is $3.8 billion. In total, the combined debt borne by Puerto Rico’s municipalities is about 5.5% of Puerto Rico’s outstanding debt.  

The fiscal plight of Puerto Rico’s municipalities has also been affected by the territory’s dismal fiscal condition: From 2000 to 2010, the population of Puerto Rico decreased, the first such decrease in census history for Puerto Rico, declining by 2.2%; but that seemingly small percentage obscures a harsher reality: it is the young and talented who are emigrating to Miami, New York City, and other parts on the mainland, leaving behind a declining and aging population—e.g. a population less able to pay taxes, but far more dependent on governmental assistance. At the same time, Puerto Rico’s investment in its human infrastructure has contributed to the economy’s decline: especially the disinvestment in its human infrastructure: a public teacher’s base salary starts at $24,000—even as the salary for a legislative advisor for Puerto Rico starts at $74,000. That is, if Puerto Rico’s youngest generation is to be its foundation for its future—and if its leaders are critical to local fiscal and governing leadership in a quasi-state where 36 of the island’s 78 municipalities, or just under half, are in fiscal distress—but, combined, have outstanding debt of about $3.8 billion; something will have to give. These municipalities, moreover, unlike Detroit, or San Bernardino, or Central Falls, have no recourse to municipal bankruptcy: they are in a fiscal Twilight Zone. (Puerto Rico has a negative real growth rate; per capita income in 2010 was estimated at $16,300; 46.1% of the territory’s population is in poverty, according to the most recent 2106 estimate; but that poverty is harsher outside of San Juan.) A declining and aging population adversely affects economic output—indeed, as former Detroit Emergency Manager Kevyn Orr who steered the city out of the largest municipal bankruptcy in U.S. history recognized, the key to its plan of debt adjustment was restoring its economic viability.

U.S. Supreme Court Justice Sonia Sotomayor, who is of Puerto Rican descent, has indicated there should be a more favorable interpretation of the law to make the system fairer to Puerto Rico: to allow the Commonwealth of Puerto Rico to create its own emergency municipal bankruptcy measures—something, however, which only Congress and the Trump administration could facilitate. It seems clear that Justice Sotomayor does believe Puerto Rico ought to be considered the equivalent of a state, i.e. empowered to create its own bankruptcy laws. However, as the First Circuit Court of Appeals has interpreted, Puerto Rico is barred from enacting its own bankruptcy laws: it is treated as a state—in a country of dual federalism wherein the federal government, consequently, has no authority to authorize state access to bankruptcy protection.

Human Needs & Fiscal Imbalances

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal challenges to the City of Detroit—especially in ensuring equitable tax collections; then we look north to assess the ongoing, serious physical and fiscal challenges to Flint’s long-term recovery, before considering the fiscal plight in Puerto Rico.

Motor City Revenue Uncollections. Unlike most cities, Detroit has a broad tax base in which municipal income taxes constitute the city’s largest single source, and that notwithstanding that the city has the highest rate of concentrated poverty among the top 25 metro areas in the U.S. by population. (Detroit’s revenues, from taxes and state-shared revenues are higher than those of any other large Michigan municipality on a per capita basis: these revenues consist of property taxes, income taxes, utility taxes, casino wagering taxes, and state-shared revenues.) Therefore, it is unsurprising that the city is cracking down on those who owe back income taxes: Detroit has launched an aggressive litigation effort, an effort targeted at thousands of tax evaders living or working at thirty-three properties in the downtown and Midtown areas. The city’s Corporation Counsel, Melvin Butch Hollowell, notes the city has identified at least 7,000 such taxpayers at these properties as potential tax evaders. Collecting those owed taxes is an especially sensitive issue in the wake of the city’s chapter 9 experiences when the decline in revenues of 22 percent over the decade of its most important source of revenues was a key trigger of the nation’s largest municipal bankruptcy.

Out Like Flint? Just as in Detroit’s chapter 9 bankruptcy, where now-retired U.S. Bankruptcy Judge Steven Rhodes had to address water cut-offs to families who had not paid their utility bills, so too the issue is confronting Flint—where the current penalty for non-payment under the city’s ordinance is tax foreclosure: something which has put at risk some 8,000 homeowners in the municipality, until, last week, the City Council approved a one-year moratorium on such tax liens: the moratorium covers residents with two years of unpaid water and sewer bills dating back to June of 2014. After the moratorium vote, City Council President Kerry Nelson said: “The people are suffering enough” for being forced to pay for water they cannot drink and are reluctant to use…The calls that I received were numerous. Everywhere I go, people were saying: Do something,” he said: “I did what the charter authorized me to do” with a temporary moratorium “until we look at the ordinance and get it corrected. It needs work. It’s 53 years old. We must start doing something for our community.” The council president insisted the Snyder administration needs to step up “and help us: They created this…the government doesn’t get a free pass.”

Indeed, the question of risk to life and health had been one which now retired U.S. Bankruptcy Judge Rhodes had to deal with in Detroit’s chapter 9 bankruptcy: how does one balance a city’s fiscal solvency versus human lives; and how does one balance or assess a family’s needs versus the civic duty to pay for vital municipal serves and ensure respect for the law? Now the situation has been further conflicted by the Michigan state-appointed Receivership Transition Advisory Board, which oversees and monitors Flint’s finances in the wake of its emergence from state oversight two years ago. That board has scheduled a vote for next month on the moratorium—as this Friday’s deadline for the thousands of homeowners to pay up under a 1964 ordinance nears—albeit a deadline which has been modified to provide a one-year partial reprieve, in part to give time to amend the ordinance. Perhaps unsurprisingly, the apprehension has had municipal political impacts: a recall effort against Mayor Karen Weaver, who a year ago was in Washington, D.C., for meetings at the White House with President Barack Obama to lobby for more federal aid and to obtain other attention for the city. The Mayor, understandably, notes Flint is now between a rock and a hard place: there is understandable residential anger over access to water critical to everyday life; however, unpaid bills could cause irreparable fiscal harm to the city—leading the Mayor to affirm that she will honor the moratorium and “follow the law: It’s not like something new has been put in place…We’re doing what has always been done. This was something that Council did. This is the legislative body. My role is to execute the law. So I’m carrying out the law that’s put in place.” Nevertheless, after a year in which the city did not enforce its ordinance, due in no small part to credits its was able to offer to its citizens courtesy of state financing, those credits expired at the end of February, a time when lead levels finally recovered to 12 parts per billion, which is under the federal action standard—and after Gov. Rick Snyder last February rejected Mayor Weaver’s request for an extension.  

The fiscal challenge is complicated too as illustrated by the case of former City Councilmember Edward Taylor, who noted that he had received a $1,053 bill from a home he had rented out to a woman whom he recently evicted. The problem? Mr. Taylor said the woman illegally turned on the water, so the city is holding him responsible for paying up. Now he is threatening to sue the City of Flint if he is unable to gain fiscal relief: i.e., he wants the city to erase his debt—but have the city’s grow.  “The calls that I received were numerous. Everywhere I go, people were saying: Do something,” Coincilman Nelson said. “I did what the charter authorized me to do” with a temporary moratorium “until we look at the ordinance and get it corrected. It needs work. It’s 53 years old. We must start doing something for our community.” The council president insisted the Snyder administration needs to step up “and help us: They created this…the government doesn’t get a free pass.”

Tropical Fiscal Typhoon. The administration of Governor Ricardo Rosselló Nevares declined yesterday to publish the recommended budget for the next fiscal year despite the fact that two days ago the deadline for completing the version of the document to be assessed by the PROMESA Board expired; initially, the Governor’s administration was supposed to turn over the budget to the Board on May 8th; however, the Board had granted a two-week extension—one which expired at the beginning of this week—time in which the Governor’s office could improve and correct some of the issues contained in its draft document—a document which has yet to have been made public, but one which the Governor is expected to make public as part of his budget message to the Legislative Assembly: according to Press Secretary Yennifer Álvarez Jaimes, the budget is currently in the draft phase, so it cannot be published, including the version which is to be provided to the PROMESA Board—even as, today, the Governor is due in the nation’s capital on an official trip, meaning the formal presentation of his budget before the legislature will almost surely be deferred until next week. The delay comes as PROMESA Chair José B. Carrión has indicated the Board will await the document prior to beginning its assessment and evaluation.

The Governor’s representative to the PROMESA Board, Elías Sánchez Sifonte, said the budget process is well advanced and that it is only necessary to complete the legal analysis and align some aspects with the provisions contained in the Fiscal Plan—even as a spokesperson for the Puerto Rico Peoples Democratic Party (PPD) minority in the Senate, Eduardo Bhatia, insisted on his claim to know the content of the document: he stated: “I think the people should know what was proposed in the budget…Yesterday (Monday) was the date to deliver the budget and we know nothing.” Sen. Bhatia, who sued at the beginning of this month to force publication of the budget, had his suit rejected by the San Juan Court of First Instance, because it was preempted under Title III of PROMESA—meaning the case was then brought before U.S. District Judge Laura Taylor Swain, who issued an order giving Puerto Rico until this Friday to present its position in this controversy. 

State Agency BankruptciesPuerto Rico has filed cases in the U.S. District Court in San Juan, according to Puerto Rico’s Fiscal Agency and Financial Advisory Authority, to place its Highways and Transportation Authority and Employees Retirement System into Title III bankruptcy—a move affecting some $9.5 billion in debt, with Governor Rosselló asserting he was seeking to protect pensioners and the transportation system by putting both agencies into municipal bankruptcy; he added he had asked the PROMESA Oversight Board to put the two entities into Title III’s chapter 9-like process, because, according to his statement, the island’s creditors had “categorically rejected” the Puerto Rico fiscal plan as a basis for negotiations and have recently started legal actions to undermine the public corporation’s stability. In the board-approved HTA fiscal plan, there would be no debt service paid through at least fiscal year 2026. Gov. Rosselló added that he had filed for Title III, because Puerto Rico faces insolvency in the coming months, and because his government has been unable to reach a consensual deal with its creditors, adding that pensioners will continue to receive their pensions from the General Fund after the territory’s pension fund, ERS, runs out of money. (As of February the ERS had $3.2 billion in debt, of which $2.7 billion was bond principal and $500 million was capital appreciation bonds.)

As Puerto Rico attempts to sort out its tangled financial web, retirees may face bigger cuts than those in past U.S. municipal insolvencies, due in part to an unconventional debt structure which pits pensioners against the very lenders whose money was supposed to sustain them—but also because this is an unbalancing teeter-totter, where the young and upwardly mobile are moving from Puerto Rico to New York City and Florida—leaving behind the impoverished and elderly, so that contributions into the Puerto Rico’s pension system are ebbing, even as demands upon it are increasing, and as the benefit structures are widely perceived as unsustainable. There is recognition that radical cuts to pensioners could deepen the population’s reliance on government subsidies and compound rampant emigration, for, as Gov. Rosselló has noted, most retirees “are already under the poverty line,” so that any pension cuts “would cast them out and challenge their livelihood.” Indeed, Puerto Rico’s Public pensions, which as of June last year had total pension liabilities of $49.6 billion, and which are projected to be insolvent sometime in the second half of this calendar year, today have almost no cash; rather pension benefits are coming out of the territory’s general fund, on a pay-as-you-go basis—imposing a cost to Puerto Rico of as much as $1.5 billion a year: $1.5 billion the territory does not have.

The Knife Edges of Municipal Bankruptcy

eBlog

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal pipeline to the recovery for the City of Flint, the outcome of a Pennsylvania grand jury investigation of the near municipally bankrupt Pennsylvania capital city of Harrisburg, before addressing the .growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico.

In Like Flint? The Michigan legislature has finally agreed to appropriate $20 million to make the requisite match in order for some $100 million in federal aid to go to the city, with the funds to be used to replace corroded pipes which leached lead into the city’s drinking water system, creating not just grave health repercussions, but also devastating the city’s assessed property values and public safety budgets. The city’s near insolvency, which had come in the wake of the decisions which lead to the water contamination by a gubernatorially appointed Emergency Manager, may mark one of the final chapters to the city’s physical and fiscal recovery.

A State Capital’s Near Bankruptcy. Pennsylvania’s capital city, Harrisburg, chartered as a city the year the Civil War commenced, which came close to filing for chapter 9 municipal bankruptcy, will, in its proposed budget for the upcoming fiscal year, follow a court-approved bankruptcy plan, with slightly more revenues than expenditures, except that the city does not expect to be able to hire police as fast as called for in its budget. At a workshop this week, the first of several planned before the City Council votes on the budget for FY2017-2018, the proposed plan proposes minimal increases in most departments, as total revenue is expected to climb to $119.86 million, an increase of about $7 million from last year. City Manager Mark Scott, in a memo to the Council prior to its consideration of the budget, wrote: “In developing our budget recommendations, it is obvious we do not have anywhere near the money we would like to have…Nor is that likely to change any time soon. We cannot expect to address our future by replicating our past. We will have different staffing than in the past and different service delivery expectation. Right now, we are budgeting to establish a solid base—meaning staff skill sets and new, efficient systems/processes.”

In the city, where taxpayers and residents, as well as city officials, consistently list public safety as a top priority, Harrisburg’s five-year plan to increase spending on police was a keystone of the city’s plan of debt adjustment, which was officially confirmed in February. Nevertheless, while the Police Department budget, at $72 million, meaning it is more than 60 percent of the total general fund budget, calls for a significant increase in hiring, and recruiting. City Manager Mark Scott, however, warned that the issue involves more than the budget: “We’re getting people into the academy as fast as we can,” as he advised he hopes the city to realize “a net increase of 18 officers by the end of the year.” Following a trend that began before the 2012 bankruptcy filing, the city again plans to have fewer employees than the year before. This year, however, that is primarily due to the new voter-approved city charter, which transfers sewer workers from the city to the independent Water Department: the new budget authorizes 746 positions, compared to 763 one year earlier.

Tropical Fiscal Typhoon. Puerto Rico, the insolvent U.S. territory, is trapped in a vicious fiscal and physical whirlpool where the austerity measures it has taken to meet its fiscal obligations to its creditors all across the U.S. have come at a steep fiscal and physical cost: some 30,000 public sector employees have lost their jobs, even as the nearly 75% increase in its sales and use tax has backfired: it has served to curtail shopping, adding to the vicious cycle of increasingly drastic fiscal steps in an effort to make payments to bondholders on the mainland—enough so that nearly 33% of the territory’s revenue is currently going to creditors and bondholders, even as its economy has shrunk 10% since 2006. Over this period, the poverty rate has grown to 45%, while the demographic imbalance has deteriorated with the exit of some 300,000 Puerto Ricans—mostly the young and better educated—leaving for Miami and New York. Puerto Rico and its public agencies owe $73 billion to its creditors, nearly five times greater than the nearly $18 billion in debts accumulated by Detroit when it filed for chapter 9 municipal bankruptcy four years ago in what was then the largest municipal bankruptcy in U.S. history. Now, with U.S. District Court Judge Laura Taylor Swain set to preside next Wednesday (Financial Oversight and Management Board of Puerto Rico, 17-cv-01578), we will witness a unique trial, comparable to those in Jefferson County, Detroit, Stockton, San Bernardino, etc.; however, here there will be differences compared to chapter 9, as there will be roles for both Puerto’s Rico, but also the PROMESA oversight board—with, presumably, both seeking a fiscal recovery, but unlikely to have comparable proposals with regard to the most appropriate and effective plan of debt adjustment. Perhaps the greatest challenge will be economic recovery: for Detroit, whose bankruptcy pales in comparison to Puerto Rico’s; Detroit was able to benefit from a constructive state role and an economy vastly boosted by the federal bailout of its gigantic auto industry. That contrasts with current federal laws discriminating against Puerto Rico’s economy vis-à-vis competitor Caribbean nations, and caught in a Twilight Zone between a state and municipality, with a stream of its young talent streaming to Miami and New York, leaving behind a demographic map of poverty, empty classrooms, and aging people—and dependent on sales taxes, but with sharp reductions in pensions almost certain to sharply and adversely affect sales tax revenues. Judge Taylor will require the wisdom and strength of Job.