September 11, 2018
Good Morning! In this morning’s eBlog, we remember those who died on 9/11; we remember those leaders, like then Arlington County Deputy Fire Chief Jim Schwartz, who became the incident commander that morning, in command of all local, state, and federal responders, demonstrating that while the federal government can shut down, city and county governments are the only governments in this country that can never shut down, but rather, as Detroit’s Emergency Manager, on the first day of Detroit’s chapter 9 municipal bankruptcy, emailed to every employee of the city: they were to report to work, on time—and the critical operations were to ensure every street light and traffic light was working—and there was a prompt and effective response to every 911 call. This foggy morning, we consider too, the challenge to Wilkes-Barre, Pennsylvania—a municipality where the population has declined more than 50% since 1930–denied state fiscal assistance, and awaiting the physical wrath of Hurricane Florence, before, finally, assessing changes to halt the shipping discrimination against the U.S. territory of Puerto Rico.
The Bar against Wilkes-Barre. Officials in Wilkes-Barre are regrouping after the coordinators of Pennsylvania’s Act 47 program for struggling municipalities rejected the city’s request made last June 29th for distressed status—a denial having the effect of barring the city from filing for chapter 9 municipal bankruptcy. Mayor Tony George and the city’s consultant, Public Financial Management, were scheduled to meet this week with representatives of the state Department of Community and Economic Development, the overseer of the state’s program for distressed cities. Under the state’s Act 47, the Dept. of Community and Economic Development is authorized to declare certain municipalities as financially distressed—a declaration which provides for the restructuring of debt of financially distressed municipalities, limits the ability of financially distressed municipalities to obtain government funding, authorizes municipalities to participate in federal debt adjustment actions and bankruptcy actions under certain circumstances, and provides for consolidation or merger of contiguous municipalities to relieve financial distress. That means a scheduled call at the end of this week with Pennsylvania DCED could be determinative with regard to a possibility the state could reverse its position and declare the municipality financially distressed.
Mayor Anthony George, last June, had applied for Act 47 “distressed” status, the same month in which S&P dropped the municipality’s credit rating to BBB (minus) with negative implications, noting: “[T]he CreditWatch listing means we believe there is at least a one-in-two chance that we will lower the rating within the coming 90 days following the receipt of information from the city regarding its plans in response to the state’s rejection…Any action on our part regarding the rating—either keeping it the same or revising it downward—hinges on our better understanding of those plans.” DCED, five weeks later, convened a hearing at City Hall, where Mayor George projected an FY2019 shortfall of $3.5 million—one which, according to a DCED overview, could spike to $16 million by FY2021. Under Act 47, the city would have been enabled Wilkes-Barre to triple its emergency services tax to $156 a year, as well as gain access to a $3 million interest free, 10-year loan—as well as gain authorization to enact a commuter tax. However, DCED hearing officer and former York Mayor Kim Bracey, in her final report, wrote that Wilkes-Barre should continue to pursue measures through the state’s early intervention program, in which the city enrolled two years ago. State lawmakers formalized early intervention in 2014 as part of the DCED Act 47 process.
With the greatest number of municipalities of any state in the nation, the process, however, appears confusing—or, as Mayor George put it: “I don’t understand what you [DCED] want us to do.” According to Professor David Fiorenza, the city can fix the deficit with two or three financial decisions that can lay the groundwork for long-term surpluses: “Cities can’t have it both ways, that is, when they have surpluses in their budgets they want less state intervention and when there are deficits they want the commonwealth to be there for the bailouts.” (Professor Fiorenza was a former chief financial officer of Radnor Township.)
The Mayor and his staff expect to learn more from the state DCED Friday via a conference call—weather, of course, permitting. In this instance, the call comes a week Pennsylvania DCED Secretary Dennis Davin stated the state would not declare the municipality financially distressed—noting that, instead, Mayor George should pursue other options to avoid the invocation of Act 47. (According to the Department, a quarter of the city’s current budget relies on intergovernmental assistance, versus 55% from local taxes.)
The municipality’s request for distressed status, however, is not supported by its state representatives, Sen. John Yudichak (D-Plymouth Township) and Rep. Eddie Day Pashinski (D-Wilkes-Barre), who had secured $260,000 in state funds to enable the municipality get Wilkes-Barre into the state’s Early Intervention Program (EIP), writing, in late July, in opposition to Mayor George’s request, noting that the intervention program also had a five-year timetable—from which the city had four years remaining, adding that the city was making progress with the help of PFM as evidenced in the municipal bond restructuring, which, they noted, had improved its cash flow, with Rep. Pashinski adding: “We’re trying to preserve the integrity of the city.”
At the end of last month, Sec. Davin had written: “Opportunities remain to keep the city out of financial distress status: Each and every viable option must be considered, including modest gains in the fund balance and earned income tax collections, the need to perform a property reassessment and recommendations for asset monetization.”
The clock on all this is ticking, with S&P indicating at least a “one-in-two chance” that it would lower its rating within 90 days of receiving any information from the city regarding its follow-up plans, adding: “Any action on our part regarding the rating–either keeping it the same or revising it downward, hinges on our better understanding of those plans.” From his perspective, Professor David Fiorenza of the Villanova School of Business noted: “The state made the right decision…I hope this decision will send the message to Pennsylvania cities and municipalities to take care of their financial house as these deficits can be remedied.” According to the Wilkes-Barre-based Pennsylvania Economy League, 44 of Pennsylvania’s cities, or 77.2%, have experienced population declines since 2010—complicating its efforts to refinance its long-term debt: the city issued $52 million in municipal bonds two years ago to refinance debt and adjust balloon payments to level, and tapped minimum municipal obligation relief under state law to reduce its 2017 pension payment to $5.6 million from $6.5 million. But the state relief program expires this year, while the city’s obligation is projected to spike to $7.1 million in 2020.
Hurricane Relief? Puerto Rico government officials are scheduled to meet at the White House this week to discuss a possible, temporary modification of the Jones Act (as opposed to the Jones-Shafroth Act) to create a five-year administrative exemption in U.S. cabotage statutes, amendments to allow maritime transportation of natural gas between the mainland and Puerto Rico on non-US ships. The Merchant Marine Act of 1920, also known as the Jones Act, provides for the promotion and maintenance of the U.S. merchant marine–§27 of the Act addresses cabotage, as opposed to cottage cheese: it provides for the regulation of the U.S. merchant marine and the regulation of maritime commerce in U.S. waters and between U.S. ports, mandating that all goods transported by water between U.S. ports be carried on U.S. flag ships, constructed in the United States, owned and crewed by U.S. citizens and U.S. permanent residents. Under the cabotage laws, the maritime cargo between U.S. ports and Puerto Rico must be accomplished in U.S. owned, registered, and crewed boats—that is, at a much greater than free market cost. A temporary administrative exemption, such as the one proposed by Puerto Rican leaders, would have to be granted “in the interest of the national defense” of the U.S., according to a 2013 report from the Government Accountability Office. The protectionist statute means the cost of providing relief to Puerto Rico in the wake of Hurricane Maria was far greater than for other Caribbean nations. Now, the Puerto Rico Electric Power Authority (PREPA), and Puerto Rico Senate Vice President appear hopeful that the U.S. territory and the Southern States Energy Board, a potent combination of the governors of 16 states, Puerto Rico, and the U.S. Virgin Islands, might be able to gain an exemption in these discriminatory cabotage laws, with a meeting scheduled next week at the White House to promote the idea that international vessels could also transport natural gas products between U.S. ports and Puerto Rico.
Unsurprisingly, the concept has the support of the Southern States Energy Board, which brings together 16 Republican governors along with the Democrats of the U.S. Virgin Islands and Puerto Rico, and proposes a more comprehensive exemption, to include all energy products. During their September 16-18 meeting in Biloxi, Mississippi, the Southern States Energy Board anticipates considering a resolution by Arkansas State Senator Gary Stubblefield (R-Branch, Arkansas) seeking to have President Trump issue an Executive Order granting a 10 year exemption in the transportation of energy products between Puerto Rico and the mainland—and urging the Congress to enact a permanent waiver.