Three Different Roads to Fiscal Recovery

November 6, 2017

Good Morning! In today’s Blog, we consider the next critical step in Detroit’s emergence from the largest chapter 9 municipal bankruptcy in U.S. history; then we consider the ongoing legal and fiscal recovery of Ferguson, Missouri, before, finally, trying to go to school in Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road Out of State Oversight. The city of Detroit expects to get the keys back to its financial house this spring for the first time since it exited bankruptcy in 2014. The question is whether it can keep the house in order once state oversight ends — and local elected officials regain control over budgets and contracts. With two balanced budgets and an audit of a third expected in May, city officials anticipate they will be released early next year from the strict financial controls required under Chapter 9 restructuring. The shift is especially important as voters cast ballots Tuesday for the Detroit leaders who will chart the city’s direction. Both Mayor Mike Duggan and challenger Coleman Young II have offered plans on how they would guide the city financially. Gov. Rick Snyder said he is optimistic about the city’s ability to manage finances on its own. “They’ve been hitting those milestones, and I hope they continue to hit them — that’s a good thing for all of us,” Snyder told The Detroit News.

There is evidence that the oversight is no longer warranted: Detroit’s credit has been upgraded among rating agencies, its employment rate is up and property values are climbing. The city, in a financial update last month, noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts and growth in multifamily home construction. Experts say bankruptcy allowed Detroit to drop billions in debt, setting it on a solid financial path. But the city faces massive future payments for past borrowing and pension obligations that are difficult to plan for. “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there,” said Lisa Washburn, managing director of the Concord, Massachusetts-based firm Municipal Market Analytics. “Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Post-oversight protections. The landmark municipal bankruptcy set forth strict conditions to help Detroit avoid falling back into debt. A nine-member commission, which under the law includes Duggan and City Council President Brenda Jones, currently signs off on the city’s four-year budget plan, certain contracts and transactions. It has also empowered to review, modify and approve operational budgets. The commission was established as a condition of a financial aid package approved by the state Legislature to defray cuts to Detroit retiree pensions and shield the Detroit Institute of Arts collection from bankruptcy creditors. There are still protections even if the city is released from oversight, Detroit officials note. The state-mandated commission would continue to meet monthly and could step back in if necessary, the city’s Chief Financial Officer John Hill said. The city would continue to hold revenue estimation conferences in February and September to set budgeting limits for each fiscal year, as well as develop a four-year financial plan. Detroit’s numbers are headed in the right direction when it comes to property values, income tax collection, median income and employment. Among the positives:

■The city’s taxable value is projected to climb by about $100 million, from $6.4 billion based on the taxable values from the end of the 2016 calendar year to $6.5 billion at the end of this year, according to data from the CFO’s office.

■The city projects an increase of about $30 million in its residential real estate — the first boost in the property class in almost two decades. Detroit’s level of owner-occupied homes went from a low of 59 percent in 2010 to a projected 74 percent in 2018, based on findings from the reappraisal, officials say.

■City figures show income tax collection has gone from $263.2 million in the 2016 fiscal year to a forecast of $285 million for 2017, based on unaudited figures.

■The city’s employment has gone up from 206,568 in January 2014 to 233,068 this July, according to labor statistics.

■Detroiters’ median household income was $28,099 in 2016, a 7.5 percent hike from the previous year, according to U.S. Census estimates released in September.

Not as encouraging are poverty and crime rates. The poverty rate has dipped 4 percentage points to 35.7 percent, Detroit’s lowest since 2008. But the rate is still the highest among large U.S. cities, as is the city’s violent crime rate. “You can’t ignore what’s happening in the downtown and Midtown, but Detroit is obviously so much bigger than that,” said Matt Butler, a vice president at Moody’s Investors Service and lead analyst for Detroit. “The real story here going forward is how is Detroit able to re-create that development in other areas of the city.”

The city filed for bankruptcy in the summer of 2013 and officially exited on Dec. 10, 2014, with a plan to shed $7 billion in debt and pump $1.7 billion into restructuring and city service improvements over a decade. Last month, Moody’s Investors Service upgraded Detroit’s credit outlook and praised the city for its gains. Detroit’s economy “remains vulnerable,” the report noted, but adds it “is showing real progress.” Detroit recorded a general fund surplus of just over $63 million in fiscal year 2016 and expects an additional surplus for 2017 of about $38.5 million. For 2015, the surplus was about $71 million. But Moody’s warns of economic unknowns that could pose future problems, namely the massive contributions that loom for its two pension funds.

A funding plan forged through Detroit’s bankruptcy coined the “grand bargain” relieved the city of much of those payments through 2023. But in 2024, the city will have to start funding a substantial portion of the pension obligations from its general fund for the General Retirement System and Police and Fire Retirement System. The initial payment was first contemplated at $113.9 million, but city officials later said estimates had been off, in part because of outdated mortality tables. If earnings meet the plan of debt adjustment’s assumed return rate of 6.75 percent, the city’s contribution in 2024 would be $167 million. If there are no earnings, it could soar to $344 million or more. Contributions to the pensions would be annual and could continue for 20-30 years. Investment returns have varied greatly. To minimize a shortfall, the city’s administration established a dedicated Retiree Protection Fund that’s expected to pull together $335 million in the coming years to help meet the required contributions. The City Council would contribute a dedicated amount from its general fund each year. So far, $105 million has been set aside. Moody’s has called the fund a “credit positive action,” noting, however, that once it’s depleted in 2033 the city will be required to fund annual pension payments directly from its budget.

Retooling debt structure. CFO Hill notes that today his greatest concern is restructuring the city’s debt, so, last month, the city solicited requests for proposals from investment banks which could help address debt tied to past capital borrowing and millages—or, as Mr. Hill put it: “We think revenues should increase, but if we can also deal with the structure of the debt and lower those payments then the city will be much better off,” said Hill, adding a plan, he said, would “set the city on the course to have dealt with two of its major challenges.” Indeed, the issue of the city’s debt and finance has been, unsurprisingly, an issue in the mayoral campaign, where Mayor Duggan, during a debate, said Detroit’s City Council has been rigorous in making sure that we “watch every dollar that we have,” and he expects the city will be released from state fiscal oversight this spring—adding that, under his administration, “We won’t ever lose self-determination again.” In response, his opponent, Coleman Young, counters that Detroit will not fully regain budget and contract authority back from the state; moreover, he vowed he would, if elected, find efficiencies and reduce costs—and cut what he deemed the “top heavy” staff to manager ratio, adding: “These are some of the things I am willing to do to make sure we have a balanced budget and our finances get back in order.”  “In theory, it would be great to have as much money plowed into redevelopment as possible, but that comes at a cost,” she said. “With less than seven years away from having to start making pension payments again, you don’t want to find yourself in a budgetary hole at a time when you can see it coming.”

Ferguson’s Steep Road to Recovery. Ferguson, Missouri, a small city of about 21,000, which in 2010 was 67.4% black, and 29.3% white, with 8,192 households of which 39.1% had children under the age of 18 living with them, and 31.5% had a female householder with no husband present—and where 32.9% were non-families, is a relatively young municipality: the median age in the city was 33.1 years, while 10.3% were 65 years of age or older. The gender makeup of the city was 44.8% male and 55.2% female. It is a city where the Mayor is directly elected (Mayor James Knowles ran unopposed in 2014 in an election where voter turnout was approximately 12%.) Ferguson is one of 89 municipalities in St. Louis County, where the county police have jurisdiction throughout. It is a city where the fatal police shooting of Michael Brown still weighs.

Last Friday, in Ferguson, as part of a street theater protest, activists set fire to a model depicting the Ferguson Commission report in front of City Hall: it was a demonstration intended to mock political leaders and the city police department’s response to crime and protests in the city. The demonstration came just two weeks after St. Louis police, using a technique called “kettling,” in which exits are blocked in and people are arrested en masse, arrested dozens of protesters, residents, journalists, and legal observers as people protested, for a third day, after former police officer Jason Stockley was found not guilty in the 2011 fatal shooting of Mr. Lamar–and after Mayor Lyda Krewson challenged the city to recommit itself to reforms laid out in the Ferguson Commission report—the nearly 200-page report which had proposed 189 “calls to action,” and marked the culmination of nearly 10 months of work for a commission established by former Gov. Jay Nixon in 2015, in response to the shooting death of Michael Brown, a black teenager, by a white Ferguson police officer—a report in which Commissioners grouped their post-Ferguson calls for action into three categories: Justice for All, involving urgent police and court reforms; Youth at the Center, exploring policies to promote better lives for children; and Opportunity to Thrive, laying out changes to address economic inequalities.

Regional leaders have largely focused on the “Justice for All” component of the report, overhauling municipal court practices such as jailing defendants who could not pay their fines, even as discussion has commenced on strengthening the Civilian Oversight Board, equipping police with body cameras, and developing police policies for using force and for handling public demonstrations. The report also called for improving the public’s relationship with law enforcement through community policing, by encouraging police departments to facilitate better interactions between officers and those they serve, and allowing the public to weigh in on programs and policies through forums. Starsky Wilson, the former co-chair of the Ferguson Commission, in a recent interview with the St. Louis Post-Dispatch, noted that while police accountability and reform has clearly been the starting point for those revisiting the Commission’s findings, he hoped elected leaders would not forget the aspects of the report devoted to building a better St. Louis for the city’s children: “It can’t just be about police. That’s just one piece of the puzzle.”

Nevertheless, the Ferguson protests appear to have produced changes, particularly in Ferguson itself, where new city and police leaders came into power. The state Legislature also passed a municipal reform statute, the most significant element of which lowered the cap on revenue from traffic tickets: It can now only make up 12.5 percent of a city’s general operating revenue in St. Louis County, and 20 percent elsewhere, down from 30 percent. Moreover, municipalities which fail to submit a timely and accurate report on their finances to the state auditor will immediately lose jurisdiction over their courts. (The previous law did little to punish the many courts that ignored the limits.) The impact was swift: Ferguson’s Municipal Court revenue plummeted from $2.7 million in 2014 to roughly $500,000 in 2016.

In St. Louis, Mr. Wilson cites several achievements, including the creation of a Civilian Oversight Board and the decision to raise the city’s minimum wage, both in 2015, though state lawmakers negated the wage effort this year. Meanwhile, other bills have been introduced to address some of the Ferguson Commission’s findings, including a measure being considered by the St. Louis Board of Aldermen limiting when St. Louis police could use pepper spray and tear gas. Sponsoring Alderman Megan Green, 15th Ward, reports she hopes it will serve as a starting point for officials to discuss revising the city’s vague ordinance against unlawful assembly. Asked what changes were made in the city police department in response to the Ferguson report, spokeswoman Schron Jackson said the St. Louis Police Department has begun training officers in de-escalation tactics and how implicit bias may affect their work, as well as how to work with victims of violence who are gay, transgender, and bisexual. These kinds of higher training standards were among recommendations laid out by the Ferguson Commission. Additionally, Ms. Jackson said, the department has launched its Community Engagement and Organizational Development Division, which carries out community outreach programs.

But Mr. Wilson questions these early efforts: “When we see police arrest more than 300 people over 18 days, then we have to ask how seriously the increased training requirements were implemented…and how much culture change is actually happening, around use of force: What were the lessons that were learned surrounding de-escalation?” Allegations that police have improperly used force in recent weeks have already prompted the ACLU to challenge St. Louis police tactics in federal court. They have also sparked conversations at the St. Louis Board of Aldermen about when force should be used—and who should investigate afterward. The aldermanic public safety committee has already interviewed Maj. Mary Warnecke, deputy Commander of the department’s Bureau of Professional Standards, and Circuit Attorney Kim Gardner. Attorney Gardner has pitched the formation of a new unit in her office to investigate use-of-force incidents and officer-involved shootings, arguing that it is no longer acceptable for police to be investigating themselves.

In the long-term, the Ferguson Commission recommended shifting deadly force investigations to the Missouri Highway Patrol and the state attorney general—a recommendation in response to which Gov. Eric Greitens said he was open to considering. City lawmakers, too, are exploring Attorney Gardner’s idea, crafting legislation expanding the circuit attorney’s prosecutorial powers and giving the office the ability to open investigations into police officers’ use of force, according to Board of Aldermen President Lewis Reed, who notes that events such as the Stockley verdict can be catalysts for change, if legislators work quickly enough: noting that the creation of a Civilian Oversight Board is proof of that. The Aldermen had attempted to institute an oversight board in 2006, but the bill, which included subpoena power, was vetoed by former Mayor Francis Slay. Ferguson finally opened the door for its creation, President Reed said, but subpoena power did not have the requisite support to make it into the final product. With the continued unrest, a new mayor and a more open-minded board, Mr. Reed sees a window of opportunity to revisit subpoena power: “I see a readiness for people now to step outside of what I would call their normal comfort zone and support efforts that probably in a normal state they would be a little more hesitant to support.” Mayor Krewson supports providing subpoena power to the city’s Civilian Oversight Board, which investigates complaints against police, and has said she agrees with community leaders who have demanded local police change how they handle use-of-force investigations and prosecutions. She also has committed to establishing a Racial Equity Fund, a proposed 25-year city fund dedicated to promoting racial equity in the region. “I know I don’t have the decision-making power across all of these things, but I am committed to adding my political will to the push to find the right way to get those things done,” Mayor Krewson said after the first week of protests over Stockley. One thing the Mayor says she has the power to do immediately is oust interim Police Chief Lawrence O’Toole, who declared police “owned the night” after law enforcement used a technique called “kettling” to surround and arrest more than 100 people on a single evening. She has shown no indication that she will act before the chief hiring process plays out.  “We have all the answers we need in the report. The road map exists. The longer (Krewson) chooses not to act, the longer our city hurts,” said Charli Cooksey, a catalyst with the Forward Through Ferguson advocacy group. ‘Not a short-term endeavor.’ There may be a long road ahead in making changes laid out in the report a reality, but leaders have pointed to some encouraging signs. Wilson says he has noticed a more diverse group of people engaging in disruption this time, suggesting that people understand the problems don’t amount to “black people’s issues” alone. “These are justice issues. Racial inequity harms the entire region and all people,” he said.

Forward Through Ferguson, the advocacy group that grew out of the Ferguson Commission, plans to knock on as many as 4,000 doors to get feedback before kicking off a series of policy campaigns next spring. “It’s not a short-term endeavor,” Ms. Cooksey said: “Diverse stakeholders in the region have to be committed to this for years to come.” But those inspired to run for office after the events of Ferguson, such as Rasheen Aldridge, a former Ferguson commissioner and now 5th Ward Democratic Committeeman, contend that new leaders have emerged at the state and local levels who have a better understanding of why young people have been protesting in recent weeks. “We have new people at the table, folks who are for the people, who haven’t been bought out and who haven’t been around for a while,” Aldridge said: “They’re willing to do the work.”

Learning about Fiscal & Physical Recovery. The Department of Education of Puerto Rico expects to open 80 percent of the 1,113 public schools on the island next Monday after having relaxed the criteria to enable the schools by the pressure of parents, mothers and students who demand a return to normalcy. Through twitter, the Department of Education published the list of schools that will open. The slowness in the process of resumption of classes on the island has been criticized by parents, educators, and even legislators who complain that six weeks after the passage of hurricane Maria on the island, only 152 schools have been opened (13 percent of the total) in the educational regions of San Juan, Ponce, Mayagüez and Bayamón. Groups of parents and teachers have held protests; the Federation of Teachers of Puerto Rico (FMPR) has called for a massive demonstration for November 9th to press for the opening of closed schools.  Members of the school community claim that many of the schools are able to operate, with water, no debris, or damage that poses a danger to students, but have not been opened. Even a mother of a special education student started a hunger strike against the DE in Hato Rey to demand that classes be resumed at the Urban Elementary School in Guaynabo, because the prolonged closure is having adverse effects on her child’s health: “Children of special education, when you take away their world, when you take away their school, you take away their therapies, you are leaving them unarmed. It is another hurricane that is reaching them: “I am seeing my daughter break down day by day, I am seeing my daughter who has started to attack herself, something that five years ago she did not do.”

The criticism focuses on the slowness of the work of the US Army Corps of Engineers and a company that contracted to inspect the schools and certify that they do not represent a danger to students and that they have water service, they are free of debris and fumigated. Most the the re-opened schools are without electricity: even the education unions FMPR and National Union of Educators and Education Workers (Unete) maintain that the limited opening of schools could be part of a supposed plan to close schools and eliminate teacher positions, something which had been happening before the impacts of hurricanes Irma and Maria, when Puerto Rico’s public education system had, after severe budget cuts, closed 167 schools—and suffered a decline of some 44,000 students. To date, some 800 schools which have been inspected, but there are still another 300—leaving Education Secretary Keleher to describe her frustration with the “slowness of the inspection process,” and that the Department will not use the Corps of Engineers or the CSA private firm for these works. The Secretary added that there are about 44 schools which will not open because of structural damage; she noted that for schools that will not open, “We are going to relocate that population or to bring them a temporary school, which is like a wagon.”

Advertisements

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

September 22, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

 

On the Edge of Municipal Fiscal Cliffs

September 20, 2017

Good Morning! In today’s Blog, we consider the upcoming challenge for voters in Detroit—with a Mayoral election around the bend—and the city aspiring to be in the competition for selection by Amazon as its second site. Then we look at the physical and fiscal storm threats to Puerto Rico, before finally looking back at post-riot Ferguson, Missouri.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of a Fiscal State/Local Cliff.  The Latin incantation, “Speramus meliora; resurget cineribus,or, translated: “We hope for better things; it will arise from the ashes,” is Detroit’s motto: it came from a French Roman Catholic priest, Father Gabriel Richard, who was born in France in 1767 and moved to Baltimore in 1792 to teach math. Reassigned to do missionary work, he moved first to Illinois and later to Detroit, where he was the assistant pastor at St. Anne’s Church—a church founded in 1701 and possibly the oldest continuously operating Roman Catholic parish in the U.S. Two hundred twelve years ago, on June 11th, a fire destroyed nearly all of then-Detroit, just weeks before the Michigan Territory was established. Today, nearly three years after the once-great city, the “arsenal of democracy” during World War II and home of the world’s most innovative manufacturers, emerged from the nation’s largest ever chapter 9 bankruptcy, national interest in Detroit has waned: in some ways, it has become a tale of two cities: One a city still mired in poverty and unemployment; one an emerging vibrant metropolis and global self-driving car center. And all this is occurring as the voters prepare to re-elect Mike Duggan—whose most profound achievement has been to raze much of the city, after first being elected in a write-in campaign. But, last month, voters in the primary gave him 68% of the votes—likely foretelling November’s re-election—in a campaign against the son of Coleman Young, Detroit’s first black mayor. Almost more than any other city in the nation, Detroit is not just a city emerging from the ashes, but also a city of profound racial transition: Over the past forty-year, Detroit has undergone a racial transformation: from 70% white in the 1960s to just 10% today. The Detroit News described the Mayor’s self-referral as a “metrics nut:” describing cabinet meeting room as one blanketed in graphs charting the city’s employment, ambulance delivery and crime rates, among other statistics. “The police are going to show up in under 14 minutes; the ambulance is going to show up in under 8 minutes; the grass is going to be cut in the parks every 10 to 12 days—it just is.” The paper notes that: “City employees who do not meet these targets do not last long.”  But, as the city’s emergency manager charged by Gov. Snyder with taking the Motor City into chapter 9 bankruptcy and then out noted to me on that very first morning, the critical distinction between municipal and corporate bankruptcy is to ensure the streetlights, traffic lights, police and fire are working. That has been an ongoing, post-plan of debt adjustment priority, and, the numbers have continued to improve: today police response times are down from an average of 40 minutes to 13.

Mayhap a far greater governance challenge, however, has been to reverse the flight of residents from the city—flight which bequeathed 40,000 abandoned properties—properties which could become havens for crime, paid no property taxes, and adversely affected the assessed values of neighboring properties in one of the nation’s largest—by land area of 139 square miles—a city once the home to 1.8 million—thrice today’s population. Or, as David Schleicher of Yale Law School described the city: it “is just too big,” to accommodate “the expense of providing services.” The Mayor has sought to “right-size,” as it were, by means of razing abandoned homes, in part via the expansion of the Detroit Land Bank, a quasi-governmental authority which now owns 96,000 properties across the city—most of them acquired through foreclosure because of unpaid taxes. Thus, the land bank has succeeded in centralizing the city’s control over abandoned and vacant properties; Detroit has replaced an antiquated registry scattered across 83 data sets, and erased liens and back taxes as a means to facilitate the clearing and demolition or restoration of properties. Since his election, the city has focused on the highest density districts, where the city has demolished 11,900 residential properties. The results indicate that the demolition of a blighted property increases the value of a nearby home by 4.2%, according to one study. And the pace has been unprecedented—indeed, so fast there have been allegations of improper contract awards; there has been a federal investigation; and Michigan’s state housing agency suspended funds for two months, after a state audit found improper controls in place. Land bank officials, including the director of demolitions, have resigned. Mayor Duggan, who has not been a subject of the investigation, blames the mistakes on a desire to increase the pace of demolitions, but acknowledges that regulators were right to rap his knuckles.

Under the program there has been, consequently, a high pace of tax foreclosures—the main pipeline for properties which end up in the land bank’s possession: under Michigan law, owners who do not pay taxes after three years lose their property—properties last comprehensively reassessed decades before market values plummeted, meaning many are set too high. Between 2006 and 2012, median sale prices for city houses fell from $70,000 to $16,200; thus, the owner of a house worth $15,000 could owe $3,000 in property taxes. The state-mandated interest rate on property-tax debt is 18% per year. Thus, an update completed at the beginning of this calendar year should lead to lower bills, but it will not be retroactive; thus, up to 53,000 properties will receive foreclosure notices this autumn. While not every foreclosed property will necessarily end up lost, tax foreclosures, driven by government policy rather than market forces, could force out longtime residents, ironically exacerbating the very problem the Mayor is focused upon: even as the demolition drive has already cost the city’s taxpayers some $162 million, the average back taxes for homes put up for auction are $7,700—much less than the cost of demolition. Or, as Michele Oberholtzer, Director of the Tax Foreclosure Prevention Project puts it: “It’s like an auto-immune disorder: We penalize people for not paying, and then we end up paying more for the punishment.” Nevertheless, Mayor and candidate Duggan believes that at the current pace of demolitions, he can clear the city’s long-standing blight within five years—mayhap paving the way for a smaller but much more vibrant city.

Fiscal Hurricane. With still another hurricane bearing down on Puerto Rico (damages caused by Hurricane Irma are estimated at more than $600 million), a fiscal storm appears in the offing after, yesterday, an agreement among Senate Finance Committee leaders to push this month the reauthorization of the Children’s Health Insurance Program for five years raised doubts about with regard to whether Medicaid funds to stabilize the finances of the Puerto Rican health system could be included in that legislation: according to the agreement between the Chairman, Republican Orrin Hatch (R-Utah), and Ranking Member Ron Wyden (D-Oregon), that program would be refinanced for another five years; however, the agreement did not include funds to close the so-called “abyss” in Medicaid funds, which would reach $ 369 million this fiscal year and then rise to about $ 1.2 billion that has been asked annually for reimbursement under the Affordable Care Act, or, as former Puerto Rico Governor Aníbal Acevedo Vilá, who was representing Gov. Ricardo Rosselló, noted: “From what I’ve been told, we are not included.” His statement came as Gov. Rosselló arrived last night in Washington, D.C. along with former Governors Acevedo Vilá and Alejandro García Padilla to meet with House Minority Leader Nancy Pelosi (D-Ca.), as the Senate Finance Committee hurries to approve the reauthorization of the CHIP program before the law expires at the end of this month. Chairman Hatch, however, has indicated that his intention is that the reauthorization of the program not increase the federal deficit—an intention which could singularly complicate the mission—even as House Speaker Paul Ryan (R-Wis.) earlier this year had told resident commissioner, Jennifer Gonzalez, that CHIP’s reauthorization was the ideal vehicle for legislating new Medicaid allocations, due to the depletion of Affordable Care Act funds in April. (For the current fiscal year, Puerto Rico’s allocation is $172 million. Meanwhile, there are already 12 Puerto Rican municipalities within  the  federally declared disaster zone: the first ones were the municipalities of Vieques and Culebra. Yesterday, Adjuntas, Canóvanas, Carolina, Guaynabo, Juncos, Loíza, Luquillo, Orocovis, Patillas and Utuado were added—with Gov. Rosselló making the announcement yesterday accompanied by FEMA Administrator William Long,  albeit the Governor added: “This does not imply that the list of municipalities is finished, it´s not over. This simply implies that as we receive  information (from the affected municipalities) and we send it to the federal government, then, we are able make these declarations.”

Good Gnus. Puerto Rico’s median household income climbed 7.8% from 2015 to 2016 according to the U.S. Census Bureau American Community Survey statistics, with the survey showing that mean household income was up 2.3% after inflation—a stark contrast with the generally negative economic data coming out of Puerto Rico. For example, Puerto Rico’s economic activity index declined 2.1% in July from a year earlier, according to a report from the Government Development Bank for Puerto Rico: according to the U.S. Bureau of Labor Statistics’ household survey, total employment in August on the island was down 0.25% from a year earlier. According to its survey of workplaces, total employment was down 1.1%. In addition, the American Community Survey showed that net migration to the rest of the United States increased to 67,000 in 2016 from an average of 44,400 per year from 2006 to 2015—that is nearly 50%. Data from the Puerto Rico Ports Authority show that the average net migration was 65,700 per year from 2006 to 2015. The difference may reflect that some Puerto Ricans migrate to countries beside the U.S., according to Mario Marazzi, executive director for the Puerto Rico Statistics Institute.

Coming Back. Moody’s has revised upwards its credit rating for Ferguson, Missouri in the wake of efforts to recover fiscally from the aftermath of a controversial police shooting, the rating agency has revised the city’s outlook on its junk-level Ba3 general obligation rating to positive from negative. The city lost its investment grade rating as it dealt with the aftermath of the August 2014 fatal shooting of Michael Brown, an unarmed African-American, by a white police officer. The shooting led to local protests and a federal probe in the city of about 21,000 just northwest of St. Louis. The city faced rising legal expenses as it dealt with a federal probe into policing and court tactics and then the costs of a settlement, and took a hit on sales and other taxes. The city has also lost a chunk of court-fine related revenue it relied on as the state government cracked down on local government use of fine levies to balance budgets. After spending cuts and other management efforts, the city is expected to begin to shore up its balance sheet as voter approved tax revenues flow into city coffers. “The positive outlook reflects the likelihood the city’s materially improved fiscal condition will continue over the next two years, especially because new taxes implemented during fiscal years 2016 through 2018 will lead to the greater likelihood of operating surpluses and improving reserve levels,” Moody’s noted, as it affirmed the B1 rating on the city’s 2013 certificates of participation and the B2 rating on its 2012 COPs: the upgrade reflects Ferguson’s current fiscal condition in the wake of several years of rapidly declining reserves and uncertainty for further operating declines; it incorporates a moderately sized tax base with a trend of declining assessed valuation, below average resident wealth, and above average yet manageable debt burden. The agency notes that the rating remains challenged by ebbing reserves and the costs of federal consent decree measures which contributed to operating deficits in fiscal 2014 through 2017; the city anticipates a $312,000 deficit for FY 2017, but, with fully phased in, voter approved taxes coming in next year, the FY2018 budget estimates a $48,000 general fund surplus. From a high in fiscal 2013, the general fund balance declined to $3.6 million or 33.5% of revenues from $10.5 million. Reserve levels remain healthy on a relative basis compared to its peer group but the city’s operating flexibility is notably narrower than it has been. The city is working towards meeting milestones and establishing policies as required in its 2016 Department of Justice consent decree. Consent decree annual expenses have declined to $500,000 from projections of $700,000 to $1.5 million. Tax hikes are projected to generate an additional $2.9 million in annual revenue for the general fund in FY2018.

Addressing Municipal Fiscal Distress

eBlog

Share on Twitter

eBlog, 04/05/17

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

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

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

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

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

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

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

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

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

 

Governance & Fiscal Recovery

Share on Twitter

eBlog, 04/03/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Ferguson, Missouri; then we return to the Motor City to assess what and how home ownership might have changed in the wake of the city’s recovery from the largest chapter 9 municipal bankruptcy in U.S. history, before returning to the azure waters of Puerto Rico to assess its most recent fiscal developments.

A Recovering City’s Future? Ferguson, Missouri voters tomorrow will pick between Mayor James Knowles III and Councilwoman Ella Jones in the Mayoral election–for a 3-year term: Mayor Knowles was first elected Mayor on April 5, 2011, after serving on the Ferguson City Council for six years: he became the youngest mayor in Ferguson’s history when he took office at the age of 31, while Councilwoman Jones became the first African-American woman to be elected to her position. But tomorrow could mark a check point in the wake of the dramatic leadership changes since the 2014 shooting of Michael Brown put the St. Louis suburb at the center of the debate over the treatment of blacks by the nation’s police forces–and on the brink of insolvency. Mayor Knowles, who is finishing his second term, noted: “These past three years have been very difficult, but I’ve been the one who has shown I can lead through tough times…That I can take the heat, but also make the changes, the reforms necessary to make the community move forward.” Nevertheless, in the wake of the killing of an unarmed black teenager, by a white police officer nearly three years ago, Mayor Knowles has borne the brunt of considerable anger, as Ferguson went from a mostly unheard-of St. Louis suburb to a flash-point of racial unrest. After months of protests following the shooting, people rioted that November when a grand jury declined to charge the officer, who resigned that month. There was further unrest the following March when the U.S. Department of Justice cleared the officer of wrongdoing—and issued a scathing report alleging racial bias and profiling by the small city’s police department and courts—a report which appeared to lead to the resignations of the city’s police chief, city manager, municipal judge, and city attorney. Indeed, of all the city’s top officials, only Mayor Knowles remains—and that notwithstanding threats in phone calls and emails, a stolen identity, and having his home’s windows broken.  In contrast, Councilwoman Jones has lived most of her life in Ferguson: she is serving her first term as a Councilwoman, and, in her campaign, assert she wants the Mayor’s office to be “inclusive for everyone, instead of exclusive,” noting: “We have to listen and stop turning our heads and turning a deaf ear to people, because they’re just like you and I. They want to be heard and they have a right to be heard.”

Whomever the voters elect will confront a daunting fiscal challenge: the city lost millions of dollars of revenue after municipal court reforms were implemented following Mr. Brown’s death: sales and use tax revenues dropped as businesses victimized by looters were burned and closed: many have not returned. Similarly, the city has more than a dozen police vacancies: the city lacks sufficient budget resources to compete with larger, better funded governments in St. Louis County—and still is handicapped by its unfunded costs of compliance with U.S. the Justice Department imposed consent decree to improve the police and municipal court systems and eliminate racial bias: an unfunded federal mandate projected to cost the impoverished city budget and taxpayers more than $2 million. The city of about 20,000, which actually experienced a population decline of nearly 6% since 2000, nevertheless has experienced a gradual increase in median income to $43,998 by 2015—approximately 86% of average statewide household income.

And, irrespective of whom the voters select, this is not a position of responsibility that pays much: the Mayor’s pay is $4,200 annually; rather, as the incumbent notes: it’s the love of their community and the opportunity to be its face to the outside world: “These past three years have been very difficult, but I’ve been the one who has shown I can lead through tough times…That I can take the heat but also make the changes, the reforms necessary to make the community move forward.” In contrast, Councilwoman Jones said she wants the Mayor’s office to be “inclusive for everyone, instead of exclusive…We have to listen and stop turning our heads and turning a deaf ear to people, because they’re just like you and I. They want to be heard and they have a right to be heard,” she said.

A Lost Fiscal Decade? Joel Kurth and Mike Wilkinson, writing in Bridge Magazine, note that still, today, home mortgages remain a rarity in Detroit: “Home sales with mortgages are rare in Detroit, occurring in just a few areas: Miles from downtown Detroit and its debates about gentrification, a more modest question surrounds the real estate in many city neighborhoods. Cash or charge?” The pair found that “sales with mortgages are rare in Detroit, occurring in just a few areas.”  Their piece outlines remarkable oscillations in assessed property values, noting that the average home sale price in the city went from $84,109 in 2001 down to $12, 517 in 2009, and then back up to $50,308 by last year—still far below the unadjusted 2001 level—albeit they found that the average price last year for homes purchased with a mortgage was $155,650. In comparing homeownership rates, they noted that last year’s rate of 47% remained under the year 2000 rate of 55%. Thus, they found that obtaining a mortgage continues to be challenging in outlying neighborhoods across Detroit, with the vast majority of homes sold for cash to landlords and investors, rather than homeowners, according to sales data and numerous interviews—posing hard questions about who will benefit in a revival rooted in downtown and Midtown in what remains the nation’s poorest city—a city where, according to the Census Bureau, 39.3% of people live below the poverty line (defined as $24,250 for a family of four), making it “the poorest in America with more than 300,000 people, followed by Cleveland (39.2%), Fresno, Calif., (30.5%), Memphis (29.8%), and Milwaukee (29%), albeit finding the Motor City’s rate has actually decreased from 2012, when it was 42.3%. The authors quoted a real estate agent: “Detroit is evolving into a new place, but outside of hot areas, neighborhoods just aren’t where they need to be to increase property values enough for banks to lend money.”

Nevertheless, a joint report by Bridge and Detroit public radio station WDET did find some grounds for optimism, determining that home sales and prices are increasing citywide after bottoming out after the mortgage meltdown, which left in excess of 65,000 foreclosures; the report noted that in some neighborhoods, prices are rising so swiftly that they are creating bidding wars, albeit the gains are uneven, and mortgage lending is mostly confined to more affluent neighborhoods, according to records from Realcomp Ltd. II: last year, only 19% of 3,800 Detroit homes sold by conventional means were financed with mortgages, demonstrating signal disparities: homes with mortgages sold for an average of $155,000; cash sales averaged $30,000—an imbalance Mayor Mike Duggan fears could “cripple” the Motor City’s recovery, according to Erica Ward Gerson, Chairwoman of the Detroit Land Bank Authority, which assembles and sells properties: she deemed the number of cash sales a “serious, serious problem,” because they can deter home ownership and depress property values, noting that cheap sales are usually rentals or vacant houses, while pricier sales are often out of reach for ordinary buyers. Most home sales in Detroit require cash; only 19 percent of the 3,800 sales in 2016 involved a mortgage, reflecting the difficulty to secure loans in a city where property values are less than half what they were a decade ago. 

In response, Mayor Duggan has sought to team with banks, foundations, and nonprofits to offer a number of programs to increase the availability of home loans; to date, as one non-profit in the city notes, the programs have demonstrated some success; however, most focus on stable neighborhoods, e.g., not where the most serious challenges remain: in more impoverished east side neighborhoods, homes last year sold for $4,000 to $40,000 in cash, according to Realcomp data—even as, a few miles away in downtown and Midtown, homes and lofts sell for $250,000 or more, according to records. Indeed, according to the Urban Institute, in 2014, 97% of Detroit homes sold for cash—nearly thrice the national average of 36%; cities with comparable populations, such as Memphis, Columbus, and El Paso, last year had at least five times as many mortgages as the approximately 710 mortgages sold in Detroit, according to data from RealtyTrac, a California-based company that tracks real estate. Indeed, according to the Urban Institute, Detroit once had one of the highest rates of home ownership among African-Americans nationwide; but, today, the city is majority renters: since 2000, the percentage of renters has increased to 53 percent from 45 percent, according to the U.S. Census.

Don’t Bank on the City’s Future. A key fiscal issue appears to be the reluctance of banks in Detroit to offer home mortgages for less than $50,000, a figure higher than many Detroit homes are worth—a seeming legacy of the sharp withering of assessed property values after the real-estate crash. Moreover, acquiring clear titles necessary for mortgages has become more difficult, because all too many Detroit homes have liens, and way too many are in such disrepair that making them livable can multiply purchase prices. Then, almost as if adding injury to insult, current federal regulations promulgated after the crash have increased the cost of issuing mortgages. Indeed, according to the Urban Institute: only one in five Detroit residents have credit scores high enough to obtain a mortgage. Erica Ward Gerson, Chair of the Detroit Land Bank, notes that Mayor Duggan, even before he took office three years ago, had recognized how critical mortgages would be to the city’s fiscal recovery: he went, in 2015, to Denver to the Clinton Global Initiative America to plead his case to the former President and leaders of foundations and banks: afraid that low appraisals and the refusal to loan small amounts would undercut any long-term recovery chances for the city. That leadership turned out to be key: In the wake of Mayor Duggan personally taking at least one bank leader on tours of stable neighborhoods in Detroit where lending was impossible, Ms. Gerson noted that in “lightning speed,” five banks, community foundations, and nonprofits teamed to form the Detroit Home Mortgage program, which removes barriers to lending and issues mortgages for up to $75,000 more than appraised value. Now, in this new initiative, announced in February, the Mayor hopes to secure financing for 1,000 mortgages over the next 3-5 years.

Governing from Afar. It is now expected to take the PROMESA Oversight Board several more months to set up the administrative structure to pass judgment over the budgetary impact of every law enacted by Puerto Rico; nevertheless, the announcement that this process will be set in motion marks the consolidation of Puerto Rico’s public finances, coming just as Puerto Rico bondholders and bond insurers have repeated a request to the Oversight Board to initiate immediate debt negotiations. The Ad Hoc Group of GO Bondholders, which had requested the negotiations get started last week, had joined with other creditors in asking the PROMESA Board to commence negotiations this morning in New York City, with the creditors having rejected the Board’s request for a mediator to oversee the negotiations. The creditors complained it would take too long to set up the mediation ground rules and that there are only a few weeks to complete the debt negotiations, writing they had “all agreed not to participate in a mediation that lacks basic process,” seeking to trigger the PROMESA provision on a consensual debt negotiation process, which can run until May 1, when a stay on litigation allowed by PROMESA and the board will end. PROMESA Board Chair José Carrión III, for his part, has claimed that his plan is not to create a “super government,” at least in terms of the amount of people in the organism, notwithstanding that the Board’s new executive director and former Ukraine Minister of Finance, Natalie Jaresko, has been tasked with creating an office which, among other things, should have the capacity to pass judgment over the fiscal impact of each law passed in the last few months and those which might be ratified from now onward—or, as the Chairman describes it: “She will start hiring (personnel), of whom the vast majority will be Puerto Rican. We are searching for people who don’t just see this as an employment opportunity, but as a patriotic duty.”

To date, the PROMESA Board’s primary task has been to certify a long-term fiscal plan, but now the hard part of agreeing on the details and putting the legislative process under the magnifying glass commence—much like the long and painful process of reaching resolution of a plan of debt adjustment under chapter 9. To date, via letters addressed to the Governor and the leaders of the legislative chambers, the PROMESA Board first established a work calendar to which the Puerto Rico Legislature is to comply with the budget the Governor must submit before the end of the month—then granting the legislature just two weeks in May to assess and amend said budget—upon which the PROMESA Board will have the final say. Indeed, if, by the end of June, the Governor and the Legislature have not complied with the Board’s mandates, the Board—which has powers greater than Puerto Rico’s elected officials—could impose its own budget for Puerto Rico’s FY2018 year that begins on July 1st.

The process, in contrast to chapter 9 in local governments, will not include all branches; rather, the PROMESA Board is expected to continue to makes its exchanges with the Governor—not the legislators, which make up a branch of government with two leaders and where, at least on paper, Senate President Thomas Rivera Schatz promises to ignore the members of the fiscal authority. Indeed, according to PROMESA, the exchange related to the revision of every law is made directly with the Governor, to whom the Board has granted seven days—after the statute is adopted—to present the fiscal impact estimate, if any, on the Governments revenues and expenditures. Or, as former Senator Fernando Martín, who is the executive president of the Puerto Rican Independence Party, put it: “As long as they take their draconian powers seriously, I believe they will do what they announced: examine passed legislation; repeal any legislation that proves contradictory with the fiscal plan; or, to soften the blow, try to make the Legislature modify it,” adding that the PROMESA Board’s defense against the Government of Puerto Rico’s bondholders is to be rigorous in controlling expenses: “Paraphrasing the current Governor’s father, the worst is yet to come: austerity, by itself, cannot be a recipe,” rather they will have to encourage solving “the structural problem in the relations between Puerto Rico and the U.S., since the solution means ending colonialism”.

Mr. Martin believes that the Governor—as the leader of the Executive branch—, the Senate President, and the House Speaker could have the judicial strength to sue: “If the Governor accepts my call to challenge the Board and the intervention in the Island’s governmental affairs, I am more than willing to help combat the Board. If I was Governor and they rejected a law I signed, I would challenge the Board’s actions in court.” However, because the PROMESA Board was imposed by Congress, in exchange for offering Puerto Rico the possibility of a quasi-chapter 9 territorial bankruptcy procedure, and because the federal law bases the Board’s control over the Island on the power Congress has to legislate through the territorial clause of the United States Constitution; it would seem his advice would be unlikely to pass judicial muster—even as Mr. Martin notes: “The Governor of Puerto Rico is Ricardo Rosselló, elected by the people’s votes. It is not Mr. Carrión. Even though Ricardo Rosselló does not belong to my party, I respect the position he holds and the power he has according to what is established by our Constitution.” Ferrer added.

Donde Estamos? Currently, while the PROMESA Board is still reviewing the workday reduction for public employees and the elimination of the Christmas bonus if its members believe that there will not be enough cash in the coffers by July 1st, the tax reduction for doctors would cost $185 million per year. Thus, the Representative from the New Progressive Party, José Enrique “Quiquito” Meléndez, opines that Governor Rosselló’s government has had “a particular worry,” which is if the Board’s power over Puerto Rico’s laws includes measures passed before the certification of the fiscal plan. Ergo. Rep. Meléndez considers that the one with the greatest cost will be the doctors’; however, among the laws which would be subject to the Board’s review would lie the financing for the plebiscite and the office of the Inspector General—or as he described it: “The plebiscite’s impact is not substantial, even without the $2.5 million that the federal government can grant.” The cost of the plebiscite—whose possible celebration is mentioned in PROMESA, has been estimated at $5 million at least—an amount that Mr. Martín does not foresee that the Board would want to say that holding a consultation on Puerto Rico’s political future, even under a Board that could only exist under the territorial status, to be “a superfluous cost.”

The Uneven Shape of Colonial Governance. Because of the PROMESA Board’s absolute power over Puerto Rico’s elected officials and even the finances of the Puerto Rico Judicial Branch, the governance situation appears to be without precedence since Congress granted Puerto Rico a structure to form a local government.

Re-Thinking Municipalites’ Post-Bankruptcy Futures

eBlog, 9/14/16

In this morning’s eBlog, we consider the foundering fiscal state of the Detroit Public School system—a system so vital to the city’s long-term fiscal recovery; then we try to prep for next November’s elections in San Bernardino—its first post-bankruptcy election—when citizens will determine the city’s future charter. Can a city remake itself? Then we head east to another question about remaking of a city: for insolvent East Cleveland—and adjacent Cleveland, would consolidation make better sense than municipal bankruptcy? After that, we jet south to Dade County, Florida to ask what will be next – might it be municipal bankruptcy? – for the small municipality in Dade County of Opa-locka. Finally, we consider the inexcusably delayed state of the implementation of the new PROMESA law Congress adopted last June.

An Unpassing Grade? For the second time in two months, the Detroit Public Schools’ state-backed debt credit rating has been downgraded—raising apprehensions that the bonds may not be refinanced by the start of the state’s new fiscal year—with the schools already open, and that new fiscal year just 16 days away.  S&P Global Ratings wrote it had cut its rating on bonds held by the former Detroit public school district from BB to B for those issued in 2011 and BB- to B for those issued in 2012, noting: “The downgrade is based on the lack of a finalized plan regarding bondholder repayment terms following the district’s recent restructuring, and the resultant elimination of a pledged revenue stream at the end of the state’s fiscal year.” In her report, S&P credit analyst Jane Ridley noted: “Although the Michigan Finance Authority’s intent is to take out the existing debt at full value, in our view, as October looms closer and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment on their bonds.” Danelle Gittus, a spokeswoman for the Michigan Department of Treasury, attributed the downgrade to the $617 million rescue package: “The focus of the downgrade is on bonds that are being refinanced as part of the recent DPS legislation…This downgrade does not impact the ability to refinance the bonds. The Michigan Finance Authority continues to work on a financing plan to refund the bonds, which is expected to be completed later this month. Once the bonds are refunded, the rating becomes irrelevant.” What is, however, relevant, is that S&P has now displayed an increasing lack of confidence: it has cut its ratings on the Detroit school debt by six levels between late June and mid-August, placing them in junk status. The issue is if S&P is giving the system and state program such failing grades, what kind of message might that give to young families with kids who are thinking about moving into Detroit?

Actually, we are beginning to have the answer to that question, as, yesterday, lawyers representing Detroit schoolchildren filed suit against Gov. Rick Snyder and state officials in what they are terming the nation’s first federal case that pushes for literacy as a right under the U.S. Constitution: their complaint alleges that the state has denied Detroit students access to literacy — the most basic building block of education—through decades of “disinvestment…and deliberate indifference.” The suit seeks significant remedies, including a statewide accountability system in which the state “monitors conditions that deny access to literacy” and intervenes. In plain words, as attorney Mark Rosenbaum described it yesterday outside the U.S. District Court: “For the last 15 years, the state has run the Detroit schools, has run them into the ground.”  The suit documents the low reading and math proficiency rates of Detroit students, as well as classes without teachers and outdated or insufficient classroom materials; it also notes poor conditions, including vermin and building problems, at some schools as recently as this month. The seven plaintiffs are students listed by pseudonyms who attend some of Detroit’s lowest-performing schools, of which three are run by the Detroit Public Schools Community District. In addition to naming Gov. Rick Snyder as a defendant, the suit also names the Michigan state Board of Education, state school Superintendent Brian Whiston, David Behen, Director of the Michigan Department of Technology, Management and Budget, and Natasha Baker, the state school reform officer. In response, John Austin, President of the Michigan state Board of Education, said he did not believe the state board merited being the target of the suit, because it has made recommendations to the Governor and legislature for increased education funding — and it, itself, has no power to approve such funding—or, as he plainly put it: “It’s the Legislature that holds the purse strings, and the Governor who proposes budgets.” Indeed, for anyone who cares about Detroit’s long-term recovery from the nation’s largest ever municipal bankruptcy, Kathryn Eidmann, a staff attorney for Public Counsel, yesterday said attorneys in the case decided to focus on Detroit because it has the lowest proficiency rates of any large urban school district in the country on national assessment tests. The suit charges that students in Detroit do not have adequate supplies, the textbooks are outdated, classrooms are overcrowded, and school buildings are dangerous: or, as alleged in the suit: “In one elementary school, the playground slide has jagged edges, causing students to tear their clothing and gash their skin, and students frequently find bullets, used condoms, sex toys, and dead vermin around the playground equipment,” adding that students are taught by insufficient or unqualified staff, with many schools lacking properly trained teachers assigned to classes within their area of expertise. The suit charges that by its actions and inactions, “the State of Michigan’s systemic, persistent, and deliberate failure to deliver instruction and tools essential for access to literacy in plaintiffs’ schools, which serve almost exclusively low-income children of color, deprives students of even a fighting chance,” bringing its claims under the 14th Amendment of the U.S. Constitution and the Civil Rights Act.

Can a City Remake Itself? Leaders of the campaigns for and against implementing the proposed new city charter in San Bernardino are set to debate tomorrow evening as the city awaits next month’s likely exit from the nation’s longest ever municipal bankruptcy and then November’s election in which the city’s voters will consider Measure L, a proposal to replace the city’s existing charter. The debate, hosted by the Verdemont Neighborhood Association and moderated by Michael Craft, the association’s co-president and a member of the city’s charter review committee (Mr. Craft has been neutral on Measure L), will feature John Longville, president of the San Bernardino Community College District board of trustees and previously a member of the state Assembly and Mayor of Rialto versus James Penman, San Bernardino’s long-time (26 years) City Attorney until his retirement three years ago. The charter functions as the city’s constitution. The existing charter was first passed in 1905 and periodically amended, while the proposed new one was mostly based on a national model and how other mid-sized cities typically operate today. Three years ago, in our report, we noted—with regard to the charter: “In the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.”

Unlocking Opa-locka. David Chiverton, the former City Manager of insolvent Opa-locka, the small municipality of about 16,000 in Florida, plead guilty Monday to accepting pay-offs in his former capacity as city manager in entering a felony plea in federal District Court for improperly paying himself city benefits: his felony: extortion and accepting bribes; prosecutors charge Mr. Chiverton participated with other city officials to solicit pay-offs in exchange for using their official positions to help residents and businesses obtain city services and deal with billing issues. His plea is similar to one entered by the city’s former Public Works supervisor last month of guilt for bribery. In each instance, the former city officials have agreed to cooperate with investigators against other Opa-locka officials in return for lighter sentence recommendations. The pleas come as a Florida state financial oversight board is seeking to prevent Opa-locka from payment default on its bonds and, ultimately, filing for municipal bankruptcy. In Florida, one of eighteen states that authorize municipal bankruptcy, the statute §§218.01, requires that to file, a municipality must first receive prior approval from the Governor. While two utility and two transportation districts have previously filed, no Florida municipality ever has. Indeed, the state is already involved, with, as we have previously noted, Florida Chief Inspector General Melinda Miguel, chair of the Governor’s appointed state oversight board, having ordered city officials to develop procedures to segregate financial duties and prevent the kind of improper access Mr. Chiverton had obtained. (Note: Mr. Chiverton also faces an ethics complaint filed with Miami-Dade County for the benefit payouts.) Mr. Chiverton has also been accused of accepting bribes in return for using his influence to obtain city licenses and preventing water from being shut off for delinquent payments, according to court filings—this has been an exceptionally leaky problem for the city: after examination of its water and sewer accounts, the state oversight panel found Opa-locka’s collection rates are as low as 27% and that many properties are not even being billed—findings which contributed to the takeover of the billing by Miami-Dade County—which the small municipality has also requested to extend it a loan because Opa-locka’s general fund balance is so low it is projected to run out of funds soon to pay for basic services and make payroll.

Off to a Rocky Start? What Promise Is there in PROMESA? Last June, when Rep. Nydia M. Velázquez (D-NY) released her statement regarding the Senate passage of legislation allowing Puerto Rico to restructure its debt, she noted: “I know first-hand that the situation in Puerto Rico is extremely dire.  And as I stated on House passage, PROMESA is far from perfect, but it is better than the alternative of taking no action at all.  Debt restructuring is an essential first step – and without it, the island would not be able to move forward…Now that we have passed PROMESA, Congress has the legal and moral responsibility to come together again and finish its work regarding Puerto Rico. We must provide new tools so that the island can rebuild its economy for the long-term.  And, we have to resolve the island’s colonial status once and for all – without doing so, the people of Puerto Rico cannot truly move forward. In this regard, I look forward to working again with my colleagues to pass additional legislation in the coming months.” The implementation of PROMESA—especially the appointment of members of its oversight board, has, however, raised increasing questions about the federal commitment. The members were not named until August 31st; consequently, as the Board’s non-voting member, Richard Ravitch, yesterday noted after returning from Puerto Rico: members of the newly appointed Puerto Rico Oversight Board do not begin to fully understand or appreciate the depth of the fiscal problems they will have to address—comments he made both on the basis of his visits with senior Puerto Rican leaders and after talking with several of his colleagues on the oversight board; nevertheless, he noted: “I think they are going up a learning curve.” He added, he anticipates the board will probably hold its first meeting in Washington, D.C. next week—a meeting at which, presumably, he will report back on his meeting this week with Puerto Rico Gov. Alejandro García Padilla, who had advised him that Puerto Rico’s financial situation is substantially worse than it was this past winter, warning the government is in “deep” distress.

Will a City’s Residents Agree to Cede Autonomy? The ongoing uncertainty about insolvent East Cleveland’s future—whether it would be willing to cede its autonomy and control (not to mention a mostly-black community afraid of being subject to Cleveland’s police force, where, not unlike in Ferguson, the city has accepted and agreed to U.S. Justice Department exacting standards with regard to how and in which circumstances may its officers use force, as well as ongoing federal oversight—all as part of what the Justice Department has termed a pattern of unconstitutional policing and abuse, ergo triggering DOJ-mandated training in Cleveland—to be annexed or incorporated into the City of Cleveland is a harrowing issue—as well as one conflicted by Cleveland’s apprehensions that such incorporation would appear to create more negative fiscal downsides than upsides, both in terms of significant fiscal challenges, and significant new fiscal burdens on its police resources. Nevertheless, it might be that the discussion appears to be triggering what one blogger asked: should we be rethinking, after decades of glorifying the concept of home rule, that the accumulation of so many fragmented small political bodies makes fiscal sense. But, then, one has to consider not just the political challenges—but equity issues: does one propose to consolidate just the poor, struggling, disinvested entities together in one jurisdiction, but leave the well-off municipalities?  Last spring at my very favorite Lincoln Institute of Land Policy, at a journalist forum, Oklahoma City Mayor Mike Cornett spoke about his city’s amazing turnaround, followed by a searing speech from Sen. Dan Kildee (D-Mi.) contrasting the ways in which Flint been harmed by external forces. But the underlying issue is, when consolidating governments, it is one thing—as occurred in Oklahoma City—to annex wealthy enclaves and productive tax-generating areas. It is a whole other challenge to contemplate annexing adjacent jurisdictions with devastated tax bases and very high police needs.

The Exceptional Challenges of Municipal Recovery: Can a State–or the Federal Government–Make It Even More Challenging?

Share on Twitter

eBlog, 9/02/16

In this morning’s eBlog, we consider the ongoing challenges to Detroit’s long-term recovery from the nation’s largest municipal bankruptcy: can it restore—via a unique Emergency Manager—its public schools to a level sufficient to attract families with children back into the city? Then we look southeast to the fiscal challenges and rising crime challenges of Ferguson, Missouri; and we ask to what extent has the federal government aggravated each of those challenges, potentially putting the municipality on a course to insolvency.   

New Math? According to a list released yesterday by the Michigan School Reform Office, more than a third of the lowest performing schools in the State of Michigan are in the Detroit Public Schools Community District (DPS): the list of 124 schools in the bottom 5 percent for academic achievement includes 47 in DPS. The School Reform Office also announced seven schools in which it found sufficiently improved student achievement to be removed from the list of failing schools, only one of which was in Detroit: a charter school, Frontier International Academy. The release of the highly anticipated priority schools list comes less than two weeks after the School Reform Office said low-performing schools across the state could be in jeopardy of closing; nevertheless, notwithstanding the large number of DPS schools on the list, a top aide to Gov. Rick Snyder said the Snyder administration believes the state’s $617 million DPS package would prevent any DPS school from being closed in the next three years. (Michigan law allows the School Reform Office to close schools which fall into the lowest 5 percent academically for three straight years.) John Walsh, Governor Snyder’s director of strategic policy, cited an August 2nd memo from the Miller Canfield law firm to DPS Emergency Manager Steven Rhodes which suggested the three-year countdown to close struggling schools was reset when those buildings were moved to a new, debt-free Detroit district last July. A spokeswoman for the Governor, Anna Heaton, yesterday said that no schools have been closed by the state since the priority schools list was established in 2010, noting: “We are following the law as written…Because Detroit is a new district, schools that were failing under the old district can’t be closed by the School Reform Office. Please note that they could still be closed by the district.” Interim DPS superintendent Alycia Meriweather said putting school closures on hold would provide the new Detroit district time to improve student performance: “The students of Detroit have a fresh start for a new educational opportunity as a result of this decision…I’d like to thank the Governor’s Office, State Legislators, and the SSRO for recognizing DPSCD as a new district as it relates to data, in the same way we are recognized as a new district legally and financially.”

Unsurprisingly, however, the Governor’s position attracted mathematical opposition from state Republican legislative leaders and charter school advocates, who argued that a three-year reset would give the Detroit public district an unfair advantage. In a statement, House Speaker Kevin Cotter said: “As a simple matter of common sense, it cannot be said with a straight face that the Legislature intended for the worst-of-the-worst schools in Detroit to remain open…This mistaken interpretation would also require failing charter public schools to be closed while failing traditional public schools are allowed to persist and drag down class after class of Detroit students, which is an absurd conclusion.” Senate Majority Leader Arlan Meekhof (R-West Olive) said he was disappointed by the Governor’s decision “to use the opinion of one law firm as a reason to eliminate a tool intended to help students in the Detroit Public School Community District,” noting the schools in question are persistently failing schools that are not educating Detroit children: “The Senate passed multiple bills that included mechanisms to close failing schools…Part of delivering a better education to the students of Detroit includes the ability to right-size the district to meet the needs of the community.”

The Trend Gap & Federal Intervention: What Are the Implication’s for Municipal Solvency? A year ago last March, the U.S. Justice Department released a report finding racial bias and discrimination pervading police and court practices in Ferguson, Missouri, the small city of just over 20,000, majority black, with nearly one-third female householders with no husband present. Mayhap ironically, the report came just over a year after the Boston Federal Reserve tag team of Bo Zhao and David Coyne released their working paper, “Walking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?” In its report, the Department of Justice argued that the Ferguson Police Department and the City of Ferguson relied on unconstitutional practices in order to balance the city’s budget through racially-motivated excessive fines and punishments. U.S. Attorney General Eric Holder said the federal government would use all the power it had, including dismantling the Ferguson Police Department—a threat which the city’s then-Mayor warned could mark the first time in U.S. history that the federal government might force a city into chapter 9 municipal bankruptcy. Indeed, Moody’s has placed the city’s already junk-level rating on review for downgrade because of threats to the city’s solvency—with the downgrade of the city’s general obligation rating reflecting what the credit rating agency described as “the continued pressure on the city’s finances from a persistent structural imbalance and incorporating the recently approved U.S. Department of Justice (DOJ) consent decree, projected to increase annual General Fund expenses over the next several years.”

The downgrade also took into consideration the outcome of last April’s ballot election, in which voters rejected a proposed property tax hike (but approved a sales tax for economic development). Both ballot measures were integral to city management’s proposed solution to close a large General Fund budget gap that existed before accounting for the additional federal consent decree costs. (Moody’s had updated its assessment after the U.S. Justice Department filed a lawsuit last February, marking the latest setback in Ferguson’s struggle to recover from a controversial police shooting in 2014.) The Justice Department also accused the City of Ferguson of policing and municipal court practices that violated constitutional and federal civil rights. The credit rating company had noted that its rating concerns had been driven by the uncertainty of the potential financial impact of litigation costs from the lawsuit and the price tag for implementing the proposed DOJ consent decree: “We believe fiscal ramifications from these items will be significant and could result in insolvency.”

Today, two years after the shooting of Michael Brown put a national spotlight on Ferguson police and provoked the Justice Department fiscal intervention, Ferguson is fiscally pressed to maintain the number of police officers it needs: its department is facing 13 vacancies; the staff is more than 30% reduced from just two years ago. The combination of federal unfunded mandates and fines combined with officer fatigue and stress from months of Ferguson protests may be emboldening criminals and contributing to an uptick in crime. Ferguson Police Chief Sam Dotson and St. Louis County Chief Jon Belmar suggest that their forces may not be large enough to handle the “new normal:” Aggravated assaults and robberies are up in both jurisdictions since Michael Brown was shot to death, but arrests are down. Or, as Chief Dotson calls it: “It’s the Ferguson effect: I see it not only on the law enforcement side, but the criminal element is feeling empowered by the environment.”

Financial constraints, including federally imposed financial penalties, related to the fallout since Mr. Brown’s death, including legal fees, reduced municipal court revenue, and costs for Justice Department-mandated changes have given the city little choice but to reduce the authorized number of officers to 49 compared to 55 two years earlier.

Ferguson voters last month approved a utility tax hike which is projected to generate $700,000 annually, the municipality’s second voter-approved tax increase this year—and, in this instance, a critical step: had the measure failed, the police force’s authorized number would have been reduced to 44, and firefighter jobs would also have been cut. Mayor Knowles said last month’s action by the Council to increase the tax was intended to make clear the city is fiscally stable; he added that the city has received 20 new applicants for the police force since it was approved, noting: “I think we’re seeing more confidence in Ferguson now, and hopefully we’ll get more qualified candidates.”