The Human Costs of Misgovernance

August 7, 2018

Good Morning! In this morning’s eBlog, we consider the awful physical, fiscal, and human challenges of municipal governance.

Human Costs of Misgovernance. In the ongoing trial in the Flint water case, Genesee District Judge William Crawford yesterday heard oral arguments in the case of Dr. Eden Wells, the state’s chief medical executive. Judge Crawford said he will make his decision only after all transcripts are completed and after attorneys are given seven days to file additional briefs with the court, meaning that Dr. Wells will likely have to wait several weeks before she learns whether or not she will have to stand trial on charges, including involuntary manslaughter, related to the Flint drinking water crisis—a trial where she faces charges of manslaughter, related to the Flint water crisis. Yesterday, Special prosecutor Todd Flood told Judge Crawford that Dr. Wells had a duty under Michigan state law to warn the public of Legionnaires’ outbreaks in the area during the 17 months that the City of Flint used the Flint River as its source of water—a source turned to under the direction of a state-appointed emergency manager, rather than the city’s elected leaders. The trial proceeded in the wake of the dismissal of Michigan Gov. Rick Snyder from the suit after, last Wednesday, U.S. District Judge Judith Levy had ruled that the suit filed on behalf of residents and businesses did not claim that Gov. Rick Snyder was aware of risks when the city switched to Flint River water in 2014—unlike other defendants who testified they knew and disregarded the hazards involved. The pending case is over claims filed on behalf of 12 Flint residents and three businesses: it names twenty-seven defendants, including state and local agencies and officials. The plaintiffs are asking the Court to establish a Flint Victims Compensation Fund, providing the affected Flint residents with medical and financial assistance. Should the state lose, such a decision could pose a financial burden for the recently upgraded state’s credit rating. Moreover, such a decision could have adverse implications for Michigan’s Emergency Manager law for distressed local governments.

Special Prosecutor Todd Flood testified: “The defendant neglected or refused to perform that duty. She knew about it…it was reasonably foreseeable that someone was going to get sick‒that someone was going to get harmed,” arguing that state officials, four of whom face criminal charges related to the Flint water contamination, and Dr. Wells, in particular, was required by her official position to halt the flow of the contaminated water she knew could create a threat.  

The arguments deemed Dr. Wells a hero during the water emergency, in no small part because of her giving credence to the work of Dr. Mona Hanna-Attisha, the Hurley Medical Center pediatrician who had studied the blood levels of Flint’s children—and concluded that the percentage of elevated blood levels doubled in the wake of the state decision to change the source of the city’s drinking water. Dr. Wells, Michigan Department of Health and Human Services Director Nick Lyon, and Gov. Snyder ultimately provided public notice of the outbreaks of Legionnaire’s disease in the city related to the Flint water contamination; however, that notice was not given until January of 2016—long after the fatal damage to human health had occurred—and months after the city’s reliance on the contaminated water source had ceased—reliance which resulted in at least 10 deaths—or, as we previously noted, U.S. Judge Judith Levy’s opinion finding that “some government officials disregarded the risk the water posed, denied the increasingly clear threat the public faced, protected themselves with bottled water, and rejected solutions that would have ended the crisis sooner.  

The human health and safety crisis arose from a governing issue: the State of Michigan’s reliance on substituting state appointed emergency managers over municipal elected leaders. Thus, Gov. Ric Snyder, named Darnell Earley as Flint’s emergency manager—displacing the city’s Mayor and City Council—in September of 2013—at a time, according to some to the document before the court in which the plaintiffs allege the defendants knew, prior to the fatal drinking water switch, that the Flint River had been was professionally evaluated and rejected as a drinking water source, with the decision to source water from the Flint River made on April 25, 2014, after the city’s contract with Detroit to receive Lake Huron water ended and the city was awaiting the completion of the new Karegnondi water pipeline—a $285 million pipeline to provide Lake Huron water to Flint and Genesee County. Flint has since entered into a long-term primary water agreement with the Great Lakes Water Authority. (Two and a half years ago, Mr. Earley was one of fourteen officials named as defendants in a class action lawsuit brought in federal court by Flint residents, a complaint alleging that “Defendant’s conduct in exposing Flint’s residents to toxic water was so egregious and so outrageous that it shocks the conscience,” and that: “For more than 18 months, state and local government officials ignored irrefutable evidence that the water pumped from the Flint River exposed (users) to extreme toxicity.” The suit also named Michigan Gov. Rick Snyder, former Flint Mayor Dayne Walling, and former Flint Emergency Manager Jerry Ambrose.

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Fiscal, Physical, & Human Challenges of Municipal Governance

August 6, 2018

Good Morning! In this morning’s eBlog, we consider the awful physical, fiscal, and human challenges of municipal governance.  

An Enduring State of Emergency. Governor Rick Snyder of Michigan was in West Michigan yesterday morning: he was touring a water system construction site in Parchment, a municipality in Kalamazoo County of less than 2,000. The construction here includes a new pressure reduction system, which will allow Parchment to transition to the City of Kalamazoo water system. The city’s water supply is being flushed out, and the city of Kalamazoo will provide water to Parchment and Cooper Township residents. The transition, raising eerie memories of a previous transfer by the Governor in Flint, comes in the wake of finding that water in Parchment was contaminated with man-made chemicals called perfluoroalkyl and polyfluoroalkyl substances (PFAS). City residents were warned to stop using the water due to the contamination on July 26th, after water tests showed the PFAS level in Parchment was 20 times higher than the EPA recommended amount of 70 parts per trillion. A local state of emergency has been set for Parchment, and neighboring Cooper Township, after, just last week, Gov. Snyder declared a state of emergency for Kalamazoo County.

Fear for children—fear that the impact of Flint’s lead-tainted water could last decades—and distrust in the state and local governance to make decisions affecting children whose development could be hurt, is, unsurprisingly causing generations of residents to lose trust in government. It is, of course, at the same time tainting the assessed property values of homes in cities in Michigan so adversely affected for decades to come by state-imposed emergency managers. What parents would wish to move to a municipality knowing the drinking water would have long-term devastating consequences for their child?

What are the fiscal challenges for municipal elected leaders—especially in a state where the long-term physical and fiscal damages were wrought by state-imposed emergency managers? What do the long-term health effects for children exposed to the lead-tainted water mean for a municipality with regard to legal vulnerability and to financing a long-term recovery? At a conference at the end of last week, Detroit News reporter Leonard Fleming noted: “They don’t trust government officials: It could take a generation or two for residents to trust the city and state again and its water.”

At the conference, Dr. Lawrence Reynolds, who was on the Governor’s Flint task force, said some health officials have tried to minimize the effects of the water on residents; nevertheless, he warned there are babies who drank lead-tainted formula for six to nine months who could experience serious disabilities later in life: “It was a civil rights crisis, a human rights crisis, an environmental racism, and there is no excuse for what was done.” Moreover, there appears little end in sight: Cynthia Lindsey, an attorney representing Flint residents in a class-action lawsuit, said it could take three to four years for the legal process to play out. That is, Flint is held hostage by decisions imposed upon it by a state-imposed emergency manager, and now the question of who will finance—and how long will it take to replace all the city’s pipes, provide it access to safe and affordable drinking water, and long-term health care appear to be decisions to be made in a courtroom.

The fateful decision that led to the lead water contamination was not a municipal decision, but rather one made by the state in 2011 via a state imposed emergency manager, Darnell Earley. That was a decision which led to the finding that hundreds of children have since been diagnosed with lead poisoning; a dozen Flint residents have died of Legionella from drinking river water. Today, some 15 state public employees have been indicted by Michigan Attorney General Bill Schuette for their roles in the water crisis—indictments on charges ranging from obstructing an investigation to involuntary manslaughter.

Now Attorney General Schuette is running to replace the term-limited Governor Rick Snyder. Some in the state claim the candidate is using the Flint charges to “make himself look like a hero.” In the Democratic gubernatorial primary, ex-state Senator Gretchen Whitmer (D-Lansing) has released a plan to speed the replacement of lead pipes, while former Detroit health director Abdul El-Sayed received the endorsement of “Little Miss Flint,” the student whose letter brought former President Barack Obama to the community.

Former Flint Mayor Dayne Walling, who lost his first race for that position in 2009 to a car dealer named Don Williamson, but, when former Mayor Williamson resigned to avoid a recall for lying about the city’s budget deficit, was elected in a special election to replace him: he was elected after promising “to transform Flint into a sustainable 21st-century city with new jobs, safe neighborhoods, great schools and opportunity for all.” Candidate Walling reports that his own trust in government is lower than it was prior to the city’s drinking water contamination; now he claims he wants to take the hard lessons he has learned to the place he sees as the major source of Flint’s problems: the state capitol in Lansing.

Representation could matter: over the last four decades, assessed property values fell more than 40 percent—and with them property tax receipts. That led to, after the city’s police union’s refusal to accept pay cuts, laying off a third of the police force—meaning that for a period of time, the city, with about 100,000 residents, was sometimes able to put only six officers on the street at one time. Unsurprisingly, murders nearly doubled between 2009 and 2010—a year when Flint had the nation’s highest murder rate—and the year when Gov. Ric Snyder announced he was appointing an emergency manager, Ed Kurz, to preempt local control and authority in an effort to eliminate the city’s $10 million general fund deficit. Just prior to that preemption of local authority, the Flint City Council had endorsed a plan to detach the city from the Detroit water system, due to what the Council believed to be unaffordable rates, and join the new Karegnondi Water Authority, which planned to build a pipeline from Lake Huron. Mr. Kurtz authorized an engineering study to prepare the city’s water treatment plant to process Flint River water instead. A sequential state-appointed Emergency Manager, Darnell Earley, implemented the changeover—a fateful decision with precipitous health and human safety and fiscal consequences. Mr. Earley has been charged with false pretenses, conspiracy, willful neglect of duty, misconduct in office, and involuntary manslaughter—charges which will be aired next Monday at a hearing, where he is likely to maintain That the City Council had decided to draw from the Flint River until the new pipeline was completed, and that he was, therefore, only executing their orders. (Mr. Kurz, who has not been charged, has previously testified before Congress that his responsibility was “strictly finance,” thus, he bore no responsibility to ensure “safe drinking water.”

Today, Mr. Walling, currently working as a public policy consultant for Michigan State University, notes he believes there ought to be changes in the relationship between Flint and the State of Michigan, noting: “The distress of Michigan’s cities, starting with Detroit and Flint, is a direct result of policies made in Lansing,” adding: “The only good news is that policy changes at the state level can help restore Michigan’s once-great cities.”

According to a Michigan State University 2015 study: “Beyond State Takeovers: Reconsidering the Role of State Government in Local Financial Distress, with Important Lessons for Michigan and its Embattled Cities,” by Joshua Sapotichne, Erika Rosebrook, Eric A. Scorsone, Danielle Kaminski, Mary Doidge, and Traci Taylor; the State of Michigan has the second-most stringent local taxation limits in the nation—limits which impose what they term “tremendous pressure on local lawmakers’ ability to generate critical revenue.” The fiscal pressure on the state’s local governments has been intensified by decisions to divert revenue sharing, the former program intended to address fiscal disparities, to instead enable state tax cuts. The decision disproportionately impacted the state’s most fiscally challenged municipalities: Flint’s loss was $54 million; Detroit lost $200 million, contributing to its 2013 chapter 9 municipal bankruptcy. Indeed, the state decision indirectly contributed to state imposition of nine emergency managers.

Thus, unsurprisingly, former Mayor Walling has a list of the new policies he wants to enact as a state representative: Allow cities to charge commuters the same income tax rate as residents (instead of just half); broaden the sales and use tax to services; provide state pension retirement assistance. This would have especial import for Flint, where the city’s taxpayers are currently financing the pensions of employees who worked for the city when it had 200,000 residents—pension payments now consuming, he says, a quarter of the city’s budget.

Trust & Intergovernmental Tensions. By candidate Walling’s own admission, throughout most of Flint’s drinking water crisis, he believed assurances from the Environmental Protection Agency and the Michigan Department of Environmental Quality that Flint’s water met safe drinking standards. When residents confronted him with discolored, foul-smelling water, he said: “I thought that water had come out of their tap because of a failure in the system at their house or near the house,” adding that it was not until three years ago when, in the wake of listening to Dr. Mona Hanna-Attisha describe her discovery that Flint children were showing elevated levels of lead in their blood, did he finally realize the city’s entire water system was tainted, asserting that it was at that moment in time that he ordered the city to issue a lead advisory, advising mothers not to mix hot tap water with formula, and for all residents to filter their water and flush it for five minutes. (In her recent memoir, What the Eyes Don’t See, Dr. Hanna-Attisha devotes an entire chapter to her meeting with Mr. Walling, criticizing him for opting out of joining her news conference on lead levels, because he was more concerned about traveling to Washington to meet Pope Francis.)

Candidate Walling’s campaign flyers assert: “My priorities are roads, schools, jobs.” they declare. As he challenges incumbent Mayor Karen Weaver, he says most voters he interacts with want to talk about the shabby state of Michigan’s roads or the excessive auto insurance rates paid by residents of Flint and Detroit. But, it appears, he is willing to support repeal of Michigan’s Emergency Manager law—a concept which journalist Anna Clark notes, in The Poisoned City, her new history of the water crisis: “The idea of emergency management is that an outside official who is not constrained by local politics or the prospect of a reelection bid will be able to better make the difficult decisions necessary to get a struggling city or school district back on solid ground.” But in Flint, emergency managers made decisions based on saving money, not the health and safety of the citizens with whose well-being they had been entrusted. Candidate Walling, in retrospect, notes: “I wish that I had never been part of any of it: “This has all happened to a community that I deeply love, and it is motivating me to make sure policy changes are made to make sure this never happens again.”

The Fiscal Challenges of Federalism

July 13, 2018

Good Morning! In this morning’s eBlog, we consider the legal, governing, and judicial challenges to Puerto Rico’s fiscal recovery, before turning to the very different kinds of fiscal recovery challenges confronting Wilkes-Barre, Pennsylvania.

Who Is Preempting Whose Power & Authority? Yesterday, the PROMESA Oversight  Board requested dismissal of Gov. Ricardo Rosselló Nevares’ suit in which he is charging that the Oversight Board has usurped his power and authority, with the Board asking the federal court to issue an injunction to prevent such action, noting in its filing: “Although PROMESA relies in the sole discretion of the Board, two major policy instruments that exist, the fiscal plan and the budget, and the law expressly empowers the Board to formulate and certify them…the Governor questions whether PROMESA preserves to the government the political powers and of government to make policy decisions.”  In response, the Board asserted that the Governor’s claim lacks merit, asserting that the law provides that the Board has the final say with regard to budget and tax issues, writing: “The provisions to which the Governor objects are not recommendations in the sense of §205 of PROMESA,” with that response coming just minutes after the U.S. requested—for a second time—its insistence on the “Constitutionality of the PROMESA statute. In a motion filed Wednesday, U.S. Justice Department Assistant Attorney General Thomas Ward advised Judge Laura Taylor Swain that two recent decisions upon which Puerto Rico had relied were not pertinent to the legal issues at hand. Promise law.

In a motion filed Wednesday, Assistant U.S. Attorney General Thomas G. Ward and Jean Lin of the Justice Department asserted before Judge Taylor Swain that two recent U.S. Supreme Court decisions presented by the Aurelius Management Investment Fund were not relevant to the critical issues at hand, after, earlier this week, the Fund had provided the Judge with two U.S. Supreme Court decisions which, it asserted, affirm its perception of the statute, as it continues to argue before the federal court that the actions of the PROMESA Board are null and void, because the members of the Board without the consent of the Senate as required by the U.S. Constitution, referencing two recent U.S. Supreme Court decisions, Lucia v. SEC and Ortiz v. United States, where, in the former case, the court, last month, determined that a higher ranking SEC official should have been appointed to his position based on the Appointments Clause of the US Constitution, while, in the Ortiz decision, the Supreme Court held that it has jurisdiction to review decisions of the Armed Forces’ appellate courts—claims which the Justice Department described as incorrect, since such decisions only support his argument that the appointment clause of the U.S. Constitution does not apply to members of the PROMESA Oversight Board—or, as the Justice Department brief put it: “A finding that the clause applies to territorial officials would not only face this historic practice, but would also challenge the current governance structures of the territories and the District of Columbia that have been in place for decades,” adding to that Congress has full authority over its territories—authority which is not subject to the “complex” distribution of the powers of the government provided by the U.S. Constitution.

Last week, Gov. Rosselló had charged that the PROMESA Oversight Board has been trying to make policy decisions that the PROMESA law does not grant it authority to make, as he had petitioned Judge Swain to mandate that the Board to answer the complaint or motion to dismiss by yesterday. His attorneys stated: “The court should expedite resolution of this case to address the injury to the Commonwealth and its people occurring every day due to the Board’s attempt to seize day-to-day control of Puerto Rico’s government.” Even though the PROMESA Board asked for more time, Judge Swain ruled in favor of the Governor’s request—so, the complex federalism sessions are scheduled to resume on the 25th, when the quasi bankruptcy court will entertain oral arguments, possibly including participation by Puerto Rico Senate President Thomas Rivera Schatz and House President Carlos Méndez Núñez, who filed a similar suit against the board on July 9th, asserting that the PROMESA Board was preempting the legislature’s rightful powers. Thus, even the Board and the Governor have generally been in agreement this year in their fiscal plans, the Board has insisted its policies must be followed—with its proposed quasi plan of debt adjustment showing a surplus of $6.5 billion from this fiscal year through fiscal year 2023.

In the suit, Gov. Rosselló quotes from Judge Swain’s opinion of last November and order denying the PROMESA Board’s motion to replace the then-chief executive of the Puerto Rico Electric Power Authority with the board’s own appointee, with the opinion noting: “Congress did not grant the [Oversight Board] the power to supplant, bypass, or replace the Commonwealth’s elected leaders and their appointees in the exercise of their managerial duties whenever the Oversight Board might deem such a change expedient.”

Mayor of Wilkes-Barre Asks State for Financial Assistance. Mayor Tony George, whose city is confronting a $3.5 million deficit in the upcoming fiscal year, is seeking financial assistance under Pennsylvania’s program for distressed communities, the Financially Distressed Municipalities Act, approval of which request would mean the municipality would be eligible for loans and grants through the state Department of Community and Economic Development. The move came as Standard & Poor’s placed the city’s “BBB-” rating on CreditWatch with negative implications, in the wake of Mayor George’s petition to the Pennsylvania Department of Community and Economic Development, with the Mayor warning the city faces an estimated $3.5 million deficit next year and in the coming years despite efforts to place Wilkes-Barre on sound financial footing with its participation in Pennsylvania’s Early Intervention Program. The credit rating agency added it will gather more information before making a determination that could make it more expensive for the city to borrow money at higher interest rates, noting: “We expect to resolve the CreditWatch status within 30 days. We could lower the rating if we believe that the city’s credit quality is no longer commensurate with the rating. However, if we believe it does remain commensurate with the current rating, we could affirm the rating and remove it from CreditWatch.” Should the credit rating be downgraded, it would be the second time during Mayor George’s administration, after, a year ago last May, S&P lowered the rating to “BBB-” from “A-” because the city’s cash flow was constrained and was relying on borrowing to make ends meet. City officials are tentatively scheduled to hold a conference call with S&P on August 7th—by which time the state is expected to have made its decision on declaring the city distressed.

Under that state statute, municipalities may also restructure debt. If the Mayor’s request is granted, the state will appoint a financial adviser to design a financial recovery plan for the city—one of the nation’s oldest, having been inhabited first by the Shawanese and Delaware Indian and (Lenape) tribes, so that it was in 1769 that John Durkee led the first recorded Europeans to the area, where they established a frontier settlement named Wilkes-Barre after John Wilkes and Isaac Barre, two British members of Parliament who supported colonial America. At the time, these settlers were aligned with colonial Connecticut, which had a claim on the land that rivaled Pennsylvania’s. Indeed, armed Pennsylvanians twice attempted to evict the residents of Wilkes-Barre in what came to be known as the Pennamite-Yankee Wars, so that it was not until after the American Revolution, in the 1780s, that a settlement was reached granting the disputed land to Pennsylvania. A century later, the city’s population exploded in the wake of the discovery of anthracite coal, an explosion so powerful that the city was nicknamed “The Diamond City:” hundreds of thousands of immigrants flocked to the city. By 1806, it was incorporated as a borough; it became a city in 1871—as it gradually became a major U.S. coal center, and an early home to Woolworth’s, Sterling Hotels, Planter’s Peanuts, Miner’s Bank, Bell Telephone, HBO, Luzerne National Bank, and Stegmaier. But the coal which once contributed so much to the city’s growth, subsequently let it down: not only were there terrible mine disasters, but also the country began to switch to other energy sources. So, the city where Babe Ruth knocked one of his longest ever homes runs is, today, at risk of striking out at the plate.  The city, which a dozen years ago celebrated its 200th anniversary, is now seeking assistance via the state’s Act 47, with the Mayor citing—as additional factors, the lack of cooperation with area unions and his own City Council. He appears to be of the view that there was no other alternative to help stabilize the city’s finances other than filing for status under Pennsylvania’s Act 47 for Distressed Municipalities, noting: “My goal is to bring the city forward, and we’re stifled.”

In Pennsylvania there are four general methods of oversight used to aid local governments: Intergovernmental Cooperation Authorities, which are used with Philadelphia and Pittsburgh; ƒ School district assistance, which can come in the form of technical assistance, or schools which can be deemed in Financial Watch Status or in Financial Recovery Status; Early intervention program for municipalities before Act 475; and Act 47, or Pennsylvania’s Municipalities Financial Recovery Act of 1987.  What Is Pennsylvania’s Act 47? We will go into more depth about Act 47 because that is the program for which Wilkes-Barre recently applied. We also touch on the special consideration taken for Pittsburgh and Philadelphia as it relates to Act 47 as we close this commentary. The Pennsylvania Municipalities Financial Recovery Act of 1987, or Act 47 as it is commonly called, is an assistance program to help Pennsylvania municipalities after they file and are officially designated as “distressed.” Many states, such as the commonwealth of Pennsylvania, generally believe that the status of one of its municipalities can affect others throughout the state. This is even set forth in writing in PA’s Act 47, which states: “Policy—It is hereby declared to be a public policy of the Commonwealth to foster fiscal integrity of municipalities so that they provide for the health, safety and welfare of their citizens; pay principal and interest on their debt obligations when due; meet financial obligations to their employees, vendors and suppliers; and provide for proper financial accounting procedures, budgeting and taxing practices. The failure of a municipality to do so is hereby determined to affect adversely the health, safety and welfare not only of the citizens of the municipality but also of other citizens in this Commonwealth.”

How Does a Pennsylvania Municipality Become Part of Act 47? The Municipalities Financial Recovery Act authorizes Pennsylvania’s Department of Community and Economic Development (DCED) to validate municipalities as financially distressed. According to Act 47’s criteria, a municipality could be deemed financially distressed if it meets at least one of the following criteria: The municipality has maintained a deficit over a three-year period, with a deficit of 1% or more in each of the previous fiscal years. The municipality’s expenditures have exceeded revenues for a period of three years or more. The municipality has defaulted in payment of principal or interest on any of its bonds or notes or in payment of rentals due any authority. The municipality has missed a payroll for 30 days. The municipality has failed to make required payments to judgment creditors for 30 days beyond the date of the recording of the judgment. The municipality, for a period of at least 30 days beyond the due date, has failed to forward taxes withheld on the income of employees or has failed to transfer employer or employee contributions for Social Security; it has accumulated and has operated for each of two successive years a deficit equal to 5% or more of its revenues; and it has failed to make the budgeted payment of its minimum municipal obligation as required by §§302, 303, or 602 of the act of December 18, 1984 (P.L. 1005, No. 205), per the Municipal Pension Plan Funding Standard and Recovery Act, with respect to a pension fund during the fiscal year for which the payment was budgeted and has failed to take action within that time period to make required payments.

Pennsylvania’s Municipalities Financial Recovery Act authorizes Pennsylvania’s Department of Community and Economic Development to validate municipalities as financially distressed. Key criteria include: A municipality has sought to negotiate resolution or adjustment of a claim in excess of 30% against a fund or budget and has failed to reach an agreement with creditors; a municipality has filed for chapter 9 municipal bankruptcy; a municipality has experienced a decrease in a quantified level of municipal service from the preceding fiscal year, which has resulted from the municipality reaching its legal limit in levying real estate taxes for general purposes.  Act 47 offers aid to the commonwealth’s second class cities (defined as those with a population of 250,000 to 999,999) and below which are negatively affected by forces such as short-term swings in the business cycle, or those burdened by more harmful longer-term negative macro-economic shifts: state support or assistance is available in several forms in order to ensure municipalities can provide essential services without interruption.

Over the long-term, Act 47 is focused on balancing ongoing revenues with ongoing expenditures—and investing in the municipality so that growth occurs and, as in a chapter 9 plan of debt adjustment, a municipality can recover. The act provides state-sponsored emergency no-interest loans and grants in order to ensure distressed municipalities can continue meeting debt payments and creditor obligations. The Department appoints a recovery coordinator who creates and then leads in helping to implement a recovery plan. Unlike an emergency manager, the plan provides for a recovery coordinator, who may act as an intermediary between the Mayor and City Council–the recovery plan is similar to a plan of debt adjustment in that it details how the available assistance and other modifications will help the municipality regain its fiscal stability, including via commonwealth economic and community development programs, assistance while negotiating new collective bargaining contracts; and enhanced tax or revenue authority—a key of which is authority to levy a nonresident wage tax.  

Ending a State’s Fiscal Emergency Manager Preemption, & Who’s on First in Puerto Rico’s Governance?

July 2, 2018

Good Morning! In this morning’s eBlog, we consider what might be the end of the State of Michigan’s much maligned emergency manager program, before returning to assess the question with regard to whether a governor and legislature or a quasi U.S. bankruptcy court are in charge in Puerto Rico.

Exiting from Municipal Bankruptcy. For the first time in nearly two decades, a state-appointed Emergency Manager governs no municipality or school district in Michigan, after the state released Wayne County’s Highland Park School District in Wayne County from receivership under Michigan’s Local Financial Stability and Choice Act of 2012. Indeed, Michigan Treasurer Nick Khouri reports that Michigan municipalities have worked hard to become financially sound, noting: “Today’s achievement is really about the hard work our communities have accomplished to become financially sound…I commend the efforts of our local units to identify problems and bring together the resources needed to help problem-solve challenging financial conditions.” Under the terms of the release, Highland Park School District’s locally elected school board will oversee the contract for Highland Park Public School Academy and the cooperative agreement with the Detroit Public Schools Community District for the continuing education of students. In addition, the board will manage the repayment of long-term debt obligations. The Highland School District has a quasi-chapter 9 plan of debt adjustment in place to address its $7.5 million general fund deficit, with revenues from property taxes imposed on non-homestead property dedicated to finance outstanding debt, as well as an approved two-year budget. According to financial statements, as of the end of last year’s fiscal year, the District had $2.4 million in general obligation bonds outstanding.

The agreement means the school district, which had been under emergency management since January of 2012, and for which the state-appointed emergency manager had established Highland Park Public School Academy to provide educational services to district students while the school district paid off long-term debt obligations—for which, since 2015, said public school academy has been educating students from pre-kindergarten through eighth grades, and for the scholastic years through high school via a cooperative agreement with the Detroit Public Schools Community District, which has been providing educational services to students from ninth through 12th grades.

Nevertheless, the State of Michigan continues to maintain an oversight role in a limited number of Michigan communities: public school districts in Benton Harbor and Pontiac are operating under a consent agreement with the state, and the Muskegon Heights school district is overseen by a receivership-transition advisory board. The critical fiscal recoveries were marked by April’s exit from state oversight by the City of Flint, after seven years, and then, the following month: Detroit.

Conflicted Fiscal Governance. With the beginning of the new fiscal year, Governor Ricardo Rosselló Nevares still assessing fiscal options, as well as his authority to address the $8.7 billion operating budget imposed yesterday by the PROMESA Oversight Board on the U.S. territory–or, as he put it: “We are evaluating the budget certified by the Fiscal Oversight Board on the U.S. territory. Certainly, the impact on the budget of the three branches of government and municipalities will require additional adjustments that will limit our ability to provide services.” Ramon Rosario, Puerto Rico’s Secretary of Public Affairs, noted:  “The Governor and his cabinet continue to analyze all possible alternatives to the scenario.”

There was no public reaction to the imposed fiscal preemption of elected authority by House President Carlos Johnny Mendez, nor Senate President Thomas Rivera Schatz, respectively, to the budget imposed by the JSF. The Governor indicated, however, that some of the biggest concerns of the Executive are public employees and the payment of the Christmas bonus, as well as the elimination of funds for economic development.

The Board’s proposed budget, interestingly, is greater than that approved by the Legislature; however, it imposes additional cuts of up to $345 million. It does not repeal Law 80-1976, the Law Against Unjustified Dismissal. It does preserve the Christmas bonus for public employees and establish two funds, one of $ 25 million for the University of Puerto Rico, and another of $ 50 million for municipio recovery. PROMESA Board Chair José Carrión, in a written statement, noted: “The course has been drawn, and although it will be a challenge, we cannot afford to deviate. We must all work together.”

Working together would be a challenge—and a question now for Puerto Rico is whether to comply or go to court to preserve, ironically, an approved fiscal budget smaller than that to be imposed by the PROMESA Board: that is, what if the Governor and Legislature were to opt not to implement the unelected PROMESA Board’s proposed budget? One attorney noted: “There would be a confrontation that would generate a controversy in the court, because, then, the Board would have to go to the court and ask it to force the officials to comply with the budget.” Under such a scenario, the unelected fiscal oversight Board would issue a certification of non-compliance, which, were it not to compel the elected government of Puerto Rico to comply, could entail the Board availing itself of the mechanisms in the PROMESA statute preempting Puerto Rico’s governing authority. Independence Party’s Denis Márquez remarked that his “exhortation is not to obey the Fiscal Control Board, but they always tell you that you have to be against the Board, but at the end of the day you look for a reasonable accommodation that always ends up hurting the country.” However, unlike a chapter 9 governance situation, where a federal bankruptcy court assesses a municipality’s plan of debt adjustment, PROMESA allows the Board to establish the budget at its sole discretion. It appears to be virtually a form of colonialism.

As the oversight board had advanced during its approval of the fiscal plan last Friday, the public expenditure scheme contemplates reductions greater than those set in the first version of the document approved by the Legislature: the budgets of some agencies seem to have an increase compared to the current fiscal year, but this is due to the fact that, for the first time, each one was assigned an authorization corresponding to the payment of their employees’ pensions (pay as you go). A spokesperson for the Popular Democratic Party in the House noted: “The vision of the Board is the republican vision, a small government with less participation.” Indeed, the version to be imposed by the Oversight Board contemplates major cuts for the Department of Education, which ended with an allocation for this fiscal year of $2.479 billion, about a 5% cut for what the Legislature had approved, with the deepest cuts coming in payroll and operating expenses, even as the Board added nearly $30 million to “cover services related to the provision of therapies and other services for special education children, and $ 23.8 million for the payment of salary increases to teachers—leading Puerto Rico Senate Education Chair Abel Nazario to note that the PROMESA Board “itself recognizes that these measures must be maintained in the coming years is an achievement that we recognize and appreciate.”

The Board imposed a number of deep cuts, such as the Bureau of the Fire Department, where the Board cut operating expenses of $576,000, as proposed by the Legislature, to $148,000; it slashed just over $1 million for firefighter protection equipment, and cut the police department payroll by $587.1 million, as stipulated in the Legislature’s version, to $ 570.2 million, but the Board retained the proposed $18.8 million for increased police salaries.

Imbalanced Governance? The Board cut funding for the Governor’s office in excess of 10 percent, and funds for the Puerto Rico Legislature by nearly 20 percent; it cut funding for the Puerto Rico Health Department by just under 10 percent.

Can there be Shelter from the Storm? Meanwhile, in a different courtroom, U.S. District Judge Leo T. Sorokin of Massachusetts has ordered that FEMA cannot end its Transitional Sheltering Assistance program until at least midnight tomorrow, granting Puerto Ricans who fled Hurricane Maria’s devastation and have been living in temporary housing on the mainland a very brief reprieve. Christiaan Perez, manager of advocacy and digital strategy for the civil-rights group, LatinoJustice, the national civil-rights group which filed a lawsuit Saturday seeking the restraining order told the court the end of the FEMA assistance would lead to Puerto Rican evacuees being evicted. The temporary restraining order is projected to offer some protection for about 1,744 Puerto Ricans for whom the FEMA transitional assistance was to end Saturday. Judge Sorokin has scheduled a telephone hearing for today.

The outcome will impact many of the families who left Puerto Rico in the wake of the storm for the mainland who have been living in hotels in New York and Florida and those who have been unable to secure affordable housing and are now worried about what happens as FEMA assistance expires—or, as Cynthia Beard, one of the 600 Puerto Rican hurricane survivors living in New York, told NBC News this week: “I don’t know what’s going to happen. The city called me and said there’s a shelter, but there’s no guarantee; they didn’t say everything is going to be OK.” According to Mayor De Blasio’s office, New York City has a program in place to direct transportation from the hotels to the shelters. Once there, families have to find out if they are deemed eligible to register into the city’s shelter system: if accepted, families are assigned to case management and housing assistance services to help them find permanent homes. 

But FEMA has also offered displaced Puerto Ricans the option to return to Puerto Rico, asserting the agency has called more than 1,500 displaced Puerto Ricans to offer to pay for their plane tickets to return to Puerto Rico by yesterday or recommend them ways to look into their respective state’s shelter system. As of June 27, only 145 families had either booked their plane tickets or already returned to Puerto Rico. It appears the majority of displaced Puerto Rican families have opted to remain stateside, even though many do not have a permanent home. The offer came in the wake of four different deadline extensions, during which, under FEMA’s TSA program has housed Puerto Rican hurricane survivors for nearly 9 months. During other disasters, survivors participating in that program were given up to a year and a half—even though officials have said that the program normally lasts 30 days. Nevertheless, FEMA warned it was ending Transitional Sheltering Assistance for survivors of hurricanes Maria, Irma, and Harvey on Saturday, asserting it has spent more than $432 million on survivor lodging as part of the program, and that it has provided rental assistance to more than 25,000 TSA participant families to help them find permanent housing.

Unretiring Municipal Fiscal Challenges

May 22, 2018

Good Morning! In this morning’s eBlog, we return to the small municipality of Harvey, Illinois, where an aging population has fiscally sapped the town’s treasury, before exploring the disparate hurricane response treatment for Puerto Rico.

Municipal Pension Insolvency? In the Land of Lincoln, ranked the most financially unstable state in the nation according to a new S.S. News and World Report ranking by McKinsey & Co., some Illinois legislators are considering rolling back enforcement of a 2011 pension delinquency statute to help other Illinois municipalities avoid Harvey’s fiscal and physical dilemma between municipal taxes and public safety (Harvey underpaid its police and fire pensions by $2.9 million in 2016.)—with the efforts in Springfield coming in the wake of state action setting a precedent in retaining tax revenues it had collected to distribute to Harvey, because the small municipality had failed to make its pension payments. Indeed, so far this year, in the wake of the court’s decision withholding tax revenues collected by the state on behalf of Harvey; the Illinois Comptroller, in the wake of a court decision, has withheld more than $1.8 million in tax revenues from Harvey, forcing the city to lay off firefighters and police officers.

In response, State Sen. Napoleon Harris (D-Harvey) has proposed a bill, 40 ILCS 5/4-109, which would defer those tax revenue collections back to 2020; his bill would also create exceptions for distressed communities, such as Harvey, as Sen. Harris reminded his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand,” as he testified before the Illinois Licensed Activities and Pensions Committee, which approved amendments to his bill. The legislative action came as analysts at Wirepoints, an Illinois government watchdog group, have warned that Harvey is not alone—finding there to be more than 200 municipalities at similar risk of state tax withholdings in order to ensure the continuity of pension payments—payments protected under the Illinois Constitution. To date, Danville, the County seat of Vermillion County, a municipality of about 31,600 120 miles south of Chicago; East St. Louis, and Kanakee appear to be in the most desperate fiscal binds. In Danville, the municipality recently adopted a fee, the revenues for which would go directly to finance the municipality’s public pension obligations; Kanakee’s leaders voted to raise taxes.

In response to the fiscal and equity crisis, both Republicans and Democrats in the Illinois Legislature have questioned why there was no state oversight of delinquent municipalities like Harvey; nevertheless, Sen. Harris’ proposed legislation has been reported to the full Illinois Senate—that in a state ranked the most financially unstable in the country by U.S. New and World Report, based upon McKinsey & Company’s 2018 ranking of the nation’s most fiscally unstable states: the report considered credit rating and state public pension liability to rank states on long-term stability; for the near term, the report measured each state’s cash solvency and budget balance. Indeed, Illinois’ public pension debt, currently estimated at $130 billion, but measured as high as $250 billion by Moody’s last summer, was a factor in Moody’s analysis. Even Illinois Gov. Bruce Rauner recognizes the epic scope of the fiscal problem, describing Illinois as the most financially unstable state in the nation.

For Illinois legislators, the fiscal dilemma is made more difficult by what Illinois State Sen. Bill Haine (D-Alton) reminded his colleagues: “We’re gonna see in the paper that the state waives the amounts due, and then they’re going to read that the Aldermen there are getting paid $100,000 a year,” even as he, nevertheless, voted for the bill. (In FY2017, the City of Harvey allocated $240,000 in wages for six aldermen—wages which did not account for public pension contributions and other “fringe benefits” that the budget lists—or, as Michael Moirano, who represents the Harvey Police Pension fund put it: “We cannot continue to do that and hope to resolve these pension issues,” adding that even though negotiations are underway to reach an agreement with the City of Harvey, the proposed “bill will make a mutually agreeable resolution impossible.”

Meanwhile in Springfield, where Illinois Comptroller Susana Mendoza has certified Harvey’s delinquency, a spokesperson noted: “The Comptroller’s Office does not want to see any Harvey employees harmed, or any Harvey residents put at risk…but the law does not give the Comptroller discretion in this case.” Similarly, Sen. Harris told his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand.”

Powering Up? For more than a week, Puerto Rico’s non-voting U.S. Representative Jennifer Gonzalez has been urging  FEMA to extend the contract under which mainland power crews have been helping repair the U.S. territory’s power grid—a request that FEMA has denied, meaning that line restoration crews hired by the U.S. Army Corps of Engineers will work to restore power in Puerto Rico, leaving the rest of the job to crews working for Puerto Rico’s public utility, PREPA, as, eight months after Hurricane Maria’s devastation, as many as 16,000 homes remain without power. With the Corps’ current work force of about 700 line workers scheduled to end their service this Friday, time is running out. Officials for PREPA and the U.S. Army Corps of Engineers, the agency which hired the mainland contractors at FEMA’s request, have reported they expect everyone on the island to have power restored by the end of this month—the day before the official start of the Atlantic hurricane season. However, in her urgent extension request, Rep. Gonzalez expressed doubts that PREPA had the resources to complete the job quickly, writing: “I must urge that there be an extension of the mission that allows agency and contract crews to remain in place to see that the system is 100 percent restored.”

There appear, however, to be some crossed governance wires: Mike Byrne, who is in charge at FEMA of the federal response, wrote last Thursday that his decision not to extend the line restoration contract came “per the direction provided by the Energy Unified Command Group and confirmed by the PREPA Chief Executive Officer,” Walter Higgins. (The Energy Unified Command Group is the multi-agency group coordinating the power restoration effort, comprising FEMA itself, the Army Corps, which reports to FEMA, and PREPA.) In addition, it appears that some of the most challenging work awaits: sites still waiting for power are among the most difficult to reach because of mountainous and forested terrain. They include areas in the municipalities of Arecibo, Caguas, Humacao, and in Yabucoa, the city where Hurricane Maria made its initial, destructive landfall–a municipio founded in October 3, 1793 when Don Manuel Colón de Bonilla and his wife, Catalina Morales Pacheco, donated the lands to the people.

“This is how government should work.”

May 15, 2018

Good Morning! In this morning’s eBlog, we fiscally visit the small municipality of Evans, New York, a town of about 41 square miles in upstate New York which was established in 1821—seventeen years after its first settler arrived, and today home to about 14,000—but a municipality so broke after years of fiscal and financial mismanagement that it lost access to the municipal market in the wake of the withdrawal of its credit rating.

Absence of Fiscal Balance? Evans Town Supervisor Mary K. Hosler has reported that the municipality was unable to secure a loan in the wake of the withdrawal of its credit rating. In her 3rd State of the Town Address, where she advised citizens that “much can be accomplished when politics are checked at the door, and a spirit of cooperation is adopted at all levels of our town government;” she added that it was her hope that citizens would leave with “a sense that our Town is mending and moving ahead with strength and momentum,” as she noted: “By way of brief overview, as many of you are aware, the Town has been faced with numerous challenges over the past two years. Unfortunately, a decade of financial mismanagement came to a head during my first year in office, and we were faced with what turned out to be the worst financial crisis in the history of the Town. There were very few options available as the Town was facing the possibility of insolvency or a control board.”

In New York, a municipality—or its emergency financial control board, may file for chapter 9 municipal bankruptcy: the Empire State’s §§85.80 to 85.90 authorize the state legislature to create a financial control board—something created in September of 1975 for New York City; however, the New York State Constitution also contains certain fiscal limitations on municipal debt—including a limit of 9 percent of the average full valuation of said municipality’s taxable real estate for municipalities with populations under 125,000.

Supervisor Hosler introduced Evans Finance Director Brittany Gloss to present the municipality’s financial accomplishments and the progress being made in terms of economic development and, “most importantly: where we are headed,” reminding constituents that any loans would have been “costly to our residents: financially, in the loss of services, and the loss of local control,” adding:  “It has been said that the definition of insanity is doing the same thing over and over again while expecting different results. Well, we stopped the insanity, which meant we had to identify the problems and take action. Every decision was critical to move the needle in the right direction, and work the Town out of this financial disaster. These decisions were often painstaking and gut‐wrenching, but they were necessary to change the Town’s financial course. They were reviewed from all angles, and made with the taxpayer’s interest and the future of the Town of Evans in the forefront. And these difficult decisions have yielded positive results.” In her introduction, Supervisor Hosler, noting the town’s bond rating had been restored to an A rating, reported: “We’re  definitely on the recovery side of the balance sheet,” with the former bank vice president who played a key role in steering the town toward solvency, telling the audience that the municipality had turned to Erie County for assistance two years ago—or, as Erie County Comptroller Stefan I. Mychajliw recalled, the call came as the town’s payroll and bills were piling up, late at night as he was “on the couch with a horrible flu.” Nevertheless, he stated that he advises every town supervisor to let him know if they ever need anything, adding: “That night I had three or four conference calls with three of my most senior staff.”

Remarkably, by the next morning, he had already helped pull together three possible fiscal plans for the town—with the one which led to the fiscal rescue: an unprecedented $980,000 short-term loan from Erie County.

For her part, Supervisor Hosler knew when she ran for office three years ago that there were financial problems; however, it was not until she took office that she discovered thousands of missing financial transactions, internal audits which had never been completed, and a $2.6 million deficit. The fiscal depths appeared to be the result of the municipality’s debt issued in 2007, when the town had borrowed $12.6 million to install new water lines, hydrants, and a water storage tower. In that transaction, instead of putting those funds into a separate account, as required, the town combined the money with the rest of its municipal funds. Thus, a subsequent New York State audit found that $2 million of those funds were used to cover operating expenses, with the bulk for the municipality’s troubled water operations—putting the municipality on a seemingly unending reliance on tax-anticipation notes to make ends meet—that is, until the ends were at the end—or, as Supervisor Hosler described it: “Not six months into office, I’m thinking ‘Holy Lord, this is a big climb’…We had to keep moving on all fronts.”

A year and a half later, Evans has received an A credit rating from S&P Global Ratings, easing the way for the municipality to issue municipal bonds to finance $5.2 million for a new water tower, with S&P noting: “The stable outlook reflects S&P Global Ratings’ view that Evans has implemented various corrective steps to restore structural balanced operations over the past three audited fiscal years. It also reflects our expectation that the town will likely maintain strong budgetary performance, which will likely support its efforts to eliminate its negative fund balance and rebuild its budgetary flexibility.” Indeed, the town’s current deficit of $320,000 is a shadow of its former $2.6 million—and Supervisor Hosler is hopeful it can be eliminated by the end of the fiscal year—a fiscal accomplishment which could create a fiscal bonus: lower capital borrowing costs on municipal bonds the municipality hopes to issue for its water system.

The $2.6 million deficit is down to $320,000, and now Supervisor Hosler is hopeful it can be erased by the end of this year. In addition, with the credit rating, she is hoping to get a lower rate on water bonds to hopefully lower water rates. As Comptroller Mychajliw put it: “I’m just thrilled for her and the town: This is how government should work.”

The Fiscal Challenges of Inequity

May 15, 2018

Good Morning! In this morning’s eBlog, we return to the small municipality of Harvey, Illinois—a city fiscally transfixed between its pension and operating budget constraints in a state which does not provide authority for chapter 9 municipal bankruptcy; then we turn east to assess Connecticut’s fiscal road to adjournment and what it might mean for its capital city of Hartford; before heading south to Puerto Rico where there might be too many fiscal cooks in the kitchen, both exacerbating the costs of restoring fiscal solvency, and exacerbating the outflow of higher income Americans from Puerto Rico to the mainland.

Absence of Fiscal Balance? After, nearly a decade ago, the Land of Lincoln—the State of Illinois—adopted its pension law as a means to ensure smaller municipalities would stop underfunding their public pension contributions—provisions which, as we noted in the case of the small municipality of Harvey, were upheld when a judge affirmed that the Illinois Comptroller was within the state law to withhold revenues due to the city—with the Comptroller’s office noting that whilst it did not “want to see any Harvey employees harmed or any Harvey residents put at risk…the law does not give the Comptroller discretion in this case: The Comptroller’s Office is obligated to follow the law. This dispute is between the retired Harvey police officers’ pension fund and the City of Harvey.” But in one of the nation’s largest metro regions—one derived from the 233 settlements there in 1900, the fiscal interdependency and role of the state may have grave fiscal consequences. As we previously noted, U. of Chicago researcher Amanda Kass found there are 74 police or fire pension funds in Illinois municipalities with unfunded pension liabilities similar to that of Harvey. Unsurprisingly, poverty is not equally distributed: so fiscal disparities within the metro region have consequences not just for municipal operating budgets, but also for meeting state constitutionally mandated public pension obligations.

Now, as fiscal disparities in the region grow, there is increasing pressure for the state to step in—it is, after all, one of the majority of states in the nation which does not authorize a municipality to file for chapter 9 municipal bankruptcy: ergo, the fiscal and human challenge in the wake of the state’s enactment of its new statute which permits public pension funds to intercept local revenues to meet pension obligations; the state faces the governance and fiscal challenge of whether to provide for a state takeover—a governing action taken in the case of neighboring Michigan, where the state takeover had perilous health and fiscal consequences in Flint, but appeared to be the key for the remarkable fiscal turnaround in Detroit from the largest municipal chapter 9 bankruptcy in American history. Absent action by the Governor and state legislature, it would seem Illinois will need to adopt an early fiscal warning system of severe municipal fiscal distress—replete with a fiscal process for some means of state assistance or intervention. In Harvey, where Mayor Eric Kellogg has been banned for life from any role in the issuance of municipal debt because of the misleading of investors, the challenge for a city which has so under-budgeted for its public pension obligations, has defaulted on its municipal bond obligations, and provided virtually no fiscal disclosure; Illinois’ new state law (PL 96-1495), which permits public pension funds to compel Illinois’ Comptroller to withhold state tax revenue which would normally go to the city, which went into effect at the beginning of this calendar year, meant the city reasons did not take effect until January 2018. Now, in the wake of the city’s opting to lay off nearly half its police and fire force, the small municipality with the 7th highest violent crime rate in the state is in a fiscal Twilight Zone—and a zone transfixed in the midst of a hotly contested gubernatorial campaign in which neither candidate has yet to offer a meaningful fiscal option.  

Under Illinois’ Financial Distressed City Law ((65 ILCS 5/) Illinois Municipal Code) there are narrow criteria, including requirements that the municipality rank in the highest 5% of all cities in terms of the aggregate of the property tax levy paid while simultaneously in the lowest percentage of municipalities in terms of the tax collected. Under the provisions, the Illinois General Assembly would then need to pass a resolution declaring the city as fiscally distressed—a law used only once before in the state’s history—thirty-eight years ago for the City of East St. Louis. The statute, as we have previously noted, contains an additional quirk—disqualifying in this case: Illinois’ Local Government Financial Planning and Supervision Act mandates an entity must have a population of less than 25,000—putting Harvey, with its waning population measured at 24,947 as of 2016 somewhere with Rod Serling in the Twilight Zone. Absent state action, Harvey could be the first of a number of smaller Illinois municipalities unable to meet its public pension obligations—in response to which, the state would reduce revenues via intercepting local or municipal revenues—aggravating and accelerating municipal fiscal distress.

Capital for the Capitol. In a rare Saturday session, the Connecticut Senate passed legislation to enable the state to claw back emergency debt assistance for its capital city, Hartford, through aid cuts beginning in mid-2022, with a bipartisan 28-6 vote—forwarding the bill to the House and Gov. Dannel Malloy—as legislators raced to overwhelmingly approve a new state budget shortly before their midnight deadline Wednesday which would:  restore aid for towns; reverse health care cuts for the elderly, poor, and disabled; and defer a transportation crisis. The $20.86 billion package, which now moves to Gov. Dannel P. Malloy’s desk, does not increase taxes; it does raise the maximum tax rate cities and towns can levy on motor vehicles. In addition, the bill would spend rather than save more than $300 million from this April’s $1 billion surge in state income tax revenues. The final fiscal compromise does not include several major changes sought by Republicans to collective bargaining rules affecting state and municipal employees. And, even as the state’s fiscal finances are projected to face multi-billion-dollar deficits after the next election tied in part to legacy debt costs amassed over the last 80 years, the new budget would leave Connecticut with $1.1 billion in its emergency reserves: it will boost General Fund spending about 1.6 percent over the adopted budget for the current fiscal year, and is 1.1 percent higher than the preliminary 2018-19 budget lawmakers adopted last October. The budget also includes provisions intended to protect Connecticut households and businesses which might be confronted with higher federal tax obligations under the new federal tax law changes. Indeed, in the end, the action was remarkably bipartisan: the Senate passed the budget 36-0 after a mere 17 minutes of debate; the House debated only 20 minutes before voting 142-8 for adoption.

In addition to reacting to the new federal tax laws, the final fiscal actions also dealt with the sharp, negative reaction from voters in the wake of tightening  Medicare eligibility requirements for the Medicare Savings Program, which uses Medicaid funds to help low-income elderly and disabled patients cover premiums and medication costs—acting to postpone cutbacks to July 1st, even though it worsened a deficit in the current fiscal year, after learning an estimated 113,000 seniors and disabled residents would lose some or all assistance. As adopted, the new budget reverses all cutbacks, at a cost of approximately $130 million. Legislators also acted to restore some $12 million to reverse new restrictions on the Medicaid-funded health insurance program for poor adults, with advocates claiming this funding would enable approximately 13,500 adults from households earning between 155 and 138 percent of the federal poverty level to retain state-sponsored coverage.

State Aid to Connecticut Cities & Towns. Legislators also took a different approach with this budget regarding aid to cities and towns. After clashing with Gov. Malloy last November, when Gov. Malloy had been mandated by the legislature to achieve unprecedented savings after the budget was in force, including the reduction of $91 million from statutory grants to cities and towns; the new budget gives communities $70.5 million more in 2018-19 than they received this year—and bars the Governor from cutting town grants to achieve savings targets. As adopted, the fiscal package means that some municipalities in the state, cities and towns with the highest local tax rates, could be adversely impacted: the legislation raises the statewide cap on municipal property taxes from a maximum rate of 39 mills to 45 mills. On the other hand, the final legislation provides additional education and other funding for communities with large numbers of evacuees from Puerto Rico—dipping into a portion of last month’s $1.3 billion surge in state income tax receipts tied chiefly to capital gains and other investment income—and notwithstanding the state’s new revenue “volatility” cap which was established last fall to force Connecticut to save such funds. As adopted, the new state budget “carries forward” $299 million in resources earmarked for payments to hospitals this fiscal year—a fiscal action which means the state has an extra $299 million to spend in the next budget while simultaneously enlarging the outgoing fiscal year’s deficit by the same amount. (The new deficit for the outgoing fiscal year would be $686 million, which would be closed entirely with the dollars in the budget reserve—which is filled primarily with this spring’s income tax receipts.) The budget reserve is now projected to have between $700 million and $800 million on hand when the state completes its current fiscal year. That could be a fiscal issue, as it would leave Connecticut with a fiscal cushion of just under 6 percent of annual operating costs, a cushion which, while the state’s largest reserve since 2009, would still be far below the 15 percent level recommended by Comptroller Kevin P. Lembo—and, mayhap of greater fiscal concern, smaller than the projected deficits in the first two fiscal years after the November elections: according to Connecticut’s nonpartisan Office of Fiscal Analysis, the newly adopted budget, absent adjustment, would run $2 billion in deficit in FY2019-20—a deficit that office projects would increase by more than 25 percent by FY2020-21, with the bulk of those deficits attributable both to surging retirement benefit costs stemming from decades of inadequate state savings, as well as the Connecticut economy’s sluggish recovery from the last recession.

As adopted, Connecticut’s new budget also retains and scales back a controversial plan to reinforce new state caps on spending and borrowing and other mechanisms designed to encourage better savings habits; it includes a new provision to transfer an extra $29 million in sales tax receipts next fiscal year to the Special Transportation Fund—designed in an effort to avert planned rail and transit fare increases—ergo, it does not establish tolls on state highways.

Reacting to Federal Tax Changes. The legislature approved a series of tax changes in response to new federal tax laws capping deductions for state and local taxes at $10,000: one provision would establish a new Pass-Through Entity Tax aimed at certain small businesses, such as limited liability corporations; a second provision allows municipalities to provide a property tax credit to taxpayers who make voluntary donations to a “community-supporting organization” approved by the municipality: under this provision, as an example, a household owing $7,000 in state income taxes and $6,000 in local property taxes could, in lieu of paying the property taxes, make a $6,000 contribution to a municipality’s charitable organization.

Impacts on Connecticut’s Municipalities. The bill would enable the state to reduce non-education aid to its capital city of Hartford by an amount equal to the debt deal. It would authorize the legislature to pare non-education grants to Hartford if the city’s deficit exceeds 2% of annual operating costs in a fiscal year, or a 1% gap for two straight year—albeit the legislature would be free to restore other funds—or, as Mayor Luke Bronin put it: “I fully understand respect legislators’ desire to revisit the agreement after five years.” Under the so-called contract assistance agreement, which Gov. Malloy, Connecticut State Treasurer Denise Nappier, and Mayor Luke Bronin signed in late March, the state would pay off the principal on the City of Hartford’s roughly $540 million of general obligation debt over 20 to 30 years. With Connecticut’s new Municipal Accountability Review Board, not dissimilar to the Michigan fiscal review Board for Detroit, having just approved Mayor Bronin’s five-year plan. In the wake of the legislative action, Mayor Bronin had warned that significant fiscal cuts in the out years could imperil the city at that time, albeit adding: “That said, I fully understand and respect legislators’ desire to revisit the agreement after five years, and my commitment is that we will continue to work hard to earn the confidence our the legislature and the state as a whole as we move our capital city in the right direction.”

Dying to Leave. While we have previously explored the departure of many young, college-educated Puerto Ricans to the mainland, depleting both municipio and the Puerto Rico treasuries of vital tax revenues, the Departamento of Salud (Health Department) reports that even though Puerto Rico’s population has declined by nearly 17% over the decade, the U.S. territory’s suicide rate has increased significantly, especially in the months immediately following Hurricane Maria, particularly among older adults, with social workers reporting that elderly people are especially vulnerable when their daily routines are disrupted for long periods. Part of the upsurge is demographically related: As those going have left for New York City, Florida, and other sites on the East Coast, it is older Americans left behind—many who went as long as six months without electricity, who appear to be at risk. Adrian Gonzalez, the COO (Chief Operating Officer at Castañer General Hospital in Castañer, a small town in the central mountains) noted: “We have elderly people who live alone, with no power, no water and very little food.” Dr. Angel Munoz, a clinical psychologist in Ponce, said people who care for older adults need to be trained to identify the warning signs of suicide: “Many of these elderly people either live alone or are being taken care of by neighbors.”

A Hot Potato of Municipal Debt. Under Puerto Rico Gov. Ricardo Rosselló’s proposed FY2019 General Fund budget, the Governor included no request to meet Puerto Rico’s debt, adding he intended not to follow the PROMESA Board’s directives in several parts of his budget—those debt obligations for Puerto Rico and its entities are in excess of $2.5 billion: last month’s projections by the Board certified a much higher amount of $3.84 billion. Matt Fabian of Municipal Market Analytics described it this way: “Bondholders have to wait until the Commonwealth makes a secured or otherwise legally protected provision to pay debt service before they can begin to (dis)count their chickens: The alternative, which is where we are today, is an assumption that debt service will be paid out of surplus funds. ‘Surplus funds’ haven’t happened in a decade and the storm has only made things worse: a better base case assumption is the Commonwealth spending every dollar of cash and credit at its disposal, regardless of what the budget says: That doesn’t leave much room for the payment of debt service and is good reason for bondholders to continue to litigate.” Under the PROMESA Board’s approved fiscal plan, Puerto Rico should have $1.13 billion in surplus funds available for debt service in FY2023—with the Board silent with regard to what percent the Gov. would be expected to dedicate to debt service. The Gov.’s budget request does seek nearly a 10% reduction for the general fund, with a statement from his office noting the proposal for operational expenditures of $7 billion is 6% less than that for the current fiscal year and 22% less than the final budget of former Gov. Alejandro García Padilla. The Governor proposed no reductions in pension benefits—indeed, it goes so far as to explicitly include that his budget does not follow the demands of the PROMESA Oversight Board for the proposed pension cuts, to enact new labor reforms, or to eliminate a long-standing Christmas bonus for government workers.

Nevertheless, PROMESA Board Executive Director Natalie Jaresko, appears optimistic that Gov. Ricardo Rosselló Nevares’s government will correct the “deficiencies” in the recommended budget without having to resort to litigation: while explaining the Board’s reasoning for rejecting the Governor’s proposed budget last week, Director Jaresko stressed that correcting the expenses and collections program, as well as implementing all the reforms contained in the fiscal plan, is necessary to channel the island’s economy and to promote transparency and accountability in the use of public funds, adding that approving a budget in accordance with the new certified fiscal plan is critical to achieve the renegotiation of Puerto Rico’s debt—adding that, should the Rosselló administration not do its part, the Board would proceed with what PROMESA establishes: “The fiscal plan is not a menu you can choose from.”