Balancing the Odds for Puerto Rico’s Fiscal Future

eBlog, 03/15/17

Good Morning! In this a.m.’s eBlog, we consider the tea leaves from the outcome of yesterday’s snowy session on Puerto Rico in New York City’s Alexander Hamilton Building, where the PROMESA Board considered Puerto Rico Governor Ricardo Rosselló’s most recent efforts to reassert ownership and control of Puerto Rico’s fiscal future.

Is There Promise or UnPromise in PROMESA? The Puerto Rico Oversight Board, meeting yesterday in the Alexander Hamilton Building in New York, unanimously certified the latest turnaround plan by Governor Ricardo Rosselló to alleviate the U.S. territory’s fiscal insolvency, albeit with some critical amendments, including the implementation of a 10% progressive reduction in public pension benefits by FY2020, albeit, as was the case in Detroit’s plan of debt adjustment, adjusted so that no retiree would fall below the federal poverty level: the decade-long plan thus permits the payment of 26.2% of debt due, while imposing austerity measures including partial government employee furloughs and elimination of their Christmas bonus, unless the government meets targets for liquidity and budgeting. The plan would cut pension spending by 10%, in what the Board determined would ensure sufficient fiscal resources to fund 26% of debt due in the next nine years as a “first salvo.” Emphasizing the critical need to address a $50-billion debt load among Puerto Rico’s three main public retirement systems and a depletion of available funds by 2022, the PROMESA Board added it would also formulate efforts to fund existing pension obligations on a pay-as-you-go basis, liquidating assets and using revenues of the government’s General Fund to that end.  Board Executive Director Ramón Ruiz Comas said the Oversight Board wanted to implement additional “safeguards to ensure sufficient liquidity and budgetary savings,” designed to generate $35 to $40 million in monthly savings, including the elimination of Christmas bonus payments to public employees, and a furlough program to begin July 1st—the furlough would eliminate four work days per month for most personnel working in the executive branch, and two work days per month for teachers and other front-line personnel—the furlough would exempt law enforcement personnel. In addition, the Board conditioned the Christmas bonus elimination and work reduction program on the budget proposal for FY2018 which the government is scheduled to submit by April 30: if the government’s liquidity plan and right-sizing measures are able to generate an additional $200 million in cash reserves by June 30th, the furlough program would be deferred to September 1st or eliminated outright; likewise, the removal of Christmas bonuses could be reduced or eliminated if the Oversight Board finds that the government’s plan is producing enough cash-flow. Subsequent to that part of the session, Gerardo Portela, Director of the commonwealth’s Fiscal Agency and Financial Advisory Authority made a presentation on behalf of Puerto Rico’s muncipios of the fiscal plan—a plan which had undergone various changes over last weekend in a contentious set of negotiations between local officials and the PROMESA Board. Puerto Rico Governor Gov. Rosselló Nevares is slated to give a live televised address to provide his public response to the board’s recommendations. 

The Dean of municipal insolvency debt, Jim Spiotto, noted the import of having creditors involved in these efforts, as their support could be vital to spurring reinvestment in Puerto Rico’s economy. Mr. Spiotto’s comments came in the context of a possible agreement by some creditors to reinvest in some part of Puerto Rico, enhancing the possibility that the PROMESA Board may be willing to consider Puerto Rico’s willingness to increase its payback of debt, according to Mr. Spiotto, something which could occur under PROMESA’ Title VI.

At the session, the Oversight Board was asked about the status of debt negotiations with Puerto Rico’s bondholders and about the possibility, already requested by Gov. Ricardo Rosselló, of pushing back a stay on litigation beyond its current end on May 1st—to which Oversight Board member Arthur González responded that negotiations had yet to proceed to an outline with regard to what fiscal resources would be available for debt service: he did say that the fiscal plan would provide such an outline, and that he thought there was real hope to reaching agreements with creditors, adding that the PROMESA Board had yet to determine whether the current stay on litigation should be extended.

Balance or Imbalance. Brad Setser, a senior fellow at the Council on Foreign Relations, told the Bond Buyer that the proposed plan’s near term fiscal austerity may be too severe, warning that the “drag on Puerto Rico’s economy–and ultimately on its ability to collect tax revenues–may still be underestimated.” As in Detroit’s plan of debt adjustment, U.S. Bankruptcy Judge Steven Rhodes’s recognition that preserving the Detroit Institute of Arts was vital to the Motor City’s long-term recovery, so too, Mr. Setser recognizes that any final agreement which would handicap Puerto Rico’s economic growth prospects could backfire.  

 

 

The Fiscal, Balancing Challenges of Federalism

eBlog, 2/16/17

Good Morning! In this a.m.’s eBlog, we consider the fiscal, balancing challenges of federalism, as Connecticut Governor Daniel Malloy’s proposed budget goes to the state legislature; then we return to the small municipality of Petersburg, Virginia—the insolvent city which now confronts not just fiscal issues, but, increasingly, trust issues—including how an insolvent city should bear the costs of litigation against its current and former mayor—including their respective ethical governing responsibilities. Finally, we seek the warming waters of the Caribbean to witness a fiscal electrical storm—all while wishing readers to think about the President who would never tell a lie…

The Challenge of Revenue Sharing—or Passing the Buck? S&P Global Ratings yesterday warned that Connecticut Governor Daniel Malloy’s proposed budget could negatively affect smaller towns while benefiting the cities, noting that from a municipal credit perspective, “S&P Global Ratings believes that communities lacking the reserves or budgetary flexibility to cushion outsized budget gaps will feel the greatest effects of the proposed budget.” S&P, as an example, cited Groton, a town of under 30,000, which has an AA+ credit rating, which could find its $12.1 million reserve balance depleted by a proposed $8.2 million reduction in state aid and a $3.9 million increase to its public pension obligations. Meanwhile, state capitol Hartford, once the richest city in the United States, today is one of the poorest cities in the nation with 3 out of every 10 families living below the poverty line—which is to write that 83% of Hartford’s jobs are filled by commuters from neighboring towns who earn over $80,000, while 75% of Hartford residents who commute to work in other towns earn just $40,000. Thus, under Gov. Rowland’s proposed budget, Hartford would receive sufficient state aid under the Governor’s proposal to likely erase its projected FY2018 nearly $41 million fiscal year 2018 budget gap, according to S&P, leading the rating agency to find that shifting of costs from the state to municipal governments would be a credit positive for Connecticut, but credit negative for many of the affected towns: “Those [municipal] governments lacking the budgetary flexibility to make revenue and expenditure adjustments will be the most vulnerable to immediate downgrades.” With the Connecticut legislature expected to act by the end of April, S&P noted that the state itself—caught between fixed costs and declining revenues, will confront both Gov. Malloy and the legislature with hard choices, or, as S&P analyst David Hitchcock put it: “Bringing the [budget] into balance will involve painful adjustments,” especially as the state is seeking to close a projected $1.7 billion annual deficit. Thus, S&P calculated that general fund debt service, pension, and other OPEB payments will amount to just under 30 percent of revised forecast revenues plus proposed revenue enhancements for FY2018, assuming the legislature agrees to Gov. Malloy’s plan to “share” some one-third, or about $408 million of annual employer teacher pension contributions with cities and towns, effectively reducing state contributions.

As Mr. Hitchcock penned: “Rising state pension and other post-employment benefit payments are colliding with weak revenue growth because of poor economic performance in the state’s financial sector…Although other states are also reporting weak revenue growth and rising pension costs, Connecticut remains especially vulnerable to an unexpected economic downturn due to its particularly volatile revenue structure.” Unsurprisingly, especially given the perfect party split in the state Senate and near balance in the House, acting on the budget promises a heavy lift to confront accumulated debt: Deputy Senate Republican Majority Leader Scott Frantz (R-Greenwich) said the state’s—whose state motto is Qui transtulit sustinet (He who transplanted sustains)—financial struggles have been predictable for more than a decade, “with a completely unsustainable rate of growth in spending on structural costs and far too much borrowing that further adds to the state’s fixed costs, especially as interest rates rise….” adding: “The proposed budget is an admission that the state can no longer afford to pay for many of its obligations and will rely on the municipalities to pick up the slack, which means that local property tax rates will rise.” The Governor’s proposals to modify the state’s school-aid formula could, according to Mr. Hitchcock, be a means by which Connecticut could comply with state Superior Court Judge Thomas Moukawsher’s order for the state to revise its revenue sharing formula to better assist its poorest municipalities: “It could benefit poor cities at the expense of the rich and lower overall local aid;” however, he added that “[c]ombined with other local aid cuts, municipalities’ credit quality could be subject to greater uncertainty.” With regard to Governor Malloy’s proposed pension obligation “sharing,” our esteemed colleagues at Municipal Market Analytics described the shift in teacher pension costs to be “a more positive credit development for the state,” notwithstanding what MMA described as “quite high” challenges. Under the proposal, the municipalities of Hartford and Waterbury would receive about $40 million apiece in incremental aid, while 145 municipalities would lose aid after the netting of pension costs. Several middle-class towns, according to MMA’s analysis, could realize reductions in pension aid of more than $10 million—some of which might be offset by the Governor’s proposal to permit towns to begin assessing property taxes on hospitals, which in turn would be eligible for some state reimbursement.

Hear Ye—or Hear Ye Not. Petersburg residents who say their elected leaders are to blame for the historic city’s fiscal challenges and insolvency yesterday withdrew their efforts to oust Mayor Samuel Parham and Councilman W. Howard Myers (and former mayor) from office in court over procedural issues, notwithstanding that good-government advocates had collected the requisite number of signatures to lodge their complaints against the duo. An attorney representing the pair testified before Petersburg Circuit Court Judge Joseph Teefey that the cover letters accompanying those petitions were drafted after the signatures were gathered. Thus, according to the attorney, even if the petition signers knew why they were endorsing efforts to unseat the elected officials, they were not aware of the specific reasoning later presented to the court.

Not unsurprisingly, Barb Rudolph, a citizen activist who had helped spearhead the attempt, said she felt discouraged but not defeated, noting: “We began collecting these signatures last March, and in all that time we’ve been trying to learn about this process…We will take the information we have learned today and use that to increase our chances of success moving forward.” The petition cited “neglect of duty, misuse of office, or incompetence in the performance of duties,” charging the two elected officials for failing to heed warnings of Petersburg’s impending fiscal insolvency; they alleged ethical breaches and violations of open government law.

But now a different fiscal and ethical challenge for the insolvent municipality ensues: who will foot the tab? Last week the Council had voted to suspend its own rules, so that members could consider whether Petersburg’s taxpayers should pick up the cost of the litigation, with the Council voting 5-2 to have the city’s taxpayers foot the tab for Sands Anderson lawyer James E. Cornwell Jr., who had previously, successfully defended elected officials against similar suits. Unsurprisingly, the current and former Mayor—with neither offering to recuse himself—voted in favor of the measure. Even that vote, it appears, was only taken in the wake of a residents’ questions about whether Council had voted to approve hiring a lawyer for the case.

A Day Late & a Dollar Short? Mayor Parham and Councilmember Myers signed a written statement acknowledging their interest in the vote with the city clerk’s office the following day. The Mayor in a subsequent interview, claimed that the attorney hired by the city told him after that vote that the action was legal and supported by an opinion issued by the Virginia Attorney General’s Office, noting: “Who would want to run for elected office if they knew they could bear the full cost of going to court over actions they took?” To date, the two elected officials have not disclosed the contract or specific terms within it detailing what the pair’s litigation has cost the city budget and the city’s taxpayers. Nor has there been a full disclosure in response to Petersburg Commonwealth’s Attorney Cassandra Conover’s determination last week with regard to whether the Mayor and former Mayor’s votes to have Petersburg’s taxpayers cover their legal fees presented a conflict of interest.

Electric Storm in Puerto Rico. Yesterday, Puerto Rico Governor Ricardo Rosselló stated that the reorganization of the Puerto Rico Electric Power Authority (PREPA) Governing Board’s composition and member benefits will not affect the fiscal recovery process that is currently underway, noting: “I remind you that we announced a week or week and a half ago that we had reached an agreement with the bondholders to extend and reevaluate the Restructuring Support Agreement (RSA) terms. Everything is on the table,” referring to the extension for which he had secured municipal bondholders’ approval—until March 31. His statement came in the wake of the Puerto Rican House of Representatives Monday voting to approve a bill altering the Board’s composition and member benefits—despite PREPA Executive Director Javier Quintana’s warning that the governance model should remain unaltered, since its structure was designed to comply with their creditors’ demands. However, Gov. Rosselló argued that, according to PROMESA, the Governor of Puerto Rico and his administration are the ones responsible for executing plans and public policies: “Therefore, the Governor and the Executive branch should feel confident that the Board and the executive directors will in fact execute our administration’s strategies and public policies. We believe we should have the power to appoint people who will carry out the changes proposed by this administration.” The Governor emphasized: “We have taken steps to have a Board that responds not to the Governor or partisan interests, but to the strategy outlined by this administration, which was validated by the Puerto Rican people.”

Indeed, at the beginning of the week, the Puerto Rican government had approved what will be the Board’s new composition, which would include the executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA), the Secretary of the Department of Economic Development and Commerce, and the executive director of the Public-Private Partnerships Authority among its members: “We campaigned with a platform, the people of Puerto Rico validated it, and the Oversight Board expects all of these entities to respond to what will be a larger plan,” he insisted. Gov. Rosselló added that adjustments are essential, due to the Government’s current fiscal situation, specifically referring to the compensation paid to the members of the Board, which can reach $60,000. If this measure becomes law, the compensation would be limited to an allowance of no more than $200 per day for regular or special sessions. (The measure, pending the Senate’s approval, would establish that no member may receive more than $30,000 per year in diet allowances.) Currently, the Governing Board’s annual expenses—including salaries and other benefits—are approximately $995,000 per year. Meanwhile, PREPA has a debt of almost $9 billion, including a $700-million credit line to purchase fuel and no access to the capital markets.

Governance Insolvency?

eBlog, 2/10/17

Good Morning! In this a.m.’s eBlog, we consider an increasing governance insolvency in Petersburg, Virginia—a virtually fiscally insolvent municipality, Michigan Governor Rick Snyder’s request to the Michigan legislature for an additional $48 million for the City of Flint, and the efforts of Puerto Rico to adjust itself to the new administration and Congress in Washington, D.C.

Governance Insolvency? Petersburg, Virginia City Council members, at the first council meeting since residents had petitioned a court to remove the Mayor and a Councilmember from office, were confronted with copies of “Robert’s Rules of Order,” and an organizational chart explaining that the voters are in charge. Nonetheless, that was insufficient to prevent the Council from suspending its own rules over complaints from its own members and city residents to allow for a vote to permit the use of taxpayers’ dollars for the hiring of a private lawyer to defend Mayor Samuel Parham and Councilman W. Howard Myers from removal petitions. The move appeared to further inflame tensions between Petersburg’s governing body and the community it serves at a time when the Council has come under fire from good-government advocates and the ACLU of Virginia. The vote followed a brief recess called after Petersburg resident Ron Flock requested to learn when the Council had (publicly) voted to hire an attorney to defend Mayor Parham and Councilmember Myers, noting: “There should be no reason why (the City Attorney) cannot represent the defendants in this hearing…At what point did you as City Council approve this expenditure?” The query came in the wake, at the beginning of this week, of Richmond attorney, James Cornwell, appearing in court to defend the Mayor and Councilmember against allegations of “neglect, misuse of office, and incompetence” that voters from their respective wards had lodged in January in Petersburg Circuit Court. Councilmember Wilson-Smith noted: “This resolution does not say how much this is costing and where the money is coming from, and I would like to know that,” with regard to the proposed resolution in advance of her vote in opposition. Neither the Mayor nor Councilmember recused themselves from voting: each voted on the measure over the dissent of audience members, who at first murmured, then hooted their disapproval at their decision not to recuse themselves from the vote. The petitioners who are seeking to oust the two elected officials have supported their ouster in large part because of their perceptions about not only their roles in the city’s collapse into insolvency, but also allegations with regard to their ethical breaches and violations of open-government law. (Virginia statutes allow for the removal of elected officials for specific reasons, which include certain criminal convictions.)

City Council Ethics, Conduct, & Insolvency. The kerfuffle came as Robert Bobb, the former Richmond City Manager, whom the city hired last October to help address its insolvency, unveiled proposed revisions to the City Council’s rules, including provisions for Councilmembers’ conduct and a detailed explanation of state laws on open records. Mr. Bobb spent time on how those laws applied to public meetings, an issue identified by the ACLU of Virginia last November in an epistle sharply critical of Council practices which the ACLU wrote violated “the spirit of open-government laws.” Mr. Bobb also formally named Joseph Preston, whom the city had retained last October as the new City Attorney, as Petersburg’s official parliamentarian. (In fact, it was in October that Mr. Preston had defended a Council vote to hire the Bobb Group that several registered parliamentarians then said appeared to be in violation of both the Council’s rules at the time and Petersburg’s charter.) Mr. Preston told the Mayor and Council it was too soon to estimate what the cost to the city’s budget and taxpayers would be to defend that Mayor and Councilmember—with the case to commence before Petersburg Circuit Judge Joseph M. Teefey Jr. next week.

Not in like Flint. State of Michigan officials have decided to end the state-funded water subsidies which, since 2014, had helped Flint residents—a city where more than 40 percent of the residents live below the federal poverty level—and where the median household income is $24,862—pay their water bills after the city’s water system became contaminated with lead due to decisions and actions taken by Gov. Rick Snyder’s former appointed Emergency Manager. Word of the abrupt state cutoff spread yesterday in the wake of a senior advisor to the Governor sending a letter to the city’s interim chief financial officer, David Sabuda, that the state credits, which applied to the water portion of Flint utility customers’ accounts, would end at the end of this month: the March billing statement will be the last to include the water usage credits, which were 20 percent for commercial customers and 65 percent for residential. In addition, the state will also no longer provide $1.2 million in monthly funding for the water the city receives from the Great Lakes Water Authority. Flint Mayor Karen Weaver issued a statement expressing concern at the manner and abruptness of the state’s action; nevertheless, she described it as a welcome sign that the city’s water is improving. The Governor’s decision comes after, last December, charges were filed against two of Gov. Snyder’s former appointed state emergency managers for the city—they were accused of misleading the Michigan Department of Treasury into issuing millions in municipal bonds, but then misused the proceeds to finance the construction of a new pipeline and force Flint’s drinking water source to be switched to the contaminated Flint River. The decision also came just ten days after the filing of a $722 million class action lawsuit against the EPA on behalf of more than 1,700 residents impacted by the water crisis. In response to the abrupt state cutoff, however, Mayor Weaver described the Governor’s action as a sign that the city’s water quality had improved—albeit stopping short of saying it was entirely safe: “I am aware that the water quality in the City of Flint is improving and that is a good thing…We knew the state’s assistance with these water-related expenses would come to an end at some point. I just wish we were given more notice so we at City Hall, and the residents, had more time to prepare for the changes.”

Federalism, Governance, & Hegemony. Former Puerto Rico Governor Anibal Acevedo Vilá yesterday brought a message from the Popular Democratic Party (PDP) to U.S. Senate leaders, saying that the New Progressive Party has legislated “another rigged status consultation” to fabricate a majority in favor of statehood, meeting with Sen. Roger Wicker (R-Miss.), an old ally of his collective, and advisors of the Chair Lisa Murkowski (R-Alaska), Chair of the Senate Environment and Natural Resources Committee and Sen. Maria Cantwell (D-Washington). The apparent intention was to begin to build a relationship with Jeff Sessions, whom the U.S. Senate yesterday confirmed as the new U.S. Attorney General. It would be in his newly confirmed capacity that the Attorney General would be in a position to approve a plebiscite’s ballot definitions and educational campaign between statehood and political sovereignty (free association or independence), which the NPP Government has set for this coming June 11th. Mr. Acevedo Vilá noted that by excluding a Commonwealth definition from the consultation, be it sovereign or developed, “a very high percentage of the Puerto Rican population” has been excluded. The former Governor of the U.S. territory is pursuing the presidency of his party; he will face former Representative Héctor Ferrer by the end of the month. He was accompanied by a delegation of legislators from his party, such as Luis Vega Ramos and Brenda López de Arrarás, who have also had their own meetings with Members of Congress concerning status, healthcare, and federal tax incentives for investment in Puerto Rico.

The meetings came as the PROMESA Puerto Rico Oversight Board fired off two letters this month asserting its authority over Puerto Rico’s legislature as its effort to oversee the island’s economy and address the debt crisis have, unsurprisingly, encountered resistance from Puerto Rico’s elected officials. Last week, the PROMESA Board sent a letter to the governor’s representative on the board, Elías Sánchez, asserting that it has many ways it can control the legislature even though Puerto Rico has yet to adopt a fiscal plan, pointing to §207 and §303 of the Puerto Rico Oversight, Management and Economic Stability Act, which address the board’s oversight of the government’s handling of debt. In addition, the board noted §204(a)(1)-(2), which states, “Except to the extent that the oversight board may provide otherwise in its bylaws, rules, and procedures, not later than seven business days after a territorial government duly enacts any law during any fiscal year in which the oversight board is in operation, the Governor shall submit the law to the oversight board.” The federal law adds that such submission is supposed to be accompanied by an independent entity’s estimate of the law’s cost: if the board finds the law inconsistent with the fiscal plan, the board can ask for it to be corrected or blocked. In the PROMESA Board’s epistle of last week, the letter notes that its review of the laws “is independent of the existence of a certified fiscal plan.” Since this PROMESA section is titled “Review of activities to ensure compliance with fiscal plan,” however, this is unclear.

The issue arose even as, this week, the PROMESA Board fired off another missive stating: “We believe that all government entities need to do the utmost to reduce expenses, including those relating to professional service contracts, as soon as possible and as much as possible,” noting the board “is currently focused on the goal of certifying a ten-year fiscal plan for Puerto Rico.” (Puerto Rico Gov. Ricardo Rosselló is supposed to submit a proposed fiscal plan covering government revenues and spending by February 21st—while the PROMESA Board has set a March 15th deadline to certify the plan. Yet the nature of the U.S. hegemony remains at issue: Puerto Rico’s Senate President Thomas Rivera Schatz has threatened to sue the Oversight Board if it attempts to exercise authority over the legislature, according to the El Vocero news website.  

 

 

The Different Roads out of Municipal Bankruptcy

eBlog, 1/25/17

Good Morning! In this a.m.’s eBlog, we consider yesterday’s guilty plea from the former Mayor of Pennsylvania’s capitol, Harrisburg, for actions he had taken as Mayor which plunged the city to the brink of chapter 9 bankruptcy; then we consider Detroit Mayor Mike Duggan’s announcement that a majority of Detroiters will see a reduction in their property tax obligations—a sign of the signal fiscal turnaround. Then we head into the icy blast of Winter in Pennsylvania, where the former Mayor of Harrisburg has pleaded guilty to stealing city-purchased artifacts, before veering south to note Puerto Rico Gov. Ricardo Rosselló has signed into law an extension of Act 154’s tax on foreign corporations.  

Public Mistrust. Former Harrisburg, Pa., Mayor Stephen Reed pleaded guilty Monday to 20 counts of theft  for stealing artifacts purchased by the city in Dauphin County court Monday, with the outcome coming in the wake of negotiations with the state Attorney General’s office. The 20 counts reflects a dramatic reduction of criminal counts from the original more than 470, including many tied to fiscal decisions during his service as Mayor, a period which had propelled the city to the verge of chapter 9 municipal bankruptcy—and a leftover severe set of fiscal challenges still bedeviling the state capitol. The former mayor, in his comments to the press after the proceeding, described it as “gut-wrenchingly humiliating.” The Patriot-News of Harrisburg reported that Mr. Reed, who served as mayor from 1982 to 2009, admitted to taking 20 historic artifacts, but said he had no criminal intent. Judge Kevin Hess scheduled a sentencing hearing for Friday in the Dauphin County Court of Common Pleas in Harrisburg. The trial commenced in the wake of then Pennsylvania Attorney General Kathleen Kane in July of 2015 announcing the indictment of the former Mayor: prosecutors asserted he had diverted municipal bond proceeds, notably related to an incinerator retrofit project, to a special projects fund he allegedly used to purchase as many as 10,000 Wild West artifacts and other “curiosities” for himself—including a $6,500 vampire hunting kit—a series of disclosures which contributed to the city’s descent into receivership due to municipal bond financing overruns related to an incinerator retrofit project; the Harrisburg City Council filed for chapter 9 municipal bankruptcy in October of 2011, notwithstanding the objection of then-Mayor Linda Thompson; however, a federal judge two months later negated the filing, and a state-appointed receivership team pulled together a recovery plan approved by the Commonwealth Court of Pennsylvania in September of 2013. Yesterday, Christopher Papst, author of the book Capital Murder an Investigative Reporter’s Hunt for Answers in a Collapsing City, noted: “Stephen Reed’s guilty plea concerning his stealing of city artifacts is a good start for the people of Harrisburg who deserve answers and justice. But far more needs to be done and more people need to be held accountable for the city’s financial collapse…A strong message must be sent that any impropriety concerning municipal financial dealings will not be tolerated.”

Rebalancing Motor City’s Tax Wheel Alignments. Detroit Mayor Mike Duggan has announced that about 55% of residential property owners in the city will see a reduction in their property tax obligations later this year. His announcement came in the wake of the city’s completion of a three-year reappraisal project, as required under Detroit’s plan of debt adjustment approved by the U.S. Bankruptcy Court. According to Mayor Duggan, about 140,000 residents will realize an average reduction of $263 on their tax bills, while 112,000 will see an average increase of $80. The reappraisal process, unlike past years, assessed each property individually. Tax assessments were mailed Monday. The city, despite boasting one of the broadest tax bases of any city in the U.S., (its municipal income taxes constitute the city’s largest single source of revenues), nevertheless have been constrained by the state: only Chrysler and DTE Energy pay business taxes; moreover, state law bars cities from increasing revenues by adding a sales tax or raising residential property tax rates more than inflation. Moreover, in the years leading up to the city’s fiscal collapse into chapter 9 bankruptcy, homeowners had complained that their property taxes did not compare to the market value of their homes. Ergo, now Mayor Duggan is hopeful that the new assessment will improve property tax collections—or as he put it yesterday: “It turns out, when people feel they’re being assessed fairly, they pay their taxes….For years, we basically have taken entire neighborhoods or sections of the city and taken averages, which is the best that could be done with the data available.” But the new assessments are based upon house-by-house reassessments using aerial and street-level photography as well as field visits. In addition, the city digitized field cards for every single residential property, allowing employees to inspect the condition of homes based on the historical information and new ground and aerial photos, according to City Assessor Alvin Horhn—or, as Mr. Horn notes: “Where everything matched up, fine. Whenever there was a difference, we sent people out to look…For the most part, this was done at a desktop (computer) review.” Next up: a citywide reassessment of all commercial and industrial properties will be completed for the winter 2018 tax bills. According to city data, collections have increased steadily from about 68% in 2012-14 during the city’s municipal bankruptcy to 79% in 2015 and a projected 82% last year: from 2015 to 2016, the city reported that property tax collections increased approximately $8 million.

Act 54 Where Are You? Puerto Rico Gov. Ricardo Rosselló has signed into law an extension of Act 154’s tax on foreign corporations (mainly corporations manufacturing pharmaceuticals and other high-tech products), a key action to preserve revenues which provide a quarter of the U.S. Territory’s general fund revenues; the action came as Public Affairs Secretary Ramon Rosario Cortés submitted a measure to replace Puerto Rico’s Moratorium Law, an action which he said could mean Puerto Rico could dedicate some of the savings from which to provide “payment of interest or some part of the principal” in negotiations with the island’s creditors: “The obligations of the government of Puerto Rico will be fulfilled in an orderly process. The government is going to commit itself to the policy that what it is directed is to pay the obligations of the government of Puerto Rico. The first thing is essential services.” The discussion occurs at a pivotal point, as, since before the administration of newly elected Governor Ricardo Rosselló Nevares taking office, Senate President Thomas Rivera Schatz had announced that they were in tune to extend the expiration of the moratorium scheduled for the end of this month. If the government does not extend the litigation deadlock, it will face $1.3 billion in February, leaving it with no cash for operations, according to a liquidity report by Conway Mackenzie. Secretary Cortés, in response to a query yesterday with regard to interest payments, did note that would be possible “with the savings that are achieved, guaranteeing priority, which are essential services…The government of Puerto Rico will be making savings with this measure and the savings that will be made will be part of the renegotiation process, which could include the payment of interest or some part of principal, but in negotiation with creditors.” The revenues, as reported over the most recent half fiscal year, accounted for 25% of all General Fund revenues—more even than the $713 million in individual income taxes. The Act, adopted in 2010 to help address the dire fiscal imbalance, was set to impose a continually declining levy rate on foreign corporations until it would phase out this year, based on Treasury regulations promulgated six years ago which allow corporations to take tax credits against temporary excise taxes. Now a tricky shoal to navigate in the midst of the major transition in power in Washington, D.C. The issue involves whether the IRS will grant an extension of Act 154 past its current scheduled expiration at the end of this calendar year. According to Puerto Rico, 10 corporations and partnerships paid some 90 percent of all Act 154 taxes in FY2016. The law mainly affects corporations manufacturing pharmaceuticals and other high-tech products on the island.

Municipal Challenges from State Control & Preemption of Local Authority

 

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eBlog, 1/0917

Good Morning! In this a.m.’s eBlog, we consider more outcomes from the Flint drinking water crisis—outcomes which raise issues with regard to the State of Michigan’s Emergency Manager law—and accountability, before taking a run to Atlantic City, a municipality in the midst of a state takeover, and, now, apparently caught between state-mandates to reduce police capacity amid an apparent dramatic surge in public safety concerns. Finally, we note a challenge to the Municipal Securities Rulemaking Board’s so-called pay-to-play rules, under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions.

Out Like Flint. Michigan Gov. Rick Snyder Friday signed into law new state legislation mandating municipalities in the state to warn residents of dangerous lead levels in drinking water within three days’ notification by the state of contamination, marking the enactment of the first piece of legislation stemming from the Flint water crisis. Gov. Snyder described it as an “important step…This is not the last piece of legislation we should see on this. This is a good start of getting faster notification to the public when there is a water issue.” The bill, sponsored by state Rep. Sheldon Neeley (D-Flint), a former Flint council member, is aimed at strengthening water quality control in Michigan to ensure a water crisis such as Flint’s will not happen in a Michigan municipality again, or, as Rep. Neeley put it: “The water crisis in Flint has left the community and its allies reeling with a sense of urgency, and rightfully so…During this difficult time, I have valued the governor’s partnership in helping to steward legislation that will have a positive impact on the residents of Flint.” Previously, owners or operators of municipal water plants were legally required to notify customers of any noncompliance with state drinking water standards, within 30 days, according to the representative; now, under the new law, operators must issue a public advisory within three business days of notification from the Michigan Department of Environmental Quality. Such alerts may be disseminated via radio or television, notices delivered to customers or advisories posted in conspicuous areas throughout the community. The bill had been adopted unanimously in both the Michigan House and Senate. The new state law comes in the wake of criminal charges filed against more than a dozen government officials related to the Flint water crisis. Last month, the Michigan Attorney General’s Office filed criminal charges against former Flint emergency manager Darnell Earley, former emergency manager Gerald Ambrose, and two former city public works employees. Mr. Earley had served as Flint’s emergency manager from 2013-15, before going on to be named by Gov. Snyder as Emergency Manager for the Detroit Public Schools, where he resigned nearly a year ago in the face of severe criticism. Mr. Earley, who had refused to testify about his role and responsibility with regard to the Flint drinking water crisis, was subsequently charged with false pretenses, conspiracy to commit false pretenses, misconduct in office, and willful neglect of duty while in office–charges which carry up to 20 years in prison.

Recent testing of Flint water suggests lead levels have dropped, but residents in the city of roughly 100,000 residents continue to rely on bottled and filtered water for their daily needs.

A City’s Fiscal and Physical Safety. According to a review of crime data by The Press of Atlantic City, the two-decade long decline in crime in Atlantic city has not only halted, but reversed itself in 2015, according to the Press’s review of New Jersey state crime data, reporting that in 2015, crime increased in nearly every major category, including homicides, rapes, and aggravated assaults—with the homicide increase extending into last year. The city’s violent crime rate is more than 500 percent higher than the statewide average—the murder rate a thousand percent—posing a stark governing challenge as, last week, New Jersey’s Local Finance Board, which is managing the city, alerted the city’s police and fire unions that it would press drastic cuts, including reduced staffing and imposing longer shifts. The Board has the authority to hire and fire employees, authorize raises and promotions, renegotiate service and labor contracts, restructure or pay off debt, approve the municipal budget, and make changes with regard to the delivery of municipal services. The state is seeking to force a restructuring of the city’s police department, including salary reductions, higher health care benefit contributions, moving to 12-hour shifts, and a more aggressive police response to nuisance issues in neighborhoods. Nevertheless, Anthony Marino, a retired executive with the South Jersey Transportation Authority, who has studied Atlantic City’s crime figures, reports that crime statistics have been on the wane since a high in 1989 and that the trend shows Atlantic City is, for the most part, a reasonably safe city, noting that in 1977, before the city had casinos, its crime index, or the total number of the seven categories tracked by State Police, was 4,391. In 1989, it peaked at over 16,000 before declining almost annually. Nevertheless, the apparent turnaround—in addition to the state-mandated changes in the city’s police department could not only limit the city’s capacity to address the seeming turnaround, but also adversely affect tourism and assessed property values.

Paying to Play. Tennessee and Georgia Republican groups are challenging the Municipal Securities Rulemaking Board’s (MSRB) so-called pay-to-play rules under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions (the pay-to-play rule also prohibits an investment adviser from soliciting contributions for a government official or the official’s political party at the same time the adviser is providing services to the government entity for which the official works.). The two political organizations have filed the suits charging that the rules violate their First Amendment rights; in addition, they claim that the Securities and Exchange Commission (SEC) and MSRB exceeded their authority and have not demonstrated a sufficient legal interest in restricting political contributions. In response, the Campaign Legal Center, in its brief to the 6th U.S. Court of Appeals, argues the rules are important to prevent municipal advisors from engaging in pay-to-play practices—and the rules are needed to address the potential for corruption in the municipal market. The amicus brief opposes attempts by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee seeking to have the court vacate the SEC’s approval of the rule changes.

Last summer, the SEC issued notice that it intends to approve the rules proposed by the MSRB and the Financial Industry Regulatory Authority, noting it would issue orders finding that the self-regulatory organizations’ rules impose “substantially equivalent or more stringent restrictions” on municipal advisors and broker-dealers than its own pay-to-play rule. The Center’s brief notes: “Substantial campaign contributions from a municipal advisor to officeholders with control over awards of municipal advisory business are likely to give rise to quid pro quo exchanges, or at a minimum, the appearance of such exchanges…That is the premise not only of the challenged amendments, but also the underlying rule, which was upheld by the D.C. Circuit.” Under the proposed changes to the rule, municipal advisors, like dealers, are barred from engaging in municipal advisory business with a municipal issuer for two years if the firm, one of its professionals, or a political action committee controlled by either the firm or an associated professional, makes significant contributions to an issuer official who can influence the award of municipal advisory business. As proposed, the modified rule contains a de minimis provision, which allows a municipal finance professional associated with a dealer or a municipal advisor professional to make a contribution of up to $250 per election to any candidate for whom she or he can vote without triggering the two-year ban. This is not a first: there was a previous challenge to an earlier version of Rule G-37 by an Alabama bond dealer in Blount v. SEC after it was first approved for dealers in 1994—a challenge which the U.S. Court of Appeals for the D.C. Circuit rejected, noting, in its opinion, the rule had been “narrowly tailored to serve a compelling government interest.”

The Avoidance of Fiscal Contagion

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eBlog, 12/15/16

Good Morning! In this a.m.’s eBlog, we consider the role of leaders appointed or named by municipalities with regard to the integrity of coming back from chapter 9 municipal bankruptcy or insolvency; then we turn to some of the critical factors which have played key roles in San Bernardino’s emergence from the nation’s longest municipal bankruptcy, before, finally, heading into the frigid physical gale and fiscal maelstrom of Atlantic City to consider not only the challenge for a state in taking over a municipality—but also the challenge of avoiding fiscal distress contagion.

Doubting Governance. The Detroit News, in its analysis of state and federal court records, tax filings, and interviews; reported that said analysis raised questions about the ability of some Detroit Development Authority (DDA) members to oversee one of the largest publicly subsidized downtown construction projects since Detroit emerged from chapter 9 municipal bankruptcy. The paper’s analysis also revealed a shortcoming of the city’s appointment process—noting it omitted any requirement for DDA members to undergo criminal or financial background checks, despite the fact that the Motor City’s DDA has approved some $250 million in taxes on Little Caesars Arena, even as the DDA is “dominated by tax delinquents with financial problems and in some cases criminal records,” according to public records.

As in most cities, the arena is being financed via the issuance of municipal bonds, under an agreement approved three years ago, where municipal taxes are to be dedicated to paying off $250 million worth of bonds issued by a branch of state government financed by the Michigan Treasury department—a department which has charged a number of DDA members of being tax delinquents. The paper adds that a majority of those appointed have a “history of financial issues,” including more than $500,000 in state and federal tax debt, according to public records. The News noted that details about the DDA members’ financial history offered some insight into a municipal public authority which all too often operates in secret—in this instance an authority whose members are appointed by the Mayor, approved by the City Council, and who then work with professional staff from the nonprofit Detroit Economic Growth Corp.; however, unlike almost every municipal or county public authority, the DDA board does not post agendas, minutes, or accurate meeting schedules; its members are not required to submit to a criminal or financial background check. (Members on the board are not compensated.) Indeed, Mayor Mike Duggan’s chief of staff Alexis Wiley, responding to inquiries by the News, said: “Really, every single person on the board has served the city of Detroit well…They’ve had personal financial challenges, but they have displayed good judgment as board members.” Malinda Jensen, the Detroit Economic Growth Corp.’s senior vice president of board administration and governmental affairs, in a statement to the News, noted: “The public funds contributing to the repayment of construction bonds to build the downtown arena come from a dedicated stream of revenue authorized by state law, approved by the DDA board as a whole, ratified by several votes of the full City Council…audited by independent accountants, and safeguarded in the terms of the sale of the bonds to financial institutions…Those funds are very well protected.” She added: “No individual on the board has any direct ability to access any public funds, and all decisions of the DDA are by majority votes in a public meeting,” adding that the DDA has a quarter-century of clean audits by an independent certified public accounting firm, she said. And DDA members are barred from voting on issues in which they have a direct financial interest, Ms. Jensen added, noting: “We all were impacted in some way through this financial crisis…I’d be curious about what some of that had to do with some of the reports you are hearing on some of these individuals.”

Would that governance and personal integrity were so simple, but, in this case, it turns out that two DDA members with a history of financial problems are also high-ranking members of the Mayor’s administration, with one running Detroit’s neighborhoods department—in this case a long-time municipal employee who has worked for every Mayoral administration since former Mayor Coleman Young, but who has also filed for bankruptcy, lost a home to foreclosure, and failed to pay $250,691 in state and federal taxes, according to public records—and served two years in federal prison in the wake of being found guilty in 1984 of receiving more than $16,000 in illegal payoffs from a sludge-hauling company—at the very time he was serving as Detroit’s Director of the city’s ill-fated Water and Sewerage Department. The paper notes that his colleague at City Hall, Corporation Counsel Melvin “Butch” Hollowell, has faced his own series of state and federal tax liens over the most recent five years: he has been accused of failing to pay more than $60,000 in federal and state taxes, although he has, according to public records, this year managed to pay off all of the debt. The News quoted University of Virginia Law School tax expert George Yin about its findings with regard to the troubled financial records of DDA members, and their fiscal integrity as it relates to their public responsibilities to oversee publicly funded sports arenas—to which Mr. Yin responded: “Given the kind of doubtful or questionable nature of public subsidies for these facilities, you want the people making decisions to be people whose judgment has been proven to be right over and over again.”

The Precipitous Road to Bankruptcy’s Exit Ramp. The City of San Bernardino, once the home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad—yesterday, some twenty-two years later, received a report from the Inland Valley Development Agency’s annual review that, for the first time, it has more than restored all of the jobs and economic impact lost when the base closed: indeed, the review found that the 14,000-acre area of the former base now employs 10,780 people and is responsible for an economic output of $1.89 billion, surpassing the totals lost when the base closed in 1994. What has changed is the nature of the jobs: today these are predominantly logistics, with Amazon’s 4,200 employees and Stater Bros. Markets’ 2,000 employees accounting for more than half of the total. Economist John Husing, whose doctoral thesis studied the economic impact of Norton Air Force Base, yesterday told the San Bernardino Sun: “The jobs that have come in are comparable or better than the jobs that were lost…Because of the spending pattern difference between civilians and military personnel, you only needed 75 percent of the number of people working there to replace the economic impact,” adding that that was because much of the spending by Norton’s employees was at the on-base store, so the money did not recirculate into the local economy—adding that that job total does not include an additional 5,000 part-time jobs created by Amazon and Kohl’s during the Christmas shopping season; nor does it include an additional 5,000 indirect jobs that help build nearly $1.9 billion of total economic benefit. Moreover, with the exception of the San Bernardino International Airport itself (the fourth-largest source of jobs in the project area, with 1,401), the major employers are not directly tied to the former role of the base. Nevertheless, as Mr. Burrows noted: it took planning and preparation to get those companies to come to San Bernardino: “Without a lot of inducement from us—infrastructure, roadway improvements, Mountain View Bridge, for example, we wouldn’t have those jobs…“It’s been a longtime strategic effort, and we’re very pleased that we’re seeing some results.” Mr. Burrows added, moreover, that the Inland Valley Development Agency has more projects (and more jobs) in the works for 2017, including continued infrastructure work and a focus on workforce development: “We’re particularly going to focus on our K-12 schools, San Bernardino Valley College, and the (San Bernardino) Community College District in making sure we’re doing more on the workforce development side.” To do so will be a regional effort, via the agency—which is composed of representatives from San Bernardino County and the cities of Colton, Loma Linda, and San Bernardino—who are responsible for the development and reuse of the non-aviation portions of the former Norton Air Force Base. San Bernardino Mayor Carey Davis noted the Development Authority’s “development of the Norton Air Force Base has proven to be a great asset to the San Bernardino community. We have positively impacted the economy with the creation of jobs and new business,” adding it was “a fine example of the progress we have made in rebuilding San Bernardino.”

Fiscal Distress Contagion & State Preemption. The Atlantic City Council had a quick meeting yesterday in the wake of the state pulling two ordinances for further review—measures which would have raised rates and revised regulations for Boardwalk trams and adopted a redevelopment plan for Atlantic City’s midtown area, with the state asking the Council to pull the ordinances “indefinitely,” according to Council President Marty Small. Subsequently, Timothy Cunningham, the Director of the New Jersey Division of Local Government Services Director and the quasi-takeover manager of the city government, said his agency has had insufficient time to review the ordinances, stating:  “We’ll just revisit them in the new year…I don’t think there’s any objection to them. Just not enough time to fully vet them.” The statement reflects the post-state takeover governance and preemption of local authority. In this case, the issue in question relates to proposed tram rules, including increasing fares to $4 one way and $8 all day in the summer, and $3 one way and $6 all day in the off season—compared to $2.25 one way and $5.50 for an all-day pass. The ordinance would also have allowed the trams to carry advertisements—from which, according to sponsor Councilman Jesse Kurtz, the city would receive half the revenue from the ads.

Nevertheless, the discordant governance situation and unresolved insolvency of the city do not, at least according to Moody’s analyst Douglas Goldmacher, appear to be contagious, with the analyst writing there is only a “relatively mild” chance that the massive fiscal and governance problems of Atlantic City will contaminate Atlantic County: “While Atlantic City remains the largest municipality in the county and its casinos are currently the largest taxpayers, the county’s dependence on Atlantic City’s tax revenues continues to decline.” Moreover, he wrote: “State law offers considerable protection from the city’s financial trauma, and the county has demonstrated a history of strong governance.” Mr. Goldmacher added that the neighboring county has managed to partially offset Atlantic City’s declining tax base and gambling activity with growth in other municipalities—with Atlantic City’s share of the county tax base less than half what it was at its peak of 39% in 2007. The report notes that the county also benefits from a New Jersey statute which insulates the county from the city’s fiscal ills, because cities are required to make payments to counties and schools prior to wresting their share—noting that Atlantic City has never missed a county tax payment and was only late once—and, in that situation, only after special permission was granted in advance. Thus, Mr. Goldmacher wrote: “While Atlantic City has endured political gridlock, the county has achieved structural balance and demonstrated stability through budgeting accuracy, strong reserves and contingency plans…The county also has substantial fund balance and other trust funds and routinely prepares multiple budgets and tax schedules to account for Atlantic City’s uncertain fate.”