Is There a “Right” Structure to Resolve Fiscal Insolvency?

06/19/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges to restoring fiscal solvency in the U.S. territory of Puerto Rico, so that chapter 9 does not apply—nor does that process provide a mechanism to address the territory’s municipalities, much less the existing federal discrimination against Puerto Rico vis-à-vis other Caribbean nations The challenge, if anything, has been heightened by the absence of mixed messages from Congress-where the PROMESA Oversight Board has sent a letter to Puerto Rico’s leaders warning of what the Board described as a waning resolve to deal with a dire financial situation.

Trying to Shock? House Natural Resources Committee Chairman Rob Bishop R-Utah) has notified PROMESA’s oversight board that its failure to approve the Puerto Rico Electric Power Authority’s restructuring support agreement is seen as “very problematic” by some federal legislators: “It appears there is no consensus from the oversight board in favor of certifying the PREPA [RSA] under…PROMESA…This is troubling, as the decision to implement the RSA had already been made by Congress with the passage of PROMESA. The oversight board’s dilatory tactics run counter to the plain language of PROMESA.” At the same time, PROMESA Board Chair José Carrión III stated that Puerto Rico needs to create implementation plans to reduce government spending and ensure adequate liquidity—writing last  Friday at a key time as the Puerto Rico legislature worked to try to reach consensus on a balanced FY2018 budget, in compliance with a board-approved 10-year fiscal plan. Chairman Carrión wrote: “I write to you out of a concern that some of the progress we appeared to have made in the past few weeks as a result of the close and positive collaboration between the board and the administration–and their respective teams of advisors–may be receding and that the necessary resolve to attain the goals set forth in the certified fiscal plan may be waning…It is equally of concern that some of the narrative taking hold in the public discourse fails to characterize adequately the truly dire fiscal situation the Commonwealth is facing.”  Chairman Carrión, in his epistle to Gov. Ricardo Rosselló, Senate President Thomas Rivera Schatz, and House of Representatives Speaker Carlos Méndez Núñez, noted it was an incorrect “narrative” for Puerto Rico’s government to say that if the government generates $200 million in additional cash reserves by June 30th, the PROMESA Board would not mandate a government furlough program and reduction or elimination of the Christmas bonus; rather, to avoid these measures, the Board is mandating a spending-reduction implementation plan in addition to the cash reserve intended to ensure ongoing liquidity—with Chairman Carrión warning that if the plan is inadequate or poorly executed, “Puerto Rico is all but certain to run out of money to fund the central government’s payroll come November or December of this year.” The PROMESA Board also called on Governor Rosselló to explain which public services are essential.

The stern warning—to a government where some of the most essential services are lacking—produced a response from Governor Rosselló’s non-voting representative to the PROMESA Board, Elías Sánchez Sifonte: “This administration has demonstrated an unwavering commitment to face this inherited crisis with the seriousness it deserves,” adding that: “We have also been demonstrating implementation plans to ensure we provide resources to cover essential services as required by PROMESA and in accordance with our Certified Tax Plan,” including progress in the Puerto Rico legislature on the budget proposed by the Governor based upon consultation with the PROMESA Board—a budget the Puerto Rican Senate expects to consider later this week.

The discussions came as U.S. District Judge Laura Taylor Swain, who is overseeing Puerto Rico’s Title III municipal bankruptcy process, taking a page from Detroit’s chapter 9 bankruptcy, named U. S. District Court Judges, including the remarkable Judge Christopher Klein, who presided over Stockton’s municipal bankruptcy trial, to help address critical issues. She also named Judge Barbara Houser of the U.S. Bankruptcy Court of the Northern District of Texas, designating her to lead the mediation team; Judge Thomas Ambro, of the U.S. Court of Appeals for the 3rd Circuit; U.S. District Court Judge Nancy Atlas of U.S. District Court for the Southern District of Texas; and Judge Victor Marrero of U.S. District Court for the Southern District of New York. Judge Swain made clear that participation in any mediation will be voluntary and confidential—and that she will not participate in mediation sessions, and mediators will not disclose information about the parties’ positions or the substance of the mediation process to her—with this process—as was the case in Stockton and Detroit’s chapter 9 cases—ongoing concurrently with trial in her courtroom. Judge Swain added that she plans to make final appointments prior to the June 28th Title III hearing in San Juan, where she will further explain the mediation process.

Who’s in Charge? The PROMESA Oversight Board has warned Puerto Rico’s leaders that the Board is apprehensive of a waning resolve to address the U.S. territory’s dire fiscal situation, with Chairman José Carrión III warning that Puerto Rico needs to create implementation plans for reducing government spending and assuring adequate liquidity at all times. The letter—coming between the emerging quasi-bankruptcy proceedings under Judge Taylor and as the Puerto Rico legislature is attempting to put together a balanced FY2018 budget, in compliance with a board-approved 10-year fiscal plan—came as PROMESA Board Chair José Carrión III urged greater resolve, writing: “I write to you out of a concern that some of the progress we appeared to have made in the past few weeks as a result of the close and positive collaboration between the Board and the administration–and their respective teams of advisors–may be receding and that the necessary resolve to attain the goals set forth in the certified fiscal plan may be waning…It is equally of concern that some of the narrative taking hold in the public discourse fails to characterize adequately the truly dire fiscal situation the Commonwealth is facing.” Chairman Carrión, in his epistle to Gov. Ricardo Rosselló, Senate President Thomas Rivera Schatz, and House of Representatives Speaker Carlos Méndez Núñez, added that there is an incorrect “narrative” that says that if the Puerto Rican government generates $200 million in additional cash reserves by the end of this month, the PROMESA Board would not mandate a government furlough program, nor a cut or elimination of the Christmas bonus. To avoid such a mandate, he added that the PROMESA Board is mandating a spending-reduction implementation plan in addition to a cash reserve plan intended to assure government liquidity, with the Chairman adding that if the plan is inadequate or poorly executed, “Puerto Rico is all but certain to run out of money to fund the central government’s payroll come November or December of this year.” Noting that: “Now we are at a critical juncture that requires that we collectively strengthen…,” the Board demanded that Gov. Rosselló explain which public services are essential.

Does Accountability Work Both Ways? Unlike chapter 9 bankruptcy cases in Detroit, San Bernardino, Central Falls, Jefferson County, and Stockton—Puerto Rico is unique in that the issue here does not involve municipalities, but rather a quasi-state. There have been no public hearings. PROMESA Chair José B. Carrion has not testified before the legislature. Now Puerto Rico Rep. Luis Raúl Torres has asked the Puerto Rico Finance Committee to invite Chair Carrión to appear to explain to Puerto Rico’s elected leaders the demands the PROMESA Board is seeking to mandate—and to justify the $60 million that the Fiscal Supervision Board is scheduled to receive as part of the resolution of special assignments. That Board, headed by Natalie Jaresko, the former Finance Minister of the Ukraine, is, according to PROMESA Chair Jose Carrión, to be in charge of the implementation of the plan, or, failing that, to achieve the fiscal balance of Puerto Rico and its return to the capital markets. (Ms. Jaresko has agreed to work for a four-year term: she is expected to earn an annual salary of $ 625,000 without additional compensation or bonuses, except for reimbursement of travel and accommodation expenses related to the position he will hold, according to PROMESA Board Chair Carrión, who has previously noted: “I know it’s going to be a controversial issue…We have a world-class problem, and we have a world-class person. This is what the rooms cost.”)

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

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

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

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

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

Getting Back in like Flint

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

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

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

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

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

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

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

The Thin Line Between Fiscal & Physical Recovery Versus Unsustainability.

eBlog

Good Morning! In this a.m.’s eBlog, we consider, Detroit’s remarkable route to fiscal recovery; then we turn to challenges to a municipality’s authority to deal with distress—or be forced into chapter 9 municipal bankruptcy in Pennsylvania, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability, and then the taxing challenge to Scranton’s efforts for a sustainable fiscal recovery.

Campaigning & Turning around the Motor City’s Fiscal Future. Detroit Mayor Mike Duggan, last week, at the annual Mackinac Policy Conference spoke about the racially divisive public policies of the first half of 20th century which, he said, had helped contribute to Detroit’s long slide into municipal bankruptcy—indeed, the largest municipal bankruptcy in U.S. history—but one which he said had helped lay the foundation for a conversation about how Detroit could grow for the first time in half a century without making the mistakes of the past that had, inexorably, led to an exodus of nearly 1.2 million from 1956 to its chapter 9 bankruptcy—noting: “If we fail again, I don’t know if the city can come back.” His remarks, mayhap ironically, came nearly a half century from the 1976 Detroit riot, a riot which  began downtown and was only curtailed after former U.S. President Lyndon Johnson ordered the 82nd and 101st Airborne Divisions to intervene, along with then Michigan Gov. George Romney ordering in the Michigan Army National Guard. The toll from the riot: 43 dead, 1,189 injured, 2,000 of the city’s buildings destroyed, and 7,200 arrests.  

But, rather than discussing or issuing a progress report on the city’s remarkable turnaround, Mayor Duggan instead spoke of the city’s racial tensions that had sparked that riot, in many ways, according to the Mayor, coming from the housing policies of former President Franklin Roosevelt—a policy which placed or zoned blacks in the city into so-called “red zones,” thereby creating the kind of racial tensions central to the 1943 and 1967 riots—a federal policy adopted in 1934 which steered federally backed mortgages away from neighborhoods with blacks and other racial minorities. Indeed, the Mayor quoted from a 1934 Federal Housing Administration manual that instructed mortgage bankers that “incompatible racial groups should not be permitted to live in the same communities;” the manual also instructed housing appraisers to “predict the probability of the location being invaded by…incompatible racial and social groups…, so that, as the Mayor added: “If you were adjacent to a minority area, your appraisal got downgraded.”

Thus, federal housing policies were a critical component contributing to the historic white and middle class flight from Detroit to its suburbs—suburbs where federal housing policies through the Federal Housing Administration subsidized more than half of the mortgages for new construction—or, as Mayor Duggan described the federal policies: “There was a conscious federal policy that discarded what was left behind and subsidized the move to the suburbs: This is our history, and it’s something we still have to overcome.” His blunt Mayoral message to the business community was that the city’s hisgtory of race and class segregation had to be acknowledged—or, as he put it: “I just wanted to deliver a message to the broader community to say, ‘Look, there’s a place for you to come invest in Detroit. Here are the ground rules, here is the reasoning behind the ground rules… and if you want to come in and invest in the city, move into the city and be part of it with the understanding that the recovery includes everybody, we’d love to have you: The African-American community voted for me, and I can’t tell you what an enormous responsibility that feels like.” Thus, the Mayor made clear that he and the Detroit City Council have been focused on governing mechanisms that ensure longtime Detroiters are not displaced by downtown and Midtown revitalization—enacting an ordinance mandating that housing developments in receipt of city tax subsidies have at least 20 percent of the units classified as affordable housing for lower-income residents, and mandating that 51% of the person-hours for construction of the new Little Caesars Arena be performed by Detroiters: “We’re going to fight economic segregation…It would be so easy in this city to have one area be all wealthy people and one area all poor people.”

The Challenge of Municipal Fiscal Recovery. Judge James Gibbons of the Lackawanna, Pennsylvania County Court of Common Pleas last week heard the City of Scranton’s preliminary arguments in response to a lawsuit by eight taxpayers seeking to bar the municipality from tripling its local services tax. The suit, filed March 2nd, contends that Scranton has been collecting taxes which exceed the legal issuance; it calls for the issuance of a mandamus against the city. In response, city attorneys, note that, as a home rule charter city, Scranton is not subject to the cap that Pennsylvania’s Act 511 stipulates. (The taxing legal and political regime, as we have previously noted, in one of the nation’s oldest cities, comes in the wake of its action to raise the levy from $52 to $156 for every person working within the city limits who earns at least $15,600, with the city justifying the action under Pennsylvania Act 47 and municipal planning code.) The taxpayer group, led by independent Mayoral candidate Gary St. Fleur, in seeking a mandamus action, has charged that lowering taxes across the board is the only way for the city to be able to fiscally recover.

Mr. St. Fleur, an independent candidate for mayor, has initiated a ballot measure to force 76,000-population county seat Scranton into chapter 9 municipal bankruptcy, citing a Wells Fargo report from October 2016, which found that a 2014 audit of Scranton revealed $375 million in liabilities and $184 million in unfunded non-pension post-retirement public pension benefits to government employees. (Mr. St. Fleur’s group, last February, had also objected to the city’s annual petition to the court to raise the tax—an objection rejected by visiting Judge John Braxton—a decision which, unsurprisingly, prompted the taxpayer group to initiate its own suit, notwithstanding that Scranton is a home-rule community, so that, in Pennsylvania, it has the authority to levy taxes.) Unsurprisingly, the anti-tax challengers’ attorney, John McGovern, counters that Act 511, which, when enacted 52 years ago, authorized the local Earned Income Tax, which authorizes municipalities and school districts the legal authority to levy a tax on individual gross earned income/compensation and net profits (the tax is based on the taxpayer’s place of residence or domicile, not place of employment) is separate from the Pennsylvania personal income tax. He charges that the Act has two “very specific” sections which cap how much the City of Scranton can tax, charging: “Call it a duck or a goose, call it a rate or a cap, but for the city to say it can tax whatever it wants, that alone is dangerous and absurd,” adding: “At this point, we’re dealing with 2017, and the city is spending like a drunken sailor…State law clearly states there is a cap to taxation through the Act 511 law…If we do not win, that would allow any city to raise taxes in any amount it wants.”

In contrast, David Fiorenza, a Villanova School of Business finance Professor and former CFO of Radnor Township, noted: “Scranton has made progress from three years ago, in part due to the renegotiating of some city union contracts and the low-interest rates on debt…The challenges this city will face will be the uncertainty of the state and federal budget as it relates to school funding and other funds that have been relied on for some many years.” Kevin Conaboy, whose firm is representing the city, told the court the city may raise its taxes under the state’s home-rule provisions, and he noted that Pennsylvania’s home rule provisions supersede a cap in the state’s Act 511 local tax enabling act. Moreover, Scranton city leaders have deemed the revenue increase essential for Scranton’s recovery under the state-sponsored Act 47 workout for distressed communities, to which Scranton has been subject since 1992.

Is the Bell Tolling for Act 47? The case is re-raising questions with regard to the effectiveness of the state’s municipal fiscal distress law, Act 47, a program which some critics charge has become an addiction rather than a cure. Villanova School of Business Professor David Fiorenza, referring to a 2014 change to the state enabling law, believes municipalities stay in the program for too long: “Act 47 is effective, but continues to present a problem as cities are able to request an extension after the five-year time period has expired…A five-year time frame is sufficient for a municipality to assess their financial situation and implement any changes. However, if the economy enters a recession during this time period, it will impede their financial progress.”

Physical & Fiscal Atrophy. Puerto Rico has lost two percent of its people in each of the past three years—but a two percent which in fiscal terms is far more grave from a fiscal perspective: the two percent, according to the insightful fiscal wizards at Federal Reserve Bank of New York, means that “If people continue to leave the island at the pace that has been set in recent years, the economic potential of Puerto Rico will only continue to deteriorate.” That outflow is comparable to 18 million Americans emigrating from the 50 states: it marks nearly a 12% drop: some 400,000 fewer Puerto Ricans today compared to 2007—meaning, increasingly, a U.S. territory entrapped in a fiscal tornado: unemployment is at 11.5%, so, unsurprisingly, the young and mobile are leaving the island behind. With unemployment at 11.5%, Puerto Rico in a quasi-chapter 9 municipal bankruptcy, federal law discriminating against the territory’s economy, and its municipalities unable to access chapter 9—the $74 billion accumulated debt and quasi-federal takeover has created incentives for more and more Puerto Ricans, from all economic levels, to leave—creating a vicious fiscal cycle of reduced government revenue, but ever-increasing debt: Puerto Rico’s municipal bond debt has grown 87 percent just since 2006—making the increasing obligations a further incentive to emigrate.

The PROMESA Board’s proposed plan to revert to fiscal sustainability does not appear to address the physical demographic realities: it assumes the population will shrink just 0.2 percent each year over the next decade, relying on that projection as the basis for its projections of tax receipts and economic growth—projections which Sergio Marxuach, Public Policy Director at the Center for the New Economy in San Juan, generously describes as: “[R]eally, really optimistic.” The harsh reality appears to be that the growing earnings disparity between Puerto Rico and the continental U.S. is so stark that any family focused on its health, safety, and financially viable future—in a situation of today where the Puerto Rican government has closed schools to save money—means that teachers can double or triple their earnings if they move to the mainland: doing that math adds up to younger generations of child-bearing age being increasingly likely to leave Puerto Rico for the mainland. Coming on top of Puerto Rico’s more than a decade-long population decline, it seems that, more and more, for those who can afford it, the option of leaving is the only choice—meaning, for those who cannot afford to—the Puerto Rico left behind could become increasingly older and less fiscally able to construct a fiscal future.

The Hard Road to Fiscal Sustainability

eBlog

Good Morning! In this a.m.’s eBlog, we consider, Detroit’s remarkable route to fiscal recovery, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability.

The Road to Recovery from Municipal Bankruptcy.  Detroit, which has roared back from the largest municipal bankruptcy ever, but, in doing so paid an average 81% of what it owed to its municipal bondholders as part of its plan of debt adjustment, nearly 25% more than either San Bernardino or Stockton, now, in the wake of its decades of its more than 50% population decline  (In 1950, there were 1,849,568 people in Detroit; in 2010, there were 713,777.), is ready to tackle its housing dilemma. Post-chapter 9 Detroit inherited an estimated 40,000 abandoned lots and structures and an 80% erosion of its manufacturing base—that in a municipality where 36 percent of its citizens were below the federal poverty level, and, the year it filed for chapter 9, had reported the highest violent crime rate for any U.S. city with a population over 200,000.

Thus, Mayor Mike Duggan now vows that his administration plans to launch a street-by-street initiative effective August 1st to board up abandoned homes in the city while demolition crews continue razing blighted houses. That will be a painstaking challenge: in a city of 142 square miles, the city reports some 25,000 unsecured houses, the bulk of which have been scheduled to be razed—but, up to now, the pace of demolitions has been limited to 4,000-5,000 annually, according to the Mayor. Thus, he posits: “We’re going to go through and board up every house we can’t get to so we’re not just saying to people, ‘It’s going to be five years before we get to everything. Wait!’”

Mayor Duggan, speaking at the Mackinac Policy Conference, vowed the city will begin deploying six crews beginning at the end of next month, with the teams slated to go through each neighborhood and close off vacant and abandoned homes—homes that are susceptible to crime, to being scrapped for metal and finishings, and becoming uninhabitable safety hazards. Mayor Duggan made the announcement, as the city’s plan of adjustment and the city’s actions in implementing it appear certain to be fodder for the upcoming mayoral primary election set for August 8th—with whichever candidate is chosen slated to confront Michigan state Sen. Coleman Young II (D) in the November 7th general election. Indeed, unsurprisingly, Sen. Young (1st District), who previously served two terms in the Michigan House prior to being elected to the State Senate, is the son of former Detroit Mayor Coleman Young—who served as the Motor City’s Mayor from 1973-1994, this week blasted Mayor Duggan for waiting until his fourth year in office to address the safety hazard of unsecured houses: he accused his upcoming opponent of “playing games with the people and the public, because it’s election time,” adding he was “just amazed now all of sudden that he cares about the neighborhoods and he wants to do this…Where was he for the last 3.5 years in office? They just should have addressed that first.”

Currently the Duggan administration estimates city crews can board up 100-200 homes each week and that the effort will take two years to complete, so that, as Mayor Duggan notes: “By the end of two years, we’ll have every house in the city either demolished, reoccupied, or boarded…So at least it will be secure. Kids won’t be wandering in and out.” In making the statement, Mayor Duggan acknowledged the city has fallen well short of its avowed initial goal of razing 10,000 blighted homes annually, describing that as “not a practical goal.” Since Mayor Duggan took office in 2014, Detroit has razed some 11,593 blighted structures; there are 331 more contracted for demolitions, and then another 2,141 in the pipeline.

In making his responses, Mayor Duggan acknowledged that his initial commitment to raze more than 5,000 homes per year had gotten him into “trouble,” noting: “I feel bad for the people who took the grief for it, because I pushed them;” he said the city will post notices on unsecured privately owned homes for which city crews will be covering the windows and doors with plywood, noting: “We’ll go down and board up every house that’s not scheduled to come down in the next six to 12 months,” adding that the city’s budget is bearing the burden more often than not, because the cost of going after the home owners of such abandoned homes has proved impractical and costly: “You’ve got a lot of people in this town (who say), ‘My uncle died, left me the house, the house is in a bad neighborhood,’ they don’t even live here…To send them bills is not practical.” To date, for the most part, Mayor Duggan said the city has been delivering plywood to some neighborhood groups and relying on volunteers to board up houses on their streets; however, he added that there are a lot of neighborhoods with mostly senior citizens who “just physically can’t put these huge sheets of wood onto these houses…We finally said, ‘You know the most efficient way to do it just roll through the city.’”

On the Road to Fiscal Recovery. As we reported earlier this week, Detroit completed its most recent fiscal year with a $63 million surplus according to its Comprehensive Annual Financial Report, which the city filed with the Michigan Treasury Department on Tuesday, with Detroit CFO John Hill noting the FY2016 surplus was some $22 million higher than the city had projected, an outcome  to which he attributed the city’s improved financial controls, stronger-than-anticipated revenues, and lower costs due to unfilled vacancies—something, he told the Detroit News, the city believes “will have a lot of positive implications on the future.” In the near future, it offers the potential for Detroit to exit from state oversight by the Financial Review Commission under terms of Detroit’s plan of debt adjustment. Or, as Mayor Mike Duggan noted: “This audit confirms that the administration is making good on its promise to manage Detroit’s finances responsibly…With deficit-free budgets two years in a row, we have put the city on the path to exit Financial Review Commission oversight.” In fact, the city now projects an FY2017 $51 million surplus.

All this is increasing optimism that the 2017 audit of the Motor City’s finances could trigger a vote by the Commission to suspend its direct financial oversight, obviating the current required state oversight and requisite approvals on all the city’s budgets and contracts. Of the city’s reported $143 million in accumulated unassigned fund balances, including this year’s surplus, the city has allocated $50 million from its FY2016 balance as a down payment to help set up the city’s Retiree Protection Fund to help it address pension obligations scheduled to come due in 2024 under the terms of the city’s plan of debt adjustment. In addition, the city has set aside $50 million in its FY2018 budget for blight remediation and capital improvements—an amount which would leave a cushion of about $43 million in an unassigned fund balance—but which account could only be drawn from with the approval of Mayor Duggan, the City Council, or the state review commission. The city primarily draws from this account for one-time costs, such as to address blight and for its capital budget. CFO Hill has expressed hope the ongoing, positive cash flow and budget balances will enhance the city’s credit rating—and, thereby reduce its borrowing or capital costs.

What Constitutes Economic Sustainability? Puerto Rico Gov. Ricardo Rosselló has proposed an austere Fy2018 General Fund budget which, he reports, would reduce the territory’s operating expenses by 9.1%, describing his plan as comparable to “those we had established in the fiscal plan.” As proposed, the Governor would allocate at least $2.04 billion for pensions—an amount that would leave naught to meet Puerto Rico’s debt obligations: he noted that funding pensions was vital to protect Puerto Rico’s most vulnerable citizens—and that the “measures implemented in this budget are those that we had established in the fiscal plan.” Nevertheless, Gov. Rosselló said his budget was different from past budgets, because it was balanced: it projects that the central government would have sufficient balance to remit $404 million of $3.283 billion in scheduled debt service, or 12.3%, in FY2018. The budget does not include the debt from semi-autonomous and autonomous public sector entities, but shows near balance: $9.1 billion in revenue and $8.987 billion in spending, according to the Puerto Rico Office of Management and Budget, with an increase of nearly 6% in spending. In the Governor’s proposed budget, all General Fund payments for debt would be eliminated—guaranteeing a battle with the PROMESA Board, which, in its plan, had projected there would be $404 million available cash flow “post-measures” for FY2018, with the Board seemingly pressing to ensure funds were included in the budget to address Puerto Rico’s debt services to municipal bond holders—even as the Governor appears focused on protecting the territory’s most vulnerable citizens. In contrast, the PROMESA board certified decade-long quasi plan of debt adjustment incorporated the amount of municipal bond debt service to be paid each year—providing that amount be $3.28 billion.

The challenge is complex: with apprehension that the territory’s young professionals are increasingly leaving to New York and Miami, leaving behind an increasingly elderly and impoverished population—less able to remit taxes, but in greater and greater need for public services, and for promised pension payments, the critical planned increase by the Governor in public pension funding is imperiled: each of Puerto Rico’s three government pension systems is projected to run out of liquid assets in FY2018, unsurprisingly leading the Governor to propose allocating at least $2.04 billion in his budget to cover pension funding—marking a stark change from his previous budget, when the line item to cover “pay-as-you-go” pension funding was absent. (Puerto Rico has three public pension systems: the Employee Retirement System, the Teacher’s Retirement System, and the Judiciary Retirement System.) In contrast, the PROMESA Board, last March, in its decade-long oversight fiscal plan, ordered a cut in public pension obligations effective in FY2020, projecting fiscal savings for the subsequent six years in the range of $83 million. It is unclear whether those projections incorporated the potential fiscal impacts on either sales tax revenues, or the increased costs of aid to those falling below the poverty level.

In his proposed budget, Gov. Rosselló has recommended to the legislature a $9.56 billion FY2018 General Fund budget, seeking a 6.4% increase—but, after compensating for public pension obligations, actually providing 21.8% less for spending. Within his proposed budget, the Governor is asking for $583 million more for “other operating expenses,” but $555 million less for salaries and related costs, and retaining $195 million as a reserve. (In the wake of the final action by the Puerto Rico legislature, the PROMESA Board is authorized to reject any final budget and substitute its own.)

However, there is now a third party to this increasingly complex fiscal process, in the form of U.S. Judge Laura Swain, who, under PROMESA’s Title III municipal bankruptcy process, has some discretion of her own to consider changes in the amounts of debt paid in the next fiscal year—albeit, as we have learned from the chapter 9 proceedings in Detroit, San Bernardino, etc., the judicial system in these exceptionally complex chapter 9 cases acts with  considerable deliberation—not haste; moreover, unlike a normal chapter 9 process, PROMESA section 106(e) prohibits Judge Swain from deviating from the PROMESA Board’s certified fiscal plan and budgets.

Gov. Rosselló’s budget, unlike previous proposals, includes a $2 billion payment for Puerto Rico’s three public pension systems, noting: “One of the most important differences, he said, as mandated by the PROMESA Board, in this budget is that, contrary to the previous ones, it really is balanced,” adding that, as proposed, Puerto Rico had created a $200 million reserve. In addition, the Governor reported he would soon propose measures to simplify Puerto Rico’s tax system. Overall, his proposed plan contains some $924 million in revenue increases versus $851 million expense cuts for FY2018: among the key fiscal plan measures to increase FY2018 revenues is $519 million by extending the Act 154 foreign corporation tax and $150 million through improving tax compliance.

What Might it Mean to Puerto’s Rico’s Fiscal Future? The PROMESA Oversight Board, which had requested a structurally balanced budget, seeking a “once and done” approach to the Puerto Rico government’s fiscal crisis, had focused on immediate large spending cuts and revenue increases in the budget. Indeed, as proposed by the Governor, there are significant changes, including reductions in support for the University of Puerto Rico ($411 million) and $250 million to the island’s municipalities or muncipios. The plan encompasses freezing payroll increases and eliminating vacation and sick day liquidations—all with the aim to reduce Puerto Rico’s debt service costs by 76% through FY2026. San Juan Mayor Carmen Yulín Cruz said, “The governor’s public policy has been to act as the messenger of the junta [i.e. the Oversight Board] and, in this way, has hidden behind it to become the executioner of Puerto Rico,” according to the El Vocero news web site. “The budget message will be another sign that the governor turns his back on the people.”

The Roads Out of and into Insolvency

Good Morning! In this a.m.’s eBlog, we consider Detroit’s remarkable route to fiscal recovery, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability.

The Road to Recovery from Municipal Bankruptcy. The Motor City, Detroit, ended its FY2016 fiscal year with a $63 million surplus, etching into the books the city’s second consecutive balanced budget out of  the nation’s largest ever chapter 9 municipal bankruptcy, an achievement officials hope will earn it better standing in the bond markets and a path out of financial oversight. Its new Comprehensive Annual Financial Report also discloses that, for the first time in more than a decade, the city did not have any costs scrutinized for its federal grant use. Nevertheless, despite hopes of a turnaround in a decades-long population decline, the most recent census data finds that Detroit lost population—0.5% or 3,541 persons in the latest U.S. Census estimates, the same number as last year, a year which marked the slowest rate of exodus in decades. While Mayor Mike Duggan has given special emphasis to the importance of population regrowth as a means of measuring the city’s economic recovery, his Chief of Staff, Alexis Wiley, notes: “We are pleased in the direction that we are heading…The data are a year behind.”

Indeed, measures of building permits, home prices, and 3,000 more occupied residences reported by DTE Energy in the city in March versus the same time a year earlier all appear to affirm that recovery is sustained, even though, based on data from July 1, 2016, Detroit has dropped down from 21st to 23rd in terms of size ranking amongst the country’s largest cities. (Last year, for the first time since before the Civil War, Detroit fell out of the top 20.) The City’s CFO, John Hill, reported Detroit’s FY2016 fiscal surplus was about $22 million higher than the city projected—a figure he attributed to improved financial controls, stronger-than-anticipated revenues, and lower costs due to unfilled vacancies—or, as he told the Detroit News: “We are operating in a very fiscally responsible way that we believe will have a lot of positive implications on the future.”

That fiscal upward trajectory matters, because, under the city’s plan of debt adjustment, Detroit must achieve three consecutive years of balanced budgets to exit oversight by the Financial Review Commission. Unsurprisingly, Mayor Mike Duggan noted: “This audit confirms that the administration is making good on its promise to manage Detroit’s finances responsibly…With deficit-free budgets two years in a row, we have put the city on the path to exit Financial Review Commission oversight.” Indeed, Detroit now projects a $51 million surplus in the 2017 fiscal year, which closes on the last day of June, according to CFO Hill—potentially paving the way for a vote by the review commission early next year to lift its direct fiscal oversight—freeing Detroit from the mandate of state approval of its budgets and contracts. The CAFR also notes $143 million in accumulated unassigned fund balances, including this year’s surplus—out of which the city has allocated $50 million to help set up the Retiree Protection Fund to help it deal with pension obligations, which will come due in 2024, as well as a matching $50 million for FY2018 for blight remediation and capital improvements. Even with that, $43 million remains in an unassigned fund balance, which city officials noted would carry over to the next fiscal year—with restrictions that none may be allocated without approvals from Mayor Duggan, the City Council, or the state review commission. Mr. Hill hopes the strong fiscal news will enhance the city’s credit rating and thereby reduce the cost of servicing its debt and capital budget.

What Constitutes Economic Sustainability? University of Puerto Rico interim President Nivia Fernandez, just hours before her arrest for failing to reopen an institution closed in the wake of a two-month student strike, has resigned, along with three members of the University’s Board of Governors in the wake of a judicial threat for her arrest if she failed to present a plan to end the student strike—a strike which commenced last March in protest of the $450 million in budget cuts sought by the PROMESA oversight board. Now there are apprehensions that strike could spread to other sectors—especially with Puerto Rico Gov. Ricardo Rosselló expected to release his proposed budget with deep cuts to programs today—a budget constructed in response to demands by the PROMESA Board for a structurally balanced budget. Those proposed cuts have provoked students to go on strike, leading to the closure at several of the university’s campuses since late March. Likely, the rate of civilian unrest will grow, or, as University of Puerto Rico sociology Professor Emilio Pantojas García has noted, the student strike may foreshadow a wave of demonstrations in coming months as Gov. Rosselló’s budget will almost certainly call for reductions in public pensions and health care—with the PROMESA Board calling for spending cuts and revenue increases in the coming fiscal year equal to nearly 11 percent of projected revenues for all central government activities—a proportion projected to increase to 28.8% by FY2022. Moreover, because the bulk of the revenue increases and spending cuts would impact the General Fund, the human and fiscal impact is expected to be much greater. University of Puerto Rico political science Professor José Garriga Pico notes: “In some, the opposition to the austerity measures will lead them to frustration and fear, as well as real suffering, and an intensification of the militancy against the Financial Oversight Board, its policies, Gov. Rosselló, and his budget proposal. These could engage in protest that may turn confrontation and violence.”

In the face of the Oversight Board’s demands for cuts at the University, Gov. Rosselló, last February, proposed a $300 million cut—leading to the resignations by the President of the University and 10 of its 11 rectors; subsequently, the PROMESA Board upped the ante, ordering the annual cut to be $411 million for the upcoming fiscal year, which starts next month—a cut of 44% compared to FY2015 appropriations—with the Board noting that out-year cuts will have to be deeper.  Yet the Board orders have put governance between a rock and a hard place: this spring a judge ordered then interim university President Nivia Fernández to submit a plan to reopen the main Rio Piedras campus; however, the Puerto Rico police department, claiming it would not act out of respect for the traditional autonomy of the University, provoked a judicial threat for Ms. Fernández’s imprisonment if she failed to comply—a threat obviated by her resignation, along with several members of the university board. Nevertheless, the judge, even after excusing Ms. Fernández from her prison sentence, maintained a $1,000 per day fine on the university until it opened operations—this, as the University, as of last February, had some $496 million in outstanding debt outstanding, according to the PROMESA board certified fiscal plan—and as Moody’s senior credit officer Diane Viacava, earlier this year, wrote that the government’s planned cuts for Puerto Rico were a “credit negative because they will be difficult for the university to absorb,” predicting that the university was likely to default on subsequent payments “absent a resumption of fund transfers to the trustees.”

How Does A City Turn Around Its Fiscal Future?

Good Morning! In this a.m.’s eBlog, we consider a state’s response to a municipal fiscal insolvency, before turning to the challenge the Windy City is facing in the virtually politically insolvent State of Illinois, before finally turning to the uncertain political, governing, and fiscal future of East Cleveland, Ohio.  

Addressing Disparate Municipal Fiscal Distress. More than a century ago, Petersburg, Virginia, was a highly industrialized city of 18,000 people—and the hub and supply center for the Confederacy: supplies arrived from all over the South via one of the five railroads or the various plank roads; it was also the last outpost. Today, it is one of the last fiscal outposts, but, mayhap, because of its fiscal distress, set to be a model for the nation and federalism with regard to how the Commonwealth of Virginia—unlike, for instance, Ohio, is responding. More than 53 percent of Virginia’s counties and cities have reported above-average or high fiscal stress, according to a report by the Commission on Local Government. Petersburg, a city grappling with a severe financial crisis, placed third on the state fiscal stress index behind the cities of Emporia and Buena Vista. Del. Lashrecse Aird (D-Petersburg) noted: “Petersburg does have some financial challenges, but they’re actually not unique. There are a lot of counties and localities within the commonwealth right now that are facing similar fiscal distressers.”  

The Virginia Legislature has dropped a proposed study of local government finances in its just completed legislative session, a legislative initiative which co-sponsor Rosalyn Dance (D-Petersburg) had described to her colleagues as necessary, because:  “Currently, there is no statutory authority for the Commission on Local Government to intervene in a fiscally stressed locality, and the state does not currently have any authority to assist a locality financially;” nevertheless, Virginia’s new fiscal year state budget did revive a focus on fiscal stress in Virginia cities and counties. Motivated by the City of Petersburg’s financial crisis, Sen. Emmett Hanger (R-Augusta County), who co-Chairs the Virginia Senate Finance Committee, had filed a bill (SJ 278) to study the fiscal stress of local governments: his bill proposed the creation of a joint subcommittee to review local and state tax systems, as well as reforms to promote economic assistance and cooperation between regions. Under SJ 278, a 15-member joint subcommittee would have reviewed local government and state tax systems, local responsibilities for delivery of state programs, and causes of fiscal stress among local governments. In addition, the study would have been focused on creating financial incentives and reforms to promote increased cooperation among Virginia’s regions. We will have to, however, await developments, as his proposal was rejected in the House Finance Committee, as members deferred consideration of tax reform for next year’s longer session; however, the adopted state budget did incorporate two fiscal stress preventive measures originally introduced in Sen. Hanger’s bill.

Del. Aird had identified the study as a top priority for this session, identifying: “what we as a Commonwealth need to do to put protections into place and allow localities to have tools and resources to prevent this type of challenge from occurring into the future,” noting: “I believe that this legislation will help address fiscal issues that localities are experiencing: ‘Currently, there is no statutory authority for the Commission on Local Government to intervene in a fiscally stressed locality, and the state does not currently have any authority to assist a locality financially.’” In the case of Petersburg, the city received technical assistance from state officials, including cataloging liabilities and obligations, researching problems, and reviewing city funds; however, state intervention could only be triggered by a request from the municipality: the state’s statutes forbid the Commonwealth from imposing reactive measures to an insolvent municipality.

To modify the conditions to enhance the ability of the state to intervene, the proposal set guidelines for state officials to identify and help alleviate signs of financial stress to prevent a more severe fiscal crisis, proposing the creation of a workgroup established by the Auditor of Public Accounts, who would have been responsible to create an early warning system for identifying fiscal stress, taking into consideration such criteria as a local government’s expenditure reports and budget information. In the event such distress was determined, such a local government would be notified and entitled to request a comprehensive review of its finances by the state. After such a review, the state would be responsible to draft an ‘action plan’ detailing: purpose, duration, and the requisite state resources for such intervention; in addition, the governor would be offered the option to channel up to $500,000 from the general fund toward relief efforts for the local government in need. As Del. Aird noted: “It is important to have someone who can speak to first-hand experience dealing with issues of local government fiscal stress: This insight will be essential in forming effective solutions that will be sustainable long-term, adding: “Prior to now, Virginia had no mechanism to track, measure, or address fiscal stress in localities…Petersburg’s situation is not unique, and it is encouraging that proactive measures are now being taken to guard against future issues. This is essential to ensuring that Virginia’s economy remains strong and that all communities can share in our commonwealth’s success.”

What Might Be a City’s Weakest Link? The state initiative comes as the city intends to write off $9 million in uncollected internal debt Petersburg has accumulated over the past 17 years: debt representing loans from Petersburg’s general fund to other city enterprises since 2000 which its leaders now concede they will never collect—or, as former Richmond City Manager—and now consultant for the city Robert Bobb notes: “This is something that the leadership should have addressed between 2000 and last year, but the issue was not being addressed.” As a result, when Petersburg officials receive the city’s financial audit for FY2017, it will show a negative fund balance that will make it even harder to secure financing for capital projects, albeit, it is expected to clear the uncollected debt from the books for the current fiscal year and the upcoming fiscal year—or, as Virginia Finance Director Ric Brown notes: “They’re taking it on the chin in FY2016 by clearing it all out of the books: To me, the most important thing is not how bad ‘16 is—it’s going forward whether FY2017 and FY2018 improve.” With its bond rating downgraded last year to BB with a negative outlook, Petersburg already faces a stiff fiscal challenge in raising capital—the municipality recently experienced an inability to raise capital to purchase police cars and fire equipment—making manifest the connection between public safety and assessed property values.

Nevertheless, Mr. Bobb has promised that this fiscal year will end without an operating deficit and the next one will begin with the first structurally balanced budget in nearly a decade—to which Secretary Brown notes: “It’s going to take some time, but I believe the sense of everyone is he’s making progress.” The Secretary noted that when the Commonwealth acted to come to Petersburg’s assistance last summer, he discovered the municipality had ended the fiscal year with $18.8 million in unpaid bills and $12 million over its operating budget; ergo, he testified the bottom line was “not going to be good” in the city’s FY2016 CAFR; however, Petersburg has worked in phases to pay its bills, reduce its costs, and rebuild its underpersonned, overwhelmed bureaucracy: The city has reduced its unpaid bills to $5.5 million, with the largest remaining obligation a $1.49 million payment to the Virginia Retirement System—a payment the city has agreed to pay by the end of December. The city’s school system has some $1.3 million in debt to its public retirement system due next month for teacher pensions. Nevertheless, in the school of lost and found, Mr. Bobb reports that city employees have scoured “every desk drawer” and discovered an additional $300,000 in unpaid bills, some of them dating back to 2015—unsurprisingly describing it as “[A] mess to clean up things from the past to where we are today.” Petersburg also has a gaping $1.9 million hole in the school system budget, in no small part by making payments this year to last year’s budget, a practice Mr. Bobb notes to be a [mal]practice the city has followed for 10 years—putting the city’s school budget near the minimum required by the Virginia Standards of Quality.

Nevertheless, Petersburg completed the first phase of recovery, focusing on short-term financing concerns, at the end of March. That has allowed it to focus on long-term financing and a fiscal plan, including developing policies for capital improvements, debt, and reserves to ensure financial stability. In the final stage, from July 1 until Mr. Bobb’s contract ends on September 30th, the city will develop five-year financial and capital improvement plans, as well as a budget transition plan, for ongoing financial performance and monitoring—as well as refilling the fiscal architecture via filling critical positions, including a finance director, which Mr. Brown notes, will be critical to filling middle management positions, such as accountants, which are vital to maintain the city’s financial stability: “If they don’t get that in place, there’s a real risk they’ll slide back.”

Petersburg wasn’t even at the top of the list of the most fiscally stressed localities ranked by the Virginia Commission on Local Government in 2014. It was third, behind Emporia and Buena Vista, and just ahead of Martinsville and Covington. “We’re only as strong as our weakest link,” said Sen. Rosalyn R. Dance, D-Petersburg, who served as the city’s mayor from 1992 to 2004. “We’re not the only ones there.”

Whither Chicago? The Windy City, nearly 350 years old, named “Chicago,” based upon a French rendering of the Native American word “shikaakwa,” from the Miami-Illinois language, is today defined by the Census Bureau as the city and suburbs extending into Wisconsin and Indiana; however, it is, today, a city experiencing population decline: last year it lost just under 20,000 residents—and its surrounding state, Illinois, saw its population decline more than any other state: 37,508 people, according to census data released last December. During the Great Recession, families chose to stay in or move to core urban areas, and migration to the suburbs decelerated; however, in the recovery, there is a reverse trend: families are deciding it is time to move back to the suburbs.

Thus, by most estimates, Chicago’s population will continue to decline, with the Chicago Tribune, from a survey of dozens of former residents, reporting the depopulation stems from reactions to: high taxes, the state budget stalemate, crime, the unemployment rate, and weather—with black residents among those leaving in search of safe neighborhoods and prosperity: it seems many are heading to the suburbs and warm-weather states: Chicago lost 181,000 black residents between 2000 and 2010, according to census data. Just under 90,000 Chicagoans left the city and its immediately surrounding suburbs for other states last year, according to an analysis of census data released in March, marking the greatest outflow since at least 1990. It appears that, more than any other city, Chicago has relied upon the increase in Mexican immigrants to offset the decline of its native-born population: during the 1990s, that immigration accounted for most of Chicago’s growth. After 2007, when Mexican-born populations began to fall across the nation’s major metropolitan areas, most cities managed to make up for the loss with the growth of their native populations, but that has not been the case for Chicago (nor Detroit, which, according to census data, realized a decline of 3,541 residents from 2015 to 2016). While Chicago’s changes may be small in context, they could be a harbinger of more losses to come.

As we had noted in our fiscal report on Chicago, Mayor Rahm Emanuel focused on drawing in new businesses, concerned that any perception that assessed property taxes might have to increase—or that schools and crime rates would not improve—would adversely affect companies’ willingness to come to Chicago—meaning an intense focus on confronting fiscal challenges: such as credit quality threats: e.g. avoiding having a disproportionate percent of the city’s budget devoted to long-term pension borrowing obligations instead of critical future investments: the more of its budget the city had to divert to meeting unsustainable pension obligations, the less it would have to address its goal of investments in the city’s infrastructure, schools, and public safety—investments the Mayor believed fundamental to the city’s economic and fiscal future.  We noted a critical change: Investing in the Future: Mayor Emanuel created enterprise funds so that a greater portion of municipal services were not financed through property taxes and the operating budget: some 83 percent of its budget was focused on schools and public safety, in an effort to draw back young families. Nevertheless, amid growing perceptions that Chicago’s cost of living has become too high, rising property taxes, and perceived growth in crime; some are apprehensive Chicago could be at a tipping point: the period in a city’s time when an increasing number of residents believe it is time to leave—or, as one leaver noted: “It’s just sad to see that people have to leave the city to protect their own future cost of living.”

Does East Cleveland Have a Fiscal Future? In the small Ohio municipality of East Cleveland, a city waiting on the State of Ohio for nearly a year to obtain permission to file for chapter 9 municipal bankruptcy, there is an upcoming Mayoral election—an election which could decide whether the city has a fiscal future—and where voters will have to decide among an array of candidates: who might they elect as most likely to turn the fortunes of the City around, and avert its continuing slide towards insolvency? One candidate, who previously served as Chairman of the East Cleveland Audit Committee, noted a report to the Council detailing twenty-four budget appropriations totaling approximately $2,440,076 in unauthorized and questionable expenditures—and that his committee had provided documentation to the Auditor of State’s Office of Local Government Services regarding the hiring of 10 individuals in violation of a Council-mandated hiring freeze, costing the City approximately $408,475 in unauthorized payroll costs, adding: “All told, the Audit Committee uncovered approximately $3,055,351 in illegal and suspicious spending by the Norton Administration…The truth is, as I stated in the beginning, the municipal government of East Cleveland is afflicted with the cancer of corruption that has been allowed to grow because of two main reasons: The first being, the indifference displayed by Ohio and Cuyahoga County government officials who failed in their respective responsibility when confronted with documented facts.  They collectively have turned a blind eye to what was, and is, happening in East Cleveland.  No one wants to get their hands dirty with so-called ‘black politics,’ even if the legal and financial evidence is given to them on a ‘silver platter.’  Personally, I smell the stench of secret political deals which produced a ‘hands off policy.’”

He added that a symptom of what he described as “this cancer” included some “$41, 857, 430 in unwarranted expenses and debt that was generated during the first 3 years of Mayor Norton’s first term as Mayor. I anticipate that whenever an audit is conducted for 2013 thru 2016, the $41 million figure will grow by an additional $25 million to $35 million.” Addressing the unresponsiveness of the State of Ohio, he described the Governor’s Financial Planning and Supervision Commission as a “joke:  It has been wholly unimpressive and has not provided the necessary oversight and forced accountability one would have expected from the Commission at the beginning.  Furthermore, The Commission became tainted when Governor Kasich appointed Helen Forbes Fields to the Commission.  She has a number of personal conflicts of interests that prevent her from being an impartial member of the Commission.  I can recall a conversation I had with the former Commission Chair, Sharon Hanrahan when she admitted to me that the State Government did not have the ‘political will’ to clean up the mess we were trying to get them to address.” He added, that, if elected, in order to bring accountability for the mismanagement of public funds, he would seek assistance from Ohio and federal law enforcement agencies to ensure those responsible for the mismanagement of East Cleveland’s financial resources would be held accountable, estimating that between $5 million and $15 million dollars could be recovered.