Fiscal Challenges Key to Municipalities’ Futures

eBlog, 04/26/17

Good Morning! In this a.m.’s eBlog, we consider the kinds of fiscal challenges key to a municipality’s future—focusing on the windy city of Chicago, before examining the complex federalism issues conflicting the U.S. Territory of Puerto Rico’s efforts to return to solvency—and deal with a Congressionally-imposed oversight board.

What Is Key to the Windy City’s Future? Chicago, the third most populous city in the U.S. with 2.7 million residents, is one which, when Mayor Rahm Emanuel was first elected, was what some termed a “time bomb:” He took office to find a $635 million operating deficit. However, he did take office as the city’s demographics were recovering from the previous decade—a decade which witnessed an exodus of 200,000, and the loss of 7.1% of its jobs—creating an exceptional fiscal challenge. At his inception as Mayor, the city confronted a debt level of $63,525 per capita—so deep that one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Chicago then had an unemployment rate of 11.3%. The then newly-elected Mayor was confronted by a Moody’s downgrade of  Chicago’s $8.2 billion of general obligation and sales tax backed bonds with a three-level downgrade—and a bleak warning that the Windy City could face further adverse ratings actions absent progress in confronting growing unfunded pension liabilities, adding that the city’s $36 billion retirement-fund deficit and “unrelenting public safety demands” on the budget would, absent significant growth in the city’s operating revenues, increasingly strain the city’s operating budget, as pension outlays competed with other spending priorities, including “debt service and public safety.” Thus at a session last week moderated by former Crain’s Chicago Business Publisher David Snyder, a key focus was: what makes a city attractive to a corporation looking to relocate? Mr. Snyder provided some background and context for that discussion, noting how the makeup of the corporate community in Chicago has changed since the 1980s, when Chicago’s economy was driven by large public corporations. He said that the era of the large corporation is over: today healthcare and logistics firms lead the way, with private or family-held middle-market businesses driving growth in the Chicago region and an entrepreneurial culture experiencing a renaissance; while John Lothian, the Executive Chairman of John J. Lothian & Co., provided an overview of the extraordinary technology changes which he believes fundamentally altered how the financial sector in Chicago operates. He noted that today, getting hired in the Windy City more often than not requires a degree in science, technology, engineering, or mathematics—a change which has closed off jobs from young people, who used to join the sector as runners, gaining experience and contacts. He also noted that Chicago, a world-class city, is now not just competing with New York City, but also in a global competition with other cities around the globe. The stock yards of old—cattle—have been transformed into shares of corporations. Providing some scope to this urban transformation, Dr. Caralynn Nowinski Collens, Chief Executive Officer of UI Labs, a tech accelerator for digital manufacturing, noted that a decade and a half ago, there was virtually no tech scene, funding, or support: students graduating from Illinois schools with technology degrees had to leave the state to pursue their careers. In contrast, she noted, today there are over 100 incubators and accelerators and 300 corporate R&D centers in Chicago; there are 275 digital startups every year. No sector of the city’s economy is growing more rapidly; indeed, today Chicago has the third fastest growing tech sector in the nation. Dr. Collens said that Chicago’s economic diversity and legacy of industry make it an excellent place for the technology industry to flourish as its legendary older industries have become among the world’s most sophisticated, noting, however, that there are many challenges which could put a snag in the Windy City’s aspirations to become the digital industrial center of the world—specifically noting that the importance of getting young Windy Cityites to focus on the threat of the displacement of jobs by automation, in order to enable the city to become a global leader in technological innovation and, thereby, economic growth.

Another speaker, Jerry Szatan, the founder of site selection consulting firm Szatan & Associates, came at the issue of municipal fiscal stability from a different perspective: he noted that risk and higher municipal taxes no longer are such key factors that can lead a company to flee a municipality. Instead, he said, the critical issue is talent: he noted that all corporate headquarters need highly skilled, educated, and creative professionals, and that there are only so many cities in the U.S. where such a wide talent pool exists. Unsurprisingly, Chicago, he noted, is one—stating that the diversity of the residents of Chicago is very important for corporations, particularly those with an international workforce; second, he noted that connectivity is crucial, citing the city’s international airport at O’Hare with being a critical asset, as well as the city’s dense downtown—which he noted facilitates interactions between coworkers and peers in other industries. Mr. Szatan balanced his enthusiasm with fiscal warnings: noting that corporations are risk averse, he warned against Chicago’s fiscal instability and the possibility of higher taxes. Mr. Szatan’s perspective was shared by Chicago Civic Federation Chairman Kent Swanson, who noted that Chicago has the infrastructure assets, educated workforce, and international appeal of a global city, but not at the steep price of a New York or a San Francisco. Thus, he said, office space costs are much more competitive, thereby more attractive to startups and smaller businesses. Ergo, he noted, he perceives the recent movement of headquarters to Chicago as a microcosm of what is happening across the world as people move from smaller cities to the cores of large cities. A third speaker, Chicago Planning and Development Commissioner David Reifman, noted that despite the fiscal challenges of the State of Illinois, there appears to be a commitment to address the state’s public pension crisis and improve the state’s dysfunctional funding and financial practices—and he extolled the city’s efforts to attract corporations, particularly via amenities in near proximity to downtown, such as an expanded O’Hare, new transit stations, and enhanced service on the Chicago Transit Authority, as well as programs to leverage high-density investments in the downtown area to generate funding for underdeveloped areas.

The Complexity of Federalism & Addressing Insolvency. The Justice Department has confirmed to D.C.-based Commissioner Jenniffer Gonzalez that it will review and send Puerto Rico’s Governor, Ricardo Rosselló, an assessment/evaluation of amendments to the U.S. territory’s pending amendments to the upcoming plebiscite on alternative status, with the confirmation coming as Puerto Rico’s main opposition party, the Popular Democratic Party, has voted to boycott the plebiscite scheduled for June 11th. The proposed plebiscite, the revised language of which the ruling New Progressive Party rejected last Sunday, appears to have exacerbated tensions between Puerto Rico House Minority Leader Rafael Hernández Montañez and three House Representatives. It comes as Gov. Ricardo Rosselló and the NPP legislators had approved a ballot that just had options for independence and statehood—and as Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, yesterday warned of the possible elimination of the Christmas bonus and the reduction of the work week for Puerto Rico’s employees as still being a possibility if Puerto Rico is unable to cut spending as contemplated in the plan approved by the PROMESA Oversight Board–with the Board, when it approved the plan last month, warning that by July 1st’s commencement of the new fiscal year, there appeared to be a gap of $190 million to close: to cure said fiscal gap, the Board has proposed to reduce the work week of public employees and eliminate the Christmas bonus—an option the government rejected; nevertheless, it looms in the event Puerto Rico is unable to achieve the projected savings—leading Secretary  Rosario Cortés to say: “If we meet these metrics, there’ll be no reduction of the work week. But, if we fail, the (PROMESA) Board has established it can do it automatically. (That is), if we don’t get the savings, it’ll mean reduction of work week and full elimination of the Christmas bonus.” As part of the legislative package of measures submitted by the Executive, House Bill 938 would seek savings with a cutback on spending and efficiencies totaling $1.623 billion, with the proposal including savings of $434 million for mobility, a hiring freeze, and leveling of benefits; $439 million in “government transformation” via consolidations, public-private alliances and efficiencies; and $750 million in reduced subsidies. The Puerto Rican House of Representatives had been anticipated to consider the bill yesterday; however, the House leadership decided to allow for additional time to hear leaders from unions representing public employees, after the former marched to the Capitol in defense of the rights of their members.

Unsurprisingly, the political dynamics of changing administrations in the nation’s capital have added to the fiscal challenges—mayhap best illustrated by a Trump administration Deputy U.S. Attorney General writing the ballot options are unfair, and that he would not recommend the U.S. Congress release federal money allotted for the plebiscite with the planned ballot choices—triggering a response from Puerto Rico legislators, who voted to revise the language to add a third option: remaining a “territory.” However, unsurprisingly, Puerto Rico’s PDP party has argued that Puerto Rico is more than a territory of the United States, thus it has objected to this ballot language. Members of the party wanted to have part of the current name of Puerto Rico, “Estado Libre Asociado,” be the option rather than “territory.” (The former can be translated as “Free Associated State,” though it is usually translated as “commonwealth.”). Thus, over the weekend, the PDP’s Governing Board, General Council, and General Assembly voted against participating in the plebiscite because of the use of the term “territory” on the ballot. In addition, the Puerto Rico Independence Party has also said it would boycott the plebiscite. Nevertheless, notwithstanding that the review process may take a few weeks, Commissioner Gonzalez believes the federal government will end up confirming a status consultation, noting: “They are waiting to be sent documents related to the plebiscite that have not yet been delivered, according to the Commissioner in the wake of a conference call with interim federal Secretary of Justice, Jesse Panuccio. Governor Rosselló had requested a response by April 22nd, with the hope that that would leave time for the House Appropriations committees to authorize the $2.5 million disbursement allowed by federal law to hold the consultation for June 11; that delivery of the $ 2.5 million is conditional, however, on receipt of a formal opinion from the US Attorney General in order to determines that the electoral ballot, the educational campaign of the State Commission of Elections, and the materials related to the plebiscite comply with the constitutional, legal, and public policy norms of the federal government.

Meanwhile, Puerto Rico’s Treasury announced that March revenues exceeded budgeted projections for the month by 7.1%, noting that through the first nine months of the fiscal year, the territory’s General Fund revenues ran 4.1% ($250 million) above projections, with the key contributor being Puerto Rico’s corporate income tax, which added 86.8% more than budgeted, or $130.4 million. Similarly, a separate tax on non-Puerto Rico based corporations’ income (Act 154) continued to outperform last month, coming in 9.8% higher or $18 million more than projected. Last Friday the Bureau of Labor Statistics announced improved employment statistics for Puerto Rico from its household survey: according to the survey, the total number of Puerto Ricans employed increased in March by 0.7% from February and 0.4% from March 2016, while the island’s unemployment rate dipped 0.5% in March from February, with the March rate tying the statistic’s low point since June of 2008, when it was 11.4%. The BLS employment survey showed continued contractions, with total nonfarm employment down by 0.2% since February and 0.3% since March 2016. The employer survey indicated that Puerto Rico’s private sector employment in March was little changed from February, but has slipped 1% since a year ago March. (The discrepancy in the direction of the household and establishment surveys may be because the former includes agricultural and self-employed workers, while the latter does not.)

Death Comes to the Archbishop? Meanwhile, the Puerto Rico Commission for the Comprehensive Audit of the Public, which is charged with reviewing the legality of Puerto Rico’s debt died Wednesday; however, it appears on the road to recovery in the wake of Gov. Ricardo Rosselló’s signing a measure terminating the Puerto Rico Commission for the Comprehensive Audit of the Public Credit, after the measure was approved by the Puerto Rico Senate and House of Representatives. Governor Rosselló and legislators from his New Progressive Party said it should be up to the legal system to pass judgment on the validity of various bonds, and that the audit commission’s work was interfering with negotiations seeking to restructure Puerto Rico’s debt. Demonstrations outside Puerto Rico’s capitol building on Monday and Tuesday had apparently failed to sway Senators and Representatives inside as they debated and then voted against keeping it. (The commission was set up by the Puerto Rico legislature in July 2015 to examine the circumstances surrounding the issuance of the debt—especially to identify invalid debt.) Some members believed it was opening doors to municipal bondholder claims against those who prepared official statements or others involved with such bond issues. Since then, the group has released two “pre-audits” which raised questions with regard to the legality of much of Puerto Rico’s municipal debt.

What Lessons Can State & Local Leaders Learn from Unique Fiscal Challenges?

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eBlog, 04/25/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenges in Michigan and how the upswing in the state’s economy is—or, in this case, maybe—is not helping the fiscal recovery of the state’s municipalities. Then we remain in Michigan—but straddle to Virginia, to consider state leadership efforts in each state to rethink state roles in dealing with severe fiscal municipal distress. Finally, we zoom to Chicago to glean what wisdom we can from the Godfather of modern municipal bankruptcy, Jim Spiotto: What lessons might be valuable to the nation’s state and local leaders?  

Fiscal & Physical Municipal Balancing I. Nearly a decade after the upswing in Michigan’s economic recovery, the state’s fiscal outlook appears insufficient to help the state’s municipalities weather the next such recession. Notwithstanding continued job growth and record auto sales, Michigan’s per-capita personal income lags the national average; assessed property values are below peak levels in 85% of the state’s municipalities; and state aid is only 80% of what it was 15 years ago.  Thus, interestingly, state business leaders, represented by the Business Leaders for Michigan, a group composed of executives of Michigan’s largest corporations universities, is pressing the Michigan Legislature to assume greater responsibility to address growing public pension liabilities—an issue which municipal leaders in the state fear extend well beyond legacy costs, but also where fiscal stability has been hampered by cuts in state revenue sharing and tax limitations. Michigan’s $10 billion general fund is roughly comparable to what it was nearly two decades ago—notwithstanding the state’s experience in the Great Recession—much less the nation’s largest ever municipal bankruptcy in Detroit, or the ongoing issues in Flint. Moreover, with personal income growth between 2000 and 2013 growing less than half the national average (in the state, the gain was only 31.1%, compared to 66.1% nationally), and now, with public pension obligations outstripping growth in personal income and property values, Michigan’s taxpayers and corporations—and the state’s municipalities—confront hard choices with regard to “legacy costs” for municipal pensions and post-retirement health care obligations—debts which today are consuming nearly 20 percent of some city, township, and school budgets—even as the state’s revenue sharing program has dropped nearly 25 percent for fiscally-stressed municipalities such as Saginaw, Flint, and Detroit just since 2007—rendering the state the only state to realize negative growth rates (8.5%) in municipal revenue in the 2002-2012 decade, according to numbers compiled by the Michigan Municipal League—a decade in which revenue for the state’s cities and towns from state sources realized the sharpest decline of any state in the nation: 56%, a drop so steep that, as the Michigan Municipal League’s COO Tony Minghine put it: “Our system is just broken…We’re not equipped to deal with another recession. If we were to go into another recession right now, we’d see widespread communities failing.” Unsurprisingly, one of the biggest fears is that another wave of chapter 9 filings could trigger the appointment of the state’s ill-fated emergency manager appointments. From the Michigan Municipal League’s perspective, any fiscal resolution would require the state to address what appears to be a faltering revenue base: Michigan’s taxable property is appreciating too slowly to support the cost of government (between 2007 and 2013, the taxable value of property declined by 8 percent in Grand Rapids, 12% in Detroit, 25% in Livonia, 32% in Warren, 22% in Wayne County values, and 24% in Oakland County.) The fiscal threat, as the former U.S. Comptroller General of the General Accounting Office warned: “Most of these numbers will get worse with the mere passage of time.”

Fiscal & Physical Municipal Balancing II. Mayhap Michigan and Virginia state and local leaders need to talk:  Thinking fiscally about a state’s municipal fiscal challenges—and lessons learned—might be underway in Virginia, where, after the state did not move ahead on such an initiative last year, the new state budget has revived the focus on fiscal stress in Virginia cities and counties, with the revived fiscal focus appearing to have been triggered by the ongoing fiscal collapse of one of the state’s oldest cities, Petersburg. Thus, Sen. Emmett Hanger (R-Augusta County), a former Commissioner of the Revenue and member of the state’s House of Delegates, who, today, serves as Senate Finance Co-Chair, and Chair of the Health and Human Services Finance subcommittee, has filed a bill, SJ 278, to study the fiscal stress of local governments: his proposal would create a joint subcommittee to review local and state tax systems, as well as reforms to promote economic assistance and cooperation between regions. Although the legislation was rejected in the Virginia House Finance Committee, where members deferred consideration of tax reform for next year’s longer session, the state’s adopted budget does include two fiscal stress preventive measures originally incorporated in Senator Hanger’s proposed legislation—or, as co-sponsor Sen. Rosalyn Dance (D-Petersburg), noted: “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.” To enhance the state’s authority to intervene fiscally, the budget has set guidelines for state officials to identify and help alleviate signs of financial stress to prevent a more severe crisis. Thus, a workgroup, established by the auditor of public accounts, would determine an appropriate fiscal early warning system to identify fiscal stress: the proposed system would consider such criteria as a local government’s expenditure reports and budget information. Local governments which demonstrate fiscal distress would thence be notified and could request a comprehensive review of their finances by the state. After a fiscal review, the commonwealth would then be charged with drafting an “action plan,” which would provide the purpose, duration, and anticipated resources required for such state intervention. The bill would also give the Governor the option to channel up to $500,000 from the general fund toward relief efforts for the fiscally stressed local government.

Virginia’s new budget also provides for the creation of a Joint Subcommittee on Local Government Fiscal Stress, with members drawn from the Senate Finance Committee, the House Appropriations, and the House Finance committees—with the newly created subcommittee charged to study local and state financial practices, such as: regional cooperation and service consolidation, taxing authority, local responsibilities in state programs, and root causes of fiscal stress. Committee member Del. Lashrecse Aird (D-Petersburg) notes: “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…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.”

Municipal Bankruptcy—or Opportunity? The Chicago Civic Federation last week co-hosted a conference, “Chicago’s Fiscal Future: Growth or Insolvency?” with the Federal Reserve Bank of Chicago, where experts, practitioners, and academics from around the nation met to consider best and worst case scenarios for the Windy City’s fiscal future, including lessons learned from recent chapter 9 municipal bankruptcies. Chicago Fed Vice President William Testa opened up by presenting an alternative method of assessing whether a municipality city is currently insolvent or might become so in the future: he proposed that considering real property in a city might offer both an indicator of the resources available to its governments and how property owners view the prospects of the city, adding that, in addition to traditional financial indicators, property values can be used as a powerful—but not perfect—indicators to reflect a municipality’s current situation and the likelihood for insolvency in the future. He noted that there is considerable evidence that fiscal liabilities of a municipality are capitalized into the value of its properties, and that, if a municipality has high liabilities, those are reflected in an adjustment down in the value of its real estate. Based upon examination, he noted using the examples of Chicago, Milwaukee, and Detroit; Detroit’s property market collapse coincided with its political and economic crises: between 2006 and 2009-2010, the selling price of single family homes in Detroit fell by four-fold; during those years and up to the present, the majority of transactions were done with cash, rather than traditional mortgages, indicating, he said, that the property market is severely distressed. In contrast, he noted, property values in Chicago have seen rebounds in both residential and commercial properties; in Milwaukee, he noted there is less property value, but higher municipal bond ratings, due, he noted, to the state’s reputation for fiscal conservatism and very low unfunded public pension liabilities—on a per capita basis, Chicago’s real estate value compares favorably to other big cities: it lags Los Angeles and New York City, but is ahead of Houston (unsurprisingly given that oil city’s severe pension fiscal crisis) and Phoenix. Nevertheless, he concluded, he believes comparisons between Chicago and Detroit are overblown; the property value indicator shows that property owners in Chicago see value despite the city’s fiscal instability. Therefore, adding the property value indicator could provide additional context to otherwise misleading rankings and ratings that underestimate Chicago’s economic strength.

Lessons Learned from Recent Municipal Bankruptcies. The Chicago Fed conference than convened a session featuring our former State & Local Leader of the Week, Jim Spiotto, a veteran of our more than decade-long efforts to gain former President Ronald Reagan’s signature on PL 100-597 to reform the nation’s municipal bankruptcy laws, who discussed finding from his new, prodigious primer on chapter 9 municipal bankruptcy. Mr. Spiotto advised that chapter 9 municipal bankruptcy is expensive, uncertain, and exceptionally rare—adding it is restrictive in that only debt can be adjusted in the process, because U.S. bankruptcy courts do not have the jurisdiction to alter services. Noting that only a minority of states even authorize local governments to file for federal bankruptcy protection, he noted there is no involuntary process whereby a municipality can be pushed into bankruptcy by its creditors—making it profoundly distinct from Chapter 11 corporate bankruptcy, adding that municipal bankruptcy is solely voluntary on the part of the government. Moreover, he said that, in his prodigious labor over decades, he has found that the large municipal governments which have filed for chapter 9 bankruptcy, each has its own fiscal tale, but, as a rule, these filings have generally involved service level insolvency, revenue insolvency, or economic insolvency—adding that if a school system, county, or city does not have these extraordinary fiscal challenges, municipal bankruptcy is probably not the right option. In contrast, he noted, however, if a municipality elects to file for bankruptcy, it would be wise to develop a comprehensive, long-term recovery plan as part of its plan of debt adjustment.

He was followed by Professor Eric Scorsone, Senior Deputy State Treasurer in the Michigan Department of Treasury, who spoke of the fall and rise of Detroit, focusing on the Motor City’s recovery—who noted that by the time Gov. Rick Snyder appointed Emergency Manager Kevyn Orr, Detroit was arguably insolvent by all of the measures Mr. Spiotto had described, noting that it took the chapter 9 bankruptcy process and mediation to bring all of the city’s communities together to develop the “Grand Bargain” involving a federal judge, U.S. Bankruptcy Judge Steven Rhodes, the Kellogg Foundation, and the Detroit Institute of Arts (a bargain outlined on the napkin of a U.S. District Court Judge, no less) which allowed Detroit to complete and approved plan of debt adjustment and exit municipal bankruptcy. He added that said plan, thus, mandated the philanthropic community, the State of Michigan, and the City of Detroit to put up funding to offset significant proposed public pension cuts. The outcome of this plan of adjustment and its requisite flexibility and comprehensive nature, have proven durable: Prof. Scorsone said the City of Detroit’s finances have significantly improved, and the city is on track to have its oversight board, the Financial Review Commission (FRC) become dormant in 2018—adding that Detroit’s economic recovery since chapter 9 bankruptcy has been extraordinary: much better than could have been imagined five years ago. The city sports a budget surplus, basic services are being provided again, and people and businesses are returning to Detroit.

Harrison J. Goldin, the founder of Goldin Associates, focused his remarks on the near-bankruptcy of New York City in the 1970s, which he said is a unique case, but one with good lessons for other municipal and state leaders (Mr. Goldin was CFO of New York City when it teetered on the edge of bankruptcy). He described Gotham’s disarray in managing and tracking its finances and expenditures prior to his appointment as CFO, noting that the fiscal and financial crisis forced New York City to live within its means and become more transparent in its budgeting. At the same time, he noted, the fiscal crisis also forced difficult cuts to services: the city had to close municipal hospitals, reduce pensions, and close firehouses—even as it increased fees, such as requiring tuition at the previously free City University of New York system and raising bus and subway fares. Nevertheless, he noted: there was an upside: a stable financial environment paved the way for the city to prosper. Thus, he advised, the lesson of all of the municipal bankruptcies and near-bankruptcies he has consulted on is that a coalition of public officials, unions, and civic leaders must come together to implement the four steps necessary for financial recovery: “first, documenting definitively the magnitude of the problem; second, developing a credible multi-year remediation plan; third, formulating credible independent mechanisms for monitoring compliance; and finally, establishing service priorities around which consensus can coalesce.”

How Do State & Local Leaders Confront & Respond to Significant Population Declines?

eBlog, 04/21/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: how does it deal with the fiscal challenges—challenges also confronting cities such as Cleveland, Philadelphia, Toledo, Dayton, Baltimore, and Philadelphia—which are experiencing significant population declines? What to do with vacant lots which no longer bring in property tax revenues—but enhance criminal proclivities?  

Fiscal & Physical Municipal Balancing. While Detroit has emerged fiscally from the nation’s largest ever municipal bankruptcy, it continues to be fiscally and governmentally bedeviled by the governance challenge of such a significant population contraction—it is, after all, a city of about 132 square miles, dotting with neighborhoods which have become splotches of vacant lots and abandoned homes: post-bankrupt Detroit, with neighborhoods that have been gradually emptying out, in a physical sense, is a shadow of its former self, with a population nearly 60% smaller than it was in 1950, but with a stock of some 40,000 abandoned homes and vacant lots—space which brings in no property taxes, but can breed crime and safety costs for the city: between 1978 and 2007, Detroit lost 67% of its business establishments and 80% of its manufacturing base. This untoward, as it were, “ungrowth” has come even as the city has spent $100 million more, on average, than its revenues since 2008: Census figures inform us that more than one in three of the city’s citizens fall below the poverty level—ranking the Motor City, along with Cleveland, Dayton, Toledo, Philadelphia, and Baltimore, as cities realizing major depopulation. Thus, while downtown Detroit today is gleaming towers along a vibrant waterfront, one need not drive far from the internationally acclaimed Detroit Institute of Arts to witness neighborhoods which are nearly abandoned as residents continue to move to the suburbs. Thus, with some of the fiscal issues effectively addressed under the city’s approved plan of debt adjustment, Detroit is commencing a number of initiatives to try to address what might be deemed its physical devastation—a challenge, in some ways, more complex than its finances: How does an emptier city restore blighted neighborhoods and link the islands of neighborhoods which have been left? Or, mayhap better put: how does the city re-envision and rebuild?

Here it seems the city is focused on four key initiatives: draw new families into the city (look at Chicago and how Mayor Emanuel succeeded); convert vacant lots from crime havens to community gardens; convert vast empty spaces to urban farms; devise a strategy to fill empty store fronts; and, again as did Mayor Emanuel, create a strategy to bring back young families with children to live in the city.

Already, Detroit’s downtown core is a new world from my first visit when the National League of Cities convened its annual meeting there in the 1980’s—a time when at the front desk of the hotel I was staying, the attendant told me that even though I could see the convention site from the hotel, it would be a grave risk to life and limb to even think about taking the bus or walking—a situation unchanged on a similar day, Detroit’s very first day in chapter 9 bankruptcy, when I had proposed setting out to walk to the Governor Rick Snyder’s Detroit office to meet just-appointed Emergency Manager Kevyn Orr. Today, the revived downtown has attracted young people, often in redeveloped historic buildings; but that emerging vibrancy does not include housing options for people at different stages of life. Thus, the city is making an effort to offer more differentiated housing options, including townhouses, apartments, carriage homes and more—as well as housing for seniors. Or, as Melissa Dittmer, director of architecture and design for Bedrock LLC, the company leading the development, notes with regard to an initiative just outside of downtown: “For so long, Detroit had a low-self-confidence issue and was willing to take just about” any residential development: “Now the city of Detroit has crossed a threshold. We can do better.”

Outside of the downtown area, one sample neighborhood, Fitzgerald, today has 131 vacant houses and 242 vacant lots; but the city’s Director of Housing and Revitalization, Arthur Jemison, notes these lots need not be filled with houses; instead, the city is moving to invest more than $4 million into the neighborhood to renovate 115 homes, landscape 192 vacant lots, and create a park with a bicycle path, or, as Mr. Jemison notes: “We can’t possibly rebuild every vacant lot with new construction…What we can do is rehabilitate a whole lot of houses, and we can have an intentional landscape scene. The landscape is important, because frankly, if it’s done and managed well, it’s inexpensive and people like it.”

But the comprehensive effort also recognizes the city does not need additional housing stock: it needs less; so it has unearthed a program, RecoveryPark Farms, to construct greenhouses on a 60-acre plot, a plot which until recently represented two dozen blighted blocks on Detroit’s east side. This unique project has diverse goals: it eliminates breeding territory for crime, eliminates blight, and creates opportunities for the unemployed, especially ex-offenders and recovering addicts. The program’s CEO Gary Wozniak, who spent more than three years in federal prison, notes farming offers a career with a lower bar for hiring and gives immediate feedback because “plants grow relatively quickly, so people can start to feel really good about building skill sets. Plus, Detroit has a lot of land.” Already, its harvests are purchased by some of Detroit’s top restaurants on a year-round basis, or, as CEO Wozniak put it: “What we’re doing is commercial-scale agriculture in an urban environment.”

On Detroit’s first day of bankruptcy, the walk from my downtown hotel to the Governor’s uptown office almost seem to resemble post-war Berlin: empty, abandoned buildings and storefronts. Thus, another post-bankruptcy challenge has been how to fill the vacant storefronts along Detroit’s half-abandoned commercial corridors—and, here, a partnership between the City of Detroit and other economic-development organizations, Motor City Match, works to create links between selected landlords and new small businesses, with a goal of converting blighted commercial districts to make them both more livable and more effective at providing job opportunities for residents—or, as Michael Forsyth, Director of small-business services at the Detroit Economic Growth Corp., notes: Motor City Match “helps get businesses from ideas to open.” The program awards $500,000 in grants every quarter, assisting businesses in completing a business plan, finding a place to open, and renovating office space: its CEO, Patrick Beal, CEO of the Detroit Training Center, received $100,000 during the first round of the program and matched it with a $100,000 loan. Now, with the help of Motor City Match, the company has trained more than 5,000 Detroiters in construction, heavy-equipment operation and other skills.

Finally, again as with Mayor Emanuel, the City respects the importance of children—meaning it must focus on public safety, and schools—governance challenges of the first order, especially as we have been long-writing, the parallel financial insolvency of the Detroit public schools. Thus, Ethan Lowenstein, the Director of the Southeast Michigan Stewardship Coalition, is working with educators and local organizations in the region to help young people address environmental challenges in their communities, noting that families with children “leave because they don’t see the strength in their community and they don’t feel recognized as someone who has knowledge.” Mr. Lowenstein is seeking to reverse the city’s depopulation trend by working with the Detroit Public Schools. At two schools he works with in southwest Detroit, he says, students were on a walk around their community and noticed tires were being illegally dumped. The schools helped the students and worked with community members to identify areas with illegally dumped tires, and eventually the tires were recycled into doormats.  

In recovery from chapter 9 bankruptcy, sometimes the fiscal part can seem easy compared to the human dimension.

Getting Out of Insolvency & Back on Fiscal Track

eBlog, 04/14/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery of Atlantic City, New Jersey—where the Mayor this week proposed, in his first post-state takeover budget, the first tax cuts in a decade. Then we head west to the Motor City, where the city, as part of its fiscal recovery from the largest municipal bankruptcy in American history is seeking to ensure all its taxpayers pay what they owe, before then veering south to assess the first 100 days of the PROMESA oversight of the U.S. Territory of Puerto Rico.

Getting Back on the Fiscal Track. Atlantic City Mayor Don Guardian this week presented his proposed $206 million budget to the City Council, which unanimously voted 7-0 to introduce it at a special meeting, and the City has scheduled a public budget hearing for May 17th. In a taste of the fiscal turnaround for the city, the proposed budget includes the first municipal tax decrease in a decade. It also marks the first budget for the city since the State of New Jersey usurped control over Atlantic City’s finances last November. As proposed, it is more than $35 million or 21% less than last year’s and would reduce the municipal tax rate by 5 percent, according to both city and state officials. The city has scheduled a public budget hearing for May 17th.

As proposed, the steepest cut is in public safety—some $8 million, but the draft proposal also seeks cuts in administration costs ($5 million), as well as proposing savings via the privatization of trash pickup, payroll, and vehicle towing services. The smaller budget request is projected to reduce the city’s costs of debt service by $6 million. Unsurprisingly, the proposed tax cuts—the first in nearly a decade, drew the strongest applause: Atlantic City’s municipal tax rate has skyrocketed 96 percent since 2010, a period during which the city’s tax base dropped by nearly 66%. The $206.3 million budget Mayor Guardian presented features $6 million of cuts to debt service at $30.8 million and proposes to allocate $8 million less for public safety.

Mayor Guardian, who is running for his second term as Mayor this fall, said in a statement before presenting the budget that state overseers have played an instrumental role in crafting the new spending plan which features the proposed 5% property tax cut. It could mark a key point in the city’s efforts to regain governance control back from the State of New Jersey—a takeover the Republican mayor had bitterly contested, which took effect last November after New Jersey’s Local Finance Board rejected the city’s five-year recovery plan, or, as the Mayor put it: “From the beginning, I have said that we need to work with the State of New Jersey to stabilize Atlantic City and to reduce the outrageous property taxes that we inherited from years of reckless spending…Even though the entire state takeover was both excessive and unnecessary, the state did play an important role in helping us turn things around.”

For his part, New Jersey Gov. Chris Christie praised former U.S. Sen. Jeffrey Chiesa for his role as the state’s designee leading the financial recovery and his contributions in helping to achieve the city’s first property tax cut in a decade. Gov. Christie credited Mr. Chiesa with withstanding union challenges to make firefighter and police cuts, as well as reaching a $72 million settlement with the Borgata casino which is projected to save the city $93 million on $165 million of owed property tax refunds from 2009 to 2015, noting: “As promised, we quickly put Atlantic City on the path to financial stability, with taxpayers and employers reaping the benefits of unprecedented property tax relief with no reduction in services by a more accountable government…I commend Senator Chiesa for leading Atlantic City to turn the corner, holding the line on expenses and making responsible choices to revitalize the city.”

Atlantic City is planning to issue $72 million in municipal bonds to finance the Borgata settlement though New Jersey’s Municipal Qualified Bond Act: the savings from the settlement, brokered by the state, were a key factor in S&P Global Ratings’ upgrade of Atlantic City’s junk-level general obligation bond debt: Atlantic City, which is weighed down by some $224 million in bonded debt, is rated Caa3 by Moody’s Investors Service. State overseer Chiesa noted: “Over the past five months, I have met so many smart, talented, tenacious people who want to see the city succeed. This inspires me every day to tackle the challenges facing the city to ensure that the progress we’ve made continues.”

A key contributor to the improved fiscal outlook appears to come from some of the unilateral contract changes to public safety officials, imposed by Mr. Chiesa, which led to reduced salaries and benefits for police and firefighters, albeit the courts will have the final say so: the unions have sued to block the cuts, arguing the takeover law is unconstitutional. In addition, the state also reach agreement on a $72 million tax settlement with Borgata Hotel Casino & Spa which is projected to save Atlantic City $93 million and essentially put Borgata back on its tax rolls. The casino had withheld property tax payments, but is now paying its part of casino payments in lieu of property taxes, or, as Mr. Chiesa put it: “Real progress is being made in the city, which is great news for the people who live, work and visit Atlantic City.”

Gov. Chris Christie, in his final term in office, praised Mr. Chiesa and jabbed at his political opponents in a statement issued before the City Council meeting, noting: “It took us merely a few months to lower property taxes for the first time in the past decade, when local leaders shamelessly spent beyond their means to satisfy their special political interests,” he said, even as Atlantic City officials described the budget as a collaborative effort with the state. Or, as Mayor Guardian put it: “He’s the governor. He makes those comments…What I think is [that] it’s clear the city moves ahead with the state.” Council President Marty Small, who chairs the Revenue and Finance Committee, said he was “intimately involved” in the budget process, describing it as a “win-win-win for everybody, particularly the taxpayers.”

Don’t Tax Me: Get the Feller behind the Tree! Getting citizens to pay their taxes is a problem everywhere, of course, but Detroit had a particularly hard time going after scofflaws because budget cuts decimated its ability to enforce the law. Even the citizens and businesses who paid up created logistical havoc for beleaguered city bureaucrats. Part of the reason, it seems, is that in Detroit, the only way to file taxes has been on paper. While that might be merely an irritation for taxpayers, it has been a nightmare for the city’s revenuers, who must devote endless hours typing data into computer systems. It appears also to have led to some innovation: last year the Motor City opted to send out more than 7,000 mailings to deadbeat tax filers, that is taxpayers who were still delinquent on their 2014 taxes; the city suspected each delinquent owed at least $350; ergo it randomly selected some taxpayers to receive one of six different letters, each with a different message in a black box on the mailing: One such message appealed to residents’ civic pride: “Detroit’s rising is at hand. The collection of taxes is essential to our success.” Another simply made clear that Detroit’s revenue department had detailed information on the deadbeats: “Our records indicate you had a federal income of $X for tax year 2014.” (Detroit is somewhat unique in that it has an income tax under which residents owe 2.4 percent of their incomes to the city, after a $600 exemption. Nonresidents who work in Detroit pay a rate of 1.2 percent.) Another message made a bold declaration: “Failure to file a tax return is a misdemeanor punishable by a fine of $500 and 90 days in jail.”

It seems that threats have proven more effective than cajoling: More than 10 percent of taxpayers responded to the letter mentioning a fine and jail time, some 300% greater than the response rate to the city’s basic control letter. This revenue experiment was overseen by Ben Meiselman, a graduate student at the University of Michigan’s economics department, who manned a desk in Detroit’s tax office to run the experiment. He wrote the messages included in the mailings to reflect behavioral economics research, noting: “I find that a single sentence, strategically placed in mailings to attract attention, can have an economically meaningful impact on tax filing behavior,” in his working paper, “Ghostbusting in Detroit: Evidence on Non-filers from a Controlled Field Experiment,” which he intends to eventually become a chapter in his doctoral dissertation. And it turns out that providing details of a taxpayer’s income boosted the response rate by 63 percent, even as a letter from the city which combined a threat with income information was less effective than a threat by itself. Or, as one city official noted: “Keeping it simple seems to be the key,” especially as city officials learned that appeals to civic pride fell flat: the response rate was just 0.8 percentage points higher than that of a basic letter. Nevertheless, the city still confronts a long uphill fiscal cliff, even if it manages to apply the results of the experiment and triple the response rate from tax delinquents: according to the IRS, approximately six percent of U.S. taxpayers break the law by not filing with the Service each year, but, in Detroit, Mr. Meiselman estimated that some 46 percent of taxpayers had not submitted their 2014 returns by the due date in the following year—and that the return rate was getting worse.

Thus, Detroit’s next step was to back up threats with action—mayhap especially because there appears to have been little enforcement for the past decade: Detroit had not undertaken an audit or tax investigation in more than a decade. One outcome of insolvency and municipal bankruptcy, it appears, can hit hard: Detroit’s tax office, which once had a staff of about 70, is today about half that: it is a department which was recently reorganized, in the wake of last year’s takeover by the state of Michigan, a takeover intended to free up city employees to collect unpaid income taxes. The city also eased such filings by permitting them to be submitted electronically for the first time. And, wow!: 77 percent of filers took advantage. Detroit has sent out 15,000 letters since July 2016 and has collected $5.3 million through letters, audits, and investigations. And some of the amounts collected are significant, particularly for those who have juked, dodged, and evaded paying taxes for years: in one instance, a taxpayer agreed to pay $400,000. Detroit also began filing misdemeanor charges and lawsuits in small claims court to get its tax revenues, especially after learning that only one in five residents in several high-end apartments buildings had filed income taxes, helping to persuade a judge to issue an order requiring landlords to turn over tenant information.

These various steps appears to be helping: The number of residents filing tax returns more than doubled last year from the previous year; filings by non-residents increased by more than a third. City returns from 2016 are due, along with state and federal returns, by next Tuesday—the same deadline as applies to all readers of this eBlog, and, this year, Detroit officials are optimistic—or, as one wag put it: In the past, “people knew we weren’t coming after them…Now we are following up on those threats.”

The Promise or PROMESA of the First 100 Days. The PROMESA oversight board, provided by the Congress with authority over the U.S. territory of Puerto Rico, has now surpassed its first one hundred days, created a juxtaposed governance challenge, especially for Governor Rosselló: how can he make sure that the framework set up during this period of quasi dual governance provides for the change Puerto Rico needs? How can he gain the approval of the Board for a long-term fiscal plan as the main achievement of his incipient administration? To prevail, it appears, he will have to convince the Oversight Board that his proposed budgets are based on real possibilities of revenues and that such estimates are free of dependence on loans and that he will conduct the restructuring of Puerto Rico’s public debt on favorable terms, and that he will take the key role in the reconstruction of the government apparatus to higher levels of service, efficiency, participation, and transparency. And, now, there appears to be some evidence that he is achieving progress. Puerto Rico’s statute on permits is intended address a serial inefficiency with regard to the “absurd and abusive terms” to obtain permits, delays which have hindered and discouraged the generation of new economic activity. The effort to provide for the progressive elimination of the costly redundancy in programs and services via the consolidation of agencies, with security first, appear to be key steps in achieving changes to restore financial health. Moreover, the creation of a spending budget 10 per cent below the current one appears to mark an important step in the goal of reasserting self-governance.

Nevertheless, the fiscal and governance challenges of recovering from fiscal insolvency can be beset from any angle: note, for instance, Judge Lauracelis Roques Arroyo has revived an “audit” of Puerto Rico’s debt and reversed Gov. Ricardo Rosselló’s attempt to dismantle the debt audit commission. (Judge Roques Arroyo is a member of the Carolina Region of the Puerto Rico Superior Court.) And, thus, he has ruled that Puerto Rico Gov. Ricardo Rosselló’s attempt to dismantle a commission auditing Puerto Rico’s debt was illegal. The statute in question, law 97 of 2015, created the Puerto Rico Commission for the Comprehensive Audit of the Public Credit. The commission aimed to find Puerto Rico debt which was legally invalid. The commission’s first report in June of last year had reviewed documents connected with the Commonwealth’s $3.5 billion general obligation bond and $1.2 billion tax and revenue anticipation note, both sold in 2014. In this report, the Commission had raised doubts with regard to the legality of much of Puerto Rico’s bond debt. Late last September, the commission questioned the legality of the series 2013A power revenue bonds from the Puerto Rico Electric Power Authority (PREPA), raising concerns with regard to the behavior of Morgan Stanley, Ernst &Young, and URS Corp. in the municipal bond sale and the period leading up to it. In early October, possibly in response to the commission’s work, the SEC commenced an investigation of PREPA’s 2012 and 2013 bonds. Ergo, Judge Arroyo’s order late last week returned three public interest members to the board, according to attorney Manuel Rodriguez Banchs; the order provided that the Governor has no authority to intervene with the commission: it said that the dismissal of the public interest members was illegal. The board has $650,000 in its account right now, according to board member Roberto Pagán, e.g. adequate to do a substantial amount of additional work. Gov. Rosselló, thus, is considering how to react to the judge’s order, according to the El Vocero news website.

The Key Lessons Learned after a Decade of Municipal Bankruptcies

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eBlog, 04/07/17

Good Morning! In this a.m.’s eBlog, we consider Detroit’s first steps to address the blight which crisscrossed the city leading to its municipal bankruptcy. Then we look to New Hampshire to assess whether the state legislature will preempt municipalities’ authority to set election dates. Then we slip south to assess fiscal developments in the efforts to recover from insolvency in Puerto Rico. Finally, we assess and consider some of the broader issues related to municipal bankruptcy.

Post Chapter 9 Recovery. One of Detroit’s first tests with regard to whether it can find new use for the vast stretches of land it cleared of blight went into effect this week when development teams announced by  Mayor Mike Duggan, along with partners: The Platform, a Detroit-based firm, and Century Partners announced they would be investing an estimated $100 million to rehab the architectural jewels in the city’s downtown—the Fisher and Albert Kahn buildings, with the two organizations declaring they will take the lead in overhauling 373 parcels of vacant land and houses in the Fitzgerald neighborhood on the northwest side, where they will coordinate with other firms on a $4 million development plan to rehab 115 vacant homes over two years, create a two-acre park, and landscape 192 vacant lots—with the work occurring in neighborhoods wherein the Detroit Land Bank took control of most of the properties and razed some abandoned homes. Mayor Duggan and other officials described the plan as a kind of reverse gentrification—or, as Mayor Duggan framed it: “We are going to keep the families here while improving the neighborhoods,” making his announcement on an empty lot which is scheduled to become a city park and include a greenway path to nearby Marygrove College: the city leaders hope to transform the neighborhood into a “Blight-Free Quarter Square Mile,” and, if the model works, seek to propagate it other neighborhoods.

Granite State Preemption or Cure? House Speaker Shawn Jasper wants to give New Hampshire towns that postponed their municipal elections due to a snowstorm a way out of facing potential lawsuits from voters who may have been disenfranchised. Speaker Jasper had proposed letting towns ratify the results of their elections by holding another vote, offering a bill to give towns which moved Election Day the option of letting townspeople vote to ratify, or confirm, the results on May 23rd. However, in the wake of about five hours of testimony, the House Election Law Committee voted 10-10 on the Jasper plan, so that a tie vote killed the Speaker’s amendment, leaving 73 towns on their own to address potential legal problems resulting from their decisions to hold their elections on days other than March 14th. The fiscal blizzard in the Granite State now depends upon whether state legislators determine whether or not a special election is needed with regard to those results. New Hampshire Deputy Secretary of State David Scanlan noted: “The concept is not entirely new…what is different is that it is applying to an entire class of towns that decided to postpone.”

In the past, the Legislature has voted to “cure” individual election defects. Speaker of the House Shawn Jasper, (R-Hudson, N.H.) noted: “Well, the fact that a bunch of towns moved the day of their town election was unprecedented…And so as a result of doing that, those towns that moved had to start bending other laws to make other issues related to the election work…The Legislature is just granting the authority to allow the towns to correct any defects that may exist,” he added, listing changed time listings, lack of proper notice, and absentee ballot date issues as possible defects in the process. All of those questions, of course, have fiscal consequences—or, as Atkinson Town Administrator Alan Phair put it; “Well, I don’t know the exact cost, what it would be, but I do know that in our case we certainly don’t have the money budgeted to (hold a special election), because we obviously just budgeted for one election…We would certainly go considerably over and have to find the money elsewhere to do it.” Under the proposed amendment, towns and school districts which postponed would hold a hearing, at which the respective governing body would vote on whether to hold a special election with one question: whether or not to ratify results, where a “no” vote would kick out anyone elected in a postponed vote, while nullifying warrant articles, with elected roles to be appointed until the next election. Salem Town Manager (Salem is a town of just under 30,000 in Rockingham County) Leon Goodwin said his elected leaders were of the opinion that its postponement was legal, so that the municipality is moving forward on projects voted on last month, noting: We’re moving on as if the votes were accepted even though there is a cloud hanging over us from Concord,” adding that town counsel advised the town moderator that it was legal to move elections. Yet, even as he remained confident the election issue will be resolved, he cautioned that the town has not budgeted for an additional election; Windham (approximately 14,000) Town Manager David Sullivan said the municipality’s town Counsel would sign off on the town’s fire truck bond, notwithstanding bond counsel elsewhere in the state advising that ratification of the elections would be necessary.

Municipal authority to act has been hampered by different state House and Senate approaches: while the two bodies have been moving on parallel tracks in the wake of state officials’ questioning the authority of town moderators to reschedule the March 14 voting sessions of their town meetings, the Senate this week passed SB 248, a bill introduced to ratify actions taken at the rescheduled meetings; however, the bill passed with a committee amendment which deletes all of the original language and provides instead for the creation of a committee to “study the rescheduling of elections.” Senators acknowledged that the bill was not likely to pass through the House in that form—asserting the intent was simply to get a bill to the House for further work. Subsequently, a floor amendment was introduced to restore the bill’s original language, ratifying all actions taken at the rescheduled meetings; however, that amendment failed on a party-line vote, with all nine Democrats voting in favor and all fourteen Republicans voting against, leaving most unclear how this could have become a partisan issue. The question comes down to what level of control local officials should have over local elections. The Speaker described the outcome thusly: “I think it was a case of 10 people (on the committee) thinking that what happened was legal;” however, he maintained that the postponed votes were not legal, adding: “The sad thing is that for school districts with bond issues that passed in those meetings, I don’t see a path forward for them,” adding: “I think if you’re afraid of snowstorms, you ought to move your meetings, probably to May,” noting that state officials are forbidden by law from moving state primary and general elections, as well as the first-in-the-nation presidential primary. Unsurprisingly, town moderators and attorneys who work with them on municipal bond issues disagreed with the Speaker’s interpretation that the postponed elections were illegal and his belief that the only way to rectify the issue was for them to act to individually ratify them, with many arguing they acted legally under a state law which allows them to postpone and reschedule the “deliberative session or voting day” of a town meeting to another day; however, the Speaker maintains that law applies only to town meetings, while town elections are governed under a different statute, which provides: “All towns shall hold an election annually for the election of town officers on the second Tuesday in March.” He also noted that the state’s official political calendar, which has the force of law, states that town elections must be held on March 14, adding: “Without trying to place blame, laws are sometimes very confusing if you look only at parts of them,” noting: “I don’t believe for one second that moving the election was legal.”

The Speaker added that still another state law provides that at special town meetings, no money may be raised or appropriated unless the number of ballots cast at the meeting is at least half the number of those on the checklist who were eligible to vote in the most recent town meeting, albeit adding that such meetings do not apply to the current situation, because they are not elections. The state’s Secretary of State said that after three weeks of research, he was able to report on voter turnout at town elections for the past 11 years, advising that 210 towns held elections in March, and 137 of them “followed the law” by holding their elections on March 14th, while 73 towns had postponed their elections by several days. Now Speaker Jasper asks: “Why would we give over 300 individual moderators the ability to do that when our Secretary of State doesn’t have the ability to do that for a snowstorm in our general election or our presidential primary?” The Speaker notes: “I think we need to provide a way to ensure that we don’t clog up the courts, and we don’t have people spend a lot of their own money to fight this, and the towns don’t have to spend a lot of money fighting it.”

Un-positive Credit Rating for Puerto Rico. Moody’s Investors Service has lowered the credit ratings on debt of the Government Development Bank and five other Puerto Rico issuers, with a total of approximately $13 billion outstanding, and revised down the Commonwealth’s fiscal outlook, and the outlooks for seven affiliated obligors linked to the central government to negative from developing, with the downgrades reflecting what the agency described as “persistent pressures on Puerto Rico’s economic base that indicate a diminishing perceived capacity to repay,” noting that while it continues to “believe that essentially all of Puerto Rico’s debt will be subject to default and loss in a broad restructuring, the securities being downgraded face more severe losses than we had previously expected, in the light of Puerto Rico’s projected economic pressures. For this reason, we downgraded to C from Ca not only the senior notes issued by the now defunct Government Development Bank, but also bonds issued by the Puerto Rico Infrastructure Financing Authority and backed by federal rum tax transfer payments, the Convention Center District Authority’s hotel occupancy tax-backed bonds, the Employees Retirement System’s bonds backed by government pension contributions, and the 1998 Resolution bonds of the Puerto Rico Highways and Transportation Authority.”

Puerto Rico Governor Rossello late Wednesday said that the U.S. territory’s fiscal plan, approved by the PROMESA Board, does not contemplate any double taxation, adding that, between the increase in the property tax and the reduction of expenses in the municipalities, he favored the latter as a measure to compensate for the absence of the state subsidy of $350 million. He reiterated that, as a substitute for these funds, the properties which are not currently paying taxes to the Centro de Recaution de Ingresos Municipales (CRIM: the Municipal Revenue Collection Center) should be identified, because they are not included in their registry. The Governor also stressed that the economic outcome of these two fiscal initiatives is still being evaluated, albeit he estimated that they could generate about $100 million, noting: “Whatever the differential after that for the municipalities, there are two mechanisms that can be worked: One, a mechanism to seek an additional source of income, or, two, to avail cuts…The central government has taken the cutting position. We are already establishing a protocol to cut in the agencies, to consolidate, to eliminate the expenses that are not necessary, to go from 131 to between 35 to 40 agencies. That has been our action. The municipalities—now we will have a conversation with our technical team—will have several options: ‘either cut as did the central government or seek mechanisms to raise more funds or impose taxes.’” Currently, mayors evaluate to increase the arbitrage of the real property to 11.83% or to 12.83% in all the municipalities; the concept is for members of the Executive to offer assistance to do the modeling. Thus, the president of the board of CRIM, Cidra Mayor Javier Carrasquillo, said CRIM will be “sensitive to the reality of the pockets of Puerto Ricans: We have to be cautious and responsible in the recommendation that we are going to make…There is nothing definitive yet. There are recommendations.” The Governor noted that the PROMESA Board approved fiscal plan approved last month does not contemplate an increase in property taxation, asserting it was “false to imply that our fiscal plan entails an increase in the rate or a double rate on properties,” albeit recalling that the disappearance of $350 million in transfers to municipalities begins on July 1, when the fiscal year begins, promising it will be done progressively, so that in the next budget (2017-2018) $175 million disappear, and the remaining $175 million, the next fiscal year, describing it as a “two-year fade out.” Unsurprisingly, he did not specify when or how the plan would fiscally benefit this island’s municipalities, stating: “We have already been able to have pilot efforts to identify different municipalities where 60% of their properties are not being assessed…We are going to commit ourselves so that all these properties are in the system.”

The End of a Chapter 9 Era? Municipal bankruptcy is a rarity: even notwithstanding the Great Recession which produced a significant number of corporate bankruptcies—and federal bailouts to large for-profit corporations and quasi-federal corporations, such as Fannie Mae; the federal government offered no bailouts to cities or counties. Yet from one of the nation’s smallest cities, Central Falls, to major, iconic cities such as Detroit and Jefferson County, the nation experienced a just-ended spate, before—with San Bernardino’s exit last month, the likely closure of an era—even as we await some resolution of the request by East Cleveland to file for chapter 9 municipal bankruptcy. The lessons learned, compiled by the nation’s leading light of municipal bankruptcy, therefore bear consideration. Jim Spiotto, with whom I had the honor and good fortune over nearly a decade of effort leading to former President Reagan’s signing into law of the municipal bankruptcy amendments of 1988, offers us a critical guide of ten lessons learned:

  1. Do not defer funding of essential services and infrastructure: Detroit is a wake- up call for others that there is never a good reason to defer funding of essential services and infrastructure at an acceptable level. If you do, Detroit’s fate will be yours.
  2. Labor and pension contracts under state constitutional and statutory provisions should not be interpreted as a mutual suicide pact: It appears one of the reasons why resolution of pension and labor costs was not achieved in Detroit prior to filing Chapter 9 was the belief of the workers and retirees that, under the Michigan constitution, those contractual rights could not be impaired or diminished to any degree. This position failed to take into consideration that the municipality can only pay that which it has revenues to pay and, in an eroding declining financial situation, there will never be sufficient funds to pay all obligations, especially those that may be unaffordable and unsustainable.
  3. Don’t question that which should be beyond questioning and is needed for the long-term financial survival of the municipality: A dedicated source of payment, statutory lien or special revenues established under state law must be honored and should not be contested. Capital markets work effectively when credibility and predictability of outcome are clear and unquestioned. Current effort to pass new legislation (California SB222 and Michigan HB5650) to grant statutory first lien on dedicated revenues. Further, as noted in the Senate Report for the 1988 Amendments to the Bankruptcy Code and Chapter 9 “Section 904 [of Chapter 9 limiting the jurisdiction and power of the Bankruptcy Court] and the tenth amendment prohibits the interpretation that pledges of revenues granted pursuant to state statutory or constitutional provisions to bondholders can be terminated by filing a Chapter 9 proceeding”. This follows the precedent from the 1975 financial distress of New York City and the State of New York’s highest court ruling the state imposed moratorium was unconstitutional given the constitutional mandate to pay available revenues to the general obligation bondholders. See Flushing Nat. Bank et. al. v. Mun. Assistance Corp. of New York, 40 N.Y.S.2nd 731, 737-738 (N.Y. 1976). Just as statutory liens and special revenues, there is a strong argument that state statutory and constitutional mandated payments (mandated set asides, priorities, appropriations and dedicated tax revenue payments) should not and cannot be impaired, limited, modified or delayed by a Chapter 9 proceeding given the rulings of the Supreme Court in the Ashton and Bekins cases and the prohibitions of Sections 903 and 904 of Chapter 9 of the Bankruptcy Code.
  4. Debt adjustment is a process, but a recovery plan is a solution: As noted above, while Detroit has proceeded with debt adjustment which provides some additional runway so it can take takeoff in a recovery, such plan is not the cure for the systemic problem. Rather, the plan provides additional breathing room so that the municipality, through its Mayor and its elected officials, may proceed with a recovery plan, reinvest in Detroit, stimulate the economy, create new jobs, clear and develop blighted areas and raise the level of services and infrastructure to that which is acceptable and attract new business and new citizens.
  5. Successful plans of debt adjustment have one common feature: virtually all significant issues have been settled and resolved with major creditors: While the Detroit Plan started with sound and fury between the emergency manager and creditors and what they would receive, in the end, similar to what occurred in Vallejo, Jefferson County and even in Stockton (with one exception), major creditors ultimately reached agreement and supported the Plan of Debt Adjustment that allowed the municipality to move forward, confirm the Plan and begin its journey to recovery.
  6. One size does not fit all: There are many ways to draft a plan of debt adjustment and sometimes the more creative, the better. As noted above, traditionally major cities of size with significant debt did not file Chapter 9. They refinanced their debt with the backing of the state which reduced their future borrowing costs and allowed them to recover by having the liquidity and the reduced costs necessary to deal with their financial difficulties. Detroit chose a different path.
  7. A recovery plan must provide for essential services and infrastructure: “Best interest of creditors” and “feasibility” can only mean an appropriate reinvestment in the municipality through a recovery plan where there is funding of essential services and infrastructure at an acceptable level to stimulate the municipality’s economy to attract new employers and taxpayers thereby increasing tax revenues and addressing the systemic problem. While no plan of debt adjustment is perfect or assured, there should be, as the Bankruptcy Court in Detroit throughout the case pointed out, a plan to show the survivability and future success of the City.
  8. Confirmation of a plan of debt adjustment is only the beginning of the journey to financial recovery, not the end: It is important to recognize, as noted above, that Chapter 9 is a process, not a solution. The recovery plan, which will take dedication and effort by the elected officials of the City along with residents, public workers and other creditors is the only way to achieve success. It is measured not by months, but by years, and by the constant vigilance to ensure that the systemic problem is addressed effectively in a permanent fix.

Governance & Fiscal Recovery

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eBlog, 04/03/17

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Municipal Fiscal Accountability

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eBlog, 03/31/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Atlantic City after its “lost decade,” before venturing inland to one of the nation’s oldest cities, Wilkes-Barre, Pennsylvania (founded in 1769) as it confronts the challenges of an early state intervention program, and, finally, to Southern California, where the City of Compton faces singular fiscal distrust from its citizens and taxpayers.  

A Lost Fiscal Decade? Atlantic City’s redevelopment effort appears to be gathering momentum following a “lost decade” which featured the closing of five casinos, a housing crisis and major recession, according to a new report released by the South Jersey Economic Review, with author Oliver Cooke writing: “The fact remains that Atlantic City’s redevelopment will take many years…The impact of the local area’s economy’s lost decade on its residents’ welfare has been stark.” The study finds the city to be in recovery—to be stable, but that it is still in critical condition with some work to do.  Nevertheless, its vital signs from developers and its improving economy are all good: that is, while the patient may not regain all its previous strength and capability,  it can thrive: it is “over(cost),” and needs to lose some of the fat it built up by going on a (budget) diet—a road to recovery which will remain steep and tortuous, because it lacks the fiscal capacity it had 15 or 20 years ago—and has to slim down to reflect it.  That is, the city will have to stress itself more in order to get better.  

The analysis, which was conducted in conjunction with the William J. Hughes Center for Public Policy at Stockton University, notes that vital signs from developers and its improving economy are in good condition—maybe even allowing the city to thrive, even if it is unable to regain all its previous strength and fiscal capacity—put in fiscal cookbook terms: Atlantic City is over(cost)weight and needs to lose some of the fat it built up by going on a (budget) diet.  The report also noted that Atlantic City is on track with some positive developments, including the decision at the beginning of this month by Hard Rock International to buy and reopen the closed Trump Taj Mahal property, as well as a recent $72 million settlement with the Borgata Hotel Casino & Spa related to $165 million in owed tax refunds. Mr. Cooke also highlighted other high-profile projects underway, including the reopening of the Showboat casino by developer Bart Blatstein and a $220 million public-private partnership for a new Stockton University satellite residential campus. Nonetheless, he warned that Atlantic City still faces a deep fiscal challenge in the wake of the loss to the city’s metropolitan area of more than 25,000 jobs in the last decade—and its heavy burden of $224 million in municipal bond debt, tied, in large part, to casino property tax appeals. Ultimately, as the ever insightful Marc Pfeiffer of the Bloustein Local Government Research Center and former Deputy Director with the state Division of Local Government Services, the city’s emergence from state control and fiscal recovery will depend on the nuances of the that relationship and whether—in the end—the state imposed Local Finance Board acts with the city’s most critical interests at heart.  

Don’t Run Out of Cash! Wilkes-Barre, first incorporated as a Borough in 1806, is the home of one of Babe Ruth’s longest-ever home runs. It became a city in 1871: today it is a city of over 40,000, but one which has been confronted by constant population decline since the 1930s: today it is less than half the size it was in 1940 and around two-thirds the size it was in 1970. It is a most remarkable city, made up of an extraordinary heritage of ethnic groups, the largest of which are: Italian (just over 25%), Polish (just under 25%), Irish (21%), German (17.9%) English (17.1%) Welsh (16.2%) Slovak (13.8%); Russian (13.4%); Ukranian (12.8%); Mexican (7%); and Puerto Rican (6.4%). (Please note: my math is not at fault, but rather cross-breeding.) Demographically, the city’s citizens and families are diverse: with 19.9% under the age of 18, 12.6% from 18 to 24, 26.1% from 25 to 44, 20.8% from 45 to 64, and 20.6% who are 65 years of age or older. The city has the 4th-largest downtown workforce in the state of Pennsylvania; its family median income is $44,430, about 66% of the national average, and an unemployment rate of just under 7%. The municipality in 2015 had a poverty rate of 32.5%, nearly double the statewide average. Last year, the City of Wilkes-Barre was awarded a $60,000 grant through the Pennsylvania Department of Economic Development (DCED) Early Intervention Program (EIP) to develop a fiscal, operational and mission management 5 year plan for the city—from which the city selected Public Financial Management (PFM) as its consultant to assist in working with the city on its 5 year plan—and from which the city has since received PFM’s Draft Financial Condition Assessment and Draft Financial Trend Forecasting related to the city’s 5 year plan. As part of the intervention, two internal committees were created to develop new sources of revenue for the city. The Revenue Improvement Task Force is comprised of employees from Finance, Tax, Health, Code, and Administration and was directed to analyze and improve upon existing revenue streams; the Small Business Task Force was designed to develop guidance for those interested in opening small businesses in Wilkes-Barre and is comprised of employees from Zoning, Health, Code, Licensing, and Administration. Overall, Mayor Anthony “Tony” George and his administration are confident that they have made significant progress is restoring law and order via the city’s goals of strengthening intergovernmental relationships, improving public safety, fixing infrastructure, fighting blight, restoring and improving city services and achieving long-term economic development.

Nevertheless, the quest for fiscal improvement and reliance on consultants has proven challenging: some of PFM’s proposed options to address city finances have caused a stir. City council Chairwoman Beth Gilbert and City Administrator Ted Wampole, for instance, agreed privatizing the ambulance and public works services as a cost-saving measure was one of the most drastic steps proposed by The PFM Group of Philadelphia, with Chair Gilbert noting: “I stand vehemently against any privatization of any of our city services, especially as an attempt to save money;” she warned the city could end up paying more for services in the long run, and residents could receive less than they get now—adding: “If privatization is on the table, then so is quality.” The financial consultant hired last year for $75,000 to assist the city with developing a game plan to fix its finances under the state’s Early Intervention Program was scheduled to present the options at a public meeting last night at City Hall. PFM representatives, paid from the combination of a $60,000 state grant and $15,000 from the city, have appeared before council several times since December.

Gordon Mann, director of The PFM Group, last night warned: “If the gunshot wound to the city’s financial health doesn’t kill it, the cancer will: both need to be treated, but not at the same time…You need to address the bullet wound, and you need to put yourself in the position to address the cancer.” Mr. Mann, at the meeting, provided an update on where the city stands and where it’s going if nothing is done to address the municipality’s structural problems of flat revenues and escalating expenses for pensions, payroll and long-term debt; then he identified a number of steps to stabilize the city and balance its books, beginning with: “Don’t run out of cash,” and “[D]on’t bother playing the blame game and pointing the finger at prior administrations either,…It may not be your fault, but it is your problem.”

Wilkes Barre is not unlike many of Pennsylvania’s 3rd class cities (York, Erie, Easton, etc.), all in varying degrees of fiscal distress, albeit with some doing better than others. The municipal revenues derived from the property tax and earned income tax will simply not sustain a city like Wilkes Barre—that it, unless and until the state’s municipalities have access to collective bargaining/binding arbitration and pension reform: the current, antiquated revenue options leave the state’s municipalities caught between a rock and a hard place. Worse, mayhap, is the increasing rate of privatization—where an alarming trend across the Commonwealth of communities selling off assets (water, sewer, parking, etc.), more often than not to plug capital into pensions, is, increasingly, leaving communities with no assets and with no pension reform facing the same issue in the future. 

Not Comping Compton: Corruption & Fiscal Distress. In Compton, California, known as the Hub City, because of its location in nearly the exact geographical center of Los Angeles County, the City of Compton is one of the oldest cities in the county and the eighth to incorporate.  The city traces its roots to territory settled in 1867 by a band of 30 pioneering families, who were led to the area by Griffith Dickenson Compton—families who had wagon-trained south from Stockton, California in search of ways to earn a living other than in the rapidly depleting gold fields, but where, the day before yesterday, the city’s former deputy treasurer was arrested for allegedly stealing nearly $4 million from the city. FBI agents arrested Salvador Galvan of La Mirada on Wednesday morning, as part of a federal criminal complaint filed Tuesday, alleging that, for six years, Mr. Galvan skimmed about $3.7 million from cash collected from parking fines, business licenses, and city fees: an audit found discrepancies ranging from $200 to $8,000 per day. Mr. Galvan, who has been an employee of the city for twenty-three years, has been charged with theft concerning programs receiving federal funds. If convicted, he could face up to five years in prison. As Joseph Serna and Angel Jennings of the La Times yesterday wrote: “The money adds up to an important chunk of the budget in a city once beset with financial problems and the possibility of [municipal] bankruptcy.” Prosecutors claim that one former city employee saw all these payments as an opportunity, alleging that the former municipal treasurer, over the last six years, skimmed more than $3.7 million from City Hall, taking as much as $200 to $8,000 a day—small enough, according to federal prosecutors, to avoid detection, even as Mr. Galvan’s purchase of a new Audi and other upscale expenses on a $60,000 salary, raised questions.

The arrest marks a setback for the Southern California city which has prided itself in recent years for its recovery from some of the crime, blight, and corruption which had threatened the city with municipal insolvency—or, as Compton Mayor Aja Brown noted: the allegations “challenge the public’s trust.”  Mayor Brown noted the wake-up call comes as the city has been working in recent months to improve financial controls and create new processes for detecting fraud—even as some of the city’s taxpayers question how the city could have missed such criminal activity for so many years. The Los Angeles County Sheriff’s Department had arrested Mr. Galvan last December in the wake of City Treasurer Doug Sanders’ confirmation with regard to “suspicious activity” in a ledger discovered by one of his employees: his position in the city involved responsibility for handling cash: as part of his duties, he collected funds from residents paying their water bills, business licenses, building permits, and trash bills. According to reports, Mr. Galvan maintained accurate receipts of the cash he received for city fees, but he would submit a lower amount to the city’s deposit records and, ultimately, on the deposit slips verified by his supervisors and the banks, according to federal prosecutors. Indeed, an audit which compared a computer-generated spreadsheet tracking money coming in to the city with documents Mr. Galvan prepared made clear that he had commenced skimming cash in 2010—starting slowly, at first, but escalating from less than $10,000 to $879,536 by 2015, a loss unaccounted for in the city’s accounting system. While Mr. Galvan faces a maximum of 10 years in federal prison, if convicted, the city faces a trial of public trust—or, as Mayor Brown, in a statement, notes: “Unfortunately, the actions of one employee can challenge the public’s trust that we strive daily as a City to rebuild…The alleged embezzlement and theft of public funds is an egregious affront to the hard-working residents of Compton as well as to our dedicated employees. The actions of one person does not represent our committed City employees who — like you — are just as disappointed.”