The Human & Fiscal Prices of Insolvency

October 20, 2017

Good Morning! In today’s Blog, we consider the spread of Connecticut’s fiscal blues to its municipalities; then we consider the health and fiscal health challenge to Flint; before, finally, observing the seemingly worsening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. It appears that the City of Hartford would have to restructure its debt to receive the requisite state assistance to keep it out of chapter 9 municipal bankruptcy under the emerging state budget compromise between the Governor and Legislature. Under the terms of the discussions, the State of Connecticut would also guarantee a major refunding of the city’s debt, as well as cover a major share of the city’s debt payments, at least for this fiscal year and next, with House Majority Leader Matt Ritter (D-Hartford) indicating this was part of a bipartisan compromise the legislature recognizes is needed to avert municipal bankruptcy: “This budget gives the city all of the tools it needs to be on a structural path to sustainability…This solution truly is a bipartisan one.” According to the city’s Mayor Luke Bronin, Hartford needs about $40 million annually in new state assistance to avert bankruptcy. The emerging agreement also includes $28 million per year for a new Municipal Accountability Review Board, likely similar to what the Commonwealth of Virginia has used so effectively, to focus on municipalities at risk of fiscal insolvency and to intervene beforehand: approximately $20 million of that $28 million would be earmarked for Hartford. The new state budget would require Hartford to restructure a significant portion of its capital debt, but the state would guarantee this refinancing, an action which—as was the case in Detroit—will help Hartford have access to lower borrowing costs: the agreement also calls for the state to pay $20 million of the city’s annual debt service—at least for this fiscal year and next.

The state actions came as Moody’s Investor Service this week placed ratings of 26 of the state’s municipalities, as well as three of the state’s regional school districts under review for downgrade, citing state aid cuts in the absence of a budget, warning those municipalities and districts face cuts in state funding equal to 100% or more of available fund balance or cash—with those cities most at risk: Hartford (which currently receives 50 percent of its revenues from the state), New Haven, New Britain, West Haven, and Bridgeport. Moody’s was even fiscally moodier, dropping the credit ratings of an additional 25 Connecticut cities and towns, and three other regional school districts, while maintaining the existing negative outlook on the rating of one town. Moody’s list did not, however, include Hartford. The down-gradings come as the state has continued to operate under Executive order in the absence of an approved fiscal budget, now more than a fiscal quarter overdue. Gov. Dannel Malloy, at the beginning of the week, had submitted his fourth FY2018-19 budget to lawmakers, a $41.3 billion spending plan in the wake of his veto last month of the version approved by the legislature, reporting that his most recent fiscal plan would eliminate some revenue proposals, including new taxes on second homes, cell phone surcharges, ridesharing fees, and daily fantasy sports fees—instead, he has proposed an additional $150 million in spending over the biennium, while simplifying the implementor language. According to Moody’s, under the Governor’s new executive order, state aid to local governments will be nearly $1 billion below last year’s level—or, as Moody’s put it: “The current budget impasse highlights the ongoing vulnerability of funding that Connecticut provides to its local governments.” Connecticut traditionally has provided significant funding to its local governments, largely through education cost sharing grants, but also through payments in lieu of taxes and other smaller governmental grants. Connecticut’s GO bond prices have deteriorated with 10-year credit spreads around 80 basis points, well above historical levels, according to Janney Capital Markets Managing Director Alan Schankel: “A state’s fiscal stress tends to flow downstream to local governments, and Connecticut is no exception.” The fiscal irony is that despite the state’s high per capita wealth, the state’s debt, at 9.2% of gross state product, is highest among the states, lagging only behind Illinois.

Not in Like Flint. U.S. District Court Judge David Lawson has ordered Flint’s City Council to choose a long-term water source for the city by Monday after it spent more than three months refusing to make a decision. In his 29-page opinion, he took Flint’s City Council to task for sitting on an April agreement backed by Mayor Karen Weaver, the state and the federal Environmental Protection Agencies that would see the city stay on the Detroit area water system through a new 30-year contract with the Great Lakes Water Authority, writing:. “The failure of leadership, in light of the past crises and manifold warnings related to the Flint water system, is breathtaking.” Judge Lawson’s decision came in response to a suit filed by the Michigan Department of Environmental Quality last June in the wake of the Flint City Council ignoring the state’s deadline for a water supply decision, arguing the delay would “cause an imminent and substantial endangerment to public health in Flint.” The Council, in hearing and filings, had requested more time from the court; however, Judge Lawson wrote that the state had demonstrated potential for “irreparable injury” in Flint and that there was an urgency to act, because the city’s short-term water agreements have expired and the long-term agreement is time sensitive, concluding: “The City Council has not voted on the negotiated agreement, it has not proposed an alternative, and the future of Flint’s fragile water system—its safety, reliability, and financial stability— is in peril…Because of the city’s indecision, the court must issue its ruling.” Judge Lawson’s order likely ensures the City Council will approve the proposed contract with the Great Lakes Authority that it had been resisting though it was negotiated with Mayor Karen Weaver’s approval. The city could choose to risk defying the court order; however, the State of Michigan has warned that tens of millions of dollars in extensive repairs and updates need to be made to the inactive Flint water plant—repairs which would take three and a half years to complete.

The warnings of Wayne State University Professor Nicholas Schroeck with regard to the risk to public health and the financial stability of the water supply system appeared key to persuading Judge Lawson to side with the state and issue a pre-emptive order. The Judge, in early August, had appointed a mediator in an effort to try gain an agreement between the city and the state Dept. of Environmental Quality; however, when the sides were unable to settle, he warned that  extending Flint’s contract with the Detroit area water system beyond 30 days could result in funding problems: “It seems to me that inaction is inviting intervention.” The Weaver administration analyzed various long-term water options for Flint, and the Mayor said Tuesday the Great Lakes agreement “proved to be in the best interest of public health by avoiding another water source switch, which could result in unforeseen issues.” The Michigan DEQ praised Judge Lawson for “recognizing there is no need to wait…and remains committed to working with the City of Flint to implement a plan once a source water determination has been finalized to ensure compliance with the Safe Drinking Water Act.” In its arguments before Judge Lawson, the State of Michigan had warned: “The City Council’s failure to act will result in at least a 55-63% increase in the water rate being charged to Flint residents, create an immediate risk of bankrupting the Flint water fund, will preclude required investment in Flint’s water distribution system, and create another imminent and substantial endangerment to public health in Flint.” That was similar to a statement from a key aide to Gov. Rick Snyder who had warned that stalling the water contract decision was costing the City of Flint an extra $600,000 a month, because it was paying for two sources—Great Lakes, from which it currently gets its treated water, and Karegnondi, from which it contractually would receive water by 2019 to 2020. Under the 30-year agreement with Great Lakes, Flint would no longer have to make payments to Karegnondi.

Unresponsiveness. President Trump last week awarded himself a perfect rating for his response to the hurricane that devastated Puerto Rico: “I would give myself a 10,” he responded when asked by reporters how he would score his efforts, on a one to 10 scale. He told Fox News correspondent Geraldo Rivera that Puerto Rican governments “owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out. You can say goodbye to that.” A comment to which OMB Director Mick Mulvaney noted: “I wouldn’t take it word for word.” Indeed, a week later, Congressional Republicans unveiled a relief plan that would only add to Puerto Rico’s unsustainable debt load. In his meeting this week with Puerto Rico Governor Ricardo Rosselló, who was in Washington to press for federal disaster relief, the President claimed: “We have provided so much, so fast.” Yet, today nearly 80 percent of the island remains without electricity, and almost 30 of the island still does not have access to clean water, according to Puerto Rican government figures.

In contrast with Texas after Hurricane Harvey and Florida after Irma, where thousands of repair workers rushed in to restring power lines, only a few hundred electrical workers from outside Puerto Rico have arrived to help: it was not until last Saturday that the Puerto Rican government said it had the federal funding needed to bring in more workers. That compares to some 5,300 workers from outside the region who converged on coastal Texas in the days after Hurricane Harvey to restore a power loss about a tenth of the size that struck Puerto Rico. Similarly, in Florida, 18,000 outside workers went in after Hurricane Irma knocked out electricity to most of the state last month, according to Florida Power and Light; whereas, in Puerto Rico, the challenge of restoration has fallen on the shoulders of about 900 members of local crews—an outcome industry experts report to be a result of poor planning, a slow response by power officials, and Puerto Rico’s dire fiscal situation—a sharp contrast to the President’s claim that his administration deserved a 10 for its response to the hurricanes which struck Puerto Rico and other parts of the United States.

The U.S. Army Corps of Engineers, charged by FEMA with restoring Puerto Rico’s power, estimated that it needed at least 2,000 additional workers. So far, the Corps has brought only about 200 workers, and most of them were dedicated not to restoring power, but to installing generators at crucial locations. In the wake of major storms, such as Katrina, power companies typically rely on mutual aid agreements to get electricity restored: such outside companies send thousands of workers, and electric companies pay for the service with funds from FEMA. However, providing such assistance to Puerto Rico is not just logistically a greater challenge—but also a discriminatorily greater challenge: the Jones Act—which the President only suspended for ten days—means that the time and cost of shipping comes at a 20% premium.  

The Human Storm. Maria risks accelerating the trend of the last decade of economic decline and depopulation, described as “a slower-moving catastrophe,” which is wreaking a devastating toll: The number of residents had plunged by 11 percent, the economy had shrunk by 15 percent, and the government has become fiscally insolvent. Already ranked among the worst cycles of economic decline and depopulation in postwar American history, the aftermath of Maria threatens an acceleration of residents fleeing en masse: accelerating economic decline and potentially accelerating a vicious cycle. Lyman Stone, an independent migration researcher and economist at the Agriculture Department notes: “We are watching a real live demographic and population collapse on a monumental scale.” At a news conference last week, Gov. Rosselló warned that without significant help, “millions” could leave for the U.S. mainland: You’re not going to get hundreds of thousands of Puerto Ricans moving to the States—you’re going to get millions…You’re going to get millions, creating a devastating demographic shift for us here in Puerto Rico.” Puerto Rico Treasury Secretary Raúl Maldonado has warned, meanwhile, that without more aid, the government could suffer a shutdown by the end of the month.

Today, only about 40 percent of Puerto Ricans in the territory are employed or seeking work—more than 33% below levels on the mainland. The danger, now, is of increased flight—but flight by the young and those with college degrees. After all, with the PROMESA Board charged with fashioning a fiscal plan to pay off more than $70 billion in Puerto Rico’s municipal debt calling for efforts to raise taxes and significant cuts to the government, the Board has predicted continuing shrinkage of the Puerto Rican economy. Thus, there is a real apprehension

As a result, for Washington and Puerto Rican officials planning a recovery, the ongoing exodus poses a multifaceted dilemma. “They’ve got to start from the ground up,” a former U.S. Treasury official said of any new plan for the island. In the short-term, at least, the island is likely to see an economic boost; rebuilding after a hurricane often injects a jolt of spending into local economies. But, according to recent research of 90 years of natural disasters in the United States, published as a National Bureau of Economic Research working paper, major natural disasters also have unfavorable effects: They increase out-migration, lower home prices, and raise poverty rates. Like many on the island, Sergio M. Marxuach, policy director for the Center for a New Economy, a San Juan-based think tank, said a massive federal investment is necessary. “We’re going to need some significant government intervention — essentially a big rescue package, not only to rebuild the economy but get it growing…People are saying, ‘I don’t want my children to grow up in a place where the economy is going to be devastated for the next 10 years.’ If enough people think that way, it’s going to be a self-reinforcing downward spiral.”

In addressing complaints about ongoing struggles on the island, President Trump noted this week that the disaster in Puerto Rico in many ways had begun years ago. Puerto Rico “was in very poor shape before the hurricanes ever hit. Their electrical grid was destroyed before the hurricanes got there. It was in very bad shape, was not working, was in bankruptcy.”

At the Level of a Muncipio. While many have considered the fiscal and physical impact on the U.S. territory of Puerto Rico, fewer have considered the fiscal challenge to Puerto Rico’s municipalities. Consider, for instance, Juncos, one of Puerto Rico’s 78 municipalities: it is located in the eastern central region of the island; it is spread over 9 wards and Juncos Pueblo (the downtown area and the administrative center of the city). The city, one of the oldest in the United States,was founded on the request of Tomas Pizarro on August 2, 1797, having previously been a village which evolved from a small ranch, the Hatillo de los Juncos. Hurricane Maria has changed this municipality forever: more than 1,000 families in Juncos lost it all that unforgettable September 20th, when Hurricane Maria struck. Yet, in a remarkable effort, residents of the La Hormiga sector of Las Piñas neighborhood, in the immediate aftermath of the hurricane, organized to help recover the humble community that is often highlighted by criminal incidents in the area: one of the community leaders of the sector, Wanda Bonilla, highlighted the deed of the trash rescuers: “Thanks to them, they have also relieved the pick up of the rubble.” The city’s community board worked immediately to install a shelter in the neighborhood community center given the circumstances that some 17 families, with between five and seven members each, where the storm tore the roofs off their homes—and most of those homes have single mothers. She noted: “Our president, Ivelisse Esquilín, who also lost everything, is helping us through the Municipality and with other donations.” Juncos Mayor Alfredo Alejandro noted that, in the wake of the storm, crossing arms was not an option for anyone “in the neighborhood” even though many of the 60 families living in the sector experienced the grief of having lost their home: “You have to do it because imagine …right now, look here, I have these pieces of a car to see if I invent a type of small generator to, even be, to turn on a fan.” The Mayor described Maria’s devastation to be of “great proportions:” Out of population of 42,000 people, more than 1,000 lost their homes and a comparable number suffered major damage to their structures; 85% of the city’s residents are still without potable water, while there are few expectations that electricity will soon be restored.

Advertisements

Can Congress Uninflict Federally Caused Fiscal & Economic Disparities & Distress?

October 13, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, legal, physical, and human challenges to Puerto Rico, before heading north to New Jersey where the fiscal and governing strains between Atlantic City and the Garden State continue to fester.

Visit the project blog: The Municipal Sustainability Project 

Physical, Oratorical, & Fiscal Storms. President Trump served notice yesterday that he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria–even as House Speaker Paul Ryan (R-Wis.) goes to Puerto Rico this morning to assess not only the damage, but also how to more effectively respond to a staggering humanitarian crisis in the aftermath of Hurricane Maria. The Speaker will also bear some good news: the House yesterday approved 353-69, a $36.5 billion disaster aid package to help victims struggling to recover from a string of devastating hurricanes and wildfires, sending the aid package to the Senate, which returns from a weeklong recess next week. While the Trump administration requested $29 billion in supplemental spending last week, it asked for additional resources Tuesday night, including $4.9 billion to fund a loan program that Puerto Rico can use to address basic functions such as infrastructure needs. Speaker Ryan noted: “‎We think it’s critical that we pass this legislation this week to get the people the help they need, to support the victims, and also to help the communities still recovering and dealing with the problems with the hurricanes Harvey, Irma, and Maria.” Puerto Rico Governor Ricardo Rosselló had warned Congressional leaders that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.”

President Trump yesterday claimed that it will be up to Congress how much federal money to appropriate for Puerto Rico, but that relief workers will not stay “forever,” even as, three weeks after Hurricane Maria struck, much of Puerto Rico remains without power, with limited access to clean water, hospitals are running short on medicine, and many businesses remain  closed. The President added:  “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!”

The White House late yesterday issued a statement committing for now “the full force of the U.S. government” to the Puerto Rico recovery, seemingly contradicting the President, who has sought to portray Puerto Rico as in full recovery mode and has voiced frustration with what he considers mismanagement by local leaders. The Governor had warned earlier in the week that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.” The legislation the House adopted last night allows up to $4.9 billion in direct loans to local governments in a bid to ease Puerto Rico’s fiscal crunch—a vital lifeline, as, absent Congressional action, the territory may not be able to make its payroll or pay vendors by the end of this month.

In contrast, Speaker Ryan said that Puerto Rico must eventually “stand on its own two feet,” but that the federal government needs to continue to respond to the humanitarian crisis: “We’re in the midst of a humanitarian crisis…Yes, we need to make sure that Puerto Rico can begin to stand on its own two feet…But at the moment, there is a humanitarian crisis which has to be attended to, and this is an area where the federal government has a responsibility, and we’re acting on it.”

Rep. Nydia M. Velázquez (D-NY), who was born in Puerto Rico, said in a statement that the President’s “most solemn duty is to protect the safety and the security of the American people. By suggesting he might abdicate this responsibility for our fellow citizens in Puerto Rico, Mr. Trump has called into question his ability to lead. We will not allow the federal government to abandon Puerto Rico in its time of need.” Similarly, Jennifer Hing, a spokeswoman for House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.), who will accompany Speaker Ryan today, said that those who live on the island “are American citizens and they deserve the federal assistance they need to recover and rebuild. The Chairman and the Committee fully stand by them in these efforts, and will continue to be at the ready to provide the victims of these devastating hurricanes with the necessary federal resources both now and in the future.” Without Congressional action, the territory may not be able to make its payroll or pay vendors by the end of the month. Unmentioned is whether such contemplated assistance might entail repealing the Jones Act—an act which means the price of goods in Puerto Rico is at least double that in neighboring islands—including the U.S. Virgin Islands. The New York Federal Reserve  found that the Act hurts the Puerto Rican economy—Sen. John McCain (R-Az.) and Rep. Gary Palmer (R-Ala.) have offered legislation to repeal or suspend the law.

President Trump yesterday warned that his administration’s response to hurricane-ravaged Puerto Rico cannot last “forever,” tweeting: “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!” He added that the U.S. territory’s existing debt and infrastructure issues compounded problems. His tweeting came as the House is preparing to consider legislation under which Puerto Rico would receive a $4.9 billion low-interest federal loan to pay its bills through the end of October, as part of a $36.5 billion package. The temporary assistance comes as Moody’s Investors Service has downgraded the Commonwealth of Puerto Rico’s general obligation bonds to Ca from Caa3, in view of the protracted economic and revenue disruptions caused by Hurricane Maria. The President also threatened he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria: he said that relief workers will not stay “forever.” Three weeks after Hurricane Maria made landfall, much of Puerto Rico, an island of 3.4 million Americans, remains without power. Residents struggle to find clean water, hospitals are running short on medicine, and commerce is slow, with many businesses closed.

The lower ratings are aligned with estimates of Puerto Rico’s reduced debt servicing capacity given extensive damage from Hurricane Maria. Puerto Rico faces almost total economic and revenue disruption in the near term and diminished output and revenue probably through the end of the current fiscal year and maybe well into the next. The weaker trajectory will undercut the government’s ability to repay its debt, a matter now being weighed in a bankruptcy-like proceeding authorized by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). For the University of Puerto Rico, the downgrade factors in expected pressure on enrollment-linked revenue and on funding from the Puerto Rican government.

With 155 mile-an-hour winds and a path that cut diagonally across the island, Hurricane Maria was the most destructive storm to hit Puerto Rico in almost 90 years. It knocked out all electric power, destroyed more than 100,000 homes, and ruptured bridges and other public infrastructure. Beyond the disruption of the immediate aftermath, the potential long-term repercussions may be somewhat mixed, however. On one hand, a massive exodus of residents relocating to the mainland, rather than rebuilding on the island, could further erode Puerto Rico’s economic base. Moody’s opined that an infusion of federal relief and rebuilding funds could spur the economic growth and infrastructure replacement that, under normal conditions, has eluded Puerto Rico: “We, nevertheless ,view the economic impact overall as a substantial negative that has weakened the commonwealth’s ability to repay creditors: The negative outlook is consistent with ongoing economic pressures, which will weigh on the commonwealth’s capacity to meet debt and other funding obligations, potentially driving bondholder recovery rates lower as restructuring of the commonwealth’s debt burden unfolds.”

Tens of thousands of islanders left for the U.S. mainland to escape the immediate aftermath of the storm. With conditions back home still grim—approximately 85 percent of residents still lack electricity and 40 percent are without running water, and neither is expected to be fully restored for months—many find themselves scrambling to build new lives away from the island. Particularly in states with large Puerto Rican populations, such as New York, Illinois, Florida, and Connecticut, people are bunking with relatives while trying to find longer-term housing, jobs and schools for their kids.

There have been several major migratory exoduses from Puerto Rico to the mainland over the years, most recently during the past decade when the island’s population shrank by about 10 percent because of a long economic slide that shows no sign of easing anytime soon. Hurricane Maria struck Sept. 20th, and, according to the latest figures from the Puerto Rican government, killed at least 45 people. It also created a new surge that could have lasting demographic effects on Puerto Rico and on the mainland. “I think that we could expect that people who did not plan to stay permanently might do so now,” said Jorge Duany, a professor of anthropology at Florida International University who has long studied migration from the island. Many of those who left are elderly or sick people who fled or were evacuated because of the dangers posed by living on a tropical island with no power or air conditioning and limited water for an indefinite period of time.  It is too early to know exactly how many have departed Puerto Rico for the mainland, but Florida reports more than 20,000 have come to the Seminole state since Oct. 3rd. There were already about 1 million Puerto Ricans in the Sunshine State, second only to New York.

Addressing the urgency of fiscal assistance, House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.) stated: “These funds are vital right now, in the near term, to get the aid where it is needed most.” Puerto Rico faces a government shutdown at the end of the month without an infusion of cash, according to Puerto Rico Treasury Secretary Raul Maldonado: the proposed loan provides flexibility for repayment: it allows the Secretary of Homeland Security, in consultation with Treasury Secretary Mnuchin to “determine the terms, conditions, eligible uses, and timing and amount of federal disbursements of loans issued to a territory or possession, and instrumentalities and local governments.”

Gov. Ricardo Rossello Nevares, in his letter at the end of last week to the President, cited “independent damage assessments in the range of $95 billion–approximately 150% of Puerto Rico’s” economy, writing that “financial damages of this magnitude will subject Puerto Rico’s central government, its instrumentalities, and municipal governments to unsustainable cash shortfalls: As a result, in addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future.”

Saving Atlantic City. New Jersey Superior Court Judge Julio Mendez has ruled that Atlantic City can cut its Fire Department by 15 members early next year as a cost-saving measure under the Garden State’s Municipal Stabilization and Recovery Act, with his ruling lifting the restriction that any reduction in force must occur through retirements or attrition. Judge Mendez, who in late August had ruled against a state proposal for 50 layoffs, ruled no cuts may take place before February 1st—marking the first legal showdown under New Jersey’s Recovery Act takeover powers under designee Jeffrey Chiesa, which enables the state to alter outstanding municipal contracts. In his decision, Judge Mendez wrote: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.”  Judge  Mendez ruled the state may exercise its authority; however, the cuts are not allowed until after Feb. 1, according to the ruling: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic, but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.” In his August ruling, the Judge had written that any reduction in force below 180 members would compromise public safety, and any further reduction would have to come through attrition and retirements. Under this week’s ruling, before the state makes cuts, however, officials must explore other funding to cover lost SAFER Grant funding, allow for additional attrition to take place, and provide fair notice to those who may lose their jobs.

Atlantic City Mayor Don Guardian said he had hoped the state would offer an early retirement incentive—especially after, last August, Gov. Chris Christie had signed a bill allowing the state to offer such an incentive to the city’s police officers, firefighters, and first responders facing layoffs. However, the state has said the offer would not be financially beneficial, leading Mayor Guardian to note: “I am disappointed that the state has pushed forward this motion knowing that the state Senate, Assembly, and the Governor all passed an early retirement bill for just this reason: We could have easily gotten to 180 fighters through these incentives.”

New Jersey Community Affairs spokeswoman Lisa Ryan noted: “We remain disappointed by the court’s insistence on requiring an artificially and unnecessarily high number of firefighters…While the decision to allow a modest reduction in firefighters on Feb. 1, 2018, will provide some budget relief, the city will still be forced to make additional and significant reductions to fire salaries in order to afford paying for 180 firefighters.” (Last January, the Fire Department had 225 members; now there are 195, or, as Judge Mendez wrote: “The plans to reduce the size of the ACFD have evolved from a request to approve a force of 125, resulting in a loss of 100 positions, to the current request to reduce the force to 180, resulting in a loss of 15 positions.” 

A Human & Fiscal Disaster

September 27, 2017

Good Morning! In today’s second Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

President Trump has amended the Puerto Rico Disaster Declaration to provide that the federal government will cover 100%, rather than the usual 75%, of costs for debris removal and emergency protective measures in the wake of the extraordinary human, physical, and fiscal damage wrought—damage surely certain to set back the U.S. territory’s fiscal recovery and efforts under Judge Laura Taylor Swain to work out a quasi-plan of debt adjustment. Puerto Rico faces weeks, if not months, without electric service as utility workers repair power plants and lines that were already falling apart. It faces a potential permanent outflow of residents who can afford to leave—potentially leaving behind a quasi-state with disproportionate numbers of retired, poor, and less educated Americans. Judge Swain yesterday issued an order to indefinitely postpone the Title III PROMESA hearing, which had been scheduled for next Monday: she requested that stakeholders to submit comments by tomorrow with regard to when the hearing should be rescheduled—adding that all subsequent hearings will take place in New York City. Nonetheless, the attorneys representing the Puerto Rico Fiscal Agency and Financial Advisory Authority made clear their desire to move forward with the case as swiftly as possible: “Despite Puerto Rico’s current circumstances, FAFAA desires to move forward with these Title III cases with as little disruption as possible: FAFAA believes that any significant delay in advancing these Title III cases would place a cloud of uncertainty over these proceedings and potentially undermine the progress achieved to date.”

At the same time, elected leaders of the Puerto Rico House and Senate have requested that the PROMESA Oversight Board stop enforcing the fiscal plan’s austerity measures for at least this year and possibly over the next five years; Puerto Rico House President Carlos Méndez Núñez reportedly asked the Oversight Board to suspend all legal proceedings against the Puerto Rico government.

President Trump yesterday announced he will visit Puerto Rico early next week, stating: “The infrastructure was in bad shape, as you know, in Puerto Rico, before the storm…And now, in many cases, it has no infrastructure. So you’re really starting from almost scratch.” The announcement and tweets, far later than announcements, federal assistance, and Presidential visits to Houston and Florida in the wake of their respective hurricane, came in the wake a  series of tweets about Puerto Rico  Monday evening, including a reference to the “billions of dollars … owed to Wall Street and the banks which, sadly, must be dealt with,’’ a tweet which drew criticism from U.S. Senate Minority Leader Chuck Schumer (D-N.Y.), who stated on the Senate floor that raising the debt issue paled “in comparison to the immediate humanitarian crisis that the island faces,” adding: “Puerto Rico needs help from aid workers, not debt collectors from Wall Street: Yes, Puerto Rico needs debt relief, but first they need humanitarian relief. Water. Food. Medicine. Fuel.” He asked that the administration prepare an immediate federal aid request to Congress for a vote by the end of this week, pointedly noting: “The administration submitted a request for aid for Hurricane Harvey less than a week after the storm made landfall: We are rapidly closing in on that same marker for Maria hitting Puerto Rico.” His remarks came as a group of 10 Democratic U.S. Senators yesterday sent a letter Tuesday to Senate Majority Leader Mitch McConnell, R-Ky., and House Speaker Paul Ryan, R-Wis., asking for both chambers to begin “immediate consideration of a supplemental appropriations bill to provide relief for Puerto Rico and the U.S. Virgin Islands in the wake Hurricane Irma and now Hurricane Maria…Specifically, we are asking that additional funds be provided to ensure an adequate balance in FEMA’s Disaster Relief Fund, and Community Development Block Grants for disaster recovery along with other disaster relief accounts be authorized and funded to respond to this catastrophe.’’

According to House Speaker Paul Ryan’s (R-Wis.) office, Congress is likely to act on several pieces of legislation: First up will be a supplemental “to ensure the FEMA disaster relief fund (DRF) has sufficient funds for immediate relief and recovery,” likely early in October, noting that the DRF also funds rebuilding and post-disaster mitigation—albeit that can take years to do. The Speaker’s office also expects the House will be “likely to provide more,” with the Speaker committing that the emerging package will address not just Puerto Rico, but also the U.S. Virgin Islands, as well as remaining needs from the havoc wrought by Hurricanes Harvey and Irma. The Speaker made clear Puerto Rico will get the same kind of help and aid as Texas and Florida, adding: “The bill we passed out of here a couple of weeks again for FEMA equally applies to Puerto Rico.”

All of Puerto Rico, yesterday, remained without power, except for generators being run by hospitals. Officials of the Federal Emergency Management Agency have not yet offered an estimate when power or communication will be restored, but FEMA has identified the supplies needed for power restoration that will be delivered by barge once Puerto Rico’s ports are reopened. That will be a Herculean challenge: catastrophe risk modeling firm AIR Worldwide estimated that more than 85% of the $40 billion to $85 billion in estimated insured industry losses caused by Maria are in Puerto Rico. AIR added that its estimate does not include infrastructure repair and replacement, the cost of hazardous waste cleanup, damage to pleasure boats and other marine craft, damage to levees or uninsured property. Rep. Jenniffer Gonzalez-Colon (R-P.R.), Puerto Rico’s non-voting Representative in Congress has estimated that Hurricane Maria caused at least $25 billion in damage.

Long Term. Former U.S. Treasury official Kent Hiteshew, the Director of the Treasury Department’s Office of State and Local Finance in the Obama administration, said, “In the short-term, Hurricane Maria is likely to produce a severe economic and fiscal shock in Puerto Rico and may further accelerate out-migration off the Island – at least temporarily…Longer term, Maria’s silver lining will likely be significant amounts federal recovery aid that could stimulate Puerto Rico’s economy and rebuild its infrastructure in a way that would not have otherwise been possible absent the hurricane.” Nevertheless, he pointed out that apart from the President’s announcement that FEMA will pick up 100% of certain initial cleanup costs, any rebuilding aid provided by FEMA will likely be accompanied by limitations: “FEMA’s programs are administratively complex, funded on a reimbursement basis and generally project, rather than general fund-based: FEMA only funds repair and rebuilding of damaged facilities–not necessarily the broader capital plan envisioned in PROMESA’s Fiscal Plan. We will have to await more detailed assessments of Maria’s damage before we can fully understand the FEMA rebuilding opportunities.” He made an even more critical point: “Lastly, PROMESA’s Fiscal Plan will likely need to be revisited in light of all of these factors with potentially even fewer available revenues for debt service–at least in the near term: Any adjustments in the Fiscal Plan will impact the current litigation and debt restructuring mediation because, under PROMESA, any Plan of Adjustment must comply with the Fiscal Plan.”

Fiscal & Human Consequences. Florida government officials are taking measures to help Puerto Ricans migrating to that state–estimated in hundred thousand–as a result of Hurricane Maria. Florida State Representative Bob Cortés, the former Deputy Mayor of the Longwood City Commission, estimated a potential influx of 100,000 Puerto Ricans to Florida, noting: “Everyone here in Florida has family in Puerto Rico, and every Puerto Rican has lost something on the Island, those Puerto Ricans are going to come and take refuge with their relatives. Personally, I have seven relatives who are coming to my house.” That is, there is a potential double fiscal whammy: an outflow of those most fiscally and physically able to leave Puerto Rico—leaving behind a more aged, poorer U.S. territory, but a territory now confronting far steeper costs, short-term and long-term with a gravely deteriorated tax base.

Leadership–and the Lack thereof: what Might that Mean vis-a-vis Municipal Bankruptcy?

eBlog, 9/19/16

In this morning’s eBlog, we consider the green light the Detroit Financial Review has given to Detroit, before heading east to the capital city of Hartford—a city fighting to avert municipal bankruptcy, and then veering south to Opa-Locka, Florida: a city that seems doomed to go into chapter 9 municipal bankruptcy. It seems that severe municipal fiscal distress can arise from human failures—and recovery, as we are experiencing in Detroit—can arise from great leadership. Distress—and municipal insolvency—can arise from great, state-blessed inequity: an issue in Michigan, California, Kansas, Connecticut, etc. Even though the cost of municipal bankruptcy can far outweigh what it would have cost for states to address fiscal disparities—as the recent court decision in Connecticut found: “[T]he state’s current system ‘has left rich school districts to flourish and poor school districts to founder,’ betraying its promise in the State Constitution to give children a ‘fair opportunity for an elementary and secondary school education.’”  

A Major Step Forward. The Detroit Financial Review Commission, created as part of Detroit’s exit from the largest municipal bankruptcy in the nation’s history to oversee the city’s recovery, has declared the city was in substantial compliance with the terms of its plan of debt adjustment—both a measure of the hard work of Mayor Mike Duggan, but also a key step towards the city’s exit from state oversight. The thumbs up came in the wake of certification of an audit of the city’s FY2015 budget; the city faces comparable hurdles over its next two, consecutive fiscal years in order to remove the state yoke under the provisions of the Michigan law adopted two years ago to govern the city’s path out of chapter 9 municipal bankruptcy. Unsurprisingly, Mayor Duggan described the Good Housekeeping state seal of approval as a “major step forward: The Legislature set up a process that said the city can earn its way out of direct financial oversight, and it has to balance the budgets and pay its bills for three straight years…I couldn’t be more pleased that we have one year down, and we’ve been certified as being fully compliant with the statute.” The Motor City has posted surpluses in recent years on the city’s nearly $1 billion annual budget; the city administration projects a balanced FY2017 budget: the prize: If the city stays within budget, and an audit is certified in 2018, Detroit could end nearly a decade of direct oversight and go into a period when the review commission would be mostly dormant, freeing the city to operate without getting required approval from the review commission on matters including budgets, budget amendments, contracts, and labor agreements.

That does not, however, mean the long road to recovery is easy: Detroit still faces fiscal challenges in the long-term, including a $490-million shortfall in pension funding the city will have to pay in the coming years—a challenge which, if unmet, would retrigger a renewed three-year period of state oversight by the review commission. Nevertheless, State Treasurer Nick Khouri congratulated city officials for getting to this point, calling it a “milestone for the city,” even as Detroit CFO John Hill noted the declaration starts the clock on the city’s path back to local control: “It really does put us on a path to the city having almost full control of its financial operations…”It’s a major milestone and an acknowledgement that we’ve made a lot of progress.”

Staving Off Chapter 9 Municipal Bankruptcy. First-term Hartford, Connecticut Mayor Luke Bonin is scrambling to fix what he terms a “broken system” and keep his city out of chapter 9 municipal bankruptcy, albeit noting that he is confronted by a broken system that relies 100 percent on property taxes for local revenue—or, as he puts it: “You’ve got a city that just doesn’t have enough property. It’s got less property than the surrounding towns.” His uphill challenge as Mayor of the state’s capital city has garnered the support of the Connecticut Conference of Municipalities, whose Executive Director, Kevin Maloney, is supporting by seeking a regional approach through his organization: “Work cooperatively with the suburban towns to find where services can be shared and be done regionally, which would not only reduce the cost for the cities, but hopefully would reduce the costs for suburban towns.” The Conference has already created a panel with leaders from larger cities such as the chapter 9-experienced city of Bridgeport, as well as New Haven and Waterbury, as well as suburbs that will meet monthly to discuss this option. For his part, Mayor Bronin notes: “This isn’t about Hartford’s success or failure. This is about Connecticut’s success or failures, the region’s success or failure. You can’t be a suburb of nowhere, you can’t be a region or a growing state if you’ve got a city that’s in crisis.” Nevertheless, the challenge will be great: Hartford confronts nearly a $50 million hole in this year’s budget, which has left city services at a bare minimum, and the city could face another $50 million deficit next year. Or, as the mayor puts it: “You can’t cut your way to growth and you can’t tax your way to growth.” Indeed, it seems that he recognizes the city will be unable to get out of its fiscal debts by itself; consequently, he is pressing for regional tax and revenue measures to help Connecticut’s cities, urging the Connecticut Municipal Finance Advisory Commission: “We do not see a way the city of Hartford can avoid projected deficits on our own without some significant reforms at the state and regional levels.” Absent some fiscal assistance, the Mayor warns the state capital could run out of cash before the end of this year: he projects a nearly $23 million deficit in this fiscal year’s budget, but warns the fiscal chasm could more than double by next year—reaching a level of nearly 20% of total expenses by FY2018. Ergo, he suggests, regionalization could stave off municipal bankruptcy: “We want to do everything to avoid that, because I don’t think it would be good for the state of Connecticut; I don’t think would be good for the region, and I don’t think it would be ideal for the city of Hartford.”

Capital Bankruptcy? Hartford, were it to seek chapter 9 municipal bankruptcy, would only be the second state capital in U.S. history to file for municipal bankruptcy—but that earlier effort turned out to be a botched one: the filing, by Pennsylvania’s capital city, Harrisburg, a filing done over the objections of the Mayor, was rejected by the courts as being non-compliant with Pennsylvania’s municipal bankruptcy authority—indeed, five years ago on August 1, 2011, Pennsylvania’s Governor signed into law new legislation that would bar any “City of the Third Class” from filing a chapter 9 petition, specifically referencing Harrisburg. It would also be only the second time a municipality in the state had sought chapter 9 protection: Bridgeport, filed for Chapter 9 bankruptcy in 1991, but a federal judge rejected the filing, because the city did not meet the U.S. Bankruptcy court’s definition of insolvency. Nevertheless, unlike almost every other chapter 9 filing in U.S. history, the effort in Connecticut is unique, because Mayor Bronin and other Connecticut mayors are seeking to craft a legislative package in the state legislature which would lessen reliance on the property tax, and move towards a Denver or St. Paul-Minneapolis type of regional tax—in no small part because Hartford, not unlike other New England capital cities, has less taxable property than several its surrounding suburban cities. According to Moody’s Investors Service, general fund reserves for the three cities range from 0.3% to 3.7% of fiscal 2015 revenues, well below the 12.9% state median for Moody’s-rated cities. Our respected colleagues at Municipal Market Analytics suggest that Hartford could model its regional recovery approach after what Pittsburgh has accomplished, as we noted in our report on the city—but, as MMA put it: “If its problems are left unaddressed, its fiscal position and attractiveness as a regional business center will reasonably continue to decline.” Nevertheless, the Mayor’s road ahead will be steep: His request earlier this year to Connecticut General Assembly oversight panel failed to gain a response—forcing the City Council to approve what the Mayor had deemed a $553 million “doomsday” budget calling for across-the-board service cuts. Municipal debt service, according to Mayor Bronin, spiked more than 50 percent to $31 million this year: it is projected to soar to $61 million by FY2020-21.

It is not that Mayor Bronin is new to this municipal challenge: even though he is a first-year mayor, he has previous experience as former chief counsel to Gov. Daniel Malloy. Mayor Bronin is seeking increased payments in lieu of taxes, regional revenue sharing, ala the Twin Cities or Denver regional area, as well as widening options for local revenue generation—albeit knowing that in a state where Connecticut Superior Court Judge Thomas Moukawsher this month ordered the state to make changes in everything from how its schools are financed to which students are eligible to graduate from high school to how teachers are paid and evaluated, holding that “Connecticut is defaulting on its constitutional duty” to give all children an adequate education, Connecticut is a state here inequality appears to be the norm. Judge Moukawsher’s decision, in response to a lawsuit filed more than a decade ago claiming the state had undercut the allocation of school funding to its poorest district, is certain to require to reconsider nearly every aspect of public school financing—or as long-time Bridgeport Mayor Joseph Ganim put it: “This is a game changer…It’s an indictment of the application of the system, and of the system itself.” Inequity seems to be the rule of thumb in the state—a state where state-local collaboration is a tall order. Nonetheless, Connecticut Comptroller Kevin Lembo notes: “The mayor is on the absolute right track in trying to tie their fates together, but it’s not going to happen just because someone asks for it to happen, and the state is never likely to mandate that…You can look at ways to build partnerships. For example, not driving office parks out to the suburbs by giving the suburban communities a piece of the property tax action when they build downtown.” He added that such partnerships could include communities which are losing population, but have “very sophisticated and high-performing school districts” to attract more children from stressed city school districts. Nevertheless, he also noted the state should examine cities’ books and propose sustainable remedies: “Historically the state has always just thrown money at a perceived problem, less so in the suburbs, more so in the cities…We’ve always solved the short-term problem, and then walked on and dealt with something else.” Finally, he noted, the state has “a couple of more cards to play” to benefit Hartford, including the sale of vacant space—an interesting observation—and one that was of key concern to the nearby capital of Providence as it danced on the edge of municipal bankruptcy, even as nearby Central Falls went into chapter 9. As Comptroller Lembo notes: Connecticut has a “ton of property in Hartford and all over the state. Some producing, some of it is sitting there, just empty office buildings,” leading him to ask: “When was the last time somebody calculated the value of that asset? It may be putting more property back on the tax rolls in Hartford.” Moody’s last week deemed Judge Moukawsher’s ruling a credit positive for Hartford, Bridgeport, and New Haven: “If the court’s ruling holds, we believe funding levels for schools in low-income communities will increase and could occur in two ways: 1) Increased funding could be distributed through a reallocation, where funding is shifted from more affluent municipalities. Or, 2) the state could expand the total pie, increasing spending for some cities while allowing more affluent communities to maintain existing funding levels or receive some increases.”

On the Road to Chapter 9? It seems that municipal bankruptcy can be a product of criminal behavior—certainly a key factor in Detroit’s road to the nation’s largest-ever municipal bankruptcy—or incompetence. It might be that for the small city of Opa-locka, Florida: it is a combination. Now a business owner who worked with the FBI to uncover shakedowns by city officials has, this week, filed suit in federal court claiming he suffered years of what he described as “extortion, coercion, threats and intimidation” which violated his civil rights and right to due process. The owner, Mr. Francisco Zambrana, has laid out details of his efforts to obtain a business license—one which he was never able to gain. In his suit, he describes his version of his encounters with key city officials, including City Commissioner Luis Santiago, and a then-assistant city manager, David Chiverton, claiming each had demanded payoffs for a business license he never received—or, as his complaint cites: “From the onset, Zambrana simply sought to obtain an occupational license…Zambrana would repeatedly tell the city officials and employees who would care to listen that all he wanted to do was work and provide for his family, including teenage son who was battling cancer.” The suit could hardly have arisen at a more awkward moment: the small municipality, under investigation by the state and under the control of a state-appointed financial oversight board, is in the midst of public hearings to develop its FY2017 budget—but unable to pay its current bills. The suit, ergo, can hardly be settled—likely numbering the luckless Mr. Zambrana in a crowd of debtors for some future plan of debt adjustment. In his complaint, Mr. Zambrana described the municipality’s “practice and custom of threatening, intimidating, and extorting individuals” based on national origin to operate a business in the city. The suit adds: “The practice and custom was authorized by policymakers within the city, and it was a widespread practice so permanent and well-settled as to constitute a custom or usage with the force of law.” In this instance, Mr. Zambrana, finding an unresponsive municipality, leapt two levels to the federal government: he went to the Federal Bureau of Investigation and agreed to work with the FBI to uncover the shakedown scheme, an investigation whose findings led to by then City Manager Chiverton to plead guilty to pocketing payoffs. His suit cites the municipality as the sole defendant—likely recognizing the lack of any remote possibility from Mr. Chiverton—and he has requested a jury trial. In the category of fiscal misery loves company, the litigation costs to Opa-Locka’s taxpayers is accruing: the suit follows in the wake of one former City Manager Roy Stephen Shiver filed at the end of last month in U.S. District Court in the wake of receiving permission to so file from the U.S. Equal Employment Opportunity Commission to file a complaint alleging racial discrimination: the suit claims he was defamed by a trumped-up allegation that he accepted a bribe—and that, last November, he was fired without proper cause by city commissioners and the mayor, all of whom are black. Indeed, it was the former city manager who first reported Opa-Locka’s serious financial problems to Gov. Rick Scott just about a year ago—a report which contributed to the state appointment of a state financial oversight board to handle all city expenses, including legal fees. Even as the state ponders action, it will not be alone: the Securities and Exchange Commission has opened an inquiry into some of the city’s bonds, which were issued as its financial condition was severely deteriorating, and the FBI’s investigation is ongoing.

Re-Thinking Municipalites’ Post-Bankruptcy Futures

eBlog, 9/14/16

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

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

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

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

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

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

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

What Comes After Municipal Bankruptcy?

Share on Twitter

eBlog, 8/12/16

In this morning’s eBlog, we consider post municipal bankruptcy elections: how does a city choose a course for the future? Here, the choices seem bleak in Stockton—the city nearly one full year out of bankruptcy. Then we consider the ongoing state-local challenges between the State of New Jersey and Atlantic City—a city not far from the knife edge of insolvency, followed by the rhythmic efforts of retired U.S. Bankruptcy Judge Steven Rhodes to get the new Detroit Public Schools the best possible leaders in his current position as the state-appointed emergency manager. Then we observe the process underway in Florida with a state oversight effort to assess the options for the future of Opa-locka. Finally, we consider the dire water situation in East Cleveland—the small city awaiting a determination of its fate: whether it will be chapter 9 municipal bankruptcy or incorporation into the City of Cleveland.

Post Municipal Bankruptcy Blues.  For a city emerging from municipal bankruptcy, the road from insolvency to recovery can be steep. In Stockton, California, where the frieze above the steps of City Hall reads: “To inspire a nobler civic life: to fulfill justice; to serve the people,” the question for the city’s voters appears to be a dispiriting choice in November’s mayoral election—the city’s first post municipal bankruptcy election—one pitting incumbent and just arrested Mayor Anthony Silva against a young City Councilmember with a pending DUI charge, Michael Tubbs. The election will mark the city’s first post-bankruptcy election in the wake of last year’s decision by U.S. Bankruptcy Judge Christopher Klein a year ago in February to approve the city’s plan of debt adjustment—a plan approved in the wake of the municipality’s success in securing voter support for more than a 10 percent increase in the local sales tax—with the bulk of the new revenues dedicated to address apprehensions about crime. The approved debt-adjustment plan provided for reductions in public employee benefits, funding cuts for police and fire, and reduced payments to the city’s creditors. (City Council members had already unanimously approved personnel cuts two years prior to the filing, but further cuts were made to parks, library, and senior programs.) The plan of debt adjustment approved by Judge Klein also eliminated post-retirement health care benefits valued at a minimum of $300 million, but continued payments for retirement benefits via the California Public Employees’ Retirement System (CalPERS). Now, in the first post-municipal bankruptcy municipal election, it seems key issues confronting voters are the city’s crime rate (albeit, now the two candidates’ crime rates)—and the question with regard to how the court-approved plan of debt adjustment will shape elections for mayor and three of six city council seats on November 8th. Mayoral candidates Mayor Anthony Silva and challenger Michael Tubbs have and are sparring over the best post-bankruptcy direction for the city.

Mayor Silva won election to his current office in November 2012 by tying his opponent to the consequences of the city’s bankruptcy, criticizing his predecessor for a year of high crime rates and failure to properly oversee the city’s finances. After securing election, he pressed for an increase in sales taxes to pay for law enforcement costs, which ultimately reached the ballot in November 2013 after adjustments by the city council. In the wake of the city’s emergence from chapter 9, Mayor Silva has promoted plans for new business development in Stockton to generate more revenue: he proposed a $170 million development plan in December of last year, a plan which included expanding the airport for international flights and spending $72 million to add arcades and rides on the river walk. The Mayor also proposed opening abandoned warehouses as shelters for the homeless. But his road to re-election took a significant detour earlier this month in the wake of his arrest at his Mayor’s Youth Camp in Silver Lake, California, where he was charged with playing strip poker with naked teenagers, providing alcohol to minors, and illegally recording the activities that are said to have occurred at last year’s camp in the wee hours of Aug. 7, 2015. That morning five unmarked law enforcement vehicles rolled onto the rustic grounds of the Stockton Municipal Camp at about 9:30 a.m.: two of them parked so they would block the one-lane road to enter and exit the site: Thirty minutes later, without incident, Mayor Silva was driven away by officers in one of the unmarked vehicles and taken to the Amador County Jail, where he was booked by Amador County sheriff’s officers. His first court date is scheduled for next week at Amador County Superior Court: the Amador County District Attorney’s Office and the FBI are the investigating agencies. The arrest does not bode well for his re-election campaign.

In the Clear? Moody’s credit ratings agency has reported that the state loan to Atlantic City should offer the requisite time for the Mayor and Council to draft a five-year budget plan which would avert not only municipal bankruptcy, but also a threatened state takeover. Moody’s yesterday wrote that the $73 million state loan is a positive for the city’s junk credit rating—and that, absent the loan, there would have been a high probability the city would default on its debt in the next few months. Moody’s, being more characteristically moody, however, added that the planned Trump Taj Mahal closure could further cut the amount of tax revenues to the municipality, writing that the city’s fiscal condition remains dire because of its dependence on the shrinking casino industry.

More Schooling on Insolvency. Retired U.S. bankruptcy Judge and current Detroit Public Schools state-appointed emergency manager Steven Rhodes yesterday reported he had met with Michigan Gov. Rick Snyder this week and had agreed to extend his contract as transition manager of the DPS until January—the date the new school board is to be sworn in. Judge Rhodes defined the election of the new board as “the single most critical issue” DPS confronts this fall, noting whomever is elected must come to the position committed to transforming DPS into a system that will not only adapt to the future needs of its 45,000 students and earn the support of the region’s businesses, but also its religious and civic communities—important enough indeed that the Judge spent two hours in a special session with 53 of the 68 candidates vying for office to fill them in on DPS’ condition and answer questions about the job. Judge Rhodes plans more such sessions. In addition, he has encouraged all of the candidates to get training on how to be an effective school board member. Judge Rhodes has been direct and clear about what those elected should bring to the table: “It may feel simplistic, but it’s the kind of stuff that can’t be emphasized enough…The No. 1 thing is commitment to serve as a trustee for the benefit of the district’s students. What that means is there’s no other agenda, no vision on higher office, no self-aggrandizement. It’s got to be all about the district’s students.” He added that new board members must recognize that DPS is not just for college-bound children, but for those whose future vocations can be taught outside of universities, and he said the board must find ways “to compensate teachers whose dedication and sacrifice.” They must commit themselves to excellence in academics and commit to hiring a permanent superintendent with that same commitment, while at the same time recognizing the diverse needs and interests of each of DPS’s 45,000-plus students: “They’re not all going to college. Many have special needs. Some want to do career technical education. Our academic offerings need to be as diverse as our student interests.” Judge Rhodes also warned that education “does not begin when the child walks into the school door and end when the child leaves the school door: “there has to be a continuing commitment to parental engagement in the educational process.”

Interestingly the electric rhythm guitar player of the famous Indubitable Equivalents also noted that he expects new DPS board members to respect the Financial Review Commission, a state entity created as part of the city’s plan of debt adjustment, but which has created some resentment in the city—stating: “This will be challenging, but the FRC is a fact of life, and they really do want to help…The nature of the FRC’s role and responsibilities in relation to DPSCD (Detroit Public Schools Community District) is going to be a matter of continuing discussion and negotiation. The school board…will continue that conversation. There will not be an emergency manager per se, but the enabling legislation for the Financial Review Commission is subject to interpretation, and that will take time to work out. There is a view which says it isn’t just to balance budgets and books of record, but no one over there wants to be involved in day-to-day academic issues.” Finally, Judge Rhodes urged that the new board would need to work with Mayor Mike Duggan—urging an end to what he called the “us versus them” mentality, both in and outside the city of Detroit: “[The school board has to figure out a way to break through that on both sides of the city boundaries.” Finally, and appropriately, he noted new school board members must be willing to learn: “Being an effective school board member is an art. It has to be learned so there has to be a commitment to learn how to do that.”

Oompapa. A south Florida public administrator, Merrett Stierheim, will determine if Opa-locka is solvent for a Florida state-appointed panel Gov. Rick Scott appointed last June 1st in the wake of the city’s entering into an agreement seeking the state’s assistance, which does not include funding. The panel is charged with overseeing the small municipality’s finances and to report upon the “gravity of the situation faced by Opa-locka,” as well as to oversee the hiring of a Finance Director for the city, according to Melinda Miguel, Chair of the Financial Emergency Board. Ms. Miguel made the announcement yesterday after noting the state appointed emergency board had received incomplete financial reports and requests for payments without details or invoices. Ms. Stierheim comes to the challenge with a background of experience with other fiscally challenged municipalities, including Miami in the late 1990’s, when it was in the midst of a corruption scandal and a financial crisis that led then-Gov. Lawton Chiles to appoint a Financial Emergency Board. Chair Miguel, who is Gov. Scott’s chief inspector general, yesterday said Opa-locka Mayor Myra Taylor had approached her for a second time requesting that the state provide the city a bridge loan, such as an advance on revenue-sharing funds—the city is apprehensive it could run out of cash before the end of next month. In addition to those fiscal and legal challenges, the SEC has opened an inquiry into whether proper disclosures were made about the city’s fiscal state, and there are federal corruption investigations ongoing: last week, the former city manager, David Chiverton, and former public works supervisor, Gregory Harris, were arrested and charged with taking kickbacks from business owners and individuals. Ms. Miguel mentioned the arrests in her opening statement, noting the city’s residents and taxpayers have “paid a steep price” by placing trust in their government officials, adding: “The citizens of Opa-locka have a right to know that their money is well spent…Instead, we see corruption. We must continue on our search for the truth.”

A Different Kind of Water Problem than Flint. East Cleveland, Ohio, a small municipality awaiting a decision whether it may file for chapter 9 municipal bankruptcy or become a part of the City of Cleveland is running out of time. Now hard decisions—such as whether to cut off water service or pay a $30,000 delinquent water bill owed to Cleveland Municipal Water Department demonstrate the fiscal chaos in the city—and bring back recollections of one of the most difficult issues in Detroit’s municipal bankruptcy: how does a city balance insolvency against the public health and safety issues of water? In this instance, East Cleveland opted to pay most of the massive balanced owed, a bill for which prior nonpayment had caused Cleveland’s water department to shut down water service to some East Cleveland properties. Now East Cleveland Council President Thomas Wheeler reports the city is facing an additional one million dollar shortfall in 2017.

How Do State-Local Relationships Affect Fiscal Futures? What Might Puerto Rico’s Fiscal Future Be?

 eBlog

        Share on Twitter

eBlog, 8/10/16

In this morning’s eBlog, we consider yesterday’s day-long session on Puerto Rico in New York City; we then turn to the uncanny Jim Spiotto’s related and invaluable insights into the newly enacted, but unimplemented PROMESA legislation; then we consider the failure in New Jersey to offer the state’s voters an opportunity in November to address either the state’s long term inability to address either its public pension liabilities or deteriorating public infrastructure; then we look at neighborhood initiatives emerging in Detroit; and, finally, the criminal activities which have exposed Opa-locka, Florida to potential municipal bankruptcy or dissolution.

Puerto Rico: What’s Next? Greg David, the marvelous Director of the Business & Economics Reporting Program at the CUNY Graduate School of Journalism and head of the school’s Ravitch Fiscal Reporting Program, yesterday hosted what has become an annual session on Puerto Rico: with the June 30 passage of the PROMESA debt restructuring bill—and, as we await the appointment of the PROMESA Board, the Ravitch Fiscal Reporting Program at the CUNY Graduate School of Journalism (with the ever tireless Mr. Ravitch very much present and participating). The event took an entire day to examine what is happening now to the U.S. territory as part of a special one-day conference for reporters and editors: the issues covered included: The basics: All you need to know about the Puerto Rico Oversight, Management and Economic Stability Act; Debt restructuring and the bond market: Possible debt scenarios and the impact on the future of the bond market; Government and politics in Puerto Rico with a control board; and The Economy: an Update and implications—obviously too much for this participant and presenter to even pretend to encapsulate in this a.m.’s eBlog. The different panels were not just dynamic, but demonstrated the vast differences in perspectives—including one presenter deeming PROMESA “a useless exercise.” The presentation by the N.Y. Federal Reserve (Restoring Economic Growth in Puerto Rico: Introduction to the Series) by Messieurs Andrew Haughwout, Hunter Clark, and Giacomo De Giorgi of the New York Federal Reserve was a double bonus in that it offered rich new resources—and their new blog, Liberty Street Economics—which features posts on options for addressing the U.S. Territory’s fiscal challenges—for scholars and eBlog readers since their post on options for addressing its fiscal problems, which features insight and analysis from economists working at the intersection of research and policy began appearing last fall—posts which have been a follow-up to not only the session we co-hosted with the N.Y. Fed, but also a series of analyses, starting with a 2012 report that detailed the economic challenges facing the Commonwealth. In most of this work, the three Fed musketeers have focused on how policymakers could help to address the immediate issues facing Puerto Rico and its people. It has been especially invaluable because of this new set of Blogs they have put together.

In the wake of Puerto Rico’s skipping payment on nearly $1 billion to municipal bondholders on July 1st, including some $780 million of principal and interest on general obligation bonds—the largest municipal default ever in the $3.7 trillion municipal-bond market and the first time a state-level borrower has ever failed to pay on its direct debt since the 1930s, yesterday’s event was clearly timely. It came as Cleary Gottlieb, Puerto Rico’s legal adviser is seeking to reduce a $70 billion debt load, and participating in discussions with U.S. Treasury staff, Commonwealth leaders, and creditors with regard to how to restructure the U.S. territory’s debt—as Puerto Rico is not authorized to file for chapter 9 municipal bankruptcy. It comes for a U.S. territory with a poverty rate in excess of 50 percent for its children—and faced with discriminatory federal policies. Thus, every day of delay in appointing the PROMESA board to address Puerto Rico’s debt, revenue mix, expenses or budget, and its public pensions will make the steep climb out of insolvency in a non-chapter 9 eligible world that much more challenging.

Implication for Municipal Bankruptcy. Ironically, our session yesterday came at the same time as the godfather of chapter 9 municipal bankruptcy, Jim Spiotto, yesterday described PROMESA as “unique in our justice system:” it is the first law in U.S. history that carves out a period outside of bankruptcy for bondholders to negotiate terms of a restructuring (referencing Title VI, §601(j)), which addresses how municipal bondholders can agree to modify their own bond terms and provides that holders of at least two-thirds of each bond pool’s principals who vote must approve the modification and holders of at least 50% of total principal outstanding in each pool must approve it. Under the new federal law, every municipal bond issuer has at least one pool of bonds, and these bonds are divided into different pools if they have different priorities or security features. Mr. Spiotto added that, under the Trust Indenture Act, which normally applies to municipal bonds, 100 percent of bondholders must agree to changes in certain terms such as principal, interest, and maturity; however, he notes, PROMESA, trumps (not an intended pun) the Trust Indenture Act with regards to Puerto Rico bonds.

In a Chapter 11 bankruptcy (available to both corporations and individuals), at least two-thirds of the holders of the debt by amount and half by number of holders must vote to accept a restructuring offer before the resolution can be accepted. But as Mr. Spiotto notes in describing the distinction from Chapter 11, that chapter involves a consideration of all of a creditor’s debts under a court-supervised process. In contrast, PROMESA extends this negotiation and voting process to those negotiating a particular class or classes of debts and does so outside of a process overseen by a federal court. One key distinction is that an issuer’s public pension holders or suppliers owed money are ineligible under PROMESA to reach a collectively negotiated solution, albeit, he notes, they could be affected by the federal court-supervised process in the law’s Title III. Interestingly, the Wizard of Municipal Bankruptcy notes that the new law’s Title VI had its origin in the terms found in foreign sovereign debt: these bonds allow bondholders to vote to change the fundamental bond terms. He added that the new law’s Title III (affecting restructuring) is basically a substitute for Chapter 9 municipal bankruptcy—except, unlike in Detroit, San Bernardino, etc., the new law provides for an oversight board. Mr. Spiotto, however, believes the new law’s Title VI is not just a break from the traditional municipal bankruptcy law, but also the provision which will prove most controversial—in large measure because it could be interpreted to provide for the retroactive modification of existing contractual rights—and do that via a process not under federal court oversight, much less the protections which the federal bankruptcy code provides to dissenting class members, including the requirement that the debtor demonstrate that the various legal standards for confirmation contained in the Bankruptcy Code are met, and with review by the federal district court only to determine if the modification is “manifestly inconsistent” with the act. Mr. Spiotto notes that because PROMESA requires 50 percent of the holders of outstanding par to vote in favor of a modification of terms—in contrast to chapter 9 municipal bankruptcy under which it is, instead, 50 percent of the votes of those who vote, it may prove a greater challenge to agree upon a voted-upon modification.

Governance & An Appealing Outcome? As in Chapter 9, where there were appeals in the Detroit and Stockton municipal bankruptcies, appeals to the 6th and 9th U.S. Circuit Courts of Appeal (never acted upon), the new PROMESA Act similarly permits appeals; the key difference from the Jefferson County, Detroit, and San Bernardino cases is that Puerto Rico’s case, because it will proceed under the new PROMESA statute, is already in the U.S. district court with only the right to appeal decisions to the circuit court. As the Chicago wizard Mr. Spiotto notes, however, under PROMESA, if a federal court becomes involved in a bankruptcy process, the court’s jurisdiction is to be limited to deciding on debt matters, according to Title III, §305, which, he adds, is similar to §904 of Chapter 9: which allows states to retain some sovereignty from the federal government in the bankruptcy process of their municipalities. Under PROMESA, that sovereignty is granted to the oversight board.

Out of Trust? Unlike the federal government, states and local governments have two kinds of budgets—operating and long-term, with the latter critical not just to infrastructure investment, but also to public pensions. But now New Jersey State Senate President Stephen M. Sweeney (D-West Deptford) has acted to prevent a measure from being considered by fellow senators for acting by the deadline for approving a constitutional amendment on the November ballot—a constitutional amendment guaranteeing quarterly state payments to the $71.5 billion New Jersey Pension Fund–a situation which has been complicated by a political battle that had little to do with pension benefits—and which appears to have pitted two critical long-term issues against each other: a nearly empty transportation trust fund and a nearly empty state pension promise. Moreover, the issue has been further complicated by last week’s request by Senate President Sweeney to top federal and state law enforcement officials to investigate what he termed coercion of legislators by leaders of public employee unions seeking voter approval of the proposed plan to require scheduled payments to the state pension system—threats which U.S. Attorney Paul Fishman deemed ones which “clearly cross the line from lobbying to attempted bribery and conspiracy…Essentially, [the New Jersey Education Association] has put members of the New Jersey State Senate in the position of tying specific official action to the receipt of a campaign contribution.” On the surface (not a pun), the amendment’s passage, one which requires a majority of votes in both houses of the Legislature, seemed likely. (The Democratic-controlled Assembly approved the proposal in June.) President Sweeney was the author of the Senate version, and there was sufficient support in the Democratic-controlled Senate. Moreover, Gov. Chris Christie, who bitterly opposed the idea, is prohibited by law from vetoing constitutional amendment legislation. However, what is simple in making legislative spaghetti is never what it seems: here the proposal has become ensnared in a dispute between the Legislature and the governor over financing the State Transportation Trust Fund, whose appropriations expired at the end of last June. So Democratic legislators have sought to raise the state gas tax to replenish the transportation fund; Gov. Christie and GOP legislators wanted tax cuts to offset the higher gas taxes.

Because the Governor can veto spending bills, President Sweeney wished to make sure he had veto-proof margins in both houses for any gas-tax and tax-cut package prior to allowing a vote on the constitutional amendment. However, he was unable to achieve that goal, so the transportation fund financing remains on empty, and the pension proposal is dead for this year—leading the Senate President to note: “With a resolution to the Transportation Trust Fund crisis — and a full accounting of how much future tax cuts will cost — it would have been too easy for opponents to argue that the state could not afford to pass the pension amendment…The pension amendment would have been doomed to defeat, and that would have given carte blanche to current and future governors to slash pension payments.” Nevertheless, because the Assembly has approved the measure, President Sweeney said the Senate could vote on the proposal any time during the current legislative session which ends in January to place the amendment on the November 2017 ballot: “If the proposed amendment was voted down this November, we would have to wait at least three years to put it on the ballot again, according to the New Jersey Constitution.” The public sector unions had pushed for the amendment after Gov. Chris Christie chose not to make the full contributions into the public-employee pension system—notwithstanding the New Jersey Supreme Court’s June decision, which upheld the suspension of cost-of-living adjustments to retiree pension benefits.

What Grade for this Governance or Tickled Pink? Detroit leaders are seeking designs to revive Detroit’s neighborhood main streets—even as they are also hoping to ease bureaucratic blocks which can interfere—asking urban planners, architects, preservationists, and designers to contribute to “Pink Zoning Detroit,” an initiative that sets out to transform the city’s complex land use rules and speed new development in its commercial corridors by reducing red tape. The project, which is being funded by a $75,000 grant through the John S. and James L. Knight Foundation, is to boast three multidisciplinary teams put together visions for walkable, mixed-use activity in three commercial sites in the Motor City; subsequently, the concepts will be tested against Detroit’s zoning ordinance and building code in order to determine what roadblocks exist and to identify strategies for reforms—or, as Maurice Cox, Director of the city’s Planning and Development Department, puts it: “For us, it’s just kind of crazy that the urban life that we want is actually inhibited or stymied by the very rules that are supposed to enable them to happen…We turn this upside down and say: ‘Let’s visualize the reality of this urban life that we want. Let’s look at where our current regulations don’t allow it and let’s just change the rules.’ This process will get us that.” With the process intended to select winners by the end of next month—after which the selectees will have six months in which to engage in research, design, and analysis; pilot “pink zones” could be identified as early as next summer, so that Detroit could test relaxed rules within certain boundaries—a process which could well serve as a model for other cities—and continue to herald post-municipal bankruptcy Detroit as, according to the Wall Street Journal, one of five cities “leading the way in urban innovation.” Some of this stems from Mayor Mike Duggan’s focus on “20-minute neighborhoods,” i.e. ones which allow residents to walk or bike to get everyday necessities.

Stick ‘em Up. In insolvent Opa-locka, Florida, the city’s assistant director of public works—in the wake of a three-year FBI investigation—has been charged in the first federal corruption case brought by prosecutors after a three-year FBI investigation into alleged bribery schemes at the highest levels of the municipal government. Gregory Harris, who resigned this week as assistant director of public works, is accused of conspiring with a city commissioner, city manager, and other employees to extort thousands of dollars in cash payments from Opa-locka business owners seeking occupational licenses, water connections, and other permits. It appears that Mr. Harris is cooperating with the U.S. attorney’s office and the FBI in the growing federal corruption probe: he is expected to plead guilty to a conspiracy; Mr. Harris is also pastor of an Opa-locka church and leads Bible studies. Now he had agreed to help FBI agents with their investigation commenced last March, when authorities led a dramatic raid on the city to seize public records, financial documents, and other evidence. He is accused of conspiring with “Public Official A” and “Public Official B” in the bribery scheme from March 2014 to March 10, 2016, the day of the raid—and, it appears, one of a party of top city officials involved in shaking down business owners who were working undercover for the FBI in a series of backroom bribes recorded on video. The FBI investigation is among the largest corruption probes in South Florida history—and one which appears likely to involve other elected and appointed city officials. According to information filed in federal court, Mr. Harris conspired with Public Official A, Public Official B and other government employees “to unlawfully enrich themselves by using their official positions and authority within the city of Opa-locka to solicit, demand and obtain payments and other things of value from businesses and individuals in exchange for taking official actions to assist and benefit [them].” Public Official A solicited and obtained “illegal payments” from businesses and individuals who were seeking occupational licenses and other permits for their properties in 2014 and 2015. In exchange for cash bribes, Mr. Santiago directed Mr. Harris and other Opa-locka employees to take care of the requests for occupational licenses, water connections, zoning benefits, and code enforcement violations.