Post-Chapter 9 Elections–and Post Physical & Fiscal Storms

November 6, 2017

Good Morning! In today’s Blog, we consider yesterday’s election results in municipalities we have followed through their fiscal stress or chapter 9 municipal bankruptcy, including: Flint, and Detroit, in its first Mayoral election since emerging from chapter 9, Then we turn to the historic municipality of Petersburg, Virginia—a municipality which avoided chapter 9 thanks to state intervention. Finally, we consider U.S. District Court Judge Laura Swain’s approval yesterday of an urgent motion from the government of Puerto Rico and the Fiscal Oversight Board (JSF) that requires all federal funds to be allocated for the tasks of assistance and recovery in the wake of Hurricane Maria, removing said funds from possible use in restructuring the U.S. territory’s restructuring of its public debt.

Visit the project blog: The Municipal Sustainability Project 

In Like Flint. Flint Mayor Karen Weaver yesterday prevailed over City Council member Scott Kincaid in a recall election involving 18 candidates, retaining the city’s proposed 30-year agreement with the Detroit water system, with Mayor Weaver prevailing by a 53-32 percent margin, according to the unofficial results. The recall had arisen from a controversy related to the Genesee County’s garbage contract: Mayor Weaver had pressed for an emergency trash collection contract with the former Rizzo Environmental Services in Macomb County over City Council opposition. The controversy arose because a former trash provider, Chuck Rizzo, and his father have reached plea deals with federal prosecutors and are expected to plead guilty this month for their roles in a wide-ranging public corruption scandal in Macomb County—a scandal which has, so far, led to criminal charges against 17 persons. The recall also came amid Mayor Weaver’s ongoing struggle with the Flint City Council with regard to the approval of a 30-year agreement with the Detroit area Great Lakes Water Authority—with City Council opposition arising from apprehension about increased water rates—and in response to last month’s decision by U.S. District Court Judge David Lawson taking the small city to task for failing to act on an April agreement supported by Mayor Weaver, the State of Michigan, and EPA which would have Flint remain on the Detroit area water system. Flint had been supposed to switch to the regional Karegnondi Water Authority; however, Mayor Weaver’s administration rejected that option, because updating of the Flint water treatment facility had been projected to cost more than $68 million and to consume more than three years to complete. The Flint Council had disregarded Judge Lawson’s decision, and approved a two-year extension of service with the Great Lakes Water Authority. Thus, while the prior agreement with the Detroit area water authority had lapsed, Mayor Weaver, the State of Michigan, the Great Lakes Authority, and other supporters have revived the agreement. Last week, the Michigan Department of Environmental Quality had filed an emergency motion asking Judge Lawson to approve giving Mayor Weaver the authority to sign the renewed contract by Election Day, because of the inability of the City Council to act—a request from the state which the Judge rejected; however, he has scheduled a hearing on the motion later this month.

Motor City Victory Lap. Detroit Mayor Duggan was re-elected yesterday by more than a 2-1 margin over challenger State Sen. Coleman A. Young II, son of a former Detroit Mayor. In remarks after the decision, Mayor Duggan  noted: “I have been treated with nothing but warmth and kindness from Detroiters in every neighborhood in the city…I hope that this is the year where we put us-versus-them politics behind us forever because we believe in a one Detroit for all of us.” His opponent, in conceding, claimed he had commenced a movement to help the politically dispossessed: “The campaign might be over, but the passion and values are eternal…We are the voice for the voiceless. We are the hope for the hopeless.” Mayor Duggan, who won a write-in primary campaign in 2013 and then defeated Wayne County Sheriff Benny Napoleon in the general election, thus became the Motor City’s first mayor to serve two terms since Dennis Archer in the 1990’s.  In his campaign, the former CEO of the Detroit Medical Center gained prominent endorsements from city labor unions, clergy, and business groups—he overwhelmed his opponent in fundraising: he secured about $2.2 million; whereas Mr. Young raised just under $39,000. Mayor Duggan, in his victory remarks, noted his campaign had focused on spending “time talking about the vision of what we are going to do in the next four years,” adding: “I thought one of the most profound things President Obama ever said was ‘If you have to divide people in order to get elected, you’ll never be able to govern.’”

In his campaign, Mayor Duggan touted public service improvements under his administration in the wake of the nation’s largest-ever municipal bankruptcy, including new streetlights, improved public safety response, and more dependable bus lines. He said he intends to continue work on building a more unified Detroit—focusing now on a series of efforts to fix up neighborhood corridors, roads, and sidewalks—and stating: “There are haves and have-nots in every city in America. We’re building a city here that it doesn’t matter where you start, you have the opportunity to be successful,” adding that he believe the greatest challenge now confronting Motor City residents will be over automobile insurance reform legislation—referring to legislation rejected by the Michigan House last week, but making clear he does not intend to give up: “We were a lot closer this time than we were two years ago, and we have a plan to get it through the next time: It’s going to be one relationship at a time, one vote at a time, but we’ve already had several meetings with both the medical and the legal community, and I think they realize we were three votes away.” 

The Road Out of State Oversight. The re-election comes at a critical time, as the City expects to have its full municipal fiscal authority restored next spring for the first time since it exited the nation’s largest ever chapter 9 municipal bankruptcy three years ago—challenging the city’s appointed and elected leaders with the task of resuming governance after the end of state oversight—and as the Mayor and Council resume authority over budgets and contracts. With two balanced budgets and an audit of a third expected next May, city leaders anticipate Detroit will be released early next year from the strict financial controls required under the city’s approved plan of debt adjustment—a key issue during the just completed campaign, where both the Mayor and his challenger had proposed plans with regard to how they would fiscally guide the recovering city—and as Michigan Governor Rick Snyder expressed optimism about the city’s ability to manage its finances, telling the Detroit News: “They’ve been hitting those milestones, and I hope they continue to hit them—that’s a good thing for all of us.”

Indeed, the Motor City’s credit rating has been upgraded; its employment rate is up; assessed property values are climbing. In its financial update last month, the city noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts, and growth in multifamily home construction. Nonetheless, the road to recovery will remain not just steep, but also pot-holed: it confronts very large future payments for past borrowing and public pension obligations under the plan of debt adjustment—or, as our colleague Lisa Washburn of Municipal Market Analytics noted: “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there…Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Petersburg. In one of the most closely watched municipal elections in Virginia, last night, Gloria Person-Brown, the wife of the current embattled City Treasurer Kevin Brown of Petersburg, was trounced by former City Council member Kenneth Pritchett, with Mr. Pritchett winning by a large margin: he captured more than 70 percent of the vote. In his campaign, stating he had been frustrated by the city’s low credit rating, and by the city’s struggles with collecting revenue and timely payment of bills, Mr. Pritchett vowed he would implement policies and standardize internal controls to improve the office’s operations. Likely, in the wake of a Virginia state fiscal report last September—a report which scrutinized eight specific aspects of city governance and fiscal responsibilities—and contained allegations of theft involving Ms. Person-Brown’s husband, City Treasurer Kevin Brown. Some Council members then had called for his resignation, and even Ms. Person-Brown had distanced herself from her husband’s actions during the election, albeit she did not say he had done anything wrong. Rather she ran on a platform of improving the Treasurer’s services, including instituting more checks and balances, and calling for more accountability.

Stepping in to Help Puerto Rico. U.S. District Court Judge Laura Taylor Swain has approved, with various changes, an urgent motion from the government of Puerto Rico and the PROMESA Fiscal Oversight Board which mandates that all federal funds to be allocated to the country for the tasks of assistance and recovery due to the passage of Hurricane Maria may not be claimed in the process of restructuring the public debt, accepting to the request of the Authority for Financial Supervision and Tax Agency and the JSF during the general hearing held in New York City‒in which it emerged that, in part, the order would restrict the use of disaster assistance funds as a condition of the federal government, so that Puerto Rico can receive assistance: the order will establish that the Federal Emergency Management Agency (FEMA) funds for Puerto Rico following in the wake of Hurricane Maria, as well as funds granted by other federal agencies, will be maintained. Judge Swain granted the order after listening to the arguments of Suzanne Uhland, legal representative of AAFAF, as well as lawyers from municipal insurers and the organized group of General Obligations bondholders (GOs), who underscored the need to incorporate into the order transparency criteria and mechanisms to ensure that some entity such as the JSF has influence in how federal funds granted by the government will be used. Matthew J. Troy, the federal government’s representative in the case, told Judge Swain that to include specific language which would give the Puerto Rican government priority in claiming funds that had been misused by state agencies or public corporations in the Island was indispensable for Puerto Rico to receive funds from the federal government: as part of the order, it would be established that, in the event federal funds were misused, it will be up to the central government to claim these funds from the agency or public corporation which received them from the federal government. Judge Swain has scheduled a follow-up hearing for next Wednesday.

During the hearing, an attorney, Marcia Goldstein, pointed out that it is urgent to know what role if any the Junta de Supervisión y Administración Financiera for Puerto Rico (the JSF) will have with regard to the approval of the contracts for the recovery tasks. The PROMESA law establishes, among other things, that the federal agency has the power to review the contracts granted by the Puerto Rican government or the dependencies subject to the control of the JSF. To date, however, it is uncertain whether the JSF has examined or had influence in the process of hiring dozens of companies which would be responsible for multiple tasks, from infrastructure repair to the audit of federal funds. In an interview with the Puerto Rican El Nuevo Día a little over a week ago, House Speaker Paul Ryan (R-Wis.), in the wake of his visit to Puerto Rico, pointed out that the JSF will have a key role in defining the scope of the aid package that Puerto Rico would need and how such resources would be allocated.

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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.

Physical & Fiscal Solvency & the Unremitting Challenges of Water

Good Morning! In this morning’s eBlog, we consider the route to fiscal solvency taken by the small Virginia municipality of Petersburg, the major legal challenges to the physical and fiscal future of Flint; and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road Back to Fiscal Solvency. Forensic auditors earlier this week presented their findings from the audit they conducted into the city of Peters burg’s financial books during a special City Council meeting in the small, historic Virginia City of Petersburg, and answered questions from Council Members. Their key focus was on the “ethical tone” of the city government: they noted they had found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time: The culture led employees to do things they might not otherwise do.” The list of misdeeds included misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. They added that the ethical problems appeared to be more “systemic” rather than individual, testifying, for instance, that they had examined fuel consumption and “[W]e could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.” Because of the city’s limited budget, the scope of the auditor’s (PBMares) work could only go so far. Council Members Darrin Hill and Treska Wilson-Smith both expressed sentiments that the audit did not go far enough; however, former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more money than the nearly insolvent city had. In fact, the city spent approximately $1 million on turnaround services, with the vast bulk of that amount to the Bobb Group to obtain outside help from the firm led by the former Richmond City Manager in its efforts to pull Petersburg back from the brink of insolvency and scrutinize the cash-strapped government’s books. The city devoted nearly $195,000 to a forensic audit by the firm PBMares. Former Mayor and now City Councilman Howard Myers believes Petersburg’s taxpayers have gotten their money’s worth: “They brought us from the depths of indebtedness…I think the resistance then was mainly misinformed about the nature of how things had gotten to the point they were.” But from the abyss of insolvency, city officials now project Petersburg will have $2 million in savings left over from the fiscal year which ended June 30. To get there, the city has deeply reduced pay for emergency workers, cut funding for public schools, and eliminated programs for children in an effort to close a $12 million hole in the city’s budget—even as those efforts still left the Council confronted by some $18.8 million in past-due bills, as well as litigation over the city’s mounting debts—not to mention growing taxpayer pressure to cease to exist, but rather to dissolve its charter and revert to becoming part of one or more counties. Nevertheless, as Mayor Samuel Parham put it: “We had to take a chance: We were at a point where all the banks were laughing at us, saying: ‘We’re not going to pay you a dime; you couldn’t afford to mail an envelope.’”

Today, it seems that gamble has paid off: the contract with Mr. Bobb’s firm ended last month, and, as Mayor Parham stated: “Look, God bless Robert Bobb…We couldn’t get anyone — nobody wanted to come risk their career to save Petersburg. The storm was so massive, it was sinking all of us, but he told us he had dealt with many storms in his 40-year career.” The appointment of Mr. Bobb, however, was a political gambit which drew the opposition of a “good government group,” Clean Sweep Petersburg, which had helped launch an effort to recall Mr. Myers and Mayor Parham. The issue which created the greatest political discord: privatization of the city’s water and sewer authority.  In an interview this week, Mr. Bobb noted that the city’s future fiscal success will depend largely on the City Council’s ability to be accountable to taxpayers through their own decisions and those of the fresh administration hired in a municipal reset. Critical to that success will be firm municipal oversight of cash flow, strong leadership in the finance department, and a newly created revenue collection department designed to wrest responsibility away from the Treasurer’s office, which, according to Mr. Bobb, was not under the Council’s purview: he added the city’s elected leaders “have a tremendous fiduciary responsibility to perform at a high level on behalf of the city’s taxpayers: I think they have a chance, absolutely. They really have to control spending, though, and be careful.” He added that  of the $10 million the firm calculated it had helped save or bring in through a combination of state money it pursued, savings achieved by restructuring debt, the sale of city assets and other actions: “We’ve given the administration and the City Council a reset and an opportunity to build moving forward: “It really is up to the City Council now.”

Out Like Flint. Thousands of Flint, Michigan’s citizens are still grappling with the effects of the city’s state-caused lead-poisoning drinking water crisis, one occasioned by a gubernatorially appointed Emergency Manager, which has, today, confronted the city with many citizens facing possible tax liens and even foreclosure on their homes due to unpaid water bills: more than 8,000 residents have received notices that past-due water bills—categorized as those left unpaid for six months or more—must be resolved to avoid a lien being placed on their property. The bills in question cover two years: they total more than $5 million in delinquent water and sewer charges, according to the city. The ongoing fiscal and physical stress comes amid an involuntary manslaughter trial after  Federal Judge Judith Levy last June ruled that the conduct of government officials was “so egregious as to shock the conscience,” approving a $97 million settlement from the State of Michigan to replace water lines in at least 18,000 households.

Nevertheless, today, the water in Flint remains unsafe to drink without a filter. Unsurprisingly, in the city, where the estimated median household income in 2015 ($25,342) was more than 10 percent lower than in 2000, and where assessed housing (home/condo) values have dropped by nearly 50 percent to a level 75 percent lower than the statewide average, the city is ensnared in a vicious fiscal quandary: the liens threatened by the city, if implemented, represent the first step in making a claim on an individual’s property, setting off a legal process which could ultimately result in families losing their homes—further depressing assessed property values. And that is in a municipality where the city’s residents face some of the highest water bills in the country.  (To bring some relief, Michigan Gov. Rick Snyder last year approved a $30 million plan to reimburse residents for a portion of payments made since April 2014 on water used for drinking, bathing, and cooking.) That state assistance ended early this year, however, so now the city’s leaders are faced with the grim task of condemnation: once water payments are missed on water or sewer accounts for more than six months, the city’s ordinance requires the Treasurer to transfer the lien to a homeowner’s property tax bill—or, as Mayor Karen Weaver puts it: “We must follow the law…I understand the concerns that have been raised, and I am working to see if any changes or something can be done to help those affected by this, especially given the extraordinary circumstances we have endured due to the water crisis.”

But Flint’s fiscal and physical crisis has become a legal entanglement for the State of Michigan, where, in another courtroom, Michigan Gov. Rick Snyder, whose original appointment of a series of state-appointed emergency managers who ran Flint city government from 2011 until mid-2015, making key decisions related to city’s water system (under former Emergency Manager Darnell Earley, the city changed its water source in what was explained as a cost-saving move, switching from pre-treated water from Lake Huron to raw water from the Flint River—and after which the DEQ did not require the city to treat the water to make it less corrosive to lead pipes and plumbing, causing lead to leach into the water supply).

That decision to preempt the city’s local elected officials had led to the fateful decision to switch the city’s water supply to a contaminated system; while state responsibility appears to be a hot potato—with state leaders not saying who initially opposed issuing a  state emergency over the Flint water crisis. During a preliminary examination this Wednesday, in the criminal case against Nick Lyon, Director of the Michigan Department of Health and Human Services, special prosecutor Todd Flood read from a November 2015 email from Richard Baird, a senior advisor to Gov. Snyder, in which Mr. Baird had written “the ‘boss’ wanted to avoid triggering the emergency, which authorizes the Michigan State Police to coordinate relief efforts and requests for assistance from the federal government.” (Former President Obama signed an emergency declaration for Flint days after Gov. Snyder ultimately requested it, clearing the way for federal assistance to replace damaged lead and galvanized water service lines in the city.) Thus, the ongoing criminal trials in which the State of Michigan and City of Flint employees have been charged with criminal wrongdoing related to the water crisis (of which there are a total of 13 pending in Genesee District Court). In the trial, Corinne Miller, the former head of Disease Control for the State of Michigan, testified in a key court hearing Wednesday that the court must determine if Nick Lyon, the then Director of the Michigan Department of Health and Human Services, must face an involuntary manslaughter charge. (Note, Mr. Lyon, has remained on the job while facing charges of involuntary manslaughter and misconduct in office.)

Indeed, the Michigan courtrooms have become filled: attorneys for 21 law firms have filed a consolidated class-action lawsuit against two engineering firms, Flint officials, and Michigan officials, including Gov. Rick Snyder and former state Treasurer Andy Dillon over Flint’s lead-contaminated water—so egregious that last June, Judith Levy ruled that Flint residents have sufficiently argued that the conduct of government officials “was so egregious as to shock the conscience.” The complaint before her had noted that approximately 100,000 Flint residents “have experienced and will continue to experience serious personal injury and property damage caused by defendents’ deliberate, reckless and negligent misconduct…Defendents caused a public health crisis by exposing (Flint residents) to contaminated water” and “exacerbated the crisis by concealing and misrepresenting its scope, failing to take effective remedial action to eliminate it, and then lying about it to cover up their misconduct.”

The lawsuit, filed on behalf of Flint’s 100,000 residents and other users of its water system, says the defendants acted recklessly and did not respect residents’ due process rights argues that the engineering firms and government officials unconstitutionally did not treat the predominantly black residents of Flint the same as the predominantly white residents of great Genesee County. In late July, a three-judge panel of the 6th U.S. Circuit Court of Appeals allowed plaintiffs in one case before Judge Levy to try to seek relief from Gov. Snyder in the form of compensation for education, medical monitoring and evaluation services for ongoing harm from Flint’s lead-contaminated water. In the other case, the appeals judges dismissed the possibility of seeking penalties for Gov. Snyder, the State of Michigan, the Michigan Department of Environmental Quality, and the Michigan Department of Health and Human Services. All three of the judges, however, wrote that the 11th Amendment gives the state and Snyder immunity against damages sought by private citizens.

Undercutting Sovereignty. President Trump set off a broad sale of Puerto Rico’s municipal bonds this week when he said: “You can say goodbye to that,” referring to the U.S. territory’s $73 billion debt as one option to help Puerto Rico recover from Hurricane Maria in an interview on Fox News during his visit to Puerto Rico—a suggestion which OMB Director Mick Mulvaney discounted just hours later, stating the White House does not intend to become involved in Puerto Rico debt restructuring—debt which, in any case, the President has no unilateral authority to forgive. The President had stated: “We’re going to work something out. We have to look at their whole debt structure. They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out…you can wave goodbye to that,” unsurprisingly leading some to understand that the Trump administration would force municipal bondholders to forgive Puerto Rico’s debt. (The price of Puerto Rico’s municipal bonds, already down in the wake of Hurricane Maria, fell another 31 percent—only recovering in the wake of comments by Office of Management and Budget Director Mulvaney, attempting to backtrack, stating: “I wouldn’t take it word for word with that. I talked to the President about this at some length yesterday as we flew home on Air Force One: The primary focus of the federal effort is to make sure the island is safe and that we’re rebuilding the island,” adding that the federal government would not pay off debts or bail out municipal bondholders: “I think what you heard the President say is that Puerto Rico is going to have to figure out a way to solve its debt problem.”

The White House Wednesday asked Congress to approve $29 billion in additional hurricane relief and municipal debt forgiveness, seeking to help Puerto Rico and the U.S. Virgin Islands, as well as shore up the debt-ridden federal flood insurance program which provides flood insurance to homes and small businesses. The latest request seeks $12.8 billion for the Federal Emergency Management Agency, to stay current with the nearly $200 million a day the agency is spending on recovery work; the request also seeks action by Congress to erase some $16 billion in debt that the National Flood Insurance Program owes to the Treasury: under the White House proposal, premiums for flood insurance would rise, at least for homeowners who could afford to pay more, while private insurers would be encouraged to start writing their own flood insurance.

For the devastated U.S. territory, however, the physical and fiscal destruction has only worsened Puerto Rico’s short and long-term fiscal plight—or, as Gov. Rossello noted: “As far as the comment made about wiping the debt clean, that is the opinion of the President,” noting, carefully, he could not comment further because of the ongoing legal proceedings. Fortunately, in Congress, House Natural Resources Committee Chairman Rob Bishop (R-Utah) is putting together a funding package to aid Puerto Rico, and he said members of his committee and other Representatives were meeting to discuss temporary measures to reduce government rules slowing Puerto Rico’s recovery: his group will examine options for ways to make Puerto Rico’s and the U.S. Virgin Island’s electrical systems more resistant to storms, as well as consider how to improve things in both territories in the short-, medium-, and long-term.

Municipal Fiscal & Physical Challenges

September 27, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, physical, and human challenges to Flint, Michigan.

Visit the project blog: The Municipal Sustainability Project 

In or Out Like Flint? The contamination of Flint’s drinking water, created under a state-imposed emergency manager, forced the city, more than 1200 days ago, to temporarily use the Flint River as a source of drinking water—when the then Flint emergency manager determined not to accept the City of Detroit’s Water and Sewerage Department’s request to reconnect the city’s water supply to Lake Huron, Flint’s original source of drinking water. That prompted Gov. Rick Snyder to appoint a state overseer, so that today, there remain a number of people in Flint still living with gross, brown water that is smelly and still lead-contaminated. In the wake of the state-created disaster, there have been lingering fiscal and physical consequences: the fertility rate in Flint has dropped dramatically; infant death rate has been on the rise. Those consequences, in turn, have fiscal implications: they affect assessed property values. EPA granted Flint $100. In the wake of litigation, a federal judge approved a settlement for $98 million—with the funds intended to fix the pipes that have destroyed the lives of families; the seemingly significant fund, however, is only expected to cover the cost of repairing pipes for about a third of Flint’s citizens. Yesterday, U.S. District Judge David Lawson said he was considering a 30-day extension to Flint’s short-term contract with the Great Lakes Water Authority in order to provide the City of Flint more time to approve a long-term drinking water source—and time is becoming shorter: Flint’s contract with the GLWA is set to expire on Sunday; an extension would allow the water supply to continue for an additional 30 days. Attorneys from Flint and the state have been in mediation trying to resolve their differences regarding the future of Flint’s drinking water, after the Michigan Department of Environmental Quality sued Flint last June, arguing the Flint City Council’s refusal to approve a 30-year agreement with the Great Lakes authority was endangering public health in the wake of a lead-contamination crisis that has largely been blamed on the state itself. The agreement is projected to cost Flint $12.1 million a year, and Michigan has argued that Flint has no feasible alternate water source. Judge Lawson said that extending the contract beyond 30 days could result in further fiscal and governance challenges, noting: “It seems to me that inaction is inviting intervention.” He has scheduled another hearing this afternoon where he wishes to discuss the option of a 30-day extension. The suit here seeks to have the court “declare the City Council’s inaction will result in a violation of applicable” state and federal Safe Drinking Water laws and compel elected officials to enter into the Great Lakes Authority agreement which Flint Mayor Karen Weaver negotiated.

The Sinking Ships of States?

September 15, 2017

Good Morning! In this a.m.’s Blog, we consider the ongoing recovery in Detroit from the nation’s largest ever municipal bankruptcy, the unrelenting fiscal challenges for Flint; who voters in the fiscally insolvent municipality of East Cleveland will elect, the steep fiscal erosion for Pennsylvania’s local governments, and the uncertain fiscal outlook for Hartford.

Visit the project blog: The Municipal Sustainability Project 

The Steep Road to Chapter 9 Recovery. Poverty declined and incomes rose last year in the Motor City, marking the first significant income increase recorded by the U.S. Census Bureau since the 2000 census, with Detroiters’ median household income up last year by 7.5% to $28,099 in 2016, according to U.S. Census’ American Community Survey estimates; ergo poverty dropped 4 percentage points to 35.7%‒the lowest level in nearly a decade—perhaps offering a boost to Mayor Mike Duggan’s reelection hopes in November.  Despite the gains, however, Detroit is still the city with the greatest level of poverty in the country—and a city where racial income disparities continue to fester: income data indicates that the incomes of Hispanic and white Detroit residents grew significantly compared to blacks, who make up 79 percent of the city, according to Kurt Metzger, a demographer and director emeritus of Data Driven Detroit, or, as Mr. Metzger writes: “Overall it’s a great story for Detroit…But when you look beneath the surface, we still have a lot of issues. There is a constant narrative out there: Are all boats rising together?” Mayor and candidate for re-election Mike Duggan has made clear he understands there is more work to do: noting that forty-four people graduated last month from the Detroit At Work job training program, which launched last February and from which half have already received job offers, the Mayor told the Detroit News: “Income goes up when one, there is a job opportunity and two, when you have the skills to take advantage of it: As we raise the skills of our residents we will raise the standard of living.” Nevertheless, he added: “Nobody is celebrating a (35.7) percent poverty rate, but the progress is important and it took us years to get here.”

If one looks farther ahead, there might be even more hope: the new data found that fewer of Detroit’s children are living in poverty: the under 18 poverty rate has declined about 14 percent to its lowest level since 2009—albeit still over 50 percent, with the decline attributed to higher numbers of jobs, and, ergo, greater incomes, with Xuan Liu, the manager of research and data analysis for the Southeast Michigan Council of Governments noting that with more residents of the city working (the unemployment rate dropped nearly 25% from 20.6% to its lowest level (16.5%) since 2009), or, as Mr. Liu noted: “Eight years after Great Recession, (census) data is finally show some significant economic benefits for more Detroiters.”

Notwithstanding that good news, it has not been city-wide, but rather concentrated: the city’s 2016 median income remains 14.6% lower today than what residents were earning a decade ago: just $32,886 adjusted for inflation, and while the new census figures show some economic improvements in Detroit, a recent Urban Institute report finds the recovery is not even through the city, noting that tax subsidies and investments are disproportionately favoring downtown and Midtown, with the bulk of the recovery along Detroit River, the Central Businesses District and Lower Woodward Corridor—or, as Mr. Metzger noted, the Motor City still faces a challenge if all of its citizens and families are to participate in the recovery: he notes the 2016 income data shows the gains were realized by Hispanic and white residents, but not for blacks, or as he described it: “The people who are ready and able to take advantage of the turnaround are doing it but those who aren’t, haven’t.” Detroit’s Workforce Development Board has set an employment goal of an additional 40,000 residents to find jobs in the next five years.

Not in like Flint. Unlike Detroit, Flint realized no change in poverty or income: the city so fiscally and physically mismanaged by the State of Michigan via its appointment of a gubernatorial Emergency Manager remains the poorest city in the nation amongst all cities with populations over 65,000: the city’s poverty rate last year was 44.5%; median household income was $25,896—less than half Macomb County’s median household income of $60,143.

Vote! Brandon King is a step closer to remaining Mayor of East Cleveland. Mr. King won the Democratic primary in East Cleveland, with 44.3% of the 1,760 citizens who voted, so that he has narrowed the field: he will continue to defend his seat in November against activist Devin Branch, who is running as a Green Party candidate, after beating out three other candidates for the nomination: former Councilman Mansell Baker, school board President Una Keenon, and community leader Dana Hawkins Jr. Ms. Keenon was the runner-up with 30.3 percent of the vote: she previously served as East Cleveland’s judge. The incumbent, who became Mayor last December after a contentious recall election ousted former Mayor Gary Norton Jr. and Council President Thomas Wheeler, leading to two vacancies on City Council, which council members Barbara Thomas and Nathaniel Martin filled with Mr. Branch and Kelvin Earby—appointees Mr. King decided to be “unlawful,” claiming there were insufficient elected leaders to choose the members, so that he usurped that authority and then appointed his own: Christopher Pitts and Ernest Smith. Unsurprisingly, a lawsuit regarding the appointments is now before the Ohio Supreme Court, even as the city’s petition for chapter 9 remains before the State of Ohio. November will bring elector contests in Ward 3 and for two at-large seats. Notwithstanding that the small municipality of 18,000 is in a state of fiscal emergency, Mayor King has pivoted away from former Mayor Norton’s strategy of trying to merge the city with Cleveland or declare the city in chapter 9 bankruptcy: instead he and the rest of the Democratic candidates want to focus on economic development.

Keystone Municipal Fiscal Erosion. The Pennsylvania Economy League reports that fiscal decay has accelerated in all sizes of municipalities throughout the in its new report: “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” a report which examines 2,388 of the state’s 2,561 municipalities where consistent data existed from 1970, 1990, and 2014, considering, as variables, the available tax base per household, as well as the tax burden, a percentage of the tax base taken in the form of taxes to support local government services‒after which the municipalities were then divided into five quintiles, from  the wealthiest and most fiscally healthy to the most distressed—with Philadelphia and Pittsburgh excluded due to their size and tax structure. The League found that the tax burden has grown on average for all municipalities since 1990, but that the tax base has fallen, on average, in the state’s municipalities since 1970. In addition, the study determined that municipalities in Pennsylvania’s Act 47 distressed municipality program generally performed worse than average despite state assistance.

The study also found that communities which finance their own local police force, as opposed to those which rely solely on Pennsylvania State Police coverage, had double the municipal tax burden and ranked lower. (Readers can find the report in its entirety on the Pennsylvania Economy League’s website.) The League’s President, Chairman Greg Nowak, noted: “The first part of understanding and doing something about a crisis is understanding what it is,” adding that clearly the League believes the state’s local governments are in a fiscal crisis, comparing the new report to one the League released in 2006, which had warned of oncoming fiscal distress—a report, he noted, which had not galvanized either the state or its municipalities to take action. Gerald Cross, the Executive Director for Pennsylvania Economy League Central, said the study also found that tax bases in cities largely remained stagnant even as the local tax burden increased from 1990 to 2014, noting that all the state’s cities were in bottom-quintile rankings in 2014—and that while tax base generally grew in boroughs and first-class townships, the tax burden there also grew from 1990 to 2014; he added that the trend for second-class townships was mixed: while the tax base increased and more second-class townships moved into healthier quintiles, the tax burden also climbed from 1990 to 2014. Or, as Kevin Murphy, the President of the Berks County Community Foundation, put it: “Pennsylvania’s system of local governments is broken and is harming the people living in our communities: It’s a system that was created here in Harrisburg [the state capitol], and it is Harrisburg which needs to fix it.” Pennsylvania has 4,897 local governments, including 1,756 special districts, cities, towns, and first, second, and third class townships.

The Sinking Ship of State? Notwithstanding Gov. Dannel Malloy’s warning before dawn this morning that “The urgency of the present moment cannot be overstated,” the state’s legislators went home in the wake of failing to approve a two-year, $41 billion budget which would have created an array of new taxes and fees, but avoided any increase in the sales or income tax. Thus, in the wake of all-day fiscal marathon, Republicans sent their members home in a chaotic ending, blaming the inability of the other side had failed to marshal the requisite votes: House Speaker Joe Aresimowicz, after the Connecticut Senate had earlier given final legislative approval to a package of concessions expected to cover $1.5 billion of the estimated $5 billion state budget deficit through June of 2019, noted that still to be completed, however, is work on the rest of the budget, with the focus on financial aid to cities and towns (the biggest chunk of spending): he add ed that the detailed legal language in the budget, which had been delayed all day long, would not be ready until at least 6 a.m. this morning—with the Senate scheduled to convene at high noon. Notwithstanding the fiscal chaos, Senate Pro Tem leader Martin Looney (New Haven) said the Senate would convene at high noon today to vote on the budget, noting: “The problem is it’s not fully drafted… and what we agreed upon with the governor had not been fully reduced to language that everyone had signed off on: We didn’t have a hold-up in the Senate. We were ready to go forward,’’ raising the possibility that the House could vote later today.

Unsurprisingly, the sticking point appears to be taxes: A big problem appears to have stemmed from a proposal to tax vacation homes—a proposal which encountered opposition among Democrats, because non-residents cannot be taxed differently than residents of Connecticut. Negotiators had been relying on the tax to generate $32 million per year, fiscal resources which would not be available without support from moderate Democrats. The Democratic plan would add new taxes on cellphone bills and vacation homes, along with higher tax rates on hospitals, cigarettes, smokeless tobacco, and hotel rooms—and in an overnight development, a $12 surcharge on all homeowners’ insurance policies statewide for the next five years was proposed in order to help residents with crumbling concrete foundations. (Connecticut homeowners have been grappling for years with problems, and government officials have been unable to reach a comprehensive solution—mayhap Harvey and Irma have sent a physical fiscal message: more than 500 homeowners in 23 towns have filed complaints with the state; however Gov. Malloy fears that more than 30,000 homes could be at risk. The emerging fiscal compromise would also add new taxes on: ride-sharing services, non-prescription drugs, and companies that run fantasy sports gambling. In addition, the package includes more than $40 million as a set aside as part of a multi-pronged effort to help Hartford avert chapter 9 municipal bankruptcy—as well as increased funding for municipalities, even as it avoids deep cuts in public education which had been promised by Gov. Malloy via an executive order to trigger effective October 1st, warning: “The urgency of the present moment cannot be overstated: Local governments, community providers, parents, teachers and students—all of them are best served by passing a budget, and passing it now.”

The fiscal roilings came in the wake of Moody’s statement earlier in the week that Hartford’s “precarious liquidity position could result in insufficient cash flow to meet upcoming debt obligations…Additionally, the city has debt service payments in every month of the fiscal year, compounding the possibility of default at any time.” Interestingly, Gov. Malloy, earlier this week, noted that municipal bondholders and unions hold the key to whether Hartford would file for chapter 9 bankruptcy: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues…on the other hand, if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided.”

The Difficult Interplay of State & Local Physical & Fiscal Challenges, especially those that can threaten lives, health, and public safety.

07/26/17

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Good Morning! In today’s iBlog, we consider the fiscal and physical challenges confronting the City of Flint, Michigan as it seeks to settle on a permanent drinking water source.

Out Like Flint. Michigan Attorney General Bill Schuette has provided an update on his criminal investigation of the Flint drinking water crisis—a crisis which evolved from the state’s appointment of an emergency manager in place of the city’s elected leaders, and which has, since, led to steadily higher in the ranks of the state government, with the update coming as the Michigan Department of Environmental Quality has sued the City of Flint over claims the City Council has been foot-dragging in approving a switch to the Great Lakes Water Authority (GLWA) to provide its long-term drinking water. Mr. Schuette was joined by Genesee County Prosecutor David Leyton, his special counsel Todd Flood, and his chief criminal investigator Andrew Arena—with, to date, some baker’s dozen current or former Michigan or City of Flint officials charged, including two gubernatorially-appointed emergency managers who were reported to the State Treasurer. The suit alleges “the City Council’s failure to act will cause an imminent and substantial endangerment to public health in Flint.”

Michigan Department of Environmental Quality officials have acknowledged a mistake in failing to require corrosion-control chemicals to be added to the water—a mistake costly to health care, the city’s fisc, and trust in government, in the wake of lead leaching from pipes, joints, and fixtures into Flint homes and drinking water—leaving a situation today where residents are still advised not to drink tap water without a filter: five current or former state employees charged previously are from the Michigan Department of Environmental Quality and three from the Department of Health and Human Services, in the wake of outbreaks of Legionnaires’ disease after the state-ordered water switch—a switch which health investigators have since tied to 12 deaths.

Even though state and federal health officials have yet to definitively link the water switch to the disease, Michigan Attorney General Scheutte and his investigators have come close to doing so in public statements and documents related to the criminal charges. Last September, he warned Michigan Health and Human Services Director Nick Lyon he was a focus of the investigation, although, since, there has been no additional notification. But there are difficult fiscal, as well as physical and intergovernmental issues. Richard Baird, a senior advisor to Gov. Rick Snyder, at a meeting with the Flint Water Interagency Coordinating Committee, last Friday noted: “Given that the City of Flint is paying for two water sources and does not have a favorable long-term contract with the Great Lakes Water Authority (GLWA), the lack of action is costing the city an extra $600,000 each month: The city has projected that it will deplete its water and sewer fund reserves by the 4th quarter of 2018, which will necessitate a significant rate increase for residents and business if the matter is not resolved.”

Such an increase would be hard on the city’s citizens: per capita income for Flint was $23,593 in 2015—nearly 20% below the statewide average. Thus, it is most unsurprising that Mayor Karen Weaver, last April, recommended, with the support of Genesee County, GLWA, and state officials that the city extend its contract with GLWA for 30-years: such a contract would result in about $9 million in savings, because it would lock in a more favorable rate with GLWA and address the $7 million in debt service payments Flint is currently obligated to pay—with Mayor Weaver noting the decision ensured water quality for the city that is still recovering from a water contamination crisis that stemmed from the decision of its previous state-appointed emergency managers to shift water sources and participate in the KWA project. Under her proposed plan, Flint would recoup roughly $7 million in annual debt service by transferring its KWA water rights to the GLWA. (The city was preparing to shift to KWA supplied, untreated water in 2019, with plans to make much-needed upgrades to its treatment plant to comply with federal EPA drinking water standards; however, last April, the Mayor dropped the plan to make the switch to the bond-financed pipeline and recommended the city continue to purchase water from GLWA—claiming the GLWA supplied and treated water is more affordable and would save the city the fiscal and physical risk of still another supply shift: the switch is projected to result in a $2.4 million savings, because GLWA would impose a better rate than is currently available under the current short-term contract with the city.)

The City Council, last Wednesday, voted to postpone the vote on the water plan for another 30 days, after, last month, voting to extend Flint’s contract with GLWA to September in an effort to provide more time to examine and weigh the costs and benefits of the longer term water contract—a delay which Mayor Weaver described as triggering the need to petition the federal court to determine the contours of the legal authority for the city and state to properly execute the requisite agreements to secure a long-term water source “on behalf of the people of Flint.” The state complaint, filed in the U.S. District Court, seeks a declaration that the Flint City Council’s failure to act is a violation of the federal Safe Drinking Water Act and an order that Flint must enter into the long-term agreement with GLWA.

Flint City Councilman Eric Mays believes the federal court should give the City Council 30 days in which to call state officials to testify about the deal and allow the City Council to tweak it, stating he wants to amend the agreement to ensure Flint does not lose its investment in the Karegnondi Water Authority—a new pipeline to Lake Huron which was instrumental in Flint switching away from Detroit water while under the control of a state-appointed emergency manager. However, Michigan Department of Environmental Quality Director Heidi Grether had given the City Council a deadline to approve the agreement last month, writing: “The City is currently paying $14.1 million per year to obtain water from the GLWA through a 72-inch line that was previously transferred to Genesee County…Due to its decision to transfer the line, Flint will lose use of the 72-inch line on Oct. 1, 2017, absent approval of the Mayor’s recommendation: No other alternate pipeline currently exists to supply GLWA water to Flint.”

At the end of last week, ergo, Mr. Baird told Flint and Genesee County officials that the City Council’s indecision on a long-term water source was not only costing more than a half million dollars each month, but also risking “significant” water rate increases next year if something were not done soon, adding that the city’s stalling on selecting a long-term water source was imposing an extra $600,000 each month, because the city is currently purchasing water from two water sources—the Great Lakes Water Authority, from which it currently gets its treated water, and the Karegnondi Water Authority, from which it contractually would take water by 2019 to 2020. His remarks were given as part of an update on a federal lawsuit the Michigan Department of Environmental Quality filed late last month against the Flint City Council—a suit in which the state alleges the elected council members have endangered the public health by failing to approve a long-term drinking water source. He added that if the Flint City Council continues to delay its vote on the 30-year contract offer, the city’s water and sewer fund reserves are expected to be tapped out by the end of 2018—an outcome which, he warned, would “necessitate a significant rate increase for residents and businesses if this is not resolved.”

Mayor Weaver has recommended the Council approve the 30-year contract with the Detroit area Great Lakes authority, in part to ensure the cleanest water at the most inexpensive price. (The city already pays some of the nation’s highest water rates: approximately $53.84 per month on the water portion of residents’ monthly bill, according to a report from Raftelis Financial Consultants of Missouri). A 2016 report from Food and Water Watch, which surveyed the nation’s 500 biggest water systems, found that Flint residents paid almost double the national average for water and the highest rates in the country despite the city’s water being undrinkable without a filter.

Disparate Fiscal Solvency Challenges

06/23/17

Good Morning! In this a.m.’s eBlog, we consider the serious municipal fiscal challenges in Ohio, where the decline in coal-fired power has led Adams County auditor David Gifford to warn that if its existing power plants close, the county could be forced to raise its property tax rates at least 500% in order to make its requisite school district bond interest payments. Then we turn to the steep fiscal trials and tribulations of implementing San Bernardino’s post-chapter 9 exit, before finally considering the governing challenges affecting the City of Flint’s physical and fiscal future, and then to the criminal charges related to Flint’s fiscal and moral insolvency. Finally, we turn to the potential for a new fiscal chapter for the nearly insolvent Virginia municipality of Petersburg.

Fiscal Municipal Distress in Coal Country. While President Trump has stressed his commitment to try to protect the U.S. coal industry, less attention has been focused on the municipal fiscal challenges for local elected leaders. For instance, in Adams County, Ohio, where the median income for a household is about $33,000, and where approximately 20% of families fall below the federal poverty line, the county, with a population near 22,000, has been in fiscal emergency for more than two years—making it one of 23 such jurisdictions in the state.  But now its auditor, David Gifford, warns that if its coal-fired power plants close, the county could be forced to raise the property tax by at least 500% in order to make the bond payments on its public school districts debt. (In Ohio, when so designated, the average time a municipality spends in fiscal emergency averages about five years.) Since 1980, when the state auditor was empowered to place municipalities in fiscal emergency, Ohio has declared and released 54 communities—with time spent in fiscal emergency averaging five years, albeit the Village of Manchester in Adams County (approximately 2,000 residents) holds the record for time spent in fiscal emergency — nearly 20 years and still counting. Over the past five years, some 350 coal-fired generating units have closed across the country, according to the Energy Information Administration: closures, which have cost not just jobs, but key tax revenues vital to municipal solvency. It is uncertain whether any actions by the White House could make coal viable as a source of energy generation; it is clear that neither the Trump Administration, nor the State of Ohio appear to have put together fiscal options to address the resulting fiscal challenges. Ohio Municipal League Director Kent Scarrett, in testimony before the Ohio Legislature last February, on behalf of the League’s 733 municipal members, in which close to 90% of Ohio’s citizens live, reminded legislators that “a lack of opportunity to invest in critical infrastructure projects” and “the myriad of challenges that present themselves as a result of the escalating opioid epidemic,” would require “reigniting the relationship between the state and municipalities.” 

Post Municipal Bankruptcy Challenges. San Bernardino Mayor Carey Davis this Wednesday declared the city’s municipal bankruptcy process officially over, noting San Bernardino had come “to the momentous exit from that process,” a five-year process which resulted in the outsourcing of its fire department to San Bernardino County, contracting out waste removal services, and reductions in healthcare benefits for retirees and current employees to lessen the impact on pensions. Mayor Davis noted: “The proceedings guided us through a process of rebuilding and restructuring, and we will continue to rebuild and create systems for successful municipal operations,” as the City Council confronted by what City Manager Mark Scott warned was “without a doubt among the lowest in per capita revenues per capita and in city employees per capita,” yet still confronted by what he described as:  “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Nevertheless, the Council adopted its first post-chapter 9 budget—a budget which is projected to achieve a surplus of $108,000, sufficient to achieve a 15% reserve. To give a perspective on the fiscal challenge, Mr. Scott warned the Mayor and City Council: “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Adding that San Bernardino’s property values and business spending are lower than other cities, contributing to its low revenue, he added: “At the same time, it costs roughly the same to repair a street in Rancho Cucamonga as in San Bernardino: California’s tax system rewards wealth.”

Nevertheless, even though San Bernardino’s plan of debt adjustment calls for minimal revenue growth over the next two decades, he advised that the plan is focused on making the city more attractive. Ergo, he proposed three criteria: 1) urgent safety concerns, including the relocation of City Hall to address unreinforced masonry concerns; 2) restoration of public safety, 30 new police officers, vehicle and safety equipment replacement, radio maintenance, and a violence intervention initiative; 3) greater efficiencies, via information technology upgrades, and economic development and revenue growth—to be met by hiring a transportation planner, associate planner, grant-writing, and consulting. In addition to the operating budget, the manager also focused on the city’s capital budget, proposing significant investment for the next two to three years. Some of these increased costs would be offset by reducing the city’s full-time city employees by about 4%. Nevertheless, the Manager noted: “The community’s momentum is clearly increasing, and we are building internal capacity to address our management challenges…We look forward to the next year and to our collective role in returning this city to a more prosperous condition.”

Under its plan of debt adjustment, San Bernardino began making distributions to creditors this month: Mayor Carey Davis noted: “From the beginning, we understood the time, hard work, sacrifice and commitment it would take for the city to emerge from the bankruptcy process,” in asking the Council to adopt the proposed $160 million operating budget and a $22.6 million capital budget.

Moody Blues. The fiscal challenge of recovering from municipal bankruptcy for the city was highlighted last April when Moody’s Investors Service analysts had warned that the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Meredith Jury would “lead to a general fund unallocated cash balance of approximately $9.5 million by fiscal 2023, down from a $360 million deficit the city projected in 2013 for the fiscal years 2013-23,” adding, however, that the city still faces hurdles with pensions, public safety, and infrastructure. Noting that San Bernardino’s plan of debt adjustment provided more generous treatment of its pension obligations than its municipal bondholders—some of its unsecured creditors will receive as little as 1% of what they are owed—and the city’s pension obligation bondholders will take the most severe cuts—about 60%–or, as Moody’s moodily noted: “The [court-approved] plan calls for San Bernardino to leave bankruptcy with increased revenues and an improved balance sheet, but the city will retain significant unfunded and rapidly rising pension obligations…Additionally, it will face operational challenges associated with deferred maintenance and potential service shortfalls…which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.”

The glum report added that San Bernardino’s finances put its aging infrastructure at risk, noting the deferral of some $180 million in street repairs and $130 million in deferred facility repairs and improvements, and that the city had failed to inspect 80 percent of its sewer system, adding: “Cities typically rely on financing large capital needs with debt, but this option may no longer exist for San Bernardino…Even if San Bernardino is able to stabilize its finances, the city will still face a material infrastructure challenge.”  Moody’s report added: “Adjusted net pension liability will remain unchanged at $904 million, a figure that dwarfs the projected bankruptcy savings of approximately $350 million.”

Justice for Flint? Michigan Attorney General Bill Schuette has charged Michigan Health and Human Services Director Nick Lyon with involuntary manslaughter and misconduct in office, making the Director the fifth state official, including a former Flint emergency manager and a member of Gov. Rick Snyder’s administration, to be confronted with involuntary manslaughter charges for their alleged roles in the Flint water contamination crisis and ensuing Legionnaire’s disease outbreak which has, to date, claimed 12 lives, noting: “This is about people’s lives and families and kids, and it’s about demonstrating to people across the state—it doesn’t matter who you are, young, old, rich, poor, black, white, north, south, east, west. There is one system of justice, and the rules apply to everybody, whether you’re a big shot or no shot at all.” To date, 12 people have died in the wake of the switch by a state-appointed Emergency Manager of the city’s drinking water supply to the Flint River—a switch which led to an outbreak of Legionnaires’ disease that resulted in those deaths. Flint Mayor Karen Weaver, in response, noted: “We wanted to know who knew what and when they knew it, and we wanted someone to be held accountable. It’s another step toward justice for the people Flint,” adding that: “What happened in Flint was serious: Not only did we have people impacted by lead poisoning, but we had people who died.”

In making his charges, Attorney General Schuette declined to say whether he had subpoenaed Governor Rick Snyder—with the charges coming some 622 days after Gov. Snyder had acknowledged that Flint’s drinking water was tainted with lead—and that the state was liable for the worst water tragedy in Michigan’s history—a tragedy due, in no small part, from the state appointment of an emergency manager to displace the city’s own elected leaders.

The state Attorney General has charged HHS Director Lyon in relation to the individual death of Robert Skidmore, who died Dec. 13, 2015, “as a result of [Mr.] Lyon’s failure to warn the public of the Legionnaires’ outbreak; the court has also received testimony that the Director “participated in obstructing” an independent research team from Wayne State University which was investigating the presence of Legionella bacteria in Flint’s water. In addition, four defendants who have been previously charged, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality drinking water Director Liane Shekter-Smith, DEQ drinking water official Stephen Busch, and former City of Flint Water Department manager Howard Croft, each now face additional charges of involuntary manslaughter in Mr. Skidmore’s death—bringing, to date, 15 current or former Michigan or Flint city officials to have been charged.

Attorney General Scheutte, at a press conference, noted: “Involuntary manslaughter is a very serious crime and a very serious charge and holds significant gravity and weight for all involved.” He was joined by Genesee County Prosecutor David Leyton, Flint Water Investigation Special Prosecutor Todd Flood, and Chief Investigator Andrew Arena. (In Michigan, involuntary manslaughter is punishable by up to 15 years in prison and/or a $7,500 fine.) The announcement brings to 51 the number of charges leveled against 15 current and former local and state leaders as a result of the probe during which 180 witnesses have been interviewed—and in the wake of the release this week of an 18-page interim investigation report, which notes: “The Flint Water Crisis caused children to be exposed to lead poisoning, witnessed an outbreak of Legionnaires’ disease resulting in multiple deaths, and created a lack of trust and confidence in the effectiveness of government to solve problems.”

A New City Leader to Take on Near Insolvency. Petersburg, Virginia has hired a new City Manager, Aretha Ferrell-Benavides, just days after consultants charged with the fiscal challenge of extricating the city from the brink of municipal bankruptcy advised the Mayor and Council the municipality needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies: increased taxes, they warned, would not do the trick; rather, in the wake of a decade of imbalanced budgets that drained the city’s rainy day funds, triggered pay cuts, disrupted the regional public utility, and forced steep cuts in public school funding, the city needed a new manager. Indeed, on her first day, Ms. Ferrell-Benavides said: “To have the opportunity to come in and make a difference in a community like this, it’s worth its weight in gold.” The gold might be heavy: her predecessor, William E. Johnson III, was fired last year as the city fiscally foundered—leading Mayor Sam Parham to note: “We’re looking forward to a new beginning, better times for the city of Petersburg.”

Manager Ferrell-Benavides won out in a field of four aspirants, with Mayor Parham noting: “She was definitely head and shoulders above the other candidates…She had clear, precise answers and a 90-day plan of action,” albeit that plan has yet to be shared until after she meets with department heads and residents in order to get a better understanding of the city’s needs. Nevertheless, City Councilman Charles Cuthbert noted: “Her energy and her warm personality and her expressions of commitment to help Petersburg solve its problems stood out…My sense is that she truly views these problems as an opportunity.” In what will mark a fiscal clean slate, Manager Ferrell-Benavides will officially begin on July 10th, alongside a new city Finance Director Blake Rane, and Police Chief Kenneth Miller, who is coming to Petersburg from the Virginia Beach Police Department. She brings considerable governmental experience, including more than 25 years of work in government for the State of Maryland, the Chicago Public Housing Authority, the City of Sunnyvale, Calif.; and Los Alamos, New Mexico—in addition to multiple jobs with the District of Columbia.