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.

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Human, Physical, & Fiscal Storms

October 3, 2017

Good Morning! In today’s Blog, we consider Connecticut and its capital city’s fiscal road—including the assessment of municipal bankruptcy for Hartford, and then, with the President set to visit today, the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road to Municipal Bankruptcy. Connecticut Comptroller Kevin Lembo yesterday said the state, still lacking an FY2018 budget, remains on track to end the year with a deficit of $93.9 million under the provisions of an executive order by the Governor, even as Hartford City Council members yesterday received a legal report about the city’s bleak fiscal situation from advisers hired to explore chapter 9 municipal bankruptcy as one way to restructure Hartford’s fiscal future. An attorney from Greenberg Traurig, the firm hired by Hartford to assess the viability of Chapter 9 bankruptcy protection, and a representative from financial advisory group Rothschild & Co., stressed that even if Hartford were to file for bankruptcy, the city would remain under the leadership and control of elected officials. Greenberg Traurig attorney Maria DiConza advised: “When a municipality files for bankruptcy, a judge, a court, does not take over and run the city: The city continues to run itself during the court-supervised process.” She added that filing for Chapter 9 protection would allow the city to restructure debt and re-open contractual arrangements: “It’s not a process where the court is taking over operations of the city. And that’s something that’s really important to understand.” Moreover, Todd Snyder, a restructuring specialist with Rothschild & Co., stressed that Hartford’s elected leaders would not be superseded by the orders of a federal bankruptcy court, should city leaders opt to take Hartford’s affairs there: “I want to be very, very clear—a federal judge is not going to come in here and say, ‘Oh, you’re overspending in this area, and you should change the way you govern the city of Hartford…That’s not going to happen.”

In response, Councilmember Larry Deutsch asked what would happen if the city “stiffed the bondholders” of a looming $27 million bond payment at the end of this month—in response to which, Mr. Snyder replied that opting not to make that municipal bond payment would be “tantamount to making the decision that you are going to file for bankruptcy.” Ms. DiConza advised that the city’s municipal bondholders could not repossess city property to cover missed payments, but they could take Hartford to court and try to force the city to raise taxes to cover its debts.

Councilwoman Wildaliz Bermudez questioned whether the two attorneys were doing enough to divert the city from bankruptcy “at all costs,” having previously deemed Mayor Luke Bronin’s consideration of municipal bankruptcy “undemocratic.” To that, Ms. DiConza said: “The city is trying to avoid bankruptcy—‘at all costs’ is really a question for you,” referring to the Council: “What is the cost of the city avoiding bankruptcy? Is the cost that people are going with trash all over their lawn, because there’s no trash service? Is the cost that crime is going to go up, because there’s no payments to the police force? Is the cost that taxes go up? That’s the question the city has to decide. What are the costs of avoiding Chapter 9?” Mr. Snyder added that whether or not Hartford files for municipal bankruptcy, the city still needs to address longstanding structural issues with the city’s finances that see it posting deficits and increasing debt year after year: “There’s a need to address all the constituencies about making contributions to this solution: We live in a beautiful city, and people have valuable property. I would think that restructuring our obligations and entering into a new partnership with the state would enhance everybody’s life in the city.”

In a letter to Gov. Dannel P. Malloy, Mr. Lembo said the administration’s spending reduction authority under his executive order should allow him to meet current state savings targets, adding, however, that state spending trends so far, some 7.2 percent higher than the same period last fiscal year, demonstrate that fixed costs (including debt, state employee and teachers retirement and retiree health care) continue to rise, while discretionary spending is forcibly decreasing, writing: “The state’s municipalities, nonprofits and Connecticut residents, including the most vulnerable, depend on discretionary program spending for critical services and to enhance the quality of life…Vital programs that have faced significant cuts include Grants for Substance Abuse Services; Mental Health Service Grants; the Connecticut Home Care Program, Aid to the Disabled; Employment Opportunities; and the Early Care and Education program. He added: “The state’s capacity to meet its spending obligations is impaired by the inability to enact a budget that provides for policy changes that increase revenue. This problem is exacerbated each month as potential sources of additional revenue are foregone due to the absence of necessary changes to the revenue structure,” warning that as the “state enters the second quarter of the fiscal year, even a potential agreement to increase in the hospital tax remains in doubt, even though it would result in higher federal reimbursements. Moreover, ongoing budget uncertainty will slow Connecticut’s economic growth and could ultimately lead to the state and its municipalities receiving downgrades in credit ratings that will cost taxpayers even more…These results do not indicate Connecticut can grow its way out of the current revenue stagnation, especially in light of the state missing it revenue targets in the last two fiscal years.”

Adding to the downbeat state fiscal plight, he reported that preliminary state Department of Labor (DOL) data for August 2017 show that Connecticut lost 3,900 jobs during the month of August to a level of 1,687,200 seasonally adjusted, adding that July’s original preliminary job loss of 600 had been revised down by the Bureau of Labor Statistics to a loss of 1,100. Over the past 12-month period ending in August, the state has posted 6,000 new payroll jobs. During the last period of economic recovery, employment growth averaged over 16,000 annually. 

Physical & Fiscal Mayhem. Some two weeks after Hurricane Maria devastated Puerto Rico, creating a humanitarian crisis, President Trump arrives today to see first-hand the damage, becoming the first President of the United States to make an official visit in the wake of a crisis. The President will meet with Gov. Rosselló Nevares and San Juan Mayor Carmen Yulín Cruz—who had alerted the media about the signal seeming disparities in responding to the human, physical, and fiscal crisis compared to Houston and Florida.

As President Trump visits Puerto Rico today, nearly two weeks after the destruction and havoc created by Hurricane Maria, officials report only 5% of the island has electricity and its schools are not close to reopening. Puerto Rico Secretary of Education Julia Kelleher told CNN on Sunday that some public schools might not resume classes until mid-month because of storm damage, though decisions will be made on a regional basis. The U.S. territory has 1,113 public schools and a student population of 350,000; however, only a small fraction (400) have been assessed for damage; thus, school districts from Florida to Massachusetts are anticipating an influx of Puerto Rican students displaced by the hurricane, so a different kind of relief operation is underway to identify which schools have space and which resources will be needed in the wake of last month’s loss, all across Puerto Rico, of power and communications. Officials hope to reopen some schools by mid-month. Edwin Meléndez, Director of the Center for Puerto Rican Studies at Hunter College in New York, said his conservative estimate is that more than 200,000 children and adults will leave Puerto Rico for the mainland—with his decision coming one day after President Trump took to Twitter to criticize the leadership of Puerto Rican leaders, especially San Juan Mayor Carmen Yulin Cruz and those the President claimed “want everything to be done for them when it should be a community effort.” The inexplicably belated, temporary suspension of the Jones Act has enabled FEMA to expand its delivery of food and water throughout Puerto Rico, though officials stressed that many people still lack the essentials: FEMA has, finally, been able to deliver food and water to all of Puerto Rico’s 79 municipalities; however, FEMA reports that some isolated areas of these municipalities may not have received the commodities, partly because lack of communication systems has hampered distribution efforts. As of late Sunday, there was safe drinking water available to 41% of Puerto Rico; FEMA has installed eleven regional staging areas for food and water distribution; some 5 percent off the island has power, and Gov. Ricardo Rossello reported the Army Corps of Engineers has begun a mission to repair the power grid. Over the next few days, close to a million gallons of gasoline and half a million gallons of diesel fuel will arrive, according to the Governor, who added that just over one-third of Puerto Rico’s residents now have phone service: all landlines are operating, but only about 11% of the cell towers are operational; 51 of 69 hospitals are running in some capacity now, along with 46 of 48 dialysis centers.

Brookings’ Michael O’Hanlon yesterday described the “patriotism, courage, compassion, and grit of the several thousand Coast Guard and other U.S. military personnel belatedly detailed by the White House to respond, writing: “But the overall approach might best be described as a modest response to a disaster: at a time when so many American citizens are suffering, we need to consider a much more massive effort.”

 

The Leadership Challenges on the Road to Fiscal and Physical Recovery

September 29, 2017

Good Morning! In today’s Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico; Hartford’s steep fiscal challenges; and Detroit’s ongoing road to fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal Safety Net? The White House yesterday announced President Trump had agreed to waive the Jones Act, which will temporarily lift shipping restrictions on Puerto Rico and enable the hurricane-ravaged island to receive necessary aid; however, the waiver from the shipping law, which mandates that only American-made and-operated vessels may transport cargo between U.S. ports, will only last for 10 days, after which the equivalent of a 20 percent tax will be reimposed. The delayed U.S. response to the save U.S. citizens compared unfavorably to the response to save and protect foreign citizens in Haiti seven years ago, when the U.S. military mobilized as if it were going to war—with the U.S. military, in less than 24 hours, and before first light, already airborne, on its way to seize control of the main airport in Port-au-Prince. Within two days, the Pentagon had 8,000 American troops en route; within two weeks, 33 U.S. military ships and 22,000 troops had arrived. By contrast, eight days after Hurricane Maria ripped across neighboring Puerto Rico, just 4,400 service members were participating in federal operations to assist the devastated U.S. citizens, according to a briefing by an Army general yesterday, in addition to about 1,000 Coast Guard members.

The seemingly inexplicable delay in waiving the Jones Act—temporarily—was due to opposition of the waiver by the Department of Homeland Security, which had argued that a federal agency may not apply for a waiver unless there is a national defense threat (as, apparently, there might have been in Houston and Florida). Sen. John McCain (R-Az.) has, for years, sought to repeal this discriminatory law: The 1920 Jones Act requires that goods shipped between U.S. ports be carried by vessels 1) built in the U.S., 2) majority-owned by American firms, and 3) crewed by U.S. citizens.

Key House and Senate members, since Monday, had been pressing for a one-year waiver from the rules in order to help accelerate deliveries of food, fuel, medical, and other critical supplies to Puerto Rico, especially with current estimates that Puerto Rico could be without power for six months. On Wednesday, 45 U.S. Senate and House Members had signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement. U.S. Rep. Nydia Velázquez (D.-N.Y.) warned: “If President Trump doesn’t swiftly deploy every available resource that our country has, then he has failed the people of Puerto Rico – and this will become his Katrina.” The temporary suspension of the onerous and discriminatory Jones law came only in the wake of a fierce backlash against the Trump administration for its inexplicable delay in not immediately lifting the federal law for Puerto Rico, especially after it issued a two-week waiver for Texas and Florida in response to Hurricanes Harvey and Irma. Nevertheless, San Juan Mayor Carmen Yulín Cruz praised the administration’s decision: she said it could help bring down the cost of emergency medical and other supplies, as well as vital construction materials by nearly 33 percent. Nevertheless, she warned there are still thousands of containers sitting idle at the ports of San Juan, a problem she blamed on “jurisdictional” and bureaucratic issues.

The belated Presidential action came as Puerto Rico continued to suffer the after effects of Hurricane Maria: Puerto Rico Electric Power Authority Executive Director Ricardo Ramos Rodríguez warned it could take PREPA as much as half a year to restore electricity.

Meanwhile, it appears the PROMESA Oversight Board is ready to revise the amount of debt to be paid in the next nine years. The Board is scheduled to meet today in New York City to revise the March-approved fiscal plan: the current Board fiscal plan specifies there should be enough funds to pay approximately 24% of the debt; however, it appears the Board will have little choice today but to revise every fiscal plan. Clearly none of the previous underlying assumptions can hold, and now the Board will have to await the actions and finding of the Federal Emergency Management Agency, while the Treasury Department will have to work with Puerto Rico to settle on a massive restructuring—or, as Puerto Rico House Representative Rafael Hernández Montañez put it: “We can’t have money spent on corporate lawyers and PowerPoint producing technocrats while funding is needed for immediate reconstruction efforts.” While FEMA has committed to paying for 100 percent of the costs of some work, on others, it is mandating a match of 20% to 25% of the costs for other work—a match which appears out of reach for the most savagely damaged municipalities or municipios—now confronted not just by enormous new capital and operating demands, but also by sharply reduced revenues.

Wednesday morning, the PREPA Bondholders Group offered up to $1.85 billion in debtor in possession loans to the authority. According to the group, part of the package would be a new money loan of up to $1 billion. Another part would be their possible acceptance of an $850 million in DIP notes in exchange for $1 billion in outstanding bonds owed to them—or, as the Group noted: “The new funding would allow PREPA to provide the required matching funds under various grants from the Federal Emergency Management Agency.” In response, PREPA’s Natalie Jaresko said: “We welcome and appreciate the expression of support from creditors…The Board will carefully consider all proposals in coordination with the government, but it is still very early as we begin to navigate a way forward following the catastrophic impact Hurricane Maria had on the island.”

The existing fiscal PREPA plan specifies there should be enough funding to pay about 24% of the debt due over the next decade; that, however, has raised questions with regard to the underlying assumptions of the Board, especially with regard to when FEMA will complete its work on the island.

Rafael Hernández Montañez, a member of Puerto Rico’s House, noted that Hurricane Maria put Puerto Rico’s territory-wide and municipal governments in very difficult financial situations. While FEMA has committed to paying for 100% of the costs of some work, he notes that the federal relief agency is still mandating a government match of 20% to 25% of the costs for other work: “It’s going to be a huge effort to cover that 20% with the government’s unbalanced budget,” adding that the hurricane will also lead to reduced revenues for the local governments.

On Wednesday, 145 U.S. Representatives and Senators signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement–the same day as the PREPA Bondholders Group offer. 

The Category 4 Maria destroyed Puerto Rico’s electrical grid; it left the island desperately short of food, clean water, and fuel—and sufficient shipping options, notwithstanding the claim from the Department of Homeland Security that: “Based on consultation with other federal agencies, DHS’s current assessment is that there is sufficient numbers of U.S.-flagged vessels to move commodities to Puerto Rico.” Thus DHS opposed a waiver of the Jones Act (Under the Jones Act federal cabotage rules, the entry of merchandise into Puerto Rico can only be made on US flag and crew ships – the most expensive fleet in the world.), which has been suspended in past natural disasters, to allow less expensive, foreign-flagged ships bring in aid. Former President George W. Bush suspended the Act after Hurricane Katrina in 2005, and President Barack Obama suspended it after superstorm Sandy in 2012. In a letter to the Department of Homeland Security, Sen. McCain criticized the department for waiving the Jones Act in the wake of hurricanes Harvey and Irma, but not for Puerto Rico. The Senator, who has long sought a repeal of the Jones Act, noted: “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster: Now, more than ever, it is time to realize the devastating effect of this policy and implement a full repeal of this archaic and burdensome Act.”  Only the Department of Defense may obtain a Jones Act waiver automatically, which it did to move petroleum products from Texas after Hurricane Harvey. The White House is expected to send Congress a request for a funding package for Puerto Rico in the next few weeks, a senior congressional aide said.

The Road to Hartford’s Default. Citing deep cuts to higher education, sharp reductions in aid to distressed communities, and unsound deferrals of public pension payments, Connecticut Gov. Dannel Malloy yesterday made good on his pledge to veto the budget that legislature, earlier this month, had adopted, deeming it: “unbalanced, unsustainable, and unwise,” adding his apprehension that were it to be implemented, it would undermine the state’s long-term fiscal stability and essentially guarantee the City of Hartford’s chapter 9 municipal bankruptcy. His veto came as the Governor and top legislators continued bipartisan talks in an attempt to reach a compromise; however, despite legislative attempts to pass a bill to increase the hospital provider tax to 8 percent, a 25 percent increase over the current level, the legislature will not meet today. In his executive order, the Governor allowed key stated services to remain operating; however, he ordered steep cuts to municipalities and certain social service programs: under his orders, approximately 85 communities would see their education cost sharing grants, the biggest source of state funding for public education in Connecticut, cut to zero next month—no doubt a critical element provoking the Connecticut Council of Small Towns, which represents more than 100 of the state’s smallest communities, to seek an override in a special session the week after next in order to avoid local property tax increases. Nevertheless, Gov. Malloy stood strongly against the Republican plan and a potential override, stating: “This budget adopts changes to the state’s pension plan that are both financially and legally unsound…This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature.” He added his apprehensions that the changes proposed to the state’s pension system could expose Connecticut taxpayers to potentially costly litigation down the road: “Prior administrations and legislatures have, over decades, consistently and dangerously underfunded the state’s pension obligations,’’ a strategy, he noted, which he said has led to crippling debt and limited the state’s ability to invest in transportation, education, and other important initiatives. Nonetheless, Republican leaders urged the Governor to sign the two-year, $40.7 billion budget, saying it makes significant structural changes, such as capping the state’s bonding authority and limiting spending. Fiscally conservative Democrats who bolted to the Republican side had criticized a Democratic budget proposal which had proposed new taxes on vacation homes, monthly cellphone bills, and fantasy sports betting, as well as increased taxes on cigarettes, smokeless tobacco, and hotel room rates.

House Republican leader Themis Klarides (R-Derby) warned she and her colleagues will try to override the veto—a steep challenge, as in Connecticut, that requires a two-thirds vote in each chambers, meaning 101 votes in the House and 24 in the Senate. The crucial Republican amendment passed with 78 votes in the House and 21 in the Senate—well short of the override margin in both chambers. The action came as S&P Global Ratings this week lowered Hartford’s credit rating, writing that its opinion “reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty,” albeit noting that the city could still avoid chapter 9 municipal bankruptcy by restructuring its debts. The agency wrote: “In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing. Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default. The mayor’s public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty.” Hartford’s fiscal plight is, if anything, made more dire by the fiscal crisis of Connecticut, which is still without a budget—and where the Legislature has under consideration a budget proposal from the Governor to slash state aid to the state’s capitol city of Hartford—where the Mayor notes that even were the state to make the payments it owes, Hartford would still be unable to pay its debts—so that S&P dropped the city’s credit rating from B- to C—a four-notch downgrade, writing: “The downgrade to ‘CC’ reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty.”

The Steep Recovery Road. Almost three years after exiting chapter 9 bankruptcy, Detroit is meeting its plan of debt adjustment, but still confronts fiscal challenges to a full return to the municipal market, even as it nears its exit from Michigan state oversight next year. Detroit’s Deputy Chief Financial Officer and City Finance Director, John Hill, this week noted that while the Motor City recognizes that any debt the city plans to issue will still need a security boost from a quality revenue stream and some enhancement, such as a state intercept, Detroit’s plan of debt adjustment did not assume the need for market access in a traditional and predictable way, without added security layers, for at least a decade. That assessment remains true today, as Detroit nears its third anniversary from its exit from the nation’s largest ever municipal bankruptcy. With chapter 9, Mr. Hill adds: “Everything that we have been able to do since exiting bankruptcy has an attached revenue stream to it: You secure it, and bond lawyers agonize over how that will be protected in the unlikely event of another bankruptcy, because everyone has to ask the question now. Then there is a strong intercept mechanism that goes to a trustee like U.S. Bank where the bondholders now know this is absolutely secure.”

Municipal Market Analytics partner Matt Fabian notes that Detroit continues to struggle with challenges which predate its chapter 9 bankruptcy, adding the city is unlikely to regain an ability to access the traditional municipal markets on its own in the near-to-medium term: “They don’t have traditional reliable access where if they need to go to the market, you can predict with certainty that they will and they will be within a generally predictable spread,” adding that reestablishing its presence in the traditional market is important, because it indicates whether bondholders have confidence in the city as a going concern. In fact, Detroit has adopted balanced budgets for two consecutive years; it is on a fiscal path to exiting Michigan Financial Review Commission oversight, and the city ended FY2016 with a $63 million surplus in its general fund; however, Detroit’s four-year fiscal forecast shows an annual growth rate of only about 1%.

The city’s public pension obligations, mayhap the thorniest issue in cobbling together its plan of debt adjustment, are to be met per its economic plan, via a balloon payment.  Mr. Fabian notes that the Motor City’s recovery plan and future revenue growth is complicated by the need to set aside from surpluses an additional $335 million between Fy2016 and Fy2023 to address that significant, unfunded pension liability, worrying that while the plan is “fiscally responsible;” nevertheless, it comes “at the expense of using these funds for reinvestment and service improvement.”

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health and Naglick says it shows the city has recognized the need to tackle it. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund, said Detriot CFO John Naglick, will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. “More importantly, the growing contributions each year from the general fund to the trust will build budget capacity to make the increased contributions in future years,” he said.

Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million. Pension woes aren’t the only challenge the city faces. Fabian said that economic development has been limited to the city’s downtown and midtown areas. The rest of Detroit’s neighborhoods haven’t fared so well.

Dan Loepp, the president and CEO of Blue Cross Blue Shield of Michigan, and Gerry Anderson, the Chairman and CEO of DTE Energy, are regarded to be among the important business leaders in Detroit, two key sectors of the Motor City’s economy, who see Detroit’s fiscal and economic trajectory as intertwined with the future of their companies; they  have headquarters in downtown and employ thousands of people including Detroiters—companies which had been making conscious and deliberate investments in the city. Asked recently to offer their perspectives about where Detroit is headed and how to include the many who are left out of the recovery, Mr. Loepp responded: “I’m a native Detroiter, and I lead a company that’s been a business resident of Detroit for nearly 80 years. I remember how uneasy it felt to be in Detroit when the national economy collapsed 10 years ago. It was hard and scary…From then to now, I strongly believe Detroit’s comeback is one of the best stories in America. The downtown is pulsing with growth and action. You’ve got business and residential development that has connected the river to Midtown and is now expanding into neighborhoods.” He added Detroit today is clear of debt and venture capital flowing backed by a city leadership which is “working well together, noting Detroit today is “now positioned to compete and win investment and jobs against any city in the country. All of this is great for Detroit.”

Notwithstanding, he warned that challenges remain: “The bankruptcy, while hard, gave the city’s leadership a clean slate to solve challenges faced by residents. The Mayor and council are working together on issues like lighting, infrastructure, zoning, and demolition…the Mayor, especially, has spent considerable energy advocating for the people of Detroit—doing things like making sure new housing developments hold space for working people of all incomes. This will promote a stronger, more diverse Detroit…Institutional issues, like improving the city’s schools and making neighborhoods safer for city residents, will take time to solve. They will take a constant, steady focus. And they need people within state and local government to work hand-in-hand with people from the neighborhoods to do the tough labor of finding sustainable solutions.” Nevertheless, he cautioned that the Motor City’s recovery is incomplete without participation of the majority: “Detroit can’t truly ‘come back’ if people living in the city are left behind. We need to always make sure there is a focus on people and that we make people a priority. Schools need to be improved. Transit needs to be addressed in a comprehensive way. Employment opportunities and housing need to be part of the master plan.”

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.”

On the Steep Edge of Chapter 9

September 12, 2017

Good Morning! In this a.m.’s Blog, we consider the increasing risk of Hartford going into municipal bankruptcy, the Nutmeg State’s fiscal challenge—and whether the state’s leaders can agree to a bipartisan budget; then we consider the ongoing fiscal challenges to Detroit’s comeback from the nation’s largest ever chapter 9 municipal bankruptcy: the road is steep.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of Chapter 9. Connecticut legislators plan to move forward with a state budget vote this week—one which is not expected to include a sales and use take hike and which may not get much support from their Republican colleagues. In his declaration, last week, Hartford Mayor Luke Bronin, in warning the city may be filing for chapter 9 municipal bankruptcy within sixty days pending state budget action, noted Hartford “believes that a restructuring of its outstanding bond indebtedness will be necessary to assure the fiscal stability of the city in the future regardless of any funding received from the State.” Nevertheless, as Municipal Market Analytics noted: “It’s unclear that the city will be able to satisfy the standard conditions for entry into bankruptcy protection such as proving itself insolvent,” albeit MMA noted that in the absence of a state bailout cash, the city will unable to make payments to its bondholders, nevertheless, noting that Connecticut fiscal changes enacted last summer “would reasonably allow the city to refinance its outstanding debt under provisions that not only purport to provide a statutory lien to bondholders, but also allow principal to be back-loaded and extended for 30 years. Under Connecticut law, municipalities may secure refunding bonds with a statutory lien if they provide for such in the resolution. MMA adds that even without a lien, Hartford “could also refinance, at a minimum, approximately 80% of its outstanding general obligation debt covered by bond insurance policies,” noting that “While this would not eliminate principal currently owed, it would avoid the expense of a chapter 9 bankruptcy.” However, as William Faulkner used to write of the “odor of verbena,” the reputation of chapter 9 can create contagion: MMA notes that “some municipal investors will still not loan capital to Bridgeport for its attempted bankruptcy filing twenty-six years ago.” Thus there is apprehension in the state house that Connecticut’s own interest rates could be adversely affected were Hartford to default or file for chapter 9—adding that such a filing would thus have fiscal adverse reverberations for the state, but also undermine business complacency about remaining in the city: “It is hard to expect that declaring bankruptcy would help the city retain its current employers or attract new ones. Amazon is unlikely to locate its headquarters in a bankrupt city.” Unsurprisingly, Connecticut legislators may be considering some sort of fiscal evaluation model like Virginia’s as a quasi- oversight and/or restructuring regime for local governments.

Meanwhile Connecticut House Speaker Joe Aresimowicz (D-Berlin) said a proposal to raise the sales and use tax as high as 6.85% has been removed from the Democratic budget proposal after facing strong opposition from moderates in his party, as the Speaker’s draft budget proposal sought to close a two-year $3.5 billion deficit, advising his colleagues: “The Senate was not comfortable with that, so it was our opinion as House Democrats that we would drop that off of our proposal in an effort to come to an agreement that would pass in both chambers.’’ Nevertheless, a proposal to raise the sales tax on restaurant meals to 7% remains under consideration—drawing strong opposition from the Farmington-based Connecticut Restaurant Association, and raising apprehensions from the industry, because it was unclear exactly which meals would be covered by the increased tax—even as restaurants now confront stiffer competition from ready-made meals at supermarkets, raising questions with regard to the definition of food and beverage—something to be resolved, according to officials, by the Connecticut Department of Revenue Services.

The fiscal dilemma has, moreover, not just been between the parties, but also between Gov. Malloy and Democrats, with the Governor opposed to many of the tax hikes they have proposed, albeit late last week he said he would agree to a small sales tax increase. Nevertheless, even as state Democratic leaders were still working on a budget agreement with the Governor, separate, simultaneous talks with Republicans broke down yesterday. While Republicans indicated they would not rule out further negotiations, the breakdown appears to be taxing: Gov. Malloy is still seeking tax increases on hospitals, cigarettes, smokeless tobacco, e-cigarettes, and real estate transactions—leading Republicans to charge that Democrats are unwilling to address major, long-term structural changes which would include spending and bonding caps, along with changing the prevailing wage for labor on municipal projects that unions and many Democrats have strongly opposed for years, or, as House Republican Leader Themis Klarides (R.-Seymour) noted: “It is very clear they have no interest in changing the way the State of Connecticut works…They want to fix it for this week, for next month, for next year. They do not want to fix this problem that has been a spiraling problem…“This might as well be Irma: I have more confidence on where Irma is going than where the state is going, based on the destruction they have left in their wake.’’

Republicans plan to release a revised budget proposal today, among which some of Gov. Malloy’s proposals could be included as part of a budget proposal House Democrats plan to consider Thursday, including an expansion of the state’s bottle bill to include juices, teas, and sports drinks. When consumers fail to return their bottles, the nickel deposit is kept by the state. As a result, the state expects to collect an additional $2.8 million starting on Jan. 1, and then another $7.4 million in the second year of the two-year budget from unclaimed deposits. The legislature appears fiscally anxious as Gov. Malloy’s October 1 deadline approaches—the date on which he is set to invoke large cuts: under his revised executive order, 85 communities would receive no educational cost-sharing funds; 54 towns would receive less money.

Nevertheless, the Governor and legislature are working in fiscal quicksand: Gov. Malloy, a Democrat, has been running the state by executive order since July 1st: he and the legislature remain at odds over a biennial spending plan while the Governor is proposing to raise the conveyance tax on real estate transactions, which he projects would bring in an expected $127 million more to the state over two years. However, the proposal comes as sources late yesterday reported that Alexion Pharmaceuticals Inc. will today announce that its corporate headquarters is moving from New Haven to Boston as part of a major “restructuring.” The state has provided Alexion with more than $26 million in state assistance to remain in Connecticut, so the announcement is likely to be a double fiscal whammy: not only will the company move, but also it plans to announce significant layoffs, renewing debate with regard to how the state can remain economically competitive. (Alexion had moved to New Haven early last year from Cheshire with a $6 million grant from the state, and a subsidized $20 million loan which will be fully forgiven if Alexion has 650 workers in Connecticut by 2017.) On average, Alexion had 827 employees in the state this year through June 30. Alexion also was offered tax credits, which could be worth as much as $25 million as part of the Malloy administration’s so-called “First Five” program. Alexion had located in a newly constructed 14-story building in downtown New Haven as part of an urban revitalization project intended to tie two sections of the city together—thus Alexion’s move was key to the completion of the first phase of the project. Gov.  Malloy noted: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues.” In releasing his proposed a $41 billion state budget, the Governor said that if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues.” The Governor added: “There is an issue that Hartford has done some pretty stupid things over the years, and that bondholders and bond rating agencies tolerated that stupidity: And if there’s going to be relief, it has to be comprehensive in nature.” With Hartford Mayor Luke Bronin having, as we previously noted, warned that Hartford would file for chapter 9 municipal bankruptcy absent critical support from the state, labor unions, and its bondholders, the Mayor has been pressing for an additional $40 million from the state to avoid bankruptcy—even as the Governor and state legislative leaders claim the state budget provides enough to Hartford—or, in the Governor’s words: “presents the opportunity to help Hartford.” The budget proposal also calls for a four-tiered municipal board to oversee Hartford and other distressed cities. Gov. Malloy, a lame duck, ergo with waning political power, confronts an evenly divided state Senate, and a narrowly divided state House (79-72), so balancing the deck of the fiscal Titanic between revenues and expenditures—and addressing long-term capital and public pension obligations is an exceptional fiscal challenge. The Governor’s budget proposals would also repeal the back-to-school sales tax holiday and increase the cigarette tax by 45 cents to $4.35 per pack, effective the end of next month, as well as increase the conveyance tax on real estate sales.

Leaving Chapter 9 Is Uneasy. Detroit is finding that returning to access traditional capital markets is a challenge: notwithstanding significant downtown economic progress, that progress has been mostly in the increasingly vibrant downtown and Midtown areas. Significant parts of the 139-square mile city continue to struggle with pre-chapter 9 challenges, even as the narrow relief window for the city’s public pension obligations is winnowing, effectively imposing increasing fiscal pressure—especially in the wake of the city’s general fund revenues coming up short for FY2016: Detroit’s four-year fiscal forecast predicts an annual growth rate of approximately 1%. Thus, with its plan of debt adjustment requiring annual set-asides from surpluses of an additional $335 million (between FY16 and FY23) to address those obligations, that has cut into fiscal resources vital to reinvestment and improvement in public services—especially in outlying neighborhoods. Nevertheless, Detroit Future City reports that the annual decline in the city’s population of 672,000 has been slowing. Indeed, job growth has been above the nationwide average since 2010, and that growth appears to be in higher paying jobs of over $40 thousand per year, implying that the job growth is targeted at educated or skilled workers—a key development to encouraging migration to the city—where the 25-34 year-old population has grown by 10 thousand since 2011. Notwithstanding, however, more than 40% of Detroit’s population lives in poverty, nearly triple the statewide rate—and a rate which appears to have some correlation with violent crime. Thus, even though the city has made some progress in reducing overall violent crime, murders have still been rising—albeit at a 2.4% rate. Nevertheless, perceptions matter: a recent Politico-Morning Consult poll reported that 41% of Detroit residents said they consider the city very unsafe. Moreover, in a city where only 78.3% of students graduate high school and just 13.5% of those that reside in Detroit have a bachelor’s degree—half the national rate, the number of families with children has declined by more than 40%. Thus, unsurprisingly, with housing and blight still a problem, the city’s vacancy rate is close to 30%, and some 80,000 met or were expected to soon meet the definition of blight. Worse: some 8,000 properties are scheduled to enter the foreclosure auction process this year.

Fiscal & Physical Hurricanes

September 8, 2017

Good Morning! In this a.m.’s Blog, we consider the increasing risk of Hartford going into municipal bankruptcy, the Nutmeg State’s fiscal challenge—and whether the state’s leaders can agree to a bipartisan budget; then we consider some of the anomalies as the Commonwealth of Virginia tests out its new fiscal stress oversight program; finally, we observe that fearful transit of Hurricane Irma, one of the most powerful hurricanes ever recorded, as it roared through the U.S. Territories of the Virgin Islands and Puerto Rico, where we feared for lives and physical and fiscal safety.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of Chapter 9. Hartford Mayor Luke Bronin fired a warning shot across the bow yesterday at the state legislature and Governor Dannel Malloy, notifying the parties the city would be seeking permission to file for chapter 9 municipal bankruptcy if the city is unable to obtain the requisite funds it needs to continue to operate by early November, in a letter also signed by Hartford Treasurer Adam Cloud and Council President Thomas “TJ” Clarke II.  In the state, where Bridgeport filed in 1991 (the case was dismissed the same year), the statute §7-566) provides that a municipality may only file for chapter 9 protection with the express prior written consent of the governor—at which point, if given, the governor must submit a report to the Treasurer and General Assembly. In his sharply worded epistle to Gov. Malloy and House and Senate leaders, Mayor Bronin cautioned: “If the state fails to enact a budget and continues to operate under the governor’s current executive order, the city of Hartford will be unable to meet its financial obligations in approximately 60 days.” Thus, while the state’s budget stalemate constitutes a fiscal threat to many Connecticut cities, it has posed exceptional problems for Hartford: projections show the capital city, facing a $65 million deficit this year, will run into cash-flow issues in November and December, including a $39.2 million end-of-year shortage. The fiscal hurricane came as Gov. Malloy yesterday unveiled new budget proposals intended to restore funding for municipalities and reject major education cuts planned for October 1, as Democrats and Republicans met in an attempt to reach common ground. However, Mayor Bronin warned that the “extraordinary measures” other towns are considering in response to the state’s ongoing budget gridlock—layoffs, cuts to services and drawing from rainy day funds—are actions Hartford has taken already, noting the city last year laid off 40 workers and cut millions from city departments—and dipped into Hartford’s rainy-day fund to help offset deficits. Notwithstanding, the city still had to borrow millions in June to help pay its bills: “For the past year, we have highlighted the urgency of Hartford’s fiscal crisis: The time has come to decide, together, what future we want for our capital city,” he wrote, urging legislators to embrace a “farsighted, collaborative approach” that includes giving Hartford more than the minimum amount of state aid it needs: he has requested at least $40 million more this year. Mayor Bronin also encouraged lawmakers “create a mechanism” to allow Hartford to achieve “fair labor contracts that truly reflect the city’s ability to pay,” and to “join us in insisting that bondholders and other stakeholders participate in the solution: “You could fail to adopt a budget, or write off Hartford’s problem as unsolvable—requiring a Chapter 9 Bankruptcy filing in the coming weeks.” Noting he wants to avoid chapter 9, the Mayor added: “A well-planned bankruptcy is a tool that can be used to address long-term liabilities like debt and pension obligations…“I think there’s a reality that Hartford needs real and major restructuring that could be accomplished in a bankruptcy: “It could be accomplished outside of a bankruptcy, but I think as days go by it becomes more likely that Hartford will be going bankrupt.” If there might be some light at the end of the fiscal tunnel, it was Connecticut House Majority Leader Matthew Ritter’s statement: “I would agree with the mayor that it does not help Hartford to give them well short of what they need, because then they’re just back in a hopeless scenario next spring: The goal is not to put Band-Aids on this. The goal is to try to begin structural reforms… Moody’s, last month, had warned Hartford was rapidly approaching debt repayment deadlines: “the city’s path to fiscal sustainability will likely require debt restructuring along with some combination of labor concessions, other expenditure cuts and new revenues,” with bills coming due for $3.8 million this month, and $26.9 million next month in October. Hartford’s leaders yesterday stressed they want a long-term solution to Hartford’s problems—or, as the Mayor put it; “We’re not interested in patches. We’re not interested in a short-term bailout…We’re not interested in Band-Aids. And we’re not interested in leaving this problem for future legislatures or future mayors…We’re interested in fixing this.”

Nevertheless, the challenge of obtaining state fiscal assistance will be hampered by the state’s own fiscal challenges: Connecticut has operated under Gov. Malloy’s executive orders since July 1, while the state legislature is still working out a biennial budget for FY2018 and 2019—efforts the Governor expects to result in a new compromise budget by today: under his most recent executive order, however, state aid for Hartford is down nearly 25% from last year—leaving the city to confront a nearly $50 million deficit for FY2018 and projecting that to grow to about $83 million next fiscal year. According to Mayor Bronin, one option would be for the state to provide the city with “just enough additional assistance” to avoid short-term liquidity problems without the structural overhaul and the necessary investment to reinvigorate the city—or, as he wrote: “This might be the path of least resistance, but it’s also the path that leads to a less competitive Connecticut,” adding that failure to adopt a budget or writing off Hartford as a lost cause would force a municipal bankruptcy filing. A third option, according to the Mayor, would be a “farsighted, collaborative approach,” which would include reimbursing the city for its disproportionate share of non-taxable property‒or about half of overall property; enable relief for the city in labor contracts; and forcing bondholders and other stakeholders to the table. Thus, he noted, he would prefer an avenue other than municipal bankruptcy.

Is There a Mother Hubbard Problem? Even as Hartford is desperately seeking state aid to avoid filing for bankruptcy, the state has its own serious fiscal challenges: it faces a biennial revenue gap of up to $5 billion, and municipal bond rating agencies have slammed it with six downgrades over the last year and a half. State legislative leaders claim they will have an idea of whether is light at the end of the proverbial tunnel by next week when they will be voting on a partisan or a bipartisan budget next week: Republican legislative leaders have been pressing their Democratic colleagues to make changes they assert would improve future budgets, but do not necessarily make it easier to close the current $3.5 billion budget deficit: most of the changes the Republicans had wanted to make in the state’s relationship with its labor unions foundered in the wake of the $1.57 billion concession package approved in a mostly party line vote. Republican lawmakers insist they have revised their budget proposals to reflect the new labor agreement; however, they are not ready to release them to the public, much less share them with Democratic legislative leaders. Senate President Martin Looney (D-New Haven), said the “significant unanswered question” is how Republican legislators close the gap between their original proposals and the labor agreement: “We hope to get all of these issues resolved, so at least we will know where we stand in relation to each other,” adding there are hopes of a vote in both chambers next week: as of today, there is no certainty with regard to whether the budget would pass, or, as House Speaker Joe Aresimowicz (D-Berlin) noted, it is worth trying to reach a bipartisan deal, “but in the end I don’t know if the differences are too large to overcome,” adding they cannot just pass a budget with the votes in either chamber, because any such budget also must pass muster with the Governor, who has not even been complimentary of his own party’s efforts to put together a budget. Senate Republican President Len Fasano (R-North Haven) said in order for there to be any progress on closing Connecticut’s $3.5 billion budget gap, there first has to be agreement over structural changes, such as a spending and a bonding cap, deeming it “an appetizer to the main meal: “You’ve got to get through this,” before you start talking about the budget numbers. Democratic legislative leaders agreed they share an interest in structural changes, but are not in agreement with how Republican lawmakers want to implement some of them.

Not So Fiscally Rich in Richmond? Or Whoops! Richmond, Virginia—notwithstanding a 25% poverty level, has been in the midst of a building boom; it has reported balancing its budget, and that it holds a savings reserve of $114 million—in addition to which, the state has logged budget surpluses in each of its most recent fiscal years; it currently has an AA rating from the three major credit rating, each of which reports that the former capital of the Confederacy has a modestly growing tax base, manageable municipal debt, and a long-term stable outlook—albeit with disproportionate levels of poverty. Nevertheless, State Auditor Martha S. Mavredes, according to a recent state report distributed within government circles, including the Virginia Municipal League and the Virginia Association of Counties, has cited the municipalities of Richmond and Bristol as failing to meet the minimum standard for financial health:

In the case of Richmond, according to the report, the city scored less than 16 on the test for the past two fiscal years—a score which Auditor Mavredes described as indicating severe stress in her testimony last month before the General Assembly’s Joint Subcommittee on Local Government Fiscal Stress, noting that the test was applied for fiscal years 2014, 2015, and 2016. The fiscal test is based on information contained in annual audited financial reports provided by each locality—except the municipalities of Hopewell and Manassas Park have stopped providing reports—with the fiscal stress rankings based on the results of ten ratios which primarily rely on revenues, expenses, assets, liabilities, and unused savings: the test weighs the level of reserves and a municipality’s ability to meet liabilities without borrowing, raising taxes, or withdrawing from reserves—as well as the extent to which a locality is able to meet the following fiscal year’s obligations without changes to revenues or expenses: Richmond’s score was near 50 in FY2014, but fell below 16 in FY2015  and to 13.7 in FY2016. Thus, even though Virginia has no authority to intervene in local finances, the new fiscal measuring system has created a mechanism to help focus fiscal attention in advance of any serious fiscal crisis.

It turns out the municipality with the biggest red flag, initially known as City A, is Bristol, an independent city of around 18,000—the twin city of Bristol, Tennessee, just across the state line, which runs down the middle of its main street: State Street. Bristol, more than a week ago, acknowledged the city is in communication with the Virginia auditor’s office to determine her audit designated Bristol with a score below 5 on a scale which uses any number below 16 as a sign of potential distress. That audit also showed City B, which fell from a score just below 50 in 2014 to below 14 the next two years, to be state capitol Richmond.

Asked about Richmond’s precipitous fiscal fall under the scale, Auditor Mavredes said that the high score for 2014 was incorrect, because of a keyboard error by her office. Instead of a steep fall, “it’s more of a flat line,” she added. Timely financial reporting has been a consistent concern for the city, which has been late in filing its CAFR for three years, although Richmond Mayor Levar Stoney has vowed to file it on time this year—and the Auditor’s office, which compiles an annual financial report for localities, is still awaiting Richmond’s fy2016 information.

The Virginia Association of Counties confirmed that Richmond County, on the Northern Neck, and Page County, with a slowing population of about 24,000 and county seat is Luray in the northern Shenandoah Valley, were two flagged by the system for what Auditor Mavredes deemed “consistently low scores:” 5.9 in 2014, 8.2 in 2015, and 7.3 last year. Page, as County B, declined from 21 in 2014 to about 15.5 in 2015, and 11.1 in 2016. Dean A. Lynch, the Virginia Association of Counties Executive Director, said both counties are “very aware” of the concerns the auditor raised. Notwithstanding, he noted that VACo believes some differences among localities stem from how they report their financial results: “We’re trying to get a group to meet with (the auditor) so we can all get on the same page,” noting, for example, the initial assessment shows Fairfax and Stafford, both fairly wealthy counties, with relatively low scores. VaCo officials believe that has less to do with their financial condition than how they report school system debt and assets—a contention with which Auditor Mavredes agrees, so she is not concerned by the scores, because she recognizes the local government is reporting the debt, while the school system is showing the assets. She also notes that some localities might show high scores, even though they have small budgets: for example, Nottoway County scored the best among counties in the new system at 98.1 last year, leading the Auditor to note: “Some localities are very debt-averse…Some of it is just the choices they’ve made in regard to the locality. They might not have many resources, but they have managed well with the resources they’ve had.” Vaco Director Lynch notes that the larger issue of fiscal stress for rural localities, such as Richmond County and Page, is the amount of money they are required to pay as their match for state funding of public education and other services, as well as their ability to generate it: “They do feel they are having a tough time in meeting some of their core services: I think if you go back and talk to Page County and Richmond County, they have trouble meeting the match that is required. It’s a state funding issue.”

Peligroso. Cataloged by the National Hurricane Center as an “extremely dangerous: cyclone, Hurricane Irma, slammed its way through northern Puerto Rico, with the Category 5 phenomenon lashing Puerto Rico with sustained maximum winds at 185 mph: by early this morning, the Aqueduct and Sewer Authority confirmed that about 80,000 people have no water—by 10:53 p.m., Irma’s eye was located at latitude 19.4 degrees north and longitude 66.8 degrees west: about 85 miles from San Juan—a half hour after some 22 hospitals had lost power, according to the Director of the State Agency for the Management of Emergencies, Abner Gomez. By yesterday morning, more than a million were without electricity.

The PROMESA fiscal oversight board yesterday reported it was working for the federal government to accelerate assistance to Puerto Rico: Gov. Ricardo Rosselló rejected that claim, stressing that no member of the Board has communicated with him to make himself available: “Yo sé que los mejores intereses de todo el mundo están en el pueblo Puerto Rico”: I know that the best interests of the whole world are in the town of Puerto Rico.  So far I have not had personal communication (with members of the PROMESA Board), but we certainly give the invitation to anyone who wants to collaborate. For its assumption, including the members of the Board.” Board Chair José Carrión told the media that he worked “closely with Governor Rosselló to coordinate support for Puerto Rico after the hurricane, asserting: “We have approached the federal government to activate Title V of PROMESA,” which Mr. Carrión asserted provides authority under Title to speed up assignments after a disaster. Similarly, in a written statement, the Board’s Executive Director, Natalie Jaresko, noted: “We have approached the federal government to activate Title V of PROMESA, which allows the Board to work with agencies to accelerate activation of allocations and loans after a disaster…We expect residents of Puerto Rico to remain safe during hurricane Irma and that any damage to the island due to the hurricane will be minimal.”

Puerto’s Rico’s first recovery focus in the wake of Irma will be on the island of Culebra, with a population of around 1,000. Generally, it appears, the worst fears were not realized: the hurricane (Humacao) spared much of the eastern region of Puerto Rico: there was one tree fall reported—even as there were a reported 500 refugees between the villages of Utuado, Lares, Adjuntas, Jayuya and Ciales.  By 8, last evening, there were approximately 77,000 subscribers without water service, as Irma’s eye passed just north of Puerto Rico—leaving some 868,846 without power—just hours after U.S. Health and Human Services Secretary Tom Price had declared a public health emergency in Puerto Rico and the US Virgin Islands to facilitate the provision of federal services.

Fiscal & Physical Storms

September 6, 2017

Good Morning! In this a.m.’s Blog, we consider the new state fiscal oversight program in Virginia; then we move west to the Motor City, where November’s election will test voters’ perception of the fiscal state of post-chapter 9 Detroit. Then we veer back East to the Nutmeg state—a state whose state fiscal problems could wreak havoc with its municipalities. Finally, with Hurricane Irma, one of the most fearsome hurricanes ever recorded, bearing down this a.m. on the U.S. Territories of the Virgin Islands and Puerto Rico, we fear for lives and physical and fiscal safety.

Visit the project blog: The Municipal Sustainability Project 

Not So Fiscally Rich in Richmond? Richmond, Virginia—notwithstanding a 25% poverty level, has been in the midst of a building boom; it has reported balancing its budget, and that it holds a savings reserve of $114 million—in addition to which, the state has logged  budget surpluses in each of its most recent fiscal years; it currently has an AA rating from the three major credit rating, each of which reports that the former capital of the Confederacy has a modestly growing tax base, manageable municipal debt, and a long-term stable outlook—albeit with disproportionate levels of poverty. Nevertheless, State Auditor Martha S. Mavredes, according to a recent state report distributed within government circles, including the Virginia Municipal League and the Virginia Association of Counties, has cited the municipalities of Richmond and Bristol as failing to meet the minimum standard for financial health. In the case of Richmond, according to the report, the city scored less than 16 on the test for the past two fiscal years—a score which Auditor Mavredes described as indicating severe stress in her testimony last month before the General Assembly’s Joint Subcommittee on Local Government Fiscal Stress, noting that the test was applied for fiscal years 2014, 2015, and 2016. The fiscal test is based on information contained in annual audited financial reports provided by each locality—except the municipalities of Hopewell and Manassas Park have stopped providing reports—with the fiscal stress rankings based on the results of ten ratios which primarily rely on revenues, expenses, assets, liabilities, and unused savings: the test weighs the level of reserves and a municipality’s ability to meet liabilities without borrowing, raising taxes, or withdrawing from reserves—as well as the extent to which a locality is able to meet the following fiscal year’s obligations without changes to revenues or expenses: Richmond’s score was near 50 in FY2014, but fell below 16 in FY2015  and to 13.7 in FY2016. Thus, even though Virginia has no authority to intervene in local finances, the new fiscal measuring system has created a mechanism to help focus fiscal attention in advance of any serious fiscal crisis.

Whereto the Motor City? Edward Isaac Dovere, writing for Politico, reported that in a new POLITICO-Morning Consult poll, only 27% of Motor City residents reported they had a very or somewhat favorable view of Detroit, compared with a quarter of respondents who said they had an unfavorable view; only 5% said they considered Detroit very safe: 41% responded they considered it very unsafe. The fear factor—in addition to apprehension about the city’s school options—appear to be discouraging young families: the keys to the city’s hope for a vibrant fiscal future.  Those keys are vital, as Detroit’s population appears to be continuing to decline. About the Mayor, he writes: “There’s no mystique to what he’s doing, or why people seem to want four more years of him, he and his aides say. A big part of whatever success he’s had is just showing up, after decades when his predecessors didn’t: ‘In Detroit,’ said Duggan’s campaign manager Rico Razo, ‘people just want a response.’”

Nutmeg or Constitution State Blues. Connecticut, which was designated the Constitution State by the General Assembly in 1959, albeit according to others the “Nutmeg State,” because its early inhabitants had the reputation of being so ingenious and shrewd that they were able to make and sell wooden nutmegs—is certainly in some need today of fiscal shrewdness. Connecticut Comptroller Kevin Lembo has warned Gov. Dannel Malloy that unless the legislature acts swiftly to enact a budget, the “inability to pass a budget will slow Connecticut’s economic growth and will ultimately lead to the state and its municipalities receiving downgrades in credit ratings that will cost taxpayers even more,” adding that the state, which is currently in fiscal limbo, operating under Gov. Malloy’s executive orders since the beginning of July, otherwise confronts a $93.9 million FY2018 deficit—adding: the state’s economy “continues to post mixed results across an array of key economic indicators: These results do not indicate that the state can grow its way out of the current revenue stagnation.” Making sure there is appreciation that the state inaction would affect far more than just the state, he added: “The inability to pass a budget…will ultimately lead to the state and its municipalities receiving downgrades in credit ratings.” The dire warning comes as the state’s 169 towns, one borough, and nineteen chartered cities are caught in the middle—and fearing an outcome, as Gov. Malloy has proposed in his biennial budget for the legislature to cut local funding by $650 million—and mandate municipalities ante up $400 million annually for public pension contributions for the state’s teachers.

The holdup in state aid to local governments comes as both state and local borrowing costs are suffering: Moody’s has hit the state with three credit downgrades, so that for local governments—even as their state aid is delayed and uncertain, their municipal bond interest rates are climbing. Indeed, Moody has deemed Gov. Malloy’s modified executive order a credit negative for local governments, because it reduces total aid to municipalities by nearly 40% from fy2017 levels: that order, issued last month, reduces the largest source of state municipal aid, the state’s education cost sharing, by $557 million relative to the last fiscal year. Thus, Controller Lembo warns that the inability to set a state budget can only aggravate state and local fiscal conditions, noting: “This problem is exacerbated each month as potential sources of additional revenue are foregone due to the absence of the necessary changes to the revenue structure.”  That is aggravated by higher state expenditures: the Comptroller noted that state expenditures through the first month of the state’s fiscal year were more than 10% higher than last year, a double-digit increase he attributes to rising fixed costs, including debt and public pension obligations. If anything, the woeful fiscal situation could be exacerbated by preliminary data indicating that the state lost 600 jobs in July, a disheartening downturn after the last fiscal year when the state had posted 11,600 new payroll jobs; indeed, during the last period of economic recovery, employment growth averaged over 16,000 annually.

Physical & Fiscal Storm. President Trump yesterday declared a state of emergency in Puerto Rico and ordered that federal assistance be provided to local authorities. Gov. Ricardo Rossello, early this morning warned: “The day has arrived,” as Hurricane Irma neared landfall, registering sustained winds of 185 miles per hour, far greater than levels measured under Hurricane Harvey in Houston. The Governor stated: “We want to make sure that in those areas of high vulnerability people can mobilize to one of our shelters; we are still preparing for what could be a catastrophic event.” The Governor called on anyone living in flood areas to seek refuge in each of a relative or friend or one of the shelters enabled. Already this a.m., the number of refugees in Puerto Rico due to the hurricane rose to 707, distributed in schools operating in the 13 police areas. The San Juan area commander, Colonel Juan Cáceres, said there are six shelters open the San Juan, noting: “In addition to staff working 12-hour shifts, area commanders are divided into two work shifts: 6:00 am to 6:00 pm and vice versa. We will be patrolling and doing surveillance work as long as the weather permits and in the commercial areas that are still selling merchandise to protect consumers.” The city’s security plan will emphasize traffic control and direction: The refugees were not only Puerto Ricans, but also tourists. By the time you read this post, the territory is expected to experience the physical intensity of Irma, a category 5 hurricane with winds of 185 miles per hour. For a territory already in severe fiscal distress, the storm promises dire fiscal and physical challenges.