The Rocky Road to Insolvency

September 18, 2015

The Road to Insolvency. Moody’s yesterday cut Ferguson, Missouri’s credit rating by four notches, a downgrade the credit rating agency said reflected the “severe and rapid deterioration of the city’s financial position, possible deletion of fund balances in the near term, and limited options for restoring fiscal stability…” adding the municipality could be headed for insolvency as early as 2017. [In Missouri, any municipality or political subdivision may file for municipal bankruptcy protection (six cities have previously]. The downgrade for the municipality of 21,000—one of 116 municipalities in the St. Louis metro area—came in the wake of the release of the Ferguson Commission report, which was released this week–more than a year after we began in this blog looking at the fiscal complexity of hundreds of municipalities operating in metropolitan areas (there are, for instance, over 280 in the Chicago metropolitan region). The downgrade was a sign of the fiscal fallout from the fatal 2014 police shooting of Michael Brown. The Ferguson report concludes:
• the State of Missouri should establish a publicly accessible database tracking incidents when police use force;
• Missouri’s Attorney General should step in as a special prosecutor in those cases which lead to a death;
• Municipal and county police should be trained with regard to the “implicit bias” which shapes decisions by people who had never consider themselves racist;
• The court system should stop jailing residents for non-violent offenses, locking them away from the jobs they would need to pay off their fines and speeding tickets in the first place, noting, pointedly: “When someone is jailed for failure to pay tickets, the justice system has not removed a dangerous criminal from the streets. In many cases, it has simply removed a poor person from the streets.”

The report, commissioned last fall by Missouri Governor Jay Nixon to dissect to roots of Ferguson’s unrest, also calls for the state of Missouri to expand Medicaid coverage (Missouri is one of 19 states which has refused to do so; it also urges adoption of a $15 minimum wage (the current floor in Missouri is $7.65 an hour). It calls for a cap on the interest predatory payday lenders demand of the poor, and an end to childhood hunger. It recommends smarter transportation investments, a commitment to early childhood education, and disciplinary reform in elementary schools. It even demands “inclusionary zoning” policies to ensure more low-income housing gets built-in neighborhoods with good schools and opportunity. The report, nearly 200 pages long, seeks to weave and connect every interlocking policy problem — in education, housing, transportation, the courts, employment, law enforcement, public health — implicated in the racial inequality at the heart of Ferguson’s unrest. A March report from the U.S. Justice’s Civil Rights Division found the Ferguson police department engaged in unlawful and discriminatory practices partially driven by the city’s reliance on court fine revenue to support its budget. Advocacy groups have filed a series of lawsuits challenging municipal ticketing operations. Between draws in fiscal 2015 which ended June 30, and fiscal 2016 projections, city reserves are expected to fall by 70% compared to audited fiscal 2014 levels.

Moody’s downgrade impacts $6.7 million of outstanding Ferguson general obligation municipal bonds, $8.4 million of certificates of participation from a 2013 issue, and $1.5 million of 2012 certificates or COPs, with the agency noting its downgrade “reflects severe and rapid deterioration of the city’s financial position, possible depletion of fund balances in the near term, and limited options for restoring fiscal stability: “Key drivers of this precipitous drop are declining key revenues, unbudgeted expenditures, and escalating expenses related to ongoing litigation and the Department of Justice consent decree currently under negotiation…”We believe fiscal ramifications from these items could be significant and could result in insolvency…We expect additional detail within the next few months as to the city’s final audited fiscal 2015 results as well as options and financial strategies for addressing these looming costs.”

Ferguson Mayor James Knowles III yesterday responded to the Justice Department report, saying he appreciated the hard work and dedication of the Commission by interviewing hundreds of community stakeholders throughout the metropolitan area, which included Ferguson residents and many of its business owners.

One outcome of the fiscal deterioration and the killing of Michael Brown in the wake of the subsequent rioting focused attention on aggressive policing tactics and the heavy reliance on court fines to prop up local government budgets. Critics note that stiff court fines imposed by local governments like Ferguson’s result in aggressive policing tactics which disproportionally target low-income and minority residents. Along with taxes and other revenue streams in 2010, the city collected over $1.3 million in fines and fees collected by its court. For FY2015, Ferguson’s budget anticipates fine revenues to exceed $3 million – more than double the total from just five years earlier, according to the report. The increase was not tied to crime figures. Ferguson responds that the city has taken action to with new ordinances to limit the use of revenue generated by court fines and fees to 15% of its budget. The city has also revised various policies on collections. The Missouri State Auditor’s office launched probes into 10 local governments’ use of court fines to ensure they comply with the law and plans more. Most Missouri local governments face new restrictions on the use of municipal court fines under legislation signed in July by Gov. Jay Nixon—especially in the wake of the new state commission’s recommendation of a sweeping overhaul of police tactics and court fine practices.

Bankruptcy Protection? Senate Finance Committee Chairman Orrin Hatch (R-Utah) reports his Committee will “have to have a hearing” on whether Puerto Rico’s agencies should be able to use bankruptcy to reorganize their finances. Interestingly, Chairman Hatch is in a very unique position to act—as it is the Senate Judiciary Committee which has jurisdiction over municipal bankruptcy legislation—and where Mr. Hatch is not only a member, but also a former Chairman. A staff member on the Finance Committee indicated it likely such a hearing would occur the week after next. For his part, Chairman Hatch, who spoke with Puerto Rico Governor Padilla this week, said “I always intended to have a hearing, because it’s a serious problem and we need to resolve it,” adding that the U.S. citizens of Puerto Rico are in “real trouble.” Chairman Hatch reports that legislation extending chapter 9 municipal bankruptcy protection to Puerto Rico, co-sponsored by Sens. Charles Schumer (D-N.Y.) and Richard Blumenthal (D-Conn.) will be discussed when panel meets.