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.