Water & Ancient Municipal Taxation & Finance

January 5, 2017

Good Morning! In today’s Blog, we consider the ongoing physical and fiscal challenges in Puerto Rico, and we reflect on an ancient form of taxation from Luxor.

Restoring Power? More than one hundred after Hurricane Maria savaged the U.S. territory of Puerto Rico, Governor Ricardo Rossello yesterday announced he will be convening the territory’s Mayors to assess how they can collaborate with the Electric Power Authority (AEE) to restore the electrical system, with the Governor stating: “They are going to be quoting the Mayors to see what will be the mechanism of collaboration they can provide and how it can be carried out, but remember it has to be done in a coordinated manner.” Those sessions are scheduled to begin Monday. The task—delayed with such devastating health and fiscal consequences, especially compared to the responses in Houston and Floridacame after several mayors pressed for clearer information and questioned how the coordination with the U.S. Army Corps of Engineers would work—leading the Governor to stress that hos designated Single Point of Contact (SPOC), Carlos Torres, would be the individual as the person in charge of “this recovery process.” (Mr. Torres is the coordinator of restoration of the electrical system.)

The Governor’s announcement came in the wake of Bayamón Mayor Ramón Luis Rivera Cruz’s demand yesterday for the head of Puerto Rico’s Electric Power Authority provide “clear and precise” information with regard to when the electric service will be restored in his municipality.  Mayor or Alcalde Cruz indicated that, at the moment, only 44% of the structures in Bayamón have electricity, according to the census carried out by the municipality itself. The entire southern half of the town is in darkness, with the exception of a small sector in the Buena Vista neighborhood. The failure to restore power, he noted, have already generated losses to the municipality of about $5 million—with that figure only reflecting what the municipal administration has failed to receive in licenses, permits, and the municipal sales and use tax (IVU), Mayor Cruz said, warning that the figure will probably increase when municipal patents payments come in in April and when there is an expected reduction in remittances received by municipalities from the Municipal Tax Collection Center (CRIM). He added that he shared the “frustration” with respect to the thousands of PREPA subscribers who still do not have electricity, but then turned his anger to the Corps for its alleged lack of “Visibility” regarding the materials that have been delivered to Puerto Rico to repair the electricity network.

Ancient Municipal Taxation. In one of the world’s most ancient regions, Egypt, one of the earliest forms of municipal taxation was, mayhap unsurprisingly, based upon the most vital resource: the Nile River. Prior to the modern construction of the Aswan Dam, high water and low water years, after all, defined wealth—or poverty—for residents in a country which is largely a desert. Thus, last week, near Aswan, we visited what is called a nilometer—a construct nearly 2500 years old—and a fiscal tool to calculate the water level of the river during the annual flooding of the Nile. Fewer than two dozen of the devices are known to exist. Prior to the completion of the Aswan Dam, financed by the U.S.S. R., in 1970, the Nile flooded the surrounding plains each year in late July or August. As the waters receded in September and October, they left behind a blanket of fertile silt that was essential for growing crops such as barley and wheat. But, there were dry years and wet years—meaning the amount of water was critical to the local economy: the hope was always for enough—but not so much that flooding would devastate homes and crops. It has been estimated that the flooding was either inadequate or excessive roughly once every five years during the Pharaonic period.

Thus, the Egyptians were looking for a means to determine how to levy taxes. Thus, fashioned out of large limestone blocks, they created a Nilometer, which, as we observed last week in a temple, was a circular well roughly eight feet (2.4 meters) in diameter with a staircase leading down into its interior. Either a channel would have connected the well to the river, or it would have simply measured the water table as a proxy for the strength of the river. Seven cubits—roughly 10 feet (3.04 meters)—was the optimum height for prosperity. Thus, during the time of the Pharaohs, the nilometer was used to compute the levy of taxes: if the water level indicated there would be a strong harvest, municipal taxes would be higher.

Interestingly, a list of names carved in Greek was inscribed on a limestone block in the Nilometer: each name is followed by a number, which suggests the individuals recorded were beneficiaries who contributed funds to build the structure. (In the third century B.C., Egypt was ruled by the Ptolemies, a line of Greek royalty who assumed power there after the death of Alexander the Great.) The sites, as observed, were parts of sacred temple complexes where priests used the structure to predict the seasonal floods, and farmers left offerings in hopes of winning the river god’s favor.

Recovering after a Quasi-State Takeover

December 8, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report that last night, House Republicans voted 235-193 to pass and send to the Senate a stopgap bill to keep the federal government open for another two weeks, freeing up space to finish both the federal budget for the year that began last October 1st—and to try to craft a conference report on federal tax reform. The House vote now awaits Senate action, where leaders plan to act swiftly to put the bill on President Trump’s desk and avoid a shutdown on Saturday.

.Visit the project blog: The Municipal Sustainability Project 

A Founding Municipality. Petersburg, Virginia—where archaeological excavations have found evidence of a prehistoric Native American settlement dated to 6500 BC, was, when the English first began to settle America, arriving in Virginia in 1607, in a region then occupied by Algonquin speaking early Americans—was founded at a strategic point along the Appomattox River. Nearly four decades later, the Virginia Colony established Fort Henry along the banks of the Appomattox River. The colony established Fort Henry—from which Colonel Abraham Wood sent several famous expeditions in subsequent years to explore points to the west; by 1675, his son-in-law, Peter Jones, who commanded Fort Henry opened the aptly named Peter’s Point trading post. In 1733, the founder of Virginia’s capitol of Richmond, Col. William Boyd, settled on plans for a municipality there—to be called Petersburgh—an appellation the Virginia General Assembly formally incorporated as Petersburg on December 17, 1748.

By the 20th century, the upward growth in one of the nation’s oldest cities peaked—at just over 41,000 residents: by 2010, the population had declined more than 20 percent—and the municipality had a poverty rate of 27.5%, double the statewide average, and nearly 33% greater than in 1999. The city’s largest employer, Brown & Williamson, departed in the mid-1980s. By last year, 100% of Petersburg School District students were eligible for free or reduced price lunch—even as the district lagged behind state graduation rates; the  and the rate of students receiving advanced diplomas. Last year, the city’s violent crime rate was just under twice the U.S. average. By 2014, Petersburg’s violent crime rate of 581 per 100,000 residents was nearly 30% higher than the violent crime rate in Danville—even though, unlike Danville, Petersburg is in the thriving Richmond metropolitan area—and has potential partners in higher education (Virginia State University and Richard Bland College) and philanthropy (Cameron Foundation), as well as a unique concentration of affordable, historic housing. Yet the city’s unassigned General Fund reverses grew from $20.4 million in FY2005 to $35.0 million by FY2014, or 55% of operating expenditures; it has very strong liquidity, with total government available cash equal to 11.5% of total governmental fund expenditures and more than ten times greater than annual debt service payments. Nevertheless, as we have previously noted, a state technical assistance team’s review last year determined that the City had exhausted most of its unrestricted reserves—also noting that in FY 2015, the City’s final budget called for General Fund revenue of $81.4 million and spending of $81.1 million, even as the municipality’s CAFR reported that actual revenue was $77 million, while spending was $82.9 million—leading to a conclusion that, based on General Ledger reports, all funds expenditures exceeded all funds revenue by at least $5.3 million.

Moreover, notwithstanding its string of operating deficits, Petersburg undertook a series of costly, low return economic development investments—purchasing a hotel, supporting a local baseball team, and building a new library—all investments beyond the city’s means. Nevertheless, after a state intervention, after nearly a decade of near insolvency, the city’s most recent Comprehensive Annual Finance Report demonstrates Petersburg is emerging from its fiscal bog—closing FY2017 having collected $73,069,843 in revenues, while spending $65,861,125 in expenditures: meaning the positive $7,208,718 difference nearly eclipsed the $7.7 million deficit which had been carried over from FY2016—unsurprisingly leading Blake Rane, the city’s Finance Director, to note: “We’re really excited about the changes that occurred in 2017: As the new administration, we are super excited that the road we have to go on is starting at a better position than where we thought it would be.” Similarly, Mayor Samuel Parham, at a news conference, noted: “We’re showing outside development that Petersburg is a safe investment…There was a time when people thought we were going to fall into the Appomattox.”

Much of the fiscal recovery credit, as we have previously noted, may be credited in part to strict expenditure practices instituted by the Robert Bobb Group, the turnaround team headed by the former City of Richmond Manager, which ran the city administration from October 2016 until September—where the team found Petersburg had always overestimated revenues, according to former Finance Director Nelsie Birch, so that the fiscal challenge was to get a “handle on spending,” a challenge met via the adoption of a very conservative FY2017 budget with a strong focus on improving Petersburg’s collection practices—including enforcement:  For the first time in several years, the city put delinquent properties up for tax sale—or, as City Manager Aretha Ferrell Benavides put it: “The new billing and collecting office is moving on collecting now: People are realizing that we’re not going to sit and wait.”  The results are significant: Petersburg’s fund balance is nearly at zero after dropping to a negative $7.7 million. Today that balance is a shadow of its former level at negative $143,933, and Manager Benavides notes: “We’re working on building up [the fund balance], because we’ve been very dependent on short-term loans through Revenue Anticipation Notes.”

Other key steps on the city’s road to recovery included selling excess water from the city’s water system, selling pieces of city-owned property, and even selling the city’s water system, or, as Mr. Bobb put it: “Moving forward, the city still needs that liquidity event (that was not intended to be a pun), because a major snowstorm, or a major water line break, sinkhole, etc., those things would be a significant drain on the city, unless it has a major fund balance.” As part of its fiscal diet, Manager Benavides notes Petersburg is still examining options to sell as many as 320 pieces of city-owned property, with the City Council already having approved the disposition of some of these properties over the past several months. The fiscal road, like the city’s history and geography, has been steep, but the fiscal exertions appear to be paying off, as it were.