Breaking Up Is Hard to Do

June 8, 2018

Good Morning! In this morning’s eBlog, we consider the issue of unincorporated areas: what are the fiscal implications?

In many U.S. states, it’s not uncommon for homeowners to reside in what are known as “unincorporated” areas, meaning portions of the state or county that are not contained within the boundaries of an incorporated city, town, village or similar local governmental entity. From a municipal perspective, that means a community not governed by its own local municipal corporation, but rather is administered as part of larger governmental administrative division—such as a township, parish, borough, county, or city—governance entities which, depending upon the pertinent state laws, may file for chapter 9 municipal bankruptcy, dissolve, disincorporate, or, as we noted in today’s eGnus, make even separate. Widespread unincorporated communities and areas are a distinguishing feature of both the U.S. and our neighbor Canada—but rare in any other countries around the globe. In fact, unincorporated areas are mostly found in this country in Texas—an enormous state, but which has the nation’s smallest municipality: McAllen, in Jim Hogg County, with a population of 6.

When it comes to unincorporated areas within states, Pennsylvania appears unique: it is, after all, the state with the greatest number of local governments or political subdivisions: the Census Bureau puts the number at 5,000—putting the state only behind Texas and Illinois; but maybe ranks it first in terms of imposing vast and conflicting arrays of taxes—taxes which, however, are imposed on shrinking tax bases. Indeed, the fiscal stress has reached such a point that the state’s House Urban Affairs Committee recently convened a public hearing on legislation intended to assist smaller municipalities mired in cycles of financial distress—threatened with insolvency absent outside assistance. House Bill 2122 would allow these communities, after gaining approval in a voter referendum, to dissolve themselves and have their functions absorbed by the county. The co-sponsors, Representatives Dom Costa and Harold English, offered the bill as a means they described to provide for the voluntary dissolution of municipal corporations (cities, boroughs, towns, & townships) within counties of the second class (Allegheny), and the substitution of an unincorporated districts as a new form of government to be administered by the county. Under the proposed legislation, the process of dissolution would be initiated by the governing body of the municipal corporation through passage of a non-binding resolution to engage in discussion with the county over a period of six months, during which time they would develop a proposed essential services-transition plan as part of an intergovernmental cooperation agreement.: such a plan would be subject to public meetings in the community and would have to be voted on by the governing body of the municipal corporation, as well as the County Council: should both the municipal corporation and county governing bodies approve said plan, a referendum would be scheduled—an election where, if approved by the voters, a six-month winding down of the affairs of the municipal corporation would begin. At the conclusion of such a period, an unincorporated district administered by the county would go into effect, and the essential services-transition plan would become an official ordinance of the county. That would entail significant powers to said county to administer and manage such a district; the county would also retain the tax levying power and authority to assess fees and service charges previously authorized to that particular class of municipal corporation. All taxes and fees levied within the service district would have to be used for the benefit of the district.

Finally, the bill provides for the potential merger and consolidation of the unincorporated district with another municipal corporation or would permit the district to re-incorporate itself as another type of municipal corporation in accordance with the existing municipal codes applicable to such entities.

They reported the legislation was carefully crafted with input from the staff of the bicameral/bipartisan Local Government Commission, confident that it represents a unique voluntary agreement between municipalities – one in which a given city, borough or township would be able to ensure a more efficient and effective delivery of services to their residents while retaining their municipal identity. 

Pennsylvania’s Department of Community and Economic Development administers Act 47, as we have previously noted, a program to help “distressed” communities as designated under the terms of the state’s Act 47, under which the state could ultimately take on the task of providing local services. However, it appears that Deputy Secretary for Community Affairs Rick Vilello, the department’s deputy secretary for community affairs and development, HB2122 might provide a better option, or, as he testified: “We’ve not timed out [on recovery options] on a community who we felt wasn’t ready to try to make it on their own…But we are fast approaching a time when several municipalities will time out. When municipalities time out, there are very few good solutions from that point forward. House Bill 2122 provides a potential solution for local leaders facing hard decisions and is a tool worth trying.” Secretary Vilello testified that to date, only 31 municipalities in the state had ever reached “distressed” status out of 2,560. Of those 31, nine were in Allegheny County.

The Secretary noted: “House Bill 2122 could be a life-preserver for communities that have been treading water for a very long time: Who knows, if it works in [Allegheny County], what would be possible next. House Bill 2122 is a tool for the elected officials and for the citizens of distressed municipalities to make a choice about their future.”

Allegheny County Executive Rich Fitzgerald testified that the proposed legislation could be useful, not only to those communities whose finances have spiraled out of control, but also to those that have managed to avoid financial disaster by cutting essential services to minimal levels:  “Some of them, quite frankly, have not gone into Act 47…They just quit providing the services. They haven’t gone into the debt problem, but they haven’t provided the services their citizens have wanted. And what [residents have] basically been doing is voting with their feet. They’ve been leaving, [and] those municipalities have been shrinking in population.” The County Executive emphasized that the legislation could not lead to any municipality being dissolved against its will; similarly, he testified that no county could be forced to absorb a municipality against its will: both governments would have to agree to the terms of the disincorporation before it even went to the voters for approval.

Under the proposed legislation, the unincorporated community would retain some level of local governance through the establishment of a district advisory committee appointed by the county council. The advisory committee would hold open meetings in the former municipality and issue reports to the county on matters pertaining to local residents.

Nevertheless, Melissa Morgan, legislative and policy analyst for the Pennsylvania State Association of Township Supervisors, warned the proposed legislation would go too far in wresting local power and vesting it in a higher level of government, telling legislators her organization, which she said represents 1,454 townships in the state, opposes the passage of HB2122 or any other legislation that would allow for the dissolution of municipalities: “County government should not be given additional powers to administer unincorporated territory…Instead, the Legislature should consider relieving unfunded mandates for municipalities, such as those requiring benefits to uniform employees to help alleviate financial challenges.” County Executive Fitzgerald said he was in favor of the Legislature taking other steps such as those suggested by Ms. Morgan to ease the plight of struggling communities; however, he noted that HB2122 was also a good option to have on the books in case those other steps fail to provide relief: “It’s a voluntary program: It’s just giving people an option. And to me, that’s what democracy is about, giving people the choice. Right now, they don’t have that choice.”

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The See-Saw of Municipal Fiscal Solvency

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eBlog, 12/27/16

Good Morning! In this a.m.’s eBlog, we consider the remarkable turnaround in fiscal fortunes in Detroit—a city unbailed out by the federal government, but now, as Detroit News editorial writer Daniel Howes writes, is “perceptively changing,” albeit, interestingly in light of the President-elect’s choice to be the new Secretary of Education, the state of Detroit’s public schools “burdens an already difficult financial picture.” Then we turn to the challenge of trying (in the frigid Winter no less!) to describe fiscal contagion from the insolvent East Cleveland, before finally trying to escape the cold by journeying south to Puerto Rico to explore the worsening demographic trends and their implications for the changing administrations both in Washington, D.C. and Puerto Rico.

Winnerville? Daniel Howes, an editor for the Detroit News, in his editorial “Loserville,” wrote that two years “after Detroit emerged from the largest municipal bankruptcy in the nation’s history, the city America gave up for dead is showing that it is anything but,” writing that vacant space downtown is “is growing increasingly hard to find,” a stark contrast from the city’s first day of municipal bankruptcy when I was specifically warned not to walk from my downtown hotel to the Governor’s Detroit offices to meet Kevyn Orr, the then newly named Emergency Manager. Thus, Mr. Howes writes:

He tempered his column by noting that violent crime continues to be an issue in parts of the city—and that neighborhood revitalization “lags the pace set by downtown,” adding that the “exodus from Detroit Public Schools burdens an already difficult financial picture,” albeit writing that Detroit’s makeover is “a process, not a destination with guaranteed arrival,” indeed, comparing it the comparable (and related) comeback of the auto industry—albeit with the profound difference that the latter was bailed out—something Detroit was not, noting: “Detroit’s automakers, effectively a ward of the federal government at the outset of the Obama administration, are closing an eight-year span their leaders used to re-engineer companies that tottered on the edge of collapse on Election Day 2008…Eight years later, at least two of Detroit’s three automakers — as well as many of its suppliers—are emerging as players to be reckoned with in both the traditional car and truck business as well as the emerging mobility space. Loserville? Hardly…The creation of the American Center for Mobility at Willow Run and the Michigan Legislature’s move to enact the most far-reaching autonomous-vehicle laws in the country underscore the state’s bid to become the nation’s epicenter of mobility development and testing.”

Loserville? Fiscal Contagion? Just as the flu can be contagious, so too municipal fiscal distress does not necessarily stop at municipal borders. So it is that a growing number of residents of Forest Hill, a twenty-five acre historic neighborhood spanning parts of Cleveland Heights and East Cleveland, Ohio, founded by John D. Rockefeller and a seeming stark contrast from the virtually bankrupt East Cleveland, are upset by the increasing number of long-abandoned homes in both municipalities: assessed property values are tanking, and there is increasing apprehension at the seeming inability of the municipality to provide even basic services. There is also a sense that East Cleveland’s possible merger with Cleveland will not happen soon enough (if ever) to help Forest Hill’s issues: incorporating as a village would take cooperation from both cities, several voter elections, and the approval of Cuyahoga County. Similarly, there are no answers to the questions of where tax dollars would come from to hire police, firefighters, and provide basic, essential public services. Ironically, the neighborhood hosts municipally influential citizens—or at least formerly so, including East Cleveland’s recalled Mayor Gary Norton, the city’s new mayor Cheryl Stephens, and former Mayor Ed Kelley. The silence of the State of Ohio must weigh heavily on their hopes for the New Year.

Unfeliz Navidad? Puerto Rican demographer Raul Figueroa released information this morning that if the current demographic trends in the U.S. territory continue, by 2020, citizens older than 60 will—for the first time ever—surpass the number of those under 18, writing that between July of 2015 and July of this year, some 60,000 island residents had departed—and that this year marked the first in which the number of deaths exceeded the number of births. He noted increasing apprehensions of an increasing schism for the young generation—whose most productive members have “established themselves outside of the U.S. territory” and are forming families there, while their counterparts who have stayed behind are, increasingly, becoming caught up in criminal activities. Thus, he wrote, “Only a significant reduction in emigration or increase in immigration could reverse this demographic trend…it will be necessary to search for a strategy to permit and facilitate strategies to create employment opportunities.” Indeed, island economists like Elías Gutiérrez and José Alameda have expressed apprehension that the island is converting into a “gueto” of the poor and aged, likening it to a “Greek tragedy.” Mr. Gutiérrez added that the middle class has receded on “every front.” He noted, too, that the increasing demographic imbalance will increase the public pension imbalance: as the young flee, fewer will be paying in, while the number of retirees will continue to grow.

The demographic pressures on the island’s fiscal challenges come as soon-to-depart Puerto Rico Gov. Alejandro García Padilla released more pessimistic figures for the next decade—as he cast increasing doubt with regard to the viability of a negotiated debt solution—explaining that his updated projection of Puerto Rico’s financial shortfall over the next decade would be $8.8 billion worse than its forecast of just two months ago, when he had submitted a 10-year fiscal plan to the PROMESA Puerto Rico Oversight Board—a plan in which the government had projected that if the government stayed on its then current fiscal course—its so-called “Baseline”—it would be short some $58.7 billion, that is, in an ever accelerating state of debt. Moreover, in a revision released yesterday, that figure had increased by nearly $10 billion to $67.5 billion—the deficit reduction target the outgoing administration estimated it would have to achieve in reductions to achieve a balanced budget by 2026. That is, the debt situation has reached such an extreme that even were all its $35 billion in debt service to be magically eliminated, the island would still be overburdened with debt.

The newly released baseline also uncovers a related fiscal challenge which the new one does: what are the fiscal implications on Puerto Rico’s economy? The government’s new baseline projects government spending cuts would lead to a more negative nominal gross national product trajectory over the next decade, with the nominal, annual GNP shrinking by 1.03 percent instead of the previously projected growth from the October plan—even as the revised assumptions about economic growth and inflation added some $3.4 billion to the new baseline compared to the October baseline. The tab? The revised projections over the next decade project $232 billion in government spending, but only $165 billion in revenue—with the difference to be bridged by unspecified budget cuts.

The revised projections come as the PROMESA Oversight Board has commenced its discussions with creditors as part of its mission, similar to a chapter 9 municipal bankruptcy, to achieve a negotiated and consensual debt cut under Title VI of the new PROMESA law. But, to Gov. Padilla, the increasingly deteriorating fiscal and economic projections over the next decade mean that “that a comprehensive restructuring under Title III (the debt restructuring title) of PROMESA is inevitable.” Yet this all comes in the midst of changing administrations in Washington, D.C. and against an encroaching deadline: under the new federal law, creditors’ rights to sue have only been suspended until the middle of February. Ergo, Gov. Padilla’s office notes: “If Puerto Rico does not seek Title III protection before the termination of the claims on February 15, 2017, the government will run out of money and essential services will be severely affected.”