The Uneven Challenges to Chapter 9 Recovery from Municipal Bankruptcy

Mayday, 2018

Good Morning! In this morning’s eBlog, we note the uneven recovery in Detroit from the largest chapter 9 municipal bankruptcy in American history.

An Absence of Fiscal Balance? In a new report by 24/7 Wall Street about the nation’s poorest urban regions, Detroit is ranked 5th, raising, the publication notes, the question why so many communities in such good times have been left fiscally behind. . The report — from 24/7 Wall St., a New York-based financial news organization — ranks the Detroit area at No. 5 in a list of impoverished communities. It also raises the question: During such good economic times, why are so many being left behind? While the report notes the seeming good times for the U.S. economy, it also reports that the share of Americans living below the federal poverty level ($25,100 for a family of four) has increased by nearly 10 percent since 2010. But of greater concern for state and local leaders, the concentration of poverty has also risen—or, as the report noted: “This increased concentration of poverty is far more pronounced in certain metropolitan areas: The share of poor residents living in extremely poor neighborhoods—defined as those with a poverty rate of at least 40%—climbed by more than 3.5% in 20 metro areas in the last six years.” That is, in a post-Richard Nixon era where the federal government no longer appears to believe it has a role in providing some fiscal equity, the report writes that the Detroit metro area has “long been the poster child for economic decline in postindustrial America.”

It appears we are in a state of fiscal disequilibrium, where no major municipality is any longer in chapter 9 municipal bankruptcy, and Detroit, emerging from the largest ever municipal bankruptcy and now a center of innovation again for the auto industry, with the city’s poverty rates having declined by more than 10% from 2015 to 2016—to its lowest rate in a decade. Nevertheless, with a poverty rate of 35.7% in 2016, the report found that an increasing share of residents in the metro region are, today, below the federal poverty level: 16.2%, putting the Motor City behind Bakersfield, Fresno, Springfield (Mass.), and Albuquerque, N.M. The report noted: “The share of poor residents living in extremely poor neighborhoods—defined as those with a poverty rate of at least 40%—climbed by more than 3.5% in 20 metro areas in the last six years: Such high-poverty neighborhoods are often characterized by high crime rates, low educational attainment rates, and high unemployment. Partially as a result, those living in these extremely poor neighborhoods are at a greatly reduced likelihood of success and upward economic mobility.”

The 24/7 Wall Street bears out Brooking’s 2016 report which defined the Detroit metro region (including Wayne, Oakland, Macomb, Livingston, St. Clair, and Lapeer) to have the highest rate of concentrated poverty among the most populous metro areas in the U.S. That is, in a nationally growing economy, one can, mayhap, better appreciate some of the appeal of President Trump, as there remains, in a growing economy, a large segment of the population unable to take advantage of the growing economy.

Part of it, of course, is that the issue of fiscal disparities is neither on the agenda of the President nor Congress.

Nevertheless, as our colleagues at Municipal Market Analytics note, Detroit’s exit from state oversight this week after shedding about $7 billion of its fiscal liabilities  “seems a bit fast, given the depths of the city’s challenges, and suggests that the state continues to value a narrative of quick rebound versus evidence that such can be sustained.” While MMA noted Detroit’s relatively conservative budgeting, small resulting surpluses, planning for the upcoming spike in pension payments, and decision to redeem $52M in recovery bonds; it noted the “the rising pension payments are a significant concern (even with funds set aside to temporarily smooth incremental costs) particularly when considered in conjunction with the city’s limited flexibility to address other potential events outside of its control such as reductions in federal or state aid, changes in federal policies that impact the economy in the state and/or nationally, and probably most concerning, an economic recession.”

Interestingly, MMA noted that were the Motor City’s recovery to stumble, the “potential for additional state intervention or aid is remote. Going forward, the city is likely on its own,” adding that, notwithstanding that the city has become an epicenter of the self-driving car industry; nevertheless,  this represents just a portion of the city and: “The rising living costs in these areas risks pushing existing residents out to more challenged neighborhoods, creating a greater income divide and worsening inequality. Notwithstanding the burgeoning economy in some pockets of Detroit, significant challenges remain across the vast city including horribly high poverty, crime, and poor educational outcomes. Detroit’s poverty rate is 39.4%, and only 13.8% have attained at least a bachelor’s degree.”

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Fiscal Fire in the Hole

April 24, 2018

Good Morning! In this morning’s eBlog, we return to the Windy City region and the small Chicago suburb of Harvey, as it teeters on the edge of insolvency in a state where municipalities are not authorized to file for chapter 9 municipal bankruptcy, albeit under Illinois’ Local Government Financial Planning and Supervision Act (see 50 Ill. Comp. Stat. 320), a local Illinois government with a population under 25,000 suffering from a “fiscal emergency” may—if it secures a two-thirds vote of its Council, petition the Governor to appoint a financial planning and supervision commission to recommend that the local government be granted the authority to file for chapter 9 via submission to the Illinois Legislature—something which happened twenty-nine years ago in the case of East St. Louis.

Fire in the Hole. Illinois Rep. Jeanne Ives (R-Ill.), whose Chicago suburban district includes all or portions of Wheaton, Warrenville, West Chicago, Winfield, Carol Stream, Lisle, and Naperville—and who served on the Wheaton City Council prior to being elected to the Legislature, yesterday said the embattled, small municipality of Harvey was not alone in its inability to meet Illinois’ pension demand, adding the small city should strongly consider filing for municipal bankruptcy. In the wake, as we have noted, of the state’s withholding of funds to Harvey because of its non-payment into the pension system, firefighters and police officers have been laid off. That is, there is a growing human risk—and, as with fire, it is a risk which could spread to other municipalities in the region—from Burbank to Niles to Maywood, small cities in comparable fiscal straits. With boarded up businesses on the main street, it appears, as Rep. Ives notes, that “Bankruptcy is the only way out.”

In the wake of the State of Illinois’ decision to withhold state assistance because of its failure to make mandatory public pension contributions, the city laid off nearly one-third of its 67 firefighters and 12 of its 81 police officers. Harvey has not kept pace with pension payments for more than 10 years. With boarded up businesses on the municipality’s main street, Rep. Ives, ergo, notes: “Bankruptcy is the only way out.” Adding, in reference to the small city’s layoffs: “Forty-two retired Harvey firefighters have saved a collective $1.42 million, but have already collected nearly $25 million in retirement.” Her comments came in the wake of the Cook County Appellate Court overturning of a prior decision by the Cook County Circuit Court and grant of a temporary restraining order against the Illinois State Comptroller with regard to the hold of $1.4 million from the City of Harvey. The Mayor, Eric Kellogg, has released a statement noting: “We will not entertain any conversation concerning the filing of bankruptcy;” however, the municipality’s fiscal options are limited. Even though the Appellate Court of Cook County has overturned the prior decision of the Cook County Circuity Court and granted a temporary restraining order against the Illinois State Comptroller regarding the hold of $1.4 million from Harvey, the option of raising local taxes appears most unlikely—or, as one local taxpayer who used to own a restaurant there put it: “My property taxes were $80,000 a year: How many hot dogs can you sell?”

As our insightful colleagues at the Municipal Market Journal observe, Illinois’ statute, P.A. 96-1495, “potentially transforms pension funding problems into service funding issues and may accelerate fiscal deterioration of some municipalities. The law, which recently became effective, requires that the Illinois Comptroller to withhold and divert state revenues targeted for a municipality to police and fire pension plans when requested to do so by the funds, because of the failure of the sponsor to make required contributions. The Journal goes on to observe: “The City of North Chicago is the second, but according to a recently published paper by the University of Chicago’s Amanda Kass, there are over 600 individual police and fire pension funds in the state and 29% were less than 50% funded in 2016 (Chicago excluded). This suggests that, if the court upholds that the state must divert money away from municipalities that short their police and fire pensions, more governments may be thrust into fiscal distress.” Their note adds: “Because of a lack of readily available information, the paper uses the Illinois Department of Insurance’s calculations regarding what should have been contributed to the pensions during the period from 2003-2010 to determine the municipalities that are more likely to be at risk of a diversion. Fifty-four municipalities responsible for 71 funds contributed 50% or less of what the Illinois Department of Insurance said should be paid, and, as a result, the funds are worse off with a 47% funded ratio in 2016 compared with a state average (again, excluding Chicago) of 60%. Notably, over 50% are in Cook County. The Department of Insurance (DOI) is one of three sources that can determine the contribution (an actuary hired by the fund or by the municipality can also make the determination).