TheExceptional Governing Challenges on Roads to Fiscal Recovery

Share on Twitter

eBlog, 12/02/16

Good Morning! In this a.m.’s eBlog, we consider the hard role to recovery not just from San Bernardino’s longest-ever municipal bankruptcy, but also the savage terrorist attack a year ago. Then we venture East to observe the evolving state role in New Jersey’s takeover of Atlantic City, where the new designee named by Gov. Chris Christie, Jeffrey Chiesa, yesterday introduced himself to residents and taxpayers, but offered little guidance about exactly how he will usurp the roles of the Mayor and City Council in governing and trying to get the famed boardwalk city out of insolvency and back to fiscal stability. Finally, we look north to the metropolitan Hartford, Connecticut region, where the municipalities in the region are seeking to work out fiscal mechanisms to address Hartford’s potential municipal bankruptcy in order to ensure no disruption of metropolitan water and sewer services—a different, but in this case critical element of a “sharing economy.”  

The Jagged Road to Chapter 9 Recovery. It was one year ago today that terrorists struck in San Bernardino—the city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, marking, then, a day of 14 deaths—with victims caught in the crossfire of gun shots and carnage in the wake of the wanton attack by Syed Rizwan Farook and Tashfeen Malik—and a horror still not over, as it will be another nine months before the trial against Enrique Marquez Jr., who has been charged with buying some of the weapons which were used in the attack, commences in September—months after the beleaguered city anticipates exiting from bankruptcy. Because the shootings took place at a San Bernardino County facility in San Bernardino, the long-term recovery has been further complicated from a governance perspective: many of the shooting survivors are accusing San Bernardino County of cutting off much-needed support for the survivors of the attack, including refusing to approve counseling or antidepressant medication. Others, who were physically wounded are seeking, so far unsuccessfully, to get surgeries and physical therapy covered. The San Bernardino County Board of Supervisors earlier this week convened a closed-door session at which survivors said they felt betrayed and abandoned, left to deal with California’s complicated workers’ compensation program without guidance or help. Their health insurers will not cover their injuries because they occurred in a workplace attack. Congressman Pete Aguilar (D-Ca.), whose district includes San Bernardino, reports that his hometown had been added to a list of cities with which people are familiar for a terrible reason, such as Littleton, Colo., or Newtown, Conn. Nevertheless, he is defiant, insisting “We will not be defined by this tragedy.”

However, murder rates in the city have been climbing: the city of just over 200,000 is grappling with a spike in violent crime, homicides especially: to date, this year, the city has reported 49 killings, already more than last year’s total, which included the terrorist victims—its homicide rate tops that of Chicago, which has become the poster child for big-city violent crime and is on pace for more than 600 killings this year. San Bernardino Police Chief Jarrod Burguan, however, said the crime wave is not unique to the chapter 9 municipality—a currently bankrupt city where empty storefronts and pawn shops have long lined downtown streets. Nevertheless, Brian Levin, a criminal justice professor at California State University, San Bernardino, who studies hate crimes, yesterday noted: “we’re a better community now, even though we’re hurt.” Professor Levin is one who, in the days and weeks which ensued after the mass tragedy, met with faith leaders, law enforcement, and families of the victims—where he discovered a unity of shock and shared pain. Today, he notes: “The attack will always be a part of our history…But here’s the thing: so will the heroics of those police officers and first responders and medical staff, and so will the grace of the families. We’re writing the rest of the history. The bastards lost.” Now the city awaits early next year for emerging not just from the physical tragedy, but also the longest chapter 9 municipal bankruptcy ever.  

Atlantic City Blues.  Jeffrey Chiesa, a former New Jersey Attorney General, U.S. Senator, and, now, Governor Chris Christie’s designee to run the state takeover of Atlantic City, yesterday introduced himself at a City Council meeting and took questions from city taxpayers and residents. He provided, however, in this first public meeting no details on plans to address either the city’s fiscal plight—or its interim governance. He reported the State of New Jersey does not yet have a plan to address the city’s $100 million budget hole, much less to pay down the Atlantic City’s $500 million debt, noting: “It has been two weeks…My plan is to do what I think is necessary to create a structural financial situation that works not for six months, not for a year, but indefinitely so that this place can flourish in a way that it deserves to flourish.” He noted he and his law firm will be paid hourly for their work, albeit he did not report what that hourly rate will be—especially as the state retention agreement remains incomplete, albeit promising: “We’ll make sure that’s available once it’s been finalized.” Related to governance, he noted that—related to his state-granted authority to sell city assets, hire or fire workers or break union contracts, among other powers—he would listen to residents and stakeholders before making major decisions: “What this designation has done is consolidate authority, per the legislation, in the designee to make those decisions…That does not mean that I’m not listening. That does not mean I’m pretending I have all the answers without consulting with other people.” Describing the seaside city as a “jewel” and “truly unique,” he added that he understood concerns about an outsider overseeing the city: “I know that most of you don’t know who I am…All I can do is be judged by my actions and the decision that I make, and I hope you give me time to do that.” He did say that he would have to move swiftly to address immediate issues, likely referring to reaching agreements with casinos to make payments in lieu of property taxes, and then focusing on the city’s expenses—noting: “That timeframe is pretty compressed…So we will take the steps we need to take.”

Fiscally Hard for Hartford. As we have recounted in the fiscally strapped municipality of Petersburg, Virginia, municipal fiscal insolvency cannot occur in a geographic vacuum: whether in Detroit—or as we note above today, in San Bernardino, fiscal insolvency has repercussions for adjacent municipalities. So too in Hartford, the Metropolitan District Commission (MDC) completed its planned $173 million municipal bond sale late last week, temporarily ending the controversy over a $5.5 million reserve fund. Under the provisions, that fund would be paid by seven of the eight MDC municipalities to cover the sewage fee for the second half of 2017 if the City of Hartford is unable to contribute its share, as it has indicated it will be unable to do. Ergo, it means that adjacent Windsor, the first English settlement in the state which abuts Hartford on its northern border, with a population of under 30,000 would contribute over $700,000, with East Hartford contributing about $900,000. The other group members in the metro region, Bloomfield, Newington, Rocky Hill, West Hartford, and Wethersfield, would pay the remaining $900,000, proportionately. One outcome of this watery alliance and experience is that the MDC will, when the state legislature convenes next February, propose two laws to avoid the necessity for a reserve fund in the future, with MDC Chairman William DiBella suggesting that the eight member municipalities be required to set aside as untouchable the percentage of their property taxes the cities and towns already know they will owe to the MDC for sewage services. (Currently, property taxes go into the municipalities’ general funds, and the cities extract the sewage fee when it is due, provided the funds are, in fact, available; however, like water at the tap, that has not always been the experience.) In effect, the consortium is recommending a selves-imposed budgeting municipal mandate, with Chairman DiBella noting: “Every town would have to do it. That way, one town can’t stiff us. You wouldn’t have to go out and borrow money or take charity and hope you get it back.” As the Chairman noted: “We never had a problem like this…Who thought a town would go bankrupt? With the proposed law, if a town were to go bankrupt, the sewage fund would be in a dedicated account and can’t be reached,” or touched in a bankruptcy proceeding. Another potential resolution would be to allow the MDC to borrow money over a long-term for operating expenses. The MDC would then be able to pay Hartford’s $5.5 million bill and look for a city reimbursement in other ways.

There has been increased pressure for a resolution—especially in the wake of municipal bond holders of the MDC, holders who, last week, made clear to the authority they would not buy its municipal bonds if a reserve fund was not put into place. That appeared to be a key incentive for the board’s action earlier this week for the MDC board, including representatives of all eight municipal members, to vote unanimously to adopt the water and sewer service provider’s 2017 budget, which contains the unwelcome “bail-out” fund for Hartford—albeit Chair DiBella said there would be no guarantee the agency could cover a Hartford default or continue operating or pay the bondholders. A key part of the incentive to try to work together relates to potential fiscal contagion: because of concerns over Hartford’s finances and fiscal condition, credit rating agencies have recently downgraded MDC’s bond rating from AA+ to AA, a downgrade expected to cost the agency and its member towns an estimated $500,000 in a higher interest rate for the bonds. The towns, unsurprisingly, are apprehensive the credit rating agencies will now consider changing their credit ratings. In contrast, creating the reserve fund would keep MDC’s credit rating where it is: thus, MDC officials hope that passing the two proposed laws would prompt the credit rating agencies to return its rating to AA+.

 

Advertisements

Municipal Sovereignty: What’s at Stake?

eBlog, 9/26/16

In this morning’s eBlog, we wonder whether the end for Atlantic City is nigh: will the state, in fact, take it over? Then we turn to the beleaguered cities of Cleveland and East Cleveland as they contemplate a potential merger: could that avert a chapter 9 municipal bankruptcy—an option which the State of Ohio has made like waiting for Godot? Then we veer east to Connecticut, where the capital City of Hartford faces insolvency—captive to fiscal and physical borders bequeathed from Pilgrim times. Just as inequality in that state’s schools propelled a powerful Connecticut Supreme Court decision, so too, we consider an insightful piece about the inequity of the post municipal bankruptcy Detroit school situation. What might it augur for the city’s post-bankruptcy future? Then, as Horace Greeley asked, we go west, where the governance challenges in San Bernardino and the upcoming ballot question about marijuana have made for heated debate about what kind of debates can the city hold to inform voters on an upcoming election critical to the city’s post-municipal bankruptcy charter. Finally, we look south to the U.S. Virgin Islands—just a hop, skip, and a jump from Puerto Rico to consider how this U.S. Territory is addressing its fiscal challenges. Phew!

Can a City Maintain its Sovereignty? The New Jersey Division of Local Government Services has notified Atlantic City that it has until next Monday to comply with the terms of a $73 million state loan or face the possibility of default because it is in violation of its loan terms, so that it must act swiftly to “cure the breach to come into compliance with the agreement,” albeit LGS spokesperson Tammori Petty noted: “We decline to speculate on next actions.” The notification appears to be a response to Mayor Don Guardian’s request last week for a reprieve after the City Council failed to agree to meet one of the terms in the loan agreement: dissolving the Atlantic Municipal Utilities Authority by September 15th. Should the city not comply by the looming deadline, the state can demand full repayment of the $73 million as well as withhold any state aid. In addition, the state could also to seize the city’s municipal utility authority or its airport as collateral, based on the terms by which the city had agreed to the bridge loan terms in order to avoid defaulting on a $3.4 million debt payment—a payment, which under the terms of the agreement, fell due at the beginning of last month. Doug Goldmacher of Moody’s noted that the city’s “inability to meet its loan covenants is a credit negative and indicative of the city’s severe fiscal distress.” Should the state take over Atlantic City, the Local Finance Board would be authorized and empowered to alter debt and municipal contracts. For the beleaguered city which has tried to weather the closure of four of its casinos—closures reducing its tax base by as much as 70 percent, in addition to undercutting assessed property values—the options appear to be waning. Nevertheless, the Mayor’s Chief of Staff, Chris Filiciello, stated: “We continue to focus on putting together the 150 day plan…If we are given the time to complete and present it, we know it will be the best plan to move Atlantic City forward while still maintaining our local sovereignty.”

To Be or Not to Be? Two of the nation’s poorest cities, East Cleveland and Cleveland, (East Cleveland’s per capita income of $12,602 ranks it 1,000th in Ohio, while Cleveland’s $14,291 ranks it 887th) are undertaking so far informal discussions about a potential merger, albeit with recognition even a combined municipality would need a sizable boost in taxpayer dollars to make it happen. From Cleveland’s perspective, the city is exploring whether there might be development possibilities through such a combination—albeit recognizing the potential pitfalls: East Cleveland is so impoverished that some residents fill their own potholes. Moreover, from a governance perspective, there appears little initiative: East Cleveland has learned that requesting authority from the State of Ohio to file for chapter 9 municipal bankruptcy is like waiting for Godot. Nevertheless, after long balking at the concept of dissolving their city, its elected leaders agreed last month to pursue annexation by the City of Cleveland without the list of demands it had earlier made as a prerequisite, such as continuing the pay of its Mayor and elected officials as its Council had originally submitted to the dismay of Cleveland officials. Nevertheless, with the writing seemingly on the wall, Thomas Wheeler, President of East Cleveland City Council, notes: “Without a revenue stream, I don’t know how we would exist,” adding he and East Cleveland Mayor Gary Norton recognize their city is out of options: it has millions in unpaid bills, and it has had no access to borrow on the municipal credit market for years; it is so cash strapped that in the wake of deep cuts in its workforce, only five firefighters were available to respond to a recent house fire: it is becoming a municipality of crumbling streets, abandoned buildings, uncertain waits for essential emergency 9-1-1 services, and, increasingly, so dangerous that citizens have armed themselves, knowing it could be a long wait for police. Nevertheless, some Cleveland politicians are enthusiastic about the possibility of a merger, citing development possibilities along a main thoroughfare which connects East Cleveland with Cleveland’s fastest-growing neighborhood, University Circle, the home of its fine research hospitals, Case Western Reserve University, and most of Cleveland’s cultural institutions. Ergo: negotiations by a commission consisting of three members from each municipality could begin sometime in the next few months.

Hard Fiscal Times for Hartford. S&P Global Ratings has downgraded the City of Hartford four notches, with the downgrade coming in the wake of the Connecticut Supreme Court decision’s [Connecticut Coalition for Justice in Education Funding v. Rell] finding unconstitutional the state’s fiscal disparities in school funding—or, as Hartford Mayor Luke Bronin put it: “The rating agency action reflects what I’ve been saying for many months, which is that the city of Hartford can’t cut or tax its way out of this challenge by itself.” Or, as S&P credit analyst Timothy Little put it, “Until the city can adopt a credible plan and sustain improved budgetary performance, the rating reflects our weak view of management conditions.” The city, which is on course to insolvency by the end of the year, reflects what S&P, in its downgrade, cited continued deficits and the “lack of a credible plan” to balance the 125,000-population city’s budget and curb out-year fiscal gaps—and it cited a one-third chance of further downgrades within a year. Mayor Bronin has repeated his call for help from the state and the region’s suburbs, pressing for consideration of a regional tax and state reconsideration of tax laws to abate municipal reliance on property taxes, noting: “We can put Hartford and the capital region on a path to fiscal health and economic growth, but it’s going to take everyone coming together—in Hartford, the region and the state—to face the realities that we need to face.” As our respected colleagues at Municipal Market Analytics put it, Hartford’s struggles parallel those of many older cities: the city confronts high, escalating fixed costs: debt service, pension obligations, and other post-employment benefits—fixed costs which now consume nearly 20 percent of its annual budget, even as it has a depleting or disparate municipal tax base, because more than one-third of its population lives below the poverty line. Unemployment reached nearly 11% in July, nearly double the statewide rate of 5.6 percent. As MMA notes, the fiscal numbers appear to more than offset the capital city’s concentrations of art, entertainment, and hospital clusters—even as its dependence on state aid meant that this year’s $45 million state aid reduction triggered a spike in its reliance on short-term debt—meaning the city’s debt service could nearly double to about $46 million by FY2018, according to forecasts by city officials. Mayor Bronin notes that past budget practices made Hartford a disaster waiting to happen, or, as he puts it: “When governments are in fiscal crisis, one approach is to hide it or minimize it just to buy a little more time. That’s what Hartford did for many years…That’s not the approach I take. We’re opening the books and telling the real story, because that’s the only way we’re going to be able to make real and lasting change.” The city band-aided its FY2017 $553 million budget on reserves and labor concessions—neither of which the city has yet to realize; the fiscal cliff looms larger in the out-years, when there are anticipated gaps of more than $30 million in FY2018, rising to $50 million thereafter.” … Judge Thomas’ ruling in the 11-year case, like those of Horton v. Meskill in 1977 and Sheff v. O’Neill in 1996, spotlights the most glaring feature of Connecticut’s taxing arrangements — the inequity of school funding.

Sins of the Founding Fathers? Connecticut, like much of New England, traces its municipal roots to the four century-old system of towns, towns based on the parish boundaries of the Puritans, which required that every resident be able to walk to church, meaning, in the case of Connecticut municipalities, many remain approximately the same size geographically, albeit that some of its cities are among the smallest towns (17 square miles in the case of Hartford, 5.5 square miles in New London). From the original parish boundaries have devolved municipal boundaries, each town with taxing power and its own elected council, police department, public works department, fire department and school system. That appears to have contributed to a governance system in which the state is made up of several medium-to-large Metropolitan Statistical Areas, defined as having one or more adjacent counties or county equivalents with at least one urban core of 50,000 population, plus adjacent area tied to the core through a high degree of social and economic integration measured by commuting ties. Of the 382 MSAs nationally, the New York City MSA is ranked No. 1 in population; the Boston MSA is No. 10; the largest MSA in Connecticut, the Hartford-West Hartford-East Hartford MSA, is made up of 29 towns: it is ranked 47th in the country in population. In 2015, it had a population of 1,211,324, just below the New Orleans-Metairie MSA at 1,262,888, and just above the Salt Lake City MSA at 1,170,266. The Bridgeport-Stamford-Norwalk MSA ranks 57th, with a population just under a million; the New Haven-Milford MSA ranks 65th with a population 859,470; the Norwich-New London MSA ranks 175th with a population of 271,863. If one transposed these places: if Simsbury were in Louisiana, it would be a neighborhood of New Orleans; if it were in Utah, it would be a neighborhood of Salt Lake City. That seems to mean a double fiscal whammy bedevils the state’s municipalities: 1) the terrible disparities or inequities so devastatingly painted by Connecticut Supreme Court Justice Moukawsher in his school decision, but 2) the inefficiency of the arrangement. Or, as Toni Gold, a transportation and community development consultant and a member of the board of the Connecticut Main Street Center, last Saturday wrote: “Regionalism is the dirtiest word in the Connecticut political vocabulary because real regionalism would require small towns and affluent suburbs alike to stop pretending that they have no connection to or responsibility for the center cities on which they depend. This snipping of a state into a lot of minuscule towns is not what the rest of the country does — and for good reason. It is financially irrational…If all legislative remedies fail in the wake of the CCJEF decision, one must ask whether there isn’t a broader legal remedy. All the school funding cases have been brought under the state constitution. Why couldn’t there be a federal case, brought on the broader issue under the 14th Amendment to the federal Constitution, which says in part, “nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws?”

Schooling on Detroit’s Future. The State of Michigan, as we have noted, in the wake of the insolvency of the Detroit Public School System, has created a dual system of public and charter schools, with the former now under the auspices of retired U.S. Bankruptcy Judge Steven Rhodes. Vikram David Amar, last Friday, writing in Justia, “In a Case with Blockbuster Potential, Detroit School Children Assert a Federal Constitutional Right to Literacy,” wrote about a class action lawsuit, Gary B. v. Snyder, pending in the U.S. District Court for Eastern Michigan, which has been filed on behalf of children who attend some of the most dilapidated and lowest-performing Detroit public schools, in which the plaintiffs allege Gov. Rick Snyder and other state officials are violating the constitutional rights of Detroit children by depriving students of their “fundamental right” to literacy under the Fourteenth Amendment’s due process and equal protection clauses. The 129-page complaint “recites in heart-wrenching detail the physical, curricular, and human resource shortcomings of the schools attended by the plaintiffs;” it also documents what he describes as the “woeful underperformance of the students at these schools, as compared to other schools in the state and also to the state’s competency baselines established for various grade levels. It is hard to believe the conditions laid out in the Complaint exist in 21st Century America; at times the allegations seem more like the setting of a Dickens novel.” He notes that the complaint also proposes what he deems an “an ambitious legal theory, effectively asking the federal court to apply ‘heightened scrutiny’ to what is going on in Detroit, and urging it not to apply the deference ordinarily given to state and local school officials [author’s emphasis]concerning their administration of public education.” The complaint identifies two related, but distinct grounds for judicial skepticism—the first being equal protection (describing the plaintiffs as a “discrete class,” almost all of whom are “low income children of color.”), but the second asserts that “heightened judicial oversight is warranted, because in the Fourteenth Amendment’s due process clause there is a ‘fundamental right of access to literacy,’ which presupposes better facilities, better instructional materials, and better teacher training than exist in Detroit. It asserts a federal “fundamental right” to literacy under the so-called “substantive due process doctrine” of the Fourteenth Amendment, the lawsuit is path-breaking, and perhaps ultimately destined for the Supreme Court. The complaint here asserts that many “Detroit public school children lack any realistic chance at literacy; the Complaint links its concept of literacy directly to expressive and political rights (including military service), saying that literacy is essential not only to success in the workplace and higher education, but also (importantly) to ‘be[ing] an informed citizen capable of participating in democracy.’” He notes that the complaint repeatedly points out, “the State of Michigan (like other states) has made attendance in some kind of state-approved school compulsory, so the State is already interfering with private choices in this realm, and in ways that allegedly make it nigh impossible for Detroit children to attain literacy.” Finally, he writes:

But the affirmative/negative rights line does implicitly bring up probably the biggest hurdle for the plaintiffs—the practical and logistical concerns about appropriate remedies that might disincline federal courts to become deeply involved in decisions about school facilities, curricula, teacher training, and the like. Most of the other settings in which the Court has recognized a fundamental right do not involve the remedial complexity the Snyder case implicates. And as the Court cautioned in Rodriguez, at a time when the federal judiciary was in the midst of a mixed experience of federal judicial oversight over busing, pupil reassignment, and other aspects of the federal judicial effort to eliminate the vestiges of racial school segregation:

He writes: “We stand on familiar ground when we continue to acknowledge that the Justices of this Court lack both the expertise and the familiarity with local problems so necessary to the making of wise decisions with respect to the raising and disposition of public revenues. . . . In addition to matters of fiscal policy, this case also involves the most persistent and difficult questions of educational policy, another area in which this Court’s lack of specialized knowledge and experience counsels against premature interference with the informed judgments made at the state and local levels. Education, perhaps even more than welfare assistance, presents a myriad of ‘intractable economic, social, and even philosophical problems.’ The very complexity of the problems of financing and managing a . . . public school system suggests that ‘there will be more than one constitutionally permissible method of solving them,’ and that, within the limits of rationality, ‘the legislature’s efforts to tackle the problems’ should be entitled to respect.”

Electing a Higher Future for Post-Chapter 9 San Bernardino? With an exit from chapter 9 bankruptcy finally within sight—and elections just around the corner, the San Bernardino City Council has voted to schedule not one, but at least two sets of debates at City Hall, after the Council overruled City Manager Mark Scott’s decision not to permit such debates. Mr. Scott had emailed those seeking or proposing such pre-election debates, debates customary in previous election years, that none would be permitted this election year,  out of a concern about a conflict of interest since the city had placed two measures on the ballot—albeit, in his email, Mr. Scott had written the City Council could vote to reverse him if it wished—an email which, unsurprisingly, drew a response from Council Members, some of whom attacked him for seeking to shut down free speech, while others defended him as implementing the implied direction of a Council that has directed staff not to spend any funds to educate the public about the city charter ballot measure. However, the Council has been unanimous in the vote to allow pre-election debates at City Hall and on the public access channel, waiving fees for both—or, as Councilman John Valdivia put it: “The actual statement from Mr. Scott is that there is a council discretion to overturn his decision, so I think he left it completely wide open for the Council to make the ultimate decision…This is unacceptable on behalf of what Mr. Scott is attempting to do.” Surprisingly, Mr. Scott was not at the meeting; however, he wrote in an email that it seemed “smart to stay completely arms-length” because the city was behind both Measure L (to replace the city charter), and Measure P, to replace the city’s marijuana ban with a regulatory scheme. City Attorney Gary Saenz noted: “It’s necessary to take precaution and care that you don’t cross over the line into endorsement and you stick within the parameters of education…Sometimes that’s hard to do. I personally encountered a forum – or a couple of forums, actually – when I was campaigning and there was a conflict of interest that I believe tainted the discussions.”

Entering Virgin Territory.  Just 17 miles from Puerto Rico lies the insular area, the U.S. Virgin Islands, which consist of the main islands of Saint Croix (where the author trained for his Peace Corps service in Liberia, West Africa) Saint John, and Saint Thomas, as well as many other surrounding minor islands reaching a total land area of 133.73 square miles with a population just over 106,000. Tourism is the primary economic activity, although there is a significant rum manufacturing sector. Previously part of the Kingdom of Denmark-Norway, they were sold to the United States in 1917: they are considered an organized, unincorporated U.S. Territory. The Territory has convened five constitutional conventions; however, its most recent and only proposed Constitution, adopted in 2009, was rejected by Congress in 2010. Thus, its status vis-à-vis the U.S. government, as it confronts severe fiscal challenges, is more difficult than Puerto Rico’s. Now U.S. Virgin Islands Gov. Kenneth Mapp has introduced legislation to authorize issuance of some $396 million in municipal bonds, with the goal of issuance this this fall—with the proposal for the fiscally challenged U.S. territory coming as his government is seeking approval of revenue increases and spending reductions. A confidential draft of the territory’s five-year financial plan of September 15th shows that, absent any changes in revenue measures or spending, the government anticipates operating deficits between $130 million and $140 million from FY2017—FY 2021, thus triggering the government to propose a wide array of revenue and spending initiatives—an array which the government projects would lead to operating deficits of $0.8 million in FY2017, $14.3 million in FY2018, and $13.8 million in FY2019—but followed by surpluses of $50 million in fiscal 2020 and $77.5 million in fiscal 2021. Gov. Mapp has, ergo, proposed revenue initiatives to increase the marine terminal user’s tax (adding $7 million in annual revenue), a new internet gross receipts tax ($5.1 million annually), an increase in cigarette taxes ($6.9 million a year), and an increase in beer taxes ($12.8 million annually)—both to reduce the current and projected deficits, but also to apply to economic development. The cuts he has proposed would affect hat it would produce at least $25 million annually. In the five year plan, Gov. Mapp proposes to take out a $55 million working capital loan and a $55 million draw on a line of credit; he projects using nearly 40 percent of the bond proceeds for operating expenses, and the balance for capital projects. Under his proposal, the interest rate on the bonds may not exceed 9.5%, nor a term of more than 30 years, with the draft legislation providing that the municipal bond issuance will be sold as either: a matching fund revenue bond, paid back with a portion of taxes on the sale of rum in the 50 states that the federal government sends to the Virgin Islands; or a gross receipts taxes bond, paid back from a government sales tax. Compared to Puerto Rico, the Virgin Islands have significantly higher unemployment and murder rates, but a significantly better rate with regard to infant mortality.

Governance, Innovative Governance, & Fiscal Contagion

Share on Twitter
eBlog, 4/11/16

In this morning’s eBlog, we think back about last week’s extraordinary World Affairs Conference at the University of Colorado that commenced with Apple co-founder Steve Wozniak wondering when computers will be able to surpass the human brain, and jazz musicians from all around the world to Law professors Sloan Speck (U. of Colorado) and Kirk Stark (UCLA) in a class where Professor Stark discussed his new paper about the critical role that regional local tax sharing might contribute to addressing growing income disparities: sometimes we forget the exceptional laboratories of governance that local leaders are—to this feeling I had as a speaker on a session called “Your Self-driving Car Hit My Self-driving Car”: where I was assailed by my younger co-panelists for suggesting that state and local leaders will have to consider safety and revenue implications and ordinances and laws: ‘You people, all you can think about is making laws and regulations and imposing taxes…’ although when I noted that the emergence of self-driving cars will offer invaluable resources for aging Americans no longer able to safely drive; I added that the question for states would be not how old should one be to obtain a license, but rather how young—posing for my skeptical colleagues the query as to their comfort level of five-year olds entrusted with the family car…they did grant that maybe we old fogies were not entirely to be dismissed…But even as I was participating in this international conference with tens of thousands of attendees and unique leaders from all around the world—and ending with Vice President Biden, the Default Clock continued to run in Atlantic City—actually worsened under the increasingly belligerent threats of Gov. Chris Christie—even as the city’s employees were essentially working for free—and as the debt clock wound down ever more quickly on Puerto Rico—with the U.S. House Natural Resources Committee constantly setting back its own clock as they increasingly have come to recognize just how hard this governance challenge is. Contemporaneously, if anything, the nearing cliff of insolvency in Atlantic City between the Governor, Mayor Don Guardian, and state legislative leaders has grown to encompass a union split within the state, creating, as one expert describes it, as “four dimensional chess.” Oh my.

War & Peace? The State of New Jersey has filed a lawsuit against the nearly insolvent Atlantic City, with the state seeking to recover more than $30 million which the state claims the city owes its school district. In a press conference last week, Gov. Chris Christie said that Atlantic City has used property tax collections earmarked for the public school system to fund city operations, adding that Atlantic City owes the school district nearly $34 million from now until June 30th, but that, due to its “irresponsibility,” the city has yet to pay the school district $8.4 million owed on April 1st and has only around $10 million in cash flow left, adding: “Today, at my direction, Education Commissioner [David] Hespe has filed a lawsuit to protect the property tax collections that rightfully belong to the Atlantic City School District…The action won’t fix the city’s own financial problems, but it will prevent them from making Atlantic City students and their families collateral damage to their reckless financial gains.” Gov. Christie, who had already effectively imposed state control over the city with his appointment of an emergency manager, made his comments as S&P lowered the Atlantic City Board of Education’s bond rating two notches due to liquidity concerns—reminding us of the DNA-like intertwined strands between cities and school systems. In response, Atlantic City Mayor Donald Guardian and City Council President Mary Small, at their responding press conference, unsurprisingly fired back at the Governor’s claims, noting that payments have been made on time under New Jersey state law and that the city’s schools are underfunded, with Mayor Guardian adding that the $34 million will be paid to the schools and will take priority over other payments: “They will be paid first…They are certainly more important than other payments that we have to make.”

Mayor Guardian also noted that the plans for the city to halt and substitute voluntary “non-essential” municipal services effective today for three weeks to avoid a default would be modified in response to unions agreeing to a 28-day pay cycle—a response which the Mayor said would keep Atlantic City’s cash flow running until June, effectively putting the day of reckoning off.

Meanwhile. Gov. Christie has been urging Assembly Speaker Vincent Prieto (D-Secaucus), to bring a state intervention bill to the floor opposed by Mayor Guardian: The governor wants the Legislature to pass a financial bailout bill that cedes key Atlantic City decision-making to Trenton: legislation which would empower New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years.

That effort appears to have gained little traction, even as Moody’s has now moodily downgraded the city even further, with Moody’s analyst Josellyn Yousef noting the downgrade reflects an expected loss to bondholders of up to 35% of principal due to “a very large structural deficit” with limited relief sources outside of state assistance, with Ms. Yousef noting: “The downgrade to Caa3 reflects the greater likelihood of default within the next year and higher probability of significant bondholder impairment given an ongoing political stalemate over an Atlantic City fiscal rescue package,” but also adding the prescient warning with regard to potential contagion: “The downgrade also incorporates renewed signals from the state that bondholders will face losses as part of a possible debt restructuring,” albeit she added that Atlantic City’s bond rating could be lifted Garden State legislators were to adopt legislation that increased revenues and “materially reduced” its deficit, adding that that the state giving an indication that bondholders will be paid in full even as fiscal recovery legislation is pending could also lead to an upgrade.
What If? My colleague from Rutgers Marc Pfeiffer has wondered what would happen if the city went into chapter 9 municipal bankruptcy—something no city in the state has done since the Great Depression—responding to his self-posed query: [W]e can’t quite predict what will happen…New Jersey has had a very favorable history of supporting it’s municipalities and their debt, so much so that the rating agencies and the bond markets recognize that and effectively give us some degree of extra credit when it comes to ratings, which results in some degree of lower interest rates compared to other entities. Because New Jersey has had this good reputation.” Nota bene: while we have often written about the threat of contagion with regard to municipal down-gradings and bankruptcy, unlike disease: there can be ‘good’ contagion. Nevertheless, Moody’s, in its report last week, noted that a recent comment by Gov. Christie about municipal bondholders making sacrifices “suggests the state may have reached the point of viewing a default as a desirable outcome,” albeit that such a default would negatively impact the credit of other distressed cities, citing Newark and Paterson by way of example, “because it calls into question the state’s future willingness to support these cities—” or, as Mr. Pfeiffer describes it: the Governor has not made it clear as to whether his policy about Atlantic City is a change in the state’s 70-or-so-year practice of making sure our cities are solvent and secure.”

Rolling the Dice on the Threat of Contagion. The Governor’s attack on Mayor Guardian and the City Council could have reverberations effecting other New Jersey municipalities—in rolling the dice on the related issue of gaming so critical to Atlantic City’s earlier fiscal solvency, the related actions and positions of the Governor with regard to gaming could fiscally impact other New Jersey municipalities. Gov. Christie has said he will oppose any new gambling in north New Jersey, the likely source of new cash for the likes of Monmouth Park, were Atlantic City to become insolvent and go into chapter 9 municipal bankruptcy. Yet, Gov. Chris Christie’s hardball negotiating position already threatens plans to fortify Monmouth’s horse-racing industry with new revenue. The Governor’s position, unsurprisingly, is stirring further disruption amongst state elected leaders: Sen. Jennifer Beck (R.-Monmouth County) last week noted: “I disagree with him on tying these two together…I understand that there’s negotiation going on around the Atlantic City takeover issue, but this is separate.” Our colleague, Marc Pfeiffer, a senior policy fellow and assistant director of Rutgers University’s Bloustein Local Government Research Center, notes: “Bond markets don’t like uncertainty and we’re nothing but uncertainty right now.”

But contagion, of course, can work two ways—like gambling. Atlantic City, a city which has wagered its modern fiscal fortunes and ills to the gaming industry—one which in New Jersey, according to the New Jersey Division of Gaming Enforcement, realized a 40 percent increase in profits last year, means there might, in fact, be signs of a turnaround—albeit, in Atlantic City, as Michael Busler, a professor of finance at Stockton University notes: “So there is a sign that things may have bottomed and started to go up again…The fly in the ointment there is Showboat and a part of Revel, which have been closed for some time, are scheduled to open this summer…The fear is that it doesn’t increase the market but, rather, the reopened casinos take revenue away from existing casinos.” That is a question upon which the voters will cast their ballots in November—when those ballots, after counting, could determine whether there will be new, competing casinos outside of Atlantic City—but ballots Gov. Christie has pledged to oppose unless his Atlantic City reforms are adopted by the legislature. Of course, at this point, it is increasingly difficult to determine—given the outgoing Governor’s ratings—whether his advocacy might do greater harm than help towards his position.

Waiting for Godot. Even as the U.S. House Natural Resources Committee is struggling to propose revised Puerto Rico fiscal reform legislation today and hold a hearing on it Wednesday, Puerto Rico’s lawmakers are working to exempt about 46 percent of the Commonwealth’s debt from the debt payment moratorium signed last week and in the wake of Puerto Rico House Rep. Rafael Hernández Montañez draft bill last week to change the U.S. territory’s moratorium law. Rep. Montañez, Chair of the House Treasury and Budget Committee, last Friday said he was confident his bill to amend the moratorium would pass, claiming he had a majority lined up and was seeking more: the legislation would exempt the commonwealth’s general obligation, guaranteed, and any securitized debt from eligibility for the payment moratorium: meaning, he said, this would mean that no moratorium could be placed on the debt of the Puerto Rico Sales Tax Finance Corp. (COFINA), COFIM, Municipal Finance Authority, Puerto Rico Electric Power Authority, and Puerto Rico Aqueduct and Sewer Authority.