The Import of Accurate Municipal Revenue Projections in Addressing Municipal Insolvency

eBlog, 1/12/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges to Detroit’s long-term recovery from the nation’s largest chapter 9 municipal bankruptcy, before turning to the small Virginia municipality of Petersburg as it struggles to not just avoid bankruptcy, but rather to right its ship of state—both by its elected and appointed leaders.

Detroit Coming Back. Detroit, as we noted in our original report on the city, is quite different than most U.S. municipalities and, indeed, from other cities in Michigan in that its revenues, from taxes and state-shared revenues are higher than those of any other large Michigan municipality on a per capita basis, in part reflecting its reliance on a significantly broader tax base than most cities in the country: property taxes, income taxes, utility taxes, casino wagering taxes, and state-shared revenues. The property tax accounted for 13.3 percent of Detroit’s revenues in 2012, even though the city had the highest property taxes among big cities in the U.S. But it was the 22 percent decline in those revenues over the decade preceding its collapse into the nation’s largest-ever chapter 9 bankruptcy that appeared to precipitate the state takeover via the appointment by Governor Rick Snyder of an emergency manager to steer the city into—and then out of chapter 9 municipal bankruptcy. The exhaustion of the city’s revenues reflected the overall loss of 15,648 business establishments between 1972 and 2007—that is, even before the massive impact of the Great Recession, or the bankruptcies and subsequent recovery of General Motors and Chrysler and the restructuring of the automotive supplier network—companies bailed out by the federal government, unlike Detroit.

Today, still, despite its lower reliance on property tax revenues, the track of those revenues can reflect the city’s fiscal direction. Indeed, the city’s housing market faces numerous challenges as the city seeks to carve out a path toward less blight, increased housing preservation, and a better functioning residential mortgage market. Zillow reports that median sale prices for metro Detroit homes and condominiums rose 7.2 percent last month compared to the year before: the median home value in Detroit is $37,000, reflecting home values which have gone up even more, by 8.5% over the past year, according to Zillow, which predicts they will rise 4.2% within the next year. At the same time, the percent of Detroit homeowners underwater on their mortgages is 0.4%, some four times higher than Detroit Metro area; the median rent price in Detroit is $750, or about 75% of the Detroit Metro median of $1,050; nevertheless, sale prices across the city have continued to grow, while both the number and share of underwater loans has continued to decline. The average household equity for all Detroit loans reached 29 percent in Q4 2015; the shares of loans in serious delinquency, foreclosure, or REO (property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction) in Detroit are on pace to fall below pre-crisis levels. The data demonstrate a particularly sharp decline in the share of REOs.

However, sales of single family homes in the city in 2015 (about 18,522) dropped about 18% from the previous year, even as Detroit’s median rent stabilized at around $756 a month in December 2015. Unemployment fell again in the early months of last year, and labor force size edged up as well, according to the Detroit Housing Tracker (the Detroit Housing Tracker monitors the latest development in the Detroit housing and community development arena and is updated quarterly: the publication has two sections in which it presents comprehensive market indicators including sales prices and volumes, rental prices, household equity level, delinquencies and foreclosures.) In comparison, in the surrounding four-county area of Oakland, Wayne, Macomb, and Livingston counties, median sale prices jumped from $149,200 in December 2015 to $159,900 in December 2016. According to Realcomp Ltd. II, last month’s figures fall in line with the general trends of 2016: the number of on-market listings in the four-county region last month declined nearly 43 percent year-over-year, from 19,634 to 11,255; however, sales prices in all four of the surrounding counties increased, on average, by 10%.

In Overtime. The city of Petersburg, Virginia added another hefty bill to its payment list after a class-action lawsuit (Thomas Ewers, et al, vs. the City of Petersburg Bureau of Police) between members of the Bureau of Police and the city was settled last week, with the settlement agreement mandating the virtually insolvent municipality to make a payment of $1.35 million in recompense for law enforcement officers’ unpaid overtime. Of that amount, the City of Petersburg will have to pay $800,000, while the Virginia Division of Risk Management will chip in the remaining $550,000. For its part, Petersburg city spokesman Clay Hamner this week reported that that part of Petersburg’s payment is expected to come via a short-term $6.5 million loan secured by Petersburg from Wells Fargo last month; other funds could potentially come from the sale of the city’s municipal water and wastewater assets—especially in the wake of an unsolicited purchase proposal last month by Aqua Virginia, Inc., leading the city to advertise for competing bids. According to the city’s press release, the settlement applies to all current and former law enforcement officers employed between Jan. 11, 2013 and June 24, 2016, by the Bureau of Police at the rank of lieutenant or below who were denied overtime or other wage-related payments. The settlement came as the city’s expensive fiscal turnaround consultants reported the city’s fiscal condition remains, reporting that the fiscal plan Petersburg has been working from since the City Council’s first attempt to strip $12 million from an outsized budget last September no longer reflects its fiscal realities: some elements of those decisions, such as slashing funding for schools, canceling a youth summer program, and boosting trash fees, would provide savings; however, not every plan materialized, according to the consultant’s analysis. Moreover, when combined with the municipality’s past-due payments to companies taken from the current year’s budget for last year’s bills, the consultant’s reported the Council, next week, will likely be forced to take further actions to reduce spending or find other revenues—and will have to include a partial restoration of a 10 percent reduction in municipal worker salaries targeted toward making whole the city’s public safety workers, with Nelsie Birch, Petersburg’s interim finance director, advising: “The reduction of salaries has done significant damage to the city.”

It seems that the employee turnover and overtime costs have soared even as morale plummeted since the austerity measure was implemented: police, firefighters and emergency communications workers would see their pay rates restored this spring if the council approves the consultant’s plan. That would be important: the city’s violent crime rate is nearly 400% higher than the statewide average. On the upside, the consultant reported that of the $18.8 million that state auditors estimated Petersburg owed to vendors as of last July 1, only $6 million to $7 million remains overdue. That might help as, next month, the city is inviting about 400 of its creditors to meet for discussions relating to past-due bills, and inviting interested buyers to consider purchasing city-owned property—with both city employees and the city’s consultants taking inventory: counting cars, combing through old equipment, and tracking every nickel spent for a dime that could be saved. The consultant addressed one key issue of concern: its current inability by its tax assessors and collectors to provide administrators with accurate revenue projections.

At the same time, the consultants expressed apprehension that city council members must learn to demand that expenses not exceed revenues: in the municipality’s FY2016 books, Petersburg had a $9 million structural imbalance in the general fund used to cover the city’s day-to-day operations: the city had $67 million to work with and spent $76 million. Finally, the consultant noted what he believes to be the source of Petersburg’s fiscal crisis: for too many years (dating back to 2009) the city has spent more than it had, propping up shortfalls from a rainy day fund which had long since evaporated. In response, interim City Manager Tom Tyrrell said the Mayor and Councilmembers could meet with officials one-on-one or in pairs to discuss the details ahead of next week’s votes to balance the current year’s budget—with such sessions not triggering Virginia’s Freedom of Information Act. Under the law, an in-person or electronic meeting of three members of a public body constitutes a quorum.

Should States Bear a Greater Fiscal Responsibility to Address Disparities–especially when so many Lives and Futures are at Stake?

 

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eBlog, 9/12/16

In this morning’s eBlog, we consider the massive and cumulative service insolvency in public safety in the bankrupt City of San Bernardino. Even as the City nears its longest road out of bankruptcy of any city ever in U.S. history, the extraordinary absence of any state role to help the city confront its cancer of crime could bode ill for the city’s post-chapter 9 recovery. Then we turn to Michigan and the ongoing issue with regard to what a state’s role ought to be in addressing fiscal disparities. While the State of California appears to be disinterested in any such role; Michigan traditionally has; but, increasingly in recent years, it has eroded such support, with grim fiscal consequences in Flint, Detroit, etc.

Can the City Do it All by Itself? San Bernardino, still healing from last December’s terror attack—the city’s response to which has been praised by the FBI, nevertheless appears today caught between a rock and a hard place: it is experiencing a surge in violence this year unlike any it has faced in decades: with four months left in 2016, there have been 150 shootings and 47 slayings in the city of 216,000 residents, compared to 44 homicides all of last year, including the 14 people killed by terrorists at the Inland Regional Center. San Bernardino is now on track to have more murders than in any year since 1995, when 67 people were killed. There is no explanation why; by the same token, even as the city nears its exit from the longest municipal bankruptcy in American history, the terrible rise in violent crime hardly augurs well for its assessed property values—or for its hopes for attracting economic development. The violence might be adding to other tensions: the killings have disproportionately victimized San Bernardino’s black residents, who account for 14 percent of the population, but nearly half of those killed.  San Bernardino Police Chief Jarrod Burguan says the city has been especially hard hit by state initiatives that reduced some drug and property-related felonies to misdemeanors, leading to shorter sentences for criminals; he did not need to mention the reductions in the city’s public safety budget as it struggled to cobble together its proposed plan of debt adjustment now awaiting final approval for U.S. Bankruptcy Judge Meredith Jury. In 2008, there were more than 340 police officers on the force. Today, there are about 215. The Chief does note, however, “We don’t have the capacity to investigate everything that’s reported in the city.” Others point to the lack of economic opportunities, its years of cuts to diversion programs, and a lack of other basic services — such as working street lights in many neighborhoods—an issue, as readers remember, that both Detroit Emergency Manager Kevyn Orr and Mayor Mike Duggan made immediate and critical priorities—have contributed to this year’s violence. Those reduced fiscal resources have, no doubt, contributed to solve fewer than 40 percent of this year’s homicides.

Unsurprisingly, a new study, commissioned by Southern California law firm Graham Donath, using FBI data and looked at crime rates, police presence, and investment in police departments, as well as community factors, including poverty, education, unemployment, and climate, determined San Bernardino to be the state’s most dangerous city—just ahead of Stockton and Modesto: the study found a high correlation between crime rates and poverty: San Bernardino’s poverty rate exceeds 30 percent, or, as the report notes: “In taking a look at our collected data, no city in the bottom ten of crime rate (that is, has the lowest crime) has a poverty rate higher than 12.9 percent,…But for cities in the top ten, every one has a poverty rate of 14.5 percent or higher, topping out at 30.6 percent in San Bernardino.”

A Lonely Vigil. Understandably, in the wake of the State of California’s rejection of the city’s application for a state grant to help fund Operation Ceasefire, Chief Burguan must wonder whether the city is alone in its battle against killings—or, as he asks: “Who really is that concerned about San Bernardino? Or are people at the state level happy letting San Bernardino drown in this stuff?…We clearly have the most significant crime spike of any place in the state, and all that money went elsewhere.”

Getting to the Heart of Fiscal Disparities—or, What We Have Here Is a Failure to Communicate. Taxpayers for Michigan Constitutional Government, Eastpointe City Manager Steve Duchane Duchane (Eastpointe is a city of about 32,000 in Macomb County), and two other Eastpointe employees have filed suit against the State of Michigan, the Michigan Department of Technology Management and Budget, and the Michigan Office of the Auditor General in the Michigan Court of Appeals. Mr. Duchane says local governments in Michigan have been doing a lot of reacting to revenue sharing cuts through the years, slashing services, and programs impacting municipalities, because they have been receiving fewer state funds. Thus, he is at the forefront of more than a dozen Michigan local governments taking action, joining a nonprofit group which has filed the civil lawsuit for overstating various payments to local governments and causing a more than $1-billion shortfall to municipalities. Ow, the state has until the end of this month to file a response. Kurt Weiss, a spokesman for the Michigan budget office, has released a statement: “The Office of Financial Management within the State Budget Office works hard each year to properly identify expenditures to determine the amount of state spending that goes to the aid of local governments…Those expenditures are in turn submitted to the Office of Auditor General for validation to ensure the calculations are accurate. This is a methodology that has been applied consistently since the passage of Proposal A (Proposal A was a property tax measure adopted in 1994: prior to its adoption, local property taxes were based on a property’s assessed value or an amount equal to 50% of the property’s market value, meaning that property taxes went up and down in close relation to an increase or decrease in property value. With the passage of Proposal A, however, the tax was stabilized.). The State Budget Office will take time to further review the complaint, but it’s important to note that these calculations have been consistently applied over time.” The local governments disagree; they respond the state is violating the Michigan Constitution by overstating spending that is paid to local governments and engaging in an “illegal tax shift.” Their  complaint states that Michigan is including payments from Proposal A revenue and payments to charter schools, county road commissions, and others from the trunk line roads fund and payments to cover the costs of state mandates in its calculations of spending in the form of aid that is paid to local governments: “When these items are subtracted, state spending in the form of aid that is paid to local governments falls significantly below 48.97% of total state spending;” ergo, in violation of the Michigan Constitution, according to the complaint.

This the complainants are seeking these items be removed from the funding formula for aid paid to local governments, and asking the court to order the state to make up the funding shortages, claiming that the loss of billions of dollars in funding has forced local governments to make significant cuts to services and programs to stay solvent. Or, as Mr. Duchane puts it: “State spending continues without control, and the locals have paid the price.” The challengers’ organization here was founded by Mr. Duchane and its president, John Mogk, a law professor at Wayne State University; its members include the cities of Center Line, Eastpointe, Mt. Clemens, New Baltimore, Richmond, Roseville, Utica, and Warren and Clinton Township in Macomb County; Hazel Park in Oakland County; Harper Woods, Southgate and Grosse Pointe Woods in Wayne County; Grosse Pointe Shores, which straddles Wayne and Macomb counties, the city of Auburn in Bay County, the Sugar Law Center for Economic and Social Justice in Detroit, and Wayne City Councilman Tom Porter. In addition, other municipalities may be joining the group, whose attorneys include John Philo, executive and legal director of the Sugar Law Center; Tracy Peters, who specializes in education and the rights of students and parents, and Robert Sedlar, a constitutional law and legal conflict professor at Wayne State University School of Law.

For his part, Mr. Duchane said that while the group does not have data to explain where the more than $13 million in funds promised to Eastpointe to address municipal disparities has instead been used, he can, obviously, report where he believes it should have gone: That kind of money, he notes, would have meant that municipal leaders would not have had to raise taxes—especially in the wake of the Great Recession which brought so many Michigan municipalities to their fiscal knees, particularly because of the mortgage market meltdown that so devastatingly impacted real estate values, the state’s elimination of the personal property tax on businesses, and continued cuts in state revenue sharing. Combined with the state’s Proposal A and Headlee Amendments imposing state mandated limits on property tax growth, he noted Eastpointe and Hazel Park formed a unique taxing authority for 20 years to raise funds for police and fire services in their cities. The small City of Wayne attempted tried to join that authority; however, voters in that city and Eastpointe rejected the effort last month. Now, the City of Wayne, facing insolvency in as early as next year, has asked the state for an emergency financial review and could be facing a state-appointed emergency manager. Indeed, the city’s Mayor, Susan Rowe, last month reported that city officials are set to meet with the Michigan Treasurer later this month to discuss finances that communities are confronting, noting: “We’re just the tip of the iceberg…We’re not the only city in this (financial) situation. It’ll be happening to communities around us soon. We don’t have an expense problem. We have a revenue problem.”

Protecting A City’s Future

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eBlog, 5/27/16

In this morning’s eBlog, we consider the vital role a city has to try to protect its most vulnerable citizens: its children—noting the essential role public safety plays in municipal trust and revenues—ergo, the continued high murder rate, especially of children, in the Motor City continues to present severe governance challenges to the city’s ongoing fiscal recovery. We look at yesterday’s action in Trenton, New Jersey, where—at long last—the legislature has adopted and sent to Gov. Chris Christie legislation to avert Atlantic City’s insolvency next month—albeit we await how the Governor will react—and the next steps as the city enters its most critical months of the year.

Protecting a City’s Children. In our report on Detroit, we had noted that, according to the census, 36 percent of its citizens were below the poverty level, and, the previous year, Detroit had “reported the highest violent crime rate for any U.S. city with a population over 200,000.” Writer Billy Hamilton had called the city “either the ghost of a lost time and place in America, or a resource of enormous potential.” Although Detroit’s crime statistics, like its finances, appear to be headed in the right direction, Forbes last fall noted that the city once again had topped Forbes’ list of America’s Most Dangerous Cities, citing 298 murders and intentional homicides in Detroit in 2014. Even though that was the lowest number in 47 years, according to statistics compiled by the Federal Bureau of Investigation and the Detroit Police Department, it still worked out to a murder rate of 43.5 per 100,000 residents, or approximately ten times the national average. The city’s overall rate of violent crime, including assault and robbery, was 1,989 per 100,000 residents, down from over 2,000 in 2013, but still more than five times the national average, which also has been falling for years. Now Detroit Mayor Mike Duggan, who was elected in 2013 and reclaimed full control over the city’s operations when it emerged from bankruptcy, has been going high-tech, urging businesses to install video cameras to give police a better picture of violent crimes and who’s committing them, noting: “I’m just so tired of every time you get this blurry image where you can’t tell who the person is.” Now, as 2016 nears the halfway point, Detroit’s list of child casualties grows, a problem underscored by two cases this week involving toddlers close to their third birthdays. It brings to eight the number of youths injured or killed by gunfire in Detroit in the past two months. Wayne County Prosecutor Kym Worthy, in announcing charges against two Wednesday, urged gun owners to secure their firearms and keep them unloaded around children. Ms. Worthy said the shootings of youth when they find weapons are “totally…absolutely preventable” and called for more criminal penalties where “negligible” gun ownership is at fault; she called for safety classes and local hospital officials to reach out to pediatricians about programs to educate parents about gun ownership. The flurry of cases involving children, especially, has residents and police upset and angry: Assistant Police Chief Steve Dolunt urged a change from the city’s violent culture, warning: “You gotta have a license to drive a car, but there’s no one to teach you to be a parent,” during a news conference yesterday, adding: “This (violence) is learned behavior.” A 2014 Detroit News investigation found nearly 500 Detroit children have died in homicides since 2000, and now the Detroit News staff writers James Dickson, Candice Williams, Oralandar Brand-Williams, and Mark Hicks note it appears to be continuing unabated. There were 298 murders and intentional homicides in Detroit in 2014, the lowest number in 47 years, according to statistics compiled by the Federal Bureau of Investigation and the Detroit Police Department—grim statistics that work out to a murder rate of 43.5 per 100,000 residents, which is still almost 10 times the national average. The city’s overall rate of violent crime, including assault and robbery, was 1,989 per 100,000 residents, down from over 2,000 in 2013, but still more than five times the national average, which also has been falling for years. Thus, Mayor Mike Duggan, who was elected in 2013 and reclaimed full control over the city’s operations when it emerged from municipal bankruptcy is laser focused on utilizing high-tech, urging city businesses to install video cameras to give police a better picture of violent crimes and who’s committing them. As the Mayor notes: “I’m just so tired of every time you get this blurry image where you can’t tell who the person is.” Mayor Duggan earlier this month announced plans for eight gas stations to install better lighting, high-resolution cameras, and license plate cameras with live feeds to Detroit police.

Life Buoy or Jewel in the Crown? The New Jersey legislature late yesterday passed and sent to Gov. Chris Christie legislation to keep Atlantic City from insolvency: the Assembly and Senate approved the measures by wide margins; Gov. Chris Christie, who earlier supported legislation allowing for an immediate state takeover of the city’s finances, has said the bill gives him the authority he needs, although he stopped short of saying whether he would sign the bill. For his part, Atlantic City Mayor Don Guardian used a Trumpian expression, calling the legislature’s action “huge: We want people to know the shore is open for business.” The bill, if signed into law, would give the city five months to draw up plans to balance its books over the next five years. New Jersey Assembly Speaker Vincent Prieto described the compromise as a signal improvement over an earlier Senate- and Christie-backed bill which would have imposed an immediate state takeover, although state Senate President Steve Sweeney criticized the delay and said he had sought unsuccessfully last summer to encourage the city to reorganize its finances, calling the long delay “very, very unnecessary,” especially since, as he noted: “A very similar offer was made last July, and it was rejected.” Under the legislation, Atlantic City will receive temporary loans of $30 million for the remainder of this year; $30 million to be applied to leftover FY2015 debt, and another $15 million for FY2017. The city also would be able to receive at least $120 million each year from casinos under a payment-in-lieu of taxes bill that would last for 10 years—and casinos would not be allowed to opt out of the PILOT plan, even if state voters authorize casinos in northern New Jersey. The compromise includes provisions to offer early retirement to the city’s workers and retain its collective bargaining rights. Finally, the package retains the Senate provisions to allow a state takeover of Atlantic City’s finances and major decision-making powers in just 150 days, including the right to unilaterally break union contracts, but only after its Community Affairs department determines that the plan Atlantic City comes up with is unworkable. Notably, the city would be barred from appealing such a determination to the courts before the state could take over. This means the city will have just five months in which to plug its more than $80 million budget deficit and prepare a five-year financial plan—or risk state intervention. Speaker Vincent Prieto described the final action as “something that gives them the tools to be able to be successful…This is something that now the administration of Atlantic City can roll up their sleeves with their workforce and I think we’re giving them an opportunity to again be the jewel of New Jersey.”

Both chambers of the legislature also passed a companion bill enabling Atlantic City’s eight remaining casinos to make fixed payments in lieu of property taxes (PILOT) for 10 years. The individual PILOT amount for each casino would be based on its share of total gambling revenue. The additional payments would be used to pay down Atlantic City’s debt through the reallocation of the receipts collected by the Casino Redevelopment Authority from the casino investment alternative tax. The bill differs from a previous version Gov. Christie vetoed last November, which would have directed the city’s casinos to contribute $30 million collectively to the city in 2016. Under the version agreed to yesterday, the program would not commence until next year. To date, all the city’s casinos have made their 2016 tax payments, except the Borgata, which is in litigation with the city over $170 million in tax refunds owed to the casino-hotel. Senate President Sweeney said the city’s recovery plan, at his insistence, could also authorize the use of early retirement programs for city workers to minimize the impact of workforce cuts—and that Atlantic City would be required to make full obligated payments to schools and Atlantic County, noting: “This plan gives Atlantic City the opportunity to do the job itself to prevent bankruptcy and make desperately-needed financial reforms…Along with the reforms, this plan will provide financial resources and the ability to access the financial markets, which is critically important for long-term fiscal health.”

The ever prescient Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, said that the new agreement should give Atlantic City officials sufficient resources to balance the city’s budget with revenue from the rescue package and the PILOT bill, noting the city will also likely seek additional savings from labor contract negotiations, shared services, and selling off city assets such as its former municipal airport, Bader Field, adding, however: “During these next five months the city has some substantial challenges.”

For his part, Gov. Christie said Wednesday night during a radio show that he will quickly decide whether to sign, noting: “All the authority I would need is in there.”