The Challenging Transition in the Wake of a State Takeover

September 25, 2018

Good Morning! In this morning’s eBlog, we report on the likely extension of the Garden State takeover of Atlantic City, because, as one of our most respected and insightful fiscal experts there, Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, put it: it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period. That is, Mr. Pfeiffer believes continued state oversight will be a positive for Atlantic City municipal bondholders, because it assures more fiscal discipline will be in place—or, in his own words: “You are going to have ongoing stability while the state is involved…The city will have to show that it can stand on its own.”

The Steep Road to Municipal Fiscal Recovery. In the wake of a release of a new state report, “Atlantic City, Building a Foundation for a Shared Prosperity,” [64-page report]  released by New Jersey Gov. Phil Murphy’s administration, a report recommending continuation of the almost two-year-old state takeover of Atlantic City’s finances, that state governance now appears likely to last a full five years, due to “longstanding challenges” to New Jersey officials, as recommended by the Governor’s office. While the Governor, in his campaign, had, as part of his platform, a commitment to terminate the state takeover of Atlantic City, now, three-quarters of a year after taking office, the Governor appears likely to leave the state takeover in place—indeed, possibly for an additional three years.

The Murphy Administration has released a plan to assist the city to get back on its fiscal feet, a plan which benefited from input from numerous study groups, task forces, and committees, as well as a redirection of some state government funds to youth programs, and a training program for municipal department heads; that plan does not end the takeover; rather the report recommends keeping the takeover in place for the full five years called for under the 2016 law, unless signal fiscal and financial improvement is put in place before then, including the significant reduction or total elimination of Atlantic City’s reliance on state aid—or, as Gov. Murphy put it: “We had a pretty clear-eyed sense of what the challenge was…That doesn’t mean Atlantic City doesn’t need the state, that the state won’t continue to stay the course and be a partner. We’re not going away; we’re going to go out and executive this plan.”

Under New Jersey’s state takeover law gave the state broad powers, including the right to overturn decisions of the city council, override or even abolish city agencies and seize and sell assets, including Atlantic City’s much-coveted water utility. The statue empowers state overseers, in addition, to hire or fire workers, break union contracts, and restructure Atlantic City’s debt, most of which was done to varying degrees, although no major assets have been sold off.

What Is the City’s Perspective? Atlantic City Mayor Frank Gilliam has conceded the uncomfortable governance challenge under the takeover, which was initiated in November of 2016 by former Governor Chris Christie, but he notes that Gov. Murphy’s administration has been willing to listen to concerns and work with city officials, even as it has retained the final governing say-so.

How Can a State Transition Governance Back to a City? Unlike under a chapter 9 municipal bankruptcy, where a federal bankruptcy court has the final say in approving (or not) a plan of debt adjustment under which governance authority reverts back to a municipality’s elected leaders, a state takeover lacks a Betty Crocker cookbook set of instructions. Gov. Murphy’s quasi-emergency manager, Jim Johnson, whom the Governor named to review Atlantic City’s transition back to local control, said the state administration should remain in place for an additional three years, unless Atlantic City’s reliance on state aid has been “substantially reduced or eliminated” and that its municipal workforce is on “solid footing.”  Under the provisions of the state takeover, enacted shortly after Atlantic City nearly defaulted on its municipal bond debt, the state was empowered to alter outstanding debt and municipal contracts—or, as Mr. Johnson wrote: “Atlantic City has a set of fiscal, operational, economic and social challenges that will only be resolved with significant direction from, and partnership with the State.”

Focus on the Fiscal Future. Mr. Pfeiffer said it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period, adding that the continued state oversight will be a positive for Atlantic City municipal bondholders, because it will assure greater fiscal discipline will be in place, or, as he put it: “You are going to have ongoing stability while the state is involved: The city will have to show that it can stand on its own.”

The report outlines a series of recommendations such, as:

  • the importance of diversifying Atlantic City’s economy beyond casinos,
  • providing increased training for senior municipal workers, and
  • purchasing data that can better track city services.

Mr. Johnson also urged Atlantic City to redirect Casino Reinvestment Development Authority funds into new development projects and toward providing increased financial support for youth programming.

Transitioning Back to Local Control. Atlantic City Mayor Frank Gilliam noted: “The citizens of Atlantic City deserve to have their local elected officials control their destiny…I am very optimistic that this is a huge step in the right direction for Atlantic City and its future.” Mr. Johnson, who was a primary challenger to the Gov. two years ago, was named after that election as a special counsel to review the state’s oversight of Atlantic City—and he came somewhat prepared thanks to his previous service as a U.S. Treasury Undersecretary for enforcement under former President Bill Clinton.

Gov. Murphy, who had been critical of the state takeover during his gubernatorial campaign, and who had criticized former Gov. Chris Christie’s administration for implementing it without support from former Mayor Donald Guardian, noted: “This is a community that needs the state’s help as a partner, not as a big-footing jamming down, taking away—you know, taxation without representation,” adding: “That doesn’t mean that Atlantic City doesn’t need the state, that the state isn’t going to stay the course and be a partner.” The Governor, soon after assuming office, had removed former Gov. Christie’s designated takeover manager Jeffrey Chiesa as the state designee to oversee the state role in Atlantic City. It should be noted, as we have previously, that Mr. Chiesa forged a number of settlements on owed casino property tax appeals and effected a $56 million reduction in Atlantic City’s FY2017 budget. All of which brings us back to the wary fiscal trepidation of Mr. Pfeiffer, because Atlantic City’s debt is still in the high risk range so favored by some casino players in the city: a CCC-plus from S&P Global Ratings and Caa3 from Moody’s Investors Service.

The Undelicate Local-State Fiscal Balance

eBlog

April 18, 2018

Good Morning! In this morning’s eBlog, we try to assess the odds for Atlantic City’s exit from state preemptive control, and then we look west to observe the lingering fiscal and physical damage created by the State of Michigan’s takeover of the City of Flint.

The Difficult Challenge of Ending State Fiscal Preemption. In the Garden State, New Jersey Gov. Phil Murphy has removed and replaced former Gov. Chris Christie’s designee, attorney Jeff Chiesa, who had been tapped to preempt local governance authority and run the famed city in an effort to avert its filing for chapter 9 municipal bankruptcy. The new Governor’s action has the effect of retaining state oversight of the fiscal governance of Atlantic City–effectively leaving the city still under state authority first imposed by former Governor Christie in November of 2016. As we had noted, that state takeover did not remove the Mayor and Council; however, Mr. Chiesa was granted broad powers in the city, such as the ability to break union contracts and sell off city assets. Ironically, it was also a prohibitively costly takeover to state taxpayers: Mr. Chesia’s law firm has filed a claim with the State of New Jersey for at least $4 million in taxpayer dollars for its work. Indeed, unlike the city’s elected leaders, Mr. Chiesa has been compensated at a rate of $400 an hour; his firm colleagues have been paid slightly less. In announcing the replacement, Gov. Murphy left unsaid the status of his earlier vow to end the state takeover of Atlantic City; he did, however, announce that state control of the city would revert to the New Jersey Department of Community Affairs, currently overseen by New Jersey Lt. Governor Sheila Oliver, a long-time opponent of the state takeover. Left unclear are the new Governor’s time frame or commitment with regard to restoring local control—as, under the current statute signed by former Gov. Christie, state control and preemption could persist until 2021.

During his campaign, then candidate Murphy had campaigned for ending the state takeover; however, when pressed to clarify his intentions last February, then candidate Murphy responded that the state would be a “partner” with the city—comments similar to those he made this week, when he said: “The economic revitalization of Atlantic City is critical to advancing our overall state economy…The actions we are taking today will ensure we are working in full partnership with the city to ensure economic growth and empowerment for all Atlantic City residents.”  Indeed, New Jersey Lt. Governor Oliver said the Department will “continue to play an active role in Atlantic City to build upon the significant gains the city and state have made over the last 18 months in stabilizing Atlantic City’s finances: This ongoing partnership between DCA’s knowledgeable local government experts and the City’s governing body and its professionals will keep Atlantic City moving in the right direction for its residents and businesses and the surrounding region.” For his part, Atlantic City Mayor Frank Gilliam notes: “Atlantic City’s rebirth is looking very bright.”

For their part, former Gov. Christie and New Jersey State Senate President Stephen Sweeney (D-Gloucester) had pressed for the state takeover in the wake of the shuttering of five of the famed resort city’s casinos over the last decade, causing a swoon in the seaside city’s tax ratables by $14 million, and its debt to balloon to over $500 million. Unsurprisingly, former Gov. Christie, Sen. Sweeney, and others claim the state takeover has helped restore the city—a saving which, not coincidentally, has meant thousands of jobs in the state, and, mayhap more fiscally valuable, millions of dollars in state tax revenues. Since the takeover commenced, New Jersey has settled tax appeal debt with Borgata casino and worked with the city to adopt a municipal budget providing the first municipal tax decrease in almost a decade. Describing the state preemption and takeover, former Gov. Christie noted: “If you compare the results Sen. Chiesa has gotten from what he billed with what you all have paid to the people who have been running this city into the ground, Sen. Chiesa is the biggest bargain in the world…You all should wish he stays here for the rest of his life.” Unsurprisingly, however, many city leaders, some state lawmakers, and union officials have opposed the takeover, saying it violates civil rights and damages collective bargaining. 

Atlantic City Mayor Frank Gilliam has, unsurprisingly, applauded the new Governor’s action, noting: “Atlantic City’s rebirth is looking very bright.”

Out Like Flint. A visibly irate Mayor Karen Weaver has stated the city is exploring legal options against Gov. Rick Snyder and the state after the Governor told her “to get over” the ending of water distribution in the citya characterization the Governor’s office disputed as inaccurate. In a hastily called news conference in her office, Mayor Weaver said she met with the Governor Monday morning in Lansing in an effort to dissuade him from his announced decision to have the state cease the provision of bottled drinking water to the various “pods” across Flint—in the wake of, more than two years ago, the city’s declaration of a lead contamination state of emergency. However, on April 6th, Gov. Snyder, citing nearly two years of test results showing lead levels in city tap water below federal standards, had ordered the end of such distributions. Thus, in the wake of her meeting with the Governor, Mayor Weaver noted: “We did not get very far in the conversation, because one of the things the Governor basically said was we need to get over it.”

But, from her perspective—and responsibility–Mayor Weaver stated that providing water to the residents of Flint is a “moral issue,” especially since it had been the state’s action—in appointing an Emergency Manager to preempt all local authority—who had been responsible for Flint’s lead-in-water crisis. Noting that, since it was state action which had precipitated the physical and fiscal crisis, she believes the burden is on the state to reestablish trust: “They gave us their word that they would see us through this lead and galvanized service line replacement and that we would have pods stay open until then…And they backed out on what they said.”

However, Anna Heaton, a spokesperson for Gov. Snyder disagreed: she said: “It was a good discussion about the city and state’s continued partnership, and an offer for economic development help, since the Mayor brought the city’s new economic development official with her to the meeting…State taxpayers could ceased funding the pods last September, but, in the wake of the city’s request, the Governor opted to keep them open—and keep them open a full seven months past when the state could have ceased funding them, asserting this action was taken in order to help with the state’s continued partnership with the city, and to “foster trust with residents as the water quality continued to improve.” Her comments came in the wake of an earlier announcement by Gov. Snyder, in which he said the state has “worked diligently to restore the water quality and the scientific data now proves the water system is stable and the need for bottled water has ended.”

Mayor Weaver said the Governor, in the 35-minute meeting, had wanted to discuss economic development, but she told him the bottled water issue was not going away. Flint’s legal counsel, Angela Wheeler, added: “We do have to explore all possibilities” with regard to whether Flint will opt to sue the state—as Mayor Weaver has been clear that the State of Michigan should wait until all of the city’s lead service lines are replaced.

Beating the Fiscal Odds?

April 10, 2018

Good Morning! In this morning’s eBlog, we return to the fiscal gaming tables of Atlantic City, where the State oversight body for the city appears to appreciate the way the fiscal dice are rolling; then we turn south to assess the depressing future for Puerto Rico’s next generation.

Beating the Odds. The New Jersey Department of Community Affairs, the Department which assumed the key role in steering Atlantic City through its quasi plan of debt adjustment, perceives the city is in the midst of a “major breakthrough” in the wake of the sale of $49.2 million in taxable municipal bonds to help finance deferred pension and health care contributions—contributions which had been deferred when the city teetered on the edge of chapter 9 municipal bankruptcy and the state stepped in to fiscally take over the municipality. In the wake of the successful sale, the Department reported the success had demonstrated that “investors are confident in Atlantic City’s ability to pay its debt and in the State of New Jersey’s oversight of the city’s finances…[and] is proud of the team of city and state professionals who worked very hard to develop a unique solution to pay the city’s deferred contributions without having to resort to tax increases on city residents,” according to New Jersey Lieutenant Gov. and Department of Community Affairs Commissioner Sheila Oliver, who noted: “These deferred contributions from 2015 were the last major debt hurdle facing Atlantic City. With yesterday’s successful bond sale, the city is now positioned to responsibly finance this debt within its budget and have confidence in its future.” The municipal bonds were sold pursuant to New Jersey’s Municipal Qualified Bond Act, which stipulates that the state Treasurer withhold a portion of the city’s state aid in amounts sufficient to pay the principal and interest on the bonds, with the Treasurer directing a portion of the Investment Alternative Taxes paid by licensed casinos to go to the city for funding the debt service on the municipal bonds. Absent such a plan, Atlantic City would have been forced to raise property taxes by more than $700 on the average assessed home of $140,000—a most unwanted option in the wake of last year’s first-in-a-decade property tax reduction, with the Commission’s Director of Local Government Services, Timothy Cunningham, stating the option had been selected to “spare city taxpayers from picking up this expense” and “immediately ends the accrual of interest.” He added that the state fiscal strategy had demonstrated the state’s willingness and ability to find creative solutions to Atlantic City’s difficult financial problems,” noting that: “Conventional thinking would have been to take the deferred contributions the city owes and incorporate them as part of the city’s budget over the next five years. But that would have resulted in significant tax increases for residents and it wouldn’t have stopped interest from accruing on the deferred contributions.”

The bonds were priced via the Garden State’s Qualified Bond Act program to fund $37.7 million in pension and healthcare payments, after, three years ago, Atlantic City had been granted state approval to defer interest payments in the face of $101 million budget shortfall, creating ever-increasing odds to the city’s bookmakers the city might file for municipal bankruptcy. Under the new fiscal arrangements, Atlantic City, by the end of this year, will owe about $47 million for these obligations—or, as New Jersey Lt. Governor Sheila Y. Oliver put it: “These deferred contributions from 2015 were the last major debt hurdle facing Atlantic City…With yesterday’s successful bond sale, the city is now positioned to responsibly finance this debt within its budget and have confidence in its future.” That fiscal confidence is bolstered, no doubt, by being wrapped with the Garden State’s credit enhancement program and backed by Investment Alternative Tax revenue from casinos, which are directed to pay down debt or debt service payments under the authority the state assumed two years ago in November to take over Atlantic City—a fiscal system under which the State Treasurer withholds a portion of the city’s state aid in amounts sufficient to pay the principal and interest on the municipal bonds, or, as Director Cunningham described it: “This strategy, which culminated in yesterday’s bond sale, demonstrates the state’s willingness and ability to find creative solutions to Atlantic City’s difficult financial problems…Conventional thinking would have been to take the deferred contributions the city owes and incorporate them as part of the city’s budget over the next five years. But that would have resulted in significant tax increases for residents, and it wouldn’t have stopped interest from accruing on the deferred contributions.” New Jersey officials said that without the bond sale, Atlantic City would have been forced to raise property taxes on residents by more than $700 on the average assessed home of $140,000.In the wake of this week’s bond sale, Atlantic City has approximately $400 million in outstanding bond debt, according to Moody’s.

But beating the odds is not just a matter of fiscal soundness, but also physical safety. Thus, Atlantic City, in finding a new way to combat crime, has beaten the odds in developing ways to stay ahead of crimes before they are committed—meaning that the number of shootings, homicides, and robberies in the city decreased by more than 33% last year, after Atlantic City began using a risk-based policing model which analyzes data to map out crime risk factors around the city and places where crimes are likely to take place: a new tool which has helped police prevent crimes by tackling factors in the environment identified as risks where crimes take place, and not the people. Indeed, the new strategy not only contributed to the reduction by more than a third in shootings, homicides, and robberies last year, but also that greater security appears likely to enhance assessed property values.

Tempus Fugit. U.S. Director of the Federal Emergency Management Agency Brock Long has warned it will take up to an estimated $50 billion to help rebuild Puerto Rico in the wake of Hurricane Maria—even as he warned the U.S. territory is not ready for another disaster. He told NPR that the agency is focused on making Puerto Rico’s roads, homes, bridges, and electrical grid as strong as possible—but that the time to complete the effort is running out: the new hurricane season is projected to hit as early as June 1st. projected to blow in June 1. A critical issue for Puerto Rico’s fiscal future, then, is a double public infrastructure risk: its physical and human capital. On the latter front, Puerto Rico Education officials have announced the closure of some 283 schools through this summer, nearly seven months after Hurricane Maria struck, reporting that Hurricane Maria exacerbated the demographic teeter totter as increasing numbers of families with children who can afford to have left for the continental U.S., leaving, increasingly, a poorer and older population behind with a depleting tax base, but significantly greater fiscal pressures. Thus, during his visit to Puerto Rico, he warned: “We’re running out of time.” And, observing that much of the territory’s infrastructure had collapsed, he added: “We have a long way to go.” He said FEMA is coordinating a Flag Day planning and training exercise with Puerto Rico’s government in which life-saving supplies will be delivered to the island’s 78 municipalities to ensure better response times for any upcoming storms, adding the muncipios and towns will be allowed to store those supplies for future disasters, but stressing that Puerto Rico’s public and private sectors have to build a strong emergency response network and establish unified plans: “FEMA cannot be directly responsible for all of the response and recovery.” Director Long added that the private sector should ensure that communication systems become more resistant—reflecting that Maria had left nearly all of Puerto Rico without phone service after the Category 4 storm struck last September. At the same time, he defended his agency from ongoing criticism that it did not respond quickly enough to the hurricane or dedicate the same amount of resources compared with other natural disasters in the U.S. mainland, asserting: “(That’s) completely false,” adding that in the first six months since Maria hit, FEMA had invested $10 billion in Puerto Rico, in contrast to the $6 billion invested in the six months after Hurricane Katrina: “Recovery never moves as fast as people want it to be…And in this case, moving faster can be detrimental from the standpoint of putting this money to work in a manner that truly makes Puerto Rico stronger and more resilient.” His staffer, Mike Byrne, who serves as FEMA’s federal coordinating officer in Puerto Rico, said he is working with Puerto Rico’s government to determine how federal funds will be used to identify priorities and rebuild damaged infrastructure: he stated that some of the funds will go toward strengthening Puerto Rico’s power grid—some two-thirds of which Maria destroyed: even hoy dia (today), some two-thirds of its distribution system remains to be fixed; more than 50,000 power customers remain in the dark. Nevertheless, he said 96 percent of all customers now have electricity, noting: “We’ve done the Band-Aid,” adding that the recovery process has been slow in part because supplies ranging from construction equipment to power poles have been scarce in light of the natural disasters that hit the U.S. mainland, Puerto Rico, and the U.S. Virgin Islands last year

La Escuela or School of Debt. In an in-depth session with NPR’s Hari Sreenivasan, who was joined by San Juan by Danica Coto of the Associated Press, Ms. Cotto noted that, over the last three decades, Puerto Rico has experienced school enrollment drop by 42%; since May of last year, that enrollment has dropped by 38,700—in part reflecting the roughly 135,000 Puerto Ricans who, in the wake of Maria, left for the mainland—that ism, those who could afford to. Ms. Cotto added that for the island’s 4,700 affected teachers, the Secretary of Education has promised that no one will lose her or his job—albeit for a quasi-state in quasi chapter 9 municipal bankruptcy, such a commitment seems hard to imagine—the related query is what will happen to the schools themselves—150 of which had been closed in the half decade prior to Maria—and an additional 179 last year. Currently, Ms.Cotto noted, there are about 283 schools in the process of closing.

Mr. Sreenivasan inquired about the demographics of those students, some 319,000 in public schools, staying behind—in response to which Ms. Cotto responded that 30% have special needs, or about twice the average of the U.S. mainland. One can appreciate immediately the disparate fiscal and human implications—for Puerto Rico’s hopes for recovery—and for its fiscal future. And she asked about the equity in the process for determining which schools would close, reminding us of Detroit Emergency Manager Kevin Orr’s recognition that any final plan of debt adjustment for Detroit to exit the largest chapter 9 municipal bankruptcy in the nation’s history would require a perception that the public schools were competitive with surrounding jurisdictions.

Ms. Cotto noted that the bulk of public school closures in Puerto Rico will be in rural areas, noting that along the north coast of the island, some muncipios will experience closures of nearly half their public schools—creating a risk of an increasing number of young Americans losing access to public education—and a risk to local tax bases. Several other municipalities will see 44 to 46% of its schools close.

Returning from Municipal Bankruptcy

February 7, 2017

Good Morning! In today’s Blog, we consider the remarkable signs of fiscal recovery from the largest municipal bankruptcy in U.S. history, before returning to consider the ongoing fiscal recovery of Atlantic City, where the chips had been down, but where the city’s elected leaders are demonstrating resiliency.

Taking the Checkered Flag. John Hill, Detroit’s Chief Financial Officer, this week reported the Motor City had realized its first net increase in residential property values in more than 15 years. Although property taxes, unlike in most cities and counties, in Detroit only account for 17.1% of municipal revenues (income taxes bring in 20.4%), the increase marked the first such increase in 16 years—demonstrating not just the fiscal turnaround, but also indicating the city’s revitalization is spreading to more of its neighborhoods. Mr. Hill described it as a “positive sign of the recovery that’s occurring in the city,” and another key step to its emergence from strict state fiscal oversight under the city’s chapter 9 plan of debt adjustment. As Mr. Hill put it: “We do believe that we’ve hit bottom, and we’re now on the way up.” Nevertheless, Mr. Hill was careful to note he does not anticipate significant gains in property tax revenues in the immediate future, rather, as he put it: “[O]ver time, it will certainly have a very positive impact on the city’s revenue.” According to the city, nearly 60 percent of residents will experience a rise of 10 percent or less in assessments this year: the average assessed home value in Detroit is between $20,000 and $50,000. The owner of a home within that range could see an increase in their taxes this year of $22 to $34, according to Alvin Horhn, the city’s chief assessor. Detroit has the seventh highest rate among Michigan municipalities, with a 70.1 mills rate for owner-occupied home in city of Detroit/Detroit school district. Mr. Hill noted that for Detroit properties which show an increase in value this year, the rate will be capped; therefore he projects residents will not experience significant increases except for certain circumstances, such as a property changing hands.

Nevertheless, in the wake of years in which the city’s assessing office had reduced assessments across Detroit to reflect the loss in property values, the valuation or assessment turnaround comes as, in the past decade, the cumulative assessed value of all residential property was $8.4 billion, officials noted Monday: and now it is on the rise: last year, that number was $2.8 billion; this year, the assessed value of Detroit’s 263,000 residential properties rose slightly to $3 billion—or, as Mr. Horhn noted: “For the last 12 to 17 years, we’ve been making massive cuts in the residential (property) class to bring the values in line with the market…It’s been a long ride, but for the first time in a very long time, we see increases in the residential class of property in the city of Detroit.” This year’s assessments come in the wake of a systemic, citywide reassessment of its properties to bring them in line with market value—a reassessment initiated four years ago as part of a state overhaul to bring Detroit’s assessment role into compliance with the General Property Tax Act to ensure all assessments are at one half of the market value and that like properties are uniform. That overhaul imposed a deadline of this August for Detroit to comply with state oversight directives imposed in 2014 in the wake of mismanagement in Detroit’s Assessment Division, widespread over-assessments, and rampant tax delinquencies in the wake of an investigation finding that Detroit was over assessing homes by an average of 65%, based upon an analysis of more than 4,000 appeal decisions by a state tax board. Mr. Hill asserts now that he is confident Detroit’s assessments are fair; better yet, he reports the fixes have led to more residents paying property taxes. Indeed, city officials note that property tax collections increased from an average rate of 69% in 2012-14 to 79 percent in 2015, and 80 percent in 2016; the collection rate for 2017 is projected to be 82%. Mayor Mike Duggan, in a statement at the beginning of the week, noted: “We still have a long way to go to in rebuilding our property values, but the fact that we have halted such a long, steep decline is a significant milestone…This also corresponds with the significant increase in home sale prices we have seen in neighborhoods across the city.”

At the same time, Mr. Horhn notes that Detroit’s commercial properties have increased in value to nearly $3 billion, while industrial properties recovered from a drop last year, rising from $314 million to $513 million. He added that the demolition of blighted homes, as well as improving city services, had contributed to the rise in assessed property values: “It’s perception to a large extent: If people believe things are improving, they’ll invest, and I think that’s what we’re seeing.”

Raking in the Chips? In the wake of a state takeover, and the loss—since 2014, of 11,000 jobs in the region, Atlantic City marked a new step in its fiscal recovery with interviews commencing for the former bankrupt Trump Taj Mahal casino to reopen this summer as a Hard Rock casino resort. Indeed, 1,400 former Taj Mahal employees applied after an invitational event, marking what Hard Rock president Matt Harkness described as the “first brush stroke of the renaissance.” The casino is projected to create more than 3,000 jobs—and to be followed by the re-opening Ocean Resort Casino, which will add thousands of additional jobs. The rising revenues come after, last year, gambling revenue increased for the second consecutive year, marking a remarkable turnaround in the wake of a decade in which five of the city’s 12 casinos shut down, eliminating 11,000 jobs—and, from the fiscal perspective, sharply hurt assessed property values and property tax revenues. New Jersey Casino Control Commission Chair James Plousis noted: “Every single casino won more, and every internet operation reported increased win last year…Total internet win had its fourth straight year of double-digit increases. It shows an industry that is getting stronger and healthier and well-positioned for the future.” In fact, recent figures by the New Jersey Division of Gaming Enforcement show the seven casinos won $2.66 billion in 2017, an increase of 2.2 percent over 2016. Christopher Glaum, Deputy Chief of Financial Investigations for the gaming enforcement division, noted that 2017 was the first year since 2006 when a year-over-year increase in gambling revenue at brick-and-mortar casinos occurred. Moreover, many are betting on the recovery to gain momentum: two of the five casinos which were shuttered in recent years are due to reopen this summer: the Taj—as reported above—under its new ownership, and the Revel, which closed in 2014, will reopen as the Ocean Resort Casino. The fiscal bookies are, however, uncertain about the odds of the reintroduction of two new casinos, apprehensive that that could over saturate the market; however, the rapid increase in internet gaming, which, last year, increased earnings for the casinos by 25 percent appear to demonstrate momentum.  

Now, the fiscal challenge might rest more at the state level, where the new administration of Gov. Phil Murphy, who promised major spending initiatives during his campaign, had been counting on revenue increases from restoring the income tax surcharge on millionaires and legalizing and taxing marijuana. The latter, however, could go up in a proverbial puff of weed—and, in any event, would arrive too late for this year’s Garden State budget. Similarly, the new federal “tax reform” act’s capping on the deduction for state and local taxes will mean increased federal income taxes most for well-off residents of high-tax states such as New Jersey—raising apprehension that a new state surcharge might encourage higher income residents to leave. That effort, however, has been panned by the New Jersey Policy Perspective, which notes: “Policy changes to avoid the new $10,000 cap on state and local tax deductions would mostly benefit New Jersey’s wealthiest families.” New Jersey Senate President Steve Sweeney (D-West Depford) notes: “We don’t have a tax problem in New Jersey. New Jersey collects plenty in taxes. We have a government problem in New Jersey, and it’s called too much of it,” noting he has tasked a panel of fellow state Senators and tax experts to “looking at everything,” including the deduction issue. In addition, he is seriously considering shifting to countywide school districts, where possible, in an effort to reduce costs. Or, as he put it: “There is a lot of money to be saved when you do things differently.” Turning to efforts to restore Atlantic City’s finances, the state Senate President said the city is “doing great;” nevertheless, noting that talk about ending the state takeover is unrealistic: “We can adjust certain things there” and Governor Murphy will select someone new to be in charge. But end the state takeover?  “Absolutely not and it’s legislated for five years.”

It seems ironic that in the city where Donald Trump’s company filed for bankruptcy protection five times for the casinos he owned or operated in the city, he was able to simply walk away from his debts: he argued that he had simply used federal bankruptcy laws to his advantage—demonstrating, starkly, the difference between personal and municipal bankruptcy.

Fiscal Challenges Under Federal or State Takeovers

December 6, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city still under a state takeover, before heading south to assess the governing and fiscal challenges in a dissimilar, quasi-takeover of the U.S. territory of Puerto Rico.  

Visit the project blog: The Municipal Sustainability Project 

Fiscal, Intergovernmental, & Branches of Government Challenges under a State Takeover. Atlantic City’s Fire Department, which, like the City, remains under the control, as part of the ongoing state takeover, of the state Department of Community Affairs, faces another round of salary cuts as the state continues to cut spending in the municipality: the firefighters are anticipated to realize an 11.3 percent reduction in their salaries effective this Sunday, according to union officials, with the cuts coming just two months after Superior Court Judge Julio Mendez ruled the state had the authority to cut the Department by 15 members, to 180, after next February 15th. Moreover, in the wake of the state’s fiscal action, the state warned further salary cuts were possible, because Atlantic City only had sufficient fiscal resources to fund the department through November 30: Lisa Ryan, a spokesperson for the New Jersey Department of Community Affairs, noted: “While we have made considerable progress in stabilizing Atlantic City, significant work remains in restraining the city’s unsustainable finances…Judge Mendez’s decision requiring 180 firefighters instead of the 148 the state and city believe is sufficient to maintain public safety in Atlantic City resulted in $3.8 million in additional costs.” Over the past couple of years, the size of the city’s Fire Department has continued to shrink: in January, the department had 225 members; currently there are 195. Indeed, over the last seven years, the department has been reduced by 82 members—leading Fire Chief Scott Evans to note that in what would have to be an understatement, the year has been tough on the department, or, as he put it, the cuts and ongoing litigation have been a “distraction” to the firefighters: “It’s tough to keep the focus on your job…What the guys have faced all year have been the toughest challenges.” Ms. Ryan noted: “The state and city refuse to have taxpayers and other city stakeholders shoulder the burden of these costs caused by the fire union, thereby resulting in the salary reduction of firefighters, who are still highly compensated when compared to other city employees…Notably, the police have chosen to mediate and find compromise, and we encourage firefighters to do the same.”

Siguiendo en Disarollo. Puerto Rico currently expects its central government revenues to come in 25% short of budget in this fiscal year. Geraldo Portelo Franco, the Executive Director of the Puerto Rico Fiscal Advisory and Financial Information Authority, advised the PROMESA Oversight Board yesterday, meaning Gov. Ricardo Rosselló and the PROMESA Board will have to address the shortfall as the island government struggles to address not just recovery from the devastation from Hurricane Maria, devastation which received far less of a U.S. response than Houston or Florida, but also left the island with a substantial loss of those who could afford to leave—and who may not return. Now Mr. Portelo Franco is warning that public corporations will be without cash this month, while the General Fund will see a 25 percent drop in revenues this fiscal year: while he did not specify how the central government would help PREPA and PRASA if the disaster loan under FEMA, a loan the final terms of which are still undefined—even as the full restoration of electricity and water services is urgent; Puerto Rico’s two main public corporations on the island, those which provide essential public services, appear to be without fiscal resources with which to cover their operations this month, according to Mr. Portela, when he spoke at the eleventh public meeting of the PROMESA Oversight Board in New York City. He noted that in the case of PREPA (the Puerto Rico Electric Power Authority), which has not yet restored electricity service to most of its customers, the corporation will deplete what is left in its coffers by the end of the week of December 22nd; he anticipates PREPA will finish the calendar year with a cash deficit of $ 224 million. Meanwhile, the Puerto Rico Aqueducts and Sewers Authority (PRASA) is anticipated to end this month with a cash overdraft of about $ 1 million. The twin fiscal perils could, according to Mr. Portela, push Puerto Rico’s general fund into negative territory, because there might be no choice but to assist PREPA and PRASA if Washington does not allocate fiscal resources to Puerto Rico as soon as possible: in total, according to PAFAA, PREPA, and PRASA need $ 883 million of liquidity. Thus, Mr. Portela noted: “Our efforts are focus on obtaining liquidity for PREPA and PRASA through the CDL (Community Disaster Loan).”

If anything, the governance and fiscal challenge has been exacerbated, because the FEMA disaster loan, which was authorized about a month ago, but for which terms have yet to be negotiated, has yet to arrive. While Puerto Rico, as part of governing for contingencies, maintains reserves in case it needs to give liquidity to these quasi-public corporations, or, as he put it: “They (PREPA) have tried to preserve cash by managing the time of payment to suppliers,” in responding to PROMESA Board executive Arthur González, the liquidity crisis in PREPA and PRASA has complicated the governance and fiscal options facing the PROMESA Board as it confronts the challenge of approving a new fiscal plan which, among other things, seeks profound reforms of Puerto Rico’s economic framework and, in turn, will be key to the renegotiation of the debt through the cases of Title III of PROMESA. For one, if Puerto Rico uses General Fund resources, it would likely face further court challenges by Puerto Rico’s creditors—similar to a challenge already underway in the case of the bondholders of the Puerto Rico Sales Tax Financing Corporation (Cofina). (Recently, the insurer Ambac Assurance Corporation and several investment funds have asked U.S. Judge Laura Taylor Swain to investigate how Puerto Rico’s decisions to suspend the collection of the Sales and Use Tax (IVU) will affect that debt. But, with some $700 million owed to its suppliers, Puerto Rico’s central government has no cash options. Notwithstanding the gloomy fiscal portents, Mr. Portela reported better collections in items such as the 4 percent tax, FEMA assistance, and a less severe migration than had been feared; notwithstanding, however, he noted that if the predicted drop of 25 percent in revenues materializes, the General Fund would fall short in this fiscal year by about $ 2.4 billion—ensnaring the government in delaying payments to its suppliers and contractors, as he admitted that, apart from the estimate of accounts payable already recorded (around $ 500 million), there could be up to $ 250 million in additional payments to suppliers which are pending, noting that because “certain systems were inoperative in the immediate aftermath of the hurricane, there was a delay in payments and processing.”

Catch 22. With the PROMESA Board, the most likely bridge to gaining any additional fiscal help from the White House and Congress, thus a critical potential ally to Puerto Rico; the evident frustration by members of the PROMESA Board, combined with the speed with which Congress is moving on federal tax reform—but with virtually no analysis of the potential fiscal impact on Puerto Rico, albeit with a debt dwarfing Puerto Rico’s, the Board appears increasingly caught between a rock and hard place—a place Director Ana Matosantos described as “unacceptable,” adding that, for at least four times, PROMESA Board executives have asked for information on what is owed to government suppliers and contractors, stating: “This issue of not having clear things about accounts payable and the ongoing issue of late payments, at the same time that we are trying to look at what is happening economically in Puerto Rico while you have outstanding balances, is frustrating.” PRMOMESA Executive Andrew Biggs noted: “I have mostly dealt with governments at the state and federal level, but I’ve never seen a government that is so dependent on external consultants.”

The fiscal challenges, indeed, go both ways: as the exchange between the Board and officials of Gov. Ricardo Rosselló Nevares’ administration, the officials sought information and analysis of the potential fiscal impacts on Puerto Rico of the rapidly moving federal tax reform legislation in Congress—legislation, after all, which Congress’ Joint Committee on Taxation has warned will add close to $1.4 trillion to the federal debt.

Putting Humpty-Dumpty Back Together Again

November 13, 2017

Good Morning! In today’s Blog, we consider the election results in Atlantic City, where incumbent Mayor Don Guardian was defeated by two-term Democratic City Councilman Frank Gilliam, in a municipality which has been under state intervention since last November.

Visit the project blog: The Municipal Sustainability Project 

Emerging from State Oversight? In New Jersey, voters elected a new Governor, Phil Murphy—and a new Mayor in Atlantic City, potentially paving the way for Atlantic City to emerge from its state takeover. Indeed, prior to his election, candidate Phil Murphy, who was elected over Republican candidate Lt. Gov. Kim Guadagno, had said he would end the state takeover of the city and instead work together with city officials as partners. The election came almost a year after the state takeover of the city—so that in his victory statement, Mayor-elect Frank Gilliam Jr., noted: “This is the beginning of a new era in Atlantic City: For the past 30-40 years Atlantic City has been taking the back seat, and now it is time for us to actually take the front seat.” How this new era will transform the municipality as it emerges from state intervention—and under a new Governor will be a challenge: the former Governor Chris Christie, under whom the state took over Atlantic City; has been replaced by the voters, who elected Philip Murphy, a former Wall Street banker with no experience in office, as the Garden State’s 56th governor—with Gov.-elect Murphy prevailing in a decisive victory to end the two-term reign of Gov. Chris Christie. The twin changes in governance could play a critical role as the city is emerging from its state takeover. The Governor-elect has proposed instituting a millionaire’s tax; he has also called for boosting public pension funding; he has not publicly discussed what he might propose with regard to the state’s current relationship with Atlantic City. Meanwhile, in Atlantic City, where voters turned Mayor Don Guardian out of office after a single, turbulent term, during which five of the city’s famed dozen casinos shut down, and the State of New Jersey seized control of the city’s assets and governing authority—voters selected Atlantic City Councilman and city native Frank Gilliam, who has served as a member of the City Council since 2009 to replace Mayor Guardian, with the Mayor-elect noting: “This is the beginning of a new era in Atlantic City.” Mayor Gilliam, in his first discussion, surrounded by his colleagues selected to fill the three open council-at-large seats, noted: “It’s going to always be about the people: We love Atlantic City: Now it’s time for us to actually take the front seat.” But the challenges ahead for the newly elected Mayor who, during his campaign, had promised the city’s voters would reverse the previous four years of debt and state takeover will not be easy. The Mayor-elect said he wants to focus on shaping up the city’s finances, improving tax rates, and bringing in more development for the city to appeal to people of all ages. In addition, he said he would like to clean up the beach blocks to raise the value of housing—a slight contrast from Mayor Guardian’s platform of taking credit for stabilizing the city’s finances and more interest from investors on new projects coming to the city, such as South Jersey Gas and Stockton University’s city campus: promises and promises which could not be converted to victory. Rounding out the City Council were victories by incumbent council-at-large candidates George Tibbitt and Moisse “Mo” Delgado, and the third at-large seat was won by Jeffrey Fauntleroy II. The Mayor-elect noted he was looking forward to having a “prosperous” relationship with the governor—describing it as it “is going to be a true partnership.”

Mayhap ironically the shuttered Trump Taj Mahal casino will reopen as a Hard Rock casino resort, bringing new life, and potentially new gaming, hotel revenue, and assessed property values; Stockton University is expected to open its Atlantic City satellite campus as part of a project which could also lead to the construction of a new corporate headquarters for South Jersey Gas in a section of the city starved for economic activity. As Brigid Harrison, a political science professor at Montclair State University put it: most people in the region believe Atlantic City has put its worst problems behind it, and are optimistic about a coming wave of development: “Part of Don Guardian’s greatest legacy will be the fact that he believed in and worked for a diversification of the city’s economic base, and, as Mayor, Frank Gilliam certainly will be able to reap some of the credit and benefits for projects initiated in the Guardian administration…Hopefully Mayor Gilliam will take a page from Mayor Guardian and continue the process of attracting a wide variety of businesses and enterprises to Atlantic City, which will only serve to strengthen the city and the region.”

But the new Mayor will also inherit unresolved challenges and problems, including the state’s takeover of Atlantic City, hundreds of millions in debt, the stalled development of a former airport property, and a city economy, which, albeit less dependent on casinos, is still disproportionately affected by their success or failure. And it is the unwinding of the state takeover which could prove the most challenging: The Mayor-elect, in his campaign, said he would commence with an audit of Atlantic City; he vowed to work closely with the incoming administration of Gov.-elect Murphy in what will be a key challenge with regard to how to unwind the state takeover of Atlantic City—a challenge to work across bureaucratic boundaries in a city where numerous state agencies held vast power even before the state takeover—or, as the Mayor-elect put it: “Atlantic City has been working in silos for 30 years: We have to talk to one another.”

S&P Global Ratings analyst David Hitchcock, in the wake of the election results, wrote that while Gov.-elect Murphy will have the support of a Democratic-controlled legislature, he will, nevertheless, be confronted by signal fiscal challenges due to decades of poor budgetary decisions. Mr. Hitchcock wrote that public pension-funding shortfalls under both Republican and Democratic administrations the last two decades have left the Garden State with a heavy pension liability shortfall along with high debt and consistent structural budget deficits, noting: “These impediments will likely constrain the state’s ability to increase funding for local aid or avoid deficits during an economic downturn, regardless of any near-term tax increases or spending cuts…The magnitude of the credit risks facing Governor-Elect Phil Murphy and the newly elected legislature means the state’s long-term credit conditions will remain challenging for the foreseeable future, no matter what policy direction they choose.”

Measuring Municipal Fiscal Distress

August 29, 2017

Good Morning! In this a.m.’s Blog, we consider the new Local Government Fiscal Distress bi-cameral body in Virginia and its early actions; then we veer north to Atlantic City, where both the Governor and the courts are weighing in on the city’s fiscal future; before scrambling west to Scranton, Pennsylvania—as it seeks to respond to a fiscally adverse judicial ruling, then back west to the very small municipality of East Cleveland, Ohio—as it awaits authority to file for chapter 9 municipal bankruptcy—and municipal elections—then to Detroit’s ongoing efforts to recover revenues as part of its recovery from the nation’s largest municipal bankruptcy, before finally ending up in the Windy City, where the incomparable Lawrence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System.  

Visit the project blog: The Municipal Sustainability Project 

Measuring Municipal Fiscal Distress. When Virginia Auditor of Public Accounts Martha S. Mavredes last week testified before the Commonwealth’s new Joint House-Senate Subcommittee on Local Government Fiscal Stress, she named Bristol as one of the state’s four financially distressed localities—a naming which Bristol City Manager Randy Eads confirmed Monday. Bristol is an independent city in the Commonwealth of Virginia with a population just under 18,000: it is the twin city of Bristol, Tennessee, just across the state line: a line which bisects middle of its main street, State Street. According to the auditor, the cities of Petersburg and Bristol scored below 5 on a financial assessment model that uses 16 as the minimum threshold for indicating financial stress, with Bristol scoring lower than Petersburg. One other city and two counties scored below 16. For his part, City Manager Eads said he and the municipality’s CFO “will be working with the APA to determine how the scores were reached,” adding: “The city will also be open to working with the APA to address any issues.” (Bristol scored below the threshold the past three years, dropping to 4.25 in 2016. Petersburg had a score of 4.48 in 2016, when its financial woes became public.) Even though the State of Virginia has no authority to directly involve itself in a municipality’s finances (Virginia does not specifically authorize its municipal entities to file for chapter 9 municipal bankruptcy, certain provisions of the state’s laws [§15.2-4910] do allow for a trust indenture to contain provisions for protecting and enforcing rights and remedies of municipal bondholders—including the appointment of a receiver.), its new system examines the Comprehensive Annual Financial Reports submitted annually and scores them on 10 financial ratios—including four that measure the health of the locality’s general fund used to finance its budget. Manager Eads testified: “At the moment, the city does not have all of the necessary information from the APA to fully address any questions…We have been informed, by the APA, that we will receive more information from them the first week of September.” He added that the city leaders have taken steps to bolster cash flow and reserves, while reducing their reliance on borrowing short-term tax anticipation notes. In addition, the city has recently began implementing a series of budgetary and financial policies prior to the APA scores being released—steps seemingly recognized earlier this summer when Moody’s upgraded the city’s outlook to stable and its municipal bond rating to Baa2 with an underlying A3 enhanced rating, after a downgrade in 2016. Nevertheless, the road back is steep: the city still maintains more than $100 million in long-term general obligation bond debt with about half of it tied to The Falls commercial center in the Exit 5 area, which has yet to attract significant numbers of tenants.

Fiscal Fire? The State of New Jersey’s plan to slash Atlantic City’s fire department by 50 members was blocked by Superior court Judge Julio Mendez, preempting the state’s efforts to reduce the number of firefighters in the city from 198 to 148. The state, which preempted local authority last November, has sought to sharply reduce the city’s expenditures: state officials had last February proposed to move the Fire Department to a less expensive health plan and reduce staffing in the department from 225 firefighters to 125. In his ruling, however, Judge Mendez wrote: “The court holds that the (fire department’s union) have established by clear and convincing evidence that Defendants’ proposal to reduce the size of the Atlantic City Fire Department to 148 firefighters will cause irreparable harm in that it compromises the public safety of Atlantic City’s residents and visitors.” Judge Mendez had previously granted the union’s request to block the state’s actions, ruling last March that any reduction below 180 firefighters “compromises public safety,” and that any reduction should happen “through attrition and retirements.”

Gov. Christie Friday signed into law an alternative fiscal measure for the city, S. 3311, which requires the state to offer an early-retirement incentive program to the city’s police officers, firefighters, and first responders facing layoffs, noting at the bill signing what he deemed the Garden State’s success in its stewardship of the city since November under the Municipal Stabilization and Recovery Act, citing Atlantic City’s “great strides to secure its finances and its future.” The Governor noted a drop of 11.4 percent in the city’s overall property-tax rate, the resolution of casino property-tax appeals, and recent investments in the city. For their parts, Senate President Steve Sweeney and Assemblyman Vince Mazzeo, sponsors of the legislation, said the new law would let the city “reduce the size of its police and fire departments without jeopardizing public safety,” adding that the incentive plan, which became effective with the Governor’s signature, would not affect existing contracts or collective bargaining rights—or, as Sen. Sweeney stated: “We don’t want to see any layoffs occur, but if a reduction in workers is required, early retirement should be offered first to the men and women who have served the city.” For his part, Atlantic City Mayor Don Guardian said, “I’m glad that the Governor and the State continue to follow the plan that we gave them 10 months ago. As all the pieces that we originally proposed continue to come together, Atlantic City will continue to move further in the right direction.”

For its part, the New Jersey Department of Community Affairs, which has been the fiscal overseer of the state takeover of Atlantic City, has touted the fiscal progress achieved this year from state intervention, including the adoption of a $206.3 million budget that is 20 percent lower than the city’s FY2015 budget, due to even $56 million less than 2015 due to savings from staff adjustments and outsourcing certain municipal services. Nevertheless, Atlantic City, has yet to see the dial spin from red to black: the city, with some $224 million in bonded debt, has deep junk-level credit ratings of CC by S&P Global Ratings and Caa3 by Moody’s Investors Service; it confronts looming debt service payments, including $6.1 million owed on Nov. 1, according to S&P.

Scrambling in Scranton. Moody’s is also characteristically moody about the fiscal ills of Scranton, Pennsylvania, especially in the wake of a court decision barring the city from  collecting certain taxes under a state law—a decision Moody’s noted  “may reduce tax revenue, which is a vital funding source for the city’s operations.” Lackawanna County Court of Common Pleas Judge James Gibbons, at the beginning of the month, in a preliminary ruling against the city, in response to a challenge by a group of eight taxpayers, led by Mayoral candidate Gary St. Fleur, had challenged Scranton’s ability to levy and collect certain taxes under Pennsylvania’s Act 511, a state local tax enabling act. His preliminary ruling against the city affects whether the Home Rule Charter law supersedes the statutory cap contained in Act 511. Unsurprisingly, the City of Scranton has filed a motion for reconsideration and requested the court to enable it to appeal to the Commonwealth Court of Pennsylvania. The city, the state’s sixth-largest city (77,000), and the County seat for Lackawanna County is the geographic and cultural center of the Lackawanna River valley, was incorporated on St. Valentine’s Day 161 years ago—going on to become a major industrial city, a center of mining and railroads, and attracted thousands of new immigrants. It was a city, which acted to earn the moniker of the “Electric City” when electric lights were first introduced in 1880 at Dickson Locomotive Works. Today, the city is striving to exit state oversight under the state’s Act 47—oversight the municipality has been under for a quarter century.

Currently, Moody’s does not provide a credit rating for the city; however, Standard and Poor’s last month upgraded the city’s general obligation bonds to a still-junk BB-plus, citing revenue from a sewer-system sale, whilst Standard and Poor’s cited the city’s improved budget flexibility and liquidity, stemming largely from a sewer-system sale which enabled the municipality to retire more than $40 million of high-coupon debt. Moreover, Scranton suspended its cost-of-living-adjustments, and manifested its intent to apply a portion of sewer system sale proceeds to meet its public pension liabilities. Ergo, Moody’s writes: “These positive steps have been important for paying off high interest debt and funding the city’s distressed pension plans…While these one-off revenue infusions have been positive, Scranton faces an elevated fixed cost burden of over 40% of general fund revenues…Act 511 tax revenues are an important revenue source for achieving ongoing, balanced operations, particularly as double-digit property tax increases have been met with significant discontent from city residents. The potential loss of Act 511 tax revenues comes at a time when revenues for the city are projected to be stagnant through 2020.”

The road to municipal fiscal insolvency is easier, mayhap, because it is downhill: Scranton fiscal challenges commenced five years ago, when its City Council skipped a $1 million municipal bond payment in the wake if a political spat; Scranton has since repaid the debt. Nevertheless, as Moody’s notes: “If the city cannot balance its budget without illegally taxing the Scranton people, it is absolute proof that the budget is not sustainable…Scranton has sold off all its public assets and raised taxes excessively with the result being a declining tax base and unfriendly business environment…The city needs to come to terms with present economic realities by cutting spending and lowering taxes. This is the only option for the city.”

Scranton Mayoral candidate Gary St. Fleur has said the city should file for Chapter 9 municipal bankruptcy and has pushed for a related ballot measure. Combined taxes collected under Act 511, including a local services tax that Scranton recently tripled, cannot exceed 1.2% of Scranton’s total market value.  Based on 2015 market values, according to Moody’s, Scranton’s “511 cap” totals $27.3 million. In fiscal 2015 and 2016, the city collected $34.5 million and $36.8 million, respectively, and for 2018, the city has budgeted to receive $38 million.  The city, said Moody’s, relied on those revenues for 37.7% of fiscal 2015 and 35.9% of fiscal 2016 total governmental revenues. “A significant reduction in these tax revenues would leave the city a significant revenue gap if total Act 511 tax revenues were decline by nearly 25%,” Moody’s said.

Heavy Municipal Fiscal Lifting. Being mayor of battered East Cleveland is one of those difficult jobs that many people (and readers) would decline. If you were to motor along Euclid Avenue, the city’s main street, you would witness why: it is riddled with potholes and flanked by abandoned, decayed buildings. Unsurprisingly, in a city still awaiting authorization from the State of Ohio to file for chapter 9 municipal bankruptcy, blight, rising crime, and poor schools, have created the pretext for East Clevelanders to leave: The city boasted 33,000 people in 1990; today it has just 17,843, according to the latest U.S. Census figures. Nevertheless, hope can spring eternal: four candidates, including current Mayor Brandon L. King, are seeking the Democratic nomination in next month’s Mayoral primary (Mayor King replaced former Mayor Gary Norton last year after Norton was recalled by voters.)

Motor City Taxing. Detroit hopes to file some 700 lawsuits by Thursday against landlords and housing investors in a renewed effort to collect unpaid property taxes on abandoned homes that have already been forfeited; indeed, by the end of November, the city hopes to double the filings, going after as many as 1,500 corporations and investors whose abandonment of Detroit homes has been blamed for contributing to the Motor City’s blight epidemic: Motor City Law PLC, working on behalf of the city, has filed more than 60 lawsuits since last week in Wayne County Circuit Court; the remainder are expected to be filed before a Thursday statute of limitations deadline: the suits target banks, land speculators, limited liability corporations, and individuals with three or more rental properties in Detroit: investors who typically purchase homes at bargain prices at a Wayne County auction and then eventually stop paying property tax bills and lose the home in foreclosure: the concern is that unscrupulous landlords have been abusing the auction system. The city expects to file an additional 800 lawsuits over the next quarter—with the recovery effort coming in the wake of last year’s suits by the city against more than 500 banks and LLCs which had an ownership stake in houses that sold at auction for less than what was owed to the city in property taxes. Eli Savit, senior adviser and counsel to Mayor Mike Duggan, noted that those suits netted Detroit more than $5 million in judgments, even as, he reports: “Many cases are still being litigated.” To date, the 69 lawsuits filed since Aug. 18 in circuit court were for tax bills exceeding $25,000 each; unpaid tax bills for less than $25,000 will be filed in district court. (The unpaid taxes date back years as the properties were auctioned off by the Wayne County Treasurer’s Office between 2013 and 2016 or sent to the Detroit Land Bank Authority, which oversees demolitions if homes cannot be rehabilitated or sold.) The suits here indicate that former property owners have no recourse for lowering their unpaid tax debt, because they are now “time barred from filing an appeal” with Detroit’s Board of Review or the Michigan Tax Tribunal; Detroit officials have noted that individual homeowners would not be targeted by the lawsuits for unpaid taxes; rather the suits seek to establish a legal means for going after investors who purchase cheap homes at auction, and then either rent them out and opt not to not pay the taxes, or walk away from the house, because it is damaged beyond repair—behavior which is now something the city is seeking to turn around.

Local Government Fiscal Protection? Just as the Commonwealth of Virginia has created a fiscal or financial assessment model to serve as an early warning system so that the State could act before a chapter 9 municipal bankruptcy occurred, the fiscal wizard of Illinois, the incomparable Chicago Civic Federation’s Laurence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System (CPS): it would be responsible to assist the CPS board and administration in finding solutions to stabilize the school district’s finances. The $5.75 billion CPS proposed budget for this school year comes with two significant asterisks: 1) There is an expectation of $269 million from the City of Chicago, and 2) There is an expectation of $300 million from the State of Illinois, especially if the state’s school funding crisis is resolved in the Democrats’ favor.

Nevertheless, in the end, CPS’s fiscal fate will depend upon Windy City Mayor Rahm Emanuel: he, after all, not only names the school board, but also is accountable to voters if the city’s schools falter: he has had six years in office to get CPS on a stable financial course, even as CPS is viewed by many in the city as seeking to file for bankruptcy (for which there is no specific authority under Illinois law). Worse, it appears that just the discussion of a chapter 9 option is contributing to the emigration of parents and students to flee to suburban or private schools.

Thus, Mr. Msall is suggesting once again putting CPS finances under state oversight, as it was in the 1980s and early 1990s, recommending consideration of a Local Government Protection Authority, which would “be a quasi-judicial body…to assist the CPS board and administration in finding solutions to stabilize the district’s finances.” Fiscal options could include spending cuts, tax hikes, employee benefit changes, labor contract negotiations, and debt adjustment. Alternatively, as Mr. Msall writes: “If the stakeholders could not find a solution, the LGPA would be empowered to enforce a binding resolution of outstanding issues.” As we noted, a signal fiscal challenge Mayor Emanuel described was to attack crime in order to bring young families back into the city—and to upgrade its schools—schools where today some 380,000 students appear caught in a school system cracking under a massive and rising debt load.  

Far East of Eden. East Cleveland Mayor Gary Norton Jr. and City Council President Thomas Wheeler have both been narrowly recalled from their positions in a special election, setting the stage for the small Ohio municipality waiting for the state to—in some year—respond to its request to file for chapter 9 municipal bankruptcy to elect a new leader. Interestingly, one challenger for the job who is passionate about the city, is Una H. R. Keenon, 83, who now heads the city school board, and campaigning on a platform of seeking a blue-ribbon panel to examine the city’s finances. Mansell Baker, 33, a former East Cleveland Councilmember, wants to focus on eliminating the city’s debt, while Dana Hawkins Jr., 34, leader of a foundation, vows to get residents to come together and save the city. The key decisions are likely to emerge next month in the September 12 Democratic primary—where the winner will face Devin Branch of the Green Party in November. Early voting has begun.

State Oversight & Severe Municipal Distress

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eBlog, 04/24/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: when and how will it emerge from state oversight? Then we spin the tables to see how Atlantic City is faring to see if it might be on the shores of fiscal recovery; before going back to Detroit to assess the math/fiscal challenges of the state created public school district; then, still in Detroit, we try to assess the status of a lingering issue from the city’s historic municipal bankruptcy: access to drinking water for its lowest income families; before visiting Hartford, to try to gauge how the fiscally stressed central city might fare with the Connecticut legislature. Finally, we revisit the small Virginia municipality of Petersburg to witness a very unique kind of municipal finance for a city so close to insolvency but in need of ensuring the provision of vital, lifesaving municipal services. 

Fiscal & Physical Municipal Balancing. Michigan Deputy Treasurer Eric Scorsone is predicting that by “early next year, Detroit will be out of state oversight,” at a time when the city “will be financially stable by all indications and have a significant surplus.” That track will sync with the city’s scheduled emergence from state oversight, albeit apprehension remains with regard to whether the city has budgeted adequately  to set funds aside to anticipate a balloon pension obligation due in 2024. Nevertheless, Mr. Scorsone has deemed the Motor City’s post-bankruptcy transformation “extraordinary,” describing its achievements in meeting its plan of debt adjustment—as well as complying with the Detroit Financial Review Commission—so well that the “city could basically operate on its own.” He noted that the progress has been sufficient to permit the Commission to be in a dormancy state—subject to any, unanticipated deficits emerging. The Deputy Treasurer credited the Motor City’s strong management team under CFO John Hill both for the city’s fiscal progress, but also for his role in keeping an open line of communication with the state oversight board; he also noted the key role of Mayor Mike Duggan’s leadership for improving basic services such as emergency response times and Detroit’s public infrastructure. Nevertheless, Detroit remains subject to the state board’s approval of any contracts, operating or capital budgets, as well as formal revenue estimates—a process which the Deputy Treasurer noted “allows the city to stay on a strong economic path…[t]hese are all critical tools,” he notes, valuable not just to Detroit, but also to other municipalities an counties to help ensure “long term stability.”

On the Shore of Fiscal Recovery. S&P Global Ratings, which last month upgraded Atlantic City’s general obligation bond rating two notches to CCC in the wake of the city’s settlement with the Borgata Casino, a settlement which yielded the city some $93 million in savings, has led to a Moody’s rating upgrade, with the credit rating agency writing that Atlantic City’s proposed FY2017 budget—one which proposes some $35.3 million in proposed cuts, is a step in the right direction for the state taken-over municipality, noting that the city’s fiscal plan incorporates a 14.6% cut in its operating budget—sufficient to save $8 million, via reductions in salaries and benefits for public safety employees, $6 million in debt service costs, and $3 million in administrative expenses. Nevertheless S&P credit analyst Timothy Little cautioned that pending litigation with regard to whether Atlantic City can make proposed police and firefighter cuts could be a fly in the ointment, writing: “In our view, the proposed budget takes significant measures to improve the city’s structural imbalance and may lead to further improved credit quality; however, risks to fiscal recovery remain from pending lawsuits against state action impeding labor contracts.” The city’s proposed $206.3 million budget, indeed, marks the city’s first since the state takeover placed it under the oversight of the New Jersey’s Local Finance Board, with the state preemption giving the Board the authority to alter outstanding debt, as well as municipal contracts. Mr. Little wrote that this year will mark the first fiscal year of the agreed-to payment-in-lieu-of-taxes (PILOT) program for casino gaming properties—a level set at $120 million annually over the next decade—out of which 10.4% will go to Atlantic County. Mr. Little also notes that the budget contains far less state financial support than in previous years, as the $30 million of casino redirected anticipated revenue received in 2015 and 2016 will be cut to $15 million; moreover, the budget includes no state transitional aid—denoting a change or drop of some $26.2 million; some of that, however, will be offset by a $15 million boost from an adjustment to the state Consolidated Municipal Property Tax Relief Act—or, as the analyst wrote: “Long-term fiscal recovery will depend on Atlantic City’s ability to continue to implement fiscal reforms, reduce reliance on nonrecurring revenues, and reduce its long-term liabilities.” Today, New Jersey state aid accounts for 34% of the city’s $206.3 million in budgeted revenue, 31% comes from casino PILOT payments, and 27% from tax revenues. S&P upgraded Atlantic City’s general obligation bond rating two notches to CCC in early March after the Borgata settlement yielded the city $93 million in savings. Moody’s rates Atlantic City debt at Caa3.

Schooled on Bankruptcy. While Detroit, as noted above, has scored high budget marks or grades with the state; the city’s school system remains physically and fiscally below grade. Now, according to the Michigan Department of Education, school officials plan to voluntarily shutter some of the 24 city schools—schools targeted for closure by the state last January, according to State Superintendent Brian Whiston, whose spokesperson, William DiSessa, at a State Board of Education meeting, said:  “Superintendent Whiston doesn’t know which schools, how many schools, or when they may close, but said that they are among the 38 schools threatened for closure by the State Reform Office earlier this year.” Mr. DiSessa added that “the decision to close any schools is the Detroit Public School Community District’s to make.” What that decision will be coming in the wake of the selection of Nikolai Vitti, who last week was selected to lead the Detroit Public Schools Community District. Mr. Vitti, 40, is currently Superintendent of the Duval County Public Schools in Jacksonville, Florida, the 20th largest district in the nation; in the wake of the Detroit board’s decision last week to enter into negotiations with Mr. Vitti for the superintendent’s job, Mr. Vitti described the offer as “humbling and an honor.” The school board also voted, if Mr.Vitti accepts the offer, to ask him to begin next week as a consultant, working with a transition team, before officially commencing on July 1st. The School Board’s decision, after a search began last January, marks the most important decision the board has made during its brief tenure, in the wake of its creation last year and election last November after the Michigan Legislature in June approved $617-million legislation which resolved the debt of Detroit Public Schools via creating the new district, and retaining the old district for the sole purpose if collecting taxes and paying off debt.

The twenty-four schools slated for closure emerged from a list of 38 the State of Michigan had targeted last January—all from schools which have performed in the bottom 5 percent of the state for at least three consecutive years, according to the education department. The Motor City had hoped to avoid any such forced state closures—hoping against hope that by entering last month into partnership negotiations with the Michigan State Superintendent’s office, and working with Eastern Michigan University, the University of Michigan, Michigan State University, and Wayne State University, the four institutions would help set “high but attainable” goals at the 24 Detroit schools to improve academic achievement and decrease chronic absenteeism and teacher vacancies. The idea was that those goals would be evaluated after 18 months and again in 36 months, according to state officials. David Hecker, president of the American Federation of Teachers Michigan, noted that he was not aware which schools might be closing or how many; however, he noted that whatever happens to the teachers of the closing schools would be subject to the collective bargaining agreement with the Detroit Federation of Teachers. “If any schools close, it would absolutely be a labor issue that would be governed by the collective bargaining agreement as to how that will work … (and) where they will go,” Mr. Hecker said. “We very strongly are opposed to any school closing for performance reasons.”

Thirsty. A difficult issue—among many—pressed upon now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 municipal bankruptcy came as the Detroit Water and Sewer Department began shutting off water service to some of nearly 18,000 residential customers with delinquent accounts. Slightly less than a year ago, in the wake of numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom, the issue was again raised: what authority did the city of Detroit have to cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Thus it was that Detroit’s Water and Sewerage Department began shutting off service to customers who had failed to pay their bills—with, at the time, DWSD guesstimating about 20,000 of its customers had defaulted on their payments, and noting that the process of shutting off service to customers with unpaid bills was designed to be equitable and not focused on any particular neighborhood or part of the city—and that the agency was not targeting customers who owed less than a $150 and were only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD was reminding its delinquent customers who were having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who were at 150 percent of the poverty level or below could receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. This week, DWSD is reporting it has resumed shutoffs in the wake of sending out notices, adding the department has payment and assistance plans to help those with delinquent accounts avoid losing service. Department Director Gary Brown told the Detroit Free Press that everyone “has a path to not have service interruption.” Indeed, it seems some progress has been achieved: the number of families facing shutoffs is down from 24,000 last April and about 40,000 in April of 2014, according to The Detroit News. In 2014, DWSD disconnected service to more than 30,000 customers due to unpaid bills, prompting protests over its actions. Nonetheless, DWSD began the controversial practice of shutting off water service again this week, this time to some of the nearly 18,000 residential customers with delinquent accounts, in the wake of notices sent out 10 days earlier, according to DWSD Director Gary Brown. Nevertheless, while 17,995 households are subject to having their water turned off, those residents who contact the water department prior to their scheduled shutoffs to make a payment or enter into an assistance plan will avoid being cut off—with experience indicating most do. And, the good gnus is that the number of delinquent accounts is trending down from the 24,302 facing a service interruption last April, according to DWSD. Moreover, this Solomon-like decision of when to shut off water service—since the issue was first so urgently pressed in the U.S. Bankruptcy Court before Judge Rhodes—has gained through experience. DWSD Director Brown reports that once residents are notified, about 90 percent are able to get into a plan and avoid being shut off, and adding that most accounts turned off are restored within 24 hours: “Every residential Detroit customer has a path not to be shut off by asking for assistance or being placed into a payment plan…I’m urging people not to wait until they get a door knocker to come in and ask for assistance to get in a payment plan.” A critical part of the change in how the city deals with shutoffs comes from Detroit’s launch two years ago of its Water Residential Assistance Program, or WRAP, a regional assistance fund created as a component of the Great Lakes Water Authority forged through Detroit’s chapter 9 municipal bankruptcy: a program designed to help qualifying customers in Wayne, Oakland, and Macomb counties who are at or below 150 percent of the federal poverty level—which equates to $36,450 for a family of four—by covering one-third of the cost of their average monthly bill and freezing overdue amounts. Since a year ago, nearly $5 million has been dedicated to the program—a program in which 5,766 Detroit households are enrolled, according to DWSD, with a retention rate for those enrolled in the program of 90 percent. DWSD spokesperson Bryan Peckinpaugh told the Detroit News the department is committed to helping every customer keep her or his water on and that DWSD provides at least three advance notifications encouraging those facing a service interruption to contact the department to make payment arrangements, adding that the outreach and assistance efforts have been successful, with the number of customers facing potential service interruption at less than half of what it was three years ago.

Fiscally Hard in Hartford. Hartford Mayor Luke Bronin has acknowledged his proposed $612.9 FY2018 budget includes a nearly $50 million gap—with proposed expenditures at $600 million, versus revenues of just over $45 million: a fiscal gap noted moodily by four-notch downgrades to the Connecticut city’s general obligation bonds last year from two credit rating agencies, which cited rising debt-service payments, higher required pension contributions, health-care cost inflation, costly legal judgments from years past, and unrealized concessions from most labor unions. Moody’s Investors Service in 2016 lowered Hartford GOs to a junk-level Ba2. S&P Global Ratings knocked the city to BBB from A-plus, keeping it two notches above speculative grade. Thus, Mayor Bronin, a former chief counsel to Gov. Daniel Malloy, has repeated his request for state fiscal assistance, noting: “The City of Hartford has less taxable property than our suburban neighbor, West Hartford. More than half of our property is non-taxable.” In his proposed “essential services only” budget, Mayor Bronin is asking the Court of Common Council to approve an increase of about $60 million, or 11%, over last year’s approved budget—with a deadline for action the end of next month. An increasing challenge is coming from the stressed city’s accumulating debt: approximately $14 million, or 23%, of that increase is due to debt-service payments, while $12 million is for union concessions which did not materialize, according to the Mayor’s office. Gov. Malloy’s proposed biennial budget, currently in debate by state lawmakers, proposes $35 million of aid to Hartford. Unsurprisingly, that level is proving a tough sell to many suburban and downstate legislators. On the other hand, the Mayor appears to be gaining some traction after, last year, gaining an agreement with the Hartford Fire Fighters Association that might save the city $4 million next year: the agreement included changes to pension contributions and benefits, active and retiree health care, and salary schedules. In addition, last month, Hartford’s largest private-sector employers—insurers Aetna Inc., Travelers Cos. and The Hartford—agreed to donate $10 million per year to the city over five years. Nonetheless, rating agencies Moody’s and S&P have criticized the city for limited operating flexibility, weak reserves, narrowing liquidity, and its rising costs of debt service and pension obligations. Gurtin Municipal Bond Management went so far as to deem the city a “slow-motion train wreck,” adding that while the quadruple-notch downgrades had a headline shock effect, the city’s fundamental credit deterioration had been slow and steady. “The price impact of negative headlines and credit rating downgrades can be swift and severe, which begs the question: How should municipal bond investors and their registered investment advisors react?” Gurtin’s Alex Etzkowitz noted, in a commentary. “The only foolproof solution is to avoid credit distress in the first place by leveraging independent credit research and in-depth, ongoing surveillance of municipal obligors.”

Fighting for a City’s Future. The small city of Petersburg. Virginia, is hardly new to the stress of battle. It was there that General Robert E. Lee’s men fought courageously throughout the Overland Campaign, even as Gen. Lee feared he confronted a campaign he feared could not be won, warning his troops—and politicians: “We must destroy this Army of Grant’s before he gets to the James River. If he gets there, it will become a siege, and then it will be a mere question of time.” Yet, even as he wrote, General Ulysses S. Grant’s Army of the Potomac was racing toward the James and Petersburg to wage an attack on the city—a highly industrialized city then of 18,000 people, with supplies arriving from all over the South via one of the five railroads or the various plank roads. Indeed, Petersburg was one of the last outposts: without it, Richmond, and possibly the entire Confederacy, was at risk. Today, the city, because of the city’s subpar credit rating, is at fiscal risk: it has been forced to beg its taxpayers to loan it funds for new emergency vehicles—officials are making a fiscal arrangement with private citizens to front the cost for new emergency vehicles, and offering to put up city hall as collateral for said arrangement, as an assurance to the lenders they will be paid back. The challenge: the police department currently needs 16 new vehicles, at a cost of $614,288; the fire department needs three new trucks, at a cost of $2,145,527. Or, as Interim City Manager Tom Tyrrell notes: “Every single day that a firefighter rolls out on a piece of equipment older than he is, or a police officer responds to an emergency call in a car with 160,000 miles on it, are days we want to avoid…We want to get this equipment as soon as possible.” Interim City Finance Director Nelsie Birch has included in the upcoming fiscal year budget the necessary funds to obtain the equipment—equipment Petersburg normally obtains via lease agreements with vendors, but which now, because of its inability to access municipal credit markets due to its “BB” credit rating with a negative outlook, makes it harder than ever to find any vendor—or, as Manager Tyrrell puts it: “We went out four different times…We solicited four different times to the market, and were unsuccessful in getting any parties to propose.” He added that when soliciting these types of agreements, you solicit “thousands of people.” Notwithstanding that the funds for the vehicles is already set aside in the upcoming budget, city officials have been unable to find anyone willing to enter into a lease agreement with the city because of the city’s financial woes.

Last week, the City Council authorized Mr. Tyrrell to “undertake emergency procurement action” in order for the lease of necessary fire and police vehicles, forcing Mr. Tyrrell and other officials to seek private funds to get the equipment—that is, asking individual citizens who have the financial means to put up money for the fire and police vehicles—or, as Mr. Tyrrell puts it: “We’ve reached out to four people, who are interested and capable,” noting they are property owners in Petersburg who will remain anonymous until the deal is closed, describing it thusly: “[This agreement] is outside the rules, because we couldn’t get a partner inside the rules.” Including in this proposed fiscal arrangement: officials must put up additional collateral, in addition to the cars themselves, and in the form of city-owned property—with the cornerstone of the proposal, as it were, being Petersburg City Hall, or, as Mr. Tyrrell notes: “What they’re looking for is some assurance that no matter what happens, we’re going to pay the note…It’s not a securitization in the financial sense, as much as it is in the emotional sense: they know that the city isn’t going to let it go.” He adds, the proposed financial arrangement will be evaluated in two areas: the interest rate and how fast the deal can close, adding: “Although it’s an emergency procurement, we still want to get the best deal we can.”

Getting Out of Insolvency & Back on Fiscal Track

eBlog, 04/14/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery of Atlantic City, New Jersey—where the Mayor this week proposed, in his first post-state takeover budget, the first tax cuts in a decade. Then we head west to the Motor City, where the city, as part of its fiscal recovery from the largest municipal bankruptcy in American history is seeking to ensure all its taxpayers pay what they owe, before then veering south to assess the first 100 days of the PROMESA oversight of the U.S. Territory of Puerto Rico.

Getting Back on the Fiscal Track. Atlantic City Mayor Don Guardian this week presented his proposed $206 million budget to the City Council, which unanimously voted 7-0 to introduce it at a special meeting, and the City has scheduled a public budget hearing for May 17th. In a taste of the fiscal turnaround for the city, the proposed budget includes the first municipal tax decrease in a decade. It also marks the first budget for the city since the State of New Jersey usurped control over Atlantic City’s finances last November. As proposed, it is more than $35 million or 21% less than last year’s and would reduce the municipal tax rate by 5 percent, according to both city and state officials. The city has scheduled a public budget hearing for May 17th.

As proposed, the steepest cut is in public safety—some $8 million, but the draft proposal also seeks cuts in administration costs ($5 million), as well as proposing savings via the privatization of trash pickup, payroll, and vehicle towing services. The smaller budget request is projected to reduce the city’s costs of debt service by $6 million. Unsurprisingly, the proposed tax cuts—the first in nearly a decade, drew the strongest applause: Atlantic City’s municipal tax rate has skyrocketed 96 percent since 2010, a period during which the city’s tax base dropped by nearly 66%. The $206.3 million budget Mayor Guardian presented features $6 million of cuts to debt service at $30.8 million and proposes to allocate $8 million less for public safety.

Mayor Guardian, who is running for his second term as Mayor this fall, said in a statement before presenting the budget that state overseers have played an instrumental role in crafting the new spending plan which features the proposed 5% property tax cut. It could mark a key point in the city’s efforts to regain governance control back from the State of New Jersey—a takeover the Republican mayor had bitterly contested, which took effect last November after New Jersey’s Local Finance Board rejected the city’s five-year recovery plan, or, as the Mayor put it: “From the beginning, I have said that we need to work with the State of New Jersey to stabilize Atlantic City and to reduce the outrageous property taxes that we inherited from years of reckless spending…Even though the entire state takeover was both excessive and unnecessary, the state did play an important role in helping us turn things around.”

For his part, New Jersey Gov. Chris Christie praised former U.S. Sen. Jeffrey Chiesa for his role as the state’s designee leading the financial recovery and his contributions in helping to achieve the city’s first property tax cut in a decade. Gov. Christie credited Mr. Chiesa with withstanding union challenges to make firefighter and police cuts, as well as reaching a $72 million settlement with the Borgata casino which is projected to save the city $93 million on $165 million of owed property tax refunds from 2009 to 2015, noting: “As promised, we quickly put Atlantic City on the path to financial stability, with taxpayers and employers reaping the benefits of unprecedented property tax relief with no reduction in services by a more accountable government…I commend Senator Chiesa for leading Atlantic City to turn the corner, holding the line on expenses and making responsible choices to revitalize the city.”

Atlantic City is planning to issue $72 million in municipal bonds to finance the Borgata settlement though New Jersey’s Municipal Qualified Bond Act: the savings from the settlement, brokered by the state, were a key factor in S&P Global Ratings’ upgrade of Atlantic City’s junk-level general obligation bond debt: Atlantic City, which is weighed down by some $224 million in bonded debt, is rated Caa3 by Moody’s Investors Service. State overseer Chiesa noted: “Over the past five months, I have met so many smart, talented, tenacious people who want to see the city succeed. This inspires me every day to tackle the challenges facing the city to ensure that the progress we’ve made continues.”

A key contributor to the improved fiscal outlook appears to come from some of the unilateral contract changes to public safety officials, imposed by Mr. Chiesa, which led to reduced salaries and benefits for police and firefighters, albeit the courts will have the final say so: the unions have sued to block the cuts, arguing the takeover law is unconstitutional. In addition, the state also reach agreement on a $72 million tax settlement with Borgata Hotel Casino & Spa which is projected to save Atlantic City $93 million and essentially put Borgata back on its tax rolls. The casino had withheld property tax payments, but is now paying its part of casino payments in lieu of property taxes, or, as Mr. Chiesa put it: “Real progress is being made in the city, which is great news for the people who live, work and visit Atlantic City.”

Gov. Chris Christie, in his final term in office, praised Mr. Chiesa and jabbed at his political opponents in a statement issued before the City Council meeting, noting: “It took us merely a few months to lower property taxes for the first time in the past decade, when local leaders shamelessly spent beyond their means to satisfy their special political interests,” he said, even as Atlantic City officials described the budget as a collaborative effort with the state. Or, as Mayor Guardian put it: “He’s the governor. He makes those comments…What I think is [that] it’s clear the city moves ahead with the state.” Council President Marty Small, who chairs the Revenue and Finance Committee, said he was “intimately involved” in the budget process, describing it as a “win-win-win for everybody, particularly the taxpayers.”

Don’t Tax Me: Get the Feller behind the Tree! Getting citizens to pay their taxes is a problem everywhere, of course, but Detroit had a particularly hard time going after scofflaws because budget cuts decimated its ability to enforce the law. Even the citizens and businesses who paid up created logistical havoc for beleaguered city bureaucrats. Part of the reason, it seems, is that in Detroit, the only way to file taxes has been on paper. While that might be merely an irritation for taxpayers, it has been a nightmare for the city’s revenuers, who must devote endless hours typing data into computer systems. It appears also to have led to some innovation: last year the Motor City opted to send out more than 7,000 mailings to deadbeat tax filers, that is taxpayers who were still delinquent on their 2014 taxes; the city suspected each delinquent owed at least $350; ergo it randomly selected some taxpayers to receive one of six different letters, each with a different message in a black box on the mailing: One such message appealed to residents’ civic pride: “Detroit’s rising is at hand. The collection of taxes is essential to our success.” Another simply made clear that Detroit’s revenue department had detailed information on the deadbeats: “Our records indicate you had a federal income of $X for tax year 2014.” (Detroit is somewhat unique in that it has an income tax under which residents owe 2.4 percent of their incomes to the city, after a $600 exemption. Nonresidents who work in Detroit pay a rate of 1.2 percent.) Another message made a bold declaration: “Failure to file a tax return is a misdemeanor punishable by a fine of $500 and 90 days in jail.”

It seems that threats have proven more effective than cajoling: More than 10 percent of taxpayers responded to the letter mentioning a fine and jail time, some 300% greater than the response rate to the city’s basic control letter. This revenue experiment was overseen by Ben Meiselman, a graduate student at the University of Michigan’s economics department, who manned a desk in Detroit’s tax office to run the experiment. He wrote the messages included in the mailings to reflect behavioral economics research, noting: “I find that a single sentence, strategically placed in mailings to attract attention, can have an economically meaningful impact on tax filing behavior,” in his working paper, “Ghostbusting in Detroit: Evidence on Non-filers from a Controlled Field Experiment,” which he intends to eventually become a chapter in his doctoral dissertation. And it turns out that providing details of a taxpayer’s income boosted the response rate by 63 percent, even as a letter from the city which combined a threat with income information was less effective than a threat by itself. Or, as one city official noted: “Keeping it simple seems to be the key,” especially as city officials learned that appeals to civic pride fell flat: the response rate was just 0.8 percentage points higher than that of a basic letter. Nevertheless, the city still confronts a long uphill fiscal cliff, even if it manages to apply the results of the experiment and triple the response rate from tax delinquents: according to the IRS, approximately six percent of U.S. taxpayers break the law by not filing with the Service each year, but, in Detroit, Mr. Meiselman estimated that some 46 percent of taxpayers had not submitted their 2014 returns by the due date in the following year—and that the return rate was getting worse.

Thus, Detroit’s next step was to back up threats with action—mayhap especially because there appears to have been little enforcement for the past decade: Detroit had not undertaken an audit or tax investigation in more than a decade. One outcome of insolvency and municipal bankruptcy, it appears, can hit hard: Detroit’s tax office, which once had a staff of about 70, is today about half that: it is a department which was recently reorganized, in the wake of last year’s takeover by the state of Michigan, a takeover intended to free up city employees to collect unpaid income taxes. The city also eased such filings by permitting them to be submitted electronically for the first time. And, wow!: 77 percent of filers took advantage. Detroit has sent out 15,000 letters since July 2016 and has collected $5.3 million through letters, audits, and investigations. And some of the amounts collected are significant, particularly for those who have juked, dodged, and evaded paying taxes for years: in one instance, a taxpayer agreed to pay $400,000. Detroit also began filing misdemeanor charges and lawsuits in small claims court to get its tax revenues, especially after learning that only one in five residents in several high-end apartments buildings had filed income taxes, helping to persuade a judge to issue an order requiring landlords to turn over tenant information.

These various steps appears to be helping: The number of residents filing tax returns more than doubled last year from the previous year; filings by non-residents increased by more than a third. City returns from 2016 are due, along with state and federal returns, by next Tuesday—the same deadline as applies to all readers of this eBlog, and, this year, Detroit officials are optimistic—or, as one wag put it: In the past, “people knew we weren’t coming after them…Now we are following up on those threats.”

The Promise or PROMESA of the First 100 Days. The PROMESA oversight board, provided by the Congress with authority over the U.S. territory of Puerto Rico, has now surpassed its first one hundred days, created a juxtaposed governance challenge, especially for Governor Rosselló: how can he make sure that the framework set up during this period of quasi dual governance provides for the change Puerto Rico needs? How can he gain the approval of the Board for a long-term fiscal plan as the main achievement of his incipient administration? To prevail, it appears, he will have to convince the Oversight Board that his proposed budgets are based on real possibilities of revenues and that such estimates are free of dependence on loans and that he will conduct the restructuring of Puerto Rico’s public debt on favorable terms, and that he will take the key role in the reconstruction of the government apparatus to higher levels of service, efficiency, participation, and transparency. And, now, there appears to be some evidence that he is achieving progress. Puerto Rico’s statute on permits is intended address a serial inefficiency with regard to the “absurd and abusive terms” to obtain permits, delays which have hindered and discouraged the generation of new economic activity. The effort to provide for the progressive elimination of the costly redundancy in programs and services via the consolidation of agencies, with security first, appear to be key steps in achieving changes to restore financial health. Moreover, the creation of a spending budget 10 per cent below the current one appears to mark an important step in the goal of reasserting self-governance.

Nevertheless, the fiscal and governance challenges of recovering from fiscal insolvency can be beset from any angle: note, for instance, Judge Lauracelis Roques Arroyo has revived an “audit” of Puerto Rico’s debt and reversed Gov. Ricardo Rosselló’s attempt to dismantle the debt audit commission. (Judge Roques Arroyo is a member of the Carolina Region of the Puerto Rico Superior Court.) And, thus, he has ruled that Puerto Rico Gov. Ricardo Rosselló’s attempt to dismantle a commission auditing Puerto Rico’s debt was illegal. The statute in question, law 97 of 2015, created the Puerto Rico Commission for the Comprehensive Audit of the Public Credit. The commission aimed to find Puerto Rico debt which was legally invalid. The commission’s first report in June of last year had reviewed documents connected with the Commonwealth’s $3.5 billion general obligation bond and $1.2 billion tax and revenue anticipation note, both sold in 2014. In this report, the Commission had raised doubts with regard to the legality of much of Puerto Rico’s bond debt. Late last September, the commission questioned the legality of the series 2013A power revenue bonds from the Puerto Rico Electric Power Authority (PREPA), raising concerns with regard to the behavior of Morgan Stanley, Ernst &Young, and URS Corp. in the municipal bond sale and the period leading up to it. In early October, possibly in response to the commission’s work, the SEC commenced an investigation of PREPA’s 2012 and 2013 bonds. Ergo, Judge Arroyo’s order late last week returned three public interest members to the board, according to attorney Manuel Rodriguez Banchs; the order provided that the Governor has no authority to intervene with the commission: it said that the dismissal of the public interest members was illegal. The board has $650,000 in its account right now, according to board member Roberto Pagán, e.g. adequate to do a substantial amount of additional work. Gov. Rosselló, thus, is considering how to react to the judge’s order, according to the El Vocero news website.

The Challenge of Recovering from or Averting Municipal Bankrupty

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eBlog, 03/28/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in U.S. history, before spinning the tables in Atlantic City, where the state takeover of the city has been expensive—and where the state’s own credit rating has been found wanting.

Home Team? A Detroit developer, an organization, Dominic Rand, has initiated a project “Home Team,” seeking to purchase up to up 25 square miles of property on the Motor City’s northwest side with a goal of keeping neighborhoods occupied by avoiding foreclosures and offering renters a path to homeownership. Nearly four years after the city’s chapter 9 filing for what former Emergency Manager Kevyn Orr deemed “the Olympics of restructuring,” to ensure continuity of essential services while developing a plan of debt adjustment to restructure the city’s finances—and to try to address the nearly 40 percent population decline and related abandonment of an estimated 40,000 abandoned lots and structures, as well as the loss of 67 percent of its business establishments and 80 percent of its manufacturing base, Mr. Rand reports he is excited about this initiative by an organization for purchases of homes slated for this year’s annual county tax foreclosure auction. His effort is intended to rehabilitate the homes and help tenants become homeowners. The effort seeks to end the cycle of home foreclosures due to unpaid property taxes. 

This is not the first such effort, however, so whether it will succeed or not is open to question. Officials at the United Community Housing Coalition note that previous such initiatives have failed, remembering Paramount Mortgage’s comparable effort, when the company purchased 2,000 properties, in part financed through $10 million from the Detroit police and fire pension fund—an effort which failed and, in its wake, left 90 percent of those in demolition status. Fox 2 reported that the City “does not support this proposal,” questioning its “ability to deliver on such a massive scale with no particular track record to indicate they would be successful,” adding the organization, if it wants to “start out by becoming a community partner through Detroit Land Bank and show what they can do with up to nine properties, they are welcome to do so.”

At first, the Home Team Detroit development group considered purchasing every property in Detroit subject to this year’s annual county tax foreclosure auction; instead, however, the group focused on the northwest quadrant covering 25 square miles and 24 neighborhoods—an area larger than Manhattan—with founder David Prentice noting: our “game plan is pretty simple: You are going to have a quadrant of (Detroit) with properties that are primarily occupied.” Mr. Prentice believes this initiative would address what he believes is one of Detroit’s biggest problems: halting the hemorrhaging of home foreclosures due to unpaid property taxes—an initiative one Detroit City Council member told the Detroit News was “unique and comprehensive.” Thus, city officials are reviewing the entity’s proposal—even as it reminds us of the Motor City’s ongoing home ownership challenge—a city where, still, more than 11,000 homes a year have ended in foreclosure over each of the last four years. Under the city’s process, the city warns property owners in January if their properties are at risk of tax foreclosure: as of last January, the Home Team group reports its targeted area has 11,073 properties headed for foreclosure.

Home Team is seeking approval from Detroit to purchase the properties via a “right of first refusal,” under which Mayor Mike Duggan and the Detroit City Council would have to approve the sale—and Wayne County and the State of Michigan would at least have to agree to not buy them as well, since both also have the option to buy the properties prior to such public auctions. Home Team claims it has the resources and expertise to buy the properties, rehab the homes, find new residents, and allow it to work with people traditional lenders would not consider due to poor credit ratings or because of the locations of the properties. The group claims its land contract system, or contracts for deeds, under which tenants make payments directly to the property owner and often have no ownership stake until the entire debt is paid, would work as an alternative to traditional mortgages—even as housing advocate groups such as the United Community Housing Coalition warn that land contracts are financial traps, and the nonprofit Michigan Legal Services told the Detroit News that many land contract deals are “gaming the system,” referencing a recent Detroit News story about many residents with land contracts losing out on actually getting a home—and others warning that those families sign contracts may end up owing significantly more than they would by renting, yet, at the end of such transactions, “have nothing to show for it.” (In recent years, the News reports, land contracts have outnumbered traditional mortgages in Detroit.) Mr. Prentice, while agreeing that “most land contracts are designed for the tenants to fail,” suggested his company’s land contracts would come without the high penalties, high monthly payments—payments which increase in time, and rising interest rates which have trapped unwary families in the past—and, he has vowed the company would fix up every property before putting it back on the market.

Detroit City Councilman George Cushingberry, who represents a major portion of the targeted area, told the News: “I like that it’s comprehensive and takes into account that one of the issues that prevents home ownership is financial literacy.” Yet, the ambitious proposal has also encountered neighborhood opposition: the Northwest Detroit Neighborhood Coalition has launched a petition drive to block the plan—and drawn support from eight neighborhood groups, with the Coalition issuing a statement: “We the people of northwest Detroit hereby declare our strong opposition to high-volume purchases of tax-foreclosed properties (10+ parcels) and other high-volume transfers of properties to real estate investors…Proposals like the one currently being circulated by (Home Team Detroit) do not serve the needs or interests of Detroit neighborhood residents. These bulk purchases only accelerate vacancy, blight, and further erosion of our community.” However, Melvin “Butch” Hollowell, Detroit’s Corporation Counsel, said the city opposes the effort, which would require the city to authorize a purchase agreement for the properties, noting: “The city does not support this proposal: We have a number of serious concerns, especially Home Team Detroit’s ability to deliver on such a massive scale with no particular track record to suggest they would be successful. If they want to start out by becoming a community partner through the Detroit Land Bank (Authority) and show what they can do with up to nine properties, they are welcome to do so and go from there.”

Robbery or the Cost of Municipal Fiscal Distress? The law firm of Jeffrey Chiesa, whom New Jersey Governor Chris Christie named to oversee the state takeover of Atlantic City, has billed the State of New Jersey about $287,000 for its work so far, according to multiple reports, including some $80,000 alone for Mr. Chiesa. The fiscal information came in the wake of the release by the state of invoices that showed the law firm submitted more than $207,000 in bills for the first three months of work, November through January—with some twenty-two members of the firm billing the state. In addition, Mr. Chiesa, who bills the State $400-an-hour for his time, reports he himself has billed $80,000 over that same period, noting to the Press those invoices were not included in the state’s data released last Friday, because they have yet to be fully reviewed. He added that the state has imposed “no cap” on the fees his firm may charge—leading State Assemblyman Chris A. Brown (R-Atlantic), who has been critical of the takeover, to note: “The governor handing over the city to a political insider without a transparent plan is like leaving your home without locking the door, and it looks like we just got robbed.”  The release of the data could not have come with more awkward timing, with the figures aired approximately a week after Mr. Chiesa wrote to Atlantic City police officers announcing the state was seeking to cut salaries, change benefits, and introduce longer shifts to save the city money—and as the state is calling for similar cuts and 100 layoffs in the city’s fire department—efforts in response to which Atlantic City’s police and fire unions have filed suit to prevent, with a judge last week ruling the state cannot yet move forward with the fire layoffs until he determines whether the state proposal is constitutional—even as Mr. Chiesa has defended the cuts, calling negotiations with the unions “money grabs.” For his part, at the end of last week, Mr. Chiesa defended his bills, claiming his firm helped negotiate a $72 million settlement with the Borgata casino in a long-running tax dispute with the city, gaining more than a 50 percent savings to the city from the refund it owed in the wake of tax appeals, deeming that an “important success on behalf of the city.”

Nevertheless, as S&P Global Ratings noted last week in upgrading Atlantic City’s credit rating from “CC” to “CCC,” despite assistance from the state, there is still the distinct possibility the city could still default on its debt over the next year and that filing for chapter 9 municipal bankruptcy remains an option down the line.  Nevertheless, S&P analyst Timothy Little wrote that the upgrade reflected S&P’s opinion that “the near-term likelihood” of Atlantic City defaulting on its debt has “diminished” because of the state takeover and the state’s role in brokering the Borgata Casino agreement—an upgrade which a spokesperson for the Governor described as “early signs our efforts are working, that we will successfully revitalize the Atlantic City and restore the luster of this jewel in the crown.”  However, despite the upgrade, Atlantic City still remains junk-rate, and S&P reported the city’s recovery remains “tenuous:” It has a debt payment of $675,000 due on April Fool’s Day, $1.6 million on May Day, $1.5 million on June 1st, and another $3.5 million on August 1st—all payments which S&P believes will be made on time and in full, albeit warning that more substantial debts will come due later in the year, meaning, according to S&P, that the city’s recovery remains “tenuous,” and that Atlantic City is unlikely “to have the capacity to meet its financial commitment…and that there is at least a one-in-two likelihood” of a default in the next year.” Or, as Mr. Little wrote: “Despite the state’s increased intervention, [municipal] bankruptcy remains an option for the city and, in our opinion, a consideration if timely and adequate gains are not made to improve the city’s structural imbalance.”