Motoring Back from Chapter 9 Bankruptcy

March 9, 2018

Good Morning! In this morning’s eBlog, we consider the state of the City of Detroit, the state of the post-state takeover Atlantic City, and the hard to explain delay by the U.S. Treasury of a loan to the U.S. Territory of Puerto Rico.

An Extraordinary Chapter 9 Exit. Detroit Mayor Mike Duggan yesterday described the Motor City as one becoming a “world-class place to put down your roots” and make an impact: “We’re at a time where I think the trajectory is going the right way…We all know what the issues are. We’re no longer talking about streetlights out, getting grass cut in the parks. We’re making progress. We’re not talking all that much about balancing the budget.” His remarks, coming nearly five years after I met with Kevin Orr on the day he had arrived in Detroit at the request of the Governor Rick Snyder to serve as the Emergency Manager and steer the city into and out of chapter 9 municipal bankruptcy, denote how well his plan of debt adjustment as approved by U.S. Bankruptcy Judge Steven Rhodes has worked.

Thus, yesterday, the Mayor touted the Detroit Promise, a city scholarship program which covers college tuition fees for graduates of the city’s school district, as well as boosting a bus “loop” connecting local charter schools, city schools and after-school programs. Maybe of greater import, the Mayor reported that his administration intends to have every vacant, abandoned house demolished, boarded up, or remodeled by next year—adding that last year foreclosures had declined to their lowest level since 2008. Over the last six months, the city has boarded up 5,000 houses, sold 3,000 vacant houses for rehab, razed nearly 14,000 abandoned houses, and sold an estimated 9,000 side lots. The overall architecture of the Motor City’s housing future envisions the preservation of 10,000 affordable housing units and creation of 2,000 new ones over the next five years.

The Mayor touted the success of the city’s Project Green Light program, noting that some 300 businesses have joined the effort, which has realized, over the last three years a 40% in carjackings, a 30% decline in homicides since 2012, and 37% fewer fires, adding that the city intends to expand the Operation Ceasefire program, which has decreased shootings and other crimes, to other police precincts. On the economic front, the Mayor stated that Lear, Microsoft, Adient, and other major enterprises are moving or planning to open sites: over the last four years, more than 25 companies of 100-500 jobs relocated to Detroit. On the public infrastructure radar screen, Mayor Duggan noted plans for $90 million in road improvements are scheduled this year, including plans to expand the Strategic Neighborhood Fund to target seven more areas across the city, add stores, and renovate properties. Nearly two years after Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) shepherded through the legislature a plan to pay off the Detroit School District’s debt, describing it to his colleagues as a “realistic compromise for a path to the future…At the end of the day, our responsibility is to solve the problem: Without legislative action, the Detroit Public Schools would head toward bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan,” the Mayor yesterday noted that a bigger city focus on public schools is the next front in Detroit’s post-bankruptcy turnaround as part of the city’s path to exiting state oversight. He also unveiled a plan to partner with the Detroit Public Schools Community District, describing the recovery of the district as vital to encourage young families to move back into the city, proposing the formation of an education commission on which he would serve, as well as other stakeholders to take on coordinating some city-wide educational initiatives, such as putting out a universal report card on school quality (which he noted would require state support) and coordinating bus routes and extracurricular programs to serve the city’s kids regardless of what schools they attend.

The Mayor, who at the end of last month unveiled a $2 billion balanced budget, noted that once the Council acts upon it, the city would have the opportunity to exit active state oversight: “I expect in April or May, we’re going to see the financial review commission vote to end oversight and return self-determination to the City of Detroit,” adding: “As everybody here knows, the financial review commission doesn’t entirely go away: they go into a dormancy period. If we in the future run a deficit, they come back.”

His proposed budget relies on the use of $100 million of an unassigned fund balance to help increase spending on capital projects, including increased focus on blight remediation, stating he hopes to double the rate of commercial demolition and get rid of every vacant, “unsalvageable” commercial property on major streets by the end of next year—a key goal from the plan he unveiled last October to devote $125 million of bond funds towards the revitalization of Detroit neighborhood commercial corridors, part of the city’s planned $317 million improvements to some 300 miles of roads and thousands of damaged sidewalks—adding that these investments have been made possible from the city’s $ billion general fund thanks to increasing income tax revenues—revenues projected to rise 2.7% for the coming fiscal year and add another $6million to $7 million to the city’s coffers. Indeed, CFO John Hill reported that the budget maintains more than a 5% reserve, and that the city continues to put aside fiscal resources to address the  higher-than-expected pension payments commencing in 2024, the fiscal year in which Detroit officials project they will face annual payments of at least $143 million under the city’s plan of debt adjustment, adding that the retiree protection fund has performed well: “What we believe is that we will not have to make major changes to the fund in order for us to have the money that we need in 2024 to begin payments; In 2016 those returns weren’t so good and have since improved in 2017 and 2018, when they will be higher than the 6.75% return that we expected.” He noted that Detroit is also looking at ways to restructure its debt, because, with its limited tax general obligation bonds scheduled to mature in the next decade, Detroit could be in a position to return to the municipal market and finance its capital projects. Finally, on the public safety front, the Mayor’s budget proposes to provide the Detroit Police Department an $8 million boost, allowing the police department to make an additional 141 new hires.

Taking Bets on Atlantic City. The Atlantic City Council Wednesday approved its FY2019 budget, increasing the tax levy by just under 3%, creating sort of a seesaw pattern to the levy, which three years ago had reached an all-time high of $18.00 per one thousand dollars of valuation, before dropping in each of the last two years. Now Atlantic City’s FY2019 budget proposal shows an increase of $439,754 or 3.06%, with Administrator Lund outlining some of the highlights at this week’s Council session. He reported that over the years, the city’s landfill has been user fee-based ($1 per occupant per month) to be self-sufficient; however, some unforeseen expenses had been incurred which imposed a strain on the landfill’s $900,000 budget. Based on a county population of 14,000, the money generated from the assessment amounts to roughly $168,000 per year, allowing the Cass County Landfill to remain open. However, the financing leaves up to each individual city the decision of fee assessments. Thus, he told the Council: “The Per Capita payment to the landfill accounted for about .35 to .40 cents of the increase.”  Meanwhile, two General Department heads requested budget increases this year and five Department Heads including; the Police Department and Library submitted budgets smaller than the previous year. Noting that he “never advocate(s) for a tax increase,” Mr. Lund stated: “But it is what it is. It was supposed to go up to $16.98 last year and now we are at $16.86, so it’s still less,” adding that the city’s continuous debt remains an anchor to Atlantic City’s credit rating—but that his proposed budget includes a complete debt assumption and plan to deleverage the City over the next ten years.

Unshelter from the Storm. New York Federal Reserve Bank President, the very insightful William Dudley, warns that Puerto Rico should not misinterpret the economic boost from reconstruction following hurricanes that hit it hard last year as a sign of underlying strength: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster,” as he met with Puerto Rican leaders in San Juan: “We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” warning, however, he expects economic growth to slow again in 2019 or 2020: “It’s “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”

President Dudley and his team toured densely populated, lower-income, hard hit  San Juan neighborhoods, noting the prevalence of “blue roofs”—temporary roofs overlaid with blue tarps which had been used as temporary cover for the more permanent structures devastated by the hurricanes, leading him to recognize that lots of “construction needs to take place before the next storm season,” a season which starts in just two more months—and a season certain to be complicated by ongoing, persistent, and discriminatory delays in federal aid—delays which U.S. Treasury Secretary Steven Mnuchin blamed on Puerto Rico, stating: “We are not holding this up…We have documents in front of them that [spell out the terms under which] we are prepared to lend,” adding that the Trump Administration has yet to determine whether any of the Treasury loans would ultimately be forgiven in testimony in Washington, D.C. before the House Appropriations Subcommittee on Financial Services and General Government.

Here, the loan in question, a $4.7 billion Community Disaster Loan Congress and the President approved last November to benefit the U.S. territory’s government, public corporations, and municipalities—but where the principal still has not been made available, appears to stem from disagreements with regard to how Puerto Rico would use these funds—questions which the Treasury had not raised with the City of Houston or the State of Florida.  It appears that some of the Treasury’s apprehensions, ironically, relate to Gov. Ricardo Rosselló’s proposed tax cuts in his State of the Commonwealth Speech, in which the Governor announced tax cuts to stimulate growth, pay increases for the police and public school teachers, and where he added his administration would reduce the size of government through consolidation and attrition, with no layoffs, e.g. a stimulus policy not unlike the massive federal tax cuts enacted by President Trump and the U.S. Congress. It seems, for the Treasury, that what is good for the goose is not for the gander.

At the end of last month, Gov. Rosselló sent a letter to Congress concerned that the Treasury was now offering only $2.065 billion, writing that the proposal “imposed restrictions seemingly designed to make it extremely difficult for Puerto Rico to access these funds when it needs federal assistance the most.” This week, Secretary Mnuchin stated: “We are monitoring their cash flows to make sure that they have the necessary funds.” Puerto Rico reports it is asking for changes to the Treasury loan documents; however, Sec. Mnuchin, addressing the possibility of potential loans, noted: “We’re not making any decision today whether they will be forgiven or…won’t be forgiven.” Eric LeCompte, executive director of Jubilee USA, a non-profit devoted to the forgiveness of debt on humanitarian grounds, believes the priority should be to provide assistance for rebuilding as rapidly as possible, noting: “Almost six months after Hurricane Maria, we are still dealing with real human and economic suffering…It seems everyone is trying to work together to get the first installment of financing sent and it needs to be urgently sent.”

Part of the problem—and certainly part of the hope—is that President Dudley might be able to lend his acumen and experience to help. While the Treasury appears to be most concerned about greater Puerto Rico public budget transparency, Mr. Dudley, on the ground there, is more concerned that Puerto Rican leaders not misinterpret the economic boost from reconstruction following the devastating hurricanes as a sign of underlying strength, noting: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster: We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” before the economic growth slows again in 2019 or 2020, adding, ergo, that it was “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”


Fiscal Recoveries from Fiscal & Physical Storms


February 23, 2018

Good Morning! In this morning’s eBlog, we consider the municipal fiscal threats to Puerto Rico and the U.S. Virgin Islands, before taking a fiscal spin on the roulette tables of Atlantic City.

Fiscal Hurricane Fallout. Jaison R. Abel, Jason Bram, Richard Deitz, and Jonathan Hastings of the New York Federal Reserve this week, in their examination of the fallout in the wake of Hurricanes Irma and Maria on the economies of the U.S. territories of Puerto Rico and the U.S. Virgin Islands noted that both were suffering from significant economic downturns and fiscal stress well before the storms hit nearly six months ago—noting that in their wake, the initial job losses in Puerto Rico totaled about 4 percent; in the U.S. Virgin Islands, job losses were double that—and there has been no rebound thus far. The authors wrote that these losses are considerably steeper than what has typically been experienced in the wake of most significant U.S. natural disasters, albeit not nearly as devastating as Hurricane Katrina’s unprecedented impact on the New Orleans economy more than a decade ago. The Fed three noted that domestic air passenger data indicate that from last September through November, more than 150,000 people left Puerto Rico, net of arrivals, and that the number who left the U.S. Virgin Islands was proportionally even larger. Thus, they opined, looking ahead, recovery will be affected by a variety of factors: especially: the level degree of out-migration, the level of external aid these economies receive, and the effectiveness of fiscal and other reforms—especially in Puerto Rico. They noted that Hurricane Maria was the most devastating hurricane to slam Puerto Rico in nearly a century—leaving an enormous toll of lives, homes, and businesses lost or suffering enormous damage, devastation of most crops and other agricultural assets, and severe havoc to its public infrastructure, adding that both for responding to the human and economic misery, the island’s experiencing of the most severe power outage in U.S. history means “it may still take months to fully restore electricity and other critical infrastructure,” describing the devastation to the U.S. Virgin Islands as similar, especially St. Croix, where I taught school long before most readers were born.

Nevertheless, the Fed Gang of Three wrote that recovery is underway in both Puerto Rico and the U.S. Virgin Islands, reporting that, as of last month, satellite images of nighttime lights suggest roughly 75 percent power restoration for Puerto Rico overall, with the southern and western parts of the island seeing nearly full restoration, and San Juan close to that level. In contrast, however, they determined that the eastern end of Puerto Rico and many interior areas have lagged substantially. As of the end of last year, they reported that the labor market has begun to recover in Puerto Rico: employment in leisure and hospitality (largely restaurants), the sector usually most affected by natural disasters, have started to bounce back in Puerto Rico, albeit not yet in the U.S. Virgin Islands. And, as often happens following natural disasters, jobs are being added in both Puerto Rico and the U.S. Virgin Islands in industries involved in clean-up, restoration, and rebuilding efforts—most notably, construction. Thus, they believe Puerto Rico and the U.S. Virgin Islands are confronted with a long and difficult recovery process ahead—a fiscal and physical process made all the more difficult because of poor economic and fiscal conditions prior to the storms.  

Financing a Recovering City’s Emergence from a State Takeover. The Atlantic City Council has voted approval the issuance of debt to pay off millions the municipality owes to pay off deferred pension and health care contributions from 2015—after, in 2015, state officials had urged the delay of some $37.2 million in pension and health care contributions—a delay which, today, officials note has added up to about $47 million with the added interest. In the ordinance the Council voted Wednesday 6-3 to authorize, Atlantic City can now issue as much as $55 million worth of municipal bonds to help finance those accrued debts, with the vote coming in the wake of a lengthy discussion between the Council and 13 residents, each of whom spoke in opposition: some urged the elected leaders to table the matter for further review, while others questioned who had authorized the deferment, whether the city was obligated to pay the interest rate, and whether there were other options to finance the debt—debt which, as of the end of the calendar year, had reached more than $344 million in outstanding debt. Timothy Cunningham, New Jersey’s local government services director and now the state appointed takeover appointee, has explained to residents the option to bond for the deferred payments would prevent it from having to go into the general fund—that is in lieu of the city being forced to raise tax rates: the municipal bond interest payments would instead be financed via the Investment Alternative Tax from casinos, which, under state takeover regulations, are redirected to be used in Atlantic City for debt service, he noted. The City Council had originally slated the issue for a vote last month, but withdrew the scheduled vote in order to host two public hearings on the matter.

At the session, Councilman Jesse Kurtz said he would have preferred a different resolution to making the payments, questioning whether Atlantic City would be obligated to pay back the payments’ interest if the deferment was at the suggestion of the State, noting it did not “sit right” with him to vote for the ordinance without a formal statement from Gov. Phil Murphy’s administration authorizing it: “When we’re short on money, the answer is to borrow money…I don’t like that.” Atlantic City Council President Marty Small responded that after the ordinance was pulled last month, city and state officials asked the Governor’s administration for forgiveness on the payment; however, the response was negative, adding that the city knew the day was coming to pay the deferred payments—and that such payment was the city’s obligation: to act otherwise, he noted, would be “putting the taxpayers in harm’s way” if they did not act to borrow to make the payments: “It’s not us versus you: What affects you, affects us.” Councilmember Kurtz, along with Councilmen Moisse Delgado and Jeffree Fauntleroy II, voted against the measure, while Councilmembers Small, George Tibbitt, Chuen “Jimmy” Cheng, William Marsh, Kaleem Shabazz, and Aaron Randolph voted aye. For his part, Mayor Frank Gilliam, told his colleagues in opposing the matter, the city needs to come up with “better ways to deal with our finances,” regardless of whether council passed the bond ordinance: “We’re still $400 million in debt.”

Prospects for Puerto Rico’s Recovery

January 12, 2017

Good Morning! In today’s Blog, we consider the ongoing challenges to Puerto Rico’s quasi-chapter 9 municipal bankruptcy.

Prospects for Recovery. Puerto Rico, slammed by one of the ten strongest Atlantic hurricanes on record last September—causing not only massive physical destruction and a tragic loss of life, but also widespread and persistent power outages,  shortages of safe drinking water, and a tragic exodus of some of the U.S. territory’s young and best educated. Now, as the New York Federal Reserve notes, an even greater concern is that the adverse short-term effects of the storm, overlaid on an already shrinking economy, may evolve into long-term adverse effects. Estimates of the physical (capital) damage wrought by Hurricane Maria—to public infrastructure, businesses, homes, schools, and personal property have been estimated by Moody’s at a capital loss at up to $55 billion, part of an overall cost estimate ranging from $45-95 billion.

The issue, as in the wake of filing for a chapter 9 municipal bankruptcy, is Puerto Rico’s long-term prospects. Last October, Puerto Rico’s payroll employment was estimated to have dropped by about 4 percent (seasonally adjusted)—a huge drop, according to the New York Fed, but not unusual in the wake of a hurricane. Employment rebounded about 1 percent last November. As the Fed noted, the sharpest job losses have occurred at restaurants, bars, hotels, and retailers. In normal economic rebounds from disasters, employment in those same industries tends to recover gradually over the course of the next nine to twelve months, while other industries bounce back more quickly. Of greater concern, there were also steep job losses in wholesale trade and health and education services, whereas sectors like professional and business services, manufacturing, construction, and finance did not experience significant declines; rather agriculture suffered severely: extensive crop damage has reportedly taken a huge toll on the island’s farmers and Puerto Rico’s $1 billion ag industry. 

In its report, the New York Fed found that mayhap the most problematic lingering issue has been widespread power outages across the territory: using satellite, nighttime maps to monitor the recovery across the island, the Fed determined the relative dimness throughout the island in October underscored “the severity and breadth of the power outage. The moderate improvement in November—more notable in the south and west than in the north and east—illustrates that the power situation has improved somewhat, though it remains fairly dire over much of the island.” The satellite mapping found that among the islands 78 muncipios, with populations ranging from 400,000 (San Juan) to just under 2,000 (Culebra), the change in brightness between August and November ranged from a 10 percent drop in Hormigueros, in the west, to a 74 percent decline in Humacao, on the southeastern coast. The areas with the quickest recoveries were found in the south and west of Puerto Rico, including Ponce and Mayaguez, whereas the eastern coast experienced the greatest fall in lighting. Thus, the Fed noted: “Puerto Rico’s local variation in night lights recovery closely parallels both the losses in employment found across the island and the trajectory of the storm—as Maria passed from east to west, the north received the stronger headwinds while the south and west experienced less severe tailwinds. A notable exception can be found in and around San Juan—despite being hit hard by the storm, these municipios fell near the middle in terms of light loss; as the capital and largest city in Puerto Rico, electricity may have been restored more quickly there than in more rural areas. 

In assessing the outlook for fiscal and economic recovery, the Fed noted that the steeper the initial loss of jobs (and population), the “longer it tends to take a local economy to recover.” Noting that Puerto Rico’s population had already been trending down at about 2 percent per year before Maria—a trend which, as we have noted, appears to be disproportionately reflecting younger and better educated Puerto Ricans moving to the mainland, the Fed noted “There has been much concern that the rate of population loss could accelerate sharply and create a vicious spiral: people emigrating, businesses closing, tax base shrinking, cuts in services and tax hikes leading to still more out-migration, and so on.” Nevertheless, the Fed wrote that “In spite of the storm’s devastating initial impact, that worst-case scenario for the island’s economy appears to have been averted—at least thus far.”

The insightful New York Federal Reserve insights come as the PROMESA Oversight Board on Wednesday deferred its deadline for Puerto Rico to submit its fiscal plans for the government and PREPA—a deadline already deferred last month—albeit PROMESA Chair Jose Carrion III, in his epistle to Gov. Ricardo Rosselló, wrote that some fiscal plans could be delayed, while others could not.  The 10-year plan approved last March by the Oversight Board had projected sufficient fiscal resources to pay off 24% of the debt due; now, however, some observers are projecting that the Board will approve fiscal plans making no fiscal resources available for debt service for Puerto Rico’s $51.5 billion of municipal bond debt. In addition, the Chairman noted that the Board believes the “submission of the Commonwealth and Puerto Rico Aqueduct and Sewer Authority (‘PRASA’) fiscal plans should be similarly delayed to January 24, 2018 to ensure alignment of the assumptions and plans.” Wednesday morning, Gov. Rosselló had tweeted that his government was prepared to submit the fiscal plan that day.

Meanwhile, the deadlines for submission of the fiscal plans of the central government and the Puerto Rico Electric Power Authority (PREPA) and Aqueduct and Sewer Authority (PRASA) were extended by two weeks after the Governor’s request to delay the date for submitting the new Fiscal Plan for PREPA. Upon this request, the Board also determined to postpone the other two fiscal documents in order for the evaluation and certification remain aligned in the agenda. In his tweet, Governor Rosselló Nevares wrote: “Our administration was ready to submit the Central Government Fiscal Plan today. The Oversight Board requested that we postpone submission for two weeks. If this is not the case, we are ready to submit the plan immediately.”


Can Congress Uninflict Federally Caused Fiscal & Economic Disparities & Distress?

October 13, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, legal, physical, and human challenges to Puerto Rico, before heading north to New Jersey where the fiscal and governing strains between Atlantic City and the Garden State continue to fester.

Visit the project blog: The Municipal Sustainability Project 

Physical, Oratorical, & Fiscal Storms. President Trump served notice yesterday that he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria–even as House Speaker Paul Ryan (R-Wis.) goes to Puerto Rico this morning to assess not only the damage, but also how to more effectively respond to a staggering humanitarian crisis in the aftermath of Hurricane Maria. The Speaker will also bear some good news: the House yesterday approved 353-69, a $36.5 billion disaster aid package to help victims struggling to recover from a string of devastating hurricanes and wildfires, sending the aid package to the Senate, which returns from a weeklong recess next week. While the Trump administration requested $29 billion in supplemental spending last week, it asked for additional resources Tuesday night, including $4.9 billion to fund a loan program that Puerto Rico can use to address basic functions such as infrastructure needs. Speaker Ryan noted: “‎We think it’s critical that we pass this legislation this week to get the people the help they need, to support the victims, and also to help the communities still recovering and dealing with the problems with the hurricanes Harvey, Irma, and Maria.” Puerto Rico Governor Ricardo Rosselló had warned Congressional leaders that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.”

President Trump yesterday claimed that it will be up to Congress how much federal money to appropriate for Puerto Rico, but that relief workers will not stay “forever,” even as, three weeks after Hurricane Maria struck, much of Puerto Rico remains without power, with limited access to clean water, hospitals are running short on medicine, and many businesses remain  closed. The President added:  “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!”

The White House late yesterday issued a statement committing for now “the full force of the U.S. government” to the Puerto Rico recovery, seemingly contradicting the President, who has sought to portray Puerto Rico as in full recovery mode and has voiced frustration with what he considers mismanagement by local leaders. The Governor had warned earlier in the week that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.” The legislation the House adopted last night allows up to $4.9 billion in direct loans to local governments in a bid to ease Puerto Rico’s fiscal crunch—a vital lifeline, as, absent Congressional action, the territory may not be able to make its payroll or pay vendors by the end of this month.

In contrast, Speaker Ryan said that Puerto Rico must eventually “stand on its own two feet,” but that the federal government needs to continue to respond to the humanitarian crisis: “We’re in the midst of a humanitarian crisis…Yes, we need to make sure that Puerto Rico can begin to stand on its own two feet…But at the moment, there is a humanitarian crisis which has to be attended to, and this is an area where the federal government has a responsibility, and we’re acting on it.”

Rep. Nydia M. Velázquez (D-NY), who was born in Puerto Rico, said in a statement that the President’s “most solemn duty is to protect the safety and the security of the American people. By suggesting he might abdicate this responsibility for our fellow citizens in Puerto Rico, Mr. Trump has called into question his ability to lead. We will not allow the federal government to abandon Puerto Rico in its time of need.” Similarly, Jennifer Hing, a spokeswoman for House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.), who will accompany Speaker Ryan today, said that those who live on the island “are American citizens and they deserve the federal assistance they need to recover and rebuild. The Chairman and the Committee fully stand by them in these efforts, and will continue to be at the ready to provide the victims of these devastating hurricanes with the necessary federal resources both now and in the future.” Without Congressional action, the territory may not be able to make its payroll or pay vendors by the end of the month. Unmentioned is whether such contemplated assistance might entail repealing the Jones Act—an act which means the price of goods in Puerto Rico is at least double that in neighboring islands—including the U.S. Virgin Islands. The New York Federal Reserve  found that the Act hurts the Puerto Rican economy—Sen. John McCain (R-Az.) and Rep. Gary Palmer (R-Ala.) have offered legislation to repeal or suspend the law.

President Trump yesterday warned that his administration’s response to hurricane-ravaged Puerto Rico cannot last “forever,” tweeting: “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!” He added that the U.S. territory’s existing debt and infrastructure issues compounded problems. His tweeting came as the House is preparing to consider legislation under which Puerto Rico would receive a $4.9 billion low-interest federal loan to pay its bills through the end of October, as part of a $36.5 billion package. The temporary assistance comes as Moody’s Investors Service has downgraded the Commonwealth of Puerto Rico’s general obligation bonds to Ca from Caa3, in view of the protracted economic and revenue disruptions caused by Hurricane Maria. The President also threatened he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria: he said that relief workers will not stay “forever.” Three weeks after Hurricane Maria made landfall, much of Puerto Rico, an island of 3.4 million Americans, remains without power. Residents struggle to find clean water, hospitals are running short on medicine, and commerce is slow, with many businesses closed.

The lower ratings are aligned with estimates of Puerto Rico’s reduced debt servicing capacity given extensive damage from Hurricane Maria. Puerto Rico faces almost total economic and revenue disruption in the near term and diminished output and revenue probably through the end of the current fiscal year and maybe well into the next. The weaker trajectory will undercut the government’s ability to repay its debt, a matter now being weighed in a bankruptcy-like proceeding authorized by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). For the University of Puerto Rico, the downgrade factors in expected pressure on enrollment-linked revenue and on funding from the Puerto Rican government.

With 155 mile-an-hour winds and a path that cut diagonally across the island, Hurricane Maria was the most destructive storm to hit Puerto Rico in almost 90 years. It knocked out all electric power, destroyed more than 100,000 homes, and ruptured bridges and other public infrastructure. Beyond the disruption of the immediate aftermath, the potential long-term repercussions may be somewhat mixed, however. On one hand, a massive exodus of residents relocating to the mainland, rather than rebuilding on the island, could further erode Puerto Rico’s economic base. Moody’s opined that an infusion of federal relief and rebuilding funds could spur the economic growth and infrastructure replacement that, under normal conditions, has eluded Puerto Rico: “We, nevertheless ,view the economic impact overall as a substantial negative that has weakened the commonwealth’s ability to repay creditors: The negative outlook is consistent with ongoing economic pressures, which will weigh on the commonwealth’s capacity to meet debt and other funding obligations, potentially driving bondholder recovery rates lower as restructuring of the commonwealth’s debt burden unfolds.”

Tens of thousands of islanders left for the U.S. mainland to escape the immediate aftermath of the storm. With conditions back home still grim—approximately 85 percent of residents still lack electricity and 40 percent are without running water, and neither is expected to be fully restored for months—many find themselves scrambling to build new lives away from the island. Particularly in states with large Puerto Rican populations, such as New York, Illinois, Florida, and Connecticut, people are bunking with relatives while trying to find longer-term housing, jobs and schools for their kids.

There have been several major migratory exoduses from Puerto Rico to the mainland over the years, most recently during the past decade when the island’s population shrank by about 10 percent because of a long economic slide that shows no sign of easing anytime soon. Hurricane Maria struck Sept. 20th, and, according to the latest figures from the Puerto Rican government, killed at least 45 people. It also created a new surge that could have lasting demographic effects on Puerto Rico and on the mainland. “I think that we could expect that people who did not plan to stay permanently might do so now,” said Jorge Duany, a professor of anthropology at Florida International University who has long studied migration from the island. Many of those who left are elderly or sick people who fled or were evacuated because of the dangers posed by living on a tropical island with no power or air conditioning and limited water for an indefinite period of time.  It is too early to know exactly how many have departed Puerto Rico for the mainland, but Florida reports more than 20,000 have come to the Seminole state since Oct. 3rd. There were already about 1 million Puerto Ricans in the Sunshine State, second only to New York.

Addressing the urgency of fiscal assistance, House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.) stated: “These funds are vital right now, in the near term, to get the aid where it is needed most.” Puerto Rico faces a government shutdown at the end of the month without an infusion of cash, according to Puerto Rico Treasury Secretary Raul Maldonado: the proposed loan provides flexibility for repayment: it allows the Secretary of Homeland Security, in consultation with Treasury Secretary Mnuchin to “determine the terms, conditions, eligible uses, and timing and amount of federal disbursements of loans issued to a territory or possession, and instrumentalities and local governments.”

Gov. Ricardo Rossello Nevares, in his letter at the end of last week to the President, cited “independent damage assessments in the range of $95 billion–approximately 150% of Puerto Rico’s” economy, writing that “financial damages of this magnitude will subject Puerto Rico’s central government, its instrumentalities, and municipal governments to unsustainable cash shortfalls: As a result, in addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future.”

Saving Atlantic City. New Jersey Superior Court Judge Julio Mendez has ruled that Atlantic City can cut its Fire Department by 15 members early next year as a cost-saving measure under the Garden State’s Municipal Stabilization and Recovery Act, with his ruling lifting the restriction that any reduction in force must occur through retirements or attrition. Judge Mendez, who in late August had ruled against a state proposal for 50 layoffs, ruled no cuts may take place before February 1st—marking the first legal showdown under New Jersey’s Recovery Act takeover powers under designee Jeffrey Chiesa, which enables the state to alter outstanding municipal contracts. In his decision, Judge Mendez wrote: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.”  Judge  Mendez ruled the state may exercise its authority; however, the cuts are not allowed until after Feb. 1, according to the ruling: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic, but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.” In his August ruling, the Judge had written that any reduction in force below 180 members would compromise public safety, and any further reduction would have to come through attrition and retirements. Under this week’s ruling, before the state makes cuts, however, officials must explore other funding to cover lost SAFER Grant funding, allow for additional attrition to take place, and provide fair notice to those who may lose their jobs.

Atlantic City Mayor Don Guardian said he had hoped the state would offer an early retirement incentive—especially after, last August, Gov. Chris Christie had signed a bill allowing the state to offer such an incentive to the city’s police officers, firefighters, and first responders facing layoffs. However, the state has said the offer would not be financially beneficial, leading Mayor Guardian to note: “I am disappointed that the state has pushed forward this motion knowing that the state Senate, Assembly, and the Governor all passed an early retirement bill for just this reason: We could have easily gotten to 180 fighters through these incentives.”

New Jersey Community Affairs spokeswoman Lisa Ryan noted: “We remain disappointed by the court’s insistence on requiring an artificially and unnecessarily high number of firefighters…While the decision to allow a modest reduction in firefighters on Feb. 1, 2018, will provide some budget relief, the city will still be forced to make additional and significant reductions to fire salaries in order to afford paying for 180 firefighters.” (Last January, the Fire Department had 225 members; now there are 195, or, as Judge Mendez wrote: “The plans to reduce the size of the ACFD have evolved from a request to approve a force of 125, resulting in a loss of 100 positions, to the current request to reduce the force to 180, resulting in a loss of 15 positions.” 


The Long Fiscal Road out from State Fiscal Oversight


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Good Morning! In this a.m.’s eBlog, we look at Philadelphia’s fiscal challenges as it seeks to fully emerge from state fiscal oversight.

Liberty Bell City. The Board of the Pennsylvania Intergovernmental Cooperation Authority this Tuesday unanimously approved the City of Philadelphia’s Five Year Plan for FY2018-2022, concurring with the assumptions and estimates that the City’s Plan were reasonable and appropriate, and that the Plan projects positive year-end fund balances for the next five fiscal years. The state authority, created in 1991 by state law, is charged with reviewing Philadelphia’s five-year plans—with state funding to the Liberty Bell city dependent on PICA approval thereof.

While the approval of the long-term fiscal plan was unanimous, the Board noted concerns about a lack of reserves. City officials are estimating general fund revenues for the 2018 fiscal year of $4.405 billion with roughly 75% derived from taxes. In its 43-page report, FICA noted: “The City’s revenue projections have consistently been outperformed by actual collections in recent years…PICA feels confident that the City and its consultant are effectively monitoring tax performance in a way that will allow adjustment to changes in economic growth.” The Board noted the FY2017 results suggested another year of solid performance for most taxes, and that the city continued to manifest signs of ongoing economic expansion since the end of the Great Recession, while continuing to implement certain reforms in order to increase its tax competitiveness. The Board also noted the City has set aside a $200 million provision to fund upcoming labor costs, as well as a $274.6 million contingency fund should the City lose grant funding as a result of federal and/or state actions. The staff noted some key fiscal risks, including pension costs, and the increased volatility of business income and receipts tax revenue.  Thus, the fiscal report card demonstrated improvement, but apprehensions about the future—especially perceptions of sluggish growth. That is, there are concerns with regard to economic growth and U.S. census data indicating more people are moving out of Philadelphia than are moving in. In its most recent manufacturing survey (this month), the Philadelphia Federal Reserve reported the index declined from 27.6 last month to 19.5 this month—with the index gauging new orders, shipments, employment and work hours, which were all positive, but which fell from June levels, with the new-orders index in particular plummeting to 2.1 from 25.9 in June. The New York Federal Reserve also found a July deceleration, or, as Joshua Shapiro, Chief U.S. economist at MFR Inc. described it: “The preponderance of recent survey data point to improving conditions in the manufacturing sector, and we expect the underlying trend of reported output to gradually accelerate in the months ahead. However, an ongoing inventory adjustment in the automotive sector will likely dampen headline factory output data over the near term.” In its report, PICA noted that while the City projects a positive fund balance the next five years, there are risks, such as rising labor, pension, and healthcare costs along with business tax revenue volatility. (The fund balance is projected at $75.5 million in 2018, or 1.7% of general fund obligations; reserves are slated to rise in each of the five years up to a peak of $123.1 million in FY2022 fiscal year, or 2.6% of projected obligations. On Wednesday, the city’s Finance Director, Rob Dubow, said the City of Brotherly Love’s fund balance target goal is 6% to 8% of revenues, but that two sets reserves should help withstand potential economic downturn that may arise over the five-year period. Philadelphia has established a reserve of $200 million for potential labor cost spikes and another one of $270 million to combat possible state and federal budget cuts—or, as Mr. Dubow describes it: “We think having those reserves gives us some more breathing room than we have had in the past…We share PICA’s concern of getting fund balances higher and they do increase over the life of the plan.”


The Thin Line Between Fiscal & Physical Recovery Versus Unsustainability.


Good Morning! In this a.m.’s eBlog, we consider, Detroit’s remarkable route to fiscal recovery; then we turn to challenges to a municipality’s authority to deal with distress—or be forced into chapter 9 municipal bankruptcy in Pennsylvania, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability, and then the taxing challenge to Scranton’s efforts for a sustainable fiscal recovery.

Campaigning & Turning around the Motor City’s Fiscal Future. Detroit Mayor Mike Duggan, last week, at the annual Mackinac Policy Conference spoke about the racially divisive public policies of the first half of 20th century which, he said, had helped contribute to Detroit’s long slide into municipal bankruptcy—indeed, the largest municipal bankruptcy in U.S. history—but one which he said had helped lay the foundation for a conversation about how Detroit could grow for the first time in half a century without making the mistakes of the past that had, inexorably, led to an exodus of nearly 1.2 million from 1956 to its chapter 9 bankruptcy—noting: “If we fail again, I don’t know if the city can come back.” His remarks, mayhap ironically, came nearly a half century from the 1976 Detroit riot, a riot which  began downtown and was only curtailed after former U.S. President Lyndon Johnson ordered the 82nd and 101st Airborne Divisions to intervene, along with then Michigan Gov. George Romney ordering in the Michigan Army National Guard. The toll from the riot: 43 dead, 1,189 injured, 2,000 of the city’s buildings destroyed, and 7,200 arrests.  

But, rather than discussing or issuing a progress report on the city’s remarkable turnaround, Mayor Duggan instead spoke of the city’s racial tensions that had sparked that riot, in many ways, according to the Mayor, coming from the housing policies of former President Franklin Roosevelt—a policy which placed or zoned blacks in the city into so-called “red zones,” thereby creating the kind of racial tensions central to the 1943 and 1967 riots—a federal policy adopted in 1934 which steered federally backed mortgages away from neighborhoods with blacks and other racial minorities. Indeed, the Mayor quoted from a 1934 Federal Housing Administration manual that instructed mortgage bankers that “incompatible racial groups should not be permitted to live in the same communities;” the manual also instructed housing appraisers to “predict the probability of the location being invaded by…incompatible racial and social groups…, so that, as the Mayor added: “If you were adjacent to a minority area, your appraisal got downgraded.”

Thus, federal housing policies were a critical component contributing to the historic white and middle class flight from Detroit to its suburbs—suburbs where federal housing policies through the Federal Housing Administration subsidized more than half of the mortgages for new construction—or, as Mayor Duggan described the federal policies: “There was a conscious federal policy that discarded what was left behind and subsidized the move to the suburbs: This is our history, and it’s something we still have to overcome.” His blunt Mayoral message to the business community was that the city’s hisgtory of race and class segregation had to be acknowledged—or, as he put it: “I just wanted to deliver a message to the broader community to say, ‘Look, there’s a place for you to come invest in Detroit. Here are the ground rules, here is the reasoning behind the ground rules… and if you want to come in and invest in the city, move into the city and be part of it with the understanding that the recovery includes everybody, we’d love to have you: The African-American community voted for me, and I can’t tell you what an enormous responsibility that feels like.” Thus, the Mayor made clear that he and the Detroit City Council have been focused on governing mechanisms that ensure longtime Detroiters are not displaced by downtown and Midtown revitalization—enacting an ordinance mandating that housing developments in receipt of city tax subsidies have at least 20 percent of the units classified as affordable housing for lower-income residents, and mandating that 51% of the person-hours for construction of the new Little Caesars Arena be performed by Detroiters: “We’re going to fight economic segregation…It would be so easy in this city to have one area be all wealthy people and one area all poor people.”

The Challenge of Municipal Fiscal Recovery. Judge James Gibbons of the Lackawanna, Pennsylvania County Court of Common Pleas last week heard the City of Scranton’s preliminary arguments in response to a lawsuit by eight taxpayers seeking to bar the municipality from tripling its local services tax. The suit, filed March 2nd, contends that Scranton has been collecting taxes which exceed the legal issuance; it calls for the issuance of a mandamus against the city. In response, city attorneys, note that, as a home rule charter city, Scranton is not subject to the cap that Pennsylvania’s Act 511 stipulates. (The taxing legal and political regime, as we have previously noted, in one of the nation’s oldest cities, comes in the wake of its action to raise the levy from $52 to $156 for every person working within the city limits who earns at least $15,600, with the city justifying the action under Pennsylvania Act 47 and municipal planning code.) The taxpayer group, led by independent Mayoral candidate Gary St. Fleur, in seeking a mandamus action, has charged that lowering taxes across the board is the only way for the city to be able to fiscally recover.

Mr. St. Fleur, an independent candidate for mayor, has initiated a ballot measure to force 76,000-population county seat Scranton into chapter 9 municipal bankruptcy, citing a Wells Fargo report from October 2016, which found that a 2014 audit of Scranton revealed $375 million in liabilities and $184 million in unfunded non-pension post-retirement public pension benefits to government employees. (Mr. St. Fleur’s group, last February, had also objected to the city’s annual petition to the court to raise the tax—an objection rejected by visiting Judge John Braxton—a decision which, unsurprisingly, prompted the taxpayer group to initiate its own suit, notwithstanding that Scranton is a home-rule community, so that, in Pennsylvania, it has the authority to levy taxes.) Unsurprisingly, the anti-tax challengers’ attorney, John McGovern, counters that Act 511, which, when enacted 52 years ago, authorized the local Earned Income Tax, which authorizes municipalities and school districts the legal authority to levy a tax on individual gross earned income/compensation and net profits (the tax is based on the taxpayer’s place of residence or domicile, not place of employment) is separate from the Pennsylvania personal income tax. He charges that the Act has two “very specific” sections which cap how much the City of Scranton can tax, charging: “Call it a duck or a goose, call it a rate or a cap, but for the city to say it can tax whatever it wants, that alone is dangerous and absurd,” adding: “At this point, we’re dealing with 2017, and the city is spending like a drunken sailor…State law clearly states there is a cap to taxation through the Act 511 law…If we do not win, that would allow any city to raise taxes in any amount it wants.”

In contrast, David Fiorenza, a Villanova School of Business finance Professor and former CFO of Radnor Township, noted: “Scranton has made progress from three years ago, in part due to the renegotiating of some city union contracts and the low-interest rates on debt…The challenges this city will face will be the uncertainty of the state and federal budget as it relates to school funding and other funds that have been relied on for some many years.” Kevin Conaboy, whose firm is representing the city, told the court the city may raise its taxes under the state’s home-rule provisions, and he noted that Pennsylvania’s home rule provisions supersede a cap in the state’s Act 511 local tax enabling act. Moreover, Scranton city leaders have deemed the revenue increase essential for Scranton’s recovery under the state-sponsored Act 47 workout for distressed communities, to which Scranton has been subject since 1992.

Is the Bell Tolling for Act 47? The case is re-raising questions with regard to the effectiveness of the state’s municipal fiscal distress law, Act 47, a program which some critics charge has become an addiction rather than a cure. Villanova School of Business Professor David Fiorenza, referring to a 2014 change to the state enabling law, believes municipalities stay in the program for too long: “Act 47 is effective, but continues to present a problem as cities are able to request an extension after the five-year time period has expired…A five-year time frame is sufficient for a municipality to assess their financial situation and implement any changes. However, if the economy enters a recession during this time period, it will impede their financial progress.”

Physical & Fiscal Atrophy. Puerto Rico has lost two percent of its people in each of the past three years—but a two percent which in fiscal terms is far more grave from a fiscal perspective: the two percent, according to the insightful fiscal wizards at Federal Reserve Bank of New York, means that “If people continue to leave the island at the pace that has been set in recent years, the economic potential of Puerto Rico will only continue to deteriorate.” That outflow is comparable to 18 million Americans emigrating from the 50 states: it marks nearly a 12% drop: some 400,000 fewer Puerto Ricans today compared to 2007—meaning, increasingly, a U.S. territory entrapped in a fiscal tornado: unemployment is at 11.5%, so, unsurprisingly, the young and mobile are leaving the island behind. With unemployment at 11.5%, Puerto Rico in a quasi-chapter 9 municipal bankruptcy, federal law discriminating against the territory’s economy, and its municipalities unable to access chapter 9—the $74 billion accumulated debt and quasi-federal takeover has created incentives for more and more Puerto Ricans, from all economic levels, to leave—creating a vicious fiscal cycle of reduced government revenue, but ever-increasing debt: Puerto Rico’s municipal bond debt has grown 87 percent just since 2006—making the increasing obligations a further incentive to emigrate.

The PROMESA Board’s proposed plan to revert to fiscal sustainability does not appear to address the physical demographic realities: it assumes the population will shrink just 0.2 percent each year over the next decade, relying on that projection as the basis for its projections of tax receipts and economic growth—projections which Sergio Marxuach, Public Policy Director at the Center for the New Economy in San Juan, generously describes as: “[R]eally, really optimistic.” The harsh reality appears to be that the growing earnings disparity between Puerto Rico and the continental U.S. is so stark that any family focused on its health, safety, and financially viable future—in a situation of today where the Puerto Rican government has closed schools to save money—means that teachers can double or triple their earnings if they move to the mainland: doing that math adds up to younger generations of child-bearing age being increasingly likely to leave Puerto Rico for the mainland. Coming on top of Puerto Rico’s more than a decade-long population decline, it seems that, more and more, for those who can afford it, the option of leaving is the only choice—meaning, for those who cannot afford to—the Puerto Rico left behind could become increasingly older and less fiscally able to construct a fiscal future.


Voting on a Municipality’s Future


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eBlog, 9/16/16

In this morning’s eBlog, we consider the upcoming election in San Bernardino on what form of municipal governance the city’s voters want for their post-municipal bankrupt municipality; then we head East to Michigan to listen to Mayor Duggan and ponder on how very perilous and challenging the path out of municipal bankruptcy can be; before heading still farther East to inquire whether Atlantic City even has a future as a city—or will, instead, be taken over by the state. After which, we turn right back around to Ohio—where the fate of East Cleveland is very, very much in question: no one seems to have an answer—and the silence from the State of Ohio has been deafening. Finally, we fly south to the U.S. Territory of Puerto Rico—albeit, really to the nation’s Capitol, as U.S. House and Senate members struggle to consider how federal policies and actions could play a vital role in the island’s long-term economic future.

Voting on a Bankrupt City’s Future. Unlike November’s election farther north in Stockton, where the vote will be over which elected leader the voters will elect to keep that city on the road to recovery, voters in what could be post-chapter 9 San Bernardino will be deciding whether to adopt a new city charter [If approved by a majority of voters Nov. 8, Measure L will replace the existing charter with the 14-page new charter.] under which to operate in the wake of U.S. Bankruptcy Judge Meredith Jury’s upcoming confirmation hearing on October 14th with regard to the decision to approve the city’s plan of debt adjustment—albeit, as San Bernardino City Attorney Gary Saenz yesterday said, the city anticipates receiving a confirmation order from Judge Jury by the end of the year with an effective exit date around March. The municipality’s creditors had been projected to vote on the city’s plan of debt adjustment earlier this month; however, CalPERS and U.S. Bank each filed extensions seeking more time to vote, even as attorneys representing Ambac Assurance Corp., the insurer on $52 million in pension obligation bonds, have voted in favor of the exit plan contingent on finalizing what it called in a court filing “the definitive documents.” Or, as City Attorney Saenz notes: “It is all contingent on how things go…Voting has come in overwhelmingly in support of the plan, which helps with regard to confirmation.” Mr. Saenz added: “We are working on resolving the smaller cases, such as personal injury claimants, trip and falls, and a case involving one of our police officers…The more of those we settle, at this time, helps with respect to confirmation.” With regard to the city’s bigger creditors, he notes that when CalPERS files today, that could be a significant milestone, albeit the huge state retirement agency reached an agreement in substance with San Bernardino more than a year ago; and an agreement with pension bondholders in May. U.S. Bank, which holds several million dollars of commercial paper issued against city buildings, also had previously reached an agreement with the city. With regard to reaching an agreement with the city’s municipal bondholders, Mr. Saenz has previously noted the city was able to offer them 40 percent of what they are owed, rather than the measly one percent it had originally offered—in large part because the agreement also stretches out payments 20 years—an important score, as the city plan of debt adjustment is keenly focused on a long-term plan to make sure it does not make a round trip down the road back into chapter 9—an agreement, too, very much intended to gaining Judge Jury’s affirmation that the city’s pan is both feasible and dependable. Or, as Mr. Saenz notes: “One thing Judge Jury will look at is the feasibility of the confirmation plan…We believe we found a model that is dependable.” The proposed debt adjustment plan pension obligation bond agreement appears to—similar to the outcomes in Central Falls, Detroit, etc.—continue a trend of municipal bondholders faring worse than public pension obligations—albeit the powerful role of CalPERS is profoundly different than in Alabama, Rhode Island, or Michigan. Under the proposed, current proposed plan, Commerzbank Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, agreed to drop their opposition to San Bernardino’s plan of debt adjustment—under the pending resolution, the holders of $50 million in pension obligation bonds will receive payments equal to 40 percent of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.

Thus, in San Bernardino, the future will not be about whether there will be a future, but rather how—and what structure or form of municipal government it will be—or, rather the form of municipal governance. Indeed, last night, John Longville, one leader of the campaign in favor of Measure L, which would repeal San Bernardino’s existing charter and replace it with a new one created by a citizen committee, said such a new charter would promise the way to end decades of destructive political infighting rather than a surrendering of self-government. Mr. Longville, who comes with no small record—he is a former Mayor of Rialto, California Assemblyman, and the current President of the San Bernardino Community College District Board of Trustees that, like other jurisdictions in the region, San Bernardino has had a variety of leaders over the years, and the city has been affected by the same economic blows, including the loss of a major steel plant and a major Air Force Base—but, he pointedly noted, those cities did not file for chapter 9 municipal bankruptcy; in fact, he said they have been thriving, he said: “We see neighboring cities able to function better than we are…It’s just the reality. Some of them quite well. Why is San Bernardino functioning so poorly?” His answer? He told his audience the reason was the city’s 46-page charter first passed in 1905 and amended no less than 135 times since then. It was that history, he noted, which makes it unclear who is responsible for fixing problems and, therefore, breeds arguments.

In contrast, his debate opponent, James Penman, San Bernardino’s City Attorney from 1987 until 2013, countered that if San Bernardino’s charter were responsible for the city’s longest ever municipal bankruptcy, then the city would have gone bankrupt, as other cities did, during the Great Depression. “The city charter is not the reason for the bankruptcy. Poor leadership on the part of certain elected officials and certain appointed officials is the reason we went bankrupt,” pointedly reminding voters of the $4 million general fund reserve San Bernardino maintained when former Mayor Judith Valles left office in 2006,, as he added: “You can’t spend more money than you take in and not go bankrupt.” He told the audience the arguments at City Hall were not with regard to lines of power, but rather over issues officials were elected to address. The culprit, Mr. Penman maintained, has been the new charter’s elimination of elections for city attorney, city clerk, and city treasurer, and to its shifting of some responsibilities from an elected mayor to an unelected city manager: “The new charter takes away your rights and your leadership in electing City Hall,” he said, arguing that it is important those positions be directly responsible to voters, rather than to City Council members who would appoint them under the new charter.

But his opponent countered that in the century since the charter was passed, city government had become too complex to expect elected officials to understand it fully the day they are sworn in: “When I was mayor of Rialto, I was proud of what I did and I think I did a pretty darn good job…But when I first came in there was sure a lot that I didn’t know, and I was glad there was a professional city manager, as there is in almost every city in California.” Interestingly, Mr. Penman countered that following that argument to its logical conclusion would mean the state Legislature should choose the Governor and Congress should choose the President, since running the state and federal government also requires great expertise. He added, moreover, that an elected city attorney helps prevents scandals like those in Bell, Moreno Valley, and Beaumont.

347 miles north of San Bernardino, however, where there will also be elections in November—those elections will not affect Stockton’s city attorney, police chief, city clerk, or auditor: Stockton’s City Council charter review committee last year voted unanimously to reject a proposal by a citizen’s commission that could have given voters the chance to decide if the police chief, clerk, and auditor should have to run for office. Current candidate for re-election, Mayor Anthony Silva, had opposed the recommendations, warning: “Can you imagine getting ready for these upcoming elections (as a mayoral or council candidate) and in the middle of it our own clerk has to go out and start putting up signs for herself and then worry about her own election?…It would be chaos.”

The Hard Road out of Municipal Bankruptcy. Detroit Mayor Mike Duggan yesterday in an address during the third Detroit Homecoming, a special program created to attract ex-Detroiters and investors to come back home praised a recovering municipality from the nation’s largest chapter 9 bankruptcy with a call to entrepreneurs who have left to “come on back home.” Mayor Duggan spoke about improved service delivery, home values, and demolition efforts that are boosting many city communities—even as the Census Bureau reports that the city’s unemployment rate remains the highest in Michigan and newly released U.S. Census estimates rank Detroit the nation’s poorest major city. Mayor Duggan, in a city where the city’s schools are under the control of a state-appointed emergency manager and a state-created dual system of charter versus public schools, added: “The solution to poverty is jobs and making sure that our residents have the education and skills to take those jobs.” The Mayor’s remarks came as part of this long-term effort which began two years ago to help bring more than 300 ex-patriots with ties to Detroit “home” to re-experience the city—an effort which, to date, has resulted in committed investments of more than $260 million in city projects and businesses. Nevertheless, the new Census estimates underline how steep this road to recovery is: the U.S. Census American Community Survey reports that Detroit realized no change in poverty or incomes; an estimated 39.8 percent of its residents are below the poverty line. Nevertheless, as Mayor Duggan noted, a key measure, unemployment, has improved measurably: Detroit’s unemployment rate was 17.8 percent when he took office in two years ago in January; it was 12.5 percent by last July—or, as he put it: “We have 15,000 more jobs today than we did three years ago…Nobody is declaring victory, but we are making progress in a whole lot of neighborhoods in the city, and we have a lot more neighborhoods to go.” Mayor Duggan added, in another key issue to the city’s recovery, that since spring 2014, the city has razed more than 10,500 vacant houses, and is averaging the razing of 150 commercial buildings each year—and the results are encouraging: in some neighborhoods, he said, home sale prices are up more than 50 percent from two years ago.

Mayor Duggan expressed less confidence on the school front, noting he continues to be concerned over the so-called state rescue package for Detroit’s public school district that pays off $467 million in operating debt and provides startup funding for its new debt-free district—a package, however, which created a divided school system of charter and public schools, so that the city lacks uniform standards for all schools—and for all its children: “We’ve got to come back at it. We’ve got to get it fixed.” It is, as the Detroit News has opined: “a major American city where public education, namely the teaching of its young, is corrupted by grasping adults and mismanaged by state bureaucrats who seize control of a system they fail to fix…And not the fact that public education in Detroit, a necessary building block for any functioning democracy, is a disgrace and an indictment. Its recurring incompetence is a disincentive to families with school-aged children, households that form the bedrock of stable communities occupied by taxpayers and law-abiding citizens…The wonder is that it’s taken this long for prosecutors to root out corruption, or for someone to file a civil rights lawsuit against the state and whoever else for the generally deplorable state of Detroit’s public schools…This is a fundamental hurdle. Jobs in Detroit go wanting for Detroiters if their DPS secondary education fails to give them the skills to compete, and if folks refuse to recognize that education also needs the active participation of parents, students, even the business community.” Characteristically moody Moody’s credit rating service clearly shares Mayor Duggan’s apprehensions: the service worries that uncertainty over the future security of Detroit Public Schools state-aid backed bonds, its governance, as well as the poor arithmetic of tax collection issues in the wake of the state restructuring of DPS following the district’s restructuring merit a downgrade from “developing” to “negative,” deep in proverbial in junk territory, albeit advising the rating, like any student’s grade, could move in either direction once various issues tied to the state preemptive restructuring of DPS is resolved, adding that the further uncertainty over the outcome of a restructuring of limited tax state aid revenue bonds is a key concern—and noting that it moodily awaits the toting up of property tax collection trends and the success or failure of the eventual transfer of DPS’ governance from emergency management to a voter-approved Board of Education.

The Future or Un-future of a Great American City. Atlantic City, having now missed its deadline and violated the terms of a $73 million state loan, has asked the state for a “reprieve” on the matter—the deadline was one which required the city to initiate dissolution of its Municipal Utilities Authority—meaning that, as of today, the city is at the mercy of the state, which could ultimately demand immediate repayment of the loan or seize the city’s collateral. One of the terms in the July 29 bridge loan agreement called for the city to dissolve Atlantic Municipal Utilities Authority (ACMUA) by yesterday or use the water authority as collateral in the case of a default—a state demand the City Council has been unwilling to support: ergo, having defaulted under the loan terms, the state could demand immediate repayment of the monies. In a statement Wednesday, Mayor Donald Guardian noted: “Although the September 15 deadline will pass tomorrow without a city council resolution dissolving the MUA or designating it as collateral in case of default, we have asked the state for a reprieve on this because we believe that the MUA will actually be a better part of the overall financial solution if it is kept whole.” For its part, a New Jersey Local Finance Board spokeswoman had responded: “A decision has not been made and the Division is awaiting legal guidance as to its options.” The city had already been moodily downgraded last April, as we have reported, because of the difficult governance situation—a situation in which the city is under a state emergency manager who has been invisible, as well as a governance situation where the MUA is financially independent from the city—a utility estimated by New Jersey Senate President Steve Sweeney (D-Gloucester) at around $100 million—part of the reason Mayor Guardian has made clear, especially given its vital public safety role, that he would like to bring the MUA under city control and opposes privatization or a public-private partnership. The city, to some great extent caught between the rock and hard place of the Governor and the legislature, had averted a default in late May when the legislature approved a rescue package giving the city 150 days in which to deliver an acceptable five-year financial turnaround plan; however, if the plan is not approved by the early November deadline, state intervention kicks in with New Jersey’s Local Finance Board then empowered to alter debt and municipal contracts—that is, a different plan than insisted upon by Gov. Chris Christie. Indeed, on the 150 day calendar, Mayor Guardian notes: “Our 150-day plan is moving forward quickly, as we have some of the best in brightest minds in the country working on our behalf to solve this problem…We just need the time to finish the plan and to present it publicly. In the end, we think this will be the best plan to move Atlantic City forward while at the same time maintaining our sovereignty and decision-making rights now held by locally elected leaders.”

Governance & A City’s Future. East Cleveland, Ohio Mayor Gary Norton will face a recall vote in December, one that comes at a time of perilously depleted city coffers and a thick layer of political tension; so too will City Council President Tom Wheeler—or, as Mayor Norton notes: “This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” The small municipality, still, like Godot, awaiting a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, and awaiting potential negotiations from the neighboring City of Cleveland whether there would be a willingness to negotiate its incorporation into Cleveland, now also awaits the decisions of its citizens in November’s election—an election with a $25,000 price tag the city can ill afford.

A U.S. Territory’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico has been meeting with federal agencies and gathering input from some 335 organizations and individuals as it works to develop recommendations with regard to how to address the U.S. territory’s struggling economy—that is a wholly different group than the PROMESA oversight board (Chair Sen. Orrin Hatch (R-Utah), Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), and Reps. Pedro Pierluisi (Puerto Rico), Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y.) —one charged here by Congress to release a report by the end of the year on the impediments in current federal law and programs to economic growth in Puerto Rico along with recommended changes which could spur sustainable long-term economic growth, increase job creation, reduce child poverty, and attract investment to the U.S. territory. In its first joint release, the task force noted: “Residents of Puerto Rico and their families face numerous challenges to economic growth along with many dimensions affected by federal law and programs, including health care, government finances, economic stagnation, population loss, and sectoral inefficiencies…[We] are actively working to arrive at a consensus in order to provide Congress with findings and recommendations as called for under PROMESA.” The task force will continue accepting submissions from individuals until the middle of next month, having extended its previous deadline of September 2nd; the task force also said in its report that its members have been working with the Federal Reserve Bank of New York, which oversees Puerto Rico in the Federal Reserve System, and which recently provided a superb update at the City University of New York session convened to identify useful economic and financial developments in Puerto Rico and to analyze the Commonwealth’s economy and finances. The New York Fed has been providing not only useful reports and insights, but also blogs—and is now aiming to explore ways that federal statistical products used to measure economic and financial activity in the states could be applied to Puerto Rico. The task force is expecting help from the Joint Committee on Taxation (JCT), the Congressional Budget Office, and the Library of Congress’s Congressional Research Service. JCT will provide a briefing in the near future to discuss federal tax policy as it applies to Puerto Rico. The eight-member body will also consult with Puerto Rico’s legislative assembly, its Department of Economic Development and Commerce, as well as representatives of the private sector on the island.