The Political & Fiscal Challenges of Recovery

September 19, 2017

Good Morning! In today’s Blog, we consider the uncertain fiscal outlook for Hartford – and Connecticut, the ongoing recovery in Detroit from the nation’s largest municipal bankruptcy, municipal fiscal erosion in Pennsylvania, and some of the fiscal and physical impacts of Hurricane Irma on Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of a Fiscal State/Local Cliff. Connecticut lawmakers passed a $40.7 billion two-year state budget early on Saturday; however, Governor Dannel Malloy could veto the legislation and leave the state racing toward severe spending cuts next month. The budget uncertainty came as the state’s capitol city Hartford is approaching debt repayment deadlines this month and next—and now the state budget uncertainty is becoming a major threat to the city; Moody’s noted: “The city owes $3.8 million in September, followed by $26.9 million in October,” with October the “heaviest debt service month this year,” apparently the result of the city’s borrowing $20 million last April to cover its cash flow problems.  Thus, with the Legislature and Gov. Dannel Malloy unable to agree on a balanced state budget, the credit rating agency notes this could be a potentially huge problem for Hartford, writing: “Approximately half of the city’s general fund revenues are derived from state aid, leaving Hartford heavily exposed to the state’s budget delay: If the delay continues, Hartford is in danger of depleting its already weak reserves between now and the end of this calendar year.” And this could become a municipal fiscal cancer—not just for Hartford, but also Bridgeport and New Haven. Mayor Luke Bronin noted: “The absence of a state budget significantly exacerbates Hartford’s fiscal crisis and accelerates our cash flow challenge.” While Gov. Malloy has issued a temporary plan to cover for the lack of a state budget, that plan would sharply cut state aid to cities and towns. Mayor Bronin said that plan, if continued through the rest of FY2018, would mean Hartford “would face a shortfall of about $100 million out of a municipal budget of $329 million.” Thus, he noted: “While we’re focused on managing our liquidity and maintaining basic services, there’s obviously no way to manage a shortfall of that magnitude indefinitely…We are exploring all of our options to restructure Hartford’s obligations and put our Capital City on a sustainable path.” Moody’s, in its assessment, described Hartford’s “path to fiscal sustainability” as one “likely require debt restructuring along with some combination of labor concessions, other expenditure cuts, and new revenues,” albeit not opining on whether debt restructuring to extend the city’s repayment schedule or bankruptcy would be the likelier outcome, but noting that the city’s debt service costs are expected to “ramp up” from $44 million in the current fiscal year to $57 million in 2018-19, and will then continue to grow almost steadily through 2020-21. Thus, Av Harris, a legislative aide to Bridgeport Mayor Joseph P. Ganim, warned Bridgeport, which had filed for chapter 9 municipal bankruptcy in 1991 (§7-566), worried: “The major impacts haven’t hit yet,” referring to apprehension with regard to the potential fallout if the city does not receive the first big installment in state school aid, noting that state aid represents about 40% of Bridgeport’s current $550 million city budget. Nearby, New Haven Mayor Toni Harp has ordered city agencies to come up with budget cutting contingency plans in case the General Assembly fails to pass a state budget by September. The Mayor said additional spending reductions would be needed to avoid local tax increases, in the event the state budget impasse continues. (New Haven’s Board of Aldermen adopted a $539.9 million city budget on June 6.) Mayor Harp has said New Haven is hoping to receive at least the $30 million in state aid that it got in the fiscal year that ended June 30, and is looking to get an additional $18 million in promised state funding, adding that failure to get that money would put New Haven in a short-term cash crisis.

Observers were surprise that the Republican-backed budget won prevailed in a legislature narrowly controlled by Democrats; yet the fiscal outcome remains uncertain, as Gov. Malloy has said he would veto the bills as they first passed through the Senate before moving to the House of Representatives, noting: “The amended budget that passed in the Senate today is unbalanced, and if it were to reach my desk I would veto it,” last Friday night, stating that the budget “relies on too many unrealistic savings, it contains immense cuts to higher education, and it would violate existing state contracts with our employees, resulting in costly legal battles for years to come.” The passage came with the state budget action two months’ overdue and, currently under emergency control: Under the Governor’s executive order, some schools and cities would see state aid slashed after October 1 unless a budget is enacted before then—burdened by some $73 billion of pension and debt obligations, high taxes, out-migration, and falling revenues—and under a now lame duck governor. Now the legislature has sent him a budget which contains provisions he says he cannot abide, including reductions to the University of Connecticut. Under the proposed budget, general fund appropriations would grow 3.5 percent in FY 2018 to $18.5 billion and 0.6 percent in FY2019 to $18.6 billion; the transportation fund, the next largest, would grow by about 11 percent over the two years, according to the legislature’s Office of Fiscal Analysis (OFA); the bill would also limit general obligation bond allocations to $2 billion a year beginning in fiscal 2018, then apply that same cap to issuances and spending starting in fiscal 2019.  

The budget, if agreed to, It would establish a Municipal Accountability Review Board to allow state oversight of fiscally troubled cities, potentially including its capital city, Hartford, with former U.S. Comptroller General and now gubernatorial candidate David Walker stating: “I think (Malloy) is likely to put the ball back in the court of the state Legislature…I think the last thing we need right now is to increase taxes.” Nevertheless, on Saturday, Gov. Malloy described the GOP budget package as “unbalanced” and “unrealistic: If the responsible solution I negotiated with Democrats isn’t going to pass, then it is incumbent on the legislature to reach a new agreement soon—one that is realistic and, ideally, bipartisan.” Nevertheless, State Rep. Cristin McCarthy Vahey (D-Fairfield) was one of six House Democrats to break ranks, called for a bipartisan fix to the state’s fiscal woes: “We all await the Governor’s next steps and will go forward from there…The challenges confronting us were a long time in the making. We need to figure out a solution working together as leaders. I support every effort that will bring us closer to the kind of compromise we need to successfully adopt a state budget.” However, Senate President Pro Tempore Martin Looney (D-New Haven) said Gov. Malloy has given his assurances that he would immediately veto what is a “short-sighted” budget that undercuts collective bargaining and public education, noting: “So much for allegedly responsible and realistic budgeting,” adding there was a “substantial danger” that no budget gets passed by Oct. 1, defaulting to the Governor’s cuts: “I think we have to look forward rather than backward and keep our focus on getting a budget.”

It seems an irony that both Republican gubernatorial hopefuls who spoke at yesterday’s rally could become casualties of the proposed elimination of the decade-old Connecticut Citizens’ Election Program, which was adopted after the resignation and imprisonment of former Gov. John Rowland for corruption. Under the program, candidates for governor are eligible for $1.4 million in public funds in the primary and $6.5 million in the general election. (They must raise $250,000 in increments of $100 or less to qualify.) One such candidate, State Rep. Prasad Srinivasan (R-Glastonbury), who has already raised the requisite $250,000—and who voted for the budget, noted: “It’s going to be a different ballgame for all of us…Is this a perfect budget? The answer is, no. Is it a good budget? Yes. We have lived in excess all of these years.” Candidate Walker said if publicly-funded elections, which could cost more than $40 million in 2018, were eliminated, he would be able to more than make up for it, adding, however, that to be fair to those gubernatorial candidates who are far along in qualifying, the subsidy should be kept for the state’s highest office. Mr. Walker is running against House Speaker Joe Aresimowicz (D-Berlin).

The Steep Road to Chapter 9 Recovery. Detroit Mayor Mike Duggan likens the gathering regional bid to land Amazon’s second headquarters to delivering Detroit Super Bowl XL more than a decade ago; however, the, as a Detroit News editorial by the ever insightful Daniel Howes noted: “It’s not even close. The hunt for Amazon is far larger, far more competitive and far more likely to tax the ability of just about anyone to corral business, political and civic leaders around a deadline measured in weeks, not years. (The deadline is Oct. 19 to proffer a plan to compete for a $5 billion investment worth 50,000 jobs.) Mayor Mike Duggan noted that with fewer than five weeks to put together its proposal: “We’re up against really tough competition from really good cities.” Or, as the editorial notes: “Yes, we are—as Detroit Regional Chamber CEO Sandy Baruah learned this week when he flew to Toronto for a speech on trade between Canada and the United States. On the minds of the Canadian CEOs: luring Amazon’s massive economic play north of the border, no mean feat in the era of Trump.” Nonetheless, as the editorial added: “That’s not deterring Detroit’s mayor, facing re-election. It’s not deterring Quicken Loans Inc. Chairman Dan Gilbert, who quickly accepted Mayor Duggan’s offer to chair the regional effort to prepare an Amazon bid. And it’s not deterring local and state politicians, or a business community that is far more active in economic development efforts than their predecessors a decade ago…It shouldn’t: In fundamental ways, this region is different than the one industrialist Roger Penske shepherded through the process of bidding for a Super Bowl (at the personal request of Bill Ford Jr., whose family owns the Lions). It’s more competent, more confident and often more regionally cooperative. It has witnessed the deep costs of division and political corruption, of big business that worries more about bragging rights with competitors than being competitive. It’s tasted the ignominy of financial dissolution, and seen how private capital can breed renewal: Weathering the near-collapse of two Detroit automakers, the Great Recession, and the largest municipal bankruptcy in American history can do that. Seeing the crucial importance of individual leaders in a broader mosaic of leadership can, too. So can national embarrassment.”

Southeast Michigan is legendary for parochial infighting pitting city against suburb, for measuring solutions to difficult civic problems in decades, not years, for fixating on why change cannot happen instead of pushing to make it happen. Which raises a critical point that will be answered by the success of Gilbert & Co. to rally disparate leaders quickly around a cohesive bid: Were the speed and decisiveness of the auto restructuring, of the city’s financial workout, of the revitalization of downtown just historical aberrations? 

Or are they harbingers of a can-do future liberated from the confrontational zero-sum game that helped drive Detroit and its hometown auto industry to the edge of complete financial collapse? Look, no one should kid themselves: For a bid that seeks access to regional transit with connections to an international airport, the region that put America on wheels is woefully behind. For a bid that aims to create a second headquarters hub for one of 21st-century America’s iconic corporate brands, southeast Michigan isn’t too far removed from the stain of bankruptcy, municipal and corporate.

How indelible are those stains, if at all?

We’re about to find out.

“This is a no-lose proposition for southeast Michigan,” according to CAO Baruah of the Chamber. “Best case is we prevail under some very heavy competition. Even if we don’t win, but come close. It’s still a win for us. We learn how to do this well.” Whatever happens, business and political leaders arguably are more aligned around the economic way forward than any time in decades. The Democratic mayor of Detroit and the Republican governor coalesce around common problems, and more often than not so do their respective lawmakers.

Business leaders are more predisposed to dig into civic problems, with a dozen or so of their top leaders coming together in a new, still-unnamed group to champion reform. For the first time in a decade or more, Detroit’s automakers are led by longtime Michiganders — Mary Barra at General Motors Co. and Bill Ford and Jim Hackett at Ford.

Poverty declined and incomes rose last year in the Motor City, marking the first significant income increase recorded by the U.S. Census Bureau since the 2000 census, with Detroiters’ median household income up last year by 7.5% to $28,099 in 2016, according to U.S. Census’ American Community Survey estimates; ergo poverty dropped 4 percentage points to 35.7%‒the lowest level in nearly a decade—perhaps offering

Keystone Municipal Fiscal Erosion. Hazleton a small city of just over 25,000 in Luzerne County, is the county’s second largest city and the seventeenth largest city in the Keystone State—it was incorporated as a  borough 160 years ago, and then as a city on December 4, 1891. Now, Department of Community and Economic Development Secretary Dennis Davin has signed documents declaring Hazleton a “financially distressed” municipality under the state’s Act 47, effectively providing the Department the ability to solicit proposals on behalf of the city for professional management services. Mayor Jeff Cusat and City Council President Jack Mundie have been notified: the development puts the city in a position to apply for a $850,000 no-interest emergency loan that the state would make available via a revolving fund; Pennsylvania officials anticipate receiving a loan request from the city, since a consultative report that the Department prepared last month projects that Hazleton will face a $895,267 cash-flow shortage by the end of the year: a cash flow analysis projects $9,782,659 in expenses outpacing $8,887,392 in revenue for the year, according to the report—a report which unsurprisingly concludes: “This clearly is not fiscally sustainable, and it is projected that an extraordinary cash flow deficit will continue to exist.” Secretary Davin will have the final say whether to grant a loan to Hazleton; prior to that, she noted the City Council must adopt a resolution in support of the funding.

Council President Jack Mundie said that although he believes the city would have avoided Act 47 if the Mayor had followed the Council’s budget, the declaration leaves the city with little choice but to participate in the program. The city would have realized about $500,000 had the Mayor followed through with a plan to sell delinquent taxes to a collection agency and accepted another $220,000 payment from Hazleton City Authority in advance of land it expects to sell as the state looks to extend Route 424 into Humboldt Industrial Park. Mayor Cusat, however, has opposed paying fees related to the tax sale and has said he has seen no evidence that the land sale would take place this year to justify accepting the upfront payment—and, he has warned on several occasions that cash-flow issues put the city at risk of missing payroll; ergo, he believes it vital for the city to secure an emergency loan so that it may continue meeting payroll. He believes the city can make payroll on October 6th, provided the municipality takes advantage of a 30-day grace period for paying health insurance, explaining that is the date “when our quarterly health insurance payment is due, which is approximately $300,000. The only chance we have of making the Oct. 6 payroll is if I do not pay health insurance and I take advance of the 30-day grace period.” Council President Mundie added that he also does not want to see city workers go unpaid.

The $850,000 loan resolution was, thus, placed on yesterday’s meeting agenda: an offer Council President Mundie believed to be hard to refuse: “It’s payable over 10 years; there’s no interest; and payments are once a year: How can you refuse that money?” And, as Mayor Cusat noted: The city would confront severe repercussions if Council did not approve the loan resolution: “If they don’t pass it, the state has notified me that it’s almost guaranteed the city will be sent into immediate receivership—which has only happened once in the history of Pennsylvania: “I’m hoping that Council finally realizes how serious this problem is and agrees to the resolution,” adding there is a time element: the process for securing emergency funds could take up to 30 days, leaving no room for delays.  He also cited a recently released Communities in Crisis report prepared by Pennsylvania Economy League, “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” which he views as “critical” of Act 47: the report found that tax burdens have grown for all types of municipalities since 1990, even as municipal tax bases have been steadily shrinking since 1970: the report states that:

  • only one of the 14 municipalities which have participated in Act 47 had a tax base in 2014 that was at least on par with the tax base for communities that never participated;
  • that the tax burden for most Act 47 municipalities increased at a rate higher than non-Act 47 municipal averages; and
  • that six boroughs that exited Act 47 between 1990 and 2007 had tax bases that were significantly below the non-Act 47 borough average for 2014.

Or, as the report concludes: “This indicates that Act 47 was not successful in restoring tax base value to the boroughs that exited the program.” Thus, unsurprisingly, Council President Mundie fears the program would result in tax increases and the sale or lease of municipal authority assets—which the Council does not support, or, as he put it: “The state is going to force us into doing things we don’t want to do…I think [it] wants to sell the water and sewer (authorities).”  For his part, Mayor Cusat said the declaration of distress should not come as a surprise: when, previously, he tried to get the city to participate in the Early Intervention Program, he said that he learned the city had met two criteria to meet distressed status, ergo: “I’ve been warning council of this for the past year and a half, that we were headed in this direction: It shouldn’t come as a shock that Secretary Davin signed the documents.”

Shutting the Spigot? But tempus fugit: Pennsylvania state officials who confirmed Hazleton’s participation in Act 47 are expressing apprehensions with regard to how the House Republican’s fund transfers could impact the business community, specifically pointing to the removal of money from the Act 47 Revolving Aid Fund, a step which, if enacted, could pull the fiscal safety net out from under the state’s distressed communities: “Without this funding, cities would have a much more difficult time exiting Act 47,” according to Secretary Davin.

The Pennsylvania Economy League reports that fiscal decay has accelerated in all sizes of municipalities throughout the in its new report: “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” a report which examines 2,388 of the state’s 2,561 municipalities where consistent data existed from 1970, 1990, and 2014, considering, as variables, the available tax base per household, as well as the tax burden, a percentage of the tax base taken in the form of taxes to support local government services‒after which the municipalities were then divided into five quintiles, from  the wealthiest and most fiscally healthy to the most distressed—with Philadelphia and Pittsburgh excluded due to their size and tax structure. The League found that the tax burden has grown on average for all municipalities since 1990, but that the tax base has fallen, on average, in the state’s municipalities since 1970. In addition, the study determined that municipalities in Pennsylvania’s Act 47 distressed municipality program generally performed worse than average despite state assistance.

The study also found that communities which finance their own local police force, as opposed to those which rely solely on Pennsylvania State Police coverage, had double the municipal tax burden and ranked lower. (Readers can find the report in its entirety on the Pennsylvania Economy League’s website.) The League’s President, Chairman Greg Nowak, noted: “The first part of understanding and doing something about a crisis is understanding what it is,” adding that clearly the League believes the state’s local governments are in a fiscal crisis, comparing the new report to one the League released in 2006, which had warned of oncoming fiscal distress—a report, he noted, which had not galvanized either the state or its municipalities to take action. Gerald Cross, the Executive Director for Pennsylvania Economy League Central, said the study also found that tax bases in cities largely remained stagnant even as the local tax burden increased from 1990 to 2014, noting that all the state’s cities were in bottom-quintile rankings in 2014—and that while tax base generally grew in boroughs and first-class townships, the tax burden there also grew from 1990 to 2014; he added that the trend for second-class townships was mixed: while the tax base increased and more second-class townships moved into healthier quintiles, the tax burden also climbed from 1990 to 2014. Or, as Kevin Murphy, the President of the Berks County Community Foundation put it: “Pennsylvania’s system of local governments is broken and is harming the people living in our communities: It’s a system that was created here in Harrisburg [the state capitol], and it is Harrisburg which needs to fix it.” Pennsylvania has 4,897 local governments, including 1,756 special districts, cities, towns, and first, second, and third class townships.

Physical & Fiscal Destruction. Municipal fiscal analysts are apprehensive that Hurricane Irma’s physical and fiscal impact on Puerto Rico’s economy may be worse, because of the U.S. territory’s physical, fiscal, and capital debt—or, as Howard Cure of Evercore Wealth Management described it: “Entities that suffer a natural disaster need a strong balance sheet to take care of immediate clean-up and assessment needs until funding from the federal government and insurance companies becomes available.” The island lacks the requisite resources to recover on its own in the wake of a decade of fiscal deterioration—and now it is seemingly transfixed in the middle of a decade of fiscal decline, even as it is attempting to restructure its roughly $69 billion of public sector debt—and restore electricity to some 70% of the Puerto Ricans in the wake of Irma. Mr. Cure described Puerto Rico’s need to repair its power and water systems to be made more vital in the wake of many years of neglect, warning: Irma’s damage “could expedite the downward spiral of the economy and could cause even more of the workforce to leave.” Moody’s Investors Service senior credit officer Rick Donner added in his own fiscal apprehensions, writing: “Reports of widespread power outages that may persist for weeks in Puerto Rico following Hurricane Irma highlight longstanding liquidity pressures and an aging infrastructure that have beleaguered [the Puerto Rico Electric Power Authority] for many years: Long-term power outages will have negative impacts on PREPA’s revenues and will pose added challenges in Puerto Rico’s overall recovery from this natural disaster; Any damage from the storm will also add to the stress related to PREPA’s recent default and could impact ultimate recovery for bondholders.” Some fiscal and physical help could come from the PROMESA Oversight Board, where Executive Director Natalie Jaresko said, “We are working closely with Gov. Rosselló to coordinate support for Puerto Rico in the aftermath of the storm. We have also reached out to the federal government to activate Title V, which allows the board to work with agencies to accelerate the deployment of grants and loans following a disaster.”

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The Sinking Ships of States?

September 15, 2017

Good Morning! In this a.m.’s Blog, we consider the ongoing recovery in Detroit from the nation’s largest ever municipal bankruptcy, the unrelenting fiscal challenges for Flint; who voters in the fiscally insolvent municipality of East Cleveland will elect, the steep fiscal erosion for Pennsylvania’s local governments, and the uncertain fiscal outlook for Hartford.

Visit the project blog: The Municipal Sustainability Project 

The Steep Road to Chapter 9 Recovery. Poverty declined and incomes rose last year in the Motor City, marking the first significant income increase recorded by the U.S. Census Bureau since the 2000 census, with Detroiters’ median household income up last year by 7.5% to $28,099 in 2016, according to U.S. Census’ American Community Survey estimates; ergo poverty dropped 4 percentage points to 35.7%‒the lowest level in nearly a decade—perhaps offering a boost to Mayor Mike Duggan’s reelection hopes in November.  Despite the gains, however, Detroit is still the city with the greatest level of poverty in the country—and a city where racial income disparities continue to fester: income data indicates that the incomes of Hispanic and white Detroit residents grew significantly compared to blacks, who make up 79 percent of the city, according to Kurt Metzger, a demographer and director emeritus of Data Driven Detroit, or, as Mr. Metzger writes: “Overall it’s a great story for Detroit…But when you look beneath the surface, we still have a lot of issues. There is a constant narrative out there: Are all boats rising together?” Mayor and candidate for re-election Mike Duggan has made clear he understands there is more work to do: noting that forty-four people graduated last month from the Detroit At Work job training program, which launched last February and from which half have already received job offers, the Mayor told the Detroit News: “Income goes up when one, there is a job opportunity and two, when you have the skills to take advantage of it: As we raise the skills of our residents we will raise the standard of living.” Nevertheless, he added: “Nobody is celebrating a (35.7) percent poverty rate, but the progress is important and it took us years to get here.”

If one looks farther ahead, there might be even more hope: the new data found that fewer of Detroit’s children are living in poverty: the under 18 poverty rate has declined about 14 percent to its lowest level since 2009—albeit still over 50 percent, with the decline attributed to higher numbers of jobs, and, ergo, greater incomes, with Xuan Liu, the manager of research and data analysis for the Southeast Michigan Council of Governments noting that with more residents of the city working (the unemployment rate dropped nearly 25% from 20.6% to its lowest level (16.5%) since 2009), or, as Mr. Liu noted: “Eight years after Great Recession, (census) data is finally show some significant economic benefits for more Detroiters.”

Notwithstanding that good news, it has not been city-wide, but rather concentrated: the city’s 2016 median income remains 14.6% lower today than what residents were earning a decade ago: just $32,886 adjusted for inflation, and while the new census figures show some economic improvements in Detroit, a recent Urban Institute report finds the recovery is not even through the city, noting that tax subsidies and investments are disproportionately favoring downtown and Midtown, with the bulk of the recovery along Detroit River, the Central Businesses District and Lower Woodward Corridor—or, as Mr. Metzger noted, the Motor City still faces a challenge if all of its citizens and families are to participate in the recovery: he notes the 2016 income data shows the gains were realized by Hispanic and white residents, but not for blacks, or as he described it: “The people who are ready and able to take advantage of the turnaround are doing it but those who aren’t, haven’t.” Detroit’s Workforce Development Board has set an employment goal of an additional 40,000 residents to find jobs in the next five years.

Not in like Flint. Unlike Detroit, Flint realized no change in poverty or income: the city so fiscally and physically mismanaged by the State of Michigan via its appointment of a gubernatorial Emergency Manager remains the poorest city in the nation amongst all cities with populations over 65,000: the city’s poverty rate last year was 44.5%; median household income was $25,896—less than half Macomb County’s median household income of $60,143.

Vote! Brandon King is a step closer to remaining Mayor of East Cleveland. Mr. King won the Democratic primary in East Cleveland, with 44.3% of the 1,760 citizens who voted, so that he has narrowed the field: he will continue to defend his seat in November against activist Devin Branch, who is running as a Green Party candidate, after beating out three other candidates for the nomination: former Councilman Mansell Baker, school board President Una Keenon, and community leader Dana Hawkins Jr. Ms. Keenon was the runner-up with 30.3 percent of the vote: she previously served as East Cleveland’s judge. The incumbent, who became Mayor last December after a contentious recall election ousted former Mayor Gary Norton Jr. and Council President Thomas Wheeler, leading to two vacancies on City Council, which council members Barbara Thomas and Nathaniel Martin filled with Mr. Branch and Kelvin Earby—appointees Mr. King decided to be “unlawful,” claiming there were insufficient elected leaders to choose the members, so that he usurped that authority and then appointed his own: Christopher Pitts and Ernest Smith. Unsurprisingly, a lawsuit regarding the appointments is now before the Ohio Supreme Court, even as the city’s petition for chapter 9 remains before the State of Ohio. November will bring elector contests in Ward 3 and for two at-large seats. Notwithstanding that the small municipality of 18,000 is in a state of fiscal emergency, Mayor King has pivoted away from former Mayor Norton’s strategy of trying to merge the city with Cleveland or declare the city in chapter 9 bankruptcy: instead he and the rest of the Democratic candidates want to focus on economic development.

Keystone Municipal Fiscal Erosion. The Pennsylvania Economy League reports that fiscal decay has accelerated in all sizes of municipalities throughout the in its new report: “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” a report which examines 2,388 of the state’s 2,561 municipalities where consistent data existed from 1970, 1990, and 2014, considering, as variables, the available tax base per household, as well as the tax burden, a percentage of the tax base taken in the form of taxes to support local government services‒after which the municipalities were then divided into five quintiles, from  the wealthiest and most fiscally healthy to the most distressed—with Philadelphia and Pittsburgh excluded due to their size and tax structure. The League found that the tax burden has grown on average for all municipalities since 1990, but that the tax base has fallen, on average, in the state’s municipalities since 1970. In addition, the study determined that municipalities in Pennsylvania’s Act 47 distressed municipality program generally performed worse than average despite state assistance.

The study also found that communities which finance their own local police force, as opposed to those which rely solely on Pennsylvania State Police coverage, had double the municipal tax burden and ranked lower. (Readers can find the report in its entirety on the Pennsylvania Economy League’s website.) The League’s President, Chairman Greg Nowak, noted: “The first part of understanding and doing something about a crisis is understanding what it is,” adding that clearly the League believes the state’s local governments are in a fiscal crisis, comparing the new report to one the League released in 2006, which had warned of oncoming fiscal distress—a report, he noted, which had not galvanized either the state or its municipalities to take action. Gerald Cross, the Executive Director for Pennsylvania Economy League Central, said the study also found that tax bases in cities largely remained stagnant even as the local tax burden increased from 1990 to 2014, noting that all the state’s cities were in bottom-quintile rankings in 2014—and that while tax base generally grew in boroughs and first-class townships, the tax burden there also grew from 1990 to 2014; he added that the trend for second-class townships was mixed: while the tax base increased and more second-class townships moved into healthier quintiles, the tax burden also climbed from 1990 to 2014. Or, as Kevin Murphy, the President of the Berks County Community Foundation, put it: “Pennsylvania’s system of local governments is broken and is harming the people living in our communities: It’s a system that was created here in Harrisburg [the state capitol], and it is Harrisburg which needs to fix it.” Pennsylvania has 4,897 local governments, including 1,756 special districts, cities, towns, and first, second, and third class townships.

The Sinking Ship of State? Notwithstanding Gov. Dannel Malloy’s warning before dawn this morning that “The urgency of the present moment cannot be overstated,” the state’s legislators went home in the wake of failing to approve a two-year, $41 billion budget which would have created an array of new taxes and fees, but avoided any increase in the sales or income tax. Thus, in the wake of all-day fiscal marathon, Republicans sent their members home in a chaotic ending, blaming the inability of the other side had failed to marshal the requisite votes: House Speaker Joe Aresimowicz, after the Connecticut Senate had earlier given final legislative approval to a package of concessions expected to cover $1.5 billion of the estimated $5 billion state budget deficit through June of 2019, noted that still to be completed, however, is work on the rest of the budget, with the focus on financial aid to cities and towns (the biggest chunk of spending): he add ed that the detailed legal language in the budget, which had been delayed all day long, would not be ready until at least 6 a.m. this morning—with the Senate scheduled to convene at high noon. Notwithstanding the fiscal chaos, Senate Pro Tem leader Martin Looney (New Haven) said the Senate would convene at high noon today to vote on the budget, noting: “The problem is it’s not fully drafted… and what we agreed upon with the governor had not been fully reduced to language that everyone had signed off on: We didn’t have a hold-up in the Senate. We were ready to go forward,’’ raising the possibility that the House could vote later today.

Unsurprisingly, the sticking point appears to be taxes: A big problem appears to have stemmed from a proposal to tax vacation homes—a proposal which encountered opposition among Democrats, because non-residents cannot be taxed differently than residents of Connecticut. Negotiators had been relying on the tax to generate $32 million per year, fiscal resources which would not be available without support from moderate Democrats. The Democratic plan would add new taxes on cellphone bills and vacation homes, along with higher tax rates on hospitals, cigarettes, smokeless tobacco, and hotel rooms—and in an overnight development, a $12 surcharge on all homeowners’ insurance policies statewide for the next five years was proposed in order to help residents with crumbling concrete foundations. (Connecticut homeowners have been grappling for years with problems, and government officials have been unable to reach a comprehensive solution—mayhap Harvey and Irma have sent a physical fiscal message: more than 500 homeowners in 23 towns have filed complaints with the state; however Gov. Malloy fears that more than 30,000 homes could be at risk. The emerging fiscal compromise would also add new taxes on: ride-sharing services, non-prescription drugs, and companies that run fantasy sports gambling. In addition, the package includes more than $40 million as a set aside as part of a multi-pronged effort to help Hartford avert chapter 9 municipal bankruptcy—as well as increased funding for municipalities, even as it avoids deep cuts in public education which had been promised by Gov. Malloy via an executive order to trigger effective October 1st, warning: “The urgency of the present moment cannot be overstated: Local governments, community providers, parents, teachers and students—all of them are best served by passing a budget, and passing it now.”

The fiscal roilings came in the wake of Moody’s statement earlier in the week that Hartford’s “precarious liquidity position could result in insufficient cash flow to meet upcoming debt obligations…Additionally, the city has debt service payments in every month of the fiscal year, compounding the possibility of default at any time.” Interestingly, Gov. Malloy, earlier this week, noted that municipal bondholders and unions hold the key to whether Hartford would file for chapter 9 bankruptcy: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues…on the other hand, if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided.”

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.

The Long Fiscal Road out from State Fiscal Oversight

07/21/17

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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.

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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.

The Knife Edges of Municipal Bankruptcy

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Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal pipeline to the recovery for the City of Flint, the outcome of a Pennsylvania grand jury investigation of the near municipally bankrupt Pennsylvania capital city of Harrisburg, before addressing the .growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico.

In Like Flint? The Michigan legislature has finally agreed to appropriate $20 million to make the requisite match in order for some $100 million in federal aid to go to the city, with the funds to be used to replace corroded pipes which leached lead into the city’s drinking water system, creating not just grave health repercussions, but also devastating the city’s assessed property values and public safety budgets. The city’s near insolvency, which had come in the wake of the decisions which lead to the water contamination by a gubernatorially appointed Emergency Manager, may mark one of the final chapters to the city’s physical and fiscal recovery.

A State Capital’s Near Bankruptcy. Pennsylvania’s capital city, Harrisburg, chartered as a city the year the Civil War commenced, which came close to filing for chapter 9 municipal bankruptcy, will, in its proposed budget for the upcoming fiscal year, follow a court-approved bankruptcy plan, with slightly more revenues than expenditures, except that the city does not expect to be able to hire police as fast as called for in its budget. At a workshop this week, the first of several planned before the City Council votes on the budget for FY2017-2018, the proposed plan proposes minimal increases in most departments, as total revenue is expected to climb to $119.86 million, an increase of about $7 million from last year. City Manager Mark Scott, in a memo to the Council prior to its consideration of the budget, wrote: “In developing our budget recommendations, it is obvious we do not have anywhere near the money we would like to have…Nor is that likely to change any time soon. We cannot expect to address our future by replicating our past. We will have different staffing than in the past and different service delivery expectation. Right now, we are budgeting to establish a solid base—meaning staff skill sets and new, efficient systems/processes.”

In the city, where taxpayers and residents, as well as city officials, consistently list public safety as a top priority, Harrisburg’s five-year plan to increase spending on police was a keystone of the city’s plan of debt adjustment, which was officially confirmed in February. Nevertheless, while the Police Department budget, at $72 million, meaning it is more than 60 percent of the total general fund budget, calls for a significant increase in hiring, and recruiting. City Manager Mark Scott, however, warned that the issue involves more than the budget: “We’re getting people into the academy as fast as we can,” as he advised he hopes the city to realize “a net increase of 18 officers by the end of the year.” Following a trend that began before the 2012 bankruptcy filing, the city again plans to have fewer employees than the year before. This year, however, that is primarily due to the new voter-approved city charter, which transfers sewer workers from the city to the independent Water Department: the new budget authorizes 746 positions, compared to 763 one year earlier.

Tropical Fiscal Typhoon. Puerto Rico, the insolvent U.S. territory, is trapped in a vicious fiscal and physical whirlpool where the austerity measures it has taken to meet its fiscal obligations to its creditors all across the U.S. have come at a steep fiscal and physical cost: some 30,000 public sector employees have lost their jobs, even as the nearly 75% increase in its sales and use tax has backfired: it has served to curtail shopping, adding to the vicious cycle of increasingly drastic fiscal steps in an effort to make payments to bondholders on the mainland—enough so that nearly 33% of the territory’s revenue is currently going to creditors and bondholders, even as its economy has shrunk 10% since 2006. Over this period, the poverty rate has grown to 45%, while the demographic imbalance has deteriorated with the exit of some 300,000 Puerto Ricans—mostly the young and better educated—leaving for Miami and New York. Puerto Rico and its public agencies owe $73 billion to its creditors, nearly five times greater than the nearly $18 billion in debts accumulated by Detroit when it filed for chapter 9 municipal bankruptcy four years ago in what was then the largest municipal bankruptcy in U.S. history. Now, with U.S. District Court Judge Laura Taylor Swain set to preside next Wednesday (Financial Oversight and Management Board of Puerto Rico, 17-cv-01578), we will witness a unique trial, comparable to those in Jefferson County, Detroit, Stockton, San Bernardino, etc.; however, here there will be differences compared to chapter 9, as there will be roles for both Puerto’s Rico, but also the PROMESA oversight board—with, presumably, both seeking a fiscal recovery, but unlikely to have comparable proposals with regard to the most appropriate and effective plan of debt adjustment. Perhaps the greatest challenge will be economic recovery: for Detroit, whose bankruptcy pales in comparison to Puerto Rico’s; Detroit was able to benefit from a constructive state role and an economy vastly boosted by the federal bailout of its gigantic auto industry. That contrasts with current federal laws discriminating against Puerto Rico’s economy vis-à-vis competitor Caribbean nations, and caught in a Twilight Zone between a state and municipality, with a stream of its young talent streaming to Miami and New York, leaving behind a demographic map of poverty, empty classrooms, and aging people—and dependent on sales taxes, but with sharp reductions in pensions almost certain to sharply and adversely affect sales tax revenues. Judge Taylor will require the wisdom and strength of Job.

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.”