Charting a Municipal Rovery Budget

April 5, 2018

Good Morning! In this morning’s eBlog, we shiver on the Appomattox River at first light in the historic Civil War municipality of Petersburg, a municipality which is on the rebound from virtual insolvency—in Virginia, where the state does not specifically authorize its municipalities to file a chapter 9 petition, but does impose a debt limitation barring any municipality from incurring debt in excess of 10% of the assessed valuation of taxable properties. It is a city, which has been, since the dawn of the republic, a strategic center for transportation and commercial activities, and it is a city, which came closest of any in the Commonwealth to filing for insolvency. But, in the wake of the appointment of a former city manager—as well as a state commission to provide assessment and evaluation of municipal fiscal well-being, it is, today, a city of 32,420 that is returning to fiscal health.

Setting the Path for a Strategic Recovery. In her first budget proposal for the historic Virginia municipality of Petersburg in the wake of its insolvency and near first-ever Virginia chapter 9 municipal bankruptcy, City Manager Aretha Ferrell-Benavides, who was hired last June just as consultants charged with turning around the city’s finances told the City Council that it needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies, Manager Ferrell-Benavides proposed a rebuilding budget–even as she  expressed cautious optimism to the Mayor and Council that Petersburg can overcome the challenges it faces and continue to restore its financial standing. Thus, she presented a $73 million proposed operating budget–one which focuses on public safety, more funding for the city’s chronically underperforming schools, but cuts to city departments.

In presenting her proposed FY2019 $102.6 million budget, she told the Mayor and Council the spending plan reflects five “strategic priorities,” led by a focus on establishing the city “as a structurally stable organization with a greater focus on customer service, efficiency, accountability, and transparency.” In addition, she added, she is proposing a budget, which aims to “strengthen our fundamental policy and process to achieve long-term fiscal stabilization.”

She cited other priorities, including boosting economic development, encouraging neighborhood revitalization, promoting community engagement, and neighborhood support. Noting that Petersburg confronts some uncertainty with regard to the levels of funding which will be available from the state and federal governments, Manager Ferrell-Benavides outlined revenue and spending plans, plans which, she advised, were based on “conservatism” in their projections, as she proposed an operating budget slightly under this year’s level–a reduction of about $305,000, or about 0.3 % from the amended budget for the current fiscal year–of which approximately 72% or $73 million would be for the operating budget–a 1.5% drop from the current level, while proposing a 6.4% increase in the capital budget for the city’s Utilities Fund, noting that public safety would remain the largest funding category, at about $18.9 million, or about 26% of the total, comparable to the current level. She proposed $13.6 million for the city’s second largest budget category, Social Services, unchanged from the current level services funding, but recommended an increase of about 3% for the city’s public schools, as part of what she asserted was a continuing effort to restore cuts which had been made during the city’s financial crisis in FY2016. For next year, she proposed that the budget allocate about $9.7 million to the school system, an increase of up about $271,000 from $9.5 million this year.

In a post General Revenue Sharing era, Petersburg, with a nearly 80% black population and where more than a quarter of its families are headed by a female householder with no husband present—and more than 11% of its households headed by a single person over the age of 65—has a median family income of $33,927, with nearly a quarter of its residents below the federal poverty level. It is a city, too, living with fear: on Wednesday, more than 100 guns were taken off the streets and destroyed by the order of Petersburg Police Chief Kenneth Miller, who described these as “illegal guns that were taken off streets.” Indeed, some nine months on the job, Chief Miller has been adamant about his decision to have the guns destroyed and not sold “to put these weapons back on the street for gain…We’re not going to take weapons of destruction and try to make a profit off of that.”

But, fiscally, the city appears to be on a strong road to recovery. Manager Ferrell-Benavides noted that the challenges that the Petersburg still faces include rising health care costs for city employees, aging water and sewer infrastructure, antiquated technology, the need to recruit and retain employees, and ongoing issues with billing and collections. Nevertheless, she said the city’s efforts to date have produced results, notably an improvement in Petersburg’s municipal bond rating from junk status to investment-grade, adding that her fiscal goal is  to wean the city off its use of revenue anticipation notes. Indeed, with her proposed five-year plan in place to build Petersburg’s cash reserve fund to $6 million, a remarkable turnaround from the city’s negative balance in place at the time of the financial crisis, she testified that her proposed budget was intended to help provide stability to city government by seeing the plan through, noting: “I am committed…and our team is committed, to be here for the next five years.” Her proposed $77 million operating budget would boost spending on public safety and restore 10 percent cuts to municipal workers’ pay, while shrinking a workforce that consultants had charged was bloated and structurally inefficient. 

In the wake of her predecessor, William Johnson’s firing for his role in dipping into the city’s rainy day fund two years ago, Ms. Ferrell-Benavides said big goals within her proposal include building up the reserve, reducing reliance on grant funding, and being conservative with estimates. She testified that her proposed budget, overall, represents a $1.1 million decrease from the FY2018 amended budget, and proposes increasing the reserve to $950,000, adding that the city’s reserve funds are out of the red–and, in good gnus, that Petersburg’s bond rating has been upgraded from junk bond status. She noted that Department heads had been instructed to trim their expenses by 10%, but that cutting salaries was not an option. Her proposed budget includes $18.93 million for public safety, a $3 million increase from two years ago–with the increase part of an effort to stem the exodus of public safety workers to surrounding counties. For the city’s kids, she proposed a budget increase of $300,000 over the current $9.7 million level, telling the Mayor and Council: “This is a big step for us. And that was part of the priorities. Our goal is to annually increase our investment in the school system.” 

The consultants are scheduled to be back in Petersburg later this week and will submit an updated report in the coming weeks. Their perspective will help, as the City Council begins the process drill down into the details over the next two months through work sessions and a round of community meetings—meetings scheduled to begin at the end of this month and finish by the end of May: the Council is scheduled to make its recommended changes to the city manager on May 22nd, after which the city has scheduled a public hearing on June 5, with the Mayor Council scheduled to act on final adoption on June 12th.  

Petersburg, a city still not completely free from the grips of financial crisis, has rolled out a $73 million proposed operating budget that emphasizes public safety, more money for chronically under performing schools, and cuts to city departments.

Advertisements

Governance in Recovering from Severe Physical and Fiscal Distress

March 2, 2018

Good Morning! In this morning’s eBlog, we consider the use of a municipality’s capital assets to get back on its fiscal feet; then we consider the fates, fiscal and physical, for many of Hurricane Maria’s Puerto Rican victims who have emigrated stateside. Are they “invisible Americans”?

Municipal Assets & Fiscal Balancing. In a surprising move, the Petersburg, Virginia City Council has unanimously adopted a motion to opt not to sell the municipality’s public water and wastewater assets, effectively ending a nearly yearlong debate with regard to whether or not to sell their public utility to Aqua Virginia and Virginia American Water, two private providers who had submitted bids in December of 2016—at a time when one of the nation’s oldest cities was on the precipice of insolvency. It would appear the decision was likely affected by several water main breaks and water boil notices in the city last month—forcing legislators and city leaders to act. In the wake of the breaks, Congressman A. Donald McEachin (VA-4) and the Virginia Conservation Network had joined forces to host a roundtable discussion on the dilapidated state of Petersburg’s water infrastructure. Under the successful motion, the Council instructed the City Manager to: 1) reject the offer made by Aqua Virginia; 2) discourage any future offers to purchase Petersburg’s water and wastewater assets; 3) reject the pending unsolicited proposal to purchase Petersburg’s water and wastewater assets. That is, the municipal fiscal and capital policy going forward is to concentrate all available city resources on devising a plan to improve the city’s collection rate—or, as Councilmember Cuthbert put it: “It was a diversion of energy…It diverted the city administration’s energy; it diverted the public’s energy; and it diverted the City Council’s energy.” Councilwoman Annette Smith-Lee noted: “For the citizens, their voice is their voice. We’re on Council because of them, and they did not want us to sell the water.”

Had the city opted to go forward with the proposed privatization and sale, the municipality would have lost control over setting the water rates—an important governance and fiscal issue, as neither the Council, nor many citizens support having a for-profit company to be in charge of the water rates. Previously, several Councilmembers had expressed skepticism about the sale of some of the city’s vital public infrastructure—even as former Richmond City Manager Robert Bobb’s Group, hired to take over the city in lieu of a chapter 9 municipal bankruptcy filing—had repeatedly made pleas to the Council to “open the envelope” and see what Aqua Virginia and Virginia American Water were offering for the system. Councilman Cuthbert noted: “Council realized that for us to sell our water and wastewater assets, it would have taken six affirmative votes, and the votes were not there.”

In the wake of that successful motion, Councilman Cuthbert told his colleagues he saw “no reason to go through another eight months of agony that was going to lead to nowhere.” The decision thus ended a year-long battle—or, as Mayor Sam Parham told his colleagues, Council Members had listened to citizens who were concerned about the sale, control over its water and sewer rates, and it never materialized. Barb Rudolph, one of those citizen leaders, where the citizen group Clean Sweep Petersburg, had questioned the idea from the Robert Bobb Group to privatize, especially after the consultants had departed Petersburg with what they had described as stabilized finances. Yet, even after offers by private companies were rejected, bids still continued to come in: obviously, private, for-profit corporations recognized intrinsic value in the system—and, of course, an opportunity for profit. Indeed, at a roundtable discussion about the city’s water and sewer infrastructure, City Manager Aretha Ferrell-Benavides acknowledged that Petersburg was still being pressured by a private vendor to sell its water and wastewater systems. The fact that Aqua Virginia leaders attended city meetings had not been lost on some residents—one even likened the private vendors to predators. Residents with Clean Sweep Petersburg took photos of empty chairs in the City Council chambers that they say Aqua Virginia executives vacated just after the Council’s vote. Now, city leaders say, energy should be devoted to improving the existing systems. In the past, necessary rate increases that the council approved were never implemented, in part because of turnover within city departments. In addition, billing issues that cost the utility system millions of dollars in recent years ended up slapping some residents with $4,000 bills, and the faulty rollout of a new utility billing system cost taxpayers upward of $1 million more. As recently as last week, some residents at the roundtable said their bills are still volatile. Ferrell-Benavides said a long-term plan to update the city’s infrastructure and improvements to the billing system are necessary and in the works.

For one of the nation’s oldest municipalities—a key city during both the Revolutionary and Civil Wars, a small, majority African-American municipality of just over 32,420, with a median household income of $33,927, where per capita income is about $18,535, and nearly 28% are below the poverty level—the politics of vital access to water matters.

The Physical & Fiscal Costs of Federalism. Physical catastrophes and federal insouciance can wreak terrible fiscal and human costs. In the case of Hurricane Maria, we can see those costs as not just fiscal, but especially in the welfare of our most vulnerable: young children and the elderly. More than 1,800 children have migrated from Puerto Rico and enrolled in Connecticut schools since Hurricane Maria decimated their homeland last September—a human and fiscal consequence of both the devastating physical and fiscal consequences, but also to the difficult fiscal challenges Connecticut is already confronting. Yet, unlike the federal government, Connecticut schools have scrambled to accommodate the new arrivals—most of them non-English speakers, and they have made such human, physical, and fiscal efforts notwithstanding the cash-strapped State of Connecticut. While Congress finally approved a compromise budget bill to provide millions of dollars to help schools care for displaced students (providing the equivalent of $8,500 for each displaced student, $9,000 for each one that is not English-speaking, and $10,000 for disabled students requiring special education); that still left a significant fiscal and physical burden for Connecticut, where State House Majority Leader Matt Ritter (D-Hartford) has set up a working group in the General Assembly to try to provide “one-stop shopping” for displaced Puerto Ricans who need assistance: he notes there “is no question that schools are looking for additional money” to accommodate the influx of unexpected students, many with special needs, and he is “very pleased” Congress finally offered some help. He believes the displaced student funding, part of the budget agreement’s $44 billion hurricane response package, will help. According to the Connecticut Department of Education, there were 1,745 displaced students in Connecticut schools as of mid-February—a slight reduction from the beginning of the year, as some families having opted to return to Puerto Rico or move to other states. Hartford, a city itself in difficult fiscal shape, finds its public schools have taken the bulk of the new arrivals, 376 at last count and 429 at the peak of the migration, followed by Waterbury, New Haven, and New Britain. Yet, while Congress finally provided some aid for displaced students, that aid appears unlikely to help school districts with the children who enroll next year.

Demographically Failing. While, as we noted above, there has been some federal and state aid to displaced children from Puerto Rico, the picture is more grim for Puerto Rico’s elderly: thousands of whom reside in vulnerable conditions outside the radar of government authorities, and too many of whom went hungry and thirsty due to mobility difficulties, or were unable to save their medicines due to the lack of light, without anyone knowing. Indeed, Department of the Family Secretary Glorimar Andújar described the challenge, because, in the wake of the physical destruction, the government lacked vital information with regard to where the most vulnerable were. Secretary Andújar noted the government neither knew where the most vulnerable lived, nor what their particular needs were. Thus, the devastating storm led her to acknowledge: “We have many elderly people in homes that we did not think were going to be in such high concentrations…Urbanizations complete with elderly people who depend on and are nourished by the help given by their neighbors…They are not necessarily under the jurisdiction of the Federal District, because we enter into protection. They are people who live alone and have particular needs, who are supplied by their neighbors: It is important, for future services that develop, to know where each of these populations are located.” That is, unlike children, who could be located via the school system—and could be lifted to accommodating state such as Connecticut, or depart with their families to Florida, Puerto Rico’s most vulnerable Americans were not only left behind, but also largely unaccounted for: as indicated, due to the nature of the services offered, the agency knows about elderly Americans only to the extent that they participate in their programs, such as Nutrition Assistance (PAN), protection services in cases of abuse or the homes of prolonged care—that is less than 3% of Puerto Rico’s nearly 860,000 senior citizens—where 36% live alone. This cohort, described by some as “that population that is most worrisome,” because they are older Americans who reside in the community, but have little support—or, as the Secretary put it: “They are invisible.”

During the most critical phase of the hurricane emergency many institutions did help many who live alone in their homes, offering food or extending electricity via long extension cords, those private efforts were far from sufficient for what is nearly a quarter of the population: In 2016, more than 23.5% of Puerto Ricans were 60 or older—compared to just 19.4% in 2011. It is almost like a teeter-totter, only where it is becoming increasingly fiscally and demographically imbalanced. Now, in the wake of the hurricane, and especially after the wave of immigration to the mainland by children and college-educated Puerto Ricans, estimates are that, by the next census, citizens over 65 will reach 30% of the population.  

To tend to these older Americans after Maria, Puerto Rico actually developed alternate methods of operation, especially because reliance on telephone communication was often impossible—the government sought to provide more personal contact and identify areas of what it deemed “high concentration,” utilizing contributions from organizations such as AARP to provide services. José Acarón, Puerto Rico’s AARP chapter president, stressed that there is “this older adult population, isolated, without a support network, living alone and mostly female, and they do not know where they are…We have to make a municipal census of needs and create community support mechanisms. Then we have to talk about different models of people supporting people, that work strategically and that is part of a plan.”

With estimates that 46.1% of Puerto Ricans live below the federal poverty level, Secretary Andújar said the Department had commissioned a study to verify socioeconomic changes, especially after Hurricane Maria, to the University of Puerto Rico, noting: “We hope to have a more up-to-date visibility of what the percentages are, what is going to throw us, what are the populations that are in those levels of poverty, and, obviously, how aligned our programs are towards services towards each one of those populations that results from the study.” She noted she was unable at present to be certain when that information would be ready. However, in the wake of Hurricane Maria, and by the end of last year, there were 35,000 new applicants for nutritional assistance. Demographer Judith Rodríguez reports that, taking into account only the difficulties brought by the emergency, she can say that the number of poor people on the island has increased: the most recent figures, from 2016, indicated that, in 30 municipios, 50% of the population lived in poverty, and that in six other towns, the figure reached 60%, adding: “Today, more than ever, families need the services offered by the government of Puerto Rico to respond to the changing needs of the people.”

What about the Youngest? Secretary Andújar reported her staff is aware of the possibility of an increase in the incidence of child abuse: “It is a reality for which we have been preparing. We are active with prevention mechanisms. After a phenomenon like the one suffered by the country, after months, it is expected that these indicators tend to increase.” Her agency noted that in the referrals from the last calendar quarter of 2017 of possible cases of abuse, the totals increased month after month, albeit they were below the records of the same period of the previous year. Due to the U.S. territory’s fiscal distress or quasi chapter 9 bankruptcy, her agency has taken a $605 million cut, with Gov. Ricardo Rosselló advising her: “You do not need more,” even as Larry Emil Alicea, president of the College of Social Work Professionals, notes: “Those who stay and cannot leave (from Puerto Rico), increase social stressors and may be associated with suicide rates: In the case of parents, protective capacities diminish and cases of child and adolescent abuse increase.”

Balancing Fiscal & Public Safety

January 9, 2017

Good Morning! In today’s Blog, we consider the potential fiscal impact of the expiration of the State of New Jersey’s public safety arbitration cap—with the expiration coming as Governor-elect Phil Murphy has been reviewing a report examining the implications for property taxes, state spending, collective bargaining agreements, and public safety. Then we journey south to witness the denouement of the fiscal siege of the historic municipality of Petersburg, Virginia.

Uncapping & Fiscal Impacts. The State of New Jersey’s statute capping public safety arbitration awards at 2% has been in effect for seven years—it was last extended in 2014. Now, with a new Governor taking office, Moody’s has warned that its expiration on the last day of 2017 is a credit negative for the Garden State—and for its municipalities and counties. Indeed, the New Jersey League of Municipalities has been joined by the New Jersey Association of Counties, the New Jersey Conference of Mayors, the New Jersey Chamber of Commerce, New Jersey Business and Industry Association, and the New Jersey Realtors Association to urge the new Governor and Legislature to support permanently extending the 2% cap Interest Arbitration Cap, noting that an expired cap would have a negative impact on property taxes and jeopardize the continued delivery of critical services, as well as adversely impact residential and commercial property taxpayers, working class families, and those on fixed incomes. The League’s President, Mayor James Cassella of East Rutherford, noted that the 2% Interest Arbitration Cap has controlled costs: without the cap, municipalities could see costly arbitration awards that would force local officials to reduce services or lay off employees to satisfy the arbitrator’s award and stay within the 2% levy cap. Similarly, New Jersey Association of Counties President Heather Simmons, a Gloucester County Freeholder, noted that failure to permanently extend the 2% cap on binding interest arbitration awards would inequitably alter the collective bargaining process in favor of labor at the expense of taxpayers, and lead to awards by arbitrators with no fiduciary duty to deliver essential services in a cost-effective manner.

Now Moody’s has moodily weighed in, deeming the expiration a credit negative for the state’s cities and  counties, as has Fitch Ratings.

In New Jersey, interest arbitration is a process open only to police and fire employee unions: it is a mechanism to resolve collective bargaining disputes between local governments and unions: when a public employer is unable to reach a contract agreement with a police or fire union, an arbitrator is called in to decide the terms of the contract. When the state adopted the 2 percent property tax levy cap, a separate 2 percent cap on interest arbitration awards was also imposed: that mandates arbitrators to take property taxes into account when issuing awards and providing local officials with a now proven and effective tool to contain property tax increases. The arbitration cap expired on Dec. 31; however, the property tax levy cap is permanent. The New Jersey League noted: “For nearly a decade, the 2 percent cap on binding interest arbitration awards has kept public safety employee salaries and wages under control simply because parties have been closer to reaching an agreement from the onset of negotiations. Moreover, the 2 percent cap on binding interest arbitration awards has established clear parameters for negotiating reasonable successor contracts that preserve the collective bargaining process and take into consideration the separate 2 percent tax levy cap on overall local government spending. And, importantly, the 2 percent cap on binding interest arbitration awards has not negatively impacted public safety services or recruitment.

In the wake of the expiration of the arbitration cap, it appears likely that arbitrator contract awards would exceed 2 percent. That would likely force cities and counties in the Garden State to reduce or eliminate municipal services—or go to the voters to seek approval to exceed the 2 percent property tax cap in order to fund an arbitration award.

Moody’s analyst Douglas Goldmacher moodily noted: “Given that salary costs are among the largest of municipal expenditures, the cost implications are obvious and considerable. The effect of this is, in most cases, unlikely to be rapid, but ultimately, the loss of the arbitration cap is likely to cause the sector’s credit quality to deteriorate…Although the cap has expired, and it may not be finished. Numerous local governments and local government advocacy groups support the arbitration cap. It is possible that the new governor and New Jersey state Legislature will revisit the matter. Until and unless that occurs, there will be a potentially dangerous mismatch between revenue and expenditures.” The statute, which caps public safety arbitration awards at 2%, came into force on January 1, 2011; it was extended for a three-year period in 2014 when it was last up for renewal. Mr. Goldmacher noted: “The cap played a major role in helping local governments manage public safety costs by instituting a limit on increases in police and fire salaries in arbitration and effectively tying the salary increases to the municipality’s or county’s revenue-raising capabilities…The cap’s expiration, should it prove permanent, is a credit negative for all local governments.” Mr. Goldmacher noted the cap’s existence has been a “valuable tool” in contract negotiations when police and firefighter unions with negotiators often forced to consider small salary increases. A September report by former Gov. Chris Christie’s appointees to the Police and Fire Public Interest Arbitration Impact Task Force stated that municipal property taxes jumped at an annual average of 7.19% for the five years prior to the cap compared to 2.41% since 2011. The report also estimated that the cap has saved taxpayers a collective $429 million. Thus, Mr. Goldmacher notes: “Given that salary costs are among the largest of municipal expenditures, the cost implications are obvious and considerable: Police and fire contracts often serve as a benchmark contract for other negotiations, which had the effect of making a 2% annual increase something of a standard target for most contracts, even for non-public safety collective bargaining units.” While it is possible the cap may be reinstated, Mr. Goldmacher added that as long as no action is taken to address the lapse, New Jersey’s cities and counties confront “a potentially dangerous mismatch” aligning revenue and expenditures, because of how much a 2% property tax cap law would limit their budgetary flexibility, writing: “The effect of this is, in most cases, unlikely to be rapid, but ultimately, the loss of the arbitration cap is likely to cause the sector’s credit quality to deteriorate,” he said. “The degree of deterioration will depend on the idiosyncratic qualities of the given community.”

For its part, Fitch wrote: “…the arbitration cap is beneficial to local government credit quality as it helps to align revenue and spending measures and supports structural balance in the context of statutory caps on property tax growth…bargaining groups may become more emboldened to pursue arbitration as opposed to voluntary settlement if the arbitration cap expires. Arbitration awards were significantly higher prior to the cap, ranging from 2.50% to 5.65% from 1993-2010, according to a report of the New Jersey Public Employment Relations Commission (PERC.)” Fitch also noted that the elimination of the arbitration cap “could force local governments to reduce governmental services and/or rely on one-time resources to accommodate higher wage expenses.”

The Fiscal Siege of Petersburg. Jack Berry, Robert Bobb, and Nelsie Birch, writing in a piece, “Overcoming the latest siege of Petersburg, referenced the city’s then vital role in the Civil War, where, as they wrote: “The series of battles known as the Siege of Petersburg lasted nine months and consisted of devastating trench warfare. It featured the largest concentration of African-American troops in the war, who suffered enormous casualties at the Battle of the Crater.” They went on to write: “Some would say that Petersburg has been under siege ever since the Civil War, that there is a siege mentality in the city. Petersburg even has a Siege Museum…But Petersburg has not always been under siege; it is not today, and it will not be tomorrow. Noting that Petersburg was once the second largest city in Virginia—and home to the largest number of free blacks in Virginia, they noted that it was once “a wealthy city, a major industrial center, and one of the largest rail hubs in the nation,” where, in the wake of the Civil War, a “coalition of Africa-American and white, populist Republicans, controlled the state legislature, which led to the creation of two large public institutions in the region: Virginia State University and Central State Hospital. Later, Fort Lee became another major economic engine for the area.” The authors noted, however, that “Jim Crow laws and Massive Resistance devastated the hopes and dreams of black citizens and fueled racial tensions. In 1985, one of the city’s largest employers, Brown & Williamson Tobacco, shut down its Petersburg factory. Later, Southpark Mall was located north of the city, sucking retail sales out of Petersburg.” These events adversely affected assessed property values—in turn reducing investment in public schools. The historic city seemed on a route to chapter 9 municipal bankruptcy—or being, as they wrote: “relinquishing city status—and being subsumed by neighboring jurisdictions,” all because of what they described as a “self-inflicted, mismanaged city government” which “ran itself into a ditch: In July of 2016, the city faced $18 million in unpaid bills. The budget was $12 million out of balance. Petersburg had nearly run out of cash and was dipping into every available pot of money, regardless of restrictions, to pay bills. A botched water meter conversion project impacted utility billings, which made the cash situation even worse.”

Because the Commonwealth of Virginia was apprehensive that a default by Petersburg would have had severe fiscal repercussions for municipalities across the state, the Commonwealth, as we have previously written, provided a consulting team to diagnose the fiscal issues and recommend fiscal measures—including, in its recommendations, pay cuts of 10 percent pay cuts for the entire city workforce. Even as the state-imposed overseer was acting, an aroused citizenry, via a grassroots group called “Clean Sweep,” attended every City Council session, demanding greater fiscal accountability. A year ago last October, former Mayor Howard Meyers and the City Council brought in a fiscal posse in an effort to restructure, hiring former Richmond City Manager Robert Bobb and his team, who set up a temporary war room in the City Hall building where General Robert E. Lee had met with his senior Confederate officers during the Siege of Petersburg. Mr. Bobb wrote of the fiscal war room: “We dug in for the long haul, with Nelsie Birch leading efforts to peel back layers of the financial onion. We got a handle on cash flow, figured out the extent of the unpaid bills, found checks stashed in drawers, arranged short-term financing, crafted a new budget, dramatically cut spending, put pressure on the city treasurer to collect taxes, and revamped the decrepit utility system…New financial policies were put in place; debt was restructured; water and sewer rates were increased to comply with debt covenants; the organization was right-sized; new managers were hired.”

Mr. Bobb described this war room process as one in which—at the same time—his team teamed with Mayor Sam Parham and the members of the Petersburg City Council “every step of the way,” to make the tough decisions, adding that, during this process, “Our strongest ally was the Governor’s Office, in particular, Virginia Secretary of Finance Ric Brown.” Indeed, by last November, external auditors reported a signal fiscal turnaround: Petersburg reported a year-end surplus of $7.2 million—and the report was on time; the auditor’s opinion was clean.

Recovering after a Quasi-State Takeover

December 8, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report that last night, House Republicans voted 235-193 to pass and send to the Senate a stopgap bill to keep the federal government open for another two weeks, freeing up space to finish both the federal budget for the year that began last October 1st—and to try to craft a conference report on federal tax reform. The House vote now awaits Senate action, where leaders plan to act swiftly to put the bill on President Trump’s desk and avoid a shutdown on Saturday.

.Visit the project blog: The Municipal Sustainability Project 

A Founding Municipality. Petersburg, Virginia—where archaeological excavations have found evidence of a prehistoric Native American settlement dated to 6500 BC, was, when the English first began to settle America, arriving in Virginia in 1607, in a region then occupied by Algonquin speaking early Americans—was founded at a strategic point along the Appomattox River. Nearly four decades later, the Virginia Colony established Fort Henry along the banks of the Appomattox River. The colony established Fort Henry—from which Colonel Abraham Wood sent several famous expeditions in subsequent years to explore points to the west; by 1675, his son-in-law, Peter Jones, who commanded Fort Henry opened the aptly named Peter’s Point trading post. In 1733, the founder of Virginia’s capitol of Richmond, Col. William Boyd, settled on plans for a municipality there—to be called Petersburgh—an appellation the Virginia General Assembly formally incorporated as Petersburg on December 17, 1748.

By the 20th century, the upward growth in one of the nation’s oldest cities peaked—at just over 41,000 residents: by 2010, the population had declined more than 20 percent—and the municipality had a poverty rate of 27.5%, double the statewide average, and nearly 33% greater than in 1999. The city’s largest employer, Brown & Williamson, departed in the mid-1980s. By last year, 100% of Petersburg School District students were eligible for free or reduced price lunch—even as the district lagged behind state graduation rates; the  and the rate of students receiving advanced diplomas. Last year, the city’s violent crime rate was just under twice the U.S. average. By 2014, Petersburg’s violent crime rate of 581 per 100,000 residents was nearly 30% higher than the violent crime rate in Danville—even though, unlike Danville, Petersburg is in the thriving Richmond metropolitan area—and has potential partners in higher education (Virginia State University and Richard Bland College) and philanthropy (Cameron Foundation), as well as a unique concentration of affordable, historic housing. Yet the city’s unassigned General Fund reverses grew from $20.4 million in FY2005 to $35.0 million by FY2014, or 55% of operating expenditures; it has very strong liquidity, with total government available cash equal to 11.5% of total governmental fund expenditures and more than ten times greater than annual debt service payments. Nevertheless, as we have previously noted, a state technical assistance team’s review last year determined that the City had exhausted most of its unrestricted reserves—also noting that in FY 2015, the City’s final budget called for General Fund revenue of $81.4 million and spending of $81.1 million, even as the municipality’s CAFR reported that actual revenue was $77 million, while spending was $82.9 million—leading to a conclusion that, based on General Ledger reports, all funds expenditures exceeded all funds revenue by at least $5.3 million.

Moreover, notwithstanding its string of operating deficits, Petersburg undertook a series of costly, low return economic development investments—purchasing a hotel, supporting a local baseball team, and building a new library—all investments beyond the city’s means. Nevertheless, after a state intervention, after nearly a decade of near insolvency, the city’s most recent Comprehensive Annual Finance Report demonstrates Petersburg is emerging from its fiscal bog—closing FY2017 having collected $73,069,843 in revenues, while spending $65,861,125 in expenditures: meaning the positive $7,208,718 difference nearly eclipsed the $7.7 million deficit which had been carried over from FY2016—unsurprisingly leading Blake Rane, the city’s Finance Director, to note: “We’re really excited about the changes that occurred in 2017: As the new administration, we are super excited that the road we have to go on is starting at a better position than where we thought it would be.” Similarly, Mayor Samuel Parham, at a news conference, noted: “We’re showing outside development that Petersburg is a safe investment…There was a time when people thought we were going to fall into the Appomattox.”

Much of the fiscal recovery credit, as we have previously noted, may be credited in part to strict expenditure practices instituted by the Robert Bobb Group, the turnaround team headed by the former City of Richmond Manager, which ran the city administration from October 2016 until September—where the team found Petersburg had always overestimated revenues, according to former Finance Director Nelsie Birch, so that the fiscal challenge was to get a “handle on spending,” a challenge met via the adoption of a very conservative FY2017 budget with a strong focus on improving Petersburg’s collection practices—including enforcement:  For the first time in several years, the city put delinquent properties up for tax sale—or, as City Manager Aretha Ferrell Benavides put it: “The new billing and collecting office is moving on collecting now: People are realizing that we’re not going to sit and wait.”  The results are significant: Petersburg’s fund balance is nearly at zero after dropping to a negative $7.7 million. Today that balance is a shadow of its former level at negative $143,933, and Manager Benavides notes: “We’re working on building up [the fund balance], because we’ve been very dependent on short-term loans through Revenue Anticipation Notes.”

Other key steps on the city’s road to recovery included selling excess water from the city’s water system, selling pieces of city-owned property, and even selling the city’s water system, or, as Mr. Bobb put it: “Moving forward, the city still needs that liquidity event (that was not intended to be a pun), because a major snowstorm, or a major water line break, sinkhole, etc., those things would be a significant drain on the city, unless it has a major fund balance.” As part of its fiscal diet, Manager Benavides notes Petersburg is still examining options to sell as many as 320 pieces of city-owned property, with the City Council already having approved the disposition of some of these properties over the past several months. The fiscal road, like the city’s history and geography, has been steep, but the fiscal exertions appear to be paying off, as it were.

Governance Amidst Fiscal and Stormy Challenges & Uneven Federalism

December 1, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s oldest municipalities, and its remarkable turnaround from verging on becoming the first municipality in Virginia to file for chapter 9 municipal bankruptcy, before veering south to assess what President Trump has described as the U.S. territory of Puerto Rico suffering from “from broken infrastructure and massive debt.” 

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Petersburg, Virginia’s City Council, one of the oldest of the nation’s cities, as part of its fiscal recovery, last week had voted 5-2 to request the Virginia Legislature to change the city’s charter in order to transfer the most critical duties of the Treasurer’s Office to a newly-created role of city collector—a position under the Council’s control, as part of its wish list for the newly elected state legislature. Petersburg, an independent city of just over 32,000, is significant for its role in African-American history: it is the site of one of the oldest free black settlements in the state–and the nation.  The unprecedented City Council effort seeks to strip power from an elected office—an office some believe curried some fault for contributing to Petersburg’s near chapter 9 municipal bankruptcy. Ironically, the effort came the same month that voters elected a former Member of the City Council to the office of Treasurer. Councilman Treska Wilson-Smith, who opposed the move, stated: “The citizens just voted in a Treasurer. For us to get rid of that position is a slap in the face to the citizens who put them in there.” Unsurprisingly, State Senator Rosalyn Dance, who for a dozen years has represented the city as part of her district in the Virginia House of Delegates, and who will consider the city’s legislative agenda, said she was concerned. Noting that the newly-elected treasurer has yet to serve a day in office, she added that much of the turmoil had to do with the current Treasurer, so, she said: “I hope [the] Council will take a second look at what they want to do.” Former Councilman and Treasurer-elect Kenneth Pritchett, who declined to comment, ran on a platform of improving the office’s operations by standardizing internal controls and implementing new policies: he urged Petersburg residents to contact lawmakers in a Facebook message posted after the Council took action, calling the decision “a prime example of total disrespect for the citizens’ vote.”

Nevertheless, Council Members who supported the legislative agenda language said it was time for a change, or, as Councilman Darrin Hill noted: “I respect the opinion of the citizens, but still, we believe if we keep on doing the same thing that we have done, then we will keep on getting the same results.” Other Councilmembers felt even better about their votes after the Council received good financial news earlier this week when newly audited reports showed a boost in Petersburg’s reserve funds, increased revenue, and a drop in expenditures—a marked fiscal reversal. In addition, the city’s external auditor provided a clean opinion—a step up from last year’s “modified” opinion—an opinion which had hinted the city had failed to comply with proper accounting principles—and a municipal fiscal year which commenced $19 million in the hole—and $12 million over budget—in response to which the Council raised taxes, cut more than $3 million in funding from the city’s chronically underperforming schools, eliminated a popular youth summer program, and closed cultural sites. Former Richmond City Manager Robert Bobb’s organization—which had been hired to help the city recoup from the verge of chapter 9 municipal bankruptcy, had supported transferring some of the duties of the Treasurer to a city collector position as a means to enhance the city’s ability to improve its tax collections.

Subsequently, late last September, another shoe fell with a 115-page report which examined eight specific aspects of city governance—and found allegations of theft involving current Treasurer Kevin Brown—claims Mr. Brown repeatedly denied, but appeared to contribute to his decision not to run for reelection—an elected which Mr. Pritchett won by a wide margin, winning just over 70 percent.  Nevertheless, Mayor Samuel Parham told his colleagues: “We are treading too thin now to risk someone who is just getting to know the job. We can’t operate as a city of hoping…Now that we are paying our bills and showing growth, there is no need to go back in time and have a situation that we had.” However, some Councilmembers believe they should await more facts with regard to Mr. Brown’s actions, especially with regard to uncollected municipal tax revenues, or, as Councilmember Wilson-Smith put it: “There are some questions which we still have unanswered when it comes to why the taxes were not collected: It appears to me that a lot of the taxes are not being collected, because they are un-collectable,” or, as she noted: Many listed for unpaid taxes were deceased.

David Foley with Robinson, Farmer, Cox Associates, Petersburg’s external auditor, had presented figures before Petersburg residents and the City Council, noting the clean opinion is a substantial improvement from last year, when auditors issued a modified opinion which suggested Petersburg had failed to maintain accounting principles—testifying that the improvement mainly came from the city being able to provide evidence of the status of some of its major financial accounts, such as public utilities. He did recommend that Petersburg strengthen some of its internal controls over the next fiscal year—noting, especially, the reconciliation of the city’s public utility system, which some officials have suggested should be sold to private companies. Indeed, City Manager Aretha Ferrell-Benavides told City Council members that a plan to correct some of the deficiencies will start in January, with monthly updates on corrective actions that she would like to continue to take. The see-saw, key fiscal change of nearly $2 million more than had been projected arose from a combination of increased real estate tax collections, and a $2.5 million reduction in expenditures, mainly came from health and welfare, and non-departmental categories: in total, there was a $7.5 million increase in the city’s chief operating fund. Unsurprisingly, Mr. Foley, in response to Councilmember Charlie Cuthbert, noted: “It was a significant year. There is still a long way to go,” indirectly referencing the city’s commencement of FY2017 $19 million in the hole and $12 million over budget—and with dire threats of legal action over unpaid bills—triggering a tidal wave of legal bills of nearly $1 million—of which about $830,000 went to Mr. Bobb’s group—while the city spent nearly $200,000 on a forensic audit.  Council members received the presentation on the annual financial report with a scant two days prior to the state imposed deadline to submit the report—after, last year, the city was about seven months late in submitting its annual financial report.

Insufficient Shelter from the Fiscal Storm. In the brutal wake of Hurricane Maria, which destroyed about 57,000 homes in Puerto Rico last September and left another 254,000 severely impacted, 50 percent of the U.S. territory’s remaining 3.5 million inhabitants are still without electricity—a lack that has adversely impacted the ability to reconstruct the toll wrought by Maria, not to mention the economy, or loss of those, more than 150,000, who could afford to leave for New York and Florida. Puerto Rico still confronts a lack of drinking water. Governor Ricardo Rosselló had assured that 95% of the island would have electricity by today, but, like too many other promises, that is not to be. An irony is that the recent visit of former President Bill Clinton, who did not come down to toss paper towels, but rather to bring fiscal and physical assistance, may be, at long last, an omen of recovery. It was just 19 days ago that Gov. Roselló appeared before Congress to request some $94 billion to rebuild the U.S. territory—a request unmet, and a request raising questions about the Puerto Rican government’s ability to manage such a vast project, especially in the wake of the $300 million no-bid contract awarded to a small Montana utility company, Whitefish, to restore the territory’s power—an effort House Natural Resources Committee Chair Rob Bishop (R-Utah) described as raising a “credibility gap.” Indeed, in the wake of that decision, Chairman Bishop and others in the Congress have called for the unelected PROMESA Financial Oversight and Management Board, known on the island as “la junta,” to extend its powers to overseeing the rebuilding effort as well—a call which, unsurprisingly, many Puerto Ricans, including pro-statehood Governor Rosselló, see as a further threat to their democratic rights. 

Nevertheless, despite the quasi-takeover threat from Congress, U.S. District Court Judge Laura Taylor Swain has denied the PROMESA Oversight Board’s request to appoint an emergency manager, similar to those appointed by Gov. Rick Snyder in Detroit, or by the former Governor of Rhode Island for Central Falls under their respective authority under state authorizations of chapter 9 municipal bankruptcy. Puerto Rico, because it is not a state, does not have such authority; consequently, Judge Swain has determined the Board does not have the authority to appoint public officials—a holding which Gov. Rosselló responded to by noting that the decision upheld his office’s position about the board’s power, writing: “It is clear that the [board] does not have the power to take full control of the Government or its instrumentalities…[T]he administration and public management of Puerto Rico remains with the democratically elected government.

Post-Chapter 9 Elections–and Post Physical & Fiscal Storms

November 6, 2017

Good Morning! In today’s Blog, we consider yesterday’s election results in municipalities we have followed through their fiscal stress or chapter 9 municipal bankruptcy, including: Flint, and Detroit, in its first Mayoral election since emerging from chapter 9, Then we turn to the historic municipality of Petersburg, Virginia—a municipality which avoided chapter 9 thanks to state intervention. Finally, we consider U.S. District Court Judge Laura Swain’s approval yesterday of an urgent motion from the government of Puerto Rico and the Fiscal Oversight Board (JSF) that requires all federal funds to be allocated for the tasks of assistance and recovery in the wake of Hurricane Maria, removing said funds from possible use in restructuring the U.S. territory’s restructuring of its public debt.

Visit the project blog: The Municipal Sustainability Project 

In Like Flint. Flint Mayor Karen Weaver yesterday prevailed over City Council member Scott Kincaid in a recall election involving 18 candidates, retaining the city’s proposed 30-year agreement with the Detroit water system, with Mayor Weaver prevailing by a 53-32 percent margin, according to the unofficial results. The recall had arisen from a controversy related to the Genesee County’s garbage contract: Mayor Weaver had pressed for an emergency trash collection contract with the former Rizzo Environmental Services in Macomb County over City Council opposition. The controversy arose because a former trash provider, Chuck Rizzo, and his father have reached plea deals with federal prosecutors and are expected to plead guilty this month for their roles in a wide-ranging public corruption scandal in Macomb County—a scandal which has, so far, led to criminal charges against 17 persons. The recall also came amid Mayor Weaver’s ongoing struggle with the Flint City Council with regard to the approval of a 30-year agreement with the Detroit area Great Lakes Water Authority—with City Council opposition arising from apprehension about increased water rates—and in response to last month’s decision by U.S. District Court Judge David Lawson taking the small city to task for failing to act on an April agreement supported by Mayor Weaver, the State of Michigan, and EPA which would have Flint remain on the Detroit area water system. Flint had been supposed to switch to the regional Karegnondi Water Authority; however, Mayor Weaver’s administration rejected that option, because updating of the Flint water treatment facility had been projected to cost more than $68 million and to consume more than three years to complete. The Flint Council had disregarded Judge Lawson’s decision, and approved a two-year extension of service with the Great Lakes Water Authority. Thus, while the prior agreement with the Detroit area water authority had lapsed, Mayor Weaver, the State of Michigan, the Great Lakes Authority, and other supporters have revived the agreement. Last week, the Michigan Department of Environmental Quality had filed an emergency motion asking Judge Lawson to approve giving Mayor Weaver the authority to sign the renewed contract by Election Day, because of the inability of the City Council to act—a request from the state which the Judge rejected; however, he has scheduled a hearing on the motion later this month.

Motor City Victory Lap. Detroit Mayor Duggan was re-elected yesterday by more than a 2-1 margin over challenger State Sen. Coleman A. Young II, son of a former Detroit Mayor. In remarks after the decision, Mayor Duggan  noted: “I have been treated with nothing but warmth and kindness from Detroiters in every neighborhood in the city…I hope that this is the year where we put us-versus-them politics behind us forever because we believe in a one Detroit for all of us.” His opponent, in conceding, claimed he had commenced a movement to help the politically dispossessed: “The campaign might be over, but the passion and values are eternal…We are the voice for the voiceless. We are the hope for the hopeless.” Mayor Duggan, who won a write-in primary campaign in 2013 and then defeated Wayne County Sheriff Benny Napoleon in the general election, thus became the Motor City’s first mayor to serve two terms since Dennis Archer in the 1990’s.  In his campaign, the former CEO of the Detroit Medical Center gained prominent endorsements from city labor unions, clergy, and business groups—he overwhelmed his opponent in fundraising: he secured about $2.2 million; whereas Mr. Young raised just under $39,000. Mayor Duggan, in his victory remarks, noted his campaign had focused on spending “time talking about the vision of what we are going to do in the next four years,” adding: “I thought one of the most profound things President Obama ever said was ‘If you have to divide people in order to get elected, you’ll never be able to govern.’”

In his campaign, Mayor Duggan touted public service improvements under his administration in the wake of the nation’s largest-ever municipal bankruptcy, including new streetlights, improved public safety response, and more dependable bus lines. He said he intends to continue work on building a more unified Detroit—focusing now on a series of efforts to fix up neighborhood corridors, roads, and sidewalks—and stating: “There are haves and have-nots in every city in America. We’re building a city here that it doesn’t matter where you start, you have the opportunity to be successful,” adding that he believe the greatest challenge now confronting Motor City residents will be over automobile insurance reform legislation—referring to legislation rejected by the Michigan House last week, but making clear he does not intend to give up: “We were a lot closer this time than we were two years ago, and we have a plan to get it through the next time: It’s going to be one relationship at a time, one vote at a time, but we’ve already had several meetings with both the medical and the legal community, and I think they realize we were three votes away.” 

The Road Out of State Oversight. The re-election comes at a critical time, as the City expects to have its full municipal fiscal authority restored next spring for the first time since it exited the nation’s largest ever chapter 9 municipal bankruptcy three years ago—challenging the city’s appointed and elected leaders with the task of resuming governance after the end of state oversight—and as the Mayor and Council resume authority over budgets and contracts. With two balanced budgets and an audit of a third expected next May, city leaders anticipate Detroit will be released early next year from the strict financial controls required under the city’s approved plan of debt adjustment—a key issue during the just completed campaign, where both the Mayor and his challenger had proposed plans with regard to how they would fiscally guide the recovering city—and as Michigan Governor Rick Snyder expressed optimism about the city’s ability to manage its finances, telling the Detroit News: “They’ve been hitting those milestones, and I hope they continue to hit them—that’s a good thing for all of us.”

Indeed, the Motor City’s credit rating has been upgraded; its employment rate is up; assessed property values are climbing. In its financial update last month, the city noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts, and growth in multifamily home construction. Nonetheless, the road to recovery will remain not just steep, but also pot-holed: it confronts very large future payments for past borrowing and public pension obligations under the plan of debt adjustment—or, as our colleague Lisa Washburn of Municipal Market Analytics noted: “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there…Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Petersburg. In one of the most closely watched municipal elections in Virginia, last night, Gloria Person-Brown, the wife of the current embattled City Treasurer Kevin Brown of Petersburg, was trounced by former City Council member Kenneth Pritchett, with Mr. Pritchett winning by a large margin: he captured more than 70 percent of the vote. In his campaign, stating he had been frustrated by the city’s low credit rating, and by the city’s struggles with collecting revenue and timely payment of bills, Mr. Pritchett vowed he would implement policies and standardize internal controls to improve the office’s operations. Likely, in the wake of a Virginia state fiscal report last September—a report which scrutinized eight specific aspects of city governance and fiscal responsibilities—and contained allegations of theft involving Ms. Person-Brown’s husband, City Treasurer Kevin Brown. Some Council members then had called for his resignation, and even Ms. Person-Brown had distanced herself from her husband’s actions during the election, albeit she did not say he had done anything wrong. Rather she ran on a platform of improving the Treasurer’s services, including instituting more checks and balances, and calling for more accountability.

Stepping in to Help Puerto Rico. U.S. District Court Judge Laura Taylor Swain has approved, with various changes, an urgent motion from the government of Puerto Rico and the PROMESA Fiscal Oversight Board which mandates that all federal funds to be allocated to the country for the tasks of assistance and recovery due to the passage of Hurricane Maria may not be claimed in the process of restructuring the public debt, accepting to the request of the Authority for Financial Supervision and Tax Agency and the JSF during the general hearing held in New York City‒in which it emerged that, in part, the order would restrict the use of disaster assistance funds as a condition of the federal government, so that Puerto Rico can receive assistance: the order will establish that the Federal Emergency Management Agency (FEMA) funds for Puerto Rico following in the wake of Hurricane Maria, as well as funds granted by other federal agencies, will be maintained. Judge Swain granted the order after listening to the arguments of Suzanne Uhland, legal representative of AAFAF, as well as lawyers from municipal insurers and the organized group of General Obligations bondholders (GOs), who underscored the need to incorporate into the order transparency criteria and mechanisms to ensure that some entity such as the JSF has influence in how federal funds granted by the government will be used. Matthew J. Troy, the federal government’s representative in the case, told Judge Swain that to include specific language which would give the Puerto Rican government priority in claiming funds that had been misused by state agencies or public corporations in the Island was indispensable for Puerto Rico to receive funds from the federal government: as part of the order, it would be established that, in the event federal funds were misused, it will be up to the central government to claim these funds from the agency or public corporation which received them from the federal government. Judge Swain has scheduled a follow-up hearing for next Wednesday.

During the hearing, an attorney, Marcia Goldstein, pointed out that it is urgent to know what role if any the Junta de Supervisión y Administración Financiera for Puerto Rico (the JSF) will have with regard to the approval of the contracts for the recovery tasks. The PROMESA law establishes, among other things, that the federal agency has the power to review the contracts granted by the Puerto Rican government or the dependencies subject to the control of the JSF. To date, however, it is uncertain whether the JSF has examined or had influence in the process of hiring dozens of companies which would be responsible for multiple tasks, from infrastructure repair to the audit of federal funds. In an interview with the Puerto Rican El Nuevo Día a little over a week ago, House Speaker Paul Ryan (R-Wis.), in the wake of his visit to Puerto Rico, pointed out that the JSF will have a key role in defining the scope of the aid package that Puerto Rico would need and how such resources would be allocated.

The Steep & Ethical Challenges in Roads to Fiscal Recovery

October 17, 2017

Good Morning! In today’s Blog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in American history; then we turn to the Constitution State, Connecticut, as the Governor and State Legislature struggle to reach consensus on a budget, before, finally, returning to Petersburg, Virginia to try to reflect on the ethical dimensions of fiscal challenges.

Visit the project blog: The Municipal Sustainability Project 

The Motor City Road to Recovery.  The City of Detroit has issued a request seeking proposals to lead a tender offer and refunding of its financial recovery municipal bonds with the goal of reducing the costs of its debt service, with bids due by the end of next week, all as a continuing part of its chapter 9 plan of debt adjustment. The city has issued $631 million of unsecured B1 and B2 notes and $88 million of unsecured C notes. The bulk of the issuance is intended to secure the requisite capital to pay off various creditors, via so-called term bonds, 30-year municipal debt at a gradually sliding interest rate of 4% for the first two decades, and then 6% over the final decade, as the debt is structured to be interest-only for the first 10 years, before amortizing principal over the remainder of the term, with the city noting: “It is the city’s goal to alleviate the significant escalation of debt service during the period when principal on the B Notes begins to amortize, and that any transaction resulting from this RFP process be executed as early as possible in the first quarter of 2018.” According to Detroit Finance Director John Naglick, “Those bonds are traded very close to par, because people view them as very secure…Those bondholders feel really comfortable because they see the intercept doing what it was designed to do.” The new borrowing is the city’s third since its exit from chapter 9 municipal bankruptcy, with the prior two issued via the Michigan Finance Authority. Last week the city announced plans to utilize the private placement of $125 million in municipal bonds, also through the Michigan Finance Authority, provided the issuance is approved by both the Detroit City Council and the Detroit Financial Review commission, with the bonds proposed to be secured by increased revenues the Motor City is receiving from its share of state gas taxes and vehicle registration fees.

Fiscal TurmoilConnecticut Gov. Dannel Malloy yesterday released his fourth fiscal budget proposal—with the issuance coming as he awaits ongoing efforts by leaders in the state legislature attempting to reach consensus on a two-year state budget, declaring: “This is a lean, no-frills, no-nonsense budget…Our goals were simple in putting this plan together: eliminate unpopular tax increases, incorporate ideas from both parties, and shrink the budget and its accompanying legislation down to their essential parts. It is my sincere hope this document will aid the General Assembly in passing a budget that I can sign into law.” The release came as bipartisan leaders from the state legislature were meeting for the 11th day behind closed doors in a so far unrewarding effort to agree on a budget to bring to the Governor—whose most recent budget offer had removed some of the last-minute revenue ideas included in the Democratic budget proposal. Nevertheless, that offer gained no traction with Republican legislators: it had proposed cuts in social services, security, and clean energy—or, as the Governor described it: “This is a stripped down budget.” Specifically, the Governor had proposed an additional $144 million in spending cuts from the most recent Democratic budget proposal, including: nearly $5 million from tax relief for elderly renters; $5.4 million for statewide marketing through the Department of Economic and Community Development; $292,000 in grants for mental health services; $11.8 million from the Connecticut Home Care Program over two years, and; about $1.8 million from other safety net services. His proposed budget would eliminate the state cellphone tax and a statewide property tax on second homes in Connecticut, as proposed by the Democrats; it also proposes the elimination of the 25 cent fee on ridesharing services, such as Uber and Lyft, and it reduces the amount of money Democrats wanted to take from the Green Bank, which helps fund renewable energy projects. His proposal also recommends cutting about $3.3 million each year from the state legislature’s own budget and eliminates the legislative Commissions for women, children, seniors, and minority communities—commissions which had already been reduced from six to two over the past two years. The Governor’s revised budget proposal would cut the number of security staff at the capitol complex to what it was before the metal detectors were implemented—proposed to achieve savings of about $325,000 annually, and the elimination of the Contracting Standards Board, which the state created a decade ago in response to two government scandals—here for a savings of $257,000.

For the state’s municipalities, the Governor’s offer proposes phasing in an unfunded state mandate that municipalities start picking up the normal cost of the teachers’ pension fund: Connecticut municipalities would be mandated to contribute a total of about $91 million in the first year, and $189 million in the second year of the budget—contributions which would be counted as savings for the state—and would be less steep than Gov. Malloy had initially proposed, but still considerably higher than many municipalities may have expected. Indeed, Betsy Gara, the Executive Director of the Council for Small Towns, described the latest gubernatorial budget proposal as a “Swing and a miss: The revised budget proposal continues to shift teachers’ pension costs to towns in a way that will overwhelm property taxpayers,” adding that if the state decides to go in this direction, they will be forced to take legal action, because requiring towns to pick up millions of dollars in teachers’ pension costs without any ability to manage those costs going forward is ‘simply unfair.’” Moreover, she noted, it violates the 2008 bond covenant.

In his revised new budget changes, Gov. Malloy has proposed cutting the Education Cost Sharing grant, reducing magnet school funding by about $15 million a year, and eliminating ECS funding immediately for 36 communities. The proposal to eliminate the ECS funding would likely encounter not just legislative challenges, but also judicial: it was just a year ago that a Connecticut judge’s sweeping ruling had declared vast portions of the state’s educational system as unconstitutional, when Superior Court Judge Thomas Moukawsher ruled that Connecticut’s state funding mechanism for public schools violated the state’s constitution and ordered the state to come up with a new funding formula—and mandated the state to set up a mandatory standard for high school graduation, overhaul evaluations for public-school teachers, and create new standards for special education in the wake of a lawsuit filed against the state in 2005 by a coalition of cities, local school boards, parents and their children, who had claimed Connecticut did not give all students a minimally adequate and equal education. The plaintiffs had sought to address funding disparities between wealthy and poor school districts.

Nevertheless, in the wake of a week where the state’s Democratic and Republican legislative leaders have been holed up in the state Capitol, without Gov. Malloy, combing, line-by-line, through budget documents; they report they have been discussing ways to not only cover a projected $3.5 billion deficit in a roughly $40 billion two-year budget, but also to make lasting fiscal changes in hopes of stopping what has become a cycle of budget crises in one of the nation’s wealthiest states—or, as House Speaker Joe Aresimowicz, (D-Berlin) put it: “I think what we’ve done over the last few days has been a really good step forward, and I think we’re moving in the right direction,” even as Senate Republican Leader Len Fasano said what the Governor put forward Monday will not pass the legislature: “It is obvious that the governor’s proposal, including his devastating cuts to certain core services and shifting of state expenses onto towns and cities, would not pass the legislature in its current form. Therefore, legislative leaders will continue our efforts to work on a bipartisan budget that can actually pass.”

Getting Schooled on Budgeting & Debt. Even as the Governor and legislature appear to be achieving some progress, the Connecticut Education Association (CEA) is suing the state over Gov. Dannel Malloy’s executive order which cuts $557 million in school funding from 139 municipalities: Connecticut’s largest teachers union has filed an injunction request in Hartford Superior Court, alleging the order violates state law. (The order eliminates education funding in 85 cities and towns and severely cuts funding in another 54 communities.) The suit contends that without a state budget, Gov. Malloy lacks the authority to cut education funding. The municipalities of Torrington, Plainfield, and Brooklyn joined the initial filing. Association President Sheila Cohen noted: “We can’t sit by and watch our public schools dismantled and students and teachers stripped of essential resources…This injunction is the first step toward ensuring that our state lives up to its commitment and constitutional obligations to adequately fund public education.”

Governance in Fiscal Straits? Connecticut Attorney General George Jepsen has questioned the legality of Governor Malloy’s executive order, and Connecticut Senate Republican Leader Len Fasano (R-North Haven) noted: “I think the Governor’s order is in very serious legal trouble.” Nevertheless, the Governor, speaking to reporters at the state capitol, accused the CEA of acting prematurely: “Under normal circumstances, those checks don’t go out until the end of October…Secondarily, they’ll have to handle the issue of the fact that we have a lot less money to spend without a budget than we do with a budget…Their stronger argument might be that we can’t make any payments to communities in the absence of a budget. That one I would be afraid of.”

Municipal Fiscal Ethics? Forensic auditors from PBMares, LLP publicly went over their findings from the forensic audit they conducted into the City of Petersburg, Virginia’s financial books during a special City Council meeting. Even though the audit and its findings were released last week, John Hanson and Mike Garber, who were in charge of the audit for PBMares, provided their report to Council and answered their questions, focusing especially on what they deemed the “ethical tone” of the city government, saying they found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time…The culture led employees to do things they might not otherwise do.” They noted misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. In response, several Council Members asked whether if some of the employees who admitted to misconduct could be named. Messieurs Garber and Hanson, however, declined to reveal names in public, but said they could discuss it in private with City Manager Aretha Ferrell-Benavides, albeit advising the City Council that the ethical problems seemed to be more “systemic,” rather than individual, adding: “For instance, we looked at fuel data usage…And we could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.”

In response to apprehensions that the audit was insufficient, the auditors noted that because of the city’s limited budget, the scope of PBMares’ work could only go so far. Former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more for a city which had hovered on the brink of chapter 9 municipal bankruptcy. However, Mr. Hanson noted that while the transgressions would have normally fallen under a conflict of interest policy, such was the culture in Petersburg that the city’s employees either did not know, or were allowed to ignore those policies: “When I asked employees what their conflict of interest or gifts and gratuity policy is, people couldn’t answer that question because they didn’t know.”