The Imbalances of Governing

May 29, 2018

Good Morning! In this morning’s eBlog, we observe the ongoing demographic exodus from Puerto Rico—and the apparent agreement between the U.S. territory and the PROMESA Oversight Board to modify old work rules.

The Imbalances of Governing. Ramón Rosario Cortés, Puerto Rico’s Secretary of Public Affairs and Public Policy, has announced the repeal of Law 80, stating; “As agreed [to] by Governor Ricardo Rosselló Nevares with the Fiscal Oversight Board, today we are presenting before the Legislative Assembly a measure of Administration to repeal Law 80, and thus give way to the agreement reached, and that removes from the discussion the elimination of the Christmas Bonus and the reduction of days of sickness and vacations of our workers.” He stressed: “We are confident that, as usual, the Legislative Assembly will consider this measure with great responsibility and analyzing the totality of the circumstances and the reality of Puerto Rico today,” adding, the “Governor exercised his responsibility to achieve this agreement that makes it possible to allocate the funds we need to develop the economy and to pay the Christmas bonus for our public employees.” For his part, Puerto Rico Senate President Thomas Rivera Schatz, one of the strongest opponents of the repeal, warned that the repeal of Law 80 seeks to favor various employers of banking, communications, and insurance companies. Nevertheless, Senator Schatz indicated he would be willing to consider it if the Board’s study details the economic benefits of the agreement.

A Demographic Fiscal Wave? Between last September and last February, that critical period in the wake of Hurricanes Irma and María, passenger exodus from Puerto Rico exceeded inflow by some 233,586 persons. In stark contrast, according to data by the U.S. Bureau of Transportation Statistics provided to the Puerto Rico Institute of Statistics, between September of 2016 and February of 2017, there were 3,988 persons arriving in Puerto Rico than departing—albeit it will not be until we have access to newer U.S. Census Bureau information that the most recent emigration data will be forthcoming. Nonetheless, the preliminary data, based on official information, is that some 1,493,180 left the island between September and February, while 1,259,614 arrived—a pattern consistent with counts of outflows between September of 2016 and February of 2017.Similarly, a chart prepared by the Institute of Statistics indicates that the number of passengers who arrived in Puerto Rico between September of 2016 and February of 2017 reached 1,999,726, compared to the 1,995,738 that left the island.

Based on an analysis of data compiled by the Teralytics Company, a cell phone company, which compiled the data, out of the 407,465 residents of Puerto Rico who left Puerto Rico, 359,815 returned between October and February. Interestingly, however, the company also reported that more people have come back to the island than those who travel to the mainland. According to the company, about 150,000 of those who left, in their sample, preferred Florida, with the first six destinations the counties of Orange (34,858), Osceola (22,610), Miami-Dade (15,233), Hillsborough (13,091), Polk (12,262), and Broward (10,580). The other four municipalities that became main destinations for those who left Puerto Rico were: 7,455 to the Bronx, 7,430 to Seminole, Florida; 5,767 to Hampden, Massachusetts, and 5,357 to Philadelphia. Previously, the Center for Puerto Rican Studies had estimated that there may be a total of 135, 592 people who left Puerto Rico between October of 2017 and February 22nd of 2018. Thus, it appears that by the end of this year, the Commonwealth might have experienced a loss of as many as 470,335 residents since 2017, or some 14% of its population, according to the Center for Puerto Rican Studies. In comparison, the Center has indicated that between 2006 and 2016, 525,769 residents of Puerto Rico emigrated to the United States.

There is, to date, no analysis of the impact of this exodus with regard to assessed property values–and the potential fiscal impact on the island municipalities. 

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Amazonian Recovery

May 18, 2018

Good Morning! In this morning’s eBlog, we take a fiscal perspective on post-chapter 9 Detroit and its income and property taxes; then we dip south to assess the seemingly interminable governing challenge with regard to whom is in charge of restoring fiscal solvency in Puerto Rico.   

The Challenging Road to Recovery. Last January, Detroit failed to make the Amazon cut to make the finalists: Sandy Baruah, president and CEO of the Detroit Regional Chamber, who was on the fateful call, nevertheless described feedback from Amazon, describing the “creativity, the regional collaboration, the quality of the bid document, the international partnership with Windsor, all of that got incredibly high marks,” adding that: “We were good, but we weren’t good enough on the talent front.” The noted urban writer Richard Florida tweeted that he believed Amazon missed the mark on Detroit, if talent was the disqualifying factor—he, after all, early on, had identified Detroit as a sleeper candidate for HQ2, with a top three of greater Washington, D.C.; Chicago; and Toronto, noting that Detroit has more tech workers than many on the list, including Pittsburgh, Indianapolis, and Columbus—and that the city has access to major public research universities, not to mention its international partnership with Windsor, Ontario, in Canada gave the bid an international quality that only Toronto’s bid could match. Indeed, Mr. Florida had suggested that Detroit’s elimination was due to outdated perceptions of the Motor City’s economy, talent, and overall livability.

Nevertheless, Detroit’s near miss—when added to the city’s exit at the end of last month from state fiscal oversight, is a remarkable testament to Detroit, that, less than five years after filing for the largest municipal bankruptcy in American history, came so close to making the cut, so successfully has it overcome the adverse repercussions of nearly six decades of economic decline, disinvestment, and chapter 9 municipal bankruptcy. State officials praised the city for fiscal gains that came quicker than many anticipated after its Chapter 9 exit in December 2014. The city shed $7 billion of its $18 billion in debts during the 18-month bankruptcy. Last year, the city’s income tax take rose by 8%–and assessed property values rose for the first time in nearly two decades.

No doubt the auto industry has played a driving role: in the emerging age of self-driving cars, a recent report by real estate services giant CBRE which evaluated the top 50 U.S. metro areas in the country in terms of tech talent ranked Detroit 21st, ahead of several cities which made the Amazon cut, including Philadelphia, Los Angeles, Pittsburgh, Indianapolis, Nashville, and Miami. Indeed, remarkably, on a percentage basis, Detroit has as many tech jobs in its metro as Washington, D.C., and Boston. The report also found that Detroit’s millennial population with college degrees grew by just under 10% between 2010 and 2015, more than double the national average of 4.6% and equivalent to rates in the Bay Area (9.5%) and Atlanta (9.3%).

Nevertheless, the Motor City continues to face taxing challenges—including a less than effective record, until recently, of collecting income and property taxes it was owed under existing law—and of improving its school system: a vital step if the city is to draw young families with kids back into the city. Moreover, it still needs to reassess its municipal tax policies: its 2.4% income tax is double that paid by non-residents working in the city. That is not exactly a drawing card to relocate from the suburbs.

The Uncertain Promise of PROMESA. While the PROMESA Oversight Board has requested Puerto Rico to amend its recommended budget, Puerto Rico has responded it would prefer to negotiate, because it understands that resorting to the Court “is not an alternative.” Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, made clear, moreover, that there would be is no change of position with regard to the Board’s demand for reducing pensions or vacation and sick leave, much less eliminating the Christmas bonus. Nevertheless, the Commonwealth appears to be of the view that its differences with the PROMESA Board are “are minimal,” despite the Board’s rejection, last week, of Governor Ricardo Rosselló’s proposed budget—a rejection upon which the Board suggested that cuts in public pensions and the elimination of the mandatory Christmas bonus had not been incorporated. The Board also noted the omission of funds finance Social Security for police officers. Secretary Rosario Cortés noted: “The Governor called to the Board to sit down and review those points they exposed, as long as they do not interfere with the Governor’s public policy. In the coming days, Gov. Rosselló and his team will be responding to each of the Board’s points and providing information that supports each of the Government’s positions: The Government is open to dialogue in order to reach consensus that does not interfere or contravene those public policy positions that the Governor has already expressed; specifically: no cuts in pensions or eliminating the Christmas bonus and reducing sick leave.”

He acknowledged that the dispute could end up in Court, as PROMESA Board Executive Director, Natalie Jaresko, has warned: “Yes, certainly, they have not only resorted to Court in the past, but they have also said it is a possibility. We understand that it is not an alternative, it would delay the fiscal recovery of Puerto Rico and would require investing resources that are scarce at the moment: They made some observations, and we are willing to look at them,” adding that the work teams of the Governor and the Board are communicating and sharing information: “Dialogue continues and, along the way, we hope to reach a consensus that will avoid setbacks and reaching the courts.”

Who Is Governing? Precisely, Director Jaresko also acknowledged that not amending the budget would delay the renegotiation of Puerto Rico’s debt, warning that if the Rosselló administration does not act, the PROMESA Board will proceed to preempt its governance authority and power as provided by the PROMESA law, which authorizes the Board to amend the U.S. territory’s budget and submit its own version to the Legislature for approval—albeit, it rattles one’s fiscal imagination that Puerto Rican legislators could conceivably want to do so.

Nevertheless, the Board has advised Gov. Rosselló that his recommended budget does not reflect what is established in the fiscal plan: regarding the General Fund, the recommended budget represents about $200 million in expenses on the certified income projection; in addition, the budget information does not include public corporations or similar dependencies—meaning that Director Jaresko is of the view that the draft budget omits some 60% of the public spending. Thus, she has threatened that the Governor has until high noon on Tuesday to correct the ‘deficiencies,’ or risk the Board preempting its governing authority.  

Nevertheless, Puerto Rico’s fiscal position appears to be on the upswing: as of last week, revenues were 7% ahead of its July 2017 forecasts; last month’s revenues came in 18% stronger than projected. Notwithstanding the physical and fiscal impact of Hurricane Maria on Puerto Rico’s economy, Puerto Rico’s central bank account, the Treasury Singular Account, held $2.65 billion as of last Friday—some $211 million more than the government had anticipated last July according to information posted on the MSRB’s EMMA.

The Long Fiscal Road out from State Fiscal Oversight

07/21/17

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eBlog

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.”

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.”