On the Edge of Municipal Fiscal Cliffs

September 20, 2017

Good Morning! In today’s Blog, we consider the upcoming challenge for voters in Detroit—with a Mayoral election around the bend—and the city aspiring to be in the competition for selection by Amazon as its second site. Then we look at the physical and fiscal storm threats to Puerto Rico, before finally looking back at post-riot Ferguson, Missouri.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of a Fiscal State/Local Cliff.  The Latin incantation, “Speramus meliora; resurget cineribus,or, translated: “We hope for better things; it will arise from the ashes,” is Detroit’s motto: it came from a French Roman Catholic priest, Father Gabriel Richard, who was born in France in 1767 and moved to Baltimore in 1792 to teach math. Reassigned to do missionary work, he moved first to Illinois and later to Detroit, where he was the assistant pastor at St. Anne’s Church—a church founded in 1701 and possibly the oldest continuously operating Roman Catholic parish in the U.S. Two hundred twelve years ago, on June 11th, a fire destroyed nearly all of then-Detroit, just weeks before the Michigan Territory was established. Today, nearly three years after the once-great city, the “arsenal of democracy” during World War II and home of the world’s most innovative manufacturers, emerged from the nation’s largest ever chapter 9 bankruptcy, national interest in Detroit has waned: in some ways, it has become a tale of two cities: One a city still mired in poverty and unemployment; one an emerging vibrant metropolis and global self-driving car center. And all this is occurring as the voters prepare to re-elect Mike Duggan—whose most profound achievement has been to raze much of the city, after first being elected in a write-in campaign. But, last month, voters in the primary gave him 68% of the votes—likely foretelling November’s re-election—in a campaign against the son of Coleman Young, Detroit’s first black mayor. Almost more than any other city in the nation, Detroit is not just a city emerging from the ashes, but also a city of profound racial transition: Over the past forty-year, Detroit has undergone a racial transformation: from 70% white in the 1960s to just 10% today. The Detroit News described the Mayor’s self-referral as a “metrics nut:” describing cabinet meeting room as one blanketed in graphs charting the city’s employment, ambulance delivery and crime rates, among other statistics. “The police are going to show up in under 14 minutes; the ambulance is going to show up in under 8 minutes; the grass is going to be cut in the parks every 10 to 12 days—it just is.” The paper notes that: “City employees who do not meet these targets do not last long.”  But, as the city’s emergency manager charged by Gov. Snyder with taking the Motor City into chapter 9 bankruptcy and then out noted to me on that very first morning, the critical distinction between municipal and corporate bankruptcy is to ensure the streetlights, traffic lights, police and fire are working. That has been an ongoing, post-plan of debt adjustment priority, and, the numbers have continued to improve: today police response times are down from an average of 40 minutes to 13.

Mayhap a far greater governance challenge, however, has been to reverse the flight of residents from the city—flight which bequeathed 40,000 abandoned properties—properties which could become havens for crime, paid no property taxes, and adversely affected the assessed values of neighboring properties in one of the nation’s largest—by land area of 139 square miles—a city once the home to 1.8 million—thrice today’s population. Or, as David Schleicher of Yale Law School described the city: it “is just too big,” to accommodate “the expense of providing services.” The Mayor has sought to “right-size,” as it were, by means of razing abandoned homes, in part via the expansion of the Detroit Land Bank, a quasi-governmental authority which now owns 96,000 properties across the city—most of them acquired through foreclosure because of unpaid taxes. Thus, the land bank has succeeded in centralizing the city’s control over abandoned and vacant properties; Detroit has replaced an antiquated registry scattered across 83 data sets, and erased liens and back taxes as a means to facilitate the clearing and demolition or restoration of properties. Since his election, the city has focused on the highest density districts, where the city has demolished 11,900 residential properties. The results indicate that the demolition of a blighted property increases the value of a nearby home by 4.2%, according to one study. And the pace has been unprecedented—indeed, so fast there have been allegations of improper contract awards; there has been a federal investigation; and Michigan’s state housing agency suspended funds for two months, after a state audit found improper controls in place. Land bank officials, including the director of demolitions, have resigned. Mayor Duggan, who has not been a subject of the investigation, blames the mistakes on a desire to increase the pace of demolitions, but acknowledges that regulators were right to rap his knuckles.

Under the program there has been, consequently, a high pace of tax foreclosures—the main pipeline for properties which end up in the land bank’s possession: under Michigan law, owners who do not pay taxes after three years lose their property—properties last comprehensively reassessed decades before market values plummeted, meaning many are set too high. Between 2006 and 2012, median sale prices for city houses fell from $70,000 to $16,200; thus, the owner of a house worth $15,000 could owe $3,000 in property taxes. The state-mandated interest rate on property-tax debt is 18% per year. Thus, an update completed at the beginning of this calendar year should lead to lower bills, but it will not be retroactive; thus, up to 53,000 properties will receive foreclosure notices this autumn. While not every foreclosed property will necessarily end up lost, tax foreclosures, driven by government policy rather than market forces, could force out longtime residents, ironically exacerbating the very problem the Mayor is focused upon: even as the demolition drive has already cost the city’s taxpayers some $162 million, the average back taxes for homes put up for auction are $7,700—much less than the cost of demolition. Or, as Michele Oberholtzer, Director of the Tax Foreclosure Prevention Project puts it: “It’s like an auto-immune disorder: We penalize people for not paying, and then we end up paying more for the punishment.” Nevertheless, Mayor and candidate Duggan believes that at the current pace of demolitions, he can clear the city’s long-standing blight within five years—mayhap paving the way for a smaller but much more vibrant city.

Fiscal Hurricane. With still another hurricane bearing down on Puerto Rico (damages caused by Hurricane Irma are estimated at more than $600 million), a fiscal storm appears in the offing after, yesterday, an agreement among Senate Finance Committee leaders to push this month the reauthorization of the Children’s Health Insurance Program for five years raised doubts about with regard to whether Medicaid funds to stabilize the finances of the Puerto Rican health system could be included in that legislation: according to the agreement between the Chairman, Republican Orrin Hatch (R-Utah), and Ranking Member Ron Wyden (D-Oregon), that program would be refinanced for another five years; however, the agreement did not include funds to close the so-called “abyss” in Medicaid funds, which would reach $ 369 million this fiscal year and then rise to about $ 1.2 billion that has been asked annually for reimbursement under the Affordable Care Act, or, as former Puerto Rico Governor Aníbal Acevedo Vilá, who was representing Gov. Ricardo Rosselló, noted: “From what I’ve been told, we are not included.” His statement came as Gov. Rosselló arrived last night in Washington, D.C. along with former Governors Acevedo Vilá and Alejandro García Padilla to meet with House Minority Leader Nancy Pelosi (D-Ca.), as the Senate Finance Committee hurries to approve the reauthorization of the CHIP program before the law expires at the end of this month. Chairman Hatch, however, has indicated that his intention is that the reauthorization of the program not increase the federal deficit—an intention which could singularly complicate the mission—even as House Speaker Paul Ryan (R-Wis.) earlier this year had told resident commissioner, Jennifer Gonzalez, that CHIP’s reauthorization was the ideal vehicle for legislating new Medicaid allocations, due to the depletion of Affordable Care Act funds in April. (For the current fiscal year, Puerto Rico’s allocation is $172 million. Meanwhile, there are already 12 Puerto Rican municipalities within  the  federally declared disaster zone: the first ones were the municipalities of Vieques and Culebra. Yesterday, Adjuntas, Canóvanas, Carolina, Guaynabo, Juncos, Loíza, Luquillo, Orocovis, Patillas and Utuado were added—with Gov. Rosselló making the announcement yesterday accompanied by FEMA Administrator William Long,  albeit the Governor added: “This does not imply that the list of municipalities is finished, it´s not over. This simply implies that as we receive  information (from the affected municipalities) and we send it to the federal government, then, we are able make these declarations.”

Good Gnus. Puerto Rico’s median household income climbed 7.8% from 2015 to 2016 according to the U.S. Census Bureau American Community Survey statistics, with the survey showing that mean household income was up 2.3% after inflation—a stark contrast with the generally negative economic data coming out of Puerto Rico. For example, Puerto Rico’s economic activity index declined 2.1% in July from a year earlier, according to a report from the Government Development Bank for Puerto Rico: according to the U.S. Bureau of Labor Statistics’ household survey, total employment in August on the island was down 0.25% from a year earlier. According to its survey of workplaces, total employment was down 1.1%. In addition, the American Community Survey showed that net migration to the rest of the United States increased to 67,000 in 2016 from an average of 44,400 per year from 2006 to 2015—that is nearly 50%. Data from the Puerto Rico Ports Authority show that the average net migration was 65,700 per year from 2006 to 2015. The difference may reflect that some Puerto Ricans migrate to countries beside the U.S., according to Mario Marazzi, executive director for the Puerto Rico Statistics Institute.

Coming Back. Moody’s has revised upwards its credit rating for Ferguson, Missouri in the wake of efforts to recover fiscally from the aftermath of a controversial police shooting, the rating agency has revised the city’s outlook on its junk-level Ba3 general obligation rating to positive from negative. The city lost its investment grade rating as it dealt with the aftermath of the August 2014 fatal shooting of Michael Brown, an unarmed African-American, by a white police officer. The shooting led to local protests and a federal probe in the city of about 21,000 just northwest of St. Louis. The city faced rising legal expenses as it dealt with a federal probe into policing and court tactics and then the costs of a settlement, and took a hit on sales and other taxes. The city has also lost a chunk of court-fine related revenue it relied on as the state government cracked down on local government use of fine levies to balance budgets. After spending cuts and other management efforts, the city is expected to begin to shore up its balance sheet as voter approved tax revenues flow into city coffers. “The positive outlook reflects the likelihood the city’s materially improved fiscal condition will continue over the next two years, especially because new taxes implemented during fiscal years 2016 through 2018 will lead to the greater likelihood of operating surpluses and improving reserve levels,” Moody’s noted, as it affirmed the B1 rating on the city’s 2013 certificates of participation and the B2 rating on its 2012 COPs: the upgrade reflects Ferguson’s current fiscal condition in the wake of several years of rapidly declining reserves and uncertainty for further operating declines; it incorporates a moderately sized tax base with a trend of declining assessed valuation, below average resident wealth, and above average yet manageable debt burden. The agency notes that the rating remains challenged by ebbing reserves and the costs of federal consent decree measures which contributed to operating deficits in fiscal 2014 through 2017; the city anticipates a $312,000 deficit for FY 2017, but, with fully phased in, voter approved taxes coming in next year, the FY2018 budget estimates a $48,000 general fund surplus. From a high in fiscal 2013, the general fund balance declined to $3.6 million or 33.5% of revenues from $10.5 million. Reserve levels remain healthy on a relative basis compared to its peer group but the city’s operating flexibility is notably narrower than it has been. The city is working towards meeting milestones and establishing policies as required in its 2016 Department of Justice consent decree. Consent decree annual expenses have declined to $500,000 from projections of $700,000 to $1.5 million. Tax hikes are projected to generate an additional $2.9 million in annual revenue for the general fund in FY2018.

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The Political & Fiscal Challenges of Recovery

September 19, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

How indelible are those stains, if at all?

We’re about to find out.

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

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

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

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

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

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

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

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

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

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

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

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

On the Steep Edge of Chapter 9

September 12, 2017

Good Morning! In this a.m.’s Blog, we consider the increasing risk of Hartford going into municipal bankruptcy, the Nutmeg State’s fiscal challenge—and whether the state’s leaders can agree to a bipartisan budget; then we consider the ongoing fiscal challenges to Detroit’s comeback from the nation’s largest ever chapter 9 municipal bankruptcy: the road is steep.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of Chapter 9. Connecticut legislators plan to move forward with a state budget vote this week—one which is not expected to include a sales and use take hike and which may not get much support from their Republican colleagues. In his declaration, last week, Hartford Mayor Luke Bronin, in warning the city may be filing for chapter 9 municipal bankruptcy within sixty days pending state budget action, noted Hartford “believes that a restructuring of its outstanding bond indebtedness will be necessary to assure the fiscal stability of the city in the future regardless of any funding received from the State.” Nevertheless, as Municipal Market Analytics noted: “It’s unclear that the city will be able to satisfy the standard conditions for entry into bankruptcy protection such as proving itself insolvent,” albeit MMA noted that in the absence of a state bailout cash, the city will unable to make payments to its bondholders, nevertheless, noting that Connecticut fiscal changes enacted last summer “would reasonably allow the city to refinance its outstanding debt under provisions that not only purport to provide a statutory lien to bondholders, but also allow principal to be back-loaded and extended for 30 years. Under Connecticut law, municipalities may secure refunding bonds with a statutory lien if they provide for such in the resolution. MMA adds that even without a lien, Hartford “could also refinance, at a minimum, approximately 80% of its outstanding general obligation debt covered by bond insurance policies,” noting that “While this would not eliminate principal currently owed, it would avoid the expense of a chapter 9 bankruptcy.” However, as William Faulkner used to write of the “odor of verbena,” the reputation of chapter 9 can create contagion: MMA notes that “some municipal investors will still not loan capital to Bridgeport for its attempted bankruptcy filing twenty-six years ago.” Thus there is apprehension in the state house that Connecticut’s own interest rates could be adversely affected were Hartford to default or file for chapter 9—adding that such a filing would thus have fiscal adverse reverberations for the state, but also undermine business complacency about remaining in the city: “It is hard to expect that declaring bankruptcy would help the city retain its current employers or attract new ones. Amazon is unlikely to locate its headquarters in a bankrupt city.” Unsurprisingly, Connecticut legislators may be considering some sort of fiscal evaluation model like Virginia’s as a quasi- oversight and/or restructuring regime for local governments.

Meanwhile Connecticut House Speaker Joe Aresimowicz (D-Berlin) said a proposal to raise the sales and use tax as high as 6.85% has been removed from the Democratic budget proposal after facing strong opposition from moderates in his party, as the Speaker’s draft budget proposal sought to close a two-year $3.5 billion deficit, advising his colleagues: “The Senate was not comfortable with that, so it was our opinion as House Democrats that we would drop that off of our proposal in an effort to come to an agreement that would pass in both chambers.’’ Nevertheless, a proposal to raise the sales tax on restaurant meals to 7% remains under consideration—drawing strong opposition from the Farmington-based Connecticut Restaurant Association, and raising apprehensions from the industry, because it was unclear exactly which meals would be covered by the increased tax—even as restaurants now confront stiffer competition from ready-made meals at supermarkets, raising questions with regard to the definition of food and beverage—something to be resolved, according to officials, by the Connecticut Department of Revenue Services.

The fiscal dilemma has, moreover, not just been between the parties, but also between Gov. Malloy and Democrats, with the Governor opposed to many of the tax hikes they have proposed, albeit late last week he said he would agree to a small sales tax increase. Nevertheless, even as state Democratic leaders were still working on a budget agreement with the Governor, separate, simultaneous talks with Republicans broke down yesterday. While Republicans indicated they would not rule out further negotiations, the breakdown appears to be taxing: Gov. Malloy is still seeking tax increases on hospitals, cigarettes, smokeless tobacco, e-cigarettes, and real estate transactions—leading Republicans to charge that Democrats are unwilling to address major, long-term structural changes which would include spending and bonding caps, along with changing the prevailing wage for labor on municipal projects that unions and many Democrats have strongly opposed for years, or, as House Republican Leader Themis Klarides (R.-Seymour) noted: “It is very clear they have no interest in changing the way the State of Connecticut works…They want to fix it for this week, for next month, for next year. They do not want to fix this problem that has been a spiraling problem…“This might as well be Irma: I have more confidence on where Irma is going than where the state is going, based on the destruction they have left in their wake.’’

Republicans plan to release a revised budget proposal today, among which some of Gov. Malloy’s proposals could be included as part of a budget proposal House Democrats plan to consider Thursday, including an expansion of the state’s bottle bill to include juices, teas, and sports drinks. When consumers fail to return their bottles, the nickel deposit is kept by the state. As a result, the state expects to collect an additional $2.8 million starting on Jan. 1, and then another $7.4 million in the second year of the two-year budget from unclaimed deposits. The legislature appears fiscally anxious as Gov. Malloy’s October 1 deadline approaches—the date on which he is set to invoke large cuts: under his revised executive order, 85 communities would receive no educational cost-sharing funds; 54 towns would receive less money.

Nevertheless, the Governor and legislature are working in fiscal quicksand: Gov. Malloy, a Democrat, has been running the state by executive order since July 1st: he and the legislature remain at odds over a biennial spending plan while the Governor is proposing to raise the conveyance tax on real estate transactions, which he projects would bring in an expected $127 million more to the state over two years. However, the proposal comes as sources late yesterday reported that Alexion Pharmaceuticals Inc. will today announce that its corporate headquarters is moving from New Haven to Boston as part of a major “restructuring.” The state has provided Alexion with more than $26 million in state assistance to remain in Connecticut, so the announcement is likely to be a double fiscal whammy: not only will the company move, but also it plans to announce significant layoffs, renewing debate with regard to how the state can remain economically competitive. (Alexion had moved to New Haven early last year from Cheshire with a $6 million grant from the state, and a subsidized $20 million loan which will be fully forgiven if Alexion has 650 workers in Connecticut by 2017.) On average, Alexion had 827 employees in the state this year through June 30. Alexion also was offered tax credits, which could be worth as much as $25 million as part of the Malloy administration’s so-called “First Five” program. Alexion had located in a newly constructed 14-story building in downtown New Haven as part of an urban revitalization project intended to tie two sections of the city together—thus Alexion’s move was key to the completion of the first phase of the project. Gov.  Malloy noted: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues.” In releasing his proposed a $41 billion state budget, the Governor said that if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues.” The Governor added: “There is an issue that Hartford has done some pretty stupid things over the years, and that bondholders and bond rating agencies tolerated that stupidity: And if there’s going to be relief, it has to be comprehensive in nature.” With Hartford Mayor Luke Bronin having, as we previously noted, warned that Hartford would file for chapter 9 municipal bankruptcy absent critical support from the state, labor unions, and its bondholders, the Mayor has been pressing for an additional $40 million from the state to avoid bankruptcy—even as the Governor and state legislative leaders claim the state budget provides enough to Hartford—or, in the Governor’s words: “presents the opportunity to help Hartford.” The budget proposal also calls for a four-tiered municipal board to oversee Hartford and other distressed cities. Gov. Malloy, a lame duck, ergo with waning political power, confronts an evenly divided state Senate, and a narrowly divided state House (79-72), so balancing the deck of the fiscal Titanic between revenues and expenditures—and addressing long-term capital and public pension obligations is an exceptional fiscal challenge. The Governor’s budget proposals would also repeal the back-to-school sales tax holiday and increase the cigarette tax by 45 cents to $4.35 per pack, effective the end of next month, as well as increase the conveyance tax on real estate sales.

Leaving Chapter 9 Is Uneasy. Detroit is finding that returning to access traditional capital markets is a challenge: notwithstanding significant downtown economic progress, that progress has been mostly in the increasingly vibrant downtown and Midtown areas. Significant parts of the 139-square mile city continue to struggle with pre-chapter 9 challenges, even as the narrow relief window for the city’s public pension obligations is winnowing, effectively imposing increasing fiscal pressure—especially in the wake of the city’s general fund revenues coming up short for FY2016: Detroit’s four-year fiscal forecast predicts an annual growth rate of approximately 1%. Thus, with its plan of debt adjustment requiring annual set-asides from surpluses of an additional $335 million (between FY16 and FY23) to address those obligations, that has cut into fiscal resources vital to reinvestment and improvement in public services—especially in outlying neighborhoods. Nevertheless, Detroit Future City reports that the annual decline in the city’s population of 672,000 has been slowing. Indeed, job growth has been above the nationwide average since 2010, and that growth appears to be in higher paying jobs of over $40 thousand per year, implying that the job growth is targeted at educated or skilled workers—a key development to encouraging migration to the city—where the 25-34 year-old population has grown by 10 thousand since 2011. Notwithstanding, however, more than 40% of Detroit’s population lives in poverty, nearly triple the statewide rate—and a rate which appears to have some correlation with violent crime. Thus, even though the city has made some progress in reducing overall violent crime, murders have still been rising—albeit at a 2.4% rate. Nevertheless, perceptions matter: a recent Politico-Morning Consult poll reported that 41% of Detroit residents said they consider the city very unsafe. Moreover, in a city where only 78.3% of students graduate high school and just 13.5% of those that reside in Detroit have a bachelor’s degree—half the national rate, the number of families with children has declined by more than 40%. Thus, unsurprisingly, with housing and blight still a problem, the city’s vacancy rate is close to 30%, and some 80,000 met or were expected to soon meet the definition of blight. Worse: some 8,000 properties are scheduled to enter the foreclosure auction process this year.

The Election Road after Municipal Bankruptcy

08/09/17

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Good Morning! In this a.m.’s blog, we consider the outcome of yesterday’s primary election in the city which has emerged from the largest municipal bankruptcy in American history: how did the voters react to the driver of the city’s plan of debt adjustment?

Incumbent Detroit Mayor Mike Duggan and Michigan State Sen. Coleman Young II prevailed in yesterday’s primary, with Mayor Duggan garnering more than a 2-1 lead, 67-26% over his challenger—leaving the other six candidates deep in their dust, clearing the way for the November general election pitting the challenger and son of a former Mayor against the incumbent who has led the city in its implementation of the chapter 9 plan of debt adjustment recovery. Nevertheless, candidate Young posed a critical issue in his challenge, asking: “What kind of comeback takes place when 48% of the residents in your city live in poverty?” He added the election was “a referendum on really the neighborhoods,” even as Mayor Duggan, in his primary victory speech last night, said Detroit’s economic recovery hinges on getting more Detroiters trained to fill in-demand jobs: “Our comeback depends on jobs: We’ve got to get Detroiters back to work. And, yes, the unemployment rate has been cut in half and 20,000 more Detroiters are back to work. But it’s not nearly enough.”

In contrast, his challenger asked voters: “What has (Mayor Duggan) done for the people in the neighborhoods?” Sen. Young was raising the challenge of almost any city: how does one way weigh neighborhoods versus downtown economic development? It has become an issue in the Motor City in the struggle over political arguments pitting taxpayer-related costs for a new $863 million sports arena and entertainment district even as large parts of the city’s still post-riot devastated neighborhoods remain. Indeed, Detroit’s demolition program, enhanced by some $130 million in federal funding, funding the subject of an ongoing federal investigation, is focused on efforts to demolish or sell its entire backlog of 30,000 houses in five years—a key step to help boost Detroit’s neighborhoods after years of decline—and, critically, to raise assessed property values. So it has not been surprising that the Mayor, in campaigning, has cross-crossed the city to highlight programs and initiatives his administration has been pursuing to rebuild commercial corridors, generate more affordable housing options near greater downtown, and stabilize neighborhoods which have been abandoned and can be more homes to crime than neighbors. The incumbent also campaigned hard by touting his Motor City Match program, which has disbursed $2.9 million in grants to businesses and leveraged $16.3 million in new investments as a mechanism to leverage neighborhood redevelopment—or, in his words: “When we started Motor City Match, we had an idea—that Detroiters who might otherwise not be able to get financing for businesses could pursue their dream if they had the talent, if they had the work ethic and we would give preference for filling in storefronts in the neighborhoods.” But the non-city campaign contributions appeared to reflect a heavy concentration coming from suburban residents, many of whom work at or own businesses in the city—something many attribute to reflecting a sense of optimism about Detroit’s future.

Post Municipal Bankruptcy Leadership

08/07/17

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Good Morning! In this a.m.’s blog, we consider the fiscal challenge as election season is upon the Motor City: what kind of a race can we expect? Then we observe the changing of the guard in San Bernardino—as the city’s first post-chapter 9 City Manager settles in as she assumes a critical fiscal leadership role in the city emerging from municipal bankruptcy. Third, we consider the changing of the fiscal guard in Atlantic City, as outgoing (not a pun) Gov. Chris Christie begins the process of restoring municipal authority. Then we turn to what might be a fiscal turnaround underway in Puerto Rico, before, fourth, considering the special fiscal challenge to Puerto Rico’s municipios—or municipalities.

Post Municipal Bankruptcy Leadership. Detroit Mayor Mike Duggan, the city’s first post-chapter 9 mayor, has been sharing his goals for a second term, and speaking about some of his city’s proudest moments as he seeks a high turnout at tomorrow’s primary election mayoral primary election‒the first since the city exited municipal bankruptcy three years ago, noting he is: “very proud of the fact the unemployment rate in Detroit is the lowest it has been in 17 years: today he notes there are 20,000 more Detroiters working than 4 years ago. In January 2014, there were 40,000 vacant houses in the city, and today 25,000. We knocked down 12,000 and 3,000 had families who moved in and fixed them up,” adding: “For most Detroiters, that means the streetlights are on, grass is cut in the parks, busses are running on time, police and ambulances showing up in a timely basis and trash picked up and streets swept.” Notwithstanding those accomplishments, however, he confronts seven contenders—with perhaps the signal challenge coming from Michigan State Senator Coleman Young, Jr., whose father, Coleman Young, served as Detroit’s first African-American Mayor from 1974 to 1994. Mr. Young claims he is the voice for the people who have been forgotten in Detroit’s neighborhoods, noting: “I want to put people to work and reduce poverty of 48% in Detroit. I think that’s atrocious. I also want mass transit that goes more than 3 miles,” adding he is seeking ‘real change,’ charging that today in Detroit: “We’re doing more for the people who left the city of Detroit, than the people who stayed. That’s going to stop in a Young administration.” Remembering his father, he adds: “I don’t think there will ever be another Coleman Young, but I am the closest thing to him that’s on this planet that’s living.” (Other candidates in tomorrow’s non-partisan primary include Articia Bomer, Dean Edward, Curtis Greene, Donna Marie Pitts, and Danetta Simpson.)  

According to an analysis by the Detroit News, voters will have some interesting alternatives: half of the eight candidates have been convicted of felony crimes involving drugs, assault, or weapons—with three charged with gun crimes and two for assault with intent to commit murder, albeit, some of the offenses date back as far as 1977. (Under Michigan election law, convicted felons can vote and run for office, just as long as they are neither incarcerated nor guilty of crimes breaching public trust.

Taking the Reins.  San Bernardino has named its first post-chapter 9 bankruptcy city manager, selecting assistant City Manager and former interim city manager, Andrea Miller, to the position—albeit with some questions with regard to the $253,080 salary in a post-chapter 9 recovering municipality where the average household income is less than $36,000 and where officials assert the city’s budget is insufficient to fully address basic public services, such as street maintenance or a fully funded police department. Nevertheless, Mayor Cary Davis and the City Council voted unanimously, commenting on Ms. Miller’s experience, vision, and commitment to stay long-term, or, as Councilman Fred Shorett told his colleagues: “As the senior councilmember—I’ve been sitting in this dais longer than anybody else—I think we’ve had, if we count you twice, eight city managers in a total of 9 years: We have not had continuity.”  However, apprehension about continuity as the city addresses and implements its plan of debt adjustment remains—or, as Councilmember John Valdivia insisted, there needs to be a “solemn commitment to the people of San Bernardino” by Ms. Miller to serve at least five years, as he told his colleagues: “During Mayor (Carey) Davis’ four years in office, the Council is now voting on the third city manager: San Bernardino cannot expect a successful recovery with this type of rampant leadership turnover at City Hall…Ms. Miller is certainly qualified, but I am concerned that she has already deserted our community once before.” Ms. Miller was the city’s assistant city manager in 2012, when then-City Manager Charles McNeely abruptly resigned, leaving Ms. Miller as interim city manager to discover that the city would have to file for chapter 9 bankruptcy—a responsibility she addressed with aplomb: she led San Bernardino through the first six months of its municipal bankruptcy, before leaving without removing “interim” from her title, instead assuming the position of executive director of the San Gabriel Valley Council of Governments.

Ms. Miller noted: “I would remind the Council that I was here as your interim city manager previously, and I did not accept the permanent appointment, because I felt like I could not make that commitment given some of the dynamics…(Since then) this Council and this community have implemented a new city charter, the Council came together in a really remarkable way and had a discussion with me that we had not been able to have previously: You committed to some regular discussion about what your expectations are, you committed to strategic planning. And so, with all those things and a strategic plan that involves all of us in a stronger, better San Bernardino, yes I can make that commitment.” Interestingly, the new contract mandates at least two strategic planning sessions per year—and, she told the Council additional sessions would probably be wise. The contract the city’s new manager signed is longer than the city’s most recent ones—mayhap leavened by experience: the length and the pay are higher than the $248,076 per year the previous manager received. Although Ms. Miller is not a San Bernardino resident, she told the Mayor and Council she is committed to the city and said the city should strive to recruit other employees who do live in the city.

Not Gaming Atlantic City’s Future. New Jersey Governor Chris Christie’s administration last week announced it had settled all the remaining tax appeals filed by Atlantic City casinos, ending a remarkable fiscal drain which has contributed to the city’s fiscal woes and state takeover. Indeed, it appears to—through removal of fiscal uncertainty and risk‒open the door to the Mayor and Council to reduce its tax rate over the long-term as the costs of the appeal are known and able to be paid out of the bonds sold earlier this year—effectively spinning the dial towards greater fiscal stability and sustainability. Here, the agreements were reached with: Bally’s, Caesars, Harrah’s, the Golden Nugget, Tropicana, and the shuttered Trump Plaza and Trump Taj Mahal: it comes about half a year in the wake of the state’s tax appeal settlement with Borgata, under which the city agreed to pay $72 million of the $165 million the casino was owed. While the Christie administration did not announce dollar amounts for any of the seven settlements announced last week, it did clarify that an $80 million bond ordinance adopted by the city will cover all the payments—effectively clearing the fiscal path for Atlantic City to act to reduce its tax rate over the long term as the costs of the appeal are known and can be paid out of the municipal bonds sold earlier this year.  

In these tax appeals, the property owners have claimed they paid more in taxes than they should have—effectively burdening the fiscally besieged municipality with hundreds of millions in debt over the last few years as officials sought to avoid going into chapter 9 municipal bankruptcy. Unsurprisingly, Gov. Christie has credited the state takeover of Atlantic City for fostering the settlements, asserting his actions were the “the culmination of my administration’s successful efforts to address one of the most significant and vexing challenges that had been facing the city…Because of the agreements announced today, casino property tax appeals no longer threaten the city’s financial future.” The Governor went on to add that his appointment of Jeffrey Chiesa, the former U.S. Senator and New Jersey Attorney General to usurp all municipal fiscal authority in Atlantic City when, in his words, Atlantic City was “overwhelmed by millions of dollars of crushing casino tax appeal debt that they hadn’t unraveled,” have now, in the wake of the state takeover, resulted in the city having a “plan in place to finance this debt that responsibly fits within its budget.” The lame duck Governor added in the wake of the state takeover, the city will see an 11.4% drop in residents’ overall 2017 property tax rate. For his part, Atlantic City Mayor Don Guardian described the fiscal turnaround as “more good news for Atlantic City taxpayers that we have been working towards since 2014: When everyone finally works together for the best interest of Atlantic City’s taxpayers and residents, great things can happen.”

Puerto Rican Debt. The Fiscal Supervision Board in the U.S. territory wants to initiate a discussion into Puerto Rico’s debt—and how that debt has weighed on the island’s fiscal crisis—making clear in issuing a statement that its investigation will include an analysis of the fiscal crisis and its taxpayers, and a review of Puerto Rico’s debt and issuance, including disclosure and sales practices, vowing to carry out its investigation consistent with the authority granted under PROMESA. It is unclear, however, how that report will mesh with the provision of PROMESA, §411, which already provides for such an investigation, directing the Government Accounting Office (GAO) to provide a report on the debt of Puerto Rico no later than one year after the approval of PROMESA (a deadline already passed: GAO notes the report is expected by the end of this year.). The fiscal kerfuffle comes as the PROMESA Oversight Board meets today to discuss—and mayhap render a decision with regard to furloughs and an elimination of the Christmas bonus as part of a fiscal oversight effort to address an expected cash shortfall this Fall, after Gov. Ricardo Rosselló, at the end of last month, vowed he would go to court to block any efforts by the PROMESA Board to force furloughs, apprehensive such an action would fiscally backfire by causing a half a billion dollar contraction in Puerto Rico’s economy.

Thus, we might be at an OK Corral showdown: PROMESA Board Chair José Carrión III has warned that if the Board were to mandate furloughs and the governor were to object, the board would sue. As proposed by the PROMESA Board, Puerto Rican government workers are to be furloughed four days a month, unless they work in an excepted class of employees: for instance, teachers and frontline personnel who worked for 24-hour staffed institutions would only be furloughed two days a month, law enforcement personnel not at all—all part of the Board’s fiscal blueprint to save the government $35 million to $40 million monthly.  However, as the ever insightful Municipal Market Advisors managing partner Matt Fabian warns, it appears “inevitable” that furloughs and layoffs would hurt the economy in the medium term—or, as he wrote: “To the extent employee reductions create a protest environment on the island, it may make the Board’s work more difficult going forward, but this is the challenge of downsizing an over-large, mismanaged government.” At the same time, Joseph Rosenblum, the Director of municipal credit research at AllianceBernstein, added: “It would be easier to comment about the situation in Puerto Rico if potential investors had more details on their cash position on a regular basis…And it would also be helpful if the Oversight Board was more transparent about how it arrived at its spending estimates in the fiscal plan.”

Pensiones. The PROMESA Board and Puerto Rico’s muncipios appear to have achieved some progress on the public pension front: PROMESA Board member Andrew Biggs asserts that the fiscal plan called for 10% cuts to pension spending in future fiscal years, while Sobrino Vega said Gov. Ricardo Rosselló has promised to make full pension payments. Natalie Ann Jaresko, the former Ukraine Minister of Finance whom former President Obama appointed to serve as Executive Director of PROMESA Fiscal Control Board, described the reduction as part of the fiscal plan that the Governor had promised to observe: the fiscal plan assumed that the Puerto Rican government would cut $880 million in spending in the current fiscal year. Indeed, in the wake of analyzing the government’s implementation plans, the PROMESA Board appeared comfortable that the cuts would save $662 million—with the Board ordering furloughs to make up the remaining $218 million. The fiscal action came as PROMESA Board member Carlos García said that the board last Spring presented the 10 year fiscal plan guiding government actions with certain conditions, Gov. Rosselló agreed to them, so that the Board approved the plan with said conditions, providing that the government achieve a certain level of liquidity by the end of June and submit valid implementation plans for spending cuts. Indeed, Puerto Rico had $1.8 billion in liquidity at the end of June, well over the $291 million that had been projected, albeit PROMESA Board member Ana Matosantos asserted the $1.8 billion denoted just a single data point. Ms. Jaresko, however, advised that this year’s government cuts were just the beginning: the Board fiscal plan calls for the budget cuts to more than double from $880 million in this year, to $1.7 billion in FY 2019, to $2.1 billion in FY2020.  No Puerto Rican government representative was allowed to make a presentation to the board on the issue of furloughs.

Not surprisingly, in Puerto Rico, where the unemployment rate is nearly triple the current U.S. rate, the issue of furloughs has raised governance issues: Sobrino Vega, the Governor’s chief economic advisor non-voting representative on the PROMESA Oversight Board, said there was only one government of Puerto Rico and that was Gov. Rosselló’s, adding that under §205 of PROMESA, the board only had the powers to recommend on issues such as furloughs, noting: “We can’t take lightly the impact of the furloughs on the economy,” adding the government will meet its fiscal goals, but it will do it according its own choices, but that the Puerto Rican government will cooperate with the Board on other matters besides furloughs. His statement came in the wake of PROMESA Board Chair José Carrión III’s statement in June that if Puerto Rico did not comply with a board order for furloughs, the Board would sue.

Cambio?  Puerto Rico Commonwealth Treasury Secretary Raul Maldonado has reported that Puerto Rico’s tax revenue collections last month were was ahead of projections, marking a positive start to the new fiscal year for an island struggling with municipal bankruptcy and a 45% poverty rate. Secretary Maldonado reported the positive cambio (in Spanish, “cambio” translates to change—and may be used both to describe cash as well as change, just as in English.): “I think we are going to be $20 to $30 million over the forecast: For July, we started the fiscal year already in positive territory, because we are over the forecast. We have to close the books on the final adjustment but we feel we are over the budget.” His office had reported the revenue collection forecast for July, the start of Puerto Rico’s 2017-2018 fiscal year, was $600.8 million: in the previous fiscal year, Puerto Rico’s tax collections exceeded forecasts by $234.9 million, or 2.6%, to $9.33 million, with the key drivers coming from the foreign corporations excise tax, the sales and use tax, and the motor vehicle excise tax. Sec. Maldonado, who is also Puerto Rico’s CFO, reported that each government department is required to freeze its spending and purchase orders at 95% of the monthly budget, noting: “I want to make sure that they don’t overspend. By freezing 5%, I am creating a cushion so if there is any variance on a monthly basis we can address that. It is a hardline budget approach but it is a special time here.” Sec. Maldonado also said he was launching a centralized tax collection pilot program, with guidance from the U.S. Treasury—one under which three large and three small municipalities have enrolled in an effort to assess which might best increase tax collection efficiency while cutting bureaucracy in Puerto Rico’s 78 municipalities, noting: “We are going to submit the tax reform during August, and we will include that option as an alternative to the municipalities.”

Municipal Moral & Fiscal Obligations

07/27/17

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Good Morning! In today’s iBlog, we consider the state & local fiscal challenge fiscal in the event of a moral obligation pledge failure; the ongoing, long-term revival and recovery of Detroit from the largest municipal bankruptcy in American history, and the revitalization fiscal challenges in Atlantic City and Puerto Rico.

A Fiscal Bogie or a Moral Municipal Bond? Buena Vista, Virginia, a small, independent city located in the Blue Ridge Mountains of Virginia with a population of about 6,650, where the issue of its public golf course became an election issue—with the antis winning office and opting not to make the bond payments on the course they opposed—rejecting a moral obligation pledge on what has become a failed economic development project, as the city’s elected leaders chose instead to focus—in the wake of the Great Recession—on essential public services, putting the city in a sub par fiscal situation with Vista Links, which was securing the bonds, according to Virginia state records. The company, unsurprisingly,  has sued to get the monies it was promised—potentially putting at risk the city’s city hall and other municipal properties which had been put up as collateral. Buena Vista City Attorney Brian Kearney discerns this to be an issue of a moral obligation bond, rather than a general obligation municipal bond, so that “[W]e could not continue to do this and continue to do our core functions.” In the wake of the fiscal imbroglio, the Virginia Commission on Local Government (COLG)—which provides an annual fiscal stress study‒ended up playing a key role in the Petersburg effort in the General Assembly—finding that very poor management had led to an $18 million hole.

Here, the municipality’s default triggered negotiations with bond insurer, ACA Financial Guaranty Corp., which led to a forbearance agreement—one on which the city subsequently defaulted—triggering the Commonwealth of Virginia  to bar financing backup to the city from the state’s low-cost municipal borrowing pool, lest such borrowing would adversely impact the pool’s credit rating—and thereby drive up capital borrowing costs for cities and counties all across the state. In this instance, the Virginia Resources Authority refused to allow Buena Vista to participate in the Virginia Pooled Financing Program to refinance $9.25 million of water and sewer obligations to lower debt service costs—lest inclusion of such a borrower from the state’s municipal pool would negatively impact the pool’s offering documents—where some pooled infrastructure bonds, backed by the Commonwealth’s moral obligation pledge, are rated double-A by S&P Global Ratings and Moody’s Investors Service.

Seven years ago, the municipality entered into a five-year forbearance agreement with bond insurer ACA Financial Guaranty Corp.—an agreement which permitted Buena Vista to make 50% of its annual municipal bond payments for five years—an agreement on which Buena Vista defaulted when, two years ago, the City Council voted against inclusion of its FY 2015 budgeted commitment to resume full bond payments. That errant shot triggered UMB Bank NA to file a lawsuit in state court in 2016 in an effort to enforce Buena Vista’s fiscal obligation. In response, the municipality contended the golf course deal was void, because only four of the city’s seven council members had voted on the bond resolution and related agreements—which included selling the city’s interest in its “public places,” arguing that Virginia’s constitution mandates that all seven council members be present to vote on the golf course deal, because the agreement granted a deed of trust lien on city hall, police, and court facilities which were to serve as collateral for the bonds.

Subsequently, last March 22nd, the city filed a motion to dismiss the federal suit for failure to state a claim—a claim on which U.S. District Judge Norman K. Moon held a hearing last Friday—with the municipality arguing that the golf course’s lease-revenue debt is not a general obligation. Therefore, the city appears to be driving at a legal claim it has the right to stop payment on its obligation, asserting: “The city seeks to enforce the express terms of the bonds, under which the city’s obligation to pay rent is subject to annual appropriations by the City Council, and ceases upon a failure of appropriations.” Moreover, pulling another fiscal club from its bag, the city claimed the municipal bonds here are not a debt of the city; rather, the city has told the court that the deed of trust lien for the collateral backing the bonds is void. That is an assertion which ACA, in its motion to dismiss, deemed an improper attempt to litigate the merits of the suit at the pleading stage, noting: “Worse, the city wants this court to rule that the city only has a ‘moral obligation’ to pay its debts, and that [ACA’s] only remedy upon default is to foreclose on a fraction of the collateral pledged by the city and the Public Recreational Facilities Authority of the city of Buena Vista….If adopted, this court will be sending a message to the market that no lender should ever finance public projects in Virginia because municipalities: (a) have unbridled discretion to not repay loans; and (b) can limit the collateral that can be foreclosed upon.” In a statement subsequently, ACA added: “It’s unfortunate that Buena Vista’s elected officials have forced ACA into court after recklessly choosing to have the city default on $9.2 million in debt even though the city has ample funds to make the payments that are owed…This is particularly troubling, because ACA spent years negotiating in good faith after the city claimed financial hardship, and even provided a generous forbearance agreement that reduced payments by 50% starting in 2011…After the city defaulted on that deal in 2014, it offered ACA only pennies on the dollar, while seeking to be absolved of all future burdens of this financing. Left with no reasonable alternative, we must look to the court for an equitable and fair outcome.”

In the nonce, as its legal costs mount, Buena Vista’s access to the municipal credit markets has not only adversely affected its ability to borrow from state financing programs, but also there is growing apprehension there could be implications for other local governments and potentially the Commonwealth of Virginia. Virginia Finance Secretary Ric Brown, when this issue first cropped up, had written previous Buena Vista Mayor Mike Clements: “This ability cannot be jeopardized or put at risk by permitting a defaulting locality to participate in a state pool financing program such as the VPSA: The Commonwealth certainly expects localities to do what is necessary to meet their debt obligations and to protect Virginia localities’ reputation for fiscal discipline.” (Virginia’s Commission on Local Government has revealed that 53% of Virginia’s counties and cities are experiencing above average or high fiscal stress.).

Motor City Recovery. Louis Aguilar of the Detroit News this week reported that Detroit is expected to grow by some 60,000 residents by 2040—growth which would mark the first time Detroit’s population will have increased since the 1950s, according to a study by the Urban Institute, “Southeast Michigan Housing Futures,” which notes that Detroit will finally end its decades-long loss of residents. Xuan Liu, manager of research and data analysis for the Southeast Michigan Council of Governments, said the study builds on recent analyses done by SEMCOG, the Michigan Department of Transportation, and the University of Michigan: “It is a reflection of both the improvements we’ve seen in the city and the changing demographic trends.” The report indicates the region’s population base will include a larger percentage of residents over the age of 65 who are more inclined to remain where they are; the population increase in population will be influenced by the continued inflow of young adults and a small but steady rise of the Latino population. The study warns these changes will present major challenges, including the doubling of senior-headed households over the next three decades: by 2040, the study projects these households will make up 37% of the region’s households versus 22% in 2010; it adds that African-American households in the Detroit metro area disproportionately suffered from the effects of the housing crisis:  African-American homeownership rates dropped from a higher than the national average in 1990 and 2000 to be in line with the national average by 2014. Interestingly, it projects that the demand for rental housing is expected to grow throughout the region, with aging households likely comprising the bulk of this net growth as established renter households age—but warning that the region, and Michigan more broadly, lack affordable rental housing for low-income households. Overall, the Metro Detroit region is expected to gain approximately 380,000 households by 2040, according to the study.

For the Motor City, the report found that by 2016, Detroit’s population had slowed to its lowest pace in decades, according U.S. Census data: as of one year ago, Detroit’s population was 672,795, a loss of 3,541 residents—a decline comparable to the previous year: between 2000 to 2010, Detroit was losing more than 23,700 annually, on average, according to the Southeast Michigan Council of Governments; in the first decade of this century, the region lost 372,242 jobs, its population shrank by 137,375; and inflation-adjusted personal income retreated from 13.7% above the U.S. average to 4.8% below in 2010.

A Bridge to Tomorrow? The Detroit City Council this week okayed the $48 million agreement to open the way for the sale of city-owned property and streets in the path of the new Gordie Howe International Bridge to Canada—with the agreement also incorporating provisions to help residents living near the Delray neighborhood where the bridge will be located. Under the pact, the city will sell 36 city-owned parcels of land–land which Windsor-Detroit Bridge Authority Director of Communications Mark Butler siad was needed for the Gordie Howe bridge project. Courtesy of Windsor-Detroit Bridge Authority noted: “The funding relates to activities in advance of the P3 partner coming on board…As a normal course of business, WDBA, either directly or through the Michigan Department of Transportation, is providing funds to Detroit for property, assets, and services. The city in turn, is using those funds to purchase or swap homes outside of the project footprint, job training etc.” The bridge authority, a Canadian Crown corporation, will manage the Public-Private Partnership procurement process; the authority will also responsible for project oversight, including the actual construction and operation of the new crossing—whilst Canadian taxpayers will be fronting the funding to pay for the deal under an arrangement with the State of Michigan—under which there will be no cost or financial liability to Michigan or to Michigan taxpayers: Canada plans to recoup its money through tolls after the bridge is constructed. The Motor City will sell 36 city-owned parcels of land, underground assets, and approximately 5 miles of city owned streets needed for the bridge project. Under the agreement, the underlying property has been conveyed to the State of Michigan, but Canada is providing the funds. The bridge authority is expected to select a contractor for the project at the end of this year; construction will begin sometime next year.

Is There a Promise of Revitalization? The PROMESA Board this week appointed Noel Zamot to serve as Revitalization Coordinator for the U.S. territory—with Governor Ricardo Rosselló concurring the appointment would benefit Puerto Rico’s ability to compete—a key issue for any meaningful, long-term fiscal recovery. He added: “With over 25 years of experience in the aerospace and defense industry, we are convinced that Mr. Zamot will contribute to our economic development agenda and increase Puerto Rico’s competitiveness.” The federal statute’s Title V provided for such an appointment, a key part to any post chapter 9 plan of debt adjustment. Direct. PROMESA Board Chair José Carrión III noted: “Noel Zamot’s successful career and multifaceted experience interfacing between the government and the private sector in critical defense infrastructure areas will allow him to hit the ground running to foster strategic infrastructure investment expeditiously.” Mr. Zamot noted: “I am honored by this opportunity to serve and give back to Puerto Rico, my birthplace, and contribute to its success…Over more than two decades of professional experience, I have seen firsthand how investments in infrastructure can have a catalyzing effect on economic growth and prosperity.”

New Jersey & You. With major new developments under construction, renewed investor interest, and a slowly diversifying economy, it appears Atlantic City might be moving more swiftly from the red to the black—at a key point in political time, as voters in the city and New Jersey head to the polls next November for statewide and municipal elections—and, potentially, the end of state oversight of the city. Moreover, two new major projects are set to open next year, mayhap setting the stage for the city’s fiscal recovery—but also economic revitalization. Some of the stir relates to the purchase and $500 million renovation of the former Trump Taj Mahal Casino Resort—an opening projected to bring thousands of jobs and a strong brand to the city’s famed boardwalk. But mayhap the more promising development will be the completion of the $220 million Atlantic City Gateway project: a 67,500 square foot development which will serve as a new campus for Stockton University, including an academic building and housing for 500 students, and the new South Jersey Gas headquarters: the company believes its cutting-edge headquarters will trigger recruitment and growth, as it is projected to bring 15,000 square feet of new retail to the boardwalk.  

Interestingly, what has bedeviled the city, low land prices‒at their lowest in decades, is now attracting successful developers, who have been buying up buildings: commercial real estate brokers note an uptick in leasing activity since the Gateway project was announced: the promise of jobs, residents, and revenue no longer overwhelmed by the gaming industry appears to be remaking the city’s image and adding to its physical and fiscal turnaround. Bart Blatstein, CEO of Tower Investments, notes: “Of course I see upside. This is what I do for a living. And it’s incredible–the upside in Atlantic City is like nowhere else I’ve seen in my 40-year career. Atlantic City is a great story. It’s got a wonderful new chapter ahead of it.”

Rising from Municipal Bankruptcies’ Ashes

07/24/17

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Good Morning! You might describe this a.m.’s e or iBlog as The Turnaround Story, as we consider the remarkable fiscal recovery in Atlantic City and observe some of the reflections from Detroit’s riot of half a century ago—a riot which presaged its nation’s largest chapter 9 bankruptcy, before we assess the ongoing fiscal turmoil in the U.S. territory look at Puerto Rico.

New Jersey & You. Governor Chris Christie on Friday announced his administration is delivering an 11.4% decrease in the overall Atlantic City property tax rate for 2017—a tax cut which will provide an annual savings of $621 for the City’s average homeowner, but which, mayhap more importantly, appears to affirm that the city’s fiscal fortunes have gone from the red to the black, after, earlier this month, the City Council accepted its $206 million budget with a proposed 5% reduction in the municipal purpose tax rate, bringing it to about $1.80 per $100 of assessed valuation. Atlantic City’s new budget, after all, marks the first to be accepted since the state took over the city’s finances last November; indeed, as Mayor Don Guardian noted, the fiscal swing was regional: the county and school tax rates also dropped—producing a reduction of more than 11%—and an FY2018 budget $35 million lower than last year—and $56 million below the FY2016 budget: “We had considerably reduced our budget this year and over the last couple of years…I’m just glad that we’re finally able to bring taxes down.” Mayor Guardian added the city would still like to give taxpayers even greater reductions; nevertheless, the tax and budget actions reflect the restoration of the city’s budget authority in the wake of last year’s state takeover: the budget is the first accepted since the state took over the city’s finances in November after the appointment last year of a state fiscal overseer, Jeff Chiesa—whom the Governor thanked, noting:

“Property taxes can be lowered in New Jersey, when localities have the will and leaders step in to make difficult decisions, as the Department of Community Affairs and Senator Jeff Chiesa have done…Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents. Annual savings of more than $600 for the average household is substantial money that families can use in their everyday lives. This 11.4% decrease is further proof that what we are doing is working.”

Contributing to the property tax rate decrease is a $35-million reduction in the City’s FY2017 budget, which, at $206.3 million, is about 25% lower than its FY2015 budget, reflecting reduced salaries, benefits, and work schedules of Atlantic City’s firefighters and police officers, as well as the outsourcing of municipal services, such as trash pickup and vehicle towing to private vendors. On the revenue side, the new fiscal budget also reflects a jackpot in the wake of the significant Borgata settlement agreement on property tax appeals—all reflected in the city’s most recent credit upgrade and by Hard Rock’s and Stockton University’s decisions to make capital investments in Atlantic City, as well as developers’ plans to transform other properties, such as the Showboat, into attractions intended to attract a wider variety of age groups to the City for activities beyond gambling—or, as the state-appointed fiscal overseer, Mr. Chiesa noted: “The City is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the City’s residents and businesses.

The Red & the Black. Unsurprisingly, there seems to be little agreement with regard to which level of government merits fiscal congratulations. Atlantic City Mayor Guardian Friday noted: “We had considerably reduced our budget this year and over the last couple of years…“I’m just glad that we’re finally able to bring taxes down.” Unsurprisingly, lame duck Gov. Christie credited the New Jersey Department of Community Affairs and Mr. Chiesa, stating: “Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents.” However, Tim Cunningham, the state director of local government services, earlier this month told the Mayor and Council the city and its budget were moving in the “right direction,” adding hopes for the city’s fiscal future, citing Hard Rock and Stockton University’s investment in the city; while Mr. Chiesa, in a statement, added: “The city is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the city’s residents and businesses.”

Do You Recall or Remember at All? Detroit Mayor Mike Duggan, the white mayor of the largest African-American city in America, last month spoke at a business conference in Michigan about the racially divisive public policies of the first half of 20th century which helped contribute to Detroit’s long, painful decline in the second half of the last century—a decline which ended in five torrid nights and days of riots which contributed to the burning and looting of some 2,509 businesses—and to the exodus of nearly 1.2 million citizens. The Mayor, campaigning for re-election, noted: “If we fail again, I don’t know if the city can come back.” His remarks appropriately come at the outset of this summer’s 50th anniversary of the summer the City Detroit burned.

Boston University economics Professor Robert Margo, a Detroit native who has studied the economic effects of the 1960’s U.S. riots, noting how a way of life evaporated in 120 hours for the most black residents in the riot’s epicenter, said: “It wasn’t just that people lived in that neighborhood; they shopped and conducted business in that neighborhood. Overnight all your institutions were gone,” noting that calculating the economic devastation from that week in 1967 was more than a numbers exercise: there was an unquantifiable human cost. That economic devastation, he noted, exacerbated civic and problems already well underway: job losses, white flight, middle-income black flight, and the decay and virtual wholesale abandonment of neighborhoods, where, subsequently, once-vibrant neighborhoods were bulldozed, so that, even today, if we were to tour along main artery of the riot, Rosa Parks Boulevard (which was 12th Street at the time of the riots), you would see overgrown vacant lots, lone empty commercial and light industrial buildings, boarded-up old homes—that is, sites which impose extra security costs and fire hazards for the city’s budget, but continue to undercut municipal revenues. Yet, you would also be able to find evidence of the city’s turnaround: townhouses, apartments, and the Virginia Park Community Plaza strip mall built from a grassroots community effort. But the once teeming avenue of stores, pharmacies, bars, lounges, gas stations, pawn shops, laundromats, and myriad of other businesses today have long since disappeared.

In the wake of the terrible violence, former President Lyndon Johnson created the Kerner Commission, formally titled the National Advisory Commission on Civil Disorders, to analyze the causes and effects of the nationwide wave of 1967 riots. That 426-page report concluded that Detroit’s “city assessor’s office placed the loss—excluding building stock, private furnishings, and the buildings of churches and charitable institutions—at approximately $22 million. Insurance payouts, according to the State Insurance Bureau, will come to about $32 million, representing an estimated 65 to 75 percent of the total loss,” while concluding the nation was “moving toward two societies, one black, one white—separate and unequal.” Absent federal action, the Commission warned, the country faced a “system of ’apartheid’” in its major cities: two Americas: delivering an indictment of a “white society” for isolating and neglecting African-Americans and urging federal legislation to promote racial integration and to enrich slums—primarily through the creation of jobs, job training programs, and decent housing. In April of 1968, one month after the release of the Kerner Commission report, rioting broke out in more than 100 cities across the country in the wake of the assassination of civil rights leader Martin Luther King, Jr.

In excerpts from the Kerner Report summary, the Commission analyzed patterns in the riots and offered explanations for the disturbances. Reports determined that, in Detroit, adjusted for inflation, there were losses in the city in excess of $315 million—with those numbers not even reflecting untabulated losses from businesses which either under-insured or had no insurance at all—and simply not covering at all other economic losses, such as missed wages, lost sales and future business, and personal taxes lost by the city because the stores had simply disappeared. Academic analysis determined that riot areas in Detroit showed a loss of 237,000 residents between 1960 and 1980, while the rest of the entire city lost 252,000 people in that same time span. Data shows that 64 percent of Detroit’s black population in 1967 lived in the riot tracts. U. of Michigan Professor June Thomas, of the Alfred Taubman College of Architecture and Urban Planning, wrote: “The loss of the commercial strips in several areas preceded the loss of housing in the nearby residential areas. That means that some of the residential areas were still intact but negatively affected by nearby loss of commercial strips.” The riots devastated assessed property values—creating signal incentives to leave the city for its suburbs—if one could afford to.

On the small business side, the loss of families and households, contributed to the exodus—an exodus from a city of 140 square miles that left it like a post WWII Berlin—but with lasting fiscal impacts, or, as Professor Bill Volz of the WSU Mike Ilitch School of Business notes: the price to reconstitute a business was too high for many, and others simply chose to follow the population migration elsewhere: “Most didn’t get rebuilt. They were gone, those mom-and-pop stores…Those small business, they were a critical part of the glue that made a neighborhood. Those small businesses anchored people there. Not rebuilding those small businesses, it just hurt the neighborhood feel that it critical in a city that is 140 square miles. This is a city of neighborhoods.” Or, maybe, he might have said: “was.” Professor Thomas adds that the Motor City’s rules and the realities of post-war suburbanization also made it nearly impossible to replace neighborhood businesses: “It’s important to point out that, as set in place by zoning and confirmed by the (city’s) 1951 master plan, Detroit’s main corridors had a lot of strip commercial space that was not easily converted or economically viable given the wave of suburban malls that had already been built and continued to draw shoppers and commerce…This, of course, all came on top of loss of many businesses, especially black-owned, because of urban renewal and I-75 construction.”

Left en Atras? (Left Behind?As of last week, two-thirds of Puerto Rico’s muncipios, or municipalities, had reported system breakdowns, according to Ramón Luis Cruz Burgos, the deputy spokesman of the delegation of the Popular Democratic Party (PPD) in the Puerto Rico House Of Representatives: he added that in Puerto Rico, a great blackout occurs every day due to the susceptibility of the electric power system, noting, for instance, that last month, for six consecutive days, nearly 70 percent of Puerto Rico’s municipalities had problems with electricity service, or, as he stated: “In Puerto Rico we have a big blackout every day. We have investigated the complaints that have been filed at the Autoridad de Energía Eléctrica (AEE) for blackouts in different sectors, and we conclude that daily, two-thirds of the island are left without light. This means that sectors of some 51 municipalities are left in the dark and face problems with the daily electricity service.”

It seems an odd juxtaposition/comparison with the events that triggered the nation’s largest ever chapter 9 municipal bankruptcy in Detroit—even as it reminds us that in Puerto Rico, not only is the Commonwealth ineligible for chapter 9 municipal bankruptcy, but also its municipalities. Mr. Cruz Burgos noted that reliability in the electric power system is one of the most important issues in the economic development of a country, expressing exasperation and apprehension that interruptions in service have become the order of the day: “Over the last two months, we have seen how more than half of the island’s villages are left dark for hours and even for several days, because the utility takes too long to repair breakdowns,” warning this problem will be further aggravated during the month of August, when energy consumption in schools and public facilities increases: “In the last two months, there are not many schools operating and the use of university facilities is also reduced for the summer vacation period. In addition, many employees go on vacation so operations in public facilities reduce their operation and, therefore, energy consumption.”

Jose Aponte Hernandez, Chair of the International and House Relations Committee, blamed the interruptions on the previous administration of Gov. Luis Fortuno, claiming: it had “abandoned the aggressive program of maintenance of the electrical structure implemented by former Gov. Luis Fortuna, claiming: “In the past four years the administration of the PPD did not lift a finger to rehabilitate the ESA structure. On the contrary, they went out of their way to destroy it in order to justify millionaire-consulting contracts. That is why today we are confronting these blackouts.”

The struggle for basic public services—just as there was a generation ago in Detroit, reflect the fiscal and governing challenge for Puerto Rico and its 88 municipalities at a time when non-Puerto Rican municipal bondholders have launched litigation in the U.S. Court of Federal Claims to demand payment of $3.1 billion in principal and interest in Puerto Rico Employment Retirement System bonds (In Altair Global Credit Opportunities Fund (A), LLC et al. v. The United States of America)—the first suit against the U.S. government proper, in contrast to prior litigation already filed against the Puerto Rico Oversight Board, with the suit relying on just compensation claims and that PROMESA is a federal entity. Here, as the Wizard of chapter 9 municipal bankruptcy, Jim Spiotto, notes, the key is whether the PROMESA board was acting on behalf of the federal government or on behalf of Puerto Rico—adding that he believes it was acting for Puerto Rico and, ergo, should not be considered part of the federal government, and that the U.S. Court of Federal Claims may find that the federal government’s actions were illegal. Nevertheless, the issue remains with regard to whether the bonds should be paid from the pledged collateral—in this case being Puerto Rico employer contributions. (The Altair complaint alleges that the PROMESA Board is a federal entity which has encouraged, directed, and even forced Puerto Rico to default on its ERS bonds—a board created by Congress which has directed the stream of employer contributions away from the bondholders and into the General Fund, according to these bondholders’ allegations.