From the Ashes of Municipal Bankruptcy

September 17, 2018

Good Morning! In this morning’s eBlog, we report, again, on the remarkable fiscal and neighborhood recovery of Detroit—a demonstration of how chapter 9 municipal bankruptcy can lay the foundation for extraordinary fiscal and physical recovery. Then we look south to consider a new strategic plan for Puerto Rico—a U.S. territory surely on notice that it cannot count on FEMA in a major, life-threatening disaster.  

The Phoenix of American Cities? Detroit, the once and mayhap future automobile capital of the U.S. and one-time Motown music capital, filed for the nation’s largest ever chapter 9 municipal bankruptcy five years and two months ago in the wake of a loss of more than a million residents, cuts in state aid, and collapsing real estate values—forcing the city to borrow to meet its operating costs. It came in the wake of the city experiencing periodic episodes of corruption and mismanagement for years—a critical consequence of this former great American industrial city’s dysfunction had been its erosion as a core for jobs: employment had fled the urban core, at a time it was rising in the metropolitan area—even as other cities were seeing something of a city-center revival. The Motor City’s ability to borrow in the municipal markets was exhausted after years of issuing long-term debt to pay its operating bills: the city had listed liabilities in excess of $17 billion—equal to $25,000 for every remaining resident. In his report, the city’s Emergency Manager, Kevyn Orr, described the city as “dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption.” For residents, escaping these debts and physical deterioration accompanied by high violent crime rates and unperforming schools meant moving to the suburbs: of the 264,209 households in Detroit, only 9.2% were married couple families with children under 18; another 78,438 households, or nearly 30%, were families headed by women.

Now, as the ever insightful Daniel Howes of the Detroit News has written, the city’s neighborhoods are in play: he wrote: “Three months after Ford Motor Co. confirmed plans to convert Corktown’s dilapidated Michigan Central Depot into its center for mobility and self-driving vehicle development, a consortium backed by $50 million from the Kresge Foundation is planning a cradle-to-career educational complex on the campus of Marygrove College at Wyoming and McNichols.” He was referring to the city’s historic district near downtown, one of the city’s oldest neighborhoods—and one listed on the National Register of Historic Places. It is not just an old part of the city, but one which gained its heritage in the middle of the last century when, in the wake of the Great Irish Potato Famine in the 1840’s, the great Irish migration to the U.S. made Detroit the city with the largest new home—with many Irish settling on the west side of the city; they were primarily from County Cork, and thus the neighborhood came to be known as Corktown. Kresge’s CEO, Rip Rapson, at the end of last week answered “unequivocally ‘yes.’ The time for the pivot to the neighborhoods is now,” in what he deemed an “an unprecedented model of neighborhood revitalization.”

A critical element to this revitalization could come from the physically and fiscally depleted Detroit Public Schools—so physically dangerous and unperforming that they served to discourage families with children from wanting to live in the city; yet, now, as Mr. Howes wrote: “The symbolism is striking. The Detroit Public Schools Community District board, burdened with a legacy of underperforming schools and labor troubles, is wagering it can create a new model for traditional public education by partnering with the University of Michigan’s School of Education, Starfish Family Services, and Marygrove to teach local students and teach their teachers…Borrowing from the residency programs used in medical education, the Ann Arbor university founded 201 years ago in Detroit would leverage its reputation and expertise in what University President Mark Schlissel calls “teamwork in service to the public.” That is, the effort is to anchor community redevelopment, as Chicago did, by education: the Detroit Public School District would operate a K-8 school and a high school carved from the former Bates Academy on the east edge of campus, while the University of Michigan would operate an undergraduate “residency” program for aspiring teachers.

Mr. Howes went on to write that, even as Detroit’s downtown and Midtown attract billions in private investment, especially from mortgage mogul Dan Gilbert and the Ilitch family to big corporate relocations and small business investment, neighborhood residents and the civic groups representing them have continued to ask: ‘what about us?’ The answer, it seems, is driving in: the Ford Motor Co. reports it will invest $740 million to build out the Corktown campus. Kresge is spearheading numerous community initiatives. A JPMorgan Chase program continues to invest in small-business creation.

On the elected front, Mayor Mike Duggan, seeking re-election, has made neighborhood revitalization a key issue in his campaign for, as Mr. Howe noted, two reasons: “It’s politically potent in a city that struggled for decades to provide basic services, and, second, it’s the next obvious step in the city’s revitalization: Reinvesting in downtown and Midtown, essentially the spine of Detroit, helps bolster tax base, fuel economic activity, and create tax-paying jobs. Reinvesting in neighborhoods and improving traditional public education strengthens community and gives Detroiters a reason to stay, to reap the benefits of rising property values.”

Kresge CEO Rip Rapson, a critical player in Detroit’s physical and fiscal recovery, notes: “What this town needs to be shown again and again is you can take big ideas and make them real…So many people are waiting to see efforts like this fail.” The heart, as Mr. Howes noted, of the so-called “P-20 Partnership” is Detroit’s reconstituted public school district, a campaign backed by Kresge’s contributions, the University of Michigan’s commitment to train teachers to teach Detroit’s youth— and the courage of its leadership to develop a new model for educating the city’s kids, right in the heart of a neighborhood.”

A new Strategic Plan for Puerto Rico? While FEMA has approved a new document for emergency response for Puerto Rico, it is a plan with a critical MIA: municipios—and this with time uncertain, as Hurricane Isaac is lurking in the Caribbean and FEMA is caught in a quagmire over the President’s assertion that fewer than 50 lives were lost in Puerto Rico from Hurricane Maria. FEMA’s Deputy Federal Coordinating Officer in Puerto Rico, Justo “Tito” Hernández has asserted that the “The Strategic Plan was revised. And we are already doing exercises based on the plan. That is already finished,”in an interview with El Nuevo Día, claiming the changes are intended to correct errors which were made before, during, and after the hurricane. In addition, the document already required amendments, in line with federal regulations. (As a rule, the Strategic Plan is modified every five years; the current one was created in October of 2014 and revised after Hurricane Maria.) Yet, even though this plan for the Commonwealth is ready, the Emergency Management Plan for each municipio has yet to be certified by the Puerto Rico State Agency for Emergency and Disaster Management or FEMA, according to Commissioner Carlos Acevedo, who noted: “The plans, I am waiting for the company (hired to develop them) to deliver them to me. And they should be handing me the plans tomorrow (today).” However, both Governor Ricardo Rosselló Nevares and Commissioner Acevedo have pointed out, in separate interviews, that the government is prepared to face the challenges of the new hurricane season. Gov. Rosselló Nevares stated that now the “people” have an emergency plan, noting there have been workshops “throughout Puerto Rico on how to develop those personal emergency plans,” that changes were made at federal, state, and municipal levels regarding the distribution of food and medication, and that another “public health response” will be implemented. Nevertheless, Gov. Rosselló Nevares recognized that the island’s infrastructure, including the homes of thousands of families that still have blue tarps on their roofs and the power grid, remain vulnerable, stating: “It is no less true that, although there are parts that are more robust, it is a somewhat more fragile (power) grid. Therefore, we want to change and transform it,” he added, referring to the process he has begun to privatize PREPA, the Electric Power Authority: “There are significant improvements, particularly in the area of preparation, but without a doubt, Puerto Rico remains vulnerable, particularly in the infrastructure area.” The Governor added that this scenario will require quick action to transform the power grid and “a bit of luck that an event like María or even a lower-category one, does not impact Puerto Rico, again, and further collapse areas that are already vulnerable.” In addition, he noted, that already, unlike last year, when the government contacted the American Public Power Association with a month of delay after the cyclone, agreements with energy companies have been reached, albeit noting that other initiatives “take time, but are being executed,” and that 64 people are being trained to exercise “very particular functions” amid any new emergency.

With regard to addressing the dysfunction of the government during Maria, the Governor said that “people have been trained based on these new protocols.” Even so, emergency management experts have indicated that unsettled issues in critical areas with regard to the Commonwealth’s role in future emergencies remain: the preparation that the government claims has been questioned by the former executive Director of the former State Office for Emergency and Disaster Management, Epifanio Jiménez, who reiterated that the problem after Maria was the lack of implementation of the existing plans—or, as he put it: “They’re using Maria’s category 5 as a pretext—which is true, it’s a precedent—but they use it as an excuse to justify the collapse of agencies and agency leaders because, when Hurricane Georges hit, the leaders knew their work and the island recovered after 32 days.”

A simple look at the 2014 Strategic Hurricane Plan, which experts say was not followed, reveals that the Health, Family, Emergency Management Agency, and General Services Administration (SGA) departments, among other government agencies, failed in their respective functions before, during, and after the hurricane; moreover, if all of these agencies had fulfilled their responsibilities, fatalities estimated today at 2,975 (except by the White House) would have been avoided, according to the study by the Milken Institute of the George Washington University.

The Strategic Plan is governed by the National Incident Management System (NIMS), which establishes and defines the entire procedure for emergency management. It is backed by Presidential orders. FEMA develops the plan, theoretically in partnership with state authorities—clearly part of the challenge, as Puerto Rico is in a quasi-twilight zone between being a state or a municipality. This matters, because such a plan is intended to detail the function of what is called the Emergency Support Function, which is nothing more than the function that each agency will have before, during, and after an emergency.

Some of the Changes. The NMEAD Commissioner (Negotiator for the Management of Emergencies and Administrator for Disasters) Carlos Acevedo, said that now the Department of Family Affairs has a list of vulnerable groups. He added that the emergency management center integrated the private sector, and even had training. However, according to Mr. Jiménez:  “That is nonsense,” recalling that the private sector was already integrated into emergencies, because there must be agreements with agencies. To avoid the collapse of communications, Commissioner Acevedo said they now have a voice and data satellite system. The Telecommunications Regulatory Board and the NMEAD have a list of radio amateurs to use analog communication, if necessary, he added, albeit noting: “That has to be refined, and the JRT has to make sure that the private sector responds.” Moreover, Commissioner Acevedo said the services of cell phone companies, which also collapsed in the wake of the hurricane, is an issue that remains in the hands of the private sector. Finally, he noted he has also held meetings with the directors of hospitals and dialysis centers on the island, stressing that each party has increased its capacity to provide services.

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Not Florence Nightingale: The Governance Challenge of Life Threatening Storms

September 12, 2018

Good Morning! In this morning’s eBlog, as Hurricane Florence bears down on the East Coast, the President, yesterday, patted himself on the back for what he deemed an “incredibly successful” job he had done in leading the federal government’s response to the human, fiscal, and physical devastation wrought by Hurricane Maria in Puerto Rico, boasting: “I think Puerto Rico was “an incredible, unsung success,” referring to the devastating hurricane which caused the death of nearly 3,000 Americans.

Hurricane Relief? President Trump patted himself on the back yesterday for an “incredibly successful” job done in Puerto Rico, where the President, in the wake of the storm, had travelled to Ponce and thrown paper towels, deeming federal response efforts as one of his administration’s “best jobs.” Asked what lessons his administration might have learned as it prepares for this week’s Hurricane Florence, headed towards the nation’s capital later this week, the President responded: “I think probably the hardest one we had by far was Puerto Rico, because of the island nature, and I actually think it was one of the best jobs that’s ever been done with respect to what this is all about…The job that FEMA, and law enforcement and everybody did working along with the governor in Puerto Rico, I think was tremendous: I think that Puerto Rico was an incredible, unsung success.” He added that his administration had received “A pluses” for its work in Texas and Florida following hurricanes last year. Yet, even as the official death toll in Puerto Rico has reached nearly 3,000—far in excess of FEMA’s original report of 64—and with electricity still not totally restored, San Juan Mayor Carmen Yulín Cruz yesterday stated: “If he thinks the death of 3,000 people is a success, God help us all.”

Speaking at the White House yesterday, the President sought to assure the public that the FEMA was ready for Hurricane Florence, noting: “We are as ready as anybody has ever been,” as he boasted that the federal government had earned excellent grades for its disaster response in Texas and Florida, but he complained that the even better job done in Puerto Rico had been ignored, describing his administration’s “incredible, unsung success,” by noting the Pentagon had deployed a “tremendous military hospital in the form of a ship” to the island, omitting mention of his failure to suspend the Jones Act and that the ship to which he referred was largely underused: prepared to support 250 hospital beds, it admitted an average of only six patients per day, or 290 in total, over its 53-day deployment. Yet the President described the White House response effort as “one of the best jobs that’s ever been done with respect to what this is all about,” adding, falsely, that Puerto Rico’s electric grid and generating plant “was dead” before Hurricanes Irma and then Maria struck within weeks of one another—or, as the President asserted: “[W]hen the storm hit, they had no electricity, essentially, before the storm.”

As readers are all too aware, electricity was not restored to every customer in Puerto Rico until a few weeks ago. Worse, according to the director of the Puerto Rico Electric Power Authority, approximately a quarter of the federally financed $3 billion in repairs will likely have to be redone. San Juan Mayor Yulín Cruz was more direct, posting on Twitter, yesterday: “If he thinks the death of 3,000 people is a success, God help us all.”

Jose Andrés, a Spanish chef who organized an emergency feeding program on Puerto Rico in the wake of one of the U.S.’s most devastating storms, deemed the President’s comments “astonishing: The death toll issue has been one of the biggest cover-ups in American history…Everybody needs to understand that the death toll was a massive failure by federal government and the White House. Not recognizing how many people died in the aftermath meant the resources and full power of the government was taken away from the American people of Puerto Rico.”

Chef Andrés stressed that the failures spread to food and water distribution—a failure belatedly acknowledged by FEMA in a report released in July, acknowledging the agency was unprepared, with empty warehouses and few qualified staff to attend to the disaster, that it had brought the wrong type of satellite phones to Puerto Rico, and did not have truck drivers to deliver aid from the port, adding that the federal disaster relief agency had been without “situational awareness” of what was happening outside. FEMA’s Michael Byrne, the coordinator for the agency’s Puerto Rico response, has ironically confessed that, unlike the White House, “I think one of the most courageous things FEMA has done is to be honest and frank in the after action and say, ‘We need to work on these areas…And we’re going to. We’re going to get better,” adding that among the areas which needed to be improved was the process to inspect damaged homes: many of the 300,000 homes damaged in the storm are still covered by canvas. To which, Amarilis González, a former English teacher who founded Toldos Pa’ Mi Gente, or Tarps for My People, a group that collected house coverings: “Anyone who flies in to Puerto Rico may notice the amount of blue tarps as they are landing, and that is only a small representation of the rest of the municipalities…If that is a ‘success,’ I do not understand the concept.”

The White House reference this week to Puerto Rico as a “colony” made it clear, however, as Gov. Ricardo Rosselló put it: “The historical relationship between Puerto Rico and Washington is unfair and un-American…It is certainly not a successful relationship,” as the Governor called on the President to extend federal coverage to continuing work on housing restoration and clean-up which is still ongoing, noting the hurricane had constituted the “worst natural disaster in our modern history: Our basic

The End of State Usurpation of Local Elected Authority? Uneasy shelter from the Fiscal and Physical Storms?

August 31, 2018

Good Morning! In this morning’s eBlog, we consider the end of the State of Michigan to usurp local authority via the appointment of an Emergency Manager, the safety of school drinking water has become an issue in Detroit—especially after Flint, and we consider the extraordinary revisions in the projected Hurricane Maria death toll in Puerto Rica—and the White House response.

Protecting a City’s Children. Detroit Public School Superintendent Nikolai P. Vitti has directed turning off drinking water across the district’s 106 schools  in the wake of after discovering higher-than-acceptable levels of copper and lead in some facilities, with Superintendent Vitti noting his decision came out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools.” he said in a statement. Test results found elevated levels of lead or copper in 16 out of 24 schools which were recently tested. Supt. Vitti stated: “Although we have no evidence that there are elevated levels of copper or lead in our other schools where we are awaiting test results, out of an abundance of caution and concern for the safety of our students and employees.” His actions, no doubt affected by fiscal and water contamination in Flint, came even as Detroit officials and the Great Lakes Water Authority sought to assure residents that water provided by the authority is safe to drink: they pointed to the city’s aging infrastructure as the problem.  Superintendent Vitti said he will be creating a task force to determine the cause of the elevated levels and solutions, noting he had initiated water testing of all 106 school buildings last spring to ensure the safety of students and employees. Water at 18 schools had been previously shut off. He added: “This was not required by federal, state, or city law or mandate: This testing, unlike previous testing, evaluated all water sources from sinks to drinking fountains.” The District does not plan to test students: a spokesperson for the school system noted: “Dr. Vitti said…he has no evidence at all that children have been impacted from a health standpoint.”

Fiscal & Physical Challenges: Earlier this summer, Supt. Vitti released details from a facilities review which had determined the school district would need to spend $500 million now to fix the deteriorating conditions of its schools—an effort for the system projected to cost as much as $1.4 billion if there is a failure to act swiftly, with the Administrator pointing to the failure by former state-appointed emergency managers to make the right investments in facilities while the system was preempted of authority and state-appointed emergency managers from 2009 to 2016 failed to make the right investments, sending what Dr. Vitti described as “the message to students, parents and employees that we really don’t care about public education in Detroit, that we allow for second-class citizenry in Detroit.” The remarks raised anew questions with regard to Michigan’s governance by means of gubernatorially chosen Emergency Managers.  

Superindent Vitti said he had notified Mayor Mike Duggan of his decision to shut off the drinking water, and a spokesperson, John Roach, noted: Mayor is “fully supportive” of the approach Supt. Vitti has taken, adding: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD (Detroit Water and Sewerage Department) has offered to partner with the district on any follow-up testing that needs to be done.” At the same time, the Great Lakes Water Authority issued a statement in an effort to assure “residents and customers of GLWA’s regional system that they are not affected by the lead and copper issues,” noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water,” adding water treated by the authority meets and surpasses all federal and state regulations, albeit adding: “A task force will be formed consisting of engineering and water quality experts” to will help the district “understand the cause and identify solutions.” (Initial results this past week showed elevated levels of copper, lead or both at one or more water sources in 16 of 24 school buildings, according to the statement. Water bottles will be provided at the schools until water coolers arrive. The district also found water-quality issues in some schools in 2016.)

The incident in Detroit raises a host of fiscal and governance issues—especially in the wake of the tragedy in upstate Flint—with, in both cases, the state’s history of appointing Emergency Managers to preempt the authority of local elected leaders. In the case of DPS, Dr. Vitti has contacted the Mayor, the Governor, and a task force of engineers and water experts to understand the cause and possible solutions; Superintendent Nikolai P. Vitti opted to close the water taps out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools,” with the decision coming just days before the school district’s 106 schools are scheduled to open next Tuesday. (Water bottles will be provided at the schools until water coolers arrive.) Water officials have blamed aging infrastructure as the cause of the public safety threat. Now Dr. Vitti has asked Mike Duggan and Gov. Rick Snyder to convene a task force of engineers and water experts to determine the cause of the elevated lead and copper levels, and to propose solutions. 

Importantly, it seems the public safety risk is limited to Detroit’s public schools: water officials released a statement Wednesday assuring residents and customers of the Great Lakes Water Authority and the Detroit Water and Sewerage Department that they are not affected by the lead and copper issues at the school district, noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water…The water at GLWA’s treatment plants is tested hourly, and DWSD has no lead service lines connected to any DPSCD building. The drinking water is of unquestionable quality.”

Nevertheless, the threat to public safety—combined with the heartbreaking, long-term threats to Flint’s children from that city’s public water contamination—could add further challenges to Detroit’s recovery from the nation’s largest-ever chapter 9 municipal bankruptcy: a critical part of the city’s plan of debt adjustment was to address its vast amassment of abandoned houses by enticing young families with children to move from the suburbs back into the city—an effort which had to rely on a perception of the quality and safety of its public schools. Now, for a system itself recovering from bankruptcy, DPS faces a bill of at least $500 million to repair its buildings: approximately 25% of the system’s school buildings are in unsatisfactory condition and another 20%are in poor condition, according to the report. The district noted nearly $223 million of high-priority repairs involving elevators and lifts, energy supply, heating and cooling systems, sprinklers, standpipes, electrical service and distribution, lighting, wiring, communications, security system, local area networking, public address and intercoms, emergency lights and plumbing fixtures.

Mayor Duggan’s office and the Detroit Health Department Wednesday issued a joint statement supporting “the approach Dr. Vitti has taken to test all water sources within DPS schools and to provide bottled water until the district can implement a plan to ensure that all water is safe for use,” noting: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD has offered to partner with the district on any follow-up testing that needs to be done. We also will be reaching out to our charter operators in the coming days to work with them on a possible similar testing strategy to the voluntary one Dr. Vitti has implemented.”

Restoring Municipal Authority. Mayhap it is ironic that Michigan’s relatively rare authority for the Governor to appoint an emergency manager to preempt local elected authority reflects the uneven results of the program—a program I well remember from meeting with Kevyn Orr, whom Gov. Rick Snyder had appointed as Emergency Manager  (EM) to preempt all governing authority of Detroit’s Mayor and Council, at the Governor’s office in Detroit on the first day the city entered the largest municipal bankruptcy in U.S. history—and after the grievous failure of a previous gubernatorially-appointed Emergency Manager to help the Motor City. The very concept of state authority to appoint a quasi dictator and to preempt any authority of local leaders elected by the citizens, after all, feels un-American.

Yet, from that very first moment, Mr. Orr had acted to ensure there was no disruption in 9-1-1 responses—and that every traffic and street light worked. Unlike the experience under an Emergency Manager in Flint, Mr. Orr was intently focused on getting Detroit back on its fiscal and physical feet—and restoring elected leadership to today’s grieving city.

Now, as of this week, Michigan no longer has any local government under a state appointed emergency manager—and observers are under the impression the state program to preempt local authority may be quietly laid to rest. It has, after all, been a program of preemption of local democracy with untoward results: while it proved invaluable in Detroit, it has proven fiscally and physically grievous in Flint, where it has been blamed for contributing to Flint’s water contamination crisis. Indeed, two of Flint’s former EMs have been criminally charged in connection with the crisis. Their failures—at a cost of human lives, appears to have put the future of state pre-emption of local governing authority—may well make state officials leery of stepping in to usurp control a local government, even as some municipal market participants and others see state oversight programs as a positive credit feature. The last municipality in Michigan to be put under a state-imposed emergency manager was Lincoln Park—an imposition which ended three years ago. Michigan Treasury spokesperson Ron Leix noted: “Each situation that led to the financial emergency is unique, so I can’t give a broad-brush assessment about how the law will be used in the future…For the first time in 18 years, no Michigan municipality or school district is under state financial oversight through an emergency manager. This is really about the hard work our local units of government have achieved to identify problems and bring together the resources needed to problem-solve challenging financial conditions.”

In Michigan, the emergency manager program was authorized twenty-eight years ago, granting the governor authority to appoint a manager with extensive powers over a troubled municipality or school district. By 2012, Michigan voters repealed the emergency manager program in a referendum; notwithstanding, one month later Gov. Snyder and legislators re-adopted a similar intervention program—under which local governments could opt among three new options in addition to the appointment of an emergency manager who reports directly to the Governor: chapter 9 municipal bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own. (In Michigan, municipalities which exit emergency management remain under the oversight of a receivership transition advisory board while executive powers are slowly restored to elected mayors and city councils.)

The state intervention/takeover program had mixed success, according to Michigan State University economist Eric Scorsone, who noted: “In some cases it’s worked well, like Allen Park where the situation was pretty clear-cut and the solution was pretty clear as to what needed to be done.” (Allen Park regained full local control of its operations and finances in February of 2017 after nearly four years of state oversight. Last June, S&P Global Ratings upgraded the city to investment-grade BBB-plus from junk-level BB, crediting strong budgetary performance and financial flexibility more than 12 months after exiting state oversight. But the appointment, in Flint, of emergency managers demonstrated the obverse: the small city had four emergency managers: Ed Kurtz, Mike Brown, Darnell Earley, and Gerald Ambrose—where the latter two today are confronted by charges of criminal wrongdoing stemming from the lead contamination crisis and ensuing Legionnaire’s disease outbreak that claimed 12 lives. It was the gubernatorially appointed Mr. Earley who oversaw the decision to change Flint’s water source to the Flint River in April 2014 as the city awaited completion of a new pipeline—a decision with fatal human and fiscal consequences. Indeed, two years ago, Gov. Snyder named a task force to investigate the Flint crisis and review the Emergency Manager law—a review which recommended the Governor consider alternatives to the current approach that would engage local elected officials. (No action has been taken to change the law.)

Because only a minority of states have authorized chapter 9 municipal bankruptcy, there is no uniform state role with regard to city or county severe fiscal distress and bankruptcy. Jane Ridley, senior director in the U.S. public finance government group at S&P Global Ratings and sector lead for local governments, has noted that state oversight is considered as part of the rating agency’s local GO criteria: “We do think that having a state that has oversight, especially if it’s a proven mechanism, can be very helpful for struggling entities…If they ended oversight entirely it would likely have an impact on the institutional framework scores and their sub scores.” A Moody’s analyst, Andrew Van Dyck Dobos, noted: “While an EM is in most cases is a last option, the ability for it to implement some policies and procedures is going to be typically viewed, at least at the onset, as a credit positive.”

Ending Shelter from the Storm. U.S. District Judge Timothy Hillman yesterday ruled that temporary housing given to hundreds of Puerto Ricans displaced by Hurricane Maria will end next month, meaning Puerto Ricans will be forced to check out of temporary housing provided by Federal Emergency Management Agency (FEMA) as part of the agency’s Transitional Sheltering Assistance (TSA) program. Judge Hillman, in his decision, wrote: I strongly recommend the parties get together to find temporary housing, or other assistance to the Plaintiffs and other members of the class prior to that date,” with his decision coming the same week Puerto Rico updated its official death toll from Maria to 2,975, a vast increase from the original count of 64. Judge Hillman’s decision also comes about two months after a national civil-rights group filed a lawsuit which had sought a restraining order to block FEMA from ending the program. The group, LatinoJustice, argued in the suit that it would lead to families’ evictions. It also came as, two days ago, President Trump met with reporters to respond to questions with regard to the mounting death toll—a session in which the President told the reporters: “I think we did a fantastic job in Puerto Rico.” Some 1,744 Puerto Rican adults and children were in the FEMA program when the lawsuit was filed. U.S. District Judge Leo T. Sorokin temporarily extended the program to the end of last July, and subsequently extended it until today—and then, once more, to September 14th.

Now, the White House is responding to a new estimate which increases the number by about 33% more to 2,975 after an independent study. White House spokeswoman Sarah Huckabee Sanders claimed in a statement that the back-to-back hurricanes which hit last year prompted “the largest domestic disaster response mission in history.” She added that President Donald Trump “remains proud of all of the work the Federal family undertook to help our fellow citizens in Puerto Rico.” She also says the federal government “will continue to be supportive” of Gov. Ricardo Rossello’s accountability efforts and says “the American people, including those grieving the loss of a loved one, deserve no less.” The new estimate of 2,975 dead in the six months after Maria devastated the island in September 2017 was made by researchers with the Milken Institute School of Public Health at George Washington University. It was released Tuesday.

Fiscal & Physical Recoveries

eBlog

July 30, 2018

Good Morning! In this morning’s eBlog, we consider a Puerto Rican post-hurricane perspective on federalism amidst fiscal and physical challenges.

Unequal Americans? Puerto Rican statehood supporter María Meléndez, the Mayor of Ponce, told the Capitol Hill publication the Hill that officials are encountering more sympathy from Congress in the wake of the two hurricanes which devastated the U.S. territory last September. Through constant visits and lobbying efforts, Mayor Meléndez has worked to remind Congress that Puerto Rico is part of the U.S., but has not ever been given voting representation in Congress. She noted that in a visit with  House Appropriations Committee Chair Rodney Frelinghuysen (R-N.J.), the Chair told her that many members of Congress had been previously unaware that Puerto Rican nationals are natural-born U.S. citizens: “Chairman Frelinghuysen told me: “You are right, you are absolutely right. I am a Republican, but why can’t you vote? We don’t get it. But we didn’t know enough about Puerto Rico until after María.’” The Mayor, as well as an increasing number of Puerto Rican elected leaders, have made a habit of visiting Senators and Representatives with large Puerto Rican constituencies to lobby for support for the territory’s reconstruction after the devastation of the hurricanes last summer—lobbying especially vital, because Puerto Rico is only represented by a resident commissioner, a four-year elected official who has access to the floor of the House of Representatives—but who may not vote. Mayor Meléndez, a member of the New Progressive Party (PNP) in Puerto Rico, said Puerto Rico’s inequitable political treatment is a civil rights issue, a position she shares with Resident Commissioner González-Colón and Gov. Ricardo Rosselló. The Mayor notes that Puerto Rico’s current status has delivered scant results: “Look at the results of the Commonwealth up to now. We’ve worked for what? For whom?”

For a brief moment in time, the President, last October, had suggested eliminating Puerto Rico’s debt because of the severe impact on its municipal bond interest rates; however, White House Office of Management and Budget Director Mick Mulvaney nixed any such offer when he instead said Puerto Rico needed to “fix the errors that it’s made for the last generation on its own finances.” OMB Director Mulvaney, as the White House has accumulated the greatest national debt in the nation’s history and facing a shutdown threat at the end of September, failed to mention that the accumulation of debt and deficits under his watch make Puerto Rico’s pale in comparison.

Unsurprisingly, a key issue for Mayor Meléndez is that the PROMESA Act focused on the territory’s finances, but overlooked those of Puerto Rico’s 78 municipalities, or muncipios, noting: “This economic crisis has forced the central government to impose more responsibilities on the municipalities,” which, she notes, rely on three revenue sources: business licenses, building permits, and property taxes. In the wake of the hurricane, Mayor Meléndez had decided to grant exemptions on building permits, adversely affecting the municipality’s budget, but taking the step as a critical action to attract new businesses and the income from property taxes and business licenses. In addition, the municipality created alliances with five neighboring municipalities, irrespective of party affiliation, to pool costs and create better bids on construction contracts. As she notes, notwithstanding the fiscal strain, Puerto Rico’s municipalities will have an outsize role in rebuilding. And, she reminds us: “Reconstruction won’t take a year; it will take several years. It took New Orleans 13 years to recover from Hurricane Katrina.” But, New Orleans, after a delay, received far more federal assistance—fiscal and physical assistance which are limited, especially when it comes to attracting investments. The cost and access to power—and the dire state of public infrastructure add to the challenge—or, as the Mayor puts it: “At 23 cents per kilowatt, no company is going to set up shop.” Nearly a year after Hurricane Maria, many families still rely on generators or simply do not have electricity available at home.

Contrasting Responses to Fiscal and Physical Storms

July 10, 2018

Good Morning! In this morning’s eBlog, we consider the superb update on the fiscal impact of Hurricanes Irma and Maria on the U.S. Virgin Islands by Jason Bram and Lauren Thomas of the New York Federal Reserve.

Much more dependent on tourism than Puerto Rico, the authors noted that there has been far less attention to the fiscal ravages of the two storms despite the fact that St. Thomas, St. Croix, St. John, and a number of smaller islands suffered comparable devastation. No doubt, they point out, this is in part due to their much smaller population: the U.S. Virgin Islands is home to about 105,000 Americans—1/30th Puerto Rico’s population. It is home to Claude O. Markoe Elementary School in Christiansted, where, long, long ago, this author taught school as part of training for the Peace Corps to teach in Bush Gbaepo Grebo Konweaken, in Grand Gedah County, Liberia.

The Fed authors reminded us that the Virgin Islands had already been fiscally weakened prior to the hurricanes in the wake of a shutdown of a major refinery on St. Croix in 2012—a shutdown which dramatically increased the dependence on tourism: employment dropped by about 15 percent between 2011 and 2014; it has changed little since. Then, last September 20th, Hurricane Maria smote St. Croix where, as they described it, the “magnitude of the damage and disruption for the territory as a whole was unprecedented in recent history.” Adding to the physical and fiscal misery, the Virgin Islands could not count on any assistance from Puerto Rico—and, as we have noted based upon the devastating lack of help from the federal government, the U.S. Virgin Islands were mostly left to fend for themselves.

The economic, physical, and fiscal damage, according to the latest available data, meant that total employment in the U.S. Virgin Islands dropped by an estimated 12% between August 2017—right before Hurricanes Irma and Maria—and November of that year; but by May of this year, the authors found that only a fraction of those job losses, about 600, had been reversed. Indeed, it appears that the fiscal and economic effects of Irma and Maria were “substantially more severe in the Virgin Islands than in Puerto Rico, where employment fell by about 6 percent right after Maria.”

Such a disparate outcome would, they wrote, seem unexpected, especially when considering not only the widespread power outages and pathetic FEMA responses which affected so much of Puerto Rico for so very long—and began to drain the U.S. territory of those most fiscally and physically able to leave for the mainland, especially when compared to the Virgin Islands, where “literally everyone lives within a few miles of the coastline,” unlike Puerto Rico where the steep mountains vastly complicated the task of restoring power to hospitals and police and emergency response centers, leading the Fed authors to pose the question: “With this greater disruption of everyday life occurring in Puerto Rico, why would the economic effect appear considerably more severe in the Virgin Islands?”

The authors note that a critical distinction relates to the Virgin Islands’ high dependence on tourism—a reliance which can be especially pernicious in the wake of a major natural disaster. Thus, they wrote, because tourism tends to be particularly sensitive to the aftermath of natural disasters, “the Virgin Islands’ dependence on this industry largely explains the relatively severe economic hit,” contrasting that with Puerto Rico’s much more diversified economy, illustrating the difference by noting that Puerto Rico’s hotel/accommodation industry, which represents just over 2% of private-sector jobs in Puerto Rico, accounts for about 13% of jobs in the U.S. Virgin Islands. Thus, one fiscal outcome of the storm was the hotel/tourist industry in the U.S. Virgin Islands experienced an especially steep slump after the storm: as of last December, employment in that industry had fallen by 1,300 jobs, or 35%; employment in the broader leisure and hospitality sector—which also includes restaurants and bars but largely caters to visitors—fell by just under 30%. Nearby in Puerto Rico, in comparison, tourism and hospitality job losses accounted for only about 25% of the total job loss. 

The Fed writers also examined the contrasting capacities of the two U.S. territories to accommodate tourists, writing that the damage wrought to hotels in the Virgin Islands after the two hurricanes significantly impacted the capacity for fiscal recovery: by the middle of last May, nearly 90% of Puerto Rico’s 149 hotels had reopened. In contrast, only 60% of the Virgin Islands’ had—adding that, in the Virgin Islands, relief workers were being housed in many of the available rooms, reducing the capacity for tourists or business travelers—and noting: “Remarkably, there has been virtually no new hotel construction in the Virgin Islands for more than two decades.” With the latter, they note, adding to the fiscal challenges to the U.S. Virgin Islands, because of the related sharp decline in restaurant business—finding that local economies had contracted far more sharply in the Virgin Islands than in Puerto Rico, where the surge of rescue workers, including from FEMA and army personnel, utility crews, and construction workers, helped offset the loss of tourists.

Now, they note, the key challenge for the U.S. Virgin Islands’ economy is to restart its vital tourism, noting that the critical steps “appear to be twofold: restoring its capacity to accommodate overnight guests, and encouraging visitors to come,” but, critically, also noting that, in the long-term, the Virgin Islands confront a dilemma: “Is it best to focus resources and policy on a key industry like tourism, which brings in money from outside, or should policy place more of an emphasis on diversifying into other industries, which may be less vulnerable to the periodic hurricane?”

A Tale of Two Cities

July 3, 2018

Good Morning! In this morning’s eBlog, we consider a tale of two cities connected by geography and history, but divided by a fiscal chasm.

A Fiscal Dividing Line. Mayor Kevin Mumpower was reelected in a unanimous Council vote, Tuesday, to serve a second, consecutive term as Mayor of Bristol, Virginia, an independent, border municipality in southern Virginia of just over 17,000, where, on Thursday, the Council has scheduled a work session to complete its review of applicants for boards and commissions. The Council’s first regularly scheduled meeting is scheduled for next Tuesday. The city is twinned with its neighbor, Bristol, Tennessee, which has a larger population of over 27,000. The twin cities’ heritage dates back more than 250 years to when Evan Shelby came to the area in 1766—an area once inhabited by Cherokee Indians. At first, Mr. Shelby had settled his family at Big Camp Meet—the current day site of the twin border cities, but a site then which Shelby had renamed Sapling Grove, where he built a in 1774 on a hill overlooking what is today downtown Bristol, but which was then a key stop on an expanding nation’s road West for early American explorers such as Daniel Boone and George Rogers Clark—a fort known as Shelby’s Station. Nearly a century later, in 1853, Joseph Anderson, when surveyors projected a junction of two railroad lines at the Virginia-Tennessee state line, Reverend James King conveyed much of his acreage to his son-in-law, Joseph R. Anderson, who then laid out the original town of Bristol, Tennessee/Virginia. About that time, Samuel Goodson, who owned land adjoining the original town of Bristol at the Virginia-Tennessee border, with Beaver Creek serving as the dividing line between the two colonies, began a development known as Goodsonville; however, he was unable to incorporate Bristol across the state lines of Tennessee and Virginia. Three years later, in 1856, Goodsonville and the original Bristol, Virginia were merged to form the composite town of Goodson, Virginia—the very year when the Virginia and Tennessee Railroads reached the cities, with, ergo, two depots, one in Bristol, Tennessee, and the other in Goodson, Virginia; albeit the depot located in Goodson continued to be referred to as Bristol, Virginia. Thirty-four years later, Goodson, Virginia once again took the name Bristol. In 1998, Congress declared Bristol the “Birthplace of Country Music,” in recognition of its contributions to early country music recordings and influence.

Contiguous to the Virginia Bristol is Tennessee, Bristol, with a slightly greater population of around 25,000, has a median income for a household in the city just over $30,039. Nevertheless, despite their abutments, the twin municipalities have starkly different fiscal situations—with the southern twin in Tennessee in fiscal health, but its northern Virginia twin in a near fiscal crisis, seemingly overwhelmed with debt—even after assistance from the Commonwealth of Virginia helped avert deep cuts in funding for the municipality’s public schools. At present, it appears that interest payments by the city are on a course to consume as much as a quarter of the city’s operating budget—or, as City Manager Randall Eads put it: “We’re about as low as you can go and not have cuts to services…We are truly rebuilding this city from the foundation up.”

While the Commonwealth of Virginia does not specifically authorize chapter 9 municipal bankruptcy, the state’s courts, six years ago, ruled that “local governing bodies have only those powers expressly granted, those necessarily or fairly implied from expressly granted powers, and those that are essential and indispensable” (see Sinclair v. New Cingular Wireless PCS, 283 Va. 567,576 (Va. 2012), the state’s Dillon Rule compounds the fiscal quandary, providing that if “[T]here is a reasonable doubt about whether legislative power exists, the doubt must be resolved against the local governing body.”

Nevertheless, as the Commonwealth’s Auditor of Public Accounts, Martha Mavredes notes: “The state takes great pride in fiscal soundness and when localities start to falter, that reflects poorly on the state.” Indeed, as we have previously noted, the Commonwealth, two years ago, as Petersburg teetered on the verge of insolvency, had tasked Ms. Mavredes to develop a municipal fiscal early-warning system—a system which, in its first report, put Bristol, along with Petersburg, at the head.

Manager Eads noted: “One of the biggest things we have to overcome as a city is our demographics,” referring to the fiscal challenge in a municipality where nearly a quarter of its residents are in poverty, with more than 40% on some of government assistance, and more than 80% of its school population eligible. That is, it has become clear to Mr. Eads that a new fiscal approach will be necessary.

A Tale of Two Cities. In one area where distinguishing one Bristol from another is enabled by small brass plaques embedded down the center line of State Street which have “Tennessee” on one side and “Virginia” on the other, the twin, bi-state municipalities share a library and an emergency dispatch system; they have connected water systems, and they share payments for the electric bills to finance the neon signs over State Street, which read: “A good place to live.” The twin cities’ city halls are just blocks apart.

However, as we know, looks can be deceiving. Here, the issue of waste appears to have precipitated the fiscal parting of ways: the Virginia Bristol’s old landfill reached capacity about two decades ago; so the municipality opted to construct a new one in a 20-acre limestone pit—one in which the walls were porous. In order to prevent seepage of dangerous chemicals, the city had to purchase a new lining for the landfill walls nearly every other year‒at a cost of $1.2 million each time. That meant, with fees insufficient to cover operating and maintenance costs, the municipality was adding to its debt: currently, Bristol is trying to finance more than $30 million in debt from the landfill, forcing the city to write off $22 million siphoned from the general fund to cover expenses.

Even as unanticipated expenses have soared, the city’s tax base has eroded, hard hit by the collapse of the coal industry, especially in the wake of one of the nation’s largest coal companies, Alpha Natural Resources, headquartered in the city, filing for bankruptcy twelve years ago—at almost the same time as Ball Corp. moved its metal lid-making plant to Mexico. A commercial area developed just off I-81 in the 1990s began to sour. The combination appeared to contribute to the consequent closure of Bristol Mall.

Looking for a fiscal and commercial recovery, the city’s leaders opted to try to enter the commercial real estate business, creating The Falls, intended to be a $260 million hub of restaurants and shops—albeit without, mayhap, closely examining how such a commercial development would be affected by an even larger such development in adjacent Tennessee—where the Tennessee General Assembly had enacted legislation intended to assist its border cities compete with rivals in other states. Because the Volunteer State has no personal income tax, but it has sales tax of up to 9.75%, or nearly double Virginia’s, the difference appears to have been an important factor in providing incentives for those who reside near the border between the two states to opt to reside in Tennessee, but shop in Virginia. The new law allowed developers who built retail within 15 miles of a border to recoup some of the sales and use tax, making projects more attractive.

That led one entrepreneur, Steve Johnson to purchase a 200-acre piece of property, valued at close to $250 million, called The Pinnacle, a complex made up of a million square feet of shops and restaurants, anchored by a Bass Pro Shop, CarMax, Marshalls, and a Belk department store. Unsurprisingly, local Bristol, Virginia officials asked Mr. Johnson to consider developing The Falls instead, pressing the Virginia Legislature to enact provisions for sales and use tax revenue rebates for project developers. In the meantime, Mr. Johnson decided developing the site would be too expensive to level and grade, the roads were too small, and the location was just wrong. Undeterred, the city found another developer, so that, today, The Pinnacle counts nearly 70 merchants, while The Falls has fewer than 10. Thus, instead of helping the city deal with its landfill debt burden, The Falls has significantly added to the fiscal quandary, adding nearly $48 million to the city’s debt—and its political dissatisfaction.

Indeed, unsurprisingly, voters tossed all five Councilmembers from office, electing a slate which included two write-in candidates—and a Council which, early last year, hired a new City Attorney, Randall Eads, who had been a criminal defense attorney, perhaps a key factor in a region which has experienced a plague of methamphetamines and prescription drug abuse. Within six months, the Council removed the then city manager and asked Mr. Eads to step in—perhaps a step that opened his eyes to how grave the city’s physical and fiscal challenges were. In a city beset by such serious drug abuse, one of his first challenges was where to host the perpetrators: the city’s jail, after all, had a capacity of 67 inmates, but, in March, 240 prisoners: the escalating drug crisis meant overcrowding in the municipal jail, and unanticipated costs for those who could not be squeezed in at a regional holding facility at a cost of $38 per inmate per day.

That forced Mr. Eads to see if he could find a way to reduce the inmate population, leading him to propose an alternative punishment program for nonviolent offenders, one which would help them find work and subject them to regular drug testing. Simultaneously, Mr. Eads has been replacing city department heads and working to build morale; he has even been paying for staff picnics out of his pocket. However, it seems as if he has been trying to climb out of a sand hole: absent fiscal changes, the municipality anticipates it will soon face a $2.4 million annual shortfall in debt service payments.

But just on the other side of the state line, in another Bristol City Hall (Tennessee), Bristol City Manager Bill Sorah, who has previous experience in the Virginia Bristol, notes the legal distinctions, especially the differences in the constitutional status of each city: The Commonwealth of Virginia is the only state in which municipalities are independent entities: they are not incorporated as art of the surrounding county. In contrast, Tennessee’s Bristol is a unit of the surrounding Sullivan County: ergo, it faces no problem with inmate overcrowding, no criminal courts to finance, no jail, and no public school system. It has the legal authority denied its counterpart to annex land—authority unavailable on the other side of the border, where Virginia has had a moratorium on annexation for nearly four decades—one the General Assembly recently extended to 2024.

Searching for fiscal solutions. Earlier this year, Virginia Auditor Mavredes granted Bristol $100,000 to hire a consultant to help determine potential fiscal solutions—help which Manager Eads is sure to appreciate—or, as he put it: “We’re in it…so now we’ve got to fix it.” Thus, the city has jacked up fees at the landfill and is pressing ahead with The Falls, and is focusing on putting together a fiscal blueprint to pay down debt and build cash reserves. Indeed, rather than let his city go to pot, he is even entertaining the potential lease from local investors to purchase the shuttered Bristol Mall: the investors are interested in financing a local start-up, Dharma Pharmaceuticals, which wants to convert the vast facility into an operation producing cannabidiol, the marijuana derivative which the Commonwealth Virginia recently approved for treating certain illnesses—meaning the abandoned Penney and Belk buildings could go to pot.

With city’s fiscal year beginning at the end of this week, city leaders have been looking ahead: Mayor Kevin Mumpower outlined his short-term priorities at the beginning of this week’s City Council meeting, and City Manager Randy Eads reported he had an agenda, but would defer presenting it until after the meeting. Mayor Mumpower said many of his goals focus on the city’s long-term fiscal fortunes: “We don’t want the city to ever get to the place it got two years ago. We want it stable and moving forward, so we’re going to look at the charter, see what we can do to refine it and maybe present a few things to the state legislature to draft for us to solidify the city’s financial footing…We know future Councils can undo what we do, but, the way I look at it, that’s on them. Our responsibility is to try to do the right thing.”

The Mayor noted that this could turn out to be a lengthy, detailed process to determine reasonable thresholds so that, in the future, there would be fiscal strictures on borrowing. He reported that his second priority would be promoting economic development and hiring an economic development coordinator—someone with a focus on attracting new businesses to the city. He described a third priority to develop a program to provide inmates job opportunities in order to reduce recidivism and the city’s expensive jail population, noting: “We want to establish that inmate work release program. That is going to be a home run if Randy [Eads], the Sheriff and the Commonwealth’s Attorney can figure this out: We’ve already had several meetings about how we would train these inmates, get them certified, give them a skill set so they’re employable. That would save the city $500,000 to $750,000 a year—that one goal. If that’s successful, it would be a really big deal for the city.”

A second is completion of a state-funded study of the city’s solid waste landfill operations, with that coming as the Council had just voted to increase residential trash collection by $4 per month in order to help offset operating costs, or, as the Mayor put it: “We need to figure out what we’re going to do with our last big albatross: We’re subsidizing the landfill $500,000 this year—it was $1 million—but we’ve done that at the expense of the community.” Finally, Mayor Mumpower reported his last priority would be to establish restricted funds where funds would be set aside for specific needs, including key capital needs such as a fire truck, a school building fund, and another exclusively to pay down debt service: “We need to have money set aside only for those purchases so we don’t have to worry about where those funds are coming from.”

Planning Municipal Debt Adjustment

May 21, 2018

Good Morning! In this morning’s eBlog, we take a fiscal perspective on post-chapter 9 Vallejo, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Fiscal Reinvention.  After Vallejo, a waterfront city in Solano County of about 115,000 in California’s Bay Area, filed for chapter 9 municipal bankruptcy, just over a decade ago, on May 17, 2008, claiming it could no longer afford to pay wages and benefits promised to its employees; it appears its chapter 9 plan of debt adjustment has worked. The municipality, which served twice as California’s capital, was the nation’s largest city to file for municipal bankruptcy when it did—a period during which, in the wake of cuts of as much as 40 percent in its police force, and closure of its fire stations, leading to sharp increases in crime—there were, consequently, serious declines in assessed property values.  The municipality’s cash reserves disappeared; it was unable to pay its bills amid falling property tax revenue, soaring costs of employee compensation and pension liabilities, and a consequent surge in foreclosures. Thus, with its official exit, the city will be able to resume its governance—albeit, as Moody’s moodily explained last month, the city’s plan of debt adjustment will bequeath “significant unfunded and rapidly rising pension obligations,” adding that in addition to higher taxes, the city will be confronted by “challenges associated with deferred maintenance and potential service shortfalls.” Further, the credit rating agency noted, the “probability of continued financial distress and possibly even a return to bankruptcy.” Today, median household income in the city is under $40,000, while average municipal employee compensation is over $114,000. The city currently has 17 police sergeants receiving compensation packages which range from $220,000-$469,000—in addition to generous promised retirement pensions.  

Vallejo Assistant City Manager Craig Whittom last week noted that the city had been left to determine its Chapter 9 bankruptcy end date in the wake of U.S. Bankruptcy Judge Michael McManus’ approval of the city’s plan of debt adjustment last August—a key component of that plan being the codification of municipal bond repayment obligations to the city’s largest creditor, Union Bank, a plan approved by the Vallejo City Council three weeks ago, with Mr. Whittom noting that Vallejo’s formal chapter 9 exit is important in tangible ways for the city. For instance, he noted the elimination of real estate agents’ requirement to disclose that the city is in bankruptcy when selling properties, albeit conceding that municipal bankruptcy-deferred lawsuits against the city will now be free to go forward.

Nevertheless, leaving municipal bankruptcy is a fiscal challenge of its own—especially in instances where a municipality’s plan of debt adjustment does not take into account public pension obligations. As Ed Mendel of Calpensions explained: “Vallejo received court approval to exit from bankruptcy last week with a plan that includes a sharp increase in pension payments to CalPERS—the opposite of what many expected when the city declared bankruptcy in May 2008,” a resolution which, left the municipality with a proverbial ball and chain around its ankle because, by 2014, the city was confronted by ballooning public pension liabilities, with CNN reporting that Vallejo’s recent public-safety retirees have annual pension benefits which top $100,000 a year, leading Wallet-Hub to describe Vallejo as the “second least recovered city.”  That is, absent the ability to trim benefits for current employees, there are few options to keep pensions from consuming ever-increasing parts of a municipality’s budget.

Nevertheless, the city’s leaders have demonstrated innovative fiscal grit and determination: it has begun reinventing itself, using technology to fill personnel gaps, rallying residents to volunteer to provide public services, and even offering its voters the chance to decide how their taxes will be used—in return for an increase in the sales tax. Now, for the first time in five years, the city expects to have enough money to address potholes, weeds in public rights of way, etc.  

Lessons Learned. Prior to its chapter 9 filing, Vallejo’s salaries for city employees had ballooned: a number of top officials were making $200,000 or $300,000—enough so that some 80 percent of the city’s budget went toward compensation, even as the city’s credit rating was downgraded to junk status—meaning that, as part of the city’s plan of debt adjustment, the municipality paid only five cents for every dollar it owed to its bondholders, while the city also reduced employees’ pay, health care and other benefits—making it harder to attract key employees.  

That meant, as former Councilmember Marti Brown noted, that for Vallejo to fiscally survive, the city needed to study best practices from around the world and bring some of them to California—an effort which, in retrospect, she said turned “out to be a really positive experience for the city.” Together with former Councilmember Stephanie Gomes, the two elected leaders focused on public safety: they went the neighborhood to neighborhood setting up e-mail groups and social media accounts so residents could, for instance, share pictures of suspicious vehicles and other information: the number of neighborhood watch groups jumped nearly 300% from 15 to 350. Moreover, the City Council worked out an unusual compact with residents: in return for agreeing to a one-penny sales tax increase, projected to generate an additional $9.5 million in revenue, the resident gained the right to vote on how the funds would be used: citizen participatory budgeting—the first in a North American city.

This fiscal and governing innovation—or “ground-up restructuring,” as Karol Denniston, a partner with Squire Patton Boggs LLP notes, has meant that, today, Vallejo is “now routinely one of the top 10 cities where people want to live, which is a huge turn-around from when they entered bankruptcy.” The median listing price in Vallejo had soared to $420,000 by last month from $290,000 in May of 2015, according to realtor.com, crediting city leaders for turning around the relationships with its police and fire employees: “It looks like someone was able to improve those relationships: You have to bring the employees and the taxpayers along at the same time to reach a good consensus on financial goals.” Thus, unsurprisingly, last week, Finance Director Ron Millard presented a structurally balanced $105 million budget to the City Council for the fifth consecutive year—proposing reserves of 17.3%, after a strict fiscal diet of austerity measures in the intervening years composed of cutting police and fire services to the bone, tax increases, and economic development measures.

The Challenging Road to Recovery. Puerto Rico’s unemployment rate slipped below 10% last month for the first time in nearly two decades—albeit the change is more a reflection of emigration than economic improvement. According to the Bureau of Labor Statistics, nonetheless, Puerto Rico’s unemployment rate was 9.9%, its lowest level since it was 9.8% in November of 2000—a rate nearly 50% lower than the Spring of 2009. The BLS reported that the number of residents with jobs declined 1% last month from April of 2017 according to the Bureau’s Current Employment Statistics, and this showed total non-farm employment declining last month by 3.6% from a year earlier, with private sector non-farm employment down 3.3% from a year earlier—denoting a further sign of the fiscal challenges ahead as the U.S. territory restructures its debt. Of concern is who is leaving, as Advantage Business Consulting President Vicente Feliciano noted that the “unemployment rate is down mainly due to emigration: Thus, there are fewer people employed, but as a result of emigration, fewer people are looking for a job; meanwhile, the Puerto Rico economy is being impacted by the start of [hurricane-related] insurance and federal transfers.” Nevertheless, he reported that the Economic Activity Index in March 2018 was up with respect to February 2018: “Cement sales are up over 20% in March 2018 compared to March 2017. While these transfers are only beginning, they are non-recurrent and therefore should not be the basis for debt renegotiation.” However, Inteligencia Económica Chairman Gustavo Vélez noted: “The [labor force] participation rate remains very low…The information that I have is that the labor market is not normalized yet. Nevertheless, key industries like construction and retail are doing well because of the federal recovery funds already deployed into the local economy ($10 billion since October 2017).” According to the most recent economic activity index release (March), the index was down 2.6% from a year earlier; however, this was a rebound from the 19.7% decline in November 2017 from November 2016.

Who’s on First? Confidential conversations between the PROMESA Board and Gov. Ricardo Rosselló Nevares’s administration continued over the past few days without the certainty to reach a balance between the revenues and expenses the Government will have during the upcoming fiscal year—a year commencing in little over a month, on July 1st. Yet, even with the adjustments made by Governor Rosselló, following some of the Board’s mandates, government expenses are proposed for some $8.73 billion, a level some $200 million higher than the revenue certified by the Board. Nevertheless, neither the Board, nor the Fiscal Agency and Financial Advisory Authority (FAFAA) have been willing to discuss the preparation of the new budget or the differences, which have been publicly outlined between the parties. For his part, the Governor has refused to accept the revenue scheme certified by the Board to prepare the budget, instead opting to use the numbers contained in the new Fiscal Plan—while the PROMESA Board has objected that pensions adjustments contained in the Fiscal Plan have not been implemented, nor have their proposed labor reforms been listed.

Some parties have indicated that, as part of the process between the parties, Puerto Rico has promised, as required by the PROMESA Board, to eliminate Law 80, a Puerto Rican law which protects workers from unjust dismissals, in exchange for the allocation of some $100 million to municipalities, as well as an increase in funds for the Legislature, the Governor’s Office, and the Federal Affairs Administration. The see-saw issue at a time of steep cuts in Puerto Rican government services and school closures, including limitations in the Government’s Health Plan, has led Gov. Rosselló Nevares’ administration to criticize the seemingly contradictory fiscal situation in which the PROMESA Board has requested nearly a 33% increase from $60 million to $80 million in the amount it receives to finance its operation and bankruptcy lawsuits of the central government and several public agencies, at the same time, as Rafael Hernández Montañez, spokesman of the Popular Democratic Party minority in the House, expressed the Board does not appear to “think the same about the elimination of workers’ rights,” and at the same time the Governor is looking to increase government investment in Puerto Rico’s future.