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?”

Advertisements

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.

The Fiscal Challenges of Exiting from Fiscal Oversight

April 23, 2018

Good Morning! In this morning’s eBlog, we return to Michigan to assess the unbalanced state of its municipal public pension and post-retirement health care obligations, before turning to the state’s largest city, Detroit, which appears to be on the brink of earning freedom from state oversight—marking the remarkable fiscal exodus from the largest chapter 9 municipal bankruptcy in American history. Then we return to Puerto Rico, a territory plunged once again into darkness and an exorbitant and costly set of fiscal overseers. 

Imbalanced Fiscal Stress. In the Michigan Treasury Department’s first round of assessments under a new state law, the Treasury reported that 110 of 490 local units of government across the state are underfunded for retiree health care benefits, pension obligations‒or both. That number is expected to increase. Nineteen municipalities in Wayne County, including Allen Park, Dearborn and two of the five Grosse Pointes (Farms and Woods), are behind on their retiree health care funding, the state says, as well as six Wayne County jurisdictions, including Redford Township, Trenton, Wayne and Westland are underfunded on both, as are Hazel Park, Oak Park, and Madison Heights in Oakland County. The state fiscal oversight effort to highlight the expanding obligations competing for scarce taxpayer dollars in the state which is home to the largest chapter 9 municipal bankruptcy in American history, the result of the state’s “Protecting Local Government Retirement and Benefits Act,” Act 202, which was enacted last December, marks a pioneering effort to put tighter local data to detect and assess the likelihood of severe fiscal distress—kind of a municipal fiscal radar—or, as Michigan Deputy Treasurer Eric Scorsone, who is the designated head of the State and Local Finance Group,  describes it: “By working together, we can help ensure the benefits promised by communities are delivered to their retirees and help ensure that the fiscal health of communities allows them to be vibrant now and into the future,” Eric Scorsone, deputy state treasurer and head of Treasury’s State and Local Finance Group, put it: “This is just a start. One of the common denominators of the financial crisis has been legacy costs. We know this is a big liability out there”—and it continues to grow for current and retired public employees, as well as their counterparts in public schools, whose districts are not covered by the new state law. In an era featuring longer lifespans, the unfunded liability of the Michigan Public School Employees Retirement System totaled $29.1 billion, or 40.3 percent, at the end of FY2015-16—an aggregate number, the likes of which have not been previously available at the municipal level. Now, under the new statute, a municipality’s post-retirement health care plan is deemed underfunded if its assets are “less than 40 percent” of its obligations, or require annual contributions “greater than 12 percent” of a jurisdiction’s annual operating revenues. A pension plan is deemed underfunded if it is “less than 60 percent funded,” or its annual contributions are “greater than 10 percent” of annual operating revenues. The new state mandates require the state’s panoply of cities, villages, townships, counties, and county commissions to report pension and retiree health care finances by the end of January. (Municipalities whose books close later could be included in future lists.) The aim is to underline the fiscal need to local elected leaders to do something the federal government simply does not do: reconcile reconciling long-term obligations with current contributions and recurring revenue—that is, not only adopt annual balanced budgets, but also longer term. The new state law, an outgrowth of the Responsible Retiree Reform for Local Government Task Force, is intended to enhance transparency and community awareness of local government finance, as well as to emphasize that failure to account for such obligations could negatively impact municipal bond ratings—effectively raising the costs of capital infrastructure. Indeed, as East Lansing City Manager George Lahanas stated last week, “The city’s pension plan was 80 percent funded in 2003 and is 50 percent funded today…The city has implemented numerous cost-controlling measures over the years to address the legacy cost challenges…City officials have identified that more aggressive payments need to be made moving forward to further address the challenges.”

Nevertheless, in one of the very few states which still try to address municipal fiscal disparities, the Michigan Senate General Government subcommittee met last week and reported (Senate Bill 855) its budget recommendations, including for revenue sharing, the subcommittee matched the Governor’s recommendation, which eliminate the 2.5% increase cities, villages, and townships received this year—a cut, ergo, of some $6.2 million for FY2019; the Senate version retained the counties current year 1% increase (which the Governor had also recommended removing) and added another 1% to the county revenue sharing line item—with the accompanying report language noting the increase was intended to ensure “fairness and stability” across local unit types, since counties do not receive Constitutional revenue sharing payments.  Estimates for sales tax growth related to Constitutional payments anticipate an additional 3.1% next year for cities, villages, and townships, distributed on a per capita basis. 

Moving into the Passing Lane? The Legislature’s actions came as the Detroit Financial Review Commission has approved the Motor City’s Four-Year Financial Plan, setting the stage for the city’s exit from direct state supervision as early as this month, enabling the city with the largest chapter 9 municipal bankruptcy in U.S. history to glimpse the possibility of exiting state oversight—or, as Detroit CFO John Hill put it:  “Today’s FRC approval of the City’s 2019 budget and plan for fiscal years 2020-2022, is another key milestone in the city’s financial recovery: It demonstrates the continued commitment of city leaders to prepare and enact budgets that are realistic and balanced now and into the future. It also demonstrates continued progress toward the waiver of active State oversight, which we expect will occur later this month.” The Commission is scheduled to meet at the end of this month for a vote to end state fiscal oversight, albeit the Commission would remain in existence, so that it could be jump started in the event of any reversal in the city’s fiscal comeback. Thus, Mr. Hill said there would likely be a memorandum of understanding between Detroit and the Commission to lay out the kinds of information the city would need to provide to the Commission for review, as he noted: “They still can at any time decide to change the waiver, although we hope and will make sure that doesn’t happen.” Mr. Hill noted that the now approved financial plan includes Mayor Mike Duggan’s budget for FY2019, as well as fiscal years 2020-2022—and that the Motor City now projects ending the current fiscal year with an operating surplus of $33 million: that would mark Detroit’s fourth consecutive municipal budget surplus since exiting from the nation’s largest ever chapter 9 municipal bankruptcy. He also noted that, as provided for under the city’s plan of debt adjustment, Detroit continues to put aside funds to address the city’s higher-than-expected pension payments, payments starting in 2024, when annual payments of at least $143 million begin. Payments of $20 million run through 2019 with no payments then due through 2023.

Unbalanced Budgets & Power–& Justice. Although they are still evaluating the impact that a new reduction of their budget would have, Puerto Rico’s Judicial Branch has expressed apprehension with regard to the PROMESA Board’s imposed cuts, with Sigfredo Steidel Figueroa, Puerto Rico’s Director of the Office of Court Administration, expressing apprehension: “At the moment, we are evaluating the impact that the proposals of the Fiscal Oversight Board, contained in the fiscal plan published yesterday, could have on the Judicial Branch,” referring to the Board certified plan of staggered cuts for the Judiciary—cuts of $31.9 million, rising to a cut of $161.9 million by 2023. He noted: “In the light of the measures already taken, any proposal for additional reduction to our budget is a matter of concern. Therefore, we will remain vigilant to ensure that the Judicial Branch has the resources it needs to ensure its efficiency and that any budgetary measures taken do not affect the quality of judicial services and the access to justice that corresponds to all the citizens and residents of Puerto Rico,” as he stressed that, “At present, even with the budgetary limitations of recent years, the Judicial Branch has managed to draw and execute the work plan defined by the presiding judge, Maite D. Oronoz Rodríguez, for an increasingly more judicial administration—one of efficiency, transparency, and accessibility.” He added:An independent and robust judiciary is essential to guarantee the legal security necessary for the stability and economic development of Puerto Rico.”

PROMESA Board Chair Jose Carrion, at the end of last week, issued a warning: “We hope the government and the legislature will comply. We don’t want to sue the government, but we have to fulfill the duties that we understand the law gives us.” That is to write that in this fiscal governance Rod Serling Twilight Zone, somewhere between chapter 9 municipal bankruptcy and hegemony; there is an ongoing question with regard to sovereignty, autonomy, and, as they would say in Puerto Rico, al fin (in the end): who is ultimately responsible for making decisions in Puerto Rico? We have a federal, quasi U.S. bankruptcy judge, a federal oversight board, a Governor, and a legislature—with only the latter two representing the U.S. citizens of Puerto Rico.

And now, in the midst of a 21st century exodus of the young and educated to Florida and New York, it appears that banks are joining this exodus—threating, potentially, to further not only isolate Puerto Rico’s financial system—a system in which the number of consumer banks has dropped by half over the past decade, and in which two of the largest, Bank of Nova Scotia and Bank of Santander SA, have been quietly shrinking—the challenge of governance and fiscal recovery as Puerto Rico seeks to emerge from recession and rebuild after last year’s Hurricane Maria, a small number of financial institutions could end up in charge of deposits and lending for its 3 million citizens. Poplar, Inc., First Bancorp/Puerto Rico, and OFG Bancorp, are cash rich and have many branches, but these financial institutions appear to have limited ability to facilitate trade beyond the Caribbean and Florida—and, as economist Antonio Fernos of the Interamerican University of Puerto Rico notes: “What would really be negative is if we lose access to the network of international banks.” The U.S. territory, once was an attractive place for banks to invest, with pharmaceutical manufacturing driving growth, meant that financial institutions entered and opened what had been scarce financing for everything from homes and cars to consumer electronics. However, as Congress changed the rules which had incentivized pharmaceutical companies to locate there—and as Congress moved to make it more attractive to provide shipping to other Caribbean nations, rather than the U.S. territory, many drug companies departed. Today, in the wake of a decade-long recession, Puerto Rico’s economy is 14% smaller, and the emigration of college graduates to the mainland appears to have accelerated—leaving behind the elderly and those who could not afford to leave—increasing a crushing public pension burden, while imposing greater fiscal burdens to serve an increasingly elderly and poor population left behind—and left with over $120 billion in debt and pension liabilities, and now, in then wake of Maria’s devastation, a spike in mortgage delinquency.

Human, Fiscal, & Physical Challenges

April 20, 2018

Good Morning! In this morning’s eBlog, we return to Flint, Michigan to assess its human and fiscal challenges in the wake of its exit from state receivership; then we return to Puerto Rico, a territory plunged once again into darkness and an exorbitant and costly set of fiscal overseers. 

Out Like Flint. Serious fiscal challenges remain for Flint, Michigan, after its exit from state financial receivership. Those challenges include employee retirement funding and the aging, corroded pipes that caused its drinking water crisis, according to Mary Schulz, associate director for Michigan State University’s Extension Center for Local Government Finance and Policy. In the public pension challenge, Michigan’s statute enacted last year mandates that the state’s municipalities report underfunded retirement benefits. That meant, in the wake of Flint’s reporting that it had only funded its pension at 37%–with nothing set aside for its other OPEB benefits, combined with the estimated $600 million to finance the infrastructure repair of its aging water infrastructure, Director Schulz added the small city is also confronted by a serious problem with its public schools—describing the city’s fiscal ills as “Michigan’s Puerto Rico,” adding it would “remain Michigan’s Puerto Rico until the state decides Flint is part of Michigan.”

Michigan Municipal League Director Dan Gilmartin notes that Flint is making better decisions financially, but still suffers from state funding cuts. He observed that Flint’s leaders are making better decisions fiscally—that they have put together a more realistic budget than before its elected leaders were preempted by state imposed emergency managers, noting: “The biggest problem Flint faces now is what all cities in Michigan face, and that is the state’s system of municipal financing, which simply doesn’t work.”

Perhaps in recognition of that, Michigan State Treasurer Nick Khouri, on April 10th announced the end of state-imposed receivership under Michigan’s Local Financial Stability and Choice Act, and he dissolved the Flint Receivership Transition Advisory Board. Treasurer Khouri also signed a resolution repealing all remaining emergency manager orders, noting: “Removing all emergency manager orders gives the City of Flint a fresh start without any lingering restrictions.” Concurrently, Michigan Governor Rick Snyder, in an email, wrote: “Under the state’s emergency manager law, emergency managers were put in place in a number of cities facing financial emergencies to ensure residents were protected and their local governments’ fiscal problems were addressed: This process has worked well for the state’s struggling cities, helping to restore financial stability and put them on a path toward long-term success. Flint’s recent exit from receivership marks the end of emergency management for cities in Michigan and a new chapter in the state’s continued comeback.” Indeed, the state action means that Detroit is the only Michigan municipality city still under a form of state oversight, albeit Benton Harbor Area Schools, Pontiac Public Schools, Highland Park School District, and the Muskegon Heights school district remain under state oversight.

The nation’s preeminent chapter 9 municipal bankruptcy expert Jim Spiotto notes that a financial emergency manager is supposed to get a struggling municipality back to a balanced budget, to find a means to increase revenue, to cut unnecessary expenses, and to keep essential services at an acceptable level:  “To the degree that they achieve that, then you want to continue with best practices: If they don’t accomplish that, then even if you return the city back to Mayor and City Council, then they have to do it: Someone has to come up with viable sustainable recovery plan, not just treading water.”

From his perspective, Director Gilmartin notes: “Flint has more realistic numbers in place, especially when it comes to revenues. I think that is the most important thing the city has accomplished from a nuts and bolts standpoint…The negative side of it is the system in which they are working under just doesn’t work for them or any communities in the state. In some cases making all the right decisions at the local level still doesn’t get to where you need to get to, and it will require a change in the state law.” Referencing last year’s Michigan Municipal League report which estimated the state’s municipalities had been shortchanged to the tune of $8 billion since 2002, Director Gilmartin noted: “A lot of the fiscal pressures that Flint and other cities in Michigan find themselves in are there by state actions.” No doubt, he was referencing the nearly $55 million in reduced state aid to Flint by 2014—as the state moved to pare revenue sharing—the state’s fiscal assistance program to provide assistance based upon population and fiscal need—funds which, had they been provided, would have sufficed to not only balance the city’s budget, but also cut sharply into its capital debts—enhancing its credit quality. Indeed, it was the state’s Emergency Manager program that voters repealed six years ago after devastating decisions had plunged Flint into not just dire fiscal straits, but also the fateful decision to change its public drinking water source—a decision poisoning children, and the city’s fisc by decimating its assessed property values. During those desperate human and fiscal times, local elected leaders were preempted—even as two of the gubernatorially named Emergency Managers were charged with criminal wrongdoing in relation to the city’s lead contamination crisis and ensuing Legionnaire’s disease outbreak which claimed 12 lives in the wake of the fateful decision to  change Flint’s water source to the Flint River in April of 2014. Now, as Director Schulz notes: “Until we come up with other solutions that aren’t really punitive in nature and leave communities like Flint vulnerable as repeat customer for emergency management law, these communities will remain in financial and service delivery purgatory indefinitely.”

Director Schulz notes a more profound threat to municipal fiscal equity: she has identified at least 93 Michigan municipalities with a taxable value per capita under $20,000, describing that as a “good indicator” for which municipalities in the state are prime candidates for finding themselves under a gubernatorially imposed Emergency Manager, in addition to 32 other municipalities in the state which  are either deemed service insolvent or on the verge of service insolvency. Flint’s taxable value per capita of $7575 comes in as the second lowest behind St. Louis, Michigan, which has a taxable value of $6733. Ms. Schulz defines such insolvency as the level below which a municipality is likely unable to fiscally provide “a basic level of services a city need to provide to its residents.” Indeed, a report released by Treasurer Khouri’s office has identified nearly 25% of the state’s local units of government as having an underfunded pension plan, retirement health care plan, or both—an issue which, as we have noted in the eGnus, comes after the State, last December enacted legislation creating thresholds on pensions and OPEB which all municipalities must meet in order to be considered funded at a viable level, meaning OPEB liabilities must be at least 40% funded, and pensions 60% funded. While the Treasurer may grant waivers, such granting is premised on plans approved to remedy the underfunding—failure to do so could trigger oversight by a three-member Michigan Stability Board appointed by the Governor. As Director Schulz notes: “The winds here are blowing such that the municipality stability board is going to be up and running soon, and there will be an effort to give that board emergency manager powers…That means they can break contacts, they can sell assets…whatever it needs to put money in the OPEB.” But in the face of such preemption—preemption which, after all, had caused such human and fiscal damage to Detroit, Detroit’s public schools, and to the City of Flint; Director Gilmartin notes: “Getting the community back to zero is the easy part and is just a function of budgeting, but having it function and provide services is harder: I would say that a lot of the support for emergency management by the state has dwindled based on the experience over the last several years.”

A Storm of Leaders. If the human health and safety, and fiscal challenges created by state oversight in Michigan give one pause; the multiplicity—and cost—of the many overseers of Puerto Rico and its future by the inequitable storm response by Congress and the Trump Administration—and by the costly “who’s on first…” sets of conflicting fiscal overseers could experience at least some level of greater clarity today, as the PROMESA Board releases its proposed fiscal plans it intends to certify, including the maintenance of its mandate to the federal court for an average public pension cut of 10 percent—after having kept under advisement the concerns of Governor Ricardo Rosselló the inclusion in the revised fiscal, quasi chapter 9 plan of debt adjustment immediate reductions in sick and vacation leave.

Thus, it appears U.S. Judge Laura Taylor Swain will consider a proposed adjustment plan to reduce public pensions later this year which would total savings of as much as nearly $1.45 billion over the next five years—a level below the PROMESA Board’s proposed $1.58 million—but massive when put in the context that the current average public pension on the island is roughly $1,100 a month, but more than 38,000 retired government employees receive only $500, because of the type of job they had and the number of years worked.

Thus, there are fiscal and human dilemmas—and governance challenges: even though the PROMESA law authorizes the restructuring of retirement systems, it is unclear whether the Congressionally-created Board has the authority to impose such a significant, unfunded federal mandate on the government of Puerto Rico, including labor reforms, and restrictions of vacation and sick leaves. Last year, Governor Rosselló agreed to a reduction in pensions for government retirees, but then his aim was to propose cuts of 6 percent.

At the moment, he is against it. A few weeks ago, after negotiations with the Board, Governor Rosselló proposed a labor reform similar to the one he negotiated with members of the Board, with differences on how to balance it with an increase in the minimum wage and when to put it in into effect—a proposal he subsequently withdrew after the PROMESA Board mandated that the labor reform be in full force in January 2019, instead of phasing it in over next three years, and conditioning the increase from $7.25 to $8.25 per hour in the minimum wage to the increase in labor participation rates—proposals which, in any event, made clear the “too many leaders” governance challenges—as these were proposals with little chance of approval by the Puerto Rican House. That is, for the Governor, there is not only a federal judge, and a PROMESA Board, but also his own legislature elected by Puerto Ricans—not appointed by non-Puerto Ricans. (Under the PROMESA Law, which also created the territorial judicial system to restructure the public debt of Puerto Rico, the PROMESA Board also has power over the local government until four consecutive balanced budgets and medium and long-term access to the financial markets are achieved. Thus, as the ever insightful Gregory Makoff of the Center for International Governance Innovation—and former U.S. Treasury Advisor put it: “While the lack of cooperation with the Board may be good in political terms in the short-term, it simply delays the return of confidence and extends the time it will take for the Oversight Board to leave the island.” Thus, he has recommended the Board and Gov. Rosselló propose to Judge Swain a cut from $45 billion to $6 billion of the public debt backed by taxes, with a payment of only 13.6 cents per each dollar owed, with the aim of equating it with the average that the states have. All of this has been complicated this week by the blackout Wednesday, before the Puerto Rico Electric Power Authority, PREPA, yesterday announced it had restored power to some 870,000 customers.

As in  Central Falls, Rhode Island, and in Detroit, in their respective chapter 9 bankruptcies, the issue and debate on pensions appears to be a matter which will be settled or resolved by the court—not the parties or Board. While the Board has the power to propose a reform in the retirement systems, it appears to lack the administrative or legislative mechanisms to implement a labor reform. The marvelous Puerto Rican daily newspaper, El Nuevo Día asked one of the PROMESA Board sources if it were possible for the Board to go to Court and demand the implementation of a labor reform in case the Governor does not propose such legislation—the response to which was such a probability was “low.” Concurrently, an advisor to House Natural Resources Committee Chairman Rob Bishop (R-Utah) with regard to proposing legislation to address the issue receive a doubtful response, albeit an official in the Chairman’s office said recently that if the Rosselló administration does not implement the labor reforms proposed by the PROMESA Board, the option for the Board would be to further reduce the expenses of the government of Puerto Rico. Put another way, Carlos Ramos González, Professor of Constitutional Law at the Interamerican University of Puerto Rico, is of the view that, notwithstanding the impasse, “in one way or another, the Board will end up imposing its criteria. How it will do it remains to be seen.”

Physical, Not Fiscal—But Fiscal Storms.  Amid the governance and fiscal storm, a physical storm in the form of am island-wide blackout hit Puerto Rico Wednesday after an excavator accidentally downed a transmission line, contributing to the ongoing physical and fiscal challenge to repair an increasingly unstable power grid nearly seven months after Hurricane Maria. More than 1.4 million homes and businesses lost power, marking the second major outage in less than a week, with the previous one affecting some 840,000 customers. PREPA estimated it would take 24 to 36 hours to restore power to all customers—it is focusing first on re-establishing service for hospitals, water pumping systems, the main airport in San Juan and other critical facilities. The physical blackout came as the PROMESA Board has placed PREPA, a public monopoly with $9 billion of debt, in the equivalent of its own quasi chapter 9 bankruptcy, in an effort to help advance plans to modernize the utility and transform it into a regulated private utility—after, last January, Gov. Ricardo Rosselló announced plans to put the utility up for sale.

Several large power outages have hit Puerto Rico in recent months, but Wednesday was the first time since Hurricane Maria that the U.S. territory has experienced a full island-wide blackout. Officials said restoring power to hospitals, airports, banking centers and water pumping systems was their priority. Following that would be businesses and then homes. By late that day, power had returned to several hospitals and at least five of the island’s 78 municipalities. Federal officials who testified before Congress last week said they expect to have a plan by June on how to strengthen and stabilize Puerto Rico’s power grid, noting that up to 75% of distribution lines were damaged by high winds and flooding. Meanwhile, the U.S. Army Corps of Engineers, which is overseeing the federal power restoration efforts, said it hopes to have the entire island fully restored by next month: some 40,000 power customers still remain without normal electrical service as a result of the hurricane. The new blackout occurred as Puerto Rico legislators debate a bill that would privatize the island’s power company, which is $14 billion in debt and relies on infrastructure nearly three times older than the industry average.

 

Exiting from State Receivership

April 9, 2018

Good Morning! In this morning’s eBlog, we return to Flint, Michigan, where, in the wake of last week’s release by Gov. Rick Snyder of the city from receivership and state oversight—the city will have to make its own way to full fiscal and physical recovery from the many years’ of state-imposed choices—but recovery too after the former Michigan Revenue Sharing program has ceased, making the physical and fiscal challenge ever so steep.  

Setting the Path for a Strategic Recovery & a Return to Home Rule. After Gov. Rick Snyder, at the end of last week, announced he was releasing the City of Flint from receivership and state oversight, he has now announced that the State of Michigan will stop providing Flint residents with free bottled water when current supplies run out, citing nearly two years of test results showing falling lead levels in city tap water. Indeed, preliminary data from early this calendar year showed 90 percent of high-risk Flint water sites at or below 4 part per billion of lead, according to the Michigan Department of Environmental Quality. Thus, if these results hold through end of June, it would be the fourth consecutive six-month period levels have tested below the federal action level of 15 parts per billion. In the wake of the Governor’s announcement, the state plans to close four remaining water bottle distribution centers when supplies are exhausted—something that could happen within the next week, albeit water filters and cartridges will remain available at Flint City Hall.

In his announcement, the Governor said: “I have said all along that ensuring the quality of the water in Flint and helping the people and the city move forward were a top priority for me and my team…We have worked diligently to restore the water quality and the scientific data now proves the water system is stable and the need for bottled water has ended.”  The Governor did not discuss the state’s role in unbalancing and aggravating Flint’s fiscal misery—one to which the State contributed both through its former imposition of Emergency managers to preempt the city’s elected leaders—and through its elimination of state revenue sharing. By 2014, Flint had lost $54.9 million dollars in state aid—funds which would have been sufficient then to have fully paid off its annual deficit, as well as all $30 million of its municipal bond indebtedness, and still have had over $5 million in surplus

One of the hard questions now will be with regard to the potential impact of assessed property values and tax revenues in a city where those values were so harshly impacted by the fear of poisoned water: property tax assessments are mailed out every March: In 2016, those revenues, $19.7 million, made up about 23% of the city’s $81 million in general revenue. Unsurprisingly, that led to appeals to the Michigan Tax Tribunal for a poverty exemption to property taxes, with residents citing the costs associated with the water problems as one reason. Those lower assessed values added to the challenge to Genesee County to sell tax-foreclosed properties.

Mayor Karen Weaver, who has played a key role in the efforts to replace underground lead service lines at homes across the city, wrote to the Gov. last Friday to advise him that residents had “great anxiety” over the prospect of closing water distribution sites., noting: “As I have stated before and will continue to say, this is not what I want for our city, and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

In response, Gov. Snyder replied that Michigan taxpayers were not legally obligated to fund bottled water or Flint distribution sites after last September; however, “in the spirit of good faith and our continued partnership, the state has continued to provide funding for hundreds of thousands of cases of bottled water for the daily use of residents.” Noting that he had provided the Mayor with Weaver recent water testing data and methodology, he added: “Since Flint’s water system has been and continues to be well within the standards set by the federal government, we will now focus even more of our efforts on continuing with the health, education and economic development assistance needed to help move Flint forward,” adding: “I remain steadfast in that commitment.

Nevertheless, with lead service line replacement set to resume this spring, there remain not just physical and fiscal fears, but also lingering apprehensions that underground work could dislodge lead flakes from existing pipes and again contaminate home tap water. That is, parents are scared—hardly a message which would enhance assessed property values.

Thus, it might seem ironic that Gov. Snyder’s decision to end bottled water service came two days after his administration had, last Wednesday, announced it was releasing Flint from receivership—a receivership under which the fateful, devastating decision to begin drawing drinking water from the Flint River until construction of the new regional Karegnondi Water Authority pipeline to Lake Huron was completed. (The City of Flint has been getting its treated water from the Great Lakes Water Authority since October of 2015. Last November, Flint inked a 30-year agreement to stay on the Detroit area system in November 2017 in the wake of a federal court order mandating the City Council to quit delaying a decision about its permanent water source.)

A Silver Lining? Flint lead levels have dropped below 4 parts per billion so far this year, according to the Michigan environmental department; for the second half of 2017, 90 percent of high-risk sites had tested below 6 ppb. Officials also said the state has conducted “extensive flushing and testing” of unfiltered water at schools, day cares and senior homes in Flint—meaning the updated test results are finding lower levels than the statewide 10 parts per billion which Gov. Snyder would like to enforce statewide. Keith Creagh, Director of the Michigan Department of Natural Resources, noted: “Flint’s water is undoubtedly one of the most monitored systems in the country, and for the last 22 months several types of extensive testing data points have consistently supported that Flint’s water system has stabilized.”

Nevertheless, the action to stop providing bottled water to the beleaguered city led Michigan Senate Minority Leader Jim Ananich (D-Flint) to state: “It’s beyond belief that the Governor expects the folks in Flint to trust the government now, when they lied to our faces about lead in our water just a few years ago…That trust was broken, and families in Flint still don’t feel that the water in their homes is safe to drink.” Similarly, Rep. Sheldon Neeley (D-Flint) stated he was requesting the Governor to continue providing bottled water until the state has successfully addressed the “crisis of confidence” among Flint residents, noting: “From the perspective of Flint residents, it was the same data, personnel and science that failed them. They don’t trust them still.” Rep Neeley added that if the State fails to continue providing services to Flint residents, he would support any legal action the city may take “to compel the state to do its job and continue water service to its citizens.” (The State of Michigan has sent more than $350 million in state funds to Flint since late 2015, in addition to $100 million from the federal government, that has paid for bottled water, water system upgrades, and local health initiatives—with a portion of the funding mandated under a four-year, $97 million settlement reached last year between the state and a coalition which had sued in an attempt to secure safe drinking water. Under the agreement, the state agreed to spend an additional $47 million on top of already budgeted funds to replace lead pipes and provide free bottled water.) Now, an Environmental Department spokeswoman reports she expects the state’s current supply of bottled water will run out within four to seven days.

Mayor Karen Weaver, whose administration is working to replace underground lead service lines at homes across the city, published a letter to Gov. Snyder earlier Friday telling him residents had “great anxiety” over the prospect of closing water distribution sites: “As I have stated before and will continue to say, this is not what I want for our city and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

Fiscal Recovery & Home Rule

April 6, 2018

Good Morning! In this morning’s eBlog, we can safely write: free, free at last, as Michigan Governor Rick Snyder has signed an order releasing Flint from receivership and state oversight—making it the final  municipality to be under such state fiscal control. Then we turn East to the Empire State to assess whether New York will grant the same fiscal liberty to Nassau County, before dipping into the warm Caribbean to assess the ongoing fiscal and political tug of fiscal war so critical to the fiscal future of Puerto Rico. Finally, before your second cup of java, we jet back to King George, Virginia, as the rural county struggles to reduce its more than $100 million in indebtedness.

Setting the Path for a Strategic Recovery & a Return to Home Rule. Gov. Rick Snyder announced he has signed an order to release the City of Flint from receivership and state oversight—making Flint the final city in the state to exit such oversight and preemption of local authority. His decision came as the lame duck Governor, who has been under fire for his selection of emergency managers to the Genesee County city and handling of the Flint water crisis, came at the behest of the Flint Receivership Transition Advisory Board. The decision marks the end of an era of state usurpation of municipal authority—especially in the wake of the role of state imposed emergency managers in the state’s lead contamination crisis for their decisions to switch to the Flint River—decisions which led to the drinking water health crisis, as well as to the devastation of the city’s assessed property values, as well as contributed to the poisoning of thousands of citizens and the deaths of 12. The Governor stated: “City management and elected leadership have worked hard to put Flint on a stronger path…With continuing cooperation between the city and state, Flint has an opportunity to take advantage of the momentum being felt around the city in terms of economic development, which can lead to stronger budgets and improved services for residents.”

The announcement cleared the path for Michigan state Treasurer Nick Khouri’s expected signature on a “Flint RTAB resolution that repeals all remaining emergency manager orders,” with the repeal effectively securing the municipality from seven years of state emergency management, restoring full authority to the city’s Mayor and Council—or, as Mayor Karen Weaver put it: “We’ve just got our divorce…I feel real good about it…I remember when I was campaigning (in 2015) — it was one of the things I talked about, was I wanted to work on getting home rule back to the City of Flint. I know it’s how we got into this mess (the water crisis), was having an emergency manager and our voice being taken from the city and taking the power away from the local elected officials. We’ve shown that we’ve been responsible, and we’re moving this city forward.” That state preemption had come in the wake of a state financial review team opining that a “financial emergency existed” in Flint, and that the city had no “satisfactory plan in place to address the city’s fiscal problems,” leading to the preemption of local control and state imposition of an emergency manager from that time until shortly after Mayor Weaver was elected in November 2015.

Will Nassau County Be Free at Last? In a comparable governing and federalism issue in New York State, Nassau County Executive Laura Curran, who took office at the beginning of this year, has submitted a revised spending plan which relies upon new revenue initiatives, after, at the end of last year, the Nassau Interim Finance Authority had rejected a $2.99 billion budget and ordered $18 million in cuts due to revenue uncertainty. The new, proposed budget, which was submitted to the Authority on March 15th, contains $54.7 million in projected savings and revenues; however, the Authority’s Executive Director, Evan Cohen, Wednesday expressed apprehensions with regard to required legislative approvals needed for some of the revenue initiatives, even as he praised the new County Executive, who attended the Authority’s session Wednesday evening in an effort to secure support for proposed new revenues and avoiding a reliance on borrowing sought by previous administrations. Director Cohen, in a letter, wrote: “Our analysis indicates that the projected risks confronting the County will impede its chances for ending FY 2018 in [generally accepted accounting principles] balance…Strong management and legislative cooperation will be essential to any chance of success on that fiscal front,” stressing in her epistle that the County is confronted by political challenges to get the Republican-controlled Nassau County Legislature to agree to and implement some of her revenue plans: the County is seeking approval of some $9.7 million of $29 million in additional projected revenues, even as it is already confronting resistance on a proposal to change fees for Little Leagues and other non-profit groups to use county-operated athletic fields. A County spokesperson noted: “It is a viable operating budget except for the risks associated with the overwhelming cost of commercial and residential claims for tax overpayment…Once again, it is clear that the county’s poor fiscal health is intertwined with the broken assessment system and the failed the tax policies of the previous administration.” Nevertheless, the Authority identified $104.7 million of projected risks in the modified budget. County Executive Curran noted that this figure, which is up from $101.4 million of projected risks cited in the December review of the budget, reflects her administration’s decision to fund $43.8 million for to honor a court judgment mandating the payment to two men who were exonerated in the wake of a 1985 murder conviction. The Authority praised the County Executive her fiscal plan to pay off the judgment through operating revenue rather than through the issuance of municipal debt. The gold star from the Authority could begin to clear the path for exit from state oversight.

Modern Day Colonialism? The Puerto Rico Senate Wednesday voted unanimously to terminate its appropriations to fund the PROMESA Oversight Board, which, under the law, is defined as an integral part of the U.S. territory’s government; the federal act specifies that Puerto Rico’s government revenues are to be used for its funding. Puerto Rico Sen. President Thomas Rivera Schatz, an attorney and former prosecutor, who was born in New York City, as well as Gov. Ricardo Rosselló both conveyed messages of defiance to the Oversight Board, with the messages coming in the wake of Gov. Rosselló’s epistle to Chairman Rob Bishop (R-Utah) of the House Natural Resources Committee defending his independent power relative to that of the Oversight Board and denouncing the quasi-imperialist effort to preempt the authority as the elected leader of the territory—an effort unimaginable for a Member of the U.S. Congress to take against any Governor of any of the 50 mainland states. Senate President Schatz noted: “The key message we want to send here is that we do not bend, we respond to the people who chose us, and we defend the Puerto Rico citizens and the American citizens who live on the island.” He added: “If there is anyone who defends the board, I urge you to tell us if the American dream and the principles of freedom and democracy that inspired the creation of the American nation accept as good that the Board’s executive director [Natalie Jaresko] earns $650,000 with all possible luxury benefits…” adding that Ms. Jaresko “lives at the expense of the people of Puerto Rico while trying to eliminate the Christmas bonus to workers of private companies and the government…and is also trying to reduce your working hours or eliminate your vacation. And who is attacking the medical services, education, and housing of the Puerto Rican people.”

Nevertheless, by submitting a revised fiscal plan—a plan which includes only 20 of the 48 recommendations made by the PROMESA Board, regarding financial and technical matters, Governor Ricardo Rosselló yesterday ruled out any alternative, as he, during a round table at La Fortaleza, insisted that the PROMESA Board may not establish a plan in which it enters into public policy issues, a prerogative that only holds for the Puerto Rico government—as would be the case with any of the nation’s other 50 states. Nevertheless, he added that it is not about having to go to court to assert Puerto Rico’s democratic rights against the PROMESA Board. Simultaneously, the Governor ruled out giving way to a measure such as that approved by the Puerto Rico Senate to stop the disbursement of public funds for the operation of the body of Congressional creation. The projected allocation of funds for the six-year PROMESA Board term is projected to cost the taxpayers of Puerto Rico up to $1.4 billion—a figure which includes operational budget, expenses of advisors, and everything related to the representation for the process of Title III of PROMESA. Thus, the Governor added: “We do not have to go to court. That is what I would like everyone to understand. We are doing what is in law that we must do. Our preference would be that all matters that we can agree, that can be executed. That we can work in that direction, but our action if they (the PROMESA Board) certify something that is the work and the right of the elected government of Puerto Rico, which does not match the public policy of our government, that part is simply not going to take. Our warning is for what to do if what they are going to do is weaken a fiscal plan before measures that obviously are not going to be executed.”

In response to the measure approved by the Puerto Rico Senate, the Governor noted: “[H]here we must show that we are a jurisdiction of law and order, and I am following the steps of our strategy…What I have said is that in the face of the future, I will always seek to defend the people of Puerto Rico. Although I understand the feeling of the Legislative Assembly, the frustration, which is a prevalent feeling, the fact is that everyone’s approach, and we discussed it yesterday in the legislative conference…must be within the subject in law, demonstrate that the fiscal oversight board cannot implement public policy issues.” He stressed that responsible, prudent actions “are aimed at achieving a fiscal plan that is enforceable.”

Referring to the 202-page document, provided to the PROMESA Board before 5:00 pm yesterday, Gov. Rossello said that once the numbers are analyzed “We are basically about [at a] $100 million difference from where they wanted to be and where we are,” highlighting that the document, through structural reforms and adjusted fiscal measures, proposes the government will achieve a surplus of $1,400 million by FY2023—that is, a document which places Puerto Rico on the path “of structural balance and restoration of growth,” insisting it is important to approve the plan Puerto Rico submitted, because it will allow for a better position toward the judicial process for debt readjustment or Title III, comparable to a chapter 9 plan of debt adjustment. Stressing that “after implementing all government transformation initiatives and structural reforms, and incorporating the federal support received for health assistance and disasters, Puerto Rico will accumulate a surplus of $6,300 million by FY2023.”

With regard to other PROMESA proposed changes, the Governor stated that Puerto Rico had agreed to a number of the PROMESA recommendations, mentioning that more than a dozen corresponded to economic aspects, noting, for example, that Puerto Rico had requested $94.4 million in federal disaster assistance because of Hurricane Maria, but on the recommendation of the Board had reduced that by nearly half to $49.7 million. With regard to differences on estimated GNP for FY2018, he noted that it had been readjusted from a fall of negative 3.9% to negative 12%, because of the resulting economic slowdown of Puerto Rico—adding, that by next year, he anticipates a rebound of 6.9%, in part because of the flow of federal aid for post-hurricane reconstruction and disbursements from insurers, which will decrease considerably in subsequent years to 0.6% positive growth in GNP by FY2023. He noted that the revision for the population decline due to migration varied significantly from a fall to negative 0.2% in the previous plan to a decrease of negative 6.4% this year.

For his part, House Natural Resources Committee Chairman Bishop has written to the PROMESA Board to criticize it for its lack of dialogue with the creditor community, lack of sufficiently aggressive action to make structural and fiscal changes in Puerto Rico, and suggesting the Board take steps to end the local government’s separate legal representation in the Title III bankruptcy cases—an epistle which, unsurprisingly, Gov. Rosselló described as anti-democratic and colonialist. Earlier, the Governor made public his own letter to Chairman Bishop in which he had written: “Your letter is truly disturbing in its reckless disregard for collaboration and cooperation in favor of an anti-democratic process akin to a dictatorial regime imposing its will by imperial fiat and decree…I cannot and will not permit you to elevate concerns of bondholders on the mainland above concern for the well-being of my constituents.” In his epistle, the Governor made clear his view that, contrary to its claims, the PROMESA Board does not have the legal authority to “take over the role of the elected government of Puerto Rico.” He added that while the Puerto Rico government “recognizes that structural reforms are key to Puerto Rico’s future success; it does not need the Board to substitute its judgment for our own in that regard.” With regard to reducing the Title III litigation costs to Puerto Rico’s government, the Governor expressed apprehension at any effort to preempt or take away the “government’s own voice and own representation in its own restructuring process,” adding that he believes Chairman Bishop’s committee “faces a fork in the road:” It can support the process found in the Puerto Rico Oversight, Management, and Economic Stability Act, or the “other path lies obstructionist behavior that would undermine the duly elected government’s authority and legitimacy…If the committee, led by you, Mr. Chairman, persists on this ruinous path, the people of Puerto Rico and their brothers and sisters on the mainland will know who to hold accountable,” adding: “Your letter embodies everything that is wrong with this process and only serves to reinforce the dismissive and second-class colonial treatment Puerto Rico has suffered throughout its history as a territory of the United States, which undermines our efforts to address the island’s fiscal, economic, and humanitarian crises.”

Colonial Eras? Meanwhile, in the former British colonies, the aptly named King George County, Virginia, where indigenous peoples of varying cultures lived along the waterways for thousands of years before Europeans came to America, Algonquian Indians some three hundred fourteen years ago first came into conflict, when early colonists retaliated for the tribe’s attacking the farm of John Rowley, capturing and shipping 40 people, including children older than 12, to Antigua, where they were sold into slavery—paving the way for the county to be formally established in 1720, when land was split off from Richmond County, Virginia—before it was substantially reorganized in the critical year of 1776, with land swapped with both Stafford and Westmoreland Counties to form today’s political boundaries—some twenty-five years after its native son, James Madison, the nation’s fourth President, was born there. Today, the county of about 26,000, with a median family income of $49,882, is looking to pay down its debt; however, one of its primary sources of revenue is no longer available: therefore, the Board of Supervisors is working on an ambitious fiscal plan to try to reduce about 30 percent of the county’s debt over the next five years, meaning it will seek to shift some of its reserve funds in order to allocate more new funds each year to pay down its debt—an effort which one consulting firm in the state described as unique: Kyle Laux, a senior vice president of Davenport & Co., a financial counseling firm for King George, Caroline, and Spotsylvania counties, noted: “What the county administrator and board are doing is unique…and it’s unique in a really good way: It’s thinking long-term about the county.”

The effort comes after the most recent campaign, when several Board of Supervisors members campaigned on the need for King George to reduce its $113 million in accumulated debt—debt which, when current County Administrator Neiman Young came on board a little over a year ago, he described as shocking—especially that no actions had been taken to address the accumulating debt. Indeed, at a work session two months ago, Mr. Young laid out numbers that caused those listening to gasp aloud. While the county has a proverbial golden goose with the King George Landfill, it turns out that the bulk of the non-odoriferous revenues generated from the landfill is already accounted for‒for the next two decades. Indeed, even the its expansion, the landfill is expected to reach capacity in 29 years—which, in turn, means that, for the next two decades, $6.2 million of the $7.5 million the county currently receives annually from the landfill is already consumed to finance capital debt. Thus, County officials wanted to change those numbers; ergo, they asked Davenport to rustle up a fiscal plan—and, subsequently, at a recent work session, County Supervisors supported the application of some $3 million from general and capital improvement reserves to pay down capital debt, with the fiscal plan adjusted to mesh with the County’s which provide that King George must have a certain amount set aside. Thus the County is proposing to add about $1 million each year for four years from revenues. Some of that would come from additional revenues King George would receive in the wake of upcoming reassessments, with the remainder from an annual surplus. The idea is to pay down the debt in three different payments between 2019 and 2023—recognizing that because every dollar paid on the debt principal saves about 41 cents in interest, the plan would free up about $11.1 million in cash flow and pay off $6.57 million in principal, according to Mr. Laux.

However, in the world of municipal finance, little is easy. Indeed, as the Supervisors learned during the work session, the amount pulled annually from revenue sources would likely fluctuate in order to address operational needs. Thus, the Board opted to place school resource officers in two of the county’s three elementary schools; it already has officers at its middle and high schools, and is applying for a grant to place a deputy for the third elementary school. Along with other operational expenses, ergo, the county is considering the set aside of some $200,000 from FY2019 revenues, far below the $750,000 proposed—or, as Board of Supervisors Chair Richard Granger put it: “It doesn’t necessarily blow up our plan, but it’s doing something rather than nothing.” He added government debt is like a home mortgage, not a credit card.

The County’s existing debt is based on a fixed rate, and the principal is repaid annually. If supervisors opt not to go forward with plans to pay down the debt sooner, the County is scheduled to repay about half of its debt within 10 years, according to a Davenport report. However, because paying down the principal faster would free up fiscal resources, the County’s new debt reduction and mitigation plan should reduce about 30% of the county’s debt over the next five years, which equates to roughly $22 million, an amount which Administrator Young understandably described as “huge.” But Supervisor Ruby Brabo had the last word: “The landfill is going to go away, folks. We either raise your taxes 30 cents or we make sure the debt is paid off before it does.”