Fiscal Challenges Key to Municipalities’ Futures

eBlog, 04/26/17

Good Morning! In this a.m.’s eBlog, we consider the kinds of fiscal challenges key to a municipality’s future—focusing on the windy city of Chicago, before examining the complex federalism issues conflicting the U.S. Territory of Puerto Rico’s efforts to return to solvency—and deal with a Congressionally-imposed oversight board.

What Is Key to the Windy City’s Future? Chicago, the third most populous city in the U.S. with 2.7 million residents, is one which, when Mayor Rahm Emanuel was first elected, was what some termed a “time bomb:” He took office to find a $635 million operating deficit. However, he did take office as the city’s demographics were recovering from the previous decade—a decade which witnessed an exodus of 200,000, and the loss of 7.1% of its jobs—creating an exceptional fiscal challenge. At his inception as Mayor, the city confronted a debt level of $63,525 per capita—so deep that one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Chicago then had an unemployment rate of 11.3%. The then newly-elected Mayor was confronted by a Moody’s downgrade of  Chicago’s $8.2 billion of general obligation and sales tax backed bonds with a three-level downgrade—and a bleak warning that the Windy City could face further adverse ratings actions absent progress in confronting growing unfunded pension liabilities, adding that the city’s $36 billion retirement-fund deficit and “unrelenting public safety demands” on the budget would, absent significant growth in the city’s operating revenues, increasingly strain the city’s operating budget, as pension outlays competed with other spending priorities, including “debt service and public safety.” Thus at a session last week moderated by former Crain’s Chicago Business Publisher David Snyder, a key focus was: what makes a city attractive to a corporation looking to relocate? Mr. Snyder provided some background and context for that discussion, noting how the makeup of the corporate community in Chicago has changed since the 1980s, when Chicago’s economy was driven by large public corporations. He said that the era of the large corporation is over: today healthcare and logistics firms lead the way, with private or family-held middle-market businesses driving growth in the Chicago region and an entrepreneurial culture experiencing a renaissance; while John Lothian, the Executive Chairman of John J. Lothian & Co., provided an overview of the extraordinary technology changes which he believes fundamentally altered how the financial sector in Chicago operates. He noted that today, getting hired in the Windy City more often than not requires a degree in science, technology, engineering, or mathematics—a change which has closed off jobs from young people, who used to join the sector as runners, gaining experience and contacts. He also noted that Chicago, a world-class city, is now not just competing with New York City, but also in a global competition with other cities around the globe. The stock yards of old—cattle—have been transformed into shares of corporations. Providing some scope to this urban transformation, Dr. Caralynn Nowinski Collens, Chief Executive Officer of UI Labs, a tech accelerator for digital manufacturing, noted that a decade and a half ago, there was virtually no tech scene, funding, or support: students graduating from Illinois schools with technology degrees had to leave the state to pursue their careers. In contrast, she noted, today there are over 100 incubators and accelerators and 300 corporate R&D centers in Chicago; there are 275 digital startups every year. No sector of the city’s economy is growing more rapidly; indeed, today Chicago has the third fastest growing tech sector in the nation. Dr. Collens said that Chicago’s economic diversity and legacy of industry make it an excellent place for the technology industry to flourish as its legendary older industries have become among the world’s most sophisticated, noting, however, that there are many challenges which could put a snag in the Windy City’s aspirations to become the digital industrial center of the world—specifically noting that the importance of getting young Windy Cityites to focus on the threat of the displacement of jobs by automation, in order to enable the city to become a global leader in technological innovation and, thereby, economic growth.

Another speaker, Jerry Szatan, the founder of site selection consulting firm Szatan & Associates, came at the issue of municipal fiscal stability from a different perspective: he noted that risk and higher municipal taxes no longer are such key factors that can lead a company to flee a municipality. Instead, he said, the critical issue is talent: he noted that all corporate headquarters need highly skilled, educated, and creative professionals, and that there are only so many cities in the U.S. where such a wide talent pool exists. Unsurprisingly, Chicago, he noted, is one—stating that the diversity of the residents of Chicago is very important for corporations, particularly those with an international workforce; second, he noted that connectivity is crucial, citing the city’s international airport at O’Hare with being a critical asset, as well as the city’s dense downtown—which he noted facilitates interactions between coworkers and peers in other industries. Mr. Szatan balanced his enthusiasm with fiscal warnings: noting that corporations are risk averse, he warned against Chicago’s fiscal instability and the possibility of higher taxes. Mr. Szatan’s perspective was shared by Chicago Civic Federation Chairman Kent Swanson, who noted that Chicago has the infrastructure assets, educated workforce, and international appeal of a global city, but not at the steep price of a New York or a San Francisco. Thus, he said, office space costs are much more competitive, thereby more attractive to startups and smaller businesses. Ergo, he noted, he perceives the recent movement of headquarters to Chicago as a microcosm of what is happening across the world as people move from smaller cities to the cores of large cities. A third speaker, Chicago Planning and Development Commissioner David Reifman, noted that despite the fiscal challenges of the State of Illinois, there appears to be a commitment to address the state’s public pension crisis and improve the state’s dysfunctional funding and financial practices—and he extolled the city’s efforts to attract corporations, particularly via amenities in near proximity to downtown, such as an expanded O’Hare, new transit stations, and enhanced service on the Chicago Transit Authority, as well as programs to leverage high-density investments in the downtown area to generate funding for underdeveloped areas.

The Complexity of Federalism & Addressing Insolvency. The Justice Department has confirmed to D.C.-based Commissioner Jenniffer Gonzalez that it will review and send Puerto Rico’s Governor, Ricardo Rosselló, an assessment/evaluation of amendments to the U.S. territory’s pending amendments to the upcoming plebiscite on alternative status, with the confirmation coming as Puerto Rico’s main opposition party, the Popular Democratic Party, has voted to boycott the plebiscite scheduled for June 11th. The proposed plebiscite, the revised language of which the ruling New Progressive Party rejected last Sunday, appears to have exacerbated tensions between Puerto Rico House Minority Leader Rafael Hernández Montañez and three House Representatives. It comes as Gov. Ricardo Rosselló and the NPP legislators had approved a ballot that just had options for independence and statehood—and as Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, yesterday warned of the possible elimination of the Christmas bonus and the reduction of the work week for Puerto Rico’s employees as still being a possibility if Puerto Rico is unable to cut spending as contemplated in the plan approved by the PROMESA Oversight Board–with the Board, when it approved the plan last month, warning that by July 1st’s commencement of the new fiscal year, there appeared to be a gap of $190 million to close: to cure said fiscal gap, the Board has proposed to reduce the work week of public employees and eliminate the Christmas bonus—an option the government rejected; nevertheless, it looms in the event Puerto Rico is unable to achieve the projected savings—leading Secretary  Rosario Cortés to say: “If we meet these metrics, there’ll be no reduction of the work week. But, if we fail, the (PROMESA) Board has established it can do it automatically. (That is), if we don’t get the savings, it’ll mean reduction of work week and full elimination of the Christmas bonus.” As part of the legislative package of measures submitted by the Executive, House Bill 938 would seek savings with a cutback on spending and efficiencies totaling $1.623 billion, with the proposal including savings of $434 million for mobility, a hiring freeze, and leveling of benefits; $439 million in “government transformation” via consolidations, public-private alliances and efficiencies; and $750 million in reduced subsidies. The Puerto Rican House of Representatives had been anticipated to consider the bill yesterday; however, the House leadership decided to allow for additional time to hear leaders from unions representing public employees, after the former marched to the Capitol in defense of the rights of their members.

Unsurprisingly, the political dynamics of changing administrations in the nation’s capital have added to the fiscal challenges—mayhap best illustrated by a Trump administration Deputy U.S. Attorney General writing the ballot options are unfair, and that he would not recommend the U.S. Congress release federal money allotted for the plebiscite with the planned ballot choices—triggering a response from Puerto Rico legislators, who voted to revise the language to add a third option: remaining a “territory.” However, unsurprisingly, Puerto Rico’s PDP party has argued that Puerto Rico is more than a territory of the United States, thus it has objected to this ballot language. Members of the party wanted to have part of the current name of Puerto Rico, “Estado Libre Asociado,” be the option rather than “territory.” (The former can be translated as “Free Associated State,” though it is usually translated as “commonwealth.”). Thus, over the weekend, the PDP’s Governing Board, General Council, and General Assembly voted against participating in the plebiscite because of the use of the term “territory” on the ballot. In addition, the Puerto Rico Independence Party has also said it would boycott the plebiscite. Nevertheless, notwithstanding that the review process may take a few weeks, Commissioner Gonzalez believes the federal government will end up confirming a status consultation, noting: “They are waiting to be sent documents related to the plebiscite that have not yet been delivered, according to the Commissioner in the wake of a conference call with interim federal Secretary of Justice, Jesse Panuccio. Governor Rosselló had requested a response by April 22nd, with the hope that that would leave time for the House Appropriations committees to authorize the $2.5 million disbursement allowed by federal law to hold the consultation for June 11; that delivery of the $ 2.5 million is conditional, however, on receipt of a formal opinion from the US Attorney General in order to determines that the electoral ballot, the educational campaign of the State Commission of Elections, and the materials related to the plebiscite comply with the constitutional, legal, and public policy norms of the federal government.

Meanwhile, Puerto Rico’s Treasury announced that March revenues exceeded budgeted projections for the month by 7.1%, noting that through the first nine months of the fiscal year, the territory’s General Fund revenues ran 4.1% ($250 million) above projections, with the key contributor being Puerto Rico’s corporate income tax, which added 86.8% more than budgeted, or $130.4 million. Similarly, a separate tax on non-Puerto Rico based corporations’ income (Act 154) continued to outperform last month, coming in 9.8% higher or $18 million more than projected. Last Friday the Bureau of Labor Statistics announced improved employment statistics for Puerto Rico from its household survey: according to the survey, the total number of Puerto Ricans employed increased in March by 0.7% from February and 0.4% from March 2016, while the island’s unemployment rate dipped 0.5% in March from February, with the March rate tying the statistic’s low point since June of 2008, when it was 11.4%. The BLS employment survey showed continued contractions, with total nonfarm employment down by 0.2% since February and 0.3% since March 2016. The employer survey indicated that Puerto Rico’s private sector employment in March was little changed from February, but has slipped 1% since a year ago March. (The discrepancy in the direction of the household and establishment surveys may be because the former includes agricultural and self-employed workers, while the latter does not.)

Death Comes to the Archbishop? Meanwhile, the Puerto Rico Commission for the Comprehensive Audit of the Public, which is charged with reviewing the legality of Puerto Rico’s debt died Wednesday; however, it appears on the road to recovery in the wake of Gov. Ricardo Rosselló’s signing a measure terminating the Puerto Rico Commission for the Comprehensive Audit of the Public Credit, after the measure was approved by the Puerto Rico Senate and House of Representatives. Governor Rosselló and legislators from his New Progressive Party said it should be up to the legal system to pass judgment on the validity of various bonds, and that the audit commission’s work was interfering with negotiations seeking to restructure Puerto Rico’s debt. Demonstrations outside Puerto Rico’s capitol building on Monday and Tuesday had apparently failed to sway Senators and Representatives inside as they debated and then voted against keeping it. (The commission was set up by the Puerto Rico legislature in July 2015 to examine the circumstances surrounding the issuance of the debt—especially to identify invalid debt.) Some members believed it was opening doors to municipal bondholder claims against those who prepared official statements or others involved with such bond issues. Since then, the group has released two “pre-audits” which raised questions with regard to the legality of much of Puerto Rico’s municipal debt.

What Lessons Can State & Local Leaders Learn from Unique Fiscal Challenges?

eBlog

Share on Twitter

eBlog, 04/25/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenges in Michigan and how the upswing in the state’s economy is—or, in this case, maybe—is not helping the fiscal recovery of the state’s municipalities. Then we remain in Michigan—but straddle to Virginia, to consider state leadership efforts in each state to rethink state roles in dealing with severe fiscal municipal distress. Finally, we zoom to Chicago to glean what wisdom we can from the Godfather of modern municipal bankruptcy, Jim Spiotto: What lessons might be valuable to the nation’s state and local leaders?  

Fiscal & Physical Municipal Balancing I. Nearly a decade after the upswing in Michigan’s economic recovery, the state’s fiscal outlook appears insufficient to help the state’s municipalities weather the next such recession. Notwithstanding continued job growth and record auto sales, Michigan’s per-capita personal income lags the national average; assessed property values are below peak levels in 85% of the state’s municipalities; and state aid is only 80% of what it was 15 years ago.  Thus, interestingly, state business leaders, represented by the Business Leaders for Michigan, a group composed of executives of Michigan’s largest corporations universities, is pressing the Michigan Legislature to assume greater responsibility to address growing public pension liabilities—an issue which municipal leaders in the state fear extend well beyond legacy costs, but also where fiscal stability has been hampered by cuts in state revenue sharing and tax limitations. Michigan’s $10 billion general fund is roughly comparable to what it was nearly two decades ago—notwithstanding the state’s experience in the Great Recession—much less the nation’s largest ever municipal bankruptcy in Detroit, or the ongoing issues in Flint. Moreover, with personal income growth between 2000 and 2013 growing less than half the national average (in the state, the gain was only 31.1%, compared to 66.1% nationally), and now, with public pension obligations outstripping growth in personal income and property values, Michigan’s taxpayers and corporations—and the state’s municipalities—confront hard choices with regard to “legacy costs” for municipal pensions and post-retirement health care obligations—debts which today are consuming nearly 20 percent of some city, township, and school budgets—even as the state’s revenue sharing program has dropped nearly 25 percent for fiscally-stressed municipalities such as Saginaw, Flint, and Detroit just since 2007—rendering the state the only state to realize negative growth rates (8.5%) in municipal revenue in the 2002-2012 decade, according to numbers compiled by the Michigan Municipal League—a decade in which revenue for the state’s cities and towns from state sources realized the sharpest decline of any state in the nation: 56%, a drop so steep that, as the Michigan Municipal League’s COO Tony Minghine put it: “Our system is just broken…We’re not equipped to deal with another recession. If we were to go into another recession right now, we’d see widespread communities failing.” Unsurprisingly, one of the biggest fears is that another wave of chapter 9 filings could trigger the appointment of the state’s ill-fated emergency manager appointments. From the Michigan Municipal League’s perspective, any fiscal resolution would require the state to address what appears to be a faltering revenue base: Michigan’s taxable property is appreciating too slowly to support the cost of government (between 2007 and 2013, the taxable value of property declined by 8 percent in Grand Rapids, 12% in Detroit, 25% in Livonia, 32% in Warren, 22% in Wayne County values, and 24% in Oakland County.) The fiscal threat, as the former U.S. Comptroller General of the General Accounting Office warned: “Most of these numbers will get worse with the mere passage of time.”

Fiscal & Physical Municipal Balancing II. Mayhap Michigan and Virginia state and local leaders need to talk:  Thinking fiscally about a state’s municipal fiscal challenges—and lessons learned—might be underway in Virginia, where, after the state did not move ahead on such an initiative last year, the new state budget has revived the focus on fiscal stress in Virginia cities and counties, with the revived fiscal focus appearing to have been triggered by the ongoing fiscal collapse of one of the state’s oldest cities, Petersburg. Thus, Sen. Emmett Hanger (R-Augusta County), a former Commissioner of the Revenue and member of the state’s House of Delegates, who, today, serves as Senate Finance Co-Chair, and Chair of the Health and Human Services Finance subcommittee, has filed a bill, SJ 278, to study the fiscal stress of local governments: his proposal would create a joint subcommittee to review local and state tax systems, as well as reforms to promote economic assistance and cooperation between regions. Although the legislation was rejected in the Virginia House Finance Committee, where members deferred consideration of tax reform for next year’s longer session, the state’s adopted budget does include two fiscal stress preventive measures originally incorporated in Senator Hanger’s proposed legislation—or, as co-sponsor Sen. Rosalyn Dance (D-Petersburg), noted: “Currently, there is no statutory authority for the Commission on Local Government to intervene in a fiscally stressed locality, and the state does not currently have any authority to assist a locality financially.” To enhance the state’s authority to intervene fiscally, the budget has set guidelines for state officials to identify and help alleviate signs of financial stress to prevent a more severe crisis. Thus, a workgroup, established by the auditor of public accounts, would determine an appropriate fiscal early warning system to identify fiscal stress: the proposed system would consider such criteria as a local government’s expenditure reports and budget information. Local governments which demonstrate fiscal distress would thence be notified and could request a comprehensive review of their finances by the state. After a fiscal review, the commonwealth would then be charged with drafting an “action plan,” which would provide the purpose, duration, and anticipated resources required for such state intervention. The bill would also give the Governor the option to channel up to $500,000 from the general fund toward relief efforts for the fiscally stressed local government.

Virginia’s new budget also provides for the creation of a Joint Subcommittee on Local Government Fiscal Stress, with members drawn from the Senate Finance Committee, the House Appropriations, and the House Finance committees—with the newly created subcommittee charged to study local and state financial practices, such as: regional cooperation and service consolidation, taxing authority, local responsibilities in state programs, and root causes of fiscal stress. Committee member Del. Lashrecse Aird (D-Petersburg) notes: “It is important to have someone who can speak to first-hand experience dealing with issues of local government fiscal stress…This insight will be essential in forming effective solutions that will be sustainable long-term…Prior to now, Virginia had no mechanism to track, measure, or address fiscal stress in localities…Petersburg’s situation is not unique, and it is encouraging that proactive measures are now being taken to guard against future issues. This is essential to ensuring that Virginia’s economy remains strong and that all communities can share in our Commonwealth’s success.”

Municipal Bankruptcy—or Opportunity? The Chicago Civic Federation last week co-hosted a conference, “Chicago’s Fiscal Future: Growth or Insolvency?” with the Federal Reserve Bank of Chicago, where experts, practitioners, and academics from around the nation met to consider best and worst case scenarios for the Windy City’s fiscal future, including lessons learned from recent chapter 9 municipal bankruptcies. Chicago Fed Vice President William Testa opened up by presenting an alternative method of assessing whether a municipality city is currently insolvent or might become so in the future: he proposed that considering real property in a city might offer both an indicator of the resources available to its governments and how property owners view the prospects of the city, adding that, in addition to traditional financial indicators, property values can be used as a powerful—but not perfect—indicators to reflect a municipality’s current situation and the likelihood for insolvency in the future. He noted that there is considerable evidence that fiscal liabilities of a municipality are capitalized into the value of its properties, and that, if a municipality has high liabilities, those are reflected in an adjustment down in the value of its real estate. Based upon examination, he noted using the examples of Chicago, Milwaukee, and Detroit; Detroit’s property market collapse coincided with its political and economic crises: between 2006 and 2009-2010, the selling price of single family homes in Detroit fell by four-fold; during those years and up to the present, the majority of transactions were done with cash, rather than traditional mortgages, indicating, he said, that the property market is severely distressed. In contrast, he noted, property values in Chicago have seen rebounds in both residential and commercial properties; in Milwaukee, he noted there is less property value, but higher municipal bond ratings, due, he noted, to the state’s reputation for fiscal conservatism and very low unfunded public pension liabilities—on a per capita basis, Chicago’s real estate value compares favorably to other big cities: it lags Los Angeles and New York City, but is ahead of Houston (unsurprisingly given that oil city’s severe pension fiscal crisis) and Phoenix. Nevertheless, he concluded, he believes comparisons between Chicago and Detroit are overblown; the property value indicator shows that property owners in Chicago see value despite the city’s fiscal instability. Therefore, adding the property value indicator could provide additional context to otherwise misleading rankings and ratings that underestimate Chicago’s economic strength.

Lessons Learned from Recent Municipal Bankruptcies. The Chicago Fed conference than convened a session featuring our former State & Local Leader of the Week, Jim Spiotto, a veteran of our more than decade-long efforts to gain former President Ronald Reagan’s signature on PL 100-597 to reform the nation’s municipal bankruptcy laws, who discussed finding from his new, prodigious primer on chapter 9 municipal bankruptcy. Mr. Spiotto advised that chapter 9 municipal bankruptcy is expensive, uncertain, and exceptionally rare—adding it is restrictive in that only debt can be adjusted in the process, because U.S. bankruptcy courts do not have the jurisdiction to alter services. Noting that only a minority of states even authorize local governments to file for federal bankruptcy protection, he noted there is no involuntary process whereby a municipality can be pushed into bankruptcy by its creditors—making it profoundly distinct from Chapter 11 corporate bankruptcy, adding that municipal bankruptcy is solely voluntary on the part of the government. Moreover, he said that, in his prodigious labor over decades, he has found that the large municipal governments which have filed for chapter 9 bankruptcy, each has its own fiscal tale, but, as a rule, these filings have generally involved service level insolvency, revenue insolvency, or economic insolvency—adding that if a school system, county, or city does not have these extraordinary fiscal challenges, municipal bankruptcy is probably not the right option. In contrast, he noted, however, if a municipality elects to file for bankruptcy, it would be wise to develop a comprehensive, long-term recovery plan as part of its plan of debt adjustment.

He was followed by Professor Eric Scorsone, Senior Deputy State Treasurer in the Michigan Department of Treasury, who spoke of the fall and rise of Detroit, focusing on the Motor City’s recovery—who noted that by the time Gov. Rick Snyder appointed Emergency Manager Kevyn Orr, Detroit was arguably insolvent by all of the measures Mr. Spiotto had described, noting that it took the chapter 9 bankruptcy process and mediation to bring all of the city’s communities together to develop the “Grand Bargain” involving a federal judge, U.S. Bankruptcy Judge Steven Rhodes, the Kellogg Foundation, and the Detroit Institute of Arts (a bargain outlined on the napkin of a U.S. District Court Judge, no less) which allowed Detroit to complete and approved plan of debt adjustment and exit municipal bankruptcy. He added that said plan, thus, mandated the philanthropic community, the State of Michigan, and the City of Detroit to put up funding to offset significant proposed public pension cuts. The outcome of this plan of adjustment and its requisite flexibility and comprehensive nature, have proven durable: Prof. Scorsone said the City of Detroit’s finances have significantly improved, and the city is on track to have its oversight board, the Financial Review Commission (FRC) become dormant in 2018—adding that Detroit’s economic recovery since chapter 9 bankruptcy has been extraordinary: much better than could have been imagined five years ago. The city sports a budget surplus, basic services are being provided again, and people and businesses are returning to Detroit.

Harrison J. Goldin, the founder of Goldin Associates, focused his remarks on the near-bankruptcy of New York City in the 1970s, which he said is a unique case, but one with good lessons for other municipal and state leaders (Mr. Goldin was CFO of New York City when it teetered on the edge of bankruptcy). He described Gotham’s disarray in managing and tracking its finances and expenditures prior to his appointment as CFO, noting that the fiscal and financial crisis forced New York City to live within its means and become more transparent in its budgeting. At the same time, he noted, the fiscal crisis also forced difficult cuts to services: the city had to close municipal hospitals, reduce pensions, and close firehouses—even as it increased fees, such as requiring tuition at the previously free City University of New York system and raising bus and subway fares. Nevertheless, he noted: there was an upside: a stable financial environment paved the way for the city to prosper. Thus, he advised, the lesson of all of the municipal bankruptcies and near-bankruptcies he has consulted on is that a coalition of public officials, unions, and civic leaders must come together to implement the four steps necessary for financial recovery: “first, documenting definitively the magnitude of the problem; second, developing a credible multi-year remediation plan; third, formulating credible independent mechanisms for monitoring compliance; and finally, establishing service priorities around which consensus can coalesce.”

State Oversight & Severe Municipal Distress

Share on Twitter

eBlog, 04/24/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: when and how will it emerge from state oversight? Then we spin the tables to see how Atlantic City is faring to see if it might be on the shores of fiscal recovery; before going back to Detroit to assess the math/fiscal challenges of the state created public school district; then, still in Detroit, we try to assess the status of a lingering issue from the city’s historic municipal bankruptcy: access to drinking water for its lowest income families; before visiting Hartford, to try to gauge how the fiscally stressed central city might fare with the Connecticut legislature. Finally, we revisit the small Virginia municipality of Petersburg to witness a very unique kind of municipal finance for a city so close to insolvency but in need of ensuring the provision of vital, lifesaving municipal services. 

Fiscal & Physical Municipal Balancing. Michigan Deputy Treasurer Eric Scorsone is predicting that by “early next year, Detroit will be out of state oversight,” at a time when the city “will be financially stable by all indications and have a significant surplus.” That track will sync with the city’s scheduled emergence from state oversight, albeit apprehension remains with regard to whether the city has budgeted adequately  to set funds aside to anticipate a balloon pension obligation due in 2024. Nevertheless, Mr. Scorsone has deemed the Motor City’s post-bankruptcy transformation “extraordinary,” describing its achievements in meeting its plan of debt adjustment—as well as complying with the Detroit Financial Review Commission—so well that the “city could basically operate on its own.” He noted that the progress has been sufficient to permit the Commission to be in a dormancy state—subject to any, unanticipated deficits emerging. The Deputy Treasurer credited the Motor City’s strong management team under CFO John Hill both for the city’s fiscal progress, but also for his role in keeping an open line of communication with the state oversight board; he also noted the key role of Mayor Mike Duggan’s leadership for improving basic services such as emergency response times and Detroit’s public infrastructure. Nevertheless, Detroit remains subject to the state board’s approval of any contracts, operating or capital budgets, as well as formal revenue estimates—a process which the Deputy Treasurer noted “allows the city to stay on a strong economic path…[t]hese are all critical tools,” he notes, valuable not just to Detroit, but also to other municipalities an counties to help ensure “long term stability.”

On the Shore of Fiscal Recovery. S&P Global Ratings, which last month upgraded Atlantic City’s general obligation bond rating two notches to CCC in the wake of the city’s settlement with the Borgata Casino, a settlement which yielded the city some $93 million in savings, has led to a Moody’s rating upgrade, with the credit rating agency writing that Atlantic City’s proposed FY2017 budget—one which proposes some $35.3 million in proposed cuts, is a step in the right direction for the state taken-over municipality, noting that the city’s fiscal plan incorporates a 14.6% cut in its operating budget—sufficient to save $8 million, via reductions in salaries and benefits for public safety employees, $6 million in debt service costs, and $3 million in administrative expenses. Nevertheless S&P credit analyst Timothy Little cautioned that pending litigation with regard to whether Atlantic City can make proposed police and firefighter cuts could be a fly in the ointment, writing: “In our view, the proposed budget takes significant measures to improve the city’s structural imbalance and may lead to further improved credit quality; however, risks to fiscal recovery remain from pending lawsuits against state action impeding labor contracts.” The city’s proposed $206.3 million budget, indeed, marks the city’s first since the state takeover placed it under the oversight of the New Jersey’s Local Finance Board, with the state preemption giving the Board the authority to alter outstanding debt, as well as municipal contracts. Mr. Little wrote that this year will mark the first fiscal year of the agreed-to payment-in-lieu-of-taxes (PILOT) program for casino gaming properties—a level set at $120 million annually over the next decade—out of which 10.4% will go to Atlantic County. Mr. Little also notes that the budget contains far less state financial support than in previous years, as the $30 million of casino redirected anticipated revenue received in 2015 and 2016 will be cut to $15 million; moreover, the budget includes no state transitional aid—denoting a change or drop of some $26.2 million; some of that, however, will be offset by a $15 million boost from an adjustment to the state Consolidated Municipal Property Tax Relief Act—or, as the analyst wrote: “Long-term fiscal recovery will depend on Atlantic City’s ability to continue to implement fiscal reforms, reduce reliance on nonrecurring revenues, and reduce its long-term liabilities.” Today, New Jersey state aid accounts for 34% of the city’s $206.3 million in budgeted revenue, 31% comes from casino PILOT payments, and 27% from tax revenues. S&P upgraded Atlantic City’s general obligation bond rating two notches to CCC in early March after the Borgata settlement yielded the city $93 million in savings. Moody’s rates Atlantic City debt at Caa3.

Schooled on Bankruptcy. While Detroit, as noted above, has scored high budget marks or grades with the state; the city’s school system remains physically and fiscally below grade. Now, according to the Michigan Department of Education, school officials plan to voluntarily shutter some of the 24 city schools—schools targeted for closure by the state last January, according to State Superintendent Brian Whiston, whose spokesperson, William DiSessa, at a State Board of Education meeting, said:  “Superintendent Whiston doesn’t know which schools, how many schools, or when they may close, but said that they are among the 38 schools threatened for closure by the State Reform Office earlier this year.” Mr. DiSessa added that “the decision to close any schools is the Detroit Public School Community District’s to make.” What that decision will be coming in the wake of the selection of Nikolai Vitti, who last week was selected to lead the Detroit Public Schools Community District. Mr. Vitti, 40, is currently Superintendent of the Duval County Public Schools in Jacksonville, Florida, the 20th largest district in the nation; in the wake of the Detroit board’s decision last week to enter into negotiations with Mr. Vitti for the superintendent’s job, Mr. Vitti described the offer as “humbling and an honor.” The school board also voted, if Mr.Vitti accepts the offer, to ask him to begin next week as a consultant, working with a transition team, before officially commencing on July 1st. The School Board’s decision, after a search began last January, marks the most important decision the board has made during its brief tenure, in the wake of its creation last year and election last November after the Michigan Legislature in June approved $617-million legislation which resolved the debt of Detroit Public Schools via creating the new district, and retaining the old district for the sole purpose if collecting taxes and paying off debt.

The twenty-four schools slated for closure emerged from a list of 38 the State of Michigan had targeted last January—all from schools which have performed in the bottom 5 percent of the state for at least three consecutive years, according to the education department. The Motor City had hoped to avoid any such forced state closures—hoping against hope that by entering last month into partnership negotiations with the Michigan State Superintendent’s office, and working with Eastern Michigan University, the University of Michigan, Michigan State University, and Wayne State University, the four institutions would help set “high but attainable” goals at the 24 Detroit schools to improve academic achievement and decrease chronic absenteeism and teacher vacancies. The idea was that those goals would be evaluated after 18 months and again in 36 months, according to state officials. David Hecker, president of the American Federation of Teachers Michigan, noted that he was not aware which schools might be closing or how many; however, he noted that whatever happens to the teachers of the closing schools would be subject to the collective bargaining agreement with the Detroit Federation of Teachers. “If any schools close, it would absolutely be a labor issue that would be governed by the collective bargaining agreement as to how that will work … (and) where they will go,” Mr. Hecker said. “We very strongly are opposed to any school closing for performance reasons.”

Thirsty. A difficult issue—among many—pressed upon now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 municipal bankruptcy came as the Detroit Water and Sewer Department began shutting off water service to some of nearly 18,000 residential customers with delinquent accounts. Slightly less than a year ago, in the wake of numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom, the issue was again raised: what authority did the city of Detroit have to cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Thus it was that Detroit’s Water and Sewerage Department began shutting off service to customers who had failed to pay their bills—with, at the time, DWSD guesstimating about 20,000 of its customers had defaulted on their payments, and noting that the process of shutting off service to customers with unpaid bills was designed to be equitable and not focused on any particular neighborhood or part of the city—and that the agency was not targeting customers who owed less than a $150 and were only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD was reminding its delinquent customers who were having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who were at 150 percent of the poverty level or below could receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. This week, DWSD is reporting it has resumed shutoffs in the wake of sending out notices, adding the department has payment and assistance plans to help those with delinquent accounts avoid losing service. Department Director Gary Brown told the Detroit Free Press that everyone “has a path to not have service interruption.” Indeed, it seems some progress has been achieved: the number of families facing shutoffs is down from 24,000 last April and about 40,000 in April of 2014, according to The Detroit News. In 2014, DWSD disconnected service to more than 30,000 customers due to unpaid bills, prompting protests over its actions. Nonetheless, DWSD began the controversial practice of shutting off water service again this week, this time to some of the nearly 18,000 residential customers with delinquent accounts, in the wake of notices sent out 10 days earlier, according to DWSD Director Gary Brown. Nevertheless, while 17,995 households are subject to having their water turned off, those residents who contact the water department prior to their scheduled shutoffs to make a payment or enter into an assistance plan will avoid being cut off—with experience indicating most do. And, the good gnus is that the number of delinquent accounts is trending down from the 24,302 facing a service interruption last April, according to DWSD. Moreover, this Solomon-like decision of when to shut off water service—since the issue was first so urgently pressed in the U.S. Bankruptcy Court before Judge Rhodes—has gained through experience. DWSD Director Brown reports that once residents are notified, about 90 percent are able to get into a plan and avoid being shut off, and adding that most accounts turned off are restored within 24 hours: “Every residential Detroit customer has a path not to be shut off by asking for assistance or being placed into a payment plan…I’m urging people not to wait until they get a door knocker to come in and ask for assistance to get in a payment plan.” A critical part of the change in how the city deals with shutoffs comes from Detroit’s launch two years ago of its Water Residential Assistance Program, or WRAP, a regional assistance fund created as a component of the Great Lakes Water Authority forged through Detroit’s chapter 9 municipal bankruptcy: a program designed to help qualifying customers in Wayne, Oakland, and Macomb counties who are at or below 150 percent of the federal poverty level—which equates to $36,450 for a family of four—by covering one-third of the cost of their average monthly bill and freezing overdue amounts. Since a year ago, nearly $5 million has been dedicated to the program—a program in which 5,766 Detroit households are enrolled, according to DWSD, with a retention rate for those enrolled in the program of 90 percent. DWSD spokesperson Bryan Peckinpaugh told the Detroit News the department is committed to helping every customer keep her or his water on and that DWSD provides at least three advance notifications encouraging those facing a service interruption to contact the department to make payment arrangements, adding that the outreach and assistance efforts have been successful, with the number of customers facing potential service interruption at less than half of what it was three years ago.

Fiscally Hard in Hartford. Hartford Mayor Luke Bronin has acknowledged his proposed $612.9 FY2018 budget includes a nearly $50 million gap—with proposed expenditures at $600 million, versus revenues of just over $45 million: a fiscal gap noted moodily by four-notch downgrades to the Connecticut city’s general obligation bonds last year from two credit rating agencies, which cited rising debt-service payments, higher required pension contributions, health-care cost inflation, costly legal judgments from years past, and unrealized concessions from most labor unions. Moody’s Investors Service in 2016 lowered Hartford GOs to a junk-level Ba2. S&P Global Ratings knocked the city to BBB from A-plus, keeping it two notches above speculative grade. Thus, Mayor Bronin, a former chief counsel to Gov. Daniel Malloy, has repeated his request for state fiscal assistance, noting: “The City of Hartford has less taxable property than our suburban neighbor, West Hartford. More than half of our property is non-taxable.” In his proposed “essential services only” budget, Mayor Bronin is asking the Court of Common Council to approve an increase of about $60 million, or 11%, over last year’s approved budget—with a deadline for action the end of next month. An increasing challenge is coming from the stressed city’s accumulating debt: approximately $14 million, or 23%, of that increase is due to debt-service payments, while $12 million is for union concessions which did not materialize, according to the Mayor’s office. Gov. Malloy’s proposed biennial budget, currently in debate by state lawmakers, proposes $35 million of aid to Hartford. Unsurprisingly, that level is proving a tough sell to many suburban and downstate legislators. On the other hand, the Mayor appears to be gaining some traction after, last year, gaining an agreement with the Hartford Fire Fighters Association that might save the city $4 million next year: the agreement included changes to pension contributions and benefits, active and retiree health care, and salary schedules. In addition, last month, Hartford’s largest private-sector employers—insurers Aetna Inc., Travelers Cos. and The Hartford—agreed to donate $10 million per year to the city over five years. Nonetheless, rating agencies Moody’s and S&P have criticized the city for limited operating flexibility, weak reserves, narrowing liquidity, and its rising costs of debt service and pension obligations. Gurtin Municipal Bond Management went so far as to deem the city a “slow-motion train wreck,” adding that while the quadruple-notch downgrades had a headline shock effect, the city’s fundamental credit deterioration had been slow and steady. “The price impact of negative headlines and credit rating downgrades can be swift and severe, which begs the question: How should municipal bond investors and their registered investment advisors react?” Gurtin’s Alex Etzkowitz noted, in a commentary. “The only foolproof solution is to avoid credit distress in the first place by leveraging independent credit research and in-depth, ongoing surveillance of municipal obligors.”

Fighting for a City’s Future. The small city of Petersburg. Virginia, is hardly new to the stress of battle. It was there that General Robert E. Lee’s men fought courageously throughout the Overland Campaign, even as Gen. Lee feared he confronted a campaign he feared could not be won, warning his troops—and politicians: “We must destroy this Army of Grant’s before he gets to the James River. If he gets there, it will become a siege, and then it will be a mere question of time.” Yet, even as he wrote, General Ulysses S. Grant’s Army of the Potomac was racing toward the James and Petersburg to wage an attack on the city—a highly industrialized city then of 18,000 people, with supplies arriving from all over the South via one of the five railroads or the various plank roads. Indeed, Petersburg was one of the last outposts: without it, Richmond, and possibly the entire Confederacy, was at risk. Today, the city, because of the city’s subpar credit rating, is at fiscal risk: it has been forced to beg its taxpayers to loan it funds for new emergency vehicles—officials are making a fiscal arrangement with private citizens to front the cost for new emergency vehicles, and offering to put up city hall as collateral for said arrangement, as an assurance to the lenders they will be paid back. The challenge: the police department currently needs 16 new vehicles, at a cost of $614,288; the fire department needs three new trucks, at a cost of $2,145,527. Or, as Interim City Manager Tom Tyrrell notes: “Every single day that a firefighter rolls out on a piece of equipment older than he is, or a police officer responds to an emergency call in a car with 160,000 miles on it, are days we want to avoid…We want to get this equipment as soon as possible.” Interim City Finance Director Nelsie Birch has included in the upcoming fiscal year budget the necessary funds to obtain the equipment—equipment Petersburg normally obtains via lease agreements with vendors, but which now, because of its inability to access municipal credit markets due to its “BB” credit rating with a negative outlook, makes it harder than ever to find any vendor—or, as Manager Tyrrell puts it: “We went out four different times…We solicited four different times to the market, and were unsuccessful in getting any parties to propose.” He added that when soliciting these types of agreements, you solicit “thousands of people.” Notwithstanding that the funds for the vehicles is already set aside in the upcoming budget, city officials have been unable to find anyone willing to enter into a lease agreement with the city because of the city’s financial woes.

Last week, the City Council authorized Mr. Tyrrell to “undertake emergency procurement action” in order for the lease of necessary fire and police vehicles, forcing Mr. Tyrrell and other officials to seek private funds to get the equipment—that is, asking individual citizens who have the financial means to put up money for the fire and police vehicles—or, as Mr. Tyrrell puts it: “We’ve reached out to four people, who are interested and capable,” noting they are property owners in Petersburg who will remain anonymous until the deal is closed, describing it thusly: “[This agreement] is outside the rules, because we couldn’t get a partner inside the rules.” Including in this proposed fiscal arrangement: officials must put up additional collateral, in addition to the cars themselves, and in the form of city-owned property—with the cornerstone of the proposal, as it were, being Petersburg City Hall, or, as Mr. Tyrrell notes: “What they’re looking for is some assurance that no matter what happens, we’re going to pay the note…It’s not a securitization in the financial sense, as much as it is in the emotional sense: they know that the city isn’t going to let it go.” He adds, the proposed financial arrangement will be evaluated in two areas: the interest rate and how fast the deal can close, adding: “Although it’s an emergency procurement, we still want to get the best deal we can.”

Public Trust, Public Safety, & Municipal Fiscal Sustainability: Has the Nation Experienced the Closing of its Chapter on Municipal Bankruptcies?

 

Share on Twitter

eBlog, 04/20/17

Good Morning! In this a.m.’s eBlog, we consider the unique and ongoing fiscal and physical challenges confronting Flint, Michigan in the wake of the drinking water crisis spawned by a state-appointed Emergency Manager, before heading far west to assess San Bernardino’s nearing formal exit from chapter 9 municipal bankruptcy—marking the last municipality to exit after the surge which came in the wake of the Great Recession.

Public Trust, Public Safety, & Due Diligence. Flint, Michigan Mayor Karen Weaver has recommended Flint continue obtaining its drinking water via the Detroit Great Lakes Water Authority (GLWA), reversing the position she had taken a year ago in the wake of the lead-contaminated drinking water crisis. Flint returned to the Detroit-area authority which sends water to Flint from Lake Huron in October of 2015 after the discovery that Flint River water was not treated with corrosion control chemicals for 18 months. Mayor Weaver said she believed residents would stick with a plan to draw from a pipeline to Lake Huron which is under construction; however, she said she had re-evaluated that decision as a condition of receiving $100 million in federal funding to address the manmade disaster, noting that switching the city’s water source again might prove too great a risk, and that remaining with Detroit’s water supply from Lake Huron would cost her citizens and businesses less. Last year, Mayor Weaver had stated that the city’s nearly 100,000 residents would stay with a plan to draw from a Karegnondi Water Authority pipeline to Lake Huron—a pipeline which remains under construction, noting, then, that switching water sources would be too risky and could cause needless disruptions for the city’s residents—still apprehensive about public health and safety in the wake of the health problems stemming from the decision by a state-imposed Emergency Manager nearly three years ago to switch and draw drinking water from the Flint River, as an interim source after deciding to switch to the fledgling Genesee County regional system and sever its ties to the Detroit system, now known as the regional Great Lakes Water Authority. Even today, federal, state, and local officials continue to advise Flint residents not to drink the water without a filter even though it complies with federal standards, as the city awaits completion of the replacement of its existing lead service lines—or, as Mayor Weaver put it: “At the end of the day, I believe this is the best decision, because one of the things we wanted to make sure we did was put public health first,” at a press conference attended by county, state, federal and Great Lakes authority officials, adding: “We have to put that above money and everything else. That was what we did. And what didn’t take place last time was public health. We’ve done our due diligence.” The 30-year contract with the Great Lakes authority keeps Flint as a member of the Karegnondi authority—a decision supported by the State of Michigan, EPA, and Genesee County officials, albeit the long-term contract still requires the approval of the Flint City Council and Flint Receivership Transition Advisory Board, a panel appointed by Gov. Rick Snyder charged with monitoring Flint’s fiscal conditions in the wake of the city’s emergence from a state-inflicted Emergency Manager two years ago.

City Councilman Eric Mays this week said he will be asking tough questions when he and his eight other colleagues will be briefed on the plan. There is also a town hall tonight in Flint to take public comments. Councilman Mays notes he is concerned the city may be “giving up ownership” in the new Genesee regional authority, something he opposes, adding he would be closely scrutinizing what he deems a “valuable asset to the city.” Mayor Weaver has said she personally wanted to review the earlier decision in the wake of last month’s receipt from the Environmental Protection Agency of $100 million to assist the city to address and recover from the drinking water disaster that took such a human and fiscal toll. (EPA is mandating that Flint provide a 30-day public comment period.) Mayor Weaver notes she anticipates some opposition, making clear any final decision will depend upon “public feedback and public opinion.” Currently, the city remains under contract to make $7 million in annual municipal bond payments over 28 years to the Karegnondi Water Authority (KWA); however, the Great Lakes authority said it would pay a $7 million “credit” for the KWA debt as long as Flint obligates itself to make its debt service payments. There is, at least so far, no indication with regard to how any such agreement would affect water rates. That matters, because, according to the Census Bureau, the city’s median household income is $7,059, significantly lower than the median Michigan-wide household income, and some $11,750 less than U.S. median household income. The GLWA said Flint customers would save a projected $1.8 million over 30 years compared with non-contractual charges they would have paid otherwise; in return, the Flint area authority would become a back-up system for the Detroit area authority, saving it an estimated $600 million over prior estimates and ensuring Metro Detroit communities would still receive water in the event of an interruption in Great Lakes authority service.

Robert Kaplan, the Chicago-based EPA’s acting regional administrator, said he signed off on the deal because the agency believes it protects the health of residents: “What’s best for public health is to stay on the water that’s currently being provided.” Jeff Wright, the KWA’s chief executive and drain commissioner of Genesee County, said the recommended plan not only would allow Flint to remain with the Genesee regional system, but also to be a back-up water supply, which, he noted, “is critically important to the safety of Flint’s residents who have not had a back-up system since the beginning of the Flint water crisis,” adding: “Whether (or not) Flint ultimately chooses high-quality Lake Huron water delivered through the newly constructed KWA pipeline, the highest quality treated water from Genesee County’s Water Treatment Plant or any other EPA-approved alternative, we will continue to assist Flint residents as they strive to recover from the Flint Water Crisis.” 

Keeping the Detroit system. The Great Lakes Water Authority Has embraced Mayor Weaver’s recommendation, with CEO Sue McCormick noting: “Flint residents can be assured that they will continue to receive water of unquestionable quality, at a significant cost savings.” Michigan Senate Minority Leader Jim Ananich (D-Flint) noted: “It provides us a long-term safe water source that we know is reliable. KWA could do the same thing, but this is an answer to help deal with one of the major parts of it,” adding the recommended move to stay on Detroit area water is “another example of the emergency manager sort of making a short-term terrible decision that’s cost us taxpayers half a billion dollars, if not more.” Emergency managers appointed by Snyder decided with the approval of the Flint City Council to switch to the Flint River water in part to save money. Flint officials said they thought Detroit water system price hikes were too high. For more than a year, the EPA has delayed any switch to KWA because of deficiencies including that the Flint treatment plant is not equipped to properly treat water. Staying with the Great Lakes authority may be an initial tough sell because of the city’s history, Mayor Weaver warned, but she is trying to get residents to move on. A town hall is scheduled for this evening at House of Prayer Missionary Baptist Church in Flint for public feedback. “I can’t change what happened,” Mayor Weaver said. “All I can do is move forward.”

Moody Blues in San Bernardino? As San Bernardino awaits its final judicial blessing from U.S. Bankruptcy Judge Meredith Jury of its plan of debt adjustment to formally exit chapter 9 municipal bankruptcy, Moody’s has issued a short report, noting the city will exit bankruptcy with higher revenues and an improved balance sheet; however, the rating agency notes the city will confront significant operational challenges associated with deferred maintenance and potential service shortfalls—even being so glum as to indicate there is a possibility that, together with the pressure of its public pension liabilities, the city faces continued fiscal pressures and that continued financial distress could increase, so that a return to municipal bankruptcy is possible. Moody’s moody report notes the debt adjustment plan is forcing creditors to bear most of the restructuring challenge, especially as Moody’s analyzes the city’s plan to favor its pension obligations over bonded municipal debt and post-retirement OPEB liabilities. Of course, as we noted early on, the city’s pension liabilities are quite distinct from those of other chapter 9 municipalities, such as Detroit, Central Falls, Rhode Island, and Jefferson County. Under the city’s plan, San Bernardino municipal bondholders are scheduled to receive a major buzz cut—some 45%, even as some other creditors whom we have previously described, are scheduled (and still objecting) to receive as little as a 1% recovery on unsecured claims. Thus, Moody’s concludes that the Southern California city will continue to have to confront rising pension costs and public safety needs. Moody’s adjusted net pension liability will remain unchanged at $904 million, a figure which dwarfs the projected bankruptcy savings of approximately $350 million. The California Public Employees’ Retirement System also recently reduced its discount rate, meaning the city’s already increasing pension contributions will rise even faster. Additionally, Moody’s warns, a failure to invest more in public safety or police could exacerbate already-elevated crime levels. That means the city will likely be confronted by higher capital and operating borrowing costs, noting that, even after municipal debt reductions, the city might find itself unable to fund even 50 percent of its deferred maintenance. 

However, as San Bernardino’s Mayor Davis has noted, the city, in wake of the longest municipal bankruptcy in American history, is poised for growth in the wake of outsourcing fire services to the county and waste removal services to a private contractor, and reaching agreements with city employees, including police officers and retirees, to substantially reduce healthcare OPEB benefits to lessen pension reductions. Indeed, the city’s plan of adjustment agreement on its $56 million in pension obligation bonds—and in significant part with CalPERS—meant its retirees fared better, as Moody’s has noted, than the city’s municipal bondholders to whom San Bernardino committed to pay 40 percent of what they are owed—far more than its early offer of one percent. San Bernardino’s pension bondholders succeeded in wrangling a richer recovery than the city’s opening offer of one percent, but far less than CalPERS, which received a nearly 100 percent recovery. (San Bernardino did not make some $13 million in payments to CalPERS early in the chapter 9 process, but subsequently set up payments to make the public employee pension fund whole.) The city was aided in those efforts in the wake of U.S. Bankruptcy Judge Meredith Jury’s ruling against the argument made by pension bond attorneys: in the wake of the city’s pension bondholders entering into mediation again prior to exit confirmation, substantial agreement was achieved for those bondholders—bondholders whose confidence in the city remains important, especially in the wake of the city’s subsequent issuance of $68 million in water and sewer bonds at competitive interest rates—with the payments to come from the city’s water and sewer revenues, which were not included in the chapter 9 bankruptcy. The proceeds from these municipal bonds were, in fact, issued to provide capital to meet critical needs to facilitate seismic upgrades to San Bernardino’s water reservoirs and funding for the first phase of the Clean Water Factor–Recycled Water Program.

The Art & Commitment of Municipal Fiscal Recovery

eBlog, 04/11/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery of the city of Flint, Michigan, before heading east to one of the smallest municipalities in America, Central Falls, Rhode Island, as it maintains its epic recovery from chapter 9 municipal bankruptcy, before finally turning south to assess recent developments in Puerto Rico. We note the terrible shooting yesterday at North Park Elementary School in San Bernardino; however, as former San Bernardino School Board Member Judi Penman noted, referring to the police department: “It is one of the most organized and well-prepared police departments around, and they are well prepared for this type of situation.” Indeed, even if sadly, the experience the city’s school police department gained from coordinating with the city’s police department in the wake of the December 2, 2015 terrorist attack appeared to enhance the swift and coordinated response—even as calls came in yesterday from the White House and California Gov. Jerry Brown to offer condolences and aid, according to San Bernardino Mayor Carey Davis.

Could this be a Jewel in the Crown on Flint’s Road to Fiscal Recovery? In most instances of severe municipal fiscal distress or bankruptcy, the situation has been endemic to the municipality; however, as we have noted in Jefferson County, the state can be a proximate cause. Certainly that appears to have been the case in Flint, where the Governor’s appointment of an emergency manager proved to be the proverbial straw that broke the camel’s back at an exceptional cost and risk to human health and safety. The fiscal challenge is, as always, what does it take to recover? In the case of Flint, the city’s hopes appear to depend upon the restoration of one of the small city’s iconic jewels: the historic, downtown Capitol Theatre—where the goal is to restore it to its original glory, dating back to 1928, when it opened as a vaudeville house: it was listed on the National Register of Historic Places in 1985, but has been empty now for more than a decade—indeed, not just empty, but rather scheduled to become still another parking lot. Instead, however, the property will undergo a $37 million renovation to become a 1,600-seat movie palace and performance venue, which will provide 28,000 square feet of ground-floor retail and second-floor office space; an additional performance space will be created in the basement for small-scale workshops, experimental theater, and other performances. Jeremy Piper, chairman of the Cultural Center Corp., a Flint lawyer, will manage the new performing arts venue in the cultural center; he will also serve as co-chair of a committee that is raising the last $4 million of the $37 million needed to bring the theater back to life. The goal and hope is that the renovated theater will, as has been the experience in other cities, such as New York City’s Lincoln Center for the Performing Arts, help serve as a foundation for Flint’s fiscal and physical recovery. The new theater is intended to become the focal point of 12,000, 13,000, or 14,000 people coming into downtown Flint for a performance and then going out for dinner—that is, to benefit and revive a downtown economy. Indeed, already, the venture firm SkyPoint is planning to open a large fine-dining restaurant on the ground floor and mezzanine timed to the rejuvenated theater’s reopening—SkyPoint Ventures being the company co-founded by Phil Hagerman, the CEO of Flint-based Diplomat Pharmacy Inc., and his wife, Jocelyn, whose Hagerman Foundation (the author, here, notes his middle name, derived from his great grandfather, is Hagerman) donated $4 million toward the Capitol’s renovation. In 2016, the Flint-based C.S. Mott Foundation announced a grant of $15 million for the Capitol Theatre project as part of $100 million it pledged to the city in the wake of the water crisis. The project also received $5.5 million from the Michigan Strategic Fund.

The ambitious effort comes as Michigan has paid $12 million to outside attorneys for work related to the Flint drinking water crisis, but out of which nearly 30% has gone to pay criminal and civil defense attorneys hired by Gov. Rick Snyder—an amount expected to climb as the lead poisoning of Flint’s drinking water has proven to be devastating for Flint and its children, but enriching for the state’s legal industry: Jeffrey Swartz, an associate professor at Western Michigan University-Cooley Law School, notes: “It’s a lot of money…I can see $10 million to $15 million being eaten up very quickly.” He added, moreover, that the state is still “on your way up the slope” in terms of mounting legal costs. The approved value of outside legal contracts, not all of which has been spent, is at least $16.6 million, adding that the Michigan Legislature may want to appoint a commission to review the appropriateness of all outside legal bills before they are approved for payment: already, Gov. Rick Snyder’s office has spent a combined $3.35 million for outside criminal and civil defense lawyers; the Michigan Department of Environmental Quality has spent $3.65 million; the Department of Health and Human Services has spent $956,000; and the Treasury Department has spent $35,555, according to figures released to the Free Press. In addition, the state has paid $340,000 to reimburse the City of Flint for some of its civil and criminal legal defense costs related to the drinking water crisis, which a task force appointed by Gov. Snyder has said was mainly brought on by mistakes made at the state level. Yet to be equitably addressed are some $1.3 million in Flint legal costs. Michigan Attorney General Bill Schuette, whose investigation is still ongoing, has charged 13 current or former state and municipal officials, including five from the Dept. of Environmental Quality, the Dept. of Health and Human Safety, the City of Flint, and two former state-appointed emergency managers who ran the city and reported to the state’s Treasury Department; no one, however, from Gov. Snyder’s office has been charged.

The Remarkable Recovery of Chocolateville. Central Falls, Rhode Island Mayor James A. Diossa, the remarkable elected leader who has piloted the fiscal recovery of one of the nation’s smallest cities from chapter 9 municipal bankruptcy, this week noted: “Our efforts and dedication to following fiscally sound budgeting practices are clearly paying off, leaving the City in a strong position. I would like to personally thank the Council and Administrative Financial Officer Len Morganis for their efforts in helping to lead the comeback of this great City.” The Mayor’s ebullient comments came in the wake of credit rating agency Standard and Poor’s rating upgrade for one of the nation’s smallest cities from “BB” to “BBB,” with S&P noting: “Central Falls is operating under a much stronger economic and management environment since emerging from bankruptcy in 2012. The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections.”

One of the nation’s smallest municipalities (population of 19,000, city land size of one-square-mile), Central Falls is Rhode Island’s smallest and poorest city—and the site of a George Mason University class project on municipal fiscal distress—and guidebook for municipal leaders. Its post-bankruptcy recovery under Mayor Diossa has demonstrated several years of strong budgetary performance, and has “fully adhered to the established post-bankruptcy plan,” or, as Mayor Diossa put it: “S&P’s latest ratings report is yet another sign of Central Falls’ turnaround from bankruptcy.” Mr. Morganis noted: “The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections,” adding that the credit rating agency’s statement expressed confidence that strong budgetary performance will continue post Rhode Island State oversight. S&P, in its upgrade, credited Mayor Diossa’s commitment to sound and transparent fiscal practices, noting the small city has an adequate management environment with improved financial policies and practices under their Financial Management Assessment (FMA) methodology—and that Central Falls exhibited a strong budgetary performance, with an operating surplus in the general fund and break-even operating results at the total governmental fund level in FY2016. Moreover, S&P reported, the former mill town and manufacturer of scrumptious chocolate bars has strong liquidity, with total government available cash at 28.7% of total governmental fund expenditures and 1.9 times governmental debt service, along with a strong institutional framework score. Similarly, Maureen Gurghigian, Managing Director of Hilltop Securities, noted: “A multi-step upgrade of this magnitude is uncommon: this is a tribute to the hard work of the City’s and the Administrative Finance Officer’s adherence to their plan and excellent relationship with State Government.” The remarkable recovery comes as one of the nation’s smallest cities heads towards a formal exit from chapter 9 municipal bankruptcy at the end of FY2017. S&P, in its upgrade, noted the city is operating under a “much stronger economic and management environment,” in the wake of its 2012 exit from municipal bankruptcy, or, as Mayor Diossa, put it: “Obviously we’ve had a lot of conversations with the rating agencies, and I was hoping we’d get an upgrade of at least one notch…When we got the triple upgrade, first, I was surprised and second, it reaffirmed the work that we’re doing. Our bonds are no longer junk. We’re investment level. It’s like getting good news at a health checkup.”  S&P, in its report, noted several years of sound budgeting and full adherence to a six-year post-bankruptcy plan which state-appointed receiver and former Rhode Island Supreme Court Justice Robert Flanders crafted. The hardest part of that recovery, as Judge Flanders noted to us so many years ago in City Hall,was his swift decision to curtail the city’s pension payments—cuts of as much as 55 percent—a statement he made with obvious emotion, recognizing the human costs. (Central Falls is among the approximately one-quarter of Rhode Island municipalities with locally administered pension plans.) Unsurprisingly, Mayor Diossa, maintains he is “fully committed” to the fiscal discipline first imposed by Judge Flanders, noting the municipality had a general fund surplus of 11% of expenditures in FY2016, and adding: “That reserve fund is very important.” He noted Central Falls also expects a surplus for this fiscal year, adding that the city’s expenses are 3% below budget, and that even as the city has reduced the residential property tax rate for the first time in a decade, even as it has earmarked 107% of its annual required contribution to the pension plan and contributed $100,000 toward its future OPEB liability.

The End of an Era? Mayor Diossa, recounting the era of chapter 9 bankruptcies, noted Pennsylvania’s capital, Harrisburg, in 2011; Jefferson County, Alabama; Stockton, Mammoth Lakes and San Bernardino, California; and Detroit: “I think Central Falls is a microcosm of all of them…I followed Detroit and heard all the discussions. They had the same issues that we had…sky-high costs, not budgeting appropriately,” adding his credit and appreciation—most distinctly from California—of the State of Rhode Island’s longstanding involvement: “The state’s been very involved,” commending Governors Lincoln Chafee and Gina Raimondo. Nevertheless, he warns: fiscal challenges remain; indeed, S&P adds: “The city’s debt and contingent liability profile is very weak…We view the pension and other post-employment benefit [OPEB] liabilities as a credit concern given the very low funded ratio and high fixed costs…They are still a concern with wealth metrics and resources that are probably below average for Rhode Island, so that’s a bit of a disadvantage…That adds more importance to the fact that they achieved an investment-grade rating through what I think is pretty good financial management and getting their house in order.” The city’s location, said Diossa, is another means to trumpet the city.

The Uncertainties of Fiscal Challenges. Natalie Jaresko is the newly named Executive Director of the PROMESA federal control board overseeing Puerto Rico’s finances, who previously served during a critical time in Ukraine’s history from 2014 to 2016 as it faced a deep recession, and about whom PROMESA Board Chair Jose Carrion noted: “Ukraine’s situation three years ago, like Puerto Rico’s today, was near catastrophic, but she worked with stakeholders to bring needed reforms that restored confidence, economic vitality and reinvestment in the country and its citizens. That’s exactly what Puerto Rico needs today;” came as Ms. Jaresko yesterday told the Board that with the tools at its disposal, Puerto Rico urgently needs to reduce the fiscal deficit and restructure the public debt, “all at once,” while acknowledging that the austerity measures may cause “things to get worse before they get better.” Her dire warnings came as the U.S. territory’s recovery prospects for the commonwealth’s general obligation and COFINA bonds continued to weaken, and, in the wake of last week’s moody Moody’s dropping of the Commonwealth’s debt ratings to its lowest rating, C, which equates with a less than 35% recovery on defaulted debt. Or, as our respected colleagues at Municipal Market Analytics put it: “[T]he ranges of potential bondholder outcomes are much wider than those, with a materially deeper low-end. For some (or many) of the commonwealth’s most lightly secured bonds (e.g., GDB, PFC, etc.) recoveries could hypothetically dip into the single digits. Further, any low end becomes more likely the longer Puerto Rico’s restructuring takes to achieve as time:

1) Allows progressively more negative economic data to materialize, forcing all parties to adopt more conservative and sustainable projections for future commonwealth revenues;

2) Allows local stakeholder groups—in particular students and workers—to organize and expand nascent protest efforts, further affecting the political center of gravity on the island;

3) Worsens potential entropy in commonwealth legislative outcomes;

4) Frustrates even pro-bondholder policymakers in the US Congress, which has little interest in, or ability to, re-think PROMESA and/or Federal aid compacts with the commonwealth.”

On the other hand, the longer the restructuring process ultimately takes, the more investable will be the security that the island borrows against in the future (whatever that is). So while the industry in general would likely benefit from a faster resolution that removes Puerto Rico from the headlines, the traditional investors who will consider lending to a “fixed” commonwealth should prefer that all parties take their time. Finally, if bleakly, MMA notes: “In our view, reliable projections of bondholder recovery impossible, and we fail to understand how any rating agency with an expected loss methodology can rate Puerto Rico’s bonds at all…Remember that the Governor’s Fiscal Plan, accepted by the Oversight Board, makes available about a quarter of the debt service to be paid on tax-backed debt through 2027, down from about 35% that was in the prior plan that the Board rejected. As we’ve noted before, the severity of the proposal greatly reduces the likelihood that an agreement will be reached with creditors by May 1 (when the stay on litigation ends), not only increasing the prospect of a Title III restructuring (cram down) un-der PROMESA, but also a host of related creditor litigation against the plan itself and board decisions both large and small. The outcomes of even normal litigation risks are inherently unpredictable, but the prospects here for multi-layered, multi-dimensional lawsuits create a problem several orders of magnitude worse than normal.

Balancing the Odds for Puerto Rico’s Fiscal Future

eBlog, 03/15/17

Good Morning! In this a.m.’s eBlog, we consider the tea leaves from the outcome of yesterday’s snowy session on Puerto Rico in New York City’s Alexander Hamilton Building, where the PROMESA Board considered Puerto Rico Governor Ricardo Rosselló’s most recent efforts to reassert ownership and control of Puerto Rico’s fiscal future.

Is There Promise or UnPromise in PROMESA? The Puerto Rico Oversight Board, meeting yesterday in the Alexander Hamilton Building in New York, unanimously certified the latest turnaround plan by Governor Ricardo Rosselló to alleviate the U.S. territory’s fiscal insolvency, albeit with some critical amendments, including the implementation of a 10% progressive reduction in public pension benefits by FY2020, albeit, as was the case in Detroit’s plan of debt adjustment, adjusted so that no retiree would fall below the federal poverty level: the decade-long plan thus permits the payment of 26.2% of debt due, while imposing austerity measures including partial government employee furloughs and elimination of their Christmas bonus, unless the government meets targets for liquidity and budgeting. The plan would cut pension spending by 10%, in what the Board determined would ensure sufficient fiscal resources to fund 26% of debt due in the next nine years as a “first salvo.” Emphasizing the critical need to address a $50-billion debt load among Puerto Rico’s three main public retirement systems and a depletion of available funds by 2022, the PROMESA Board added it would also formulate efforts to fund existing pension obligations on a pay-as-you-go basis, liquidating assets and using revenues of the government’s General Fund to that end.  Board Executive Director Ramón Ruiz Comas said the Oversight Board wanted to implement additional “safeguards to ensure sufficient liquidity and budgetary savings,” designed to generate $35 to $40 million in monthly savings, including the elimination of Christmas bonus payments to public employees, and a furlough program to begin July 1st—the furlough would eliminate four work days per month for most personnel working in the executive branch, and two work days per month for teachers and other front-line personnel—the furlough would exempt law enforcement personnel. In addition, the Board conditioned the Christmas bonus elimination and work reduction program on the budget proposal for FY2018 which the government is scheduled to submit by April 30: if the government’s liquidity plan and right-sizing measures are able to generate an additional $200 million in cash reserves by June 30th, the furlough program would be deferred to September 1st or eliminated outright; likewise, the removal of Christmas bonuses could be reduced or eliminated if the Oversight Board finds that the government’s plan is producing enough cash-flow. Subsequent to that part of the session, Gerardo Portela, Director of the commonwealth’s Fiscal Agency and Financial Advisory Authority made a presentation on behalf of Puerto Rico’s muncipios of the fiscal plan—a plan which had undergone various changes over last weekend in a contentious set of negotiations between local officials and the PROMESA Board. Puerto Rico Governor Gov. Rosselló Nevares is slated to give a live televised address to provide his public response to the board’s recommendations. 

The Dean of municipal insolvency debt, Jim Spiotto, noted the import of having creditors involved in these efforts, as their support could be vital to spurring reinvestment in Puerto Rico’s economy. Mr. Spiotto’s comments came in the context of a possible agreement by some creditors to reinvest in some part of Puerto Rico, enhancing the possibility that the PROMESA Board may be willing to consider Puerto Rico’s willingness to increase its payback of debt, according to Mr. Spiotto, something which could occur under PROMESA’ Title VI.

At the session, the Oversight Board was asked about the status of debt negotiations with Puerto Rico’s bondholders and about the possibility, already requested by Gov. Ricardo Rosselló, of pushing back a stay on litigation beyond its current end on May 1st—to which Oversight Board member Arthur González responded that negotiations had yet to proceed to an outline with regard to what fiscal resources would be available for debt service: he did say that the fiscal plan would provide such an outline, and that he thought there was real hope to reaching agreements with creditors, adding that the PROMESA Board had yet to determine whether the current stay on litigation should be extended.

Balance or Imbalance. Brad Setser, a senior fellow at the Council on Foreign Relations, told the Bond Buyer that the proposed plan’s near term fiscal austerity may be too severe, warning that the “drag on Puerto Rico’s economy–and ultimately on its ability to collect tax revenues–may still be underestimated.” As in Detroit’s plan of debt adjustment, U.S. Bankruptcy Judge Steven Rhodes’s recognition that preserving the Detroit Institute of Arts was vital to the Motor City’s long-term recovery, so too, Mr. Setser recognizes that any final agreement which would handicap Puerto Rico’s economic growth prospects could backfire.  

 

 

What Do Today’s Fiscal Storms Augur for Puerto Rico and New Jersey’s Fiscal Futures?

Share on Twitter

eBlog, 03/13/17

Good Morning! In this a.m.’s eBlog, we consider the frigid challenges awaiting Puerto Rico in New York City’s Alexander Hamilton Building today, where even as a fierce winter storm promises heavy snow, the U.S. Territory of Puerto Rico will likely confront its own harsh challenge by the PROMESA Board to its efforts to reassert ownership and control of Puerto Rico’s fiscal future. Then we turn south to New Jersey, where there are fiscal and weather storm warnings, with the former focused on a legacy of public pension debt that Governor Chris Christie will bequeath to his successors.

Is There Promise or UnPromise in PROMESA? In the wake of changes made by Puerto Rico Governor Ricardo Rosselló Nevares to update its economic growth projections to address a concern expressed by the PROMESA Oversight Board, it remains unclear whether that will be certified by today—when the Board will convene in New York City in the Alexander Hamilton building to act on measures intended to guide the fiscal future of the U.S. territory over the next decade. The update was made in an effort to close a new gap between Puerto Rico’s projected revenue and expenditure projections, since the new economic projections altered all the Government’s revenue estimates. Gov. Rosselló, in an interview with El Nuevo Día, explained his administration had ordered four new measures to correct the insufficiency, which had been estimated at $262 million: the first measure would be an increase in the tax on tobacco products, an increase projected to add around $161 million in public funds, nearly doubling the current rate. The Governor proposed eliminating Christmas bonuses from the highest salaries in the government and public corporations, albeit without providing details with regard to the distinction between an executive salary and a non-executive salary, stating the changes would generate savings of between $10 million and $20 million. He also said the revised, updated plan would reflect an additional $78 million by means of the reconfiguration of the property tax through an appraisal process, as well as modifications to achieve $35 million in savings by means of changing the amount of sick and vacation days which public servants accrue, noting: “We were able to evaluate some of the economic development projections, and, even though our economists don’t agree with the Oversight Board’s s economists, we’ve used the Board’s economic projections within our model for the sake of getting the fiscal plan certified…(Due to the changes) we’ve prepared, some initiatives to have additional savings of up to $262 million. We had already assuaged some of the Board’s concerns within the same proposal we had made, and those were clarified.”

The Governor indicated that the decision taken yesterday does not imply that he will support other proposals made by the Board, noting that he especially opposed the suggestions to reduce the working hours of public employees by almost 20% and cutting professional services in the government by 50%, in order to reduce costs immediately in an effort to ensure the government does not run out of cash by the first two quarters of the next fiscal year, admitting that current projections suggest they are short by around $190 million, and warning: “This (the Board’s proposals) has a toxic effect on workers and on the economy.”

In response to the PROMESA Board’s apprehensions about the double counting of revenues in its submitted plan, the Governor noted: “We’ve established that our public policy is to renegotiate the debt. The idea is to keep everything in one place so we can work with it. The debt service will be affected depending on economic development projections, but we haven’t touched that part of the fiscal plan. We’re focusing on preparing the collection areas, because we’re aware that (government revenues) have been overestimated in the past. We’ve answered questions about healthcare, revenue, government size, and we’ve worked on the pension category within our administration’s public policy about protecting the most vulnerable as much as possible.”

As for today’s session in New York, noting that he believes the government has succeeded in answering the Board’s questions and concerns, and, using the Board’s economic growth numbers, the Governor believes the updated plan will address the revenue gap without major cuts, noting: “That’s no small thing. We’ve been able to dilute it and make the impact progressive, in the sense that those who have more have to contribute more, and keep the most vulnerable from losing access. We’ve established a plan of cost reduction. Now, the plan guarantees structural changes in the government so it operates better, as well as changes to the healthcare model and the educational model. It defends the most vulnerable, it doesn’t reduce the payroll by 30% or 20%, and it doesn’t reduce working hours like they’ve asked, and we reduced tax measures.” Nevertheless, Gov. Rosselló noted that the Board’s proposed service delivery cuts of as much as 50% affect health care and education—defining those two vital government services as ones in which such deep proposed cuts could trigger a drop in the economy by 8% or 9%, noting: “I’m very aware that the ones that are in the middle of all this are the people of Puerto Rico.” Indeed, the plan considers cuts to retiree pensions, lapses in the basic coverage of the Mi Salud healthcare program, a freeze in tax incentives, agency mergers, privatizations, and reductions in transfers to the University of Puerto Rico and to municipalities. On the revenue side, the Governor’s proposal seeks to increase the collection of the Puerto Rico Sales and Use Tax, the property tax, and corporate taxes. In addition, it boosts the cost of insurance, penalties, and licenses granted by the Government.

With or without the endorsement of Governor Rosselló’s administration, when the PROMESA Board meets today in the Alexander Hamilton US Custom House, the agenda includes certifying a plan that some argue goes far beyond not only considering the Governor’s proposed fiscal recommendations, but to some marks a transition under which the PROMESA Board members will “will become both the Legislative and Executive powers in Puerto Rico.” That is to note that this and ensuing fiscal budgets, or at least until the government of Puerto Rico is able to balance four consecutive budgets and achieve medium- and long-term access to financial markets—will first be overseen and subject to approval by the Oversight Board, as well every piece of legislation which has a fiscal impact.

Balancing. The undelicate federalism balance of power will be subject to review next week, when the House Committee on Natural Resources’ Subcommittee on Insular Affairs has a scheduled PROMESA oversight hearing.

The Stakes & States of Yieldy—or Kicking the Pension Can Down the Road.  Alan Schankel, Janney Capital Markets’ fine analyst has now warned that the Garden State’s lack of a significant plan to address New Jersey’s deteriorating fiscal conditions will lead to more credit rating downgrades and wider credit spreads, writing that New Jersey is unique among what he deemed the nation’s “yieldy states,” because the bulk of its tax-supported debt is not full faith and credit, lacks a credit pledge, and some 90% of the debt payments are subject to annual appropriation. If that were not enough, Mr. Schankel wrote that the state is burdened by another fiscal whammy: it sports among the lowest pension funding levels of any state combined with a high debt load and other OPEB liabilities. Mr. Schankel warned the fiscal road ahead could aggravate the dire fiscal outlook, noting that the recent sales tax reduction from 7% to 6.625%, combined with phasing out the estate tax under last year’s $16 billion Transportation Trust Fund renewal, will reduce the state’s annual revenue by $1.4 billion by 2021—long after Gov. Christie has left office, noting that the state’s unfunded pension liabilities worsened when in the wake of FY2014—16 revenue shortfalls, New Jersey reduced pension funding to a level below the scheduled-ramp up Gov. Chris Christie had agreed to his as part of New Jersey’s 2011 pension reform legislation, emphasizing that public pension underfunding has been “aggravated by current leadership,” albeit noting that such underfunding is neither new, nor partisan: “This long history of kicking the can down the road seems poised to continue, and although New Jersey appropriation backed debt offers some of the highest yields among all states, we advise caution…Given the persistent lack of political willingness to aggressively address the state’s financial morass, we believe the future holds more likelihood of rating downgrades than upgrades.”