Disparate Fiscal Solvency Challenges

06/23/17

Good Morning! In this a.m.’s eBlog, we consider the serious municipal fiscal challenges in Ohio, where the decline in coal-fired power has led Adams County auditor David Gifford to warn that if its existing power plants close, the county could be forced to raise its property tax rates at least 500% in order to make its requisite school district bond interest payments. Then we turn to the steep fiscal trials and tribulations of implementing San Bernardino’s post-chapter 9 exit, before finally considering the governing challenges affecting the City of Flint’s physical and fiscal future, and then to the criminal charges related to Flint’s fiscal and moral insolvency. Finally, we turn to the potential for a new fiscal chapter for the nearly insolvent Virginia municipality of Petersburg.

Fiscal Municipal Distress in Coal Country. While President Trump has stressed his commitment to try to protect the U.S. coal industry, less attention has been focused on the municipal fiscal challenges for local elected leaders. For instance, in Adams County, Ohio, where the median income for a household is about $33,000, and where approximately 20% of families fall below the federal poverty line, the county, with a population near 22,000, has been in fiscal emergency for more than two years—making it one of 23 such jurisdictions in the state.  But now its auditor, David Gifford, warns that if its coal-fired power plants close, the county could be forced to raise the property tax by at least 500% in order to make the bond payments on its public school districts debt. (In Ohio, when so designated, the average time a municipality spends in fiscal emergency averages about five years.) Since 1980, when the state auditor was empowered to place municipalities in fiscal emergency, Ohio has declared and released 54 communities—with time spent in fiscal emergency averaging five years, albeit the Village of Manchester in Adams County (approximately 2,000 residents) holds the record for time spent in fiscal emergency — nearly 20 years and still counting. Over the past five years, some 350 coal-fired generating units have closed across the country, according to the Energy Information Administration: closures, which have cost not just jobs, but key tax revenues vital to municipal solvency. It is uncertain whether any actions by the White House could make coal viable as a source of energy generation; it is clear that neither the Trump Administration, nor the State of Ohio appear to have put together fiscal options to address the resulting fiscal challenges. Ohio Municipal League Director Kent Scarrett, in testimony before the Ohio Legislature last February, on behalf of the League’s 733 municipal members, in which close to 90% of Ohio’s citizens live, reminded legislators that “a lack of opportunity to invest in critical infrastructure projects” and “the myriad of challenges that present themselves as a result of the escalating opioid epidemic,” would require “reigniting the relationship between the state and municipalities.” 

Post Municipal Bankruptcy Challenges. San Bernardino Mayor Carey Davis this Wednesday declared the city’s municipal bankruptcy process officially over, noting San Bernardino had come “to the momentous exit from that process,” a five-year process which resulted in the outsourcing of its fire department to San Bernardino County, contracting out waste removal services, and reductions in healthcare benefits for retirees and current employees to lessen the impact on pensions. Mayor Davis noted: “The proceedings guided us through a process of rebuilding and restructuring, and we will continue to rebuild and create systems for successful municipal operations,” as the City Council confronted by what City Manager Mark Scott warned was “without a doubt among the lowest in per capita revenues per capita and in city employees per capita,” yet still confronted by what he described as:  “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Nevertheless, the Council adopted its first post-chapter 9 budget—a budget which is projected to achieve a surplus of $108,000, sufficient to achieve a 15% reserve. To give a perspective on the fiscal challenge, Mr. Scott warned the Mayor and City Council: “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Adding that San Bernardino’s property values and business spending are lower than other cities, contributing to its low revenue, he added: “At the same time, it costs roughly the same to repair a street in Rancho Cucamonga as in San Bernardino: California’s tax system rewards wealth.”

Nevertheless, even though San Bernardino’s plan of debt adjustment calls for minimal revenue growth over the next two decades, he advised that the plan is focused on making the city more attractive. Ergo, he proposed three criteria: 1) urgent safety concerns, including the relocation of City Hall to address unreinforced masonry concerns; 2) restoration of public safety, 30 new police officers, vehicle and safety equipment replacement, radio maintenance, and a violence intervention initiative; 3) greater efficiencies, via information technology upgrades, and economic development and revenue growth—to be met by hiring a transportation planner, associate planner, grant-writing, and consulting. In addition to the operating budget, the manager also focused on the city’s capital budget, proposing significant investment for the next two to three years. Some of these increased costs would be offset by reducing the city’s full-time city employees by about 4%. Nevertheless, the Manager noted: “The community’s momentum is clearly increasing, and we are building internal capacity to address our management challenges…We look forward to the next year and to our collective role in returning this city to a more prosperous condition.”

Under its plan of debt adjustment, San Bernardino began making distributions to creditors this month: Mayor Carey Davis noted: “From the beginning, we understood the time, hard work, sacrifice and commitment it would take for the city to emerge from the bankruptcy process,” in asking the Council to adopt the proposed $160 million operating budget and a $22.6 million capital budget.

Moody Blues. The fiscal challenge of recovering from municipal bankruptcy for the city was highlighted last April when Moody’s Investors Service analysts had warned that the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Meredith Jury would “lead to a general fund unallocated cash balance of approximately $9.5 million by fiscal 2023, down from a $360 million deficit the city projected in 2013 for the fiscal years 2013-23,” adding, however, that the city still faces hurdles with pensions, public safety, and infrastructure. Noting that San Bernardino’s plan of debt adjustment provided more generous treatment of its pension obligations than its municipal bondholders—some of its unsecured creditors will receive as little as 1% of what they are owed—and the city’s pension obligation bondholders will take the most severe cuts—about 60%–or, as Moody’s moodily noted: “The [court-approved] plan calls for San Bernardino to leave bankruptcy with increased revenues and an improved balance sheet, but the city will retain significant unfunded and rapidly rising pension obligations…Additionally, it will face operational challenges associated with deferred maintenance and potential service shortfalls…which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.”

The glum report added that San Bernardino’s finances put its aging infrastructure at risk, noting the deferral of some $180 million in street repairs and $130 million in deferred facility repairs and improvements, and that the city had failed to inspect 80 percent of its sewer system, adding: “Cities typically rely on financing large capital needs with debt, but this option may no longer exist for San Bernardino…Even if San Bernardino is able to stabilize its finances, the city will still face a material infrastructure challenge.”  Moody’s report added: “Adjusted net pension liability will remain unchanged at $904 million, a figure that dwarfs the projected bankruptcy savings of approximately $350 million.”

Justice for Flint? Michigan Attorney General Bill Schuette has charged Michigan Health and Human Services Director Nick Lyon with involuntary manslaughter and misconduct in office, making the Director the fifth state official, including a former Flint emergency manager and a member of Gov. Rick Snyder’s administration, to be confronted with involuntary manslaughter charges for their alleged roles in the Flint water contamination crisis and ensuing Legionnaire’s disease outbreak which has, to date, claimed 12 lives, noting: “This is about people’s lives and families and kids, and it’s about demonstrating to people across the state—it doesn’t matter who you are, young, old, rich, poor, black, white, north, south, east, west. There is one system of justice, and the rules apply to everybody, whether you’re a big shot or no shot at all.” To date, 12 people have died in the wake of the switch by a state-appointed Emergency Manager of the city’s drinking water supply to the Flint River—a switch which led to an outbreak of Legionnaires’ disease that resulted in those deaths. Flint Mayor Karen Weaver, in response, noted: “We wanted to know who knew what and when they knew it, and we wanted someone to be held accountable. It’s another step toward justice for the people Flint,” adding that: “What happened in Flint was serious: Not only did we have people impacted by lead poisoning, but we had people who died.”

In making his charges, Attorney General Schuette declined to say whether he had subpoenaed Governor Rick Snyder—with the charges coming some 622 days after Gov. Snyder had acknowledged that Flint’s drinking water was tainted with lead—and that the state was liable for the worst water tragedy in Michigan’s history—a tragedy due, in no small part, from the state appointment of an emergency manager to displace the city’s own elected leaders.

The state Attorney General has charged HHS Director Lyon in relation to the individual death of Robert Skidmore, who died Dec. 13, 2015, “as a result of [Mr.] Lyon’s failure to warn the public of the Legionnaires’ outbreak; the court has also received testimony that the Director “participated in obstructing” an independent research team from Wayne State University which was investigating the presence of Legionella bacteria in Flint’s water. In addition, four defendants who have been previously charged, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality drinking water Director Liane Shekter-Smith, DEQ drinking water official Stephen Busch, and former City of Flint Water Department manager Howard Croft, each now face additional charges of involuntary manslaughter in Mr. Skidmore’s death—bringing, to date, 15 current or former Michigan or Flint city officials to have been charged.

Attorney General Scheutte, at a press conference, noted: “Involuntary manslaughter is a very serious crime and a very serious charge and holds significant gravity and weight for all involved.” He was joined by Genesee County Prosecutor David Leyton, Flint Water Investigation Special Prosecutor Todd Flood, and Chief Investigator Andrew Arena. (In Michigan, involuntary manslaughter is punishable by up to 15 years in prison and/or a $7,500 fine.) The announcement brings to 51 the number of charges leveled against 15 current and former local and state leaders as a result of the probe during which 180 witnesses have been interviewed—and in the wake of the release this week of an 18-page interim investigation report, which notes: “The Flint Water Crisis caused children to be exposed to lead poisoning, witnessed an outbreak of Legionnaires’ disease resulting in multiple deaths, and created a lack of trust and confidence in the effectiveness of government to solve problems.”

A New City Leader to Take on Near Insolvency. Petersburg, Virginia has hired a new City Manager, Aretha Ferrell-Benavides, just days after consultants charged with the fiscal challenge of extricating the city from the brink of municipal bankruptcy advised the Mayor and Council the municipality needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies: increased taxes, they warned, would not do the trick; rather, in the wake of a decade of imbalanced budgets that drained the city’s rainy day funds, triggered pay cuts, disrupted the regional public utility, and forced steep cuts in public school funding, the city needed a new manager. Indeed, on her first day, Ms. Ferrell-Benavides said: “To have the opportunity to come in and make a difference in a community like this, it’s worth its weight in gold.” The gold might be heavy: her predecessor, William E. Johnson III, was fired last year as the city fiscally foundered—leading Mayor Sam Parham to note: “We’re looking forward to a new beginning, better times for the city of Petersburg.”

Manager Ferrell-Benavides won out in a field of four aspirants, with Mayor Parham noting: “She was definitely head and shoulders above the other candidates…She had clear, precise answers and a 90-day plan of action,” albeit that plan has yet to be shared until after she meets with department heads and residents in order to get a better understanding of the city’s needs. Nevertheless, City Councilman Charles Cuthbert noted: “Her energy and her warm personality and her expressions of commitment to help Petersburg solve its problems stood out…My sense is that she truly views these problems as an opportunity.” In what will mark a fiscal clean slate, Manager Ferrell-Benavides will officially begin on July 10th, alongside a new city Finance Director Blake Rane, and Police Chief Kenneth Miller, who is coming to Petersburg from the Virginia Beach Police Department. She brings considerable governmental experience, including more than 25 years of work in government for the State of Maryland, the Chicago Public Housing Authority, the City of Sunnyvale, Calif.; and Los Alamos, New Mexico—in addition to multiple jobs with the District of Columbia.

 

Is There a “Right” Structure to Resolve Fiscal Insolvency?

06/19/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges to restoring fiscal solvency in the U.S. territory of Puerto Rico, so that chapter 9 does not apply—nor does that process provide a mechanism to address the territory’s municipalities, much less the existing federal discrimination against Puerto Rico vis-à-vis other Caribbean nations The challenge, if anything, has been heightened by the absence of mixed messages from Congress-where the PROMESA Oversight Board has sent a letter to Puerto Rico’s leaders warning of what the Board described as a waning resolve to deal with a dire financial situation.

Trying to Shock? House Natural Resources Committee Chairman Rob Bishop R-Utah) has notified PROMESA’s oversight board that its failure to approve the Puerto Rico Electric Power Authority’s restructuring support agreement is seen as “very problematic” by some federal legislators: “It appears there is no consensus from the oversight board in favor of certifying the PREPA [RSA] under…PROMESA…This is troubling, as the decision to implement the RSA had already been made by Congress with the passage of PROMESA. The oversight board’s dilatory tactics run counter to the plain language of PROMESA.” At the same time, PROMESA Board Chair José Carrión III stated that Puerto Rico needs to create implementation plans to reduce government spending and ensure adequate liquidity—writing last  Friday at a key time as the Puerto Rico legislature worked to try to reach consensus on a balanced FY2018 budget, in compliance with a board-approved 10-year fiscal plan. Chairman Carrión wrote: “I write to you out of a concern that some of the progress we appeared to have made in the past few weeks as a result of the close and positive collaboration between the board and the administration–and their respective teams of advisors–may be receding and that the necessary resolve to attain the goals set forth in the certified fiscal plan may be waning…It is equally of concern that some of the narrative taking hold in the public discourse fails to characterize adequately the truly dire fiscal situation the Commonwealth is facing.”  Chairman Carrión, in his epistle to Gov. Ricardo Rosselló, Senate President Thomas Rivera Schatz, and House of Representatives Speaker Carlos Méndez Núñez, noted it was an incorrect “narrative” for Puerto Rico’s government to say that if the government generates $200 million in additional cash reserves by June 30th, the PROMESA Board would not mandate a government furlough program and reduction or elimination of the Christmas bonus; rather, to avoid these measures, the Board is mandating a spending-reduction implementation plan in addition to the cash reserve intended to ensure ongoing liquidity—with Chairman Carrión warning that if the plan is inadequate or poorly executed, “Puerto Rico is all but certain to run out of money to fund the central government’s payroll come November or December of this year.” The PROMESA Board also called on Governor Rosselló to explain which public services are essential.

The stern warning—to a government where some of the most essential services are lacking—produced a response from Governor Rosselló’s non-voting representative to the PROMESA Board, Elías Sánchez Sifonte: “This administration has demonstrated an unwavering commitment to face this inherited crisis with the seriousness it deserves,” adding that: “We have also been demonstrating implementation plans to ensure we provide resources to cover essential services as required by PROMESA and in accordance with our Certified Tax Plan,” including progress in the Puerto Rico legislature on the budget proposed by the Governor based upon consultation with the PROMESA Board—a budget the Puerto Rican Senate expects to consider later this week.

The discussions came as U.S. District Judge Laura Taylor Swain, who is overseeing Puerto Rico’s Title III municipal bankruptcy process, taking a page from Detroit’s chapter 9 bankruptcy, named U. S. District Court Judges, including the remarkable Judge Christopher Klein, who presided over Stockton’s municipal bankruptcy trial, to help address critical issues. She also named Judge Barbara Houser of the U.S. Bankruptcy Court of the Northern District of Texas, designating her to lead the mediation team; Judge Thomas Ambro, of the U.S. Court of Appeals for the 3rd Circuit; U.S. District Court Judge Nancy Atlas of U.S. District Court for the Southern District of Texas; and Judge Victor Marrero of U.S. District Court for the Southern District of New York. Judge Swain made clear that participation in any mediation will be voluntary and confidential—and that she will not participate in mediation sessions, and mediators will not disclose information about the parties’ positions or the substance of the mediation process to her—with this process—as was the case in Stockton and Detroit’s chapter 9 cases—ongoing concurrently with trial in her courtroom. Judge Swain added that she plans to make final appointments prior to the June 28th Title III hearing in San Juan, where she will further explain the mediation process.

Who’s in Charge? The PROMESA Oversight Board has warned Puerto Rico’s leaders that the Board is apprehensive of a waning resolve to address the U.S. territory’s dire fiscal situation, with Chairman José Carrión III warning that Puerto Rico needs to create implementation plans for reducing government spending and assuring adequate liquidity at all times. The letter—coming between the emerging quasi-bankruptcy proceedings under Judge Taylor and as the Puerto Rico legislature is attempting to put together a balanced FY2018 budget, in compliance with a board-approved 10-year fiscal plan—came as PROMESA Board Chair José Carrión III urged greater resolve, writing: “I write to you out of a concern that some of the progress we appeared to have made in the past few weeks as a result of the close and positive collaboration between the Board and the administration–and their respective teams of advisors–may be receding and that the necessary resolve to attain the goals set forth in the certified fiscal plan may be waning…It is equally of concern that some of the narrative taking hold in the public discourse fails to characterize adequately the truly dire fiscal situation the Commonwealth is facing.” Chairman Carrión, in his epistle to Gov. Ricardo Rosselló, Senate President Thomas Rivera Schatz, and House of Representatives Speaker Carlos Méndez Núñez, added that there is an incorrect “narrative” that says that if the Puerto Rican government generates $200 million in additional cash reserves by the end of this month, the PROMESA Board would not mandate a government furlough program, nor a cut or elimination of the Christmas bonus. To avoid such a mandate, he added that the PROMESA Board is mandating a spending-reduction implementation plan in addition to a cash reserve plan intended to assure government liquidity, with the Chairman adding that if the plan is inadequate or poorly executed, “Puerto Rico is all but certain to run out of money to fund the central government’s payroll come November or December of this year.” Noting that: “Now we are at a critical juncture that requires that we collectively strengthen…,” the Board demanded that Gov. Rosselló explain which public services are essential.

Does Accountability Work Both Ways? Unlike chapter 9 bankruptcy cases in Detroit, San Bernardino, Central Falls, Jefferson County, and Stockton—Puerto Rico is unique in that the issue here does not involve municipalities, but rather a quasi-state. There have been no public hearings. PROMESA Chair José B. Carrion has not testified before the legislature. Now Puerto Rico Rep. Luis Raúl Torres has asked the Puerto Rico Finance Committee to invite Chair Carrión to appear to explain to Puerto Rico’s elected leaders the demands the PROMESA Board is seeking to mandate—and to justify the $60 million that the Fiscal Supervision Board is scheduled to receive as part of the resolution of special assignments. That Board, headed by Natalie Jaresko, the former Finance Minister of the Ukraine, is, according to PROMESA Chair Jose Carrión, to be in charge of the implementation of the plan, or, failing that, to achieve the fiscal balance of Puerto Rico and its return to the capital markets. (Ms. Jaresko has agreed to work for a four-year term: she is expected to earn an annual salary of $ 625,000 without additional compensation or bonuses, except for reimbursement of travel and accommodation expenses related to the position he will hold, according to PROMESA Board Chair Carrión, who has previously noted: “I know it’s going to be a controversial issue…We have a world-class problem, and we have a world-class person. This is what the rooms cost.”)

Getting Back in like Flint

Good Morning! In this a.m.’s eBlog, we consider the lessons learned from Flint—lessons that were not unrelated to the largest municipal bankruptcy in U.S, history in Detroit.

Immunity for State & Municipal Employees: What Does it Mean in Flint? U.S. Judge Judith Levy, in her 101-page decision this week, held that Flint and Michigan employees can be sued over the city’s lead water contamination; however, she found that Michigan Governor Rick Snyder and the State of Michigan have governmental immunity. The ruling came in response to a suit brought by a resident of Flint, against Gov. Snyder and 13 other public officials. Judge Levy dismissed many of the counts; however, she concurred that Flint resident Shari Guerin, who had brought the suit against the city and the other public officials, had had both her and her child’s “bodily integrity” unknowingly exposed by the dangerous levels of lead in Flint’s drinking water—levels of which the state was aware, but had hidden from the public. Indeed, the Judge wrote: “The conduct of many of the individual governmental defendants was so egregious as to shock the conscience.” Despite dismissing the charges against the Governor, the Michigan Departments of Environmental Quality and Health and Human Services—and the city’s water treatment plant operator, Judge Levy found that some key state leaders, including the state’s Chief Medical Executive and Health and Human Services Director could be sued in their individual capacities—and that Flint officials have no state governmental immunity, writing: “As this case highlights, the more governmental actors that are involved in causing a massive tort in Michigan, the less likely it is that state tort claims can proceed against the individual government actors given the way the state immunity statutes operate…Because the harm that befell plaintiffs was such a massive undertaking, and took so many government actors to cause, the perverse result is that none can be held responsible under state tort law.”

A Vicious Fiscal Whirlpool? For the city, the severe water contamination had not just physical fiscal implications, but also fiscal ones. Indeed, one of the plaintiffs was one of nearly 8,000 homeowners who was in danger of losing homes under tax foreclosure proceedings (Real property tax delinquency in the state entails a three-year forfeiture and foreclosure process)—proceedings which had been scheduled to commence last week until the Flint City Council approved a one-year moratorium—a moratorium which covered residents with two years of unpaid water and sewer bills going back to June 2014. While that temporary reprieve is in question, confronting an unknown outcome before the state-appointed Receivership Transition Advisory Board, which has monitored Flint’s finances since the city’s emergence from state oversight in two years ago last April—and is scheduled to vote on the moratorium at its June meeting; the outstanding water liens and inability to collect have further emptied the city’s coffers—even as, unsurprisingly, assessed property values  have become the latest fiscal hardship as an impoverished Flint still reels from a lead-in-water crisis which was first publicly acknowledged less than two years ago.

According to a recent Michigan State University study, “Flint Fiscal Playbook: An Assessment of the Emergency Manager Years, 2011-2015),” Flint has lost nearly 75 percent of its tax base—and of that base, assessed property valuations reeled to a 50 percent drop from $1.5 billion to $750 million.  Thus, unsurprisingly, more than 100 residents showed up at this week’s Council meeting—understandably upset that they face foreclosure even as they have been confronted by bills for drinking water, which they could neither drink, nor use in any way that might jeopardize the health and safety of their children. Those citizens received a temporary, one-year reprieve from the city—but the reprieve implies greater fiscal challenges to the city.

With liabilities high and revenues and property taxes struggling, Flint Mayor Karen Weaver reports that Flint has trimmed $2 million in annual garbage collection expenses by rebidding the service; expects to cut annual water expenses to $12 million from $21 million; and, due to federal grants, is hiring 33 more firefighters. The city is proceeding with a $37 million renovation of the Capitol Theatre downtown, seeking to create a central, historic space which could enhance the downtown—or, as the Mayor puts it: “I don’t think people should take their eyes off Flint.”

But assessing the dimensions of this disaster, created in no small part under the state’s original takeover of the city via the appointment of the emergency manager who had made the fatal decisions to change the city’s sourcing of drinking water, also includes looking back to the critical governmental decisions—especially Flint’s opting to abandon reliance on the  Karegnondi Water Authority (KWA) and instead rely upon the Great Lakes Water Authority (GLWA), a regional water authority created as part of Detroit’s chapter 9 plan of debt adjustment—meaning Flint’s citizens will keep drawing Detroit water from their taps—or, as the Mayor put it: “Staying with our water source gives us reassurance our water is good…It gets us out of our $7 million (annual) debt to the KWA. We did not have the finances to be able to do that.” Under the city’s 30-year agreement with the  30-year deal with GLWA, the city will receive a $7 million annual credit equal to its annual municipal bond payment to KWA for as long as Flint remains current with scheduled debt service. In addition, the agreement also enables the city to redirect water plant improvements to upgrading the city’s water distribution system—or, as Mayor Weaver notes: “We have pipes going into the ground now (referring to the planned replacement of lead service lines).We’re addressing this water crisis. The water quality is better. There are some good things going on.”

Mayor Weaver notes Flint has cut its $2 million in annual garbage collection expenses by rebidding the service; the city expects to cut annual water expenses to $12 million from $21 million; and the city continues to work with the Governor to address the public health concerns associated with the Flint water crisis. To try to become an economic magnet or hub, rather than a city to be avoided, the city is focused on a $37 million renovation of the Capitol Theatre, creating a central, historic space which could draw folks to events, restaurants, and bars. As the Mayor puts it: “I don’t think people should take their eyes off Flint…They should know the rest of the story. One of the things I’ve learned is we were going to get more done if we work together. If people are going to help you, why would you not sit down and work things out?”

The Hard Road to Fiscal Sustainability

eBlog

Good Morning! In this a.m.’s eBlog, we consider, Detroit’s remarkable route to fiscal recovery, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability.

The Road to Recovery from Municipal Bankruptcy.  Detroit, which has roared back from the largest municipal bankruptcy ever, but, in doing so paid an average 81% of what it owed to its municipal bondholders as part of its plan of debt adjustment, nearly 25% more than either San Bernardino or Stockton, now, in the wake of its decades of its more than 50% population decline  (In 1950, there were 1,849,568 people in Detroit; in 2010, there were 713,777.), is ready to tackle its housing dilemma. Post-chapter 9 Detroit inherited an estimated 40,000 abandoned lots and structures and an 80% erosion of its manufacturing base—that in a municipality where 36 percent of its citizens were below the federal poverty level, and, the year it filed for chapter 9, had reported the highest violent crime rate for any U.S. city with a population over 200,000.

Thus, Mayor Mike Duggan now vows that his administration plans to launch a street-by-street initiative effective August 1st to board up abandoned homes in the city while demolition crews continue razing blighted houses. That will be a painstaking challenge: in a city of 142 square miles, the city reports some 25,000 unsecured houses, the bulk of which have been scheduled to be razed—but, up to now, the pace of demolitions has been limited to 4,000-5,000 annually, according to the Mayor. Thus, he posits: “We’re going to go through and board up every house we can’t get to so we’re not just saying to people, ‘It’s going to be five years before we get to everything. Wait!’”

Mayor Duggan, speaking at the Mackinac Policy Conference, vowed the city will begin deploying six crews beginning at the end of next month, with the teams slated to go through each neighborhood and close off vacant and abandoned homes—homes that are susceptible to crime, to being scrapped for metal and finishings, and becoming uninhabitable safety hazards. Mayor Duggan made the announcement, as the city’s plan of adjustment and the city’s actions in implementing it appear certain to be fodder for the upcoming mayoral primary election set for August 8th—with whichever candidate is chosen slated to confront Michigan state Sen. Coleman Young II (D) in the November 7th general election. Indeed, unsurprisingly, Sen. Young (1st District), who previously served two terms in the Michigan House prior to being elected to the State Senate, is the son of former Detroit Mayor Coleman Young—who served as the Motor City’s Mayor from 1973-1994, this week blasted Mayor Duggan for waiting until his fourth year in office to address the safety hazard of unsecured houses: he accused his upcoming opponent of “playing games with the people and the public, because it’s election time,” adding he was “just amazed now all of sudden that he cares about the neighborhoods and he wants to do this…Where was he for the last 3.5 years in office? They just should have addressed that first.”

Currently the Duggan administration estimates city crews can board up 100-200 homes each week and that the effort will take two years to complete, so that, as Mayor Duggan notes: “By the end of two years, we’ll have every house in the city either demolished, reoccupied, or boarded…So at least it will be secure. Kids won’t be wandering in and out.” In making the statement, Mayor Duggan acknowledged the city has fallen well short of its avowed initial goal of razing 10,000 blighted homes annually, describing that as “not a practical goal.” Since Mayor Duggan took office in 2014, Detroit has razed some 11,593 blighted structures; there are 331 more contracted for demolitions, and then another 2,141 in the pipeline.

In making his responses, Mayor Duggan acknowledged that his initial commitment to raze more than 5,000 homes per year had gotten him into “trouble,” noting: “I feel bad for the people who took the grief for it, because I pushed them;” he said the city will post notices on unsecured privately owned homes for which city crews will be covering the windows and doors with plywood, noting: “We’ll go down and board up every house that’s not scheduled to come down in the next six to 12 months,” adding that the city’s budget is bearing the burden more often than not, because the cost of going after the home owners of such abandoned homes has proved impractical and costly: “You’ve got a lot of people in this town (who say), ‘My uncle died, left me the house, the house is in a bad neighborhood,’ they don’t even live here…To send them bills is not practical.” To date, for the most part, Mayor Duggan said the city has been delivering plywood to some neighborhood groups and relying on volunteers to board up houses on their streets; however, he added that there are a lot of neighborhoods with mostly senior citizens who “just physically can’t put these huge sheets of wood onto these houses…We finally said, ‘You know the most efficient way to do it just roll through the city.’”

On the Road to Fiscal Recovery. As we reported earlier this week, Detroit completed its most recent fiscal year with a $63 million surplus according to its Comprehensive Annual Financial Report, which the city filed with the Michigan Treasury Department on Tuesday, with Detroit CFO John Hill noting the FY2016 surplus was some $22 million higher than the city had projected, an outcome  to which he attributed the city’s improved financial controls, stronger-than-anticipated revenues, and lower costs due to unfilled vacancies—something, he told the Detroit News, the city believes “will have a lot of positive implications on the future.” In the near future, it offers the potential for Detroit to exit from state oversight by the Financial Review Commission under terms of Detroit’s plan of debt adjustment. Or, as Mayor Mike Duggan noted: “This audit confirms that the administration is making good on its promise to manage Detroit’s finances responsibly…With deficit-free budgets two years in a row, we have put the city on the path to exit Financial Review Commission oversight.” In fact, the city now projects an FY2017 $51 million surplus.

All this is increasing optimism that the 2017 audit of the Motor City’s finances could trigger a vote by the Commission to suspend its direct financial oversight, obviating the current required state oversight and requisite approvals on all the city’s budgets and contracts. Of the city’s reported $143 million in accumulated unassigned fund balances, including this year’s surplus, the city has allocated $50 million from its FY2016 balance as a down payment to help set up the city’s Retiree Protection Fund to help it address pension obligations scheduled to come due in 2024 under the terms of the city’s plan of debt adjustment. In addition, the city has set aside $50 million in its FY2018 budget for blight remediation and capital improvements—an amount which would leave a cushion of about $43 million in an unassigned fund balance—but which account could only be drawn from with the approval of Mayor Duggan, the City Council, or the state review commission. The city primarily draws from this account for one-time costs, such as to address blight and for its capital budget. CFO Hill has expressed hope the ongoing, positive cash flow and budget balances will enhance the city’s credit rating—and, thereby reduce its borrowing or capital costs.

What Constitutes Economic Sustainability? Puerto Rico Gov. Ricardo Rosselló has proposed an austere Fy2018 General Fund budget which, he reports, would reduce the territory’s operating expenses by 9.1%, describing his plan as comparable to “those we had established in the fiscal plan.” As proposed, the Governor would allocate at least $2.04 billion for pensions—an amount that would leave naught to meet Puerto Rico’s debt obligations: he noted that funding pensions was vital to protect Puerto Rico’s most vulnerable citizens—and that the “measures implemented in this budget are those that we had established in the fiscal plan.” Nevertheless, Gov. Rosselló said his budget was different from past budgets, because it was balanced: it projects that the central government would have sufficient balance to remit $404 million of $3.283 billion in scheduled debt service, or 12.3%, in FY2018. The budget does not include the debt from semi-autonomous and autonomous public sector entities, but shows near balance: $9.1 billion in revenue and $8.987 billion in spending, according to the Puerto Rico Office of Management and Budget, with an increase of nearly 6% in spending. In the Governor’s proposed budget, all General Fund payments for debt would be eliminated—guaranteeing a battle with the PROMESA Board, which, in its plan, had projected there would be $404 million available cash flow “post-measures” for FY2018, with the Board seemingly pressing to ensure funds were included in the budget to address Puerto Rico’s debt services to municipal bond holders—even as the Governor appears focused on protecting the territory’s most vulnerable citizens. In contrast, the PROMESA board certified decade-long quasi plan of debt adjustment incorporated the amount of municipal bond debt service to be paid each year—providing that amount be $3.28 billion.

The challenge is complex: with apprehension that the territory’s young professionals are increasingly leaving to New York and Miami, leaving behind an increasingly elderly and impoverished population—less able to remit taxes, but in greater and greater need for public services, and for promised pension payments, the critical planned increase by the Governor in public pension funding is imperiled: each of Puerto Rico’s three government pension systems is projected to run out of liquid assets in FY2018, unsurprisingly leading the Governor to propose allocating at least $2.04 billion in his budget to cover pension funding—marking a stark change from his previous budget, when the line item to cover “pay-as-you-go” pension funding was absent. (Puerto Rico has three public pension systems: the Employee Retirement System, the Teacher’s Retirement System, and the Judiciary Retirement System.) In contrast, the PROMESA Board, last March, in its decade-long oversight fiscal plan, ordered a cut in public pension obligations effective in FY2020, projecting fiscal savings for the subsequent six years in the range of $83 million. It is unclear whether those projections incorporated the potential fiscal impacts on either sales tax revenues, or the increased costs of aid to those falling below the poverty level.

In his proposed budget, Gov. Rosselló has recommended to the legislature a $9.56 billion FY2018 General Fund budget, seeking a 6.4% increase—but, after compensating for public pension obligations, actually providing 21.8% less for spending. Within his proposed budget, the Governor is asking for $583 million more for “other operating expenses,” but $555 million less for salaries and related costs, and retaining $195 million as a reserve. (In the wake of the final action by the Puerto Rico legislature, the PROMESA Board is authorized to reject any final budget and substitute its own.)

However, there is now a third party to this increasingly complex fiscal process, in the form of U.S. Judge Laura Swain, who, under PROMESA’s Title III municipal bankruptcy process, has some discretion of her own to consider changes in the amounts of debt paid in the next fiscal year—albeit, as we have learned from the chapter 9 proceedings in Detroit, San Bernardino, etc., the judicial system in these exceptionally complex chapter 9 cases acts with  considerable deliberation—not haste; moreover, unlike a normal chapter 9 process, PROMESA section 106(e) prohibits Judge Swain from deviating from the PROMESA Board’s certified fiscal plan and budgets.

Gov. Rosselló’s budget, unlike previous proposals, includes a $2 billion payment for Puerto Rico’s three public pension systems, noting: “One of the most important differences, he said, as mandated by the PROMESA Board, in this budget is that, contrary to the previous ones, it really is balanced,” adding that, as proposed, Puerto Rico had created a $200 million reserve. In addition, the Governor reported he would soon propose measures to simplify Puerto Rico’s tax system. Overall, his proposed plan contains some $924 million in revenue increases versus $851 million expense cuts for FY2018: among the key fiscal plan measures to increase FY2018 revenues is $519 million by extending the Act 154 foreign corporation tax and $150 million through improving tax compliance.

What Might it Mean to Puerto’s Rico’s Fiscal Future? The PROMESA Oversight Board, which had requested a structurally balanced budget, seeking a “once and done” approach to the Puerto Rico government’s fiscal crisis, had focused on immediate large spending cuts and revenue increases in the budget. Indeed, as proposed by the Governor, there are significant changes, including reductions in support for the University of Puerto Rico ($411 million) and $250 million to the island’s municipalities or muncipios. The plan encompasses freezing payroll increases and eliminating vacation and sick day liquidations—all with the aim to reduce Puerto Rico’s debt service costs by 76% through FY2026. San Juan Mayor Carmen Yulín Cruz said, “The governor’s public policy has been to act as the messenger of the junta [i.e. the Oversight Board] and, in this way, has hidden behind it to become the executioner of Puerto Rico,” according to the El Vocero news web site. “The budget message will be another sign that the governor turns his back on the people.”

Human Needs & Fiscal Imbalances

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal challenges to the City of Detroit—especially in ensuring equitable tax collections; then we look north to assess the ongoing, serious physical and fiscal challenges to Flint’s long-term recovery, before considering the fiscal plight in Puerto Rico.

Motor City Revenue Uncollections. Unlike most cities, Detroit has a broad tax base in which municipal income taxes constitute the city’s largest single source, and that notwithstanding that the city has the highest rate of concentrated poverty among the top 25 metro areas in the U.S. by population. (Detroit’s revenues, from taxes and state-shared revenues are higher than those of any other large Michigan municipality on a per capita basis: these revenues consist of property taxes, income taxes, utility taxes, casino wagering taxes, and state-shared revenues.) Therefore, it is unsurprising that the city is cracking down on those who owe back income taxes: Detroit has launched an aggressive litigation effort, an effort targeted at thousands of tax evaders living or working at thirty-three properties in the downtown and Midtown areas. The city’s Corporation Counsel, Melvin Butch Hollowell, notes the city has identified at least 7,000 such taxpayers at these properties as potential tax evaders. Collecting those owed taxes is an especially sensitive issue in the wake of the city’s chapter 9 experiences when the decline in revenues of 22 percent over the decade of its most important source of revenues was a key trigger of the nation’s largest municipal bankruptcy.

Out Like Flint? Just as in Detroit’s chapter 9 bankruptcy, where now-retired U.S. Bankruptcy Judge Steven Rhodes had to address water cut-offs to families who had not paid their utility bills, so too the issue is confronting Flint—where the current penalty for non-payment under the city’s ordinance is tax foreclosure: something which has put at risk some 8,000 homeowners in the municipality, until, last week, the City Council approved a one-year moratorium on such tax liens: the moratorium covers residents with two years of unpaid water and sewer bills dating back to June of 2014. After the moratorium vote, City Council President Kerry Nelson said: “The people are suffering enough” for being forced to pay for water they cannot drink and are reluctant to use…The calls that I received were numerous. Everywhere I go, people were saying: Do something,” he said: “I did what the charter authorized me to do” with a temporary moratorium “until we look at the ordinance and get it corrected. It needs work. It’s 53 years old. We must start doing something for our community.” The council president insisted the Snyder administration needs to step up “and help us: They created this…the government doesn’t get a free pass.”

Indeed, the question of risk to life and health had been one which now retired U.S. Bankruptcy Judge Rhodes had to deal with in Detroit’s chapter 9 bankruptcy: how does one balance a city’s fiscal solvency versus human lives; and how does one balance or assess a family’s needs versus the civic duty to pay for vital municipal serves and ensure respect for the law? Now the situation has been further conflicted by the Michigan state-appointed Receivership Transition Advisory Board, which oversees and monitors Flint’s finances in the wake of its emergence from state oversight two years ago. That board has scheduled a vote for next month on the moratorium—as this Friday’s deadline for the thousands of homeowners to pay up under a 1964 ordinance nears—albeit a deadline which has been modified to provide a one-year partial reprieve, in part to give time to amend the ordinance. Perhaps unsurprisingly, the apprehension has had municipal political impacts: a recall effort against Mayor Karen Weaver, who a year ago was in Washington, D.C., for meetings at the White House with President Barack Obama to lobby for more federal aid and to obtain other attention for the city. The Mayor, understandably, notes Flint is now between a rock and a hard place: there is understandable residential anger over access to water critical to everyday life; however, unpaid bills could cause irreparable fiscal harm to the city—leading the Mayor to affirm that she will honor the moratorium and “follow the law: It’s not like something new has been put in place…We’re doing what has always been done. This was something that Council did. This is the legislative body. My role is to execute the law. So I’m carrying out the law that’s put in place.” Nevertheless, after a year in which the city did not enforce its ordinance, due in no small part to credits its was able to offer to its citizens courtesy of state financing, those credits expired at the end of February, a time when lead levels finally recovered to 12 parts per billion, which is under the federal action standard—and after Gov. Rick Snyder last February rejected Mayor Weaver’s request for an extension.  

The fiscal challenge is complicated too as illustrated by the case of former City Councilmember Edward Taylor, who noted that he had received a $1,053 bill from a home he had rented out to a woman whom he recently evicted. The problem? Mr. Taylor said the woman illegally turned on the water, so the city is holding him responsible for paying up. Now he is threatening to sue the City of Flint if he is unable to gain fiscal relief: i.e., he wants the city to erase his debt—but have the city’s grow.  “The calls that I received were numerous. Everywhere I go, people were saying: Do something,” Coincilman Nelson said. “I did what the charter authorized me to do” with a temporary moratorium “until we look at the ordinance and get it corrected. It needs work. It’s 53 years old. We must start doing something for our community.” The council president insisted the Snyder administration needs to step up “and help us: They created this…the government doesn’t get a free pass.”

Tropical Fiscal Typhoon. The administration of Governor Ricardo Rosselló Nevares declined yesterday to publish the recommended budget for the next fiscal year despite the fact that two days ago the deadline for completing the version of the document to be assessed by the PROMESA Board expired; initially, the Governor’s administration was supposed to turn over the budget to the Board on May 8th; however, the Board had granted a two-week extension—one which expired at the beginning of this week—time in which the Governor’s office could improve and correct some of the issues contained in its draft document—a document which has yet to have been made public, but one which the Governor is expected to make public as part of his budget message to the Legislative Assembly: according to Press Secretary Yennifer Álvarez Jaimes, the budget is currently in the draft phase, so it cannot be published, including the version which is to be provided to the PROMESA Board—even as, today, the Governor is due in the nation’s capital on an official trip, meaning the formal presentation of his budget before the legislature will almost surely be deferred until next week. The delay comes as PROMESA Chair José B. Carrión has indicated the Board will await the document prior to beginning its assessment and evaluation.

The Governor’s representative to the PROMESA Board, Elías Sánchez Sifonte, said the budget process is well advanced and that it is only necessary to complete the legal analysis and align some aspects with the provisions contained in the Fiscal Plan—even as a spokesperson for the Puerto Rico Peoples Democratic Party (PPD) minority in the Senate, Eduardo Bhatia, insisted on his claim to know the content of the document: he stated: “I think the people should know what was proposed in the budget…Yesterday (Monday) was the date to deliver the budget and we know nothing.” Sen. Bhatia, who sued at the beginning of this month to force publication of the budget, had his suit rejected by the San Juan Court of First Instance, because it was preempted under Title III of PROMESA—meaning the case was then brought before U.S. District Judge Laura Taylor Swain, who issued an order giving Puerto Rico until this Friday to present its position in this controversy. 

State Agency BankruptciesPuerto Rico has filed cases in the U.S. District Court in San Juan, according to Puerto Rico’s Fiscal Agency and Financial Advisory Authority, to place its Highways and Transportation Authority and Employees Retirement System into Title III bankruptcy—a move affecting some $9.5 billion in debt, with Governor Rosselló asserting he was seeking to protect pensioners and the transportation system by putting both agencies into municipal bankruptcy; he added he had asked the PROMESA Oversight Board to put the two entities into Title III’s chapter 9-like process, because, according to his statement, the island’s creditors had “categorically rejected” the Puerto Rico fiscal plan as a basis for negotiations and have recently started legal actions to undermine the public corporation’s stability. In the board-approved HTA fiscal plan, there would be no debt service paid through at least fiscal year 2026. Gov. Rosselló added that he had filed for Title III, because Puerto Rico faces insolvency in the coming months, and because his government has been unable to reach a consensual deal with its creditors, adding that pensioners will continue to receive their pensions from the General Fund after the territory’s pension fund, ERS, runs out of money. (As of February the ERS had $3.2 billion in debt, of which $2.7 billion was bond principal and $500 million was capital appreciation bonds.)

As Puerto Rico attempts to sort out its tangled financial web, retirees may face bigger cuts than those in past U.S. municipal insolvencies, due in part to an unconventional debt structure which pits pensioners against the very lenders whose money was supposed to sustain them—but also because this is an unbalancing teeter-totter, where the young and upwardly mobile are moving from Puerto Rico to New York City and Florida—leaving behind the impoverished and elderly, so that contributions into the Puerto Rico’s pension system are ebbing, even as demands upon it are increasing, and as the benefit structures are widely perceived as unsustainable. There is recognition that radical cuts to pensioners could deepen the population’s reliance on government subsidies and compound rampant emigration, for, as Gov. Rosselló has noted, most retirees “are already under the poverty line,” so that any pension cuts “would cast them out and challenge their livelihood.” Indeed, Puerto Rico’s Public pensions, which as of June last year had total pension liabilities of $49.6 billion, and which are projected to be insolvent sometime in the second half of this calendar year, today have almost no cash; rather pension benefits are coming out of the territory’s general fund, on a pay-as-you-go basis—imposing a cost to Puerto Rico of as much as $1.5 billion a year: $1.5 billion the territory does not have.

The Knife Edges of Municipal Bankruptcy

eBlog

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal pipeline to the recovery for the City of Flint, the outcome of a Pennsylvania grand jury investigation of the near municipally bankrupt Pennsylvania capital city of Harrisburg, before addressing the .growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico.

In Like Flint? The Michigan legislature has finally agreed to appropriate $20 million to make the requisite match in order for some $100 million in federal aid to go to the city, with the funds to be used to replace corroded pipes which leached lead into the city’s drinking water system, creating not just grave health repercussions, but also devastating the city’s assessed property values and public safety budgets. The city’s near insolvency, which had come in the wake of the decisions which lead to the water contamination by a gubernatorially appointed Emergency Manager, may mark one of the final chapters to the city’s physical and fiscal recovery.

A State Capital’s Near Bankruptcy. Pennsylvania’s capital city, Harrisburg, chartered as a city the year the Civil War commenced, which came close to filing for chapter 9 municipal bankruptcy, will, in its proposed budget for the upcoming fiscal year, follow a court-approved bankruptcy plan, with slightly more revenues than expenditures, except that the city does not expect to be able to hire police as fast as called for in its budget. At a workshop this week, the first of several planned before the City Council votes on the budget for FY2017-2018, the proposed plan proposes minimal increases in most departments, as total revenue is expected to climb to $119.86 million, an increase of about $7 million from last year. City Manager Mark Scott, in a memo to the Council prior to its consideration of the budget, wrote: “In developing our budget recommendations, it is obvious we do not have anywhere near the money we would like to have…Nor is that likely to change any time soon. We cannot expect to address our future by replicating our past. We will have different staffing than in the past and different service delivery expectation. Right now, we are budgeting to establish a solid base—meaning staff skill sets and new, efficient systems/processes.”

In the city, where taxpayers and residents, as well as city officials, consistently list public safety as a top priority, Harrisburg’s five-year plan to increase spending on police was a keystone of the city’s plan of debt adjustment, which was officially confirmed in February. Nevertheless, while the Police Department budget, at $72 million, meaning it is more than 60 percent of the total general fund budget, calls for a significant increase in hiring, and recruiting. City Manager Mark Scott, however, warned that the issue involves more than the budget: “We’re getting people into the academy as fast as we can,” as he advised he hopes the city to realize “a net increase of 18 officers by the end of the year.” Following a trend that began before the 2012 bankruptcy filing, the city again plans to have fewer employees than the year before. This year, however, that is primarily due to the new voter-approved city charter, which transfers sewer workers from the city to the independent Water Department: the new budget authorizes 746 positions, compared to 763 one year earlier.

Tropical Fiscal Typhoon. Puerto Rico, the insolvent U.S. territory, is trapped in a vicious fiscal and physical whirlpool where the austerity measures it has taken to meet its fiscal obligations to its creditors all across the U.S. have come at a steep fiscal and physical cost: some 30,000 public sector employees have lost their jobs, even as the nearly 75% increase in its sales and use tax has backfired: it has served to curtail shopping, adding to the vicious cycle of increasingly drastic fiscal steps in an effort to make payments to bondholders on the mainland—enough so that nearly 33% of the territory’s revenue is currently going to creditors and bondholders, even as its economy has shrunk 10% since 2006. Over this period, the poverty rate has grown to 45%, while the demographic imbalance has deteriorated with the exit of some 300,000 Puerto Ricans—mostly the young and better educated—leaving for Miami and New York. Puerto Rico and its public agencies owe $73 billion to its creditors, nearly five times greater than the nearly $18 billion in debts accumulated by Detroit when it filed for chapter 9 municipal bankruptcy four years ago in what was then the largest municipal bankruptcy in U.S. history. Now, with U.S. District Court Judge Laura Taylor Swain set to preside next Wednesday (Financial Oversight and Management Board of Puerto Rico, 17-cv-01578), we will witness a unique trial, comparable to those in Jefferson County, Detroit, Stockton, San Bernardino, etc.; however, here there will be differences compared to chapter 9, as there will be roles for both Puerto’s Rico, but also the PROMESA oversight board—with, presumably, both seeking a fiscal recovery, but unlikely to have comparable proposals with regard to the most appropriate and effective plan of debt adjustment. Perhaps the greatest challenge will be economic recovery: for Detroit, whose bankruptcy pales in comparison to Puerto Rico’s; Detroit was able to benefit from a constructive state role and an economy vastly boosted by the federal bailout of its gigantic auto industry. That contrasts with current federal laws discriminating against Puerto Rico’s economy vis-à-vis competitor Caribbean nations, and caught in a Twilight Zone between a state and municipality, with a stream of its young talent streaming to Miami and New York, leaving behind a demographic map of poverty, empty classrooms, and aging people—and dependent on sales taxes, but with sharp reductions in pensions almost certain to sharply and adversely affect sales tax revenues. Judge Taylor will require the wisdom and strength of Job.

On the Hard Roads of Fiscal Recovery

eBlog

Good Morning! In this a.m.’s eBlog, we consider the growing, remarkable fiscal recoveries in post-bankruptcy Detroit and formerly insolvent Atlantic City, before turning to the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy.

Pacing a City’s Economic Recovery. JP Morgan Chairman and Chief Executive Officer yesterday described the city of Detroit’s economic recovery as one which has moved faster than expected—indeed, so much so that the giant financial institution today will announce it is expanding its investment in the city over the next two years, bringing the total effort to $150 million by 2019—some two years ahead of schedule. Mr. Dimon credited the city’s economic progress to strong collaboration between civic, business, and nonprofit leadership, as well as improving economic conditions in the city. If anything, over the last three years, the bank has become an enthusiastic partner in the Motor City’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy via investing more than $107 million in loans and grants to enhance the city’s remarkable progress in implementing its plan of debt adjustment and achieving the goal of complete restoration of its fiscal autonomy. JP Morgan’s investments have included $50 million in community development financing, $25.8 million to revitalize neighborhoods, $15 million for workforce development, $9.5 million for small business expansion, and $6.9 million in additional investments. In addition, Morgan appears to be ready for more, with the bank’s future investments likely to focus on:

  • further revitalizing Detroit’s neighborhoods,
  • strengthening the city’s workforce system, and
  • helping minority-owned small businesses grow.

Indeed, Mr. Dimon noted: “Detroit’s resurgence is a model for what can be accomplished when leaders work together to create economic growth and opportunity…This collaboration allowed us to speed up our investment and extend our commitment over the next two years. Going forward, I hope business, government and nonprofit leaders will see Detroit’s comeback as a shining example of how to put aside differences and work to find meaningful and innovative solutions to our most pressing economic problems.” For his part, Detroit Mayor Mike Duggan called JPMorgan Chase “a true partner” in the city’s work to restore economic growth and opportunity, noting that Morgan’s investments “have enabled thousands of Detroiters to receive training and created new opportunities for entrepreneurs and revitalized neighborhoods. There is more work to do, and I hope our continued partnership will build a thriving economy for all Detroiters.”

Indeed, the giant financial institution has extended its fiscal commitment: it plans to make investments of about $30 million focused on creating livable, inclusive, and sustainable neighborhoods. Officials report that will include preparing residents with the skills needed for high-paying careers and providing small businesses with capital. In addition, JPMorgan Chase officials said they will invest about $13 million re-paid loans paid back into two community development investment funds with which the bank has partnered in the community: Invest Detroit and Capital Impact Partners. This post-municipal bankruptcy investment in Detroit has been key, city officials, report to enabling Detroit to test solutions, adapt programs, and even find models that could be applied to other cities. For instance, the city’s Motor City Mapping project, Detroit’s comprehensive effort to digitize Detroit’s property information and create clear communication channels back and forth between the public, the government, and city service providers, has provided JP Morgan with insights how blight mapping can be applied in other cities to bring community partners together to fight blight—the bank has already shared the mapping technology in Cleveland, Columbus, and Cincinnati.

Is Atlantic City like Dracula? New Jersey State Senator Jim Whelan (D-Northfield), the former Mayor of Atlantic City and previous teacher in the city’s public school system, yesterday noted: “I always say Atlantic City is like Dracula—you can’t kill it, no matter how hard we try.” Indeed, the city’s gleaming casinos are turning profits, and plans have recently been announced to embark upon a $375 million renovation and reopening of the Trump Taj Mahal by Hard Rock casino; Stockton University just broke ground on a satellite campus. A luxury apartment complex, the first to be constructed in Atlantic City in decades, is underway. With upgrades in the city’s credit rating, a city that was on the brink of chapter 9 bankruptcy and taken over by the state is, today, on the road to recovery. The fiscal recovery comes in the wake of a decade which featured a 50 percent drop in the city’s casino revenues, witnessed the closure of nearly half of the casinos, and loss of 10,000 jobs, a loss which triggered a massive spike in home foreclosures—indeed losses which so imperiled the city’s fisc that the state took over the city. But this week, with a new playground ready for when the local elementary school lets out and a reduction in property taxes, there is a note of fiscal optimism. David G. Schwartz, an Atlantic City native, who currently serves as the Director of the Center for Gaming Research at the University of Nevada, Las Vegas, described it this way: “I think we are definitely into the next phase of the city’s history…Atlantic City has faced adversity before, and it has always moved forward–even though it sometimes took a few decades.”

My distinguished colleague, Marc Pfeiffer, the Assistant Director of the Bloustein Local Government Research Center in New Jersey, who, after a brief 37-year career in New Jersey local government administration, and a mere 26 years of service in New Jersey’s Division of Local Government Services, described the remarkable fiscal turnaround this way:

“The state is proceeding with its low-key recovery approach, working hand-in-hand with Mayor Guardian’s administration and the City Councilinsofar as politically feasible, and when not, pushing ahead using the authority in the law.  A few fits and starts with some challenges along the way, but it is a generally forward, positive trajectory. The recent Superior and Appellate decisions affirmed (or until appealed to the Supreme Court) the validity of New Jersey’s authority under the law, which eliminated the uncertainty of the last year. That’s good.  Jeff Chiesa’s team can now work with the city’s administration to make the changes which have long been discussed: reducing costs, modifying service levels and workforce size, in order to meet the city’s needs today given its new and evolving economy.”

In answer to the query what still remains to be addressed, he noted that the hard political issue of payments in lieu of taxes is being challenged by the neighboring County Executive and mayors of surrounding jurisdictions.  He reports that finding a “chunk of money to bring down long-term debt” to enable reductions in the city’s property tax is still a challenge—as is the enduring question with regard to how to address the water authority: how can it be monetized and meet the city’s interest in not losing ownership of it.  

From a governance perspective, he notes that the State of New Jersey had managed to keep all these issues relatively low-key: negotiations have been undertaken far from the public spotlight—mayhap depriving the public of critical information, but, at the same time, facilitating fiscal progress in avoiding the once, seemingly certain municipal bankruptcy.

Importantly, he adds that Atlantic City’s evolving economy cannot be ignored: “We’ve seen new investment and construction; new market rate rentals, South Jersey Gas moving its headquarters to Atlantic City; there is a new Stockton State University campus, and the pending revitalization and reopening of the shuttered Taj Mahal as a Hard Rock casino: “casino gaming revenues are up as we slide into the prime season.” Finally, he writes: “We seem to be getting to the point of ‘right-sizing’ the city, both economically and governmentally…which may be complicated by the pending elections—where the issue will be the upcoming primary battle to determine who will run against Mayor Guardian this fall.

Could There Be Promise in PROMESA? PROMESA Puerto Rico Oversight Board Chair José Carrión has advised the Governor Rosselló that the board has deferred until a week from Monday for either the board approving the Governor’s budget or notifying the Governor of violations and providing a description of corrective actions, writing: “We have received a working draft of the proposed budget, and are reviewing the submission and its completeness…The board will provide the Governor an additional 14 days to amend and improve the submission before it approves it or identifies violations.” The Governor’s working draft has yet to be made public; and constructing it will be perilous: according to the PROMESA board-certified fiscal plan, as of mid-March the Board expects the Governor to add nearly $924 million in revenues and cut $951 million in expenses from Puerto Rico’s All Government Activities budget—changes in a deteriorating economy the equivalent of nearly 10% of the Commonwealth’s budget.

Dr. José G. Caraballo, a professor in the Department of Business Administration at the University of Puerto Rico at Cayey, who also serves as the Director of the Census Information Center at the University, this week provided some perspective—or what he called “conjectures” with regard to the cause of what he called Puerto Rico’s “unsustainable indebtedness,” noting one hypothesis is that a “bloating” government inflated the government payroll, increasing the need to borrow. That perspective is valuable: for instance, he writes: “Even when there is no academic study showing that the payroll is payable or not, the proportion of government employees to the overall population aged 16 and older was lower in 2001 than in 1988, when there were no debt problems. In fact, the ratio of government workers to the population, ages 16-64, in 2013 was 10.3 percent in the U.S. and 11.2 percent in Puerto Rico, reducing the validity of this claim.”

Addressing the hypothesis that reckless and corrupt administrations had caused Puerto Rico’s fiscal and debt crisis, he noted: “I acknowledge that fiscal mismanagement has exacerbated this crisis, but there are studies showing that the (low) quality of administrators was similar from 1975-2000, and there is no evidence that the corruption of the 2000s was worse than the corruption in the 1970s or 1980s, when there was no debt crisis,” adding that “debt (measured in the correct way, either adjusted for inflation or as a share of gross domestic product) actually decreased from over the decade from 1977-1987.”  

Finally, he turned to an underlying issue: the disparate treatment of Puerto Rico created by §936 of the Internal Revenue Code—under which the industrial incentives provided to Puerto Rico were stripped, undercutting the island’s economy and disadvantaging it compared to other Caribbean nations: he noted that the proportion of manufacturing left the U.S. territory without any substitutable economic strategy, reduced government revenues, and increased Puerto Rico’s dependency on external funding—noting that in 1995, manufacturing represented 42% of Puerto Rico’s GDP, creating more than 30% of the local bank deposits and generating 17% of the total direct employment. Thus, he added; “It is far from a coincidence that when the transition period of the §936 ended in 2006, Puerto Rico entered the largest economic depression in more than 100 years. I verified the relationship between this deindustrialization and indebtedness with advanced statistical methods in a recent paper.”

Dr. José G. Caraballo offered that Congress could include Puerto Rico in the Guam-Northern Mariana Islands Visa Waiver Program—a change which he suggested would draw more tourists from Asia; remove the federal navigation acts which force Puerto Ricans to exclusively contract expensive U.S. vessels; implement new industrial policies; or provide parity in the distribution of Medicare and Medicaid assistance.