Human, Physical, & Fiscal Storms

October 3, 2017

Good Morning! In today’s Blog, we consider Connecticut and its capital city’s fiscal road—including the assessment of municipal bankruptcy for Hartford, and then, with the President set to visit today, the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road to Municipal Bankruptcy. Connecticut Comptroller Kevin Lembo yesterday said the state, still lacking an FY2018 budget, remains on track to end the year with a deficit of $93.9 million under the provisions of an executive order by the Governor, even as Hartford City Council members yesterday received a legal report about the city’s bleak fiscal situation from advisers hired to explore chapter 9 municipal bankruptcy as one way to restructure Hartford’s fiscal future. An attorney from Greenberg Traurig, the firm hired by Hartford to assess the viability of Chapter 9 bankruptcy protection, and a representative from financial advisory group Rothschild & Co., stressed that even if Hartford were to file for bankruptcy, the city would remain under the leadership and control of elected officials. Greenberg Traurig attorney Maria DiConza advised: “When a municipality files for bankruptcy, a judge, a court, does not take over and run the city: The city continues to run itself during the court-supervised process.” She added that filing for Chapter 9 protection would allow the city to restructure debt and re-open contractual arrangements: “It’s not a process where the court is taking over operations of the city. And that’s something that’s really important to understand.” Moreover, Todd Snyder, a restructuring specialist with Rothschild & Co., stressed that Hartford’s elected leaders would not be superseded by the orders of a federal bankruptcy court, should city leaders opt to take Hartford’s affairs there: “I want to be very, very clear—a federal judge is not going to come in here and say, ‘Oh, you’re overspending in this area, and you should change the way you govern the city of Hartford…That’s not going to happen.”

In response, Councilmember Larry Deutsch asked what would happen if the city “stiffed the bondholders” of a looming $27 million bond payment at the end of this month—in response to which, Mr. Snyder replied that opting not to make that municipal bond payment would be “tantamount to making the decision that you are going to file for bankruptcy.” Ms. DiConza advised that the city’s municipal bondholders could not repossess city property to cover missed payments, but they could take Hartford to court and try to force the city to raise taxes to cover its debts.

Councilwoman Wildaliz Bermudez questioned whether the two attorneys were doing enough to divert the city from bankruptcy “at all costs,” having previously deemed Mayor Luke Bronin’s consideration of municipal bankruptcy “undemocratic.” To that, Ms. DiConza said: “The city is trying to avoid bankruptcy—‘at all costs’ is really a question for you,” referring to the Council: “What is the cost of the city avoiding bankruptcy? Is the cost that people are going with trash all over their lawn, because there’s no trash service? Is the cost that crime is going to go up, because there’s no payments to the police force? Is the cost that taxes go up? That’s the question the city has to decide. What are the costs of avoiding Chapter 9?” Mr. Snyder added that whether or not Hartford files for municipal bankruptcy, the city still needs to address longstanding structural issues with the city’s finances that see it posting deficits and increasing debt year after year: “There’s a need to address all the constituencies about making contributions to this solution: We live in a beautiful city, and people have valuable property. I would think that restructuring our obligations and entering into a new partnership with the state would enhance everybody’s life in the city.”

In a letter to Gov. Dannel P. Malloy, Mr. Lembo said the administration’s spending reduction authority under his executive order should allow him to meet current state savings targets, adding, however, that state spending trends so far, some 7.2 percent higher than the same period last fiscal year, demonstrate that fixed costs (including debt, state employee and teachers retirement and retiree health care) continue to rise, while discretionary spending is forcibly decreasing, writing: “The state’s municipalities, nonprofits and Connecticut residents, including the most vulnerable, depend on discretionary program spending for critical services and to enhance the quality of life…Vital programs that have faced significant cuts include Grants for Substance Abuse Services; Mental Health Service Grants; the Connecticut Home Care Program, Aid to the Disabled; Employment Opportunities; and the Early Care and Education program. He added: “The state’s capacity to meet its spending obligations is impaired by the inability to enact a budget that provides for policy changes that increase revenue. This problem is exacerbated each month as potential sources of additional revenue are foregone due to the absence of necessary changes to the revenue structure,” warning that as the “state enters the second quarter of the fiscal year, even a potential agreement to increase in the hospital tax remains in doubt, even though it would result in higher federal reimbursements. Moreover, ongoing budget uncertainty will slow Connecticut’s economic growth and could ultimately lead to the state and its municipalities receiving downgrades in credit ratings that will cost taxpayers even more…These results do not indicate Connecticut can grow its way out of the current revenue stagnation, especially in light of the state missing it revenue targets in the last two fiscal years.”

Adding to the downbeat state fiscal plight, he reported that preliminary state Department of Labor (DOL) data for August 2017 show that Connecticut lost 3,900 jobs during the month of August to a level of 1,687,200 seasonally adjusted, adding that July’s original preliminary job loss of 600 had been revised down by the Bureau of Labor Statistics to a loss of 1,100. Over the past 12-month period ending in August, the state has posted 6,000 new payroll jobs. During the last period of economic recovery, employment growth averaged over 16,000 annually. 

Physical & Fiscal Mayhem. Some two weeks after Hurricane Maria devastated Puerto Rico, creating a humanitarian crisis, President Trump arrives today to see first-hand the damage, becoming the first President of the United States to make an official visit in the wake of a crisis. The President will meet with Gov. Rosselló Nevares and San Juan Mayor Carmen Yulín Cruz—who had alerted the media about the signal seeming disparities in responding to the human, physical, and fiscal crisis compared to Houston and Florida.

As President Trump visits Puerto Rico today, nearly two weeks after the destruction and havoc created by Hurricane Maria, officials report only 5% of the island has electricity and its schools are not close to reopening. Puerto Rico Secretary of Education Julia Kelleher told CNN on Sunday that some public schools might not resume classes until mid-month because of storm damage, though decisions will be made on a regional basis. The U.S. territory has 1,113 public schools and a student population of 350,000; however, only a small fraction (400) have been assessed for damage; thus, school districts from Florida to Massachusetts are anticipating an influx of Puerto Rican students displaced by the hurricane, so a different kind of relief operation is underway to identify which schools have space and which resources will be needed in the wake of last month’s loss, all across Puerto Rico, of power and communications. Officials hope to reopen some schools by mid-month. Edwin Meléndez, Director of the Center for Puerto Rican Studies at Hunter College in New York, said his conservative estimate is that more than 200,000 children and adults will leave Puerto Rico for the mainland—with his decision coming one day after President Trump took to Twitter to criticize the leadership of Puerto Rican leaders, especially San Juan Mayor Carmen Yulin Cruz and those the President claimed “want everything to be done for them when it should be a community effort.” The inexplicably belated, temporary suspension of the Jones Act has enabled FEMA to expand its delivery of food and water throughout Puerto Rico, though officials stressed that many people still lack the essentials: FEMA has, finally, been able to deliver food and water to all of Puerto Rico’s 79 municipalities; however, FEMA reports that some isolated areas of these municipalities may not have received the commodities, partly because lack of communication systems has hampered distribution efforts. As of late Sunday, there was safe drinking water available to 41% of Puerto Rico; FEMA has installed eleven regional staging areas for food and water distribution; some 5 percent off the island has power, and Gov. Ricardo Rossello reported the Army Corps of Engineers has begun a mission to repair the power grid. Over the next few days, close to a million gallons of gasoline and half a million gallons of diesel fuel will arrive, according to the Governor, who added that just over one-third of Puerto Rico’s residents now have phone service: all landlines are operating, but only about 11% of the cell towers are operational; 51 of 69 hospitals are running in some capacity now, along with 46 of 48 dialysis centers.

Brookings’ Michael O’Hanlon yesterday described the “patriotism, courage, compassion, and grit of the several thousand Coast Guard and other U.S. military personnel belatedly detailed by the White House to respond, writing: “But the overall approach might best be described as a modest response to a disaster: at a time when so many American citizens are suffering, we need to consider a much more massive effort.”

 

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Leadership Challenges to Fiscal & Physical Recoveries

08/04/17

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Good Morning! In this a.m.’s blog, we consider the ongoing fiscal and physical recovery of Flint, Michigan—as well as the fiscal recoveries of Pontiac and Lincoln Park, and we look at the special fiscal challenge to Puerto Rico’s debts.

In Like Flint. EPA has okayed the State of Michigan’s plans to forgive $20.7 million in past water infrastructure loans owed by the City of Flint, relying on federal legislation enacted at the end of last year to provide states the Safe Drinking Water Revolving Loan program to forgive past loans owed to a state. EPA Administrator Scott Pruitt noted: “Forgiving Flint’s past debt will better protect public health and reduce the costs associated with maintaining the city’s water system over time…Forgiving the city’s debt will ensure that Flint will not need to resume payments on the loan, allowing progress toward updating Flint’s water system to continue.” In response, Mayor Karen Weaver stated: “We appreciate the EPA’s continued assistance as we work to recover from the water crisis: We have come a long way, but there is still much more work that needs to be done. With help and support like this from federal, state as well as local entities, Flint will indeed bounce back.”

Emerging from State Fiscal Oversight. The Michigan Treasury Department reports that the Michigan municipalities of Pontiac and Lincoln Park have both sufficiently improved their fiscal conditions to warrant release from eight long years of state oversight: they may return to local control in the wake of Michigan Treasurer Nick Khouri’s announcement that the Pontiac and Lincoln Park Receivership Transition Advisory Boards would be dissolved and effective immediately, thereby returning full fiscal authority to the elected leaders of the respective municipalities. The Michigan Receivership Transition Advisory Boards, which have been monitoring the cities’ finances since the departure of emergency managers, have been dissolved—clearing the way for locally elected officials to resume complete control of the respective municipal governments again, with Lincoln Park now making regular contributions to its pension fund, with the Detroit suburb emerging from state oversight which commenced in 2014. Nearby Pontiac had sought a state financial review a decade ago—operating in the wake thereof under a consent agreement and an emergency manager. The Treasury today reports the municipality has a general fund balance of $14 million. Thus, the two municipalities join Wayne County, Benton Harbor, Highland Park, and four other municipalities in exiting such fiscal oversight; however, nine municipalities and school districts remain under some sort of state oversight, although the state has imposed an emergency manager only in Highland Park Schools. In making the announcement, Gov. Rick Snyder reported: “Under the guidance of the Receivership Transition Advisory Boards, both Lincoln Park and Pontiac have made significant progress to right their finances and build solid, fiscal foundations for their communities: This is a great achievement for the cities.”

In the case of Pontiac, the city’s debt long-term debt dropped nearly 80% under state oversight, from over $45 million to about $8.2 million since 2009, according to the Michigan Treasury Department, culminating at FY2016 year-end with a general fund balance of $14 million. At the same time, a blight remediation program in the city has succeeded in razing nearly 680 blighted residential properties since 2012, in no small part through CDBG assistance. Secretary Khouri noted: “Pontiac has seen great economic progress and opportunity since the lost decade.” The city of Lincoln Park cut its long term debt from more than $1 million in 2014 when it entered state oversight to $260,707. At the end of fiscal-year 2016, Lincoln Park ended with a general fund balance of $24.4 million.  The city entered state controlled emergency management in February 2014 and began its transition to local control in December 2015. “Today marks an important achievement for Lincoln Park residents, the city and all who have contributed to moving the city back to a path of fiscal stability,” Khouri said. Lincoln Park, with a population of close to 40,000, where Brad Coulter, who has served as the Emergency Manager, noted that the Hispanic and Latino population make up about 15% of Lincoln Park residents, describing the diversity as a “growing and an important part of the city” which as really helped “to stabilize the city.”

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

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

Municipal Moral & Fiscal Obligations

07/27/17

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

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

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

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

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

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

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

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

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

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

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

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

Trying to Recover on all Pistons

07/19/17

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Good Morning! In this a.m.’s eBlog, we look back at the steep road out of the nation’s largest ever municipal bankruptcy—in Detroit, where the Chicago Federal Reserve and former U.S. Chief Bankruptcy Judge Thomas Bennett, who presided over Jefferson County’s chapter 9 municipal bankruptcy case, has noted: “[S]tates can have precipitating roles as well as preventative roles” in work he did for the Chicago Federal Reserve. Indeed, it seems the Great Recession demarcated the nation’s states into distinct fiscal categories: those with state oversight programs which either protected against or offered fiscal support to assist troubled municipalities, versus those, such as Alabama or California—with the former appearing to aid and abet Jefferson County’s descent into chapter 9 bankruptcy, and California, home to the largest number of chapter 9 bankruptcies over the last two decades, contributing to fiscal distress, but avoiding any acceptance of risk. Therefore, we try to provide our own fiscal autopsy of Detroit’s journey into and out of the nation’s largest municipal bankruptcy.

I met in the Governor’s Detroit offices with Kevyn Orr, whom Governor Rick Snyder had asked to come out from Washington, D.C. to serve as the city’s Emergency Manager to take the city into—and out of chapter 9 municipal bankruptcy: the largest in American history. Having been told by the hotel staff that it was unsafe to walk the few blocks from my hotel to the Governor’s Detroit offices on the city’s very first day in insolvency—a day in which the city was spending 38 cents on every dollar of taxes collected from residents and businesses on legacy costs and operating debt payments totaling $18 billion; it was clear from the get go, as he told me that early morning, there was no choice other than chapter 9: it was an essential, urgent step in order to ensure the provision of essential services, including street and traffic lights, emergency first responders, and basic maintenance of the Motor City’s crumbling infrastructure—especially given the grim statistics, with police response times averaging 58 minutes across the city, fewer than a third of the city’s ambulances in service, 40% of the city’s 88,000 traffic lights not working, “primarily due to disrepair and neglect.” It was, as my walk made clear, a city aptly described as: “[I]nfested with urban blight, which depresses property values, provides a fertile breeding ground for crime and tinder for fires…and compels the city to devote precious resources to demolition.” Of course, not just physical blight and distress, but also fiscal distress: the Motor City’s unbalanced fiscal condition was foundering under its failure to make some $108 million in pension payments—payments which, under the Michigan constitution, because they are contracts, were constitutionally binding. Nevertheless, in one of his early steps to staunch the fiscal bleeding, Mr. Orr halted a $39.7 million payment on $1.4 billion in pension debt issued by former Detroit Mayor Kwame Kilpatrick’s administration to make the city pension funds appear better funded than they really were; thus, Mr. Orr’s stop payment was essential to avoid immediate cash insolvency at a moment in time when Detroit’s cash position was in deepening debt. Thus, in his filing, Mr. Orr aptly described the city’s dire position and the urgency of swift action thusly: “Without this, the city’s death spiral I describe herein will continue.”

Today, the equivalent of a Presidential term later, the city has installed 65,000 new streetlights; it has cut police and emergency responder response times to 25% of what they were; it has razed 11,847 blighted buildings. Indeed, ambulance response times in Detroit today are half of what they were—and close to the national average—even as the city’s unrestricted general fund finished FY2016 fiscal year with a $143 million surplus, 200% of the prior fiscal year: as of March 31st, Detroit sported a general fund surplus of $51 million, with $52.8 million more cash on hand than March of last year, according to the Detroit Financial Review Commission—with the surplus now dedicated to setting aside an additional $20 million into a trust fund for a pension “funding cliff” the city has anticipated in its plan of debt adjustment by 2024.  

Trying to Run on all Pistons. The Detroit City Council has voted 7-1 to approve a resolution to allow the Motor City to realize millions of dollars in income tax revenues from its National Basketball Association Pistons players, employees, and visiting NBA players—with such revenues dedicated to finance neighborhood improvements across the Motor City, under a Neighborhood Improvement Fund—a fund proposed in June by Councilwoman (and ordained Minister) Mary Sheffield, with the proposal coming a week after the City Council agreed to issue some $34.5 million in municipal bonds to finance modifications to the Little Caesars Arena—where the Pistons are scheduled to play next season. Councilwoman Sheffield advised her colleagues the fund would also enable the city to focus on blight removal, home repairs for seniors, educational opportunities for young people, and affordable housing development in neighborhoods outside of downtown and Midtown—or, as she put it: “This sets the framework; it expresses what the fund should be used for; and it ultimately gives Council the ability to propose projects.” She further noted the Council could, subsequently, impose additional limitations with regard to the use of the funds—noting she had come up with the proposal in response to complaints from Detroit constituents who had complained the city’s recovery efforts had left them out—stating: “It’s not going to solve all of the problems, and it’s not going to please everyone, but I do believe it’s a step in the right direction to make sure these catalyst projects have some type of tangible benefits for residents.”

Detroit officials estimate the new ordinance will help generate a projected $1.3 million annually. In addition, city leaders hope to find other sources to add to the fund—sources the Councilmember reports, which will be both public and private: “We as a council are going to look at other development projects and sources that could go into the fund too.” As adopted, the resolution provides: “[I]t is imperative that the neighborhoods, and all other areas of the City, benefit from the Detroit Pistons’ return downtown …In turn, the City will receive income tax revenue, from the multimillion dollar salaries of the NBA players as well as other Pistons employees and Palace Sports & Entertainment employees.” The Council has forwarded the adopted proposals to Mayor Duggan’s office for final consideration and action. The proposed new revenues—unless the tax is modified or rejected by the Mayor—would be dedicated for use in the city’s Neighborhood Improvement Fund in FY2018—with decisions with regard to how to allocate the funds—by Council District or citywide—to be determined at a later date. The funds, however, could also be used to address one of the lingering challenges from the city’s adopted plan of debt adjustment from its chapter 9 bankruptcy: meeting its public pension obligations when general fund revenues are insufficient, “should there be any unforeseen shortfall,” as the resolution provides.

This fiscal recovery, however, remains an ongoing challenge: Detroit CFO John Hill laid up the proverbial hook shot up by advising the Council that the reason the city reserved the right to use the Pistons tax revenue to cover pension or debt obligation shortfalls was because of the large pension obligation payment the city will confront in 2024: “We knew that in meeting our pensions and debt obligation in 2024 and 2025 that those funds get very tight: If this kind of valve wasn’t there, I would have a lot of concerns that in those years its tighter and we don’t get revenues we expect we don’t get any of those funds to meet those obligations.”

But, as in basketball, there is another side: at the beginning of the week, the NBA, Palace Sports & Entertainment, and Olympia Entertainment were added to a federal lawsuit—a suit filed in late June by community activist Robert Davis and Detroit city clerk candidate D. Etta Wilcox against the Detroit Public Schools Community District. The suit seeks to force a vote on the $34.5 million public funding portion of the Pistons’ deal, under which Detroit, as noted above, is seeking to capture the school operating tax, the proceeds of which are currently used to service $250 million of bonds DDA bonds previously issued for the arena project in addition to the $34.5 million of additional bonds the city planned to issue for the Pistons relocation.

Overcoming the Fiscal & Physical Challenges of Emerging from Municipal Bankruptcy

06/26/17

Good Morning! In this a.m.’s eBlog, we consider the extra fiscal challenges of exiting chapter 9 municipal bankruptcy where the fiscal (and in this case physical) odds are stacked against your city. Nevertheless, it appears that San Bernardino’s elected and appointed leaders have overcome terrorism and fiscal challenges to emerge from the nation’s longest municipal bankruptcy. Then we look to see if Detroit’s new bridge to Canada will be not just a physical, but also a fiscal bridge to the city’s future. Finally, we toke (yes, a pun) a look at the ongoing fiscal and governing challenges in Puerto Rico between the U.S. Territory’s own government and the Congressionally appointed oversight board.

On the Other Side of Municipal Bankruptcy: How Sweet It Can Be. Exiting chapter 9 municipal bankruptcy is an exceptional challenge—there is no federal or state bailout, as we have witnessed for, say, major banks, financial institutions, or automobile manufacturers. It is, instead, especially in states like California, where the state, unlike, for instance, Rhode Island, or Michigan, plays no role in helping a city as part of the development of a plan of debt adjustment, an exceptional test of municipal leaders—and U.S. bankruptcy judges. Moreover, because California—in our post General Revenue Sharing economy—likewise provides no program or assistance focused on municipal fiscal disparities, the fiscal lifting is more challenging. An important challenge too is perception or reputation: what must change to send a message to a business or family that this is a city worth moving to?

San Bernardino, after all, has emerged in relatively hale fiscal shape, at long last—even as it faces such an unlevel fiscal playing field, as well as signal budget challenges for public safety in a city where the chances of being a victim of violent crime are nearly 400% higher than the statewide average. Thus, the post-bankrupt municipality confronts—and has plans to address a violent crime wave and a massive amount of deferred maintenance, in the wake of the Council’s adoption of a $120 million general fund operating budget, including funds to hire more police officers and replace outdated equipment—as well as to undertake a violence intervention program—modeled on a program which has proven effective in dramatically reducing homicides in other municipalities which have employed it.

San Bernardino’s new budget provides for repairs and overdue maintenance of streets, streetlights, traffic signals, storm drains, medians, and park facilities; it adds additional maintenance workers in the Public Works and Parks departments. According to City Attorney Gary Saenz: “One of the greatest effects is the perception, now, I think people should give San Bernardino a second look and see that it is an ideal place and has a lot of potential.”

The epic scale of the city’s fiscal and budgetary change from its $45 million deficit five years ago and decline in employees from 1,140 full-time to 746 budgeted for its FY2018 budget offers a perspective: the city has renegotiated contracts, restructured debts, and, as part of its approved plan of bankruptcy debt adjustment, been authorized to pay some of its creditors as little as a cent on the dollar. And, its citizens and taxpayers have elected new leaders and replaced the city’s old, convoluted charter. Moreover, if weathering municipal bankruptcy were not hard enough, the city was also subjected to a horrific terrorist attack which took 14 lives and injured 22 at the Inland Regional Center. Indeed, it somehow seems consistent, that in the middle of these terrible fiscal and terrorist challenges, the city also had to abandon its City Hall building: it was not just fiscally imbalanced, but also seismically unsound.  

A Bridge to Detroit’s Tomorrow. Mayor Mike Duggan last Friday announced the Motor City had reached an agreement with the state to sell land, assets, and some streets for more than $48 million, with the proceeds to be used in the project to construct a second bridge between Windsor, Canada and Detroit. Mayor Duggan reported the city will use the proceeds for related neighborhood programs, job training, and health monitoring—with a key set aside to assist Delray residents to voluntarily relocate to renovated houses in other neighborhoods in Detroit. Joined by Michigan officials, community leaders, as well as representatives from the Windsor-Detroit Bridge Authority (the nonprofit entity managing the design, construction, operation, and maintenance of the new Gordie Howe International Bridge), Mayor Duggan noted: “This is a major step forward…This is eliminating one of the last obstacles.” The new bridge named for the city’s former hockey legend, will provide a second highway link for heavy trucks at the busiest U.S.‒Canadian crossing point in the U.S.—a $2.1 billion span scheduled to open in 2020, with Canada supplying Michigan’s $550 million share of the bridge, which the donated funds to be repaid through tolls. There will be other benefits for the U.S. city emerging from the largest chapter 9 municipal bankruptcy in history: Rev. Kevin Casillas, pastor of the First Latin American Baptist Church on Fort, in thanking Mayor Duggan and other officials for hammering out the agreement, noted: “Today is a good day in our decade-long fight, advocating for residents of Delray and southwest Detroit…Residents will benefit from health-impact assessments and air monitoring in our community; residents will benefit from job training; residents will benefit from having the option of relocating to another fully updated house elsewhere in the city.” (The Mayor noted that he intends to set up a real estate office in Delray to help homeowners relocate if they wish to move, emphasizing no one would be forced to—and that “If someone want to stay, then they’re welcome to…”). Under the agreement, Detroit will sell the Michigan Department of Transportation 36 parcels of land, underground assets, and approximately five miles of streets in the bridge’s footprint for $48.4 million. Mayor Duggan said Detroit plans to use the proceeds mainly to address four goals: $33 million will be invested in a neighborhood improvement fund, with the bulk, $26 million to assist Delray residents to relocate, and $9 million to upgrade homes; $10 million for a job training initiative to prepare Detroit residents to fill both construction and operations jobs; $2.4 million for air and health monitoring in southwest Detroit over the next 10 years; and $3 million for the Detroit Water & Sewerage Department and Public Lighting Authority to purchase assets in the project’s footprint.

Michigan Gov. Rick Snyder noted: “Mayor Duggan’s announcement is the result of several years of successful collaboration between the state, the city, the Windsor-Detroit Bridge Authority, and numerous stakeholders, including community leaders…Everyone listened to one another, worked hard to understand concerns, and forged a partnership based on solutions. This shows that by working together, we can achieve great things for everyone.”

Fiscal Inhaling in Puerto Rico? Early yesterday morning, the Puerto Rico Senate voted 21-9 to approve the government’s general $ 9.562 billion FY2018 general budget, passing Joint House Resolutions 186, 187, 188, and 189 with no amendments—clearing the way for Governor Ricardo Rosselló to sign it. Giving a lift to the legislative effort, the legislature also approved a bill to regulate the medical marijuana industry—legislation that establishes that it may be used for terminal patients or when no other suitable medical alternative is available. The uplifting governmental actions came as Gov. Ricardo Rosselló opposed demands by the PROMESA Oversight Board that the government furlough employees and suspend their Christmas bonuses. According to a spokesperson for the president of the Puerto Rico House of Representatives, as of the beginning of last weekend, there was also disagreement between the Board and Gov. Rosselló’s ruling party with regard to whether to shift money from school and municipal improvements to a budget reserve fund. In his epistle to the Board, Gov. Rosselló, last Thursday, had written that the Board’s Executive Director, Natalie Jaresko, had informed him that the Board will mandate furloughs and the suspension of any bonuses—a demand which Gov. Rosselló believes usurps his authority under PROMESA, as well as contravenes the Board’s position of earlier this Spring, when it had said there would have to be furloughs and an end to the bonus, unless two conditions were met: 1) Puerto Rico would have to gain a $200 million cash reserve by this Friday, and 2) Puerto Rico would have to submit an implementation plan for reducing spending on government programs. The PROMESA Board, a week ago last Friday, had written that it believed the reserve would be met; however, the Board asserted the implementation plan was inadequate. (In insisting upon the furlough program, the Board assumed such furloughs would save the government $35 million to $40 million on a monthly basis.) Thus, in his letter, Gov. Rosselló wrote: “In contravention of PROMESA §205, the Oversight Board is now trying to strong-arm the government into accepting the expenditure controls.” He appeared especially concerned with the PROMESA Board’s mandate to shift $80 million in the budget for school improvements and reserves for the island’s municipalities.

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 Thin Line Between Fiscal & Physical Recovery Versus Unsustainability.

eBlog

Good Morning! In this a.m.’s eBlog, we consider, Detroit’s remarkable route to fiscal recovery; then we turn to challenges to a municipality’s authority to deal with distress—or be forced into chapter 9 municipal bankruptcy in Pennsylvania, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability, and then the taxing challenge to Scranton’s efforts for a sustainable fiscal recovery.

Campaigning & Turning around the Motor City’s Fiscal Future. Detroit Mayor Mike Duggan, last week, at the annual Mackinac Policy Conference spoke about the racially divisive public policies of the first half of 20th century which, he said, had helped contribute to Detroit’s long slide into municipal bankruptcy—indeed, the largest municipal bankruptcy in U.S. history—but one which he said had helped lay the foundation for a conversation about how Detroit could grow for the first time in half a century without making the mistakes of the past that had, inexorably, led to an exodus of nearly 1.2 million from 1956 to its chapter 9 bankruptcy—noting: “If we fail again, I don’t know if the city can come back.” His remarks, mayhap ironically, came nearly a half century from the 1976 Detroit riot, a riot which  began downtown and was only curtailed after former U.S. President Lyndon Johnson ordered the 82nd and 101st Airborne Divisions to intervene, along with then Michigan Gov. George Romney ordering in the Michigan Army National Guard. The toll from the riot: 43 dead, 1,189 injured, 2,000 of the city’s buildings destroyed, and 7,200 arrests.  

But, rather than discussing or issuing a progress report on the city’s remarkable turnaround, Mayor Duggan instead spoke of the city’s racial tensions that had sparked that riot, in many ways, according to the Mayor, coming from the housing policies of former President Franklin Roosevelt—a policy which placed or zoned blacks in the city into so-called “red zones,” thereby creating the kind of racial tensions central to the 1943 and 1967 riots—a federal policy adopted in 1934 which steered federally backed mortgages away from neighborhoods with blacks and other racial minorities. Indeed, the Mayor quoted from a 1934 Federal Housing Administration manual that instructed mortgage bankers that “incompatible racial groups should not be permitted to live in the same communities;” the manual also instructed housing appraisers to “predict the probability of the location being invaded by…incompatible racial and social groups…, so that, as the Mayor added: “If you were adjacent to a minority area, your appraisal got downgraded.”

Thus, federal housing policies were a critical component contributing to the historic white and middle class flight from Detroit to its suburbs—suburbs where federal housing policies through the Federal Housing Administration subsidized more than half of the mortgages for new construction—or, as Mayor Duggan described the federal policies: “There was a conscious federal policy that discarded what was left behind and subsidized the move to the suburbs: This is our history, and it’s something we still have to overcome.” His blunt Mayoral message to the business community was that the city’s hisgtory of race and class segregation had to be acknowledged—or, as he put it: “I just wanted to deliver a message to the broader community to say, ‘Look, there’s a place for you to come invest in Detroit. Here are the ground rules, here is the reasoning behind the ground rules… and if you want to come in and invest in the city, move into the city and be part of it with the understanding that the recovery includes everybody, we’d love to have you: The African-American community voted for me, and I can’t tell you what an enormous responsibility that feels like.” Thus, the Mayor made clear that he and the Detroit City Council have been focused on governing mechanisms that ensure longtime Detroiters are not displaced by downtown and Midtown revitalization—enacting an ordinance mandating that housing developments in receipt of city tax subsidies have at least 20 percent of the units classified as affordable housing for lower-income residents, and mandating that 51% of the person-hours for construction of the new Little Caesars Arena be performed by Detroiters: “We’re going to fight economic segregation…It would be so easy in this city to have one area be all wealthy people and one area all poor people.”

The Challenge of Municipal Fiscal Recovery. Judge James Gibbons of the Lackawanna, Pennsylvania County Court of Common Pleas last week heard the City of Scranton’s preliminary arguments in response to a lawsuit by eight taxpayers seeking to bar the municipality from tripling its local services tax. The suit, filed March 2nd, contends that Scranton has been collecting taxes which exceed the legal issuance; it calls for the issuance of a mandamus against the city. In response, city attorneys, note that, as a home rule charter city, Scranton is not subject to the cap that Pennsylvania’s Act 511 stipulates. (The taxing legal and political regime, as we have previously noted, in one of the nation’s oldest cities, comes in the wake of its action to raise the levy from $52 to $156 for every person working within the city limits who earns at least $15,600, with the city justifying the action under Pennsylvania Act 47 and municipal planning code.) The taxpayer group, led by independent Mayoral candidate Gary St. Fleur, in seeking a mandamus action, has charged that lowering taxes across the board is the only way for the city to be able to fiscally recover.

Mr. St. Fleur, an independent candidate for mayor, has initiated a ballot measure to force 76,000-population county seat Scranton into chapter 9 municipal bankruptcy, citing a Wells Fargo report from October 2016, which found that a 2014 audit of Scranton revealed $375 million in liabilities and $184 million in unfunded non-pension post-retirement public pension benefits to government employees. (Mr. St. Fleur’s group, last February, had also objected to the city’s annual petition to the court to raise the tax—an objection rejected by visiting Judge John Braxton—a decision which, unsurprisingly, prompted the taxpayer group to initiate its own suit, notwithstanding that Scranton is a home-rule community, so that, in Pennsylvania, it has the authority to levy taxes.) Unsurprisingly, the anti-tax challengers’ attorney, John McGovern, counters that Act 511, which, when enacted 52 years ago, authorized the local Earned Income Tax, which authorizes municipalities and school districts the legal authority to levy a tax on individual gross earned income/compensation and net profits (the tax is based on the taxpayer’s place of residence or domicile, not place of employment) is separate from the Pennsylvania personal income tax. He charges that the Act has two “very specific” sections which cap how much the City of Scranton can tax, charging: “Call it a duck or a goose, call it a rate or a cap, but for the city to say it can tax whatever it wants, that alone is dangerous and absurd,” adding: “At this point, we’re dealing with 2017, and the city is spending like a drunken sailor…State law clearly states there is a cap to taxation through the Act 511 law…If we do not win, that would allow any city to raise taxes in any amount it wants.”

In contrast, David Fiorenza, a Villanova School of Business finance Professor and former CFO of Radnor Township, noted: “Scranton has made progress from three years ago, in part due to the renegotiating of some city union contracts and the low-interest rates on debt…The challenges this city will face will be the uncertainty of the state and federal budget as it relates to school funding and other funds that have been relied on for some many years.” Kevin Conaboy, whose firm is representing the city, told the court the city may raise its taxes under the state’s home-rule provisions, and he noted that Pennsylvania’s home rule provisions supersede a cap in the state’s Act 511 local tax enabling act. Moreover, Scranton city leaders have deemed the revenue increase essential for Scranton’s recovery under the state-sponsored Act 47 workout for distressed communities, to which Scranton has been subject since 1992.

Is the Bell Tolling for Act 47? The case is re-raising questions with regard to the effectiveness of the state’s municipal fiscal distress law, Act 47, a program which some critics charge has become an addiction rather than a cure. Villanova School of Business Professor David Fiorenza, referring to a 2014 change to the state enabling law, believes municipalities stay in the program for too long: “Act 47 is effective, but continues to present a problem as cities are able to request an extension after the five-year time period has expired…A five-year time frame is sufficient for a municipality to assess their financial situation and implement any changes. However, if the economy enters a recession during this time period, it will impede their financial progress.”

Physical & Fiscal Atrophy. Puerto Rico has lost two percent of its people in each of the past three years—but a two percent which in fiscal terms is far more grave from a fiscal perspective: the two percent, according to the insightful fiscal wizards at Federal Reserve Bank of New York, means that “If people continue to leave the island at the pace that has been set in recent years, the economic potential of Puerto Rico will only continue to deteriorate.” That outflow is comparable to 18 million Americans emigrating from the 50 states: it marks nearly a 12% drop: some 400,000 fewer Puerto Ricans today compared to 2007—meaning, increasingly, a U.S. territory entrapped in a fiscal tornado: unemployment is at 11.5%, so, unsurprisingly, the young and mobile are leaving the island behind. With unemployment at 11.5%, Puerto Rico in a quasi-chapter 9 municipal bankruptcy, federal law discriminating against the territory’s economy, and its municipalities unable to access chapter 9—the $74 billion accumulated debt and quasi-federal takeover has created incentives for more and more Puerto Ricans, from all economic levels, to leave—creating a vicious fiscal cycle of reduced government revenue, but ever-increasing debt: Puerto Rico’s municipal bond debt has grown 87 percent just since 2006—making the increasing obligations a further incentive to emigrate.

The PROMESA Board’s proposed plan to revert to fiscal sustainability does not appear to address the physical demographic realities: it assumes the population will shrink just 0.2 percent each year over the next decade, relying on that projection as the basis for its projections of tax receipts and economic growth—projections which Sergio Marxuach, Public Policy Director at the Center for the New Economy in San Juan, generously describes as: “[R]eally, really optimistic.” The harsh reality appears to be that the growing earnings disparity between Puerto Rico and the continental U.S. is so stark that any family focused on its health, safety, and financially viable future—in a situation of today where the Puerto Rican government has closed schools to save money—means that teachers can double or triple their earnings if they move to the mainland: doing that math adds up to younger generations of child-bearing age being increasingly likely to leave Puerto Rico for the mainland. Coming on top of Puerto Rico’s more than a decade-long population decline, it seems that, more and more, for those who can afford it, the option of leaving is the only choice—meaning, for those who cannot afford to—the Puerto Rico left behind could become increasingly older and less fiscally able to construct a fiscal future.