Getting Out of Insolvency & Back on Fiscal Track

eBlog, 04/14/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery of Atlantic City, New Jersey—where the Mayor this week proposed, in his first post-state takeover budget, the first tax cuts in a decade. Then we head west to the Motor City, where the city, as part of its fiscal recovery from the largest municipal bankruptcy in American history is seeking to ensure all its taxpayers pay what they owe, before then veering south to assess the first 100 days of the PROMESA oversight of the U.S. Territory of Puerto Rico.

Getting Back on the Fiscal Track. Atlantic City Mayor Don Guardian this week presented his proposed $206 million budget to the City Council, which unanimously voted 7-0 to introduce it at a special meeting, and the City has scheduled a public budget hearing for May 17th. In a taste of the fiscal turnaround for the city, the proposed budget includes the first municipal tax decrease in a decade. It also marks the first budget for the city since the State of New Jersey usurped control over Atlantic City’s finances last November. As proposed, it is more than $35 million or 21% less than last year’s and would reduce the municipal tax rate by 5 percent, according to both city and state officials. The city has scheduled a public budget hearing for May 17th.

As proposed, the steepest cut is in public safety—some $8 million, but the draft proposal also seeks cuts in administration costs ($5 million), as well as proposing savings via the privatization of trash pickup, payroll, and vehicle towing services. The smaller budget request is projected to reduce the city’s costs of debt service by $6 million. Unsurprisingly, the proposed tax cuts—the first in nearly a decade, drew the strongest applause: Atlantic City’s municipal tax rate has skyrocketed 96 percent since 2010, a period during which the city’s tax base dropped by nearly 66%. The $206.3 million budget Mayor Guardian presented features $6 million of cuts to debt service at $30.8 million and proposes to allocate $8 million less for public safety.

Mayor Guardian, who is running for his second term as Mayor this fall, said in a statement before presenting the budget that state overseers have played an instrumental role in crafting the new spending plan which features the proposed 5% property tax cut. It could mark a key point in the city’s efforts to regain governance control back from the State of New Jersey—a takeover the Republican mayor had bitterly contested, which took effect last November after New Jersey’s Local Finance Board rejected the city’s five-year recovery plan, or, as the Mayor put it: “From the beginning, I have said that we need to work with the State of New Jersey to stabilize Atlantic City and to reduce the outrageous property taxes that we inherited from years of reckless spending…Even though the entire state takeover was both excessive and unnecessary, the state did play an important role in helping us turn things around.”

For his part, New Jersey Gov. Chris Christie praised former U.S. Sen. Jeffrey Chiesa for his role as the state’s designee leading the financial recovery and his contributions in helping to achieve the city’s first property tax cut in a decade. Gov. Christie credited Mr. Chiesa with withstanding union challenges to make firefighter and police cuts, as well as reaching a $72 million settlement with the Borgata casino which is projected to save the city $93 million on $165 million of owed property tax refunds from 2009 to 2015, noting: “As promised, we quickly put Atlantic City on the path to financial stability, with taxpayers and employers reaping the benefits of unprecedented property tax relief with no reduction in services by a more accountable government…I commend Senator Chiesa for leading Atlantic City to turn the corner, holding the line on expenses and making responsible choices to revitalize the city.”

Atlantic City is planning to issue $72 million in municipal bonds to finance the Borgata settlement though New Jersey’s Municipal Qualified Bond Act: the savings from the settlement, brokered by the state, were a key factor in S&P Global Ratings’ upgrade of Atlantic City’s junk-level general obligation bond debt: Atlantic City, which is weighed down by some $224 million in bonded debt, is rated Caa3 by Moody’s Investors Service. State overseer Chiesa noted: “Over the past five months, I have met so many smart, talented, tenacious people who want to see the city succeed. This inspires me every day to tackle the challenges facing the city to ensure that the progress we’ve made continues.”

A key contributor to the improved fiscal outlook appears to come from some of the unilateral contract changes to public safety officials, imposed by Mr. Chiesa, which led to reduced salaries and benefits for police and firefighters, albeit the courts will have the final say so: the unions have sued to block the cuts, arguing the takeover law is unconstitutional. In addition, the state also reach agreement on a $72 million tax settlement with Borgata Hotel Casino & Spa which is projected to save Atlantic City $93 million and essentially put Borgata back on its tax rolls. The casino had withheld property tax payments, but is now paying its part of casino payments in lieu of property taxes, or, as Mr. Chiesa put it: “Real progress is being made in the city, which is great news for the people who live, work and visit Atlantic City.”

Gov. Chris Christie, in his final term in office, praised Mr. Chiesa and jabbed at his political opponents in a statement issued before the City Council meeting, noting: “It took us merely a few months to lower property taxes for the first time in the past decade, when local leaders shamelessly spent beyond their means to satisfy their special political interests,” he said, even as Atlantic City officials described the budget as a collaborative effort with the state. Or, as Mayor Guardian put it: “He’s the governor. He makes those comments…What I think is [that] it’s clear the city moves ahead with the state.” Council President Marty Small, who chairs the Revenue and Finance Committee, said he was “intimately involved” in the budget process, describing it as a “win-win-win for everybody, particularly the taxpayers.”

Don’t Tax Me: Get the Feller behind the Tree! Getting citizens to pay their taxes is a problem everywhere, of course, but Detroit had a particularly hard time going after scofflaws because budget cuts decimated its ability to enforce the law. Even the citizens and businesses who paid up created logistical havoc for beleaguered city bureaucrats. Part of the reason, it seems, is that in Detroit, the only way to file taxes has been on paper. While that might be merely an irritation for taxpayers, it has been a nightmare for the city’s revenuers, who must devote endless hours typing data into computer systems. It appears also to have led to some innovation: last year the Motor City opted to send out more than 7,000 mailings to deadbeat tax filers, that is taxpayers who were still delinquent on their 2014 taxes; the city suspected each delinquent owed at least $350; ergo it randomly selected some taxpayers to receive one of six different letters, each with a different message in a black box on the mailing: One such message appealed to residents’ civic pride: “Detroit’s rising is at hand. The collection of taxes is essential to our success.” Another simply made clear that Detroit’s revenue department had detailed information on the deadbeats: “Our records indicate you had a federal income of $X for tax year 2014.” (Detroit is somewhat unique in that it has an income tax under which residents owe 2.4 percent of their incomes to the city, after a $600 exemption. Nonresidents who work in Detroit pay a rate of 1.2 percent.) Another message made a bold declaration: “Failure to file a tax return is a misdemeanor punishable by a fine of $500 and 90 days in jail.”

It seems that threats have proven more effective than cajoling: More than 10 percent of taxpayers responded to the letter mentioning a fine and jail time, some 300% greater than the response rate to the city’s basic control letter. This revenue experiment was overseen by Ben Meiselman, a graduate student at the University of Michigan’s economics department, who manned a desk in Detroit’s tax office to run the experiment. He wrote the messages included in the mailings to reflect behavioral economics research, noting: “I find that a single sentence, strategically placed in mailings to attract attention, can have an economically meaningful impact on tax filing behavior,” in his working paper, “Ghostbusting in Detroit: Evidence on Non-filers from a Controlled Field Experiment,” which he intends to eventually become a chapter in his doctoral dissertation. And it turns out that providing details of a taxpayer’s income boosted the response rate by 63 percent, even as a letter from the city which combined a threat with income information was less effective than a threat by itself. Or, as one city official noted: “Keeping it simple seems to be the key,” especially as city officials learned that appeals to civic pride fell flat: the response rate was just 0.8 percentage points higher than that of a basic letter. Nevertheless, the city still confronts a long uphill fiscal cliff, even if it manages to apply the results of the experiment and triple the response rate from tax delinquents: according to the IRS, approximately six percent of U.S. taxpayers break the law by not filing with the Service each year, but, in Detroit, Mr. Meiselman estimated that some 46 percent of taxpayers had not submitted their 2014 returns by the due date in the following year—and that the return rate was getting worse.

Thus, Detroit’s next step was to back up threats with action—mayhap especially because there appears to have been little enforcement for the past decade: Detroit had not undertaken an audit or tax investigation in more than a decade. One outcome of insolvency and municipal bankruptcy, it appears, can hit hard: Detroit’s tax office, which once had a staff of about 70, is today about half that: it is a department which was recently reorganized, in the wake of last year’s takeover by the state of Michigan, a takeover intended to free up city employees to collect unpaid income taxes. The city also eased such filings by permitting them to be submitted electronically for the first time. And, wow!: 77 percent of filers took advantage. Detroit has sent out 15,000 letters since July 2016 and has collected $5.3 million through letters, audits, and investigations. And some of the amounts collected are significant, particularly for those who have juked, dodged, and evaded paying taxes for years: in one instance, a taxpayer agreed to pay $400,000. Detroit also began filing misdemeanor charges and lawsuits in small claims court to get its tax revenues, especially after learning that only one in five residents in several high-end apartments buildings had filed income taxes, helping to persuade a judge to issue an order requiring landlords to turn over tenant information.

These various steps appears to be helping: The number of residents filing tax returns more than doubled last year from the previous year; filings by non-residents increased by more than a third. City returns from 2016 are due, along with state and federal returns, by next Tuesday—the same deadline as applies to all readers of this eBlog, and, this year, Detroit officials are optimistic—or, as one wag put it: In the past, “people knew we weren’t coming after them…Now we are following up on those threats.”

The Promise or PROMESA of the First 100 Days. The PROMESA oversight board, provided by the Congress with authority over the U.S. territory of Puerto Rico, has now surpassed its first one hundred days, created a juxtaposed governance challenge, especially for Governor Rosselló: how can he make sure that the framework set up during this period of quasi dual governance provides for the change Puerto Rico needs? How can he gain the approval of the Board for a long-term fiscal plan as the main achievement of his incipient administration? To prevail, it appears, he will have to convince the Oversight Board that his proposed budgets are based on real possibilities of revenues and that such estimates are free of dependence on loans and that he will conduct the restructuring of Puerto Rico’s public debt on favorable terms, and that he will take the key role in the reconstruction of the government apparatus to higher levels of service, efficiency, participation, and transparency. And, now, there appears to be some evidence that he is achieving progress. Puerto Rico’s statute on permits is intended address a serial inefficiency with regard to the “absurd and abusive terms” to obtain permits, delays which have hindered and discouraged the generation of new economic activity. The effort to provide for the progressive elimination of the costly redundancy in programs and services via the consolidation of agencies, with security first, appear to be key steps in achieving changes to restore financial health. Moreover, the creation of a spending budget 10 per cent below the current one appears to mark an important step in the goal of reasserting self-governance.

Nevertheless, the fiscal and governance challenges of recovering from fiscal insolvency can be beset from any angle: note, for instance, Judge Lauracelis Roques Arroyo has revived an “audit” of Puerto Rico’s debt and reversed Gov. Ricardo Rosselló’s attempt to dismantle the debt audit commission. (Judge Roques Arroyo is a member of the Carolina Region of the Puerto Rico Superior Court.) And, thus, he has ruled that Puerto Rico Gov. Ricardo Rosselló’s attempt to dismantle a commission auditing Puerto Rico’s debt was illegal. The statute in question, law 97 of 2015, created the Puerto Rico Commission for the Comprehensive Audit of the Public Credit. The commission aimed to find Puerto Rico debt which was legally invalid. The commission’s first report in June of last year had reviewed documents connected with the Commonwealth’s $3.5 billion general obligation bond and $1.2 billion tax and revenue anticipation note, both sold in 2014. In this report, the Commission had raised doubts with regard to the legality of much of Puerto Rico’s bond debt. Late last September, the commission questioned the legality of the series 2013A power revenue bonds from the Puerto Rico Electric Power Authority (PREPA), raising concerns with regard to the behavior of Morgan Stanley, Ernst &Young, and URS Corp. in the municipal bond sale and the period leading up to it. In early October, possibly in response to the commission’s work, the SEC commenced an investigation of PREPA’s 2012 and 2013 bonds. Ergo, Judge Arroyo’s order late last week returned three public interest members to the board, according to attorney Manuel Rodriguez Banchs; the order provided that the Governor has no authority to intervene with the commission: it said that the dismissal of the public interest members was illegal. The board has $650,000 in its account right now, according to board member Roberto Pagán, e.g. adequate to do a substantial amount of additional work. Gov. Rosselló, thus, is considering how to react to the judge’s order, according to the El Vocero news website.

The Potential Consequences of a State Takeover of a Municipality

 

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eBlog, 2/03/17

Good Morning! In this a.m.’s eBlog, we consider the long-term costs and consequences of state takeovers of a municipality, and of a broken state financial system.

The Fiscal Costs of Incompetence. Michigan taxpayers, including those in Flint, will be paying litigation and legal defense expenses for two former officials implicated in contributing to Flint’s lead-contaminated water crisis. Governor Rick Snyder’s Office confirmed that the Michigan Treasury Department will reimburse the city of Flint for legal and defense fees for former state-imposed Flint Emergency Managers Darnell Earley and Gerald Ambrose—officials appointed by the Governor who have now been charged by Michigan Attorney General Bill Schuette with committing false pretenses and conspiracy to commit false pretenses, 20-year felonies. The duo also face a charge of misconduct in office, a five-year felony, and a one-year misdemeanor count of willful neglect of duty. Gov. Rick Snyder’s spokeswoman notes that state officials do not have any estimates on costs to state taxpayers for their defense—or if there is any ceiling with regard to what state taxpayers will be chipping in.

The Fiscal Costs of a Broken State Financial System. Dan Gilmartin, the Executive Director of the Michigan Municipal League, this week noted that “A lot of people feel as if we’ve turned the corner here in Michigan, you know, we’ve got more people employed, and the big three are doing better, and there’s some good things happening in the tourist economy and all kinds of different areas, so they think things are getting better…they might be getting better for state coffers; but they’re actually getting worse at the local level because of the system that we’re in right now.” Noting that, despite the state’s strong economic recovery, that recovery has not filtered down to its cities—which, in the wake of some $7 billion in state cuts to general revenue sharing since 2002—has left the state’s municipalities confronting an increasingly harder time to finance public infrastructure and public safety. The League’s report also recommends the state help cities come up with more modern health care plans which would allow them to control costs and stay competitive with other employers. Perhaps most intriguing, Mr. Gilmartin recommended that state aid for public infrastructure be allocated on a regional basis, rather than jurisdiction by jurisdiction. Finally, he urged the Michigan legislature to make up for the steep cuts made to revenue sharing in the last 15 years.

Exiting Receivership. The Michigan Department of Treasury has announced that the small municipality of Allen Park—a city of about 28,000 in Wayne County, where the annual per capita income is $27,000 and the estimated median assessed property value is $91,000, is no longer under receivership—meaning the city’s elected leaders have effectively had their authority to govern restored. The small city, which had also been charged in 2014 by the Securities and Exchange Commission with fraud, with the SEC charging public officials as “control persons,” came in the wake of a recommendation from members of the Allen Park Receivership Transition Advisory Board, which was state-appointed in 2014 in the wake of Gov. Rick Snyder’s announcement that the city’s 2012 financial emergency had been resolved after its structural and cumulative deficits had been eliminated. Gov. Snyder had imposed an Emergency Manager from March 2013 to September 2014, the same month in which the Michigan Receivership Transition Advisory Board was appointed. According to the Treasury, Allen Park “has made significant financial and operational progress,” including increasing its general fund balance; passing 10-year public safety and road millages; and saving $1.1 million by tendering 62 percent of Allen Park’s outstanding municipal bonds issued through the Michigan Finance Authority. In addition, the municipality made its required contributions into the pension and retiree healthcare systems, including an additional $500,000 annual payment toward other OPEB liabilities. Allen Park Mayor William Matakas responded: “On behalf of the city, I express my gratitude to the members of the Receivership Transition Advisory Board for their professionalism during Allen Park’s transition from emergency management to local control…I look forward to working with local and state officials to ensure we continue down a path of financial success.” Michigan Treasurer Nick Khouri, in the wake of the release of the municipality under Michigan’s Local Financial Stability and Choice Act, said Allen Park leaders are thus authorized to regain control and proceed with tasks such as approving ordinances, noting: “This is an important day for the residents of Allen Park, the city, and all who worked diligently to move the city back to fiscal stability…The cooperation of state and city officials to problem-solve complex debt issues now provides the community an opportunity to succeed independently. I am pleased to say that the city is released from receivership and look forward to working with our local partners in the future…The cooperation of state and city officials to problem-solve complex debt issues now provides the community an opportunity to succeed independently.” According to Mr. Khouri, since the state intervention, Allen Park has increased the city’s general fund balance in the wake of adopting a 10-year public safety millage and a 10-year road millage; in addition, the city completed a successful tendering of 62% of the outstanding municipal bonds issued via the Michigan Finance Authority used to fund a failed movie studio project for a savings of $1.1 million in 2015. An additional remarketing of the remaining amount was finalized in 2016, saving the city another $900,000. It makes one wonder whether New Jersey Governor Chris Christie might benefit from observing the constructive relationship between the state and Allen Park as a means to help an insolvent city regain its fiscal feet.

Leadership–and the Lack thereof: what Might that Mean vis-a-vis Municipal Bankruptcy?

eBlog, 9/19/16

In this morning’s eBlog, we consider the green light the Detroit Financial Review has given to Detroit, before heading east to the capital city of Hartford—a city fighting to avert municipal bankruptcy, and then veering south to Opa-Locka, Florida: a city that seems doomed to go into chapter 9 municipal bankruptcy. It seems that severe municipal fiscal distress can arise from human failures—and recovery, as we are experiencing in Detroit—can arise from great leadership. Distress—and municipal insolvency—can arise from great, state-blessed inequity: an issue in Michigan, California, Kansas, Connecticut, etc. Even though the cost of municipal bankruptcy can far outweigh what it would have cost for states to address fiscal disparities—as the recent court decision in Connecticut found: “[T]he state’s current system ‘has left rich school districts to flourish and poor school districts to founder,’ betraying its promise in the State Constitution to give children a ‘fair opportunity for an elementary and secondary school education.’”  

A Major Step Forward. The Detroit Financial Review Commission, created as part of Detroit’s exit from the largest municipal bankruptcy in the nation’s history to oversee the city’s recovery, has declared the city was in substantial compliance with the terms of its plan of debt adjustment—both a measure of the hard work of Mayor Mike Duggan, but also a key step towards the city’s exit from state oversight. The thumbs up came in the wake of certification of an audit of the city’s FY2015 budget; the city faces comparable hurdles over its next two, consecutive fiscal years in order to remove the state yoke under the provisions of the Michigan law adopted two years ago to govern the city’s path out of chapter 9 municipal bankruptcy. Unsurprisingly, Mayor Duggan described the Good Housekeeping state seal of approval as a “major step forward: The Legislature set up a process that said the city can earn its way out of direct financial oversight, and it has to balance the budgets and pay its bills for three straight years…I couldn’t be more pleased that we have one year down, and we’ve been certified as being fully compliant with the statute.” The Motor City has posted surpluses in recent years on the city’s nearly $1 billion annual budget; the city administration projects a balanced FY2017 budget: the prize: If the city stays within budget, and an audit is certified in 2018, Detroit could end nearly a decade of direct oversight and go into a period when the review commission would be mostly dormant, freeing the city to operate without getting required approval from the review commission on matters including budgets, budget amendments, contracts, and labor agreements.

That does not, however, mean the long road to recovery is easy: Detroit still faces fiscal challenges in the long-term, including a $490-million shortfall in pension funding the city will have to pay in the coming years—a challenge which, if unmet, would retrigger a renewed three-year period of state oversight by the review commission. Nevertheless, State Treasurer Nick Khouri congratulated city officials for getting to this point, calling it a “milestone for the city,” even as Detroit CFO John Hill noted the declaration starts the clock on the city’s path back to local control: “It really does put us on a path to the city having almost full control of its financial operations…”It’s a major milestone and an acknowledgement that we’ve made a lot of progress.”

Staving Off Chapter 9 Municipal Bankruptcy. First-term Hartford, Connecticut Mayor Luke Bonin is scrambling to fix what he terms a “broken system” and keep his city out of chapter 9 municipal bankruptcy, albeit noting that he is confronted by a broken system that relies 100 percent on property taxes for local revenue—or, as he puts it: “You’ve got a city that just doesn’t have enough property. It’s got less property than the surrounding towns.” His uphill challenge as Mayor of the state’s capital city has garnered the support of the Connecticut Conference of Municipalities, whose Executive Director, Kevin Maloney, is supporting by seeking a regional approach through his organization: “Work cooperatively with the suburban towns to find where services can be shared and be done regionally, which would not only reduce the cost for the cities, but hopefully would reduce the costs for suburban towns.” The Conference has already created a panel with leaders from larger cities such as the chapter 9-experienced city of Bridgeport, as well as New Haven and Waterbury, as well as suburbs that will meet monthly to discuss this option. For his part, Mayor Bronin notes: “This isn’t about Hartford’s success or failure. This is about Connecticut’s success or failures, the region’s success or failure. You can’t be a suburb of nowhere, you can’t be a region or a growing state if you’ve got a city that’s in crisis.” Nevertheless, the challenge will be great: Hartford confronts nearly a $50 million hole in this year’s budget, which has left city services at a bare minimum, and the city could face another $50 million deficit next year. Or, as the mayor puts it: “You can’t cut your way to growth and you can’t tax your way to growth.” Indeed, it seems that he recognizes the city will be unable to get out of its fiscal debts by itself; consequently, he is pressing for regional tax and revenue measures to help Connecticut’s cities, urging the Connecticut Municipal Finance Advisory Commission: “We do not see a way the city of Hartford can avoid projected deficits on our own without some significant reforms at the state and regional levels.” Absent some fiscal assistance, the Mayor warns the state capital could run out of cash before the end of this year: he projects a nearly $23 million deficit in this fiscal year’s budget, but warns the fiscal chasm could more than double by next year—reaching a level of nearly 20% of total expenses by FY2018. Ergo, he suggests, regionalization could stave off municipal bankruptcy: “We want to do everything to avoid that, because I don’t think it would be good for the state of Connecticut; I don’t think would be good for the region, and I don’t think it would be ideal for the city of Hartford.”

Capital Bankruptcy? Hartford, were it to seek chapter 9 municipal bankruptcy, would only be the second state capital in U.S. history to file for municipal bankruptcy—but that earlier effort turned out to be a botched one: the filing, by Pennsylvania’s capital city, Harrisburg, a filing done over the objections of the Mayor, was rejected by the courts as being non-compliant with Pennsylvania’s municipal bankruptcy authority—indeed, five years ago on August 1, 2011, Pennsylvania’s Governor signed into law new legislation that would bar any “City of the Third Class” from filing a chapter 9 petition, specifically referencing Harrisburg. It would also be only the second time a municipality in the state had sought chapter 9 protection: Bridgeport, filed for Chapter 9 bankruptcy in 1991, but a federal judge rejected the filing, because the city did not meet the U.S. Bankruptcy court’s definition of insolvency. Nevertheless, unlike almost every other chapter 9 filing in U.S. history, the effort in Connecticut is unique, because Mayor Bronin and other Connecticut mayors are seeking to craft a legislative package in the state legislature which would lessen reliance on the property tax, and move towards a Denver or St. Paul-Minneapolis type of regional tax—in no small part because Hartford, not unlike other New England capital cities, has less taxable property than several its surrounding suburban cities. According to Moody’s Investors Service, general fund reserves for the three cities range from 0.3% to 3.7% of fiscal 2015 revenues, well below the 12.9% state median for Moody’s-rated cities. Our respected colleagues at Municipal Market Analytics suggest that Hartford could model its regional recovery approach after what Pittsburgh has accomplished, as we noted in our report on the city—but, as MMA put it: “If its problems are left unaddressed, its fiscal position and attractiveness as a regional business center will reasonably continue to decline.” Nevertheless, the Mayor’s road ahead will be steep: His request earlier this year to Connecticut General Assembly oversight panel failed to gain a response—forcing the City Council to approve what the Mayor had deemed a $553 million “doomsday” budget calling for across-the-board service cuts. Municipal debt service, according to Mayor Bronin, spiked more than 50 percent to $31 million this year: it is projected to soar to $61 million by FY2020-21.

It is not that Mayor Bronin is new to this municipal challenge: even though he is a first-year mayor, he has previous experience as former chief counsel to Gov. Daniel Malloy. Mayor Bronin is seeking increased payments in lieu of taxes, regional revenue sharing, ala the Twin Cities or Denver regional area, as well as widening options for local revenue generation—albeit knowing that in a state where Connecticut Superior Court Judge Thomas Moukawsher this month ordered the state to make changes in everything from how its schools are financed to which students are eligible to graduate from high school to how teachers are paid and evaluated, holding that “Connecticut is defaulting on its constitutional duty” to give all children an adequate education, Connecticut is a state here inequality appears to be the norm. Judge Moukawsher’s decision, in response to a lawsuit filed more than a decade ago claiming the state had undercut the allocation of school funding to its poorest district, is certain to require to reconsider nearly every aspect of public school financing—or as long-time Bridgeport Mayor Joseph Ganim put it: “This is a game changer…It’s an indictment of the application of the system, and of the system itself.” Inequity seems to be the rule of thumb in the state—a state where state-local collaboration is a tall order. Nonetheless, Connecticut Comptroller Kevin Lembo notes: “The mayor is on the absolute right track in trying to tie their fates together, but it’s not going to happen just because someone asks for it to happen, and the state is never likely to mandate that…You can look at ways to build partnerships. For example, not driving office parks out to the suburbs by giving the suburban communities a piece of the property tax action when they build downtown.” He added that such partnerships could include communities which are losing population, but have “very sophisticated and high-performing school districts” to attract more children from stressed city school districts. Nevertheless, he also noted the state should examine cities’ books and propose sustainable remedies: “Historically the state has always just thrown money at a perceived problem, less so in the suburbs, more so in the cities…We’ve always solved the short-term problem, and then walked on and dealt with something else.” Finally, he noted, the state has “a couple of more cards to play” to benefit Hartford, including the sale of vacant space—an interesting observation—and one that was of key concern to the nearby capital of Providence as it danced on the edge of municipal bankruptcy, even as nearby Central Falls went into chapter 9. As Comptroller Lembo notes: Connecticut has a “ton of property in Hartford and all over the state. Some producing, some of it is sitting there, just empty office buildings,” leading him to ask: “When was the last time somebody calculated the value of that asset? It may be putting more property back on the tax rolls in Hartford.” Moody’s last week deemed Judge Moukawsher’s ruling a credit positive for Hartford, Bridgeport, and New Haven: “If the court’s ruling holds, we believe funding levels for schools in low-income communities will increase and could occur in two ways: 1) Increased funding could be distributed through a reallocation, where funding is shifted from more affluent municipalities. Or, 2) the state could expand the total pie, increasing spending for some cities while allowing more affluent communities to maintain existing funding levels or receive some increases.”

On the Road to Chapter 9? It seems that municipal bankruptcy can be a product of criminal behavior—certainly a key factor in Detroit’s road to the nation’s largest-ever municipal bankruptcy—or incompetence. It might be that for the small city of Opa-locka, Florida: it is a combination. Now a business owner who worked with the FBI to uncover shakedowns by city officials has, this week, filed suit in federal court claiming he suffered years of what he described as “extortion, coercion, threats and intimidation” which violated his civil rights and right to due process. The owner, Mr. Francisco Zambrana, has laid out details of his efforts to obtain a business license—one which he was never able to gain. In his suit, he describes his version of his encounters with key city officials, including City Commissioner Luis Santiago, and a then-assistant city manager, David Chiverton, claiming each had demanded payoffs for a business license he never received—or, as his complaint cites: “From the onset, Zambrana simply sought to obtain an occupational license…Zambrana would repeatedly tell the city officials and employees who would care to listen that all he wanted to do was work and provide for his family, including teenage son who was battling cancer.” The suit could hardly have arisen at a more awkward moment: the small municipality, under investigation by the state and under the control of a state-appointed financial oversight board, is in the midst of public hearings to develop its FY2017 budget—but unable to pay its current bills. The suit, ergo, can hardly be settled—likely numbering the luckless Mr. Zambrana in a crowd of debtors for some future plan of debt adjustment. In his complaint, Mr. Zambrana described the municipality’s “practice and custom of threatening, intimidating, and extorting individuals” based on national origin to operate a business in the city. The suit adds: “The practice and custom was authorized by policymakers within the city, and it was a widespread practice so permanent and well-settled as to constitute a custom or usage with the force of law.” In this instance, Mr. Zambrana, finding an unresponsive municipality, leapt two levels to the federal government: he went to the Federal Bureau of Investigation and agreed to work with the FBI to uncover the shakedown scheme, an investigation whose findings led to by then City Manager Chiverton to plead guilty to pocketing payoffs. His suit cites the municipality as the sole defendant—likely recognizing the lack of any remote possibility from Mr. Chiverton—and he has requested a jury trial. In the category of fiscal misery loves company, the litigation costs to Opa-Locka’s taxpayers is accruing: the suit follows in the wake of one former City Manager Roy Stephen Shiver filed at the end of last month in U.S. District Court in the wake of receiving permission to so file from the U.S. Equal Employment Opportunity Commission to file a complaint alleging racial discrimination: the suit claims he was defamed by a trumped-up allegation that he accepted a bribe—and that, last November, he was fired without proper cause by city commissioners and the mayor, all of whom are black. Indeed, it was the former city manager who first reported Opa-Locka’s serious financial problems to Gov. Rick Scott just about a year ago—a report which contributed to the state appointment of a state financial oversight board to handle all city expenses, including legal fees. Even as the state ponders action, it will not be alone: the Securities and Exchange Commission has opened an inquiry into some of the city’s bonds, which were issued as its financial condition was severely deteriorating, and the FBI’s investigation is ongoing.

The Critical Challenge of Restoring One’s Property Tax Base

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eBlog, 6/24/16

In this morning’s eBlog, we explore the key steps underway in San Bernardino to restore the city’s critical property tax base—an essential element not just to approval by U.S. Bankruptcy Judge Meredith Jury of the city’s pending plan of debt adjustment, but also for any meaningful, long-term fiscal recovery. Then we turn to the very different kind of federal role in Opa-locka, Florida—already under a state takeover, but now under the impatient eyes of the federal Securities and Exchange Commission.

Restoring a Municipal Tax Base. The City of San Bernardino, once the key gateway from the East and Midwest to Los Angeles basin and former home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad—but today in chapter 9 municipal bankruptcy longer than any other city in U.S. history, is experiencing returns from its efforts to revitalize its property tax base—a base that was devastated in the Great Recession—which left the municipality with nearly 50 percent of its residents on some form of public assistance and 56 percent of homes underwater: it reduced property tax revenues by 15 percent. In the years leading up to bankruptcy, San Bernardino suffered heavily as important sources of revenue fell, notably property taxes: the San Bernardino FY2006-2008 CAFR reports show that property taxes generally accounted for about 30% of the city’s total revenue, but the Great Recession demonstrated that reliance on property tax revenues can be volatile. In the case of San Bernardino, the city had experienced a huge housing boom from 2001-2007, and a consequent growth in property tax revenues; but what goes up can come down, so the city was one which was especially hard hit when the housing market crashed. While home prices around the country fell by 24% from 2005 to 2010, they fell by over double that in San Bernardino, which also experienced a foreclosure rate around almost four times the national average. From 2008 to 2011, property tax revenue fell from $74.7 million to $46.7 million, a steep 37% decrease. Meanwhile, adding fiscal insult to injury, the state’s Proposition 13 barred San Bernardino and all California cities from attempting to make up this lost revenue through increased property tax rates. The 1978 constitutional amendment pegs the statewide property tax rate to 1 percent of a property’s assessed value at the time Prop 13 was enacted or the sale price when the property changes hands. Annual increases of assessed value are limited to 2 percent in the years the property is not sold. Therefore, unsurprisingly, focusing on vacant and heavily vandalized houses has been a critical component of the city’s focus on a turnaround and exit from municipal bankruptcy—and the city’s program: RENU, or the Receivership Empowering Neighborhood Upkeep, which it initiated a year ago in April 2015, and is now seeking to expand. San Bernardino has now completed the first project, and funds from the sale of the property—which involve the court taking control of a property where the owner is unresponsive and appointing a receiver to fix it up—is then used to reimburse the receiver, the city, and others involved in the process, so that there is no cost to the city. From June 2011 to August 2015, the city issued 14 notices and several times secured the property where yesterday’s open house was held, with Deputy City Attorney Lauren Daniels noting the house had gone into foreclosure and become bank-owned: “We sent countless notices to the holder of the mortgage and trust, because there were issues of squatters, and schoolchildren at Serrano (Middle School) were nearby and they would come to the house…With the hazardous swimming pool, hazardous pieces of the ceiling coming off — there were numerous code violations.” The result: one year after the first San Bernardino house completed the receivership process, neighbors say it is still making a world of difference—or as one neighbor yesterday described it: “Peace and safety has been restored to our neighborhood, because of what the city did to our neighborhood. It’s a very, very good program.”

Unlocking a Municipality’s Fisc. The small Florida municipality of Opa-locka, which Florida Gov. Rick Scott declared on the first of this month to be in a state of financial emergency, now is also under investigation by the Securities and Exchange Commission, with the SEC requesting documents and emails relating to municipal bonds the city issued for the May 2015 purchase of an $8 million building. The federal probe came as Melinda Miguel, Florida’s Inspector General, whom Gov. Scott named to take responsibility for state fiscal oversight, convening her panel for its first meeting yesterday—and at which Acting City Manager Yvette Harrell, in giving the state financial emergency board an overview of the city’s finances, described Opa-locka’s fiscal situation as “dire,” noting: “We have an important job here to do.” That is a task, no doubt, made more difficult, because it marks the second state fiscal takeover of the municipality—so one key task will be to determine in what ways the first state takeover failed to produce long-term fiscal stability. In her presentation yesterday, Ms. Harrell told the state board of recently discovered information which appears to demonstrate that the city failed to budget a “$1.7 million prior debt obligation required to keep the city moving.” Ms. Harrell added that Opa-locka had: failed to budget extra money for staff it hired; that the city continued to budget and spend revenues it would not receive even though property values declined; and that the cash-flow deficit has fluctuated wildly, from $1.42 million to $4.5 million to $1.89 million in a matter of weeks—adding that the city needed help to “figure out where we are.” She noted that some key steps would involve enhancing efforts to collect past-due bills, although, with the city inside Miami-Dade County, a county with its own experience once on the brink of municipal bankruptcy, but today experiencing a booming economy and rapidly rising property values, a critical issue for Opa-locka is to get a handle on why it has been experiencing a consistent decrease in property values by as much as 60 percent.

For her part, IG Miguel named appointees to committees to examine different aspects of the city’s budgets and contracts, as she presses to meet an August 1st deadline for the board to submit a financial plan to Governor Scott—a task no doubt made even more challenging since Opa-locka has yet to begin work on its 2015 audit. Thus, unsurprisingly, questions were raised during the financial board meeting about the need to hire a new, independent auditor. The city had total long-term debt outstanding of $11.6 million, including $6.56 million of revenue bonds placed with a financial institution and state loans, according to its most recent, FY2014 audit. A financial assessment conducted by Miami-Dade County Auditor Cathy Jackson earlier this year found that as the city’s fiscal crisis had worsened, there were numerous irregularities with the city’s use of restricted funds, including debt service reserves—reserves which the Miami Herald last week reported the city had dipped into to cover payroll expenses—a disclosure which the city manager yesterday omitted to inform the financial emergency board.