Exiting from Municipal Bankruptcy


March 16, 2018

Good Morning! In this morning’s eBlog, we consider the Motor City’s final steps in its successful exit from chapter 9 municipal bankruptcy; then we worry about lead level threats in Flint, before journeying to the warmer climes of the Caribbean to update the fiscal challenges for Puerto Rico.

Early Departure from Chapter 9. The City of Detroit this week dipped into its budget surplus to devote some $54.4 million to finance paying off the outstanding municipal bonds it had issued as part of its plan of debt adjustment four years ago, with the borrowing then issued by the city to settle debts with municipal bond insurers related to the Motor City’s pension-related debt—here the payments were to finance the remaining principal and interest owed on $88 million in 12-year Financial Recovery, with the city formally moving to pay off $54 million of its 2014 financial recovery bonds. The unexpected payments might make the leprechaun jump to celebrate still another demonstration of improved fiscal health. Here, the payment had the support of the Detroit Financial Review Commission, as well as the Detroit City Council, clearing the way for the city Wednesday to issue a 30-day redemption notice and report it had fully funded an escrow to retire $52.3 million of remaining principal and $2.1 million of accrued interest to fully redeem the 2014C bonds effective April 13th—an action projected to save Detroit’s taxpayers some $11.7 million in interest savings. CFO John Hill noted: “The Mayor and City Council have again shown their commitment to the city’s long-term financial sustainability by taking action to authorize the resolution for the redemption of the entire outstanding principal on the city’s Financial Recovery Bonds, Series 2014C.”  In this case, the C series of unrated, taxable municipal bonds totaled $88.4 million; they carried an interest rate of 5% interest, with the bonds secured by Detroit’s limited tax general obligation pledge and payable from city parking revenues. According to Detroit Deputy Chief Financial Officer John Naglick, approximately $54 million remains outstanding after early maturities amortized and the $15 million sale of a parking garage triggered a mandatory redemption. The C series was part of $1.28 billion of borrowing Detroit closed on in December of  2014 to fund creditor settlements, as well as raise revenues for revitalization efforts, thereby paving the way for its exit from the largest chapter 9 municipal bankruptcy in American history—and mayhap bring the luck of the Irish that the city could exit from direct state oversight within the next few months—especially in the wake of Mayor Mike Duggan recently proposed $2 billion balanced budget—the approval of which could facilitate Detroit’s exit from active state oversight, or. As Mr. Naglick put it: “I expect in April or May we’re going to see the Financial Review Commission vote to end oversight and return self-determination to the city of Detroit.”

The Motor City’s $1 billion general fund, according to the Mayor, continues to be healthy, because the city’s most important source of revenues, its income tax, is producing more revenues. Indeed, the city’s budget maintains more than a 5% reserve, which is projected at $62.3 million. At the same time, the city is continuing to set aside fiscal resources to address higher-than-expected pension payments starting in 2024 when annual payments of at least $143 million begin. Payments of $20 million run through 2019 with no payments then due through 2023 under U.S. Bankruptcy Judge Steven Rhodes’ approved plan of debt adjustment. Detroit’s bond ratings, albeit still deep in junk territory, were upgraded last year, with, just before Christmas, S&P Global Ratings slipping down the chimney to upgrade Detroit’s credit rating to B-plus.

Not in Like Flint. Recent tests of the Michigan City of Flint’s drinking water at elementary schools have found an increase in samples with lead levels above the federal action limit. The Michigan Department of Environmental Quality determined that 28 samples tested last month were above 15 parts per billion of lead. DEQ spokesman George Krisztian reported the increase may be due to changes in testing conditions, such as the decision to collect samples prior to flushing lines. (Samples collected before flushing tend to have higher lead levels because the water has been in contact with the pipes longer.) Thus, according to Mr. Krisztian, the overall results are encouraging, because they meet federal guidelines for lead if treated like samples collected by municipal water systems. Most of the more than 90 Legionnaires’ disease cases during the deadly 2014-15 outbreak in the Flint area were caused by changes in the city’s water supply — and the epidemic may have been more widespread than previously believed, according to two studies published Monday. The risk of acquiring Legionnaires’ disease increased more than six-fold across the Flint water distribution system after the city switched from the Detroit area water system’s Lake Huron source to the Flint River in April 2014, according to a report in the Proceedings of the National Academy of Sciences.

Despite the improvement in lead levels over the last 18 months, federal, state, and local officials have advised city residents to continue using bottled water—as the city continues its costly efforts to extract at least 6.000 lead lines from houses this year and next—with Mayor Karen Weaver reporting that state-funded bottled water should be available to residents until the work is completed; the effort to test the drinking water in the city’s schools has yet to be completed. The Michigan Department of Environmental Quality this week defended its outreach efforts in the city, after the Flint Journal reported on a new report which found that 51% of bottled water users surveyed here said they either had no faucet filter or are not confident they know how to maintain the equipment they do have. Mayor Weaver urges the State of Michigan to continue to finance the distribution of bottled water until the last of the leaded lines are removed.

Even as fears remain about the health of the city’s schoolchildren, the State of Michigan has selected a former emergency manager for two Michigan school districts to serve as interim Superintendent of Flint’s public schools after the school board removed the superintendent and two other senior officials. Thus, Wednesday, Gregory Weatherspoon was unanimously approved for the post by the Flint Board of Education, one day after the Board that Bilal Tawwab, Assistant Superintendent Shawn Merriweather, and the school district’s attorney had been placed on leave. It appears the school district’s roughly 4,500 students, an enrollment that has been falling steadily since 1968, when there were 1000% more students, are still at risk. The lower numbers and ongoing safe drinking water fears augur badly for assessed property values in a city where the population suffered a serious decline from 1970 to 1980, losing nearly 40,000 residents—a loss from which Flint never recovered—and a population which has declined continuously—so much so that an August 2015 WalletHub study revealed that Flint placed dead last, as one of the least healthy real estate markets out of 300 U.S. cities.

Arriba? In Puerto Rico, where about 60% of the U.S. territory’s children live below the federal poverty level, it appears there might be some rising optimism—even amidst growing frustration at the exorbitant costs of the Congressionally-imposed PROMESA process. The optimism comes in the wake of disclosures that Puerto Rico’s earlier estimates of the fiscal and financial impact of Hurricane Maria appear to have been overly pessimistic. The rising optimism appears to be reflected by the rally in Puerto Rico’s municipal bond prices. At the same time, Christian Sobrino, Governor Ricardo Rosselló’s representative before the PROMESA Oversight Board, Wednesday said that the Board’s letter regarding lawyers and advisers high fees in PROMESA Title III cases did “not reflect the truth,” adding he found it “laughable that there are unnecessary expenses on behalf of the government of Puerto Rico:  To start with, the structure of Cofina (the Puerto Rico Sales Tax Financing Corporation) and central government agents was not an invention of Puerto Rico in Title III,” Mr. Sobrino said, referring to the mechanism suggested by the Board to determine whether the Sales and Use tax collection belongs to the corporation which issued the debt or to the central government. He noted that the attorneys and counselors assisting these agents billed, all together, $17 million of the total $ 77.7 million in fees claimed during the first five months of the federal PROMESA law: “These letters reflect imprudence and a ridiculous use of these expressions and do not reflect the truth of what we have done in the government to avoid this. It is out-of-place.”

That led the PROMSEA Board to write to the Congressional leadership to indicate that high expenses for lawyers and advisers fees, participating in that process, are due to the PROMESA—or, as PROMESA Board President José B. Carrión noted: “Historically, the people of Puerto Rico have suffered a problem of wasteful spending, admitting that there has been duplication of efforts in Title III cases.” Representative Sobrino stressed that the government has tried not to duplicate efforts with the Board, but that drawing the fiscal plan and budget, as well as its implementation, are the government’s responsibility, adding that the government agreed that Citibank would act as the leading banker in the Electric Power Authority (PREPA) case, as suggested by the Board, and that only a firm hired by the Board would conduct the audit of the bank accounts. However, Rep. Sobrino stressed that there have been times when the government had to use its lawyers to ensure success in Court, as was recently the case with a claim by the Highway and Transportation Authority bondholders: “We have been forced to hire our lawyers to preserve self-government,” adding that the government intervention prevented that, after Hurricane Maria, Noel Zamot from being appointed as a PREPA de-facto trustee.


Balancing Fiscal & Public Safety

January 9, 2017

Good Morning! In today’s Blog, we consider the potential fiscal impact of the expiration of the State of New Jersey’s public safety arbitration cap—with the expiration coming as Governor-elect Phil Murphy has been reviewing a report examining the implications for property taxes, state spending, collective bargaining agreements, and public safety. Then we journey south to witness the denouement of the fiscal siege of the historic municipality of Petersburg, Virginia.

Uncapping & Fiscal Impacts. The State of New Jersey’s statute capping public safety arbitration awards at 2% has been in effect for seven years—it was last extended in 2014. Now, with a new Governor taking office, Moody’s has warned that its expiration on the last day of 2017 is a credit negative for the Garden State—and for its municipalities and counties. Indeed, the New Jersey League of Municipalities has been joined by the New Jersey Association of Counties, the New Jersey Conference of Mayors, the New Jersey Chamber of Commerce, New Jersey Business and Industry Association, and the New Jersey Realtors Association to urge the new Governor and Legislature to support permanently extending the 2% cap Interest Arbitration Cap, noting that an expired cap would have a negative impact on property taxes and jeopardize the continued delivery of critical services, as well as adversely impact residential and commercial property taxpayers, working class families, and those on fixed incomes. The League’s President, Mayor James Cassella of East Rutherford, noted that the 2% Interest Arbitration Cap has controlled costs: without the cap, municipalities could see costly arbitration awards that would force local officials to reduce services or lay off employees to satisfy the arbitrator’s award and stay within the 2% levy cap. Similarly, New Jersey Association of Counties President Heather Simmons, a Gloucester County Freeholder, noted that failure to permanently extend the 2% cap on binding interest arbitration awards would inequitably alter the collective bargaining process in favor of labor at the expense of taxpayers, and lead to awards by arbitrators with no fiduciary duty to deliver essential services in a cost-effective manner.

Now Moody’s has moodily weighed in, deeming the expiration a credit negative for the state’s cities and  counties, as has Fitch Ratings.

In New Jersey, interest arbitration is a process open only to police and fire employee unions: it is a mechanism to resolve collective bargaining disputes between local governments and unions: when a public employer is unable to reach a contract agreement with a police or fire union, an arbitrator is called in to decide the terms of the contract. When the state adopted the 2 percent property tax levy cap, a separate 2 percent cap on interest arbitration awards was also imposed: that mandates arbitrators to take property taxes into account when issuing awards and providing local officials with a now proven and effective tool to contain property tax increases. The arbitration cap expired on Dec. 31; however, the property tax levy cap is permanent. The New Jersey League noted: “For nearly a decade, the 2 percent cap on binding interest arbitration awards has kept public safety employee salaries and wages under control simply because parties have been closer to reaching an agreement from the onset of negotiations. Moreover, the 2 percent cap on binding interest arbitration awards has established clear parameters for negotiating reasonable successor contracts that preserve the collective bargaining process and take into consideration the separate 2 percent tax levy cap on overall local government spending. And, importantly, the 2 percent cap on binding interest arbitration awards has not negatively impacted public safety services or recruitment.

In the wake of the expiration of the arbitration cap, it appears likely that arbitrator contract awards would exceed 2 percent. That would likely force cities and counties in the Garden State to reduce or eliminate municipal services—or go to the voters to seek approval to exceed the 2 percent property tax cap in order to fund an arbitration award.

Moody’s analyst Douglas Goldmacher moodily noted: “Given that salary costs are among the largest of municipal expenditures, the cost implications are obvious and considerable. The effect of this is, in most cases, unlikely to be rapid, but ultimately, the loss of the arbitration cap is likely to cause the sector’s credit quality to deteriorate…Although the cap has expired, and it may not be finished. Numerous local governments and local government advocacy groups support the arbitration cap. It is possible that the new governor and New Jersey state Legislature will revisit the matter. Until and unless that occurs, there will be a potentially dangerous mismatch between revenue and expenditures.” The statute, which caps public safety arbitration awards at 2%, came into force on January 1, 2011; it was extended for a three-year period in 2014 when it was last up for renewal. Mr. Goldmacher noted: “The cap played a major role in helping local governments manage public safety costs by instituting a limit on increases in police and fire salaries in arbitration and effectively tying the salary increases to the municipality’s or county’s revenue-raising capabilities…The cap’s expiration, should it prove permanent, is a credit negative for all local governments.” Mr. Goldmacher noted the cap’s existence has been a “valuable tool” in contract negotiations when police and firefighter unions with negotiators often forced to consider small salary increases. A September report by former Gov. Chris Christie’s appointees to the Police and Fire Public Interest Arbitration Impact Task Force stated that municipal property taxes jumped at an annual average of 7.19% for the five years prior to the cap compared to 2.41% since 2011. The report also estimated that the cap has saved taxpayers a collective $429 million. Thus, Mr. Goldmacher notes: “Given that salary costs are among the largest of municipal expenditures, the cost implications are obvious and considerable: Police and fire contracts often serve as a benchmark contract for other negotiations, which had the effect of making a 2% annual increase something of a standard target for most contracts, even for non-public safety collective bargaining units.” While it is possible the cap may be reinstated, Mr. Goldmacher added that as long as no action is taken to address the lapse, New Jersey’s cities and counties confront “a potentially dangerous mismatch” aligning revenue and expenditures, because of how much a 2% property tax cap law would limit their budgetary flexibility, writing: “The effect of this is, in most cases, unlikely to be rapid, but ultimately, the loss of the arbitration cap is likely to cause the sector’s credit quality to deteriorate,” he said. “The degree of deterioration will depend on the idiosyncratic qualities of the given community.”

For its part, Fitch wrote: “…the arbitration cap is beneficial to local government credit quality as it helps to align revenue and spending measures and supports structural balance in the context of statutory caps on property tax growth…bargaining groups may become more emboldened to pursue arbitration as opposed to voluntary settlement if the arbitration cap expires. Arbitration awards were significantly higher prior to the cap, ranging from 2.50% to 5.65% from 1993-2010, according to a report of the New Jersey Public Employment Relations Commission (PERC.)” Fitch also noted that the elimination of the arbitration cap “could force local governments to reduce governmental services and/or rely on one-time resources to accommodate higher wage expenses.”

The Fiscal Siege of Petersburg. Jack Berry, Robert Bobb, and Nelsie Birch, writing in a piece, “Overcoming the latest siege of Petersburg, referenced the city’s then vital role in the Civil War, where, as they wrote: “The series of battles known as the Siege of Petersburg lasted nine months and consisted of devastating trench warfare. It featured the largest concentration of African-American troops in the war, who suffered enormous casualties at the Battle of the Crater.” They went on to write: “Some would say that Petersburg has been under siege ever since the Civil War, that there is a siege mentality in the city. Petersburg even has a Siege Museum…But Petersburg has not always been under siege; it is not today, and it will not be tomorrow. Noting that Petersburg was once the second largest city in Virginia—and home to the largest number of free blacks in Virginia, they noted that it was once “a wealthy city, a major industrial center, and one of the largest rail hubs in the nation,” where, in the wake of the Civil War, a “coalition of Africa-American and white, populist Republicans, controlled the state legislature, which led to the creation of two large public institutions in the region: Virginia State University and Central State Hospital. Later, Fort Lee became another major economic engine for the area.” The authors noted, however, that “Jim Crow laws and Massive Resistance devastated the hopes and dreams of black citizens and fueled racial tensions. In 1985, one of the city’s largest employers, Brown & Williamson Tobacco, shut down its Petersburg factory. Later, Southpark Mall was located north of the city, sucking retail sales out of Petersburg.” These events adversely affected assessed property values—in turn reducing investment in public schools. The historic city seemed on a route to chapter 9 municipal bankruptcy—or being, as they wrote: “relinquishing city status—and being subsumed by neighboring jurisdictions,” all because of what they described as a “self-inflicted, mismanaged city government” which “ran itself into a ditch: In July of 2016, the city faced $18 million in unpaid bills. The budget was $12 million out of balance. Petersburg had nearly run out of cash and was dipping into every available pot of money, regardless of restrictions, to pay bills. A botched water meter conversion project impacted utility billings, which made the cash situation even worse.”

Because the Commonwealth of Virginia was apprehensive that a default by Petersburg would have had severe fiscal repercussions for municipalities across the state, the Commonwealth, as we have previously written, provided a consulting team to diagnose the fiscal issues and recommend fiscal measures—including, in its recommendations, pay cuts of 10 percent pay cuts for the entire city workforce. Even as the state-imposed overseer was acting, an aroused citizenry, via a grassroots group called “Clean Sweep,” attended every City Council session, demanding greater fiscal accountability. A year ago last October, former Mayor Howard Meyers and the City Council brought in a fiscal posse in an effort to restructure, hiring former Richmond City Manager Robert Bobb and his team, who set up a temporary war room in the City Hall building where General Robert E. Lee had met with his senior Confederate officers during the Siege of Petersburg. Mr. Bobb wrote of the fiscal war room: “We dug in for the long haul, with Nelsie Birch leading efforts to peel back layers of the financial onion. We got a handle on cash flow, figured out the extent of the unpaid bills, found checks stashed in drawers, arranged short-term financing, crafted a new budget, dramatically cut spending, put pressure on the city treasurer to collect taxes, and revamped the decrepit utility system…New financial policies were put in place; debt was restructured; water and sewer rates were increased to comply with debt covenants; the organization was right-sized; new managers were hired.”

Mr. Bobb described this war room process as one in which—at the same time—his team teamed with Mayor Sam Parham and the members of the Petersburg City Council “every step of the way,” to make the tough decisions, adding that, during this process, “Our strongest ally was the Governor’s Office, in particular, Virginia Secretary of Finance Ric Brown.” Indeed, by last November, external auditors reported a signal fiscal turnaround: Petersburg reported a year-end surplus of $7.2 million—and the report was on time; the auditor’s opinion was clean.

Fiscal & Physical Storm Recoveries

October 30, 2017

Good Morning! In today’s Blog, we consider, again, the spread of Connecticut’s fiscal blues to its municipalities; then, we observe the lengthening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. Ending months of fiscal frustration, the Connecticut House of Representatives late Thursday provided its strong, bipartisan endorsement (126-23) to two-year, $41 billion state budget which closes a gaping deficit, rejects large-scale tax increases, and seeks to bolster the state’s future fiscal stability. Notwithstanding, S&P Global Ratings, the following day, issued its own fiscal storm warnings that it is a budget which will still leave the state’s municipalities at fiscal risk. Governor Dannell Molloy has not yet said if or when he might sign that budget into state law; however, because it passed both Houses by veto-proof margins, the question is no longer “if,” but rather: what will it mean for the state’s municipalities? Thus, S&P warned:  “We note that virtually all local governments will see some reductions to state aid, while only a few—typically those with the greatest economic challenges—will see flat year-over-year state aid.” Similarly, Conn. House Majority Leader Matt Ritter (D-Hartford) told his colleagues: “We’re at the end of a journey: This budget offers needed reforms, but also some immediate comfort that is so needed by a lot of our residents and our towns…In the darkest of days…we found a way to pull through.”

As adopted, the budget bill provides financial assistance to eastern Connecticut homeowners dealing with crumbling foundations, reduced funding for UConn, offers $40 million to help the City of Hartford avoid filing for Chapter 9 municipal bankruptcy. The Connecticut Conference of Municipalities Executive Director Joe DeLong, in the League’s initial analysis of the municipal impact of the bipartisan budget agreement, noted: “Municipal leaders acknowledge the difficult choices made by state leaders in forging this bipartisan budget agreement and the impact they have on the lives of Connecticut residents: The actions taken by State leaders to support cities and towns protects the interests of residents and businesses across the state and for that we are grateful.” With the State facing a $5 billion biennial budget deficit, the state budget agreement spares towns and cities from the draconian cuts set to roll out under the Governor’s Executive Order and includes many significant structural reforms that municipalities have been advocating for years. Mr. DeLong added that the final budget agreement provides for numerous municipal reforms sought by the League last January in its groundbreaking public policy initiative, “This Report Is Different.”  

Connecticut House Speaker Joe Aresimowicz noted: “Leaders do things that are maybe not in their best interests, or may be against their own beliefs, in an effort to do what’s right. And I think that was done,’’ as Rep. Toni Walker (D-New Haven), Co-Chairwoman of the appropriations committee, described the bill as a significant step toward closing a $3.5 billion deficit over the next two years and righting the state’s wobbly finances for decades to come: “I want everybody to understand we must recalibrate the financial future of Connecticut, for our families and for our businesses and this budget begins that process.’’

As adopted, the budget does not increase income or sales tax rates, although it raises hundreds of millions of dollars in revenue via an assortment of smaller measures, such as higher taxes on cigarettes, a $10 surcharge on motor vehicle registrations to support parks, and new fees on ride-sharing companies, such as Uber. On the other hand, the final agreement rolled back proposed taxes on cellphone plans, second homes, and restaurant meals. In the end, small tax increases represent just .85 percent of the budget; fee hikes constituted an even smaller contribution .11%. On the revenue side, the new budget proposes the elimination of a property tax credit for many middle-income homeowners, raises the cigarette tax, and sweeps $64 million from a clean energy fund.

In the wake of the passage, S&P Global Ratings indicated it would review the state’s municipal bond rating, but noted the municipal impact, citing the $31.4 million cut to the Education Cost Sharing Grant, the primary state grant which goes to cities and towns to help operate their schools—albeit, the cut is to be nearly fully restored next year, and distributed using an updated formula which more heavily favors the state’s lowest-performing school districts. The adopted budget also rejected Gov. Malloy’s proposal to mandate that the state’s cities and towns assume some fiscal share of the state’s soaring contributions to the teachers’ pension fund. Nevertheless, the budget was less generous to municipalities on the revenue front: the 2015 state plan to share sales tax receipts with cities and towns is all but eliminated in this budget, which officially ends the diversion of these receipts into a special account: the last remnants of a program which was supposed to distribute more than $300 million per year in sales tax receipts are: A “municipal transition grant” worth $13 million in FY 2017 and $15 million for next year. Similarly axed: a $36.5 million payment this year to offset a portion of the funds communities with high property tax rates lose because of a state-imposed cap on motor vehicle taxes: the new budget would cut $19 million in each year from grants that reimburse communities for taxes they cannot collect on exempt property owned by the state and by private colleges, hospitals and other nonprofit entities.

The adopted budget, however, from a municipal perspective, proposes to revise the prevailing wage and binding arbitration systems: municipalities would have greater flexibility to launch more publicly financed capital projects without having to pay union-level construction wages, and arbiters would have more options when ruling on wage and other contract issues involving municipalities and their employees.

Nevertheless, S&P noted: “Since new state revenue measures would have less than a year to be collected, this may leave the state without the available resources to fully appropriate for these (municipal grants),” adding: “The length of the budget impasse underscores the state’s struggling financial health.” The rating agency last month had already placed nine Connecticut municipalities and one school district on a “negative” credit watch, warning it could lead to a rating downgrade within 90 days unless their fiscal outlook improves, citing the uncertainty of Connecticut’s ability to maintain existing levels of municipal aid, reinforcing Moody’s moody outlook earlier this month when it warned that the state actions could lead to lower bond ratings for 51 municipalities and six regional school districts, placing ratings for 26 cities and towns and three regional school districts under review for downgrade, and assigning negative outlooks to an additional 25 municipalities and three more regional school districts. For its part, S&P warned: “In the end, if state fiscal pressures persist, all local governments in Connecticut will continue to be affected…and the degree of credit deterioration will depend on each government’s level [of] budgetary reserves and ability to adapt.”

Underpowered. House Natural Resources Committee Chairman Rob Bishop (R-Utah) said he does not want to “come to conclusions” before he has all the information regarding the controversial $300 million contract of the Montana-based company, Whitefish Energy Holdings, with the Puerto Rico Electric Power Authority (PREPA); nevertheless, Chairman Bishop has given PREPA Chairman Ricardo Ramos until this Thursday to submit a series of documents related to the contract with the company—a company whose largest project prior to Hurricane Maria was $ 1.3 million in the state of Arizona—especially in the wake of the contract award here made without bidding—ergo triggering a series of questions and requests for investigations by the Office of  Inspector General and from the Government Accountability Office (GAO). Chairman Bishop was part of the Congressional delegation with House Majority Leader Kevin McCarthy (R-Ca.) and Deputy Minority Leader Steny Hoyer (D-Md.), as well as Puerto Rico resident Commissioner in Washington, D.C., Jennifer González. House Speaker Paul Ryan ((R-Wis.) who had earlier visited the town of Utuado, known as “El Pueblo del Viví,’ which was founded in 1739 by Sebastían de Morfi, and derives its name from a local Indian Chief Otoao, which means between the mountains, to see first-hand the devastation caused by Hurricane Maria—in the wake of which he noted: “Our committee, like other groups, will investigate and we will know what is behind the Whitefish contract. I do not know enough right now to come to a conclusion against or in favor, but that’s the idea, to know the details and how it happened.”

The Chairman was not alone: the Federal Agency for Emergency Management (FEMA) has released a statement making clear that agency’s concerns about certain aspects of the contract, including an absence of certainty that some prices were even “reasonable,” in apparent reference to the hourly pay of some employees of the company. FEMA also warned that entities that fail to meet FEMA requirements may not see their expenses reimbursed. Nevertheless, Chairman Bishop said he will not “let” any concern of FEMA “get in the way…FEMA will do its job,” he insisted when asked if he was worried that FEMA would not reimburse the Puerto Rico government for payments to Whitefish. (Last night, Governor Ricardo Rosselló Nevares confirmed that he was about to receive a report he had requested from the Office of Management and Budget about the contract.).

Chairman Bishop noted that, as a result of the destruction caused by Hurricane Maria, he is considering possible changes to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), albeit, when asked about specific changes, he limited himself to saying that the Oversight Board “does not need more authority;” rather, he said, the focus now needs to be on the provision of power and drinking water. Asked by Majority Leader McCarthy whether the devastation he had witnessed makes him think that the aid mechanism for Puerto Rico should change, he answered that “a lot of infrastructure is needed, and we have to lift the electrical system…I spoke with (Minority Leader) Steny Hoyer. I do not think it would be the best use of taxpayers’ money to build the same grid that we had. We need a 21st century one that is more efficient and effective and we can do it with more transparency,” albeit he was unclear what he meant by transparency. Rep. Hoyer noted: “We know there is an urgency,”  adding the delegation needed to all go back to Washington, D.C. to work together, but “we need an urgency to fix the electrical system and for power to reach the whole island. Governor Rosselló Nevares, who accompanied them on the tour, has said that if the quality of life in Puerto Rico does not reach what it should be: “People will be disappointed, and they will leave.”


The Leadership Challenges on the Road to Fiscal and Physical Recovery

September 29, 2017

Good Morning! In today’s Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico; Hartford’s steep fiscal challenges; and Detroit’s ongoing road to fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal Safety Net? The White House yesterday announced President Trump had agreed to waive the Jones Act, which will temporarily lift shipping restrictions on Puerto Rico and enable the hurricane-ravaged island to receive necessary aid; however, the waiver from the shipping law, which mandates that only American-made and-operated vessels may transport cargo between U.S. ports, will only last for 10 days, after which the equivalent of a 20 percent tax will be reimposed. The delayed U.S. response to the save U.S. citizens compared unfavorably to the response to save and protect foreign citizens in Haiti seven years ago, when the U.S. military mobilized as if it were going to war—with the U.S. military, in less than 24 hours, and before first light, already airborne, on its way to seize control of the main airport in Port-au-Prince. Within two days, the Pentagon had 8,000 American troops en route; within two weeks, 33 U.S. military ships and 22,000 troops had arrived. By contrast, eight days after Hurricane Maria ripped across neighboring Puerto Rico, just 4,400 service members were participating in federal operations to assist the devastated U.S. citizens, according to a briefing by an Army general yesterday, in addition to about 1,000 Coast Guard members.

The seemingly inexplicable delay in waiving the Jones Act—temporarily—was due to opposition of the waiver by the Department of Homeland Security, which had argued that a federal agency may not apply for a waiver unless there is a national defense threat (as, apparently, there might have been in Houston and Florida). Sen. John McCain (R-Az.) has, for years, sought to repeal this discriminatory law: The 1920 Jones Act requires that goods shipped between U.S. ports be carried by vessels 1) built in the U.S., 2) majority-owned by American firms, and 3) crewed by U.S. citizens.

Key House and Senate members, since Monday, had been pressing for a one-year waiver from the rules in order to help accelerate deliveries of food, fuel, medical, and other critical supplies to Puerto Rico, especially with current estimates that Puerto Rico could be without power for six months. On Wednesday, 45 U.S. Senate and House Members had signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement. U.S. Rep. Nydia Velázquez (D.-N.Y.) warned: “If President Trump doesn’t swiftly deploy every available resource that our country has, then he has failed the people of Puerto Rico – and this will become his Katrina.” The temporary suspension of the onerous and discriminatory Jones law came only in the wake of a fierce backlash against the Trump administration for its inexplicable delay in not immediately lifting the federal law for Puerto Rico, especially after it issued a two-week waiver for Texas and Florida in response to Hurricanes Harvey and Irma. Nevertheless, San Juan Mayor Carmen Yulín Cruz praised the administration’s decision: she said it could help bring down the cost of emergency medical and other supplies, as well as vital construction materials by nearly 33 percent. Nevertheless, she warned there are still thousands of containers sitting idle at the ports of San Juan, a problem she blamed on “jurisdictional” and bureaucratic issues.

The belated Presidential action came as Puerto Rico continued to suffer the after effects of Hurricane Maria: Puerto Rico Electric Power Authority Executive Director Ricardo Ramos Rodríguez warned it could take PREPA as much as half a year to restore electricity.

Meanwhile, it appears the PROMESA Oversight Board is ready to revise the amount of debt to be paid in the next nine years. The Board is scheduled to meet today in New York City to revise the March-approved fiscal plan: the current Board fiscal plan specifies there should be enough funds to pay approximately 24% of the debt; however, it appears the Board will have little choice today but to revise every fiscal plan. Clearly none of the previous underlying assumptions can hold, and now the Board will have to await the actions and finding of the Federal Emergency Management Agency, while the Treasury Department will have to work with Puerto Rico to settle on a massive restructuring—or, as Puerto Rico House Representative Rafael Hernández Montañez put it: “We can’t have money spent on corporate lawyers and PowerPoint producing technocrats while funding is needed for immediate reconstruction efforts.” While FEMA has committed to paying for 100 percent of the costs of some work, on others, it is mandating a match of 20% to 25% of the costs for other work—a match which appears out of reach for the most savagely damaged municipalities or municipios—now confronted not just by enormous new capital and operating demands, but also by sharply reduced revenues.

Wednesday morning, the PREPA Bondholders Group offered up to $1.85 billion in debtor in possession loans to the authority. According to the group, part of the package would be a new money loan of up to $1 billion. Another part would be their possible acceptance of an $850 million in DIP notes in exchange for $1 billion in outstanding bonds owed to them—or, as the Group noted: “The new funding would allow PREPA to provide the required matching funds under various grants from the Federal Emergency Management Agency.” In response, PREPA’s Natalie Jaresko said: “We welcome and appreciate the expression of support from creditors…The Board will carefully consider all proposals in coordination with the government, but it is still very early as we begin to navigate a way forward following the catastrophic impact Hurricane Maria had on the island.”

The existing fiscal PREPA plan specifies there should be enough funding to pay about 24% of the debt due over the next decade; that, however, has raised questions with regard to the underlying assumptions of the Board, especially with regard to when FEMA will complete its work on the island.

Rafael Hernández Montañez, a member of Puerto Rico’s House, noted that Hurricane Maria put Puerto Rico’s territory-wide and municipal governments in very difficult financial situations. While FEMA has committed to paying for 100% of the costs of some work, he notes that the federal relief agency is still mandating a government match of 20% to 25% of the costs for other work: “It’s going to be a huge effort to cover that 20% with the government’s unbalanced budget,” adding that the hurricane will also lead to reduced revenues for the local governments.

On Wednesday, 145 U.S. Representatives and Senators signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement–the same day as the PREPA Bondholders Group offer. 

The Category 4 Maria destroyed Puerto Rico’s electrical grid; it left the island desperately short of food, clean water, and fuel—and sufficient shipping options, notwithstanding the claim from the Department of Homeland Security that: “Based on consultation with other federal agencies, DHS’s current assessment is that there is sufficient numbers of U.S.-flagged vessels to move commodities to Puerto Rico.” Thus DHS opposed a waiver of the Jones Act (Under the Jones Act federal cabotage rules, the entry of merchandise into Puerto Rico can only be made on US flag and crew ships – the most expensive fleet in the world.), which has been suspended in past natural disasters, to allow less expensive, foreign-flagged ships bring in aid. Former President George W. Bush suspended the Act after Hurricane Katrina in 2005, and President Barack Obama suspended it after superstorm Sandy in 2012. In a letter to the Department of Homeland Security, Sen. McCain criticized the department for waiving the Jones Act in the wake of hurricanes Harvey and Irma, but not for Puerto Rico. The Senator, who has long sought a repeal of the Jones Act, noted: “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster: Now, more than ever, it is time to realize the devastating effect of this policy and implement a full repeal of this archaic and burdensome Act.”  Only the Department of Defense may obtain a Jones Act waiver automatically, which it did to move petroleum products from Texas after Hurricane Harvey. The White House is expected to send Congress a request for a funding package for Puerto Rico in the next few weeks, a senior congressional aide said.

The Road to Hartford’s Default. Citing deep cuts to higher education, sharp reductions in aid to distressed communities, and unsound deferrals of public pension payments, Connecticut Gov. Dannel Malloy yesterday made good on his pledge to veto the budget that legislature, earlier this month, had adopted, deeming it: “unbalanced, unsustainable, and unwise,” adding his apprehension that were it to be implemented, it would undermine the state’s long-term fiscal stability and essentially guarantee the City of Hartford’s chapter 9 municipal bankruptcy. His veto came as the Governor and top legislators continued bipartisan talks in an attempt to reach a compromise; however, despite legislative attempts to pass a bill to increase the hospital provider tax to 8 percent, a 25 percent increase over the current level, the legislature will not meet today. In his executive order, the Governor allowed key stated services to remain operating; however, he ordered steep cuts to municipalities and certain social service programs: under his orders, approximately 85 communities would see their education cost sharing grants, the biggest source of state funding for public education in Connecticut, cut to zero next month—no doubt a critical element provoking the Connecticut Council of Small Towns, which represents more than 100 of the state’s smallest communities, to seek an override in a special session the week after next in order to avoid local property tax increases. Nevertheless, Gov. Malloy stood strongly against the Republican plan and a potential override, stating: “This budget adopts changes to the state’s pension plan that are both financially and legally unsound…This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature.” He added his apprehensions that the changes proposed to the state’s pension system could expose Connecticut taxpayers to potentially costly litigation down the road: “Prior administrations and legislatures have, over decades, consistently and dangerously underfunded the state’s pension obligations,’’ a strategy, he noted, which he said has led to crippling debt and limited the state’s ability to invest in transportation, education, and other important initiatives. Nonetheless, Republican leaders urged the Governor to sign the two-year, $40.7 billion budget, saying it makes significant structural changes, such as capping the state’s bonding authority and limiting spending. Fiscally conservative Democrats who bolted to the Republican side had criticized a Democratic budget proposal which had proposed new taxes on vacation homes, monthly cellphone bills, and fantasy sports betting, as well as increased taxes on cigarettes, smokeless tobacco, and hotel room rates.

House Republican leader Themis Klarides (R-Derby) warned she and her colleagues will try to override the veto—a steep challenge, as in Connecticut, that requires a two-thirds vote in each chambers, meaning 101 votes in the House and 24 in the Senate. The crucial Republican amendment passed with 78 votes in the House and 21 in the Senate—well short of the override margin in both chambers. The action came as S&P Global Ratings this week lowered Hartford’s credit rating, writing that its opinion “reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty,” albeit noting that the city could still avoid chapter 9 municipal bankruptcy by restructuring its debts. The agency wrote: “In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing. Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default. The mayor’s public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty.” Hartford’s fiscal plight is, if anything, made more dire by the fiscal crisis of Connecticut, which is still without a budget—and where the Legislature has under consideration a budget proposal from the Governor to slash state aid to the state’s capitol city of Hartford—where the Mayor notes that even were the state to make the payments it owes, Hartford would still be unable to pay its debts—so that S&P dropped the city’s credit rating from B- to C—a four-notch downgrade, writing: “The downgrade to ‘CC’ reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty.”

The Steep Recovery Road. Almost three years after exiting chapter 9 bankruptcy, Detroit is meeting its plan of debt adjustment, but still confronts fiscal challenges to a full return to the municipal market, even as it nears its exit from Michigan state oversight next year. Detroit’s Deputy Chief Financial Officer and City Finance Director, John Hill, this week noted that while the Motor City recognizes that any debt the city plans to issue will still need a security boost from a quality revenue stream and some enhancement, such as a state intercept, Detroit’s plan of debt adjustment did not assume the need for market access in a traditional and predictable way, without added security layers, for at least a decade. That assessment remains true today, as Detroit nears its third anniversary from its exit from the nation’s largest ever municipal bankruptcy. With chapter 9, Mr. Hill adds: “Everything that we have been able to do since exiting bankruptcy has an attached revenue stream to it: You secure it, and bond lawyers agonize over how that will be protected in the unlikely event of another bankruptcy, because everyone has to ask the question now. Then there is a strong intercept mechanism that goes to a trustee like U.S. Bank where the bondholders now know this is absolutely secure.”

Municipal Market Analytics partner Matt Fabian notes that Detroit continues to struggle with challenges which predate its chapter 9 bankruptcy, adding the city is unlikely to regain an ability to access the traditional municipal markets on its own in the near-to-medium term: “They don’t have traditional reliable access where if they need to go to the market, you can predict with certainty that they will and they will be within a generally predictable spread,” adding that reestablishing its presence in the traditional market is important, because it indicates whether bondholders have confidence in the city as a going concern. In fact, Detroit has adopted balanced budgets for two consecutive years; it is on a fiscal path to exiting Michigan Financial Review Commission oversight, and the city ended FY2016 with a $63 million surplus in its general fund; however, Detroit’s four-year fiscal forecast shows an annual growth rate of only about 1%.

The city’s public pension obligations, mayhap the thorniest issue in cobbling together its plan of debt adjustment, are to be met per its economic plan, via a balloon payment.  Mr. Fabian notes that the Motor City’s recovery plan and future revenue growth is complicated by the need to set aside from surpluses an additional $335 million between Fy2016 and Fy2023 to address that significant, unfunded pension liability, worrying that while the plan is “fiscally responsible;” nevertheless, it comes “at the expense of using these funds for reinvestment and service improvement.”

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health and Naglick says it shows the city has recognized the need to tackle it. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund, said Detriot CFO John Naglick, will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. “More importantly, the growing contributions each year from the general fund to the trust will build budget capacity to make the increased contributions in future years,” he said.

Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million. Pension woes aren’t the only challenge the city faces. Fabian said that economic development has been limited to the city’s downtown and midtown areas. The rest of Detroit’s neighborhoods haven’t fared so well.

Dan Loepp, the president and CEO of Blue Cross Blue Shield of Michigan, and Gerry Anderson, the Chairman and CEO of DTE Energy, are regarded to be among the important business leaders in Detroit, two key sectors of the Motor City’s economy, who see Detroit’s fiscal and economic trajectory as intertwined with the future of their companies; they  have headquarters in downtown and employ thousands of people including Detroiters—companies which had been making conscious and deliberate investments in the city. Asked recently to offer their perspectives about where Detroit is headed and how to include the many who are left out of the recovery, Mr. Loepp responded: “I’m a native Detroiter, and I lead a company that’s been a business resident of Detroit for nearly 80 years. I remember how uneasy it felt to be in Detroit when the national economy collapsed 10 years ago. It was hard and scary…From then to now, I strongly believe Detroit’s comeback is one of the best stories in America. The downtown is pulsing with growth and action. You’ve got business and residential development that has connected the river to Midtown and is now expanding into neighborhoods.” He added Detroit today is clear of debt and venture capital flowing backed by a city leadership which is “working well together, noting Detroit today is “now positioned to compete and win investment and jobs against any city in the country. All of this is great for Detroit.”

Notwithstanding, he warned that challenges remain: “The bankruptcy, while hard, gave the city’s leadership a clean slate to solve challenges faced by residents. The Mayor and council are working together on issues like lighting, infrastructure, zoning, and demolition…the Mayor, especially, has spent considerable energy advocating for the people of Detroit—doing things like making sure new housing developments hold space for working people of all incomes. This will promote a stronger, more diverse Detroit…Institutional issues, like improving the city’s schools and making neighborhoods safer for city residents, will take time to solve. They will take a constant, steady focus. And they need people within state and local government to work hand-in-hand with people from the neighborhoods to do the tough labor of finding sustainable solutions.” Nevertheless, he cautioned that the Motor City’s recovery is incomplete without participation of the majority: “Detroit can’t truly ‘come back’ if people living in the city are left behind. We need to always make sure there is a focus on people and that we make people a priority. Schools need to be improved. Transit needs to be addressed in a comprehensive way. Employment opportunities and housing need to be part of the master plan.”


Municipal Moral & Fiscal Obligations


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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.”


Foundering Federalism?


Good Morning! In this a.m.’s eBlog, we consider the seemingly increasing likelihood of chapter 9 bankruptcy for Connecticut’s capital city, Hartford, before veering south to consider the ongoing fiscal storms in the U.S. Territory of Puerto Rico.

Moody Blues. In the latest blow from the capital markets to Connecticut’s capital city, Standard & Poor’s Global Ratings late Tuesday lowered Hartford’s general obligation ratings to junk bond status—with the action coming less than a week after we had reported the city had hired a firm to help it explore options for chapter 9 or other steps involving severe fiscal distress. Moody’s Investors Service had already downgraded Hartford’s bonds to a speculative-grade (Ba2), and it has placed the city on review for yet another downgrade.  S&P’s action appeared to reflect an increased likelihood Connecticut’s capital could default on its debt or seek to renegotiate its obligations to its bondholders, with S&P credit analyst Victor Medeiros noting: “The downgrade to BB reflects our opinion of very weak diminished liquidity, including uncertain access to external liquidity and very weak management conditions as multiple city officials have publicly indicated they are actively considering [municipal] bankruptcy.” The ratings actions occurred as the city continues to seek more state aid and concessions from the city’s unions—even as the state remains enmired in its own efforts to adopt its budget. Mayor Luke Bronin, in an interview yesterday, confirmed the possibility of bond restructuring negotiations. This is all occurring at a key time, with the Governor and legislators still negotiating the state’s budget—on which negotiations for the fiscal year which began at the beginning of this month, remain unresolved. In a statement yesterday, Mayor Bronin noted:  “I have said for months that we cannot and will not take any option off the table, because our goal is to get Hartford on the path to sustainability and strength.” He added that any long-term fiscal solution would “will require every stakeholder—from the State of Connecticut to our unions to our bondholders—to play a significant role,” adding: “Today’s downgrade should send a clear message to our legislature, to labor, and to our bondholders that this is the time to come together to support a true, far-sighted restructuring.”

A key fiscal dilemma for the city is that approximately 51 percent of the property in the city is tax-exempt. While the state provides a payment in lieu of local property taxes (PILOT) for property owned and used by the State of Connecticut (such payment is equal to a percentage of the amount of taxes that would be paid if the property were not exempt from taxation, including 100% for facilities used as a correctional facility, 100% for the Mashantucket Pequot Tribal land taken into trust by federal government on or after June 8, 1999, 100% for any town in which more than 50% of all property in the town is state-owned real property, 65% for the Connecticut Valley Hospital facility, and 45% for all other property; such state payments are made only for real property.  

Unretiring Debt. U.S. Federal Judge Laura Taylor Swain gave the government of Puerto Rico and the Employees Retirement Systems (ERS) bondholders until yesterday to settle their dispute over these creditors’ petition for adequate protection—warning that if a deal was not reached, she would issue her own ruling on the matter—a ruling which could mean setting aside at least $18 million every month in a separate account, albeit Judge Swain noted she was not ready at this time to say whether that would entail adequate protection. Her statement came even as Puerto Rico Governor Ricard Rossello Nevares yesterday stated that, contrary to complaints made by the Chapter of Retirees and Pensioners of the Federation of Teachers, the House Joint Resolution does not represent a “threat,” but rather comes to ensure pension payments to public workers who once served the U.S. Territory, adding, however, that the retirement system as it was known no longer exists, stating it “is over,” in the absence of resources that can ensure long-term pension payments: What we have done is that we have changed from a system where it was a fund to a pay system where what implies is that now the government under the General Fund assumes responsibility for the payment of the pension…That is, the retired do not have to fear, quite the opposite. The measure that we are going to do saves and guarantees the System. If we had not implemented this in the fiscal plan…the retirement system would run out of money in the next few months.” Describing it as a “positive measure for pensioners,” because, absent the action, it was “guaranteed to run out of money,” the Governor spoke in the wake of a demonstration, in front of La Fortaleza, where spokesmen of the Chapter of Retirees and Pensioners of the Federation of Teachers denounced the measure—a measure approved by both legislative bodies and sent to the Executive last month as a substitute retirement system for teachers.

Unsurprisingly, the Puerto Rico government and representatives of labor unions and retirees opposed the ERS bondholders’ request to lift the stay under PROMESA’s Title III. In response to Judge Swain’s query to the bondholders: “If I were to enter a sequestration in the manner you stipulated…What would that do for you?” Jones Day attorney Bruce Bennett responded; “Not enough,” as the ERS bondholders argued they needed adequate protection, because Puerto Rico has not made the requisite employer contributions to the ERS, which guarantee payments of their bonds. In contrast, opponents argued the resolution authorizing the issuance of these bonds was an obligation of Puerto Rico’s retirement system‒not the Commonwealth, and creditors were going beyond contractual rights in forcing the government to make appropriations from the general fund and remit them as employer contributions. An attorney representing the retirement system argued the ERS security interest filings were defective in reference to claims by bondholders that they have a right to receive employer contributions; however, an attorney representing the PROMESA Board countered that just because the collateral to their municipal bonds has been reduced, those bondholders are not entitled to such protection, testifying: “What is the claim worth when you have the GOs saying ‘we get all the money because we are in default.’”

Due to Puerto Rico’s perilous fiscal condition, it currently is making pension payments, for the most part, on a pay-as-you-go basis: public corporations and municipalities are making their employer contributions; however, those contributions are going into a segregated account; in addition, the fiscal plan contemplates making public corporations and municipalities similarly transform to a pay-go pension system—with the Territory supporting its position before Judge Swain by its police power authority.

The State of Puerto Rico’s Municipalities. The Puerto Rico Center for Integrity and Public Policy has reported that Puerto Rico’s municipal government finances deteriorated in FY2016 after improving in the prior two fiscal years. Arnaldo Cruz, a co-founder of the Center, said the cause of the deterioration was likely related to the election year, based on the collection of data and responses from 68 of the territory’s 78 municipios. Mr. Cruz added that the ten non-responders happened to be ones which had received D’s and F’s in past years. The updated study found that 30 municipalities nearly have the muncipios received more than 40% of their general fund revenue from the central government—mayhap presaging fiscal mayhem under the PROMESA Board’s intentions to eliminate such state aid to local governments over the next two fiscal years—i.e,: a cut of some $428 million. Such severe cuts would come even as the study found that more than half the muncipios realized a decrease their net assets last year, and half realized a decrease in their general fund balance—even as 27 municipios allocated more than 15% of their general fund income to debt repayment.

According to the March fiscal plan, Puerto Rico’s municipalities have:

  • $556 million in outstanding bond debt;
  • $1.1 billion in loans to private entities; and
  • Owe $2 billion to Puerto Rico government entities, primarily the Government Development Bank for Puerto Rico.

Mr. Cruz notes a potentially greater fiscal risk is related to Government Development Bank loans, which Puerto Rico’s municipalities continued to receive last year: last month, however, the Puerto Rico Senate approved a bill to allow the municipalities to declare an emergency and declare a moratorium on the payment of their debt. The fate of the effort, however, is uncertain, because the legislation died when the legislature adjourned before House action—mayhap to be taken up next month when they reconvene.


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.