Post Municipal Bankruptcy Leadership

08/07/17

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Good Morning! In this a.m.’s blog, we consider the fiscal challenge as election season is upon the Motor City: what kind of a race can we expect? Then we observe the changing of the guard in San Bernardino—as the city’s first post-chapter 9 City Manager settles in as she assumes a critical fiscal leadership role in the city emerging from municipal bankruptcy. Third, we consider the changing of the fiscal guard in Atlantic City, as outgoing (not a pun) Gov. Chris Christie begins the process of restoring municipal authority. Then we turn to what might be a fiscal turnaround underway in Puerto Rico, before, fourth, considering the special fiscal challenge to Puerto Rico’s municipios—or municipalities.

Post Municipal Bankruptcy Leadership. Detroit Mayor Mike Duggan, the city’s first post-chapter 9 mayor, has been sharing his goals for a second term, and speaking about some of his city’s proudest moments as he seeks a high turnout at tomorrow’s primary election mayoral primary election‒the first since the city exited municipal bankruptcy three years ago, noting he is: “very proud of the fact the unemployment rate in Detroit is the lowest it has been in 17 years: today he notes there are 20,000 more Detroiters working than 4 years ago. In January 2014, there were 40,000 vacant houses in the city, and today 25,000. We knocked down 12,000 and 3,000 had families who moved in and fixed them up,” adding: “For most Detroiters, that means the streetlights are on, grass is cut in the parks, busses are running on time, police and ambulances showing up in a timely basis and trash picked up and streets swept.” Notwithstanding those accomplishments, however, he confronts seven contenders—with perhaps the signal challenge coming from Michigan State Senator Coleman Young, Jr., whose father, Coleman Young, served as Detroit’s first African-American Mayor from 1974 to 1994. Mr. Young claims he is the voice for the people who have been forgotten in Detroit’s neighborhoods, noting: “I want to put people to work and reduce poverty of 48% in Detroit. I think that’s atrocious. I also want mass transit that goes more than 3 miles,” adding he is seeking ‘real change,’ charging that today in Detroit: “We’re doing more for the people who left the city of Detroit, than the people who stayed. That’s going to stop in a Young administration.” Remembering his father, he adds: “I don’t think there will ever be another Coleman Young, but I am the closest thing to him that’s on this planet that’s living.” (Other candidates in tomorrow’s non-partisan primary include Articia Bomer, Dean Edward, Curtis Greene, Donna Marie Pitts, and Danetta Simpson.)  

According to an analysis by the Detroit News, voters will have some interesting alternatives: half of the eight candidates have been convicted of felony crimes involving drugs, assault, or weapons—with three charged with gun crimes and two for assault with intent to commit murder, albeit, some of the offenses date back as far as 1977. (Under Michigan election law, convicted felons can vote and run for office, just as long as they are neither incarcerated nor guilty of crimes breaching public trust.

Taking the Reins.  San Bernardino has named its first post-chapter 9 bankruptcy city manager, selecting assistant City Manager and former interim city manager, Andrea Miller, to the position—albeit with some questions with regard to the $253,080 salary in a post-chapter 9 recovering municipality where the average household income is less than $36,000 and where officials assert the city’s budget is insufficient to fully address basic public services, such as street maintenance or a fully funded police department. Nevertheless, Mayor Cary Davis and the City Council voted unanimously, commenting on Ms. Miller’s experience, vision, and commitment to stay long-term, or, as Councilman Fred Shorett told his colleagues: “As the senior councilmember—I’ve been sitting in this dais longer than anybody else—I think we’ve had, if we count you twice, eight city managers in a total of 9 years: We have not had continuity.”  However, apprehension about continuity as the city addresses and implements its plan of debt adjustment remains—or, as Councilmember John Valdivia insisted, there needs to be a “solemn commitment to the people of San Bernardino” by Ms. Miller to serve at least five years, as he told his colleagues: “During Mayor (Carey) Davis’ four years in office, the Council is now voting on the third city manager: San Bernardino cannot expect a successful recovery with this type of rampant leadership turnover at City Hall…Ms. Miller is certainly qualified, but I am concerned that she has already deserted our community once before.” Ms. Miller was the city’s assistant city manager in 2012, when then-City Manager Charles McNeely abruptly resigned, leaving Ms. Miller as interim city manager to discover that the city would have to file for chapter 9 bankruptcy—a responsibility she addressed with aplomb: she led San Bernardino through the first six months of its municipal bankruptcy, before leaving without removing “interim” from her title, instead assuming the position of executive director of the San Gabriel Valley Council of Governments.

Ms. Miller noted: “I would remind the Council that I was here as your interim city manager previously, and I did not accept the permanent appointment, because I felt like I could not make that commitment given some of the dynamics…(Since then) this Council and this community have implemented a new city charter, the Council came together in a really remarkable way and had a discussion with me that we had not been able to have previously: You committed to some regular discussion about what your expectations are, you committed to strategic planning. And so, with all those things and a strategic plan that involves all of us in a stronger, better San Bernardino, yes I can make that commitment.” Interestingly, the new contract mandates at least two strategic planning sessions per year—and, she told the Council additional sessions would probably be wise. The contract the city’s new manager signed is longer than the city’s most recent ones—mayhap leavened by experience: the length and the pay are higher than the $248,076 per year the previous manager received. Although Ms. Miller is not a San Bernardino resident, she told the Mayor and Council she is committed to the city and said the city should strive to recruit other employees who do live in the city.

Not Gaming Atlantic City’s Future. New Jersey Governor Chris Christie’s administration last week announced it had settled all the remaining tax appeals filed by Atlantic City casinos, ending a remarkable fiscal drain which has contributed to the city’s fiscal woes and state takeover. Indeed, it appears to—through removal of fiscal uncertainty and risk‒open the door to the Mayor and Council to reduce its tax rate over the long-term as the costs of the appeal are known and able to be paid out of the bonds sold earlier this year—effectively spinning the dial towards greater fiscal stability and sustainability. Here, the agreements were reached with: Bally’s, Caesars, Harrah’s, the Golden Nugget, Tropicana, and the shuttered Trump Plaza and Trump Taj Mahal: it comes about half a year in the wake of the state’s tax appeal settlement with Borgata, under which the city agreed to pay $72 million of the $165 million the casino was owed. While the Christie administration did not announce dollar amounts for any of the seven settlements announced last week, it did clarify that an $80 million bond ordinance adopted by the city will cover all the payments—effectively clearing the fiscal path for Atlantic City to act to reduce its tax rate over the long term as the costs of the appeal are known and can be paid out of the municipal bonds sold earlier this year.  

In these tax appeals, the property owners have claimed they paid more in taxes than they should have—effectively burdening the fiscally besieged municipality with hundreds of millions in debt over the last few years as officials sought to avoid going into chapter 9 municipal bankruptcy. Unsurprisingly, Gov. Christie has credited the state takeover of Atlantic City for fostering the settlements, asserting his actions were the “the culmination of my administration’s successful efforts to address one of the most significant and vexing challenges that had been facing the city…Because of the agreements announced today, casino property tax appeals no longer threaten the city’s financial future.” The Governor went on to add that his appointment of Jeffrey Chiesa, the former U.S. Senator and New Jersey Attorney General to usurp all municipal fiscal authority in Atlantic City when, in his words, Atlantic City was “overwhelmed by millions of dollars of crushing casino tax appeal debt that they hadn’t unraveled,” have now, in the wake of the state takeover, resulted in the city having a “plan in place to finance this debt that responsibly fits within its budget.” The lame duck Governor added in the wake of the state takeover, the city will see an 11.4% drop in residents’ overall 2017 property tax rate. For his part, Atlantic City Mayor Don Guardian described the fiscal turnaround as “more good news for Atlantic City taxpayers that we have been working towards since 2014: When everyone finally works together for the best interest of Atlantic City’s taxpayers and residents, great things can happen.”

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

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

Pensiones. The PROMESA Board and Puerto Rico’s muncipios appear to have achieved some progress on the public pension front: PROMESA Board member Andrew Biggs asserts that the fiscal plan called for 10% cuts to pension spending in future fiscal years, while Sobrino Vega said Gov. Ricardo Rosselló has promised to make full pension payments. Natalie Ann Jaresko, the former Ukraine Minister of Finance whom former President Obama appointed to serve as Executive Director of PROMESA Fiscal Control Board, described the reduction as part of the fiscal plan that the Governor had promised to observe: the fiscal plan assumed that the Puerto Rican government would cut $880 million in spending in the current fiscal year. Indeed, in the wake of analyzing the government’s implementation plans, the PROMESA Board appeared comfortable that the cuts would save $662 million—with the Board ordering furloughs to make up the remaining $218 million. The fiscal action came as PROMESA Board member Carlos García said that the board last Spring presented the 10 year fiscal plan guiding government actions with certain conditions, Gov. Rosselló agreed to them, so that the Board approved the plan with said conditions, providing that the government achieve a certain level of liquidity by the end of June and submit valid implementation plans for spending cuts. Indeed, Puerto Rico had $1.8 billion in liquidity at the end of June, well over the $291 million that had been projected, albeit PROMESA Board member Ana Matosantos asserted the $1.8 billion denoted just a single data point. Ms. Jaresko, however, advised that this year’s government cuts were just the beginning: the Board fiscal plan calls for the budget cuts to more than double from $880 million in this year, to $1.7 billion in FY 2019, to $2.1 billion in FY2020.  No Puerto Rican government representative was allowed to make a presentation to the board on the issue of furloughs.

Not surprisingly, in Puerto Rico, where the unemployment rate is nearly triple the current U.S. rate, the issue of furloughs has raised governance issues: Sobrino Vega, the Governor’s chief economic advisor non-voting representative on the PROMESA Oversight Board, said there was only one government of Puerto Rico and that was Gov. Rosselló’s, adding that under §205 of PROMESA, the board only had the powers to recommend on issues such as furloughs, noting: “We can’t take lightly the impact of the furloughs on the economy,” adding the government will meet its fiscal goals, but it will do it according its own choices, but that the Puerto Rican government will cooperate with the Board on other matters besides furloughs. His statement came in the wake of PROMESA Board Chair José Carrión III’s statement in June that if Puerto Rico did not comply with a board order for furloughs, the Board would sue.

Cambio?  Puerto Rico Commonwealth Treasury Secretary Raul Maldonado has reported that Puerto Rico’s tax revenue collections last month were was ahead of projections, marking a positive start to the new fiscal year for an island struggling with municipal bankruptcy and a 45% poverty rate. Secretary Maldonado reported the positive cambio (in Spanish, “cambio” translates to change—and may be used both to describe cash as well as change, just as in English.): “I think we are going to be $20 to $30 million over the forecast: For July, we started the fiscal year already in positive territory, because we are over the forecast. We have to close the books on the final adjustment but we feel we are over the budget.” His office had reported the revenue collection forecast for July, the start of Puerto Rico’s 2017-2018 fiscal year, was $600.8 million: in the previous fiscal year, Puerto Rico’s tax collections exceeded forecasts by $234.9 million, or 2.6%, to $9.33 million, with the key drivers coming from the foreign corporations excise tax, the sales and use tax, and the motor vehicle excise tax. Sec. Maldonado, who is also Puerto Rico’s CFO, reported that each government department is required to freeze its spending and purchase orders at 95% of the monthly budget, noting: “I want to make sure that they don’t overspend. By freezing 5%, I am creating a cushion so if there is any variance on a monthly basis we can address that. It is a hardline budget approach but it is a special time here.” Sec. Maldonado also said he was launching a centralized tax collection pilot program, with guidance from the U.S. Treasury—one under which three large and three small municipalities have enrolled in an effort to assess which might best increase tax collection efficiency while cutting bureaucracy in Puerto Rico’s 78 municipalities, noting: “We are going to submit the tax reform during August, and we will include that option as an alternative to the municipalities.”

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Addressing Municipal Fiscal Distress at the White House and State House

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07/31/17

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Good Morning! In today’s Blog, we consider whether President Trump’s appointment of new White House Communications Director of Communications might have fiscal implications for Puerto Rico’s fiscal future; then we turn to leadership efforts in the Virginia General Assembly to refine what a state’s role in oversight of municipal fiscal distress might be. 

Might There Be a Change in White House Direction vis-à-vis Puerto Rico? Prior to his new appointment as White House Director of Communications, Anthony Scaramucci, more than a year ago, questioned whether the U.S. territory of Puerto Rico should be granted authority more akin to a sovereign nation than a state—power which would, were it granted, authorize Puerto Rico to authorize its muncipios the authority to file for chapter 9 municipal bankruptcy, writing in an op-ed, “The shame of leaving Puerto Rico in limbo,” in Medium a year ago last May, just as the U.S. House Natural Resources Committee was seeking to report the PROMESA legislation. Mr. Scaramucci then indicated that creditors wanted to file with regard to the actions taken by the Puerto Rican government as if they were “equal to the intransigence of the Kirchner government in Argentina, but in reality the situations (of both countries) are completely different.” He explained: Not only does Puerto Rico not have the same public policy options as Argentina, but its economy and ability to pay its debts are worse off: Not only does Puerto Rico not have the same public policy options as Argentina, but its economy and ability to pay its debts are worse off.” He further noted that House Speaker Paul Ryan (R.-Wis.) was in a difficult situation to deal with the situation in Puerto Rico, amid what he described as a “civil war” within the Republican Party—a war he described as “induced by Donald Trump.”

Now, of course, Mr. Scaramucci is in a starkly different position—one where he might be able to influence White House policy. Having written, previously, that the “tax code of the Commonwealth must be revised to be more friendly to economic development…Social assistance programs should be drastically reduced and labor laws softened,” Mr. Scaramucci has also called for public-private partnerships to make “essential” government services more efficient, such as the Puerto Rico Electric Power Authority—noting: “Ultimately…we must also allow Puerto Rico to operate as a sovereign country or grant them legal protections more similar to those of the states (which is the preference of the Puerto Rican people).” He argued that the case of Puerto Rico represents a “failure on multiple levels: the insatiable desire of US investment funds for Puerto Rico triple exemption bonds; U.S. Congressmen of the status of the Congressionally-created territory, and misappropriation of funds by the Puerto Rican government: “We must now face our failures and take pragmatic measures to create a better future:  The tax code of the Commonwealth must be revised to be more friendly to economic development; social assistance programs should be drastically reduced, and labor laws softened.” He noted that public-private partnerships could be vital in rendering “essential” government services more efficient, such as the Puerto Rico Electric Power Authority, noting: “Ultimately, we must also allow Puerto Rico to operate as a sovereign country or grant them legal protections more similar to those of the states (which is the preference of the Puerto Rican people).” Referencing that, as in the Great Recession of 2008, he noted the case of Puerto Rico represents a “failure on multiple levels: the insatiable desire of US investment funds for Puerto Rico triple exemption bonds; U.S. Congressmen of the status of ELA (Estado Libre Asociado de Puerto Rico), and misappropriation of funds by the Puerto Rican government…But as we did after 2008, we must now face our failures and take pragmatic measures to create a better future.”

Mr. Scaramucci’s comments came as the City or Pueblo of San Juan has filed a legal challenge to the PROMESA Oversight Board’s approval of the Government Development Bank (GDB) for Puerto Rico debt restructuring agreement: San Juan is seeking a declaratory judgement and injunctive relief against the PROMESA Oversight Board, the GDB, and the Puerto Rico Fiscal Agency and Financial Advisory Authority before U.S. Judge Laura Swain Taylor in the U.S. District Court for Puerto Rico—a judge by now immersed in multiple bankruptcy filings, after the Bastille Day PROMESA Board’s approval of a restructuring agreement for the GDB’s $4.8 billion in debt—an approval for which the Board asserted it had authority under PROMESA’s Title VI.

San Juan’s filing claims the GDB holds more than $152 million in San Juan deposits—deposits which the city asserts are the property of San Juan, and thereby ineligible for Title VI restructuring, which explicitly addresses only municipal bonds, loans, and other similar securities. San Juan then claims the GDB deposits are “secured,” unlike the funds which the GDB owes to municipal bondholders—even as the PROMESA Board’s approved Restructuring Support Agreement provides for the municipalities to vote in the same class as all the other GDB creditors, asserting that such a voting practice would be contrary to PROMESA. The suit also notes that, under Puerto Rico statutes, municipal depositors are allowed to set-off their deposits against their GDB loan balances; however, the Restructuring Support Agreement (RSA) is grossly inaccurate in accounting for these deposits against the loans and, thus, the agreement is breaching the law—asserting:

“The ultimate effect of the RSA would be to provide a windfall to the GDB’s bondholders by using the resources of San Juan and other municipalities for the payment of bondholder claims while imposing enormous losses on those same municipal depositors through the confiscation of their excess [special tax deposit] and their statutorily guaranteed right to setoff deposits at the GDB against their loans from the GDB.” The suit further charged that the PROMESA Board convened illegal executive private sessions concerning the creation of the RSA—sessions which included representatives of the GDB and FAFAA. (The federal statute only allows executive sessions with board members and its staff present, according to the suit.)  Thus, in its complaint , the city is requesting that Judge Swain find the board’s approval of the agreement invalid, and that Judge Swain further find that PROMESA and Article VI, Clause 2 of the U.S. Constitution preempt Puerto Rican laws and executive order that have stopped the municipalities from withdrawing their funds from the GDB for over a year.

Not Petering Out. In the Virginia Legislature, Del. Lashrecse Aird (D-Petersburg), the youngest woman ever elected to the House of Delegates, recently noted: “In this session, I’m carrying a very light load, just four or five bills, that are locality bill requests: As a lawmaker overall, you will always see me supporting those initiatives and those policy issues that reference those three priorities: jobs, education, and healthcare. I think that if I can execute on those priorities, that will definitely improve the quality of life for the citizens, the families and kids, not just for Petersburg but the entire district.” Del. Air noted that last year, the City of  Petersburg’s financial situation made headlines throughout the Commonwealth, and led to serious conversations about the financial health of Virginia’s cities and counties: “What we saw in Petersburg, in addition to a declining economy nationwide, was longstanding financial mismanagement, negligence, and declining cash balances dating back to 2009. And, what we saw in localities like Emporia, Martinsville, Lynchburg, Buena Vista—all classified as having significant fiscal stress—is that these historic cities were displaying similar indicators, and they were largely going unaddressed.” Thus, she played a key role in creating a work group which has examined local fiscal distress—and which has produced an action plan, a plan from which components have been incorporated into the state’s new budget: including:

  • improving how the Commonwealth of Virginia monitors fiscal activity and increases the level of oversight by the auditor of public accounts;
  • establishing a mechanism which is responsive to situations of local fiscal distress; and
  • providing readily available resources should intervention become necessary.

As a start, she noted that Virginia House has adopted a budget which allocates up to $500,000 to conduct intervention and remediation efforts in situations of local fiscal distress that have been previously documented by the Office of the State Secretary of Finance prior to January 1st, 2017. As part of a longer-term approach, the effort incorporates additional language establishing a Joint Subcommittee on Local Government Fiscal Stress, with the new subcommittee charged to review:

  • savings opportunities for increased regional cooperation and consolidation of services;
  • local responsibilities for service delivery of state-mandated or high-priority programs;
  • causes of fiscal stress; potential financial incentives and other governmental reforms for regional cooperation; and
  • the different taxing authorities of cities and counties.

Or, she she put it:

“An integral part of the approach we take towards addressing fiscal distress must also include conversations about electing capable local leadership and providing training in areas most critical to effective governance and financial management. Where there are gaps in knowledge and understanding, elected officials must be willing to educate themselves in every area necessary for good governance.”

Rising from Municipal Bankruptcies’ Ashes

07/24/17

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Good Morning! You might describe this a.m.’s e or iBlog as The Turnaround Story, as we consider the remarkable fiscal recovery in Atlantic City and observe some of the reflections from Detroit’s riot of half a century ago—a riot which presaged its nation’s largest chapter 9 bankruptcy, before we assess the ongoing fiscal turmoil in the U.S. territory look at Puerto Rico.

New Jersey & You. Governor Chris Christie on Friday announced his administration is delivering an 11.4% decrease in the overall Atlantic City property tax rate for 2017—a tax cut which will provide an annual savings of $621 for the City’s average homeowner, but which, mayhap more importantly, appears to affirm that the city’s fiscal fortunes have gone from the red to the black, after, earlier this month, the City Council accepted its $206 million budget with a proposed 5% reduction in the municipal purpose tax rate, bringing it to about $1.80 per $100 of assessed valuation. Atlantic City’s new budget, after all, marks the first to be accepted since the state took over the city’s finances last November; indeed, as Mayor Don Guardian noted, the fiscal swing was regional: the county and school tax rates also dropped—producing a reduction of more than 11%—and an FY2018 budget $35 million lower than last year—and $56 million below the FY2016 budget: “We had considerably reduced our budget this year and over the last couple of years…I’m just glad that we’re finally able to bring taxes down.” Mayor Guardian added the city would still like to give taxpayers even greater reductions; nevertheless, the tax and budget actions reflect the restoration of the city’s budget authority in the wake of last year’s state takeover: the budget is the first accepted since the state took over the city’s finances in November after the appointment last year of a state fiscal overseer, Jeff Chiesa—whom the Governor thanked, noting:

“Property taxes can be lowered in New Jersey, when localities have the will and leaders step in to make difficult decisions, as the Department of Community Affairs and Senator Jeff Chiesa have done…Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents. Annual savings of more than $600 for the average household is substantial money that families can use in their everyday lives. This 11.4% decrease is further proof that what we are doing is working.”

Contributing to the property tax rate decrease is a $35-million reduction in the City’s FY2017 budget, which, at $206.3 million, is about 25% lower than its FY2015 budget, reflecting reduced salaries, benefits, and work schedules of Atlantic City’s firefighters and police officers, as well as the outsourcing of municipal services, such as trash pickup and vehicle towing to private vendors. On the revenue side, the new fiscal budget also reflects a jackpot in the wake of the significant Borgata settlement agreement on property tax appeals—all reflected in the city’s most recent credit upgrade and by Hard Rock’s and Stockton University’s decisions to make capital investments in Atlantic City, as well as developers’ plans to transform other properties, such as the Showboat, into attractions intended to attract a wider variety of age groups to the City for activities beyond gambling—or, as the state-appointed fiscal overseer, Mr. Chiesa noted: “The City is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the City’s residents and businesses.

The Red & the Black. Unsurprisingly, there seems to be little agreement with regard to which level of government merits fiscal congratulations. Atlantic City Mayor Guardian Friday noted: “We had considerably reduced our budget this year and over the last couple of years…“I’m just glad that we’re finally able to bring taxes down.” Unsurprisingly, lame duck Gov. Christie credited the New Jersey Department of Community Affairs and Mr. Chiesa, stating: “Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents.” However, Tim Cunningham, the state director of local government services, earlier this month told the Mayor and Council the city and its budget were moving in the “right direction,” adding hopes for the city’s fiscal future, citing Hard Rock and Stockton University’s investment in the city; while Mr. Chiesa, in a statement, added: “The city is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the city’s residents and businesses.”

Do You Recall or Remember at All? Detroit Mayor Mike Duggan, the white mayor of the largest African-American city in America, last month spoke at a business conference in Michigan about the racially divisive public policies of the first half of 20th century which helped contribute to Detroit’s long, painful decline in the second half of the last century—a decline which ended in five torrid nights and days of riots which contributed to the burning and looting of some 2,509 businesses—and to the exodus of nearly 1.2 million citizens. The Mayor, campaigning for re-election, noted: “If we fail again, I don’t know if the city can come back.” His remarks appropriately come at the outset of this summer’s 50th anniversary of the summer the City Detroit burned.

Boston University economics Professor Robert Margo, a Detroit native who has studied the economic effects of the 1960’s U.S. riots, noting how a way of life evaporated in 120 hours for the most black residents in the riot’s epicenter, said: “It wasn’t just that people lived in that neighborhood; they shopped and conducted business in that neighborhood. Overnight all your institutions were gone,” noting that calculating the economic devastation from that week in 1967 was more than a numbers exercise: there was an unquantifiable human cost. That economic devastation, he noted, exacerbated civic and problems already well underway: job losses, white flight, middle-income black flight, and the decay and virtual wholesale abandonment of neighborhoods, where, subsequently, once-vibrant neighborhoods were bulldozed, so that, even today, if we were to tour along main artery of the riot, Rosa Parks Boulevard (which was 12th Street at the time of the riots), you would see overgrown vacant lots, lone empty commercial and light industrial buildings, boarded-up old homes—that is, sites which impose extra security costs and fire hazards for the city’s budget, but continue to undercut municipal revenues. Yet, you would also be able to find evidence of the city’s turnaround: townhouses, apartments, and the Virginia Park Community Plaza strip mall built from a grassroots community effort. But the once teeming avenue of stores, pharmacies, bars, lounges, gas stations, pawn shops, laundromats, and myriad of other businesses today have long since disappeared.

In the wake of the terrible violence, former President Lyndon Johnson created the Kerner Commission, formally titled the National Advisory Commission on Civil Disorders, to analyze the causes and effects of the nationwide wave of 1967 riots. That 426-page report concluded that Detroit’s “city assessor’s office placed the loss—excluding building stock, private furnishings, and the buildings of churches and charitable institutions—at approximately $22 million. Insurance payouts, according to the State Insurance Bureau, will come to about $32 million, representing an estimated 65 to 75 percent of the total loss,” while concluding the nation was “moving toward two societies, one black, one white—separate and unequal.” Absent federal action, the Commission warned, the country faced a “system of ’apartheid’” in its major cities: two Americas: delivering an indictment of a “white society” for isolating and neglecting African-Americans and urging federal legislation to promote racial integration and to enrich slums—primarily through the creation of jobs, job training programs, and decent housing. In April of 1968, one month after the release of the Kerner Commission report, rioting broke out in more than 100 cities across the country in the wake of the assassination of civil rights leader Martin Luther King, Jr.

In excerpts from the Kerner Report summary, the Commission analyzed patterns in the riots and offered explanations for the disturbances. Reports determined that, in Detroit, adjusted for inflation, there were losses in the city in excess of $315 million—with those numbers not even reflecting untabulated losses from businesses which either under-insured or had no insurance at all—and simply not covering at all other economic losses, such as missed wages, lost sales and future business, and personal taxes lost by the city because the stores had simply disappeared. Academic analysis determined that riot areas in Detroit showed a loss of 237,000 residents between 1960 and 1980, while the rest of the entire city lost 252,000 people in that same time span. Data shows that 64 percent of Detroit’s black population in 1967 lived in the riot tracts. U. of Michigan Professor June Thomas, of the Alfred Taubman College of Architecture and Urban Planning, wrote: “The loss of the commercial strips in several areas preceded the loss of housing in the nearby residential areas. That means that some of the residential areas were still intact but negatively affected by nearby loss of commercial strips.” The riots devastated assessed property values—creating signal incentives to leave the city for its suburbs—if one could afford to.

On the small business side, the loss of families and households, contributed to the exodus—an exodus from a city of 140 square miles that left it like a post WWII Berlin—but with lasting fiscal impacts, or, as Professor Bill Volz of the WSU Mike Ilitch School of Business notes: the price to reconstitute a business was too high for many, and others simply chose to follow the population migration elsewhere: “Most didn’t get rebuilt. They were gone, those mom-and-pop stores…Those small business, they were a critical part of the glue that made a neighborhood. Those small businesses anchored people there. Not rebuilding those small businesses, it just hurt the neighborhood feel that it critical in a city that is 140 square miles. This is a city of neighborhoods.” Or, maybe, he might have said: “was.” Professor Thomas adds that the Motor City’s rules and the realities of post-war suburbanization also made it nearly impossible to replace neighborhood businesses: “It’s important to point out that, as set in place by zoning and confirmed by the (city’s) 1951 master plan, Detroit’s main corridors had a lot of strip commercial space that was not easily converted or economically viable given the wave of suburban malls that had already been built and continued to draw shoppers and commerce…This, of course, all came on top of loss of many businesses, especially black-owned, because of urban renewal and I-75 construction.”

Left en Atras? (Left Behind?As of last week, two-thirds of Puerto Rico’s muncipios, or municipalities, had reported system breakdowns, according to Ramón Luis Cruz Burgos, the deputy spokesman of the delegation of the Popular Democratic Party (PPD) in the Puerto Rico House Of Representatives: he added that in Puerto Rico, a great blackout occurs every day due to the susceptibility of the electric power system, noting, for instance, that last month, for six consecutive days, nearly 70 percent of Puerto Rico’s municipalities had problems with electricity service, or, as he stated: “In Puerto Rico we have a big blackout every day. We have investigated the complaints that have been filed at the Autoridad de Energía Eléctrica (AEE) for blackouts in different sectors, and we conclude that daily, two-thirds of the island are left without light. This means that sectors of some 51 municipalities are left in the dark and face problems with the daily electricity service.”

It seems an odd juxtaposition/comparison with the events that triggered the nation’s largest ever chapter 9 municipal bankruptcy in Detroit—even as it reminds us that in Puerto Rico, not only is the Commonwealth ineligible for chapter 9 municipal bankruptcy, but also its municipalities. Mr. Cruz Burgos noted that reliability in the electric power system is one of the most important issues in the economic development of a country, expressing exasperation and apprehension that interruptions in service have become the order of the day: “Over the last two months, we have seen how more than half of the island’s villages are left dark for hours and even for several days, because the utility takes too long to repair breakdowns,” warning this problem will be further aggravated during the month of August, when energy consumption in schools and public facilities increases: “In the last two months, there are not many schools operating and the use of university facilities is also reduced for the summer vacation period. In addition, many employees go on vacation so operations in public facilities reduce their operation and, therefore, energy consumption.”

Jose Aponte Hernandez, Chair of the International and House Relations Committee, blamed the interruptions on the previous administration of Gov. Luis Fortuno, claiming: it had “abandoned the aggressive program of maintenance of the electrical structure implemented by former Gov. Luis Fortuna, claiming: “In the past four years the administration of the PPD did not lift a finger to rehabilitate the ESA structure. On the contrary, they went out of their way to destroy it in order to justify millionaire-consulting contracts. That is why today we are confronting these blackouts.”

The struggle for basic public services—just as there was a generation ago in Detroit, reflect the fiscal and governing challenge for Puerto Rico and its 88 municipalities at a time when non-Puerto Rican municipal bondholders have launched litigation in the U.S. Court of Federal Claims to demand payment of $3.1 billion in principal and interest in Puerto Rico Employment Retirement System bonds (In Altair Global Credit Opportunities Fund (A), LLC et al. v. The United States of America)—the first suit against the U.S. government proper, in contrast to prior litigation already filed against the Puerto Rico Oversight Board, with the suit relying on just compensation claims and that PROMESA is a federal entity. Here, as the Wizard of chapter 9 municipal bankruptcy, Jim Spiotto, notes, the key is whether the PROMESA board was acting on behalf of the federal government or on behalf of Puerto Rico—adding that he believes it was acting for Puerto Rico and, ergo, should not be considered part of the federal government, and that the U.S. Court of Federal Claims may find that the federal government’s actions were illegal. Nevertheless, the issue remains with regard to whether the bonds should be paid from the pledged collateral—in this case being Puerto Rico employer contributions. (The Altair complaint alleges that the PROMESA Board is a federal entity which has encouraged, directed, and even forced Puerto Rico to default on its ERS bonds—a board created by Congress which has directed the stream of employer contributions away from the bondholders and into the General Fund, according to these bondholders’ allegations.

Getting into and out of Municipal Bankruptcy

07/10/17

Good Morning! In this a.m.’s eBlog, we consider the exceptional fiscal challenge to post-chapter 9 Detroit between building and razing the city; then we head East to Hartford, where the Governor and Legislature unhappily contemplate the Capital City’s fiscal future—and whether it will seek chapter 9 bankruptcy, before finally returning the key Civil War battlefield of Petersburg, Virginia—where a newly brought on Police Chief mayhap signals a turnaround in the city’s fiscal future.  

Raising or Razing a Municipality? Detroit, founded on July 24th in 1701 by Antoine de la Mothe Cadillac, the French explorer and adventurer, went on to become one of the country’s most vital music and industrial centers by the early 20th century; indeed, by the 1940’s, the Motor City had become the nation’s fourth-largest city. But that period might have been its apogee: the combination of riots and industrial restructuring led to the loss of jobs in the automobile industry, and signal white flight to the suburbs; since reaching a peak of 1.8 million in the 1950 census, Detroit’s population has declined precipitously: more than 60%.  Nevertheless, it is, today, the nation’s largest city on the U.S.—Canada border, and, with the imminent completion of the Gordie Howe Bridge to Canada, the city—already the anchor of the second-largest region in the Midwest, and the central city of a metro region of some 4.3 million Americans at the U.S. end of the busiest international crossing in North America; the question with regard to how to measure its fiscal comeback has been somewhat unique: it has been—at least up until currently, by the number of razed homes. Indeed, one of former Mayor Dave Bing’s key and touted programs was his pledge to raze 10,000 homes—a goal actually attained last year under Mayor Mike Duggan—under whose leadership some 11,500 homes have been razed. Mayor Duggan reports his current goal is to raze another 2,000 to 4,000 annually—so that, today, the city is host to the country’s largest blight-removal program—a critical component of Detroit’s future in a municipality which has experienced the loss of over one million residents over the last six decades—and where assessed property values of blighted and burned homes can be devastating to a municipality’s budget—and to its public schools. Worse, from a municipal governing perspective, is the challenge: how do the cities’ leaders balance helping its citizens to find affordable housing versus expenditures to raze housing—especially in a city where so many homeowners owed more than their homes were worth after the 2008 housing collapse?

Mayor Duggan’s response, moreover, has attracted the focus of multiple investigations, including federal subpoenas into bidding practices and the costs of demolitions—even as a separate grand jury has been reported to have subpoenaed as many as 30 contractors and Detroit municipal agencies, and Michigan officials have sought fines, because contractors mishandled asbestos from razed homes. Mayhap even more challenging: a recent blight survey by Loveland Technologies, a private company which maps the city, questions whether demolition is even keeping pace with blight in Detroit: the report indicates that vacancies in neighborhoods targeted for demolition have actually increased 64% over the last four years.

Hard Fiscal Challenges in Hartford: Is there a Role for the State? The Restructuring of Municipal Debt. Connecticut Gov. Daniel Malloy stated that the state would be willing to help the City of Hartford avoid chapter 9 municipal bankruptcy—but only if the city gets its own financial house in order, with his comments coming in the wake of the decision by Mayor Luke Bronin to hire an international law firm with expertise in municipal bankruptcies—with the Mayor making clear the city is also exploring other fiscal alternatives. Gov. Malloy has proposed offering millions more in state aid to the capital city in his budget proposal, to date, the state legislature, already enmired in its own, ongoing budget stalemate—has not reacted. Thus, the Governor noted: “I don’t know whether we can be all things to all people, but I think Hartford has to, first and foremost, help itself…But we should play a role. I think we need to do that not just in Hartford, but in Bridgeport and New Haven, and other urban environments and Waterbury. There’s a role for us to play.” The stakes are significant: Hartford is trying to close a $65 million fiscal gap—a gap which, should it not be able to bridge, would mean the city would have to seek express, prior written consent of the Governor to file a municipal bankruptcy petition (Conn. Gen. Stat.§7-566)—consent not yet sought by the city—or, as the Governor put it on Friday: “There’s no request for that…I don’t think they’re in a position to say definitively what they are going to do. I’m certainly not going to prejudge anything. That should be viewed as a last resort, not as a first.”

House Speaker Joe Aresimowicz (D-Berlin and Southington) and a former Member of the Berlin Council, reports the legislature could vote as early as a week from tomorrow on a two-year, $40 billion state budget, albeit some officials question whether a comprehensive agreement could be reached by that date, after the legislature has missed a series of deadlines, including the end of the legislative session on June 7th, not to mention the fiscal year of June 30th.  Meanwhile, the city awaits its fiscal fate: it has approved a budget of nearly $613 million, counting on nearly half the funds to come from the state; meanwhile, the city has hired the law firm of Greenberg Traurig to begin exploration of the option of filing for bankruptcy—or, as Mayor Bronin noted: “One important element of any municipal restructuring is the restructuring of debt…They will be beginning the process of reaching out to bond holders to initiate discussion about potential debt restructuring.”

Municipal Physical & Fiscal Safety. The fiscally challenged municipality of Petersburg, Virginia has brought on a new Chief of Police, “Kenny” Miller, a former Marine with 36 years of law enforcement experience.  Chief Miller views his new home as an “opportune place to give back” after a “blessed” career with one of Virginia’s largest police agencies—in the wake of serving 34 of his 36 years as an officer with the Virginia Beach Police Department. Chief Miller, who was sworn in last Friday afternoon, in the wake of a national search, noted: “You got to get out there and engage people…If people see that you care, they know you care. You can’t police inside of a building,” adding: “Engagement means working with the community…Solving problems together. People that live in the communities know the problems better than I do just passing through…We need to break down some barriers and get some trust going.” Chief Miller commences in his new role as the historic city seeks to turn around a fiscal and leadership crisis—one which left some parts of city government in dysfunction. The police department has had its own woes—including the Police Department, where, a year and a half ago, former Petersburg Chief John I. Dixon III acknowledged, after weeks of silence, that an audit of the department’s evidence and property room turned up $13,356 in missing cash related to three criminal cases—a finding which led former Petersburg Commonwealth’s Attorney Cassandra Conover to ask Virginia State Police to investigate “any issues involving” the police department that had come to her attention through “conversations and media reports” of alleged police misconduct or corruption—an investigation which remains ongoing. But the new Chief will face a different kind of fiscal challenge in the wake of the resignations of 28 sworn officers who have resigned in the last nine months after the city’s leaders imposed an across-the-board 10 percent pay cut for the city’s nearly 600 full-time workforce a year ago—and dropped 12 civilians from emergency communications positions. Nevertheless, Chief Miller said he was attracted to Petersburg because “the job was tailor-made for me. It’s a city on the rise, and I wanted to be part of something good…I don’t do it for the money. I’ve been blessed. I want to give back, (and) Petersburg is the opportune place to give back…The community members and the city leadership team are all working together to bring Petersburg to a beginning of a new horizon: “So why not be a part of that great opportunity?”

Chief Miller enters the job as Petersburg is straining to overcome a fiscal and leadership crisis that left some parts of city government in dysfunction; moreover, the police department has had its own woes. Seventeen months ago, former Petersburg police Chief John I. Dixon III acknowledged after weeks of silence that an audit of the department’s evidence and property room turned up $13,356 in missing cash related to three criminal cases. That led former Petersburg Commonwealth’s Attorney Cassandra Conover to ask the Virginia State Police to investigate “any issues involving” the police department which had come to her attention through “conversations and media reports” of alleged police misconduct or corruption. Nevertheless, Chief Miller reports he was “intrigued” by those officers who stayed with the force in spite of the pay cut “and showed virtue with respect to policing: Policing isn’t something that you do, it’s what you are: There are men and women there who really care about the city, and (those) people stayed.” He adds, he was attracted to Petersburg, because “the job was tailor-made for me. It’s a city on the rise, and I wanted to be part of something good…I’m now in my 36th year in law enforcement…And I don’t do it for the money. I’ve been blessed. I want to give back, (and) Petersburg is the opportune place to give back. The community members and the city leadership team are all working together to bring Petersburg to a beginning of a new horizon: So why not be a part of that great opportunity?” According to an announcement of his appointment as Petersburg’s Chief on Virginia Beach’s Facebook page: “[H]is connection with multiple civic leaders and groups throughout the city have forged and strengthened deep bonds between the Virginia Beach community and the police department.”

Emerging from Chapter 9–and the conflict between fiscal and physical safety.

07/07/17

Good Morning! In this a.m.’s eBlog, we consider the final emergence of Orange County, California from chapter 9 municipal bankruptcy; then we consider the ongoing fiscal and fiscal challenges for Flint’s leaders from its fiscal & physical challenges.

Free at Last? Twenty-three years ago, when the former Orange County, California Treasurer, Robert Citron, then managing an investment pool for southern California municipalities, speculated unwisely, the municipal pool he managed lost $1.64 billion—plunging the county into the first chapter 9 municipal bankruptcy of the modern era (California §53760)—a chapter 9 bankruptcy from which the County emerged this week in the wake of its final payment on the $1 billion worth of municipal bonds it had issued. Orange County, however, still owes approximately $20 million to various cities and agencies that have a separate repayment agreement—debt Orange County expects to resolve by late next year. (A subsequent grand jury investigation later found that Mr. Citron, who had earned praise for his investment skills, relied on a mail order astrologer and a psychic for interest rate predictions as Orange County’s Treasurer.)

For this writer, the emergence evokes memories of how controversial the concept of municipal bankruptcy had been—at the time—for the National League of Cities to advocate for the changes in chapter 9: the then Executive Director and the then President of NLC (former New York City Council Chair Carol Bellamy) decried the notion that an association of municipal elected leaders would support facilitating filing for municipal bankruptcy; yet the Orange County case illuminated its importance by demonstrating how important it was to have a mechanism in federal law to ensure continuity in the provision of essential municipal public services.  

In the case of Orange County, the insolvency of an investment pool it ran on behalf of itself and other municipalities in the region would have, absent the kinds of protections provided under chapter 9, risked plunging municipalities in the region into insolvency without a mechanism to ensure vital public services and operations. The County’s insolvency and threat to the other municipalities in the region was its own kind of tremor: a fiscal, rather than physical tremor. In the end, the access to chapter 9 meant the county was able to issue $1 billion in municipal bonds to avoid a critical default and ensure avoidance of any disruption in essential municipal services—bonds the payments on which ($1.5 billion including interest) were finally completed at the beginning of this month when the County made its final payment on that bankruptcy bond debt. While the price to its taxpayers was steep–repayments averaged $68 million a year, and the loss of vital public improvements and services great; the shock it sent to the nation’s cities was key in helping Congress better understand that while an Eastern Airlines could file for federal bankruptcy protection and simply walk away from its services and debts; that could never be the case for a city or county: there had to be a mechanism in federal law to ensure that a city, county, or public school system could continue to operate during insolvency.  

In managing these municipalities’ investment pool, Mr. Citron made unlucky/unwise wagers on interest rates—so unwise that the multi-jurisdiction investment pool suffered a crippling $1.64 billion loss. Now California State Senator John Moorlach, who prior to his Senate service was twice re-elected Orange County Treasurer-Tax Collector after running against Mr. Citron in 1994, has noted: “The bankruptcy dramatically changed my life…I sort of feel like I lived in a movie. I was an officer of the county when those recovery bonds were issued, and I wondered if I’d live long enough to see them paid off. It was a great turn-around opportunity. A lot has changed since then, and the county is better for it. It’s been nearly 23 years, and no one has been able to pull a stunt like this again. It’s a good day.”

While the “day” is not quite over: there are still another $19.7 million which must be settled before all municipal bankruptcy-related bills are resolved; the fiscal lesson appears to have been learned—or as current Supervisor William Steiner put it: “Despite the checks and balances now, and a commitment to strategic planning, there is always the chance that institutional memory will fade as time goes by and as leadership changes…The county has essentially fared well over the years despite the bankruptcy. Still, millions of dollars have been diverted from other important county departments and priorities.” The godfather of modern-day chapter 9 municipal bankruptcy, the incomparable Jim Spiotto, with whom I had the great fortune to work for so many years to achieve enactment of today’s municipal bankruptcy laws, appropriately notes: “Chapter 9 is the most extreme remedy, the last resort, if you can even call it a last resort.” Nevertheless, as he puts it, it creates a powerful tool for a municipality to avoid a potentially devastating “run on the bank.”

Out Like Flint? The State of Michigan, whose former Emergency Manager law played the critical role precipitating the grave physical and fiscal crisis affecting Flint, is now pressing the Flint City Council to vote on a long-term water contract under which Flint would lose rights to a municipal bond financed water pipeline—after the City Council two weeks ago voted to extend the city’s water delivery contract with the Great Lakes Water Authority (GLWA) until September, but delayed a vote on a longer term proposal by Mayor Karen Weaver to extend the contract for 30-years. Unsurprisingly, the state is now ramping up the pressure: in the wake of this week’s City Council vote, the state Department of Environmental Quality (MDEQ) filed suit against the city over the delay on a long-term arrangement, with the state alleging that the City Council’s refusal to approve a long-term water contract is endangering public health in the wake of the city’s lead contamination crisis. The complaint seeks a declaration that the Council’s failure to act is a violation of the federal Safe Drinking Water Act and a mandate that the city must enter into the long-term agreement with the GLWA negotiated by Mayor Weaver. The MDEQ charges that the city would be wasting its resources if it refuses to quit its current Karegnondi water pipeline plan: “The MDEQ has determined that the City Council’s failure to approve the agreement with GLWA and continued consideration of other options that may require operation of the water treatment plant places public health at risk.”

Under the proposed long-term contract, Flint would lose water rights to the Karegnondi Water Authority (KWA) (a new pipeline to Lake Huron, which is currently under construction). Thus, as Flint has awaited completion of the Karegnondi pipeline, it has been drawing its water from the Flint River—withdrawals which contributed to corroding pipes and lead contamination. Flint has been preparing to shift to KWA supplied, un-treated water in two years—with plans to construct vital upgrades to its treatment plant to meet EPA-mandated standards. In April, Mayor Weaver dropped the plan to make the switch to the bond-financed pipeline and recommended the city continue to purchase water from GLWA, believing that the GLWA supplied and treated water is more affordable—and apprehensive about the risk of another supply shift. With the city’s fiscal and physical health scarred by the water contamination crisis which came in the wake of the state-appointed emergency manager’s fateful decision to allow the city’s contract with Detroit for Lake Huron-treated water to expire—Mayor Weaver advised: “The recommendation I put forward months ago is the best option to protect public health and is supported by the public health community…[It] would also allow the City to avoid a projected 40 percent water rate increase and ensure the City of Flint gets millions of dollars to continue replacing lead tainted pipes and make much-needed repairs to our damaged infrastructure so we are able to deliver quality water to residents. The people of Flint have waited long enough for a reliable, permanent water source. Implementing my recommendation will provide that, and will allow us to move forward as a community and focus more on rebuilding our City.” Under her plan, Flint would recoup the roughly $7 million in annual debt service by transferring its KWA water rights to the GLWA.

Nevertheless, as Flint Councilmember Eric Mays described his apprehensions with regard to Flint losing its rights to the KWA pipeline, he recommended the city retain the asset: “My position is that the since the Governor won’t apologize, and the state has the money they can pay the bond; and whether we ever use the KWA asset, I don’t want, at this juncture, to turn over that asset and lose those rights under the deal with GLWA…I would be almost ready to vote for the GLWA deal if we could tweak it and get that bond off to the state and still retain the asset.” He added that he is the only Councilmember to propose an alternative to Mayor Weaver’s plan—a plan, he added, on which the Council “has done nothing.” Rather, he believes the State of Michigan, the precursor of the fiscal and physical crisis, should bear the burden for the municipal bond payments: “Since the MDEQ issued a suspicious administrative consent order for minor repairs and put it into the bond prospectus at the initial bond sale, my position is that Governor has the money and can pay the bond.”

Overcoming the Fiscal & Physical Challenges of Emerging from Municipal Bankruptcy

06/26/17

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

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

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

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

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

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

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

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

Are There non-Judicial Avenues to Solvency?

Good Morning! In this a.m.’s eBlog, we consider the increasing threat to Hartford, Connecticut’s capitol, of insolvency; then we look at the nearing referendum in Puerto Rico to address the U.S. Territory’s legal status.

Can Chapter 9 Be Avoided? As the Connecticut legislature nears ending its session, House Majority Leader Matthew Ritter (D-Hartford) has been taking the lead in efforts to commit tens of millions of state dollars to rescue the city—but, as the Leader noted: “There are going to be strings;” the price to the municipality will be greater state control—however, what that control will be and how implemented remains unclear. One key issue will be the city’s looming pension challenge: the city’s current $33 million in annual obligations is projected to increase to $52.6 million by FY2023—ergo, one option for the state would be to utilize an oversight board to re-negotiate union contracts, a move used before by the state for Waterbury—and a step Mayor Luke Bronin had proposed last year—only to see it rejected. His efforts to seek a commitment for $15 million in givebacks by the unions this year succeeded in getting only one tenth that amount, $1.5 million—and came as the local AFSCME Council recently rejected a contract which could have saved the city $4 million.

The inability to agree upon voluntary steps to address the nearing insolvency has pushed state leaders, increasingly, to discuss the creation of a state financial control board as a linchpin to any state bailout of the city—with leaders discussing a board composed evenly of state, local, and union representatives. Connecticut’s law (§7-566) requires the express prior written consent of the Governor—obligating him to submit a report to the Treasurer and General Assembly—actions taken twice before in the cases of Bridgeport (1991) and the Westport Transit District; however, each case was resolved without going through the legal process and submission of a plan off debt adjustment. Indeed, there is, as yet, little consensus in the state legislature with regard to what oversight governance would include: one option under consideration would impose a spending cap, while another would provide for state preemption of the city’s authority to negotiate with its unions: the Majority Leader notes: “I think that if we could get these concessions agreed to and reach the savings that have been targeted…it would go a long way to limiting the amount of oversight in the city of Hartford.” Whatever route to restoring solvency, tempus fugit as the Romans used to say: time is fleeing: the city’s deficit is just under $50 million, even as the departure of one of its biggest employers, Aetna, looms—and, as we had reported in Providence, the city has a disproportionate hole in its property tax base: state and local government agencies, hospitals, and universities occupy 50% of the city’s property. Add to that, the city’s current authority to levy property tax limits such collections to an assessed value of 70 percent.

Mayor Bronin, recognizing that state help is critical, notes his “goal and hope is that legislators from around the state of Connecticut will recognize that Hartford cannot responsibly solve a crisis of this magnitude at the local level alone.” State aid will be critical for an additional reason: absent such assistance, the city’s credit rating is almost certain to deteriorate, thereby driving up its costs for capital borrowing.  Adding to the urgency of fiscal action is the pending departure of Aetna from the city: even though city leaders believe the giant health care corporation will keep many of its 6,000 employees in Connecticut, notwithstanding its negotiations with several states to relocate its corporate headquarters from Hartford, Aetna has stated it remains committed to its Connecticut employees and its Hartford campus. (Aetna and Hartford’s other four biggest taxpayers contribute nearly 20% of the city’s $280 million of property-tax revenues which make up nearly half the city’s general fund revenues.) The companies have imposed a fiscal price, however: Aetna, together with Hartford Financial Services and Travelers have offered to contribute a voluntary payment of $10 million annually over the next five years to help the city avoid chapter 9 municipal avoid bankruptcy, but only on the condition there are comprehensive governing and fiscal changes. But the companies have said they want to see comprehensive changes in how Hartford is run—including vastly reducing reliance on the property tax—a tax rate which the city has raised seven times in the past decade and a half to rates 50% greater than they were in 1998. Thus, with time fleeing, the city confronts coming up with the fiscal resources to finance nearly $180 million in debt service, health care, pensions, and other fixed costs for its upcoming fiscal budget—an amount equal to more than half of the city’s budget, excluding education; that is, the city’s options are increasingly limited—and the Mayor has made clear that he will not reduce essential public safety. As the Majority Leader describes it, it is in the state’s best interest to make sure the city has a sustainable future, noting that a municipal bankruptcy would not “just affect Hartford: It would affect neighboring communities, it would affect the state, it would probably affect our credit ratings.”

Eliminating local power? Hartford City Council President Thomas Clark is apprehensive with regard to state preemption of local authority, noting hisconcern has always been if this bill is passed–in whatever form it gets passed–what does that do to the elected leadership at the local level?…And I think until we see what that actually includes, we’re just going to be uncomfortable with this concept.” From the Mayor’s perspective, he notes: “Understandably, Connecticut residents do not want their hard-earned tax dollars being used wastefully, or simply funding an increase in the cost of city government…I don’t mind anybody looking over my shoulder…and I don’t mind having the books open. I’m confident in the decisions that we’ve made.” That contrasts with his colleagues on the City Council—and the city’s unions, who have previously charged: “The Governor and this mayor are clutching at their last chance at unconditional and overreaching power.” The unions have claimed there are measures which could be taken without resorting to negating collective bargaining rights and municipal bankruptcy; yet, as we have seen in Detroit, San Bernardino, etc., those efforts were ineffective compared to the pressure of a U.S. bankruptcy judge.

Chartering a Post Insolvency Future? Voters and taxpayers in the U.S. Territory of Puerto Rice go to the polls this Sunday to vote on a referendum on Puerto Rico’s political status—the fifth such referendum since it became an unincorporated territory of the United States. Although, originally, this referendum would only have the options of statehood versus independence, a letter from the Trump administration had recommended adding “Commonwealth,” the current status, in the plebiscite; however, that recommendation was scotched in response to the results of the plebiscite in 2012 which asked whether to remain in the current status—which the voters rejected. Subsequently, the administration cited changes in demographics during the past 5 years as a reason to add the option once again, leading to amendments incorporating ballot wording changes requested by the Department of Justice, as well as adding a “current territorial status” as provided under the original Jones-Shafroth Act as an option. Notwithstanding what the voters decide, however, it remains uncertain what might happen—much less how a Trump Administration or how Congress would react. The referendum was approved last January by the Puerto Rico Senate—and then by the House, and signed by Gov. Rossello last February.