“This is how government should work.”

May 15, 2018

Good Morning! In this morning’s eBlog, we fiscally visit the small municipality of Evans, New York, a town of about 41 square miles in upstate New York which was established in 1821—seventeen years after its first settler arrived, and today home to about 14,000—but a municipality so broke after years of fiscal and financial mismanagement that it lost access to the municipal market in the wake of the withdrawal of its credit rating.

Absence of Fiscal Balance? Evans Town Supervisor Mary K. Hosler has reported that the municipality was unable to secure a loan in the wake of the withdrawal of its credit rating. In her 3rd State of the Town Address, where she advised citizens that “much can be accomplished when politics are checked at the door, and a spirit of cooperation is adopted at all levels of our town government;” she added that it was her hope that citizens would leave with “a sense that our Town is mending and moving ahead with strength and momentum,” as she noted: “By way of brief overview, as many of you are aware, the Town has been faced with numerous challenges over the past two years. Unfortunately, a decade of financial mismanagement came to a head during my first year in office, and we were faced with what turned out to be the worst financial crisis in the history of the Town. There were very few options available as the Town was facing the possibility of insolvency or a control board.”

In New York, a municipality—or its emergency financial control board, may file for chapter 9 municipal bankruptcy: the Empire State’s §§85.80 to 85.90 authorize the state legislature to create a financial control board—something created in September of 1975 for New York City; however, the New York State Constitution also contains certain fiscal limitations on municipal debt—including a limit of 9 percent of the average full valuation of said municipality’s taxable real estate for municipalities with populations under 125,000.

Supervisor Hosler introduced Evans Finance Director Brittany Gloss to present the municipality’s financial accomplishments and the progress being made in terms of economic development and, “most importantly: where we are headed,” reminding constituents that any loans would have been “costly to our residents: financially, in the loss of services, and the loss of local control,” adding:  “It has been said that the definition of insanity is doing the same thing over and over again while expecting different results. Well, we stopped the insanity, which meant we had to identify the problems and take action. Every decision was critical to move the needle in the right direction, and work the Town out of this financial disaster. These decisions were often painstaking and gut‐wrenching, but they were necessary to change the Town’s financial course. They were reviewed from all angles, and made with the taxpayer’s interest and the future of the Town of Evans in the forefront. And these difficult decisions have yielded positive results.” In her introduction, Supervisor Hosler, noting the town’s bond rating had been restored to an A rating, reported: “We’re  definitely on the recovery side of the balance sheet,” with the former bank vice president who played a key role in steering the town toward solvency, telling the audience that the municipality had turned to Erie County for assistance two years ago—or, as Erie County Comptroller Stefan I. Mychajliw recalled, the call came as the town’s payroll and bills were piling up, late at night as he was “on the couch with a horrible flu.” Nevertheless, he stated that he advises every town supervisor to let him know if they ever need anything, adding: “That night I had three or four conference calls with three of my most senior staff.”

Remarkably, by the next morning, he had already helped pull together three possible fiscal plans for the town—with the one which led to the fiscal rescue: an unprecedented $980,000 short-term loan from Erie County.

For her part, Supervisor Hosler knew when she ran for office three years ago that there were financial problems; however, it was not until she took office that she discovered thousands of missing financial transactions, internal audits which had never been completed, and a $2.6 million deficit. The fiscal depths appeared to be the result of the municipality’s debt issued in 2007, when the town had borrowed $12.6 million to install new water lines, hydrants, and a water storage tower. In that transaction, instead of putting those funds into a separate account, as required, the town combined the money with the rest of its municipal funds. Thus, a subsequent New York State audit found that $2 million of those funds were used to cover operating expenses, with the bulk for the municipality’s troubled water operations—putting the municipality on a seemingly unending reliance on tax-anticipation notes to make ends meet—that is, until the ends were at the end—or, as Supervisor Hosler described it: “Not six months into office, I’m thinking ‘Holy Lord, this is a big climb’…We had to keep moving on all fronts.”

A year and a half later, Evans has received an A credit rating from S&P Global Ratings, easing the way for the municipality to issue municipal bonds to finance $5.2 million for a new water tower, with S&P noting: “The stable outlook reflects S&P Global Ratings’ view that Evans has implemented various corrective steps to restore structural balanced operations over the past three audited fiscal years. It also reflects our expectation that the town will likely maintain strong budgetary performance, which will likely support its efforts to eliminate its negative fund balance and rebuild its budgetary flexibility.” Indeed, the town’s current deficit of $320,000 is a shadow of its former $2.6 million—and Supervisor Hosler is hopeful it can be eliminated by the end of the fiscal year—a fiscal accomplishment which could create a fiscal bonus: lower capital borrowing costs on municipal bonds the municipality hopes to issue for its water system.

The $2.6 million deficit is down to $320,000, and now Supervisor Hosler is hopeful it can be erased by the end of this year. In addition, with the credit rating, she is hoping to get a lower rate on water bonds to hopefully lower water rates. As Comptroller Mychajliw put it: “I’m just thrilled for her and the town: This is how government should work.”

Exiting from State Receivership

April 9, 2018

Good Morning! In this morning’s eBlog, we return to Flint, Michigan, where, in the wake of last week’s release by Gov. Rick Snyder of the city from receivership and state oversight—the city will have to make its own way to full fiscal and physical recovery from the many years’ of state-imposed choices—but recovery too after the former Michigan Revenue Sharing program has ceased, making the physical and fiscal challenge ever so steep.  

Setting the Path for a Strategic Recovery & a Return to Home Rule. After Gov. Rick Snyder, at the end of last week, announced he was releasing the City of Flint from receivership and state oversight, he has now announced that the State of Michigan will stop providing Flint residents with free bottled water when current supplies run out, citing nearly two years of test results showing falling lead levels in city tap water. Indeed, preliminary data from early this calendar year showed 90 percent of high-risk Flint water sites at or below 4 part per billion of lead, according to the Michigan Department of Environmental Quality. Thus, if these results hold through end of June, it would be the fourth consecutive six-month period levels have tested below the federal action level of 15 parts per billion. In the wake of the Governor’s announcement, the state plans to close four remaining water bottle distribution centers when supplies are exhausted—something that could happen within the next week, albeit water filters and cartridges will remain available at Flint City Hall.

In his announcement, the Governor said: “I have said all along that ensuring the quality of the water in Flint and helping the people and the city move forward were a top priority for me and my team…We have worked diligently to restore the water quality and the scientific data now proves the water system is stable and the need for bottled water has ended.”  The Governor did not discuss the state’s role in unbalancing and aggravating Flint’s fiscal misery—one to which the State contributed both through its former imposition of Emergency managers to preempt the city’s elected leaders—and through its elimination of state revenue sharing. By 2014, Flint had lost $54.9 million dollars in state aid—funds which would have been sufficient then to have fully paid off its annual deficit, as well as all $30 million of its municipal bond indebtedness, and still have had over $5 million in surplus

One of the hard questions now will be with regard to the potential impact of assessed property values and tax revenues in a city where those values were so harshly impacted by the fear of poisoned water: property tax assessments are mailed out every March: In 2016, those revenues, $19.7 million, made up about 23% of the city’s $81 million in general revenue. Unsurprisingly, that led to appeals to the Michigan Tax Tribunal for a poverty exemption to property taxes, with residents citing the costs associated with the water problems as one reason. Those lower assessed values added to the challenge to Genesee County to sell tax-foreclosed properties.

Mayor Karen Weaver, who has played a key role in the efforts to replace underground lead service lines at homes across the city, wrote to the Gov. last Friday to advise him that residents had “great anxiety” over the prospect of closing water distribution sites., noting: “As I have stated before and will continue to say, this is not what I want for our city, and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

In response, Gov. Snyder replied that Michigan taxpayers were not legally obligated to fund bottled water or Flint distribution sites after last September; however, “in the spirit of good faith and our continued partnership, the state has continued to provide funding for hundreds of thousands of cases of bottled water for the daily use of residents.” Noting that he had provided the Mayor with Weaver recent water testing data and methodology, he added: “Since Flint’s water system has been and continues to be well within the standards set by the federal government, we will now focus even more of our efforts on continuing with the health, education and economic development assistance needed to help move Flint forward,” adding: “I remain steadfast in that commitment.

Nevertheless, with lead service line replacement set to resume this spring, there remain not just physical and fiscal fears, but also lingering apprehensions that underground work could dislodge lead flakes from existing pipes and again contaminate home tap water. That is, parents are scared—hardly a message which would enhance assessed property values.

Thus, it might seem ironic that Gov. Snyder’s decision to end bottled water service came two days after his administration had, last Wednesday, announced it was releasing Flint from receivership—a receivership under which the fateful, devastating decision to begin drawing drinking water from the Flint River until construction of the new regional Karegnondi Water Authority pipeline to Lake Huron was completed. (The City of Flint has been getting its treated water from the Great Lakes Water Authority since October of 2015. Last November, Flint inked a 30-year agreement to stay on the Detroit area system in November 2017 in the wake of a federal court order mandating the City Council to quit delaying a decision about its permanent water source.)

A Silver Lining? Flint lead levels have dropped below 4 parts per billion so far this year, according to the Michigan environmental department; for the second half of 2017, 90 percent of high-risk sites had tested below 6 ppb. Officials also said the state has conducted “extensive flushing and testing” of unfiltered water at schools, day cares and senior homes in Flint—meaning the updated test results are finding lower levels than the statewide 10 parts per billion which Gov. Snyder would like to enforce statewide. Keith Creagh, Director of the Michigan Department of Natural Resources, noted: “Flint’s water is undoubtedly one of the most monitored systems in the country, and for the last 22 months several types of extensive testing data points have consistently supported that Flint’s water system has stabilized.”

Nevertheless, the action to stop providing bottled water to the beleaguered city led Michigan Senate Minority Leader Jim Ananich (D-Flint) to state: “It’s beyond belief that the Governor expects the folks in Flint to trust the government now, when they lied to our faces about lead in our water just a few years ago…That trust was broken, and families in Flint still don’t feel that the water in their homes is safe to drink.” Similarly, Rep. Sheldon Neeley (D-Flint) stated he was requesting the Governor to continue providing bottled water until the state has successfully addressed the “crisis of confidence” among Flint residents, noting: “From the perspective of Flint residents, it was the same data, personnel and science that failed them. They don’t trust them still.” Rep Neeley added that if the State fails to continue providing services to Flint residents, he would support any legal action the city may take “to compel the state to do its job and continue water service to its citizens.” (The State of Michigan has sent more than $350 million in state funds to Flint since late 2015, in addition to $100 million from the federal government, that has paid for bottled water, water system upgrades, and local health initiatives—with a portion of the funding mandated under a four-year, $97 million settlement reached last year between the state and a coalition which had sued in an attempt to secure safe drinking water. Under the agreement, the state agreed to spend an additional $47 million on top of already budgeted funds to replace lead pipes and provide free bottled water.) Now, an Environmental Department spokeswoman reports she expects the state’s current supply of bottled water will run out within four to seven days.

Mayor Karen Weaver, whose administration is working to replace underground lead service lines at homes across the city, published a letter to Gov. Snyder earlier Friday telling him residents had “great anxiety” over the prospect of closing water distribution sites: “As I have stated before and will continue to say, this is not what I want for our city and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

Fiscal Recovery & Home Rule

April 6, 2018

Good Morning! In this morning’s eBlog, we can safely write: free, free at last, as Michigan Governor Rick Snyder has signed an order releasing Flint from receivership and state oversight—making it the final  municipality to be under such state fiscal control. Then we turn East to the Empire State to assess whether New York will grant the same fiscal liberty to Nassau County, before dipping into the warm Caribbean to assess the ongoing fiscal and political tug of fiscal war so critical to the fiscal future of Puerto Rico. Finally, before your second cup of java, we jet back to King George, Virginia, as the rural county struggles to reduce its more than $100 million in indebtedness.

Setting the Path for a Strategic Recovery & a Return to Home Rule. Gov. Rick Snyder announced he has signed an order to release the City of Flint from receivership and state oversight—making Flint the final city in the state to exit such oversight and preemption of local authority. His decision came as the lame duck Governor, who has been under fire for his selection of emergency managers to the Genesee County city and handling of the Flint water crisis, came at the behest of the Flint Receivership Transition Advisory Board. The decision marks the end of an era of state usurpation of municipal authority—especially in the wake of the role of state imposed emergency managers in the state’s lead contamination crisis for their decisions to switch to the Flint River—decisions which led to the drinking water health crisis, as well as to the devastation of the city’s assessed property values, as well as contributed to the poisoning of thousands of citizens and the deaths of 12. The Governor stated: “City management and elected leadership have worked hard to put Flint on a stronger path…With continuing cooperation between the city and state, Flint has an opportunity to take advantage of the momentum being felt around the city in terms of economic development, which can lead to stronger budgets and improved services for residents.”

The announcement cleared the path for Michigan state Treasurer Nick Khouri’s expected signature on a “Flint RTAB resolution that repeals all remaining emergency manager orders,” with the repeal effectively securing the municipality from seven years of state emergency management, restoring full authority to the city’s Mayor and Council—or, as Mayor Karen Weaver put it: “We’ve just got our divorce…I feel real good about it…I remember when I was campaigning (in 2015) — it was one of the things I talked about, was I wanted to work on getting home rule back to the City of Flint. I know it’s how we got into this mess (the water crisis), was having an emergency manager and our voice being taken from the city and taking the power away from the local elected officials. We’ve shown that we’ve been responsible, and we’re moving this city forward.” That state preemption had come in the wake of a state financial review team opining that a “financial emergency existed” in Flint, and that the city had no “satisfactory plan in place to address the city’s fiscal problems,” leading to the preemption of local control and state imposition of an emergency manager from that time until shortly after Mayor Weaver was elected in November 2015.

Will Nassau County Be Free at Last? In a comparable governing and federalism issue in New York State, Nassau County Executive Laura Curran, who took office at the beginning of this year, has submitted a revised spending plan which relies upon new revenue initiatives, after, at the end of last year, the Nassau Interim Finance Authority had rejected a $2.99 billion budget and ordered $18 million in cuts due to revenue uncertainty. The new, proposed budget, which was submitted to the Authority on March 15th, contains $54.7 million in projected savings and revenues; however, the Authority’s Executive Director, Evan Cohen, Wednesday expressed apprehensions with regard to required legislative approvals needed for some of the revenue initiatives, even as he praised the new County Executive, who attended the Authority’s session Wednesday evening in an effort to secure support for proposed new revenues and avoiding a reliance on borrowing sought by previous administrations. Director Cohen, in a letter, wrote: “Our analysis indicates that the projected risks confronting the County will impede its chances for ending FY 2018 in [generally accepted accounting principles] balance…Strong management and legislative cooperation will be essential to any chance of success on that fiscal front,” stressing in her epistle that the County is confronted by political challenges to get the Republican-controlled Nassau County Legislature to agree to and implement some of her revenue plans: the County is seeking approval of some $9.7 million of $29 million in additional projected revenues, even as it is already confronting resistance on a proposal to change fees for Little Leagues and other non-profit groups to use county-operated athletic fields. A County spokesperson noted: “It is a viable operating budget except for the risks associated with the overwhelming cost of commercial and residential claims for tax overpayment…Once again, it is clear that the county’s poor fiscal health is intertwined with the broken assessment system and the failed the tax policies of the previous administration.” Nevertheless, the Authority identified $104.7 million of projected risks in the modified budget. County Executive Curran noted that this figure, which is up from $101.4 million of projected risks cited in the December review of the budget, reflects her administration’s decision to fund $43.8 million for to honor a court judgment mandating the payment to two men who were exonerated in the wake of a 1985 murder conviction. The Authority praised the County Executive her fiscal plan to pay off the judgment through operating revenue rather than through the issuance of municipal debt. The gold star from the Authority could begin to clear the path for exit from state oversight.

Modern Day Colonialism? The Puerto Rico Senate Wednesday voted unanimously to terminate its appropriations to fund the PROMESA Oversight Board, which, under the law, is defined as an integral part of the U.S. territory’s government; the federal act specifies that Puerto Rico’s government revenues are to be used for its funding. Puerto Rico Sen. President Thomas Rivera Schatz, an attorney and former prosecutor, who was born in New York City, as well as Gov. Ricardo Rosselló both conveyed messages of defiance to the Oversight Board, with the messages coming in the wake of Gov. Rosselló’s epistle to Chairman Rob Bishop (R-Utah) of the House Natural Resources Committee defending his independent power relative to that of the Oversight Board and denouncing the quasi-imperialist effort to preempt the authority as the elected leader of the territory—an effort unimaginable for a Member of the U.S. Congress to take against any Governor of any of the 50 mainland states. Senate President Schatz noted: “The key message we want to send here is that we do not bend, we respond to the people who chose us, and we defend the Puerto Rico citizens and the American citizens who live on the island.” He added: “If there is anyone who defends the board, I urge you to tell us if the American dream and the principles of freedom and democracy that inspired the creation of the American nation accept as good that the Board’s executive director [Natalie Jaresko] earns $650,000 with all possible luxury benefits…” adding that Ms. Jaresko “lives at the expense of the people of Puerto Rico while trying to eliminate the Christmas bonus to workers of private companies and the government…and is also trying to reduce your working hours or eliminate your vacation. And who is attacking the medical services, education, and housing of the Puerto Rican people.”

Nevertheless, by submitting a revised fiscal plan—a plan which includes only 20 of the 48 recommendations made by the PROMESA Board, regarding financial and technical matters, Governor Ricardo Rosselló yesterday ruled out any alternative, as he, during a round table at La Fortaleza, insisted that the PROMESA Board may not establish a plan in which it enters into public policy issues, a prerogative that only holds for the Puerto Rico government—as would be the case with any of the nation’s other 50 states. Nevertheless, he added that it is not about having to go to court to assert Puerto Rico’s democratic rights against the PROMESA Board. Simultaneously, the Governor ruled out giving way to a measure such as that approved by the Puerto Rico Senate to stop the disbursement of public funds for the operation of the body of Congressional creation. The projected allocation of funds for the six-year PROMESA Board term is projected to cost the taxpayers of Puerto Rico up to $1.4 billion—a figure which includes operational budget, expenses of advisors, and everything related to the representation for the process of Title III of PROMESA. Thus, the Governor added: “We do not have to go to court. That is what I would like everyone to understand. We are doing what is in law that we must do. Our preference would be that all matters that we can agree, that can be executed. That we can work in that direction, but our action if they (the PROMESA Board) certify something that is the work and the right of the elected government of Puerto Rico, which does not match the public policy of our government, that part is simply not going to take. Our warning is for what to do if what they are going to do is weaken a fiscal plan before measures that obviously are not going to be executed.”

In response to the measure approved by the Puerto Rico Senate, the Governor noted: “[H]here we must show that we are a jurisdiction of law and order, and I am following the steps of our strategy…What I have said is that in the face of the future, I will always seek to defend the people of Puerto Rico. Although I understand the feeling of the Legislative Assembly, the frustration, which is a prevalent feeling, the fact is that everyone’s approach, and we discussed it yesterday in the legislative conference…must be within the subject in law, demonstrate that the fiscal oversight board cannot implement public policy issues.” He stressed that responsible, prudent actions “are aimed at achieving a fiscal plan that is enforceable.”

Referring to the 202-page document, provided to the PROMESA Board before 5:00 pm yesterday, Gov. Rossello said that once the numbers are analyzed “We are basically about [at a] $100 million difference from where they wanted to be and where we are,” highlighting that the document, through structural reforms and adjusted fiscal measures, proposes the government will achieve a surplus of $1,400 million by FY2023—that is, a document which places Puerto Rico on the path “of structural balance and restoration of growth,” insisting it is important to approve the plan Puerto Rico submitted, because it will allow for a better position toward the judicial process for debt readjustment or Title III, comparable to a chapter 9 plan of debt adjustment. Stressing that “after implementing all government transformation initiatives and structural reforms, and incorporating the federal support received for health assistance and disasters, Puerto Rico will accumulate a surplus of $6,300 million by FY2023.”

With regard to other PROMESA proposed changes, the Governor stated that Puerto Rico had agreed to a number of the PROMESA recommendations, mentioning that more than a dozen corresponded to economic aspects, noting, for example, that Puerto Rico had requested $94.4 million in federal disaster assistance because of Hurricane Maria, but on the recommendation of the Board had reduced that by nearly half to $49.7 million. With regard to differences on estimated GNP for FY2018, he noted that it had been readjusted from a fall of negative 3.9% to negative 12%, because of the resulting economic slowdown of Puerto Rico—adding, that by next year, he anticipates a rebound of 6.9%, in part because of the flow of federal aid for post-hurricane reconstruction and disbursements from insurers, which will decrease considerably in subsequent years to 0.6% positive growth in GNP by FY2023. He noted that the revision for the population decline due to migration varied significantly from a fall to negative 0.2% in the previous plan to a decrease of negative 6.4% this year.

For his part, House Natural Resources Committee Chairman Bishop has written to the PROMESA Board to criticize it for its lack of dialogue with the creditor community, lack of sufficiently aggressive action to make structural and fiscal changes in Puerto Rico, and suggesting the Board take steps to end the local government’s separate legal representation in the Title III bankruptcy cases—an epistle which, unsurprisingly, Gov. Rosselló described as anti-democratic and colonialist. Earlier, the Governor made public his own letter to Chairman Bishop in which he had written: “Your letter is truly disturbing in its reckless disregard for collaboration and cooperation in favor of an anti-democratic process akin to a dictatorial regime imposing its will by imperial fiat and decree…I cannot and will not permit you to elevate concerns of bondholders on the mainland above concern for the well-being of my constituents.” In his epistle, the Governor made clear his view that, contrary to its claims, the PROMESA Board does not have the legal authority to “take over the role of the elected government of Puerto Rico.” He added that while the Puerto Rico government “recognizes that structural reforms are key to Puerto Rico’s future success; it does not need the Board to substitute its judgment for our own in that regard.” With regard to reducing the Title III litigation costs to Puerto Rico’s government, the Governor expressed apprehension at any effort to preempt or take away the “government’s own voice and own representation in its own restructuring process,” adding that he believes Chairman Bishop’s committee “faces a fork in the road:” It can support the process found in the Puerto Rico Oversight, Management, and Economic Stability Act, or the “other path lies obstructionist behavior that would undermine the duly elected government’s authority and legitimacy…If the committee, led by you, Mr. Chairman, persists on this ruinous path, the people of Puerto Rico and their brothers and sisters on the mainland will know who to hold accountable,” adding: “Your letter embodies everything that is wrong with this process and only serves to reinforce the dismissive and second-class colonial treatment Puerto Rico has suffered throughout its history as a territory of the United States, which undermines our efforts to address the island’s fiscal, economic, and humanitarian crises.”

Colonial Eras? Meanwhile, in the former British colonies, the aptly named King George County, Virginia, where indigenous peoples of varying cultures lived along the waterways for thousands of years before Europeans came to America, Algonquian Indians some three hundred fourteen years ago first came into conflict, when early colonists retaliated for the tribe’s attacking the farm of John Rowley, capturing and shipping 40 people, including children older than 12, to Antigua, where they were sold into slavery—paving the way for the county to be formally established in 1720, when land was split off from Richmond County, Virginia—before it was substantially reorganized in the critical year of 1776, with land swapped with both Stafford and Westmoreland Counties to form today’s political boundaries—some twenty-five years after its native son, James Madison, the nation’s fourth President, was born there. Today, the county of about 26,000, with a median family income of $49,882, is looking to pay down its debt; however, one of its primary sources of revenue is no longer available: therefore, the Board of Supervisors is working on an ambitious fiscal plan to try to reduce about 30 percent of the county’s debt over the next five years, meaning it will seek to shift some of its reserve funds in order to allocate more new funds each year to pay down its debt—an effort which one consulting firm in the state described as unique: Kyle Laux, a senior vice president of Davenport & Co., a financial counseling firm for King George, Caroline, and Spotsylvania counties, noted: “What the county administrator and board are doing is unique…and it’s unique in a really good way: It’s thinking long-term about the county.”

The effort comes after the most recent campaign, when several Board of Supervisors members campaigned on the need for King George to reduce its $113 million in accumulated debt—debt which, when current County Administrator Neiman Young came on board a little over a year ago, he described as shocking—especially that no actions had been taken to address the accumulating debt. Indeed, at a work session two months ago, Mr. Young laid out numbers that caused those listening to gasp aloud. While the county has a proverbial golden goose with the King George Landfill, it turns out that the bulk of the non-odoriferous revenues generated from the landfill is already accounted for‒for the next two decades. Indeed, even the its expansion, the landfill is expected to reach capacity in 29 years—which, in turn, means that, for the next two decades, $6.2 million of the $7.5 million the county currently receives annually from the landfill is already consumed to finance capital debt. Thus, County officials wanted to change those numbers; ergo, they asked Davenport to rustle up a fiscal plan—and, subsequently, at a recent work session, County Supervisors supported the application of some $3 million from general and capital improvement reserves to pay down capital debt, with the fiscal plan adjusted to mesh with the County’s which provide that King George must have a certain amount set aside. Thus the County is proposing to add about $1 million each year for four years from revenues. Some of that would come from additional revenues King George would receive in the wake of upcoming reassessments, with the remainder from an annual surplus. The idea is to pay down the debt in three different payments between 2019 and 2023—recognizing that because every dollar paid on the debt principal saves about 41 cents in interest, the plan would free up about $11.1 million in cash flow and pay off $6.57 million in principal, according to Mr. Laux.

However, in the world of municipal finance, little is easy. Indeed, as the Supervisors learned during the work session, the amount pulled annually from revenue sources would likely fluctuate in order to address operational needs. Thus, the Board opted to place school resource officers in two of the county’s three elementary schools; it already has officers at its middle and high schools, and is applying for a grant to place a deputy for the third elementary school. Along with other operational expenses, ergo, the county is considering the set aside of some $200,000 from FY2019 revenues, far below the $750,000 proposed—or, as Board of Supervisors Chair Richard Granger put it: “It doesn’t necessarily blow up our plan, but it’s doing something rather than nothing.” He added government debt is like a home mortgage, not a credit card.

The County’s existing debt is based on a fixed rate, and the principal is repaid annually. If supervisors opt not to go forward with plans to pay down the debt sooner, the County is scheduled to repay about half of its debt within 10 years, according to a Davenport report. However, because paying down the principal faster would free up fiscal resources, the County’s new debt reduction and mitigation plan should reduce about 30% of the county’s debt over the next five years, which equates to roughly $22 million, an amount which Administrator Young understandably described as “huge.” But Supervisor Ruby Brabo had the last word: “The landfill is going to go away, folks. We either raise your taxes 30 cents or we make sure the debt is paid off before it does.”

Charting a Municipal Rovery Budget

April 5, 2018

Good Morning! In this morning’s eBlog, we shiver on the Appomattox River at first light in the historic Civil War municipality of Petersburg, a municipality which is on the rebound from virtual insolvency—in Virginia, where the state does not specifically authorize its municipalities to file a chapter 9 petition, but does impose a debt limitation barring any municipality from incurring debt in excess of 10% of the assessed valuation of taxable properties. It is a city, which has been, since the dawn of the republic, a strategic center for transportation and commercial activities, and it is a city, which came closest of any in the Commonwealth to filing for insolvency. But, in the wake of the appointment of a former city manager—as well as a state commission to provide assessment and evaluation of municipal fiscal well-being, it is, today, a city of 32,420 that is returning to fiscal health.

Setting the Path for a Strategic Recovery. In her first budget proposal for the historic Virginia municipality of Petersburg in the wake of its insolvency and near first-ever Virginia chapter 9 municipal bankruptcy, City Manager Aretha Ferrell-Benavides, who was hired last June just as consultants charged with turning around the city’s finances told the City Council that it needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies, Manager Ferrell-Benavides proposed a rebuilding budget–even as she  expressed cautious optimism to the Mayor and Council that Petersburg can overcome the challenges it faces and continue to restore its financial standing. Thus, she presented a $73 million proposed operating budget–one which focuses on public safety, more funding for the city’s chronically underperforming schools, but cuts to city departments.

In presenting her proposed FY2019 $102.6 million budget, she told the Mayor and Council the spending plan reflects five “strategic priorities,” led by a focus on establishing the city “as a structurally stable organization with a greater focus on customer service, efficiency, accountability, and transparency.” In addition, she added, she is proposing a budget, which aims to “strengthen our fundamental policy and process to achieve long-term fiscal stabilization.”

She cited other priorities, including boosting economic development, encouraging neighborhood revitalization, promoting community engagement, and neighborhood support. Noting that Petersburg confronts some uncertainty with regard to the levels of funding which will be available from the state and federal governments, Manager Ferrell-Benavides outlined revenue and spending plans, plans which, she advised, were based on “conservatism” in their projections, as she proposed an operating budget slightly under this year’s level–a reduction of about $305,000, or about 0.3 % from the amended budget for the current fiscal year–of which approximately 72% or $73 million would be for the operating budget–a 1.5% drop from the current level, while proposing a 6.4% increase in the capital budget for the city’s Utilities Fund, noting that public safety would remain the largest funding category, at about $18.9 million, or about 26% of the total, comparable to the current level. She proposed $13.6 million for the city’s second largest budget category, Social Services, unchanged from the current level services funding, but recommended an increase of about 3% for the city’s public schools, as part of what she asserted was a continuing effort to restore cuts which had been made during the city’s financial crisis in FY2016. For next year, she proposed that the budget allocate about $9.7 million to the school system, an increase of up about $271,000 from $9.5 million this year.

In a post General Revenue Sharing era, Petersburg, with a nearly 80% black population and where more than a quarter of its families are headed by a female householder with no husband present—and more than 11% of its households headed by a single person over the age of 65—has a median family income of $33,927, with nearly a quarter of its residents below the federal poverty level. It is a city, too, living with fear: on Wednesday, more than 100 guns were taken off the streets and destroyed by the order of Petersburg Police Chief Kenneth Miller, who described these as “illegal guns that were taken off streets.” Indeed, some nine months on the job, Chief Miller has been adamant about his decision to have the guns destroyed and not sold “to put these weapons back on the street for gain…We’re not going to take weapons of destruction and try to make a profit off of that.”

But, fiscally, the city appears to be on a strong road to recovery. Manager Ferrell-Benavides noted that the challenges that the Petersburg still faces include rising health care costs for city employees, aging water and sewer infrastructure, antiquated technology, the need to recruit and retain employees, and ongoing issues with billing and collections. Nevertheless, she said the city’s efforts to date have produced results, notably an improvement in Petersburg’s municipal bond rating from junk status to investment-grade, adding that her fiscal goal is  to wean the city off its use of revenue anticipation notes. Indeed, with her proposed five-year plan in place to build Petersburg’s cash reserve fund to $6 million, a remarkable turnaround from the city’s negative balance in place at the time of the financial crisis, she testified that her proposed budget was intended to help provide stability to city government by seeing the plan through, noting: “I am committed…and our team is committed, to be here for the next five years.” Her proposed $77 million operating budget would boost spending on public safety and restore 10 percent cuts to municipal workers’ pay, while shrinking a workforce that consultants had charged was bloated and structurally inefficient. 

In the wake of her predecessor, William Johnson’s firing for his role in dipping into the city’s rainy day fund two years ago, Ms. Ferrell-Benavides said big goals within her proposal include building up the reserve, reducing reliance on grant funding, and being conservative with estimates. She testified that her proposed budget, overall, represents a $1.1 million decrease from the FY2018 amended budget, and proposes increasing the reserve to $950,000, adding that the city’s reserve funds are out of the red–and, in good gnus, that Petersburg’s bond rating has been upgraded from junk bond status. She noted that Department heads had been instructed to trim their expenses by 10%, but that cutting salaries was not an option. Her proposed budget includes $18.93 million for public safety, a $3 million increase from two years ago–with the increase part of an effort to stem the exodus of public safety workers to surrounding counties. For the city’s kids, she proposed a budget increase of $300,000 over the current $9.7 million level, telling the Mayor and Council: “This is a big step for us. And that was part of the priorities. Our goal is to annually increase our investment in the school system.” 

The consultants are scheduled to be back in Petersburg later this week and will submit an updated report in the coming weeks. Their perspective will help, as the City Council begins the process drill down into the details over the next two months through work sessions and a round of community meetings—meetings scheduled to begin at the end of this month and finish by the end of May: the Council is scheduled to make its recommended changes to the city manager on May 22nd, after which the city has scheduled a public hearing on June 5, with the Mayor Council scheduled to act on final adoption on June 12th.  

Petersburg, a city still not completely free from the grips of financial crisis, has rolled out a $73 million proposed operating budget that emphasizes public safety, more money for chronically under performing schools, and cuts to city departments.

April 3, 2018

Good Morning! In this morning’s eBlog, we consider the challenges of governance in insolvency. Who is in charge of steering a municipality, county, or U.S. territory out of insolvency? How? How do we understand and assess the status of the ongoing quasi chapter 9 municipal bankruptcy PROMESA deliberations in the U.S. territory of Puerto Rico. Then we head north to assess the difficult fiscal balancing challenges in Connecticut.

Governance in Insolvency.  Because, in our country, it was the states which created the federal government, making the U.S. unique in the world; chapter 9 municipal bankruptcy is only, in this country, an option in states which have enacted state legislation to authorize municipal bankruptcy. Thus, unsurprisingly, the process is quite different in the minority of states which have authorized municipal bankruptcy. In some states, such as Rhode Island and Michigan, for instance, the Governor has a vital role in which she or he is granted authority to name an emergency manager–a quasi-dictator to assume governmental and fiscal authority, usurping that of the respective city or county’s elected officials. That is what happened in the cases of Detroit and Central Falls, Rhode Island, where, in each instance, all authority was stripped from the respective Mayors and Councils pending a U.S. Bankruptcy Court’s approval of respective plans of debt adjustment, allowing the respective jurisdictions to emerge from municipal bankruptcy. Thus, in the case of those two municipalities, the state law preempted the governing authority of the respective Mayors and Councils.

That was not the case, however, in Jefferson County, Alabama–a municipal bankruptcy precipitated by the state’s refusal to allow the County to raise its own taxes. Nor was it the case in the instances of Stockton or San Bernardino, California: two chapter 9 cases where the State of California played virtually no role. 

Thus, the question with regard to governance in the event of a default or municipal bankruptcy is a product of our country’s unique form of federalism.

In the case of Puerto Rico, the U.S. territory created under the Jones-Shafroth Act, however, the issue falls under Rod Sterling’s Twilight Zone–as Puerto Rico is neither a municipality, nor a state: a legal status which has perplexed Congress, and now appears to plague the author of the PROMESA law, House Natural Resources Committee Chair Rob Bishop (R-Utah) with regard to who, exactly, has governing or governance authority in Puerto Rico during its quasi-chapter 9 bankruptcy process: is it Puerto Rico’s elected Governor and legislature? Is it the PROMESA Board imposed by the U.S. Congress? Is it U.S. Judge Laura Swain, presiding over the quasi-chapter 9 bankruptcy trial in New York City? 

Chairman Bishop has defended the PROMESA’s Board’s authority to preempt the Governor and Legislature’s ruling and governance authority, stressing that the federal statute gave the Board the power to promote “structural reforms” and fiscal authority, writing to Board Chair Jose Carrion: “It has been delegated a statutory duty to order any reforms–fiscal or structural–to the government of Puerto Rico to ensure compliance with the purpose of PROMESA, as he demanded the federally named Board use its power to make a transparent assessment of the economic impact of Hurricanes Irma and Maria on Puerto Rico’s fiscal conditions–and to ensure that the relative legal priorities and liens of Puerto Rico’s public debt are respected–leaving murky whether he intended that to mean municipal bonholders and other lien holders living far away from Puerto Rico ought to have a priority over U.S. citizens of Puerto Rico still trying to recover from violent hurricanes which received far less in federal response aid than the City of Houston–even appearing to link his demands for reforms to the continuity of that more limited federal storm recovery assistance to compliance with his insistence that there be greater “accountability, goodwill, and cooperation from the government of Puerto Rico…” Indeed, it seems ironic that a key Chairman of the U.S. Congress, which has voted to create the greatest national debt in the history of the United States, would insist upon a quite different standard of accountability for Puerto Rico than for his own colleagues.

It seems that the federal appeals court, which may soon consider an appeal of Judge Swain’s opinion with regard to Puerto Rico’s Highway and Transportation Authority not to be mandated to make payments on its special revenue debt during said authority’s own insolvency, could help Puerto Rico: a positive decision would give Puerto Rico access to special revenues during the pendency of its proceedings in the quasi-chapter 9 case before Judge Swain.

Stabilizing the Ship of State. Farther north in Connecticut, progressive Democrats at the end of last week pressed in the General Assembly against Connecticut’s new fiscal stability panel, charging its recommendations shortchange key priorities, such as poorer municipalities, education and social services—even as the leaders of the Commission on Fiscal Stability and Economic Growth conceded they were limited by severe time constraints. Nevertheless, Co-Chairs Robert Patricelli and Jim Smith asserted the best way to invest in all of these priorities would be to end the cycle of state budget deficits and jump-start a lagging state economy. The co-chairs aired their perspectives at a marathon public hearing in the Hall of the House, answering questions from members of four legislative committees: Appropriations; Commerce; Finance, Revenue and Bonding; and Planning and Development—where Rep. Robyn Porter (D-New Haven) charged: “I’m only seeing sacrifice from the same people over and over again,” stating she was increasingly concerned about growing income inequality, asking: “When do we strike a balance?” Indeed, New York and Connecticut, with the wealthiest 1 percent of households in those states earning more than 40 times the average annual income of the bottom 99 percent, demonstrate the governance and fiscal challenge of that trend. In its report, the 14-member Commission made a wide array of recommendations centered on a major redistribution of state taxes—primarily reducing income tax rates across the board, while boosting the sales and corporation levies. Ironically, however, because the wealthy pay the majority of state income taxes, the proposed changes would disproportionately accrue to the benefit of the state’s highest income residents—in effect mirroring the federal tax reform, leading Rep. Porter to question why the Commission made such recommendations, including another to do away immediately with the estate tax on estates valued at more than $2 million, but gradually phase in an increase to the minimum wage over the next four years.  From a municipal perspective, Rep. James Albis (D-East Haven), cited a 2014 state tax incidence report showing that Connecticut’s heavy reliance on property taxes to fund municipal government “is incredibly regressive,” noting it has the effect of shifting a huge burden onto lower-middle- and low-income households—even as the report found that households earning less than $48,000 per year effectively pay nearly one-quarter of their annual income to cover state and local taxes. Rep. Brandon McGee (D-Hartford), the Vice Chair of the legislature’s Black and Puerto Rican Caucus, said the Committee’s recommendations lack bold ideas on how to revitalize Connecticut’s poor urban centers—with his concerns mirrored by Rep. Toni E. Walker (D-New Haven), Chair of the House Appropriations Committee, who warned she fears a commission proposal to cut $1 billion from the state’s nearly $20 billion annual operating budget would inevitably reduce municipal aid, especially to the state’s cities. Co-Chair Patricelli appeared to concur, noting: “Candidly, I would agree we came up a little short on the cities,” adding that the high property tax rates in Hartford and other urban centers hinder economic growth: “They really are fighting with one or more hands tied behind their backs.”

The ongoing discussion comes amidst the state’s fiscal commitment to assume responsibility to pay for Hartford’s general obligation debt service payments, more than $50 million annually—a fiscal commitment which understandably is creating equity questions for other municipalities in the state confronted by fiscal challenges. Like a teeter-totter, balancing fiscal needs in a state where the state itself has a ways to go to balance its own budget creates a test of fiscal and moral courage.

The Fiscal & Legal Challenges of Smaller Municipalities

eBlog

March 28, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal, physical, intergovernmental, and legal challenges to Flint, Michigan—as too many parties seek to plead innocent to state actions, which have wreaked such devastating fiscal and physical costs. Then we head east to one of the nation’s oldest municipalities, Bristol, Virginia, which appears to be on the precipice of chapter 9 municipal bankruptcy.

Fiscal Fraud & Unfiscal Federalism? Andy Arena, the FBI Detroit office’s former director, and lead investigator into the City of Flint’s water crisis, this week testified before the Michigan Senate Appropriations Subcommittee on General Government that he has launched a new probe amid allegations of “financial fraud” and “greed” as critical factor behind the fateful decision years ago to switch the city’s water source, stating: “Without getting too far into depth, we believe there was a significant financial fraud that drove this,” adding that the alleged scheme benefited “individuals.” Or, as he testified: “I believe greed drove this.”

His testimony came as Michigan Attorney General Bill Schuette continued the investigation he started in the wake of Gov. Rick Snyder’s declaration, two years ago, of a state of emergency in the wake of the severe and life threatening lead water contamination, as the criminal probe, which has already led to charges against 15 local and state officials—charges resulting in four plea deals and preliminary exams involving six defendants, including state Health and Human Services Director Nick Lyon and Chief Medical Executive Eden Wells continue. Now, the investigation is focusing on the potential motivation behind the decision to switch the City of Flint from the Detroit area water system to the new Karegnondi Water Authority—a decision which, when Flint opted to join the regional authority, had terminated its arrangement with the Detroit water system and opened the fateful portals to drawing water from the Flint River as an interim source, e.g. the dreadful step which resulted in contaminated drinking water and calamitous drops in assessed property values—not to mention grave governing questions with regard to the culpability of state appointed emergency managers preempting local elected leaders. (Within 17 months, the decision, made while the city was run by state-appointed emergency managers, was reversed after outbreaks of Legionnaires’ and increased levels of bacteria, total trihalomethanes and lead were found in water. Five years ago, in March, Flint’s City Council members voted 7-1 to join a new regional provider, rather than remain a customer with the Detroit system—as it had for decades. Three days earlier, Flint Emergency Manager Ed Kurtz had approved the agreement, notwithstanding then-State Treasurer Andy Dillon’s skepticism with regard to whether the new regional authority made financial sense.).

Last week, when Sen. Mike Nofs (R-Battle Creek) asked whether the probe involved local, state, and federal entities, Mr. Arena responded: “It kind of cuts across all lines right now…I don’t know that they were working so much in concert, but the end game was people were trying to make money in different ways.” He reiterated that his FBI team has been heading the Flint criminal investigation for more than two years; however, he testified he was uncertain when it might end, adding: “We’re moving at lightning speed…I can assure everyone here that we are working as quickly as we possibly can: Our bottom line is we want justice for the people of Flint, and we have to do that methodically.” Unsurprisingly, he did not detail what “justice” might mean: would it mean reparations for the fiscally and physically devastated city and its taxpayers?

The case, as we have previously written, commenced after the Governor, five years’ ago, preempted all municipal authority via the appointment of Ed Kurtz as the city’s Emergency Manager, effectively preempting any municipal authority for the brewing fiscal, physical, and health catastrophe; Mr. Kurtz, in this preemptive capacity then signed off on the fateful order in June of 2013 to allow the “upgrading of the Flint Water Plant to ready it to treat water from the Flint River to serve as the primary drinking water source for approximately two years and then converting to KWA delivered lake water,” a source which the city used from April of 2014 until October 2015, when the city was reverted to the Detroit system in the wake of an outbreak of Legionnaires’ cases and evidence of elevated levels of lead in the city’s children—a most ill omen, as it signaled to parents the prohibitive cost of health and safety to continue to reside in the city—and the unlikelihood of any ability to sell their homes at any kind of a reasonable price. Mayhap worse, last October, a federal judge dismissed objections by Flint’s City Council and paved the way for Flint officials to move forward with a long-term contract with the Detroit area Great Lakes Water Authority—a position supported by Mayor Karen Weaver as vital to avert chapter 9 municipal bankruptcy. Thus, Mayor Weaver, Gov. Snyder, and the EPA supported a proposed 30-year agreement with the Great Lakes Water Authority—a position on which the Flint City Council did not agree—leading to a successful suit by the Michigan Department of Environmental Quality to compel approval of the agreement.

Concurrently, in a related trial on these physical and fiscal event, before a Genesee District Court Judge in a trial where the state’s Chief Medical Officer has been charged with crimes related to the Flint water crisis, a researcher, Virginia Tech Professor Marc Edwards, testified before Genesee District Court Judge William Crawford yesterday that Dr. Eden Wells had sought to “get to the truth of the matter,” and that had seen no evidence of Dr. Wells having committed crimes during her preliminary examination on potential charges including involuntary manslaughter.(Prosecutors charge that Dr. Wells, a member of Gov. Snyder’s cabinet, failed to protect the health and welfare of Flint area residents, including victims of Legionnaires’ disease outbreaks in the Flint area while the city used the Flint River as its water source in parts of 2014 and 2015: Dr, Wells is charged with attempting to withhold funding for programs designed to help the victims of the water crisis and with lying to an investigator about material facts related to a Flint investigation by the Michigan Attorney General’s Office.) 

Professor Edwards is among those who believe that Flint’s switch to river water without proper treatment to make it less corrosive triggered both elevated lead and increased Legionella bacteria in large buildings in Flint at the time, adding that he disagreed with the approach taken by the Flint Area Community Health and Environment Partnership, which contracted with the state to find the root cause of the Legionella outbreaks, which officials have reported lead to the deaths of at least a dozen people in Genesee County while the river was in use. Thus, Professor Edwards notes, instead of focusing on the potential for the bacteria in water filters, state fiscal resources would have been put to better use if directed to investigate cases tied to large buildings, particularly hospitals, where his own testing showed very high levels were present. Moreover, in response to the query whether Dr. Wells did anything to discourage his research, Prof. Edwards responded: “To the contrary. She seemed interested, and she encouraged it.”

The Fiscally Desperate State of a Small Municipality. Far to the east of Flint, in one of the nation’s oldest municipalities, Bristol, Virginia, a municipality which, in 1880, had a population of 1,562—a population which gradually grew to 19,042 in 1980, before waning to 16,060 by 2016. The area of what is, today, Bristol, was once inhabited by early Americans, Cherokee Indians, with the name, according to legend, because numerous deer and buffalo met there to feast in the canebrakes; it was subsequently renamed the site Sapling Grove, and then, in 1890, finally settled upon as Bristol. It used to have a fort on a hill overlooking what is now downtown Bristol: it marked an important stopping-off place for notables, including Daniel Boone and George Rogers Clark, as well as hundreds of pioneers, who found Bristol, a former trading post, way station, and stockade, to be a cornerstone to opening up a young nation to the West.  Now, a Virginia Auditor of Public Accounts (APA) new report has found the municipality may require state fiscal assistance to address its significant debt tied to The Falls development and landfill operations—having, at the end of last week, in its fiscal distress monitoring report of local governments, assessed the small city as scoring poorly on a set of financial metrics, including debt overload, cash flow issues, revenue shortfalls, deficit spending, billing issues, and a lack of qualified staff. The small municipality today has a median household income of $27,389. Approximately 13.2% of families and 16.2% of the population fall below federal poverty levels–including 25.8% of those under age 18. The Auditor’s report notes: “During follow-up with the City of Bristol, we observed two primary issues that we concluded are contributing to a situation of fiscal distress at the city: issues specific to the operational sustainability of its solid waste disposal fund and the debt and future revenues related to The Falls commercial development project,” positions which Bristol City Manager Randy Eads noted “exactly” portrayed the city’s financial problems, as opposed to preliminary findings released last year which included some incorrect information. Specific findings found that the city does not have unrestricted reserves to use for a revenue shortfall or unforeseen situations, and that the city is not in the “most desirable” position to meet its fiscal obligations without obtaining additional revenues.

As part of the report, the APA issued written notification to Gov. Ralph Northam, the General Assembly’s money committees, the Secretary of Finance, and city officials detailing these specific issues and recommending that Bristol may warrant further assistance from the state to help assess and stabilize areas of concern—with such potential state assistance including an independent consultant reviewing the viability of landfill operations and developing long-range financial forecasts for revenue—each items sought by the city. Or, as Manager Eads noted: “That’s something we requested from the APA. It’s our understanding there’s $500,000 the state has set aside to help low-scoring localities with some of their financial issues…We requested funds for a detailed financial analysis of the landfill and requested funds for a financial planning firm to help us with a three-, five- and 10-year financial forecast.” Manager Eads reports he plans to meet with Virginia legislators to seek support. Bristol’s solid waste fund has $33.5 million in long-term bond debt; the municipality’s general fund continues to transfer funds to pay bills, according to the report. The report notes that city officials completed a significant refinancing of all short-term debt earlier this year; however, debt remains a challenge: “However, the city’s increasing debt service costs continue to be a concerning factor, as Bristol’s ability to pay the debt service will be contingent upon sufficient future revenues received from The Falls project,” according to the report. The auditor’s office notes the city is entitled to additional sales tax revenues under provision of a state law, but notes “Bristol continues to experience some uncertainty with its long-term revenue stream and future growth after all phases of The Falls project are implemented.”

Fiscal Surgery to Restore Stability & Accountability

March 20, 2018

Good Morning! In this morning’s eBlog, we consider options for addressing serious fiscal challenges in Connecticut, before journeying to the U.S. territory of Puerto Rico, where we try to assess whether there might be too many fiscal cooks in the kitchen.

The State of the Constitution State. In the wake of the unveiling of a series of diverse and likely fiscally painful recommendations, the Connecticut Commission on Fiscal Stability and Economic Growth has challenged the state’s legislature to adopt the proposal. Moreover, the Connecticut Conference of Municipalities, notwithstanding that full adoption could jeopardize state aid to local governments in the state, endorsed the full report, finding it would offer more long-term benefits for the state and its municipalities. The Commission report recommendations focused on new long-term benefits for the state and its communities, with its recommendations focused on new revenue-raising options for cities and towns and collective bargaining changes which could prove to be vital reforms which could more than offset the steep reduction in the state budget. The Conference’s Executive Director Joe DeLong noted: “Connecticut has long been the land of steady habits, but the precarious fiscal condition that still plagues the state budget demands that Connecticut change key core public policies—now,” adding the Commission report echoes many of the recommendations the Conference proposed to state legislators just one year ago: “We can wait no longer for substantive change that will set the state on a sustainable economic path that will benefit hard-pressed residents and businesses.”

The 14-member Commission, which was created last October as part of the new state budget, was charged with the task of helping to navigate Connecticut through one of its worst fiscal crises in modern history: the state not only lagged the majority of states in recovering from the great Recession, but also is confronted by surging public retirement benefit costs tied to more than 70 years of inadequate contributions—creating a fiscal challenge projected to place unprecedented pressure on state finances for at least the next 15 years.

Unsurprisingly, the growing costs of financing retirement pensions of post-retirement health care benefits has acted like a python in squeezing aid to the state’s cities and towns. Thus, the Conference found some solace from the commission recommendations, which might grant greater fiscal flexibility to the state’s communities to manage their own budgets and programs. Among the key recommendations: 

  • Authorizing municipal coalitions to add one-half of 1 percentage point to the sales tax rate to fund regional services and diversify local budgets that rely excessively on property taxes.
  • Allowing regional coalitions of municipalities to raise supplemental taxes for capital projects by special referendum.
  • Allowing communities, through regional councils of government, to charge fees on nonprofit colleges and hospitals, which currently are exempt from local property taxation.
  • Permitting towns to increase fees for use of the public rights of way, storm water fees, hotels, car rentals, restaurants, and other services.
  • Urging the state to increase the grants it already provides to restore some of the funds communities lose because state property is exempt from local taxation.

The fiscal stability panel also proposed several changes to collective bargaining, which could help the state’s local governments, including:

  • Allowing communities to use non-union labor on rehabilitation projects costing less than $1 million;
  • Providing communities with a single, neutral arbitrator for labor negotiations;
  • And exempting a city or town’s emergency budget reserve from being used to pay for labor contract settlements.

The Commission’s recommendation that the Legislature reduce the state annual operating budget approximately 5%, or about $1 billion per year left unclear what areas would be targeted, albeit the co-Chairs said that recommendation is not intended to target the nearly $3 billion Connecticut spends annually on major statutory grants to cities and towns; rather, their intent appears to be that the Legislature could achieve these savings via privatizing more services, seeking other efficiencies, and trimming labor costs wherever possible. The Connecticut Business and Industry Association and other business leaders have been urging lawmakers to revisit six reports prepared in 2010 and 2011 by a business coalition known as The CT Institute for the 21st Century. The coalition outlined strategies to cut state spending by hundreds of millions of dollars in total spread across several areas, including reductions in public-sector benefits. These strategies, many of which would take several years, also involved prisons, long-term health care, public-sector benefits, and use of technology to deliver public services. Nevertheless, a number of state legislators questioned the reality of a $1 billion reduction, given that nearly two-thirds of the state budget involves retirement obligations, payments on bonded debt, Medicaid, and other largely fixed costs, without constraining aid to cities and towns.

A Consulting Estado de Emergencia? (State of Emergency) Puerto Rico’s Executive and Legislative branches, during the Hurricane Maria state of emergency, agreed to 1,408 consulting and professional contracts totaling $ 70.1 million, according to an analysis of El Nuevo Día. That effectively translates into approximately 16 contractual agreements for each of the 88 days in which 3.5 million Puerto Ricans were almost in survival mode in the wake of last September’s hurricane—all contracts which were subject to the scrutiny of the Chamber and the Senate of Puerto Rico, as well as the PROMESA Oversight Board with regard to any contract which exceeded $10 million. It appears that nearly half of the consulting and professional services agreements agreed upon during the emergency period registered with the Office of the Comptroller were given mainly to individuals and several dozen firms which provide services to the government under an “administrative consulting” agreement and services: agreements totaling $24 million, with the largest contracts provided via three amendments to agreements of the Department of Health and the Special Program of Supplementary Nutrition for Pregnant, Lactating, Postpartum, Infants and Children from 1 to 5 years old (WIC) with the company to ManPower for temporary employment services. In addition, there is a $ 3.1 million contract from the Office of Management and Budget (OGP) with Deloitte & Touche for financial consulting—which has subsequently signed another contract with the office which will be in charge of administering the federal funds Puerto Rico receives for recovery from Hurricane Maria. Meanwhile, the firm KPMG received an amendment to a contract with the Public-Private Partnerships Authority (AAPP) of $ 947,189. Based on data from the Comptroller, during the emergency, when it was known that the agencies and schools were not operating properly and the courts recessed their work substantially, the agencies also granted 123 contracts for “legal consulting” and “legal services” for $ 4.6 million—with another 31 contracts valued at $2.6 million to accounting firms.  The list of administrative consultants also includes several contracts with amounts close to $1 million, with some of the largest granted by the Bureau for Emergency Management and Disaster Management to the firms Consul-Tech Caribe and DCMC LLC for $ 900,000 each.