Exiting from Municipal Bankruptcy


March 16, 2018

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

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

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

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

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

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

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

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


The Steep & Winding Road Out of Municipal Bankruptcy and State Oversight

February 26, 2018

Good Morning! In this morning’s eBlog, we consider the hard road out of chapter 9 municipal bankruptcy and state oversight.

Motor City Races to Earn the Checkered Flag. Detroit Mayor Mike Duggan last Friday presented his proposed annual budget to the City Council, informing Councilmembers that, if approved, his $2 billion budget would be the keystone for formal exit from Michigan state oversight: that is, he advised he believed it would lay the ground work for ending the Financial Review Commission created in the wake of the city’s chapter 9 municipal bankruptcy: “Once we get this budget passed, we have the opportunity to get out from active state oversight…I don’t have enough good things to say about how the administration and Council has worked together.” As we had noted last month, Michigan Treasurer Nick Khouri, the Chair of the state oversight commission, made clear that the trigger to such an exit would be for the city to post its third straight budget surplus—with the Treasurer noting: “I think everyone, including me, has just been impressed with the progress that’s been made in the city of Detroit, both financially and operationally.”

For Detroit to fully emerge from the nation’s largest ever municipal bankruptcy, it must both comply with the provisions of the federal chapter 9 bankruptcy code, which provides that the debtor must file a plan (11 U.S.C. §941); neither creditors nor the U.S. Bankruptcy Court may control the affairs of a municipality indirectly through the mechanism of proposing a plan of adjustment of a municipality’s debts that would in effect determine the municipality’s future tax and/or spending decisions: the standards for plan confirmation in municipal bankruptcy cases are a combination of the statutory requirements of 11 U.S.C. §943(b) and portions of 11 U.S.C. §129. Key confirmation standards provide that the federal bankruptcy court must confirm a plan if the following conditions are met: the plan complies with the provisions of title 11 made applicable by sections 103(e) and 901;the plan complies with the provisions of chapter 9; all amounts to be paid by the debtor or by any person for services or expenses in the case or incident to the plan have been fully disclosed and are reasonable; the debtor is not prohibited by law from taking any action necessary to carry out the plan; except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that on the effective date of the plan, each holder of a claim of a kind specified in section 507(a)(1) will receive on account of such claim cash equal to the allowed amount of such claim; any regulatory or electoral approval necessary under applicable non-bankruptcy law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval; and the plan is in the best interests of creditors and is feasible.

Unlike in a non-municipal corporate bankruptcy (chapter 11), where the requirement that the plan be in the “best interests of creditors,” means in the “best interest of creditors” if creditors would receive as much under the plan as they would if the debtor were liquidated; under chapter 9, because, as one can appreciate, the option of Detroit to sell its streets, ambulances, and other publicly owned municipal assets is simply not an option, in municipal bankruptcy, the “best interests of creditors” test has generally been interpreted to mean that the plan must be better than other alternatives available to the creditors. It is not, in a sense, different from a Solomon’s Choice (Kings 3:16-28): that is, in lieu of the alternative to municipal chapter 9 bankruptcy of permitting each and every creditor to fend for itself, the federal bankruptcy court instead seeks to interpret what is in the “best interests of creditors” as a means to balance a reasonable effort by the municipality against the obligations it has to its retirees, municipal duties, service obligations, and its creditors—albeit, of course, leaving the door open for unhappy parties to object to confirmation, (see, viz. 11 U.S.C. §§ 901(a), 943, 1109, 1128(b)). The statute provides that a city or municipality may exit after a municipal debtor receives a discharge in a chapter 9 case after: (1) confirmation of the plan; (2) deposit by the debtor of any consideration to be distributed under the plan with the disbursing agent appointed by the court; and (3) a determination by the court that securities deposited with the disbursing agent will constitute valid legal obligations of the debtor and that any provision made to pay or secure payment of such obligations is valid. (11 U.S.C. §944(b)). Thus, the discharge is conditioned not only upon confirmation, but also upon deposit of the consideration to be distributed under the plan and a court determination of the validity of securities to be issued. (The Financial Review Commission is responsible for oversight of the City of Detroit and the Detroit Public Schools Community District, pursuant to the Michigan Financial Review Commission Act (Public Act 181 of 2014); it ensures both are meeting statutory requirements, reviews and approves their budgets, and establishes programs and requirements for prudent fiscal management, among other roles and responsibilities.)

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved from its last place ranking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining to 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he added. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the resources allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge, and East English Village; and boosting animal control so it can operate seven days a week.

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said it is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirementCouncilman Scott Benson said the Mayor presented a “conservative fiscal budget” which allows Detroit to live within its means. The Councilmember said prior to the meeting that he had hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals, “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.

That early checkered flag for the Motor City ought to help salve the city’s reputational wounds in the wake of the KO administered to the city’s bid to host Amazon. Indeed, as Quicken Loans Chairman Dan Gilbert wrote, it was Detroit’s negative reputation, not a lack of talent which knocked it out of the running for an Amazon headquarters, as he tweeted to the 60-plus member bid committee who crafted Detroit’s bid: “We are all disappointed,” referring to the city’s failed bid to make the cut for the top 20 finalists. Nevertheless, Mr. Gilbert urged members not to accept the “conventional belief” that Detroit had fallen short because of its challenges with regional transportation and attracting talent; rather, he wrote, the “elephant in the room” was the nasty reputation associated with the post-bankruptcy city’s 50-plus years of decline: “Old, negative reputations do not die easily. I believe this is the single largest obstacle that we face…Outstanding state-of-the-art videos, well-packaged and eye-catching proposals, complex and generous tax incentives, and highly compelling and improving metrics cannot, nor will not overcome the strong negative connotations that the Detroit brand still needs to conquer.” Regional leaders had been informed that Detroit’s bid had failed to move on because of inadequate mass transit and questionable ability to attract talent.

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved for its last place raking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he said. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the money allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge and East English Village, and boosting animal control so it can operate seven days a week. 

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said Detroit is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirementCouncilman Scott Benson said the mayor presented a “conservative fiscal budget” that allows Detroit to live within its means, having said, prior to the meeting, that he hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals. “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.

Fiscal Recoveries from Fiscal & Physical Storms


February 23, 2018

Good Morning! In this morning’s eBlog, we consider the municipal fiscal threats to Puerto Rico and the U.S. Virgin Islands, before taking a fiscal spin on the roulette tables of Atlantic City.

Fiscal Hurricane Fallout. Jaison R. Abel, Jason Bram, Richard Deitz, and Jonathan Hastings of the New York Federal Reserve this week, in their examination of the fallout in the wake of Hurricanes Irma and Maria on the economies of the U.S. territories of Puerto Rico and the U.S. Virgin Islands noted that both were suffering from significant economic downturns and fiscal stress well before the storms hit nearly six months ago—noting that in their wake, the initial job losses in Puerto Rico totaled about 4 percent; in the U.S. Virgin Islands, job losses were double that—and there has been no rebound thus far. The authors wrote that these losses are considerably steeper than what has typically been experienced in the wake of most significant U.S. natural disasters, albeit not nearly as devastating as Hurricane Katrina’s unprecedented impact on the New Orleans economy more than a decade ago. The Fed three noted that domestic air passenger data indicate that from last September through November, more than 150,000 people left Puerto Rico, net of arrivals, and that the number who left the U.S. Virgin Islands was proportionally even larger. Thus, they opined, looking ahead, recovery will be affected by a variety of factors: especially: the level degree of out-migration, the level of external aid these economies receive, and the effectiveness of fiscal and other reforms—especially in Puerto Rico. They noted that Hurricane Maria was the most devastating hurricane to slam Puerto Rico in nearly a century—leaving an enormous toll of lives, homes, and businesses lost or suffering enormous damage, devastation of most crops and other agricultural assets, and severe havoc to its public infrastructure, adding that both for responding to the human and economic misery, the island’s experiencing of the most severe power outage in U.S. history means “it may still take months to fully restore electricity and other critical infrastructure,” describing the devastation to the U.S. Virgin Islands as similar, especially St. Croix, where I taught school long before most readers were born.

Nevertheless, the Fed Gang of Three wrote that recovery is underway in both Puerto Rico and the U.S. Virgin Islands, reporting that, as of last month, satellite images of nighttime lights suggest roughly 75 percent power restoration for Puerto Rico overall, with the southern and western parts of the island seeing nearly full restoration, and San Juan close to that level. In contrast, however, they determined that the eastern end of Puerto Rico and many interior areas have lagged substantially. As of the end of last year, they reported that the labor market has begun to recover in Puerto Rico: employment in leisure and hospitality (largely restaurants), the sector usually most affected by natural disasters, have started to bounce back in Puerto Rico, albeit not yet in the U.S. Virgin Islands. And, as often happens following natural disasters, jobs are being added in both Puerto Rico and the U.S. Virgin Islands in industries involved in clean-up, restoration, and rebuilding efforts—most notably, construction. Thus, they believe Puerto Rico and the U.S. Virgin Islands are confronted with a long and difficult recovery process ahead—a fiscal and physical process made all the more difficult because of poor economic and fiscal conditions prior to the storms.  

Financing a Recovering City’s Emergence from a State Takeover. The Atlantic City Council has voted approval the issuance of debt to pay off millions the municipality owes to pay off deferred pension and health care contributions from 2015—after, in 2015, state officials had urged the delay of some $37.2 million in pension and health care contributions—a delay which, today, officials note has added up to about $47 million with the added interest. In the ordinance the Council voted Wednesday 6-3 to authorize, Atlantic City can now issue as much as $55 million worth of municipal bonds to help finance those accrued debts, with the vote coming in the wake of a lengthy discussion between the Council and 13 residents, each of whom spoke in opposition: some urged the elected leaders to table the matter for further review, while others questioned who had authorized the deferment, whether the city was obligated to pay the interest rate, and whether there were other options to finance the debt—debt which, as of the end of the calendar year, had reached more than $344 million in outstanding debt. Timothy Cunningham, New Jersey’s local government services director and now the state appointed takeover appointee, has explained to residents the option to bond for the deferred payments would prevent it from having to go into the general fund—that is in lieu of the city being forced to raise tax rates: the municipal bond interest payments would instead be financed via the Investment Alternative Tax from casinos, which, under state takeover regulations, are redirected to be used in Atlantic City for debt service, he noted. The City Council had originally slated the issue for a vote last month, but withdrew the scheduled vote in order to host two public hearings on the matter.

At the session, Councilman Jesse Kurtz said he would have preferred a different resolution to making the payments, questioning whether Atlantic City would be obligated to pay back the payments’ interest if the deferment was at the suggestion of the State, noting it did not “sit right” with him to vote for the ordinance without a formal statement from Gov. Phil Murphy’s administration authorizing it: “When we’re short on money, the answer is to borrow money…I don’t like that.” Atlantic City Council President Marty Small responded that after the ordinance was pulled last month, city and state officials asked the Governor’s administration for forgiveness on the payment; however, the response was negative, adding that the city knew the day was coming to pay the deferred payments—and that such payment was the city’s obligation: to act otherwise, he noted, would be “putting the taxpayers in harm’s way” if they did not act to borrow to make the payments: “It’s not us versus you: What affects you, affects us.” Councilmember Kurtz, along with Councilmen Moisse Delgado and Jeffree Fauntleroy II, voted against the measure, while Councilmembers Small, George Tibbitt, Chuen “Jimmy” Cheng, William Marsh, Kaleem Shabazz, and Aaron Randolph voted aye. For his part, Mayor Frank Gilliam, told his colleagues in opposing the matter, the city needs to come up with “better ways to deal with our finances,” regardless of whether council passed the bond ordinance: “We’re still $400 million in debt.”


The Precipitous Chapter 9 Road to Recovery

January 3, 2018

Good Morning! In this a.m.’s Blog, we consider the fiscal, scholastic, and governing challenges of the city emerging from the largest chapter 9 municipal bankruptcy in U.S. history.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery.  After years of failed leadership, financial mismanagement, quasi-chapter 9 municipal bankruptcy which led to a state takeover; the state of Detroit’s Public Schools Community District remains vital to encouraging young families to move back into the city—especially in the wake, last month, of DPS failing to meet critical deadlines necessary to be eligible for vital state aid.  (In 2016, Michigan enacted a $617 million DPS bailout, as we have previously noted.) That action separated the district’s debt from a new district that could start fresh. Now, renewed state intervention would be a critical fiscal step backwards; thus it is fortunate that Superintendent Nikolai Vitti appears to be on top of the situation: he warns that disciplinary action will follow in the wake of DPS’ failure to meet these deadlines, making it critical the Superintendent can trust his staff. It is especially vital now in the wake of a second credit rating upgrade—with the report card having recorded, last month, that DPS that Detroit Public Schools had lost out on $6.5 million in fiscal assistance to whittle down its old debt, because DPS officials had failed to turn in paperwork homework on time, according to Superindent Vitti (Michigan reimburses its public school districts for debt loss under Public Act 86 if they met the Aug. 15 deadline; thus, Superindent Vitte, on Monday, reported: “At this point, Detroit Public Schools is not eligible for the $6.5 million-dollar reimbursement from the state…After speaking with state officials, the available funds have already been disbursed to other qualifying entities. However, we will continue to petition the state to receive the reimbursement.”

Under the agreement, Detroit’s old district is still obligated to pay down its past operating debt; thus, the system’s failure to meet two deadlines last year cost not $6.5 million in aid from the state to help pay down its debt, but also a loss of public trust and confidence. As Superintendent Vitte noted last month: “At this point, Detroit Public Schools is not eligible for the $6.5 million-dollar reimbursement from the state: After speaking with state officials, the available funds have already been disbursed to other qualifying entities.” According to Superintendent Vitti, former CFO Marios Demetriou received the documents, but never completed them or sent them to the state. Even though the missed payout from the state is not expected to harm the day-to-day operations of the new district, it appears to curry a D grade; more importantly, it delays repayment of DPS’ legacy debt—or, as Superintendent Vitti notes: it is “unacceptable….The inability to submit the reimbursement form on time is a vestige of the past that continues to haunt the district…This is directly associated with the need for stronger leaders, systems, and processes. The individuals who were closest to the responsibility to submit the form will no longer be with the district.”

The unscholarly missteps appear to have contributed to ongoing doubts about the city’s fiscal acumen: The Motor City’s credit ratings remain deep in junk-bond territory, even after S&P Global Ratings last month upgraded Detroit’s credit rating from B to B+, while Moody’s last October had lifted its to B1 in the wake of the city’s launch of a new web portal to improve investor access to its financial data and bond offerings, Stephen Winterstein, a Managing Director and chief municipal fixed income strategist at Wilmington Trust Investment Advisors, Inc. to note he was “really optimistic about what they have been doing in terms of disclosure and the investor website is definitely a move in the right direction: The road to recovery is a long one, and I think that Detroit is doing the right things.”

Since exiting from the largest chapter 9 municipal bankruptcy in American history just three years ago last month, Detroit has issued debt twice: in August 2015 with $245 million of local government loan program revenue bonds, and in August 2016 with a $615 million general obligation/distributable state aid backed bond sale—albeit both issuances were via the Michigan Finance Authority, with the first enhanced with a statutory lien and intercept feature on the city’s income taxes. CFO John Naglick said that Detroit is also close to deciding on the underwriting team for a request for proposals it launched in October to find banks to lead a tender offer and refunding of its unsecured financial recovery municipal bonds with the aim of lowering its costs and easing a future escalation of debt service. For its part, S&P, in its upgrade, cited positive momentum the city is building with regard to stabilizing its operations and being better prepared to address future significant increases in pension contributions—or, as the agency noted: “We believe the city’s financial position is now more transparent compared with recent years, as is Detroit’s long-term financial strategy, which relies on fairly conservative growth assumptions…We also believe that the city has a stronger capacity to service its debt obligations than in years past.” Indeed, Detroit’s credit ratings are the highest since March of 2012, just over a year before Kevin Orr filed for chapter 9 bankruptcy in July of 2013. Nevertheless, Detroit’s credit rating remains deep in junk territory and vulnerable to another recession, say market participants. Or, as Michigan Attorney General and gubernatorial Bill Scheutte notes: “We still believe Detroit faces a long path that will require years of prudent decision-making from management and the avoidance of major economic shocks before its debt makes sense for investors looking for high-quality municipal exposure…The city still has an abundance of extremely high-risk characteristics and speculative-grade qualities that investors should be very cognizant of and understand what they are taking on.” Notwithstanding, Detroit appears to be on course to exit state oversight this year: it has presented deficit-free budgets for two consecutive years, enabling it to exit from oversight by the Financial Review Commission oversight; it ended FY2016 with a $63 million surplus; Detroit’s four-year forecast predicts an anemic annual growth rate of only about 1%; thus, any adverse public school news could have repercussions.



Getting Schooled on Disaster

December 15, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report on continuing, discouraging blocks to Puerto Rico’s fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery. Detroit’s Cerveny – Grandmont neighborhood, where median household income has declined by 5 percent since 2000 and average household incomes are under $38,000—and median home sale prices are just over $51,000, this week was one of 10 areas in the Motor City yesterday was cited in a report, “Reset, Rethink, Rebuild: A Shared Vision of Performing Schools in Quality Buildings for Every Child in Detroit”  a study about neighborhoods, educational opportunity, and the conditions of public school buildings, as one of ten neighborhoods wherein it is nearly impossible to find a quality school. Indeed, the report determined that the problem is deeper than just those 10 neighborhoods: Only 20 percent of the children enrolled in a public school in the city, whether charter or traditional public, are attending a quality school: a discouraging, failing grade with implications for both assessed property values and Detroit’s budget. Chris Uhl, the Executive Director of the eastern region for IFF, which published the study, noted: “The fact that four out of five kids in this city” are not attending a quality school “is pretty horrifying to me…that…should catalyze action.” The report notes that nearly half of the space in school buildings in the city is underutilized. A key recommendation of the report was that greater coordination is needed between leaders of the Detroit Public School System and the authorizers of charter schools—presumably including the current U.S. Secretary of Education. (Currently, only Grand Valley State University and Central Michigan University are authorized to open new charters in the city, but there are a number of other authorizers with schools in the city.)  IFF’s recommendations are similar last week’s report by the Coalition for the Future of Detroit Schoolchildren.

In its report, the IFF identified quality schools using Michigan’s less than clear, but outdated quality schools color-coded accountability system–a system due to be replaced next year: a part of that old system provided for the assignment of five colors, based on how well students achieved academic goals. Of the city’s 178 general education public schools, just 2.4% received the equivalent of an A.  The report makes clear that the steep road back from the nation’s largest municipal bankruptcy requires a greater focus on the next generation’s future: schools good enough to attract families back into the city—attracted by a good school to enroll their children. Today, too few of them exist—or, as the report notes: Detroit needs nearly 70,000 more seats available in quality schools to ensure that every child has access to such a school. Tonya Allen, President and CEO of the Skillman Foundation, which funded the research, noted: “We’re not meeting the demand, which leaves us vulnerable to leakages: for students to leave the city to go to school in the suburbs.”

A Taxing Recovery? Just as Puerto Ricans were treated unequally by the federal response to hurricane devastation compared to Houston and Florida, so too there is apprehension that the tax “reform” legislation nearing completion in Congress—especially as there is growing apprehension that Congress could move towards adopting a territorial tax system for businesses—that is a new tax system which would treat Puerto Rico as a foreign country with respect to the numerous foreign subsidiaries of U.S. corporations which operate there. Puerto Rico Secretary of Economic Development and Commerce Manuel Laboy Rivera is apprehensive that subsidiaries of U.S. corporations which receive favorable treatment under current federal law could find the emerging federal tax reform would impose a new 20 percent federal excise tax on all pharmaceuticals, medical devices, and other products shipped to the mainland—that is a new, discriminatory tax—which would be in addition to the Jones Act provisions which render Puerto Rico unable to compete fairly vis-à-vis other Caribbean competitor nations—even as Puerto Rico is subject to the federal minimum wage and other federal regulations involving workplace safety and environmental protection. Indeed, last December, a bipartisan congressional task force had recommended changes in the tax treatment of the U.S. territory with the Congressional Task Force on Economic Growth writing: “Puerto Rico is too often relegated to an afterthought in Congressional deliberations over federal business tax reform legislation. The task force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform.” Among the recommendations: a modification of the federal child tax credit to include the first and second children of families living in Puerto Rico, not just the third as specified under current law; the report also recommended making permanent the so-called rum cover-over payments to the governments of Puerto Rico and the U.S. Virgin Islands. The task force, however, was divided with regard to whether to fully expand the eligibility of Puerto Rican families for the Earned Income Tax Credit. The report recommended that a domestic business production credit known as Section 199 that has covered Puerto Rico since 2006 should be maintained as long as Section 199 continues. Now, however, that credit has been targeted for elimination in the pending tax reform negotiations as they enter their final hours. Under the discriminatory treatment, for federal tax purposes, Puerto Rico is considered outside the U.S. tax code, even though for virtually all other issues the island is treated as a domestic part of the U.S. For the purposes of federal tax reform, however, Senate Finance Committee Chair Orrin Hatch (R-Utah) said during the Finance Committee’s deliberations that Puerto Rico’s tax issues would be handled in separate legislation. So, it seems that for Hurricane Maria ravaged Puerto Rico, where 20% to 40% of all businesses are at risk of being shuttered in the wake of the hurricane and its ensuing devastation for the economy because of challenges ranging from the lack of electricity to loss of inventory, physical damage to their facilities, business interruption, and lack of capital; the message from Congress is to wait for next year.

House Ways and Means Committee Chairman Kevin Brady (R-Tx.) has informed reporters that he and other lawmakers are considering several options for Puerto Rico—especially in the wake of meeting with Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Representative in Congress, to discuss her request to consider making Puerto Rico an economic opportunity zone or empowerment zone—provisions adopted by Congress to abet economic recovery in hard-hit cities and counties. Thus, a change would be to treat Puerto Rico similarly—as if it were, gasp, a part of the United States for federal tax purposes and eligible for the same treatment. Likewise, tax reform could have been a vehicle for Congress to eliminate or reduce the discriminatory 20% excise tax on goods from Puerto Rico—a tax which undercuts Puerto Rico’s ability to compete with Cuba, and other countries in the region.

Even as the tax reform-deficit/debt increase legislation has swiftly moved towards the President’s desk, in New York, U.S. Judge Laura Taylor Swain, presiding over Puerto Rico’s quasi-chapter 9 case, heard from attorneys for the Employees Retirement System and the Puerto Rico Oversight Board—with the critical issue what claims of Puerto Rico’s bondholders are valid. PROMESA Oversight Board attorney Steven Weise said the 2008 Financing Statements governing Puerto Rico’s municipal bonds did not provide bondholders any collateral, arguing that the bondholders’ written arguments quoted from legal rulings about “security agreements,” but that what is allowed in these agreements are not allowed in Financing Statements—adding that the system’s legal name changed in the last several years, but that bondholders had failed to properly follow-up on this development—a failure which meant, at least as he argued, that the system should not be legally obligated to pay interest on the municipal bonds—even as Bruce Bennett, representing bondholders, told Judge Swain the bondholders had a lien on employer contributions, based on multiple commitments, arguing that the 2008 Financing Statements gave the bondholders the lien. He said errors in the document were not of such gravity to merit undercutting to undercut the bondholders’ claims—and adding that the Spanish name of the system had not changed, and that the change in the English name was just a translation change—a change without legal significance. Moreover, he noted, that along with the Financing Statements, a parallel “security agreement” had been created in 2008 and this perfected the lien; further, he argued, the 2015 and 2016 Financing Statements also assured the bondholders’ lien on the employer contributions.

Where Are the Lights? U.S. Army Corps of Engineers Lieutenant General Todd Semonite, the commanding General and Chief Engineer for the Corps reports that Puerto Rico’s electrical grid is unlikely to be fully restored until the end of May, a far more pessimistic timeline that suggested by Puerto Rico Governor Ricardo Rossello, who Wednesday stated he expects Puerto Rico’s electric grid to reach 75 percent of customers by the end of January—and 95 percent by the end of February—and 100 percent by the end of May. Adding to the dissonance, the Puerto Rico Electric Power Authority last month pledged service would reach 95 percent of customers by the end of this month—even though, as of Wednesday, just 61 percent of electricity had been restored.  


Post-Chapter 9 Elections–and Post Physical & Fiscal Storms

November 6, 2017

Good Morning! In today’s Blog, we consider yesterday’s election results in municipalities we have followed through their fiscal stress or chapter 9 municipal bankruptcy, including: Flint, and Detroit, in its first Mayoral election since emerging from chapter 9, Then we turn to the historic municipality of Petersburg, Virginia—a municipality which avoided chapter 9 thanks to state intervention. Finally, we consider U.S. District Court Judge Laura Swain’s approval yesterday of an urgent motion from the government of Puerto Rico and the Fiscal Oversight Board (JSF) that requires all federal funds to be allocated for the tasks of assistance and recovery in the wake of Hurricane Maria, removing said funds from possible use in restructuring the U.S. territory’s restructuring of its public debt.

Visit the project blog: The Municipal Sustainability Project 

In Like Flint. Flint Mayor Karen Weaver yesterday prevailed over City Council member Scott Kincaid in a recall election involving 18 candidates, retaining the city’s proposed 30-year agreement with the Detroit water system, with Mayor Weaver prevailing by a 53-32 percent margin, according to the unofficial results. The recall had arisen from a controversy related to the Genesee County’s garbage contract: Mayor Weaver had pressed for an emergency trash collection contract with the former Rizzo Environmental Services in Macomb County over City Council opposition. The controversy arose because a former trash provider, Chuck Rizzo, and his father have reached plea deals with federal prosecutors and are expected to plead guilty this month for their roles in a wide-ranging public corruption scandal in Macomb County—a scandal which has, so far, led to criminal charges against 17 persons. The recall also came amid Mayor Weaver’s ongoing struggle with the Flint City Council with regard to the approval of a 30-year agreement with the Detroit area Great Lakes Water Authority—with City Council opposition arising from apprehension about increased water rates—and in response to last month’s decision by U.S. District Court Judge David Lawson taking the small city to task for failing to act on an April agreement supported by Mayor Weaver, the State of Michigan, and EPA which would have Flint remain on the Detroit area water system. Flint had been supposed to switch to the regional Karegnondi Water Authority; however, Mayor Weaver’s administration rejected that option, because updating of the Flint water treatment facility had been projected to cost more than $68 million and to consume more than three years to complete. The Flint Council had disregarded Judge Lawson’s decision, and approved a two-year extension of service with the Great Lakes Water Authority. Thus, while the prior agreement with the Detroit area water authority had lapsed, Mayor Weaver, the State of Michigan, the Great Lakes Authority, and other supporters have revived the agreement. Last week, the Michigan Department of Environmental Quality had filed an emergency motion asking Judge Lawson to approve giving Mayor Weaver the authority to sign the renewed contract by Election Day, because of the inability of the City Council to act—a request from the state which the Judge rejected; however, he has scheduled a hearing on the motion later this month.

Motor City Victory Lap. Detroit Mayor Duggan was re-elected yesterday by more than a 2-1 margin over challenger State Sen. Coleman A. Young II, son of a former Detroit Mayor. In remarks after the decision, Mayor Duggan  noted: “I have been treated with nothing but warmth and kindness from Detroiters in every neighborhood in the city…I hope that this is the year where we put us-versus-them politics behind us forever because we believe in a one Detroit for all of us.” His opponent, in conceding, claimed he had commenced a movement to help the politically dispossessed: “The campaign might be over, but the passion and values are eternal…We are the voice for the voiceless. We are the hope for the hopeless.” Mayor Duggan, who won a write-in primary campaign in 2013 and then defeated Wayne County Sheriff Benny Napoleon in the general election, thus became the Motor City’s first mayor to serve two terms since Dennis Archer in the 1990’s.  In his campaign, the former CEO of the Detroit Medical Center gained prominent endorsements from city labor unions, clergy, and business groups—he overwhelmed his opponent in fundraising: he secured about $2.2 million; whereas Mr. Young raised just under $39,000. Mayor Duggan, in his victory remarks, noted his campaign had focused on spending “time talking about the vision of what we are going to do in the next four years,” adding: “I thought one of the most profound things President Obama ever said was ‘If you have to divide people in order to get elected, you’ll never be able to govern.’”

In his campaign, Mayor Duggan touted public service improvements under his administration in the wake of the nation’s largest-ever municipal bankruptcy, including new streetlights, improved public safety response, and more dependable bus lines. He said he intends to continue work on building a more unified Detroit—focusing now on a series of efforts to fix up neighborhood corridors, roads, and sidewalks—and stating: “There are haves and have-nots in every city in America. We’re building a city here that it doesn’t matter where you start, you have the opportunity to be successful,” adding that he believe the greatest challenge now confronting Motor City residents will be over automobile insurance reform legislation—referring to legislation rejected by the Michigan House last week, but making clear he does not intend to give up: “We were a lot closer this time than we were two years ago, and we have a plan to get it through the next time: It’s going to be one relationship at a time, one vote at a time, but we’ve already had several meetings with both the medical and the legal community, and I think they realize we were three votes away.” 

The Road Out of State Oversight. The re-election comes at a critical time, as the City expects to have its full municipal fiscal authority restored next spring for the first time since it exited the nation’s largest ever chapter 9 municipal bankruptcy three years ago—challenging the city’s appointed and elected leaders with the task of resuming governance after the end of state oversight—and as the Mayor and Council resume authority over budgets and contracts. With two balanced budgets and an audit of a third expected next May, city leaders anticipate Detroit will be released early next year from the strict financial controls required under the city’s approved plan of debt adjustment—a key issue during the just completed campaign, where both the Mayor and his challenger had proposed plans with regard to how they would fiscally guide the recovering city—and as Michigan Governor Rick Snyder expressed optimism about the city’s ability to manage its finances, telling the Detroit News: “They’ve been hitting those milestones, and I hope they continue to hit them—that’s a good thing for all of us.”

Indeed, the Motor City’s credit rating has been upgraded; its employment rate is up; assessed property values are climbing. In its financial update last month, the city noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts, and growth in multifamily home construction. Nonetheless, the road to recovery will remain not just steep, but also pot-holed: it confronts very large future payments for past borrowing and public pension obligations under the plan of debt adjustment—or, as our colleague Lisa Washburn of Municipal Market Analytics noted: “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there…Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Petersburg. In one of the most closely watched municipal elections in Virginia, last night, Gloria Person-Brown, the wife of the current embattled City Treasurer Kevin Brown of Petersburg, was trounced by former City Council member Kenneth Pritchett, with Mr. Pritchett winning by a large margin: he captured more than 70 percent of the vote. In his campaign, stating he had been frustrated by the city’s low credit rating, and by the city’s struggles with collecting revenue and timely payment of bills, Mr. Pritchett vowed he would implement policies and standardize internal controls to improve the office’s operations. Likely, in the wake of a Virginia state fiscal report last September—a report which scrutinized eight specific aspects of city governance and fiscal responsibilities—and contained allegations of theft involving Ms. Person-Brown’s husband, City Treasurer Kevin Brown. Some Council members then had called for his resignation, and even Ms. Person-Brown had distanced herself from her husband’s actions during the election, albeit she did not say he had done anything wrong. Rather she ran on a platform of improving the Treasurer’s services, including instituting more checks and balances, and calling for more accountability.

Stepping in to Help Puerto Rico. U.S. District Court Judge Laura Taylor Swain has approved, with various changes, an urgent motion from the government of Puerto Rico and the PROMESA Fiscal Oversight Board which mandates that all federal funds to be allocated to the country for the tasks of assistance and recovery due to the passage of Hurricane Maria may not be claimed in the process of restructuring the public debt, accepting to the request of the Authority for Financial Supervision and Tax Agency and the JSF during the general hearing held in New York City‒in which it emerged that, in part, the order would restrict the use of disaster assistance funds as a condition of the federal government, so that Puerto Rico can receive assistance: the order will establish that the Federal Emergency Management Agency (FEMA) funds for Puerto Rico following in the wake of Hurricane Maria, as well as funds granted by other federal agencies, will be maintained. Judge Swain granted the order after listening to the arguments of Suzanne Uhland, legal representative of AAFAF, as well as lawyers from municipal insurers and the organized group of General Obligations bondholders (GOs), who underscored the need to incorporate into the order transparency criteria and mechanisms to ensure that some entity such as the JSF has influence in how federal funds granted by the government will be used. Matthew J. Troy, the federal government’s representative in the case, told Judge Swain that to include specific language which would give the Puerto Rican government priority in claiming funds that had been misused by state agencies or public corporations in the Island was indispensable for Puerto Rico to receive funds from the federal government: as part of the order, it would be established that, in the event federal funds were misused, it will be up to the central government to claim these funds from the agency or public corporation which received them from the federal government. Judge Swain has scheduled a follow-up hearing for next Wednesday.

During the hearing, an attorney, Marcia Goldstein, pointed out that it is urgent to know what role if any the Junta de Supervisión y Administración Financiera for Puerto Rico (the JSF) will have with regard to the approval of the contracts for the recovery tasks. The PROMESA law establishes, among other things, that the federal agency has the power to review the contracts granted by the Puerto Rican government or the dependencies subject to the control of the JSF. To date, however, it is uncertain whether the JSF has examined or had influence in the process of hiring dozens of companies which would be responsible for multiple tasks, from infrastructure repair to the audit of federal funds. In an interview with the Puerto Rican El Nuevo Día a little over a week ago, House Speaker Paul Ryan (R-Wis.), in the wake of his visit to Puerto Rico, pointed out that the JSF will have a key role in defining the scope of the aid package that Puerto Rico would need and how such resources would be allocated.


The Human & Fiscal Challenges of Recovery

November 3, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal recovery of Michigan municipalities; the City of Detroit’s efforts to upgrade the quality of rental housing, and the ongoing fiscal and human plight of the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Royal R-O-L-A-I-D-S. Michigan State officials Wednesday released Royal Oak Township, a suburb of Detroit and a charter township of Oakland County with a population as of the 2010 census of 2,419, from its consent agreement, with Michigan Treasurer Nick Khouri stating the Oakland County township is now free of the fiscal agreement under which the state placed it three years ago to resolve a financial emergency: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” He added that progress has been made since 2014 to resolve issues that led to a financial emergency for the Oakland County community, for example, noting that today the township has a general fund balance of $920,000 instead of a deficit—and that police and fire services are improved. Township Supervisor Donna Squalls says the community has been able to work with the state and “enact reforms to ensure our long-term fiscal sustainability. Royal Oak Township’s financial emergency resulted in an assets deficit of nearly $541,000 for its 2012 budget year. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever: The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” For his part, State Treasurer Khouri noted the township was the last remaining Michigan municipality operating under a fiscal consent agreement: over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements in response to fiscal and financial improvements and operational reforms. The Treasurer stated only three communities: Ecorse, Flint, and Hamtramck remain under state oversight through a Receivership Transition Advisory Board.

Protecting the Motor City’s Renters. The Detroit City Council this week voted unanimously to update its rental regulations, am update which included the enactment of rules to bar landlords from collecting rent on units which have not passed city inspections. Under the current ordinance, housing units are supposed to be registered and have passed city inspections by obtaining a certificate of compliance prior to being available for rental purposes; however, before they can be rented out. However, city officials admit they have permitted most landlords to ignore those rules for more than a decade—rules adopted to ensure compliance with safety regulations, especially lead poisoning prevention efforts, for which inspections are a part of obtaining a certificate of compliance. Or, as Councilman Andre Spivey put it: “We hope it will improve the quality of life in our neighborhoods and entire city.” However, some landlords have claimed that enforcing inspections with the threat of rent being withheld would discourage the incentive to provide rental housing opportunities in the city—already a challenge because of apprehensions about crime and the quality of public schools—with some even vowing to sue the city. Last year, just 4,174 addresses were registered and inspected—less than 3 percent of the Motor City’s estimated 140,000 rental units—and more than 20 percent below the number registered a decade ago. Indeed, last year, the Detroit News reported that only one of every 13 eviction cases was filed on an address legally registered with the city—with the paper reporting that families facing eviction in homes that were never inspected by the city and had numerous problems, including: lack of heat, hazardous electric systems, missing windows, and rodent infestation.

Under the updated regulations, to be phased in over the next six months, tenants who live in rentals which have not passed city inspections would be given the option to could put their rent in an escrow account for 90 days. If the landlord, by the end of such period, had failed to obtain a city certificate, the renter will be able to keep the money. Subsequently, a tenant would be permitted to continue to put rent in escrow if the landlord does not comply, while the city would hire a third-party company to manage the escrow fund. The new escrow provision will be phased in, and each neighborhood will have different deadlines. Renters who are escrowing their payments will also have the right to “retain possession of the rental property,” according to the updated regulations.

A Motor City of Dreams? Meanwhile, yesterday, Renu Zaretsky, writing for the Tax Policy Center, “Transformational Brownfield of Dreams in a Motor City,” about the role of fiscal tax policy in revitalizing two Michigan cities, noted that the city’s famed Renaissance Center had been constructed to revitalize Detroit in the wake of the 1967 riots—with Henry Ford II, in 1971, convincing dozens of businesses to invest in the $350 million project; however, she noted: the hoped-for transformation never took place, leading to the collapse of the Center’s assessed property value—and crushing hopes for the city’s fiscal revival. Yet, today, Detroit and the state of Michigan seem poised to invest half a trillion dollars to try once again to revitalize the recovering downtown—a downtown in which developer Dan Gilbert, the founder of Quicken Loans, is investing to transform via 3.2 million square feet of office, residential, and retail space, including a skyscraper and 900 apartments—albeit, Mr. Gilbert is seeking tax incentives to support the effort, claiming taxpayer subsidies are “essential,” for not only this project, but also other investment in the city. Under his proposal, he would to put up a total of $1.9 billion, with about $500 million up-front: in return, he is seeking the leverage of additional funding from a newly amended state tax incentive program—under which he anticipated some $557 million over the next three and a half decades, based on new state legislation Gov. Rick Snyder signed last summer to amend the state’s Brownfield Redevelopment Financing Act of 1996: under the state’s current statute, brownfield developers could recoup limited construction costs (such as demolition, site preparation, and infrastructure improvements) via tax increment financing; however, under his new proposal, the state would directly subsidize construction costs that directly benefit an eligible property—with the municipal bonds backed by Michigan state sales and income taxes generated during on-site construction, as well as 50 percent of state income and withholding taxes from those who will live and work on the sites in the future, as well as the added property tax revenue. The Detroit Brownfield Redevelopment Authority would issue municipal bonds to finance the project, with the bond payments secured by some $229.6 million in property tax revenues, $18.2 million from construction site state income taxes, $1.6 million from city income taxes, and $307.9 million from state income taxes paid by future workers and residents. She notes that Mr. Gilbert promises this project would attract 2,122 residents who would pay monthly rents ranging from $2,287 to $3,321 and create 8,500 direct permanent jobs, including 5,400 office jobs paying an annual average of $85,000 and 1,700 retail and service positions paying $25,000—with Michigan reimbursed via captured state and municipal income taxes over the next two decades.  

As we have noted—and she writes: this is a fiscal dare: notwithstanding its fiscal recovery, the Motor City still has the highest rate of concentrated poverty among the 25 most populous metro areas in the U.S.; its median household income is about $26,000; and its unemployment rate was 9.6% in July. That is: this is a gamble in an area in the downtown where—on the day Detroit filed for chapter 9 municipal bankruptcy, the hotel clerk told me it was unsafe for me to walk to the Governor’s Detroit offices—about a half mile away—to meet with Kevin Orr on his very first morning as the Governor’s appointed Emergency Manager. Now, nearly a decade later, the fiscal challenge—and risk—is whether new state tax expenditures which benefit developers could succeed in boosting Detroit’s recovering revenues.

Physical & Fiscal Destruction. Hurricane Maria left no equina or corner of Puerto Rico untouched: the cataclysmic storm meted out systemic physical and fiscal devastation to the U.S. territory and to the lives and livlihoods of its 3.4 million American citizens. This morning, more than five weeks later, too many residents still lack safe and clean drinking water, access to food, and communications. Power, and transportation links are only partially restored. While tens of thousands of public servants and volunteers are now hard at work restoring those essential needs and unblocking constraints from logistics to information flow, the contrast with the federal responses in Houston and Florida have become even more stark. It means Puerto Rico’s leaders face two simultaneous challenges: addressing people’s most urgent physical needs, and laying the foundations for the direction of the medium- and long-term recovery and reconstruction efforts ahead.

In a way similar to Detroit, Puerto Rico confronts a legacy of debt and economic uncertainty, but, as we have noted above; the physical and fiscal devastation might offer a historic opportunity to reimagine Puerto Rico’s future. Yet, how the island’s fiscal and physical reconstruction is conceived and implemented will determine the future of the island: it will be the architecture of Puerto Rico’s physical and civic infrastructure for the next half century, or, as Puerto Rico’s Economic Secretary Manuel Laboy said recently: “We have this historic opportunity: Instead of going with incremental changes, we can go and push the envelope to really transform the infrastructure. That is the silver lining opportunity that we have.” After all, Hurricane Maria exacerbated the considerable challenges already confronting Puerto Rico: a massive public finance debt crisis and migration flows which have witnessed a dramatic outflow of the island’s population: an outflow of more than 10%–but an unbalanced 10%, as the outflow has been characterized disproportionately by being both younger and more educated, meaning Puerto Rico has disproportionately greater low-income and elderly citizens in need of greater fiscal assistance, even as those most valuable to a vibrant economy has become smaller.

The fiscal and human challenge, this, will be for its leaders not to employ the paper towels thrown at them by President Trump, but rather to leverage its considerable natural assets: its central location in the Caribbean region, its hard-working and resourceful residents, its mostly mild climate, and its development-friendly topography. Indeed, many agencies involved in the reconstruction are rightly conducting a “needs assessment” to align their aid efforts. Equally important to medium- and long-term reconstruction is an “asset map” to ensure that Puerto Rico’s strengths, resources, and opportunities are taken into account when imagining the future potential of the island. At the same time, as part of rebuilding, its leaders will need to anticipate that global warming means that more category 4 and 5 storms are certain in the future—so that rebuilding what was is not a constructive option: there will have to be innovation to creating a resilient infrastructure for power, water and sanitation, communications and transportation.

But, again as in Detroit, the physical, governance, and fiscal reform process which Puerto Rico’s new administration has promised must remain front and center: how can Puerto Rico restore its own fiscal and political solvency—a challenge hardly enhanced in the wake of criticism of the Puerto Rico Electric Power Authority’s (PREPA) now-canceled contract with Whitefish Energy Holdings: the territory must create transparent budgets and plans with regard to how recovery funding is allocated—as well as complete its exploration how citizen panels and consultations to review different design options and careful procurement, oversight, and reporting mechanisms can earn respect and support—not only from its citizens and taxpayers, but also from the PROMESA Oversight Board: a transparent procurement system which can assess the myriad offers that will come in to ensure that the legacies created are cost-effective and the best options for the people and the island. 

Puerto Rico’s Municipalities or Muncipios. Unsurprisingly, the fiscal crisis which has enveloped most of Puerto Rico’s municipalities has multiplied after the passage of Hurricane Maria. The economic burden to respond to the emergency situation has undermined efforts to refills depleted coffers, meaning that the municipal executives of the Popular Democratic Party (PDP), grouped under the Association of Mayors, have not ruled out imposing austerity measures in addition to those applied last year—or, as Association President Rolando Ortiz, the Mayor of Cayey, put it:I am sure that all municipalities are exposed to having to reduce working hours or eliminate places permanently, because we are all exposed to lack of income.” According to reports from El Nuevo Día from last August, some 15 municipalities had to cut working hours of their employees—in some municipalities up to 50%, including in the towns of Vieques, Toa Baja, Las Piedras, and Cabo Rojo. The physical and fiscal devastation comes in the wake of fiscal declines of the municipalities in the past decades after assuming burdens imposed by the Commonwealth, such as mandated increases in contributions to the Retirement Systems, the subsidy to the Government Health Plan, and the reduction in the government contribution. Even though the municipalities have been unable to generate specific data on the economic impact that the municipalities have suffered in the wake of Maria’s impact, Mr. Ortiz emphasized that the blow has been severe: the mayors have had to assume recovery and first response tasks which were not budgeted, such as the collection and disposition of debris and the purchase and supply of diesel and gasoline. Notwithstanding that some of the funds will be reimbursed by the Federal Emergency Management Agency (FEMA), such funding will not represent an automatic improvement in the coffers. As Mr. Ortiz notes: “Before the hurricanes Irma and María, 40 municipalities were about to close their operations. With this impact we have had, we have almost two months of zero commercial economic activity…it makes the fiscal situation precarious.” One of the most serious fiscal claims of the mayors has been for the return of $ 350 million in revenue from contributions that the central government has proposed to cut to municipal assistance in the next fiscal year—with the Mayors meeting yesterday in San Juan to discuss the economic and social situation of each of the associated municipalities in the wake of the storms, where they agreed that the urgency of water and food supplies and the restoration of basic services persists—and that they could not “validate” the claim of Puerto Rico’s Aqueduct and Sewer Authority that 82 percent of subscribers have service. Mayor Marcelo Trujillo of Humacao noted: “If electricity does not arrive, the municipality will go bankrupt, given the case that we depend on 13 industries, trade, and hospitals that we have that are working halfway,” adding that some of the businesses in his city which are open, are only partly operating—while the municipality’s largest shopping center remains shuttered—depriving the community of tax revenues, earned income, and hop—and meaning, as he reported, that the municipality has been unable to restore operations, because the Casa Alcaldía (town hall) suffered damages that prevent work from there. 

His colleague, the Mayor of Comerío, José A. Josian Santiago, noted: “As of July 1 of next year, my budget goes down from 60 percent from $10 million to $4 million, which would mean that, at this time of crisis, I have to leave 200 employees out of a total of 300. How am I going to operate? How will I respond to the emergency?” He noted that the current situation of Comerío is complicated, because, in addition to the lack of basic services, citizens have no way to obtain money for the purchase of food and basic necessities, because banks and ATM’s are closed: “It is a fatigue for my team, as for the people, to be every day trying to survive. A country cannot establish that as a condition of life. There is no way to sentence the communities of our municipalities to survive every day.”

The Price of Solvency. Even as Puerto Rico is struggling to recover without anything comparable to the federal assistance rendered to Houston and Florida, the PROMESA federal oversight board has given the U.S. territory about seven weeks to revise its financial recovery plan to account for the devastating damage suffered in Hurricane Maria, raising the possibility the territory will need to impose deeper losses on owners of its $74 billion debt. The panel earlier this week mandated that Puerto Rico will need to seek approval for any contract over $10 million, significantly expanding its supervision—a step taken in the wake of PREPA’s decision to grant a critical $300 million rebuilding contact to a small Montana company which had just two full-time employees before beginning its work in Puerto Rico. With Maria wreaking an estimated $95 billion in physical devastation, Puerto Rico’s municipal bonds have tumbled on speculation that investors will be forced to accept even steeper concessions than previously anticipated: the territory’s main operational account, which receives most of its public funds and covers most of its expenses, is now projected to report a deficit of $2.4 billion by the end of this year—a deficit exploded not just by the storm devastation, but also by Maria’s toll on the government’s tax collections—or, as PROMESA Board Executive Director Natalie Jaresko put it: “The devastation has affected millions of lives, decimated critical infrastructure, made revenue collections almost impossible…In light of this new reality, we must work urgently towards revising the certified fiscal plans.” The commonwealth and PREPA have been ordered to submit to the federal board their updated fiscal plans by Dec. 22nd. It is unclear, however, whether the PROMESA Board has fully taken into account the demographic changes caused by the physical storm: The revisions need to take into account the anticipated population loss because of Maria, with Hunter College’s Center for Puerto Rican Studies estimates Puerto Rico will lose 14 percent of its population by 2019 because of the storm.

Director Jaresko told the PROMESA Board the hurricane left several variables that will affect the amount of revenues available and spending that will be necessary in the next few years, meaning that the territory’s fiscal recovery plan should show that structural balance should be achieved by FY2022, so that, according to the schedule discussed by the Board, it will seek draft fiscal plans from the commonwealth government, PREPA, and the Puerto Rico Aqueduct and Sewer Authority by Dec. 22nd, aiming to have approved fiscal plans for these entities by Ground Hog Day. The Board plans to adopt certified plans by March 16th, after holding two public meetings in Puerto Rico and one in New York City to receive public comment on the revision to the fiscal plans: these are tentatively scheduled for Nov. 16, 28, and Dec. 4.