Is There a “Right” Structure to Resolve Fiscal Insolvency?

06/19/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges to restoring fiscal solvency in the U.S. territory of Puerto Rico, so that chapter 9 does not apply—nor does that process provide a mechanism to address the territory’s municipalities, much less the existing federal discrimination against Puerto Rico vis-à-vis other Caribbean nations The challenge, if anything, has been heightened by the absence of mixed messages from Congress-where the PROMESA Oversight Board has sent a letter to Puerto Rico’s leaders warning of what the Board described as a waning resolve to deal with a dire financial situation.

Trying to Shock? House Natural Resources Committee Chairman Rob Bishop R-Utah) has notified PROMESA’s oversight board that its failure to approve the Puerto Rico Electric Power Authority’s restructuring support agreement is seen as “very problematic” by some federal legislators: “It appears there is no consensus from the oversight board in favor of certifying the PREPA [RSA] under…PROMESA…This is troubling, as the decision to implement the RSA had already been made by Congress with the passage of PROMESA. The oversight board’s dilatory tactics run counter to the plain language of PROMESA.” At the same time, PROMESA Board Chair José Carrión III stated that Puerto Rico needs to create implementation plans to reduce government spending and ensure adequate liquidity—writing last  Friday at a key time as the Puerto Rico legislature worked to try to reach consensus on a balanced FY2018 budget, in compliance with a board-approved 10-year fiscal plan. Chairman Carrión wrote: “I write to you out of a concern that some of the progress we appeared to have made in the past few weeks as a result of the close and positive collaboration between the board and the administration–and their respective teams of advisors–may be receding and that the necessary resolve to attain the goals set forth in the certified fiscal plan may be waning…It is equally of concern that some of the narrative taking hold in the public discourse fails to characterize adequately the truly dire fiscal situation the Commonwealth is facing.”  Chairman Carrión, in his epistle to Gov. Ricardo Rosselló, Senate President Thomas Rivera Schatz, and House of Representatives Speaker Carlos Méndez Núñez, noted it was an incorrect “narrative” for Puerto Rico’s government to say that if the government generates $200 million in additional cash reserves by June 30th, the PROMESA Board would not mandate a government furlough program and reduction or elimination of the Christmas bonus; rather, to avoid these measures, the Board is mandating a spending-reduction implementation plan in addition to the cash reserve intended to ensure ongoing liquidity—with Chairman Carrión warning that if the plan is inadequate or poorly executed, “Puerto Rico is all but certain to run out of money to fund the central government’s payroll come November or December of this year.” The PROMESA Board also called on Governor Rosselló to explain which public services are essential.

The stern warning—to a government where some of the most essential services are lacking—produced a response from Governor Rosselló’s non-voting representative to the PROMESA Board, Elías Sánchez Sifonte: “This administration has demonstrated an unwavering commitment to face this inherited crisis with the seriousness it deserves,” adding that: “We have also been demonstrating implementation plans to ensure we provide resources to cover essential services as required by PROMESA and in accordance with our Certified Tax Plan,” including progress in the Puerto Rico legislature on the budget proposed by the Governor based upon consultation with the PROMESA Board—a budget the Puerto Rican Senate expects to consider later this week.

The discussions came as U.S. District Judge Laura Taylor Swain, who is overseeing Puerto Rico’s Title III municipal bankruptcy process, taking a page from Detroit’s chapter 9 bankruptcy, named U. S. District Court Judges, including the remarkable Judge Christopher Klein, who presided over Stockton’s municipal bankruptcy trial, to help address critical issues. She also named Judge Barbara Houser of the U.S. Bankruptcy Court of the Northern District of Texas, designating her to lead the mediation team; Judge Thomas Ambro, of the U.S. Court of Appeals for the 3rd Circuit; U.S. District Court Judge Nancy Atlas of U.S. District Court for the Southern District of Texas; and Judge Victor Marrero of U.S. District Court for the Southern District of New York. Judge Swain made clear that participation in any mediation will be voluntary and confidential—and that she will not participate in mediation sessions, and mediators will not disclose information about the parties’ positions or the substance of the mediation process to her—with this process—as was the case in Stockton and Detroit’s chapter 9 cases—ongoing concurrently with trial in her courtroom. Judge Swain added that she plans to make final appointments prior to the June 28th Title III hearing in San Juan, where she will further explain the mediation process.

Who’s in Charge? The PROMESA Oversight Board has warned Puerto Rico’s leaders that the Board is apprehensive of a waning resolve to address the U.S. territory’s dire fiscal situation, with Chairman José Carrión III warning that Puerto Rico needs to create implementation plans for reducing government spending and assuring adequate liquidity at all times. The letter—coming between the emerging quasi-bankruptcy proceedings under Judge Taylor and as the Puerto Rico legislature is attempting to put together a balanced FY2018 budget, in compliance with a board-approved 10-year fiscal plan—came as PROMESA Board Chair José Carrión III urged greater resolve, writing: “I write to you out of a concern that some of the progress we appeared to have made in the past few weeks as a result of the close and positive collaboration between the Board and the administration–and their respective teams of advisors–may be receding and that the necessary resolve to attain the goals set forth in the certified fiscal plan may be waning…It is equally of concern that some of the narrative taking hold in the public discourse fails to characterize adequately the truly dire fiscal situation the Commonwealth is facing.” Chairman Carrión, in his epistle to Gov. Ricardo Rosselló, Senate President Thomas Rivera Schatz, and House of Representatives Speaker Carlos Méndez Núñez, added that there is an incorrect “narrative” that says that if the Puerto Rican government generates $200 million in additional cash reserves by the end of this month, the PROMESA Board would not mandate a government furlough program, nor a cut or elimination of the Christmas bonus. To avoid such a mandate, he added that the PROMESA Board is mandating a spending-reduction implementation plan in addition to a cash reserve plan intended to assure government liquidity, with the Chairman adding that if the plan is inadequate or poorly executed, “Puerto Rico is all but certain to run out of money to fund the central government’s payroll come November or December of this year.” Noting that: “Now we are at a critical juncture that requires that we collectively strengthen…,” the Board demanded that Gov. Rosselló explain which public services are essential.

Does Accountability Work Both Ways? Unlike chapter 9 bankruptcy cases in Detroit, San Bernardino, Central Falls, Jefferson County, and Stockton—Puerto Rico is unique in that the issue here does not involve municipalities, but rather a quasi-state. There have been no public hearings. PROMESA Chair José B. Carrion has not testified before the legislature. Now Puerto Rico Rep. Luis Raúl Torres has asked the Puerto Rico Finance Committee to invite Chair Carrión to appear to explain to Puerto Rico’s elected leaders the demands the PROMESA Board is seeking to mandate—and to justify the $60 million that the Fiscal Supervision Board is scheduled to receive as part of the resolution of special assignments. That Board, headed by Natalie Jaresko, the former Finance Minister of the Ukraine, is, according to PROMESA Chair Jose Carrión, to be in charge of the implementation of the plan, or, failing that, to achieve the fiscal balance of Puerto Rico and its return to the capital markets. (Ms. Jaresko has agreed to work for a four-year term: she is expected to earn an annual salary of $ 625,000 without additional compensation or bonuses, except for reimbursement of travel and accommodation expenses related to the position he will hold, according to PROMESA Board Chair Carrión, who has previously noted: “I know it’s going to be a controversial issue…We have a world-class problem, and we have a world-class person. This is what the rooms cost.”)

The Hard Road to Fiscal Sustainability

eBlog

Good Morning! In this a.m.’s eBlog, we consider, Detroit’s remarkable route to fiscal recovery, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability.

The Road to Recovery from Municipal Bankruptcy.  Detroit, which has roared back from the largest municipal bankruptcy ever, but, in doing so paid an average 81% of what it owed to its municipal bondholders as part of its plan of debt adjustment, nearly 25% more than either San Bernardino or Stockton, now, in the wake of its decades of its more than 50% population decline  (In 1950, there were 1,849,568 people in Detroit; in 2010, there were 713,777.), is ready to tackle its housing dilemma. Post-chapter 9 Detroit inherited an estimated 40,000 abandoned lots and structures and an 80% erosion of its manufacturing base—that in a municipality where 36 percent of its citizens were below the federal poverty level, and, the year it filed for chapter 9, had reported the highest violent crime rate for any U.S. city with a population over 200,000.

Thus, Mayor Mike Duggan now vows that his administration plans to launch a street-by-street initiative effective August 1st to board up abandoned homes in the city while demolition crews continue razing blighted houses. That will be a painstaking challenge: in a city of 142 square miles, the city reports some 25,000 unsecured houses, the bulk of which have been scheduled to be razed—but, up to now, the pace of demolitions has been limited to 4,000-5,000 annually, according to the Mayor. Thus, he posits: “We’re going to go through and board up every house we can’t get to so we’re not just saying to people, ‘It’s going to be five years before we get to everything. Wait!’”

Mayor Duggan, speaking at the Mackinac Policy Conference, vowed the city will begin deploying six crews beginning at the end of next month, with the teams slated to go through each neighborhood and close off vacant and abandoned homes—homes that are susceptible to crime, to being scrapped for metal and finishings, and becoming uninhabitable safety hazards. Mayor Duggan made the announcement, as the city’s plan of adjustment and the city’s actions in implementing it appear certain to be fodder for the upcoming mayoral primary election set for August 8th—with whichever candidate is chosen slated to confront Michigan state Sen. Coleman Young II (D) in the November 7th general election. Indeed, unsurprisingly, Sen. Young (1st District), who previously served two terms in the Michigan House prior to being elected to the State Senate, is the son of former Detroit Mayor Coleman Young—who served as the Motor City’s Mayor from 1973-1994, this week blasted Mayor Duggan for waiting until his fourth year in office to address the safety hazard of unsecured houses: he accused his upcoming opponent of “playing games with the people and the public, because it’s election time,” adding he was “just amazed now all of sudden that he cares about the neighborhoods and he wants to do this…Where was he for the last 3.5 years in office? They just should have addressed that first.”

Currently the Duggan administration estimates city crews can board up 100-200 homes each week and that the effort will take two years to complete, so that, as Mayor Duggan notes: “By the end of two years, we’ll have every house in the city either demolished, reoccupied, or boarded…So at least it will be secure. Kids won’t be wandering in and out.” In making the statement, Mayor Duggan acknowledged the city has fallen well short of its avowed initial goal of razing 10,000 blighted homes annually, describing that as “not a practical goal.” Since Mayor Duggan took office in 2014, Detroit has razed some 11,593 blighted structures; there are 331 more contracted for demolitions, and then another 2,141 in the pipeline.

In making his responses, Mayor Duggan acknowledged that his initial commitment to raze more than 5,000 homes per year had gotten him into “trouble,” noting: “I feel bad for the people who took the grief for it, because I pushed them;” he said the city will post notices on unsecured privately owned homes for which city crews will be covering the windows and doors with plywood, noting: “We’ll go down and board up every house that’s not scheduled to come down in the next six to 12 months,” adding that the city’s budget is bearing the burden more often than not, because the cost of going after the home owners of such abandoned homes has proved impractical and costly: “You’ve got a lot of people in this town (who say), ‘My uncle died, left me the house, the house is in a bad neighborhood,’ they don’t even live here…To send them bills is not practical.” To date, for the most part, Mayor Duggan said the city has been delivering plywood to some neighborhood groups and relying on volunteers to board up houses on their streets; however, he added that there are a lot of neighborhoods with mostly senior citizens who “just physically can’t put these huge sheets of wood onto these houses…We finally said, ‘You know the most efficient way to do it just roll through the city.’”

On the Road to Fiscal Recovery. As we reported earlier this week, Detroit completed its most recent fiscal year with a $63 million surplus according to its Comprehensive Annual Financial Report, which the city filed with the Michigan Treasury Department on Tuesday, with Detroit CFO John Hill noting the FY2016 surplus was some $22 million higher than the city had projected, an outcome  to which he attributed the city’s improved financial controls, stronger-than-anticipated revenues, and lower costs due to unfilled vacancies—something, he told the Detroit News, the city believes “will have a lot of positive implications on the future.” In the near future, it offers the potential for Detroit to exit from state oversight by the Financial Review Commission under terms of Detroit’s plan of debt adjustment. Or, as Mayor Mike Duggan noted: “This audit confirms that the administration is making good on its promise to manage Detroit’s finances responsibly…With deficit-free budgets two years in a row, we have put the city on the path to exit Financial Review Commission oversight.” In fact, the city now projects an FY2017 $51 million surplus.

All this is increasing optimism that the 2017 audit of the Motor City’s finances could trigger a vote by the Commission to suspend its direct financial oversight, obviating the current required state oversight and requisite approvals on all the city’s budgets and contracts. Of the city’s reported $143 million in accumulated unassigned fund balances, including this year’s surplus, the city has allocated $50 million from its FY2016 balance as a down payment to help set up the city’s Retiree Protection Fund to help it address pension obligations scheduled to come due in 2024 under the terms of the city’s plan of debt adjustment. In addition, the city has set aside $50 million in its FY2018 budget for blight remediation and capital improvements—an amount which would leave a cushion of about $43 million in an unassigned fund balance—but which account could only be drawn from with the approval of Mayor Duggan, the City Council, or the state review commission. The city primarily draws from this account for one-time costs, such as to address blight and for its capital budget. CFO Hill has expressed hope the ongoing, positive cash flow and budget balances will enhance the city’s credit rating—and, thereby reduce its borrowing or capital costs.

What Constitutes Economic Sustainability? Puerto Rico Gov. Ricardo Rosselló has proposed an austere Fy2018 General Fund budget which, he reports, would reduce the territory’s operating expenses by 9.1%, describing his plan as comparable to “those we had established in the fiscal plan.” As proposed, the Governor would allocate at least $2.04 billion for pensions—an amount that would leave naught to meet Puerto Rico’s debt obligations: he noted that funding pensions was vital to protect Puerto Rico’s most vulnerable citizens—and that the “measures implemented in this budget are those that we had established in the fiscal plan.” Nevertheless, Gov. Rosselló said his budget was different from past budgets, because it was balanced: it projects that the central government would have sufficient balance to remit $404 million of $3.283 billion in scheduled debt service, or 12.3%, in FY2018. The budget does not include the debt from semi-autonomous and autonomous public sector entities, but shows near balance: $9.1 billion in revenue and $8.987 billion in spending, according to the Puerto Rico Office of Management and Budget, with an increase of nearly 6% in spending. In the Governor’s proposed budget, all General Fund payments for debt would be eliminated—guaranteeing a battle with the PROMESA Board, which, in its plan, had projected there would be $404 million available cash flow “post-measures” for FY2018, with the Board seemingly pressing to ensure funds were included in the budget to address Puerto Rico’s debt services to municipal bond holders—even as the Governor appears focused on protecting the territory’s most vulnerable citizens. In contrast, the PROMESA board certified decade-long quasi plan of debt adjustment incorporated the amount of municipal bond debt service to be paid each year—providing that amount be $3.28 billion.

The challenge is complex: with apprehension that the territory’s young professionals are increasingly leaving to New York and Miami, leaving behind an increasingly elderly and impoverished population—less able to remit taxes, but in greater and greater need for public services, and for promised pension payments, the critical planned increase by the Governor in public pension funding is imperiled: each of Puerto Rico’s three government pension systems is projected to run out of liquid assets in FY2018, unsurprisingly leading the Governor to propose allocating at least $2.04 billion in his budget to cover pension funding—marking a stark change from his previous budget, when the line item to cover “pay-as-you-go” pension funding was absent. (Puerto Rico has three public pension systems: the Employee Retirement System, the Teacher’s Retirement System, and the Judiciary Retirement System.) In contrast, the PROMESA Board, last March, in its decade-long oversight fiscal plan, ordered a cut in public pension obligations effective in FY2020, projecting fiscal savings for the subsequent six years in the range of $83 million. It is unclear whether those projections incorporated the potential fiscal impacts on either sales tax revenues, or the increased costs of aid to those falling below the poverty level.

In his proposed budget, Gov. Rosselló has recommended to the legislature a $9.56 billion FY2018 General Fund budget, seeking a 6.4% increase—but, after compensating for public pension obligations, actually providing 21.8% less for spending. Within his proposed budget, the Governor is asking for $583 million more for “other operating expenses,” but $555 million less for salaries and related costs, and retaining $195 million as a reserve. (In the wake of the final action by the Puerto Rico legislature, the PROMESA Board is authorized to reject any final budget and substitute its own.)

However, there is now a third party to this increasingly complex fiscal process, in the form of U.S. Judge Laura Swain, who, under PROMESA’s Title III municipal bankruptcy process, has some discretion of her own to consider changes in the amounts of debt paid in the next fiscal year—albeit, as we have learned from the chapter 9 proceedings in Detroit, San Bernardino, etc., the judicial system in these exceptionally complex chapter 9 cases acts with  considerable deliberation—not haste; moreover, unlike a normal chapter 9 process, PROMESA section 106(e) prohibits Judge Swain from deviating from the PROMESA Board’s certified fiscal plan and budgets.

Gov. Rosselló’s budget, unlike previous proposals, includes a $2 billion payment for Puerto Rico’s three public pension systems, noting: “One of the most important differences, he said, as mandated by the PROMESA Board, in this budget is that, contrary to the previous ones, it really is balanced,” adding that, as proposed, Puerto Rico had created a $200 million reserve. In addition, the Governor reported he would soon propose measures to simplify Puerto Rico’s tax system. Overall, his proposed plan contains some $924 million in revenue increases versus $851 million expense cuts for FY2018: among the key fiscal plan measures to increase FY2018 revenues is $519 million by extending the Act 154 foreign corporation tax and $150 million through improving tax compliance.

What Might it Mean to Puerto’s Rico’s Fiscal Future? The PROMESA Oversight Board, which had requested a structurally balanced budget, seeking a “once and done” approach to the Puerto Rico government’s fiscal crisis, had focused on immediate large spending cuts and revenue increases in the budget. Indeed, as proposed by the Governor, there are significant changes, including reductions in support for the University of Puerto Rico ($411 million) and $250 million to the island’s municipalities or muncipios. The plan encompasses freezing payroll increases and eliminating vacation and sick day liquidations—all with the aim to reduce Puerto Rico’s debt service costs by 76% through FY2026. San Juan Mayor Carmen Yulín Cruz said, “The governor’s public policy has been to act as the messenger of the junta [i.e. the Oversight Board] and, in this way, has hidden behind it to become the executioner of Puerto Rico,” according to the El Vocero news web site. “The budget message will be another sign that the governor turns his back on the people.”

Monitoring Municipal Fiscal Stress

eBlog, 11/17/16

Good Morning! In this a.m.’s eBlog, we consider the evolving state takeover of Atlantic City, with the appointment by the state of what Mayor Don Guardian deemed the “occupation force.” We consider the role of the state and mechanisms for a state takeover—as well as the options for the municipality. Then we look west to an innovative state-local tax collection sharing effort between the State of Michigan and City of Detroit—mayhap appropriate in the emerging sharing economy; then west where, in the wake of municipal elections in post-chapter 9 Stockton, the newly elected Mayor begins thinking about the city’s further post municipal bankruptcy fiscal future. Then we swing back southeast to the historic small city of Petersburg, Virginia—where a private team has been hired to try to pilot the city—and the region—out of near insolvency. Then we look north, to the land of the incomparable Don Boyd of the Rockefeller Institute, who yesterday was a host to a fascinating session with New York Assistant Comptroller Tracey Hitchen Boyd who discussed with us the Empire State’s “groundbreaking Fiscal Stress Monitoring System to identify local governments and school districts experiencing financial strain.” Finally, with winter beginning to bite, we seek warmth in the Caribbean, venturing back to Puerto Rico, where the Puerto Rico Oversight Board created under the new PROMESA law preps for its meeting tomorrow—a meeting that will come during transition periods of administrations both in the federal and Puerto Rican governments—adding still greater challenges to the U.S. territory’s transition.

Share on Twitter

State Preemption of a Municipality? The twilight period during which Atlantic City has awaited its state takeover now appears to be over, or, as Mayor Don Guardian posed it, the “occupation force” of a “governor we don’t like” has been named. New Jersey has tasked Jeffrey Chiesa, a longtime ally and associate of Gov. Chris Christie—indeed, an associate the Governor once named to fill in as one of the state’s U.S. Senators in the wake of the death of former U.S. Sen. Frank Lautenberg, and who also served as New Jersey’s Attorney General, to serve as the “director’s designee” to execute the state takeover of Atlantic City, from which position he will report to New Jersey’s Department of Community Affairs, under the leadership of Tim Cunningham, the Director of New Jersey’s Local Finance Board. In this new capacity, Mr. Chiesa will have far-reaching powers, including the authority to unilaterally hire, fire, eliminate departments and authorities, sell assets, terminate union contracts, and veto any action by City Council, according to the state’s Municipal Stabilization and Recovery Act. In its release, the New Jersey Department of Community Affairs said Mr. Chiesa would use his authority “judiciously.”

In the statement, Mr. Chiesa said: “It is my hope to work together with firm conviction and not disrupt the democratic process…I am committed to improving essential government and community services for the people of the Atlantic City…“I will listen to the people and work hand in hand with local stakeholders to create solutions that will prevent waste and relieve generations of taxpayers from the burden of long-term debt. We will put Atlantic City back on a path to fiscal stability.”

With regard to governance, the Department said Atlantic City Mayor and City Council will “maintain day-to-day municipal functions.”  Mr. Chiesa’s role will be to oversee “fiscal recovery efforts, ” with the release from the Department noting his immediate steps would include entering into PILOT (payment in lieu of taxes) agreements with casinos, ensuring that debt service and county and school payments are made on time, in addition to exploring “right-sizing the City’s work force.” What and how Atlantic City’s elected government leaders will do—and what they may do could now be the outcome of the third branch of the state’s government: the courts, especially in the wake of Mayor Guardian’s making clear yesterday that the city was poised to go to court to block any actions by the state that it regards as civil rights violations. Early yesterday, Mayor Guardian said the city would go to court if the state takes actions “we see as unconstitutional.”

The road ahead promises to be steep: the state takeover comes with the Governor potentially leaving to join the new Trump Administration; Atlantic City has a roughly $100 million annual budget deficit and about $500 million in total debt. The city’s ratable base has declined from $20 billion in 2010 to $6 billion today as the casino town faced more competition in neighboring states: five of the city’s famed boardwalk casinos have closed since 2014—with significant implications for unemployment, per capita income, and assessed property values.

State Preemption. In the wake of last week’s state Local Finance Board vote to usurp major decision-making powers from Atlantic City’s elected leaders week, Local Government Services Director Timothy Cunningham noted: “The simple fact is Atlantic City cannot afford to function the way it has in the past…I look forward to meeting with Mayor Guardian and members of the City Council and starting the process of bringing this great city back to financial stability. It is my hope to work together with firm conviction and not disrupt the democratic process.”

As we have previously noted, the Board’s vote for the takeover came in the wake of the state Department of Community Affairs Commissioner Charles Richman rejecting the city’s fiscal-recovery plan last week—a plan which the Department criticized, because it failed to balance the city’s 2017 budget, ran a five-year shortfall of $106 million, and did not accurately estimate cost and revenue projections. In addition, the Department expressed concerns over the Bader (airport) Field sale, calling the water authority’s plan to issue $126 million in low-interest, long-term bonds to pay for the land “dubious at best.”

The Sharing Economy? The State of Michigan Tuesday committed to begin processing Detroit city business tax returns for the first time next January, enhancing a state-local partnership between the Motor City and the Michigan Department of Treasury that began last year with individual income tax returns and which will extend to business returns starting with the 2016 tax year. Under the new partnership, any business required to withhold city income taxes and any taxpayer who files under Detroit’s corporate partnership and fiduciary rules will be affected by the change: it will allow corporate filers to electronically submit their returns and use other online department services. In addition, partnership and fiduciary filers will submit their returns to the Treasury Department. As part of the reforms, the State’s handling of individual tax returns will allow filers to electronically submit both city and state returns. (Detroit residents pay a 2.4 percent individual income tax rate, while nonresidents pay a 1.2 percent rate. Detroit’s business income tax rate is 2 percent.)

Taking Stock in Stockton. In his first public comments since last week’s election, Mayor Anthony Silva this week said “the hate and the political battles” must end “if Stockton is truly going to heal and move forward.” Noting that: “Stockton is still a divided city,” the new Mayor said: “We have a new mayor, and he is now my mayor.” The outgoing Mayor spoke for five minutes at this week’s City Council meeting, the first such meeting since his lopsided loss last week to City Councilman Michael Tubbs. He graciously added: “I would expect anyone out there who claims to be my friend or one of my supporters not to participate in any sort of hate against the new mayor and to allow him the opportunity to lead.” (Mayor-elect Tubbs will take office January 1st.) Mayor Silva added: “I want you to pray and root for his success. Mayor-elect Tubbs, you have my support and you have my commitment for a smooth transition during the next month and a half. Congratulations.” The Mayor-elect did not refer to the outgoing Mayor’s comments during his own public remarks; rather he said Stockton has much to be grateful for as Thanksgiving approaches, referring especially to voters’ approval in the election of a one-quarter-cent sales and use tax to benefit Stockton’s library and recreation services: “Think of the gifts the voters gave us…That shows me that the residents in the city of Stockton are ready to get to work, that they want to be part of the solution. I think that bodes well for us at the end of this year as we move forward to next year.” (The Mayor-elect won his election by a 70-30 margin.) He added: “In Stockton, we love diversity. We don’t tolerate bigotry. If you’re LGBT, if you’re Muslim, if you’re undocumented, if you’re documented, if you’re immigrant, Stockton is your home, we love you, you’re part of our community.” Outgoing Mayor Silva noted that he had sent a text message to Councilmember Tubbs immediately after the election, and added that the two had “a great meeting” post-election meeting—a meeting he noted which “was important…because four years ago I never got a text message or a phone call or an email from my opponent (then-Mayor Ann Johnston), and then when I reached out to her I still never got one.” He added: “I would never wish this same action upon anyone, and Mayor-elect Tubbs and the new City Council do not deserve this type of hate, either.”

Addressing Municipal Dysfunction. Robert Bobb, the former Richmond, Virginia city manager whose consulting team has been hired on for hundreds of thousands of dollars by the nearly insolvent small, but historic city of Petersburg, Virginia told the City Council this week “There’s a lot of work to do, a lot of clean-up to do. We’re at it every day…There are a lot of dedicated people here who are working hard to help us.” Nevertheless, the challenge is significant: Mr. Bobb estimated the city has just $78,000 in cash in the wake of a debt payment due; yet it confronts critical payments to select vendors; a mandatory $427,000 payment to the school system; and tomorrow’s payroll—and that is after an unexpected fiscal gift: some $1.3 million that the team was able to scrounge up working with the administration of Virginia Gov. Terry McAuliffe and the Virginia Resources Authority from unused municipal bonds dating back to 2013. The challenge is made greater, moreover, in a city where nearly half the city’s children are estimated to live below the federal poverty line, according to U.S. Census data. Mr. Bobb also warned the Council that he remains unable to ascertain how much of the $18 million backlog in past-due bills the city owes that Virginia state officials identified over the summer has been resolved. About $10 million in accounts payable bills remain outstanding; however, there are many other categories of expenses. Moreover, as Nelsie Birch, Petersburg’s deputy interim City Manager and acting Finance Director noted: “That’s only for bills we’ve received,” adding that as of earlier this week there was more than $1 million in the city’s checking account, but “it’s more than spoken for,” noting that payroll costs about $1 million every two weeks. Unsurprisingly, the Council voted unanimously to allow the city manager to make the moves necessary to secure the funding. In addition, the Council authorized acting City Manager to move forward and secure $6.5 million in short-term financing to help Petersburg remain operating through the end of the year, with part of those funds to go toward a lump-sum payment of $1.2 million due by mid-December to help settle a lawsuit filed against the city by the regional South Central Wastewater Authority—where the municipality has been delinquent since last May, threatening the budgets of the other municipalities in its region. Petersburg has agreed to address its outstanding balance within two years, according to the statement, albeit how it will do so is something which remains to be resolved.

Good Gnus, Bad Gnus. Mr. Bobb advised the Council that his team’s fiscal analysis had, to date, discovered both good and bad news: in the latter category, among the most disappointing findings, they determined that a $92,000 cut made this year to the city’s Department of Social Services had triggered a loss of $600,000 in state funds needed to help Petersburg’s most vulnerable residents—especially its children. On the good gnus side, he told them that the dismissal of the South Central region’s lawsuit would clear the path for the city to move forward with short-term solutions that would offer his group the time and space to implement long-term plans to move the city back towards solvency, noting that the city, for the first time since the beginning of the fiscal year, had posted its current fiscal year budget online. However, he also reported that it was not just the city’s taxpayers who had been left in the fiscal dark in recent months: the municipality’s department heads had been operating without spending plans revised to address the $12 million in cuts made by the City Council last September to balance the budget for the first time in nearly a decade. The report, however, also advised Councilmembers that the City Council had voted to approve road projects Petersburg could not afford and that the city’s decentralized system of paying for goods and services was such that finance workers hoping to avoid further overspending could not see what resources had been committed until the office received an invoice. That meant, the team reported to the elected leaders, Petersburg will need to defer some past priorities, including postponing some utility upgrades such as water tank upgrades and overhauling sewage main and lines; museum and golf course upgrades; replacing City Hall; and planned work on other city facilities.

Early Fiscal Storm Warnings. New York Assistant Comptroller Tracey Hitchen Boyd this week, in a communication to New York local elected leaders, wrote that since the state, three years ago, had implemented a “groundbreaking Fiscal Stress Monitoring System to identify local governments and school districts experiencing financial strain,” the state had received suggestions from local leaders on ways to enhance that system, so that the state has opened a comment period to enhance the state’s ability to provide an early fiscal warning to local leaders in order to provide an opportunity to take corrective actions. The program, now in its fourth year, aims to provide an early warning of fiscal problems to local officials and citizens so that corrective actions can be taken before a true financial crisis occurs. The state is completing its fourth year of such reviews, evaluating every city, county, town, village, and school district based on a series of standard financial indicators. Each entity is scored annually to determine if, according to the measures, it falls within one of three levels of fiscal stress. The System also evaluates the general environmental factors affecting municipalities, or, as Ms. Boyd wrote: “We are completing our fourth year of FSMS reviews, evaluating every city, county, town, village, and school district based on a series of standard financial indicators. Each entity is scored annually to determine if, according to the measures, they are in one of three levels of fiscal stress. The System also evaluates the general environmental factors affecting municipalities.”

Federal Preemption. The Puerto Rico Oversight Board has scheduled its first session in Puerto Rico for tomorrow, with the meeting set outside of Fajardo, Puerto Rico. While the session will be by invitation only, it is scheduled to be streamed online at www.oversightboard.pr.gov, and to be followed by a press conference. It follows two earlier meetings convened in New York City. At this week’s session, the agenda includes a presentation by Conway MacKenzie Inc. on the government’s liquidity; a presentation by the Puerto Rico Aqueduct and Sewer Authority; public testimony on Puerto Rico’s proposed fiscal plan; and the creation of procedures to approve transactions of the board’s “covered entities.” The session comes as the U.S. territory confronts a $3 billion cash shortfall in its current fiscal year—having disclosed that sum yesterday as part of its report it will be presenting to the PROMESA Board tomorrow—with that tidy sum coming due next February—assuming that would be the proximate date of the lifting of the current debt payment moratorium, but also optimistically assumes Puerto Rico will not have reached agreements with its creditors by that date: the tidy sum, after all, represents nearly 33% of Puerto Rico’s current approved fiscal year budget. Moreover, the island faces some $2.2 billion in municipal bond debt service between then and the end of its fiscal year—not to mention some nearly $850 million in unpaid municipal debt service. The territory’s government has sought to address its growing financial crisis via any number of avenues, including the deferral of payments to suppliers and the deferral of tax payments; however, it is running out of fiscal options.

Post Municipal Bankruptcy Governance

eBlog

Share on Twitter

eBlog, 11/09/16

Good Morning! In this a.m.’s eBlog, we observe election results in San Bernardino, where the voters, by a wide margin in a city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, voted to move to a city manager type of governance; then we head sharply across the nation to New Jersey, where, this morning, the New Jersey Local Finance Board will begin the process for the state to determine if and how it would wrest governance authority from Atlantic City. Finally, we do a U-turn back to the West coast, where voters in post-chapter 9 Stockton voted to reject the incumbent mayor and elect one of the youngest new mayors in the nation—Councilmember Michael Tubbs, who jubilantly crowed:  “We have a great opportunity to show the nation, ‘How do you reinvent yourself?”  

Post Municipal Bankruptcy Governance. Voters in the nation’s city nearing the denouement of the longest-ever municipal bankruptcy are on the verge of replacing a governing document which many city leaders and, in our in-depth report, we believe has hobbled the city for years, voting by an official 60 percent margin to adopt Measure L, which would replace the San Bernardino City Charter with a new one—that is, the rules of the road that govern how the city is run, comparable to a state’s constitution, essentially moving the city to a city manager form of government, will change dramatically. The measure replaces San Bernardino’s charter with a new one, written over a two-year period by a committee based on state and national models. Or, as the head of the drafting committee which authored the new charter noted, “This is the beginning of a new day for the city, one that a lot of people worked very hard for, and I want to thank all of you: This city can now become what it used to be and what it should be.” His comments were in sharp contrast to former City Attorney James Penman, one of the leading opponents of Measure L, who said he was not surprised by the apparent defeat and hoped he was wrong in his predictions that the charter change would enable corruption, adding he prayed he was “wrong: I want to see San Bernardino do well, and I hope that whoever the future city managers are led well.” Mr. Penman stated that a city manager form of government works best when voter engagement is high—something which, historically, has not been the case in San Bernardino. However, advocates of Measure L believe that gloom will change, because turnout in future elections is projected to increase substantially, because it moves future elections for city officials from odd-number years to match California state elections—November of even-numbered years. (Four years ago, 61 percent of San Bernardino voters came out to vote for President, compared to the last Mayoral election in 2013 when the election turnout was below 16 percent.) Measure L was drafted over a two-year period by a committee based on state and national models. As adopted it provides that the offices of city attorney, city clerk, and city treasurer—currently elective offices—will instead be appointed, and responsibility for some day-to-day operations will shift from elected City Council members to the city manager, who is appointed by the City Council. In addition, pay for police will be set through collective bargaining, instead of through the unique formula San Bernardino has used for decades, which bases the pay on the average of 10 like-sized California cities. San Bernardino has operated under its own city charter, albeit amended several times, since 1905.

State Preemption of a Municipality? The New Jersey Local Finance Board will consider in the next few hours whether to wrest power and authority from Atlantic City’s Mayor and Council and grant them to a state official to turn around the city’s near insolvency in the wake of last week’s rejection of the city’s turnaround plan, when New Jersey Department of Community Affairs Commissioner Charles Richman, in a 14-page reply, said the city’s supplemental information did not change his view, in some part because it was still overly reliant on state aid and a partnership with the state: “The extent to which the city minimizes the plan’s weaknesses by invoking the value of a partnership to propel the plan forward is, to me, confirmation that the plan does not stand on its own. Ergo, this morning, following are the ten powers the state can take under the so-called takeover law:

State Usurpation Powers. The state’s takeover law provides for state authority powers, including authority to “unilaterally modify, amend, or terminate any collective negotiations agreements, except those related to school districts.” The law also permits the state authority of “selling, conveying, leasing, monetizing, or otherwise disposing of any interest in any municipally-owned assets.” (The city’s Bader Field, a 143-acre former airstrip, and the Municipal Utilities Authority, the city’s waterworks, are considered two of the city’s most prized assets—and monetizing those assets had been a signal part of the city’s proposed, but rejected recovery plan.) The state can unilaterally “appoint, transfer, or remove employees” of the city, up to and including department and division heads; such state authority excludes appointed officials who have received tenure.

  • Enter shared services agreements.The state, under the law, may strike agreements with Atlantic County, other municipalities, or “any instrumentality of the state” to share or consolidate municipal services. (Atlantic City recently reached a shared services deal with Atlantic County for senior and health services.)
  • Restructure debt.The state can retain bond counsel, adopt bond ordinances, and take “any other steps necessary” to restructure and adjust debt. (Atlantic City has roughly $500 million in total debt.)
  • File papers in bankruptcy court. The State of New Jersey may file a chapter 9 municipal bankruptcy petition and other pleadings and papers with any United States court or federal bankruptcy court for the purpose of “effecting a plan of readjustment or composition of debts;” however, the state must first have the approval of the legislative Joint Budget Oversight Committee.
  • Abolish city departments.The state’s sweeping powers also include “dissolving, terminating, transferring, abolishing, or otherwise disposing of any municipal authority, board, commission, or department.”
  • Control legal affairs.The state can take over the city’s litigation and legal affairs, including suing in the city’s name, prosecuting, defending, and resolving litigation, arbitration, disputes, and controversies.
  • Purchasing goods and services.The state may procure any “goods, services, commodities, information technology, software, hardware, or other items” on behalf of Atlantic City; and
  • Veto meeting minutes.The state can veto minutes from the governing body and “any board, commission, or department” of the city. Copies of meeting minutes must be sent to the director of Local Government Services, who can approve or veto any action taken by the city.

In response to Atlantic City’s information and efforts to avert a state takeover, as well as Mayor Don Guardian’s epistle late last week to the New Jersey Department of Community Affairs, the Department, created to provide administrative guidance, financial support, and technical assistance to local governments, community development organizations, businesses and individuals, has scheduled the following agenda items for its meeting today:

11:15 AM City of Atlantic City
Atlantic – NJSA 52:27BB-87 0 Proposed Adoption of Municipal Budget

11:20 AM City of Atlantic City
Atlantic – NJSA 52:27BBBB-1 et seq. – Confirmation of Powers under Municipal Stabilization and Recovery Act. 

Under said Act, the Commissioner of the Department of Community Affairs has 150 days in which to approve or reject the city’s five-year plan. Should the Department find that the proposed plan failed to achieve fiscal stability, a state takeover would take effect. Moreover, the statute also provides authority for a state takeover if Atlantic City, at any point, fails to follow the five-year plan—although it permits Atlantic City the right to appeal the Commissioner’s decisions to a Superior Court judge.

In its 25-page document, as we previously noted, the city sought to respond to the criticisms of the state to its report and urge that the city’s proposed plan is the best way to address its fiscal future. The timing, one day after the Presidential election, is mayhap ironic, coming after last week’s closure of candidate Donald Trump’s Taj Mahal casino—one he once called “the eighth wonder of the world,” despite, ironically, taking his Atlantic City casinos through bankruptcy four times. Nevertheless, he last week said: “There’s no reason for this,” in a recent interview as his friend and fellow billionaire Carl Icahn prepared to close the casino. Thus, in another blow to the city’s tax base and employment and other sales and hotel tax revenues, the Taj Mahal closed its doors amid a strike by union members that had lasted more than 100 days, making it the fifth Atlantic City casino to close since 2014. Mr. Trump claimed both sides should have been able to work out an agreement to keep the casino open. Local 54 of the Unite-HERE union had gone on strike July 1st, after the Local was unable to agree with Mr. Icahn on a new contract to restore health insurance and pension benefits—benefits which were terminated two years ago in a federal bankruptcy court. So last August, Mr. Icahn decided to close the casino, stating it lacked a “path to profitability.” That path, according to candidate Trump, is now forever closed: “Once it closes, it’s too expensive to ever reopen it.” The casino’s closure of course impacted Atlantic City’s fiscal challenges: its impact in lost jobs (nearly 3,000 workers—bringing the total jobs lost by Atlantic City casino closings to 11,000 since 2014), reduced assessed property values.

New Hands at the Tiller. Stockton City Councilman Michael Tubbs appeared certain this morning to become Stockton’s first black mayor after vaulting to a resounding lead over incumbent Anthony Silva in an election upsetting night across the country. At the age of 26, the Mayor-elect of the formerly bankrupt city stated: “We have a great opportunity to show the nation, How do you reinvent yourself? I’m tired of talking about where we’ve been. I’m more interested in talking about where we’re going. We have to mature as a community and start demanding solutions.” Outgoing and defeated former Mayor Tony Silva said: “The people have spoken…I respect the will of the people. I want to thank everyone who believed in me and stood by me…My heart will always belong to Stockton. I will always be remembered as the People’s Mayor and I will support the new mayor and I will ask my supporters to also support him and help us make Stockton an amazing city.” Mayor-elect Tubbs’ victory margin was an overwhelming 40-percent. In his acceptance speech, Mayor-elect Tubbs noted: “You don’t get 70 percent of the vote out of nowhere…This victory is yours and ours. This room is what Stockton looks like. It’s people from gated communities and Conway Homes, black people, Asians, white people. Each of us is what it will take to move Stockton forward.” Indeed, it is a remarkable pinnacle for the new Mayor-elect, who was raised by a single mother in south Stockton, earned his bachelor’s and master’s degrees from Stanford University and was elected to the Stockton City Council in 2012. The new Mayor noted, last night: “Stockton has a long history of turning tragedy into triumph…The Stockton I know, I met in this campaign…I am more resolute than ever that Stockton’s best days are ahead. This is a prelude to a beautiful chapter. Michael Tubbs will not write it himself. We will write it together.”

Hard Choices for Municipalities

Share on Twitter

eBlog, 11/03/16

Good Morning! In this a.m.’s eBlog, we visit Petersburg, Virginia, where the beleaguered city is under new management—management which yesterday unveiled troubling evidence of how significant a fiscal hole confronts the small municipality’s future. Then we return to the nation’s East Coast former gaming capitol—Atlantic City—where, in the wake of the state’s announced takeover of the city, questions abound to just what that means, whether the city will sue to bar such a takeover, and how such a takeover might manifest itself. Finally, we head west to Stockton where, yesterday, a Councilmember vying next Tuesday against the incumbent Mayor announced he had been endorsed by the President. Wow.

Citizen’s Trust in its Elected Leaders? Former Richmond City Manager Robert Bobb laid out his firm’s short-term plan to deliver Petersburg from financial peril on Tuesday, a week after taking command of the city’s beleaguered administration. Advising the City Council that the city lacked adequate fiscal resources to operate through this month, Mr. Bobb demonstrated to the Council and audience a photo of fat stacks of unsent municipal checks—not awaiting stamps, but rather sufficient funds—necessitating, he warned, in the near term that the city triage debts, adding that even as unmet bills are piling up, so too are expensive legal challenges. Nevertheless, after criticizing what he described as a lack of transparency surrounding the city’s financial challenges, he drew applause when he followed up by stating: “This is not rocket science, we can make this happen.” Prior to the session, Petersburg City Treasurer Kevin Brown said he could not provide a reporter with tax collection revenues from last year, nor give an estimate of where collections were anticipated to be at this point in FY2017, stating that all he had were the revenues tallied by Dironna Moore Belton, Petersburg’s transit manager, who had served as the municipality’s interim city manager for eight months.

The exchange came as the Council agreed to permit the Bobb Group to negotiate with lenders in an effort to remain solvent through the end of this month—albeit the proposal, coming in the wake of steep cuts in municipal workers’ salaries, cancellation of the city’s summer youth program, and cutting deeply into the budget of Petersburg’s underperforming schools would be, as Councilwoman Treska Wilson-Smith warned, challenging: “We’ve been doing this for years to help our cash flow, but our financial advisers had recommended we lessen our reliance on this type of thing.” Councilmember Wilson-Smith and the remaining council members ultimately voted to allow negotiations to move forward. For his part, Mr. Bobb said his firm had struggled in an effort to find evidence of corrective action taken by the city’s leadership in response to increasing problems he traced to 2009: “The deficit from a cash standpoint cascaded to where we are today…It’s just basic research in trying to find: How did we get where we are?” He added that Petersburg’s leaders failed to act last March when the city’s financial advisers “basically said that the city’s house is on fire,” adding that, at that stage, the answer should have been: “Do something; take some action,” as he vowed that a fuller blueprint for moving the municipality forward would be delivered within a month. (Under his contract, the virtually insolvent municipality is obligated to an initial five month contract of on-site assistance at a cost of $350,000, plus up to $25,000 in expenses under a contract executed last week under emergency hiring rules.)

As the city sputters toward a promised comprehensive solution to its financial challenges, residents increasingly frustrated with the city’s administrative dysfunction continue to take matters into their own hands. Last week, local lawyer Dale Pittman and other members of a committee that oversees Petersburg’s public law library filed a lawsuit against the city over a possible misuse of funds. Historical preservation advocates are crowdfunding a $50,000 campaign to staff museums shuttered as a cost-saving measure last month. The membership of a government accountability group whose leaders are a vocal presence at City Council meetings has ballooned to more than 1,830 members online—with an organizer of that group, Clean Sweep Petersburg, challenging audience members at this week’s session to remember that the city’s residents have the ability to hire and fire Council Members, noting: “I’m looking at tonight as the last meeting before you know some different team members will be part of this Council,” she wrote, referring to Election Day next Tuesday. This week’s Council session commenced behind closed doors with a 35-minute session to discuss “matters related to litigation.” In the public session, the meeting came with a warning—or, as Petersburg resident Cory Harris told the elected officials: “We are not your enemy, we just want to be heard…You cannot fix Petersburg without fixing the people, and the citizens of this city are angry, they’re frustrated, they’re confused.”

Saving Grace? Atlantic City Mayor Don Guardian yesterday—in response to the state’s announced takeover of the city, said the city would rework and resubmit the city’s financial-recovery plan to the state—a response which would, he noted, speak to what he termed “inaccuracies and misinformation,” as the city hopes to work with New Jersey Department of Community Affairs Commissioner Charles Richman—adding that the 150-day period provided by the state to form an acceptable recovery plan expires tomorrow. The Mayor added the city is prepared to go to court to bar a state takeover: “Having a plan in place allows the city to access bond markets at reasonable interest rates…We are appealing to the Commissioner to understand the critical nature of this plan and reevaluate it on the accurate backup information that we will provide.” The city’s response came as a spokesperson for the Department said New Jersey’s Local Finance Board will consider whether it should assume finance-related powers under the Municipal Stabilization and Recovery Act approved by lawmakers last May—a new state statute which authorizes the Local Finance Board to alter Atlantic City’s outstanding debt and municipal contracts, as well as sell city assets for a five-year period. The spokesperson, however, did not immediately respond for comment on what would happen if the city resubmits the recovery plan to the DCA or what the timetable is for deciding how much control the state may choose to exercise. The city has, ironically, been under state financial supervision since October of 2010, the year the state Local Finance Board, which oversees municipal budgets and finances, voted to put Atlantic City under financial supervision that gave the state approval over its annual budgets. Last year, the state took a further step when Gov. Christie appointed an emergency manager, who, theoretically was charged with assuming responsibility over Atlantic City’s day-to-day operations; however, his executive authority was amorphous at best. Unlike in Michigan, where state law authorizes an emergency manager to bar elected leaders from even meeting or taking any governmental actions, no such authority is provided under New Jersey’s statutes; therefore it is unclear whether New Jersey’s model provides any constructive means for a state to work with a fiscally stressed municipality to not only avert insolvency, but also to act as a coordinator between the state and municipality. Indeed, Atlantic City Council President Marty Small yesterday noted that six years of state oversight of by the state have proven ineffective, adding that the city’s elected leadership would continue to oppose what would be the state’s most preemptive interference with a local government in decades, adding: “The state has never had a plan, never will have a plan, and in their 75 pages of nonsense they didn’t offer a plan…All of the criticism that they had for the city government—the state has overseen every decision that we made in the city of Atlantic City since 2010.” Nevertheless, a spokesperson for the Department stated: “Commissioner Richman categorically rejects any claim that his decision was disingenuous, inaccurate, misinformed, politically motivated…It was a fair examination; the commissioner and his team stand by the decision.”

Moody credit rating agency analyst Douglas Goldmacher, who had praised the city’s proposed recovery plan, yesterday noted the negative response from the state to the city’s proposed plan left unclear how it would impact Atlantic City’s credit rating, mostly because it provided little information with regard to exactly how such a “takeover” would work, albeit adding: “The city’s financial condition remains extremely weak, and it will be difficult for it to make these payments without funding assistance from the state or other outside sources.”

Marc Pfeiffer, mayhap one of the most insightful and thoughtful experts on the state’s fiscal policies, who is a remarkable senior policy fellow and Assistant Director for Rutgers University’s Bloustein Local Government Research Center, notes that Commissioner Richman’s report raises legitimate concerns with regard to a number of provisions, including Atlantic City’s proposal to raise cash by selling its former municipal airport to its public water utility for $110 million, and he adds that Atlantic City leaders’ announcement that they intend to resubmit their plan to address the state’s concerns likely lays the groundwork for court action: “There’s been a chess game in play for about three years now and this is the next move: What we have is uncertainty, which unfortunately will continue for a while.” (It reminds one of the terrific Paul Newman line: “What we have here is a failure to communicate.”)Gordon MacInnes, President of the New Jersey Policy Perspective think tank, added that New Jersey’s record on intervention in Atlantic City is not a record which inspires confidence that a state takeover would work—adding a key concern: “Both the municipal and the state governments walked away from acknowledging the magnitude of the problem and working together to try to do something about it.”

What’s Next? The announced takeover opens the door to unprecedented state authority over Atlantic City’s affairs, including the right to:

  • dissolve agencies,
  • override decisions by elected local leaders, and
  • sell off assets, including land and a water utility coveted by private operators.

Commissioner Richman, however, offered no insights with regard to how the state intends to use that authority, with a spokesperson for the state agency stating that “the next step” will be up to the state Local Finance Board; however, she provided no timetable for a decision. The city’s 120-page proposal had proposed 100 job cuts, early retirement for some employees, a tax settlement with casinos, and a plan to sell the former Bader Field airport site to the city’s municipal utilities authority for $110 million, among other cost-saving measures.

Taking Election Stock in Stockton. Mayoral challenger Michael Tubbs yesterday announced he had received the endorsement of President Obama, a rare and possibly singular occurrence in Stockton political history. The President’s statement noted: “I am proud to endorse Michael Tubbs in his bid to become Stockton’s next Mayor…Michael’s service as a Councilmember illustrates that he understands the need for every Stocktonian to have safer neighborhoods, stronger schools, and a voice in the political process. His story is the American story, and Michael will work tirelessly to ensure that Stockton reaches its full potential.” Unsurprisingly, it seems unprecedented for a Stockton mayoral candidate to have received a presidential endorsement—especially against an incumbent mayor—in this instance, Mayor Anthony Silva. If Councilmember Tubbs wins, he will be Stockton’s first black mayor and its youngest mayor ever. The Councilmember was raised by a south Stockton single mother; he is a graduate of Franklin High School and, as is this blogger, a graduate of Stanford University. The Councilmember is not exactly new to the White House: he served a four-month internship at the White House in 2010, and, three years later, wrote to the White House seeking designation for Stockton by the federal government as a “Promise Zone,” albeit this was a wish ungranted.  

Can Municipal Insolvency Be Contagious?

eBlog, 10/24/16

Good Morning! In this a.m.’s eBlog, we consider the risks of fiscal contagion emanating from the historic city of Petersburg, Virginia, where the city’s virtual insolvency risks the solvency of the regional wastewater authority—and, therefore, the other participating municipalities. Next, with Election Day approaching, we travel to post-chapter 9 Stockton where the ballot issue of a sales tax increase on next month’s municipal ballot has divided the city’s candidates for Mayor and Council. Finally, we consider the exceptional challenges for the U.S. territory of Puerto Rico in the wake of the first PROMESA board meeting.

Can Municipal Insolvency Be Contagious? The South Central Wastewater Authority (SCWA), which provides wastewater treatment services to protect and enhance the environment for the City of Petersburg, the City of Colonial Heights, Chesterfield County, Dinwiddie County, and Prince George County, Virginia, may have to dip into its cash reserves and raise rates for its four other member municipalities if Petersburg fails to resume making its monthly payments very soon: to make up for the gap, each of the other four member jurisdictions would have to increase its monthly payments by approximately 61 percent. At a special meeting at the end of last week, the boards of the SCWA and the Appomattox River Water Authority were briefed on the outlook for SCWA’s finances due to Petersburg’s looming insolvency—with SCWA accounting manager Melissa B. Wilkins warning that unless the authority can tap some of its cash reserves, without Petersburg’s monthly payments, the Authority will be insolvent by the middle of next month—or, as she put it: “Right now, mid-October, we’re broke.” Indeed, forecasts provided to the directors, all municipal government officials from Petersburg, Chesterfield County, Colonial Heights, Dinwiddie County, and Prince George County, make clear that if SCWA does not begin to receive payments consistently by Petersburg and does not tap into its reserves, its operating cash will go into the red as early as next month: by the end of the fiscal year next June, the figures show the authority’s cash balance will be nearly $3 million in arrears. Ms. Wilkens advised that if Petersburg were to start making regular monthly payments beginning with the amount due for this month, and if SCWA were to shift about $996,000 in unused construction funds from a reserve account to the authority’s operating account, the authority would end the fiscal year with a positive cash balance of $35. Ms. Wilkin’s forecast assumes that SCWA will continue to operate under a “bare bones” budget—one which would not include any deposits into the authority’s reserves and puts a hold on any non-mandated construction projects. The key issue is that Petersburg imposes a disproportionate burden on the joint authority: the city accounts for approximately 55 percent of SCWA’s treatment load; ergo its share is of SCWA’s operating and maintenance costs. Its failure to do so means that to make up for the non-payment, each of the other four member municipalities would have to increase its monthly payments by about 61 percent.

The urgency and briefing come in the wake of the suit the authority filed against Petersburg last month, seeking the appointment of a receiver to oversee the city’s utility revenue and make sure the money collected from residents is used to pay SCWA and not for other purposes: the authority claims Petersburg owed it more than $1.5 million in overdue payments. Two weeks ago, Petersburg Circuit Court Judge Joseph M. Teefey Jr. opined that the suit contained “sufficient information that an emergency exists, and it is necessary that this court appoint a special receiver” to make sure residents’ wastewater payments are not used for other purposes, naming attorney Bruce Matson of the Richmond-based law firm LeClairRyan as the receiver. In addition, Judge Teefey, on his own initiative, ordered the city and the wastewater authority to meet with a mediator, McCammon Group of Richmond, because of “the special relationship of the parties to this action and the potential conflicts that are a consequence of these relationships.” In response, the City of Petersburg’s attorneys have filed a motion asking Judge Teefey to issue a stay of his order or to vacate it, because the appointment of a receiver automatically puts the city in technical default on more than $12 million in debt. The court has scheduled a hearing in the case for next Monday.)

For her part, Petersburg Interim City Manager Dironna Moore Belton, who represents the city on the SCWWA’s board, indicated she was hopeful the city would be able to resume making its monthly payments in the very near future, stating that the city is currently seeking a short-term loan to help that effort, advising the board Petersburg has identified a list of “key obligations” to be paid each month, which includes payments to regional authorities such as SCWWA, the Appomattox River Water Authority, and Riverside Regional Jail—albeit acknowledging that to keep current on those payments, that would “still not address some past-due payments.” Ms. Belton stated that city officials and their financial advisers “have a long-term package we are working on to address fiscal year 2016 past-due payments.”

Financing Post Municipal Bankruptcy City Services. Stockton residents in two weeks will have a say on whether to approve a quarter-cent restricted sales tax increase where the new revenues would be dedicated toward funding libraries, a recreation program, and other services in the city. The vote on Measure M is projected to generate $9 million a year and $144 million overall for library and recreation services, including after-school programs, homework centers, and children’s story times. It will be a heavy lift: Measure M requires approval of two-thirds of voters to pass. Since 1980, proponents argue, the city has underfunded its library and recreation services; they add that the city’s municipal bankruptcy and the recession “only compounded previously existing problems;” moreover, they argue that since 1980, the city’s population has doubled, but not a single new library has been built. The main goal for proponents of the tax is to get Stockton to go from an average spending per resident of $15 on public libraries and recreation to California’s median of $35 per capita. Last June, the City Council voted 5-2, with councilmen Michael Tubbs and Dan Wright opposing, to reopen the Fair Oaks Library; however, the facility is not expected to open for several months. The City’s Community Service Director John Alita, speaking as a private citizen, told the Stockton Record the city has had to close pools, has under maintained playing fields, and has reduced the average time libraries are open to less than 30 hours per week, noting: “The more that those things continue, then the less and less there is opportunity for our community members to actually benefit from these amenities that we made and created to provide for them…(The) combined benefit of restoring what would be a normal schedule to residents and then being able to enhance that in areas where there’s nothing right now, I think we see that as Measure M’s greatest benefit.” (Last year, the Stockton Unified School District had the lowest third-grade literacy rate in San Joaquin County at 16 percent, according to University of the Pacific’s annual San Joaquin Literacy Report Card.) All six of the city’s Council Members have endorsed Measure M, as have civil rights leader Dolores Huerta, San Joaquin County Superintendent of Schools James Mousalimas, the League of Women Voters, and the Greater Stockton Chamber of Commerce. As proposed, Measure M would essentially leave the sales tax unchanged, as a state sales tax increase approved by the passage of Proposition 30 in 2012 will expire this year.

Nonetheless, incumbent Mayor and candidate for re-election Anthony Silva, City Council candidate Steve Colangelo, and former Councilman Ralph Lee White have expressed apprehensions, testifying before the City Council last May they opposed approving a new tax when Measure A funds are not being used to fund library services. (Measure A, a three-quarter cent tax, was a tax increase approved by voters in 2014 with no restrictions, but with the city’s promise funds would be used to hire more police officers—a promise as yet unmet.) Mayor Silva, at a candidate’s forum last week, said: “I’m kind of caught in the middle on this one: All that money that we promised has not been spent exactly on what it was promised to you. So here comes another tax,” adding that Measure A had also promised to fund essential services, including opening libraries and pools; however, but none of those things were done…I love libraries…I love books, but the schools already have libraries.” Another opponent. Ned Leiba, a CPA, who closely monitors the Stockton’s finances, noting what he termed was poor management of Measure A funds and the city’s overall “problem with accounting and auditing,” stated: “You don’t want to give money to an entity that can’t be responsible.” Mr. Leiba, a member of the Measure A oversight committee, said that instead, Measure M proponents should pressure the city into using budgeted but unspent funds and not a new tax to open libraries. Stockton wants to “hold on to every shekel,” but there’s no basis for management’s claim that there’s no money, he added: “You want to exhaust all other remedies before you turn to taxes.” Were voters to adopt Measure M, a seven-member oversight committee would be appointed to do an annual review of how much money is generated and how funds are used. It appears that were the measure to pass, all dollars collected by the restricted sales tax would be placed in a separate city fund to be used for libraries and recreation services in Stockton.  

Wherefore the Promise of PROMESA? The process of unravelling insolvency is slow and frustrating: it can be even more trying where it involves a quasi-state and there are issues of sovereignty. Ergo, despite two meetings, the federal control board has, to date, evidenced scant progress—likely awaiting the outcome of both U.S. and Puerto Rico elections. Moreover, despite the ongoing recovery from the Great Recession, our respected colleagues at Municipal Market Analytics note that the fifty-two year-to-date first time payment defaulters so far this year has broken above last year’s trend (forty-eight between January and October), noting that in order for this year to finish with fewer defaults than last year (a trend that has held every year since MMA began collecting this data in 2009), “there can be no more than six additional defaults in November and December. Those two months have together averaged 14 defaults since 2013, strongly suggesting that 2016 will see a break in the downtrend.” For its part, the representatives of the U.S. territory advised the PROMESA Board it lacked any fiscal ability to finance any of its debt service over the next decade absent changes in federal laws to address both the island’s economy—and those provisions which harm its ability to compete against other Caribbean nations, noting that Puerto Rico’s GDP has contracted for nine of the last ten years in real terms, driven by the expiration of incentives provided under §936 of the U.S. tax code and the U.S. financial crisis, both of which were exacerbated by out-migration and extraordinary austerity measures taken by the Commonwealth, measures including reducing government consumption by 12% in real terms from 2006 through 2015, cutting the public administration headcount by approximately a quarter; reducing or deferring critical capital expenditures; delaying tax refunds and vendor payments; implementing significant new revenue measures, including recent sales and petroleum products tax increases generating approximately $1.4 billion annually; depleting liquidity and undertaking extraordinary short-term borrowings from pension and insurance systems; reforming pensions, converting defined benefit plans to defined contribution plans—austerity measures which they said had been insufficient to eliminate deficits, thereby incurring significant deficit financing, a ballooning debt load, and persistent economic decline, as evidenced by driving emigration to the U.S. mainland: a loss of not just some 9% of the island’s population—but disproportionately a loss for the best-educated.

The statistics, part of a 100-page fiscal plan submitted to the PROMESA Board, sought to identify the resources available to support basic governmental services and promote growth; it promised to put together a specific debt restructuring proposal in the wake of receipt of input from the Oversight Board. The plan warns that if the U.S. territory were to take various steps to improve revenues, reduce spending, and improve economic growth, it would still face a $6 billion gap over the decade—leaving no resources to meet commonwealth-supported debt. The plan addressed neither the financial outlook for Puerto Rico’s public corporations or municipalities (which also owe roughly $17 billion of debt). The plan treats $50.2 billion of debt as being addressed by the fiscal plan and the remainder of Puerto Rico’s debt as independent of it, because it is supported by the public corporations, municipalities, and other public entities. For priorities, Puerto Rico’s first is for Congress to continue Affordable Care Act funding to the Commonwealth beyond its planned end in FY2018—a continuation which the territory projects this could mean an additional $16.1 billion in direct Puerto Rico government revenues and an additional $8.4 billion in indirect revenues due to improved economic performance. Gov. Padilla also asked for an indefinite extension of the Affordable Care Act and that Congress treat Puerto Rico similarly to the 50 states with regard to Medicaid spending—and the extension of the earned income tax credit program to Puerto Rico, noting that such changes would lead to an $18.9 billion surplus, which could be used for the payments. This would be out of a total scheduled debt service of $34.2 billion. In its plan, the Governor recommended seven principals critical to reducing the government financing gap and restoring economic growth: any austerity must be minimal; the government must introduce improved budgetary controls and financial transparency; Puerto Rico needs to improve tax enforcement, consolidate agencies, reduce workforce, and reform its tax policy to eliminate the revenue impact of the planned end of the Act 154 tax in fiscal 2018; change local labor regulations, simplify permitting in order to promote economic growth, and invest in strategic growth-promoting projects. Fifth, Puerto Rico’s government must continue to protect vulnerable members of the population, such as the elderly, young, disabled, and poor through government services. The territory must reduce its debt to a “sustainable” level. And, seventh, the federal government must be involved to help generate economic growth.

He identified other concerns, as well, including caution in balancing amongst the island’s creditors, noting a “contingent value right or growth bond that pays creditors in the event growth targets set in the plan are exceeded should therefore be considered as part of any debt restructuring,” and that, because local municipal bondholders are believed to hold $8 billion to $12 billion of Puerto Rico’s debt, according to an official with the Puerto Rico Fiscal Agency and Financial Authority, the plan says there must be consideration of the impact of debt restructuring on the local economy. Finally, Puerto Rico Secretary of the Treasury Juan Zaragoza advised the board that Puerto Rico currently owes $1.3 billion to $1.35 billion to suppliers.

 

How Might Next Month’s Elections Affect Municipalities’ Fiscal Futures?

eBlog

Share on Twitter

eBlog, 10/19/16

Good Morning! In this a.m.’s eBlog, we consider the fiscal challenges Detroit Mayor Mike Duggan is encountering which could interrupt the city’s recovery from the nation’s largest-ever municipal bankruptcy, but note the city’s continuing progress towards becoming a national center of innovation;  then we head east to the exceptional challenge and nearing deadline for Atlantic city if it is to have a future versus being taken over by the State of New Jersey; then we fly to the West Coast where next month’s elections will determine the future municipal status of San Bernardino—the nation’s city on the road to exiting the longest municipal bankruptcy in American history, before jogging north to Stockton—where the post-chapter 9 municipality has a difficult mayoral election, but also where voters will decide what kind of municipal governance they want. Finally, we look south to observe the first steps in Puerto Rico under the new PROMESA law to address the U.S. territory’s quasi municipal bankruptcy.

Demolition Derby? Detroit Mayor Mike Duggan this week disclosed the Motor City’s controversial demolition program had been suspended by the U.S. Treasury Department this summer to address “mistakes” and “errors.” The federally funded program, according to Mayor Duggan, had been at a standstill since the middle of August—as the city and Detroit Land Bank Authority met with officials from the U.S. Treasury and the Michigan State Housing and Development Authority to reach agreement on a new set of procedures—procedures accepted by the Treasury at the end of last week, albeit Mayor Duggan declined to cite specific examples of what went wrong, albeit noting: “No amount of error in the rules is tolerable…We’re going to eliminate those mistakes with these new controls.” The contretemps comes as the city’s demolition program has become the focus of a federal criminal investigation, related to issues involving bidding practices and soaring costs. Based upon its approval of the city’s new rules, the Treasury has officially released $42 million allocated for the city’s fourth round of the program, albeit, as Mayor Duggan noted: “They didn’t do it casually,” adding the city’s “land bank did not have sufficient procedures in place to make sure we had proper documentation for all the bills and didn’t have sufficient controls to assure Treasury would not be charged for ineligible expenses.” Among the changes, Michigan State Housing authority employees will now be embedded at the land bank, along with the Detroit Building Authority to provide compliance support, input, and on-site assurance “that all contracts are bid appropriately.” The housing authority will also conduct quality control audits to assure ongoing compliance. In addition, the land bank has established a $5 million escrow fund for any demolition costs not eligible for Hardest Hit funding. Or, as Mayor Duggan put it, he was “very disappointed” by some of the things he learned during the review, but said federal and state officials will disclose those “when they are ready.”

The Treasury last August instructed housing authority officials to suspend disbursement of federal TARP funds to Detroit for blight elimination, including payment of invoices received from the land bank with the state’s second and third funding allocations under the program. Treasury, in addition, asked the housing authority to halt approval of demolition and other blight elimination activities by Detroit or its affiliates. (Detroit has been awarded more than $258 million under the federal program—with which the city has razed more than 10,000 homes early 2014. The new federal allocation is part of $130 million awarded to the Motor City in recent months. Mayor Duggan noted the new rules are in response to concerns over practices as well as Detroit’s volume of demolitions, stating: “It’s a far more intense review, because we are handing far more demolitions…The speed at which we went outstripped the controls that we had in place.”

Detroit’s auditor general last year had commenced an audit of the city’s demolition activities at the request of Detroit’s City Council in response to growing apprehension with regard to soaring costs and bidding: last April, Detroit Auditor General Mark Lockridge confirmed his office received a federal subpoena after releasing preliminary findings from the months-long audit. Adamo Group, one of the program’s largest contractors, also was served with a subpoena from the Office of the Special Inspector General for the Troubled Asset Relief Program, as was the land bank and Detroit’s Building Authority. Last May, the FBI’s Detroit office confirmed it was also investigating the program, and Detroit’s Office of Inspector General has been conducting a review of its own into an aspect of the program. The city has said it is cooperating fully with all investigations. Nevertheless, this week, Mayor Duggan stated he had seen “no evidence of criminal activity,” but declined to comment on the federal probe. Nevertheless, the fiscal costs are tolling: Detroit has more than $80,000 in legal fees for the investigation—and now faces more. The city came under scrutiny last fall over a pilot program aimed at attracting larger players to rapidly take down larger bundles of homes. At the time, a WJBK-TV report accused city building officials of improperly meeting with contractors in 2014 to set prices for the bulk demolition work before requests for bids were official. The administration has said there was nothing improper about the set-price contract initiative, which was discontinued shortly after it failed to attract national players. Last October, the Michigan State Housing Development Authority reviewed the land bank’s bid selection process related to Hardest Hit funds and did not uncover any significant issues. The agency, which distributes the federal funding once invoices are reviewed, did. however, require changes to “further strengthen their selection of contractors.” Detroit’s demolition costs have soared from an average of about $13,600 per house in 2014 to about $16,400 last year—more than 25 percent. According to the city, those rising prices were tied in part to new environmental safeguards: today, the average residential demolition is $12,575 per house, according to estimates listed on the city’s website. Detroit only stopped its federally funded demolition over the last two months. It has continued doing 25-30 city funded demolitions per week, Mayor Duggan notes.

Innovating an Old City. Matt Simoncini, President and CEO of Southfield, Michigan-based supplier Lear Corp., officially opened its Detroit Innovation Center yesterday, calling it an idea to boost technological transformation for the company and a return to the city in which it was founded: to Mr. Simoncini, the near $10 million investment represents a pivotal moment in Lear’s trajectory as a seating supplier turned advanced automotive technologies developer; yet he also perceives it as a foundation to Detroit’s resurgence, noting: “This city is on the cusp of changing the world: Urbanization, mass transit, that’s all going to come out of this town. While other places, like Silicon Valley, have players in a big pond…We are the pond. Detroit is going to have an amazing role in our future. We’re going to be part of that.” The workers there will focus on next-generation automotive battery charging, seating designs and technology integration and non-automotive projects. He adds: “We’re at a pivot point: So much of the work we do sucks everyone in. If I can get those workers out of the mainstream at Lear (in Southfield) and leverage what the city has to offer, we can send big things up the food chain.” Noting he is working with Wayne State University and the College for Creative Studies to develop curriculum and provide opportunities for those universities’ students, he added: “We (the auto industry) haven’t fully utilized what the city, and its universities, have to offer: These universities are in our backyard. I’m surprised more (companies) haven’t rushed down here to access that talent and help drive innovation.” He also is focused on opening a manufacturing plant in the city: he has discussed creating jobs in the Motor City instead of Mexico if he could attain a new wage tier with the United Auto Workers that pays in the mid-teens per hour with some benefits. A specified pay rate and benefits would need to be negotiated and are subject to moving up or down, according to the company: Lear currently pays $35 per hour, which includes the cost of benefits, at its just-in-time seating plants and upward of $25 per hour at its component plants.  Mr. Simocini notes: “This is my hometown. Of course I want to be part of its success.”  

The Edge of the Boardwalk. Chris Filiciello, Atlantic City Mayor Don Guardian’s chief of staff this week confirmed that the city did not submit a revised budget to the state, as Mayor Guardian warned in a letter that a tax increase would be “devastating” for Atlantic City, which he said increased taxes by 50 percent over 2013 and 2014. With the debt clock from the state ticking, Atlantic City is now nearly two weeks past its deadline in violation of its $73 million state loan; the next deadline is just over two weeks away—by which time the city must submit a five-year fiscal stability plan. It appears the Mayor believes his five-year budget will save roughly $73 million by 2021, in no small part related to the sale of its municipal airport, Bader Field, and its water authority for $110 million. In addition, the City Council is slated to vote on new labor agreements between the city and its seven worker unions, as well as consider privatizing payroll services. Under Mayor Guardian’s proposed five-year fiscal recovery plan, the city projects $72.9 million in savings from 2017 through 2021 (Atlantic City has annual budget deficits of about $100 million before state aid.). In his statement, Mayor Guardian listed 26 items on which Atlantic City has or intends to cut costs and raise revenues, including 400 fewer full-time workers since 2013, a recent shared-services deal with Atlantic County, bidding out city services, and land sales worth $7.1 million. In addition, Atlantic City has offered early retirement buyouts to 165 senior workers. The plan anticipates saving $7.4 million next year; $12.7 million in 2018; $17 million in 2019; $17.3 million in 2020; and $18.5 million in 2021, according to Mayor Guardian’s statement. The city currently has a fortnight in which to submit its plan to the state—the rejection of which would result in a five-year state takeover. The Mayor described the plan as one which “will include increasing revenue, reducing costs, maximizing redirected funds from casinos, receiving state aid, restructuring of debt payments, early retirement incentives, realizing the value of City owned properties and the MUA, and much more, all while maintaining Atlantic City’s sovereign right to local self-governance.” Nevertheless, how the plan will fare in City Council remains uncertain: the Council has pulled or voted down measures to dissolve the authority five times amid pressure from residents to keep the authority independent. (The Council must approve the sale at two meetings. The sale is also subject to state approval.) In addition, the Council will vote on seven memorandums of understanding with its police, fire, white-collar, blue-collar, electrical, and supervisory employees—with, according to Mayor Guardian, the city renegotiating contracts to include multiple years with no wage increases, restructured pay scales, health care cuts, and reduced overtime and paid-leave costs.

Getting Back to Fiscal Recovery. San Bernardino, the California municipality seeking to become the first U.S. municipality to overhaul its political structure while in chapter 9 municipal bankruptcy, and asking its voters next month to approve a new charter that strips the Mayor and city council of day-to-day operational control, has completed all of its required audits for the first time in six years, with the City Council having this week filed its FY2015 final audit, marking the first time since 2010 the city has all of its legally required audits. The FY2016 audit is due by March 31, 2017, a deadline the city will meet, according to Finance Director Brent Mason—albeit the audits were “qualified”—denoting the auditors were unable to find enough evidence the financial statements were accurate in four of 10 areas, leading Councilman Henry Nickel to note: “This is a job well done, but now I think the next step is implementing some corrective actions to get back to where we need to be.” Part of the challenge for the city stems from the 2012 state-mandated dissolution of the city’s redevelopment agency, requiring a significant expansion of the audit, or, as Mr. Mason notes: “They’re not small-ticket issues to get our hands around, but they’re all doable.” One of the qualified opinion concerns was with regard to the liability for compensated absences, such as vacation and sick time, which San Bernardino has proposed adjusting as part of its bankruptcy exit plan—a plan which appears to have the qualified approval of U.S. Bankruptcy Judge Meredith Jury.

Taking Stock in Stockton. Just four years ago, then Mayoral candidate Anthony Silva rode the city’s misery to an easy upset victory over incumbent Mayor Ann Johnston: the city was insolvent, in chapter 9 municipal bankruptcy, and besieged by violent crime. Now, as he ends his four-year term and faces re-election, Mayor Silva is himself confronting not just serious personal charges, but also serious crime. Unsurprisingly, he is being challenged by City Councilman Michael Tubbs, who believes the city’s mayor should be an “ambassador” for the city: he vows, if elected, that he will use the “bully pulpit” to showcase Stockton’s assets, like University of the Pacific, the Delta, the city’s proximity to the Bay Area, and its inexpensive real estate. He says Stockton is well-positioned to attract companies looking to expand in California; he also says he will maintain an open line of communication with the media to ensure awareness of the city’s accomplishments. Councilman Tubbs is seeking to become Stockton’s first black mayor and its youngest mayor. Unsurprisingly, the Mayor who was in charge when the city emerged from municipal bankruptcy, Mayor Silva, wants to be the city’s first two-term mayor since Gary Podesto left office at the end of 2004.

As we have noted, however, Mayor Silva’s tenure has, especially this election year, been marked by controversy, most recently a revelation that a gun stolen from him was used in the unsolved killing of a 13-year-old boy—followed almost immediately by allegations that he secretly made an audio recording of a strip poker game involving naked teenagers and provided alcohol to minors—even as he was serving concurrently as Mayor and CEO of the Boys & Girls Clubs of Stockton. But Councilmember Tubbs is confronting his own high-profile controversy: two years ago he was arrested by the California Highway Patrol for driving under the influence; he publicly apologized within days and pleaded no contest to the charges two months later.

A key issue for this post-bankruptcy city’s future could be governance: Mayor Silva has long claimed that Stockton residents would be better served by a governance system that provides more power to the mayor; he has previously advocated working to put a “strong mayor” ballot initiative before voters; he has never followed through, however. Unsurprisingly, Councilmember Tubbs disagrees, stating: “Stockton is incredibly blessed that we don’t have a strong mayor city…If you had a strong mayor city, your police chief would be gone…a lot of your staff would be gone. And the city would be run not with any thought, but be run based on the whims and feelings and ego of one central figure, which is incredibly dangerous.” These are not their only differences which the voters will have to consider: a key difference is Mayor Silva’s statement of nearly a year ago:  “The government of Stockton does not work…If you’re frustrated by why things haven’t changed, every day of my life is the same. Everything I’ve done, I’ve done without their help.” The election promises to be close: last June, Councilman Tubbs prevailed in the eight-candidate primary with 33.4 percent of the vote; Mayor Silva finished second with 26.4 percent.

Federal Oversight Governance in Puerto Rico. The Puerto Rico Oversight Board directed six of the U.S. Territory’s public entities to develop and present fiscal plans: the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC), and the University of Puerto Rico, having voted unanimously to tack on additional oversight responsibilities for itself to include some 24 island public entities—all as part of an emerging effort by the federal oversight board to create a ten-year plan. The Board’s Executive Director, Javier Quintana noted: “PREPA is beginning the process of preparing the fiscal plan as required by the Oversight Board: According to PROMESA, the fiscal plan should span at least 5 years. Because the Oversight Board has not yet set a deadline, PREPA does not know when it will be required to be completed.” In addition, the board barred all governmental covered entities from carrying out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or municipal bond sales. Board Chairman José Carrión, in the wake of Gov. Alejandro García Padilla’s presentation of Puerto Rico’s fiscal plan to the PROMESA board, the board would “confer with him about the central government and instrumentality plans…Then the board will seek public comment and consult with the government about the schedule for bringing their plans to eventual approval and certification,” in the wake of which the board will give the Governor a schedule for the process of submission, approval, and certification of the fiscal plans. The Puerto Rico Oversight Board also directed the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC)—six of Puerto Rico’s twenty-four public entities, and the University of Puerto Rico to put together plans—albeit without any explanation of why that specific six. Under the newly signed Congressional PROMESA law, the fiscal plan should span at least 5 years. Finally, the board ordered all of its covered entities to not carry out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or bond sales.