The Challenges of Investing in the Future, or, Can God Work a Miracle?

eBlog, 04/18/17

Good Morning! In this a.m.’s eBlog, we consider the vestige of a most challenging issue during Detroit’s historic bankruptcy: water and sewer fees: how does a municipality balance between its needs and the ability of its lowest income citizens to pay? Then, we look at the same issue—especially because of its regional implications, in the nearly insolvent municipality of Petersburg, Virginia—where, as in many regions, water and sewer services—and costs—have regional dimensions. Finally, we inquire about lingering colonialism in Puerto Rico, where the government is planning a plebiscite so that its citizens can have a voice with regard to the U.S. territory’s future.

Fiscal & Physical Municipal Balancing. The City of Detroit’s Board of Water Commissioners is set to vote on a proposal to scale back a controversial storm water drainage fee in the wake of a backlash from churches and businesses, which have been most unhappy about the newly set $750-per-acre monthly charge—with the Board set to consider an option to reduce the drainage fee to $125 per acre until July, after which it would phase in increases over the next five fiscal years to $677 by July of 2022, according to Gary Brown, the Detroit Water and Sewerage Department [DWSD] Director. The Motor City began imposing the fee in July 2015 on the owners of 22,000 parcels with impervious surfaces such as roofs and parking lots which “were not,” as Director Brown noted, “paying anything at all…This essentially is giving them an opportunity to have five years to build green infrastructure projects and get a credit to permanently reduce their costs.”

The issue comes at a politically critical time, as Mayor Mike Duggan, running this year for re-election, has been confronted by opposition to the fee by Detroit’s politically-influential pastors—or, as Pastor Everett Jennings, of New Providence Baptist Church, put it: “They say it’s not taxation, but to me it’s a way to tax the church.” The Pastor notes the proposed monthly water bill for his northwest side church skyrocketed from $650 per month to $7,500 per month after the city began assessing the storm water drainage fee. Similarly, Phil Cifuentes, owner and CEO of Omaha Automation Inc., a small automotive and military manufacturing supplier near the Detroit-Hamtramck border, reports: “I came into a system that wasn’t charging anyone…And then I came into a system that, two years later, was charging the largest water sewerage rates in the country,” referring to the $15,630 bill he received in 2015—with the assessment dated back several years, leading him to note: “If they come down through this new rate, how does that affect everyone who owes them outstanding charges like the $10,000 I owe?”

Property owners will still owe the water department past-due charges at the higher rate; however, according to Mr. Brown, they will be eligible for relief for the next few years. The new phased-in rate structure going before the city water board will commence at $125 effective April Fool’s Day, double on July 1st, increase to $375 in July of 2018, $500 in July of 2019, and $626 in July of 2020. In July 2021, the per-acre fee will increase to $651, followed by a final hike of $26 in July of 2022. Mr. Brown notes: “By having a longer five-year opportunity to phase in, it gives them an opportunity to better budget for the new cost and also to go out and have a green infrastructure project designed.” He added that DWSD customers who were originally being charged $852 per impervious acre will see their rate gradually reduced to $677 by July of 2022 to match the rate charged to the 22,000 parcels in the new five-year phased-in plan: “This all goes away and everybody goes to one flat rate at the end of five years.”

To address an issue which had been raised before now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 bankruptcy, Mr. Brown noted that the water department is going to offer grants of up to $50,000 for half of the cost of water retention projects on the sites of large churches and businesses to reduce the amount of storm water and impervious surfaces, according to Mr. Brown, who noted the city agency has budgeted $5 million for the grants, even as he described the drainage fee as having been “a real deterrent” to his plans to buy an adjoining 2.5-acre parcel and build another 40,000-square-foot manufacturing facility. The drainage fee itself was partly a response to a 2015 class action lawsuit Michigan Warehousing Group LLC brought against both the City of Detroit and DWSD for charging some property owners the $852 per acre monthly fee, while charging others nothing or as little as $20 based on the size of their water meter pipe. Thus, as Mr. Brown this week noted: “We’re trying to settle that lawsuit by getting everyone on to a fairer and equitable rate system by putting them on the same rate.” CEO Cifuentes notes that Omaha Automation is part of the class action lawsuit.

The non-paying customers included industrial parcels, commercial buildings, churches, and residential parcels where Detroiters have purchased vacant side lots and built additional parking spaces, according to Mr. Brown: “Parking lots were a big part of it—and they weren’t getting a bill, because they didn’t have an account.” Churches in Detroit received large bills because of their large parking lots: for instance, Shield of Faith Church has racked up a $65,000 bill with the city water department, because the storm water drainage fee costs the 300-member congregation nearly $5,000 per month, according to Pastor James Jennings, or as Pastor Jennings had warned prior to the rollback: “It’s actually causing us not to be able to meet our expenses, and we’re about to go under unless God works a miracle.”

The drainage fee also was imposed to pay for needed sewer infrastructure upgrades and try to reduce the city’s overall storm water runoff that causes combined sewage water outflows to discharge into the Detroit River and River Rouge in violation of state and federal environmental laws. The U.S. Environmental Protection Agency has mandated Detroit to eliminate all sewage discharges by 2022, according to Mr. Brown. The sewage releases vary depending on heavy rainstorms. Last year, the city released 800 million gallons of combined sewage and storm water, according to DWSD. In 2014, a torrential August rain storm contributed to 6.8 billion gallons of untreated sewage and storm water being released—and widespread basement flooding in the city and northern suburbs.

The Fiscal & Physical Costs of Delay. Unlike the federal government, states, cities, and counties have capital budgets. As we have noted previously, however, failure to properly administer one’s capital budgets can have, as we have noted in the case of Flint, Michigan, signal human physical and fiscal costs—or, as Prince George, Virginia Chairman William A. Robertson Jr. put it, with a case study just across the county line in Petersburg of what can happen if a locality goes too long without upgrading its water systems: “Sorry, but this is something we had to do…We don’t want to end up as a Petersburg or a Flint, Michigan.” Thus, with the vote, the county’s rate for drinking water will increase by 10% and the rate for wastewater will rise by 20% effective July 1st. Prince William Utilities Director Chip England noted that the county had performed a water rate study several years ago which “did call for annual rate increases;” however, he said, this rate increase will be the first in three years and just the second in the past 13 years, noting that, as is the case for most localities, Prince George’s utility system is an “enterprise fund” which is intended to be self-funded through customers’ payments for service. Ergo, he advised: “No general fund tax revenues are used to cover the expenses of the department.” But, as in Detroit, the fee increase did not come without opposition: Joe Galloni, president of the 55-plus neighborhood’s homeowner association, noted that many of the residents there are retired and living on fixed incomes: “A lot of folks over there can’t absorb any more increases.” In response, however, board members cited Petersburg’s financial woes and near insolvency as an object lesson in the need to keep current on infrastructure investments. Indeed, Petersburg officials have acknowledged that the city’s aging water and wastewater system is “on the brink of collapse” and estimate that it will take $97 million to repair the system. Like Prince George, Petersburg had gone many years without a rate increase, causing issues not only for the city, but also the region. Now, the Petersburg City Council has recently approved a 13.4% increase—and slated another increase of 14.3% in the city’s budget for next year—and even set plans providing for additional 15 percent increases in each of the following four years. Thus, Supervisor T.J. Webb noted that Petersburg’s financial crisis last year led the city to fall behind on its payments to the South Central Wastewater Authority, a regional entity which provides wastewater treatment to Prince George, Chesterfield County, Colonial Heights, and Dinwiddie County in addition to Petersburg. Had Petersburg not resumed making its $327,000-a-month payments to the authority, the other member jurisdictions would have been required to make up the shortfall, which would have meant an additional $38,000 that Prince George wastewater customers would have had to pay each month. Indeed, Chairman Robertson noted that Petersburg is considering two offers by for-profit companies, Aqua Virginia and Virginia American Water, to purchase the city’s water system.

Vestiges of American Colonialism. Before dawn this morning, the Puerto Rican House of Representatives passed Senate Bill 427, which amends the U.S. territory’s proposed plebiscite and responds to the demands made by the U.S. Justice Department. The actions came in the wake of the threat by U.S. Acting Deputy Attorney General Dana Boente, who had written to Gov. Ricardo Rosselló that the Justice Department would not notify Congress that it approved the ballot or suggest that Congress release funds to hold the plebiscite and educate voters on it. According to Mr. Boente, the current ballot “is not drafted in a way that ensures that its result will accurately reflect the current popular will of the people of Puerto Rico.” Moreover, the Justice Department has objected to the ballot only offering statehood and “free association/independence” as options; the Justice Department apparently believes that the ballot fails to offer Puerto Ricans the option of continuing in the current territorial status, and has alleged that the ballot statement that only statehood status “guarantees” U.S. citizenship by birth for Puerto Ricans is false, as the current territorial status already does this; the Department is also alleging that the ballot language fails to make clear that a vote for Puerto Rico to have a “free association” with the United States would make Puerto Rico an independent nation and strip Puerto Ricans of their U.S. citizenship.

The Justice Department intervention could also jeopardize the Congressional authorization of some $2.5 million to hold a plebiscite on its status in the United States and to educate its voters. While the authorization imposed no limit on when the funds could be used, it did require that prior to the release of the funds, the Justice Department was to notify Congress that the plebiscite ballot and educational materials were consistent with the laws, Constitution, and policies of the United States. Thus, the amended version (Senate 427) was modified in coordination with the Governor’s office and passed by the Puerto Rico Senate, notwithstanding aggravation with federal interference—a kind of interference virtually unimaginable with any U.S. state. Or, as New Progressive Party Senator Luis Daniel Muñiz Cortés put it: “It’s disgusting what the United States is doing with Puerto Rico. I, totally dissatisfied with the measure, will vote in favor if my Party votes in favor of Party discipline, but totally dissatisfied because it is unworthy for the people.” Nonetheless, Senate President Thomas Rivera Schatz said that this status consultation was a necessary step toward a definitive definition of Puerto Rico’s status, although he made it clear that his preference would be not to include “the colony” in the plebiscite: “We cannot fall into the game of those who do not want to do anything in Puerto Rico and do not want to do anything there, in the United States,” noting it was not an option to maintain the current status that “overwhelms the Puerto Rican people.” Thus, the approved version includes the territorial situation of Puerto Rico, but does not make specific mention of the Commonwealth; nor does the document refer to U.S. citizenship. 

Gov. Ricardo Rosselló and legislators from his pro-statehood New Progressive Party, had agreed to a measure authorizing a status plebiscite with the first vote to take place on June 11th—with that scheduled vote apparently triggering the demands from the Trump administration—demands, in response to which, Gov. Rosselló promised that his government would add remaining as a U.S. territory as an option to the ballot—and adding that the Congressional authorization of the $2.5 million requires that the Department of Justice notify the U.S. Congress at least 45 days prior to the plebiscite—that is, with sufficient time to provide Puerto Rico until this Saturday to authorize funds for the June 11th plebiscite. The Governor said Puerto Rico’s legislature would act swiftly—as, indeed, it has done. Now, the question will be how the changes might impact the tax-status of Puerto Rico’s future bonds, its economy, and whether it might mean Congress would treat Puerto Rico more like a state, which would have significant implications for programs such as Medicaid.  

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