Leadership Challenges to Fiscal & Physical Recoveries

08/04/17

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Good Morning! In this a.m.’s blog, we consider the ongoing fiscal and physical recovery of Flint, Michigan—as well as the fiscal recoveries of Pontiac and Lincoln Park, and we look at the special fiscal challenge to Puerto Rico’s debts.

In Like Flint. EPA has okayed the State of Michigan’s plans to forgive $20.7 million in past water infrastructure loans owed by the City of Flint, relying on federal legislation enacted at the end of last year to provide states the Safe Drinking Water Revolving Loan program to forgive past loans owed to a state. EPA Administrator Scott Pruitt noted: “Forgiving Flint’s past debt will better protect public health and reduce the costs associated with maintaining the city’s water system over time…Forgiving the city’s debt will ensure that Flint will not need to resume payments on the loan, allowing progress toward updating Flint’s water system to continue.” In response, Mayor Karen Weaver stated: “We appreciate the EPA’s continued assistance as we work to recover from the water crisis: We have come a long way, but there is still much more work that needs to be done. With help and support like this from federal, state as well as local entities, Flint will indeed bounce back.”

Emerging from State Fiscal Oversight. The Michigan Treasury Department reports that the Michigan municipalities of Pontiac and Lincoln Park have both sufficiently improved their fiscal conditions to warrant release from eight long years of state oversight: they may return to local control in the wake of Michigan Treasurer Nick Khouri’s announcement that the Pontiac and Lincoln Park Receivership Transition Advisory Boards would be dissolved and effective immediately, thereby returning full fiscal authority to the elected leaders of the respective municipalities. The Michigan Receivership Transition Advisory Boards, which have been monitoring the cities’ finances since the departure of emergency managers, have been dissolved—clearing the way for locally elected officials to resume complete control of the respective municipal governments again, with Lincoln Park now making regular contributions to its pension fund, with the Detroit suburb emerging from state oversight which commenced in 2014. Nearby Pontiac had sought a state financial review a decade ago—operating in the wake thereof under a consent agreement and an emergency manager. The Treasury today reports the municipality has a general fund balance of $14 million. Thus, the two municipalities join Wayne County, Benton Harbor, Highland Park, and four other municipalities in exiting such fiscal oversight; however, nine municipalities and school districts remain under some sort of state oversight, although the state has imposed an emergency manager only in Highland Park Schools. In making the announcement, Gov. Rick Snyder reported: “Under the guidance of the Receivership Transition Advisory Boards, both Lincoln Park and Pontiac have made significant progress to right their finances and build solid, fiscal foundations for their communities: This is a great achievement for the cities.”

In the case of Pontiac, the city’s debt long-term debt dropped nearly 80% under state oversight, from over $45 million to about $8.2 million since 2009, according to the Michigan Treasury Department, culminating at FY2016 year-end with a general fund balance of $14 million. At the same time, a blight remediation program in the city has succeeded in razing nearly 680 blighted residential properties since 2012, in no small part through CDBG assistance. Secretary Khouri noted: “Pontiac has seen great economic progress and opportunity since the lost decade.” The city of Lincoln Park cut its long term debt from more than $1 million in 2014 when it entered state oversight to $260,707. At the end of fiscal-year 2016, Lincoln Park ended with a general fund balance of $24.4 million.  The city entered state controlled emergency management in February 2014 and began its transition to local control in December 2015. “Today marks an important achievement for Lincoln Park residents, the city and all who have contributed to moving the city back to a path of fiscal stability,” Khouri said. Lincoln Park, with a population of close to 40,000, where Brad Coulter, who has served as the Emergency Manager, noted that the Hispanic and Latino population make up about 15% of Lincoln Park residents, describing the diversity as a “growing and an important part of the city” which as really helped “to stabilize the city.”

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

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

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Puerto Rico & Municipal Bankruptcy: a process of pain where “failure is not an option.”

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Good Morning! In this a.m.’s eBlog, we consider the opening under U.S. Judge Laura Swain of the unique, quasi chapter 9 municipal bankruptcy process which opened this week in Puerto Rico, where Judge Swain noted the process “will certainly involve pain,” but that “failure is not an option.”

Getting Ready to Rumble. Judge Swain has combined two major PROMESA Title III filings made earlier this month by Puerto Rican authorities—one for its general obligation debt, and one for debt which is backed by the Puerto Rico’s Commonwealth or COFINA sales tax revenues. Reuters helps explain, writing: “The island’s initial bankruptcy filing on [May 3] included only its central government, which owes some $18 billion in general obligation, or GO debt, backed by its constitution…The COFINA filing [on May 5] will pull in another $17 billion or so in debt under the Title III umbrella. Overall the island’s government and various agencies have a debt load of $74 billion that they cannot repay.” Unsurprisingly, as Bloomberg notes, a sizeable separation between general obligation and COFINA bondholders has already emerged. Judge Swain’s early decision to merge the two filings for administrative purposes appears to denote a small victory for the PROMESA Board, as some COFINA stakeholders had objected (COFINA bondholders were the first to sue the government of Puerto Rico after the freeze on creditor litigation under PROMESA expired at Midnight May 1st.) They accuse Puerto Rico, Governor Ricardo Rossello and other officials of angling to repurpose the tax revenue earmarked to pay COFINA debt.: they argued that COFINA is a separate entity whose assets, in the form of sales tax revenue, are earmarked only for creditors.” The debt here dwarfs any we have seen in Detroit, San Bernardino, etc.: Puerto Rico, according to the PROMESA Board, cannot even meet 25% of its $900 million necessary to service its municipal debt. And, in some sense, that debt—owed to investors in the 50 states, pales compared to the human obligations at home: NPR’s Greg Allen describes: “retirees who are owed pensions; 180 closed public schools, $500 million in cuts proposed for the university here…So lots of pain to come here—and the governor is going to be releasing a budget later this month, which will show a lot more pain coming. Among the things that are going to happen is, I think, big cuts in health care benefits.” He estimated the trial could exceed the duration of Detroit’s chapter 9, taking as many as five years to conclude. Judge Swain will—as Judge Rhodes had to in Detroit, and as was the very hard case in Central Falls, Rhode Island’s municipal bankruptcy‒Puerto Rico’s $49 billion in government pension obligations. But Puerto Rico’s debt is not just fiscal: the island has a poverty rate of 45%–a level dwarfing what we have experienced in previous chapter 9 bankruptcies. The current case may not affect all of these because some are for the employees of semi-autonomous Puerto Rico entities like the Puerto Rico Electric Power Authority. And, the trial here dwarfs the previous largest U.S. municipal bankruptcy in Detroit, where the stakes involved $18 billion in debt, pension obligations, and other OPEB benefits. The pension obligations have been described as liabilities of as much as $45 billion. On the trial’s first day, Judge Swain heard presentations with regard to whether the case should include mediation—and, if so, which parties should be included: that is, she will have a Solomon-like set of choices, choosing between Puerto’s Rico’s citizens, its municipal bondholders, suppliers owed money, pensioners, and government employees. Judge Swain will also hear presentations with regard to whether—and when‒Puerto Rico should be required to submit lists of its creditors and in what manner and how notice to creditors will be made. The PROMESA Oversight Board attorney Martin Bienenstock said he anticipates other Puerto Rico public entities, including the Highways and Transportation Authority, would soon file for Title III later. The considerations in the court will also have to address how some $800 million set aside in Puerto Rico’s certified 10-year fiscal recovery plan will be apportioned between competing claims–including those of constitutionally backed general obligation debt (GO) and sales-tax backed or COFINA bonds.

Solomon’s Choices: Who Will Define Puerto Rico’s Fiscal Future–and How?

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Good Morning! In this a.m.’s eBlog, we consider the growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy. 

Tropical Fiscal Typhoon. U.S. Supreme Court Chief Justice John Roberts has selected Southern District of New York Judge Laura Taylor Swain, who previously served as a federal bankruptcy Judge for the Eastern District of New York from 1996 until 2000 to preside over Puerto Rico’s PROMESA Title III bankruptcy proceedings—presiding, thus, over a municipal bankruptcy nearly 500% larger than that of Detroit’s–one which will grapple with creating a human and fiscal blueprint for the future of some 3.5 million Americans—and force Judge Swain to grapple with the battle between the citizens of the country and the holders of its debt spread throughout the U.S. (Title III of PROMESA, which is modeled after Chapter 9 of the Municipal Bankruptcy Code and nearly a century of legal precedent, provides a framework for protecting Puerto Rico’s citizens while also respecting the legitimate rights and priorities of creditors.) For example, the recent Chapter 9 restructuring in Detroit sought reasonable accommodations for vulnerable pensioners and respected secured creditors’ rights.

The action came in the wake of Puerto Rico’s announcement last week that it was restructuring a portion of its nearly $73 billion in debt—an action which it was clear almost from the get-go that the requisite two-thirds majority of Puerto Rico’s municipal bondholders would not have supported. (Puerto Rico’s constitution provides that payments to holders of so-called “general obligation” bonds have priority over all other expenditures—even as another group of creditors has first access to revenues from the territory’s sales tax.) More critically, Judge Swain will be presiding over a process affecting the lives and futures of some 3.5 million Americans—nearly 500% greater than the population of Detroit. And while the poverty rate in Detroit was 40%, the surrounding region, especially after the federal bailout of the auto industry, differs signally from Puerto Rico, where the poverty rate is 46.1%–and where there is no surrounding state to address or help finance schools, health care, etc. Indeed, Puerto Rico, in its efforts to address its debt, has cut its health care and public transportation fiscal support; closed schools; and increased sales taxes. With the Bureau of Labor Statistics reporting an unemployment rate of at 12.2%, and, in the wake of last year’s Zika virus, when thousands of workers who were fighting the epidemic were let go from their jobs; the U.S. territory’s fiscal conditions have been exacerbated by the emigration of some of its most able talent—or, as the Pew Research Center has noted:  “More recent Puerto Rican arrivals from the island are also less well off than earlier migrants, with lower household incomes and a greater likelihood of living in poverty.”

For Judge Swain—as was the case in Detroit, Central Falls, San Bernardino, Stockton, etc., a grave challenge in seeking to fashion a plan of debt adjustment will resolve around public pensions. While the state constitutional issues, which complicated—and nearly led to a U.S. Supreme Court federalism challenge—do not appear to be at issue here; nevertheless the human aspect is. Just as former Rhode Island Supreme Court Judge Robert G. Flanders, Jr., who served as Central Falls’ Receiver during that city’s chapter 9 bankruptcy—and told us, with his voice breaking—of the deep pension cuts which he had summarily imposed of as much as 50%—so too Puerto Rico’s public pension funds have been depleted. Thus, it will fall to Judge Swain to seek to balance the desperate human needs on one side versus the demands of municipal bondholders on the other. Finally, the trial over which Judge Swain will preside has an element somewhat distinct from the others we have traced: can she press, as part of this process to fashion a plan of debt adjustment, for measures—likely ones which would have to emanate from Congress—to address the current drain of some of Puerto Rico’s most valuable human resources: taxpayers fleeing to the mainland. Today, Puerto Rico’s population is more than 8% smaller than seven years ago; the territory has been in recession almost continuously for a decade—and Puerto Rico is in the midst of political turmoil: should it change its form of governance: a poll two months’ ago found that 57% support statehood. Indeed, even were Puerto Rico’s voters to vote that way, and even though the 2016 GOP platform backed statehood; it seems most unlikely that in the nation’s increasingly polarized status the majority in the U.S. Congress would agree to any provision which would change the balance of political power in the U.S. Senate.

Is There a PROMESA of Recovery?

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Good Morning! In this a.m.’s eBlog, we consider the growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy, after which we journey north to review the remarkable fiscal recovery from chapter 9 municipal bankruptcy of one of the nation’s smallest municipalities.

Tropical Fiscal Typhoon. Puerto Rico is trapped in a vicious fiscal whirlpool where the austerity measures it has taken to meet short-term obligations to its creditors all across the U.S., including laying off some 30,000 public sector employees and increasing its sales tax by nearly 75% have seemingly backfired—doing more fiscal harm than good: it has devastated its economy, depleted revenue sources, and put the government on a vicious cycle of increasingly drastic fiscal steps in an effort to make payments—enough so that nearly 33% of the territory’s revenue is currently going to creditors and bondholders, even as its economy has shrunk 10% since 2006, while its poverty rate has grown to 45%. At the same time, a demographic imbalance has continued to accelerate with the exit of some 300,000 Puerto Ricans—mostly the young and better educated—leaving for Miami and New York. Puerto Rico and its public agencies owe $73 billion to its creditors, nearly 500% greater than the nearly $18 billion in debts accumulated by Detroit when it filed for chapter 9 municipal bankruptcy four years ago in what was then the largest municipal bankruptcy in U.S. history. Thus, with the island’s hedge-fund creditors holding defaulted municipal general obligation bonds on the verge of completing a consensual agreement earlier this week, the PROMESA oversight board intervened to halt negotiations and place Puerto Rico under the Title III quasi municipal bankruptcy protection. That will set up courtroom confrontations between an impoverished population, wealthy municipal bondholders in every state in the domestic U.S., and hedge funds—pitted against some of the poorest U.S. citizens and their future. Nevertheless, as Congress contemplated, the quasi-municipal bankruptcy process enacted as part of the PROMESA statute provides the best hope for Puerto Rico’s future.

Thus the PROMESA Board has invoked these provisions of the PROMESA statute before a federal judge in San Juan, in what promises to be a long process—as we have seen in Detroit, San Bernardino, and other cities, but with one critical distinction: each of the previous municipal bankruptcies has involved a city or county—the quasi municipal bankruptcy here is more akin to a filing by a state. (Because of the dual federalism of our founding fathers, Congress may not enact legislation to permit states to file for bankruptcy protection.) Unsurprisingly, when Puerto Rico was made a U.S. territory under the Jones-Shafroth Act, no one contemplated the possibility of bankruptcy. Moreover, as chapter 9, as authorized by Congress, only provides that a city or county may file for chapter 9 bankruptcy if authorized by its respective state; Puerto Rico inconveniently falls into a Twilight Zone—to write nothing with regard to access to such protections for Puerto Rico’s 87 municipalities or muncipios.

Moreover, while from Central Falls, Rhode Island to Detroit, the role of public pension obligations has played a critical role in those chapter 9 resolutions; the challenge could be far greater here: in Puerto Rico, retired teachers and police officers do not participate in Social Security. Adopting deep cuts to their pensions would be a virtual impossibility. So now it is that Puerto Rico will be in a courtroom to confront hedge funds, mutual funds, and bond insurers, after the negotiations between Puerto Rico and its creditors over a PROMESA Board-approved fiscal plan that allocates about $787 million a year to creditors for the next decade, less than a quarter of what they are owed, was deemed by said creditors to be a slap in the face—with the Board having pressed for a combination of debt restructuring spending cuts in its efforts to revive an economy trapped by a 45% poverty rate—and where the Board had proposed upping water rates on consumers, liquidating its decades-old industrial development bank, and seeking concessions from creditors of other government agencies. Moreover, amid all this, Gov. Ricardo Rosselló, who has recently renegotiated to mitigate politically unpopular fee increases on residents, now finds himself nearly transfixed between desperate efforts to sort out governance, meet demands of his constituents and taxpayers, and negotiate with a federally imposed oversight board, even as he is in the midst of a campaign for U.S. statehood ahead of a plebiscite on Puerto Rico’s political status—and in the wake of being named a defendant in a lawsuit by hedge funds after the expiration of a stay on such suits expired this week. Hedge funds holding general obligation and sales-tax bonds filed the suit on Tuesday, naming Gov. Rosselló as a defendant—albeit, the suit, and others, are nearly certain to be frozen, as the main judicial arena now will fall into a quasi-chapter 9 courtroom epic battle. And that battle will not necessarily be able to fully look to prior chapter 9 judicial precedents: while Title III incorporates features of chapter 9, the section of the U.S. bankruptcy code covering insolvent municipal entities, courts have never interpreted key provisions of Title III—a title, moreover, which protections for creditors which chapter 9 does not.

The Rich Chocolatey Road to Recovery! Moody’s has awarded one of the nation’s smallest municipalities, Central Falls, aka Chocolate City, Rhode Island, its second general obligation bond upgrade in two months, a sign of the former mill city’s ongoing recovery from municipal bankruptcy—an upgrade which Mayor James Diossa unsurprisingly noted to be “very important.” Moody’s noted that its upgrade “reflects a multi-year trend of stable operating results and continued positive performance relative to the post-bankruptcy plan since the city’s emergence from Chapter 9 bankruptcy in 2012,” adding that it expects the city will enhance its flexibility when its plan of debt adjustment period ends at the end of next month—at which time one of the nation’s smallest cities (one square mile and 19,000 citizens) will implement a policy of requiring maintenance of unassigned general fund reserves of at least 10% of prior year expenditures. In its upgrade, Moody’s reported the upgrade reflected Central Falls’ high fixed costs, referring to its public pension obligations, OPEB, and debt service–costs which add up to nearly 30% of its budget—and what it termed a high sensitivity to adverse economic trends compared with other municipalities, with the rating agency noting that a sustained increase in fund balance and maintenance of structural balance could lead to a further upgrade, as could a reduction in long-term liabilities and fixed costs and material tax-base and growth.

 

The Hard Challenges of Fiscal Sustainability

eBlog, 11/29/16

Good Morning! In this a.m.’s eBlog, we consider the ongoing—and evolving–state role in addressing municipal fiscal distress in Atlantic City: what is the role of a state and the impact on fiscal sustainability? Then we turn to the grim fiscal and governance situation in East Cleveland, Ohio—where state un-governance and next week’s looming Mayoral election appear to bode fiscal ills. Then we head south to the challenge of determining whether and how there might be promise in the implementation and unrolling of Congress’ recently enacted PROMESA legislation—the quasi chapter 9 for the U.S. Territory of Puerto Rico.

Not the Moody Blues. Moody’s Investors Service was uncharacteristically unmoody in determining that the state takeover of Atlantic City was a “credit positive” for the city, citing the unlikely threat of immediate default through 2017 as the largest contributing factor in its outlook. The credit positive comes during the first month of Gov. Chris Christie’s appointment of Jeffrey Chiesa to oversee the city: under his appointment, he has wide-ranging fiscal authority—indeed, as Moody’s described it: “While the state has not officially guaranteed Atlantic City’s debt, [the State] intends to prevent any default.” The state takeover comes as the city confronts a $2.3 million payment this week, followed by a $4.8 million debt payment on December 15th—but in the wake of the New Jersey Local Finance Board’s unanimous vote to grant its director, Timothy Cunningham, far-reaching governing powers over the beleaguered city under the authority granted by the state’s Municipal Stabilization and Recovery Act, was the worst-case scenario for the city, which has been fighting a takeover for the last year, even as it barely escaped going broke; Moody’s described Mr. Cunningham’s expressed “willingness to go to the state treasury for assistance if necessary to pay debt service” as a credit positive—or, as Moody’s described it: “While the state has not officially guaranteed Atlantic City’s debt, Director Cunningham has said the state intends to prevent any default.”

Trouble in River City. In the wake of last month’s hefty fine ($114,100) by the Ohio Election Commission of East Cleveland, Ohio Mayor Gary Norton over incomplete, late, and missing fundraising reports—fine nearly quintuple last year’s—with this year’s levied in response to complaints from the Cuyahoga County Board of Elections that the Mayor failed to file a 2015 annual report, turned in his 2014 report late, and has yet to resolve issues with his 2013 reports. In a series of letters, the board of elections asked Mayor Norton to fix a number of discrepancies in his 2013 reports—including incorrect fundraising totals and missing addresses; the board has now also requested proof of mileage, bank fees, phone expenses, and other spending for that year. In response to the reports, the Mayor—and December candidate for re-election, responded: “I am aware of the situation regarding delinquent campaign finance reports…All required reports will be completed and filed. The decision of the elections commission will be appealed. Campaign finances and reporting are completely separate from city finances. No city or public funds are involved.”

It’s not as if the fiscally insolvent city is new at this game: Mayor Norton also faced complaints in the wake of several missing finance reports from years prior to 2013, according to elections commission case summary records. Many of those reports have since been submitted and posted on the county board of elections website. Last year, the Ohio elections commission imposed a $20,000 fine on the Mayor in connection with many of those cases. The problems come at an inopportune time: Mayor Norton faces a recall election next Tuesday.

Is There Promise in PROMESA? At a third session of the PROMESA oversight board, Puerto Rico Gov. Alejandro García Padilla warned the Board he will not cooperate with it to administer a fiscal plan which subjects his constituents to greater sacrifice, but offers no federal financial assistance. The response comes in the wake of last Friday’s warning by Board members that the solution to the U.S. territory’s problems will have to include deep government spending cuts and structural changes. None of the Board members emphasized the importance of paying Puerto Rico’s debt. Indeed, several board members emphasized that substantial federal aid was neither likely, but rather impossible. In the wake of last month’s implicit and at times explicit rejection of the fiscal plan presented by Gov. Alejandro García Padilla last month, PROMESA Board Member Ana Matosantos noted that “deep” restructuring was necessary—adding that additional reforms and spending cuts would also be necessary, warning that federal assistance was unlikely and that without it, there would have to be an additional $16 billion in spending cuts “before you pay a dime of debt service.” Indeed, Board member Andrew Biggs noted that the PROMESA Board will have to put together a recovery package which does not assume a federal bailout; but he also noted that in cases of sovereign debt crises, most attempts to turn the situation around fail, because they fail to examine and address the “big questions.” Thus, he warned: the successful turnarounds question the existence of the big social programs. PROMESA Board Chairman José Carrión III warned that he believed it unlikely Puerto Rico would receive all of the fiscal assistance the Governor was seeking—especially vis-à-vis health care, where the U.S. territory is not treated on a par with states—noting that the board must come up with multiple scenarios, and the Board would have to be bold and use the plan to encourage economic growth.

The PROMESA Board December 15th deadline would seem, as our colleagues at Municipal Market Analytics note, “in peril,” but also raise the specter of the legal authority of the PROMESA Board should a new gubernatorial regime prove unwilling to comply with or carry out mandates from the PROMESA Board. MMA notes, also, the near term impossible straddle between addressing its structural debt whilst making projected debt payments, adding that “an acceptable plan’s likely need for sweeping layoffs, service austerity, and, potentially, pension payout reductions increases the potential for social unrest on the island.”

Finding Hope in Flint. Brian Willingham, for the New York Times last week wrote of his services two decades ago with the Flint Police Department “because I believed I could make a difference,” asking: “How can a city fall so far that we lose sight of the possibility of solutions?”  Noting that wages and benefits in the city have been reduced by more than 25% since 2011—a period during which he was laid off and rehired thrice—he noted the police force today is one-third of its former size—adding that while the national average is three officers for every one thousand citizens, in Flint is half an officer for that number of citizens, writing: “In one of America’s most dangerous cities, the people who secure the city are less secure than they’ve ever been. Yet we continue serving, as we did through the loss of General Motors, through the crack cocaine epidemic and, most recently, through the mass lead poisoning of Flint citizens. The crisis around Flint’s poisoned water points to a larger issue of structural racism and poverty in urban society. How can citizens in Flint trust the police to protect them when they can’t even trust their government to provide them with clean water? This is the kind of question that has placed police officers and African-Americans on a collision course. Police officers are seen as outsiders in urban America. White officers are seen as racist, while black officers like me are seen as traitors to our race.”

Preempting Local Governance?

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eBlog, 11/07/16

Good Morning! In this a.m.’s eBlog, we observe the ongoing efforts by Atlantic City to respond to and avert a state takeover of the city—with a key hearing now scheduled one day after the Presidential election; then we look south to the small city of Petersburg, Virginia, where a wholly distinct takeover of a municipal government is underway in the virtually insolvent city, even as, tomorrow, its citizens will have a chance to vote for candidates who will at some indeterminate point in the future be able to resume responsibility and authority to reshape the beleaguered city’s fiscal future.   

State Preemption of a Municipality? 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 Wednesday:

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.

An Affordable Cost for an Insolvent City? The Petersburg City Council and the small municipality’s residents have finally been able to get a sense at what services or responsibilities they will receive in return for the insolvent municipality’s very expensive payments to a consulting firm over the next five months after Robert C. Bobb, the founder and president of the Robert Bobb Group, provided a detailed presentation at last week’s City Council meeting with regard to how his firm plans to help Petersburg solve its financial problems and what the company had completed in its first week on the job. In the wake of meeting with Councilmembers and city officials, and reviewing scores of reports and other documents, the Bobb Group’s experts concluded that “by not addressing growing structural deficits since 2009, the city faces great risk in funding essential and critical public services. The fiscal crisis deepens.” (Among the reviewed documents was the August 3rd report by auditors from the Virginia Department of Finance alerting the small city’s officials to a backlog of nearly $19 million in unpaid bills from FY2016, as well as a looming $12 million deficit in the current fiscal year.) In addition, the group noted additional problems with regard to how the city government manages its money, adding that it had determined that some of the steps taken to deal with the fiscal crisis may not have done enough—indeed, may have done more harm than good: “The fiscal year 17 budget is unrealistic, lacks transparency, and has not been appropriated or made available to the public…Even with the $12.5 million reduction from the original budget to the amended budget, there is a lack of accountability and information…to ensure that the city can meet what is planned.”

Indeed, the report noted that some of the fiscal steps taken by the city may well have been counter-productive, noting that the early action imposing an across-the-board 10 percent pay cut for city employees—an imposition which, according to the Bobb Group, triggered a “mass exodus” of city workers, “was taken over-dramatically, eliminating services:” The pay cut, the group reported, led to the resignations of 146 city employees.

The city had already issued a solicitation for a $6.5 million loan against its expected tax revenue before the Bobb Group arrived on scene. Nelsie L. Birch, the Bobb Group staffer currently acting as Petersburg’s interim budget and finance director, reported that negotiations with potential lenders are about to get underway. Already, however, it appears the proceedings might be delayed: Petersburg officials had expected the loan proceeds to be available this month; however, according to the Bobb Group, “the proceeds may not be available until December (at the earliest). This leaves November vulnerable to ensuring payroll obligations are able to be met.”

Governance by Contract? The terms of the firm’s effective preemption of municipal governance which the Bobb Group provided to the city—a plan which included a so-called “plan of entry” featuring an “immediate ‘All Hands’ discussion with the Mayor and City Council on the city’s goals, service levels, and future direction; immediate one-on-one meetings with the individual members of the City Council…[and] a documents review, including but not limited to budgets, audits, special studies on the city’s current financial operations, organizational structure [and] city charter.” Among the key services the contract calls for the consulting firm to provide:

  • “Perform a financial review of the city, including but not limited to a review and assessment of financial information that has been, and that will be, provided by the city to its creditors, including without limitation its short- and long-term projected cash flows and operating performance.”
  • “Assist in the identification and implementation of cost-reduction and operations-improvement opportunities.”
  • “Assist the mayor and City Council and other city-authorized professionals in developing for the City Council’s review possible restructuring plans or strategic alternatives for maximizing the enterprise value of the city’s various economic development opportunities.”

For these and other services, the Bobb Company is to be paid $350,000 plus expenses up to $25,000 to cover the company’s employees’ travel, lodging and meals. The contract requires that “All hotel and apartment rental for the period of the engagement will be within the City of Petersburg.”