Fiscal & Public Service Insolvency

eBlog, 03/03/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges for the historic municipality of Petersburg, Virginia as it seeks to depart from insolvency; we consider, anew, the issues related to “service insolvency,” especially assisted by the exceptional insights of Marc Pfeiffer at Rutgers, then turning to the new fiscal plan by the Puerto Rico Fiscal Agency and Financial Advisory Authority, before racing back to Virginia for a swing on insolvent links. For readers who missed it, we commend the eBlog earlier this week in which we admired the recent wisdom on fiscal disparities by the ever remarkable Bo Zhao of the Federal Reserve Bank of Boston with regard to municipal fiscal disparities.

Selling One’s City. Petersburg, Virginia, the small, historic, and basically insolvent municipality under quasi state control is now trying to get hundreds of properties owned by the city off the books and back on the tax rolls as part of its effort to help resolve its fiscal and trust insolvency. As Michelle Peters, Economic Development Director for Petersburg, notes: “The city owns over 200 properties, but today we had a showcase to feature about 25 properties that we group together based on location, and these properties are already zoned appropriate for commercial development.” Thus the municipality is not only looking to raise revenues from the sale, but also to realize revenues through the conversion of these empty properties into thriving businesses—or as Ms. Peters puts it: “It’s to get the properties back on the tax rolls for the city, because, currently, the city owns them so they are just vacant, there are no taxes being collected,” much less jobs being filled. Ms. Peters notes that while some of the buildings do need work, like an old hotel on Tabb Street, the city stands ready to offer a great deal on great property, and it is ready to make a deal and has incentives to offer:  “We’re ready to sit down at the table and to negotiate, strike a deal and get those properties developed.”

New Jersey & Its Taken-over City. The $72 million tax settlement between Borgata Hotel Casino & Spa and Atlantic City’s state overseers is a “major step forward” in fixing the city’s finances, according to Moody’s Investors Service, which deemed the arrangement as one that has cleared “one of the biggest outstanding items of concern” in the municipality burdened by hundreds of millions of dollars in debt and under state control. Atlantic City owed Borgata $165 million in tax refunds after years of successful tax appeals by the casino, according to the state. The settlement is projected to save the city $93 million in potential debt—savings which amount to a 22 percent reduction of the city’s $424 million total debt, according to Moody’s, albeit, as Moody’s noted: “[W]hile it does not solve the city’s problems, the settlement makes addressing those problems considerably more likely.” The city will bond for the $72 million through New Jersey’s state Municipal Qualified Bond Act, making it a double whammy: because the bonds will be issued via the state MQBA, they will carry an A3 rating, ergo at a much better rate than under the city’s Caa3 junk bond status. Nevertheless, according to the characteristically moody Moody’s, Atlantic City’s finances remain in a “perilous state,” with the credit rating agency citing low cash flow and an economy still heavily dependent upon gambling.

Fiscal & Public Service Insolvency. One of my most admired colleagues in the arena of municipal fiscal distress, Marc Pfeiffer, Senior Policy Fellow and Assistant Director of the Bloustein Local Government Research Center in New Jersey, notes that a new twist on the legal concept of municipal insolvency could change how some financially troubled local governments seek permission to file for federal bankruptcy protection. Writing that municipal insolvency traditionally means a city, county, or other government cannot pay its bills, and can lead in rare instances to a Chapter 9 bankruptcy filing or some other remedy authorized by the state that is not as drastic as a Chapter 9, he notes that, in recent years, the description of “insolvency” has expanded beyond a simple cash shortage to include “service-delivery insolvency,” meaning a municipality is facing a crisis in managing police, fire, ambulance, trash, sewer and other essential safety and health services, adding that service insolvency contributed to Stockton, California, and Detroit filings for Chapter 9 bankruptcy protection in 2012 and 2013, respectively: “Neither city could pay its unsustainable debts, but officials’ failure to curb violent crime, spreading blight and decaying infrastructure was even more compelling to the federal bankruptcy judges who decided that Stockton and Detroit were eligible to file for Chapter 9.”

In fact, in meeting with Kevyn Orr, the emergency manager appointed by Michigan Governor Rick Snyder, at his first meeting in Detroit, Mr. Orr recounted to me that his very first actions had been to email every employee of the city to ensure they reported to work that morning, noting the critical responsibility to ensure that street lights and traffic lights, as well as other essential public services operated. He wanted to ensure there would be no disruption of such essential services—a concern clearly shared by the eventual overseer of the city’s historic chapter 9 municipal bankruptcy, now retired U.S. Bankruptcy Judge Steven Rhodes, who, in his decision affirming the city’s plan of debt adjustment, had written: “It is the city’s service delivery insolvency that the court finds most strikingly disturbing in this case…It is inhumane and intolerable, and it must be fixed.” Similarly, his colleague, U.S. Bankruptcy Judge Christopher Klein, who presided over Stockton’s chapter 9 trial in California, had noted that without the “muscle” of municipal bankruptcy protection, “It is apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic public services.” Indeed, in an interview, Judge Rhodes said that while Detroit officials had provided ample evidence of cash and budget insolvency, “the concept of service delivery insolvency put a more understanding face on what otherwise was just plain numbers.” It then became clear, he said, that the only solution for Detroit—as well as any insolvent municipality—was “fresh money,” including hundreds of millions of dollars contributed by the state, city, and private foundations: “It is a rare insolvency situation—corporate or municipal—that can be fixed just by a change in management.”

Thus, Mr. Pfeiffer writes that “Demonstrating that services are dysfunctional could strengthen a local government’s ability to convince a [federal bankruptcy] judge that the city is eligible for chapter 9 municipal bankruptcy protection (provided, of course, said municipality is in one the eighteen states which authorize such filings). Or, as Genevieve Nolan, a vice president and senior analyst at Moody’s Investors Service, notes: “With their cases focusing on not just a government’s ability to pay its debts, but also an ability to provide basic services to residents, Stockton and Detroit opened a path for future municipal bankruptcies.”

Mr. Pfeiffer notes that East Cleveland, Ohio, was the first city to invoke service insolvency after Detroit. In its so far patently unsuccessful efforts to obtain authority from the State of Ohio to file for municipal bankruptcy protection—in a city, where, as we have noted on numerous occasions, the city has demonstrated a fiscal inability to sustain basic police, fire, EMS, or trash services. East Cleveland had an approved plan to balance its budget, but then-Mayor Gary Norton told the state the proposed cuts “[would] have the effect of decimating our safety forces.” Ohio state officials initially rejected the municipality’s request for permission to file for municipal bankruptcy, because the request came from the mayor instead of the city council; the city’s status has been frozen since then.

Mr. Pfeiffer then writes:

Of concern.  [Municipal] Bankruptcy was historically seen as the worst case scenario with severe penalties – in theory the threat of it would prevent local officials from doing irresponsible things. [Indeed, when I first began my redoubtable quest with the Dean of chapter 9 municipal bankruptcy Jim Spiotto, while at the National League of Cities, the very idea that the nation’s largest organization representing elected municipal leaders would advocate for amending federal laws so that cities, counties, and other municipal districts could file for such protection drew approbation, to say the least.] Local officials are subject to such political pressures that there needs to be a societal “worst case” that needs to be avoided.  It’s not like a business bankruptcy where assets get sold and equity holders lose investment.  We are dealing with public assets and the public, though charged with for electing responsible representatives, who or which can’t be held fully responsible for what may be foolish, inept, corrupt, or criminal actions by their officials. Thus municipal bankruptcy, rather than dissolution, was a worst case scenario whose impact needed to be avoided at all costs. Lacking a worst case scenario with real meaning, officials may be more prone to take fiscal or political risks if they think the penalty is not that harsh. The current commercial practice of a structured bankruptcy, which is commonly used (and effectively used in Detroit and eventually in San Bernardino and other places) could become common place. If insolvency were extended to “service delivery,” and if it becomes relatively painless, decision-making/political risk is lowered, and political officials can take greater risks with less regard to the consequences. In my view, the impact of bankruptcy needs to be so onerous that elected officials will strive to avoid it and avoid decisions that may look good for short-term but have negative impact in the medium to long-term and could lead to serious consequences. State leaders also need to protect their citizens with controls and oversight to prevent outliers from taking place, and stepping in when signs of fiscal weakness appear.”

Self-Determination. Puerto Rico Gov. Ricardo Rosselló has submitted a 10-year fiscal plan to the PROMESA Oversight Board which would allow for annual debt payments of about 18% to 41% of debt due—a plan which anticipates sufficient cash flow in FY2018 to pay 17.6% of the government’s debt service. In the subsequent eight years, under the plan, the government would pay between 30% and 41% per year. The plan, according to the Governor, is based upon strategic fiscal imperatives, including restoring credibility with all stakeholders through transparent, supportable financial information and honoring the U.S. territory’s obligations in accordance with the Constitution of Puerto Rico; reducing the complexity and inefficiency of government to deliver essential services in a cost-effective manner; implementing reforms to improve Puerto Rico’s competitiveness and reduce the cost of doing business; ensuring that economic development processes are effective and aligned to incentivize the necessary investments to promote economic growth and job creation; protecting the most vulnerable segments of our society and transforming our public pensions system; and consensually renegotiating and restructuring debt obligations through Title VI of PROMESA. The plan he proposed, marvelously on the 100th anniversary of the Jones-Shafroth Act making Puerto Rico a U.S. territory, also proposes monitoring liquidity and managing anticipated shortfalls in current forecast, and achieving fiscal balance by 2019 and maintaining fiscal stability with balanced budgets thereafter (through 2027 and beyond). The Governor notes the Fiscal Plan is intended to achieve its objectives through fiscal reform measures, strategic reform initiatives, and financial control reforms, including fiscal reform measures that would reduce Puerto Rico’s decade-long financing gap by $33.3 billion through:

  • revenue enhancements achieved via tax reform and compliance enhancement strategies;
  • government right-sizing and subsidy reductions;
  • more efficient delivery of healthcare services;
  • public pension reform;
  • structural reform initiatives intended to provide the tools to significantly increase Puerto Rico’s capacity to grow its economy;
  • improving ease of business activity;
  • capital efficiency;
  • energy [utility] reform;
  • financial control reforms focused on enhanced transparency, controls, and accountability of budgeting, procurement, and disbursement processes.

The new Fiscal Plan marks an effort to achieve fiscal solvency and long-term economic growth and to comply with the 14 statutory requirements established by Congress’ PROMESA legislation, as well as the five principles established by the PROMESA Oversight Board, and intended to sets a fiscal path to making available to the public and creditor constituents financial information which has been long overdue, noting that upon the Oversight Board’s certification of those fiscal plans it deems to be compliant with PROMESA, the Puerto Rico government and its advisors will promptly convene meetings with organized bondholder groups, insurers, union, local interest business groups, public advocacy groups and municipality representative leaders to discuss and answer all pertinent questions concerning the fiscal plan and to provide additional and necessary momentum as appropriate, noting the intention and preference of the government is to conduct “good-faith” negotiations with creditors to achieve restructuring “voluntary agreements” in the manner and method provided for under the provisions of Title VI of PROMESA.

Related to the service insolvency issues we discussed [above] this early, snowy a.m., Gov. Rosselló added that these figures are for government debt proper—not the debt of issuers of the public corporations (excepting the Highways and Transportation Authority), Puerto Rico’s 88 municipalities, or the territory’s handful of other semi-autonomous authorities, and that its provisions do not count on Congress to restore Affordable Care Act funding. Rather, Gov. Rosselló said he plans to determine the amount of debt the Commonwealth will pay by first determining the sums needed for (related to what Mr. Pfeiffer raised above] “essential services and contingency reserves.” The Governor noted that Puerto Rico’s debt burden will be based on net cash available, and that, if possible, he hopes to be able to use a consensual process under Title VI of PROMESA to decide on the new debt service schedules. [PROMESA requires the creation of certified five-year fiscal plan which would provide a balanced budget to the Commonwealth, restore access to the capital markets, fund essential public services, and pensions, and achieve a sustainable debt burden—all provisions which the board could accept, modify, or completely redo.]  

Adrift on the Fiscal Links? While this a.m.’s snow flurries likely precludes a golf outing, ACA Financial Guaranty Corp., a municipal bond insurer, appears ready to take a mighty swing for a birdie, as it is pressing for payback on the defaulted debt which was critical to the financing of Buena Vista, Virginia’s unprofitable municipal golf course, this time teeing the proverbial ball up in federal court. Buena Vista, a municipality nestled near the iconic Blue Ridge of some 2,547 households, and where the median income for a household in the city is in the range of $32,410, and the median income for a family was $39,449—and where only about 8.2 percent of families were below the poverty line, including 14.3 percent of those under age 18 and 10 percent of those age 65 or over. Teeing the fiscal issue up is the municipal debt arising from the issuance by the city and its Public Recreational Facilities Authority of some $9.2 million of lease-revenue municipal bonds insured by ACA twelve years ago—debt upon which the municipality had offered City Hall, police and court facilities, as well as its municipal championship golf course as collateral for the debt—that is, in this duffer’s case, municipal debt which the municipality’s leaders voted to stop repaying, as we have previously noted, in late 2015. Ergo, ACA is taking another swing at the city: it is seeking:

  • the appointment of a receiver appointed for the municipal facilities,
  • immediate payment of the debt, and
  • $525,000 in damages in a new in the U.S. District Court for Western Virginia,

Claiming the municipality “fraudulently induced” ACA to enter into the transaction by representing that the city had authority to enter the contracts. In response, the municipality’s attorney reports that Buena Vista city officials are still open to settlement negotiations, and are more than willing to negotiate—but that ACA has refused its offers. In a case where there appear to have been any number of mulligans, since it was first driven last June, teed off, as it were, in Buena Vista Circuit Court, where ACA sought a declaratory judgment against the Buena Vista and the Public Recreational Facilities Authority, seeking judicial determination with regard to the validity of its agreement with Buena Vista, including municipal bond documents detailing any legal authority to foreclose on city hall, the police department, and/or the municipal golf course. The trajectory of the course of the litigation, however, has not been down the center of the fairway: the lower court case took a severe hook into the fiscal rough when court documents filed by the city contended that the underlying municipal bond deal was void, because only four of the Buena Vista’s seven City Council members voted on the bond resolution, not to mention related agreements which included selling the city’s interest in its “public places.” Moreover, pulling out a driver, Buena Vista, in its filing, wrote that Virginia’s constitution filing, requires all seven council members to be present to vote on a matter which involved backing the golf course’s municipal bonds with an interest in facilities owned by the municipality. That drive indeed appeared to earn a birdie, as ACA then withdrew its state suit; however, it then filed in federal court, where, according to its attorney, it is not seeking to foreclose on Buena Vista’s municipal facilities; rather, in its new federal lawsuit, ACA avers that the tainted vote supposedly invalidating the municipality’s deed of trust supporting the municipal bonds and collateral does not make sense, maintaining in its filing that Buena Vista’s elected leaders had adopted a bond resolution and made representations in the deed, the lease, the forbearance agreement, and in legal opinions which supported the validity of the Council’s actions, writing: “Fundamental principles of equity, waiver, estoppel, and good conscience will not allow the city–after receiving the benefits of the [municipal] bonds and its related transactions–to now disavow the validity of the same city deed of trust that it and its counsel repeatedly acknowledged in writing to be fully valid, binding and enforceable.” Thus, the suit requests a judgment against Buena Vista, declaring the financing documents to be valid, appointing a receiver, and an order granting ACA the right to foreclose on the Buena Vista’s government complex in addition to compensatory damages, with a number of the counts seeking rulings determining that Buena Vista and the authority breached deed and forbearance agreements, in addition to an implied covenant of good faith and fair dealing, requiring immediate payback on the outstanding bonds, writing: “Defendants’ false statements and omissions were made recklessly and constituted willful and wanton disregard.” In addition to compensatory damages and pre-and post-judgment interest, ACA has asked the U.S. court to order that Buena Vista pay all of its costs and attorneys’ fees; it is also seeking an order compelling the city to move its courthouse to other facilities and make improvements at the existing courthouse, including bringing it up to standards required by the ADA.

Like a severe hook, the city’s municipal public course appears to have been errant from the get-go: it has never turned a profit for Buena Vista; rather it has required general fund subsidies totaling $5.6 million since opening, according to the city’s CAFR. Worse, Buena Vista notes that the taxpayer subsidies have taken a toll on its budget concurrent with the ravages created by the great recession: in 2010, Buena Vista entered a five-year forbearance agreement in which ACA agreed to make bond payments for five years; however, three years ago, the city council voted in its budget not to appropriate the funds to resume payment on the debt, marking the first default on the municipal golf course bond, per material event notices posted on the MSRB’s EMMA.

Voting on a Municipality’s Future

 

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eBlog, 9/16/16

In this morning’s eBlog, we consider the upcoming election in San Bernardino on what form of municipal governance the city’s voters want for their post-municipal bankrupt municipality; then we head East to Michigan to listen to Mayor Duggan and ponder on how very perilous and challenging the path out of municipal bankruptcy can be; before heading still farther East to inquire whether Atlantic City even has a future as a city—or will, instead, be taken over by the state. After which, we turn right back around to Ohio—where the fate of East Cleveland is very, very much in question: no one seems to have an answer—and the silence from the State of Ohio has been deafening. Finally, we fly south to the U.S. Territory of Puerto Rico—albeit, really to the nation’s Capitol, as U.S. House and Senate members struggle to consider how federal policies and actions could play a vital role in the island’s long-term economic future.

Voting on a Bankrupt City’s Future. Unlike November’s election farther north in Stockton, where the vote will be over which elected leader the voters will elect to keep that city on the road to recovery, voters in what could be post-chapter 9 San Bernardino will be deciding whether to adopt a new city charter [If approved by a majority of voters Nov. 8, Measure L will replace the existing charter with the 14-page new charter.] under which to operate in the wake of U.S. Bankruptcy Judge Meredith Jury’s upcoming confirmation hearing on October 14th with regard to the decision to approve the city’s plan of debt adjustment—albeit, as San Bernardino City Attorney Gary Saenz yesterday said, the city anticipates receiving a confirmation order from Judge Jury by the end of the year with an effective exit date around March. The municipality’s creditors had been projected to vote on the city’s plan of debt adjustment earlier this month; however, CalPERS and U.S. Bank each filed extensions seeking more time to vote, even as attorneys representing Ambac Assurance Corp., the insurer on $52 million in pension obligation bonds, have voted in favor of the exit plan contingent on finalizing what it called in a court filing “the definitive documents.” Or, as City Attorney Saenz notes: “It is all contingent on how things go…Voting has come in overwhelmingly in support of the plan, which helps with regard to confirmation.” Mr. Saenz added: “We are working on resolving the smaller cases, such as personal injury claimants, trip and falls, and a case involving one of our police officers…The more of those we settle, at this time, helps with respect to confirmation.” With regard to the city’s bigger creditors, he notes that when CalPERS files today, that could be a significant milestone, albeit the huge state retirement agency reached an agreement in substance with San Bernardino more than a year ago; and an agreement with pension bondholders in May. U.S. Bank, which holds several million dollars of commercial paper issued against city buildings, also had previously reached an agreement with the city. With regard to reaching an agreement with the city’s municipal bondholders, Mr. Saenz has previously noted the city was able to offer them 40 percent of what they are owed, rather than the measly one percent it had originally offered—in large part because the agreement also stretches out payments 20 years—an important score, as the city plan of debt adjustment is keenly focused on a long-term plan to make sure it does not make a round trip down the road back into chapter 9—an agreement, too, very much intended to gaining Judge Jury’s affirmation that the city’s pan is both feasible and dependable. Or, as Mr. Saenz notes: “One thing Judge Jury will look at is the feasibility of the confirmation plan…We believe we found a model that is dependable.” The proposed debt adjustment plan pension obligation bond agreement appears to—similar to the outcomes in Central Falls, Detroit, etc.—continue a trend of municipal bondholders faring worse than public pension obligations—albeit the powerful role of CalPERS is profoundly different than in Alabama, Rhode Island, or Michigan. Under the proposed, current proposed plan, Commerzbank Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, agreed to drop their opposition to San Bernardino’s plan of debt adjustment—under the pending resolution, the holders of $50 million in pension obligation bonds will receive payments equal to 40 percent of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.

Thus, in San Bernardino, the future will not be about whether there will be a future, but rather how—and what structure or form of municipal government it will be—or, rather the form of municipal governance. Indeed, last night, John Longville, one leader of the campaign in favor of Measure L, which would repeal San Bernardino’s existing charter and replace it with a new one created by a citizen committee, said such a new charter would promise the way to end decades of destructive political infighting rather than a surrendering of self-government. Mr. Longville, who comes with no small record—he is a former Mayor of Rialto, California Assemblyman, and the current President of the San Bernardino Community College District Board of Trustees that, like other jurisdictions in the region, San Bernardino has had a variety of leaders over the years, and the city has been affected by the same economic blows, including the loss of a major steel plant and a major Air Force Base—but, he pointedly noted, those cities did not file for chapter 9 municipal bankruptcy; in fact, he said they have been thriving, he said: “We see neighboring cities able to function better than we are…It’s just the reality. Some of them quite well. Why is San Bernardino functioning so poorly?” His answer? He told his audience the reason was the city’s 46-page charter first passed in 1905 and amended no less than 135 times since then. It was that history, he noted, which makes it unclear who is responsible for fixing problems and, therefore, breeds arguments.

In contrast, his debate opponent, James Penman, San Bernardino’s City Attorney from 1987 until 2013, countered that if San Bernardino’s charter were responsible for the city’s longest ever municipal bankruptcy, then the city would have gone bankrupt, as other cities did, during the Great Depression. “The city charter is not the reason for the bankruptcy. Poor leadership on the part of certain elected officials and certain appointed officials is the reason we went bankrupt,” pointedly reminding voters of the $4 million general fund reserve San Bernardino maintained when former Mayor Judith Valles left office in 2006,, as he added: “You can’t spend more money than you take in and not go bankrupt.” He told the audience the arguments at City Hall were not with regard to lines of power, but rather over issues officials were elected to address. The culprit, Mr. Penman maintained, has been the new charter’s elimination of elections for city attorney, city clerk, and city treasurer, and to its shifting of some responsibilities from an elected mayor to an unelected city manager: “The new charter takes away your rights and your leadership in electing City Hall,” he said, arguing that it is important those positions be directly responsible to voters, rather than to City Council members who would appoint them under the new charter.

But his opponent countered that in the century since the charter was passed, city government had become too complex to expect elected officials to understand it fully the day they are sworn in: “When I was mayor of Rialto, I was proud of what I did and I think I did a pretty darn good job…But when I first came in there was sure a lot that I didn’t know, and I was glad there was a professional city manager, as there is in almost every city in California.” Interestingly, Mr. Penman countered that following that argument to its logical conclusion would mean the state Legislature should choose the Governor and Congress should choose the President, since running the state and federal government also requires great expertise. He added, moreover, that an elected city attorney helps prevents scandals like those in Bell, Moreno Valley, and Beaumont.

347 miles north of San Bernardino, however, where there will also be elections in November—those elections will not affect Stockton’s city attorney, police chief, city clerk, or auditor: Stockton’s City Council charter review committee last year voted unanimously to reject a proposal by a citizen’s commission that could have given voters the chance to decide if the police chief, clerk, and auditor should have to run for office. Current candidate for re-election, Mayor Anthony Silva, had opposed the recommendations, warning: “Can you imagine getting ready for these upcoming elections (as a mayoral or council candidate) and in the middle of it our own clerk has to go out and start putting up signs for herself and then worry about her own election?…It would be chaos.”

The Hard Road out of Municipal Bankruptcy. Detroit Mayor Mike Duggan yesterday in an address during the third Detroit Homecoming, a special program created to attract ex-Detroiters and investors to come back home praised a recovering municipality from the nation’s largest chapter 9 bankruptcy with a call to entrepreneurs who have left to “come on back home.” Mayor Duggan spoke about improved service delivery, home values, and demolition efforts that are boosting many city communities—even as the Census Bureau reports that the city’s unemployment rate remains the highest in Michigan and newly released U.S. Census estimates rank Detroit the nation’s poorest major city. Mayor Duggan, in a city where the city’s schools are under the control of a state-appointed emergency manager and a state-created dual system of charter versus public schools, added: “The solution to poverty is jobs and making sure that our residents have the education and skills to take those jobs.” The Mayor’s remarks came as part of this long-term effort which began two years ago to help bring more than 300 ex-patriots with ties to Detroit “home” to re-experience the city—an effort which, to date, has resulted in committed investments of more than $260 million in city projects and businesses. Nevertheless, the new Census estimates underline how steep this road to recovery is: the U.S. Census American Community Survey reports that Detroit realized no change in poverty or incomes; an estimated 39.8 percent of its residents are below the poverty line. Nevertheless, as Mayor Duggan noted, a key measure, unemployment, has improved measurably: Detroit’s unemployment rate was 17.8 percent when he took office in two years ago in January; it was 12.5 percent by last July—or, as he put it: “We have 15,000 more jobs today than we did three years ago…Nobody is declaring victory, but we are making progress in a whole lot of neighborhoods in the city, and we have a lot more neighborhoods to go.” Mayor Duggan added, in another key issue to the city’s recovery, that since spring 2014, the city has razed more than 10,500 vacant houses, and is averaging the razing of 150 commercial buildings each year—and the results are encouraging: in some neighborhoods, he said, home sale prices are up more than 50 percent from two years ago.

Mayor Duggan expressed less confidence on the school front, noting he continues to be concerned over the so-called state rescue package for Detroit’s public school district that pays off $467 million in operating debt and provides startup funding for its new debt-free district—a package, however, which created a divided school system of charter and public schools, so that the city lacks uniform standards for all schools—and for all its children: “We’ve got to come back at it. We’ve got to get it fixed.” It is, as the Detroit News has opined: “a major American city where public education, namely the teaching of its young, is corrupted by grasping adults and mismanaged by state bureaucrats who seize control of a system they fail to fix…And not the fact that public education in Detroit, a necessary building block for any functioning democracy, is a disgrace and an indictment. Its recurring incompetence is a disincentive to families with school-aged children, households that form the bedrock of stable communities occupied by taxpayers and law-abiding citizens…The wonder is that it’s taken this long for prosecutors to root out corruption, or for someone to file a civil rights lawsuit against the state and whoever else for the generally deplorable state of Detroit’s public schools…This is a fundamental hurdle. Jobs in Detroit go wanting for Detroiters if their DPS secondary education fails to give them the skills to compete, and if folks refuse to recognize that education also needs the active participation of parents, students, even the business community.” Characteristically moody Moody’s credit rating service clearly shares Mayor Duggan’s apprehensions: the service worries that uncertainty over the future security of Detroit Public Schools state-aid backed bonds, its governance, as well as the poor arithmetic of tax collection issues in the wake of the state restructuring of DPS following the district’s restructuring merit a downgrade from “developing” to “negative,” deep in proverbial in junk territory, albeit advising the rating, like any student’s grade, could move in either direction once various issues tied to the state preemptive restructuring of DPS is resolved, adding that the further uncertainty over the outcome of a restructuring of limited tax state aid revenue bonds is a key concern—and noting that it moodily awaits the toting up of property tax collection trends and the success or failure of the eventual transfer of DPS’ governance from emergency management to a voter-approved Board of Education.

The Future or Un-future of a Great American City. Atlantic City, having now missed its deadline and violated the terms of a $73 million state loan, has asked the state for a “reprieve” on the matter—the deadline was one which required the city to initiate dissolution of its Municipal Utilities Authority—meaning that, as of today, the city is at the mercy of the state, which could ultimately demand immediate repayment of the loan or seize the city’s collateral. One of the terms in the July 29 bridge loan agreement called for the city to dissolve Atlantic Municipal Utilities Authority (ACMUA) by yesterday or use the water authority as collateral in the case of a default—a state demand the City Council has been unwilling to support: ergo, having defaulted under the loan terms, the state could demand immediate repayment of the monies. In a statement Wednesday, Mayor Donald Guardian noted: “Although the September 15 deadline will pass tomorrow without a city council resolution dissolving the MUA or designating it as collateral in case of default, we have asked the state for a reprieve on this because we believe that the MUA will actually be a better part of the overall financial solution if it is kept whole.” For its part, a New Jersey Local Finance Board spokeswoman had responded: “A decision has not been made and the Division is awaiting legal guidance as to its options.” The city had already been moodily downgraded last April, as we have reported, because of the difficult governance situation—a situation in which the city is under a state emergency manager who has been invisible, as well as a governance situation where the MUA is financially independent from the city—a utility estimated by New Jersey Senate President Steve Sweeney (D-Gloucester) at around $100 million—part of the reason Mayor Guardian has made clear, especially given its vital public safety role, that he would like to bring the MUA under city control and opposes privatization or a public-private partnership. The city, to some great extent caught between the rock and hard place of the Governor and the legislature, had averted a default in late May when the legislature approved a rescue package giving the city 150 days in which to deliver an acceptable five-year financial turnaround plan; however, if the plan is not approved by the early November deadline, state intervention kicks in with New Jersey’s Local Finance Board then empowered to alter debt and municipal contracts—that is, a different plan than insisted upon by Gov. Chris Christie. Indeed, on the 150 day calendar, Mayor Guardian notes: “Our 150-day plan is moving forward quickly, as we have some of the best in brightest minds in the country working on our behalf to solve this problem…We just need the time to finish the plan and to present it publicly. In the end, we think this will be the best plan to move Atlantic City forward while at the same time maintaining our sovereignty and decision-making rights now held by locally elected leaders.”

Governance & A City’s Future. East Cleveland, Ohio Mayor Gary Norton will face a recall vote in December, one that comes at a time of perilously depleted city coffers and a thick layer of political tension; so too will City Council President Tom Wheeler—or, as Mayor Norton notes: “This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” The small municipality, still, like Godot, awaiting a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, and awaiting potential negotiations from the neighboring City of Cleveland whether there would be a willingness to negotiate its incorporation into Cleveland, now also awaits the decisions of its citizens in November’s election—an election with a $25,000 price tag the city can ill afford.

A U.S. Territory’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico has been meeting with federal agencies and gathering input from some 335 organizations and individuals as it works to develop recommendations with regard to how to address the U.S. territory’s struggling economy—that is a wholly different group than the PROMESA oversight board (Chair Sen. Orrin Hatch (R-Utah), Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), and Reps. Pedro Pierluisi (Puerto Rico), Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y.) —one charged here by Congress to release a report by the end of the year on the impediments in current federal law and programs to economic growth in Puerto Rico along with recommended changes which could spur sustainable long-term economic growth, increase job creation, reduce child poverty, and attract investment to the U.S. territory. In its first joint release, the task force noted: “Residents of Puerto Rico and their families face numerous challenges to economic growth along with many dimensions affected by federal law and programs, including health care, government finances, economic stagnation, population loss, and sectoral inefficiencies…[We] are actively working to arrive at a consensus in order to provide Congress with findings and recommendations as called for under PROMESA.” The task force will continue accepting submissions from individuals until the middle of next month, having extended its previous deadline of September 2nd; the task force also said in its report that its members have been working with the Federal Reserve Bank of New York, which oversees Puerto Rico in the Federal Reserve System, and which recently provided a superb update at the City University of New York session convened to identify useful economic and financial developments in Puerto Rico and to analyze the Commonwealth’s economy and finances. The New York Fed has been providing not only useful reports and insights, but also blogs—and is now aiming to explore ways that federal statistical products used to measure economic and financial activity in the states could be applied to Puerto Rico. The task force is expecting help from the Joint Committee on Taxation (JCT), the Congressional Budget Office, and the Library of Congress’s Congressional Research Service. JCT will provide a briefing in the near future to discuss federal tax policy as it applies to Puerto Rico. The eight-member body will also consult with Puerto Rico’s legislative assembly, its Department of Economic Development and Commerce, as well as representatives of the private sector on the island.

Saving Lives, Dollars, and Families’ Homes

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eBlog, 6/27/16

In this morning’s eBlog, we explore the signal change set to occur this week with the consolidation of San Bernardino’s Fire Department into that of San Bernardino County—a critical step to saving capital and operating costs, as well as earning new revenues—and, likely, saving more lives. The consolidation marks the successful execution of this key provision in the city’s plan of debt adjustment. Next, we turn to view the success of Wayne County’s apparently successful efforts to sharply reduce tax foreclosures in Detroit—a vital fiscal effort to restoring the city’s property tax base.

The Sharing Economy. Implementation of a key provision in San Bernardino’s plan of debt adjustment is slated to happen this week when the city’s 137-year old fire department will be taken over by San Bernardino County—producing an additional $7 million to $8 million for the bankrupt municipality, according to the city’s projections—with those estimates calculating savings from the economies of scale offered by a larger organization as well as the associated new parcel tax, which will be $148 per parcel in FY2017—and increasing by up to 3 percent each year. Because the annexation involved subsuming the city’s fire department being annexed into an existing fire protection district that already had a 3 percent tax, the tax was automatically triggered for city residents—unless 25 percent of city residents had submitted protest forms by last April 21st—the threshold to trigger a vote. Thus the San Bernardino County Fire Department will officially assume responsibility for San Bernardino’s fire, rescue, and emergency medical services this Friday, with the actual personnel changes going into effect on Sunday, July 3rd. The consolidation will involve about two-thirds of the city’s current fire personnel taking positions in the county — and an equal number of county firefighters transferring into the city. But that appears to be just the tip of the iceberg: Technical support changes have been ongoing for months, fire rigs have been reconfigured to communicate with the county communication center, and officials have met regularly to ensure a smooth transition, and, of course, the replacement of labels on the vehicles themselves has already been underway.

Trying to Foreclose on Tax Foreclosures. Wayne County Treasurer Eric Sabree expects as many as 18,000 properties will be headed to the annual tax foreclosure auction this fall, with the vast majority in Detroit—which seems like a large number until one recognizes it would mark nearly a 36 percent drop from last year’s 28,000, leading Mr. Sabree to note: “Collections are up all over the county, including Detroit. That’s a good sign. But people are still struggling. We have to stay vigilant.” Over the last year, Mr. Sabree’s office has partnered with a number of nonprofits, neighborhood leaders, and Detroit Mayor Mike Duggan’s office to reach out to delinquent owners, including mailings, personal visits and workshops. Homeowners with tax debt can still enter payment plans with the Treasurer’s office until Thursday. Of those properties headed to foreclosure this fall, 8,000 are estimated to be occupied. Half of those are renters, according to Treasurer Sabree, and the rest homeowners. Wayne County officials attribute the marked decline in part to new payment plans which sharply reduce interest rates for many homeowners from 18 percent to 6 percent, as well as assistance available to homeowners through the Step Forward Michigan program. Those interest rate reductions, however, expire in June; consequently he.is pressing the Michigan Legislature to extend the program. This month officials with Loveland Technologies visited nearly 9,000 homes believed to be occupied and surveyed about 1,800 occupants: the company was able to help 256 residents get on payment plans; a key finding by Loveland: of the nearly 2,000 homeowners they visited, 38 percent said they were unaware the property was in foreclosure.