What Is a State’s Role in Averting Municipal Fiscal Contagion?

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eBlog, 9/28/16

Good Morning! In this a.m.’s eBlog, we consider, again, the risk of municipal fiscal contagion—and what the critical role of a state might be as the small municipality of Petersburg, Virginia’s fiscal plight appears to threaten neighboring municipalities and utilities: Virginia currently lacks a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion. Nor does the state appear to have any policy to enhance the ability of its cities to fiscally strengthen themselves. Then we try to go to school in Detroit—where the state almost seems intent on micromanaging the city’s public and charter schools so critical to the city’s long-term fiscal future. Then we jet to O’Hare to consider an exceptionally insightful report raising our age-old question with regard to: are there too many municipalities in a region? Since we’re there, we then look at the eroding fiscal plight of Cook County’s largest municipality: Chicago, a city increasingly caught between the fiscal plights of its public schools and public pension liabilities.  From thence we go up the river to Flint, where Congressional action last night might promise some fiscal hope—before, finally, ending this morn’s long journey in East Cleveland—where a weary Mayor continues to await a response from the State of Ohio—making the wait for Godot seem impossibly short—and the non-response from the State increasingly irresponsible.

Where Was Virginia While Petersburg Was Fiscally Collapsing? President Obama yesterday helicoptered into Fort Lee, just 4.3 miles from the fiscally at risk municipality of Petersburg, in a region where Petersburg’s regional partners are wondering whether they will ever be reimbursed for delinquent bills: current regional partners to which the city owes money include the South Central Wastewater Authority, Appomattox River Water Authority, Central Virginia Waste Management, Riverside Regional Jail, Crater Criminal Justice Academy, and Crater Youth Care Commission. Acting City Manager Dironna Moore Belton has apparently advised these authorities to expect a partial payment in October—or as a spokesperson of a law firm yesterday stated: “The City appears committed to meeting its financial obligations for these important and necessary services going forward and to starting to pay down past due amounts dating back to the 2016 fiscal year…We appreciate the plan the city presented; however we have to reserve judgment until we see whether the City follows through on these commitments.” One option, it appears, alluded to by the Acting City Manager would be via a tax anticipation note. Given the municipality’s virtual insolvency, however, such additional borrowing would likely come at a frightful cost.

The municipality is caught in a fiscal void. It appears to have totally botched the rollout of new water meters intended to reduce leakage and facilitate more efficient billing. It appears to be insolvent—and imperiling the fiscal welfare of other municipalities and public utilities in its region. It appears the city has been guilty of charges that when it did collect water bills, it diverted funds toward other activities and failed to remit to the water authority. While it seems the city has paid the Virginia Resources Authority to stave off default, questions have arisen with regard to the role of the Commonwealth of Virginia—one of the majority of states which does not permit municipalities to file for chapter 9 bankruptcy. But questions have also arisen with regard to what role—or lack of a role—the state has played over the last two fiscal years, years in which the city’s auditor has given it a clean signoff on its CAFRs; and GFOA awarded the city its award for financial reporting. There is, of course, also the bedeviling query: if Virginia law does not permit localities to go into municipal bankruptcy, and if Petersburg’s insolvency threatens the fiscal solvency of a public regional utility and, potentially, other regional municipalities, what is the state role and responsibility—a state, after all, which rightly is apprehensive that is its coveted AAA credit rating could be at risk were Petersburg to become insolvent.

In this case, it seems that Petersburg passed the Virginia State Auditor’s scrutiny because (1) it submitted the required documents according to the state’s schedule, regardless of whether or not the numbers were correct; (2) the firm used by the city was probably out of its league. (It appears Petersburg used a firm that specialized in small town audits); (3) the City Council apparently did not focus on material weaknesses identified by the private CPA (nor did the State Auditor). The previous city manager, by design, accident, or level of competence, simply did not put up much of a struggle when the Council would amend the budget in mid-year to increase spending—a task no doubt politically challenging in the wake of the Great Recession—a fiscal slam which, according to the State Auditor’s presentation, devastated the city’s finances, forcing the city in a posture of surviving off cash reserves. (http://sfc.virginia.gov/pdf/committee_meeting_presentations/2016%20Interim/092216_No2b_Mavredes_SFC%20Locality%20Fiscal%20Indicators%20Overview.pdf). Now, in the wake of fiscal failures at both levels of government, the Virginia Senate Finance Committee last week devoted a great deal of time discussing “early warning systems,” or fiscal distress trip wires which would alert a state early on of impending municipal fiscal distress. Currently, in Virginia, no state agency has the responsibility for such an activity. That augurs ill: it means the real question is: is Petersburg an anomaly or the beginning of a trend?

The challenge for the state—because its credit rating could be adversely affected if it fails to act, and Petersburg’s fiscal contagion spreads to its regional neighbors and public utilities, a larger question for the Governor and legislators might be with regard to the state’s strictures in Virginia which bar municipal bankruptcy, bar annexation, prohibit local income taxes, cap local sales tax, and have been increasing state-driven costs for K-12, line-of-duty, water and wastewater, etc.

Who’s Governing a City’ Future? Michigan Attorney General Bill Scheutte yesterday stated the state would close poorly performing Detroit schools by the end of the current academic year if they ranked among the state’s worst in the past three years in an official legal opinion—an opinion contradictory to a third-party legal analysis that Gov. Rick Snyder’s administration had said would prevent the state from forcing closure any Detroit public schools until at least 2019, because they had been transferred to a new debt-free district as part of a financial rescue package legislators approved this year—a state law which empowers the School Reform Office authority to close public schools which perform in the lowest five percent for three consecutive years. Indeed, in his opinion, Attorney General Scheutte wrote that enabling the state’s $617 million district bailout specified Detroit closures should be mandatory unless such closures would result in an unreasonable hardship for students, writing: “The law is clear: Michigan parents and their children do not have to be stuck indefinitely in a failing school…Detroit students and parents deserve accountability and high performing schools. If a child can’t spell opportunity, they won’t have opportunity.” The Attorney General’s opinion came in response to a request by Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) as part of the issue with regard to whether the majority in the state legislature, the City of Detroit, or the Detroit Public Schools ought to be guiding DPS, currently under Emergency Manager retired U.S. Bankruptcy Judge Steven Rhodes would best serve the interest of the city’s children. It appears, at least from the perspective of the state capitol, this will be a decision preempted by the state, with the Governor’s School Reform Office seemingly likely to ultimately decide whether to close any number of struggling schools around the state—a decision his administration has said would likely be made—even as the school year is already underway—“a couple of months” away. The state office last month released a list of 124 schools that performed in the bottom 5 percent last year, on which list more than a third, 47, were Detroit schools.

Nevertheless, the governance authority to so disrupt a city’s public school system is hardly clear: John Walsh, Gov. Snyder’s director of strategic policy, had told The Detroit News that the state could not immediately close any Detroit schools, citing an August 2nd legal memorandum Miller Canfield attorneys sent Detroit school district emergency manager Judge Rhodes, a memorandum which made clear that the transferral of Detroit schools to a new-debt free district under the provisions of the state-enacted legislation had essentially reset the three-year countdown clock allowing the state to close them—a legal position the state attorney general yesterday rejected, writing: a school “need not be operated by the community district for the immediately preceding three school years before it is subject to closure.” Michigan State Rep. Sherry Gay-Dagnogo (D-Detroit) reacted to the state opinion by noting it would not give Detroit’s schools a chance to make serious improvements as part of so-called “fresh start” promised by the legislature as part of the $617 million school reform package enacted last June, noting that she believes the timing of its release—just one week before student count day—is part of an intentional effort to destabilize the district: “We could possibly lose students, because parents are afraid and confused, that’s what this is all about…They want the district to implode…They want to completely remake public education, and implode the district to charter the district. There’s big money in charter schools…This is about business over children.”

Are There Too Many Municipalities? Can We Afford Them All? The Chicago Civic Federation recently released a report, “Unincorporated Cook County: A Profile of Unincorporated Areas in Cook County and Recommendations to Facilitate Incorporation,” which examines unincorporated areas in Cook County—a county with a population larger than that of 29 individual states—and the combined populations of the seven smallest states—a county in which there are some 135 incorporated municipalities partially or wholly within the county, the largest of which is the City of Chicago, home to approximately 54% of the population of the county. Approximately 2.4%, or 126,034, of Cook County’s 5.2 million residents live in unincorporated areas of the County and therefore do not pay taxes to a municipality. According to Civic Federation calculations, Cook County spends approximately $42.9 million annually in expenses related to the delivery of municipal-type services to unincorporated areas, including law enforcement, building and zoning and liquor control. Because the areas only generate $24.0 million toward defraying the cost of these special services, County taxpayers effectively pay an $18.9 million subsidy, even as they pay taxes for their own municipal services. The portion of Cook County which lies outside Chicago’s city limits is divided into 30 townships, which often divide or share governmental services with local municipalities. Thus, this new report builds on the long-term effort by the Federation in the wake of its 2014 comprehensive analysis of all unincorporated areas in Cook County as well as recommendations to assist the County in eliminating unincorporated areas. .In this new report, the Federation looks at the $18.9 million cost to the County of providing municipal-type services in unincorporated areas compared to revenue generated from the unincorporated areas, finding it spent approximately $18.9 million more on unincorporated area services than the total revenue it collected in those areas in FY2014, including nearly $24.0 million in revenues generated from the unincorporated areas of the county compared to $42.9 million in expenses related to the delivery of municipal-type services to the unincorporated areas of the county—or, as the report notes: “In sum, all Cook County taxpayers provide an $18.9 million subsidy to residents in the unincorporated areas. On a per capita basis, the variance between revenues and expenditures is $150, or the difference between $340 per capita in expenditures versus $190 per capita in revenues collected. The report found that in that fiscal year, Cook County’s cost to provide law enforcement, building and zoning, animal control and liquor control services was approximately $42.9 million or $340.49 per resident of the unincorporated areas. The following chart identifies the Cook County agencies that provide services to the unincorporated areas and the costs associated with providing those services. The county’s services to these unincorporated areas are funded through a variety of taxes and fees, including revenues generated from both incorporated and unincorporated taxpayers to fund operations countywide: some revenues are generated or are distributed solely within the unincorporated areas, such as income taxes, building and zoning fees, state sales taxes, wheel taxes (the wheel tax is an annual license fee authorizing the use of any motor vehicle within the unincorporated area of Cook County). The annual rate varies depending on the type of vehicle as well as a vehicle’s class, weight, and number of axles. Receipts from this tax are deposited in the Public Safety Fund. In FY2014 the tax generated an estimated $3.8 million., and business and liquor license fees, but the report found these areas also generated revenues from the Cook County sales and property taxes, which totaled nearly $15.5 million in revenue, noting, however, those taxes are imposed at the same rate in both incorporated and unincorporated areas and are used to fund all county functions. With regard to revenues generated solely within the unincorporated areas of the county, the Federation wrote that the State of Illinois allocates income tax funds to Cook County based on the number of residents in unincorporated areas: if unincorporated areas are annexed to municipalities, then the distribution of funds is correspondingly reduced by the number of inhabitants annexed into municipalities. Thus, in FY2014, Cook County collected approximately $12.0 million in income tax distribution based on the population of residents residing in the unincorporated areas of Cook County. The report determined the Wheel Tax garnered an estimated $3.8 million in FY2014 from the unincorporated areas; $3.7 million from permit and zoning fees (including a contractor’s business registration fee, annual inspection fees, and local public entity and non-profit organization fees (As of December 1, 2014, all organizations are required to pay 100% of standard building, zoning and inspection fees.). The County receives a cut of the Illinois Retailer’s Occupation Tax (a tax on the sale of certain merchandise at the rate of 6.25%. Of the 6.25%, 1.0% of the 6.25% is distributed to Cook County for sales made in the unincorporated areas of the County. In FY2014 this amounted to approximately $2.8 million in revenue. However, if the unincorporated areas of Cook County are annexed by a municipality this revenue would be redirected to the municipalities that annexed the unincorporated areas.) Cook County also receives a fee from cable television providers for the right and franchise to construct and operate cable television systems in unincorporated Cook County (which garnered nearly $1.3 million in revenue in FY2104). Businesses located in unincorporated Cook County pay an annual fee in order to obtain a liquor license that allows for the sale of alcoholic liquor. The minimum required license fee is $3,000 plus additional background check fees and other related liquor license application fees. In FY2014 these fees generated $365,904. Finally, businesses in unincorporated Cook County engaged in general sales, involved in office operations, or not exempt are required to obtain a Cook County general business license—for which a fee of $40 for a two-year license is imposed—enough in FY2014 for the county to count approximately $32,160 in revenue.

Who’s Financing a City’s Future? It almost seems as if the largest municipality within Cook County is caught between its past and its future—here it is accrued public pension liabilities versus its public schools. The city has raised taxes and moved to shore up its debt-ridden pension system—obligated by the Illinois constitution to pay, but under further pressure and facing a potential strike by its teachers, who are seeking greater benefits. The Chicago arithmetic for the public schools, the nation’s third-largest public school district is an equation which counts on the missing variables of state aid and union concessions—neither of which appears to be forthcoming. Indeed, this week, Moody’s, doing its own moody math, cut the Big Shoulder city’s credit rating deeper into junk, citing its “precarious liquidity” and reliance on borrowed money, even as preliminary data demonstrated a continuing enrollment decline drop of almost 14,000 students—a decline that will add fiscal insult to injury and, likely, provoke potential investors to insist upon higher interest rates. According to the Chicago Board of Education, enrollment has eroded from some 414,000 students in 2007 to 396,000 last year: a double whammy, because it not only reduces its funding, but likely also means the Mayor’s goal of drawing younger families to move into the city might not be working. In our report on Chicago, we had noted: “The demographics are recovering from the previous decade which saw an exodus of 200,000. In the decade, the city lost 7.1% of its jobs. Now, revenues are coming back, but the city faces an exceptional challenge in trying to shape its future. With a current debt level of $63,525 per capita, one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Nevertheless, unemployment is coming down (11.3% unemployment, seasonally adjusted) and census data demonstrated the city is returning as a destination for the key demographic group, the 25-29 age group, which grew from 227,000 in 2006 to 274,000 by end of 2011.) Ergo, the steady drop in enrollment could signal a reversal of those once “recovering” demographics. Or, as Moody’s notes, the chronic financial strains may lead investors to demand higher interest rates—rates already unaffordably high with yields of as much as 9 percent, according to Moody’s. Like an olden times Pac-Man, principal and interest rate costs are chewing into CPS’s budget consuming more than 10 percent of this year’s $5.4 billion budget, or as the ever perspicacious Richard Ciccarone of Merritt Research Services in the Windy City put it: “To say that they’re challenged is an understatement…The problems that they’re having poses risks to continued operations and the timely repayment of liabilities.” Moody’s VP in Chicago Rachel Cortez notes: “Because the reserves and the liquidity have weakened steadily over the past few years, there’s less room for uncertainty in the budget: They don’t have any cash left to buffer against revenue or expenditure assumptions that don’t pan out.” And the math threatens to worsen: CPS’ budget for FY2016-17 anticipate the school district will gain concessions from the union, including phasing out CPS’ practice of covering most of teachers’ pension contributions—a phase-out the teachers’ union has already rejected; CPS is also counting on $215 million in aid contingent on Illinois adopting a pension overhaul—the kind of math made virtually impossible under the state’s constitution, r, as Moody’s would put it: an “unrealistic expectations.” Even though lawmakers approved a $250 million property-tax levy for teachers’ pensions, those funds will not be forthcoming until after the end of the fiscal year—and they will barely make a dent in CPS’s $10 billion in unfunded retirement liabilities.

Out Like Flint. The City of Flint will continue to receive its water from the Great Lakes Water Authority for another year, time presumed to be sufficient to construct a newly required stretch of pipeline and allow for testing of water Flint will treat from its new source, the Karegnondi Water Authority (KWA). The decision came as the Senate, in its race to leave Washington, D.C. yesterday, passed legislation to appropriate some $170 million—but funds which would only actually be available and finally acted upon in December when Congress is scheduled to come back from two months’ of recess—after the House of Representatives adopted an amendment to a water projects bill, the Water Resources Development Act, which would authorize—but not appropriate—the funds for communities such as Flint where the president has declared a state of emergency because of contaminants like lead. Meanwhile, the Michigan Strategic Fund, an arm of the Michigan Economic Development Corp., Tuesday approved a loan of up to $3.5 million to help Flint finance the $7.5-million pipeline the EPA is requiring to allow treated KWA water to be tested for six months before it is piped to Flint residents to drink. While the pipeline connecting Flint and Lake Huron is almost completed, the EPA wants an additional 3.5-mile pipeline constructed so that Flint residents can continue to be supplied with drinking water from the GLWA in Detroit while raw KWA water, treated at the Flint Water Treatment Plant, is tested for six months. The Michigan Department of Environmental Quality is expected to pay $4.2 million of the pipeline cost through a grant, with the loan covering the balance of the cost. Even though the funds the Strategic Fund has approved is in the form of a loan, with 2% interest and 15 years of payments beginning in October of 2018, state officials said they were considering various funding sources to repay the loan so cash-strapped Flint will not be on the hook for the money. Time is of the essence; Flint’s emergency contract for Detroit water, which has already been extended, is currently scheduled to end next June 30th.  

Waiting for Godot. Last April 27th, East Cleveland Mayor Gary Norton wrote to Ohio State Tax Commissioner Joseph W. Testa for approval for his city to file chapter 9 bankruptcy: “Given East Cleveland’s decades-long economic decline and precipitous decrease in revenue, the City is hereby requesting your approval of its Petition for Municipal Bankruptcy. Despite the City’s best Efforts, East Cleveland is insolvent pursuant…Based upon Financial Appropriations projections for the years 2016, 2017, 2018 and 2019, the City will be unable to sustain basic Fire, Police, EMS or rubbish collection services. The City has tried to negotiate with its creditors in good faith as required by 11 U.S.C. 109. It has been a somewhat impracticable effort. The City’s Financial Recovery Plan, approved by the City Council, the Financial Commission and the Fiscal Supervisors, while intended to restore the City to fiscal solvency, will have the effect of decimating our safety forces. Hence, our goal to effect a plan that will adjust our debts pursuant to 11 U.S.C. 109 puts us in a catch-22 that is unrealistic. This is particularly true now that petitions for Merger/Annexation with the City of Cleveland have been delayed by court action in the decision of Cuyahoga County Common Pleas Judge Michael Russo, Court Case No. 850236.” Mayor Norton closed his letter: “Thank you for your prompt consideration of this urgent matter.” He is still waiting.

 

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What Is a State’s Role When a Municipality Can No Longer Provide Essential Public Services?

eBlog, 9/27/16

Good Morning! In this a.m.’s eBlog, we consider the risk of municipal fiscal contagion—and what the critical role of a state might be as the small municipality of Petersburg, Virginia’s fiscal plight appears to be spreading to neighboring municipalities and utilities: Virginia currently lacks a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion. Then we journey to Atlantic City, where a comparable fiscal challenge—but in a state with a much longer history of state-local consideration—appears on the verge of a total state takeover: we ask whether the city’s end is nigh: will the state, in fact, take it over? Then we turn to the school yards in Chicago, where a threatened teacher strike augurs fiscal downgrades and worse fiscal math for Chicago Public Schools—a city beleaguered by this year’s terrible increase in murders and now unsettling math.

When It Rains, It Pours. The small Virginia municipality of Petersburg, near insolvency–or its tipping point, uncertain of what role the Commonwealth of Virginia will take in a state where, were the city to file a chapter 9 municipal bankruptcy petition, its municipal bondholders holding bonds to which statutory liens have attached would continue to receive payments on those bonds, [§15.2-5358], now is confronted by the filing of two similar lawsuits, accusing the city of repeated failures to meet payment due dates. The fiscal crisis is finally forcing the State of Virginia to contemplate what role it might have to take—a role which would set a precedent in a state which does not specifically authorize its municipal entities to file for municipal bankruptcy—and where the only such petition filed—by an economic development authority—was dismissed. The likely mechanism that will leave the state little alternative but to act is likely to be the filing of two lawsuits against the city over past-due payments—suits alleging similar accusations of repeated failures to meet payment due dates even before Petersburg’s fiscal problems evolved into a crisis: the South Central Wastewater Authority last week filed a lawsuit against the city, seeking more than $1 million and the appointment of a receiver to make sure the money the authority says it is owed is not spent by the city on other things, with the suit alleging: “Since 2011, city officials have failed to regularly and timely bill and collect monies for wastewater services and have failed to make payments due and owing to South Central.”

The second suit, filed last month by a road paving company, alleges that Petersburg failed to make payments on time for the company’s work repaving U.S. Route 460 East—a contract which specified that the company would receive payment within 30 days of the work being billed. In its filing, however, the company noted that its bills were paid late and that many times “those checks bore dates that made it appear they had been issued on time pursuant to the contract terms, even though delivery did not occur until weeks or months later.” The company’s corporate credit manager and chief financial officer met in July 2015 with Petersburg’s then Finance Director to discuss the problems—in the wake of which the city proposed a very delayed schedule—late enough that the company halted work on the project. The suit charges it has been left with an unpaid balance of about $214,000, so that it is seeking payment of that balance plus interest of 1 percent per month. For its part, the South Central Wastewater Authority alleges a similar pattern of late payments stretching back to mid-2011: “Since 2011, city officials have failed to regularly and timely bill and collect monies for wastewater services and have failed to make payments due and owing to South Central…This failure by Petersburg became sustained and serious beginning in the middle of 2012 and has become chronic and severe since…Despite continuous communication and extraordinary forbearance by [South Central] regarding Petersburg’s payment practices, which only resulted in repeated assurances of payment followed by more broken commitments, Petersburg has now altogether ceased making payments.” The suit charges the city is delinquent by $1.2 million, excluding penalty fees. Another $410,000 came due on the first of this month, according to the lawsuit. Because the Authority, moreover, provides wastewater treatment for the municipalities of Petersburg and Colonial Heights, and the counties of Chesterfield, Dinwiddie, and Prince George; and because Petersburg uses about half of the wastewater plant’s capacity, South Central’s complaint notes that  if Petersburg continues to fail to make payments, the authority will have to ask the other municipalities to pay higher rates, or it may be forced to shut down the treatment plant—a shutdown which, the utility notes, “would endanger public health and require an alternate means of treatment to prevent the flow of untreated wastewater directly into the Appomattox River…Planning, permitting, financing and construction of new facilities would take years. The scale and seriousness of this crisis cannot be overstated.” Indeed, the scale and complexity of the growing list of creditors of the municipality unearthed by auditors last summer determined Petersburg owed a total of about $3.4 million to six regional organizations: South Central, the Appomattox River Water Authority, the Central Virginia Waste Management Authority and Riverside Regional Jail, Crater Youth Care and the District 19 Community Services Board. It has become increasingly apparent that Petersburg’s fiscal problems have become contagious to adjacent municipalities and essential public services, so that, increasingly, the Commonwealth of Virginia will be forced to act.

Indeed, Virginia Secretary of Finance Richard D. Brown last week briefed members of the General Assembly’s Finance Committees on his department’s effort to help Petersburg figure out how to close its $12 million budget gap and generate enough cash flow to both keep the city government operating and to begin to pay down a debt that has ballooned to nearly $19 million. But, as it has become apparent the city likely will simply be unable to get out by itself, its fiscal collapse risks spreading—as can be noted from the impact of its non-payment to a regional facility—adjacent municipalities, it would appear the Governor and Virginia legislature will have little choice but to both act on measures to protect the state’s AAA credit rating, but also to prevent the fiscal distress from spreading. The Virginian Commission on Local Government, which has measured local fiscal distress in the state for three decades: notes in its stress index measures cities’ and counties’ revenue capacity, revenue effort, and median household income: it ranks Petersburg as the third-most fiscally stressed locality in Virginia—behind Emporia and Buena Vista.

The increasing apprehension in Richmond has led the Chairman of the House Appropriations Committee, Del. S. Chris Jones (R-Suffolk) to ask: “How did this get this bad without anyone knowing about it?” It also triggered his appointment last week of Del. R. Steven Landes (R-Augusta) to head a subcommittee to study states dealing with fiscally stressed localities and come up with solutions if a situation similar to that in Petersburg were to occur elsewhere in Virginia—or, as the Chairman put it: “We want to do our due diligence to see if there is legislation we might have to put in place to give authority to the state in certain circumstances to potentially take action…Right now, we don’t have the authority to do this, which is why I thought it is important to have this subcommittee between now and January and then begin the process to come up with some legislation.” In doing so, the Chairman emphasized that the state legislature will look primarily for proposals aimed at protecting the state’s interests—not those of the troubled localities, stating: “We are elected to represent our citizens at the state level, and we have our AAA bond rating to consider.” For his part, Chairman Landes said his committee will also examine the state’s options with regard to steps it could take to shorten its response time when a locality is heading toward the fiscal cliff, noting: “We want to make sure that audit information is getting to the money committees and the administration, because we would much rather be kept abreast sooner rather than later,” even as he vowed that a “bailout” for Petersburg is out of the question, noting: “I’m not aware where the state has ever stepped in to provide a locality a bailout…I don’t see that happening.”

Balancing on the Prick of the NeedleWhile it seems clear that neither the Governor nor the Legislature have much willingness to either grant municipal bankruptcy or provide significant fiscal assistance; nevertheless, there appears to be recognition that should Petersburg default, it would have implications for other municipalities in the state, especially if there were a default—such a default—increasingly possible in Petersburg’s case, because it is unclear how Petersburg, by Saturday, will come up with a $1.4 million principal-and-interest payment owed to the Virginia Resources Authority, a premier funding source for local government infrastructure financing through bond and loan programs. Under Virginia’s intercept provision, the Commonwealth is authorized to seize dollars it directs to localities for services, such as for schools, police and welfare, and use them, instead, to make scheduled payments on bonds to avoid default.

Interim City Manager Dironna Moore Belton acknowledged in an email last week that in order to secure short-term financing and bring long-term stability to the city, it cannot default on its loan payments. But Ms. Belton did not provide any specifics about from where she would take these dollars: “The city regularly collects revenues which go toward paying obligations…(and) has set aside dollars from incoming revenue to make the VRA payment;” however, in light of the $1.2 million lawsuit filed last week by the South Central Wastewater Authority, calls for the city to file for chapter 9 municipal bankruptcy have grown louder at public meetings and on internet message boards. However, as one expert commentator warns: “The state’s position is that Petersburg has dug themselves into a very unusual hole, and that they are going to have to take some very stringent and even draconian steps to get their house in order.” It is no longer certain, however, that the municipality has the capacity to get out by itself—indeed, it seems that, more likely than not, its fiscal tribulations will, increasingly, adversely affect neighboring public utilities and jurisdictions. According to Secretary Brown, the possibility of the city defaulting on bond payments is very real—a default which would leave the municipality with few alternatives—to which the Secretary remarked: “Some say that if it’s gotten to the point where they can’t operate, they should look at their charter and un-incorporate.” Such incorporation, however, would be a version of passing the buck—after all: which government would then be responsible for not only providing essential public services, but also paying off the growing mountain of municipal debts?

Thirsty City. Just as the provision of drinking water was a difficult issue in Detroit’s chapter 9 municipal bankruptcy, and has become so in Petersburg, so too the issue has arisen in San Bernardino, where the city’s municipal water department has announced water bills will increase by an average of $3.50 starting in October—with some of the increased  costs triggered by a state mandated water reduction goal of 28% this past summer—even as the utility notes the importance of conserving water during winter months: the Board of Water Commissioners, which is responsible for water rates in the city, voted unanimously to impose the higher rates, the first increase in four years; the city has approved further increases to go into effect next July 1st and in the subsequent July 1st of 2018. Again, just as in Detroit, virtually all who attended the session and vote came away angry—as the city water department’s General Manager put it: “For all of us, the last thing we want to do is cause economic distress to people…But we need to take care of what we’ve got, or we’re going to end up spending more in the future.” Since the city’s last rate increase, the water department has had to deal with California’s historic drought; the rising cost of imported water; new water quality regulations; and other expenses. Cost-cutting efforts include operating with fewer employees than in 2007, requiring employees to pay for a larger portion of their benefits, and securing as much as $350,000 in rebates from Southern California Edison, according to the water department. According to the water department website, the average water bill in San Bernardino, will be just under $50 per month, higher than average in adjacent Riverside and Redlands, but less than in Colton, Rialto, the East Valley Water District, the Cucamonga Valley Water District, the West Valley Water District and Fontana. Unlike Detroit, where one of the most difficult issues for then U.S. Bankruptcy Judge Steven Rhodes was how to balance the critical public health and safety issues related to water versus affordability; that question appears not to have arisen in San Bernardino.

Can a City Maintain its Sovereignty? Just as the question of sovereignty for a municipality in Virginia has become an issue, so too the question of whether the State of New Jersey will take over Atlantic  City and dissolve its sovereignty, after the New Jersey Division of Local Government Services notified Atlantic City that it has until Monday to comply with the terms of a $73 million state loan or face the possibility of default, warning that, because the city is in violation of its loan terms, it must act swiftly to “cure the breach.” As part of its effortsd to cure that “breach,” Atlantic City has reached an agreement with its water utility to purchase its old municipal airport property in a deal that officials of the city hope will help it avoid a state takeover. The Municipal Utilities Authority, which provides Atlantic City’s drinking water and is financially independent from the city, plans to purchase the 143-acres of the former Bader Field airport for at least $100 million through bonding, officials announced at a press conference yesterday, with Mayor Donald Guardian touting the partnership as a way of maintaining both the city and utility’s “sovereignty” while also helping the city dig its way out of more than $500 million of total debt. Mayor Guardian said he hopes the agreement, one which still needs city council and state approval, prevents New Jersey’s Local Finance Board from taking action after it violated the terms of a $73 million bridge loan that called for dissolving the MUA. Nevertheless, the New Jersey Department of Community Affairs declined to comment on whether the Local Finance Board would accept the Atlantic City MUA plan—a key apprehension after that Board last Thursday had imposed a deadline of next Monday to fix a breach of a condition on its $73 million bridge loan or face a possible default where the state could seek full repayment and withhold state aid—indeed, under the terms of last July’s loan agreement mandating the city needed to dissolve the MUA by September 15th, the state could demand full repayment of the $73 million loan and withhold state aid if the city were unable to avert a default by the October 3 deadline. For his part, MUA Executive Director Bruce Ward said the authority will get an agreement with the city before deciding how to proceed with the property. Mr. Ward added that floating a bond for the Bader Field purchase is attainable and that the MUA has advisors who will help strategize the borrowing. The MUA has $15.7 million in annual revenues with $16.6 million of net water revenue debt outstanding, according to Moody’s Investors Service.

Learning about Debt—or Failing Grades? Moody’s yesterday awarded a failing credit grade to Chicago Public Schools, downgrading CPS’ bond rating further into junk status, lowering its view of the school system’s debt one notch to a B3 rating, citing a variety of factors, including CPS’ reliance on short-term borrowing, a “deepening structural deficit,” and a budget “built on unrealistic expectations” of help from a state government with money woes of its own. If there could be fiscal insult to financial injury, it arrived yesterday when CPS announced budgets at about 300 schools would lose a total of $45 million because of enrollment declines, and the Chicago Teachers Union said its members authorized a strike if contract talks break down. Unsurprisingly, that led the ever so moody Moody’s to warn that its debt rating could decline even further—a downgrade that would make the school district’s borrowing more expensive, even as CPS’ Board is set to vote Wednesday on the system’s $338 million capital budget—a budget projected to swell amid plans to borrow up to $945 million in long-term debt for a variety of other school infrastructure projects. For its part, the union yesterday announced that more than 95% of members who submitted a ballot last week voted in favor of authorizing a strike, easily crossing the requisite 75% threshold: CTU’s House of Delegates will meet Wednesday to discuss a possible strike date which could come as soon as October 11th—a strike, were it to occur, which added to Moody’s fiscal moodiness, as it noted CPS’ “increasingly precarious liquidity position and acute need for cash flow borrowing to support ongoing operations…The downgrade is also based on CPS’s deepening structural deficit, with budgets that are built on unrealistic expectations of assistance from the State of Illinois, which faces its own financial challenges. The rating also incorporates escalating pension contribution requirements, strong employee bargaining groups that impede cost cutting efforts, and elevated debt service expenses.” (CPS is offering raises in a new multi-year contract offer but it wants to phase out the $130 million annual tab for covering 7% of teachers’ 9% pension contribution. The union argues that the contract offer results in a pay cut and is strike-worthy.)

Can Municipal Insolvency Affect Neighboring Municipalities?

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eBlog, 9/23/16

In this morning’s eBlog, we consider the chances of getting high in San Bernardino—the city in municipal bankruptcy longer than any other in U.S. history—but now on the verge not only of elections, but also ballot questions, including the legalization of marijuana—something which could, presumably not only make citizens high, but mayhap municipal revenues higher. Then we veer East to Michigan, where the complex issues imposed by the legislature on the virtually insolvent Detroit Public Schools, via the creation of a state-imposed charter and public school system has created threatening credit problems—as well as governance problems for the Detroit Public Schools. Finally, we head further East to the small Virginia municipality of Petersburg, famous as a site during the Civil War where, in nine months of trench war in which vastly outnumbered confederate forces warded off Gen. Ulysses S. Grant, the city was the essential supply line to Confederate Commander Robert E. Lee. Today, the historic city faces a fiscal rather than armed challenge—it is virtually insolvent—and, as we note—because now, as then, the small city is connected to other cities in the state, its insolvency could have ever widening fiscal ramifications–or fiscal contagion– for other municipalities…We wonder what the tipping point into insolvency might be–or when the Commonwealth of Virginia might feel compelled to act.  

Electing a Higher Future for Post-Chapter 9 San Bernardino? San Bernardino City Manager Mark Scott has informed the City Council he will not allow any of the traditional election forums or local election broadcasts unless a majority of the council members vote to undo his decision—even as Councilman Henry Nickel responded he considered that to be a decision which ought to be determined by the city’s elected leaders, calling it a “suppression of the First Amendment rights of the public to hear items that are relevant to our government: It is not up to the unilateral decision of the city manager to deviate substantially from prior practice and policy until and unless it has been presented by the City Council, which has the policy-making power both under the current charter and the (proposed) new city charter.” In his email to his colleagues on the Council, he emphasized, however, that even though the Council could reinstate election events and broadcasts, there might be a conflict of interest: “Just so you know, UNLESS directed otherwise by Council action, we have told those who have asked that we will NOT allow use of the Council Chamber for any election events or taping between now and the November election, nor will we be doing any local election broadcasts on Channel 3,” acknowledging that even though this “has been done in the past,” it just seemed “smart to stay completely arms’ length” this election year. The discussion came as city officials worked on and endorsed a measure that would replace San Bernardino’s city charter and another that would allow marijuana in the city—with the first measure, Measure L, to allow voters to replace the existing city charter with a new one created by a charter review committee—which, by a 6-1 vote, Council adopted. The manager’s announcement would also—unless reversed—mean there would be no public discussion about getting high on the three pending marijuana legalization measures—where all three have been authored by advocates of legalization and none representing the view that dispensaries should remain illegal—in part because only one counter-argument is printed against each measure for the November ballot, and — by random chance — City Clerk Gigi Hanna had selected arguments against each measure that had been filed by proponents of competing measures. (If more than one measure receives more than 50 percent of the vote, whichever measure gets the most “yes” votes will become law…) The city has had a medical marijuana ban on its books since 2007, but enforcement was ineffective, with dispensaries dotting the city in open defiance. City officials had attempted on several occasions to replace the ban with what they hoped would be a more effective regulatory framework; however, they were preempted last July when the City Council determined resident Vincent Guzman had secured sufficient signatures that legally his measure had to be put November’s ballot—Measure O—with Mr. Guzman having written: “Measure O is the only one to generate significant tax revenue for San Bernardino: It funds both enforcement and general city services. It reduces the number of dispensaries and eliminates them near our schools and homes.” In his advocacy, Mr. Guzman cited a study by economist Beau Whitney estimating that Measure O [“The San Bernardino Regulate Marijuana Act of 2016”] would allow an outside special interest group to establish a marijuana monopoly in the city,” the argument against contends: “Measure O circumvents local control and does not comply with our local general plan and land use policies.” Nevertheless, proponents claim the measure, if adopted, would generate between $19.5 million and $24.8 million in revenue for San Bernardino in addition to 2,750 jobs. Opening the doors to getting municipally high stimulated a second group to secure sufficient signatures to place its own, alternative regulation plan on the ballot—all of which led the City Council to draft its own version, which would require separate licenses for marijuana cultivation, marketing, testing, distribution, and dispensaries; application fees and enforcement fees would be set yearly to match the cost of providing the service. Under the city’s version, dispensaries could only be within industrial zones, and could not be within 600 feet of a school, park, library or recreation center, nor within 100 feet of a residential zone or religious center; and no two dispensaries could be within 1,000 feet of each other, amounting to a significant limitation on the number of dispensaries, according to Graham, the primary author of the initiative. The city’s proposal is on the ballot as Measure P, and it’s supported by the same group that opposed Measure O: “Measure P is the only medical marijuana ordinance supported and put on the ballot by our local elected officials,” the group’s ballot statement reads:  “Measure P was drafted by the city attorney’s office – and not by marijuana industry special interest groups.” The argument says Measure P is the only one that would retain local control, “including a potential ban.” In the alphabetic voting guide for readers, the other citizen-submitted ballot item, Measure N, an anti-marijuana measure supported by several City Council members, who claim that even though the harmful effects of marijuana are well-documented, the proponents continue to advocate for its legalization: “The legalization experiment in Colorado and Washington is a disaster. The ‘Regulate and Control’ policy attempt has failed, yielding huge increases in underage and adult use, and drugged driving.” That opposition is signed by Mayor Davis and City Council Members Jim Mulvihill, Fred Shorett, and Virginia Marquez.

Under the math, if voters provide more than 50 percent on the city’s drafted measure and more “yes” votes than either of the citizen-submitted initiatives, the municipally-written measure would become law. Moreover, unlike those initiatives, it could be modified as state law regarding marijuana changes, which led the City Council to put the medical marijuana regulation on the ballot in a 5-2 vote—albeit reluctantly, in some cases. The most vocal advocate of the ban has been Mayor Carey Davis, who gave extensive evidence that marijuana legalization has been harmful in Colorado and suggested it would stretch thin an already understaffed police department. But the city had no legal alternative to putting the two citizen initiatives on the ballot — other than immediately adopting the framework they suggest, and Deputy City Attorney Steven Graham said that was not an option, either, for the measure that imposed a tax on marijuana. (California law forbids cities from passing a tax without a vote of the public. It is unclear legally whether a voter-originated tax can pass in an election at which Council Members are not up for a vote, which is the case in November according to Counselor Graham.) The City-drafted measure would require:

  • separate licenses for marijuana cultivation, marketing, testing, distribution, and dispensaries;
  • application fees and enforcement fees would be set yearly to match the cost of providing the service;
  • Dispensaries could only be within industrial zones, and could not be within 600 feet of a school, park, library or recreation center, nor within 100 feet of a residential zone or religious center;
  • And no two dispensaries could be within 1,000 feet of each other, amounting to a significant limitation on the number of dispensaries, said Graham, the primary author of the initiative.

Protecting Tomorrow’s Leaders? The Michigan Finance Authority has approved a plan to issue $235 million of debt to refund some Detroit Public Schools (DPS) municipal bonds before they lose their state aid backing at the end of this month, approving an authorizing resolution for the issuance to be backed solely by an existing 18-mill non-homestead levy—with the fabulous Matt Fabian of Municipal Market Analytics warning the “investor will be at risk if the levy produced by the 18 mills continues to decline or is disrupted by, for example, assessment appeals in the future. Some kind of state backstop or protection would be needed to make this investment grade.” The Michigan Finance Authority has not, however, provided any indication with regard to whether it intends to backstop the bond refunding, albeit the Authority has stated the outstanding bonds will be refunded and defeased at par “plus any applicable redemption premium and accrued interest,” suggesting that those bondholders will be made whole—albeit with the uncertainty remaining that should the state-aid pledge evaporate or shift, there would be likely adverse credit quality implications, because of the shift to entire reliance on a property tax pledge. The outstanding bonds lost their investment grade status amid uncertainty about the state planned to restructure the debt after the state-ordered restructuring of Detroit Public Schools took effect July 1. The state assistance is set to shift to the state-mandated newly formed public school district that operates schools while the former district remains intact only to collect taxes and repay bonds. Under the provisions, the operating levy of roughly $50 million to $60 million per year will go to pay off debt service on the refunding bonds, which will retire 2011 and 2012 DPS state aid bonds with a final maturity of 2023. The state Finance Authority intends to issue the refunding bonds on or before the end of this month—the date when the current, outstanding bonds lose their state aid backing because, without students, the old district will no longer be able to collect state aid. The pending switch could cause fiscal shivers: the existing municipal bonds had initially carried S&P A ratings because of the state aid pledge; they also carried a limited tax general obligation pledge—albeit DPS’s underlying GO credit ratings are junk level—or, in school parlance, D-, with S&P last week having demoted the credit rating from B to BB-minus, warning that with the October deadline looming closer and ushering in the new fiscal year, there is increasing doubt with regard to whether bondholders would receive full and timely payment on their bonds—with the new drop the third such comparable action over the last three months—moodily moving in some syncopation with Moody’s, which recently revised the outlook on DPS’ Caa1 issuer rating to “developing” from “negative.”

What External Event Can Force a Municipality into Chapter 9 Bankruptcy? The City of Petersburg, the small, independent city in Virginia, a municipality on the steep edge of insolvency, and in which there seems little indication the Virginia legislature is poised to step in, a new shoe has dropped that would seem likely to precipitate a defining event: the South Central Wastewater Authority has filed a $1.2 million lawsuit over unpaid sewer bills, noting the has failed to pay for any wastewater services since May: “The City of Petersburg charges its residents for wastewater service. Under the service agreement between South Central and the city, these fees should be used to pay the costs of that service, including the costs of having the wastewater treated by South Central.” The suit seeks the appointment of a receiver to make sure the more than $1 million the authority says it is owed is not spent by the city on other things. According to the suit, filed in Petersburg Circuit Court, the authority is not only seeking to recover past-due amounts, but also requesting that the court appoint a receiver to supervise Petersburg’s billing and collection of wastewater fees from its residents, writing: “South Central seeks this appointment to ensure that the money is used for its intended purposes and that residents continue to receive the wastewater service they pay for…South Central is particularly dependent upon the regular and timely payment by the city of Petersburg, whose share of these costs account for more than half of South Central’s budget for operations and maintenance.” In addition to seeking payment of about $1.5 million in overdue service charges and penalties, South Central said it was filing the lawsuit “to request the court to appoint a receiver to supervise Petersburg’s billing and collection of wastewater fees from its residents. South Central seeks this appointment to ensure that the money is used for its intended purposes and that residents continue to receive the wastewater service they pay for,” adding that while the utility “appreciates the difficult financial circumstances the city of Petersburg is experiencing. Nevertheless, efforts to resolve the arrearages have been unsuccessful and — if left unaddressed — threaten the continued operation of South Central and the finances of the other member localities and their residents.” That is, there is a fiscal interdependence, and insolvency by Petersburg could have consequences for other Virginia public authorities, including the other four Virginia municipalities served by South Central. For its part, the city had billed residents for the service, but has not been remitting the fees to the CVWMA — a situation similar to what prompted South Central’s lawsuit. In response, interim Petersburg City Attorney Mark Flynn unsurprisingly noted the city “is disappointed that the authority has chosen to file a lawsuit,” adding that the “city is and has been working with the authority to resolve the amounts it owes: The lawsuit does not help the city and the authority in achieving resolution for the city’s obligations. As the authority and citizens know, the City Council and management have been working to resolve the city’s financial difficulties.” Moreover, for the municipality, in which a recent state audit of its finances determined the city is facing a $12 million budget gap in the current fiscal year while dealing with nearly $19 million in unpaid bills, including those to South Central, the suit threatens to unravel efforts by city officials to close the budget gap and repay unpaid obligations—efforts including its approval earlier this month of a series of austerity measures aimed at freeing up much-needed cash flow, including tax increases, pay cuts of city staff members, and the closing of the city’s three museums.

When it Rains, it Pours. The suit could hardly have come at a more inopportune time—as Rochelle Small-Toney, a deputy city manager in Fayetteville, North Carolina, has just removed herself out of the competition to be the city’s next city manager, according to Petersburg Mayor W. Howard Myers III—she had been in the city last week as City Council convened to hire a city manager in the midst of an ongoing financial crisis; however, Council Members were unable to agree on a hire and adjourned the meeting without taking action after local media reported that Ms. Small-Toney had resigned in the midst of a financial controversy from a previous position as city manager of Savannah, Georgia; ergo, the Council had voted unanimously to hire an executive search firm to conduct a national search for a new city manager—albeit with what funds unclear. Indeed, when asked by Ward 4 Councilman Brian Moore what funding source could be tapped to pay for the search, he was advised to talk with the city’s Finance Department and negotiate the best possible financial arrangement: Petersburg has been operating without a permanent city manager since early last March, when William E. Johnson III was fired amid the municipality’s emerging fiscal crisis and a furor over the mishandling of a plan to replace water meters throughout the city. Former City Attorney Brian Telfair resigned at the same time for health reasons. Dironna Moore Belton, who was the general manager of Petersburg Area Transit at the time, was named shortly afterward as interim city manager. At the same time, Mark Flynn of the Richmond law firm of Woodley & Flynn was contracted to act as interim city attorney. Ms. Belton is one of the applicants for the permanent city manager position; however, it is unclear whether she and the other candidates will have to re-apply if a search firm is hired.

eBlog
March 10, 2016. Share on Twitter

Seems to me
I’ve been a long time
On this road
Has there been a sign
Another way
And I’ve passed it by
I don’t know what it is that drives me on
Gotta keep movin’
Gotta keep movin’ on

Moody Blues in Atlantic City. In their lyrical rendition, above, the Moody Blues, in Nervous, set the kind of tone with which, yesterday, Moody’s Vice President-Senior Analyst Josellyn Yousef warned that, absent state rescue legislation, Atlantic City could soon default and need to file for municipal bankruptcy, warning that: “Without drastic action, Atlantic City could face a default as early as next month.” Ms. Yousef noted the city also owes $190 million to casinos which have successfully appealed their property taxes. Factoring in those different liabilities, she noted that Moody’s projects a budget deficit of $102 million for FY 2016. Thus, the city cannot afford to roll the dice, but rather state legislation would be what she termed the “Key to Fiscal Recovery.” Her red flag fiscal warning comes as the state legislature is considering two bills to help Atlantic City: the Casino Property Tax Stabilization Act (PILOT bill) and the Municipal Stabilization and Recovery Act (state intervention bill); thus, the credit rating agency identified three scenarios that would be key to a positive or negative credit impact on the city’s credit quality—and fiscal future.

First, and most credit positive, Moody’s noted that if the legislature and Gov. Chris Christie passed and enacted both bills, that would give the state authority to implement proposals included in Atlantic City’s state-appointed emergency manager Kevin Lavin’s report and recommendations from January—fiscal steps which Moody’s projects could reduce the city’s current $102 million deficit by nearly 75 percent this year—and nearly eliminate it by 2020. Mr. Lavin’s proposals include added revenues, expense cuts, and restructured casino debt. And, as Ms. Yousef wrote: “The state would also generate savings by eliminating city departments and terminating union contracts, which would allow it to turn over police and fire operations to the county,” noting that reorganizing the police and fire departments has been, just as in San Bernardino, a political football—albeit with one significant difference: the state is very much involved with Atlantic City’s fiscal fate; whereas it seems unclear whether Governor Brown or the California legislature care in the slightest about San Bernardino’s municipal bankruptcy or fiscal future.

Ms. Yousef notes that Moody’s believes if only the PILOT bill were to be enacted, Atlantic City would continue to face fiscal distress, since the bill, by itself, would be insufficient to restore Atlantic City’s fiscal health. While the PILOT bill would produce additional revenues and avoid incurring additional casino tax liabilities for the city, it would not, Moody’s moodily noted, suffice to avoid crippling deficits of $30 million to $40 million annually over the next five years. Moreover, Moody’s believes that the state intervention bill is too politically contentious to pass on its own. If neither bill passes, Moody’s becomes especially moody, warning the municipality will deplete all of its cash in the next few weeks, leading to a potential default, distressed exchange, or chapter 9 municipal bankruptcy filing—adding that the state could take stopgap measures to help Atlantic City, such as a providing a loan or allowing the deferment of pension contributions, but that such action would not solve the underlying causes of the crisis—and, to make the outlook mayhap bleaker—adding that Atlantic City’s financial position remains vulnerable to external factors such as further casino closures and deteriorating state finances.

Atlantic City’s Perspective: An American City at a Crossroads. Even as Gov. Christie continues to trail candidate Donald Trump across the country, Atlantic City Mayor Don Guardian, yesterday, in a letter to the Bond Buyer, provided his own perspective on his city’s plight and fiscal outlook:

Mayor Donald A. Guardian
March 9, 2016

Three summits, two take over bills, and an emergency manager later, and Atlantic City has not yet seen the assistance it was promised in 2014. Within the past two years, the State has hired a nationally respected emergency manager and put together a world-class team with the promise of restructuring the City’s $240 million in legacy debt and to negotiate a settlement for our outstanding $148 million bill from Borgata’s successful line of tax appeal victories. Unfortunately, as it stands today, the State has neither restructured our debt nor settled the Borgata tax appeal case.

There was a glimmer of hope in 2014 when Senate President Steve Sweeney introduced a PILOT bill that would have locked in Atlantic City casinos at a collective payment of $120 million a year. It was a brilliant move that would have stabilized our local economy by locking in the casinos at this set amount and would have protected against devastating casino tax appeals. Everyone, including the casinos themselves, agreed that this bill would have been a significant in helping Atlantic City stabilize its finances. The state legislature even added two more amendments that would have given Atlantic City an additional $45 million in 2015 and 2016. Unfortunately, the PILOT bill has since been vetoed twice by the Governor, leaving Atlantic City in an even more perilous position. Without having the PILOT bill signed into law and having the guarantee of no future devastating tax appeals – the city, county, school system, and library all stand to lose over $25 million of revenue from 2015 when the casinos file their respective property tax appeals. Meanwhile, the city inches closer towards bankruptcy each day.

Since 2014, I wake up every day and try to be the most proactive Mayor that Atlantic City has ever seen. We have made significant cuts within every department and dramatically reduced the size of our workforce including the police and fire departments. There are over 300 less employees working for city hall today than when I was sworn into office. We have saved over $25 million in fiscal year 2015, and expect to save $25 million in fiscal year 2016. I will be first to acknowledge this is not enough, but I will not be the last to say that we have not done our part.

I am working diligently with city council to find more ways to cut costs and save money while bringing in more revenue. As such, I want to maximize the value of the Atlantic City Municipal Utilities Authority by bringing it under city control and leveraging it for at least another $4 million a year without raising residential rates more than 2% annually. This is a common sense solution that would benefit everyone.

We believe that no stone should be left unturned, that is why we are increasing fees that have not been touched in decades. Our State Monitor, Ed Sasdelli, has been guiding us scrupulously. We are increasing our fees across the board for construction, code, and fire inspections. We are lining up valuable property to be sold at auction. We reviewed the necessity of all city vehicles and brought in those that are not needed. In my first year of office, we had over 60 vehicles returned that are no longer take home cars. I have tasked my business administrator to once again meet with the Atlantic County business administrator and other government business administrators in the area to find additional cost savings through mutual beneficial shared services. We are in the process of putting out an RFP for a parking utility that we anticipate would triple the amount of parking meters in the City. I would have undertaken all of these good government initiatives even if this was just a normal time for Atlantic City. However, this is not a normal time in Atlantic City. In fact, our city is at a cross roads of historic proportions.

A wise leader once challenged the President of the United States by saying, “I have a particular message for the president: He should get in and lead and bring them together. And he should have those people in the same room and he should say to them, ‘We’re not leaving here until we’ve resolved this issue.’”

That wise leader was Governor Chris Christie, in 2011, who was referring to a potential shutdown of the federal government just a few years ago. As Mayor of Atlantic City, I could not agree with the Governor’s sentiments more. I hope and expect the Governor will apply the same advice he once gave the President to the current situation facing Atlantic City. Allowing one of the state’s most iconic cities to declare bankruptcy should not be a viable option.

The New Jersey legislature is considering two bills to endow the State of New Jersey with greater powers to put Atlantic on a path to fiscal health: the Casino Property Tax Stabilization Act (PILOT bill) and the Municipal Stabilization and Recovery Act (state intervention bill) were introduced in the New Jersey General Assembly on February 22nd. Moody’s, as these debates on these bills continue, has, for its part, identified three potential scenarios that would, in its view, have a positive or negative effect on the city’s credit quality. Under all three scenarios, however, Atlantic City’s financial position will remain vulnerable to external factors such as further casino closures and deteriorating state finances:

Scenario 1: Both bills pass. Under such a scenario, the PILOT and state intervention bills would give the state expanded authority to set the city’s finances on a path to fiscal recovery: the legislation would allow the state to restructure casino liabilities, shift casinos to a PILOT (payment-in-lieu-of-taxes) structure, provide additional aid, and cut city expenses. If the bills were successfully implemented, Moody’s notes it would expect the city’s projected $102 million structural budget deficit (42% of the city budget) to drop dramatically by the end of this calendar year and disappear by 2020.

Scenario 2: Neither bill passes. In this scenario, the rating agency writes that if political disputes prevent adoption of either bill, Atlantic City faces a debt service default as early as next month or May as well as municipal bondholder impairment. While it finds that the state could take stopgap actions, such as allowing the city to, once again, defer pension contributions or to provide a loan; it warns that these actions would only delay the fiscal crisis for a year or two. Moody’s writes that New Jersey could also force the city to raise property taxes under existing state oversight powers, but gloomily notes that would be an unrealistic option for a tax base with a 34 percent poverty rate, adding that the city’s bondholder impairment would also occur if the city were to negotiate a distressed exchange, or successfully file for chapter 9 municipal bankruptcy, in order to reduce its onerous $437 million casino and general obligation (GO) debt burden.

Scenario 3: Only the PILOT bill passes. Finally, under its third scenario, the agency notes that Atlantic City continues to face duress, because the PILOT bill alone is insufficient to restore the city’s fiscal health, writing that the PILOT bill would produce additional revenues for the city, but the cost-cutting allowed under the new state intervention bill or other difficult steps would still be needed in order to prevent the city from running deficits in excess of $30 million at least through 2020. The PILOT bill, Moody’s notes, is less politically contentious, making it more likely to pass than the state intervention bill.

Pass or Fail? Warning that a Detroit Public Schools (DPS) chapter 9 municipal bankruptcy would not earn a passing grade—because such an option would not erase DPS’ debt, DPS overseer, retired U.S. bankruptcy Judge Steven Rhodes yesterday warned the Motor City’s school system might be unable to pay teachers after April 8th absent state action to enact $50 million in aid. Judge Rhodes noted that he could not in “good conscience” ask the city’s teachers to continue to work without assuring them they would be paid for their work: “I’m deeply concerned about the district running out of money after April 8,” he told reporters in the wake of testifying before the Michigan House Appropriations Committee, carefully noting: “There is no plan B. I plan to work as hard as I can, and as hard as necessary, to persuade the Legislature that the kids of the City of Detroit need their help and their support not only in the $50 million supplemental appropriation, but also for the larger reorganization proposal.” Ivy Bailey, interim president of the union, the Detroit Federation of Teachers, said in a statement that besides teachers and staff not being paid, many students would not receive breakfast or lunch if the school system runs out of money. The legislature is currently considering Gov. Rick Snyder’s proposal to divert $72 million per year for the next decade from Michigan’s tobacco settlement revenues to generate sufficient fiscal resources to pay down DPS’ anticipated $515 million in debt and split the district into two. The original DPS district would exist only to repay the outstanding debt and then would be phased out; the plan would then create a new Detroit Community School District to educate students and handle all other operations.

June 30, 2015

Is Puerto Rico at the Tipping Point? Puerto Rico Gov. Alejandro García Padilla yesterday praised a report, “Puerto Rico—a Way Forward,” by Anne Krueger, Ranjit Teja, and Andrew Wolfe—which calls for a comprehensive solution to Puerto Rico’s problems, including debt restructuring. The report, which Puerto Rico commissioned, calls for fiscal adjustment, structural reforms, and debt restructuring. As for the latter, the authors say that even after Puerto Rico took major revenue and expenditure measures, there would be large financial gaps. These would peak at about $2.5 billion in fiscal 2016 and generally decline to about $0 in fiscal 2024. By comparison, the total commonwealth government debt service in fiscal 2016 is slated to be about $3.6 billion. The report notes: “Debt relief could be obtained through a voluntary exchange of old bonds for new ones with a later/lower debt service profile. Negotiations with creditors will doubtlessly be challenging.” They make clear the general obligation as well as other commonwealth government debt should be restructured. The authors also call for negotiations on the public corporations debt and for the federal government to make the corporations eligible for Chapter 9 bankruptcy.

The report warns that Puerto Rico will need to seek relief from principal and interest payments falling due from 2016 to 2023; however, it also warns that any restructuring of general obligation, or central government debt, would set a precedent as “no U.S. state has restructured (such debt) in living memory,” and any such attempt would face legal challenges—even as it made clear there are limits with regard to how much more expenditures can be cut or taxes raised. Or, as Adam Weigold, senior portfolio manager at Eaton Vance, put it last Friday: This coming week “is the tipping point:” Puerto Rico’s debt problems could lead to a reduction in government services. Nevertheless, Reuters noted that the island is not contemplating a partial or full shutdown of government services. With some of Puerto Rico’s creditors, restructuring negotiations are already underway: late last week, Puerto Rico officials and creditors of the island’s electric power authority were apparently close to a deal which would avoid a default on a $416 million payment due the day after tomorrow, and, with other payment deadlines looming, Gov. Padilla and his staff said they would begin looking for possible concessions on all forms of government debt.

The key takeaways from the report:

  • This is a problem years in the making;
  • The problems are structural–not cyclical;
  • This is a “vicious cycle” where unsustainable public finances are feeding uncertainty and low growth;
  • “failed partial solutions argue for a comprehensive approach;
  • “[the]single most telling factor is that 40% of the adult population — versus 63% on the mainland — is employed.” Why? Because the minimum wage; local overtime, paid vacation, benefits are too costly to the governments—and to the 147 municipalities; local welfare benefits are more generous than the minimum wage.
  • Public sector debt has risen each year–reaching 100% of GNP by the end of FY’14;
  • “If federal obstacles could be overcome, there is no reason why Puerto Rico could not grow in new directions…”

June 29, 2015

More Trouble in River City. A critical issue for any municipality is an audit; that is even more the case when a city or county files for bankruptcy: it provides that outside review important to the city’s taxpayers, the federal bankruptcy court, and the municipality’s creditors. While an audit, technically, is not necessarily required by San Bernardino’s charter committee, City Attorney Gary Saenz had warned that failure to have those audits by the deadline would be “devastating for the city.” City Manager Allen Parker had agreed, last spring, with council members who said its absence in the city’s plan of debt adjustment would allow San Bernardino’s creditors to attack the plan before the federal court as unprepared and undeserving of bankruptcy protection. Notwithstanding that apprehension, Deputy City Manager Nita McKay has now confirmed the audit has not been completed, and, obviously, not been included in the city’s plan of debt adjustment. Worse, the city’s accounting firm, Macias, Gini and O’Connell LLP, not only has missed repeated deadlines, but had also requested nearly half a million dollars—more than double its original cost estimate given to the city—to complete it. Unsurprisingly, the attorney representing San Bernardino’s municipal bondholders had charged in U.S. Bankruptcy Judge Meredith Jury’s first hearing earlier this month that San Bernardino had failed in its duty to the court and the city’s creditors by not even disclosing that its plan of debt adjustment did not mention the missing audits—either in its submitted plan or in its testimony before the court. Nor, the attorney charged, had the city proposed a hearing date at which Judge Jury could consider the adequacy of San Bernardino’s financial disclosure statement. For her part, Judge Jury has noted that a bankrupt entity normally would have proposed such a date to keep momentum in the case. Instead, Judge Jury set the hearing date for October 8th. The problem appears to lie not just with the city’s auditor, Macias, Gini and O’Connell LLP accounting firm, but also with the city’s own transparency and at least perceived competency. While there is every indication San Bernardino staff have been responsive to every request from the auditor—according to the auditor; as late as last Thursday, the firm’s audit managers gave the city staff a new list of outstanding items—a list city staff described as one which “contains 29 items, 24 of which have not been requested before the time of the meeting…For eight of these items, they could not articulate what it is that they are requesting, i.e. ‘changes to General Fund accounts receivable resulted in additional testing being needed for $3.7 million. Sample to follow.’” San Bernardino Councilmember Fred Shorett at the end of last week stated the seemingly obvious: the city might need to consider starting over with a new firm, even though that would present difficulties: “This sounds as though this auditing firm is incompetent or (not) working…Giving no responses to you and coming at us with requests at the eleventh hour is not acceptable. This whole situation needs review. I’m very concerned that this firm has some kind of agenda that is not helpful to us.” Councilman Rikke Van Johnson also questioned the firm’s motives. “Sounds as if they are playing us and trying to get more money!” he wrote. The auditing firm is surely on notice that, despite its 13th hour demands for a significant increase in payments for a job not done, it is requesting said increases as, now, one of many creditors in bankruptcy—it will not be paid one hundred cents on the dollar—but its integrity and competence, as well as the failure of the city to oversee—or disclose—the absence seem hardly likely to curry respect from Judge Jury.

Is Puerto Rico at the Tipping Point? With the increasing likelihood that Congress will continue to ignore the U.S. territory of Puerto Rico’s looming insolvency—or even give Puerto Rico the ability and authority to offer its 147 municipalities access to chapter 9 municipal bankruptcy, Puerto Rico Governor Alejandro García Padilla stated:  “My administration is doing everything not to default…But we have to make the economy grow…If not, we will be in a death spiral.” Gov. Padilla has now conceded the commonwealth cannot likely pay its nearly $72 billion in outstanding debts, warning the island is in a “death spiral,” but, unlike any other U.S. corporation, denied access to the federal bankruptcy courts.

Puerto Rico needs to restructure its debts and should make reforms, including cutting the number of teachers and raising property taxes, a report by former International Monetary Fund economists on the Caribbean island’s financial woes said. Gov. Padilla, and senior members of his staff said last week that they would probably seek significant concessions from as many as all of the island’s creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment: “The debt is not payable…There is no other option. I would love to have an easier option. This is not politics, this is math.” Gov. Padilla is also likely to release a new report today by former IMF economists, who were hired earlier this year by the Puerto Rico Government Development Bank to analyze Puerto Rico’s economic and financial stability and growth prospects—a report concluding that Puerto Rico’s debt load is unsustainable. The report suggests a municipal bond exchange, with the new bonds carrying “a longer/lower debt service profile,” noting that: “There is no U.S. precedent for anything of this scale or scope.” The report is not solely focused on Puerto Rico, however, but also seems aimed at the White House and Congress—neither of which appear to be willing to devote time or resources on these events affecting hundreds of thousands of Americans, although both New York Federal Reserve leaders and United States Treasury officials have been advising the island’s government in recent months amid the worsening fiscal situation.

Said report, according to Reuters, recommends structural reform and debt restructuring, writing: “Puerto Rico faces hard times…Structural problems, economic shocks, and weak public finances have yielded a decade of stagnation, out-migration, and debt… A crisis looms.” The report recommends restructuring of Puerto Rico’s general obligation debt, as well as suspending the minimum wage and reducing electricity and transport costs, noting the U.S. territory must overcome a legacy of weak budget execution and opaque data.

Seemingly overwhelmed by its staggering $73 billion debt load and faltering economy—and with its Government Development Bank running out of cash, Puerto Rico this week has a number of municipal bond payments coming due—even as its public power utility, PREPA, is in talks to avoid a possible default. The report warns that Puerto Rico will need to seek relief from principal and interest payments falling due from 2016 to 2023; however, warning that any restructuring of general obligation, or central government debt, would set a precedent as “no U.S. state has restructured (such debt) in living memory,” and any such attempt would face legal challenges—even as it made clear there are limits with regard to how much more expenditures can be cut or taxes raised. Or, as Adam Weigold, senior portfolio manager at Eaton Vance, put it last Friday: This coming week “is the tipping point:” Puerto Rico’s debt problems could lead to a reduction in government services. Nevertheless, Reuters noted that the island is not contemplating a partial or full shutdown of government services. With some of Puerto Rico’s creditors, restructuring negotiations are already underway: late last week, Puerto Rico officials and creditors of the island’s electric power authority were apparently close to a deal that would avoid a default on a $416 million payment due the day after tomorrow, and, with other payment deadlines looming, Gov. Padilla and his staff said they would begin looking for possible concessions on all forms of government debt.

The ever perceptive Mary Walsh Williams of the New York Times this morning notes “Puerto Rico’s municipal bonds have a face value roughly eight times that of Detroit’s bonds.” That is, as she wrote, Puerto Rico’s fiscal meltdown and inability to access U.S. bankruptcy courts could have fiscal implications for cities and counties throughout America, writing: “Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending. Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it. Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors, and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.” She writes that Puerto Rico must set aside as much as $93 million each month to pay the holders of its general obligation bonds — a critical action, because Puerto Rico’s constitution requires that interest on its municipal bonds—payments which go to citizens in every state in the U.S.—be paid before any other expense, adding that “No American state has restructured its general obligation debt in living memory.” The government’s Public Finance Corporation, which has issued bonds to finance budget deficits in the past, owes $94 million on July 15. The Government Development Bank — the commonwealth’s fiscal agent — must repay $140 million of bond principal by Aug. 1.

Here Come da Judge. It turns out that even though Congress appears determined to bar Puerto Rico from access to the U.S. Bankruptcy Court, Puerto Rico is creating its own wise investment, this month hiring retired U.S. Bankruptcy Judge Steven W. Rhodes, who presided over the largest municipal bankruptcy in U.S. history in Detroit’s 18 month municipal bankruptcy. In addition, Puerto Rico is also consulting with a group of bankers from Citigroup who advised Detroit on a $1.5 billion debt exchange with certain creditors. The ever electronically and musically perceptive Judge Rhodes told Ms. Williams that Congress needs to go further and permit Puerto Rico’s central government to file for bankruptcy — or risk chaos, telling her in an interview: “There are way too many creditors and way too many kinds of debt…They need Chapter 9 for the whole commonwealth.”

June 25, 2015

Not My Problem. A unique characteristic of the United States and federalism is dual sovereignty, making the U.S. and its kind of federalism unique among all nations. In the field of bankruptcy, it means Congress lacks Constitutional authority to even grant authority to states to file for bankruptcy; similarly, the federal government cannot grant municipalities such authority—except by means of authorizing states to, as is done under chapter 9. Unsurprisingly, then, not only do not all states authorize municipalities to file for municipal bankruptcy, but among those that do, virtually no two provide such authority the same way. Moreover, as we have noted, not only the differing statutes, but also the state role in those states where municipalities have filed for chapter 9 municipal bankruptcy, has been profoundly different. Key issues have related not only to whether, under such state authorizing legislation, the state asserts authority to preempt local authority by means of the appointment of a receiver or emergency manager—appointments which have meant suspension of any authority for the elected leaders of a city or county, but also the role of the state in contributing in some way to the development and implementation of an ensuing plan of debt adjustment—the plan which must be approved by a U.S. bankruptcy court for a city or county to successfully exit bankruptcy. U.S. Bankruptcy Judge Thomas Bennett keenly noted the precipitate role of the State Alabama in leading to Jefferson County’s bankruptcy, while in Michigan, Gov. Rick Snyder gradually began coordinating with key bipartisan leaders of Michigan’s House and Senate in making critical contributions to Detroit’s plan of debt adjustment—granted with some exceptionally innovative and creative contributions by U.S. Chief Judge Gerald Rosen. So it is that, unlike municipal bankruptcy in any other country around the world, states not only have a role under the U.S. Constitution, the federal municipal bankruptcy law, but also the unique politics and leadership within each state.

Ergo, mayhap ironically, California appears to be set on the Alabama model—spurning the more constructive roles taken by Rhode Island, Michigan, New Jersey, and Pennsylvania. If anything, that message appeared to be reinforced yesterday when Gov. Jerry Brown offered no positive reinforcement to San Bernardino’s Mayor Carey Davis in his quest to the state capitol in Sacramento. Mayor Davis, notwithstanding the absence of any affirmative state role in the municipal bankruptcies of Vallejo or Stockton, nevertheless had made the long trip just in case.

It was time and resources, scarce commodities for a city in bankruptcy, apparently for naught. Gov. Brown’s response, according to the city, was no. The key issue – ironically in the midst of the surge of the so-called sharing economy – was sharing vital public services. Or, as Mayor Davis’ chief of staff, Christopher Lopez, put it: the “cornerstone” of San Bernardino’s plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury is contracting out for some services, including fire protection. Specifically, the city has pressed for the 110-year old California state agency Cal Fire to submit a bid for providing fire services to San Bernardino—part of the city’s plan to contract out such services, and something the city has repeatedly sought to pressure Cal Fire to provide. Given the lack of any response, the delegation yesterday sought a prod from Gov. Brown—a prod which produced, apparently, not even a spark, or, as Mr. Lopez put it: “Governor Brown’s office has recently made San Bernardino aware that Cal Fire will not provide a proposal and that our additional requests will not be considered.” In contrast, the San Bernardino County Fire Department and a private firm, Centerra, have each submitted proposals to provide San Bernadino’s fire services—bids which the city guesstimates could save it as much as $7 million annually. Having struck out on the fire front, the Mayor and delegation then sought assistance on other key items on their list, including some relief from a potential California Public Employees’ Retirement System penalty, the threatened decertification of the San Bernardino Employment and Training Agency, a loan, help with the dissolution of the city’s redevelopment agency, and clarification on its tax agreement with Amazon. They went home empty-handed.

Send for Batman! In most instances, in the case of a potential drowning, a lifeguard at least throws a buoy, but in the wake of Wayne Count Executive Warren Evans’ request for Michigan state intervention, Standard & Poor’s put the county’s speculative grade rating on CreditWatch with negative implications yesterday. The downgrade will increase costs for the fiscally struggling county; the harder question is what S&P’s actions might mean to the many municipalities, including Detroit, within its boards. Jane Ridley, S&P’s analyst, wrote: “The CreditWatch placement reflects our expectation that with the onset of actions under Michigan Act 436, the county could lose some of the autonomy currently held by the CEO and his staff.” Ironically, Mr. Evans’ June 17th request was intended to enable the county to enter into a consent agreement with the state (please not the stark contrast with the seeming lack of any intergovernmental commitment in California, above) to enhance Wayne County’s authority to deal with labor contracts and other pending issues critical to the county’s fiscal sustainability—and, as state officials have made clear, municipal bankruptcy or even the appointment of an emergency manager is not only not in the picture, but also Michigan state officials almost immediately made most clear that municipal bankruptcy is not only not in the picture, but also that they perceive Mr. Warren’s request as a positive, constructive step towards resolution of Wayne County’s fiscal challenges. Nonetheless, in its warning, S&P noted that under Michigan law, if the county’s request were approved by the state for a financial review, the Wayne County board would be faced by four options: a consent agreement; appointment of an emergency manager; a neutral evaluation; or it could pursue a Chapter 9 bankruptcy filing, with Ms. Ridley writing: “In our view, the county’s request for financial review does not signal the start of filing for bankruptcy, but rather a step in its stated goal of using all possible tools to regain structural balance…However, given the uncertainty associated with these four options—as well as the potential for a prolonged time frame to make additional meaningful structural changes while this process is underway—we have placed the rating on CreditWatch,” adding that its actions reflect apprehensions Wayne County’s autonomy in its restructuring could be diminished if an emergency manager is ultimately named: “In our view, this could mean that making the significant, meaningful adjustments necessary could be delayed or adjusted, which would have an impact on the county’s long-term financial health.” If, instead, Wayne County retains control over its restructuring, as seems to be not only its intent, but also the state’s impression, S&P noted it could remove the rating from CreditWatch and assign a negative outlook, reflecting the long-term budget pressures the county is facing. Interestingly, in light of the discussion re: federalism above, Ms. Ridley notes that S&P views the appointment of an emergency manager as more risky due to the loss of autonomy—a loss the credit rating agency notes which could lead to a credit rating downgrade: “Notwithstanding the uncertainty of the county’s near-term management control, without the county’s clear, demonstrable progress in the next year to regain structural balance and reduce its sizable pension burden, we could lower the rating…In addition, should Wayne County’s liquidity position deteriorate significantly, we could lower the rating.”

Trying to Balance its Budget. The Puerto Rican Senate is currently considering the U.S. territory’s FY2016 budget—a balanced budget, like every state in the U.S., albeit unlike any Congressional budget in modern times, which the House adopted and sent to the Senate early this week, and which includes austerity measures to improve Puerto Rico’s fiscal health. As passed, the House budget estimates $9.8 billion in revenues, and proposes $9.55 billion in spending. The House proposed $674 million in spending cuts, with much of the savings to anticipate the territory’s increasing debt service costs and public pension obligations; the House cut nearly 60 percent off the Puerto Rico Development Bank’s budget request of $700 million—with the bank facing potential insolvency later this summer when some $4 billion in debt it issued begins to become due. The House Chairman of Committee on Treasury and the Budget, Rep. Rafael Hernández Montañez, noted the development bank could be forced to restructure its debt, but that the House-passed budget would be sufficient to ensure Puerto Rico would not default on any of its general obligation or G.O. bonds, albeit, he warned that if the U.S. territory’s development bank encounters difficulties in meeting its obligations and is forced to restructure its debt, there might have to be some delay in setting aside the proposed funding in the House-adopted budget to meet pending general obligation bond payments—warning that the alternative would be a government shutdown—an alternative he made clear would be devastating to the island’s economy.

In the Fiscal Twilight Zone. Even as Puerto Rico’s elected leaders have been pressing to address the U.S. territory’s overwhelming debts—and hedge funds have mounted an expensive lobbying and advertising campaign with full page adds—“No Bailout for Puerto Rico”—in the Wall Street Journal as part of a heavily financed lobbying blitz in the U.S. Congress to bar granting Puerto Rico the same authority provided to every state in the U.S., or even broader authority so that the U.S. Bankruptcy courts could act to ensure the continuity of essential public services while overseeing the development of a plan of debt adjustment; Congress so far has been seemingly paralyzed—and it is focusing its attention in a diverting way, so that Puerto Rico’s Governor, Alejandro García Padilla, is urging Congress to act on pending legislation to give the U.S. territory access to municipal bankruptcy authority—and not divert its focus to the issue of potential statehood. The urgency came this week in the face of continued inaction by the House Judiciary Committee, but, instead, a hearing yesterday by the House Committee on Natural Resources Subcommittee on Indian, Insular and Alaska Native Affairs on proposed legislation to authorize a means for Puerto Ricans to determine what legal options might be available for its citizens to opt for statehood. Even with the U.S. territory nearing a potential default and insolvency, Chairman Don Young (R-Alaska) had scheduled the hearing earlier this month to consider legislation proposed by Rep. Pedro Pierluisi (D-P.R.) to authorize a U.S. sponsored vote to be held in Puerto Rico within one year of its enactment: the vote suggested in the bill would be solely on the question with regard to whether Puerto Rico should become a state—a status which, were it to be adopted, would render Puerto Rico not only able to authorize its 147 municipality’s the option to file for chapter 9 municipal bankruptcy, but also make the state-to-be eligible for billions of dollars in additional annual federal funding. Rep. Pierluisi stated: “I don’t seek special, different or unique treatment…I don’t ask (for Puerto Rico) to be treated any better than the states, but I won’t accept being treated any worse either. I want only for Puerto Rico to be treated equally. Give us the same rights and opportunities as our fellow American citizens, and let us rise or fall based on our own merits. Because I know that we will rise.” He testified of his apprehensions that, absent statehood, he worried there would be a continuing exodus of intelligent workers to the U.S. mainland in search of full rights available in the 50 states. Puerto Rico Attorney General César Miranda, testifying on behalf of Gov. Padilla, urged Congress to focus on the immediate, “truly dire” situation: Puerto Rico’s “state of fiscal emergency,” telling the Committee that diverting attention to the issue of authorizing a mechanism for considering statehood should await resolution of the island’s most crucial issue: granting bankruptcy authorization rights to the island: “We have the capabilities to come across and bring the island to a brighter condition…We need to have an instrument to deal with the debt that we are carrying now. That is why we support extending Chapter 9 to Puerto Rico.”