February 26, 2016. Share on Twitter

Out Like Flint. The profound threats to human health and safety in Flint created in signal part by a state appointed emergency manager—especially for the city’s children—appear to have been issues brought to the state’s attention long before there was any action: key advisers to Gov. Rick Snyder urged switching Flint back to Detroit’s water system nearly a year and a half ago in October of 2014 in the wake of a General Motors Co. warning that Flint’s heavily chlorinated river water was rusting engine parts, according to governor’s office emails examined by The Detroit News: Valerie Brader, then Gov. Snyder’s environmental policy adviser, requested that the governor’s office ask Flint’s state-appointed emergency manager to return to Detroit’s system on October 14, 2014, three weeks before Gov. Snyder’s re-election. Moreover, Mike Gadola, then Gov. Snyder’s chief legal counsel—today a Judge on the Michigan Court of Appeals, appointed by Gov. Snyder– agreed Flint should be switched back to Detroit water nearly a year before state officials relented to public pressure and independent research demonstrated elevated levels of lead in the water and bloodstreams of Flint residents. Mr. Gadola’s memo reported: “To anyone who grew up in Flint as I did, the notion that I would be getting my drinking water from the Flint River is downright scary…Too bad the (emergency manager) didn’t ask me what I thought, though I’m sure he heard it from plenty of others.” Mr. Gadola added that his mother remains a resident of Flint, making his personal alarm part of his communication to Gov. Snyder’s Chief of Staff Dennis Muchmore, Deputy Chief of Staff Beth Clement, as well as then-Communications Director Jarrod Agen, writing: “Nice to know she’s drinking water with elevated chlorine levels and fecal coliform…I agree with Valerie (Brader). They should try to get back on the Detroit system as a stopgap ASAP before this thing gets too far out of control.”

The telltale emails make clear that that some of the Governor’s closest advisers were privately, but clearly put on notice of the human health threat to Flint—especially its children—long, long before the state began to act. The information comes in the wake of the Governor’s office this week releasing nearly 1,6oo pages of emails to The Detroit News related to Flint’s 2014 switch to river water—a switch which experts believe caused the deadly leaching of lead into Flint’s drinking water. If anything, the News notes, the emails make clear that the Governor’s aides discussed poor water quality in Flint as early as the fall of 2014 after the city issued limited boil-water advisories because of an outbreak of E. coli and total coliform bacteria in the water supply. Moreover, Ms. Brader’s email alluded to festering apprehensions with regard to how the chlorine used to kill the bacteria outbreak was causing the formation of a harmful disinfection byproduct known as trihalomethane, a carcinogen which can increase the risk of cancer, liver, kidney, and central nervous system problems—or, as she tellingly wrote: “Specifically, there has been a boil water order due to bacterial contamination…What is not yet broadly known is that attempts to fix that have led to some levels of chlorine-related chemicals that can cause long-term damage if not remedied (though we believe they will remedy them before any damage would occur in the population).” Two months later, the Michigan Department of Environmental Quality issued a Safe Drinking Water Act violation to Flint for the high levels of trihalomethanes in the water. According to state records, Flint violated the law twice more until coming into compliance on Sept. 2, 2015. Nevertheless, despite her concerns and other staff concerns about the city’s brownish water quality, the Governor’s staff never took a recommendation to him that Flint be switched back to Detroit water until the following October.

Perhaps unsurprisingly, the apprehensions by key members of the Governor’s staff were held in abeyance pending completion of the new Karegnondi Water Authority pipeline could be completed; however, Michigan Treasury Department officials seemed to feel that the cost to reconnect Flint to Detroit water — an extra $1 million per month — was more than the fiscally stressed city of Flint could afford, with, as one aide to the Gov. put it: “The assessment was you couldn’t do it, because it was a cost that should have borne by the system.” Nevertheless, Mr. Muchmore, in a subsequent email, advocated using a $2 million grant the state had given Flint to upgrade its troubled water plant toward reconnecting to the Detroit water system, tellingly writing: “Since we’re in charge, we can hardly ignore the people of Flint,” in an email he sent to communications officials in the Governor’s office, the state Department of Environment Quality, and the Treasury Department, adding: “After all, if GM refuses to use the water in their plant and our own agencies are warning people not to drink it…we look pretty stupid hiding behind some financial statement.” But when asked why the Governor’s office had not sought funding from the Michigan Senate and House appropriations Chairmen last winter for a supplemental appropriations bill to reconnect Flint to Detroit’s system, the former chief of staff told the Detroit News it would have been dead on arrival.

Indeed, the newly released trove of emails demonstrates that Ms. Brader learned of GM’s switch to Detroit water on October 14, 2014 from an aide in the office of Senate Minority Leader Jim Ananich (D-Flint): Ms. Brader sent a note that afternoon to other top gubernatorial aides writing that Flint’s water was “an urgent matter to fix.” By August and September 2014, the city of Flint had issued boil water advisories to residents after water tests revealed an outbreak of E. coli and total coliform in some parts of the city. To treat the outbreak, the city increased the amount of chloride added to the drinking water at the Flint water treatment plant—chlorine levels General Motors had cited when it disconnected from Flint’s water system and turned to nearby Flint Township’s water, which came from Detroit’s Lake Huron pipeline. The message, however, did not seem to impact Flint’s state-appointed emergency manager: On Oct. 16, 2014, the City of Flint reported that General Motors’ exit from Flint’s water system “ensures that Flint residents will continue to have safe quality drinking water but minimizes the impact on GM’s machining work.”

Puerto Rico. In the wake of two Congressional hearings this week, Congress appears to be leaning in support of creating a federal oversight control board for the U.S. territory of Puerto Rico—an oversight board not dissimilar to previous New York City and Washington, D.C. boards—authorized to restructure and oversee Puerto Rico’s debt, pension, and economic crises. The hearings come as House Speaker Paul Ryan (R-Wi.) has set a March 31 deadline for action by the full House—a critical timeline, as Puerto Rico risks insolvency as early as April. Legislators said the two hearings, one on the Treasury Department’s proposal for the commonwealth and the other on possible ramifications of a restructuring on the municipal bond market, were the last scheduled before they prepare to draft a legislative package before a March 31 deadline imposed by House Speaker Rep. Paul Ryan (R-Wisc.).

At one of yesterday’s two hearings, Antonio Weiss, a counselor to U.S. Treasury Secretary Jack Lew, testified the administration believes the best solution is for Congress to allow for territorial restructuring authority using the powers Congress has under the U.S. Constitution’s Territorial Clause: “This would give Puerto Rico the tools it needs to reach a resolution with creditors and adjust its debts to a sustainable level…Importantly, this authority would expressly not apply to states, which have an entirely different relationship with the federal government under the 10th Amendment.” Mr. Weiss’s testimony appeared to signal a shift in the Administration’s position to ask Congress to authorize Puerto Rico authority to restructure all of its debts under Chapter 9 bankruptcy protections—a proposal dubbed “Super Chapter 9,” which never gained support in Congress because of misplaced apprehensions and misunderstandings in Congress about the nation’s dual sovereignty. Mr. Weiss also dispensed with a second misapprehension with regard to Puerto Rico’s public pension liabilities, testifying that while the Treasury is “deeply concerned about the pensions in Puerto Rico,” he said there was no truth to some press reports that the administration is proposing to put the territory’s pension obligations above its debt obligations in a restructuring hierarchy. Instead he said everyone should come to the table in a restructuring. With regard to restructuring, the Administration believes it should be in three parts in addition to a balanced approach to any federal board’s authority: a temporary stay on litigation to allow for voluntary negotiations between creditors and the commonwealth; a voting mechanism to prevent a few hold-out creditors from blocking a reasonable compromise; and a court-supervised structure to assure an orderly resolution if negotiations fail. Mr. Weiss testified there would be room for further Puerto Rico proposals to address economic growth, territorial tax reform, and improving Puerto Rico’s access to federal healthcare programs, noting: “We believe it is for Puerto Rican legislators and the governor to identify the reforms that are needed structurally, but we think it is equally important that the oversight board makes sure that those reforms that are identified are implemented.” He also sought to address apprehensions about potential concerns which have been raised with regard to broader adverse impacts on the state and local municipal bond front, noting that a key focus was to ensure an orderly restructure of the islands debts precisely to avoid the kinds of “cascading defaults and litigation” over the next decade that could risk muni market destabilization, telling lawmakers: “The best thing for municipal bond markets is for this to be brought to an orderly solution.”

Chairman Rob Bishop (R-Ut.) of the Natural Resources Committee, in the wake of the hearing, seemed to concur that any entity given oversight authority in Puerto Rico would also need to have the power to restructure, stating: “Some organization that is going to do a restructuring in this situation has to be the logical solution and there’s no other way around it…But it’s not necessarily going to be a remake of other control boards that have happened in the past. It has to be dictated by the specific situation.”

In the companion, simultaneous hearing chaired by Rep. Sean Duffy (R-Wis.), Chairman of the House Financial Services Committee’s Subcommittee on Oversight & Government Reform, Mark Zandi, Moody Analytics’ Chief economist testified that the Chairman’s proposed legislation was “a very positive step in the right direction;” however, he said he believed it failed to be broad enough, noting that Puerto Rico needs a much broader restructuring of all of its debts—as well as its unfunded pension liabilities. (Chairman Duffy’s proposed legislation (HR 4199) would provide public authorities in Puerto Rico with Chapter 9 municipal bankruptcy authority in return for Puerto Rico’s acceptance of a newly created five-member Financial Stability Council to review and approve its financial plans, budget and borrowing plans.) Mr. Zandi testified that authorizing the territory to file for municipal bankruptcy might only help restructure 30% of Puerto Rico’s debt—and perhaps up to 75% if COFINA bonds were included, but the proposal could trigger expensive and lengthy litigation—consuming time that is running out; ergo, Mr. Zandi recommended a Financial Stability Council be authorized to implement a temporary stay of perhaps 12 to 18 months on all debt payments so that there would be sufficient time to “fashion a sustainable restructuring.”

Anne Krueger, a senior research professor of international economics at Johns Hopkins University who led a study on Puerto Rico’s economic situation and prospects, told lawmakers the Commonwealth needs to reform its financial policies to become sustainable, stressing that Puerto Rico must deal with its unfunded pension liabilities, reform its tax and business policies, and receive Medicaid equal to all other states. William Isaac, senior managing director and global head of financial institutions for FTI Consulting, testified that authorizing municipal bankruptcy authority to the territory, “would be unprecedented and would have far-reaching implications, including raising the costs of borrowers for the fifty states.” Subcommittee members responded that Iowa Gov. Terry Branstad had raised the same apprehensions in a recent letter to House leaders. But Rep. Nydia Velazquez (D-NY) noted: “There’s no evidence of this,” and asked Mr. Zandi for his perspective—in response to which, he replied: “Investors have said quite clearly that Puerto Rico’s situation is Puerto Rico’s situation and it’s no one else’s problem.”

Our respected and admired friends at Municipal Market Analytics this week provided their own key perspective on this tension we have observed in Detroit, Central Falls, Stockton, and San Bernardino, noting that by elevating Puerto Rico’s pension systems to a higher priority that its constitutional debt, the territory would be “abrogating its duty to creditors,” adding that such an elevation would also be picking one set of retirees over another—e.g., in this instance, Puerto Ricans, who own a significant amount of the U.S. territory’s debt: 30 percent of all outstanding Puerto Rico municipal bonds are owned on-island through retirement funds, leading MMA to write: “By choosing to support pensioners from the public employee system instead of debt, the Commonwealth would effectively be choosing public employees over private employees, biasing the system against retirees who saved in private markets in favor of retirees in the government-run program. Pension systems in PR are collectively underfunded by about $44 billion at present, according to the most recent actuarial estimates, and the contributions made by public employees into defined contribution plans have been liquidated alongside the contributions made for defined benefit plans in the past. Meanwhile, about 30 Puerto Rican credit unions (cooperativas) are on the brink of default due to losses incurred on PR bonds.” Thus, MMA worries: “If the stated purpose of a PR restructuring is to protect regular Puerto Ricans through shared sacrifice, proposals of the type advanced by the US Treasury (per Reuters) are not the route forward, as severe damage to the local financial system would ensue under such a plan.”

Seizing Atlantic City. If anything, the time line for insolvency could be direr in Atlantic City than Puerto Rico, potentially triggering a state takeover of the city even if the state fails to enact pending takeover legislation. The issue comes with regard to costs: according to a memo from the nonpartisan Office of Legislative Services (OLS), preventing a “catastrophe” would require significant, long-term state financial support. Such a situation could occur if the city defaulted on its bonds or were unable to transfer property tax payments to the state, local school district, or Atlantic County government. Atlantic City, which is on the edge of insolvency, has little to no ability to borrow: its credit rating is below junk-bond status. Under the Local Government Supervision Act of 1947 — the same law that allowed the state to imposed oversight of some parts of city government in 2010 — New Jersey has significant powers to intervene in the city’s finances, according to OLS. It also has additional authority because the local government receives transitional aid that is subject to a memorandum of understanding with the Division of Local Government Services. The memo notes: “At the point when Atlantic City cannot borrow, short-term, to pay its essential operating expenses and payments due to the county and other taxing districts, it is hard to envision the State refusing to exercise its powers under the Local Government Supervision Act (1947) to take control of the finances of the city.”

The new development comes as local leaders, led by Mayor Don Guardian, are pushing back against the takeover proposal sponsored by Senate President Stephen Sweeney and supported by Gov. Chris Christie, with Mayor Guardian and City Council members holding a press conference at the beginning of the week to oppose the legislation, with the mayor going so far as to describe it as a “fascist dictatorship.” Nevertheless, the Governor and Sen. Sweeney have stood their ground, albeit Assembly Majority Leader Lou Greenwald, the sponsor in the lower chamber, on Monday said he may not move forward with the proposal unless local leaders are on board. Nevertheless, Atlantic City’s leaders are rapidly losing leverage: Gov. Christie last month vetoed a bill that would have protected the city from the impact of court-ordered reassessments on the struggling casinos and injected millions of dollars in revenue in the near term. Now the new takeover proposal comes with similar legislation, which would create payments in lieu of taxes the casinos could pay to the city, the school district and county government.

If state lawmakers were to drop their takeover effort, some form of intervention increasingly seems inevitable, according to the legislative services memo, which asserts the state has “sufficient authority over the city’s finances to prevent a financial catastrophe.” In the short-term, the state could offer a low or no-interest loan. It could also force the city to liquidate debt and require the city’s financial officer to issue special reports and hold hearings, OLS says. While the state would not be able to unilaterally end existing collective bargaining agreements — a power included in the proposed takeover bill — it could negotiate new agreements with unions. But all that would not necessarily fix the city’s deep-rooted problems, according to OLS. The city owes hundreds of millions of dollars to bond holders and casinos that won tax appeals, and it also receives less money than it used to from the casinos. Referring to the pachyderms in the house, the memo notes: “Of course, the ‘elephants in the room,’ being the tax refunds owed by Atlantic City to the casinos and the corresponding loss of casino ratables to the city’s property tax base, will likely render the State’s financial supervision efforts insufficient to fully address Atlantic City’s financial situation without the provision of increased long-term financial aid to the city and school district.”

To make matters worse, federal bankruptcy protection — something that city had been mulling but would need state approval to seek — may not be able to solve the issue either. A judge may not have the authority to erase or “cram-down” the $170 million in debt the city owes the Borgata Hotel Casino & Spa, which had won tax appeals and is owed a refund. Because the casino is exercising its right to skip property tax payments until the city issues the refund, a judge might consider the debt a credit against future taxes, or, as OLS noted: “If the Borgata property tax refund can be characterized as a property tax prepayment for future tax quarters, then it is unlikely that the bankruptcy code’s automatic stay of action would apply.”

Marc Pfeiffer, the superb Assistant Director of the Bloustein Local Government Research Center, Bloustein School of Planning and Public Policy in New Brunswick, New Jersey, notes that generally, while New Jersey clearly has significant authority now, given the magnitude of Atlantic City’s immediate and long term problems, the traditional solutions may not work, pointing to immediate issues such as cash flow, the need for stability of calculating casino property values and the tax revenue they represent, and monetizing their accumulated debt and deficits. He wrote that the long term requires the city to restructure and rationalize the cost of running the city: the current cost structure (with a few exceptions) was effectively established when Atlantic City had 12 casinos of higher value (i.e., market value of $22B in 2007 and $7.4B today), adding that labor costs, staffing levels, and position allocations all need to be rationalized—and there is no adequate legal authority for that to happen. Further, he notes, city officials need to understand that the current and prior generations of elected officials could have done a better job of managing their resources. The city has traditionally been overstaffed with pay scales in excess. Historically the city has been rife with patronage appointments and expectation of privilege (he notes, for instance, that only in the last month did city council members give up their personal vehicles). That means they cannot do business as usual and blame the state; that does not win any arguments, adding that even though Atlantic City officials were aware of the drop in value, they did little to address it.

Similarly, he adds, New Jersey’s plans for the City over the last 6 years have not met expectations: political decisions along the way resulted in the today’s crisis: Instead of waiting until 2015 to engage via an emergency manager who only recommended actions, if stronger state action had been taken several years ago, the immediate crisis could have been avoided—adding that, nevertheless, the situation being as grave as it is, the parties need to quickly align and understand that dramatic action is needed now to avoid a municipal bankruptcy filing which would only prolong the problem and add more costs. He notes that while the state clearly has significant authority now, given the magnitude of Atlantic City’s immediate and long term problems, the traditional solutions may not work. The immediate issues: cash flow, the need for stability of calculating casino property values and the tax revenue they represent, and monetizing accumulated debt and deficits. Further, he wrote, city officials need to understand that the current and prior generations of elected officials could have done a better job of managing their resources. The city has traditionally been overstaffed with pay scales in excess.

He added that New Jersey’s plans for the City over the last 6 years have not met expectations: “political decisions along the way resulted in the today’s crisis. Instead of waiting until 2015 to engage via an emergency manager who only recommended actions, if stronger state action had been taken several years ago, we could have avoided the immediate crisis…But we are where we are, and the parties need to quickly align and understand that dramatic action is needed now to avoid a bankruptcy filing which will only prolong the problem and add more costs.”

Michigan’s Role in Municipal Fiscal Fates

February 23, 2016. Share on Twitter

Out Like Flint. Does Flint have a fiscal future? University of Michigan-Flint Professor Marty Kaufman, who has been leading a research team studying the city’s denigrated water lines, has reported there are as many as 8,000 lead service lines—making the announcement yesterday at a news conference at City Hall, in the wake of his team’s painstaking analysis of handwritten records, paper maps, and scanned images to create a digital database of lead pipes. Professor Kaufman stressed that while the project is a full compilation of available data, the records, compiled from a 1984 survey, do not always indicate the types of pipes used—vastly complicating Mayor Karen Weaver’s efforts to get those lines removed as quickly as possible from what, once, was the state’s second largest city, but where, today, the fear of lead contamination, especially for children, can only threaten significant adverse fiscal consequences for the city as families with children become increasingly fearful of remaining in the city—not to mention the apprehension of other families about moving to Flint: fears that cannot bode well for the city’s assessed property values. Because at the time of the switch of its water supply, under then state-appointed emergency manager Darnell Earley, Flint did not treat the water with anti-corrosion chemicals: the omission allowed river water to scrape too much lead from aging pipes and into some residents’ homes. Nevertheless, yesterday, Gov. Snyder said 89 percent of water samples collected from key locations in Flint measured below the “action level” of 15 parts per billion for lead in an initial round of testing, adding that samples from the so-called “sentinel” sites will help determine when it is safe to drink unfiltered water again.

Out Like Snyder? Meanwhile, the Michigan State Board of Canvassers, which is responsible for canvassing and certifying statewide elections, elections for legislative districts that cross county lines and all judicial offices, except Judge of the Probate Court, conducting recounts for state-level offices, canvassing nominating petitions filed with the Secretary of State, canvassing state-level ballot proposal petitions, assigning ballot designations and adopting ballot language for statewide ballot proposals, and approving electronic voting systems for use in the state, has approved another petition seeking to recall Gov. Snyder, citing the governor’s declaration of a state of emergency in Flint after lead leached from the pipes into the city’s water supply. The Board approved the petition yesterday from the Rev. David Bullock of Detroit, who had filed his petition two weeks ago yesterday after the board rejected eight petitions to recall the Governor. Notwithstanding the approval, Rev. Bullock now must obtain at least 789,133 signatures. If approved, the recall effort would become a ballot question which would then need majority support from Michigan’s voters.

Schooling on Municipal Bankruptcy. As every city or county elected leader knows, the quality of a jurisdiction’s public schools are fundamental to such a jurisdiction’s fiscal balance: if the schools are excellent: they attract families to the city or county, with important, positive implications for assessed property values and property tax collections. If, in contrast, they appear to be physically dangerous or threatening, or incompetent; the schools can create the opposite fiscal outcome. Thus, even though many public school systems are nominally distinct from city or county-elected jurisdictions; those locally elected leaders have a very great stake in the perceived excellence of their public schools.

The city and Detroit Public Schools (DPS) have entered a consent agreement setting a timetable to address hundreds of safety and health violations in DPS’ school buildings. The agreement covers the first 26 schools inspected by the city that require repairs; additional schools will be added as inspections progress. Detroit Mayor Mike Duggan stated: “What we wanted was a commitment from DPS with specific time lines for making each repair and a binding agreement enforceable in court if those time lines are not met.” The action by the city comes in the wake of Detroit’s Building, Safety, Engineering & Environmental Department’s four-month inspection program for all 97 DPS buildings after complaints by teachers and parents about problems including water leaks, mold and heating—and rat infestation: at six schools with reported rodent infestations — Blackwell Institute, Clark Preparatory Academy, Cody High, Sampson-Webber Leadership Academy, Ronald Brown Academy and Spain Elementary-Middle — inspections are being done monthly by pest control contractors, according to the city report. Building checks were promptly conducted in 20 DPS buildings believed to be most problematic. Inspections of the remaining district buildings, plus Detroit charter schools, are to be completed by the end of April. The consent agreement, signed by Detroit’s City Attorney and Marios Demetriou, the DPS deputy superintendent of finance and operations, includes a spreadsheet listing progress on scores of projects and completion deadlines. City officials report that city inspectors have visited 64 DPS properties so far. In addition, the Detroit Health Department also conducted follow-up inspections in some cases. It is uncertain how the action taken by the city to deal with the dysfunctional DPS might impact—at least from a fiscal perspective—the suit filed last month by the Detroit Federation of Teachers with regard to building conditions, and seeking the removal of state-appointed Emergency Manager Darnell Earley, although Ivy Bailey, interim president of the DFT, said: “We do not plan to withdraw it until we are confident that the consent agreement’s commitments have been fulfilled.” Mr. Earley, who has previously served, or mayhap mis-served, as Gov. Rick Snyder’s appointed Emergency Manager for the City of Flint, will step down on Monday.

Recovery! Wayne County, the largest county in Michigan—and the home not just to Detroit, but also to 33 other cities and 9 townships—and where Michigan Gov. Rick Snyder last July had declared a financial emergency, and which is still operating under a consent agreement with the state—is now, according to the unmoody Moody’s, stable, with Moody’s Investors Service having revised its credit rating outlook on Wayne’s junk-level rating upward from negative in recognition of the Wayne County’s remarkable success in making substantial cuts to its public pension liabilities and other operating expenses, noting: “Revision of the outlook to stable from negative reflects diminished near-term fiscal challenges.” In response, Wayne County Executive Warren Evans noted: “Moody’s decision to upgrade our credit outlook to stable is a step in the right direction…Our successes last year in eliminating the structural deficit and reducing unfunded health care liabilities were definitely noteworthy, but, we aren’t resting on those successes. My administration continues to work to restore long term fiscal stability to Wayne County.”

The county has succeeded in reducing nearly $50 million in spending, achieved with elimination or modification of retirement benefits, a contraction of payroll, and other operating efficiencies over the last six months—having announced earlier this month that it is expecting $23 million in fiscal 2016 budget relief from cuts to retiree healthcare benefits—cuts which trimmed $850 million from its unfunded liabilities. In addition, the county now projects its annual savings are expected to grow, citing its post-employment benefit liabilities as one of the factors which had driven its deficit enough to raise the specter of municipal bankruptcy. Indeed, County Executive Evans noted: “The restructuring of the county retiree healthcare was the single largest contributor to restoring solvency.” Wayne County reduced its actuarial accrued OPEB liability by 65% in 2015, lowering it to $471 million from $1.32 billion, according to an actuarial analysis from Nyhart Actuary & Employment Benefits: the restructuring is projected to reduce Wayne County’s pay-as-you-go contribution this year down to $17.6 million from $40.4 million. In its upgrading, Moody’s analysts noted: “Enhanced control over expenditures was key to addressing the county’s fiscal concerns given limited options to raise revenue.”

Spinning the Debt Wheel in Atlantic City: “The city’s fiscal crisis is severe and immediate.” A new Atlantic City rescue bill, the “Municipal Stabilization and Recovery Act,” would give the State of New Jersey increased authority over Atlantic City’s finances as part of an effort to avoid the city going into chapter 9 municipal bankruptcy: the proposed legislation would empower the state to renegotiate Atlantic City’s outstanding municipal debt and municipal contracts for up to five years, while also giving the state the ability to leverage city assets and make staff cuts. Under the proposal, Atlantic City would be given one year to find a way to monetize its water authority. The quasi-state takeover of the city, coming in the wake of last month’s veto by then-Presidential candidate Gov. Gov. Chris Christie—a package which would have enabled Atlantic City’s eight remaining casinos to enter into a payment-in-lieu of taxes program for 15 years and aggregately pay $120 million annually during that period instead of a traditional property tax. The introduction of the bill came in the midst of ongoing governance confusion—with the role of the Governor’s appointed emergency manager for the city still in question. There has been, however, little question from the city’s perspective: Mayor Donald Guardian, joined by city council members and other elected officials, harshly criticized the takeover plan yesterday in a press conference, urging instead a new financial assistance bill which would allow the city to maintain “sovereignty,” with Mayor Guardian stating: “We cannot stand here today and accept any bill with the broad, overreaching powers as the one presented to us last week contained.” Or, as Atlantic City Council President Marty Small put it: “We were all troubled by this draft bill: It takes our sovereign right to govern our own city away.”

The legislation was introduced by New Jersey State Senate President Steve Sweeney (D-Gloucester), with Senators Kevin O’Toole (D-Wayne), and Paul Sarlo (D-Wood-Ridge), in an effort to avoid an Atlantic City chapter 9 municipal bankruptcy—with time beginning to run out at the home of the gaming tables: According to a January 21 report from Gov. Christie’s appointed emergency manager Kevin Lavin, Atlantic City could default as early as April absent a state rescue package. That is, there looms an Atlantic City fiscal hurricane—the red flag warnings of which now appear to have disrupted the year-beginning “new partnership” between Mayor Guardian, Gov. Christie, and Sen. Sweeney to avoid municipal bankruptcy—or, as Mayor Guardian described it: “The final piece of legislation that the State presented to us was far from a partnership…It was worse. Some would even say fascist.” Atlantic County Freeholder Ernest Coursey was no less upset, noting: “It will be a cold day in hell before we just stand by idly and just allow folks to run over the people of Atlantic City…I think we ought to work in partnership with the state of New Jersey and stop this hostile talk of a takeover.”

In Rome, they would say: tempus fugit, or time is flying: In this case, time is running out: in addition to addition to municipal bond debt, Atlantic City confronts a debt of $170 million to the Borgata casino from its tax appeals and a missed $62.5 million payment owed last December; moreover, Atlantic County Court Judge Julio Mendez ordered a 45-day mediation period commencing February 5th: Mayor Guardian yesterday said that if no resolution can be reached by then, he will have no choice but to petition the state’s Local Finance Board for a bankruptcy declaration, adding: “The sad irony is that we have a casino industry that wants to redirect their funds to the City of Atlantic City to help avoid all these doomsday scenarios,…There is a reasonable and practical solution out there, but that path has not been chosen by the state yet.”

Saving Puerto Rico. The U.S. House will convene simultaneous hearings on Puerto Rico Thursday as part of an accelerating effort to meet House Speaker Paul Ryan’s (R-Wi.) deadline for final House action by April first: The House Financial Services Committee’s Subcommittee on Oversight and Investigations will hold a hearing on the possible effects of Puerto Rico’s debt crisis on the municipal bond market; the House Natural Resources Committee will convene its hearing to discuss the Treasury Department’s analysis of the situation in Puerto Rico. The subcommittee hearing will feature three witnesses: Anne Krueger, a senior research professor of international economics at John Hopkins University who led a recent economic study of Puerto Rico; Juan Carlos Batlle, senior managing director of CPG Island Servicing, LLC; and William Isaac, senior managing director and global head of financial institutions for FTI Consulting. House Financial Services Subcommittee Chair Sean Duffy (R-Wis.) has, to date, been a key player in seeking to determine an exit from Puerto Rico’s looming insolvency: he introduced legislation last December to give Puerto Rico’s public authorities Chapter 9 bankruptcy protection in return for the creation of a five-person, Presidentially appointed financial stability council, seeking to balance the municipal bankruptcy authority Democrats have been pushing with the oversight authority for which Republicans have pressed. The Treasury proposal the Natural Resources Committee is scheduled to discuss is not dissimilar to Rep. Duffy’s, but it would propose restructuring for the entire commonwealth, a legislative concept deemed by some “Super Chapter 9” bankruptcy—a proposal which has not gained support in Congress over misplaced apprehensions by some that such a proposal could open up the possibility for states, such as Illinois, to try to restructure their constitutionally backed general obligation debts. These members are, apparently, unfamiliar with the dual sovereignty system unique to the United States of America. The Treasury position supports restructuring for the entire commonwealth, but that the extension of restructuring could come through Congress’s power under the Constitution’s Territorial Clause—a clause which gives Congress the power to “dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.” U.S. Treasury Secretary Jack Lew has backed comprehensive restructuring legislation for the territory, partially to make it easier for its officials to bring all the commonwealth’s creditors to the table.

It Ain’t Over ‘Til It’s Over: One would think that after the long, tortuous, expensive process of gaining approval for a plan of debt restructuring from a U.S. Bankruptcy Court to exit municipal bankruptcy, a municipality could get back to focusing on recovery. But then you might be misjudging. Jefferson County, Alabama, however, finally at least has its new day in court set to determine whether its approved bankruptcy plan of debt adjustment is final: The 11th Circuit Court of Appeals has tentatively set the week of May 16 for its expected schedule of oral arguments in an appeal of the county’s successful exit from Chapter 9 municipal bankruptcy—albeit the 11th Circuit has no timeframe within which it must rule after arguments are heard. But one could anticipate a long and arduous road: it has taken well over a year to prepare the record for the court to consider hearing arguments, meaning that Jefferson County has now been in appeal longer than it was in municipal bankruptcy case. The lingering issue relates to the county’s approved plan of debt adjustment which .enabled it to issue $1.8 billion in sewer refunding warrants to write down $1.4 billion in related sewer debt two years ago last December—an approval which provoked a group of ratepayers on the sewer system to appeal U.S. (now retired) Bankruptcy Judge Thomas Bennett’s approval, and after, nearly 18 months ago, U.S. District Judge Sharon Blackburn rejected the Jefferson County’s contention that the ratepayers’ bankruptcy appeal was moot, based in part on the fact that the plan was largely consummated when the refunding debt was sold.

The Daunting Fiscal Challenges of Smaller, Poorer Municipalities

February 10, 2016. Share on Twitter

In this morning’s  blog post, we consider the growing fiscal and governing challenges of smaller cities with disproportionate lower income populations: here, Flint, Michigan, and Ferguson, Missouri–both smaller cities struggling with disproportionate levels of poverty. But there, as Robert Frost would have noted, their paths diverge. Because the fiscal disaster and human crisis from the lead poisoning for Flint’s children emerged from neglect and other state and federal failures–and because the crisis has put the city’s children at greatest risk–there seem to be signal federal and state efforts to make amends, including the provision of fiscal help. There is no such comparison in Ferguson, where the U.S. Justice Department yesterday filed suit against the city–a city characterized by disproportionately low incomes and race–but which has sought to fill its municipal coffers through the imposition of traffic fines levied disproportionately on those travelling into the city, rather than through more traditional and equitable means. There are two trends: the increasing fiscal disparities between municipalities in the U.S. as the concept of revenue sharing by the federal government and states has dissipated, and the growing apprehension over the cost of operating too many municipalities in metropolitan regions. 

Out Like Flint. Flint Michigan Mayor Karen Weaver has proposed a plan to replace the lead pipes in the city—pipes which have become a major health threat to the city’s future because of drinking water contamination and lead poisoning in the wake of a decision by a former gubernatorially appointed emergency manager, Darnell Earley, to begin pumping water from the Flint River to homes in what used to be one of the state’s largest cities two years ago. Her plan could be assisted by appropriations recommended this week by Gov. Rick Snyder. The hope is that replacing lead service lines would prove to be a key step to reducing the highest risk for lead to leach into the city’s drinking water—notwithstanding that there are other sources of lead in plumbing, including older soldered joints and fixtures containing leaded brass. Mayor Weaver noted: “We’ll let the investigations focus on who is to blame for Flint’s water crisis…I’m focused on solving it.” Mayor Weaver stated the $55 million project could begin by March: the goal is to replace an estimated 15,000 lead service lines within one year at no cost to homeowners: her plan is to target homes, but not schools, businesses, or other nonresidential sites—or, as she put it: “We are going to restore safe drinking water one house at a time, one child at a time until the lead pipes are gone.” The Mayor said the project would be a joint partnership between the National Guard and the city, but would require coordination with state government and funding from the Michigan Legislature.

Flint is the gritty rustbelt metropolis, where General Motors was founded in 1908, but which, since 2011, has been run by a series of state-appointed emergency managers: It has lost half its population since the 1960s, as GM cut its local workforce from 80,000 to around 5,000; fewer than 100,000 people now live there. More than 40% of the city’s mostly black population lives below the poverty line. Crime and unemployment rates are sky-high. Around 15% of Flint’s houses are abandoned. But for Flint, the stakes are higher: its tax base is most likely to erode—beginning with its property tax revenues, where as if the unacceptable levels of lead in the drinking water would not be sufficient to deter new homeowners from bolstering the city’s property tax revenues, some mortgage lenders are now warning home buyers in the city that they must prove there is no contamination at a property, or else they will not make a loan for its purchase. It is difficult to imagine a more immediate source of critical tax revenue erosion: now local real-estate agents and lenders must be apprehensive that the new limitation could be another punch in the gut of the city’s key tax revenues—revenues already on a long, downhill slide in the wake of the departure of major auto industry employers. Or, as Daniel Jacobs, an executive with Michigan Mutual, which recently issued a notice to its employees requiring that homes pass a water test before it will make a loan put it: “The tragedy in an already depressed community is now likely to see housing values plummet not only because of the hazardous water, but because folks cannot obtain financing.” Indeed, the Flint water contamination crisis and Detroit’s public school restructuring took center stage yesterday when Gov. Snyder presented his FY2017 budget—in which he told legislators he was “committed to providing critical investments needed for the Flint water crisis and Detroit Public Schools, while maintaining the long-term focus on the key priorities of education, job creation, health and human services, public safety and fiscal responsibility.” His budget seeks an additional $195 million to help restore safe drinking water to Flint—appropriations which would be in addition to the $37 million already approved from a supplemental budget action, bringing total state funding for Flint to $232 million, telling legislators the level includes the $37 million to help with water infrastructure; $15 million for food and nutrition; $63 million for the health and well-being of Flint children and other vulnerable residents; and $30 million to provide water bill payment relief for Flint. In addition, Gov. Snyder proposed that $50 million be set aside in a reserve fund for legislative oversight of the Flint programs after a six-to nine-month period, noting legislators would have the opportunity to assess where the resources could be deployed most effectively with good accountability, efficiency, and outcomes. Indeed, the proposal appears consistent with the levels Mayor Weaver reported yesterday, noting that her plan to remove and replace all lead water pipes in city homes carries a $55 million price tag. Gov. Snyder’s budget recommendation also seeks funding for statewide water infrastructure improvement. He introduced the creation of a commission to look at 21st century water infrastructure in his state of the state address earlier this year.

For a legislature already apprehensive about the distribution of annual appropriations, however, the Governor’s new requests might create some balancing issues—especially with the swelling costs for the struggling Detroit Public Schools’ (DPS) restructuring—for which the Governor is asking for $715 million from the legislature, stating yesterday: “The action plan here is to devote resources, not from the school aid fund, but instead use tobacco settlement proceeds at the rate of $72 million a year for 10 years to deal with the $515 million deficit and $200 million for additional investment.” In addition, he sought an additional $50 million to help with DPS current debt situation that, he said, is already reserved in the state’s 2016 budget supplemental. The governor is apprehensive DPS could be insolvent by this summer, urging state legislators to act swiftly, waring: “If we don’t, this is an issue that will be resolved in the court system where the outcomes can be much more devastating to the citizens of Michigan and other school districts in the state. The clock is ticking and action is required.”

Transferred Water Woes. Somehow it almost seems as if Detroit has channeled some of its fiscal woes north to Flint—yesterday Moody’s restored Detroit’s old water and sewer debt to an investment-grade rating for the first time since Detroit exiting municipal bankruptcy the city left bankruptcy a year ago last November. Ergo, yesterday, Moody’s upgraded the newly created Great Lakes Water Authority bonds—some the $5.5 billion of water and sewer revenue municipal bond debt—of the post-bankruptcy created regional authority (The water system treats water from Lake Huron, Lake St. Clair and the Detroit River and distributes treated water to a service area population of about 3.8 million. The sewer system treats and disposes of wastewater produced by a service area population of approximately 2.8 million.) to investment grade, with a stable outlook, with the rating agency recognizing that the new authority has assumed all the debt secured by the net revenues of the Detroit Water and Sewerage Department. The regional authority manages regional water and wastewater services, assets, and handles rate-setting responsibilities, even as Detroit retains control of water and sewer services within city limits. Under the terms of the lease, the regional authority has sole ownership interest in revenue generated by the combined regional and local system—or, as Moody’s observed: “This significantly limits the risk that a future bankruptcy filing by the city of Detroit or intensified fiscal pressure on the city in general would contribute to bondholder impairment with respect to the water revenue debt,” adding that the upbeat ratings also reflect the massive scale of water operations, as well as a customer base that extends beyond Detroit’ boundaries, very strong operational and fiscal management, healthy liquidity, and the expectation of stable or improved debt service coverage. Nevertheless, the ratings were tempered by what Moody’s characterized as the authority’s credit challenges, such as high leverage of pledged revenue, extensive capital needs, and labor market and demographic weaknesses. Under Detroit’s chapter 9 municipal bankruptcy plan of debt adjustment, the city had successfully sought to monetize its water and sewer assets: a key provision of the regional system’s 40-year lease with Detroit provides the Motor City will receive $50 million a year to overhaul its aging infrastructure as well as $4.5 million in assistance for low-income customers.

Recall. Michigan Governor Rick Snyder yesterday presented his budget—with the twin emergency focus on Flint and Detroit’s fiscally failing public schools even as the Michigan Board of State Canvassers three days’ ago approved a recall petition to force him out of office—with a statewide vote potentially as early as August 2nd, provided the requisite signatures are gathered by the deadline: The petition seeks the recall for moving the state School Reform Office to a department under the governor’s control; nine other petitions involving the Flint water crisis were rejected because of technical errors such as misspelled or omitted words. Almost as if Pandora’s box has been opened, Gov. Snyder is also likely to confront challenges in court: According to Great Lakes Law, lawsuits have been filed on three fronts: “class action citizen suits filed by environmental groups, class action and torts, coupled with constitutional claims against the governor, government investigations both state and federal, that may result in civil and criminal enforcement actions,” even though special legal protections make it difficult to hold governments liable for damages such as those filed by Flint residents.

The U.S. Sues Ferguson over Municipal Taxes and Charges. The U.S. Justice Department, in a lawsuit filed on Wednesday against the small city of Ferguson, Missouri, charged the municipality with regard to an effort to end an allegedly longstanding pattern of unconstitutional policing. The suit, coming in the wake of inability to reach a settlement with the city’s Mayor and Council, charges that the city’s police and court systems routinely violate the civil rights of the city’s black residents, in part to generate revenue from tickets, claiming in its suit that the city’s “routine violation of constitutional and statutory rights, based in part on prioritizing the misuse of law enforcement authority as a means to generate municipal revenue over legitimate law enforcement purposes, is ongoing and pervasive,” adding: Ferguson’s municipal code confers broad authority on the Court Clerk, including authority to collect all fines and fees, accept guilty pleas, sign and issue subpoenas, and approve bond determinations. The Court Clerk and assistant clerks routinely issue arrest warrants and perform other judicial functions without judicial supervision. As the number of charges initiated by Ferguson Police Department has increased in recent years, the size of the court’s docket has also increased. According to data the City reported to the Missouri State Courts Administrator, at the end of fiscal year 2009, the court had roughly 24,000 traffic cases and 28,000 non-traffic cases pending….In January 2013 the City Manager requested and secured City Council approval to fund additional assistant court clerk positions because “each month we are setting new all-time records in fines and forfeitures,” and the funding for the additional positions “will be more than covered by the increase in revenues.” The federal suit includes a count noting: “The City’s desire to generate revenue influences fine amounts. City officials have extolled that Ferguson’s preset fines are “at or near the top of the list” compared with other municipalities across a large number of offenses, and have cited these fine amounts—which were lowered during the pendency of the United States’ investigation—as one of several measures taken to increase court revenues. For violations that do not have preset fines, the siut noted: “Defendant has also taken measures to ensure fines are set sufficiently high for revenue purposes.”

Puerto Rico in the Twilight Zone. U.S. Senate Judiciary Committee Chairman Orrin Hatch (R-Utah) yesterday demanded Puerto Rico Gov. Alejandro Garcia Padilla provide detailed financial information by March 1st and stated he intends to come up with a plan to help the commonwealth by the end of March—relatively consistent with House Speaker Paul Ryan’s time frame, discussing his goals for a solution to Puerto Rico’s fiscal and debt crisis during a Finance Committee hearing on the President’s FY2017 budget with Treasury Secretary Jack Lew—with the Secretary making clear that any restructuring solution has to pass before Puerto Rico faces major bond payments in May and June—even as Mr. Hatch called the administration’s position an “unprecedented debt-restructuring authority” for Puerto Rico that would give “an explicit preference for public pension liabilities over debt issued by the Puerto Rican government, even though the territory’s constitution gives preference to some of [the] debt.” Chairman Hatch seems focused on requesting up-to-date details about the Territory’s three largest pension systems, stating he understands that the systems are only 4% funded and that the commonwealth-wide bankruptcy regime Treasury has floated would give preference to those unfunded liabilities.

The U.S. House Natural Resources Committee has scheduled a February 25th hearing at which Treasury Counselor Antonio Weiss has been asked to discuss an analysis of Puerto Rico, as the House presses to meet House Speaker Paul Ryan’s deadline of April 1st for the House to complete and send legislation to the Senate, with a focus on legislation authored by Rep. Sean Duffy (R-Wisc.) which would give the U.S. territory some sort of access to bankruptcy—as well as impose a financial stability council. Treasury Counselor Weiss last Friday, at a panel sponsored by the Bipartisan Policy Center, reported there have been “very positive discussions taking place on both sides of the aisle” in Congress, adding that there now seems to be greater agreement that any Congressional plan to help Puerto Rico avoid default and insolvency should include both restructuring and oversight. In his presentation last week, Mr. Weiss said the administration believes that restructuring of Puerto Rico’s debt could come through the Constitution’s Territorial Clause instead of through an addition to the U.S. bankruptcy code. (The clause in question reads: “Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.”) Mr. Weiss added that not all the territory’s debt would have to “be treated with a broad brush equally,” and that restructuring could take into account the many differences between Puerto Rico’s various debts, noting: “A special legislative act is required, tailored to the territories, consistent with Article 4 of the Constitution and that is neither for cities nor for states…It is on Congress recognizing the severity of this problem to agree in a bipartisan fashion on what those tools should be. It’s emergency legislation to deal with an emergency situation.”

Resident Commissioner Pedro Pierluisi, Puerto Rico’s sole representative in Congress, noted, in response to the emerging resolution, that he and other elected Puerto Rican leaders are concerned that any Congressional action not create a federal oversight authority that would impose too much control over the island’s municipalities: he said he would support an oversight authority as long as it respected Puerto Rico’s local governance, something both Republicans and Democrats have agreed is important to a final bill.

How Can a Government Provide Essential Services and Create a Plan of Debt Adjustment outside the Protection of a federal Bankruptcy Court?

July 28, 2015

Taking on Fiscal Sustainability. The Detroit News’ insightful columnist Daniel Howes yesterday wrote that Detroit Mayor Mike Duggan’s “readiness to challenge professional fees associated with Detroit’s historic bankruptcy is paying dividends,” noting that those astute challenges had already resulted in some $30 million in reduced borrowing needs, or, as Mayor Duggan’s deputy chief of staff reported: “It’s hugely helpful: For those years the debt service is reduced in principal and interest, you have that much more you can provide in services.” Mr. Howes added: “That’s not all. As part of its expected refinancing in the municipal bond market (the same market that experts predicted would spurn Detroit’s post-Chapter 9 borrowing efforts), the city also plans to restructure repayment schedules to eliminate what would have been larger payments in future years.” That is to note that the kind of fiscal discipline emerging in post-bankrupt Detroit is providing for not just more disciplined financial certainty and disciplined budgets, but also more fiscal resources to support delivery of basic public services—or, as Mr. Howes wrote: “an improved financial profile that could be reflected in credit ratings upgrades, perhaps as early as this week,” adding: “That’s in Detroit, little more than six months after completing the largest municipal bankruptcy in American history. That’s in record time and in a largely consensual proceeding that, for the first time in a very long time, also produced collective bargaining agreements with all the city’s unions.”

Wayne’s World. Wayne County commissioners are expected, today, to discuss options for resolving the county’s financial emergency when they meet as a committee of the whole this afternoon, less than a week less than a week after Gov. Rick Snyder said he agreed with an independent financial review team’s assessment that a financial emergency exists in Wayne County—giving the County until tomorrow afternoon to request a hearing before the state treasurer on the financial emergency declaration. Should they opt, this afternoon, to request such a hearing, the hearing will take place in Lansing on Thursday morning—after which Gov. Rick Snyder can either confirm or revoke his determination that the county is in a financial emergency. Wayne County commissioners eventually could vote for one of four options for state intervention: a consent agreement (which would impose benchmarks the county would have to accomplish); mediation; state appointment of an emergency manager, or filing for Chapter 9 municipal bankruptcy. Wayne County Executive Warren Evans has said he hopes the Commissioners will opt for a consent agreement to fix the county’s finances. The county, which encompasses Detroit and 27 other municipalities, is facing a $52 million structural deficit, caught in a vise between its underfunded pension system and a $100 million yearly drop in property tax revenue since 2008. The county’s accumulated deficit is $150 million.

Incumplimiento Técnico. When Puerto Rico failed, last week, to transfer to transfer cash to a Public Finance Corporation (PFC) trustee ahead of an August 1 debt service payment, that trigger a technical default, or, in Spanish, an incumplimiento technico, a step ahead of what could become the U.S. territory’s first payment default if sufficient funds have not been advanced by the end of this week. Our astute market observers at MMA have already noted to their institutional investor clients: “we expect that even a single default anywhere in Puerto Rico’s capital structure enhances the political viability of additional defaults everywhere else.” MMA notes that “Puerto Rico issuers now account for 59% of all impaired municipal par across all sectors, states, and categories. This creates a challenge in showing that the municipal industry as a whole has very low default and impairment rates. A summarization of all current, non-Puerto Rico impairment across the industry by sector, rating category, etc., shows that the rest of the municipal industry still has very low default rates.” The island’s public utility, PREPA, is seeking to push debt maturities on its $8.1 billion of municipal bonds back by five years, during which time no principal would be paid and interest would be cut to 1%, unless the authority’s cash position warrants it—a different approach—MMA notes, than the more common approach of simply cutting principal and interest payments. That stance by the utility is comparable to what Puerto Rico Governor Alejandro Garcia Padilla is advocating as part of what is shaping up to be the biggest municipal debt restructuring in U.S. history: “The ultimate goal is a negotiated moratorium with bondholders to postpone debt payments a number of years,” albeit, under the utility’s proposed plan, insured debt would be excluded from these treatments. As the potential for default escalates, and the chances of Congress providing access to a U.S. Bankruptcy court evaporate by week’s end with Congress departing for its five week vacation; the pressure is increasing on Puerto Rico’s Working Group for Economic Recovery to cobble together proposals for restructuring the commonwealth government’s debt by September 1st—a process sure to be unprecedented and rocky—already a report released by a group of hedge funds which own $5.2 billion of Puerto Rico municipal bonds wrote that Puerto Rico’s central government can pay what it owes—a thunderous shot over the bow as the island’s leaders seek, with ever diminishing time, to restructure its $72 billion of debt. According to the hedge fund commissioned report, budget cuts and tax increases would allow Puerto Rico to stabilize its finances. The hedge funds are, unsurprisingly, among the first bondholders to challenge Puerto Rico’s claim in June  that it needs to defer debt payments—at least until Gov. Padilla’s administration completes its draft proposal by the end of August for restructuring the island’s debt, an unprecedented effort in the U.S. which is certain to be challenged in court. The public challenge for Puerto Rico, in effect, is how to put together a plan of debt adjustment without the protection of bankruptcy to ensure uninterrupted ability to maintain essential public services. Remembering that Detroit’s process of putting together and obtaining Judge Steven Rhodes’ approval of its plan of debt adjustment consumed 18 months, one can appreciate not just the fiscal, but also the moral dilemma—or, as the Gov.’s chief of staff, Victor Suarez, puts it: “[T]he simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an economy already on its knees.” That is, there is no longer any question that Puerto Rico’s creditors will not be held harmless—Moody’s has already speculated that some investors may receive as little as 35 cents on the dollar on some securities, while owners of debt with the greatest safeguards could receive more than twice as much. Indeed, Moody’s, in its report, noted that it is a near certainty that Puerto Rico will default on some of its securities, possibly as early as this Saturday, when $36.3 million of bonds sold by its Public Finance Corp. become due—the legislature simply has not appropriated the funds. Thus will begin the great gladiator battles: different legal protections for Puerto Rico’s securities promise to pit owners of Puerto Rico general-obligation bonds, which have a constitutional pledge of repayment, against holders of other bondholders, such as sales-tax debt, which are backed by dedicated revenue sources. The hedge-fund group holds both types of securities.

Our perceptive friends at MMA note that were Puerto Rico able to avert a default, that would leave the proverbial door or “puerta” open to the idea of voluntary concessions by bondholders to remain viable for at least a bit longer; avert a new round of costly and goodwill‐consuming litigation from creditors; and, most importantly, reduce the risk of other island stakeholders organizing to protect their interests. The key point MMA makes is that: “we continue to strongly believe that a Puerto Rican default on any government‐related security would greatly increase the risk of additional defaults elsewhere. However, should Puerto Rico actually default on a debt payment, the implication would be that the U.S. territory has either chosen not to pay (perhaps referencing the government’s police power—the ultimate trump card vis‐à‐vis bondholders—as did the director of Puerto Rico’s OMB last week) or cannot pay while cash and liquidity are so scarce. Both scenarios are deeply unfavorable to [municipal] bondholders and could signal the start of a new, more adversarial chapter in creditor negotiations.” The ever perceptive MMA adds that the fiscal road ahead will, if anything, become more precipitous, as there is a projected sharp decline in expected FY15 commonwealth revenues, the government’s holdback of nearly 50% of 2015 income tax refunds, and what the Washington Post quotes a Pew director describing as, “the biggest movement of people out of Puerto Rico since the great migration of the 1950s.”

The Intergovernmental & Governance Challenges to Municipal Sustainability

eBlog

 

June 18, 2015

Visit the project blog: The Municipal Sustainability Project 

S-O-S. Wayne County Executive Warren Evans yesterday, writing that “Wayne County’s fiscal situation will continue to deteriorate without further remedial measures,” requested the State of Michigan to issue, on an expedited basis, a declaration of financial emergency. Mr. Evans wrote to Michigan State Treasurer Nick Khouri to request a preliminary review and declaration of financial emergency, citing several key issues which, he wrote, “threaten the county’s ability to provide necessary governmental services essential to public health, safety, and welfare,” referring to a projection that Wayne County’s accumulated unassigned deficit would grow from $9.9 million in the current fiscal year to $171.4 million by 2019, the county’s junk bond rating, and the judgement levy this month in a pension case that will cost taxpayers an estimated $50 in a one-time property tax assessment this summer on a $100,000 house. The epistle comes in the wake of a stream of warnings Mr. Evans has provided with regard to the County’s structural deficit and its unfunded pension liability—a liability now estimated to be approaching $1 billion—and comes in the first year of neighboring Detroit’s implementation of its municipal bankruptcy plan of debt adjustment in a city where the school system is under a state-appointed emergency manager—and where there are, as we noted yesterday, questions about the state’s legal authority to impose an emergency manager. Mr. Evans, in a release subsequent to the request, reported Wayne County would continue to negotiate with stakeholders under a consent agreement: “Our recovery plan provides a clear path to financial stability for the county, but we are keenly aware that our time frame to get the job done is quickly fading…Throughout this process we are constantly evaluating where we stand and proactively seeking solutions to work ourselves out of this massive deficit. I am requesting this consent agreement because the additional authority it can provide the county may be necessary to get the job of fixing the county’s finances done.” Under Michigan’s law, the state will first determine if a preliminary review is warranted, and, if so, the Treasurer will have up to 30 days to complete a preliminary review and final report—after which the local emergency financial assistance loan board would have 20 days to determine if probable financial stress exists—a finding seemingly likely here, and one which, if made, would trigger Governor Rick Snyder’s appointment of a financial review team, which would have up to 60 days to perform a more in-depth study—a study which could result in the appointment of an emergency manager or a consent agreement or emergency manager.

Under a consent agreement, the county would retain authority to implement pieces of County leader Evans’ plans, although complicated by the existence of constitutionally mandated positions, such as the sheriff and prosecutor complicate the prospects for a workable consent agreement. A consent agreement would be designed to allow the county to maintain a level of local control while providing a plan for managing the financial crisis with state assistance. Mr. Evans said a consent agreement would allow the county to continue negotiations with stakeholders while giving the county the ability, if necessary, to find other ways to achieve cost-savings and address the county’s $52 million structural deficit — a recurring shortfall that stems from an underfunded pension system and a $100 million yearly drop in property tax revenue since 2008: “Our recovery plan provides a clear path to financial stability for the county, but we are keenly aware that our time frame to get the job done is quickly fading.”

Because Wayne County surrounds Detroit, the two municipalities are not just linked geographically, but also fiscally. It is hard to imagine what the impact of insolvency for Wayne County would mean for Detroit’s ongoing recovery and implementation of its federally approved plan of debt adjustment.

It Ain’t Over Until It’s Over. While going through municipal bankruptcy can be fiscally and governmentally draining, it turns out that emerging from municipal bankruptcy—even once a U.S. Bankruptcy Court has approved a municipality’s plan of adjustment, might not suffice. So it is that in the wake of U.S. District Judge Sharon Blackburn’s rejection last September of Jefferson County’s contention that the appeal of U.S. Bankruptcy Judge Thomas Bennett’s decision approving the county’s—at the time—exit from the largest municipal bankruptcy in U.S. history just might not prove to be the last word. In rejecting Jefferson County’s argument that the appeal was moot, Judge Blackburn also said that she would consider the constitutionality of the county’s approved adjustment plan that cedes the county’s future authority to oversee sewer rates to the federal bankruptcy court. So it was that this week. Jefferson County’s attorneys argued in the 11th U.S. Circuit Court of Appeals that investors in the financing that enabled the county to exit bankruptcy nearly two and a half years ago should not have the “rug pulled out from under them” by losing a prime security feature they relied upon in deciding to loan the county money—referring to the security feature of the federal bankruptcy court’s oversight of Jefferson County’s plan of adjustment for the 40 years that the sewer refunding warrants remain outstanding—a key provision of the county’s plan of debt adjustment. As the godfather of municipal bankruptcy, Jim Spiotto, notes, what transpires in this appeal will have broader implications for all municipal bond market investors who rely on security enhancements, such as promised rate covenants or court oversight as part of their investment decisions: “To the market, hopefully the result [of Jefferson County’s case] will be a reaffirmation that rate covenants will be and should be enforced, and if you make a promise, especially in a Chapter 9 plan, it should be enforced as any contractual promise is.” In its 93-page brief, Jefferson County attorneys requested oral arguments to examine the constitutional, statutory, and equitable principles of the case which “are particularly important to governmental entities that may consider Chapter 9 relief now or in the future, as well as to the municipal debt market.” The issue underlying the appeal centers on whether proper legal steps were taken when Jefferson County’s bankruptcy plan was appealed to the U.S. District Court in Alabama by 13 residents and elected officials on the county’s sewer system, described as the “ratepayers” in court documents, who, Jefferson County attorneys argued, had failed to obtain the required legal “stay” suspending the plan while the appeal proceeded. Without any barriers to re-enter the bond market, Jefferson County proceeded to issue $1.8 billion in sewer refunding warrants in December 2013 that allowed the county to write down $1.4 billion in related sewer debt and exit bankruptcy. With the sewer refunding warrants long since sold to new investors, the complex plan of adjustment cannot be unwound, the attorneys wrote. Mr. Spiotto notes that the issue here comes down to an interpretation with regard to what chapter 9 permits and whether the bankruptcy court’s supervision is actually the act of setting rates or insuring that the county complies with the covenants that it promised. In its petition for an appeal before the 11th Circuit, Jefferson County wrote that neither its court-approved plan of adjustment or Judge Bennett’s confirmation order “changes the substantive law of the state of Alabama with regard to the enforcement of rates established pursuant to contract or legislation…Rather, the plan merely retains the bankruptcy court as an available forum in which such substantive law may be enforced, using the same remedies available in Alabama state court…In no event will the bankruptcy court ever set sewer rates; it is simply a forum to enforce the plan and related contracts – just as an Alabama state court could.” As Mr. Spiotto notes: here, no person—or court—is attempting to usurp the right of the state or a municipality under state law: “At the same time, no state or municipality should believe that it can make a promise and not live up to it: Whether you give it as Detroit did as a statutory lien or you have the court involved there are different roads to the same summit.”

Who has standing in a municipal bankruptcy case–and whether taxpayers, citizens, citizen groups, and major businesses in a municipality should have a role e in connection with the plan of debt adjustment, was a question I posed to U.S. Bankruptcy Judge Steven Rhodes for an interview with State Tax Notes. Judge Rhodes, in his response, wrote:

  1. This is perhaps among the most difficult questions in chapter 9. One practical reality is that every resident and business in a municipality that is going through a bankruptcy case has a direct and personal stake in the outcome of the case, although that stake may or may not be a financial stake in the strictest sense. But another practical reality is that the case has to be manageable. Most cases therefore deny standing to residents, concluding that the municipality’s democratically elected leadership adequately represents the residents’ interest in the case. That was my conclusion in a previous chapter 9 case called Addison Community Hospital District.

But the question is more complex where, as in the Detroit case, the management of the case is in the hands of an un-elected agent of the state and not the municipality’s elected leadership. In the Detroit case, I decided that a looser application of the traditional standing requirements was needed and so I invited the public to participate in the eligibility and confirmation phases of the case.  I maintained the manageability of the proceeding in other, more creative ways.

I followed up: Should a debtor propose a plan of debt adjustment which requires the debtor to take action that is contrary to state law including disregarding the pledge or dedication of revenues to the debt payment required under state law? In reply to which, Judge Rhodes said: “Yes, if it is necessary to restore or maintain adequate services. Although the Fifth and Fourteen Amendments generally prohibit bankruptcy from impairing property rights, nothing in those amendments or the bankruptcy code prohibits a plan from impairing creditors’ statutory or contract rights under state law.”

The Fate of a U.S. Territory. As Congress readies a hearing next week to consider whether Puerto Rico should be eligible for statehood, pressure continues in a separate committee in the House with regard to whether Puerto Rico should have the same authority as all other states with regard to municipal bankruptcy—that is, the authority to enact legislation which would permit any of its 157 municipalities to file for federal bankruptcy protection. In the latter issue, the struggle is with regard to H.R. 870, legislation proposed by  Rep. Pedro Pierluisi (D-P.R.), which is pending before the House Judiciary Committee—and which has the strong support of Puerto Rico Gov. Alejandro García Padilla. As pending, the bill would allow nearly insolvent governmental authorities, including the islands cities to formally reorganize under U.S. Bankruptcy court supervision—if authorized by Puerto Rico. The legislation, unsurprisingly, is opposed by funds which invest in Puerto Rico bonds, including Franklin Municipal Bond Group and OppenheimerFunds, Inc.: the funds recognize that municipal bondholders—in the event of a municipal bankruptcy—are more likely than not to take a haircut. Thus, they oppose any efforts to grant Puerto Rico the same powers granted to every state, claiming the municipal bankruptcy process is filled with uncertainty. The issues are even more complex from a governance perspective, however: should the bill be amended so that Puerto Rico, itself, could seek access to chapter 9, or should the bill be adopted as proposed, authorizing Puerto Rico to consider whether its municipalities should have access to municipal bankruptcy. Gov. Padilla supports the legislation as drafted; however, municipal distress veteran and long-time specialist Dick Ravitch, who has experience not just from his leadership in averting bankruptcy for New York City in the 1970’s, but more recently during his volunteer service in Detroit’s bankruptcy, has been pressing Congress to modify the bill so that Puerto Rico would itself have access to the U.S. bankruptcy court to reorganize its own debts. Mr. Ravitch fears that the territory, because it has issued so much debt, cannot conceivably repay it all, noting: “I do not believe the economy in Puerto Rico can prosper without a significant restructuring of all the debt.” That position contrasts the veteran municipal distress expert with Rep. Pierluisi, who yesterday released a statement cautioning that Congress would not support the bill to allow the restructuring of the island’s general obligation bonds, stating: “To lobby to amend H.R. 870 to enable Puerto Rico to restructure its general obligation debt is unwise and unnecessary as a matter of public policy.” The questions and issues with regard to equitable treatment for cities in Puerto Rico comes as the House Natural Resources Subcommittee on Indian, Insular, and Alaska Native Affairs has scheduled a hearing for next Wednesday on H.R. 727, proposed legislation to provide a path to statehood for Puerto Rico: the bill would authorize a U.S. sponsored vote to be held in Puerto Rico within one year of its enactment—the gist of which would be whether or not Puerto Rico should become a state. Should that vote be authorized—and the voters in Puerto Rico approve it, then the new state would automatically gain the authority to determine whether its municipalities ought to have access to chapter 9 municipal bankruptcy. Such a decision would also eliminate any authority by Congress to determine the new state’s access to federal bankruptcy, as Puerto Rico would become a sovereign. Former Puerto Rico Gov. Luis Fortuño said the statehood bill is getting a hearing because Rep. Don Young, the Alaska Republican who chairs the panel, is a friend to Puerto Rico and remembers when Alaska was a territory prior to 1959.

Unrelenting Municipal Leadership Challenges

May 29, 2015
Visit the project blog: The Municipal Sustainability Project

Municipal Bankruptcy Fallout. Wayne County Executive Warren Evans, who, from his bird’s eye perspective from the county surrounding Detroit, and who has himself expressed grave concerns about his own county’s fiscal sustainability, also has to think about risks to other municipalities from Wayne County’s dire fiscal condition. Thus the Wayne County Treasurer’s Office will have to provide assurances that the funds the county borrows to cover the delinquent taxes it collects for local communities would not be subject to diminution should the county be forced to file for federal bankruptcy protection―an assurance, which will come in a bankruptcy opinion which combines county legal opinions with those of an outside firm—or, as Christa McLellan, Wayne County Deputy Treasurer puts it: “There was just a lot of reaction to the comments. … (Bond markets are) very sensitive to what’s in the papers.” With County Executive Evans acutely aware of the unprecedented costs of municipal bankruptcy, ergo, he is laser-focused on what is now believed to be a $52-million structural deficit in the county and its “grossly” underfunded pension system—the triggering apprehensions for his proposed recovery plan to preempt municipal bankruptcy—a plan which proposes $230 million in cuts over four years. But the threat of municipal bankruptcy has forced the County’s hand, as—in order to prevent any diversion of funds the county collects for other jurisdictions or which it borrows to provide funding through its delinquent tax revolving fund—it has been forced by Merrill Lynch, which underwrites Wayne County’s borrowing for the fund this year, to obtain a municipal bankruptcy opinion in order to demonstrate that the funds are safe, “because they can’t be diverted,” or, as Deputy Treasurer McLellan puts it: “The county is never at risk…It’s a very secure program…It’s really structured that whatever happens, we can repay the notes,” adding there is no danger to creditors in the delinquent property tax program, because the communities must repay the money. The effort allows the Treasurer’s office to take over delinquent property tax collections for communities each year and provides the communities with revenue which they would otherwise be trying to collect.

The Fine Art of Diplomacy in Municipal Bankruptcy. As we have noted previously, the costs—especially legal and consulting fees—of municipal bankruptcy are withering. Few seemed more aware of this than U.S. Bankruptcy Judge Steven Rhodes and his appointed federal mediator, Chief Judge Gerald Rosen—so that, as part of the mediated settlement in the largest municipal bankruptcy in U.S. history, Miller Buckfire, which served as a paid consultant to Detroit emergency manager Kevyn Orr throughout the course of Detroit’s bankruptcy, has now contributed $1 million to help pay the water bills for Detroit residents in danger of getting service shut off―the largest nonutility contribution to the Motor City’s The Heat and Warmth Fund (THAW) in the charity’s history—a contribution that was part of the mediated settlement worked out by Judge Rosen and which came in the wake of strong objections from Detroit Mayor Mike Duggan to the unbelievable fees levied by Miller Buckfire. With water service—now to be shared via a regional authority, also a part of the resolution—even if still not resolved—of the city’s plan of debt adjustment, there remains a crushing, but prohibitive need: more than 64,000 Detroiters, disproportionately elderly, cannot afford water to pay their utility bills—and the bulk are likely seniors.

Schooling Governance. If too many Motor City residents cannot afford water, the whole city cannot afford its current school system—which is insolvent—an insolvency which is imposing strains on the relationship between Michigan Governor Rick Snyder and Detroit Mayor Mike Duggan—especially with regard to the authority to make appointments to the Detroit school board. Mayor Duggan this week urged Gov. Snyder not to appoint members of the city’s school board, but rather to leave those decisions up to Detroit’s voters, noting that Detroit school parents have demonstrated for years, through their withdrawals of their kids from the city’s school system that they have no confidence in schools under state control. Instead, Mayor Duggan said he would prefer a financial review commission to monitor and act as a check on excessive spending and borrowing, not dissimilar to the oversight commission incorporated into Detroit’s plan of debt adjustment as part of the grand plan worked out by Judge Rosen, the Governor, and bipartisan leaders of the state legislature. Mayor Duggan would like to have the state empower the current school board to be responsible for paying down the Detroit Public School (DPS) system’s hundreds of millions in debts, and a new school board charged with moving Detroit’s schools forward; moreover, Mayor Duggan believes a Detroit Education Commission should be created to allow the city to manage and coordinate all schools in the city, both public and charter schools—an element on which he is agreement with Gov. Snyder: under their concept, such a commission would be able to hold both types of schools accountable, and the authority to shutter failing schools, but also the authority to determine where schools are opened and closed to prevent too many schools in some neighborhoods—and none in others, as well as coordinated citywide bus service to all students, in public or charter schools, with a common enrollment system for all. The Mayor cites his goal to be the establishment of order in a chaotic system—a system, he believes rendered more unstable by years of failed state oversight that led to devastating enrollment declines and insolvency — in a city where 95 schools have opened or closed in the last six years, urging a governmental system of coordination and stability necessary to encourage families to keep their kids in city schools, noting: “We’re becoming a community where if you’re born rich you die rich, and if you’re born poor, you die poor.” DPS today has only five schools which meet the state average in reading; only seven meet the average in math; the district has gone from 180,000 students to 47,000 over the last decade—a period during which its schools have dropped from 13th to 45th in statewide student achievement. Mayor Duggan’s position contrasts with Gov. Snyder’s, who is, instead, proposing that DPS be split in two, under which the new district would be created debt free—and focus on educating kids, instead of debt; the existing system would continue to collect the local millage in order to retire DPS’s debt. But, as Gov. Snyder has acknowledged, getting his potential package through the legislature will be more than academically challenging: “Helping pay for their debt is a huge issue and the whole governance question…It’s a challenge to say, ‘We’d like to pay your debts and not have a role in the governance of the district.’”

Pensionary Musings. As San Bernardino enters its long awaited municipal bankruptcy trial to seek U.S. Judge Meredith Jury’s ok for its proposed plan of debt adjustment—a plan which proposes substantial cuts in what it would pay its municipal bondholders and its retiree health care obligations—but, as in Stockton and Vallejo, no reductions in its pension obligation to CalPERS; nevertheless, the plan is quite different in that it seeks to address pensions in a quite different manner: by contracting out for fire, waste management, and other services; the city projects substantial savings via a singular reduction in its employee base—especially for fire protection—via shared services, contract services expected to reduce city pension costs. The plan also proposes additional pension savings which would be derived by means of a substantial increase in employee payments toward pensions and from a payment of only 1 percent on a $50 million bond issued in 2005 to cover pension costs. Or, as Councilmember Henry Nickel put it before the Council vote to approve the city’s plan of adjustment: “The justification from what I’m understanding from the plan — the justification for contracting is more or less to save the city from the pension obligation. Is that correct?” The question came based on one of the slides staff had created to help explain the complex plan: the slide noted: “CalPERS costs continue to escalate, making in-house service provision for certain functions unsustainable.”

In response to the query, City Manager Allen Parker responded: “[T]hat’s part of it,” but not the “entirety,” advising Councilmember Nickel that in addition to pension savings, contracting with a private firm for refuse collection now handled through a special fund is expected to yield a “$5 million payment up front” into the deficit-ridden city general fund, adding that the CalPERS safety rate for firefighters is between 45 and 55 percent of base pay, “so if you have a fireman making say $100,000 a year, there is another $50,000 a year that goes to CalPERS,” further explaining that an actuary had estimated that contracting for fire services could save the city $2 million a year in pension costs, so that the change could achieve an annual savings of $7 million or more. Moreover, unlike other unions, firefighters had not voluntarily agreed to accept either the suggested 10 percent pay cut or to forego merit increases. Indeed, fire and waste management are the biggest opportunities for savings and revenue among 15 options for contracting city services listed in San Bernardino’s plan of debt adjustment—the plan whose mandated submission date from Judge Jury is today. Under the plan, many city employees are expected to be rehired by contractors, with estimated annual savings for contracting five other services: business licenses $650,000 to $900,000, fleet maintenance $400,000, soccer complex management $240,000 to $320,000, custodial $150,000, and graffiti abatement $132,600.

San Bernardino plan to return to solvency
Indeed, pension obligations have been very much at the heart of San Bernardino’s municipal bankruptcy: after its chapter 9 filing, San Bernardino—unlike Stockton or Vallejo, became the first California municipality to omit its annual payments to CalPERS—an expensive omission, as that, under the city’s proposed plan of debt adjustment, would be repaid over two fiscal years with equal installments of about $7.2 million, including some $400,000 annually in penalties and interest at the end of the proposed repayment period. Or, as Mr. Parker further explicated last week: San Bernardino’s public pensions have an “unfunded liability” of $285 million, but are only 74 percent funded, adding that the proposed plan of debt adjustment would protect pension amounts already earned by city employees, even with a new employer, and, like the Stockton and Vallejo plans, are proposed that way in recognition that cities—as employers—can ill afford not to offer competitive benefits. Further, noting the very deep pockets of CalPERS, Mr. Parker added: “We naively thought we could negotiate more successfully, but that didn’t necessarily happen,” and that San Bernardino’s pockets were not remotely deep enough for what would have been a costly and lengthy legal battle with deep-pocketed CalPERS is said to be 8 to 10 percent below market because of low benefits. The bankrupt city stopped paying the employee CalPERS share and raised police and firefighters rates to 14 percent of pay. On the post retirement health care side, the plan proposes to reduce health payments from a maximum of $450 per month to $112 per month, saving $213,750 last year.

Underwater in Puerto Rico—and Washington, D.C. The U.S. territory of Puerto Rico—neither a state, nor a municipality, but home to millions of Americans, is caught in a legal twilight zone, because it lacks the authority of every U.S. corporation—municipal or private—to seek federal bankruptcy protection; nor is the territory, again because it is not a state, authorized by the federal municipal bankruptcy law to authorize its municipalities with authority to seek such protection. While legislation to grant such authority has been pending before the House Judiciary Committee (HR 870, the Chapter 9 Uniformity Act of 2015), the bill appears to be in perpetual suspension, with many members confusing municipal bankruptcy with a federal bailout—almost as if to demonstrate a bankruptcy of comprehension. After all, they would be hard pressed to find any pennies devoted by the federal government to “bail out” Jefferson County, Stockton, Detroit, etc.; albeit they would find it far easier to find spell out the bailouts for Chrysler and General Motors—two of the three very large corporations in the Detroit metropolitan area to file for bankruptcy in the wake of the Great Recession. Thus, instead of acting on legislation which would—at no cost to the federal taxpayers—allow a federal judge to oversee the creation, adjudication, and approval of a plan to adjust debts between all the islands creditors, the issue has instead become, as Bloomberg observes, a bonanza for Washington lobbyists, who are developing websites, creating advertisements, and lining up the support of conservative advocacy groups, with one group posturing: “Puerto Rico may soon reach a height of budget crisis that can be addressed only through a massive bailout package from the federal government.” A website set up by 60 Plus Association, a senior-citizen advocacy group, opposes the legislation, while still another, NoBailout4PR.org., posts: “Make no mistake: Extending Chapter 9 bankruptcy protection to Puerto Rico is not a way to avoid a bailout…It is a bailout.” The legislation which is diverting so many dollars to Washington lobbyists and campaign coffers would amend the Federal Bankruptcy Code to treat Puerto Rico as a state: that is, it would enable Puerto Rico—as all 50 states are authorized, the option to authorize its municipalities and public agencies to file for Chapter 9 protection. It would not obligate Congress to appropriate one thin dime. Indeed, as Bloomberg notes: “The lobbying efforts focus on Republicans, who control the House. BlueMountain, Franklin Resources Inc. and several other investment managers have hired former high-ranking Republican staffers from the House Financial Services Committee and Senate Banking Committee who now work at Venable LLP, a law and lobby firm, to defeat the bill, according to disclosure records….Others that oppose the legislation include Tea Party activists and the Alexandria, Virginia-based 60 Plus, which describes itself as a “seniors advocacy group with a free enterprise, less government, less taxes approach.” Mayhap ironically, the issue has attracted 35 asset managers who favor the legislation and who support the Puerto Rico Fiscal Stability Coalition, co-chaired by former Puerto Rico Governor Luis Fortuno. The coalition’s spokesman, Phil Anderson, is a former special assistant to former Vice President Dan Quayle, who is now president and a founder of Navigators Global LLC, a Washington-based lobbying group that has set up English- and Spanish-language websites and produced video ads targeting the Puerto Rican public and Congressional members and staff—a coalition which has gained support from a group which could never be characterized as supportive of taxpayer-backed bailouts, including Citizens Against Government Waste and Grover Norquist’s Americans for Tax Reform. Their spokesperson noted that allowing Puerto Rico entities to file for bankruptcy would prevent what Anderson calls the “potential collapse” of the $3.6 trillion municipal-bond market, about 40 percent of which is held directly by U.S. households. An orderly restructuring would allow debtors and creditors to settle the dispute without involving taxpayers: “What solution is in the best interest of the U.S. taxpayer and what’s the most conservative solution to apply to the problem.”

eNews
May 29, 2015

Running on Empty. The Just before leaving town for its Memorial Day recess, and with no funding solution in the tank, Congress extended spending authority until the end of July, just before its five week vacation. The stopgap and start funding renders states and local governments unable to sign long-term contracts—and sharply increases the cost of issuing long-term municipal bonds for infrastructure financing.

“I will be stunned if the Republicans deal with the Highway Trust Fund responsibly…It’s not going to happen,” U.S. Sen. Bob Corker (R-Tenn.), the former Mayor of Chattanooga, who last year proposed a 12 cent per gallon increase in the federal gasoline tax, told reporters at a breakfast session sponsored by the Christian Science Monitor this week, adding that the short-term HTF extension favored by some in Congress is “incredibly irresponsible.”

Who, exactly, is getting bailed out? For all the provisions in the Congressional Budget resolution and individual bills and vows that there shall be no municipal bailouts, no Member of the U.S. House or Senate has yet been able to cite any bailout to a state or local government. In fact, of course, the federal government is munificent when it comes to bailouts to non-municipal corporations—whether it was the bailouts to General Motors and Chrysler—two of the three iconic corporations that filed for federal bankruptcy protection in the wake of the Great Recession—but not to the third, the City of Detroit. In fact, for all the Congressional sturm and drang about opposition to the so far non-existent municipal bailouts, the evidence points to ever increasing federal bailouts of private, non-municipal corporations. Indeed, as you can see from the chart, the Federal Reserve Bank of Richmond notes that the federal government is most generous with bailouts to private corporations. In its conveniently updated and most aptly named Bailout Barometer, the Richmond Fed reports that 60 percent of the U.S. financial system’s loans are explicitly or implicitly backed by the federal government—a 45% increase since 1999. According to the Richmond Fed: Implicit guarantees effectively subsidize risk. Investors in implicitly protected markets feel little need to demand higher yields to compensate for the risk of loss. Implicitly protected funding sources are therefore cheaper, causing market participants to rely more heavily on them. At the same time, risk is more likely to accumulate in protected areas since market participants are less likely to prepare for the possibility of distress — for example, by holding adequate capital to cushion against losses, or by building safeguarding features into contracts — and creditors are less likely to monitor their activities. This is the so-called “moral hazard” problem of the financial safety net: The expectation of government support weakens the private sector’s ability and willingness to limit risk, resulting in excessive risk-taking…The Richmond Fed’s view is that the moral hazard from the [Too Big To Fail] problem is pervasive in our financial system: the U.S. government’s history of market interventions — from the bailout of Continental Illinois National Bank and Trust Company in 1984 to the public concerns raised during the Long-Term Capital Management crisis in 1998 — shaped market participants’ expectations of official support leading up to the events of 2007-08. According to Richmond Federal Reserve Bank estimates, the proportion of total U.S. financial firms’ liabilities covered by the federal financial safety net has increased by one-third since our first estimate in 1999: The safety net covered 60 percent of financial sector liabilities as of 2013. More than 40 percent of that support is implicit and ambiguous.

Municipal Compliance. Cleveland this week agreed, as part of a settlement with the Justice Department, to create new watchdogs, retrain its police officers, and collect and analyze reams of new data as part of a settlement to resolve federal allegations that its police routinely used excessive force. The Cleveland police department, which has become a flash point in the racially charged debate over police tactics, has agreed to follow some of the most exacting standards in the nation over how and when its officers can use force, and will accept close oversight to make sure those rules are not ignored, city and federal officials said Tuesday. The agreement is part of a settlement with the Justice Department over what federal officials have termed a pattern of unconstitutional policing and abuse, with the Department having determined that police officers in Cleveland used stun guns inappropriately, punched and kicked unarmed people, and shot at people who posed no threat. In addition, the federal investigators determined the incidents often went unreported and uninvestigated. Under the agreement, Cleveland has agreed to document every time officers so much as unholster their guns: police supervisors will investigate the uses of force in much the same way that officers investigate crimes, or, as the agreement reads: “A fundamental goal of the revised use of force policy will be to account for, review, and investigate every reportable use of force.” The new federal rules prohibit officers from using force against people simply for talking back or as punishment for running away. Pistol whipping is prohibited, as is firing warning shots. In addition, the city has agreed to allow an independent monitor to track its progress. If the city does not put into effect the changes called for in the settlement, a federal judge has the authority to mandate them. (Under the Obama administration, the Justice Department has opened nearly two dozen civil rights investigations into the practices of police departments. Many of the elements in the Cleveland settlement — improved training, better internal oversight and an independent monitor — have become standard.) The Cleveland settlement came out of negotiations that commenced last year in the wake of discussions with the Justice Department after investigators determined that police in Cleveland engaged in a pattern of excessive force, although the settlement still must be approved by a judge. According to the U.S. Justice Department, problems in Cleveland involved both police shootings and blows to the head; Justice Department officials also cited what they called excessive or retaliatory use of Tasers, chemical sprays, and fists—including the department’s use of force against mentally ill people. As resolved, the agreement calls for a series of compliance actions intended to respond to the federal findings:
• Cleveland police would be required to try to de-escalate situations before using force and be barred from using force in retaliation;
• Officers will not be allowed to take their weapons out of their holsters “unless the circumstances create a reasonable belief that lethal force may become necessary,” and every time an officer takes out her or his weapon, an officer would have to document it; and
• A newly created inspector general is charged to monitor the department, while a civilian would oversee its internal affairs unit.

Cleveland U.S. Attorney Steven Dettelbach has called the agreement “a national model for any police department ready to escort a great city to the forefront of the 21st century,” while Cleveland Mayor Frank Jackson called the agreement a “very positive result.” Mayor Jackson reports the agreement, which will be overseen by an independent, court-appointed monitor, was the result of a long-running collaboration between the Justice Department and the city. He added, however, that the agreement will be not only complex, but costly: Cleveland and its taxpayers city will have to spend millions of dollars over several years in order to comply with the terms of the consent decree, according to Matt Zone, the chairman of the Cleveland City Council’s public safety committee, and will have to adopt a new ordinance to ensure that the city’s police officers are not able to use race and class as profiling techniques in their traffic stops and investigations. Unsurprisingly, several members of Cleveland city council expressed concern about the cost of implementing the consent agreement—a cost not disclosed by federal government officials involved in the new mandate, but one estimated to be in the millions of dollars.

Wealth Disparities. Christopher Ingraham this week wrote about an issue which has been the subject of governance discussion in Europe: wealth inequality, where it has been highlighted in a huge new report from the Organization for Economic Cooperation and Development (OECD). What is the distinction between income versus wealth inequality? Income is the amount of money one earns from work and/or investments, but wealth is what one owns: one’s home, car, savings, retirement accounts, etc. The OECD report finds that the richest 10 percent of American households earn about 28 percent of the overall income pie. In contrast, he writes, the wealthiest 10 percent of U.S. households now own or hold 76 percent of all the wealth in the U.S.—a percentage far greater than the globe’s other rich nations. Mr. Ingraham explains this extraordinary disparity by writing: “Let’s imagine that there are just 100 people in the United States. The richest guy―and, yes, he’s probably a guy―owns more than one-third of the total wealth in this country. He’s got a third of all the property, a third of the stock market and a third of anything else that can be owned. Not bad…The next-richest four people together own 28 percent of all the stuff. Divvied up four ways, that’s still not too shabby. The next five people together own 14 percent of all the things, and the next 10 own another 12 percent…We’ve accounted for just 20 percent of the people, but nearly 90 percent of the total wealth. Ninety percent! …The next 20 percent of people have only nine percent of the wealth to split among them…The next 20 percent, the middle wealth quintile, only have three percent of the wealth to split 20 ways…” Then, as he writes: “Now we’ve reached the bottom 40 percent of Americans, but guess what? We’ve run out of stuff. Sorry guys, you get nothing. In fact,…this bottom 40 percent actually has an overall negative net worth, which means that they owe more money than they own…” Unsurprisingly, this wealth disparity is most unevenly distributed across the country—and, since the General Revenue Sharing program created under the administration of former President Richard Nixon—a program explicitly recognizing that wealth and opportunity were unequally distributed across states and local governments, so that the federal government—and states—had a role in recognizing and leavening these disparities―but which was abandoned under the Reagan administration, the very apprehensions discussed by former President Nixon and the leaders of the nation’s governors, state legislators, and city and county leaders of increased disparities are transpiring. As one can see from the map of Baltimore below, this accelerating fiscal disparity can have explosive consequences—especially when it is constructed on federal policies.

Senate Appropriators Approve 302(b) Allocations. Before leaving for recess, appropriators in Congress made progress on moving spending bills. The table above provides House and Senate 302(b) allocations for FY2016, per the $1.017 trillion discretionary cap set by the Budget Control Act (BCA).

New Reporting Mandates. The Securities and Exchange Commission this week approved the Municipal Securities Rulemaking Board’s (MSRB) proposal to collect additional post-trade data for its electronic municipal reporting service EMMA; the new data reporting requirements, which will become effective next May 23d (2016) are included in amendments to MSRB Rule G-14 on trade reporting and the MSRB’s facility for its Real-Time Transaction Reporting System (RTRS). The amendments will require dealers to report new information through the RTRS, such as whether a trade occurred on an alternative trading system or involved a non-transaction based fee. They also would eliminate the requirement for dealers to report the yield for trades with customers.

2015 Schedule
March 13th. State & Local Governments Securities (SLGS). Congress’s failure to act to increase the nation’s debt ceiling triggered a federal unfunded mandate: the cost of refinancing state and local bonds and securities to increase.
July 31st. The current federal surface transportation law expires; the federal highway trust fund is projected to be out of money by mid-summer; state and local governments have already begun to cut back on projects. To date, there has been no progress in Congress.
June. The Export-Import Bank, which helps finance overseas purchases of American exports, might shut in the face of opposition to its mission.
Sept. 30. The Children’s Health Insurance Program faces expiration.
October 1. Sequester set to trigger.
September-October. Default? The government’s borrowing limit was reinstated on March 16, although Congressional Budget Office projects the government will likely come up against the ceiling in September or early October.
State & Local Finance

Mapping Challenges to Fiscal Sustainability. As can be perceived from the map to the left here, the increasing disparity in wealth discussed above is demonstrative of growing fiscal disparities in cities and counties across the nation. The ongoing, persistent federal reductions by means of sequesters and squeezing out of domestic discretionary investment—and significant growth in federal tax expenditure subsidies to those in least need has, it appears, significant and growing geographic and governance implications. Federal housing assistance today is dominated by federal tax expenditures—not federal housing programs from HUD. One only need look at the graphic here of the sea of vacant homes and buildings in Baltimore to appreciate how it is undercutting critical property tax revenues to the city—even as it is imposing ever greater public safety costs on the city’s depleting fisc. According to Scott Calvert of the Wall Street Journal, nearly 17,000 homes, or about 8% of the city’s housing stock, are deemed unfit for habitation. But, as in Detroit, the fiscal challenge confronting Baltimore is not just those residences that have become uninhabitable, but rather those that are abandoned: because the city’s population has declined more than a third over the last six decades. Whether it be Baltimore, Detroit, San Bernardino, or a growing list of cities throughout the nation, it appears a growing list of urban areas are confronting the twin fiscal risks of widespread vacancies: a risk not just to property tax revenues, but also as these neighborhoods become at risk to become magnets for criminal activity. Baltimore’s experiences demonstrate the exceptional challenges to the Mayor and Council: Between 2010, when it started a new program, and 2013, Baltimore sold 410 vacant houses for rehab; yet, as Mr. Calvert writes, more than 40% do not have use-and-occupancy permits, more likely than not meaning the house is vacant: a target not for property tax revenue, but rather for criminal use. Nevertheless, he writes, Baltimore has taken a three-pronged approach to tackling vacancies: enforcing city code more stringently by levying fines and persuading judges to force auctions if owners do not renovate; demolishing more than 1,500 houses, with hundreds more to be razed in coming years; and marketing some of its own vacant inventory, which accounts for about 15% of the total―adding: “‘Baltimore officials deserve credit for a higher-than-50% success rate on vacant homes sold by the city,’ said Frank Alexander, an Emory University law professor who co-founded the Center for Community Progress, a nonprofit that advises local governments on addressing vacant properties. ‘But they cannot fail to deal with those for which there has been no progress.’” While he said he understands officials’ reluctance to take properties back, failing to do so means the problem continues. More than 800 of the city’s 16,745 vacant homes are in Sandtown-Winchester, the site of Mr. Gray’s arrest and some of the worst looting of the protests.

In 1964, in his State of the Union address, former President Lyndon Johnson said:
This administration today, here and now, declares unconditional war on poverty in America. I urge this Congress and all Americans to join with me in that effort.
It will not be a short or easy struggle, no single weapon or strategy will suffice, but we shall not rest until that war is won. The richest Nation on earth can afford to win it. We cannot afford to lose it. One thousand dollars invested in salvaging an unemployable youth today can return $40,000 or more in his lifetime.

Poverty is a national problem, requiring improved national organization and support. But this attack, to be effective, must also be organized at the State and the local level and must be supported and directed by State and local efforts.

For the war against poverty will not be won here in Washington. It must be won in the field, in every private home, in every public office, from the courthouse to the White House.
The program I shall propose will emphasize this cooperative approach to help that one-fifth of all American families with incomes too small to even meet their basic needs.
Our chief weapons in a more pinpointed attack will be better schools, and better health, and better homes, and better training, and better job opportunities to help more Americans, especially young Americans, escape from squalor and misery and unemployment rolls where other citizens help to carry them.

Very often a lack of jobs and money is not the cause of poverty, but the symptom. The cause may lie deeper — in our failure to give our fellow citizens a fair chance to develop their own capacities, in a lack of education and training, in a lack of medical care and housing, in a lack of decent communities in which to live and bring up their children.
But whatever the cause, our joint Federal-local effort must pursue poverty, pursue it wherever it exists — in city slums and small towns, in sharecropper shacks or in migrant worker camps, on Indian Reservations, among whites as well as Negroes, among the young as well as the aged, in the boom towns and in the depressed areas.

Is Chicago Contagious? Our admired friends at Municipal Market Analytics this week raised concerns with regard to whether Chicago’s recent downgrade might be contagious, affecting the cost of municipal borrowing for other cities—a risk you can see (below) that can already be tracked to New Jersey municipalities. As my esteemed MMA colleagues wrote: “That such an important, economically vibrant city such as Chicago is considered junk credit by one of the major rating agencies makes for a perception problem that all issuers may have to contend with, adding: “The pension drumbeat only grows louder as it is the city’s pension liabilities that drove the credit action…In the days after the Moody’s downgrade, we saw significant retail selling of the city’s debt—even of other Chicago credits that were not downgraded. Additionally, many of the state’s own credits began to widen as many investors looked to shed any Illinois exposure whatsoever. Then the real contagion began to occur as other municipal credits that also have large [public] pension liabilities began to cheapen as retail accounts sold those bonds as well…Most notable was New Jersey appropriation debt [please note MMA chart below] but we also saw cheapening for Pennsylvania, Connecticut, and Louisiana general obligation debt.

The Sharing/Disruptive Economy

As we observe the changing economy—what with the sharing economy, the impact of the internet on work hours and locations, we can anticipate it will lead to profound changes in transportation and housing. Because the internet is permitting more people to work from anywhere, anytime, the old model of cities and suburbs is becoming increasingly obsolete.

The Disruptive, but Sharing Economy: What’sApp? Do States & Local Governments Need New Rules for the Sharing/Disruptive Economy?

Playing by the Tarheel Rules. Airbnb has announced that, effective Monday, June 1, it will begin collecting and remitting sales and hotel occupancy taxes to North Carolina—and sales and hotel occupancy taxes in four of the state’s counties (all of No. Carolina’s 157 counties and municipalities levy a local occupancy tax of at least 1 percent.) The agreement follows in the wake of the Raleigh City Council decision last December to declare Airbnb illegal—an action which led Councilmember Mary Ann Baldwin to work with the sharing company, noting: “Airbnb is a popular piece of this new economy that tourists and prospective residents expect to see in modern cities.” The state action makes North Carolina only the second state in which Airbnb collects a statewide tax—Airbnb does collect and remit occupancy taxes on behalf of its guests in several municipalities, including: Washington, D.C., Chicago, San Francisco, Portland (Ore.), Malibu, and San Jose.

Shairing. Airbnb will begin collecting taxes on behalf of D.C. residents: under the voluntary agreement, the District joins a smattering of municipalities with which Airbnb has worked out tax agreements to share some of its revenues—revenues for an emerging platform under which thousands of Americans have become innkeepers—but innkeepers not subject to the same tax, insurance, or public safety standards as their business competitors. The agreement could mean significant additional revenues for the city; for Airbnb, the promise to remit that money straight to D.C. treasury could help legitimize a service which, in many places, is still not strictly legal. In the cities where Airbnb has agreed or been required to do collect, Airbnb will automatically collect the local hotel or transient occupancy taxes, which run from about 5 percent to 14.5 percent in the District, on every transaction. Airbnb will then pay the municipalities cities in a regular lump sum, but will not include details about individual hosts or guests. Airbnb began collecting these taxes in Portland, Ore., last July and in San Francisco last October. Between those two cities so far, the company says it has already paid about $5 million in taxes (it has not, however, agreed to collect and remit back taxes anywhere). It will also be collecting and remitting in San Jose, Chicago, and Amsterdam—cities comprising some of Airbnb’s largest markets. As an Airbnb spokesperson helps us to understand: “In many cases, these taxes were designed for hotels and folks with teams of lawyers and accountants, and the reality is that the person who’s renting out his basement in Cleveland Park once a month probably doesn’t have tax experts on payroll…You shouldn’t need a lawyer and a tax specialist if you want to rent out your house.” On the newly receiving end, Stephen Cordi, the deputy CFO for D.C. explains to us: “It’s undoubtedly true that people particularly at the bottom end of this probably didn’t know what to do.” he says. Airbnb hosts should have been registering with the city and collecting the tax, which supports both a convention center fund and the city’s general fund — and, ultimately, services like the fire and police departments. Under this agreement, he notes: “This will eliminate the need for them to do that,” adding that Airbnb, rather than the District, took the initiative, which now means Airbnb hosts have a formal mechanism for paying taxes on an activity—even though it is still not exactly recognized by D.C. law: the District has yet to pass new regulation that would formally legalize the kind of short-term rentals Airbnb has made possible—unlike some municipalities, including Portland and San Francisco, which have adopted new laws explicitly legalizing the activity under certain conditions. Interestingly enough, Airbnb’s initiative to become a corporate citizen could send shock waves to other vacation rental companies, such as VRBO, because, unsurprisingly, Airbnb would like its competitors to compete on a level playing field, so that the company does not confront a disadvantage in a market where other platforms offer untaxed homes which may then be more attractive to potential lodgers. My colleague, Philip Auerswald, an associate professor at George Mason who studies innovation and entrepreneurship, argues that cities really ought to be responding to the rise of companies like Airbnb by broadly rethinking where and how they collect tax revenue in the 21st century: “It’s not particularly interesting or insightful to say ‘since hotels are taxed this way, it’s only fair,’” he says. “That makes sense as long as you think that whatever the status quo is is where we want to end up.”

Fractional Jobs: No Benefits. Christopher Mims of the Wall Street Journal this week described the new, emerging sharing economy as “a hodgepodge of mostly unrelated but often lumped-together startups, many originating in Silicon Valley, that involve ‘sharing’ things like cars and homes…’ adding: “The first thing everyone misses about the sharing economy is that there is no such thing, not even if we’re being semantically charitable…Increasingly, the goods being ‘shared’ in the sharing economy were purchased expressly for business purposes, whether it’s people renting apartments they can’t afford on the theory that they can make up the difference on Airbnb, or drivers getting financing through partners of ride-sharing services Uber and Lyft to get a new car to drive for those same services….What’s more, many of the companies under this umbrella, like labor marketplace TaskRabbit, don’t involve ‘sharing’ anything other than labor. If TaskRabbit is part of the sharing economy, then so is every other worker in America: The only thing these companies have in common is that they are all marketplaces, though they differ widely in the amount of control they give their buyers and sellers…perhaps the worst offender in how it controls its labor force is Uber: Uber sets the prices that its drivers must accept, and has lately been in the habit of unilaterally squeezing drivers in two ways, both by lowering the rates drivers are paid per trip and increasing Uber’s cut of those wages,” leading Britain’s Financial Times Izabella Keminska to note: “The uncomfortable truth is that the sharing economy is a rent-extraction business of the highest middleman order.”

Mr. Mims writes that Uber has reported it is hiring 20,000 new drivers a month, and in this report it claims that in major U.S. cities, such as Los Angeles and Washington, D.C., drivers are averaging more than $17 an hour; however, as he notes: this data hardly reflects what Uber drivers actually make, because Uber does not include drivers’ expenses: it turns out that being an Uber driver pays about $10/hour—and there are no benefits….It isn’t minimum wage, but it’s a far cry from Uber’s previous claims about what drivers make, which reached the height of absurdity in May 2014, when the company claimed that the median income for drivers in New York was $90,000 a year. Months of investigation of that claim by journalist Alison Griswold yielded not a single driver in New York making that much.” Then he adds; “What this all means is simple: Uber and its kin Lyft, which is more generous with its drivers but has a similar business model, are remarkably efficient machines for producing near minimum-wage jobs. Uber isn’t the Uber for rides—it’s the Uber for low-wage jobs: There is much gnashing of teeth by critics over whether or not jobs for ride-sharing companies are ‘good’ jobs, but data from both Uber and Lyft show that more than 80% of their drivers have other jobs or are seeking other work, and Uber has said that 51% of its drivers are driving less than 15 hours a week…Ride-sharing companies, like many other firms in the ‘sharing economy,’ allow for a new kind of employment—sometimes called fractional employment—in which people can take on extra work when and if they need it. The key to fractional employment is flexibility for both these companies and their workers. Economically, these companies have been explicit that their business model doesn’t work if their ‘driver partners,’ who are currently independent contractors, are treated like employees…And this is the final and most important thing that both critics and boosters get wrong about the sharing economy: That in order for it to move forward, regulators must decide whether its employees are independent contractors or employees….”

While he writes that drivers for Uber and Lyft, mostly part-time, appear relatively satisfied because of the flexibility with which they can earn their wages, he notes they are quite obviously neither employees nor freelancers: “Like Schrödinger’s cat, neither alive nor dead, they confound conventional definitions,” adding: “The only way forward is something that has gotten far too little attention, called “dependent contractors.” In contrast with independent contractors, dependent contractors work for a single firm with considerable control over their work—as in, Lyft or Uber or Postmates or Instacart or any of a hundred other companies like them. This category doesn’t exist in current U.S. law, but it does exist in countries such as Germany, where dependent contractors get more protections than freelancers but are still distinct from full-time employees…The alternative is the underappreciated possibility that ride-sharing companies could cease to exist entirely, owing to a class-action lawsuit that almost certainly represents an existential threat to their business. http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/: This is a link to a PBS speculative report about white collar jobs that can be performed by robots: three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and horrors, attorneys.”
RDDII? http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/. The above is a link to a PBS speculative report about white collar jobs that can be performed by robots. Three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and, horrors, attorneys.

Fragmentation Index? According to crack researchers at the University of Illinois at Chicago, the Windy City metro area is the country’s most governmentally fragmented with its 1,550 local governments. Rebecca Hendrik of UIC, one of the authors, and dubbers of the so-called “fragmentation index,” which compares some 51 metropolitan regions of at least 51 million residents, reports that while such a panoply of municipalities is normally assumed to increase the cost of governance, it can also increase competition, and, thereby, drive down the cost of public services—as well as allow “people to choose a local government based on their values.” She asserts that it is rather special purpose districts, such as school districts, park and fire districts—many of which overlap municipal borders—which can prove “costly and confusing,” adding that “[m]ost local governments in metropolitan areas can’t function without affecting their neighbors: they either collaborate or compete: Collaboration is being promoted for efficiency, but we need to consider what conditions affect collaboration versus competition: competition and collaboration are related phenomena, not two ends of the same spectrum.”

Driving a Hard Bargain. The second day of testimony in Lyft’s hearing before the Pennsylvania Public Utility Commission’s administrative law judges dealt mainly with insurance issues, and how passengers would be protected in the event of an accident; however, in the midst of the trial, Administrative Law Judge Mary Long closed the courtroom so that Lyft’s director of public policy, Joseph Okpaku, could answer questions about the number of rides Lyft provided while it was under a cease-and-desist order. However, just as Uber’s attorney refused in its hearing earlier this month, Lyft attorney Adeolu Bakare claimed such information was proprietary: releasing it could put his company at a competitive disadvantage—in effect seemingly in direct conflict with a court order requiring the company to disclose the information, which was issued by the administrative law judges: indeed, at one point, Counsel Bakare sought to have information about Lyft’s insurance policy’s terms and conditions protected as well, but Judge Long told him not providing information about the policy would “almost certainly result in dismissal of your application,” albeit after the hearing, PUC spokeswoman Jennifer Kocher explained that the judges ruled to make that portion of the hearing private in order to receive the information and allow the hearing to move forward, not because the information was truly proprietary. Judge Long said she would issue a ruling on the protected information. Both the ride-sharing companies drove into the Steel City earlier this year, where they have not only tangled with each other, but also with the PUC: neither company had the proper licenses to operate in Allegheny County as an alternative to taxicabs, which led to proposed daily fines of $1,000 and cease-and-desist orders against the companies—instead each is operating under temporary authority in Allegheny County. In its hearing, Lyft’s attorney explained that Lyft’s insurance acts as excess to a driver’s personal policy, and would act as the primary policy if the driver’s personal insurance denied a claim, adding that there are three periods during which Lyft considers its insurance policy active: 1) when a driver has the app open, but does not have a passenger, 2) when the driver is en route to pick up a passenger, and 3) during the ride itself. But in response to the question with regard to how Lyft verifies its drivers have insurance coverage, the attorney responded that Lyft asks for proof of insurance in the form of the insurance card provided to drivers, but it does not further verify the policy.

Arrivaderci! An Italian court this week bid arrivaderci to unlicensed car-sharing services such as those offered by Uber, in another setback for the fast-growing U.S. car sharing service. The court in Italy’s business capital of Milan determined the Uber POP service, which links private drivers with passengers through a smartphone app, created “unfair competition,” and that the use of Uber POP was forbidden, as was the offering of paid car-ride services by unlicensed drivers in any other way. The court gave Uber 15 weeks to comply with the ruling or face a fine of 20,000 euros for each day’s delay in meeting the court ruling.

The Silver Tsunami. U.S. District Court Judge Kevin Castel this week held that the Empire State’s Constitution does not protect former city Bronx City councilman and state legislator Larry Seabrook’s pension from a $418,000 forfeiture judgment issued in the wake of his corruption conviction. Mr. Seabrook has been convicted on nine counts of corruption and wire fraud in Manhattan Federal Court in Manhattan in a case involving the “misdirection” of some $1.5 million of taxpayer funds which were supposed to go to community groups to his own pocket, according to U.S. Attorney Preet Bharara, who noted: “Today’s conviction ensures that the Councilman will pay for betraying the public trust. Rooting out public corruption and restoring the public’s faith in honest government remains a vital mission of this office.” Mr. Seabrook had argued in court that his pension was protected by a provision of the state Constitution barring public pensions from being “diminished or impaired;” however, Judge Castel wrote: “This section of the New York State Constitution yields to the federal forfeiture to the extent that the state provision purports to foreclose forfeiture of Seabrook’s pension benefits.”

Hooked Horns. The Texas Senate has voted to beef up (a terrible pun) the state’s underfunded retirement system for state employees by adding about $440 million to the program, with the bill increasing state employee contributions to the system to 9.5%―the equivalent of a 2 percent increase―as part of an effort to address an approximate $7 billion shortfall, after approving House Bill 9, which the House passed and sent to the Senate in April.

Ethics & Public Trust
From the Richmond Times Dispatch: “Successful government relies on trust. The breakdown of comity at all levels reflects the citizenry’s lack of confidence in institutions and individuals. Washington’s woes are well documented. Local jurisdictions suffer self-inflicted damage as well.”

Inexcusable behavior at City Council meetings
The Virginian-Pilot this week ran an editorial (please see below) on an issue key to public trust:

Decorum in city council chambers lately has reflected poorly on this region’s citizens. Perhaps when people speak to elected officials, they take a cue from online forums, where rants and attacks are de rigueur. Perhaps they see nothing wrong with booing, berating, hounding, even threatening those with different opinions.
In Norfolk, a resident regularly heckles Councilman Paul Riddick during the public comment portion of council meetings. Riddick last month lost his temper and told the man not to come within 5 feet.

Sadly, in Portsmouth, the attacks come from the dais as often as from the audience. Councilmembers have hurled insults and profanities as they criticized each other’s ideas.
Most of the time, their comments, however obnoxious, are protected by the First Amendment. Federal courts have ruled that comments sharply critical, even personal, about a city council or school board member are allowed under the Constitution.
Protected status doesn’t make such speech persuasive, however; often, it’s simply an embarrassment and a distraction that garners attention on TV and online.
Virginia Beach City Councilman Bobby Dyer says his city can do better. During the contentious budget hearings, residents compared the City Council to Nazis. Another made a racist remark to a councilwoman. One woman approached Councilwoman Rosemary Wilson and yelled that she was “coming after” her.
Dyer said he understands that some citizens are angry about the tax increase. They have every right to express their frustration. But there are ways to communicate that message respectfully, he said, proposing the council develop more guidelines “to make things easier in building bridges.”

According to the city’s rules of conduct, “Any person addressing the council shall confine himself to comments germane to the action under debate, avoid reference to personalities, and refrain from vulgarity or other breach of respect. For any failure to so conform, he shall be declared out of order by the presiding officer and shall forthwith yield the floor.”
The question is how much further the council can go in defining “breach of respect” and “reference to personalities.”

A federal court 14 years ago struck down a Virginia Beach School Board bylaw that prohibited personal attacks during public comments at meetings. The court ruled that the bylaw acted as a filter to screen out negative comments toward School Board members and the administration while allowing proponents to speak.

As the First Amendment Center explained in 2004, “Government officials may not silence speech because it criticizes them. They may not open a ‘public comment’ period up to other topics and then carefully pick and choose which topics they want to hear. They may not even silence someone because they consider him a gadfly or a troublemaker.”
But those constitutional rights aren’t absolute. Speakers can – and should – be silenced if they are disruptive.
As Beach Councilman John Moss noted, “a number of people went way, way over the line” in their comments to the council this spring. “It was way too personal.”
Councilmembers agreed to discuss possible solutions – asking speakers to affirm in writing the code of conduct, for example, or more aggressive use of a sergeant at arms.
Here’s the best idea of all: People – whether council member or citizen – should speak their mind, and mind their manners.

Untrustworthy Math? Jim Bacon, the fine writer of his Blog, “Bacon’s Rebellion,” this week wrote about the (see: “A Strike Force about as Effective as the Iraqi Army”) interparty feud from the Virginia gubernatorial election in 2013, when former Virginia Attorney General Ken Cuccinelli lost to now Gov. Terry McAuliffe by 56,000 votes in a gubernatorial race in which he was outspent by two to one, with Mr. Bacon asking: “Would $85,000 more in his campaign war chest have made a difference in the election?…Probably not — the number was a small fraction of the $21 million Cuccinelli spent — but it’s a point worth pondering, given news that the Conservative StrikeForce PAC has agreed to pay $85,000 and hand over fund-raising contact lists to Mr. Cuccinelli, according to the Washington Post.” He notes that Mr. Cuccinelli, in his suit, had accused the PAC of raising funds which were never delivered to his campaign, estimating that the group had succeeded in raising about $435,000 from emails using his name; thus, he alleged that he had received only $10,000. In fact, Mr. Bacon notes. between January 2013 and June 2014, according to Federal Election Commission records, Conservative StrikeForce raised more than $2.8 million overall, of which it paid only $82,000 toward candidates or campaign committees, unsurprisingly leading the former state Attorney General to note: “It’s just a thunderous precedent…to make it harder and more expensive to be deceitful and misleading with people in the political arena as far as donations go…In an already sour environment, people who think they’re supporting something they believe in are defrauded.” The Washington Post article provides no response from Arlington-based Conservative StrikeForce, its chairman, Dennis Whitfield, or its independent treasurer and outside consultant, Scott MacKenzie; but, as Mr. Bacon writes: “[A]n outside observer must wonder if this is a case of an opportunist mimicking the police and veteran fund-raising scams in a political context. In a similar case, the Post notes, a committee to recruit conservative physician Ben Carson to run in the 2016 presidential race spent $2.44 million to raise $2.4 million.” For his bottom line, Mr. Bacon writes that: “Maybe this was a case in which Conservative StrikeForce just wasn’t very effective at its job, which it defined on its website as raising small contributions for conservative candidates through mail, direct mail and telephone solicitations. Or maybe it was a cynical ploy for the organizers to pay themselves handsome salaries and perks. We don’t know. But, sad to say, in the wild, wild world of political financing, we’ll probably be reading about a lot more cases like this one.”

TIME TO STEP UP
Daily Press Editorial: Running for public office takes courage, confidence and the committed support of family and friends. The endeavor is not easy — walking through neighborhoods and knocking on doors takes plenty of time and effort — nor is it cheap, since campaign signs do not grow on trees. So as we head down the stretch toward Election Day, we extend our gratitude to those who volunteered for the experience and seek a place in local government. And we encourage other civic-minded citizens to lend their time and talent to the calling of public service, since our communities will surely benefit as a result.

Bill Bolling, former—and now convicted—Governor Bob McDonnell’s lieutenant governor, and current Co-Chair of the Governor’s ethics commission, writes on his Facebook page:
“The public’s trust is hard to gain and easy to lose.”

eBlog

March 24, 2015
Visit the project blog: The Municipal Sustainability Project

Getting Ready to Rumble. Today is likely to be D-Day for Atlantic City: emergency manager Kevin Lavin is expected to issue his report and recommendations with regard to whether he and Kevyn Orr will recommend to New Jersey Governor Chris Christie whether or not the city should file for federal chapter 9 municipal bankruptcy protection. A spokesperson for the New Jersey Department of Community Affairs said he thought it was unlikely the report would recommend a declaration of bankruptcy, noting: “It is my understanding that Kevin Lavin and Kevyn Orr were sent here to help [Mayor] Don Guardian restructure short-term and long-term debt so we can find a long-term solution and not a band-aid fix,” adding that he had spoken with Mr. Orr in recent days: “Obviously their goal is to restructure the debt, analyze the city’s ratable base, and ensure the city’s finances are stable without hitting hard-working families over the head with a tax increase or a municipal bankruptcy.”

York Distress. Pennsylvania Auditor General Eugene DePasquale yesterday, standing next to York Mayor Kim Bracey, warned that York, known as the White Rose City, will need to come up with $10 million by the end of this year to meet its minimum pension payment obligations. Like other Pennsylvania municipalities, the AG noted the city has fallen behind on its required annual payments: based upon its most recent audit, Mr. De Pasquale reports the municipality owes more than $4.13 million to its employee pension funds for missed payments for the last two years—and, another $5.7 million is due by the end of 2015―$3.4 million for the police fund, $1.5 million for the firefighter fund, and $757,667 for the non-uniform fund. Failure to make up the payments, the AG warned, could trigger withholding of state aid. Nevertheless, the Attorney General noted that, “[D]espite Mayor [Kim] Bracey’s best efforts, York simply does not have the money, and there is no realistic way the city will ever catch up without help.” Mayor Bracey asked for state help, stating: “The system is simply broken. Unfortunately, our situation in York is not unique.” She and the AG urged the legislature to act on a bill which would shift new state hires to a cash-balance hybrid pension plan, and require the calculation of pensions based on base pay and a small percent of overtime to curb the practice of “spiking,” or increasing final average salary with excessive overtime and unused sick or vacation days.

Municipalities in Crisis. In response to a request from House Judiciary Committee Ranking Member John Conyers (D-Mi.) of Detroit and Sen. Gary Peters (D.-Mi.), Rebecca O’Connor and Peter Del Toro of the U.S. Government Accountability Office submitted a report, http://www.gao.gov/products/GAO-15-222, Municipalities in Crisis, advising Congress that municipalities in fiscal crisis confront diminished abilities to manage federal grants because of: workforce reductions, decreased financial capacities, and outdated information technologies. The report was compiled after interviews with grant administrators at the federal, state, and local levels; local officials in Detroit, Flint, Camden, and Stockton, as well as academic researchers and practitioners (including this author) with expertise on the topics of local government administration, local fiscal distress, and Chapter 9 municipal bankruptcy. In the GAO report, the dynamic duo examined eight federal grant programs in housing, transportation, and public safety to better understand the repercussions of municipal fiscal distress on their ability to access and utilize such federal grants—finding, for instance, that in Detroit, Flint, and Stockton, downsizing directly affected staffing responsible for grant management and oversight―Detroit’s Planning and Development Department, which administers CDBG and HOME Investment Partnerships Program grants received by the city, lost more than one third of its workforce between 2009 and 2013, according to the report, undercutting the ability of the remaining staff to carry out all of the grant compliance and oversight tasks; similarly, staff attrition created by the respective municipal fiscal distress led to “grant management skills gaps” in the Detroit, Flint, and Stockton workforces: in Detroit and Stockton, turnover in senior and mid-level staff particularly created challenges―the skills shortages sometimes led to violations of grant agreements or unspent grant money in Detroit and Flint. In both cities, according to the report, decreased financial capacity undercut the municipalities’ abilities to apply for certain federal grants. To the extent there were lessons learned, the GAO noted that Flint, Stockton, and the Motor City have consolidated management processes—especially writing that under Kevyn Orr in Detroit, Mr. Orr had directed Detroit’s CFO to establish a central grant-management department. The GAO report also found that Detroit, Flint, and Camden have collaborated with local nonprofit organizations to apply for federal grants, helping them deal with limited staffing. The duo also examined eight federal grant programs: they reported these programs “used, or had recently implemented, a risk-based approach to grant monitoring and oversight.” When federal officials of such grant programs found deficiencies, they often required grantees to take corrective actions, but the municipalities did not always take these actions. The report also determined that a White House Working Group on Detroit and individual federal agencies had taken steps to improve collaboration with municipalities in fiscal crisis: “These actions included improving collaboration between selected municipalities and federal agencies, providing flexibilities to help grantees meet grant requirements, and offering direct technical assistance.” Nevertheless, the report notes that federal agencies have not formally documented and shared the lessons learned from the federal efforts to help Detroit, adding: “If these lessons are not captured in a timely manner, experiences from officials who have first-hand knowledge may be lost,” recommending that OMB mandate federal agencies involved in the Detroit working group to collect good practices and lessons learned and share them with other federal agencies and local governments.