State Oversight & Severe Municipal Distress

Share on Twitter

eBlog, 04/24/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: when and how will it emerge from state oversight? Then we spin the tables to see how Atlantic City is faring to see if it might be on the shores of fiscal recovery; before going back to Detroit to assess the math/fiscal challenges of the state created public school district; then, still in Detroit, we try to assess the status of a lingering issue from the city’s historic municipal bankruptcy: access to drinking water for its lowest income families; before visiting Hartford, to try to gauge how the fiscally stressed central city might fare with the Connecticut legislature. Finally, we revisit the small Virginia municipality of Petersburg to witness a very unique kind of municipal finance for a city so close to insolvency but in need of ensuring the provision of vital, lifesaving municipal services. 

Fiscal & Physical Municipal Balancing. Michigan Deputy Treasurer Eric Scorsone is predicting that by “early next year, Detroit will be out of state oversight,” at a time when the city “will be financially stable by all indications and have a significant surplus.” That track will sync with the city’s scheduled emergence from state oversight, albeit apprehension remains with regard to whether the city has budgeted adequately  to set funds aside to anticipate a balloon pension obligation due in 2024. Nevertheless, Mr. Scorsone has deemed the Motor City’s post-bankruptcy transformation “extraordinary,” describing its achievements in meeting its plan of debt adjustment—as well as complying with the Detroit Financial Review Commission—so well that the “city could basically operate on its own.” He noted that the progress has been sufficient to permit the Commission to be in a dormancy state—subject to any, unanticipated deficits emerging. The Deputy Treasurer credited the Motor City’s strong management team under CFO John Hill both for the city’s fiscal progress, but also for his role in keeping an open line of communication with the state oversight board; he also noted the key role of Mayor Mike Duggan’s leadership for improving basic services such as emergency response times and Detroit’s public infrastructure. Nevertheless, Detroit remains subject to the state board’s approval of any contracts, operating or capital budgets, as well as formal revenue estimates—a process which the Deputy Treasurer noted “allows the city to stay on a strong economic path…[t]hese are all critical tools,” he notes, valuable not just to Detroit, but also to other municipalities an counties to help ensure “long term stability.”

On the Shore of Fiscal Recovery. S&P Global Ratings, which last month upgraded Atlantic City’s general obligation bond rating two notches to CCC in the wake of the city’s settlement with the Borgata Casino, a settlement which yielded the city some $93 million in savings, has led to a Moody’s rating upgrade, with the credit rating agency writing that Atlantic City’s proposed FY2017 budget—one which proposes some $35.3 million in proposed cuts, is a step in the right direction for the state taken-over municipality, noting that the city’s fiscal plan incorporates a 14.6% cut in its operating budget—sufficient to save $8 million, via reductions in salaries and benefits for public safety employees, $6 million in debt service costs, and $3 million in administrative expenses. Nevertheless S&P credit analyst Timothy Little cautioned that pending litigation with regard to whether Atlantic City can make proposed police and firefighter cuts could be a fly in the ointment, writing: “In our view, the proposed budget takes significant measures to improve the city’s structural imbalance and may lead to further improved credit quality; however, risks to fiscal recovery remain from pending lawsuits against state action impeding labor contracts.” The city’s proposed $206.3 million budget, indeed, marks the city’s first since the state takeover placed it under the oversight of the New Jersey’s Local Finance Board, with the state preemption giving the Board the authority to alter outstanding debt, as well as municipal contracts. Mr. Little wrote that this year will mark the first fiscal year of the agreed-to payment-in-lieu-of-taxes (PILOT) program for casino gaming properties—a level set at $120 million annually over the next decade—out of which 10.4% will go to Atlantic County. Mr. Little also notes that the budget contains far less state financial support than in previous years, as the $30 million of casino redirected anticipated revenue received in 2015 and 2016 will be cut to $15 million; moreover, the budget includes no state transitional aid—denoting a change or drop of some $26.2 million; some of that, however, will be offset by a $15 million boost from an adjustment to the state Consolidated Municipal Property Tax Relief Act—or, as the analyst wrote: “Long-term fiscal recovery will depend on Atlantic City’s ability to continue to implement fiscal reforms, reduce reliance on nonrecurring revenues, and reduce its long-term liabilities.” Today, New Jersey state aid accounts for 34% of the city’s $206.3 million in budgeted revenue, 31% comes from casino PILOT payments, and 27% from tax revenues. S&P upgraded Atlantic City’s general obligation bond rating two notches to CCC in early March after the Borgata settlement yielded the city $93 million in savings. Moody’s rates Atlantic City debt at Caa3.

Schooled on Bankruptcy. While Detroit, as noted above, has scored high budget marks or grades with the state; the city’s school system remains physically and fiscally below grade. Now, according to the Michigan Department of Education, school officials plan to voluntarily shutter some of the 24 city schools—schools targeted for closure by the state last January, according to State Superintendent Brian Whiston, whose spokesperson, William DiSessa, at a State Board of Education meeting, said:  “Superintendent Whiston doesn’t know which schools, how many schools, or when they may close, but said that they are among the 38 schools threatened for closure by the State Reform Office earlier this year.” Mr. DiSessa added that “the decision to close any schools is the Detroit Public School Community District’s to make.” What that decision will be coming in the wake of the selection of Nikolai Vitti, who last week was selected to lead the Detroit Public Schools Community District. Mr. Vitti, 40, is currently Superintendent of the Duval County Public Schools in Jacksonville, Florida, the 20th largest district in the nation; in the wake of the Detroit board’s decision last week to enter into negotiations with Mr. Vitti for the superintendent’s job, Mr. Vitti described the offer as “humbling and an honor.” The school board also voted, if Mr.Vitti accepts the offer, to ask him to begin next week as a consultant, working with a transition team, before officially commencing on July 1st. The School Board’s decision, after a search began last January, marks the most important decision the board has made during its brief tenure, in the wake of its creation last year and election last November after the Michigan Legislature in June approved $617-million legislation which resolved the debt of Detroit Public Schools via creating the new district, and retaining the old district for the sole purpose if collecting taxes and paying off debt.

The twenty-four schools slated for closure emerged from a list of 38 the State of Michigan had targeted last January—all from schools which have performed in the bottom 5 percent of the state for at least three consecutive years, according to the education department. The Motor City had hoped to avoid any such forced state closures—hoping against hope that by entering last month into partnership negotiations with the Michigan State Superintendent’s office, and working with Eastern Michigan University, the University of Michigan, Michigan State University, and Wayne State University, the four institutions would help set “high but attainable” goals at the 24 Detroit schools to improve academic achievement and decrease chronic absenteeism and teacher vacancies. The idea was that those goals would be evaluated after 18 months and again in 36 months, according to state officials. David Hecker, president of the American Federation of Teachers Michigan, noted that he was not aware which schools might be closing or how many; however, he noted that whatever happens to the teachers of the closing schools would be subject to the collective bargaining agreement with the Detroit Federation of Teachers. “If any schools close, it would absolutely be a labor issue that would be governed by the collective bargaining agreement as to how that will work … (and) where they will go,” Mr. Hecker said. “We very strongly are opposed to any school closing for performance reasons.”

Thirsty. A difficult issue—among many—pressed upon now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 municipal bankruptcy came as the Detroit Water and Sewer Department began shutting off water service to some of nearly 18,000 residential customers with delinquent accounts. Slightly less than a year ago, in the wake of numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom, the issue was again raised: what authority did the city of Detroit have to cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Thus it was that Detroit’s Water and Sewerage Department began shutting off service to customers who had failed to pay their bills—with, at the time, DWSD guesstimating about 20,000 of its customers had defaulted on their payments, and noting that the process of shutting off service to customers with unpaid bills was designed to be equitable and not focused on any particular neighborhood or part of the city—and that the agency was not targeting customers who owed less than a $150 and were only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD was reminding its delinquent customers who were having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who were at 150 percent of the poverty level or below could receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. This week, DWSD is reporting it has resumed shutoffs in the wake of sending out notices, adding the department has payment and assistance plans to help those with delinquent accounts avoid losing service. Department Director Gary Brown told the Detroit Free Press that everyone “has a path to not have service interruption.” Indeed, it seems some progress has been achieved: the number of families facing shutoffs is down from 24,000 last April and about 40,000 in April of 2014, according to The Detroit News. In 2014, DWSD disconnected service to more than 30,000 customers due to unpaid bills, prompting protests over its actions. Nonetheless, DWSD began the controversial practice of shutting off water service again this week, this time to some of the nearly 18,000 residential customers with delinquent accounts, in the wake of notices sent out 10 days earlier, according to DWSD Director Gary Brown. Nevertheless, while 17,995 households are subject to having their water turned off, those residents who contact the water department prior to their scheduled shutoffs to make a payment or enter into an assistance plan will avoid being cut off—with experience indicating most do. And, the good gnus is that the number of delinquent accounts is trending down from the 24,302 facing a service interruption last April, according to DWSD. Moreover, this Solomon-like decision of when to shut off water service—since the issue was first so urgently pressed in the U.S. Bankruptcy Court before Judge Rhodes—has gained through experience. DWSD Director Brown reports that once residents are notified, about 90 percent are able to get into a plan and avoid being shut off, and adding that most accounts turned off are restored within 24 hours: “Every residential Detroit customer has a path not to be shut off by asking for assistance or being placed into a payment plan…I’m urging people not to wait until they get a door knocker to come in and ask for assistance to get in a payment plan.” A critical part of the change in how the city deals with shutoffs comes from Detroit’s launch two years ago of its Water Residential Assistance Program, or WRAP, a regional assistance fund created as a component of the Great Lakes Water Authority forged through Detroit’s chapter 9 municipal bankruptcy: a program designed to help qualifying customers in Wayne, Oakland, and Macomb counties who are at or below 150 percent of the federal poverty level—which equates to $36,450 for a family of four—by covering one-third of the cost of their average monthly bill and freezing overdue amounts. Since a year ago, nearly $5 million has been dedicated to the program—a program in which 5,766 Detroit households are enrolled, according to DWSD, with a retention rate for those enrolled in the program of 90 percent. DWSD spokesperson Bryan Peckinpaugh told the Detroit News the department is committed to helping every customer keep her or his water on and that DWSD provides at least three advance notifications encouraging those facing a service interruption to contact the department to make payment arrangements, adding that the outreach and assistance efforts have been successful, with the number of customers facing potential service interruption at less than half of what it was three years ago.

Fiscally Hard in Hartford. Hartford Mayor Luke Bronin has acknowledged his proposed $612.9 FY2018 budget includes a nearly $50 million gap—with proposed expenditures at $600 million, versus revenues of just over $45 million: a fiscal gap noted moodily by four-notch downgrades to the Connecticut city’s general obligation bonds last year from two credit rating agencies, which cited rising debt-service payments, higher required pension contributions, health-care cost inflation, costly legal judgments from years past, and unrealized concessions from most labor unions. Moody’s Investors Service in 2016 lowered Hartford GOs to a junk-level Ba2. S&P Global Ratings knocked the city to BBB from A-plus, keeping it two notches above speculative grade. Thus, Mayor Bronin, a former chief counsel to Gov. Daniel Malloy, has repeated his request for state fiscal assistance, noting: “The City of Hartford has less taxable property than our suburban neighbor, West Hartford. More than half of our property is non-taxable.” In his proposed “essential services only” budget, Mayor Bronin is asking the Court of Common Council to approve an increase of about $60 million, or 11%, over last year’s approved budget—with a deadline for action the end of next month. An increasing challenge is coming from the stressed city’s accumulating debt: approximately $14 million, or 23%, of that increase is due to debt-service payments, while $12 million is for union concessions which did not materialize, according to the Mayor’s office. Gov. Malloy’s proposed biennial budget, currently in debate by state lawmakers, proposes $35 million of aid to Hartford. Unsurprisingly, that level is proving a tough sell to many suburban and downstate legislators. On the other hand, the Mayor appears to be gaining some traction after, last year, gaining an agreement with the Hartford Fire Fighters Association that might save the city $4 million next year: the agreement included changes to pension contributions and benefits, active and retiree health care, and salary schedules. In addition, last month, Hartford’s largest private-sector employers—insurers Aetna Inc., Travelers Cos. and The Hartford—agreed to donate $10 million per year to the city over five years. Nonetheless, rating agencies Moody’s and S&P have criticized the city for limited operating flexibility, weak reserves, narrowing liquidity, and its rising costs of debt service and pension obligations. Gurtin Municipal Bond Management went so far as to deem the city a “slow-motion train wreck,” adding that while the quadruple-notch downgrades had a headline shock effect, the city’s fundamental credit deterioration had been slow and steady. “The price impact of negative headlines and credit rating downgrades can be swift and severe, which begs the question: How should municipal bond investors and their registered investment advisors react?” Gurtin’s Alex Etzkowitz noted, in a commentary. “The only foolproof solution is to avoid credit distress in the first place by leveraging independent credit research and in-depth, ongoing surveillance of municipal obligors.”

Fighting for a City’s Future. The small city of Petersburg. Virginia, is hardly new to the stress of battle. It was there that General Robert E. Lee’s men fought courageously throughout the Overland Campaign, even as Gen. Lee feared he confronted a campaign he feared could not be won, warning his troops—and politicians: “We must destroy this Army of Grant’s before he gets to the James River. If he gets there, it will become a siege, and then it will be a mere question of time.” Yet, even as he wrote, General Ulysses S. Grant’s Army of the Potomac was racing toward the James and Petersburg to wage an attack on the city—a highly industrialized city then of 18,000 people, with supplies arriving from all over the South via one of the five railroads or the various plank roads. Indeed, Petersburg was one of the last outposts: without it, Richmond, and possibly the entire Confederacy, was at risk. Today, the city, because of the city’s subpar credit rating, is at fiscal risk: it has been forced to beg its taxpayers to loan it funds for new emergency vehicles—officials are making a fiscal arrangement with private citizens to front the cost for new emergency vehicles, and offering to put up city hall as collateral for said arrangement, as an assurance to the lenders they will be paid back. The challenge: the police department currently needs 16 new vehicles, at a cost of $614,288; the fire department needs three new trucks, at a cost of $2,145,527. Or, as Interim City Manager Tom Tyrrell notes: “Every single day that a firefighter rolls out on a piece of equipment older than he is, or a police officer responds to an emergency call in a car with 160,000 miles on it, are days we want to avoid…We want to get this equipment as soon as possible.” Interim City Finance Director Nelsie Birch has included in the upcoming fiscal year budget the necessary funds to obtain the equipment—equipment Petersburg normally obtains via lease agreements with vendors, but which now, because of its inability to access municipal credit markets due to its “BB” credit rating with a negative outlook, makes it harder than ever to find any vendor—or, as Manager Tyrrell puts it: “We went out four different times…We solicited four different times to the market, and were unsuccessful in getting any parties to propose.” He added that when soliciting these types of agreements, you solicit “thousands of people.” Notwithstanding that the funds for the vehicles is already set aside in the upcoming budget, city officials have been unable to find anyone willing to enter into a lease agreement with the city because of the city’s financial woes.

Last week, the City Council authorized Mr. Tyrrell to “undertake emergency procurement action” in order for the lease of necessary fire and police vehicles, forcing Mr. Tyrrell and other officials to seek private funds to get the equipment—that is, asking individual citizens who have the financial means to put up money for the fire and police vehicles—or, as Mr. Tyrrell puts it: “We’ve reached out to four people, who are interested and capable,” noting they are property owners in Petersburg who will remain anonymous until the deal is closed, describing it thusly: “[This agreement] is outside the rules, because we couldn’t get a partner inside the rules.” Including in this proposed fiscal arrangement: officials must put up additional collateral, in addition to the cars themselves, and in the form of city-owned property—with the cornerstone of the proposal, as it were, being Petersburg City Hall, or, as Mr. Tyrrell notes: “What they’re looking for is some assurance that no matter what happens, we’re going to pay the note…It’s not a securitization in the financial sense, as much as it is in the emotional sense: they know that the city isn’t going to let it go.” He adds, the proposed financial arrangement will be evaluated in two areas: the interest rate and how fast the deal can close, adding: “Although it’s an emergency procurement, we still want to get the best deal we can.”

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

eBlog, 04/18/17

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

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

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

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

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

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

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

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

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

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

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

Fiscal & Public Service Insolvency

eBlog, 03/03/17

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

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

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

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

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

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

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

Mr. Pfeiffer then writes:

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

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

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

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

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

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

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

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

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

Post Chapter 9 Challenges

eBlog, 2/22/17

Good Morning! In this a.m.’s eBlog as we remember the first President of our country,  we consider the accomplishments and challenges ahead for the city recovering from the largest ever municipal bankruptcy; then we visit the historic Civil War city of Petersburg, Virginia—as it struggles on the edge of fiscal and physical insolvency; from thence, we roll the dice to witness a little fiscal Monopoly in the state-taken over City of Atlantic City, before finally succumbing to the Caribbean waters made turbulent by the governance challenges of a federal fiscal takeover of the U.S. territory of Puerto Rico, before considering whether to take a puff of forbidden weed as we assess the governing and fiscal challenges in San Bernardino—a city on the precipice of emerging from the longest municipal bankruptcy in American history.   

State of a Post Chapter 9 City. Pointing to FY2015 and 2016 balanced budgets, Detroit Mayor Mike Duggan, in his fourth State of the City address, pointed to the Motor City’s balanced budgets for FY2015 and 2016 and said the city’s budget will be balanced again at the close of this fiscal year in June—progress he cited which will help the city emerge from state get oversight and back to “self-determination” by 2018. Mayor Duggan cited as priorities: job training, affordable housing, and rebuilding neighborhoods, orating at the nonprofit human rights organization Focus: HOPE on Oakman Boulevard on the city’s northwest side, where residents and others for decades have received critical job training. Mayor Duggan was not just excited about what he called the transformation of city services and finances in a city that exited municipal bankruptcy three years ago, but rather “what comes next,” telling his audience: “We’ve improved the basic services, but if we’re going to fulfill a vision of building a Detroit that includes everybody, then we’ve got to do a whole lot more…You can’t have a recovery that includes everyone if there aren’t jobs available for everyone willing to work.” Ergo, to boost job opportunities, Mayor Duggan announced a new initiative, “Detroit at Work,” which he said would help connect the Motor City’s job seekers with employers, deeming it a portal which would provide a “clear path to jobs.” He also discussed his administration’s program to help city youth secure jobs and the Detroit Skilled Trades Employment Program, a recent partnership with local unions to increase Detroit membership and boost job opportunities.

With regard to neighborhoods, Mayor Duggan touted his Neighborhood Strategic Fund, his initiative to encourage neighborhood development, especially in wake of the exceptional success of Detroit’s new downtown: this fund allocates $30 million from philanthropic organizations toward development, commencing with the engagement of residents in the areas of Livernois/McNicols, West Village, and in southwest Detroit to create revitalized and walkable communities—under the city’s plan to align with the city’s vision for “20-minute neighborhoods” to provide nearby residents with close, walkable access to grocery stores and other amenities—or, as Mayor Duggan noted: “If we can prove that when you invest in these neighborhoods, the neighborhoods start to come back. The first $30 million will only be the beginning. I want everybody to watch…If we prove this works…then we go back for another $30 million and another $30 million as we move across the neighborhoods all through this city.”

In a related issue, the Mayor touted the return of the Department of Public Works’ Street Sweeping Unit, which is preparing to relaunch residential cleanings for the 2017 season, marking the first time in seven years for the program. On the affordable housing front, Mayor Duggan addressed affordable housing, saying that future projects will ensure such housing exists in all parts of the city, referencing a new ordinance, by Councilwoman Mary Sheffield, which seeks to guarantee that 20 percent of the units in new residential projects which receive financial support from the city will be affordable: “We are going to build a city where there is a mix of incomes in every corner and neighborhood and we’re going to be working hard.”

But in his address—no doubt with his re-election lurking somewhere behind his words, Mayor Duggan reflected not just on his successes, but also some missteps, including his administration’s massive federally funded demolition program, now the focus of a federal probe and state and city reviews: that initiative has been successful in the razing of nearly 11,000 abandoned homes since the spring of 2014, but has also triggered federal and state investigations over spiraling costs and bidding practices: an ongoing state review of the program’s billing practices turned up $7.3 million in what the State of Michigan deems “inappropriate” or “inaccurate” costs: the vast majority in connection with a controversial set-price bid pilot in 2014 designed to quickly bring down big bundles of houses—an initiative over which Mayor Duggan has so far rejected the state’s assertion that about $6 million tied to costs of the pilot were inappropriate. Thus, yesterday, he conceded that the federal government’s decision to suspend the demolition program for 60 days beginning last August had been warranted, but noted the city has since overhauled procedures and made improvements to get the program back on track, so that, he said, he is confident the city will raze an additional 10,000 homes in the next two years.

For new initiatives, Mayor Duggan said the Detroit Police Department will hire new officers, and invest in equipment and technology, and he announced the launch of Detroit Health Department’s Sister Friends program, a volunteer program to provide support to pregnant women and their families. On the school front, the Mayor noted what he deemed a “complete alliance” between his office and the new Detroit Public Schools Community District school board, saying the city has joined the Board in its attempt to convince the state’s School Reform Office not to close low-performing schools. (As many as 24 of 119 city schools could potentially be shuttered as soon as this summer.) In a hint of the state-local challenge to come, Mayor Duggan said: “The new school board hasn’t had an opportunity to address the problem…We have 110,000 schoolchildren in this city, which means we need 110,000 seats in quality schools. Closing a school doesn’t add a quality seat. All it does is bounce our children around from place to place. Before you close a school, you need to make sure there’s a better alternative.”

Fiscal & Physical Repair. In a surprising turn of events in Virginia, the Petersburg City Council accepted a motion by Councilman Charlie Cuthbert to postpone the vote on moving forward with the bids for Petersburg’s aging water system, after the Council had been scheduled to vote on whether to move forward with the bids the city had received from Aqua Virginia and Virginia American Water Company to purchase the nearly insolvent city’s water and wastewater system. While the vote, by itself, would not have authorized such a sale, it would have paved the way for formal consideration of such proposals. Under his motion, Councilman Cuthbert outlined a plan to delay the vote, so the Council and the City would have more time to consider options, in part through the formation of a seven person committee, which would be separate from the one the Robert Bobb Group, which is currently overseeing the city in place of the Mayor and Council, has been proposing. Mayhap unsurprisingly, citizens’ reactions to a potential sale has been negative; thus there was approbation when Councilmember Cuthbert’s motion passed—even as it appears many citizen/tax/ratepayers appeared to be hoping for the bids to be scrapped entirely: many had spoken in strong opposition, and there were numerous signs held up in chambers for the Mayor and Council to read: “Listen to us for once, do not sell our water,” or, as one citizen told the elected officials: “We have a choice to make: to make the easy, wrong decision, or the hard, right decision,” as he addressed the Council. The city’s residents and taxpayers appear to want other options to be explored, with many citing reports of Aqua Virginia having trouble with the localities with which it holds contracts.

On the fiscal front, many citizens expressed apprehension that any short-term profit the city would realize by selling its system would be paid back by the citizens in the form of rate-hikes by Aqua Virginia or Virginia American, or as one constituent said: “Never have I seen private industry interested in what the citizens want…They’re going to come in here and raise the rates.” Interim City Manager Tom Tyrell had begun the meeting by giving a presentation outlining the problems with the system. Due to past mismanagement and a lack of investment over decades, the Petersburg water system is in urgent need of upgrades. Tyrell outlined certain deficiencies, such as water pumps that need replacing, and pipes nearly blocked by sediment build up. The water quality has never come into question, but Mr. Tyrell said that the system is very close to needing a complete overhaul: the projected cost needed to get the system completely up to standard is about $97 million. Mr. Tyrell stressed that water rates will need to increase whether or not the city sells the system, going over Petersburg’s water rates, which have been relatively low for many years, ranking near the lowest amongst municipalities across the Commonwealth of Virginia. Even if the rates were to double, he told citizens, the rates still would still not be in the top 15 amongst Virginia localities. The Council had received two unsolicited bids for the system in December, one from Aqua Virginia, a second from the Virginia American Water Company. The Robert Bobb Group recommended to the Council that it move forward to examine the detailed proposals in order to “keep all options open.” The cost of moving forward with the proposals will cost approximately $100,000, which includes the cost of examining each proposal. Thus, the Robert Bobb Group recommended that the Council put together a citizens’ advisory group as an outside adviser group. The council gave no timetable on when they will officially vote to see if the bids will go forward. The people who will make up the seven person committee were not established.

Monopoly Sale. Atlantic City has sold two of its Boardwalk properties and several lots along the Inlet for nearly $6 million, closing on three properties at the end of last week, according to city officials—meaning that a Philadelphia-based developer has gained control of five waterfront properties since 2015. His purchases, he said, reflect his belief in Atlantic City’s revival. Mayor Don Guardian reported the city had received wire transfers for the former Boardwalk volleyball court on New Jersey Avenue ($3.8 million), Garden Pier ($1.5 million) and 12 lots bordered by the Absecon Inlet, Oriental Avenue and Dewey Place ($660,000), according to Atlantic City Planning and Development Director Elizabeth Terenik, all part of a way to raise money for the insolvent municipality – and to spur redevelopment, or, as Ms. Terenik noted: “The effort was part of the Guardian administration’s initiative to leverage underutilized or surplus public lands for economic development and jobs, and to increase the ratable base.” How the new owner intends to develop the properties or use them, however, is unclear—as is the confusing governance issue in a city under state control. The Inlet lots were sold in a city land auction last summer, purchased through an entity called A.C. Main Street Renaissance, according to city officials: the Atlantic City Council approved the auction and voted to name the purchaser, conditional redeveloper of Garden Pier and the volleyball court last year. Unsurprisingly, Council President Marty Small deemed the sales as great news for the city, saying they would bring revenue, jobs, and “new partners to the Inlet area…This instills investor confidence…It lets me know that we made the right decision by going out to auction for land and getting much-needed revenue for the city.”

Paying the Piper. Atlantic City has also announced its intention to issue $72 million in municipal bonds to pay for its tax settlement with the Borgata casino, securing the funds to cover its property tax refunds by borrowing though New Jersey’s Municipal Qualified Bond Act (MQBA), according to Lisa Ryan, a spokeswoman for the New Jersey Department of Community Affairs, which is overseeing the state takeover which took effect last November, with her announcement coming just a week after the state announced it had struck a deal for Atlantic City to pay less than half of the $165 million it owes the Borgata in tax appeals from 2009 to 2015, or, as Ms. Ryan noted: “Qualified bonds will be issued in one or more tranches to achieve the settlement amount…The parties are confident in the City’s ability to access the capital market and raise the necessary amount needed to cover the financing,” albeit adding that the city’s borrowing costs would not be known until the sale. (The Garden State’s MQBA is a state intercept program which diverts a municipality’s qualified state aid to a trustee for debt service payments.) Prior to the New Jersey’s state takeover of Atlantic City, city officials had proposed paying $103 million for a Borgata settlement through MQBA bonding as part of a five-year rescue plan—a plan which the state’s Department of Community Affairs had rejected.

As the state taken over city struggles to adjust, Mayor Don Guardian, in a statement, noted: “I’m glad the state is seeing the wisdom in what we proposed in our fiscal plan back in November…I applaud them for getting the actual amount due upfront lower, even though they have had over two years to do it. It remains to be seen how the other $30 million will be taken care of, but the quicker we can get this issue off the table, the quicker we can move forward tackling the remaining legacy debt.” Atlantic City last utilized New Jersey’s state credit enhancement program in May of 2015 to pay off an emergency $40 million loan and retire $12 million of maturing bond anticipation notes, paying a substantial fiscal penalty for a $41 million taxable full faith and credit general obligation municipal bond sale to address its loan payment with Bank of America Merrill Lynch pricing the bonds to yield at 7.25% in 2028 and 7.75% in 2045. Today, the city, under state control, is seeking to recover from five casino closures since 2014, closures which have bequeathed it with $224 million in outstanding municipal bond debt—debt sufficient according to Moody’s to have saddled the city with some $36.8 million in debt service last year.

Grass Fire? Two separate groups have now filed lawsuits challenging San Bernardino’s Measure O, the initiative citizens approved last November to allow marijuana dispensaries in the city—a measure yet to be implemented by the city—and one which now, according to City Attorney Gary Saenz, will almost surely be further delayed because of the suit. Should Measure O be struck down, the related, quasi-backup Measure N, a second marijuana initiative San Bernardino voters approved last November, but which received fewer votes, would pop up, as it were. The twin suits, one filed by a group of marijuana-related entities, the second by interested property owners in San Bernardino, challenge Measure O on multiple grounds, including the measure’s language determining where dispensaries may operate in the city. One suit charges: “The overlay zones together with the parcel numbers and the location criteria limit the locations within the City of San Bernardino where marijuana businesses may be permitted to only approximately 3 to 5 parcels of land within the entire city, and all of these parcels of land are either owned or controlled by the proponents of Measure O…The locations of these 3 to 5 parcels of land, furthermore, are incompatible for a medical marijuana business by virtue of the locations and surrounding land uses and for this reason are in conflict with the City of San Bernardino General Plan.” Unsurprisingly, Roger Jon Diamond, the attorney for the proponents of Measure O, disputes that number and predicts the challenge will fail, noting that thirteen marijuana dispensaries and related groups that describe themselves as non-profits are operating in San Bernardino or which have invested substantial sums of money in plans to operate in San Bernardino. The soon to be out of chapter 9 municipal bankruptcy city, prior to citizen adoption of Measure O, means, according to Counselor Diamond, that the dispensaries have been operating illegally, or as he put it: “There’s a concept in the law called clean hands: If you don’t have clean hands, you can’t maintain a lawsuit…Here we have people who don’t qualify (to operate a dispensary in their current location), complaining that they would not become legal under the new law. It sounds like sour grapes.”

The second, related suit, filed earlier this month, calculates a somewhat higher (not a pun) number of eligible locations—between three to twelve, but makes the same observation regarding physical location: “We think there is a financial interest in the people who wrote it up,” said Stephen Levine of Milligan, Beswick Levine & Knox: “We don’t think that is fair, because it was so narrowly constricted. Zoning by parcel numbers is a highly unusual practice in California. Let’s include Colorado and Washington State in there, too; they don’t use parcel numbers for this.” (Measure O restricts marijuana businesses to marijuana business overlay districts, which are identified by parcel number, and further prohibits the businesses from being within 600 feet of schools or residentially zoned property.) In this case, Mr. Levine is representing a consortium of property owners calling themselves AMF as well as Wendy McCammack, a business owner and former San Bernardino Councilmember. According to Mr. Levine, the plaintiffs’ interest is in possible changes in assessed property values due to the location of the dispensaries.

Getting High on the City Agenda. The City Council last week, in a closed session, discussed the lawsuit in closed session; however, City Attorney Saenz reported he was unaware aware of the lawsuit and had yet to decide upon a response to either, noting: “We haven’t totally assessed the merits of the lawsuit, nor how we’ll respond.” Nevertheless, the lawsuits’ arguments appear likely to interfere with the city’s process of incorporating Measure O into the development code and beginning to issue permits, or, as Mr. Saenz notes: “It (the AMF lawsuit) very much calls into question the validity of Measure O…Being a city of very limited resources, we don’t want to expend resources on an implementation that’s never going to occur. That would be a waste of resources.” The suits will also complicate governance: last month the city, on its website, and in a letter to interested parties, said it would provide an update in March on when the marijuana measure would be implemented: “City departments are in the process of integrating the provisions of Measure O into the City’s existing Development Code, developing procedures for receiving applications, and identifying provisions that may require interpretation and clarification prior to implementation…The San Bernardino Development Code and Measure O are both complex legal regulatory frameworks and it will require time to properly implement this new law.”

Governance & Challenges. Puerto Rico Gov. Ricardo Rosselló has arrived in Washington, D.C., where he will meet with his colleagues at the National Governors Association and join them at the White House tomorrow; he will also dine with Vice President Mike Pence this week. Last week, in Puerto Rico, he had hosted Chairman Sean Duffy (R-Wisc.), of the House Financial Services Subcommittee on Housing & Insurance, and an author of the Puerto Rico Oversight, Management and Economic Stability Act – in San Juan.  Chairman Duffy told the Governor he is available to amend PROMESA to ensure that the PROMESA oversight board treats Puerto Rico fairly, according to an office press statement. The lunch this week might occasion an interesting discussion in the wake of the Governor’s claim that the PROMESA Oversight Board’s plans for austerity may violate federal law: the Governor’s Chief of Staff, William Villafañe, this week stated: “The Fiscal Supervision Board officials cannot act outside of the law that created the body. If the board were to force the implementation of a fiscal plan that affects people’s essential services, it would be acting contrary to the PROMESA law.” His complaints appear to signify an escalation of tensions between the U.S. territory and the PROMESA Board: Mr. Villafañe added: “The [PROMESA] board is warned that it must act in conformance with the law…The commitment of Governor Ricardo Rosselló is to achieve economies that allow government efficiency, doing more with fewer expenses, without affecting essential services to the people and without laying off public employees.” If anything, Mr. Villafañe added fuel to his fire by criticizing the Board’s new interim executive director, Ramón Ruiz Comas, in the wake of Mr. Ruiz’ radio statement this week that if Gov. Rosselló did not present an acceptable fiscal plan by the end of February, the PROMESA Board would provide its own—and the plan would be deemed the legally, binding plan—in reaction to which, Mr. Villafañe had responded: “To make expressions prejudging a fiscal plan proposal that the board has not yet seen demonstrates on the part of the board improvisation and lack of a collaborative attitude for the benefit of the Puerto Rican people,” adding that “The board must be aware that the federal Congress will supervise the board.” He went on to say that when the Governor presents a fiscal plan, Congress will be aware of the way the board evaluates it.

Mr. Villafañe’s complaints and warnings extend tensions between the board and the U.S. territory: even before the Governor took office in January, a Rosselló official complained that the board was seeking a $2 billion cut in spending. On Feb. 13 the governor rejected the board’s claimed right to review bills before they are submitted to the Puerto Rico legislature. On Jan. 18 the board sent a letter to Gov. Rosselló stating that spending cuts and/or tax raises equaling 44% of the general fund would have to be made in the next 18 months. At its Jan. 28 meeting, board chairman José Carrion, for emphasis, said twice that some governor-proposed changes to the board’s Jan. 18 proposals may be OK, “as long as the ultimate fiscal plan is based on solid savings and revenue projections, a once and done approach, and not simply on hope or predictions that various changes will generate more revenues in the future.”

The Fiscal, Balancing Challenges of Federalism

eBlog, 2/16/17

Good Morning! In this a.m.’s eBlog, we consider the fiscal, balancing challenges of federalism, as Connecticut Governor Daniel Malloy’s proposed budget goes to the state legislature; then we return to the small municipality of Petersburg, Virginia—the insolvent city which now confronts not just fiscal issues, but, increasingly, trust issues—including how an insolvent city should bear the costs of litigation against its current and former mayor—including their respective ethical governing responsibilities. Finally, we seek the warming waters of the Caribbean to witness a fiscal electrical storm—all while wishing readers to think about the President who would never tell a lie…

The Challenge of Revenue Sharing—or Passing the Buck? S&P Global Ratings yesterday warned that Connecticut Governor Daniel Malloy’s proposed budget could negatively affect smaller towns while benefiting the cities, noting that from a municipal credit perspective, “S&P Global Ratings believes that communities lacking the reserves or budgetary flexibility to cushion outsized budget gaps will feel the greatest effects of the proposed budget.” S&P, as an example, cited Groton, a town of under 30,000, which has an AA+ credit rating, which could find its $12.1 million reserve balance depleted by a proposed $8.2 million reduction in state aid and a $3.9 million increase to its public pension obligations. Meanwhile, state capitol Hartford, once the richest city in the United States, today is one of the poorest cities in the nation with 3 out of every 10 families living below the poverty line—which is to write that 83% of Hartford’s jobs are filled by commuters from neighboring towns who earn over $80,000, while 75% of Hartford residents who commute to work in other towns earn just $40,000. Thus, under Gov. Rowland’s proposed budget, Hartford would receive sufficient state aid under the Governor’s proposal to likely erase its projected FY2018 nearly $41 million fiscal year 2018 budget gap, according to S&P, leading the rating agency to find that shifting of costs from the state to municipal governments would be a credit positive for Connecticut, but credit negative for many of the affected towns: “Those [municipal] governments lacking the budgetary flexibility to make revenue and expenditure adjustments will be the most vulnerable to immediate downgrades.” With the Connecticut legislature expected to act by the end of April, S&P noted that the state itself—caught between fixed costs and declining revenues, will confront both Gov. Malloy and the legislature with hard choices, or, as S&P analyst David Hitchcock put it: “Bringing the [budget] into balance will involve painful adjustments,” especially as the state is seeking to close a projected $1.7 billion annual deficit. Thus, S&P calculated that general fund debt service, pension, and other OPEB payments will amount to just under 30 percent of revised forecast revenues plus proposed revenue enhancements for FY2018, assuming the legislature agrees to Gov. Malloy’s plan to “share” some one-third, or about $408 million of annual employer teacher pension contributions with cities and towns, effectively reducing state contributions.

As Mr. Hitchcock penned: “Rising state pension and other post-employment benefit payments are colliding with weak revenue growth because of poor economic performance in the state’s financial sector…Although other states are also reporting weak revenue growth and rising pension costs, Connecticut remains especially vulnerable to an unexpected economic downturn due to its particularly volatile revenue structure.” Unsurprisingly, especially given the perfect party split in the state Senate and near balance in the House, acting on the budget promises a heavy lift to confront accumulated debt: Deputy Senate Republican Majority Leader Scott Frantz (R-Greenwich) said the state’s—whose state motto is Qui transtulit sustinet (He who transplanted sustains)—financial struggles have been predictable for more than a decade, “with a completely unsustainable rate of growth in spending on structural costs and far too much borrowing that further adds to the state’s fixed costs, especially as interest rates rise….” adding: “The proposed budget is an admission that the state can no longer afford to pay for many of its obligations and will rely on the municipalities to pick up the slack, which means that local property tax rates will rise.” The Governor’s proposals to modify the state’s school-aid formula could, according to Mr. Hitchcock, be a means by which Connecticut could comply with state Superior Court Judge Thomas Moukawsher’s order for the state to revise its revenue sharing formula to better assist its poorest municipalities: “It could benefit poor cities at the expense of the rich and lower overall local aid;” however, he added that “[c]ombined with other local aid cuts, municipalities’ credit quality could be subject to greater uncertainty.” With regard to Governor Malloy’s proposed pension obligation “sharing,” our esteemed colleagues at Municipal Market Analytics described the shift in teacher pension costs to be “a more positive credit development for the state,” notwithstanding what MMA described as “quite high” challenges. Under the proposal, the municipalities of Hartford and Waterbury would receive about $40 million apiece in incremental aid, while 145 municipalities would lose aid after the netting of pension costs. Several middle-class towns, according to MMA’s analysis, could realize reductions in pension aid of more than $10 million—some of which might be offset by the Governor’s proposal to permit towns to begin assessing property taxes on hospitals, which in turn would be eligible for some state reimbursement.

Hear Ye—or Hear Ye Not. Petersburg residents who say their elected leaders are to blame for the historic city’s fiscal challenges and insolvency yesterday withdrew their efforts to oust Mayor Samuel Parham and Councilman W. Howard Myers (and former mayor) from office in court over procedural issues, notwithstanding that good-government advocates had collected the requisite number of signatures to lodge their complaints against the duo. An attorney representing the pair testified before Petersburg Circuit Court Judge Joseph Teefey that the cover letters accompanying those petitions were drafted after the signatures were gathered. Thus, according to the attorney, even if the petition signers knew why they were endorsing efforts to unseat the elected officials, they were not aware of the specific reasoning later presented to the court.

Not unsurprisingly, Barb Rudolph, a citizen activist who had helped spearhead the attempt, said she felt discouraged but not defeated, noting: “We began collecting these signatures last March, and in all that time we’ve been trying to learn about this process…We will take the information we have learned today and use that to increase our chances of success moving forward.” The petition cited “neglect of duty, misuse of office, or incompetence in the performance of duties,” charging the two elected officials for failing to heed warnings of Petersburg’s impending fiscal insolvency; they alleged ethical breaches and violations of open government law.

But now a different fiscal and ethical challenge for the insolvent municipality ensues: who will foot the tab? Last week the Council had voted to suspend its own rules, so that members could consider whether Petersburg’s taxpayers should pick up the cost of the litigation, with the Council voting 5-2 to have the city’s taxpayers foot the tab for Sands Anderson lawyer James E. Cornwell Jr., who had previously, successfully defended elected officials against similar suits. Unsurprisingly, the current and former Mayor—with neither offering to recuse himself—voted in favor of the measure. Even that vote, it appears, was only taken in the wake of a residents’ questions about whether Council had voted to approve hiring a lawyer for the case.

A Day Late & a Dollar Short? Mayor Parham and Councilmember Myers signed a written statement acknowledging their interest in the vote with the city clerk’s office the following day. The Mayor in a subsequent interview, claimed that the attorney hired by the city told him after that vote that the action was legal and supported by an opinion issued by the Virginia Attorney General’s Office, noting: “Who would want to run for elected office if they knew they could bear the full cost of going to court over actions they took?” To date, the two elected officials have not disclosed the contract or specific terms within it detailing what the pair’s litigation has cost the city budget and the city’s taxpayers. Nor has there been a full disclosure in response to Petersburg Commonwealth’s Attorney Cassandra Conover’s determination last week with regard to whether the Mayor and former Mayor’s votes to have Petersburg’s taxpayers cover their legal fees presented a conflict of interest.

Electric Storm in Puerto Rico. Yesterday, Puerto Rico Governor Ricardo Rosselló stated that the reorganization of the Puerto Rico Electric Power Authority (PREPA) Governing Board’s composition and member benefits will not affect the fiscal recovery process that is currently underway, noting: “I remind you that we announced a week or week and a half ago that we had reached an agreement with the bondholders to extend and reevaluate the Restructuring Support Agreement (RSA) terms. Everything is on the table,” referring to the extension for which he had secured municipal bondholders’ approval—until March 31. His statement came in the wake of the Puerto Rican House of Representatives Monday voting to approve a bill altering the Board’s composition and member benefits—despite PREPA Executive Director Javier Quintana’s warning that the governance model should remain unaltered, since its structure was designed to comply with their creditors’ demands. However, Gov. Rosselló argued that, according to PROMESA, the Governor of Puerto Rico and his administration are the ones responsible for executing plans and public policies: “Therefore, the Governor and the Executive branch should feel confident that the Board and the executive directors will in fact execute our administration’s strategies and public policies. We believe we should have the power to appoint people who will carry out the changes proposed by this administration.” The Governor emphasized: “We have taken steps to have a Board that responds not to the Governor or partisan interests, but to the strategy outlined by this administration, which was validated by the Puerto Rican people.”

Indeed, at the beginning of the week, the Puerto Rican government had approved what will be the Board’s new composition, which would include the executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA), the Secretary of the Department of Economic Development and Commerce, and the executive director of the Public-Private Partnerships Authority among its members: “We campaigned with a platform, the people of Puerto Rico validated it, and the Oversight Board expects all of these entities to respond to what will be a larger plan,” he insisted. Gov. Rosselló added that adjustments are essential, due to the Government’s current fiscal situation, specifically referring to the compensation paid to the members of the Board, which can reach $60,000. If this measure becomes law, the compensation would be limited to an allowance of no more than $200 per day for regular or special sessions. (The measure, pending the Senate’s approval, would establish that no member may receive more than $30,000 per year in diet allowances.) Currently, the Governing Board’s annual expenses—including salaries and other benefits—are approximately $995,000 per year. Meanwhile, PREPA has a debt of almost $9 billion, including a $700-million credit line to purchase fuel and no access to the capital markets.

Lone Star Blues

Share on Twitter

eBlog, 2/16/17

Good Morning! In this a.m.’s eBlog, we consider the dwindling timeline confronting the city of Dallas to take action to avert a potential municipal bankruptcy; then we return to the small municipality of Petersburg, Virginia—an insolvent city with what appears to be an increasingly insolvent governing model, enmeshing the small city in litigation it can ill afford. Finally, we return to the trying governing and fiscal challenges in the U.S. territory of Puerto Rico—caught between changing administrations, a federal oversight board, a disparate Medicaid regime than for other states and counties, and trying to adjust to a new Administration and Congress.

Dallas, Humpty-Dumpty, & Chapter 9? In a state where, as one state and local government expert yesterday described it, that state has created a governance structure which allows everyone to avoid accountability, the City of Dallas is confronting a public pension problem that could force the city into municipal bankruptcy [Texas Local Government Code §101.006—seven Texas towns and cities have filed for such protection.]. Should the city lose its current case against its firefighters—a case with some $4 billion at stake—municipal bankruptcy could ensue. Another Texan, noting the challenge of putting “Humpty Dumpty back together again,” said failure of the city to emulate Houston and come to terms with its employees, retirees, and taxpayers would be “cataclysmic.” With about two weeks remaining to file bills in the Longhorn legislature and negotiations over the city’s mismanaged and underfunded police and fire pension at a standstill, state lawmakers note they will likely be forced to step into the crisis, if the city is to avoid chapter 9 municipal bankruptcy—or, as Rep. Jason Villalba (R-Dallas) noted: “I think we’re forced to step in. We’re [17] days away from the deadline, and there is yet to be an agreement between the city and the pension board…I think at this point we have to have a summit or some form of intervention, get everyone to the table and hammer those final issues down. If they don’t do that, it’s going to be a plan that’s drawn by the legislators, and we don’t have a stake interest like the other groups do to understand the nuances.” His statement came in the wake of a stoppage in negotiations over the last couple weeks—negotiations originally set up by the state, and negotiations with a short fuse: the last chance for the Texas Legislature to file bills to address the issue is looming: March 1st.

The severity of the crisis could be partially alleviated by a settlement reached late yesterday by the failing Dallas Police and Fire Pension System in its litigation against its former real estate advisers, whom pension officials had accused of leading the retirement fund astray. CDK Realty Advisors and the Dallas pension system both agreed to drop all claims and counterclaims with prejudice, according to court records filed late yesterday—and came as the city’s pension system and its attorneys have also been battling litigation from four City Council members, Mayor Mike Rawlings, a former contract auditor, and active and retired police and firefighters. The stakes are the city’s fiscal future: its retirement fund is now set to become insolvent within the next decade because of major losses and overvaluations—mostly from real estate—and generous benefits guaranteed by the system. Advising me that the “stigma or consequences for a city with the pride and stature of Dallas to fail would be cataclysmic,” one of the nation’s most insightful state and local pension wizards described the city’s pension challenge as “about as bad as any I have ever seen.”  

Hear Ye—or Hear Ye Not. A hearing for the civil case brought against Petersburg Mayor Samuel Parham and Councilman and former Mayor W. Howard Myers is set for this morning: Both men are defendants in a civil court case brought about by members of registered voters from the fifth and third wards of Petersburg: members of the third and fifth wards signed petitions to have both men removed from their positions. The civil case calls for both Parham and Myers to be removed from office due to “neglect, misuse of office, and incompetence in the performance of their duties.” The purpose of hearing is to determine a trial date, to hear any motions, to determine whether Messieurs Parham and Myers will be tried separately, and if they want to be tried by judge or jury. James E. Cornwell of Sands Anderson Law Firm will be representing Myers and Parham. The City Council voted 5-2 on Tuesday night to have the representation of Mr. Myers and Mayor Parham be paid for by the city. Mayor Parham, Vice Mayor Joe Hart, Councilman Charlie Cuthbert, former Mayor Myers, and Councilman Darrin Hill all voted yes to the proposition, while Councilwoman Treska Wilson-Smith and Councilwoman Annette Smith-Lee voted no. Mayor Parham and Councilmember Hill stated that the Council’s decision to pay for the representation was necessary to “protect the integrity of the Council,” noting: “It may not be a popular decision, but it’s [Myers and Parham] today, and it could be another council tomorrow.” Messieurs Hill and Parham argued that the recall petition could happen to any member of council: “[The petitions] are a total attack on our current leadership…We expect to get the truth told and these accusations against us laid to rest.” The legal confrontation is further muddied by City Attorney Joseph Preston’s inability to represent the current and former Mayors, because he was also named in the recall petition, and could be called as a witness during a trial.

Municipal Governance Bankruptcy? Virginia Commonwealth’s Attorney Cassandra Conover has felt forced to write a complaint, suggesting a conflict of interest in the virtually insolvent municipality of Petersburg, Virginia, in the wake of a city council vote to have the city pay for the legal expenses of Mayor Samuel Parham and Councilman Howard Myers. Ms. Conover, in an advisory opinion, described the vote to approve those expenses as a conflict of interest for the current and former mayors: “It is my advisory opinion that the undeclared conflict of interest disqualified both councilmen from voting on this motion and renders the vote invalid.” (The vote in question, as we have previously noted, was to hire a private attorney to represent Mayor Sam Parham and Councilman Howard Myers after more than 400 neighbors signed a petition to oust two Councilmembers from office.) Ms. Conover cited Virginia Code §2.2-3112, which says an employee of a state or local government entity “shall disqualify himself from participating in the transaction where the transaction involves a property or business or governmental agency in which he has a personal interest,” noting that Code §2.2-3115(F) mandates that in such a situation, there must be oral or written statements that show the transaction involved; the nature of the employee’s personal interest: that he (or she) is a member of a business, profession, occupation or group of members which are affected by the transaction: and that he is able to participate fairly, objectively and in the public interest. In this case, Ms. Conover stated that there was “no evidence that all four of these requirements were met in this case: concluding that the undeclared conflict of interest disqualified both men from voting and renders the vote invalid. 

The governance issue was not just the concept of an insolvent city’s Council voting to use public municipal funds to hire the private attorney, but also that neither Mayor Parham, nor Councilmember Myers recused himself from voting. Nevertheless, Petersburg City Attorney Joseph Preston responded that there was no conflict of interest and that the pair of elected officials had acted legally. Mayor Parham said the city likely will pay the bill for the personal attorney he and Councilmember Myers retained, albeit noting: “We’ve had to make cuts to schools and public safety, and we’re just starting to get back on our feet. It is a shame that we have to pump funds into something like this.” City Attorney Preston noted that Ms. Conover’s advisory opinion “adequately represents what occurred at their council meeting,” but he said he believes the pair of elected officials were legally allowed to take part in the vote, citing Virginia Code §2.2-3112 which provides that persons who have a conflict of interest can submit a disclosure statement on the issue—filings which the two elected officials filed with the Clerk of Court’s office the day after the vote. In addition, City Attorney Preston cited a decision from the Virginia Attorney General’s Office from 2009 which had ruled in favor of the Gloucester County Board of Supervisors, who were seeking compensation for their legal expenses; Ms. Conover, however, responded that the Attorney General’s 2009 decision did not apply to this case, because the charges against the Gloucester Board of Supervisors had been dismissed, and the court ordered the locality to pay for the majority of the legal fees which the board members had accrued, adding that the insolvent city had offered no estimate with regard to how much their legal fees could be. Notwithstanding the Commonwealth Attorney’s opinion, it appears unlikely that the Council will vote on the issue again: Mayor Parham yesterday noted: “I don’t feel like there was any conflict, and we did as we were advised by our attorney…We’ve had to make cuts to schools and public safety, and we’re just starting to get back on our feet. It is a shame that we have to pump funds into something like this.”  

Federalism, Governance, & Hegemony. With the enactment of the PROMESA legislation, Congress created governance and fiscal oversight responsibilities in the hands of seven non-elected officials to make critical fiscal reforms and restructuring of Puerto Rico—either through federal courts or via voluntary negotiations—for a debt that adds up to about $69 billion, but the new law also tasked a Congressional Task Force with analyzing initiatives which could help the island’s economy to grow; however, this bipartisan and bicameral committee ceased to exist upon submitting its report; ergo, unsurprisingly, both Governor Ricardo Rosselló and Jenniffer González, the new Resident Commissioner for Puerto Rico, have demanded that the PROMESA board members support their claims. But now a key area of concern has arisen: if the U.S. territory is unable to comply with the implementation of an information system which methodically integrates the management of important data for Medicaid claims—as mandated for federal eligibility as part of an integrated system to process claims and recover information, which is a Medicaid program requirement for federal fund eligibility which Puerto Rico should have long ago met, the island faces a more stark January 1 deadline by which it must comply with 60% of this system or be confronted with a fine of $147 million—a threat so dire that, according to the Health Secretary, Dr. Rafael Rodríguez Mercado, failing to comply with this requirement would mean the end of the Puerto Rico Government Health Plan. Puerto Rico is the only jurisdiction lacking such a platform, a platform intended to protect against medical fraud and establish eligibility, compliance, and service quality controls.

It was revealed in December, during the new government’s transition hearings for the Department of Health that the development of this platform began in 2011, but that it was not until 2014 that the project was resumed in its planning stage. The necessary funds to begin the implementation phase were finally matched during this fiscal year. The last administration predicted that the basic modules would begin working in a year and a half, and that the entire system would be operating in five years: it was expected that the window for the disbursement of Medicare and Medicaid funds would open in a year and a half. However, under threat of a fine, the government now expects to reach this goal before the date predicted by the last administration. Dr. Rodríguez Mercado stressed that there are currently 470,000 Puerto Ricans without health care insurance, many of whom cannot afford private insurance or are ineligible for the Government Health Plan, thus, many of these people seek out services in Centro Médico, an institution with a multi-million dollar deficit, when they become sick or are injured. Dr. Mercado further noted the disproportionate percentage of Medicare and Medicaid fraud cases, further undermining the territory’s credibility with the federal government—and, adding that local governments have complied  with the implementation of a Medicaid Fraud Control Unit (MFCU), which he says falls under the purview of the Department of Justice. Nevertheless, despite differing points of emphasis, both the leadership of the PROMESA Oversight Board and Resident Commissioner Jenifer González yesterday restated the importance of preventing Puerto Rico’s healthcare system from falling into a fiscal abyss, given the depletion of the $1.2 billion in Medicaid funds which has been provided on an annual basis under the Affordable Care Act.

Yesterday, in the wake of separate meetings with Commissioner González, with one of Speaker Paul Ryan’s advisors, and with Congresswoman Elise Stefanik (R-NY), PROMESA Oversight Board Chair José Carrión claimed that “we always try to include healthcare and economic development issues” in the meetings held in Congress, describing meetings in which he had been joined by Board member Carlos García and interim executive director, Ramón Ruiz Comas, as sessions to provide updates, while trying to deal with the issue which most concerns the Board: health care—emphasizing that especially in the wake of the end of the Congressional Task Force on Economic Growth in Puerto Rico.  

Federalism, Governance, & Bankruptcy

Share on Twitter

eBlog, 2/15/17

Good Morning! In this a.m.’s eBlog, we consider the evolving governance challenge in New Jersey and the state takeover of fiscally troubled Atlantic City—a breach into which it appears the third branch of government—the judiciary—might step. Next, we turn to whether governmental trust by citizens, taxpayers, and voters can be exhausted–or bankrupted–as the third branch of government, the judiciary–as in the case of New Jersey–could determine the fate of the former and current mayors of the fiscally insolvent municipality of Petersburg, Virginia. Finally, we try to get warm again by visiting Puerto Rico—where the territorial status puts Puerto Rico between a state and a municipality—what Rod Serling likely would have deemed a fiscal Twilight Zone—further complicated by language barriers—and, in a country where the federal government may not authorize states to file for bankruptcy protection, in a governance challenge with a new Governor. No doubt, one can imagine if Congress appointed an oversight board to take over New Jersey or Illinois or Kansas, the ruckus would lead to a Constitutional crisis.

We Await the Third Branch. The first legal action challenging the State of New Jersey’s takeover of Atlantic City finances will be decided at the local level in the wake of U.S. District Court Judge Renee Marie Bumb’s decision to remand the case back to Atlantic County Superior Court. The case involves a lawsuit from the union representing Atlantic City firefighters which alleges state officials are unlawfully seeking to lay off 100 firefighters and alter the union’s contract; Judge Bumb held that the federal court lacks jurisdiction, since the complaint does not assert any federal claims, thereby granting International Association of Firefighters Local 198’s “emergency motion” to remand the lawsuit to New Jersey state court, saying it was inappropriate for the defendants to remove the action to federal court. Thus, the case will revert to New Jersey Superior Court Judge Julio Mendez, who temporarily blocked the state-ordered firefighter cuts at the beginning of the month. The case involves the suit filed by the International Association of Fire Fighters, Local 198, and the AFL-CIO challenging the state’s action to proceed with 100 layoffs and other unilateral contract changes under New Jersey’s Municipal Stabilization and Recovery Act—the legislation enacted last November in the wake of the New Jersey Local Finance Board’s rejection of Atlantic City’s rescue plan. The suit claims the act violates New Jersey’s constitution. This legislation, which was implemented last November after the New Jersey’s Local Finance Board rejected an Atlantic City rescue plan, empowers the state alter outstanding Atlantic City debt and municipal contracts. Prior to Judge Mendez’s Ground Hog Day ruling, the state was planning to set up changes to the firefighters’ work schedule, salaries, and benefits commencing by cutting the 225-member staff roughly in half beginning in September.

Hear Ye—or Hear Ye Not. A hearing for the civil case brought against Petersburg Mayor Samuel Parham and Councilman and former Mayor W. Howard Myers is set for tomorrow morning. Both men are defendants in a civil court case brought about by members of registered voters from the fifth and third wards of Petersburg. Members of the third and fifth wards signed petitions to have both men removed from their positions. The civil case calls for both Parham and Myers to be removed from office due to “neglect, misuse of office, and incompetence in the performance of their duties.” The purpose of hearing is to determine trial date, to hear any motions, to determine whether Mayors Parham and Myers will be tried separately, and if they want to be tried by judge or jury. James E. Cornwell of Sands Anderson Law Firm will be representing messieurs Myers and Parham. (Mr. Cornwell recently represented the Board of Supervisors in Bath County, Virginia, where the board was brought to court over a closed-doors decision to cut the county budget by $75,000 and eliminate the county tourism office.) The City Council voted 5-2 on Tuesday night to have the representation of Mr. Myers and Mayor Parham be paid for by the city. Mayor Parham, Vice Mayor Joe Hart, Councilman Charlie Cuthbert, former Mayor Myers, and Councilman Darrin Hill all voted yes to the proposition, while Councilwoman Treska Wilson-Smith and Councilwoman Annette Smith-Lee voted no. Mayor Parham and Councilmember Hill stated that the Council’s decision to pay for the representation was necessary to “protect the integrity of the Council,” noting: “It may not be a popular decision, but it’s [Myers and Parham] today, and it could be another council tomorrow.” Messieurs Hill and Parham argued that the recall petition could happen to any member of council: “[The petitions] are a total attack on our current leadership…We expect to get the truth told and these accusations against us laid to rest.” The legal confrontation is further muddied by City Attorney Joseph Preston’s inability to represent the current and former Mayors, because he was also named in the recall petition, and could be called as a witness during a trial.

Federalism, Governance, & Hegemony. Puerto Rico Gov. Ricardo Rosselló has said that he is setting aside $146 million for the payment of interest due on general obligation municipal bonds, noting, in an address to the Association of Puerto Rico Industrialists, that he plans to pay off GO holders owed $1.3 million, because the Commonwealth defaulted on its payment at the beginning of this month, so, instead, he said the interest would be drawn from “claw back” funds, a term the government uses to describe the diversion of revenue streams which had supported other municipal bonds. Now the Governor has reported the $146 million would be held in an account at Banco Popular, ready to be used to meet subsequent general obligation payments to bondholders—noting that the funds to be used had not been “destined” to be used for essential services for Puerto Rico’s people; the Governor did not answer a question as to which bond revenues were being clawed back; however, his announcement creates the potential to partially address the nearly 9 month default on a $779 million payment.

But mayhap the harder, evolving governance issue is the scope of the PROMESA Board to “govern” in Puerto Rico: the statute Congress enacted and former President Obama signed does not vest authority in the PROMESA Oversight Board to review all legislation introduced by the current administration before its approval—thus, the growing perception or apprehension is the implication that Congress has created an entity which is violating the autonomy of the Government of Puerto Rico. It is, for instance, understood that Congress and the President lack the legal or Constitutional authority to take over the State of Illinois—a state which, arguably—has its own serious fiscal disabilities. Thus, it should come as no surprise that Gov. Rosselló’s administration is feeling besieged by disparate treatment at the receipt of a letter sent by the PROMESA Board at the beginning of this month—an epistle in which Board Chair José B. Carrión requested that the Puerto Rican Government discuss with the Board the implications of any new legislation before submission, citing §§204, 207, and 303 of PROMESA as part of the “many tools that can be deployed in terms of legislation.” Unsurprisingly, Elías Sánchez Sifonte, Gov. Rosselló’s representative to the Board, wrote that the Board’s “request to preliminarily review all legislation, as a right they can exercise, is not considered in PROMESA, and it violates the autonomy of the Government of Puerto Rico,” noting that Governor Rosselló’s administration “is working and will continue to work in cooperation with the Oversight Board on all issues” considered under PROMESA. Nevertheless, in the epistle, Mr. Sifonte wrote that “nowhere” in §204 is there any mention that the Government of Puerto Rico must submit its legislation for revision, rather: “It only requires that the legislation be submitted to the Board after it has been properly approved,” even as Mr. Sifonte acknowledged in the letter that after the Fiscal Plan has been certified, the Commonwealth must forward any adopted legislation to the PROMESA Board, accompanied by a cost estimate and a certification stating if it is consistent with the fiscal plan. Moreover, Mr. Sifonte added, because there is currently no fiscal plan, such a certification is not applicable, although a cost estimate is—the deadline for the fiscal plan is February 28th at the latest.

Moreover, according to Mr. Sifonte, “[o]nce the Plan is certified, every piece of legislation to be submitted will be consistent with the Fiscal Plan and will be accompanied by the proper certification, which, in his view, means that it should be protected from Board review, according to the Congressional report that gave way to PROMESA, adding that his purpose in communicating was to “help” both Puerto Rico and the PROMESA Board understand and respect each other’s authority—or, as he noted: “PROMESA’s broad powers are recognized, and we recognize all of the Board’s powers contained within the law. What shouldn’t happen is for them to want to go further, despite those extensive powers, and occupy a space that belongs to the officials elected by the people, because then that would in fact infringe upon the full democracy of our country,” adding that “the administration’s intention is not to interfere with the Oversight Board while the members carry out their mission under the federal statute, but the letter seeks to clarify “the autonomy of Puerto Rico’s Government, which is safeguarded under PROMESA.” The letter also states that the Government’s interpretation of PROMESA is based on Section 204(a)(6), which establishes that the Oversight Board may review legislation before it is approved “only by request of the Legislature.” Finally, Mr. Sifonte addressed a fundamental federalism apprehension: referencing §207 of PROMESA, which establishes that “the territory” cannot issue, acquire, or modify debt, he wrote that Puerto Rico has not issued, nor does it intend to issue any debt, referencing the Puerto Rico Financial Emergency & Fiscal Responsibility Act, and emphasizing this statute marks a change in public policy, with the intention of paying the creditors, just as Governor Rosselló this month had announced. Finally, he noted: the “inappropriateness” of the Chairman’s proposition, where—under the protection of §303 of PROMESA—he tells the Government that “the compliance measures under PROMESA should be a last resort and hopefully won’t be necessary,” noting that that provision “expressly says that the Government of Puerto Rico retains the duty to exercise political power or the territory’s governmental powers.”