Balancing Fiscal & Public Safety

January 9, 2017

Good Morning! In today’s Blog, we consider the potential fiscal impact of the expiration of the State of New Jersey’s public safety arbitration cap—with the expiration coming as Governor-elect Phil Murphy has been reviewing a report examining the implications for property taxes, state spending, collective bargaining agreements, and public safety. Then we journey south to witness the denouement of the fiscal siege of the historic municipality of Petersburg, Virginia.

Uncapping & Fiscal Impacts. The State of New Jersey’s statute capping public safety arbitration awards at 2% has been in effect for seven years—it was last extended in 2014. Now, with a new Governor taking office, Moody’s has warned that its expiration on the last day of 2017 is a credit negative for the Garden State—and for its municipalities and counties. Indeed, the New Jersey League of Municipalities has been joined by the New Jersey Association of Counties, the New Jersey Conference of Mayors, the New Jersey Chamber of Commerce, New Jersey Business and Industry Association, and the New Jersey Realtors Association to urge the new Governor and Legislature to support permanently extending the 2% cap Interest Arbitration Cap, noting that an expired cap would have a negative impact on property taxes and jeopardize the continued delivery of critical services, as well as adversely impact residential and commercial property taxpayers, working class families, and those on fixed incomes. The League’s President, Mayor James Cassella of East Rutherford, noted that the 2% Interest Arbitration Cap has controlled costs: without the cap, municipalities could see costly arbitration awards that would force local officials to reduce services or lay off employees to satisfy the arbitrator’s award and stay within the 2% levy cap. Similarly, New Jersey Association of Counties President Heather Simmons, a Gloucester County Freeholder, noted that failure to permanently extend the 2% cap on binding interest arbitration awards would inequitably alter the collective bargaining process in favor of labor at the expense of taxpayers, and lead to awards by arbitrators with no fiduciary duty to deliver essential services in a cost-effective manner.

Now Moody’s has moodily weighed in, deeming the expiration a credit negative for the state’s cities and  counties, as has Fitch Ratings.

In New Jersey, interest arbitration is a process open only to police and fire employee unions: it is a mechanism to resolve collective bargaining disputes between local governments and unions: when a public employer is unable to reach a contract agreement with a police or fire union, an arbitrator is called in to decide the terms of the contract. When the state adopted the 2 percent property tax levy cap, a separate 2 percent cap on interest arbitration awards was also imposed: that mandates arbitrators to take property taxes into account when issuing awards and providing local officials with a now proven and effective tool to contain property tax increases. The arbitration cap expired on Dec. 31; however, the property tax levy cap is permanent. The New Jersey League noted: “For nearly a decade, the 2 percent cap on binding interest arbitration awards has kept public safety employee salaries and wages under control simply because parties have been closer to reaching an agreement from the onset of negotiations. Moreover, the 2 percent cap on binding interest arbitration awards has established clear parameters for negotiating reasonable successor contracts that preserve the collective bargaining process and take into consideration the separate 2 percent tax levy cap on overall local government spending. And, importantly, the 2 percent cap on binding interest arbitration awards has not negatively impacted public safety services or recruitment.

In the wake of the expiration of the arbitration cap, it appears likely that arbitrator contract awards would exceed 2 percent. That would likely force cities and counties in the Garden State to reduce or eliminate municipal services—or go to the voters to seek approval to exceed the 2 percent property tax cap in order to fund an arbitration award.

Moody’s analyst Douglas Goldmacher moodily noted: “Given that salary costs are among the largest of municipal expenditures, the cost implications are obvious and considerable. The effect of this is, in most cases, unlikely to be rapid, but ultimately, the loss of the arbitration cap is likely to cause the sector’s credit quality to deteriorate…Although the cap has expired, and it may not be finished. Numerous local governments and local government advocacy groups support the arbitration cap. It is possible that the new governor and New Jersey state Legislature will revisit the matter. Until and unless that occurs, there will be a potentially dangerous mismatch between revenue and expenditures.” The statute, which caps public safety arbitration awards at 2%, came into force on January 1, 2011; it was extended for a three-year period in 2014 when it was last up for renewal. Mr. Goldmacher noted: “The cap played a major role in helping local governments manage public safety costs by instituting a limit on increases in police and fire salaries in arbitration and effectively tying the salary increases to the municipality’s or county’s revenue-raising capabilities…The cap’s expiration, should it prove permanent, is a credit negative for all local governments.” Mr. Goldmacher noted the cap’s existence has been a “valuable tool” in contract negotiations when police and firefighter unions with negotiators often forced to consider small salary increases. A September report by former Gov. Chris Christie’s appointees to the Police and Fire Public Interest Arbitration Impact Task Force stated that municipal property taxes jumped at an annual average of 7.19% for the five years prior to the cap compared to 2.41% since 2011. The report also estimated that the cap has saved taxpayers a collective $429 million. Thus, Mr. Goldmacher notes: “Given that salary costs are among the largest of municipal expenditures, the cost implications are obvious and considerable: Police and fire contracts often serve as a benchmark contract for other negotiations, which had the effect of making a 2% annual increase something of a standard target for most contracts, even for non-public safety collective bargaining units.” While it is possible the cap may be reinstated, Mr. Goldmacher added that as long as no action is taken to address the lapse, New Jersey’s cities and counties confront “a potentially dangerous mismatch” aligning revenue and expenditures, because of how much a 2% property tax cap law would limit their budgetary flexibility, writing: “The effect of this is, in most cases, unlikely to be rapid, but ultimately, the loss of the arbitration cap is likely to cause the sector’s credit quality to deteriorate,” he said. “The degree of deterioration will depend on the idiosyncratic qualities of the given community.”

For its part, Fitch wrote: “…the arbitration cap is beneficial to local government credit quality as it helps to align revenue and spending measures and supports structural balance in the context of statutory caps on property tax growth…bargaining groups may become more emboldened to pursue arbitration as opposed to voluntary settlement if the arbitration cap expires. Arbitration awards were significantly higher prior to the cap, ranging from 2.50% to 5.65% from 1993-2010, according to a report of the New Jersey Public Employment Relations Commission (PERC.)” Fitch also noted that the elimination of the arbitration cap “could force local governments to reduce governmental services and/or rely on one-time resources to accommodate higher wage expenses.”

The Fiscal Siege of Petersburg. Jack Berry, Robert Bobb, and Nelsie Birch, writing in a piece, “Overcoming the latest siege of Petersburg, referenced the city’s then vital role in the Civil War, where, as they wrote: “The series of battles known as the Siege of Petersburg lasted nine months and consisted of devastating trench warfare. It featured the largest concentration of African-American troops in the war, who suffered enormous casualties at the Battle of the Crater.” They went on to write: “Some would say that Petersburg has been under siege ever since the Civil War, that there is a siege mentality in the city. Petersburg even has a Siege Museum…But Petersburg has not always been under siege; it is not today, and it will not be tomorrow. Noting that Petersburg was once the second largest city in Virginia—and home to the largest number of free blacks in Virginia, they noted that it was once “a wealthy city, a major industrial center, and one of the largest rail hubs in the nation,” where, in the wake of the Civil War, a “coalition of Africa-American and white, populist Republicans, controlled the state legislature, which led to the creation of two large public institutions in the region: Virginia State University and Central State Hospital. Later, Fort Lee became another major economic engine for the area.” The authors noted, however, that “Jim Crow laws and Massive Resistance devastated the hopes and dreams of black citizens and fueled racial tensions. In 1985, one of the city’s largest employers, Brown & Williamson Tobacco, shut down its Petersburg factory. Later, Southpark Mall was located north of the city, sucking retail sales out of Petersburg.” These events adversely affected assessed property values—in turn reducing investment in public schools. The historic city seemed on a route to chapter 9 municipal bankruptcy—or being, as they wrote: “relinquishing city status—and being subsumed by neighboring jurisdictions,” all because of what they described as a “self-inflicted, mismanaged city government” which “ran itself into a ditch: In July of 2016, the city faced $18 million in unpaid bills. The budget was $12 million out of balance. Petersburg had nearly run out of cash and was dipping into every available pot of money, regardless of restrictions, to pay bills. A botched water meter conversion project impacted utility billings, which made the cash situation even worse.”

Because the Commonwealth of Virginia was apprehensive that a default by Petersburg would have had severe fiscal repercussions for municipalities across the state, the Commonwealth, as we have previously written, provided a consulting team to diagnose the fiscal issues and recommend fiscal measures—including, in its recommendations, pay cuts of 10 percent pay cuts for the entire city workforce. Even as the state-imposed overseer was acting, an aroused citizenry, via a grassroots group called “Clean Sweep,” attended every City Council session, demanding greater fiscal accountability. A year ago last October, former Mayor Howard Meyers and the City Council brought in a fiscal posse in an effort to restructure, hiring former Richmond City Manager Robert Bobb and his team, who set up a temporary war room in the City Hall building where General Robert E. Lee had met with his senior Confederate officers during the Siege of Petersburg. Mr. Bobb wrote of the fiscal war room: “We dug in for the long haul, with Nelsie Birch leading efforts to peel back layers of the financial onion. We got a handle on cash flow, figured out the extent of the unpaid bills, found checks stashed in drawers, arranged short-term financing, crafted a new budget, dramatically cut spending, put pressure on the city treasurer to collect taxes, and revamped the decrepit utility system…New financial policies were put in place; debt was restructured; water and sewer rates were increased to comply with debt covenants; the organization was right-sized; new managers were hired.”

Mr. Bobb described this war room process as one in which—at the same time—his team teamed with Mayor Sam Parham and the members of the Petersburg City Council “every step of the way,” to make the tough decisions, adding that, during this process, “Our strongest ally was the Governor’s Office, in particular, Virginia Secretary of Finance Ric Brown.” Indeed, by last November, external auditors reported a signal fiscal turnaround: Petersburg reported a year-end surplus of $7.2 million—and the report was on time; the auditor’s opinion was clean.

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Recovering after a Quasi-State Takeover

December 8, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report that last night, House Republicans voted 235-193 to pass and send to the Senate a stopgap bill to keep the federal government open for another two weeks, freeing up space to finish both the federal budget for the year that began last October 1st—and to try to craft a conference report on federal tax reform. The House vote now awaits Senate action, where leaders plan to act swiftly to put the bill on President Trump’s desk and avoid a shutdown on Saturday.

.Visit the project blog: The Municipal Sustainability Project 

A Founding Municipality. Petersburg, Virginia—where archaeological excavations have found evidence of a prehistoric Native American settlement dated to 6500 BC, was, when the English first began to settle America, arriving in Virginia in 1607, in a region then occupied by Algonquin speaking early Americans—was founded at a strategic point along the Appomattox River. Nearly four decades later, the Virginia Colony established Fort Henry along the banks of the Appomattox River. The colony established Fort Henry—from which Colonel Abraham Wood sent several famous expeditions in subsequent years to explore points to the west; by 1675, his son-in-law, Peter Jones, who commanded Fort Henry opened the aptly named Peter’s Point trading post. In 1733, the founder of Virginia’s capitol of Richmond, Col. William Boyd, settled on plans for a municipality there—to be called Petersburgh—an appellation the Virginia General Assembly formally incorporated as Petersburg on December 17, 1748.

By the 20th century, the upward growth in one of the nation’s oldest cities peaked—at just over 41,000 residents: by 2010, the population had declined more than 20 percent—and the municipality had a poverty rate of 27.5%, double the statewide average, and nearly 33% greater than in 1999. The city’s largest employer, Brown & Williamson, departed in the mid-1980s. By last year, 100% of Petersburg School District students were eligible for free or reduced price lunch—even as the district lagged behind state graduation rates; the  and the rate of students receiving advanced diplomas. Last year, the city’s violent crime rate was just under twice the U.S. average. By 2014, Petersburg’s violent crime rate of 581 per 100,000 residents was nearly 30% higher than the violent crime rate in Danville—even though, unlike Danville, Petersburg is in the thriving Richmond metropolitan area—and has potential partners in higher education (Virginia State University and Richard Bland College) and philanthropy (Cameron Foundation), as well as a unique concentration of affordable, historic housing. Yet the city’s unassigned General Fund reverses grew from $20.4 million in FY2005 to $35.0 million by FY2014, or 55% of operating expenditures; it has very strong liquidity, with total government available cash equal to 11.5% of total governmental fund expenditures and more than ten times greater than annual debt service payments. Nevertheless, as we have previously noted, a state technical assistance team’s review last year determined that the City had exhausted most of its unrestricted reserves—also noting that in FY 2015, the City’s final budget called for General Fund revenue of $81.4 million and spending of $81.1 million, even as the municipality’s CAFR reported that actual revenue was $77 million, while spending was $82.9 million—leading to a conclusion that, based on General Ledger reports, all funds expenditures exceeded all funds revenue by at least $5.3 million.

Moreover, notwithstanding its string of operating deficits, Petersburg undertook a series of costly, low return economic development investments—purchasing a hotel, supporting a local baseball team, and building a new library—all investments beyond the city’s means. Nevertheless, after a state intervention, after nearly a decade of near insolvency, the city’s most recent Comprehensive Annual Finance Report demonstrates Petersburg is emerging from its fiscal bog—closing FY2017 having collected $73,069,843 in revenues, while spending $65,861,125 in expenditures: meaning the positive $7,208,718 difference nearly eclipsed the $7.7 million deficit which had been carried over from FY2016—unsurprisingly leading Blake Rane, the city’s Finance Director, to note: “We’re really excited about the changes that occurred in 2017: As the new administration, we are super excited that the road we have to go on is starting at a better position than where we thought it would be.” Similarly, Mayor Samuel Parham, at a news conference, noted: “We’re showing outside development that Petersburg is a safe investment…There was a time when people thought we were going to fall into the Appomattox.”

Much of the fiscal recovery credit, as we have previously noted, may be credited in part to strict expenditure practices instituted by the Robert Bobb Group, the turnaround team headed by the former City of Richmond Manager, which ran the city administration from October 2016 until September—where the team found Petersburg had always overestimated revenues, according to former Finance Director Nelsie Birch, so that the fiscal challenge was to get a “handle on spending,” a challenge met via the adoption of a very conservative FY2017 budget with a strong focus on improving Petersburg’s collection practices—including enforcement:  For the first time in several years, the city put delinquent properties up for tax sale—or, as City Manager Aretha Ferrell Benavides put it: “The new billing and collecting office is moving on collecting now: People are realizing that we’re not going to sit and wait.”  The results are significant: Petersburg’s fund balance is nearly at zero after dropping to a negative $7.7 million. Today that balance is a shadow of its former level at negative $143,933, and Manager Benavides notes: “We’re working on building up [the fund balance], because we’ve been very dependent on short-term loans through Revenue Anticipation Notes.”

Other key steps on the city’s road to recovery included selling excess water from the city’s water system, selling pieces of city-owned property, and even selling the city’s water system, or, as Mr. Bobb put it: “Moving forward, the city still needs that liquidity event (that was not intended to be a pun), because a major snowstorm, or a major water line break, sinkhole, etc., those things would be a significant drain on the city, unless it has a major fund balance.” As part of its fiscal diet, Manager Benavides notes Petersburg is still examining options to sell as many as 320 pieces of city-owned property, with the City Council already having approved the disposition of some of these properties over the past several months. The fiscal road, like the city’s history and geography, has been steep, but the fiscal exertions appear to be paying off, as it were.

Governance Amidst Fiscal and Stormy Challenges & Uneven Federalism

December 1, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s oldest municipalities, and its remarkable turnaround from verging on becoming the first municipality in Virginia to file for chapter 9 municipal bankruptcy, before veering south to assess what President Trump has described as the U.S. territory of Puerto Rico suffering from “from broken infrastructure and massive debt.” 

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Petersburg, Virginia’s City Council, one of the oldest of the nation’s cities, as part of its fiscal recovery, last week had voted 5-2 to request the Virginia Legislature to change the city’s charter in order to transfer the most critical duties of the Treasurer’s Office to a newly-created role of city collector—a position under the Council’s control, as part of its wish list for the newly elected state legislature. Petersburg, an independent city of just over 32,000, is significant for its role in African-American history: it is the site of one of the oldest free black settlements in the state–and the nation.  The unprecedented City Council effort seeks to strip power from an elected office—an office some believe curried some fault for contributing to Petersburg’s near chapter 9 municipal bankruptcy. Ironically, the effort came the same month that voters elected a former Member of the City Council to the office of Treasurer. Councilman Treska Wilson-Smith, who opposed the move, stated: “The citizens just voted in a Treasurer. For us to get rid of that position is a slap in the face to the citizens who put them in there.” Unsurprisingly, State Senator Rosalyn Dance, who for a dozen years has represented the city as part of her district in the Virginia House of Delegates, and who will consider the city’s legislative agenda, said she was concerned. Noting that the newly-elected treasurer has yet to serve a day in office, she added that much of the turmoil had to do with the current Treasurer, so, she said: “I hope [the] Council will take a second look at what they want to do.” Former Councilman and Treasurer-elect Kenneth Pritchett, who declined to comment, ran on a platform of improving the office’s operations by standardizing internal controls and implementing new policies: he urged Petersburg residents to contact lawmakers in a Facebook message posted after the Council took action, calling the decision “a prime example of total disrespect for the citizens’ vote.”

Nevertheless, Council Members who supported the legislative agenda language said it was time for a change, or, as Councilman Darrin Hill noted: “I respect the opinion of the citizens, but still, we believe if we keep on doing the same thing that we have done, then we will keep on getting the same results.” Other Councilmembers felt even better about their votes after the Council received good financial news earlier this week when newly audited reports showed a boost in Petersburg’s reserve funds, increased revenue, and a drop in expenditures—a marked fiscal reversal. In addition, the city’s external auditor provided a clean opinion—a step up from last year’s “modified” opinion—an opinion which had hinted the city had failed to comply with proper accounting principles—and a municipal fiscal year which commenced $19 million in the hole—and $12 million over budget—in response to which the Council raised taxes, cut more than $3 million in funding from the city’s chronically underperforming schools, eliminated a popular youth summer program, and closed cultural sites. Former Richmond City Manager Robert Bobb’s organization—which had been hired to help the city recoup from the verge of chapter 9 municipal bankruptcy, had supported transferring some of the duties of the Treasurer to a city collector position as a means to enhance the city’s ability to improve its tax collections.

Subsequently, late last September, another shoe fell with a 115-page report which examined eight specific aspects of city governance—and found allegations of theft involving current Treasurer Kevin Brown—claims Mr. Brown repeatedly denied, but appeared to contribute to his decision not to run for reelection—an elected which Mr. Pritchett won by a wide margin, winning just over 70 percent.  Nevertheless, Mayor Samuel Parham told his colleagues: “We are treading too thin now to risk someone who is just getting to know the job. We can’t operate as a city of hoping…Now that we are paying our bills and showing growth, there is no need to go back in time and have a situation that we had.” However, some Councilmembers believe they should await more facts with regard to Mr. Brown’s actions, especially with regard to uncollected municipal tax revenues, or, as Councilmember Wilson-Smith put it: “There are some questions which we still have unanswered when it comes to why the taxes were not collected: It appears to me that a lot of the taxes are not being collected, because they are un-collectable,” or, as she noted: Many listed for unpaid taxes were deceased.

David Foley with Robinson, Farmer, Cox Associates, Petersburg’s external auditor, had presented figures before Petersburg residents and the City Council, noting the clean opinion is a substantial improvement from last year, when auditors issued a modified opinion which suggested Petersburg had failed to maintain accounting principles—testifying that the improvement mainly came from the city being able to provide evidence of the status of some of its major financial accounts, such as public utilities. He did recommend that Petersburg strengthen some of its internal controls over the next fiscal year—noting, especially, the reconciliation of the city’s public utility system, which some officials have suggested should be sold to private companies. Indeed, City Manager Aretha Ferrell-Benavides told City Council members that a plan to correct some of the deficiencies will start in January, with monthly updates on corrective actions that she would like to continue to take. The see-saw, key fiscal change of nearly $2 million more than had been projected arose from a combination of increased real estate tax collections, and a $2.5 million reduction in expenditures, mainly came from health and welfare, and non-departmental categories: in total, there was a $7.5 million increase in the city’s chief operating fund. Unsurprisingly, Mr. Foley, in response to Councilmember Charlie Cuthbert, noted: “It was a significant year. There is still a long way to go,” indirectly referencing the city’s commencement of FY2017 $19 million in the hole and $12 million over budget—and with dire threats of legal action over unpaid bills—triggering a tidal wave of legal bills of nearly $1 million—of which about $830,000 went to Mr. Bobb’s group—while the city spent nearly $200,000 on a forensic audit.  Council members received the presentation on the annual financial report with a scant two days prior to the state imposed deadline to submit the report—after, last year, the city was about seven months late in submitting its annual financial report.

Insufficient Shelter from the Fiscal Storm. In the brutal wake of Hurricane Maria, which destroyed about 57,000 homes in Puerto Rico last September and left another 254,000 severely impacted, 50 percent of the U.S. territory’s remaining 3.5 million inhabitants are still without electricity—a lack that has adversely impacted the ability to reconstruct the toll wrought by Maria, not to mention the economy, or loss of those, more than 150,000, who could afford to leave for New York and Florida. Puerto Rico still confronts a lack of drinking water. Governor Ricardo Rosselló had assured that 95% of the island would have electricity by today, but, like too many other promises, that is not to be. An irony is that the recent visit of former President Bill Clinton, who did not come down to toss paper towels, but rather to bring fiscal and physical assistance, may be, at long last, an omen of recovery. It was just 19 days ago that Gov. Roselló appeared before Congress to request some $94 billion to rebuild the U.S. territory—a request unmet, and a request raising questions about the Puerto Rican government’s ability to manage such a vast project, especially in the wake of the $300 million no-bid contract awarded to a small Montana utility company, Whitefish, to restore the territory’s power—an effort House Natural Resources Committee Chair Rob Bishop (R-Utah) described as raising a “credibility gap.” Indeed, in the wake of that decision, Chairman Bishop and others in the Congress have called for the unelected PROMESA Financial Oversight and Management Board, known on the island as “la junta,” to extend its powers to overseeing the rebuilding effort as well—a call which, unsurprisingly, many Puerto Ricans, including pro-statehood Governor Rosselló, see as a further threat to their democratic rights. 

Nevertheless, despite the quasi-takeover threat from Congress, U.S. District Court Judge Laura Taylor Swain has denied the PROMESA Oversight Board’s request to appoint an emergency manager, similar to those appointed by Gov. Rick Snyder in Detroit, or by the former Governor of Rhode Island for Central Falls under their respective authority under state authorizations of chapter 9 municipal bankruptcy. Puerto Rico, because it is not a state, does not have such authority; consequently, Judge Swain has determined the Board does not have the authority to appoint public officials—a holding which Gov. Rosselló responded to by noting that the decision upheld his office’s position about the board’s power, writing: “It is clear that the [board] does not have the power to take full control of the Government or its instrumentalities…[T]he administration and public management of Puerto Rico remains with the democratically elected government.

“Now there’s a wall between us something there’s been lost I took too much for granted got my signals crossed Just to think that it all began on a long-forgotten morn “Come in” she said “I’ll give you shelter from the storm.”

November 28, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s founding cities, the ongoing fiscal challenges in Connecticut, where the capital city of Hartford remains on a fiscal precipice, and, finally, the  deepening Medicaid crisis and Hurricane Maria recovery in the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Six months ago, Richmond, Virginia Mayor Levar Stoney released a promised comprehensive review of his city’s municipal government—that is the government incorporated as a town “to be styled the City of Richmond” in 1742. From those Colonial beginnings, Richmond went on to become a center of activity prior to and during the Revolutionary War: indeed, it was the site of Patrick Henry’s famous speech “Give me liberty or give me death” at the city’s St. John’s Church, which was reported to have inspired the House of Burgesses to pass a resolution to deliver Virginia troops to the Revolutionary War in 1775. It was only in 1782 that Richmond was incorporated as a city—a city which was the capital of the Confederate States of America during the Civil War.  

The findings Mayor Stoney released, compiled by an outside consulting group, were bleak: they detailed excessive bureaucracy, low morale, and micromanagement. This week, Mayor Stoney’s administration is releasing its action plan to begin addressing those problems: the recommendations range from big-picture proposals, such as creating a new city department focused on housing and community development issues, to smaller suggestions, such as a citywide protocol for phone etiquette. Thad Williamson, Mayor Stoney’s chief policy adviser for opportunity described it this way: “We tried to consolidate all these moving parts into one coherent thing, which is a bear, but it’s kind of part one to what it takes to get a handle on changing the organization.”

Mayor Stoney’s administration hired Virginia Commonwealth University’s Wilder School of Government and Public Affairs to conduct the initial review, and the municipality released the 110-page report last May, so that, since then, officials report city staff have been working to convert those recommendations into a plan to be implemented. The report includes both short and long-term recommendations—and Mayor Stoney has already acted to replace several department directors, including the Director of Public Works and the Fire Chief. (The report recommends a goal of filling all remaining leadership positions by the end of next January.) Thus, Mayor Stoney has let go the Directors of Economic Development, Human Resources, Information Technology, and Procurement Services. At the same time, he has empowered, per the report’s recommendations, a team of employees to draw up a variety of proposals to improve communications among departments. The city has even acted to adopt the report’s recommendation to implement a citywide protocol for phone etiquette and “person-to-person etiquette.” On the key issue of municipal finance, Mayor Stony expects to address other recommendations as part of his next budget—to be presented in March—when the key issues he expects to put forward will focus on: procurement, human resources, finance, and information technology.

No doubt, that shift in focus relates to the review’s singling out dysfunction and staffing shortages in some of the city’s departments as adversely affecting nearly every element of city government—such as the report’s findings that it takes the Fire Department months working with procurement to get new shirts for its employees. “Police and public education are always top of mind when it comes to budgets, but if you go that way every year, then it has a negative impact on the organization,” according to Mr. Williamson. The plan also lays out a proposal to create a city department focused on housing and community development which “will be the driving force for public housing transformation, and East End revitalization.” The report also proposes reforms to the city’s funding of nonprofit community groups through annual grants, referred to internally as the city’s non-departmental budget. Organizations such as Sports Backers, the Better Housing Coalition, Venture Richmond, and CultureWorks are among the annual beneficiaries. Chief Administrative Officer Selena Cuffee-Glenn noted that revised funding applications have already been distributed and that, this year, the city will emphasize city goals like housing and poverty, describing them all as “valuable, worthy projects,” albeit, adding: “It’s just a limited amount of resources, so this helps identify targets and priorities for the city.” Finally, to track overall progress on the plan, Mayor Stoney is proposing the creation of a three-person performance management and change division which will report to the CAO to track whether, and presumably how, recommendations are being implemented.

State Municipal Oversight. In Connecticut, Gov. Dannell Malloy has appointed Thomas Hamilton, Scott Jackson, and Jay Nolan to six-year terms on the state’s new Municipal Accountability Review Board: the biennial budget which the Governor signed at the end of October provided for the appointment of an 11-member panel to work with cities and towns on early intervention and technical assistance, if needed, and to help financially distressed municipalities avoid insolvency or bankruptcy in exchange for greater accountability, with the Governor stating: “The state will be poised to intercede early to put struggling local governments on a path to sustainable fiscal health,” even as House Minority Leader Themis Klarides (D-Derby) has called for the General Assembly to reconvene and overturn the municipal aid cuts ordered last week by Gov. Malloy. The Republican leader’s announcement came less than a week after the legislature put the finishing touches on a two-year, $41.3 million budget, which provided Gov. Malloy wide discretion on unilateral cost-cutting which he announced last Friday. Connecticut Senate President Pro Tempore Martin M. Looney (D-New Haven) said that House and Senate leaders, who spent weeks in closed-door discussions to reach the recent bipartisan budget deal, will meet again next week. His counterpart, Senate Republican Leader Len Fasano (R-North Haven) believes Gov. Malloy is over-estimating the deficit so he can order further budget cuts, noting slashing. Leader Derby derided the Governor’s proposed cuts as “clearly intended to punish towns and cities,’’ saying that legislative leaders were under the impression that Gov. Malloy’s savings would come from personnel savings and other line items called Targeted Lapse Savings in the budget—after the Governor, last Friday, announced $880 million in cuts across both state agencies and municipal aid. Leader Klarides stated: “Governor Malloy clearly knew exactly how we intended to achieve the Targeted Savings Lapse…Instead, his recent action shifts more pain onto municipalities and is a blatant disregard for the will of the legislative leaders and the overwhelming majority of legislators who voted for the budget.”  Gov. Malloy yesterday reported that the estimate deficit in the current budget is more than $202 million. If Connecticut Comptroller Kevin Lembo agrees, Gov. Malloy will have to arrange further rescissions to balance the state’s budget—or, as House Speaker Joe Aresimowicz (D-Berlin) put it: “When you look at it in terms of percentages, about 1 percent of the total budget, and consider that we are only four months into the current fiscal year, it is not an unmanageable number…If and when the Governor does need to submit a mitigation plan to the legislature, we stand ready to work with the administration in the coming months to ensure the budget is balanced going forward.”

Leader Fasano said that Gov. Malloy had included some items in his deficit calculation which legislators had not planned to be part of the budget, noting: “I would have hoped Gov. Malloy would have been honest about the size of that deficit and focus on starting a conversation with lawmakers about how we can address these shortfalls together…He is releasing artificially high numbers to trigger the need for a formal deficit mitigation plan, a process that gives him the power to issue his own plan for the budget and make himself relevant. It’s disturbing that Gov. Malloy would purposefully make the state’s finances look worse than they actually are just so he can have a say in how we close the budget shortfall.”

The state political sparring comes as its state capital, Hartford, remains on the fiscal precipice: Hartford received an additional $40 million in the tardy state budget—and Mayor Luke Bronin continues to dicker with the city’s municipal bondholders and labor leaders in his ongoing effort to avoid filing for a chapter 9 municipal bankruptcy, noting: “With this accountability and review board, the state will be poised to intercede early to put struggling local governments on a path to sustainable fiscal health before they are on the brink of a fiscal crisis.” The new state statute mandates that the Governor appoint five members, three of his own choice, one from the recommendation of the American Federation of State, County and Municipal Employees, and the remaining from a joint recommendation of the Connecticut Education Association and the Connecticut branch of the American Federation of Teachers.

Shelter from the Storm & Governing Competency? With, as the Romans used to put it, tempus fugiting, Congress appears poised to increase the $44 billion of disaster assistance proposed by the Trump administration for Puerto Rico, the U.S. Virgin Islands, Texas, and Florida; however, there is recognition and apprehension at the proposed terms by the White House that any such financial aid be subject to a mandate of providing matching funds for a portion of the fiscal assistance—and that Congress enact $59.2 billion in offsetting spending reductions. The White House has recommended that one major piece of the emergency supplemental request, $12 billion for the CDBG Disaster Recovery program, should be awarded states and territories once they “present cost-effective solutions to reducing future disaster risk and lowering the potential cost of future disaster recovery.” More than half of the request is for $25.2 billion for disaster relief administered through the Federal Emergency Management Agency and Small Business Administration. Other pieces include: $4.6 billion for repair or replacement of damaged federal property and equipment and other federal agencies’ recovery costs; $1.2 billion for an education recovery fund; and $1 billion for emergency agricultural assistance.

Sen. Patrick Leahy (D-Vt.) has warned that Puerto Rico will not receive such federal assistance, because the Administration’s proposal “favors states that can provide matching funds,” even as Sen. Leahy observed that thousands of residents of Puerto Rico are abandoning their homes and moving to the mainland, noting: “Much like in the delayed response to Katrina and the people of New Orleans, we are seeing the people of Puerto Rico lose faith that we will help them rebuild.” Senate Minority Leader Chuck Schumer (D-N.Y.) added that the Trump administration’s request is inadequate to address the needs of Puerto Rico, the U.S. Virgin Islands, Florida, and Texas—as well as western states hit by wildfires. Moreover, Leader Schumer added that the Trump Administration’s failure to address “the impending Medicaid funding crisis the islands are facing,” much less to “provide waivers to cost share mandates which are sorely needed due to Puerto Rico and the U.S. Virgin Island’s financial challenges.” The Federal Emergency Management Agency had received just over 1 million applications for disaster assistance as of early last week; the agency has approved more than $180 million under the Individual Assistance Program and $428 million under the Public Assistance program, reporting: “There are over 10,000 federal employees working in Puerto Rico in the response and recovery efforts.”

Nevertheless, with this session of Congress nearing a critical final two weeks of its schedule, the U.S. territory’s Medicaid funding crisis is deepening: Hurricane Maria wrought serious physical and fiscal damage to Puerto Rico’s health-care system; yet, not a dime of the federal disaster relief money has, to date, been earmarked for the island’s Medicaid program. The White House, last Friday, belatedly submitted a $44 billion supplemental payment request, noting that the administration was “aware” that Puerto Rico needed Medicaid assistance; however, the Trump Administration put the onus on Congress to act—leaving the annual catchall omnibus appropriations bill as the likely last chance: this Congress is scheduled to adjourn on December 14th.  However, with a growing list of “must do” legislation, including the pending tax bill and expiring S-CHIP authorizations, time is short—and the administration’s request is short: In a joint statement, House Energy and Commerce Committee ranking members Frank Pallone Jr. (D-N.J) and Senate Finance Committee ranking member Ron Wyden (D-Or.) called on the Trump Administration to “immediately provide additional funding and extend a one-hundred percent funding match for Medicaid in Puerto Rico and the U.S. Virgin Islands, just as we did in the aftermath of Hurricane Katrina,” with the request coming amid apprehensions that unless Congress acts, federal funds will be exhausted in a matter of months—potentially threatening Puerto Rico’s ability to meet its Medicaid obligations. Gov. Ricardo Rosselló, last month, requested $1.6 billion annually over the next five years from Congress and the Trump administration in the wake of the devastating physical and fiscal storm, writing to Congressional leaders that the “total devastation brought on by these natural disasters has vastly exacerbated the situation and effectively brought the territory’s healthcare system to the brink of collapse.” Puerto Rico, last year, devoted almost $2.5 billion to meet its Medicaid demands—so even the proposed reimbursement would only cover about 60 percent of the projected cost. The urgency comes as the House, earlier this month, passed legislation reauthorizing the CHIP program, including $1 billion annually for Puerto Rico for the next two years, specifically aimed at shoring up the island’s Medicaid program. Nevertheless, despite the progress in the House on CHIP funding, the Senate has yet to moved forward with its version of the legislation—and the version reported by the Senate Finance Committee does not include any funds for Puerto Rico. Should Congress not act, up to 900,000 Puerto Ricans would likely be cut from Medicaid—more than half of total enrollment, according to federal estimates.

Post-Chapter 9 Elections–and Post Physical & Fiscal Storms

November 6, 2017

Good Morning! In today’s Blog, we consider yesterday’s election results in municipalities we have followed through their fiscal stress or chapter 9 municipal bankruptcy, including: Flint, and Detroit, in its first Mayoral election since emerging from chapter 9, Then we turn to the historic municipality of Petersburg, Virginia—a municipality which avoided chapter 9 thanks to state intervention. Finally, we consider U.S. District Court Judge Laura Swain’s approval yesterday of an urgent motion from the government of Puerto Rico and the Fiscal Oversight Board (JSF) that requires all federal funds to be allocated for the tasks of assistance and recovery in the wake of Hurricane Maria, removing said funds from possible use in restructuring the U.S. territory’s restructuring of its public debt.

Visit the project blog: The Municipal Sustainability Project 

In Like Flint. Flint Mayor Karen Weaver yesterday prevailed over City Council member Scott Kincaid in a recall election involving 18 candidates, retaining the city’s proposed 30-year agreement with the Detroit water system, with Mayor Weaver prevailing by a 53-32 percent margin, according to the unofficial results. The recall had arisen from a controversy related to the Genesee County’s garbage contract: Mayor Weaver had pressed for an emergency trash collection contract with the former Rizzo Environmental Services in Macomb County over City Council opposition. The controversy arose because a former trash provider, Chuck Rizzo, and his father have reached plea deals with federal prosecutors and are expected to plead guilty this month for their roles in a wide-ranging public corruption scandal in Macomb County—a scandal which has, so far, led to criminal charges against 17 persons. The recall also came amid Mayor Weaver’s ongoing struggle with the Flint City Council with regard to the approval of a 30-year agreement with the Detroit area Great Lakes Water Authority—with City Council opposition arising from apprehension about increased water rates—and in response to last month’s decision by U.S. District Court Judge David Lawson taking the small city to task for failing to act on an April agreement supported by Mayor Weaver, the State of Michigan, and EPA which would have Flint remain on the Detroit area water system. Flint had been supposed to switch to the regional Karegnondi Water Authority; however, Mayor Weaver’s administration rejected that option, because updating of the Flint water treatment facility had been projected to cost more than $68 million and to consume more than three years to complete. The Flint Council had disregarded Judge Lawson’s decision, and approved a two-year extension of service with the Great Lakes Water Authority. Thus, while the prior agreement with the Detroit area water authority had lapsed, Mayor Weaver, the State of Michigan, the Great Lakes Authority, and other supporters have revived the agreement. Last week, the Michigan Department of Environmental Quality had filed an emergency motion asking Judge Lawson to approve giving Mayor Weaver the authority to sign the renewed contract by Election Day, because of the inability of the City Council to act—a request from the state which the Judge rejected; however, he has scheduled a hearing on the motion later this month.

Motor City Victory Lap. Detroit Mayor Duggan was re-elected yesterday by more than a 2-1 margin over challenger State Sen. Coleman A. Young II, son of a former Detroit Mayor. In remarks after the decision, Mayor Duggan  noted: “I have been treated with nothing but warmth and kindness from Detroiters in every neighborhood in the city…I hope that this is the year where we put us-versus-them politics behind us forever because we believe in a one Detroit for all of us.” His opponent, in conceding, claimed he had commenced a movement to help the politically dispossessed: “The campaign might be over, but the passion and values are eternal…We are the voice for the voiceless. We are the hope for the hopeless.” Mayor Duggan, who won a write-in primary campaign in 2013 and then defeated Wayne County Sheriff Benny Napoleon in the general election, thus became the Motor City’s first mayor to serve two terms since Dennis Archer in the 1990’s.  In his campaign, the former CEO of the Detroit Medical Center gained prominent endorsements from city labor unions, clergy, and business groups—he overwhelmed his opponent in fundraising: he secured about $2.2 million; whereas Mr. Young raised just under $39,000. Mayor Duggan, in his victory remarks, noted his campaign had focused on spending “time talking about the vision of what we are going to do in the next four years,” adding: “I thought one of the most profound things President Obama ever said was ‘If you have to divide people in order to get elected, you’ll never be able to govern.’”

In his campaign, Mayor Duggan touted public service improvements under his administration in the wake of the nation’s largest-ever municipal bankruptcy, including new streetlights, improved public safety response, and more dependable bus lines. He said he intends to continue work on building a more unified Detroit—focusing now on a series of efforts to fix up neighborhood corridors, roads, and sidewalks—and stating: “There are haves and have-nots in every city in America. We’re building a city here that it doesn’t matter where you start, you have the opportunity to be successful,” adding that he believe the greatest challenge now confronting Motor City residents will be over automobile insurance reform legislation—referring to legislation rejected by the Michigan House last week, but making clear he does not intend to give up: “We were a lot closer this time than we were two years ago, and we have a plan to get it through the next time: It’s going to be one relationship at a time, one vote at a time, but we’ve already had several meetings with both the medical and the legal community, and I think they realize we were three votes away.” 

The Road Out of State Oversight. The re-election comes at a critical time, as the City expects to have its full municipal fiscal authority restored next spring for the first time since it exited the nation’s largest ever chapter 9 municipal bankruptcy three years ago—challenging the city’s appointed and elected leaders with the task of resuming governance after the end of state oversight—and as the Mayor and Council resume authority over budgets and contracts. With two balanced budgets and an audit of a third expected next May, city leaders anticipate Detroit will be released early next year from the strict financial controls required under the city’s approved plan of debt adjustment—a key issue during the just completed campaign, where both the Mayor and his challenger had proposed plans with regard to how they would fiscally guide the recovering city—and as Michigan Governor Rick Snyder expressed optimism about the city’s ability to manage its finances, telling the Detroit News: “They’ve been hitting those milestones, and I hope they continue to hit them—that’s a good thing for all of us.”

Indeed, the Motor City’s credit rating has been upgraded; its employment rate is up; assessed property values are climbing. In its financial update last month, the city noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts, and growth in multifamily home construction. Nonetheless, the road to recovery will remain not just steep, but also pot-holed: it confronts very large future payments for past borrowing and public pension obligations under the plan of debt adjustment—or, as our colleague Lisa Washburn of Municipal Market Analytics noted: “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there…Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Petersburg. In one of the most closely watched municipal elections in Virginia, last night, Gloria Person-Brown, the wife of the current embattled City Treasurer Kevin Brown of Petersburg, was trounced by former City Council member Kenneth Pritchett, with Mr. Pritchett winning by a large margin: he captured more than 70 percent of the vote. In his campaign, stating he had been frustrated by the city’s low credit rating, and by the city’s struggles with collecting revenue and timely payment of bills, Mr. Pritchett vowed he would implement policies and standardize internal controls to improve the office’s operations. Likely, in the wake of a Virginia state fiscal report last September—a report which scrutinized eight specific aspects of city governance and fiscal responsibilities—and contained allegations of theft involving Ms. Person-Brown’s husband, City Treasurer Kevin Brown. Some Council members then had called for his resignation, and even Ms. Person-Brown had distanced herself from her husband’s actions during the election, albeit she did not say he had done anything wrong. Rather she ran on a platform of improving the Treasurer’s services, including instituting more checks and balances, and calling for more accountability.

Stepping in to Help Puerto Rico. U.S. District Court Judge Laura Taylor Swain has approved, with various changes, an urgent motion from the government of Puerto Rico and the PROMESA Fiscal Oversight Board which mandates that all federal funds to be allocated to the country for the tasks of assistance and recovery due to the passage of Hurricane Maria may not be claimed in the process of restructuring the public debt, accepting to the request of the Authority for Financial Supervision and Tax Agency and the JSF during the general hearing held in New York City‒in which it emerged that, in part, the order would restrict the use of disaster assistance funds as a condition of the federal government, so that Puerto Rico can receive assistance: the order will establish that the Federal Emergency Management Agency (FEMA) funds for Puerto Rico following in the wake of Hurricane Maria, as well as funds granted by other federal agencies, will be maintained. Judge Swain granted the order after listening to the arguments of Suzanne Uhland, legal representative of AAFAF, as well as lawyers from municipal insurers and the organized group of General Obligations bondholders (GOs), who underscored the need to incorporate into the order transparency criteria and mechanisms to ensure that some entity such as the JSF has influence in how federal funds granted by the government will be used. Matthew J. Troy, the federal government’s representative in the case, told Judge Swain that to include specific language which would give the Puerto Rican government priority in claiming funds that had been misused by state agencies or public corporations in the Island was indispensable for Puerto Rico to receive funds from the federal government: as part of the order, it would be established that, in the event federal funds were misused, it will be up to the central government to claim these funds from the agency or public corporation which received them from the federal government. Judge Swain has scheduled a follow-up hearing for next Wednesday.

During the hearing, an attorney, Marcia Goldstein, pointed out that it is urgent to know what role if any the Junta de Supervisión y Administración Financiera for Puerto Rico (the JSF) will have with regard to the approval of the contracts for the recovery tasks. The PROMESA law establishes, among other things, that the federal agency has the power to review the contracts granted by the Puerto Rican government or the dependencies subject to the control of the JSF. To date, however, it is uncertain whether the JSF has examined or had influence in the process of hiring dozens of companies which would be responsible for multiple tasks, from infrastructure repair to the audit of federal funds. In an interview with the Puerto Rican El Nuevo Día a little over a week ago, House Speaker Paul Ryan (R-Wis.), in the wake of his visit to Puerto Rico, pointed out that the JSF will have a key role in defining the scope of the aid package that Puerto Rico would need and how such resources would be allocated.

The Human & Fiscal Prices of Insolvency

October 20, 2017

Good Morning! In today’s Blog, we consider the spread of Connecticut’s fiscal blues to its municipalities; then we consider the health and fiscal health challenge to Flint; before, finally, observing the seemingly worsening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. It appears that the City of Hartford would have to restructure its debt to receive the requisite state assistance to keep it out of chapter 9 municipal bankruptcy under the emerging state budget compromise between the Governor and Legislature. Under the terms of the discussions, the State of Connecticut would also guarantee a major refunding of the city’s debt, as well as cover a major share of the city’s debt payments, at least for this fiscal year and next, with House Majority Leader Matt Ritter (D-Hartford) indicating this was part of a bipartisan compromise the legislature recognizes is needed to avert municipal bankruptcy: “This budget gives the city all of the tools it needs to be on a structural path to sustainability…This solution truly is a bipartisan one.” According to the city’s Mayor Luke Bronin, Hartford needs about $40 million annually in new state assistance to avert bankruptcy. The emerging agreement also includes $28 million per year for a new Municipal Accountability Review Board, likely similar to what the Commonwealth of Virginia has used so effectively, to focus on municipalities at risk of fiscal insolvency and to intervene beforehand: approximately $20 million of that $28 million would be earmarked for Hartford. The new state budget would require Hartford to restructure a significant portion of its capital debt, but the state would guarantee this refinancing, an action which—as was the case in Detroit—will help Hartford have access to lower borrowing costs: the agreement also calls for the state to pay $20 million of the city’s annual debt service—at least for this fiscal year and next.

The state actions came as Moody’s Investor Service this week placed ratings of 26 of the state’s municipalities, as well as three of the state’s regional school districts under review for downgrade, citing state aid cuts in the absence of a budget, warning those municipalities and districts face cuts in state funding equal to 100% or more of available fund balance or cash—with those cities most at risk: Hartford (which currently receives 50 percent of its revenues from the state), New Haven, New Britain, West Haven, and Bridgeport. Moody’s was even fiscally moodier, dropping the credit ratings of an additional 25 Connecticut cities and towns, and three other regional school districts, while maintaining the existing negative outlook on the rating of one town. Moody’s list did not, however, include Hartford. The down-gradings come as the state has continued to operate under Executive order in the absence of an approved fiscal budget, now more than a fiscal quarter overdue. Gov. Dannel Malloy, at the beginning of the week, had submitted his fourth FY2018-19 budget to lawmakers, a $41.3 billion spending plan in the wake of his veto last month of the version approved by the legislature, reporting that his most recent fiscal plan would eliminate some revenue proposals, including new taxes on second homes, cell phone surcharges, ridesharing fees, and daily fantasy sports fees—instead, he has proposed an additional $150 million in spending over the biennium, while simplifying the implementor language. According to Moody’s, under the Governor’s new executive order, state aid to local governments will be nearly $1 billion below last year’s level—or, as Moody’s put it: “The current budget impasse highlights the ongoing vulnerability of funding that Connecticut provides to its local governments.” Connecticut traditionally has provided significant funding to its local governments, largely through education cost sharing grants, but also through payments in lieu of taxes and other smaller governmental grants. Connecticut’s GO bond prices have deteriorated with 10-year credit spreads around 80 basis points, well above historical levels, according to Janney Capital Markets Managing Director Alan Schankel: “A state’s fiscal stress tends to flow downstream to local governments, and Connecticut is no exception.” The fiscal irony is that despite the state’s high per capita wealth, the state’s debt, at 9.2% of gross state product, is highest among the states, lagging only behind Illinois.

Not in Like Flint. U.S. District Court Judge David Lawson has ordered Flint’s City Council to choose a long-term water source for the city by Monday after it spent more than three months refusing to make a decision. In his 29-page opinion, he took Flint’s City Council to task for sitting on an April agreement backed by Mayor Karen Weaver, the state and the federal Environmental Protection Agencies that would see the city stay on the Detroit area water system through a new 30-year contract with the Great Lakes Water Authority, writing:. “The failure of leadership, in light of the past crises and manifold warnings related to the Flint water system, is breathtaking.” Judge Lawson’s decision came in response to a suit filed by the Michigan Department of Environmental Quality last June in the wake of the Flint City Council ignoring the state’s deadline for a water supply decision, arguing the delay would “cause an imminent and substantial endangerment to public health in Flint.” The Council, in hearing and filings, had requested more time from the court; however, Judge Lawson wrote that the state had demonstrated potential for “irreparable injury” in Flint and that there was an urgency to act, because the city’s short-term water agreements have expired and the long-term agreement is time sensitive, concluding: “The City Council has not voted on the negotiated agreement, it has not proposed an alternative, and the future of Flint’s fragile water system—its safety, reliability, and financial stability— is in peril…Because of the city’s indecision, the court must issue its ruling.” Judge Lawson’s order likely ensures the City Council will approve the proposed contract with the Great Lakes Authority that it had been resisting though it was negotiated with Mayor Karen Weaver’s approval. The city could choose to risk defying the court order; however, the State of Michigan has warned that tens of millions of dollars in extensive repairs and updates need to be made to the inactive Flint water plant—repairs which would take three and a half years to complete.

The warnings of Wayne State University Professor Nicholas Schroeck with regard to the risk to public health and the financial stability of the water supply system appeared key to persuading Judge Lawson to side with the state and issue a pre-emptive order. The Judge, in early August, had appointed a mediator in an effort to try gain an agreement between the city and the state Dept. of Environmental Quality; however, when the sides were unable to settle, he warned that  extending Flint’s contract with the Detroit area water system beyond 30 days could result in funding problems: “It seems to me that inaction is inviting intervention.” The Weaver administration analyzed various long-term water options for Flint, and the Mayor said Tuesday the Great Lakes agreement “proved to be in the best interest of public health by avoiding another water source switch, which could result in unforeseen issues.” The Michigan DEQ praised Judge Lawson for “recognizing there is no need to wait…and remains committed to working with the City of Flint to implement a plan once a source water determination has been finalized to ensure compliance with the Safe Drinking Water Act.” In its arguments before Judge Lawson, the State of Michigan had warned: “The City Council’s failure to act will result in at least a 55-63% increase in the water rate being charged to Flint residents, create an immediate risk of bankrupting the Flint water fund, will preclude required investment in Flint’s water distribution system, and create another imminent and substantial endangerment to public health in Flint.” That was similar to a statement from a key aide to Gov. Rick Snyder who had warned that stalling the water contract decision was costing the City of Flint an extra $600,000 a month, because it was paying for two sources—Great Lakes, from which it currently gets its treated water, and Karegnondi, from which it contractually would receive water by 2019 to 2020. Under the 30-year agreement with Great Lakes, Flint would no longer have to make payments to Karegnondi.

Unresponsiveness. President Trump last week awarded himself a perfect rating for his response to the hurricane that devastated Puerto Rico: “I would give myself a 10,” he responded when asked by reporters how he would score his efforts, on a one to 10 scale. He told Fox News correspondent Geraldo Rivera that Puerto Rican governments “owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out. You can say goodbye to that.” A comment to which OMB Director Mick Mulvaney noted: “I wouldn’t take it word for word.” Indeed, a week later, Congressional Republicans unveiled a relief plan that would only add to Puerto Rico’s unsustainable debt load. In his meeting this week with Puerto Rico Governor Ricardo Rosselló, who was in Washington to press for federal disaster relief, the President claimed: “We have provided so much, so fast.” Yet, today nearly 80 percent of the island remains without electricity, and almost 30 of the island still does not have access to clean water, according to Puerto Rican government figures.

In contrast with Texas after Hurricane Harvey and Florida after Irma, where thousands of repair workers rushed in to restring power lines, only a few hundred electrical workers from outside Puerto Rico have arrived to help: it was not until last Saturday that the Puerto Rican government said it had the federal funding needed to bring in more workers. That compares to some 5,300 workers from outside the region who converged on coastal Texas in the days after Hurricane Harvey to restore a power loss about a tenth of the size that struck Puerto Rico. Similarly, in Florida, 18,000 outside workers went in after Hurricane Irma knocked out electricity to most of the state last month, according to Florida Power and Light; whereas, in Puerto Rico, the challenge of restoration has fallen on the shoulders of about 900 members of local crews—an outcome industry experts report to be a result of poor planning, a slow response by power officials, and Puerto Rico’s dire fiscal situation—a sharp contrast to the President’s claim that his administration deserved a 10 for its response to the hurricanes which struck Puerto Rico and other parts of the United States.

The U.S. Army Corps of Engineers, charged by FEMA with restoring Puerto Rico’s power, estimated that it needed at least 2,000 additional workers. So far, the Corps has brought only about 200 workers, and most of them were dedicated not to restoring power, but to installing generators at crucial locations. In the wake of major storms, such as Katrina, power companies typically rely on mutual aid agreements to get electricity restored: such outside companies send thousands of workers, and electric companies pay for the service with funds from FEMA. However, providing such assistance to Puerto Rico is not just logistically a greater challenge—but also a discriminatorily greater challenge: the Jones Act—which the President only suspended for ten days—means that the time and cost of shipping comes at a 20% premium.  

The Human Storm. Maria risks accelerating the trend of the last decade of economic decline and depopulation, described as “a slower-moving catastrophe,” which is wreaking a devastating toll: The number of residents had plunged by 11 percent, the economy had shrunk by 15 percent, and the government has become fiscally insolvent. Already ranked among the worst cycles of economic decline and depopulation in postwar American history, the aftermath of Maria threatens an acceleration of residents fleeing en masse: accelerating economic decline and potentially accelerating a vicious cycle. Lyman Stone, an independent migration researcher and economist at the Agriculture Department notes: “We are watching a real live demographic and population collapse on a monumental scale.” At a news conference last week, Gov. Rosselló warned that without significant help, “millions” could leave for the U.S. mainland: You’re not going to get hundreds of thousands of Puerto Ricans moving to the States—you’re going to get millions…You’re going to get millions, creating a devastating demographic shift for us here in Puerto Rico.” Puerto Rico Treasury Secretary Raúl Maldonado has warned, meanwhile, that without more aid, the government could suffer a shutdown by the end of the month.

Today, only about 40 percent of Puerto Ricans in the territory are employed or seeking work—more than 33% below levels on the mainland. The danger, now, is of increased flight—but flight by the young and those with college degrees. After all, with the PROMESA Board charged with fashioning a fiscal plan to pay off more than $70 billion in Puerto Rico’s municipal debt calling for efforts to raise taxes and significant cuts to the government, the Board has predicted continuing shrinkage of the Puerto Rican economy. Thus, there is a real apprehension

As a result, for Washington and Puerto Rican officials planning a recovery, the ongoing exodus poses a multifaceted dilemma. “They’ve got to start from the ground up,” a former U.S. Treasury official said of any new plan for the island. In the short-term, at least, the island is likely to see an economic boost; rebuilding after a hurricane often injects a jolt of spending into local economies. But, according to recent research of 90 years of natural disasters in the United States, published as a National Bureau of Economic Research working paper, major natural disasters also have unfavorable effects: They increase out-migration, lower home prices, and raise poverty rates. Like many on the island, Sergio M. Marxuach, policy director for the Center for a New Economy, a San Juan-based think tank, said a massive federal investment is necessary. “We’re going to need some significant government intervention — essentially a big rescue package, not only to rebuild the economy but get it growing…People are saying, ‘I don’t want my children to grow up in a place where the economy is going to be devastated for the next 10 years.’ If enough people think that way, it’s going to be a self-reinforcing downward spiral.”

In addressing complaints about ongoing struggles on the island, President Trump noted this week that the disaster in Puerto Rico in many ways had begun years ago. Puerto Rico “was in very poor shape before the hurricanes ever hit. Their electrical grid was destroyed before the hurricanes got there. It was in very bad shape, was not working, was in bankruptcy.”

At the Level of a Muncipio. While many have considered the fiscal and physical impact on the U.S. territory of Puerto Rico, fewer have considered the fiscal challenge to Puerto Rico’s municipalities. Consider, for instance, Juncos, one of Puerto Rico’s 78 municipalities: it is located in the eastern central region of the island; it is spread over 9 wards and Juncos Pueblo (the downtown area and the administrative center of the city). The city, one of the oldest in the United States,was founded on the request of Tomas Pizarro on August 2, 1797, having previously been a village which evolved from a small ranch, the Hatillo de los Juncos. Hurricane Maria has changed this municipality forever: more than 1,000 families in Juncos lost it all that unforgettable September 20th, when Hurricane Maria struck. Yet, in a remarkable effort, residents of the La Hormiga sector of Las Piñas neighborhood, in the immediate aftermath of the hurricane, organized to help recover the humble community that is often highlighted by criminal incidents in the area: one of the community leaders of the sector, Wanda Bonilla, highlighted the deed of the trash rescuers: “Thanks to them, they have also relieved the pick up of the rubble.” The city’s community board worked immediately to install a shelter in the neighborhood community center given the circumstances that some 17 families, with between five and seven members each, where the storm tore the roofs off their homes—and most of those homes have single mothers. She noted: “Our president, Ivelisse Esquilín, who also lost everything, is helping us through the Municipality and with other donations.” Juncos Mayor Alfredo Alejandro noted that, in the wake of the storm, crossing arms was not an option for anyone “in the neighborhood” even though many of the 60 families living in the sector experienced the grief of having lost their home: “You have to do it because imagine …right now, look here, I have these pieces of a car to see if I invent a type of small generator to, even be, to turn on a fan.” The Mayor described Maria’s devastation to be of “great proportions:” Out of population of 42,000 people, more than 1,000 lost their homes and a comparable number suffered major damage to their structures; 85% of the city’s residents are still without potable water, while there are few expectations that electricity will soon be restored.

Physical & Fiscal Storms

September 20, 2017

Good Morning! In today’s Blog, we consider the fiscal challenge confronting the small Virginia municipality of Pound; then we turn to the fiscal and physical storms pounding the U.S. Territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Pound fiscally pounded. The Council of the small Virginia Town of Pound, the original home of former U-2 pilot Gary Powers, with a population under 1,200, where the median income for a household is under $30,000, confronted by an inability to make payroll and pay other bills due has unanimously agreed in an emergency meeting to borrow enough to pay employees, but not any other outstanding obligations. The Mayor and interim Town Manager George Dean advised the Council that resources in the general fund get low about this time every year; this year, he noted, however, the town has experienced some unanticipated expenditures; thus it needed to tap into its line of credit. As factors, Manager Dean identified unbudgeted overtime, especially in the police department, as the single biggest problem.  He added: “I did not budget to have a chief of police and an assistant police chief in the office side by side,” adding the town could not sustain the current level of overtime. In response, Councilman Terry Short said that with eight officers, there should be no need for overtime, asking how the officers are receiving more overtime than is budgeted. The Manager responded: “You have to ask him,” referring to Chief Tony Baker—which unsurprisingly led Councilman Clifton Cauthorne to note that the town manager is in charge of the finances. But Manager Dean was clear: “I’m not telling the Chief of Police how to run his department: You all need to address that.”  But Councilmember Short noted that when four full-time officers are receiving more than 100 hours of overtime, “we’ve got a problem.”  Town clerk and bookkeeper Jenny Carter, however, said the Police Department was not the only position drawing overtime out of the general fund, telling Council her position also is paid through that account, and she logs considerable overtime, because the office is so understaffed. She had four meetings last month, Ms. Carter noted, and it took 23 and a half hours to type up all those minutes. So, how much was budgeted, Councilman Danny Stanley asked. Eight hours, Ms. Dean responded. While there was some discussion that the seasonal financial crush should ease when the town converts to a twice-annually billing cycle, Ms. Carter said she was confident that will resolve matters in the future; however, she also suggested Council consider increasing the town’s line of credit—a suggestion Councilmember Cauthorne was quick to oppose, noting: “I feel that is like giving a drunk more booze,” adding this was not the first year the town has run into this fiscal problem—or, as one of his colleagues added: “[it] just continues to snowball,” overspending every year, robbing Peter to pay Paul, borrowing money it does not have and without a method to pay it back. Asked how much the town has repaid of its original debt, Ms. Dean said the town still owes the bank about $65,000, adding the town has access to roughly $35,000 available of a $100,000 line of credit, while Ms. Carter said the town is negative $24,500 in the general fund, with open payables of almost another $10,000. If the Council is going to put any more on the line of credit, Councilman Cauthorne made clear he wants to revisit automatic spending cuts—reminding his colleagues that Pound had adopted a plan in 2014 to trigger automatic cuts if the town ever reached $55,000 of its line of credit—an action the Council rescinded a year later.

Councilmember Short said the town’s internal controls require use of time cards, and other kinds of time sheets have not been approved, moving to mandate immediately that all employees use time cards as required by Pound’s internal controls policy: he further noted that the town has a budget and has policies and procedures to control operations, adding: “All we have to do is follow it. It’s that simple.” Council unanimously endorsed requiring time cards as per existing policy. Councilmember Short then moved that all overtime require approval of the town manager, including the police force, but Manager Dean immediately objected, stating: “That’s not going to work,” adding he was not going to comply and Council would have to figure out who was going to tell the police chief, adding: “I am not in control of the chief of police’s overtime hours…He works for you…We’ve got a financial problem here and we’ve got to do something about it: the Council is being asked to borrow money to pay for bills which “we are not controlling.” With regard to employees spending more money than is budgeted, he added: “I don’t know of any business that works like that. If they do, it ain’t long before they are out of business…” He noted they are obligating all taxpayers in the town when they sign contracts borrowing money and citizens are financially obligated to repay that money if the town goes under.

Fiscal & Physical Storms. Promesa Oversight Board Executive Director Natalie Jaresko, in an interview with the Bond Buyer, warned that Puerto Rico is confronted by what this morning could be the strongest hurricane to ever hit the U.S. territory, further decimating public utilizes and forcing the virtually insolvent government to rebuild dozens of communities. But she also said she anticipated Puerto Rico’s fiscal ability to make its requisite municipal bond payments should improve after nine years, expressing optimism with regard to Puerto Rico’s future and the PROMESA board’s relationship with the government of Gov. Ricardo Rosselló—albit, she added, the next few years of reform will inevitably be tough: the PROMESA Board does not expect Puerto Rico to return to nominal gross national product growth until FY2022 and inflation-adjusted growth until FY2024, adding that by the end of the next decade, she anticipates Puerto Rico’s economy to be growing, noting: “In the years 11 to 40 there’s bound to be more cash in all the estimates available for debt service: So creditors shouldn’t only focus on the 10 years.” She added that the Board is working on a “plan of adjustment” for the debt, as provided under PROMESA, albeit she was uncertain when the plan would be publicly released. With regard to timing, she said, in the interview, that Judge Swain has said she plans to rule by mid-December on the dispute between the Puerto Rico Sales Tax Financing Corp. (COFINA) and Puerto Rico over the ownership of sales tax proceeds allotted for the former. Once this is done, she noted, Puerto Rico may pay some of the debt due this fiscal year, adding that work on restructuring all of Puerto Rico’s public sector debt is proceeding simultaneously on three tracks: in negotiations, in the private mediation process overseen by Barbara Houser, and in the Title III litigation process overseen by Judge Swain. She added that the PROMESA Board is working with PREPA and parts of Gov. Rosselló’s administration to adopt a new fiscal plan for PREPA, noting that lowering Puerto Rico’s electric rates would be a vital step for enhancing the economy—albeit Hurricane Maria appears to have very different implications.

With regard to the relationship between the PROMESA Board and the Governor, the Director was generally positive, adding she said she was satisfied with government’s progress in releasing financial information to the board, noting that the Rosselló administration is providing the PROMESA board a report comparing budgeted to actual spending department by department, as well as weekly reports on cash and liquidity, adding that Puerto Rico is moving towards better accounting practices.

Interestingly, the Director said the experience she gained from her service as the Minister of Finance for Ukraine from 2014–2016, taught her “implementation is everything.” Last month, she said, a lack of implementation plans had led the PROMESA Board to order Puerto Rico to institute furloughs, noting: “There are governments aplenty that can adopt plans, adopt laws, have full commitment and desire to change but implementation at an agency level in a bureaucracy is extremely difficult: that is the key to success,” adding that she believes the Rosselló administration has been “committed” to the fiscal plan: “If you take the case of right-sizing the government, I have no doubt there is a desire and intent and it is part of the public campaign of the governor to right-size the government. So I don’t think there’s not an alignment in the goal.” Nevertheless, as she put it—and as we have learned from Pound: “[T]he devil will be in the details of the implementation and enforcement of the fiscal plan, and that is the biggest lesson learned [from the Ukraine.]” to execute cuts in an agency, the agency can run out of money eight or nine months into the fiscal year, she said. “Then the agency usually turns to the central government for an additional allocation to continue operations…“There is a general fatigue among creditors [with Puerto Rico’s continuing problems] and I understand that because they have been dealing with these problems for years. But the problems that grew didn’t evolve overnight and didn’t evolve over one year and resolving them is also going to take time.”

It is unclear what level of fiscal planning will be sufficient today as Hurricane Maria, bringing sustained winds of 160 miles per hour (mph) appears relentlessly approaching—with the government insisting its the priority is to save lives, even as it continues to deal with the after effects of Hurricane Irma, which passed tens of miles above the north coast. The National Weather Service warned: “It is catastrophic in every way, winds, rain and storm surge. We are talking about an extremely dangerous event.” Along with winds of 160 mph and even higher gusts, Maria was predicted to bring 12 to 18 inches of rain, and up to 25 inches for isolated areas in Puerto Rico: the storm surge is estimated from 6 to 9 feet, with large breaking waves that could reach 25 feet. Governor Ricardo Rosselló Nevares urged citizens and families to seek save havens to prevent the loss of human lives: “We have not experienced an event of this magnitude in our modern history…An event like this has never happened before. Maria is predicted to be the worst atmospheric event in a century in Puerto Rico, and, if we do not take precautions, we will have loss of lives that we could have avoided.” The Governor noted that yesterday afternoon residents had already begun to move in five communities which are threatened due to their location in flood-prone areas: Juana Matos, in Cataño; Playita, in Salinas; Amelia, in Guaynabo; Islote, in Arecibo, and Palo Seco, in Toa Baja: by yesterday afternoon, there was clearance and authorization for opening 499 shelters, 49 more than for Hurricane Irma: the Gov. noted: “The main goal is to save lives. If you are in a flood area, your life is in danger. If you live in a wooden home, your life is in danger.” Already, from the previous Hurricane Irma 27 municipalities in Puerto Rico have already been declared disaster areas. Thus, even as Maria roars in, there are still many, many customers without power, homeless citizens, houses without walls, trees lying on power lines, and debris accumulated along the roads.

At the request of the Puerto Rican government, President Trump had already authorized a new emergency declaration before the arrival Maria: Puerto Rico FEMA Director Alejandro de la Campa indicated that he had requested more equipment from the US Department of Defense: “We are asking for more ships, and the aircraft carrier (available for the emergency) has moved to be in a safe area… And ships with helicopters that we will use in case of evacuation or search and rescue are still in the area.” Nevertheless, due to the fragility of the infrastructure of the Puerto Rico Electric Power Authority (PREPA), the Governor anticipates Puerto Rico will be without power after the passage of Maria: “No one in Puerto Rico should expect to have power on the days following María. The time it will take us to fix (the damage caused by the hurricane) remains to be seen.” PREPA Executive Director Ricardo Ramos noted that the total recovery of the system after the passage of Hurricane Hugo in 1989 took about six months. One especially cruel threat will be water: Elí Díaz, the Executive Director of the Puerto Rico Aqueduct and Sewer Authority, noted: “If there is damage to large generators, there will be no power generation, therefore, our facilities will not have power to operate,” adding that there are approximately 1,300 generators which received preventive maintenance since the beginning of the hurricane season, but they are not enough for their 4,000 facilities, including pumping stations. By yesterday afternoon, they managed to prepare 110 tanker trucks, more than double those used during Irma, and are already managing imports from the port of Jacksonville in agreement with private companies. He added that since last Sunday, the levels of the Carraízo and La Plata dams have been gradually dropped to about three meters in order to prevent them from having to open the emergency flood gates.

For his part, last evening, President Trump tweeted his support: “Puerto Rico being hit hard by new monster Hurricane. Be careful, our hearts are with you-will be there to help!” The eye of the hurricane passed near or over St. Croix last night, prompting U.S. Virgin Islands Gov. Kenneth Mapp to insist that people remain alert. St. Croix was largely spared the widespread damage caused by Hurricane Irma on the chain’s St. Thomas and St. John islands just two weeks ago; however, this time, the island would experience five hours of hurricane force winds, Mapp warned: “For folks in their homes, I really recommend that you not be in any kind of sleepwear: Make sure you have your shoes on. Make sure you have a jacket around.”