Catalysts to Fiscal Recoveries

November 10, 2017

Good Morning! In today’s Blog, we consider the ongoing challenges to Detroit’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy; the State of Michigan’s winnowing down of municipalities under state oversight; and the ongoing physical and fiscal challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Reframing the Motor City’s Post Chapter 9 Future. Nolan Finley, a wonderful contributor to the editorial page of the Detroit News, this week noted “elections are a wonderful catalyst for refocusing priorities, as evidenced by the just-completed Detroit mayoral campaign, which moved the city’s comeback conversation away from the downtown development boom and centered it on the uneven progress of the neighborhoods. Never before has such an intense spotlight shown on the places where most Detroit voters actually live.” He attributed some of the credit to the loser in this week’s mayoral election, challenger Coleman Young II, who forced Mayor Mike Duggan to defend his record on improving quality of life in the neighborhoods. He perceptively wrote that while candidate Young’s ugly “Take back the Motherland” rallying cry was dispiriting, it spoke to the governing challenge the newly, re-elected Mayor confronts, writing: “Detroit is not a city united. It must become one. There were too many skirmishes along the racial divide in this mayoral contest. The old city versus suburb story line was replaced by a neighborhood versus downtown narrative, but both are code for black versus white. Four years ago, Duggan’s election as Detroit’s first white mayor in 40 years suggested much of the city was ready to stop looking back at its dark and divisive past and begin focusing on a brighter future.” Now, he wrote, after Mayor Duggan focused his first term on meeting the city’s plan of debt adjustment, and trying to improve the quality of life for residents—and as developers are beginning to add community projects to their downtown portfolios, “too many in the neighborhoods feel as if their lives are not getting better, or at least not fast enough.” Thus, he noted, Mayor Duggan needs to redouble his efforts to restore the city’s residential communities, and push ahead the timetable: “Four years from now, Detroit cannot still be wearing the mantle of America’s most violent city.” He added that while Mayor Duggan has little—too little—authority to address education in Detroit; nevertheless—just as his colleague Rahm Emanuel, the Mayor of Chicago recognized, needs to strongly back Detroit Public School Superintendent Nikolai Vitti’s efforts to rapidly boost the performance of the Detroit Public Schools Community District: it is a key to bringing young families back into the city. And, Mr. Finley wrote, the mayor “must also find a way to connect the neighborhoods to downtown, to instill in all residents a sense of ownership and pride in the rejuvenation of the core city. That means getting way better at inclusion. Downtown’s comeback must be more diverse, and include many more of the people who have grown up and stayed in the city. Encouraging and supporting more African-American entrepreneurs is a great place to begin breaking down the perception that downtown is just for white people: Detroit needs more diversity everywhere in the city, both racial and economic,” referring especially to young millennials who are steeped in social justice and imbued with the obsession to give back that marks their generation. “They are committed Detroiters. And they deserve to be appreciated for their contributions, not made to feel guilty or viewed as a threat to hard-won gains.”

Free, Free at Last. Michigan State officials have released Royal Oak Township, a municipality of about 2,500 just north of Detroit, from its consent agreement: Michigan Treasurer Nick Khouri said the Oakland County municipality has resolved its financial emergency and is ready to emerge from the state oversight imposed since 2014, stating: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” The township’s financial emergency resulted in an assets FY2012 deficit of nearly $541,000. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever…The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” Treasurer Khouri also said the township was the last Michigan remaining municipality following a consent agreement: Over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements because of fiscal and financial improvements and operational reforms. The Treasurer noted that today only three communities, Ecorse, Flint, and Hamtramck, remain under state oversight through a Receivership Transition Advisory Board.

Preempting Authority. House Natural Resources Committee Chair Rob Bishop (R—Utah) this week said the PROMESA Oversight Board should be granted even more power to preempt the authority of the government of Puerto Rico, stating: “Today’s testimony will inform the work of Congress to ensure the Oversight Board and federal partners have the tools to coordinate an effective and sustained recovery,” in a written statement after a hearing of the House Committee on Natural Resources: “It is clear that a stronger mechanism will be necessary to align immediate recovery with long-term revitalization and rebuilding.” Chairman Bishop added: “This committee will work to ensure [the Puerto Rico Oversight Board] has the tools to effectively execute that mission and build a path forward for this island and its residents.” The Board was created last year to oversee fiscal management by the island government, which had said more than $70 billion of debt was unpayable under current economic conditions. Since the hurricane, the Board has clashed with the territorial government over leadership at the power utility. During the hearing the board’s Executive Director, Natalie Jaresko, said the ability of Puerto Rico’s government to repay its debt was “gravely worse” than it was before Hurricane Maria, which arrived Sept. 20. By the end of December, the Board plans to complete a 30 year debt sustainability analysis with Puerto Rico’s government, she said: “After the hurricane, it is even more critical that the Board be able to operate quickly and decisively…to avoid uncertainty and lengthy delays in litigation, Congressional reaffirmation of our exercise of our authority is welcome.” On Oct. 27, the board had filed a motion in the Title III bankruptcy case for the Puerto Rico Electric Power Authority (PREPA) seeking the court’s permission to appoint Noel Zamot as the authority’s new leader. The government of Gov. Ricardo Rosselló has made it clear that it intends to challenge this motion. The court is scheduled to hold a hearing on the matter on Monday, November 13th.

In calling for more board power, Chairs Bishop and Jaresko probably were at least partly referring to the struggle over PREPA’s leadership. They may also want the Board’s power augmented in other ways: the Board has already announced that it will be creating five-year fiscal plan for Puerto Rico’s government and for its public authorities this winter. Puerto Rico’s government will have substantial needs for federal aid in the coming years, Ms. Jaresko said. Congress plans to tie this aid to the government following the Board’s fiscal plan and this would be appropriate, she said. “Before the hurricanes, the board was determined that Puerto Rico and its instrumentalities could achieve balanced budgets, work its way through its debt problems, and develop a sustainable economy without federal aid,” Ms. Jaresko said in her written testimony. “That is simply no longer possible. Without unprecedented levels of help from the United States government, the recovery we were planning for will fail.” She also said that over the next 1.75 years Puerto Rico’s government will need federal help closing a gap of between $13 billion and $21 billion for basic services. She added the federal government should change tax laws to benefit the island: “The representatives of the Financial Oversight and Management Board (FOMB) who appeared before the House Committee on Natural Resources insist on jeopardizing the necessary resources for the payment of pensions and job stability,” Gov. Rosselló testified in his written statement, adding to that the testimony of Ms. Jaresko and Mr. Zamot “evidenced ignorance about the recovery process in Puerto Rico, presenting incorrect figures relating to the existing conditions on the island,” adding: “I again invite the FOMB to collaborate so that the government of Puerto Rico, together with the support of the federal government, facilitates the fastest possible recovery of our island.” He noted that such assistance should not depend on the Board “assuming the administrative role” which belongs to the elected government of Puerto Rico.

Sanctioned Discrimination. The endorsement that the House Ways and Means Committee effectively incorporated in its “tax reform” legislation reported out of Committee this week appears to discriminate against Puerto Rico, imposing a tariff on the products which Puerto Rico exports to the mainland—threatening to deal a devastating blow to Puerto Rico’s industrial base at the very moment in time the territory is striving to recover from the already disparate hurricane recovery blows. According to economists Joaquín Villamil: “None of these measures, nor the repatriation of profits, the corporate rate and the 20% tax on imports is positive for the island…The companies are not going to pay a 4% royalty to Puerto Rico and a 20% tax to bring their product to the United States. They will leave the island, especially if the tax rate is lowered there.” Mr. Villamil added: “If that happens, 21% of the income received by the Puerto Rican Treasury is eliminated,” he added, referencing P.L. 154, the statute which established a 4% tax on sales of an operation in Puerto Rico to its parent company in the mainland. In its markup, yesterday, the House Ways and Means Committee left almost intact §4303 which establishes a 20% tariff on all imported goods for resale by companies and businesses in the United States. Moreover, the disposition forces multinationals with operations in places such as the U.S. territory of Puerto Rico to repatriate their income to the U.S. What that means is that the production of drugs, medical devices, and many other goods in Puerto Rico is done on U.S. soil; however, for federal tax purposes, Puerto Rico is deemed an international jurisdiction—or, as economist Luis Benítez notes: “This (House Ways and Means bill) generates greater uncertainty about what the economic future of the island should be: with this, the figure of the controlled foreign corporation (CFC) loses the competitive advantage it had (under §936).” He noted that by reducing the corporate rate to multinationals operating in Puerto Rico, the benefit of giving them tax exemptions at the local level is also reduced, as is the case of Law 73 on Industrial Incentives: via the elimination of §936, Puerto Rico, as a place to do business, went from competing with the continental U.S. to competing with countries such as Singapore and Ireland, adding that now a reduction in the corporate rate would cause Puerto Rico not only to compete with the rest of the world, but with jurisdictions on the mainland: “I think that if I were the Secretary of the Treasury, I would tremble with this situation.”

In Puerto Rico, he estimates manufacturing employs approximately 75,000 people directly—a number which rises to 250,000 when indirect and induced jobs are calculated, adding that even though the manufacturing sector has shrunk in the past years, the productive and contributory base rests on that activity, adding that: “As much as it is said that they do not pay taxes, this sector contributes 33% of the revenues…As long as jobs are lost there, the treasury will erode,” noting that the industrial sector plays such a large role in Puerto Rico’s economy that no other sector of the service economy can counterbalance it. He worries that if Congress fails to address the apparent discrimination, the chances that the PROMESA Board and the government of Puerto Rico can put together an economic recovery plan is minimal: “These are implications for all of Puerto Rico: It is difficult to think about options, because if this is approved, it would be disastrous, because of everything that has happened after Hurricane Maria.”

Last night, the former president of the Association of Certified Public Accountants, Kenneth Rivera Robles, who has been part of several lobbying delegations to Washington, remained relatively optimistic that the project language will be amended.

President Woodrow Wilson signed the Jones-Shafroth Act into law on March 2, 1917, with the law providing U.S. citizenship to Puerto Rico’s citizens, granting civil rights to its people, and separating the Executive, Judicial, and Legislative branches of its government. The statute created a locally elected bicameral legislature with a House and Senate—but retained authority for the Governor and the President of the United States to have the authority to veto any law passed by the legislature. In addition, the statute granted Congress the authority to override any action taken by the Puerto Rico legislature, as well as maintain control over fiscal and economic matters, including mail services, immigration, defense, and other basic governmental matters. 

Advertisements

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 Import of Accurate Municipal Revenue Projections in Addressing Municipal Insolvency

eBlog, 1/12/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges to Detroit’s long-term recovery from the nation’s largest chapter 9 municipal bankruptcy, before turning to the small Virginia municipality of Petersburg as it struggles to not just avoid bankruptcy, but rather to right its ship of state—both by its elected and appointed leaders.

Detroit Coming Back. Detroit, as we noted in our original report on the city, is quite different than most U.S. municipalities and, indeed, from other cities in Michigan in that its revenues, from taxes and state-shared revenues are higher than those of any other large Michigan municipality on a per capita basis, in part reflecting its reliance on a significantly broader tax base than most cities in the country: property taxes, income taxes, utility taxes, casino wagering taxes, and state-shared revenues. The property tax accounted for 13.3 percent of Detroit’s revenues in 2012, even though the city had the highest property taxes among big cities in the U.S. But it was the 22 percent decline in those revenues over the decade preceding its collapse into the nation’s largest-ever chapter 9 bankruptcy that appeared to precipitate the state takeover via the appointment by Governor Rick Snyder of an emergency manager to steer the city into—and then out of chapter 9 municipal bankruptcy. The exhaustion of the city’s revenues reflected the overall loss of 15,648 business establishments between 1972 and 2007—that is, even before the massive impact of the Great Recession, or the bankruptcies and subsequent recovery of General Motors and Chrysler and the restructuring of the automotive supplier network—companies bailed out by the federal government, unlike Detroit.

Today, still, despite its lower reliance on property tax revenues, the track of those revenues can reflect the city’s fiscal direction. Indeed, the city’s housing market faces numerous challenges as the city seeks to carve out a path toward less blight, increased housing preservation, and a better functioning residential mortgage market. Zillow reports that median sale prices for metro Detroit homes and condominiums rose 7.2 percent last month compared to the year before: the median home value in Detroit is $37,000, reflecting home values which have gone up even more, by 8.5% over the past year, according to Zillow, which predicts they will rise 4.2% within the next year. At the same time, the percent of Detroit homeowners underwater on their mortgages is 0.4%, some four times higher than Detroit Metro area; the median rent price in Detroit is $750, or about 75% of the Detroit Metro median of $1,050; nevertheless, sale prices across the city have continued to grow, while both the number and share of underwater loans has continued to decline. The average household equity for all Detroit loans reached 29 percent in Q4 2015; the shares of loans in serious delinquency, foreclosure, or REO (property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction) in Detroit are on pace to fall below pre-crisis levels. The data demonstrate a particularly sharp decline in the share of REOs.

However, sales of single family homes in the city in 2015 (about 18,522) dropped about 18% from the previous year, even as Detroit’s median rent stabilized at around $756 a month in December 2015. Unemployment fell again in the early months of last year, and labor force size edged up as well, according to the Detroit Housing Tracker (the Detroit Housing Tracker monitors the latest development in the Detroit housing and community development arena and is updated quarterly: the publication has two sections in which it presents comprehensive market indicators including sales prices and volumes, rental prices, household equity level, delinquencies and foreclosures.) In comparison, in the surrounding four-county area of Oakland, Wayne, Macomb, and Livingston counties, median sale prices jumped from $149,200 in December 2015 to $159,900 in December 2016. According to Realcomp Ltd. II, last month’s figures fall in line with the general trends of 2016: the number of on-market listings in the four-county region last month declined nearly 43 percent year-over-year, from 19,634 to 11,255; however, sales prices in all four of the surrounding counties increased, on average, by 10%.

In Overtime. The city of Petersburg, Virginia added another hefty bill to its payment list after a class-action lawsuit (Thomas Ewers, et al, vs. the City of Petersburg Bureau of Police) between members of the Bureau of Police and the city was settled last week, with the settlement agreement mandating the virtually insolvent municipality to make a payment of $1.35 million in recompense for law enforcement officers’ unpaid overtime. Of that amount, the City of Petersburg will have to pay $800,000, while the Virginia Division of Risk Management will chip in the remaining $550,000. For its part, Petersburg city spokesman Clay Hamner this week reported that that part of Petersburg’s payment is expected to come via a short-term $6.5 million loan secured by Petersburg from Wells Fargo last month; other funds could potentially come from the sale of the city’s municipal water and wastewater assets—especially in the wake of an unsolicited purchase proposal last month by Aqua Virginia, Inc., leading the city to advertise for competing bids. According to the city’s press release, the settlement applies to all current and former law enforcement officers employed between Jan. 11, 2013 and June 24, 2016, by the Bureau of Police at the rank of lieutenant or below who were denied overtime or other wage-related payments. The settlement came as the city’s expensive fiscal turnaround consultants reported the city’s fiscal condition remains, reporting that the fiscal plan Petersburg has been working from since the City Council’s first attempt to strip $12 million from an outsized budget last September no longer reflects its fiscal realities: some elements of those decisions, such as slashing funding for schools, canceling a youth summer program, and boosting trash fees, would provide savings; however, not every plan materialized, according to the consultant’s analysis. Moreover, when combined with the municipality’s past-due payments to companies taken from the current year’s budget for last year’s bills, the consultant’s reported the Council, next week, will likely be forced to take further actions to reduce spending or find other revenues—and will have to include a partial restoration of a 10 percent reduction in municipal worker salaries targeted toward making whole the city’s public safety workers, with Nelsie Birch, Petersburg’s interim finance director, advising: “The reduction of salaries has done significant damage to the city.”

It seems that the employee turnover and overtime costs have soared even as morale plummeted since the austerity measure was implemented: police, firefighters and emergency communications workers would see their pay rates restored this spring if the council approves the consultant’s plan. That would be important: the city’s violent crime rate is nearly 400% higher than the statewide average. On the upside, the consultant reported that of the $18.8 million that state auditors estimated Petersburg owed to vendors as of last July 1, only $6 million to $7 million remains overdue. That might help as, next month, the city is inviting about 400 of its creditors to meet for discussions relating to past-due bills, and inviting interested buyers to consider purchasing city-owned property—with both city employees and the city’s consultants taking inventory: counting cars, combing through old equipment, and tracking every nickel spent for a dime that could be saved. The consultant addressed one key issue of concern: its current inability by its tax assessors and collectors to provide administrators with accurate revenue projections.

At the same time, the consultants expressed apprehension that city council members must learn to demand that expenses not exceed revenues: in the municipality’s FY2016 books, Petersburg had a $9 million structural imbalance in the general fund used to cover the city’s day-to-day operations: the city had $67 million to work with and spent $76 million. Finally, the consultant noted what he believes to be the source of Petersburg’s fiscal crisis: for too many years (dating back to 2009) the city has spent more than it had, propping up shortfalls from a rainy day fund which had long since evaporated. In response, interim City Manager Tom Tyrrell said the Mayor and Councilmembers could meet with officials one-on-one or in pairs to discuss the details ahead of next week’s votes to balance the current year’s budget—with such sessions not triggering Virginia’s Freedom of Information Act. Under the law, an in-person or electronic meeting of three members of a public body constitutes a quorum.

What Distinguishes a Municipality’s Fiscal Path to Success or Failure?

Share on Twitter

eBlog, 10/21/16

Good Morning! In this a.m.’s eBlog, we consider the fiscal and children’s health challenges in Flint, Michigan—problems created under the state’s Emergency Manager system; we consider the ongoing challenge to municipal sustainability in Atlantic City as an impending state takeover threatens; we update readers as San Bernardino nears its municipal elections—and nears its emergence early next year from the nation’s longest-ever chapter 9 municipal bankruptcy; then we consider a new legal challenge to try to provide for an education for Detroit’s children in a system under a state-imposed emergency manager, but also a state-impose dysfunctional system; then we visit Petersburg, Virginia—where the small, historic city is grappling with hard, hard choices if it is to avoid insolvency, before finally trying to shed a bright spotlight on the signal success of Wayne County, Michigan as it celebrates its formal exit from state fiscal oversight.

Not in Like Flint. A new suit was filed this week charging that public officials failed children in Flint, Michigan by allowing the city’s supply of drinking water to remain contaminated with lead, a known neurotoxin, for a year and a half—with the suit alleging the government is again falling short by failing to provide the city’s children with educational services that they legally deserve and that could counter the effects of the Flint lead exposure: the complaint, filed in U.S. District Court in the Eastern District of Michigan, argues that the public school system in Flint is not meeting its legal obligation to screen lead-exposed children for disabilities or provide services and interventions that could make a difference in their ability to learn and thrive. It also alleges that the Michigan Education Department has failed to provide Flint schools, which have cut teachers and other staff in the face of a $10 million deficit, with the resources and funding they need to provide those services: the suit notes there are 30,000 children and teenagers under the age of 19 in Flint, and 8,000 of them are younger than 5—those particularly vulnerable to the effects of lead exposure—exposure which can result in diminished academic achievement and a greater tendency to be hyperactive, impulsive, and aggressive. Without meaningful action soon, the complaint says, children’s opportunities to reach their full potential will be “permanently foreclosed,” or, as the complaint states: “In the wake of the Flint lead crisis, Flint children face an unprecedented educational and civil rights disaster.” The complaint seeks class certification to represent all Flint children who were exposed to lead and are—or may be—eligible for special-education services: the plaintiffs are 15 children, ages 3 to 17, each of whom was exposed to lead in Flint; it alleges that they have been denied the special-education services they need and deserve under the federal Individuals with Disabilities Education Act, the Americans with Disabilities Act, and Michigan state law. The suit requests the court to order sweeping changes in Flint schools, including high-quality universal preschool for all 3-to 5-year-olds; enhanced screening of all Flint children to determine their physical, social, emotional and behavioral needs; training for teachers in managing students’ behavior without resorting to physical restraint and seclusion; and regular lead testing of drinking water in Flint schools. It also seeks a comprehensive review of all education plans for children currently identified for special education, to make sure their needs have been properly identified, requesting the federal court to convene a group that would lay out a comprehensive plan for addressing children’s physical, emotional and behavioral trauma in the aftermath of lead exposure, and for a special monitor to oversee the implementation of that plan over the next seven years. (Note: nine current or former government workers have been criminally charged since doctors detected elevated levels of lead in some children due to the discolored and smelly water supply in the impoverished city of nearly 100,000, in the wake of the city’s change from the metropolitan Detroit utility system to a temporary water source, the Flint River, in 2014, a decision made not by the city, but rather a gubernatorially appointed state emergency manager. One of the outcomes could be adoption of a recommendation in a report issued by a panel of four Republican and two Democratic state legislators focused on preventing recurrence of such a crisis. Among the recommendations is lifting emergency managers’ general immunity from civil lawsuits and prohibiting them from using cost as the primary factor in any decision that will affect public health and safety. Other recommendations include the adoption of the country’s toughest lead-in-water rules, increased transparency about water rates and shut-off practices, and the creation of a commission to oversee the state Department of Environmental Quality, which has been deemed primarily responsible for Flint’s water problems. The recommendations also propose that a community’s water source should not be changed absent voter approval. A key recommendation related to Michigan’s 2012 emergency manager law—widely criticized as a key factor in Flint’s city’s water crisis: the report recommends that Michigan’s Emergency Manager emergency managers be replaced with financial management teams that include a financial expert, a local government operations expert, and an ombudsman. Emergency managers would also be mandated to post a $5 million bond that would be forfeited for negligence or misconduct on the job and to host a website to solicit and respond to public comments on their key decisions. Or, as Senate Minority Leader Jim Ananich (D-Flint) noted: “The more we encourage…oversight and citizen involvement, the better our government’s going to be.”  The report also calls for:

  • testing water for lead in schools and other facilities for children and fragile adults;
  • the mandatory disclosure of lead services lines in home sales and rental contracts;
  • a constitutional amendment making it easier to discipline state employees and the appointment of an ombudsman to hear confidential state employee reports of misconduct;
  • enhanced criminal penalties for public officials whose misconduct causes bodily harm to others;
  • more robust lead screening of school-age children;
  • assessing children’s past lead exposure by testing their baby teeth, because blood tests only reveal recent exposure; and
  • requiring water systems to inventory their service pipes and other infrastructure and, within 10 years, adopt a full lead service pipe replacement program.

The Edge of the Boardwalk. Chris Filiciello, Atlantic City Mayor Don Guardian’s chief of staff this week confirmed that the city did not submit a revised budget to the state, as Mayor Guardian warned in a letter that a tax increase would be “devastating” for Atlantic City, which he said increased taxes by 50 percent over 2013 and 2014. With the debt clock from the state ticking, Atlantic City is now nearly two weeks past its deadline in violation of its $73 million state loan; the next deadline is just over two weeks away—by which time the city must submit a five-year fiscal stability plan. It appears the Mayor believes his five-year budget will save roughly $73 million by 2021, in no small part related to the sale of its municipal airport, Bader Field, and its water authority for $110 million. In addition, the City Council is slated to vote on new labor agreements between the city and its seven worker unions, as well as consider privatizing payroll services. Under Mayor Guardian’s proposed five-year fiscal recovery plan, the city projects $72.9 million in savings from 2017 through 2021 (Atlantic City has annual budget deficits of about $100 million before state aid.). In his statement, Mayor Guardian listed 26 items on which Atlantic City has or intends to cut costs and raise revenues, including 400 fewer full-time workers since 2013, a recent shared-services deal with Atlantic County, bidding out city services, and land sales worth $7.1 million. In addition, Atlantic City has offered early retirement buyouts to 165 senior workers. The plan anticipates saving $7.4 million next year; $12.7 million in 2018; $17 million in 2019; $17.3 million in 2020; and $18.5 million in 2021, according to Mayor Guardian’s statement. The city currently has a fortnight in which to submit its plan to the state—the rejection of which would result in a five-year state takeover. The Mayor described the plan as one which “will include increasing revenue, reducing costs, maximizing redirected funds from casinos, receiving state aid, restructuring of debt payments, early retirement incentives, realizing the value of City owned properties and the MUA, and much more, all while maintaining Atlantic City’s sovereign right to local self-governance.” Nevertheless, how the plan will fare in City Council remains uncertain: the Council has pulled or voted down measures to dissolve the authority five times amid pressure from residents to keep the authority independent. (The Council must approve the sale at two meetings. The sale is also subject to state approval.) In addition, the Council will vote on seven memorandums of understanding with its police, fire, white-collar, blue-collar, electrical, and supervisory employees—with, according to Mayor Guardian, the city renegotiating contracts to include multiple years with no wage increases, restructured pay scales, health care cuts, and reduced overtime and paid-leave costs.

Getting Back to Fiscal Recovery. San Bernardino, the California municipality seeking to become the first U.S. municipality to overhaul its political structure while in chapter 9 municipal bankruptcy, and asking its voters next month to approve a new charter that strips the Mayor and city council of day-to-day operational control, has completed all of its required audits for the first time in six years, with the City Council having this week filed its FY2015 final audit, marking the first time since 2010 the city has all of its legally required audits. The FY2016 audit is due by March 31, 2017, a deadline the city will meet, according to Finance Director Brent Mason—albeit the audits were “qualified”—denoting the auditors were unable to find enough evidence the financial statements were accurate in four of 10 areas, leading Councilman Henry Nickel to note: “This is a job well done, but now I think the next step is implementing some corrective actions to get back to where we need to be.” Part of the challenge for the city stems from the 2012 state-mandated dissolution of the city’s redevelopment agency, requiring a significant expansion of the audit, or, as Finance Director Mason notes: “They’re not small-ticket issues to get our hands around, but they’re all doable.” One of the qualified opinion concerns was with regard to the liability for compensated absences, such as vacation and sick time, which San Bernardino has proposed adjusting as part of its bankruptcy exit plan—a plan which appears to have the qualified approval of U.S. Bankruptcy Judge Meredith Jury.

Detroit’s Future? Lawyers representing Detroit schoolchildren last month filed a lawsuit against Gov. Rick Snyder and state officials in what has been viewed as the nation’s which pushes for literacy as a right under the U.S. Constitution: the complaint alleges that the state has denied Detroit students access to literacy, the most basic building block of education, through decades of “disinvestment … and deliberate indifference.” The suit seek broad remedies, including implementation of evidence-based literacy programs, universal screening for literacy problems, and a statewide accountability system in which the state “monitors conditions that deny access to literacy” and intervenes. It documents the low reading and math proficiency rates of Detroit students, as well as classes without teachers and outdated or insufficient classroom materials, it also notes poor conditions, including vermin and building problems, at some schools as recently as this month, seeking class action status on behalf of students who attend the schools. In addition to Governor Snyder, the lawsuit names the state Board of Education, state school Superintendent Brian Whiston, David Behen, director of the Michigan Department of Technology, Management and Budget, and Natasha Baker, the state school reform officer.

Petersburg’s Future? Mayhap ironically the person once appointed as emergency manager by Michigan Governor Rick Snyder to address the Detroit Public Schools’ fiscal and educational insolvency, Robert Bobb, under whose tenure DPS’s deficit steadily worsened, rather than improved—and where now a federal class-action lawsuit a class action suit has been filed, contending that under state control, the Detroit Public Schools have deteriorated to such an extent they violate students’ civil rights. (DPS’s current emergency manager, retired U.S. Bankruptcy Judge Steven Rhodes, has called the latest corruption allegations “outrageous;” he has placed all the accused principals still with DPS on unpaid leave, and instituted new oversight measures for approving contracts. Nevertheless, the ongoing events have meant that many Michigan legislators appear to be increasingly antithetical to ever allowing the district to revert to local control—with some even suggesting it should be permitted to become insolvent and be dissolved—leaving the state on the hook for at least $500 million of its massive debt.)

Now, after the Petersburg, Virginia City Council this week was on the verge of hiring Mr. Bobb as a turnaround specialist, the Council developed cold feet: late into a meeting in which the Council took a lashing from city residents upset over what they characterized as a lack of transparency surrounding negotiations with its search firm, Councilman Samuel Parham put the contract to a vote: it failed 3-3-1, meaning the Council must wait at least 30 days before reconsidering a potential agreement which for the insolvent municipality is rumored to cost about $350,000 according to the elected leaders. The delay would mean pushing off any decision about the city’s future—if it is to have one—until after the election—one in which two of three council races on the ballot are contested. The unscheduled vote came minutes after a public acknowledgment from Councilmember Darrin Hill that members’ recent closed-session meetings and interference with the administration of city business deserved scrutiny, or as Councilmember Hill noted: “Ethically I think we can do better as a council as a whole,” he said. “I think a lot of us are being thrown under the bus over the actions of a few.” If the old expression is “time is money,” the delay—even as lawsuits and threats of legal action, much of it over unpaid bills, are building for a small city for which Virginia state auditors have determined is approximately $19 million in the hole, comes after the Council began this fiscal year by slashing about $12 million from the current year’s operating budget—eliminating youth summer programs, unfilled positions, millions in public school funding, and money for travel and training—even borrowing a fire truck from the city of Colonial Heights’ reserve fleet for day-to-day operations. Yet, the anatomy of debt and deficits and how the municipality got there remains clouded; ergo Council members have been asking since last February for the administration to hire a forensic auditor to scrutinize the city’s books. Interim City Manager Dironna Moore Belton this week said the city had winnowed a list down to two firms which could do the work—but of course at a cost of as much as $300,000—leading incoming City Attorney Joseph Preston to request that the Council not authorize a forensic audit, noting that a newly expanded grand jury investigation by a Chesterfield County prosecutor might yield the answers council members are seeking—at County rather than municipal taxpayers’ expense. The inability to act and uncertain state willingness to help has provoked residents, who report they are tired of seeing the city make negative headlines: they are pleading with the City Council to stop holding special meetings at the last-minute and to engage in more robust public discussion before taking votes on consequential matters—or, as one constituent put it: “I would like to know what you’re afraid of talking about in public…It’s very strange, and it’s part of why people are looking at Petersburg.”

Free at Last. The State of Michigan has formally released Wayne County, Michigan from state oversight. The County, whose general obligation bonds Moody’s upgraded at the end of last month, cited several factors, including: improvement in the county’s financial position following substantial reductions in retirement liabilities and associated costs, which will aid the budgetary capacity to address outstanding capital facility needs…,” as well as noting the “county continues to enhance its operating reserves while accommodating increased costs associated with outstanding criminal justice facility needs…” as well as reflect “substantial expense reductions…” thanks to its development and implementation of a “financial recovery plan in May 2015 to correct a structural imbalance that developed during years of rapidly falling property tax revenue. The recovery plan culminated in nearly $50 million of cost reductions achieved with elimination or modification of retirement benefits, contraction of payroll, and other operating efficiencies…” Or, as Wayne County Executive Warren C. Evans noted: the report by the credit rating agency “speaks to the depth of our Recovery Plan and the fiscal responsibility we’re instituting in every facet of County government…This positions us to do more with the resources we have and continue to move in the right direction. While the news is good, there’s a lot of work to do. We’re committed to staying the course and taking on the challenges that remain.” Mr. Evans added, however: “It’s a positive step, but not cause for any long celebrations…The consent agreement allowed us to do what we needed to do, but it was never going to be a cure-all to Wayne County’s finances. It was the necessary means to get our fiscal house in order so we could tackle the remaining challenges.” The strong fiscal discipline brought other good news with it: the State of Michigan formally granted the county’s request to be released from oversight yesterday—just a year and a month after the oversight agreement allowed the county to work with the state to renegotiate contracts, improve its cash position, and reduce underfunding in the pension system, resulting in elimination of a structural deficit. Michigan Treasurer added: “I am pleased to see the significant progress Wayne County has made while operating within the best practices established by the consent agreement.” Under that agreement, Wayne County established a recovery plan and eliminated a nearly $100 million accumulated deficit and a yearly structural deficit of approximately $52 million through various measures that aimed to bring recurring revenues in line with liabilities. The county reduced its unfunded pension liabilities from $817 million to $636 million—reductions, ergo, which also meant some retirees experienced significant reductions in post-retirement healthcare benefits. Wayne County—the county in which the City of Detroit is centered—has now balanced its budget two years in row and recorded surpluses: it ended the last fiscal year with an accumulated unassigned surplus of $35.7 million, of which $5.7 million is available for general fund operations. County Executive Evans said he expects to report a surplus in excess of $35.7 million when the books are closed on 2016. However, he also warned that Wayne County still must address some $635 million in unfunded pension liabilities and over $400 million in other post-employment benefits liabilities, areas where he made clear future budget surpluses are likely key.

The Hard Challenges of Fiscal Recovery

 eBlog

Share on Twitter

eBlog, 7/05/16

In this morning’s eBlog, we focus—again—on the ongoing efforts to protect the health and safety of the citizens of Flint, Michigan, and the so far remarkable fiscal recovery of Detroit’s surrounding county of Wayne, which was itself on the brink of insolvency. We note that East Cleveland deferred a Council vote last night on whether to seek annexation with Cleveland.

In Like Flint. The Great Lakes Water Authority (GLWA) board yesterday voted to extend its emergency service agreement with the city of Flint for an additional year without an increase in charges through the term of the agreement. The GLWA was created in November of 2014 to provide water and waste water services to 126 municipalities in seven Southeastern Michigan counties, and which, commencing this year, assumed operational, infrastructure improvements, environmental compliance and budget-setting responsibilities for the regional water and sewage treatment plants, major water transmission mains and sewage interceptors, and related facilities, leases these facilities from the City of Detroit for an allocation of $50 million per year to fund capital improvements for the City of Detroit retail system and/or debt obligations. GLWA also funds a Water Residential Assistance Program to assist low-income residential customers throughout the system. The GLWA board includes one representative each from Oakland, Macomb, and Wayne counties, as well as two representatives from the City of Detroit, and one from the State of Michigan to represent customer communities outside the tri-county area. GLWA CEO Sue McCormick noted: “This tragedy continues to increase costs for a city that is experiencing a public health emergency, and we want to reassure residents the GLWA will not increase costs to them through the term of the city’s agreement with us. As a larger, established system, we have the ability to hold the line on charges for Flint in light of the public health situation they are facing.” (Flint’s water supply was switched from the Detroit water authority to the Flint River to cut costs in 2014 in anticipation of an eventual move to the Karegnondi Water Authority, when it starts taking water from Lake Huron. Just when Flint will start receiving water from Karegnondi is uncertain: it was expected to be by the end of this summer, but now Karegnondi is not expected to be operational until next summer; Flint’s connection to it will come sometime after that.

Batman. Wayne County, the most populous in Michigan, with nearly 2 million, where the county seat is Detroit, nearly followed Detroit into insolvency, but now, in the wake of cutting retiree health-care bills, public pension benefits, labor costs, it has earned higher ratings from credit rating agencies: Fitch Ratings last month raised it four levels to BB+—one step below investment grade, and Moody’s and S&P also raised their outlooks. The County now projects that by the end of this fiscal year, the government expects to have a surplus of $67.6 million, compared to a deficit of $146 million in FY2013—or, as County Executive Warren Evans put it: “We had to agree on the size of the problem before we could agree on how to fix it…We did a good job assessing our debt and making stakeholders aware of the situation.” A financial review from auditing firm Ernst & Young, coupled with research from a group put together during Mr. Evans’ transition into office, determined that among the major issues the county confronted were dealing with a $70-million deficit, and pension funding at 45%, down from 95% just a decade earlier. Nevertheless, the road to recovery is pock-marked with potholes: the county still has a junk-level grade from all three major rating companies. Moreover, it faces a shrinking population and an unemployment rate in May that was 5.7 percent, a full percentage point higher than the national rate. Wayne also confronts new costs as it plans to issue municipal debt to finance a jail (in Detroit)—in addition to the debt service it is already paying on some $200 million of municipal bonds issued six years ago for a new facility which was halted midway through construction because of cost overruns: some of that debt service is supported by a federal interest subsidy—a subsidy under review by the Internal Revenue Service. In addition, a judge has ordered improvements at Wayne’s existing jail after finding that Wayne County neglected maintenance. Nevertheless, compared to 2015, when Gov. Rick Snyder was contemplating the appointment of an Emergency Manager for the county, Mr. Evans’ recovery plan, a plan which included cutting future pension and health-care benefits for retirees and 5 percent across-the-board wage cuts (designed to save $230 million over four years), earned the county a consent agreement with the state that left it in charge of its own destiny, but it required officials to work together to turn around the county’s finances, eventually paving the way for Mr. Evans to reach agreements with 11 employee unions that cut its unfunded liabilities for retiree health-care benefits. S&P notes that today Wayne County still faces challenges including a “weak tax base,” but if the county keeps up its improvements, it may work its way back to investment grade. Or, as S&P credit analyst John Sauter put it: “They’re in much better shape, but the question is whether they can keep up and stay there.”

Annexation or Municipal Bankruptcy? The Mayor and Council of East Cleveland last night voted to table until the 19th a vote on proposed ordinance 04-16, an ordinance declaring the desire of the City Council of East Cleveland to enter into negotiations with the City of Cleveland for annexation by Cleveland (for corporate municipal purposes only). If adopted, the ordinance would trigger the appointment of three Commissioners to represent East Cleveland—as well as a letter from Mayor Norton to the Cleveland Foundation pledging his support and cooperation for a fiscal analysis and report by Conway Mackenzie, Inc. Interestingly, that would defer the vote to the middle of the RNC Convention in Cleveland.

Saving Lives, Dollars, and Families’ Homes

eBlog

Share on Twitter

eBlog, 6/27/16

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

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

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

The Importance of Bipartisan Leadership in Averting Severe Human & Fiscal Distress

eBlog
Share on Twitter
eBlog, 5/26/16

In this morning’s eBlog, we applaud House Speaker Paul Ryan (R-Wisc.), House Natural Resources Committee Chair Rob Bishop’s (R-Utah), U.S. Treasury Secretary Jacob Lew, and House Minority Leader Nancy Pelosi (D-Ca.) for their leadership roles in contributing to the remarkably swift, bipartisan markup of legislation (PROMESA) to address Puerto Rico’s looming insolvency; and, we continue to follow the seemingly unrelenting challenge in Wayne County to emerge from its fiscal emergency consent agreement.

House Panel Forwards Puerto Rico Legislation. The House Natural Resources Committee yesterday voted 29-10 to send to the full House legislation, HR 5278, to address Puerto Rico’s debt crisis with solid bipartisan support, a strong sign the bill could move quickly through Congress ahead of a potential default by the territory on July 1. As reported, the bill would create a debt-restructuring process and name a seven-member financial control board, not the government elected by Puerto Rico, to determine whether and when to initiate court-supervised debt restructuring, and it would have the power to approve or reject budgets. The board would terminate after Puerto Rico regains the ability to borrow at reasonable interest rates and balances its budget for four consecutive years.to oversee the U.S. territory—not unlike previous control boards in New York City and Washington, D.C.—and similar to the oversight fiscal control board created as part of Detroit’s exit from the largest municipal bankruptcy in American history. The bipartisan vote came despite the strong opposition from some municipal bondholders, hedge funds, and unions: millions of dollars on television advertisements had been expended to defeat it. Chair Rob Bishop (R.- Utah) said he expects majorities of both parties to back the bill when it comes to the House floor when Congress returns the week after next, while in the Senate, Majority Leader Mitch McConnell (R.- Ky.) said Senators were “anxious to take up” whatever the House could pass. The White House supports the measure. The measure was opposed by both labor unions and Puerto Rican elected officials, as well as some House members, who claimed the bill would threaten creditors’ rights and create a potential precedent for distressed states—claims not only inconsistent with the dual sovereignty of the United States, but also because the legislation was done through the territories clause of the U.S. Constitution—or, as David Hammer, co-head of municipal bond portfolio management at Pacific Investment Management Co. put it: “This creates a clear firewall and ring-fences Puerto Rico from the broader muni market,” adding hat, moreover, the debt-restructuring mechanism would require Puerto Rico to cede more power to the federal government, noting: “That’s not something a state or local government would ever seek to do.”

The Committee rejected proposed amendments to delete language limiting Puerto Rico’s minimum wage, ease economic aid to the island, and ban the Federal Reserve from purchasing Puerto Rican bonds or paying down the commonwealth’s debt—as well as amendments focused on Puerto Rico’s constitutionally guaranteed debt. (Roughly $18 billion of the more than $70 billion in Puerto Rican municipal debt is backed by its constitution.) The committee also rejected an amendment from Rep. John Fleming (R-La.) that critics said would not give the board enough flexibility to properly sort out debt repayment priorities according to the Puerto Rican Constitution. The bill cleared committee with one significant change. The adopted amendment from Rep. Garret Graves (R-La.) mandates that no federal money can go to paying down or buying Puerto Rican debt or liability, which could help tamp down Republican fears of a potential bailout.

Pensionary Solvency. Wayne County, Michigan Executive Warren Evans has taken another step in pressing his commitment to take the county surrounding Detroit out of its emergency consent agreement by the end of this year by, yesterday, announcing the County will make an additional $14 million contribution toward its underfunded pension system—a contribution which will be in addition to the $63 million which the County is currently obligated to pay annually into its retirement fund, but falls short of the $19 million county officials originally anticipated they would be able to afford. In FY2014, Wayne’s pension audit revealed some $840.5 million of unfunded pension liabilities. According to Wayne County spokesman James Canning, last December officials determined the County could make a $10 million contribution into the pension fund from funds declared as surplus from its Delinquent Tax Revolving Fund and Property Forfeiture funds; in addition Wayne anticipated it could funnel another $9 million from fund balances—albeit, in the wake of a third-party administered study on its pension system conducted earlier this year, the County determined it would only be able to contribute an additional $4 million from the fund balances. When the County entered into the consent agreement, it faced an accumulated deficit of $82 million, a yearly structural deficit of $52 million, $1.3 billion in unfunded health care liabilities, and a pension fund that was underfunded by nearly $900 million. By last month, according to its CAFR, its FY15 year-ending accumulated deficit of more than $82 million had been eliminated and the books were closed with a $35.7 million unassigned surplus—albeit some $30 million of that was earmarked for specific uses, leaving Wayne County with a surplus of only $5.7 million.

Other key steps involved reductions in other post-employment benefits, where the County achieved reductions of about $850 million in unfunded liabilities—reducing its OPEB liability by 65%, and bringing the county’s pay-as-you-go contribution this year down more than 50 percent from $40.4 million to $17.6 million—savings achieved by switching some retirees to what the county deems more “cost-effective health plans and providing others with need-based stipends to purchase their own insurance.” Absent such changes, Wayne County had warned that the actuarial accrued liability was on track to rise to $1.8 billion.