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?

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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

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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

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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

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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.

Is Michigan’s Model for Intergovernmental Finance Broken?

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eBlog, 5/18/16

In this morning’s eBlog, we applaud the exceptional municipal leadership of Central Falls Mayor James Diossa who has presided over a truly remarkable fiscal recovery from his very small city’s municipal bankruptcy; we look at the depressing challenges to the physical, educational, and fiscal solvency of the Detroit Public Schools—even as Michigan’s legislative leaders hope to better educate themselves on the idyllic retreat on Mackinaw Island. We wonder if the end game is nearing in Atlantic City; and we are in some awe as Wayne County Executive Warren Evans begins a statewide tour to learn and try to better understand growing fiscal disparities—an emerging issue to which governors, state legislators, Congress, and even the Administration appear disinterested.

Chocolateville. Central Falls, Rhode Island Mayor James A. Diossa has introduced a proposed $18.01 million budget for FY’17 fiscal year, which would, if adopted, for the first time in a decade, lower the city’s residential property tax rate. Wow! His budget proposal incorporates a one percent reduction in proposed spending: under his proposal, the residential tax rate would be reduced to $26.69 from $27.63, a decrease of 3.4 percent. The small, but densely populated city of just under 20,000—taking up about one square mile, emerged from municipal bankruptcy in 2012. Its first day in municipal bankruptcy occurred on the very day our George Mason class of senior employees of No. Virginia local governments met at City Hall with Judge Robert Flanders, who had been appointed by the then-Governor to serve as the quasi-Emergency Manager to steer the city out of chapter 9 municipal bankruptcy. Mayor Diossa has also proposed a one percent decrease in spending, noting: “Fiscally, we’ve been able to carefully plan and monitor and be responsible and transparent about the budget process. The city is doing much better fiscally,” adding that the budget proposal would provide relief to taxpayers who, over many years, have been taxed due to a court-approved five-year plan of debt adjustment.

The median income for a household in the city is just over $22,628, but approximately 26 percent of families and 29 percent of its population fall below the poverty line, including 40.8% of those under age 18 and 29.3% of those age 65 or over. Mayor Diossa’s FY2017 budget is the last under the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Frank Bailey, which called for a minimum four percent residential property tax increase each year. However, due to the city’s post-bankruptcy record of fiscal responsibility, CAO/CFO Leonard Morganis, who was charged by the court with monitoring implementation of the five-year plan of debt adjustment, approved the proposed lowering of the residential tax rate. As Mayor Diossa noted: “We’ve been very careful with our budget…It shows the city has come a long way…Every resident in Central Falls has had to do more with less and I think we have to do more with less.”

In addition to lowering the residential property tax rate, the Mayor’s proposed budget would provide for increasing the homestead exemption by 15%, increasing the senior citizen homeowner tax exemption by 25%, increasing the veterans’ exemption by 25%, and freezing the car tax rate. Additionally, his proposal calls for freezing the city’s commercial tax rate and tangible tax, which officials say should encourage economic development and provide predictability for local businesses. Mayor Diossa also believes the budget proposal would prove beneficial to Central Falls residents of all ages, from seniors to children: it includes youth investments, such as increased after-school programming and renovated space for the Innovation Lab in partnership with the Central Falls School District and Rhode Island College. His proposal also calls for $100,000 in funding for the Dexter and Broad street commercial corridor, façade improvements, and $600,000 for the Central Falls Redevelopment Agency; $200,000 for roadwork improvements, $200,000 for sidewalk repair and replacement, conversion of city streetlights to energy-efficient LED technology, and improvements at the Illinois Street Park and other recreational areas throughout the square-mile city.

Mayor Diossa notes that his budget proposal would provide relief to taxpayers who over many years have been taxed due to the U.S. bankruptcy court-approved five-year bankruptcy plan of debt adjustment. His budget proposal marks the last under the U.S. Bankruptcy court-approved plan, which called for a minimum four percent residential property tax increase each year. It also marks the first year the municipality had authority to set its own property tax rate. As Mayor Diossa noted: “We’ve been very careful with our budget…It shows the city has come a long way…Every resident in Central Falls has had to do more with less, and I think we have to do more with less.” The budget includes an additional $100,000 to other post-employment benefits, or OPEB, trust to match the city’s initial allocation last year. Mayor Diossa also submitted, for the second straight year, 107% of its actuarially required contribution to the city’s wobbly pension plan. The budget also calls for a 3.4% reduction in the city’s mill rate. Central Falls, Rhode Island’s poorest city with 19,000 residents in one square mile seven miles north of Providence, cited an $80 million unfunded pension liability in its bankruptcy filing. According to the Mayor, Central Falls has increased its pension funding level from 14% in 2010 to 22%. Its goal is to achieve 60% funding within 10 years.

In addition to lowering the residential property tax rate, his proposal calls for:
• increasing the homestead exemption by 15 percent,
• increasing the senior citizen homeowner tax exemption by 25 percent,
• increasing the veterans’ exemption by 25 percent,
• freezing the car tax rate, and,
• freezing the city’s commercial tax rate and tangible tax, which officials say should encourage economic development and provide predictability for local businesses.

The budget proposes $600,000 for the Central Falls Redevelopment Agency, $200,000 for roadwork improvements, $200,000 for sidewalk repair and replacement, conversion of city streetlights to energy-efficient LED technology, and improvements at the Illinois Street Park and other recreational areas throughout the square-mile city. The remarkable turnaround comes in the wake of then-Governor Lincoln Chaffee’s appointment of former Rhode Island Supreme Court Justice Robert Flanders as receiver in the wake of its filing for municipal bankruptcy protection in August of 2011, reporting an $80 million unfunded pension liability. In one of Judge Flanders’ earliest actions, he imposed benefit cuts of up to 55% for retirees—albeit these reductions were subsequently modified by the former Chafee administration. It is special for the eBlog, of course, because our distinguished class of senior Northern Virginia leaders had visited with Judge Flanders on the city’s first day in municipal bankruptcy, and, subsequently, written the GMU Financial Crisis Toolkit (created with digital tabs).

The Breaching of Public Trust & Pensions. U.S. Attorney Barbara McQuade may go after the state pensions of 13 former and current Detroit Public School officials after they have been sentenced for their crimes in a $2.7 million bribery scheme, although a spokesperson for her office reports the federal government still does not have legal standing to request the forfeiture of their pensions. A spokesperson added, however: “[O]nce the defendant has been sentenced and restitution ordered by the district judge, the government can and will take steps to enforce the restitution order, which may include garnishment of their pensions.” An unlucky number, thirteen, of school administrators face federal charges or have accepted plea agreements in connection with a scheme uncovered by an FBI investigation into the near-insolvent DPS: five of the 13 DPS officials retired from the district this spring in the wake of being criminally charged last March.

The U.S. Attorney’s office is seeking full restitution from all 13 defendants in the case, as well as school supplies vendor Norman Shy, who is accused of paying $908,518 in exchange for $5 million in business with his company, Allstate Sales. (Mr. Shy has pleaded guilty in the case: he was ordered to repay DPS $2,768,846.23 in restitution. A key factor in these decisions is that Michigan is one of a few states which has a pension forfeiture law for public employees: under Michigan law, a public employee or retiree convicted of a felony arising out of official duties “is considered to have breached the public trust” and may have his or her rights to a vested retirement benefit in forfeited. The statute, enacted twelve years ago, provides that a felony can be defined as misusing public funds or resulting from the receipt of a bribe or other financial benefit in that person’s capacity as a public employee.

A State Seminar on Debt & Insolvency. Michigan House Speaker Kevin Cotter plans to hold a session and votes during the legislature’s annual policy conference on Mackinac Island in June to give state legislators more time to settle and resolve the Detroit Public School debt issues. It appears the time away from Lansing will be vital to negotiating a compromise on legislation to overhaul DPS, as well as to make adjustments to a state budget with unanticipated revenue shortfalls. Speaker Cotter’s office announced the schedule change shortly after state economists yesterday agreed the state needs to scale back spending plans by $460 million in the current and upcoming fiscal years because of an unexpected decline in revenue. But as they used to recite in schools in Rome: tempus fugit (time flies): If the legislature is unable to reach resolution on the budget by the end of this month, the Senate will put off final votes until the week of June 6th. All of this comes as the Senate continues to struggle how to respond to House passage two weeks ago of a $500 million Detroit Public Schools debt relief plan—and as retired U.S. Bankruptcy Judge and DPS Emergency Manager Steven Rhodes faces a tight schedule to ensure the city’s schools can be fiscally and physically safe to open for the fast approaching new school year.

Running on Fumes—or Can Atlantic City Control Its Own Destiny? Atlantic City Mayor Don Guardian reported that the virtually insolvent municipality still had the fiscal resources to pay its bills this week: the city made its $8.5 million school tax payment last Friday and on Monday paid surrounding Atlantic County $7 million—funds owed for quarterly property taxes. And Atlantic City reports it has enough money to make a $7 million payroll payment June 3rd, as well as a $1.5 million bond payment due June 1st. These fiscal resources come—notwithstanding broken state promises of $33.5 million from a state relief package—in significant part thanks to Atlantic City workers’ agreement to be paid monthly to avoid a municipal government shutdown. Thus, with the Governor still focused on a state takeover and the legislature still considering options for a compromise, the city seems to endure in a Rod Serling fiscal Twilight Zone: it has $550 million in debt and a $100 million budget deficit. On Monday, Assembly Speaker Vincent Prieto reported: “We’re working on details…Wait till the final product, and you’ll see. Hopefully it’s going to be something fair, that Atlantic City actually has an opportunity to really have control of its own destiny.” The inability of the state to act, meanwhile, is imposing statewide costs: Standard & Poor’s has revised its view of the support system for New Jersey local governments to “strong” from “very strong” due to the state’s seeming inability to address Atlantic City’s financial crisis, noting that in the nearly half-year since Gov. Christie vetoed aid to Atlantic City, no progress on a plan to reduce the city’s budget deficit and no agreement addressing the city’s unfunded tax appeals has been passed, so that S&P’s Timothy Little wrote big: “In our opinion, these issues indicate a change in what has historically been very strong state support of its distressed entities…We maintain the view that should extraordinary state intervention occur in Atlantic City, we are not confident that it would be sufficient to prevent impairment of the city’s debt obligations.”

Is Michigan’s Model for Intergovernmental Finance Broken? Wayne County Executive Warren Evans today begins a statewide tour, a tour he calls: “Investing in Michigan Communities: Finding Fair Funding for Strong, Successful Communities,” beginning not in Trenton, New Jersey, but Trenton, Mi., to begin a discussion about innovative ways to fund communities. In the wake of his first visit today, he will meet with six other communities’ mayors, township supervisors, commissioners, city council members, and decision makers throughout the year to identify viable solutions to fix what he fears is the state’s broken model for funding local governments. These visits, or summits, have been designed to educate participants about the history of the current funding system, tell stories of how the current model is hurting local communities, examine past proposals to fix the system, and begin discussions on possible fiscal solutions. He begins this morning in Taylor, a city of about 63,000 in Wayne County, where Mayor Rick Sollars will be the featured elected official. As part of this ground-up initiative, Mr. Evans has assembled a team of research and policy institutions, many of whom or which have already been exploring options for addressing local finance issues, including the Michigan State University Extension Center for Local Government Finance and Policy, MML (the terrific Michigan Municipal League), the Citizens Research Council of Michigan—which was so invaluable a resource to us when we did our report on Detroit’s bankruptcy, the Michigan Association of Counties, and the Southeast Michigan Council of Governments. In announcing the tour, Mr. Evans noted: “For years, it’s been hard to pin down an agreement around the best solutions to fix local funding…Now, more than ever, municipalities are finding the cost-cutting measures they’ve taken are not enough to meet the long-term needs for their residents. It’s a struggle for many to properly fund basic services like police, fire, road, and infrastructure repairs. The tour will also take this leader to Grand Rapids, Michigan’s Upper Peninsula, Lansing, Traverse City, Flint, and Southeast Michigan.

A Disparate Tale of Two Municipalities

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March 2, 2016. Share on Twitter

Federally Assisted Municipal Bankruptcy? Moody’s Investor Service has reduced Ferguson, Missouri’s credit rating from its junk-level status because of apprehensions about its solvency in the wake of the U.S. Justice Department suit against the city filed by the Attorney General on February 10th, accusing the city of policing and municipal court practices which the Department claims violate constitutional and federal civil rights. The suit was filed in the wake of the city’s rejection of a proposed negotiated consent decree which city leaders feared would force the municipality into insolvency—with the city having sought a modified version. The rating agency reported its downgrade came in the wake of apprehensions with regard to the potential fiscal uncertainty of the financial impact of litigation costs from the lawsuit and the cost to the city to comply and implement the proposed DOJ consent decree, noting: “We believe fiscal ramifications from these items will be significant and could result in insolvency…During the review period, we expect to obtain additional detail on the city’s current financial position, near and medium term cash flow projections, as well as financial strategies for addressing the consent decree-related costs.” The report underscored that even before accounting for costs associated with the Justice Department investigation, the city acknowledged its FY2016 budget could lead to insolvency if it failed to address deficits and rapidly dwindling reserves.

Moody’s is now on a watch alert to assess how two April ballot outcomes—one to raise Ferguson’s ad valorem taxes, and the second to introduce a new sales and use tax. In its ratings adjustment. Moody’s noted: “Passage of the April ballot initiatives is integral to the city’s proposed fiscal solution to close the existing budget gap. Absent passage of these initiatives, city management has indicated a balanced budget will be achieved with reductions in force.” The city has estimated it would cost between $2.1 million to $3.7 million to implement the consent decree reforms in the first year. City documents put the price tag at $1.8 million to $3 million in the third year and beyond. The city operates on a $14.5 million budget. Ferguson’s fiscal options are limited due to constrained revenue raising ability and its stagnant economy.

U.S. Attorney General Loretta Lynch had announced the lawsuit one day after the Ferguson City Council refused to adopt all terms of a consent decree reached after lengthy negotiations, notably rejecting a provision that would have applied the decree’s requirements to any policing entity. The city, which once had a healthy balance sheet and carried an Aa3 rating, has struggled to recover from reduced fine collections and other litigation—and came in the wake of a scathing federal investigation and report last March which concluded that the small city’s reliance on traffic and court-related fine revenues rather than general taxes on its own citizens, together with racial bias, constituted illegal practices. Since the events of last year, the city has implemented changes, limiting court fine collections and adopted policing changes; however, according to the U.S. Justice Department, those changes have been “insufficient to eliminate the pattern or practice of unconstitutional conduct and ensure it will not recur” absent a federally imposed decree.
Missouri local governments may file for Chapter 9 bankruptcy protection by an action of the local governing body without sign-off or approval from any other agency, although the city has not indicated plans to file. The city had stated that its leaders “recognize the seriousness of this report, as well as this overall challenging time in Ferguson. We continue to work hard to improve the financial condition of the city, and believe the passage of two ballot initiatives in the April 2016 election would help tremendously. We are continuing to explore all options to restore our financial health and long-term stability.” Under Missouri law (Mo. Ann. Stat. §427.100), any municipality or political subdivision authorized to levy taxes or to cause taxes to be levied may file a chapter 9 municipal bankruptcy petition.

Municipal Fiscal Recovery. Wayne County, Michigan’s largest municipality, which encompasses Detroit, and was feared just a year ago to be at its own risk of insolvency and municipal bankruptcy, is today, according to Wayne County Executive Warren Evans, heading in the right direction: deficits have been eliminated and the county has achieved a positive general fund balance—thanks, Chairman Evans notes, to county employees and retirees who “were required to make huge sacrifices,” adding he was pleased to report that “as a result of unprecedented cooperation and shared sacrifice, Wayne County finished its last fiscal year with a positive general fund balance,” in his first State of the County yesterday at the Detroit Film Theater. Although not nominated for an Oscar, Executive Evans noted: “Let me say that again, for the first time in eight years, the county finished a fiscal year in the black.” He said the county has reduced its health-care liabilities, cutting costs nearly 75% from $1.3 billion to $471 million, and noting, that without such action, costs would have ballooned to $1.8 billion by the end of last year. The challenges for the state’s largest jurisdiction have included its underfunded pension system and a drop in revenues from lower assessed property values as it struggled to avoid an emergency manager and chapter 9 municipal bankruptcy. Today, as the County Executive put it: the county’s fisc “has stabilized, it continues to improve, and that our best days lie ahead.”

Next up, Mr. Evans said he plans to organize a summit of elected officials, community leaders, leading economists, business leaders, and others in the coming weeks to develop an alternative to the system of local government funding, which depends on property taxes—a system which he described as “broken: Our system of funding local governments threatens the financial stability of counties and local municipalities…We cannot continue to under fund local governments. We need to start down the road to a solution.”