Remembering & Thanking Those Who Serve

September 11, 2018

Good Morning! In this morning’s eBlog, we remember those who died on 9/11; we remember those leaders, like then Arlington County Deputy Fire Chief Jim Schwartz, who became the incident commander that morning, in command of all local, state, and federal responders, demonstrating that while the federal government can shut down, city and county governments are the only governments in this country that can never shut down, but rather, as Detroit’s Emergency Manager, on the first day of Detroit’s chapter 9 municipal bankruptcy, emailed to every employee of the city: they were to report to work, on time—and the critical operations were to ensure every street light and traffic light was working—and there was a prompt and effective response to every 911 call. This foggy morning, we consider too, the challenge to Wilkes-Barre, Pennsylvania—a municipality where the population has declined more than 50% since 1930–denied state fiscal assistance, and awaiting the physical wrath of Hurricane Florence, before, finally, assessing changes to halt the shipping discrimination against the U.S. territory of Puerto Rico.

The Bar against Wilkes-Barre. Officials in Wilkes-Barre are regrouping after the coordinators of Pennsylvania’s Act 47 program for struggling municipalities rejected the city’s request made last June 29th for distressed status—a denial having the effect of barring the city from filing for chapter 9 municipal bankruptcy. Mayor Tony George and the city’s consultant, Public Financial Management, were scheduled to meet this week with representatives of the state Department of Community and Economic Development, the overseer of the state’s program for distressed cities. Under the state’s Act 47, the Dept. of Community and Economic Development is authorized to declare certain municipalities as financially distressed—a declaration which provides for the restructuring of debt of financially distressed municipalities, limits the ability of financially distressed municipalities to obtain government funding, authorizes municipalities to participate in federal debt adjustment actions and bankruptcy actions under certain circumstances, and provides for consolidation or merger of contiguous municipalities to relieve financial distress. That means a scheduled call at the end of this week with Pennsylvania DCED could be determinative with regard to a possibility the state could reverse its position and declare the municipality financially distressed.

Mayor Anthony George, last June, had applied for Act 47 “distressed” status, the same month in which S&P dropped the municipality’s credit rating to BBB (minus) with negative implications, noting: “[T]he CreditWatch listing means we believe there is at least a one-in-two chance that we will lower the rating within the coming 90 days following the receipt of information from the city regarding its plans in response to the state’s rejection…Any action on our part regarding the rating—either keeping it the same or revising it downward—hinges on our better understanding of those plans.” DCED, five weeks later, convened a hearing at City Hall, where Mayor George projected an FY2019 shortfall of $3.5 million—one which, according to a DCED overview, could spike to $16 million by FY2021. Under Act 47, the city would have been enabled Wilkes-Barre to triple its emergency services tax to $156 a year, as well as gain access to a $3 million interest free, 10-year loan—as well as gain authorization to enact a commuter tax. However, DCED hearing officer and former York Mayor Kim Bracey, in her final report, wrote that Wilkes-Barre should continue to pursue measures through the state’s early intervention program, in which the city enrolled two years ago. State lawmakers formalized early intervention in 2014 as part of the DCED Act 47 process.

With the greatest number of municipalities of any state in the nation, the process, however, appears confusing—or, as Mayor George put it: “I don’t understand what you [DCED] want us to do.” According to Professor David Fiorenza, the city can fix the deficit with two or three financial decisions that can lay the groundwork for long-term surpluses: “Cities can’t have it both ways, that is, when they have surpluses in their budgets they want less state intervention and when there are deficits they want the commonwealth to be there for the bailouts.” (Professor Fiorenza was a former chief financial officer of Radnor Township.)

The Mayor and his staff expect to learn more from the state DCED Friday via a conference call—weather, of course, permitting. In this instance, the call comes a week Pennsylvania DCED Secretary Dennis Davin stated the state would not declare the municipality financially distressed—noting that, instead, Mayor George should pursue other options to avoid the invocation of Act 47. (According to the Department, a quarter of the city’s current budget relies on intergovernmental assistance, versus 55% from local taxes.)

The municipality’s request for distressed status, however, is not supported by its state representatives, Sen. John Yudichak (D-Plymouth Township) and Rep. Eddie Day Pashinski (D-Wilkes-Barre), who had secured $260,000 in state funds to enable the municipality get Wilkes-Barre into the state’s Early Intervention Program (EIP), writing, in late July, in opposition to Mayor George’s request, noting that the intervention program also had a five-year timetable—from which the city had four years remaining, adding that the city was making progress with the help of PFM as evidenced in the municipal bond restructuring, which, they noted, had improved its cash flow, with Rep. Pashinski adding: “We’re trying to preserve the integrity of the city.”

At the end of last month, Sec. Davin had written: “Opportunities remain to keep the city out of financial distress status: Each and every viable option must be considered, including modest gains in the fund balance and earned income tax collections, the need to perform a property reassessment and recommendations for asset monetization.”

The clock on all this is ticking, with S&P indicating at least a “one-in-two chance” that it would lower its rating within 90 days of receiving any information from the city regarding its follow-up plans, adding: “Any action on our part regarding the rating–either keeping it the same or revising it downward, hinges on our better understanding of those plans.” From his perspective, Professor David Fiorenza of the Villanova School of Business noted: “The state made the right decision…I hope this decision will send the message to Pennsylvania cities and municipalities to take care of their financial house as these deficits can be remedied.” According to the Wilkes-Barre-based Pennsylvania Economy League, 44 of Pennsylvania’s cities, or 77.2%, have experienced population declines since 2010—complicating its efforts to refinance its long-term debt: the city issued $52 million in municipal bonds two years ago to refinance debt and adjust balloon payments to level, and tapped minimum municipal obligation relief under state law to reduce its 2017 pension payment to $5.6 million from $6.5 million. But the state relief program expires this year, while the city’s obligation is projected to spike to $7.1 million in 2020.

Hurricane Relief? Puerto Rico government officials are scheduled to meet at the White House this week to discuss a possible, temporary modification of the Jones Act (as opposed to the Jones-Shafroth Act) to create a five-year administrative exemption in U.S. cabotage statutes, amendments to allow maritime transportation of natural gas between the mainland and Puerto Rico on non-US ships. The Merchant Marine Act of 1920, also known as the Jones Act, provides for the promotion and maintenance of the U.S. merchant marine–§27 of the Act addresses cabotage, as opposed to cottage cheese: it provides for the regulation of the U.S. merchant marine and the regulation of maritime commerce in U.S. waters and between U.S. ports, mandating that all goods transported by water between U.S. ports be carried on U.S. flag ships, constructed in the United States, owned and crewed by U.S. citizens and U.S. permanent residents. Under the cabotage laws, the maritime cargo between U.S. ports and Puerto Rico must be accomplished in U.S. owned, registered, and crewed boats—that is, at a much greater than free market cost. A temporary administrative exemption, such as the one proposed by Puerto Rican leaders, would have to be granted “in the interest of the national defense” of the U.S., according to a 2013 report from the Government Accountability Office. The protectionist statute means the cost of providing relief to Puerto Rico in the wake of Hurricane Maria was far greater than for other Caribbean nations. Now, the Puerto Rico Electric Power Authority (PREPA), and Puerto Rico Senate Vice President appear hopeful that the U.S. territory and the Southern States Energy Board, a potent combination of the governors of 16 states, Puerto Rico, and the U.S. Virgin Islands, might be able to gain an exemption in these discriminatory cabotage laws, with a meeting scheduled next week at the White House to promote the idea that international vessels could also transport natural gas products between U.S. ports and Puerto Rico.

Unsurprisingly, the concept has the support of the Southern States Energy Board, which brings together 16 Republican governors along with the Democrats of the U.S. Virgin Islands and Puerto Rico, and proposes a more comprehensive exemption, to include all energy products. During their September 16-18 meeting in Biloxi, Mississippi, the Southern States Energy Board anticipates considering a resolution by Arkansas State Senator Gary Stubblefield (R-Branch, Arkansas) seeking to have President Trump issue an Executive Order granting a 10 year exemption in the transportation of energy products between Puerto Rico and the mainland—and urging the Congress to enact a permanent waiver.

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Municipal Fiscal Accountability

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eBlog, 03/31/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Atlantic City after its “lost decade,” before venturing inland to one of the nation’s oldest cities, Wilkes-Barre, Pennsylvania (founded in 1769) as it confronts the challenges of an early state intervention program, and, finally, to Southern California, where the City of Compton faces singular fiscal distrust from its citizens and taxpayers.  

A Lost Fiscal Decade? Atlantic City’s redevelopment effort appears to be gathering momentum following a “lost decade” which featured the closing of five casinos, a housing crisis and major recession, according to a new report released by the South Jersey Economic Review, with author Oliver Cooke writing: “The fact remains that Atlantic City’s redevelopment will take many years…The impact of the local area’s economy’s lost decade on its residents’ welfare has been stark.” The study finds the city to be in recovery—to be stable, but that it is still in critical condition with some work to do.  Nevertheless, its vital signs from developers and its improving economy are all good: that is, while the patient may not regain all its previous strength and capability,  it can thrive: it is “over(cost),” and needs to lose some of the fat it built up by going on a (budget) diet—a road to recovery which will remain steep and tortuous, because it lacks the fiscal capacity it had 15 or 20 years ago—and has to slim down to reflect it.  That is, the city will have to stress itself more in order to get better.  

The analysis, which was conducted in conjunction with the William J. Hughes Center for Public Policy at Stockton University, notes that vital signs from developers and its improving economy are in good condition—maybe even allowing the city to thrive, even if it is unable to regain all its previous strength and fiscal capacity—put in fiscal cookbook terms: Atlantic City is over(cost)weight and needs to lose some of the fat it built up by going on a (budget) diet.  The report also noted that Atlantic City is on track with some positive developments, including the decision at the beginning of this month by Hard Rock International to buy and reopen the closed Trump Taj Mahal property, as well as a recent $72 million settlement with the Borgata Hotel Casino & Spa related to $165 million in owed tax refunds. Mr. Cooke also highlighted other high-profile projects underway, including the reopening of the Showboat casino by developer Bart Blatstein and a $220 million public-private partnership for a new Stockton University satellite residential campus. Nonetheless, he warned that Atlantic City still faces a deep fiscal challenge in the wake of the loss to the city’s metropolitan area of more than 25,000 jobs in the last decade—and its heavy burden of $224 million in municipal bond debt, tied, in large part, to casino property tax appeals. Ultimately, as the ever insightful Marc Pfeiffer of the Bloustein Local Government Research Center and former Deputy Director with the state Division of Local Government Services, the city’s emergence from state control and fiscal recovery will depend on the nuances of the that relationship and whether—in the end—the state imposed Local Finance Board acts with the city’s most critical interests at heart.  

Don’t Run Out of Cash! Wilkes-Barre, first incorporated as a Borough in 1806, is the home of one of Babe Ruth’s longest-ever home runs. It became a city in 1871: today it is a city of over 40,000, but one which has been confronted by constant population decline since the 1930s: today it is less than half the size it was in 1940 and around two-thirds the size it was in 1970. It is a most remarkable city, made up of an extraordinary heritage of ethnic groups, the largest of which are: Italian (just over 25%), Polish (just under 25%), Irish (21%), German (17.9%) English (17.1%) Welsh (16.2%) Slovak (13.8%); Russian (13.4%); Ukranian (12.8%); Mexican (7%); and Puerto Rican (6.4%). (Please note: my math is not at fault, but rather cross-breeding.) Demographically, the city’s citizens and families are diverse: with 19.9% under the age of 18, 12.6% from 18 to 24, 26.1% from 25 to 44, 20.8% from 45 to 64, and 20.6% who are 65 years of age or older. The city has the 4th-largest downtown workforce in the state of Pennsylvania; its family median income is $44,430, about 66% of the national average, and an unemployment rate of just under 7%. The municipality in 2015 had a poverty rate of 32.5%, nearly double the statewide average. Last year, the City of Wilkes-Barre was awarded a $60,000 grant through the Pennsylvania Department of Economic Development (DCED) Early Intervention Program (EIP) to develop a fiscal, operational and mission management 5 year plan for the city—from which the city selected Public Financial Management (PFM) as its consultant to assist in working with the city on its 5 year plan—and from which the city has since received PFM’s Draft Financial Condition Assessment and Draft Financial Trend Forecasting related to the city’s 5 year plan. As part of the intervention, two internal committees were created to develop new sources of revenue for the city. The Revenue Improvement Task Force is comprised of employees from Finance, Tax, Health, Code, and Administration and was directed to analyze and improve upon existing revenue streams; the Small Business Task Force was designed to develop guidance for those interested in opening small businesses in Wilkes-Barre and is comprised of employees from Zoning, Health, Code, Licensing, and Administration. Overall, Mayor Anthony “Tony” George and his administration are confident that they have made significant progress is restoring law and order via the city’s goals of strengthening intergovernmental relationships, improving public safety, fixing infrastructure, fighting blight, restoring and improving city services and achieving long-term economic development.

Nevertheless, the quest for fiscal improvement and reliance on consultants has proven challenging: some of PFM’s proposed options to address city finances have caused a stir. City council Chairwoman Beth Gilbert and City Administrator Ted Wampole, for instance, agreed privatizing the ambulance and public works services as a cost-saving measure was one of the most drastic steps proposed by The PFM Group of Philadelphia, with Chair Gilbert noting: “I stand vehemently against any privatization of any of our city services, especially as an attempt to save money;” she warned the city could end up paying more for services in the long run, and residents could receive less than they get now—adding: “If privatization is on the table, then so is quality.” The financial consultant hired last year for $75,000 to assist the city with developing a game plan to fix its finances under the state’s Early Intervention Program was scheduled to present the options at a public meeting last night at City Hall. PFM representatives, paid from the combination of a $60,000 state grant and $15,000 from the city, have appeared before council several times since December.

Gordon Mann, director of The PFM Group, last night warned: “If the gunshot wound to the city’s financial health doesn’t kill it, the cancer will: both need to be treated, but not at the same time…You need to address the bullet wound, and you need to put yourself in the position to address the cancer.” Mr. Mann, at the meeting, provided an update on where the city stands and where it’s going if nothing is done to address the municipality’s structural problems of flat revenues and escalating expenses for pensions, payroll and long-term debt; then he identified a number of steps to stabilize the city and balance its books, beginning with: “Don’t run out of cash,” and “[D]on’t bother playing the blame game and pointing the finger at prior administrations either,…It may not be your fault, but it is your problem.”

Wilkes Barre is not unlike many of Pennsylvania’s 3rd class cities (York, Erie, Easton, etc.), all in varying degrees of fiscal distress, albeit with some doing better than others. The municipal revenues derived from the property tax and earned income tax will simply not sustain a city like Wilkes Barre—that it, unless and until the state’s municipalities have access to collective bargaining/binding arbitration and pension reform: the current, antiquated revenue options leave the state’s municipalities caught between a rock and a hard place. Worse, mayhap, is the increasing rate of privatization—where an alarming trend across the Commonwealth of communities selling off assets (water, sewer, parking, etc.), more often than not to plug capital into pensions, is, increasingly, leaving communities with no assets and with no pension reform facing the same issue in the future. 

Not Comping Compton: Corruption & Fiscal Distress. In Compton, California, known as the Hub City, because of its location in nearly the exact geographical center of Los Angeles County, the City of Compton is one of the oldest cities in the county and the eighth to incorporate.  The city traces its roots to territory settled in 1867 by a band of 30 pioneering families, who were led to the area by Griffith Dickenson Compton—families who had wagon-trained south from Stockton, California in search of ways to earn a living other than in the rapidly depleting gold fields, but where, the day before yesterday, the city’s former deputy treasurer was arrested for allegedly stealing nearly $4 million from the city. FBI agents arrested Salvador Galvan of La Mirada on Wednesday morning, as part of a federal criminal complaint filed Tuesday, alleging that, for six years, Mr. Galvan skimmed about $3.7 million from cash collected from parking fines, business licenses, and city fees: an audit found discrepancies ranging from $200 to $8,000 per day. Mr. Galvan, who has been an employee of the city for twenty-three years, has been charged with theft concerning programs receiving federal funds. If convicted, he could face up to five years in prison. As Joseph Serna and Angel Jennings of the La Times yesterday wrote: “The money adds up to an important chunk of the budget in a city once beset with financial problems and the possibility of [municipal] bankruptcy.” Prosecutors claim that one former city employee saw all these payments as an opportunity, alleging that the former municipal treasurer, over the last six years, skimmed more than $3.7 million from City Hall, taking as much as $200 to $8,000 a day—small enough, according to federal prosecutors, to avoid detection, even as Mr. Galvan’s purchase of a new Audi and other upscale expenses on a $60,000 salary, raised questions.

The arrest marks a setback for the Southern California city which has prided itself in recent years for its recovery from some of the crime, blight, and corruption which had threatened the city with municipal insolvency—or, as Compton Mayor Aja Brown noted: the allegations “challenge the public’s trust.”  Mayor Brown noted the wake-up call comes as the city has been working in recent months to improve financial controls and create new processes for detecting fraud—even as some of the city’s taxpayers question how the city could have missed such criminal activity for so many years. The Los Angeles County Sheriff’s Department had arrested Mr. Galvan last December in the wake of City Treasurer Doug Sanders’ confirmation with regard to “suspicious activity” in a ledger discovered by one of his employees: his position in the city involved responsibility for handling cash: as part of his duties, he collected funds from residents paying their water bills, business licenses, building permits, and trash bills. According to reports, Mr. Galvan maintained accurate receipts of the cash he received for city fees, but he would submit a lower amount to the city’s deposit records and, ultimately, on the deposit slips verified by his supervisors and the banks, according to federal prosecutors. Indeed, an audit which compared a computer-generated spreadsheet tracking money coming in to the city with documents Mr. Galvan prepared made clear that he had commenced skimming cash in 2010—starting slowly, at first, but escalating from less than $10,000 to $879,536 by 2015, a loss unaccounted for in the city’s accounting system. While Mr. Galvan faces a maximum of 10 years in federal prison, if convicted, the city faces a trial of public trust—or, as Mayor Brown, in a statement, notes: “Unfortunately, the actions of one employee can challenge the public’s trust that we strive daily as a City to rebuild…The alleged embezzlement and theft of public funds is an egregious affront to the hard-working residents of Compton as well as to our dedicated employees. The actions of one person does not represent our committed City employees who — like you — are just as disappointed.”