From the Ashes of Municipal Bankruptcy

Posted on September 17, 2018 by Frank Shafroth

September 17, 2018

Good Morning! In this morning’s eBlog, we report, again, on the remarkable fiscal and neighborhood recovery of Detroit—a demonstration of how chapter 9 municipal bankruptcy can lay the foundation for extraordinary fiscal and physical recovery. Then we look south to consider a new strategic plan for Puerto Rico—a U.S. territory surely on notice that it cannot count on FEMA in a major, life-threatening disaster.

The Phoenix of American Cities? Detroit, the once and mayhap future automobile capital of the U.S. and one-time Motown music capital, filed for the nation’s largest ever chapter 9 municipal bankruptcy five years and two months ago in the wake of a loss of more than a million residents, cuts in state aid, and collapsing real estate values—forcing the city to borrow to meet its operating costs. It came in the wake of the city experiencing periodic episodes of corruption and mismanagement for years—a critical consequence of this former great American industrial city’s dysfunction had been its erosion as a core for jobs: employment had fled the urban core, at a time it was rising in the metropolitan area—even as other cities were seeing something of a city-center revival. The Motor City’s ability to borrow in the municipal markets was exhausted after years of issuing long-term debt to pay its operating bills: the city had listed liabilities in excess of $17 billion—equal to $25,000 for every remaining resident. In his report, the city’s Emergency Manager, Kevyn Orr, described the city as “dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption.” For residents, escaping these debts and physical deterioration accompanied by high violent crime rates and unperforming schools meant moving to the suburbs: of the 264,209 households in Detroit, only 9.2% were married couple families with children under 18; another 78,438 households, or nearly 30%, were families headed by women.

Now, as the ever insightful Daniel Howes of the Detroit News has written, the city’s neighborhoods are in play: he wrote: “Three months after Ford Motor Co. confirmed plans to convert Corktown’s dilapidated Michigan Central Depot into its center for mobility and self-driving vehicle development, a consortium backed by $50 million from the Kresge Foundation is planning a cradle-to-career educational complex on the campus of Marygrove College at Wyoming and McNichols.” He was referring to the city’s historic district near downtown, one of the city’s oldest neighborhoods—and one listed on the National Register of Historic Places. It is not just an old part of the city, but one which gained its heritage in the middle of the last century when, in the wake of the Great Irish Potato Famine in the 1840’s, the great Irish migration to the U.S. made Detroit the city with the largest new home—with many Irish settling on the west side of the city; they were primarily from County Cork, and thus the neighborhood came to be known as Corktown. Kresge’s CEO, Rip Rapson, at the end of last week answered “unequivocally ‘yes.’ The time for the pivot to the neighborhoods is now,” in what he deemed an “an unprecedented model of neighborhood revitalization.”

A critical element to this revitalization could come from the physically and fiscally depleted Detroit Public Schools—so physically dangerous and unperforming that they served to discourage families with children from wanting to live in the city; yet, now, as Mr. Howes wrote: “The symbolism is striking. The Detroit Public Schools Community District board, burdened with a legacy of underperforming schools and labor troubles, is wagering it can create a new model for traditional public education by partnering with the University of Michigan’s School of Education, Starfish Family Services, and Marygrove to teach local students and teach their teachers…Borrowing from the residency programs used in medical education, the Ann Arbor university founded 201 years ago in Detroit would leverage its reputation and expertise in what University President Mark Schlissel calls “teamwork in service to the public.” That is, the effort is to anchor community redevelopment, as Chicago did, by education: the Detroit Public School District would operate a K-8 school and a high school carved from the former Bates Academy on the east edge of campus, while the University of Michigan would operate an undergraduate “residency” program for aspiring teachers.

Mr. Howes went on to write that, even as Detroit’s downtown and Midtown attract billions in private investment, especially from mortgage mogul Dan Gilbert and the Ilitch family to big corporate relocations and small business investment, neighborhood residents and the civic groups representing them have continued to ask: ‘what about us?’ The answer, it seems, is driving in: the Ford Motor Co. reports it will invest $740 million to build out the Corktown campus. Kresge is spearheading numerous community initiatives. A JPMorgan Chase program continues to invest in small-business creation.

On the elected front, Mayor Mike Duggan, seeking re-election, has made neighborhood revitalization a key issue in his campaign for, as Mr. Howe noted, two reasons: “It’s politically potent in a city that struggled for decades to provide basic services, and, second, it’s the next obvious step in the city’s revitalization: Reinvesting in downtown and Midtown, essentially the spine of Detroit, helps bolster tax base, fuel economic activity, and create tax-paying jobs. Reinvesting in neighborhoods and improving traditional public education strengthens community and gives Detroiters a reason to stay, to reap the benefits of rising property values.”

Kresge CEO Rip Rapson, a critical player in Detroit’s physical and fiscal recovery, notes: “What this town needs to be shown again and again is you can take big ideas and make them real…So many people are waiting to see efforts like this fail.” The heart, as Mr. Howes noted, of the so-called “P-20 Partnership” is Detroit’s reconstituted public school district, a campaign backed by Kresge’s contributions, the University of Michigan’s commitment to train teachers to teach Detroit’s youth— and the courage of its leadership to develop a new model for educating the city’s kids, right in the heart of a neighborhood.”

A new Strategic Plan for Puerto Rico? While FEMA has approved a new document for emergency response for Puerto Rico, it is a plan with a critical MIA: municipios—and this with time uncertain, as Hurricane Isaac is lurking in the Caribbean and FEMA is caught in a quagmire over the President’s assertion that fewer than 50 lives were lost in Puerto Rico from Hurricane Maria. FEMA’s Deputy Federal Coordinating Officer in Puerto Rico, Justo “Tito” Hernández has asserted that the “The Strategic Plan was revised. And we are already doing exercises based on the plan. That is already finished,”in an interview with El Nuevo Día, claiming the changes are intended to correct errors which were made before, during, and after the hurricane. In addition, the document already required amendments, in line with federal regulations. (As a rule, the Strategic Plan is modified every five years; the current one was created in October of 2014 and revised after Hurricane Maria.) Yet, even though this plan for the Commonwealth is ready, the Emergency Management Plan for each municipio has yet to be certified by the Puerto Rico State Agency for Emergency and Disaster Management or FEMA, according to Commissioner Carlos Acevedo, who noted: “The plans, I am waiting for the company (hired to develop them) to deliver them to me. And they should be handing me the plans tomorrow (today).” However, both Governor Ricardo Rosselló Nevares and Commissioner Acevedo have pointed out, in separate interviews, that the government is prepared to face the challenges of the new hurricane season. Gov. Rosselló Nevares stated that now the “people” have an emergency plan, noting there have been workshops “throughout Puerto Rico on how to develop those personal emergency plans,” that changes were made at federal, state, and municipal levels regarding the distribution of food and medication, and that another “public health response” will be implemented. Nevertheless, Gov. Rosselló Nevares recognized that the island’s infrastructure, including the homes of thousands of families that still have blue tarps on their roofs and the power grid, remain vulnerable, stating: “It is no less true that, although there are parts that are more robust, it is a somewhat more fragile (power) grid. Therefore, we want to change and transform it,” he added, referring to the process he has begun to privatize PREPA, the Electric Power Authority: “There are significant improvements, particularly in the area of preparation, but without a doubt, Puerto Rico remains vulnerable, particularly in the infrastructure area.” The Governor added that this scenario will require quick action to transform the power grid and “a bit of luck that an event like María or even a lower-category one, does not impact Puerto Rico, again, and further collapse areas that are already vulnerable.” In addition, he noted, that already, unlike last year, when the government contacted the American Public Power Association with a month of delay after the cyclone, agreements with energy companies have been reached, albeit noting that other initiatives “take time, but are being executed,” and that 64 people are being trained to exercise “very particular functions” amid any new emergency.

With regard to addressing the dysfunction of the government during Maria, the Governor said that “people have been trained based on these new protocols.” Even so, emergency management experts have indicated that unsettled issues in critical areas with regard to the Commonwealth’s role in future emergencies remain: the preparation that the government claims has been questioned by the former executive Director of the former State Office for Emergency and Disaster Management, Epifanio Jiménez, who reiterated that the problem after Maria was the lack of implementation of the existing plans—or, as he put it: “They’re using Maria’s category 5 as a pretext—which is true, it’s a precedent—but they use it as an excuse to justify the collapse of agencies and agency leaders because, when Hurricane Georges hit, the leaders knew their work and the island recovered after 32 days.”

A simple look at the 2014 Strategic Hurricane Plan, which experts say was not followed, reveals that the Health, Family, Emergency Management Agency, and General Services Administration (SGA) departments, among other government agencies, failed in their respective functions before, during, and after the hurricane; moreover, if all of these agencies had fulfilled their responsibilities, fatalities estimated today at 2,975 (except by the White House) would have been avoided, according to the study by the Milken Institute of the George Washington University.

The Strategic Plan is governed by the National Incident Management System (NIMS), which establishes and defines the entire procedure for emergency management. It is backed by Presidential orders. FEMA develops the plan, theoretically in partnership with state authorities—clearly part of the challenge, as Puerto Rico is in a quasi-twilight zone between being a state or a municipality. This matters, because such a plan is intended to detail the function of what is called the Emergency Support Function, which is nothing more than the function that each agency will have before, during, and after an emergency.

Some of the Changes. The NMEAD Commissioner (Negotiator for the Management of Emergencies and Administrator for Disasters) Carlos Acevedo, said that now the Department of Family Affairs has a list of vulnerable groups. He added that the emergency management center integrated the private sector, and even had training. However, according to Mr. Jiménez: “That is nonsense,” recalling that the private sector was already integrated into emergencies, because there must be agreements with agencies. To avoid the collapse of communications, Commissioner Acevedo said they now have a voice and data satellite system. The Telecommunications Regulatory Board and the NMEAD have a list of radio amateurs to use analog communication, if necessary, he added, albeit noting: “That has to be refined, and the JRT has to make sure that the private sector responds.” Moreover, Commissioner Acevedo said the services of cell phone companies, which also collapsed in the wake of the hurricane, is an issue that remains in the hands of the private sector. Finally, he noted he has also held meetings with the directors of hospitals and dialysis centers on the island, stressing that each party has increased its capacity to provide services.

Innovative, but Challenging Paths to Exiting Municipal Bankruptcy

Posted on May 25, 2018 by Frank Shafroth

May 25, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s has upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes. Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by former U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs. CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, the Bureau determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow. He has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668.

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates, or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, while according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing.

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, more than three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation? In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the state has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:

Effective date (there is still no cap for employees hired before the effective date);

Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date to have a mandatory settlement hearing within 60 days of the filing of the answer; and
Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $ 25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18^th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló Nevares, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

Ending the Long Delay? The Federal Emergency Management Agency (FEMA) yesterday announced it is accelerating community disaster loans to help Puerto Rico muncipios mitigate the loss of income due to natural disasters, the Government of Puerto Rico reaffirmed that, for the time being, as well as the approval of another $39 million in loans from the CDL program for the municipalities of Aguadilla, Cabo Rojo, Canóvanas, Carolina, Manatí, Mayagüez, Peñuelas, and Orocovis—with the approvals coming in the wake of last month’s approvals for Bayamón, Caguas, Humacao, Juncos, Ponce, Toa Baja, and Trujillo Alto—meaning that, in total, FEMA has, to date, distributed at least $92.8 million for municipalities on the island and $371 million for the U.S. Virgin Islands, as part of the $4.9 billion loan passed by Congress to help local governments recover. At the same time, the U.S. territory’s Treasury Secretary Raúl Maldonado reported: “The administration (of Puerto Rico) has been very successful in lowering operational costs and achieving an increase in collections.” The new loans will offer access to the Puerto Rican Government through March of 2020, as Secretary Maldonado considers that it may be useful in case of another disaster or a drop in the income of public corporations.

Nevertheless, because Puerto Rico—unlike other U.S. states, is also under the authority of the PROMESA Board, it appears that Gov. Ricardo Rosselló’s budget will have to be revised and may be rejected if proposed labor reforms do not satisfy the Board—with Board Executive Director Natalie Jaresko, in the wake of the Governor’s release of his proposed $8.73 billion general fund budget to the Legislature Tuesday night dictating that the future of the budget is linked to the legislature’s approval of at-will employment. Her statement came after the Governor and the board had announced an agreement on a compromise on reforming labor practices as well as agreeing to other changes in the Board-certified fiscal plan. In exchange for the Board waiving its demands for the abolition of the Christmas bonus and reduction of the island’s mandatory 27 days of vacation and sick leave, Gov. Rosselló agreed to bring at-will employment to the territory by repealing Law 80 from 1976—a concession which Director Jaresko described this agreement as an “accommodation.” Earlier this week, Director Jaresko said that the first step for Gov. Rosselló should be to resubmit a fiscal plan consistent with the new agreement with the Board, followed by a resubmitted budget consistent with the new plan, adding she anticipated these actions should all be completed by the end of June: the agreed-to changes to the fiscal plan are expected to reduce the 30 year surplus to $35 billion from $39 billion in the April certified fiscal plan, according to Director Jaresko, who noted that most of the surplus is expected to be used for debt payment. From the Governor’s perspective, he noted: “The approval of the agreed budget makes it easier for Puerto Rico to be in a stronger position to renegotiate the terms of the debt. We have significantly improved the management and controls over the cash flow of the General Fund. Contrary to the past, there is now visibility on how cash flows in government operations. At present Puerto Rico has robust and reliable cash balances.” Finally, she stated she expected it would take 12 to 18 months for the Board to create a plan of adjustment on the debt and pensions for the central government—a plan which would likely take the Title III bankruptcy court several more months to confirm.

Becoming Positively Moody in Detroit

Posted on May 24, 2018 by Frank Shafroth

May 24, 2018

Motor City Upgrade. Moody’s on Tuesday upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes. Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

As part of its approved plan of debt adjustment by retired U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, however, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs.

CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, which determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, who, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow, has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates; or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, according to the Detroit regional council of governments.

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation? In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the stated has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan municipality to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

effective date (there is still no cap for employees hired before the effective date);

Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date have a mandatory settlement hearing within 60 days of the filing of the answer; and
Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

According to Gov. Rosselló, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $ 125 per month.

Unretiring Municipal Fiscal Challenges

Posted on May 22, 2018 by Frank Shafroth

May 22, 2018

Good Morning! In this morning’s eBlog, we return to the small municipality of Harvey, Illinois, where an aging population has fiscally sapped the town’s treasury, before exploring the disparate hurricane response treatment for Puerto Rico.

Municipal Pension Insolvency? In the Land of Lincoln, ranked the most financially unstable state in the nation according to a new S.S. News and World Report ranking by McKinsey & Co., some Illinois legislators are considering rolling back enforcement of a 2011 pension delinquency statute to help other Illinois municipalities avoid Harvey’s fiscal and physical dilemma between municipal taxes and public safety (Harvey underpaid its police and fire pensions by $2.9 million in 2016.)—with the efforts in Springfield coming in the wake of state action setting a precedent in retaining tax revenues it had collected to distribute to Harvey, because the small municipality had failed to make its pension payments. Indeed, so far this year, in the wake of the court’s decision withholding tax revenues collected by the state on behalf of Harvey; the Illinois Comptroller, in the wake of a court decision, has withheld more than $1.8 million in tax revenues from Harvey, forcing the city to lay off firefighters and police officers.

In response, State Sen. Napoleon Harris (D-Harvey) has proposed a bill, 40 ILCS 5/4-109, which would defer those tax revenue collections back to 2020; his bill would also create exceptions for distressed communities, such as Harvey, as Sen. Harris reminded his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand,” as he testified before the Illinois Licensed Activities and Pensions Committee, which approved amendments to his bill. The legislative action came as analysts at Wirepoints, an Illinois government watchdog group, have warned that Harvey is not alone—finding there to be more than 200 municipalities at similar risk of state tax withholdings in order to ensure the continuity of pension payments—payments protected under the Illinois Constitution. To date, Danville, the County seat of Vermillion County, a municipality of about 31,600 120 miles south of Chicago; East St. Louis, and Kanakee appear to be in the most desperate fiscal binds. In Danville, the municipality recently adopted a fee, the revenues for which would go directly to finance the municipality’s public pension obligations; Kanakee’s leaders voted to raise taxes.

In response to the fiscal and equity crisis, both Republicans and Democrats in the Illinois Legislature have questioned why there was no state oversight of delinquent municipalities like Harvey; nevertheless, Sen. Harris’ proposed legislation has been reported to the full Illinois Senate—that in a state ranked the most financially unstable in the country by U.S. New and World Report, based upon McKinsey & Company’s 2018 ranking of the nation’s most fiscally unstable states: the report considered credit rating and state public pension liability to rank states on long-term stability; for the near term, the report measured each state’s cash solvency and budget balance. Indeed, Illinois’ public pension debt, currently estimated at $130 billion, but measured as high as $250 billion by Moody’s last summer, was a factor in Moody’s analysis. Even Illinois Gov. Bruce Rauner recognizes the epic scope of the fiscal problem, describing Illinois as the most financially unstable state in the nation.

For Illinois legislators, the fiscal dilemma is made more difficult by what Illinois State Sen. Bill Haine (D-Alton) reminded his colleagues: “We’re gonna see in the paper that the state waives the amounts due, and then they’re going to read that the Aldermen there are getting paid $100,000 a year,” even as he, nevertheless, voted for the bill. (In FY2017, the City of Harvey allocated $240,000 in wages for six aldermen—wages which did not account for public pension contributions and other “fringe benefits” that the budget lists—or, as Michael Moirano, who represents the Harvey Police Pension fund put it: “We cannot continue to do that and hope to resolve these pension issues,” adding that even though negotiations are underway to reach an agreement with the City of Harvey, the proposed “bill will make a mutually agreeable resolution impossible.”

Meanwhile in Springfield, where Illinois Comptroller Susana Mendoza has certified Harvey’s delinquency, a spokesperson noted: “The Comptroller’s Office does not want to see any Harvey employees harmed, or any Harvey residents put at risk…but the law does not give the Comptroller discretion in this case.” Similarly, Sen. Harris told his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand.”

Powering Up? For more than a week, Puerto Rico’s non-voting U.S. Representative Jennifer Gonzalez has been urging FEMA to extend the contract under which mainland power crews have been helping repair the U.S. territory’s power grid—a request that FEMA has denied, meaning that line restoration crews hired by the U.S. Army Corps of Engineers will work to restore power in Puerto Rico, leaving the rest of the job to crews working for Puerto Rico’s public utility, PREPA, as, eight months after Hurricane Maria’s devastation, as many as 16,000 homes remain without power. With the Corps’ current work force of about 700 line workers scheduled to end their service this Friday, time is running out. Officials for PREPA and the U.S. Army Corps of Engineers, the agency which hired the mainland contractors at FEMA’s request, have reported they expect everyone on the island to have power restored by the end of this month—the day before the official start of the Atlantic hurricane season. However, in her urgent extension request, Rep. Gonzalez expressed doubts that PREPA had the resources to complete the job quickly, writing: “I must urge that there be an extension of the mission that allows agency and contract crews to remain in place to see that the system is 100 percent restored.”

There appear, however, to be some crossed governance wires: Mike Byrne, who is in charge at FEMA of the federal response, wrote last Thursday that his decision not to extend the line restoration contract came “per the direction provided by the Energy Unified Command Group and confirmed by the PREPA Chief Executive Officer,” Walter Higgins. (The Energy Unified Command Group is the multi-agency group coordinating the power restoration effort, comprising FEMA itself, the Army Corps, which reports to FEMA, and PREPA.) In addition, it appears that some of the most challenging work awaits: sites still waiting for power are among the most difficult to reach because of mountainous and forested terrain. They include areas in the municipalities of Arecibo, Caguas, Humacao, and in Yabucoa, the city where Hurricane Maria made its initial, destructive landfall–a municipio founded in October 3, 1793 when Don Manuel Colón de Bonilla and his wife, Catalina Morales Pacheco, donated the lands to the people.

The Fiscal Challenges of Inequity

Posted on May 14, 2018 by Frank Shafroth

May 15, 2018

Good Morning! In this morning’s eBlog, we return to the small municipality of Harvey, Illinois—a city fiscally transfixed between its pension and operating budget constraints in a state which does not provide authority for chapter 9 municipal bankruptcy; then we turn east to assess Connecticut’s fiscal road to adjournment and what it might mean for its capital city of Hartford; before heading south to Puerto Rico where there might be too many fiscal cooks in the kitchen, both exacerbating the costs of restoring fiscal solvency, and exacerbating the outflow of higher income Americans from Puerto Rico to the mainland.

Absence of Fiscal Balance? After, nearly a decade ago, the Land of Lincoln—the State of Illinois—adopted its pension law as a means to ensure smaller municipalities would stop underfunding their public pension contributions—provisions which, as we noted in the case of the small municipality of Harvey, were upheld when a judge affirmed that the Illinois Comptroller was within the state law to withhold revenues due to the city—with the Comptroller’s office noting that whilst it did not “want to see any Harvey employees harmed or any Harvey residents put at risk…the law does not give the Comptroller discretion in this case: The Comptroller’s Office is obligated to follow the law. This dispute is between the retired Harvey police officers’ pension fund and the City of Harvey.” But in one of the nation’s largest metro regions—one derived from the 233 settlements there in 1900, the fiscal interdependency and role of the state may have grave fiscal consequences. As we previously noted, U. of Chicago researcher Amanda Kass found there are 74 police or fire pension funds in Illinois municipalities with unfunded pension liabilities similar to that of Harvey. Unsurprisingly, poverty is not equally distributed: so fiscal disparities within the metro region have consequences not just for municipal operating budgets, but also for meeting state constitutionally mandated public pension obligations.

Now, as fiscal disparities in the region grow, there is increasing pressure for the state to step in—it is, after all, one of the majority of states in the nation which does not authorize a municipality to file for chapter 9 municipal bankruptcy: ergo, the fiscal and human challenge in the wake of the state’s enactment of its new statute which permits public pension funds to intercept local revenues to meet pension obligations; the state faces the governance and fiscal challenge of whether to provide for a state takeover—a governing action taken in the case of neighboring Michigan, where the state takeover had perilous health and fiscal consequences in Flint, but appeared to be the key for the remarkable fiscal turnaround in Detroit from the largest municipal chapter 9 bankruptcy in American history. Absent action by the Governor and state legislature, it would seem Illinois will need to adopt an early fiscal warning system of severe municipal fiscal distress—replete with a fiscal process for some means of state assistance or intervention. In Harvey, where Mayor Eric Kellogg has been banned for life from any role in the issuance of municipal debt because of the misleading of investors, the challenge for a city which has so under-budgeted for its public pension obligations, has defaulted on its municipal bond obligations, and provided virtually no fiscal disclosure; Illinois’ new state law (PL 96-1495), which permits public pension funds to compel Illinois’ Comptroller to withhold state tax revenue which would normally go to the city, which went into effect at the beginning of this calendar year, meant the city reasons did not take effect until January 2018. Now, in the wake of the city’s opting to lay off nearly half its police and fire force, the small municipality with the 7^th highest violent crime rate in the state is in a fiscal Twilight Zone—and a zone transfixed in the midst of a hotly contested gubernatorial campaign in which neither candidate has yet to offer a meaningful fiscal option.

Under Illinois’ Financial Distressed City Law ((65 ILCS 5/) Illinois Municipal Code) there are narrow criteria, including requirements that the municipality rank in the highest 5% of all cities in terms of the aggregate of the property tax levy paid while simultaneously in the lowest percentage of municipalities in terms of the tax collected. Under the provisions, the Illinois General Assembly would then need to pass a resolution declaring the city as fiscally distressed—a law used only once before in the state’s history—thirty-eight years ago for the City of East St. Louis. The statute, as we have previously noted, contains an additional quirk—disqualifying in this case: Illinois’ Local Government Financial Planning and Supervision Act mandates an entity must have a population of less than 25,000—putting Harvey, with its waning population measured at 24,947 as of 2016 somewhere with Rod Serling in the Twilight Zone. Absent state action, Harvey could be the first of a number of smaller Illinois municipalities unable to meet its public pension obligations—in response to which, the state would reduce revenues via intercepting local or municipal revenues—aggravating and accelerating municipal fiscal distress.

Capital for the Capitol. In a rare Saturday session, the Connecticut Senate passed legislation to enable the state to claw back emergency debt assistance for its capital city, Hartford, through aid cuts beginning in mid-2022, with a bipartisan 28-6 vote—forwarding the bill to the House and Gov. Dannel Malloy—as legislators raced to overwhelmingly approve a new state budget shortly before their midnight deadline Wednesday which would: restore aid for towns; reverse health care cuts for the elderly, poor, and disabled; and defer a transportation crisis. The $20.86 billion package, which now moves to Gov. Dannel P. Malloy’s desk, does not increase taxes; it does raise the maximum tax rate cities and towns can levy on motor vehicles. In addition, the bill would spend rather than save more than $300 million from this April’s $1 billion surge in state income tax revenues. The final fiscal compromise does not include several major changes sought by Republicans to collective bargaining rules affecting state and municipal employees. And, even as the state’s fiscal finances are projected to face multi-billion-dollar deficits after the next election tied in part to legacy debt costs amassed over the last 80 years, the new budget would leave Connecticut with $1.1 billion in its emergency reserves: it will boost General Fund spending about 1.6 percent over the adopted budget for the current fiscal year, and is 1.1 percent higher than the preliminary 2018-19 budget lawmakers adopted last October. The budget also includes provisions intended to protect Connecticut households and businesses which might be confronted with higher federal tax obligations under the new federal tax law changes. Indeed, in the end, the action was remarkably bipartisan: the Senate passed the budget 36-0 after a mere 17 minutes of debate; the House debated only 20 minutes before voting 142-8 for adoption.

In addition to reacting to the new federal tax laws, the final fiscal actions also dealt with the sharp, negative reaction from voters in the wake of tightening Medicare eligibility requirements for the Medicare Savings Program, which uses Medicaid funds to help low-income elderly and disabled patients cover premiums and medication costs—acting to postpone cutbacks to July 1st, even though it worsened a deficit in the current fiscal year, after learning an estimated 113,000 seniors and disabled residents would lose some or all assistance. As adopted, the new budget reverses all cutbacks, at a cost of approximately $130 million. Legislators also acted to restore some $12 million to reverse new restrictions on the Medicaid-funded health insurance program for poor adults, with advocates claiming this funding would enable approximately 13,500 adults from households earning between 155 and 138 percent of the federal poverty level to retain state-sponsored coverage.

State Aid to Connecticut Cities & Towns. Legislators also took a different approach with this budget regarding aid to cities and towns. After clashing with Gov. Malloy last November, when Gov. Malloy had been mandated by the legislature to achieve unprecedented savings after the budget was in force, including the reduction of $91 million from statutory grants to cities and towns; the new budget gives communities $70.5 million more in 2018-19 than they received this year—and bars the Governor from cutting town grants to achieve savings targets. As adopted, the fiscal package means that some municipalities in the state, cities and towns with the highest local tax rates, could be adversely impacted: the legislation raises the statewide cap on municipal property taxes from a maximum rate of 39 mills to 45 mills. On the other hand, the final legislation provides additional education and other funding for communities with large numbers of evacuees from Puerto Rico—dipping into a portion of last month’s $1.3 billion surge in state income tax receipts tied chiefly to capital gains and other investment income—and notwithstanding the state’s new revenue “volatility” cap which was established last fall to force Connecticut to save such funds. As adopted, the new state budget “carries forward” $299 million in resources earmarked for payments to hospitals this fiscal year—a fiscal action which means the state has an extra $299 million to spend in the next budget while simultaneously enlarging the outgoing fiscal year’s deficit by the same amount. (The new deficit for the outgoing fiscal year would be $686 million, which would be closed entirely with the dollars in the budget reserve—which is filled primarily with this spring’s income tax receipts.) The budget reserve is now projected to have between $700 million and $800 million on hand when the state completes its current fiscal year. That could be a fiscal issue, as it would leave Connecticut with a fiscal cushion of just under 6 percent of annual operating costs, a cushion which, while the state’s largest reserve since 2009, would still be far below the 15 percent level recommended by Comptroller Kevin P. Lembo—and, mayhap of greater fiscal concern, smaller than the projected deficits in the first two fiscal years after the November elections: according to Connecticut’s nonpartisan Office of Fiscal Analysis, the newly adopted budget, absent adjustment, would run $2 billion in deficit in FY2019-20—a deficit that office projects would increase by more than 25 percent by FY2020-21, with the bulk of those deficits attributable both to surging retirement benefit costs stemming from decades of inadequate state savings, as well as the Connecticut economy’s sluggish recovery from the last recession.

As adopted, Connecticut’s new budget also retains and scales back a controversial plan to reinforce new state caps on spending and borrowing and other mechanisms designed to encourage better savings habits; it includes a new provision to transfer an extra $29 million in sales tax receipts next fiscal year to the Special Transportation Fund—designed in an effort to avert planned rail and transit fare increases—ergo, it does not establish tolls on state highways.

Reacting to Federal Tax Changes. The legislature approved a series of tax changes in response to new federal tax laws capping deductions for state and local taxes at $10,000: one provision would establish a new Pass-Through Entity Tax aimed at certain small businesses, such as limited liability corporations; a second provision allows municipalities to provide a property tax credit to taxpayers who make voluntary donations to a “community-supporting organization” approved by the municipality: under this provision, as an example, a household owing $7,000 in state income taxes and $6,000 in local property taxes could, in lieu of paying the property taxes, make a $6,000 contribution to a municipality’s charitable organization.

Impacts on Connecticut’s Municipalities. The bill would enable the state to reduce non-education aid to its capital city of Hartford by an amount equal to the debt deal. It would authorize the legislature to pare non-education grants to Hartford if the city’s deficit exceeds 2% of annual operating costs in a fiscal year, or a 1% gap for two straight year—albeit the legislature would be free to restore other funds—or, as Mayor Luke Bronin put it: “I fully understand respect legislators’ desire to revisit the agreement after five years.” Under the so-called contract assistance agreement, which Gov. Malloy, Connecticut State Treasurer Denise Nappier, and Mayor Luke Bronin signed in late March, the state would pay off the principal on the City of Hartford’s roughly $540 million of general obligation debt over 20 to 30 years. With Connecticut’s new Municipal Accountability Review Board, not dissimilar to the Michigan fiscal review Board for Detroit, having just approved Mayor Bronin’s five-year plan. In the wake of the legislative action, Mayor Bronin had warned that significant fiscal cuts in the out years could imperil the city at that time, albeit adding: “That said, I fully understand and respect legislators’ desire to revisit the agreement after five years, and my commitment is that we will continue to work hard to earn the confidence our the legislature and the state as a whole as we move our capital city in the right direction.”

Dying to Leave. While we have previously explored the departure of many young, college-educated Puerto Ricans to the mainland, depleting both municipio and the Puerto Rico treasuries of vital tax revenues, the Departamento of Salud (Health Department) reports that even though Puerto Rico’s population has declined by nearly 17% over the decade, the U.S. territory’s suicide rate has increased significantly, especially in the months immediately following Hurricane Maria, particularly among older adults, with social workers reporting that elderly people are especially vulnerable when their daily routines are disrupted for long periods. Part of the upsurge is demographically related: As those going have left for New York City, Florida, and other sites on the East Coast, it is older Americans left behind—many who went as long as six months without electricity, who appear to be at risk. Adrian Gonzalez, the COO (Chief Operating Officer at Castañer General Hospital in Castañer, a small town in the central mountains) noted: “We have elderly people who live alone, with no power, no water and very little food.” Dr. Angel Munoz, a clinical psychologist in Ponce, said people who care for older adults need to be trained to identify the warning signs of suicide: “Many of these elderly people either live alone or are being taken care of by neighbors.”

A Hot Potato of Municipal Debt. Under Puerto Rico Gov. Ricardo Rosselló’s proposed FY2019 General Fund budget, the Governor included no request to meet Puerto Rico’s debt, adding he intended not to follow the PROMESA Board’s directives in several parts of his budget—those debt obligations for Puerto Rico and its entities are in excess of $2.5 billion: last month’s projections by the Board certified a much higher amount of $3.84 billion. Matt Fabian of Municipal Market Analytics described it this way: “Bondholders have to wait until the Commonwealth makes a secured or otherwise legally protected provision to pay debt service before they can begin to (dis)count their chickens: The alternative, which is where we are today, is an assumption that debt service will be paid out of surplus funds. ‘Surplus funds’ haven’t happened in a decade and the storm has only made things worse: a better base case assumption is the Commonwealth spending every dollar of cash and credit at its disposal, regardless of what the budget says: That doesn’t leave much room for the payment of debt service and is good reason for bondholders to continue to litigate.” Under the PROMESA Board’s approved fiscal plan, Puerto Rico should have $1.13 billion in surplus funds available for debt service in FY2023—with the Board silent with regard to what percent the Gov. would be expected to dedicate to debt service. The Gov.’s budget request does seek nearly a 10% reduction for the general fund, with a statement from his office noting the proposal for operational expenditures of $7 billion is 6% less than that for the current fiscal year and 22% less than the final budget of former Gov. Alejandro García Padilla. The Governor proposed no reductions in pension benefits—indeed, it goes so far as to explicitly include that his budget does not follow the demands of the PROMESA Oversight Board for the proposed pension cuts, to enact new labor reforms, or to eliminate a long-standing Christmas bonus for government workers.

Nevertheless, PROMESA Board Executive Director Natalie Jaresko, appears optimistic that Gov. Ricardo Rosselló Nevares’s government will correct the “deficiencies” in the recommended budget without having to resort to litigation: while explaining the Board’s reasoning for rejecting the Governor’s proposed budget last week, Director Jaresko stressed that correcting the expenses and collections program, as well as implementing all the reforms contained in the fiscal plan, is necessary to channel the island’s economy and to promote transparency and accountability in the use of public funds, adding that approving a budget in accordance with the new certified fiscal plan is critical to achieve the renegotiation of Puerto Rico’s debt—adding that, should the Rosselló administration not do its part, the Board would proceed with what PROMESA establishes: “The fiscal plan is not a menu you can choose from.”

Upsetting State & Local Fiscal Balances

Posted on April 27, 2018 by Frank Shafroth

April 27, 2018

Good Morning! In this morning’s eBlog, we seek to understand the fiscal imbalances in Connecticut and its capitol city of Hartford, before venturing west to assess the uneasy fiscal dilemmas in Illinois.

Biting the Fiscal Hand that Feeds the City? In a letter to Connecticut Treasurer Denise Nappier, House Minority Leader Themis Klarides (R-Derby) this week warned that the state’s fiscal bailout out the City of Hartford will exhaust the state’s ability to issue debt, — at least temporarily, noting that the legislature’s non nonpartisan Office of Fiscal Analysis projects “the state would exceed the statutory bond cap by $522 million” effective next July 1^st, because of the Hartford fiscal agreement. That arrangement, implemented earlier this spring by Gov. Dannel P. Malloy’s administration and by Treasurer Nappier’s office, commits the State of Connecticut to finance Hartford’s $534 million in outstanding municipal bond debt, in addition to an undetermined about of interest. While state Legislators had ordered fiscal assistance for Hartford last October as part of a final consensus on adopting the budget, now a number are claiming the agreement went beyond what legislators had authorized. At stake is Connecticut’s expectation of retiring this debt over 20 to 30 years—something which could now depend upon how Hartford city leaders renegotiate their obligations with the city’s municipal bondholders—and, especially, at what interest rates—in one of the nation’s oldest states, and one which has long had in statute a debt limit—one which applies not only to bond debt already issued by the state, but also bonded debt it has committed to undertake in the future. Leader Klarides noted that he had been informed by the state’s Office of Fiscal Analysis that the full amount of Hartford which the state is expected to assume, $534 million, would be counted against the state’s bond cap: he has, indeed, requested clarification from the Treasurer with regard to when Hartford’s debt was included in calculations of the state’s debt burden. Unless legislators abandon the cap, the only alternatives to exceeding the limit this summer would be to delay or cancel planned municipal bonding for various projects, such as municipal school construction or capital programs at public colleges and universities; increase taxes or adopt other revenue raising measures, or vote to modify the Connecticut debt limit statute and grant an exemption for the emergency aid for the City of Hartford.

With Republicans currently holding nearly half the seats in the House (71 of 151) and exactly half the seats in the Senate, any traction for the city will confront, ergo, steep political divides—especially in an election year where Republicans have already indicated they plan to campaign on their efforts to stabilize state finances; thus, any effort to curtail other projects is likely to draw objections from both sides of the aisle. Treasurer Nappier’s office did not comment immediately after Leader Klarides issued her letter. Wednesday, Gov. Dannell Malloy’s office, noted that legislators should have known the assistance would count against the state’s debt limit, with a spokesperson for his office noting: “The contract assistance agreement is perfectly in keeping with the legislation passed last year by the bipartisan coalition,” adding that that was language the Legislature had both drafted and passed with support from Leader Klarides—language which stated that contract assistance agreements would constitute a full faith and credit obligation of the state: “This was not ambiguous then, and it is not now. The only question that continues to arise regarding the contract assistance agreement is did Representative Klarides have any idea what she was voting for?”

While there is consensus on both sides of the aisle that the two-year state budget enacted last October appropriated about $80 million in assistance for Hartford over the biennium, legislators had also agreed that Hartford would seek to refinance its debt over the long-term—debt the state would guarantee, committing to make annual debt assistance payments close to $40 million for 20 to 30 years, until the city’s entire $534 million general obligation debt is retired; however, last week, House and Senate Republicans recommended budget adjustments which would reduce traditional state grants to Hartford each year, beginning in the new fiscal year, by an amount equal to the debt assistance—effectively undercutting the fiscal commitment—or, as effectively neutralizing the deal. Or, as Rep. Klarides put it, legislators were very clear in what they ordered, and that the Governor and Treasurer negotiated last-minute changes with the city and its bondholders that overstepped their authority, noting: “We only agreed to a two-year lifeline: This was a deal that was done in the dark of night.” Leader Klarides declined to speculate what the Legislature will do, but warned that if lawmakers are forced to begin canceling planned borrowing: “Let’s de-authorize Hartford projects.” In response, House Majority Leader Matt Ritter (D-Hartford), unsurprisingly, said exempting the aid for his home community from the statutory debt limit might be the best solution, especially, as he noted, because legislators on both sides of the aisle still want to make adjustments to the state budget for the next fiscal year before the session’s scheduled close on May 9^th, noting that the single-largest amount of state borrowing is used to support municipal school construction, and canceling more than $500 million in planned borrowing by July 1 likely would impact many communities across Connecticut. Thus, he added: “If we all agree we want safe schools for our kids, we should come together and talk.”

The difficult negotiations in the Legislature come as Wall Street is warning Connecticut that its municipalities could be in fiscal peril. Last week, Moody’s moodily released an analysis that the recently enacted federal tax law changes may wreak fiscal havoc to the state’s local governments—especially the cap on the deductibility of state and local taxes. There is fiscal apprehension that the federal changes could lead to stagnant assessed property values—changes which would augur bad news for municipal property tax receipts in a state which relies more on property taxes than any other—or., as the exception UConn Law Professor Richard Pomp noted: “Because fewer people are going to be able to deduct the property tax, there is the concern that this will lower the demand for housing: That will lower a municipality’s property tax base at the next reassessment.” The federal tax changes which have led to record federal deficits and debt for the one level of government which does not try to balance its budget means, as Kevin Maloney of the Connecticut Conference of Municipalities put it: “There is no way to sugarcoat the fact that the recently passed sweeping federal tax reform will adversely impact a majority of property taxpayers and towns and city governments across Connecticut: Limiting the ability of Connecticut towns and cities to write off property tax paid annually will only place more pressure on the property tax in Connecticut, making Connecticut local economies and tax environment more uncompetitive and depressing the value of homeownership.”

In 2014, more than 41% of returns in Connecticut included a state and local tax deduction (the last year available): the average amount for this deduction was $19,000. Thus, as he put it: “Property taxes represent an absolutely vital source of revenue for cities in Connecticut: According to the Lincoln Institute for Land Policy, property taxes account for 60% of local revenues—twice the national average.” That unbalanced reliance is further complicating fiscal stability in the state, because Connecticut is the state with the nation’s greatest income inequality—creating widely disparate impacts on Connecticut municipalities’ fiscal capacity to provide equitable levels of services. Those fiscal disparities can cause, as Moody’s reported, “significant headwinds,” especially for cities like Bridgeport, where a shrinking tax base and plummeting assessed property values have generated a vicious fiscal cycle of ever-higher tax increases on remaining residents: higher and higher tax burdens, even as services are reduced. Two years; ago, a Bridgeport family making $75,000 a year faced a tax rate of nearly 16%: as higher income families have fled the municipality, the new federal tax bill could contribute to drive still more away.

On a Golden Parachute in Highland Park? In an Illinois County, Highland Park, where more than a century ago in 1867, ten men purchased Highland Park for the gaudy sum of $39,198.70 to become the original stockholders of the Highland Park Building Company—after which, following construction of the Chicago and Milwaukee Railroad, a depot was established at Highland Park and a plat, extending south to Central Avenue, was laid out in 1856, leading to the establishment of the municipality on March 11, 1869, with a population of 500; today, the Chicago suburb has a different distinction: it is a county with some of the state’s highest property taxes, and one where more than one-third of employees at one park district are making more than six figures: out of 51 employees listed in compensation documents provided by the Park District of Highland Park, 18 earn more than $100,000 in total compensation. (In Illinois, park districts receive the bulk of their funding from local property taxes: the Park District of Highland Park is no exception, with more than 57% of its funding coming from local tax dollars.)

Part of the cost appears to stem from lavish severance payouts. Thus, one proposal in the Illinois General Assembly, Senate Bill 3604, would limit government workers’ ability to collect extravagant severance packages, or “golden parachutes.” The bill, the Government Severance Pay Act, would mandate specific provisions in government employment contracts to limit the capacity for excessive severance pay, imposing a fixed ceiling on severance payouts, capping any severance pay at the equivalent of 20 weeks of compensation, and re-establishing public-worker severance pay as a privilege, rather than an entitlement, mandating that government worker contracts include a provision barring severance packages for employees terminated due to misconduct. Illinois Sen. Bill Cunningham (D-Chicago) would require greater transparency in severance pay negotiations for public university officials, as well as cap their payouts at one year’s compensation. Indeed, it seems leaving municipal employment has been munificent in the state: the Better Government Association illustrated as much in a report released last October, cataloguing a number of big severance payouts. University officials comprised seven of the nine Illinois officials listed in the report. The College of DuPage Board of Trustees issued one of the largest severance packages for a government employee in Illinois history, according to the Chicago Tribune, reporting that during his tenure, President Robert Breuder hid more than $95 million in public expenditures, $243,300 of which was used to purchase liquor—an item listed as “instructional supplies” on ledger lines. Generously, trustees purchased Mr. Breuder’s early retirement for nearly $763,000 in severance pay.

Fiscal Fire in the Hole

Posted on April 24, 2018 by Frank Shafroth

April 24, 2018

Good Morning! In this morning’s eBlog, we return to the Windy City region and the small Chicago suburb of Harvey, as it teeters on the edge of insolvency in a state where municipalities are not authorized to file for chapter 9 municipal bankruptcy, albeit under Illinois’ Local Government Financial Planning and Supervision Act (see 50 Ill. Comp. Stat. 320), a local Illinois government with a population under 25,000 suffering from a “fiscal emergency” may—if it secures a two-thirds vote of its Council, petition the Governor to appoint a financial planning and supervision commission to recommend that the local government be granted the authority to file for chapter 9 via submission to the Illinois Legislature—something which happened twenty-nine years ago in the case of East St. Louis.

Fire in the Hole. Illinois Rep. Jeanne Ives (R-Ill.), whose Chicago suburban district includes all or portions of Wheaton, Warrenville, West Chicago, Winfield, Carol Stream, Lisle, and Naperville—and who served on the Wheaton City Council prior to being elected to the Legislature, yesterday said the embattled, small municipality of Harvey was not alone in its inability to meet Illinois’ pension demand, adding the small city should strongly consider filing for municipal bankruptcy. In the wake, as we have noted, of the state’s withholding of funds to Harvey because of its non-payment into the pension system, firefighters and police officers have been laid off. That is, there is a growing human risk—and, as with fire, it is a risk which could spread to other municipalities in the region—from Burbank to Niles to Maywood, small cities in comparable fiscal straits. With boarded up businesses on the main street, it appears, as Rep. Ives notes, that “Bankruptcy is the only way out.”

In the wake of the State of Illinois’ decision to withhold state assistance because of its failure to make mandatory public pension contributions, the city laid off nearly one-third of its 67 firefighters and 12 of its 81 police officers. Harvey has not kept pace with pension payments for more than 10 years. With boarded up businesses on the municipality’s main street, Rep. Ives, ergo, notes: “Bankruptcy is the only way out.” Adding, in reference to the small city’s layoffs: “Forty-two retired Harvey firefighters have saved a collective $1.42 million, but have already collected nearly $25 million in retirement.” Her comments came in the wake of the Cook County Appellate Court overturning of a prior decision by the Cook County Circuit Court and grant of a temporary restraining order against the Illinois State Comptroller with regard to the hold of $1.4 million from the City of Harvey. The Mayor, Eric Kellogg, has released a statement noting: “We will not entertain any conversation concerning the filing of bankruptcy;” however, the municipality’s fiscal options are limited. Even though the Appellate Court of Cook County has overturned the prior decision of the Cook County Circuity Court and granted a temporary restraining order against the Illinois State Comptroller regarding the hold of $1.4 million from Harvey, the option of raising local taxes appears most unlikely—or, as one local taxpayer who used to own a restaurant there put it: “My property taxes were $80,000 a year: How many hot dogs can you sell?”

As our insightful colleagues at the Municipal Market Journal observe, Illinois’ statute, P.A. 96-1495, “potentially transforms pension funding problems into service funding issues and may accelerate fiscal deterioration of some municipalities. The law, which recently became effective, requires that the Illinois Comptroller to withhold and divert state revenues targeted for a municipality to police and fire pension plans when requested to do so by the funds, because of the failure of the sponsor to make required contributions. The Journal goes on to observe: “The City of North Chicago is the second, but according to a recently published paper by the University of Chicago’s Amanda Kass, there are over 600 individual police and fire pension funds in the state and 29% were less than 50% funded in 2016 (Chicago excluded). This suggests that, if the court upholds that the state must divert money away from municipalities that short their police and fire pensions, more governments may be thrust into fiscal distress.” Their note adds: “Because of a lack of readily available information, the paper uses the Illinois Department of Insurance’s calculations regarding what should have been contributed to the pensions during the period from 2003-2010 to determine the municipalities that are more likely to be at risk of a diversion. Fifty-four municipalities responsible for 71 funds contributed 50% or less of what the Illinois Department of Insurance said should be paid, and, as a result, the funds are worse off with a 47% funded ratio in 2016 compared with a state average (again, excluding Chicago) of 60%. Notably, over 50% are in Cook County. The Department of Insurance (DOI) is one of three sources that can determine the contribution (an actuary hired by the fund or by the municipality can also make the determination).

What Are the Fiscal Conditions & Promises of Recovery?

Posted on March 30, 2018 by Frank Shafroth

March 30, 2018

Good Morning! In this morning’s eBlog, we consider the potential impact of urban school leadership; then we try to assess the equity of federal responses to hurricanes, before trying to understand and assess the status of the ongoing quasi chapter 9 municipal bankruptcy PROMESA deliberations in the U.S. territory of Puerto Rico.

Schooled in Municipal Finance? As we wrote, years ago, in our studies on Central Falls, Detroit, San Bernardino, and Chicago; schools matter: they determine whether families with kids will want to live in a central city—raising the issue, who ought to be setting the policies for such schools. In its report, five years ago, the Center for American Progress report cited several school districts like Chicago, Philadelphia, Baltimore—but not Detroit, were examples of municipalities where mayoral governance of public schools has had some measure of success in improving the achievement gap for students, or, as the Center noted: “Governance constitutes a structural barrier to academic and management improvement in too many large urban districts, where turf battles and political squabbles involving school leaders and an array of stakeholders have for too long taken energy and focus away from the core mission of education.” In the case of Detroit, of course, the issue was further addled by the largest municipal bankruptcy in the nation’s history and the state takeover of the Motor City’s schools.

Thus, interestingly, the report stated “mayoral accountability aims to address the governing challenges in urban districts by making a single office responsible for the performance of the city’s public schools. Citywide priorities such as reducing the achievement gap receive more focused attention.” In fact, many cities and counties have independent school boards—and there was certainly little shining evidence that the state takeover in Detroit was a paradigm; rather it appeared to lead to the creation of a quasi apartheid system under which charter schools competed with public schools to the detriment of the latter.

In its report, the Center finds: “[T]he only problem is this belief about mayoral control of schools has not worked well for Detroit. It has done just the opposite since the 1999 state takeover of the schools under former Gov. John Engler, which allowed for the mayor of Detroit to make some appointments to the school board. Since the state took over governance of the schools, when it was in a surplus, the district has been on a downward spiral with each year returning ballooning deficits under rotating state-appointed emergency managers. The district lost thousands of students to suburban schools as corruption and graft also became a hallmark of a system that took away resources that were meant to educate the city’s kids. Such history is what informs the resistance to outside involvement with the new Detroit Public Schools Community District that is now under an elected board with Superintendent Nikolai Vitti. His leadership is being received as a breath of fresh air as he implements needed reforms. That is what is now fueling skepticism and reservation about Mayor Mike Duggan’s bus loop initiative to help stem the tide of some 30,000 Detroit students he says attend schools in the suburbs.” Because of the critical importance to Detroit of income taxes, Mayor Duggan has always had a high priority of sending a message to families about the quality of the Motor City’s schools. Superintendent Vitti noted that previous policies had “favored charter schools over traditional public schools.” Superintendent Vitti said he believes this issue is less about mayoral control than the Mayor Duggan’s leadership efforts to entice families with children back to the city, adding that he is not really concerned about mayoral control of the schools, noting: “I have no evidence or belief that the mayor is interested in running schools…I honestly believe the Mayor’s intent is to recruit students back to the city.”

Double Standards? The Capitol Hill newspaper, Politico, this week published an in-depth analysis of the seeming discriminatory responses to the federal responses to the savage hurricanes which struck Houston and Puerto Rico., reporting that while no two hurricanes are exactly alike, here, nine days after the respective hurricanes struck, “FEMA had approved $141.8 million in individual assistance to Hurricane Harvey victims, versus just $6.2 million for Hurricane Maria victims,” adding that the difference in response personnel mirrored the discriminatory responses, reporting there were 30,000 responders in Houston versus 10,000 in Puerto Rico, adding: “No two hurricanes are alike, and Harvey and Maria were vastly different storms that struck areas with vastly different financial, geographic and political situations. But a comparison of government statistics relating to the two recovery efforts strongly supports the views of disaster-recovery experts that FEMA and the Trump administration exerted a faster, and initially greater, effort in Texas, even though the damage in Puerto Rico exceeded that in Houston: Within six days of Hurricane Harvey, U.S. Northern Command had deployed 73 helicopters over Houston, which are critical for saving victims and delivering emergency supplies. It took at least three weeks after Maria before it had more than 70 helicopters flying above Puerto Rico; nine days after the respective hurricanes, FEMA had approved $141.8 million in individual assistance to Harvey victims, versus just $6.2 million for Maria victims. The periodical reported that it took just 10 days for FEMA to approve permanent disaster work for Texas, but 43 days for the Commonwealth of Puerto Rico. Politico, in an ominous portion of its reporting, notes: “[P]residential leadership plays a larger role. But as the administration moves to rebuild Texas and Puerto Rico, the contrast in the Trump administration’s responses to Harvey and Maria is taking on new dimensions. The federal government has already begun funding projects to help make permanent repairs to Texas infrastructure. But, in Puerto Rico, that funding has yet to start, as local officials continue to negotiate the details of an experimental funding system that the island agreed to adopt after a long, contentious discussion with Trump’s Office of Management and Budget. The report also notes: “Seventy-eight days after the two hurricanes, FEMA had received 18 percent more applications from victims of Maria than from victims of Harvey, but had approved 13 percent more applicants from Harvey than from Maria. At the time, 39 percent of applicants from Harvey had been approved compared with just 28 percent of applicants from Maria.”

Finally, the report notes that, as of last week, six months after Hurricane Harvey, Texas was already receiving federal dollars from FEMA for more than a dozen permanent projects to repair schools, roads, and other public infrastructure which were damaged by the storm, while in Puerto Rico, FEMA has, so far, “not funded a single dollar for similar permanent work projects.”

Elected versus Unelected Governance. Puerto Rico Gov. Ricardo Rosselló yesterday reported he was rejecting the PROMESA Oversight Board’s “illegal” demands for labor law reforms and a 10% cut in pension outlays, stating: “The Board pretends to dictate the public policy of the government, and that, aside from being illegal, is unacceptable.” Gov. Rosselló was responding to demand letters from the Board for changes to the fiscal plans he had submitted, along with the Puerto Rico Electric Power Authority, and the Puerto Rico Aqueduct and Sewer Authority earlier this month. Gov. Rosselló noted that §205 of the PROMESA statute allows the Board to make public policy recommendations, but not to set policy, adding that the PROMESA Board’s proposed mandates would make it “practically impossible” to increase Puerto Rico’s minimum wage, as he contemplated the Board’s demand of a $1.58 billion cut in government expenditures, nearly 10% more than he had proposed, and adding he would be “tenaz” (tenacious) in opposing the proposed 10% cut in public pension outlays demanded by the PROMESA Board—with the political friction reflecting governing apprehension about the potential impact on employment at a time when Puerto Rico’s unemployment rate is more than 300% higher than on the mainland—and, because of perceptions that such decisions ought to be reflective of the will of the island’s voters and taxpayers, rather than an outside board.

Who’s on First? The governance challenge in Puerto Rico involves federalism: yesterday, House Natural Resources Committee Chair Rob Bishop (R-Utah), criticized the Puerto Rico Oversight Board and the Governor over their failure to engage with bondholders in restructuring the Commonwealth’s debt, writing to PROMESA Board Chairman José Carrión: “The Committee has been unsatisfied with the implementation of PROMESA and the lack of respect for Congressional requirements of the fiscal plan…And now, due to intentional misinterpretations of the statute, the promise we made to Puerto Rico may take decades to fulfill,” adding he had become “frustrated” with the Board’s unwillingness to engage in dialogue and reach consensual restructuring agreements with creditors: he noted that both the Rosselló administration and the PROMESA Board must show “much greater degrees of transparency, accountability, goodwill and cooperation,” amid seemingly growing apprehensions on his part that Puerto Rico government costs will increase, even as its population is projected to decline, and that he was becoming increasingly concerned with the “extreme amount” being spent on Title III bankruptcy litigation. He said that Board should make sure it is the sole legal representative of Puerto Rico in these cases—and asked that the PROMESA Board define what constitutes “essential public services” in Puerto Rico: “I ask that you adhere to the mandates of PROMESA and work closely with creditors and the Puerto Rican government as you finalize and certify the fiscal plans…“My committee will be monitoring your actions closely; and as we near the two-year anniversary of the passage of PROMESA, an oversight hearing on the status of achieving PROMESA’s goals will likely be merited.”

For its part, the PROMESA Oversight Board has rejected fiscal plans presented by Gov. Ricardo Rosselló and the island’s two public authorities and has demanded the territory reduce public pensions by 10% , writing, this week, three letters outlining its demands for changes in fiscal plans submitted this month by the central government, Puerto Rico Electric Power Authority, and Puerto Rico Aqueduct and Sewer Authority. Under the PROMESA statute, the federal court overseeing the quasi-chapter 9 municipal bankruptcy is mandated to accept the fiscal plans, including their allotments for debt—plans which the PROMESA Board has demanded, as revised, be submitted by 5 p.m. next Thursday. The Board is directed there should be no benefit reductions for those making less than $1,000 per month from a combination of their Social Security benefits and retirement plans and that employees should be shifted from a defined-benefit plan to a defined-contribution plan by July 1^st of next year; it directed that police, teachers, and judges under age 40 should be enrolled in Social Security and their pension contributions be lowered by the amount of their Social Security contribution, directing this for the PREPA, PRASA, Teachers, Employees, and Judiciary retirement systems. In its letter concerning the central government, the PROMESA Board directed Gov. Rosselló to make many changes: some require more information; some are “structural” changes focused on reforming laws to make the economy more vibrant; at least one adds revenues without requiring a greater burden; and many of them require greater tax burdens, or assume lower tax revenues or higher expenditures—noting that any final plan, to be approved, should aim at achieving a total $5.66 billion in agency efficiency savings through FY2023, but that Puerto Rico’s oil taxes should be kept constant rather than adjusted each year.

The Board directed that a single Office of the CFO should be created to oversee the Department of the Treasury, Office of Management and Budget, Office of Administration and Transformation of Human Resources, General Services Administration, and Fiscal Agency and Financial Advisory Authority—adding that Puerto Rico will be mandated to convert to legally at-will employment by the end of this year, reduce mandatory vacation and sick leave to a total of 14 days immediately, and add a work requirement for the Nutritional Assistance Program by no later than Jan. 1st, 2021—and that any increase in the minimum wage to $8.25 must be linked to conditions—and, for Puerto Ricans 25 or younger, such an increase would only be permitted if and when Puerto Rico eliminated the current mandatory Christmas bonus for employers.

Catalysts to Fiscal Recoveries

Posted on November 10, 2017 by Frank Shafroth

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.

Measuring Municipal Fiscal Distress

Posted on August 29, 2017 by Frank Shafroth

August 29, 2017

Good Morning! In this a.m.’s Blog, we consider the new Local Government Fiscal Distress bi-cameral body in Virginia and its early actions; then we veer north to Atlantic City, where both the Governor and the courts are weighing in on the city’s fiscal future; before scrambling west to Scranton, Pennsylvania—as it seeks to respond to a fiscally adverse judicial ruling, then back west to the very small municipality of East Cleveland, Ohio—as it awaits authority to file for chapter 9 municipal bankruptcy—and municipal elections—then to Detroit’s ongoing efforts to recover revenues as part of its recovery from the nation’s largest municipal bankruptcy, before finally ending up in the Windy City, where the incomparable Lawrence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System.

Visit the project blog: The Municipal Sustainability Project

Measuring Municipal Fiscal Distress. When Virginia Auditor of Public Accounts Martha S. Mavredes last week testified before the Commonwealth’s new Joint House-Senate Subcommittee on Local Government Fiscal Stress, she named Bristol as one of the state’s four financially distressed localities—a naming which Bristol City Manager Randy Eads confirmed Monday. Bristol is an independent city in the Commonwealth of Virginia with a population just under 18,000: it is the twin city of Bristol, Tennessee, just across the state line: a line which bisects middle of its main street, State Street. According to the auditor, the cities of Petersburg and Bristol scored below 5 on a financial assessment model that uses 16 as the minimum threshold for indicating financial stress, with Bristol scoring lower than Petersburg. One other city and two counties scored below 16. For his part, City Manager Eads said he and the municipality’s CFO “will be working with the APA to determine how the scores were reached,” adding: “The city will also be open to working with the APA to address any issues.” (Bristol scored below the threshold the past three years, dropping to 4.25 in 2016. Petersburg had a score of 4.48 in 2016, when its financial woes became public.) Even though the State of Virginia has no authority to directly involve itself in a municipality’s finances (Virginia does not specifically authorize its municipal entities to file for chapter 9 municipal bankruptcy, certain provisions of the state’s laws [§15.2-4910] do allow for a trust indenture to contain provisions for protecting and enforcing rights and remedies of municipal bondholders—including the appointment of a receiver.), its new system examines the Comprehensive Annual Financial Reports submitted annually and scores them on 10 financial ratios—including four that measure the health of the locality’s general fund used to finance its budget. Manager Eads testified: “At the moment, the city does not have all of the necessary information from the APA to fully address any questions…We have been informed, by the APA, that we will receive more information from them the first week of September.” He added that the city leaders have taken steps to bolster cash flow and reserves, while reducing their reliance on borrowing short-term tax anticipation notes. In addition, the city has recently began implementing a series of budgetary and financial policies prior to the APA scores being released—steps seemingly recognized earlier this summer when Moody’s upgraded the city’s outlook to stable and its municipal bond rating to Baa2 with an underlying A3 enhanced rating, after a downgrade in 2016. Nevertheless, the road back is steep: the city still maintains more than $100 million in long-term general obligation bond debt with about half of it tied to The Falls commercial center in the Exit 5 area, which has yet to attract significant numbers of tenants.

Fiscal Fire? The State of New Jersey’s plan to slash Atlantic City’s fire department by 50 members was blocked by Superior court Judge Julio Mendez, preempting the state’s efforts to reduce the number of firefighters in the city from 198 to 148. The state, which preempted local authority last November, has sought to sharply reduce the city’s expenditures: state officials had last February proposed to move the Fire Department to a less expensive health plan and reduce staffing in the department from 225 firefighters to 125. In his ruling, however, Judge Mendez wrote: “The court holds that the (fire department’s union) have established by clear and convincing evidence that Defendants’ proposal to reduce the size of the Atlantic City Fire Department to 148 firefighters will cause irreparable harm in that it compromises the public safety of Atlantic City’s residents and visitors.” Judge Mendez had previously granted the union’s request to block the state’s actions, ruling last March that any reduction below 180 firefighters “compromises public safety,” and that any reduction should happen “through attrition and retirements.”

Gov. Christie Friday signed into law an alternative fiscal measure for the city, S. 3311, which requires the state to offer an early-retirement incentive program to the city’s police officers, firefighters, and first responders facing layoffs, noting at the bill signing what he deemed the Garden State’s success in its stewardship of the city since November under the Municipal Stabilization and Recovery Act, citing Atlantic City’s “great strides to secure its finances and its future.” The Governor noted a drop of 11.4 percent in the city’s overall property-tax rate, the resolution of casino property-tax appeals, and recent investments in the city. For their parts, Senate President Steve Sweeney and Assemblyman Vince Mazzeo, sponsors of the legislation, said the new law would let the city “reduce the size of its police and fire departments without jeopardizing public safety,” adding that the incentive plan, which became effective with the Governor’s signature, would not affect existing contracts or collective bargaining rights—or, as Sen. Sweeney stated: “We don’t want to see any layoffs occur, but if a reduction in workers is required, early retirement should be offered first to the men and women who have served the city.” For his part, Atlantic City Mayor Don Guardian said, “I’m glad that the Governor and the State continue to follow the plan that we gave them 10 months ago. As all the pieces that we originally proposed continue to come together, Atlantic City will continue to move further in the right direction.”

For its part, the New Jersey Department of Community Affairs, which has been the fiscal overseer of the state takeover of Atlantic City, has touted the fiscal progress achieved this year from state intervention, including the adoption of a $206.3 million budget that is 20 percent lower than the city’s FY2015 budget, due to even $56 million less than 2015 due to savings from staff adjustments and outsourcing certain municipal services. Nevertheless, Atlantic City, has yet to see the dial spin from red to black: the city, with some $224 million in bonded debt, has deep junk-level credit ratings of CC by S&P Global Ratings and Caa3 by Moody’s Investors Service; it confronts looming debt service payments, including $6.1 million owed on Nov. 1, according to S&P.

Scrambling in Scranton. Moody’s is also characteristically moody about the fiscal ills of Scranton, Pennsylvania, especially in the wake of a court decision barring the city from collecting certain taxes under a state law—a decision Moody’s noted “may reduce tax revenue, which is a vital funding source for the city’s operations.” Lackawanna County Court of Common Pleas Judge James Gibbons, at the beginning of the month, in a preliminary ruling against the city, in response to a challenge by a group of eight taxpayers, led by Mayoral candidate Gary St. Fleur, had challenged Scranton’s ability to levy and collect certain taxes under Pennsylvania’s Act 511, a state local tax enabling act. His preliminary ruling against the city affects whether the Home Rule Charter law supersedes the statutory cap contained in Act 511. Unsurprisingly, the City of Scranton has filed a motion for reconsideration and requested the court to enable it to appeal to the Commonwealth Court of Pennsylvania. The city, the state’s sixth-largest city (77,000), and the County seat for Lackawanna County is the geographic and cultural center of the Lackawanna River valley, was incorporated on St. Valentine’s Day 161 years ago—going on to become a major industrial city, a center of mining and railroads, and attracted thousands of new immigrants. It was a city, which acted to earn the moniker of the “Electric City” when electric lights were first introduced in 1880 at Dickson Locomotive Works. Today, the city is striving to exit state oversight under the state’s Act 47—oversight the municipality has been under for a quarter century.

Currently, Moody’s does not provide a credit rating for the city; however, Standard and Poor’s last month upgraded the city’s general obligation bonds to a still-junk BB-plus, citing revenue from a sewer-system sale, whilst Standard and Poor’s cited the city’s improved budget flexibility and liquidity, stemming largely from a sewer-system sale which enabled the municipality to retire more than $40 million of high-coupon debt. Moreover, Scranton suspended its cost-of-living-adjustments, and manifested its intent to apply a portion of sewer system sale proceeds to meet its public pension liabilities. Ergo, Moody’s writes: “These positive steps have been important for paying off high interest debt and funding the city’s distressed pension plans…While these one-off revenue infusions have been positive, Scranton faces an elevated fixed cost burden of over 40% of general fund revenues…Act 511 tax revenues are an important revenue source for achieving ongoing, balanced operations, particularly as double-digit property tax increases have been met with significant discontent from city residents. The potential loss of Act 511 tax revenues comes at a time when revenues for the city are projected to be stagnant through 2020.”

The road to municipal fiscal insolvency is easier, mayhap, because it is downhill: Scranton fiscal challenges commenced five years ago, when its City Council skipped a $1 million municipal bond payment in the wake if a political spat; Scranton has since repaid the debt. Nevertheless, as Moody’s notes: “If the city cannot balance its budget without illegally taxing the Scranton people, it is absolute proof that the budget is not sustainable…Scranton has sold off all its public assets and raised taxes excessively with the result being a declining tax base and unfriendly business environment…The city needs to come to terms with present economic realities by cutting spending and lowering taxes. This is the only option for the city.”

Scranton Mayoral candidate Gary St. Fleur has said the city should file for Chapter 9 municipal bankruptcy and has pushed for a related ballot measure. Combined taxes collected under Act 511, including a local services tax that Scranton recently tripled, cannot exceed 1.2% of Scranton’s total market value. Based on 2015 market values, according to Moody’s, Scranton’s “511 cap” totals $27.3 million. In fiscal 2015 and 2016, the city collected $34.5 million and $36.8 million, respectively, and for 2018, the city has budgeted to receive $38 million. The city, said Moody’s, relied on those revenues for 37.7% of fiscal 2015 and 35.9% of fiscal 2016 total governmental revenues. “A significant reduction in these tax revenues would leave the city a significant revenue gap if total Act 511 tax revenues were decline by nearly 25%,” Moody’s said.

Heavy Municipal Fiscal Lifting. Being mayor of battered East Cleveland is one of those difficult jobs that many people (and readers) would decline. If you were to motor along Euclid Avenue, the city’s main street, you would witness why: it is riddled with potholes and flanked by abandoned, decayed buildings. Unsurprisingly, in a city still awaiting authorization from the State of Ohio to file for chapter 9 municipal bankruptcy, blight, rising crime, and poor schools, have created the pretext for East Clevelanders to leave: The city boasted 33,000 people in 1990; today it has just 17,843, according to the latest U.S. Census figures. Nevertheless, hope can spring eternal: four candidates, including current Mayor Brandon L. King, are seeking the Democratic nomination in next month’s Mayoral primary (Mayor King replaced former Mayor Gary Norton last year after Norton was recalled by voters.)

Motor City Taxing. Detroit hopes to file some 700 lawsuits by Thursday against landlords and housing investors in a renewed effort to collect unpaid property taxes on abandoned homes that have already been forfeited; indeed, by the end of November, the city hopes to double the filings, going after as many as 1,500 corporations and investors whose abandonment of Detroit homes has been blamed for contributing to the Motor City’s blight epidemic: Motor City Law PLC, working on behalf of the city, has filed more than 60 lawsuits since last week in Wayne County Circuit Court; the remainder are expected to be filed before a Thursday statute of limitations deadline: the suits target banks, land speculators, limited liability corporations, and individuals with three or more rental properties in Detroit: investors who typically purchase homes at bargain prices at a Wayne County auction and then eventually stop paying property tax bills and lose the home in foreclosure: the concern is that unscrupulous landlords have been abusing the auction system. The city expects to file an additional 800 lawsuits over the next quarter—with the recovery effort coming in the wake of last year’s suits by the city against more than 500 banks and LLCs which had an ownership stake in houses that sold at auction for less than what was owed to the city in property taxes. Eli Savit, senior adviser and counsel to Mayor Mike Duggan, noted that those suits netted Detroit more than $5 million in judgments, even as, he reports: “Many cases are still being litigated.” To date, the 69 lawsuits filed since Aug. 18 in circuit court were for tax bills exceeding $25,000 each; unpaid tax bills for less than $25,000 will be filed in district court. (The unpaid taxes date back years as the properties were auctioned off by the Wayne County Treasurer’s Office between 2013 and 2016 or sent to the Detroit Land Bank Authority, which oversees demolitions if homes cannot be rehabilitated or sold.) The suits here indicate that former property owners have no recourse for lowering their unpaid tax debt, because they are now “time barred from filing an appeal” with Detroit’s Board of Review or the Michigan Tax Tribunal; Detroit officials have noted that individual homeowners would not be targeted by the lawsuits for unpaid taxes; rather the suits seek to establish a legal means for going after investors who purchase cheap homes at auction, and then either rent them out and opt not to not pay the taxes, or walk away from the house, because it is damaged beyond repair—behavior which is now something the city is seeking to turn around.

Local Government Fiscal Protection? Just as the Commonwealth of Virginia has created a fiscal or financial assessment model to serve as an early warning system so that the State could act before a chapter 9 municipal bankruptcy occurred, the fiscal wizard of Illinois, the incomparable Chicago Civic Federation’s Laurence Msall has proposed a Local Government Protection Authority—a quasi-judicial body—to serve as a resource for the Chicago Public School System (CPS): it would be responsible to assist the CPS board and administration in finding solutions to stabilize the school district’s finances. The $5.75 billion CPS proposed budget for this school year comes with two significant asterisks: 1) There is an expectation of $269 million from the City of Chicago, and 2) There is an expectation of $300 million from the State of Illinois, especially if the state’s school funding crisis is resolved in the Democrats’ favor.

Nevertheless, in the end, CPS’s fiscal fate will depend upon Windy City Mayor Rahm Emanuel: he, after all, not only names the school board, but also is accountable to voters if the city’s schools falter: he has had six years in office to get CPS on a stable financial course, even as CPS is viewed by many in the city as seeking to file for bankruptcy (for which there is no specific authority under Illinois law). Worse, it appears that just the discussion of a chapter 9 option is contributing to the emigration of parents and students to flee to suburban or private schools.

Thus, Mr. Msall is suggesting once again putting CPS finances under state oversight, as it was in the 1980s and early 1990s, recommending consideration of a Local Government Protection Authority, which would “be a quasi-judicial body…to assist the CPS board and administration in finding solutions to stabilize the district’s finances.” Fiscal options could include spending cuts, tax hikes, employee benefit changes, labor contract negotiations, and debt adjustment. Alternatively, as Mr. Msall writes: “If the stakeholders could not find a solution, the LGPA would be empowered to enforce a binding resolution of outstanding issues.” As we noted, a signal fiscal challenge Mayor Emanuel described was to attack crime in order to bring young families back into the city—and to upgrade its schools—schools where today some 380,000 students appear caught in a school system cracking under a massive and rising debt load.

Far East of Eden. East Cleveland Mayor Gary Norton Jr. and City Council President Thomas Wheeler have both been narrowly recalled from their positions in a special election, setting the stage for the small Ohio municipality waiting for the state to—in some year—respond to its request to file for chapter 9 municipal bankruptcy to elect a new leader. Interestingly, one challenger for the job who is passionate about the city, is Una H. R. Keenon, 83, who now heads the city school board, and campaigning on a platform of seeking a blue-ribbon panel to examine the city’s finances. Mansell Baker, 33, a former East Cleveland Councilmember, wants to focus on eliminating the city’s debt, while Dana Hawkins Jr., 34, leader of a foundation, vows to get residents to come together and save the city. The key decisions are likely to emerge next month in the September 12 Democratic primary—where the winner will face Devin Branch of the Green Party in November. Early voting has begun.

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The GMU Municipal Sustainability Project

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Category Archives: Chicago

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The Fiscal Challenges of Inequity

Upsetting State & Local Fiscal Balances

Fiscal Fire in the Hole

What Are the Fiscal Conditions & Promises of Recovery?

Catalysts to Fiscal Recoveries

Measuring Municipal Fiscal Distress