Complexities of Democracy & Municipal Bankruptcy

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October 29, 2015. Share on Twitter

Complexities of Democracy & Municipal Bankruptcy. With election day just around the corner, San Bernardino Mayor Carey Davis spent an evening with constituents answering questions, including the inevitable ones about the status of the municipality’s 2012 municipal bankruptcy filing—where the city’s plan of adjustment has long since missed the deadline for submission set by U.S. Bankruptcy Judge Meredith Jury—and where, of course, next week’s election, if there are changes, could create still further disruption. Indeed, Mayor Davis admitted, in response to several residents’ questions, that San Bernardino is not there yet and confronts hard choices in putting together making further “haircuts” before its plan will be ready. Speaking to about 30 residents at Jovi’s Diner for his second “Evening with the Mayor,” he offered updates on key issues—and sought input. He discussed what he termed “seven strategies” the city had identified over the course of five strategic planning sessions or community meetings the city’s leaders had convened with citizens earlier this year, in an effort, he said, to demonstrate the impact community input can have, noting: “As a result of that process, public safety is a top priority of the recovery plan,” noting the city has hired more police, created a park ranger program, and used federal grants to purchase police body cameras and new patrol cars. (See: http://www.city-data.com/crime/crime-San-Bernardino-California.html). Nevertheless, as can be discerned from the data, the challenge of public safety remains, as the Mayor noted, an issue: “Our police are very engaged in trying to eradicate some of the problems in our community, but they’re overwhelmed at times with the heavy call volume.” On the related public safety front, Mayor Davis said the city was continuing in its efforts to outsource or regionalize emergency fire and rescue services with surrounding San Bernardino County, noting: “We’re working through the hoops and hurdles, but we hope to have that done probably by July of next year.” One of the hurdles has been the legal and political challenge by the fire union—a challenge with which Judge Jury has previously concurred with San Bernardino’s fire union was done without required negotiation. Nevertheless, the city and the Local Agency Formation Commission for San Bernardino County, the commission which is in charge of approving San Bernardino’s efforts to annex itself into the San Bernardino County Fire Protection District voted unanimously last month to make that and two related applications its top priority—a focus meant to ensure the annexation process can be completed by next July 1st for the applicants, which include San Bernardino, the Twenty-nine Palms Water District, and Hesperia Fire Protection District. Mayor Davis also pointed out other signs of progress, including the San Manuel Gateway College, a project of Loma Linda University Health with an expected 2016 completion date, which the Mayor reports will create career paths for local students while increasing the number of patient visits nearly tenfold from 30,000 to 200,000 per year. He said the city had issued more than 2,000 new business licenses over the last year—and that, for the first time in decades, the San Bernardino City Unified School District had registered higher graduation rates—and that the city’s Middle College High School had ranked ninth among California’s nearly 2,000 schools.

The Human Side of Municipal Bankruptcy. The bankruptcies of Central Falls and Detroit, perhaps more than any others, and the significant human and fiscal costs, appear to have been central to the exceptional efforts Wayne County, the jurisdiction encompassing and surrounding Detroit, has taken to avoid going into municipal bankruptcy—steps including reducing retirement health care benefits and transferring some of its retirees from employer-paid group health care to a system under which they will receive a monthly stipend enabling purchase of a plan on the federal Health Insurance Marketplace or a plan through the insurance company Wayne County has contracted with to manage the day-to-day administration of the stipend program. The seemingly harsh steps came in the wake of the State of Michigan’s declaration of a financial emergency in the county—a declaration short of municipal bankruptcy, but which triggered a consent agreement between Wayne County and the state which gives Wayne County Executive Warren Evans some powers normally made available only to emergency managers. It seems the experience with the largest municipal bankruptcy in American history has yielded some lessons learned which could be valuable to Michigan’s taxpayers, and Wayne County’s future. Nevertheless, there will be costs. That is to write that Wayne County continues to grapple with a recurring budgetary shortfall that stems from the steep, $100 million annual drop in property tax revenues since 2008. Wayne County officials have been able to drop the deficit be nearly half—nearly $30 million from a $52 million structural deficit. For the longer term challenge, the county faces an underfunded pension system, underfunded by $910.5 million, according to its most recent actuarial report—an underfunding which has been bleeding Wayne County’s general fund by about $20 million annually to prevent it from going under. That is, with the unique authority conferred by the state, the County has been acting with conferred state authority to take extraordinary fiscal steps to avert going into municipal bankruptcy—steps under which Mr. Evans last April announced a plan to cut $230 million from the budget over four years, including reducing health care benefits for employees, eliminating health care for future retirees, and restructuring the pension system—with the transition set to begin at the end of next month when the current health care plan ends and the new one takes effect on the first of December. County officials estimate some 4,000 retirees will be eligible. As James Canning, a Wayne County spokesperson noted: “We understand change is never easy…But moving from employer-paid health care to a stipend program was necessary to improve the long-term financial health of the county. We really appreciate our retirees’ understanding as we move through this process.” The plan also means health care benefits for the county’s current retirees will be affected: Wayne County officials switched an employer-paid group health care plan for retirees to giving them a monthly stipend—and has, in an effort to try to help its retirees through the wrenching process—hosted 13 informational meetings for retirees at sites across Metro Detroit in recent weeks, as well as set up an 800-number and a website at http://waynecounty.amwins.com/ to answer retirees’ questions about their health care benefits. Under the plan, Wayne County employees who retired before 2007 and are eligible for Medicare will receive a $130 monthly stipend for themselves and one for eligible spouses. Wayne County employees who retired before 2007 and are not Medicare eligible will receive a monthly stipend based on their household income: e.g., a retiree with a spouse or single dependent and who earns less than $35,000 a year, will receive a $150 monthly stipend; a retiree with a spouse who earns between $35,000 and $65,000 will receive $300 a month. Under the plan, retirees may buy insurance through a broker or an independent agent, or directly from an insurance carrier, or obtain coverage through a spouse’s employer. Prior to this change, as in many cities and counties, retirees paid a minimal amount out of their own pockets for health care. In Wayne County, for instance, most county retirees paid about $90 per month for coverage for themselves, two people or a family with Blue Cross or Health Alliance Plan under last year’s benefits structure, according to the county. Retirees in the supervisory unit paid about $44 a month for single coverage, $104 for two people and $122 for a family. In addition, county retirees paid a yearly deductible of $500 for themselves and $1,000 for a family. Co-pays for doctor’s visits ranged from $30 to 20 percent for general services from in-network health care providers. Under the new change, the county expects to realize savings of nearly $22 million in FY2015-16 alone. According to the County, effective this December 1st, the county will transfer about 4,000 retirees from employer-paid group health insurance to a monthly-stipend system. County employees who retired prior to 2007 and are Medicare-eligible will receive a monthly $130 stipend for themselves and one for spouses, if eligible; employees who retired before 2007 and are not Medicare-eligible will receive a monthly stipend based on their household income. Here is how it will impact county retirees who are not Medicare-eligible:

Single retiree:

■$100 for income less than $30,000
■$200 for income of $30,000-$45,000
■$400 for income $45,000-plus
Retiree and spouse or one dependent
■$150 for income less than $35,000
■$300 for income of $35,000-$65,000
■$750 for income of $65,000-plus
Family
■$150 for income less than $40,000
■$300 for income of $40,000-$55,000
■$400 for income of $55,000-$70,000
■$800 for income of $70,000-plus

Source: Wayne County

Down Under. Rene Vollgraaff and Xola Potelwa, writing for Bloomberg this week, noted that South Africa’s credit rating could drop to junk in “just a matter of time.” Fitch and Moody’s Investors Service, which rate the nation’s debt two steps above sub-investment, are set to bring their assessments in line with S&P’s at the lowest investment-grade level, noting that another step down would start triggering capital outflows. The cost of insuring South Africa’s dollar debt against default for five years has climbed 58 basis points in the past 12 months to 248, compared with the 142 median of five emerging-market economies with similar ratings at Moody’s and Fitch, and 215 for those rated one level lower. Weakening tax revenue is putting pressure on the country’s budget deficit, even as the country is close to a recession and confronting a 25 percent jobless rate. The budget deficit will widen from earlier forecasts, reaching 3.3 percent in the fiscal year through March 2017 and 3.2 percent in the following year. The federal government debt is projected to reach almost 50 percent of GDP this year. Having lived and worked in Africa—and visited Johannesburg last year, this national fiscal challenge, unsurprisingly, led me to apprehension about the fiscal fallout for the nation’s cities. A 2013 study by the South Africa Fiscal and Financial Commission grouped South Africa’s municipalities into three categories: fiscally neutral, fiscal watch, and fiscally distressed, based on short-term and long-term indicators. According to the short-term indicators, fiscally healthy municipalities decreased (from 34 per cent in 2011/12 to 24 per cent in 2012/13), and the number of municipalities in the fiscal watch and fiscally distressed categories increased. However, the long-term analysis revealed that a large percentage of municipalities are fiscally healthy, with the number of fiscal distressed municipalities remaining relatively low. The study recommended the federal government should develop an early warning system, which would detect municipalities heading towards fiscal distress. Once the probability of fiscal stress was detected, further investigation would be needed to identify the underlying root causes and frame appropriate and timely responses.

The question then becomes, what might that mean for South Africa’s cities? It was, after all, just three years ago that some 64 municipalities in that country were named on a list of financially distressed municipalities, where the report noted: “From evidence to date, it is clear that much of local government is indeed in distress, and that this state of affairs has become deeply rooted within our system of governance.” The assessments were designed to ascertain the root causes of distress in many of the country’s 283 municipalities in order to inform a national turn-around strategy for municipalities; they were carried out in all nine of South Africa’s provinces. One key finding was an overall vacancy rate of 12 percent for senior managers in local government, demonstrating the challenge—a challenge not unlike in many cities in the U.S.—of attracting the most competent managers—especially an issue for municipalities in distress, which often lack both the financial wherewithal, not to mention the budget to attract the top talent. Or, as the South African report found, insufficient municipal capacity due to lack of scarce skills, along with poor financial management, corruption, and service delivery delays all combined for disproportionate municipal fiscal instability and unsustainability. The report also found that the disparity in skills was exacerbated by the decline of municipal professional associations and poor linkages between local government and the tertiary education sector: “Functional overreach and complexity are forcing many municipalities into distress mode, exacerbated by the poor leadership and support from other spheres and stakeholders.” The report found that the distressed municipalities lacked financial and human resources to deliver on their mandate and citizens’ expectations. Or, as we wrote then: when we were in Johannesburg, the news reported: “Most people are not entirely clear about what the officials in this amorphous government department do all day long beyond, presumably, going to a great many meetings with various levels of government, chiefs and tribal councils, listening attentively, nodding sympathetically, and then going home to watch TV…but while the man in the pothole street might not be clear about the purpose and day-to-day functioning of cooperative governance…the minister of finance would have been acutely aware of the need to sort out local and provincial government where mayors and MEC’s buy themselves fancy 4X4’s from the public purse (even the provincial ambulance budget, if that’s what it takes), because their administrations either can’t or can’t be bothered to fix their roads….The job of cooperative governance minister might be less glamorous than divvying up the public sector kitty and deciding who gets taxed how much, but it is, in every sense, a real job, just one that hasn’t been done terribly well until now….”