Municipal Elections: Will They Provide a Platform for Fiscal Sustainability?

November 6, 2015. Share on Twitter

Voting for a City’s Post-Bankruptcy Future. In an election, where a majority, or four of the seven San Bernardino City Council seats were on the ballot, to determine half of the leaders who will shape whether and how San Bernardino might emerge from the longest municipal bankruptcy in U.S. history, only one-third of the city’s residents are even registered to vote. The greatest number of votes—in an election with an abysmal turnout of about 10 percent—came in the race for city Treasurer, where the incumbent, David Kennedy easily won reelection by a 2-1 margin. Or, as City Clerk Gigi Hanna, who was re-elected in an uncontested election, describes it: “It’s abysmal,” referring to the low turnout: “It’s a perennial problem in this area.” Councilman John Valdivia, who ran unopposed, was re-elected with 641 votes. In the 6th Ward, four candidates split a total of 983, while there were just over 1,500 votes cast in the 5th and 7th wards—where in the latter, 7th Ward Councilman Jim Mulvihill will face a runoff — albeit it remains uncertain who his opponent will be. Final, unofficial results appear to indicate that Bessine Littlefield Richard will face Roxanne Williams in a runoff for the 6th Ward. In the 5th Ward race, incumbent Henry Nickel won re-election with 66 percent of the vote, while incumbent San Bernardino Treasurer was easily reelected with 71 percent of the vote. In the city races where none of the candidates reach 50 percent, the top two vote-getters will advance to a February run-off. The runoff in the 7th – in the north end of the city, where the abysmal voter turnout was about 5% — centered on incumbent Councilmember Mulvihill, who had been elected two years ago in the wake of a recall election of Wendy McCammack. In the 6th Ward race to replace retiring Councilman Rikke Van Johnson, Littlefield Richard of San Bernardino County’s Workforce Development Department has been narrowly leading Roxanne Williams, a program specialist for the San Bernardino City Unified School District — 370 votes to 356 votes — reversing their order from the first round of results. However, both are assured placement on the runoff ballot, beating out Anthony Jones (156 votes) and Rafael Rawls (101 votes). Challenger Karmel Roe failed to dislodge the long-term hold of incumbent City Treasurer David Kennedy, who has served for some 24 years. A mortgage broker who ran for Mayor two years ago and the 5th Ward City Council in 2014, Mr. Roe attacked Treasurer Kennedy for not having done more to help a bankrupt city. The specific commitments Ms. Roe campaigned on that said she would do to change the office — demanding audits, taking control of the Finance Department, encouraging economic development in the city — are, however, not issues in the city which the treasurer is authorized to handle under the current city charter. Incumbent City Attorney Gary Saenz, City Clerk Gigi Hanna and 3rd Ward Councilman John Valdivia all, successfully—and unopposed, were re-elected.

Waiting for Godot. S&P yesterday reported it was keeping Atlantic City on credit watch negative as the credit rating agency awaits both an updated report by Emergency Manager Kevin Lavin and an expected decision by New Jersey Governor and aspiring GOP Presidential candidate Chris Christie whether and when he might sign into law a financial assistance package approved by the New Jersey State Legislature. Atlantic City Revenue Director Michael Stinson said he expects resolution on the fate of the legislature-approved rescue package by next week before the state Assembly and Senate return to session. If Gov. Christie takes no action before the new session, the five bills automatically become law, according to Mr. Stinson: “If the bills are passed than we are going to get revenue…The uncertainty of the bills should be resolved by next week.” Atlantic City, which is in a fiscal and governance Twilight Zone, with its municipal finances overseen by a state-appointed overseer and Mayor Don Guardian, is closing a $101 million budget deficit this year by firing employees, and crossing its fingers for a state assistance package approval. The city’s proposed budget, approved by the state’s Local Finance Board at the end of last month, depends on Governor and Presidential candidate Chris Christie’s approval of bills that would allow the city to spend $33.5 million of revenue from casinos that now goes to redevelopment projects and marketing. The Atlantic City budget was adopted nine months late, but came in time to mail fourth quarter tax bills and also fully funds its annual requirements for settled tax appeals. Emergency Manager Lavin, testifying before the legislature in Trenton, told state lawmakers the budget was an initial step to ease a fiscal crisis in the city, while Mayor Guardian testified: “We understand that we can’t get out of this by ourselves.” The unique partnership between Mayor Guardian and state-appointed emergency manager Lavin has led to the dismissal of more than 100 employees, reducing the city’s workforce by nearly a third, and deferring payments for employee pensions and health-care benefits, while continuing to meet Atlantic City’s obligations to its municipal bondholders. Nevertheless, S&P last month cut the city’s credit rating deeper into junk, because it had yet to lay out detailed plans for dealing with its fiscal distress. S&P ranks the debt B, five levels below investment grade. Moody’s Investors Service grades it two steps lower at Caa1.

S&P analysts Timothy Little and Lisa Schroeer noted in a report yesterday that while the state’s Local Finance Board approved a balanced Atlantic City 2015 budget in late September, that budget relies on anticipated revenues of $33.5 million in redirected casino taxes and $38.9 million in deferred pension and health care expenses. The pending assistance package adopted by the legislature last June of five bills would allow the redirection of casino taxes to pay debt service. S&P said the city reported it will be able to make an $11 million December 2015 debt service payment even the anticipated redirected casino tax revenue is not received. S&P dropped Atlantic City’s credit rating three notches by S&P in August due to uncertainty over whether it could meet its 2015 fiscal obligations. Now the city awaits both the decision of the peripatetic Gov. Christie as well as a second report from Emergency Manager Lavin which is expected anon. The city is rated Caa1 by Moody’s Investors Service.

Unaccountability? The road to municipal bankruptcy can be paved by inattention and unaccountability. Thus, a California audit of the City of Beaumont, an LA suburb, found that the city failed to properly account for nearly three quarters of a billion dollars’ worth of municipal bond transactions and that the municipality was unable to provide the State Controller’s office with any accounting records for the bond transactions—and that neither the current city management nor its employees were able to provide any information or records of bond transactions, according to the audit. Beaumont officials say they are already taking steps to address what the report called pervasive shortcomings resulting in non-existent accounting controls for the city: the state report found that 95% of the city’s internal control elements reviewed in an audit of fiscal years 2012-13 and 2012-14 were inadequate—or, as California Controller Betty Yee stated: “These kinds of deficiencies are of great concern,” adding: “However, I am encouraged that city leaders recognize the need to implement major improvements.” The audit uncovered widespread deficiencies that rendered them effectively non-existent, with 75 of 79 internal control elements determined to be inadequate, or, as Ms. Yee explained: “These kinds of deficiencies are of great concern, especially to the citizens of Beaumont, who rightly expect their city government to safeguard their tax dollars.” The state fiscal investigation came in the wake of an FBI and Riverside County District Attorney’s Office search conducted at Beaumont City Hall. Controller Yee launched her audit last May, a month after the Riverside County District Attorney’s office and the FBI executed warrants at City Hall, former City Manager Alan Kapanicas’ house, and the Beaumont offices of Urban Logic Consultants, a firm which had provided many of the city’s top managers on a contract basis. No charges have been filed, but the investigation is ongoing; the audit found improper accounting by three city agencies for bonds issued between 1993 and 2014.

Among the state findings:

  • The city failed to properly account for bond transactions by three of its units, including financing and utility authorities and a community facilities district that together issued $626 million in bonds. As a result, the Controller’s team could not determine whether the bond proceeds were used for the intended purposes.
  • The former city manager and former public works director, both principals of outside consultants that provided city staff, received fees from bond proceeds for their services. In the absence of any written agreements, it was unclear whether these services were separate from their responsibilities as city officials. These two officials approved payments to the consulting companies where they were principals, creating conflicts of interests.
  • In 2008, Beaumont obtained a reseller’s permit from the state Board of Equalization, allowing it to purchase items outside the city without paying sales tax, even though the city did not appear to be in the business of selling goods. Beaumont also allowed one of its vendors to use the permit. The arrangement allowed the city to shift sales tax revenues from other jurisdictions by moving the supposed point of sale within its boundaries.
  • The city did not consistently follow its competitive bidding laws. City staff bought equipment or let contracts for public works without competitive bidding, arguing that the vendor was the only source, yet failed to provide documents supporting this claim. In 2013, the city entered into a no-bid contract with Urban Logic Consultants that allowed engineering projects to be approved through “job cards” rather than open, competitive bidding.
  • The city lacked receipts and descriptions for credit card purchases, supporting documentation for loans made to employees, and sufficient records for a loan to a private business. Invoices were missing, including purchases from a construction company totaling more than $1 million.
  • For five years in a row, the city ended the fiscal year with material deficits of as much as $10 million in its General Fund. It did not have sufficient revenue to fund existing levels of service. The city said it would cover these deficits with $21.5 million owed by its redevelopment agency. However, the redevelopment agency has been dissolved and it is highly uncertain that amount can be collected.
  • Beaumont failed to do timely bank reconciliations and did not segregate staff duties.

According to acting City Manager Elizabeth Gibbs-Urtiaga, the findings of the Controller’s office confirm what the City Council and the new city management team uncovered last summer, in the wake of which, last month, the former city manager signed a separation agreement valued at $213,702.75 to terminate his contract, according to city documents—or, as Beaumont Mayor Brenda Knight said in a statement: “We have been very busy correcting the business practices going forward.”

Should Municipal Bankruptcy Be a Last Resort?

November 3, 2015. Share on Twitter

Complexities of Democracy & Municipal Bankruptcy. On the eve of an election, San Bernardino’s voters, tomorrow, could help determine or reshape the city’s chances of getting out of municipal bankruptcy—especially with regard to how any plan of debt adjustment addresses public safety and taxes. There are three Council seats at stake, as well as the city’s Treasurer. In a city where key votes related to its efforts to exit bankruptcy have been decided by one vote margins, this election could well reshape the city’s future—indeed, determine whether it will have a future. In the Council races, Councilman John Valdivia is running unopposed, while 5th Ward incumbent Henry Nickel is being challenged. Next door, with current Councilmember Rikke Van Johnson retiring, there is a heated four-way race. In the 7th Ward, incumbent Jim Mulvihill, who was elected two years ago in a recall election, is facing four challengers.

Polee, Polee. In Liberia, the elders in the village, Konweaken, where I lived and worked, used to caution us with those words—which, literally, translate to “slowly, slowly; but surely.” So too credit rating company Standard and Poor’s seems to be cautioning Chicago Mayor Rahm Emanuel in the wake of his success in gaining passage a record $548 million increase in the Windy City’s property tax—warning the adoption of the city’s budget and record tax increase represent notable progress, but, nevertheless, adding: “While the actions taken in this budget to raise property taxes are intended to address the cost pressures in 2016, they may not be sufficient to mitigate the city’s financial stress…In our view, the extent of the city’s structural imbalance, when factoring in required pension contributions, will take multiple years to rectify,” noting that Chicago confronts some $20 billion in unfunded public pension obligations—and that the pace with which the city plans to stabilize its pension obligations will continue to “place pressure on the city’s budget—one of the primary drivers of our rating.” S&P rates Chicago’s general obligation debt BBB-plus with a negative outlook. In its new analysis, S&P analysts Helen Samuelson, John Kenward, and Jane Ridley noted the property tax increase was an “important first step” toward dealing with skyrocketing public safety contributions under a 2010 state mandate; nevertheless, the trio expressed apprehension over the plan’s reliance on approval by the seemingly dysfunctional state of a re-amortization of the police and firefighter fund contribution schedule. Chicago’s proposal would reduce by $220 million the amount due next year to $328 million: if the proposed changes are not approved by the state, the city will owe, instead, $550 million. Under the city-adopted plan, Chicago would phase in the changes over five years to an actuarially required contribution (ARC) level which, under Illinois’ 2010 mandate, is supposed to take effect in 2016—with the first year’s payment finalized by the end of this year—a problematic deadline given the stalemate in Springfield—and failure, as the S&P trio noted, would put “even more stress on the city’s budget.” Chicago’s contributions to its four pension funds now run to $978 million, a 78% increase from the $550 million the city budgeted in 2015, and the deteriorated fiscal condition of its pension funds appear to be falling far short. S&P also expressed concerns over the long -term impact of a looming Illinois Supreme Court ruling deciding the fate of Chicago’s 2014 pension reforms to its laborers and municipal funds—changes on appeal to the Illinois Supreme Court in the wake of rejection by the lower court, with oral arguments looming this month. If successful in its appeal, Chicago would see public pension payments due next year fall by about $100 million. Nevertheless, the city would still need to come up with a plan to keep the funds solvent that does not rely on benefit cuts.

Won’t You Be My Neighbor? Wayne County has filed a class action suit against Wyandotte, a small city of about 25,000 inside of Wayne County, over tax revenues which were supposed to be collected as part of a judgment levy earlier this year. Wayne County is alleging Wyandotte and its Downtown Development Authority and Tax Increment Finance Authority instead collected taxes intended for the judgment levy for their own use. The levy in question derives from a ruling last June which requires Wayne County to replenish funds it pulled from a retirement fund. In its filing, Wayne County charged: “The (city of Wyandotte, its Downtown Development Authorities, and Tax Increment Finance Authorities) have stated that they…intend to capture revenue raised from a special purpose millage levied by Wayne County…(They) have misconstrued applicable law to conclude that they are required to capture revenue from the judgment levy…If (the city of Wyandotte, its DDA and TIFA) divert a portion of the judgment levy to their own use, the county will be unable to satisfy the judgment levy, because the revenue collected will be insufficient.” A key reasoning behind the filing by Wayne County—which is in a state of fiscal emergency, is to protect against any intergovernmental precedent whereby other municipalities, development districts, or tax increment financing authorities would not capture and use revenues from the judgment levy. While it is unclear how much Wyandotte’s tax increment finance systems have collected, Wayne County’s lawsuit does state “the amount in controversy exceeds $25,000, exclusive of interest and costs,” as it seeks a speedy hearing. Wayne County Commissioners are scheduled to meet Thursday to hear further updates on the matter, which relates to a one-time tax on property owners Wayne County adopted last June in order to raise sufficient revenue to pay a $49 million judgment in favor of a Wayne County retiree fund, stemming a lawsuit retirees filed against the county for pulling $32 million from its “Inflation Equity Fund—” the fund which provided retirees what is referred to as the “13th check.” The $49 million made up for the amount taken from the fund, plus lost earnings. In the wake of the ruling, Wayne County Commissioners adopted a resolution to use the delinquent revolving tax fund to pay for the judgment, but County Executive Warren Evans vetoed it. The result was the average Wayne County homeowner had to pay an extra $35 on her or his summer tax bill.

Will the View Be Downhill? The question before U.S. Bankruptcy Judge Alan Stout is with regard to what makes a municipality eligible for chapter 9 bankruptcy. Now the question appears to be coming to a head in the small municipality of Hillview, Kentucky, which became, last August, the first municipality to file for municipal bankruptcy since Detroit did in July of 2013, with Hillview Mayor Jim Eadens stating to the U.S. Bankruptcy court: “I believe that we did everything humanly possible to try to work this out, but we will not commit to something that is too much and that we believe will impair the city too much as far as our obligations to provide care and services to our citizens.” The filing came in the wake of the small city’s unsuccessful appeal of a court ruling ordering it to pay $11.4 million in damages to Truck America Training. Now attorneys for Truck America have challenged Hillview’s request to utilize municipal bankruptcy, citing federal rules which require a municipality to negotiate with all its creditors—not just one—before turning to chapter 9 municipal bankruptcy, noting that the municipality neither tried to make deals, nor did it try to raise taxes on the small city’s growing population. Hillview’s occupational tax, the city’s key source of revenue, is much lower than the region’s average rate: indeed, according to Truck America, raising the rate to 2% from 1.5% would give the small municipality an additional $500,000 in annual reveues. The trucking company attorneys added: “We don’t think they ever seriously tried to raise taxes or negotiate other debts,” and the city had rejected an offer to repay the Truck America debt at a 40% discount the day before the bankruptcy. The company is seeking to convince Judge Stout that Hillview should be ruled ineligible for municipal bankruptcy. In fact, the city appears to have sought to negotiate a repayment deal, including in talks which were led by retired U.S. Bankruptcy Judge and lead rhythm guitar player for the Indubitable Equivalents Steven Rhodes—but those talks led to naught—a breakdown which created apprehension on the part of Mayor Eadens that Truck America would gain the requisite authority to freeze the city’s bank account a second time—with the Mayor noting that when that happened the first time, it “was extremely disruptive, scary, and a real crisis in city operations,” in the city’s court filings. Hillview, a municipality of about 8,000 people had about $13.8 million in debt, compared with revenue of $2.5 million in the 2014 fiscal year. That is, the municipality, at least according to Moody’s analyst Nathan Phelps, is in sufficient fiscal shape to issue municipal bonds to cover losses in legal judgments and pay off the resolution over the course of a decade or, it could increase taxes on wages, business profits and property. That is, there might well be less expensive ways for the city to avoid being towed into federal bankruptcy court—and, with Truck America petitioning the federal bankruptcy court by filing an objection to the city’s petition, claiming “Hillview cannot sustain its burden of establishing eligibility under 11 U.S.C. § 109(c) and has not filed its petition in good faith,” it might well be that the federal court will concur.

Municipal Information. The Center for Integrity and Public Policy in Puerto Rico has started a web site and municipal financial index to provide statistics on Puerto Rico’s 78 cities, the site will provide comparative rankings of the cities, and will provide information in both English and Spanish, including the financial rank of each of the municipalities overall and on different measures In its press release, the Center found that Puerto Rico’s cities or muncipios were generally in a difficult financial position:
• 70 municipalities have negative net assets (unrestricted);
• 50 municipalities have a general fund deficit;
• 43 municipalities have an accumulated general fund deficit (that is, a negative general fund balance);
• 24 municipalities spend more than 15% of their budget on debt service;
• 40 municipalities receive over 40% of their revenues from the central government;
• Total long-term debt of the municipalities exceeds $5 billion.

OPEN Puerto Rico [], which is not in English, (lo siento!) has, simultaneously announced the launch of a Municipal Financial Health Index for all 78 municipalities, noting: “With this index we are providing a new measurement tool that will allow residents to compare their municipality to the others on the island utilizing a series of standardized financial indicators…Mayors can often arrive at their own conclusions about the financial health of their municipality, but now they can do it using the index and its underlying indicators and data that is information that can be independently verified,” with the financial information on the site current to FY2013. Over time as new data becomes available, OPEN Puerto Rico will update the financial information and the index values. The index values are based on a statistical analysis of 13 financial indicators and how municipalities compare to the current Puerto Rico municipal averages. The indicators of short-term financial health have a greater weight than the long-term measures, Cruz said. The index can take positive and negative values with no particular maximum or minimum value. It indicates how far each city or town is from the mean financial condition of the Puerto Rico municipalities. Positive values indicate the municipalities are better than average and negative values show the reverse. The index values are currently not on the web site proper but in a Spanish language paper which is linked on the web site.

Municipal Fiscal Transparency & Democracy

October 21, 2015. Share on Twitter

Municipal Fiscal Transparency in Insolvency. With municipal election day in San Bernardino less than two weeks away, Deputy City Manager Nita McKay has reported to the Mayor and Council that a critical element for the city’s municipal bankruptcy case pending before U.S. federal bankruptcy Judge Meredith Jury will be made more complete via the submission of its long-delayed audits, stating: “In meeting with the city’s auditor, Macias, Gini and O’Connell LLP (MGO), they have committed to us that they will have the fiscal year 2012-13 financial audit, including the independent auditor’s report on the assurance of whether the financial statements are free of material misstatement and whether they can be relied upon by the readers of those financial statements.” This is an older audit—long past due–of San Bernardino’s FY2012-13 financial statements—expected to be completed today and presented to the City Council and public on Monday, November 2nd—the day before the city’s voters go to the polls—an audit which could well provide important financial information not just for the city’s elected officials and candidates vying for seats on the City Council and the position of Treasurer, but also for the city’s many, many creditors in its municipal bankruptcy, its taxpayers, and voters. It will mark the first key fiscal information on the city’s finances in the wake of its filing for municipal bankruptcy in 2012—a municipal bankruptcy which has already lasted longer than any in U.S. history. The pre-election day audit release will not, however, include the way overdue FY2013-14 audit, although according to Ms. McKay, MGO will provide the Mayor, Council, and public a more detailed report a week from Monday. Ms. McKay advised the Mayor and Council the additional information could also be leading to the completion of still another important and inexplicably overdue single audit—a costly delay, because the California State Employment Development Department began, last February, withholding $125,000 a month in assistance to the city’s San Bernardino Employment and Training agency because of the city’s failure to complete its single audit report for the 2012-13 year—a report due in March of 2014. Auditor Jim Godsey, of MGO, however, appeared much less confident the single audit would be done this week; however, he said the financial statement audit likely will be completed by today, adding that he had requested additional information from City Hall in the wake of discovering that its latest response may not have answered all of MGO’s questions. Ms. McKay, who supervises the city’s finances under the city manager, told the Mayor and Council: “We provided all of the requested information…Then he (Mr. Godsey) said they sent a follow-up on questions that were still outstanding. I just received a follow-up email tonight, at 6:41 p.m., when I’m in this meeting, that they have further follow-up questions.” The back and forth has placed the city’s elected leaders-candidates in an awkward quandary with regard to how much to blame city staff and how much to blame MGO for the exceptional and costly delays.

Stay tuned: San Bernardino’s next City Council meeting falls on Monday November 2nd—the day before the city’s voters go to the polls to vote on the city’s future leadership.

Rethinking Tax Systems & The Importance of Revenues


February 11, 2014
Visit the project blog: The Municipal Sustainability Project

State of the Motor City. Yesterday was a day of another round of voting to round out Detroit’s process of filling a vacancy on its City Council—with the Council yesterday narrowing the list of candidates sixteen to two after seven rounds of voting: the finalists are Janee’ Ayers, a 33-year-old union leader, and Debra Walker, a community organizer and retired Chrysler executive. Yesterday’s voting was done in public, so Councilmembers did not have an opportunity to speak in private between votes. Councilmember George Cushingberry, who admitted to cutting a deal ahead of last year’s vote for council president, attempted to call a recess so members could speak privately; however, Council President Brenda Jones rejected the request, hinting that such conversations would violate Michigan’s open meetings act. The next round will be early next week, after the Council completes interviewing Ms. Ayers and Ms. Walker a second time—after which a final vote is anticipated. The next round became necessary after the Council was unable to obtain the requisite super-majority of six members yesterday to settle upon either of the two candidates—and that was in the wake of four rounds of voting at yesterday’s public meeting to narrow the field to two finalists. In the subsequent three rounds, the votes for the two aspirants remained the same, so an impasse was declared. The job pays about $76,000. Councilmember Cushingberry after the session said he has no problem with open government, but the Council’s fear of breaking the open meetings act has hamstrung the appointment process, because members are hesitant to talk freely about the issue in public meetings, claiming the council is “severely constrained by this damn act.” While he told the Detroit Free Press he would switch his vote, other members said they would go into the next interview phase with a less rigid stance. Candidate Ayers, who attended the session, said her experience as elected vice president of Metro Detroit AFL-CIO and as a tutor for children would be an asset to the council: “I build bridges, I problem solve and I can get along with everybody…I don’t do anything in order for somebody to know my name. It’s all about what happens to benefit the people.” For her part, Ms. Walker, who lives in Corktown in District 6, said she is humbled to be among the final two candidates: “If they’re looking to truly get a candidate that can work with the entire council and bring the depth and breadth of energy and experience and ideas, then hopefully they would recognize that individual to be me.”

Raising Revenues. Moving swiftly after Judge Francisco A. Besosa of the United States District Court in San Juan, Puerto Rico, last Friday ruled that Puerto Rico’s Recovery Act violated federal law―and enjoined commonwealth officials from enforcing it, Gov. Alejandro García Padilla of the Commonwealth of Puerto Rico—under pressure to realize more than a 10 percent increase in tax revenues―has proposed a major overhaul of the island’s tax system in an effort to reduce tax evasion and promote economic growth—key steps if the territory is to avert fiscal failure. The Governor is proposing to move to a VAT or value added tax system, under which the system would move to taxing consumption from its current significant reliance on individual income taxes (please see pie chart below—as well as the chart at the bottom to assess how the Commonwealth’s year-to-year revenues have changed), stating: “With this tax system overhaul we can help direct the island’s revenues towards the future and ensure that we will borrow less, pay our current debts, and pay down the debt previous administrations committed to without the appropriate means for repayment.” Under his proposal, the commonwealth’s income tax would no longer apply to those earning less than $40,000 annually—as opposed to today’s $20,000 trigger. Under the proposal, Puerto Rico’s 7% sales and use tax would be replaced by a 16% VAT tax, according to Government Development Bank President Melba Acosta Febo. Under such a system, value added taxes are charged at each stage of an item or product’s path to the final purchaser—as opposed to a traditional state or local sales tax, which is only applied at the final transaction. The government hopes the move to a more European type of revenue system will help pump up critically needed new revenues, but will also address significant tax evasion. Last year, the government expanded its sales and use tax base and increased corporate income tax rates—and halted its projected reductions in corporate excise taxes—the second largest source of revenues. Puerto Rico’s corporate tax collections increased sharply last year, while individual and non-resident withholding tax collections fell. Gov. Padilla—in pressing for the significant tax changes noted: “We currently have a tax system that penalizes work and productivity while encouraging evasion…It is inefficient and unfair. The current system punishes the middle class and the poor who work so hard to provide for their families,” noting that last year only 12,000 taxpayers filed tax returns for $150,000 and up in income—something which appears in sharp contrast to the island’s many luxury cars and beautiful homes—raising concerns that many taxpayers are significantly underreporting their income—a door that will be shut, under the revised system used by most European countries as it is likely to mean significantly reduce tax avoidance, according to what Puerto Rico’s Treasury Secretary Juan Zaragoza Gómez told The Bond Buyer. Under the VAT tax, prescription medications, groceries, rents, mortgages, and public higher education charges would be exempt. Under the switch, the government predicts it will achieve significant savings, because it will not have to process 850,000 tax returns.

The Last Full Measures of Municipal Bankruptcy

October 17, 2014
Visit the project blog: The Municipal Sustainability Project

The Last Hurdle? Detroit reached an agreement early yesterday with FGIC, its largest remaining holdout creditor, which had claimed the Motor City owed it $1.1 billion. The federally facilitated agreement likely will accelerate an end to the nation’s largest municipal bankruptcy in history. The agreement was reached at 2:30 a.m. in the wake of closed-door negotiations overseen by Chief U.S. District Judge and bankruptcy mediator Gerald Rosen; but the discussions also involved Michigan Governor Rick Snyder’s adviser, Richard Baird. Syncora, another municipal bond insurer which had earlier reached an agreement with Detroit, and FGIC were two creditors who constituted the biggest outstanding holdout creditors to the city’s proposed plan for its adjustment of debts: together they had insured $1.4 billion in troubled pension debt. However, unlike the agreement reached last month with Syncora, the new agreement with FGIC settlement involving real estate must be approved by Mayor Mike Duggan and the Detroit City Council in the wake of the resolution adopted by the city last month which provided for the restoration of local control over city departments, contracts, and other day-to-day matters after 18 months under state emergency management. The settlement provides for a mix of cash and prime downtown Detroit real estate. FGIC will receive about $152 million in city notes, part of which will be backed by public parking revenue, as well as $19.7 million in credits it can apply for purchasing city parking assets or real estate. In return, FGIC, which has a $1.1 billion exposure from insuring the pension certificates of participation (COPs), will drop its objections to the city’s plan to adjust $18 billion of debt. In addition, another, smaller barrier was also removed yesterday when the city announced its settlement with the Macomb Interceptor Drainage District over a $26 million claim. The agreement could effectively end all creditor opposition to Detroit’s plan of debt adjustment—which will be updated so that an 8th, and presumably final, version will be submitted to the U.S. bankruptcy court next week, when the Motor City is scheduled to offer its closing arguments. “There wasn’t any more cash,’’ Mayor Mike Duggan said in an interview yesterday. “They made an assessment that their best chance for a return was to participate in Detroit’s redevelopment.” Nevertheless, it remains on Judge Rhodes plate to independently determine that the revised, eighth version of Detroit’s plan of debt adjustment is feasible, and his finding that the city has a reasonable likelihood of achieving its financial projections and performing its obligations.

The Deal. Yesterday’s federally mediated agreement involved FGIC’s wrapping of $1.1 billion worth of the city’s certificates of participation or COPs, which the city has sued to repudiate, claiming the debt was illegally issued by the former Kilpatrick administration—a lawsuit which will be dropped under yesterday’s agreement, although it remains uncertain whether the holders of the COPs, which include hedge funds, are parties to the agreement, with an attorney representing the COPs holders reportedly advising Judge Rhodes it was still uncertain how many would choose to opt in on the settlement. Under the agreement, Detroit would provide FGIC the opportunity to redevelop the city’s prime riverfront site which now includes the Joe Louis Arena, where the Detroit Red Wings skate, allowing FGIC to replace the arena with a 300-room hotel, condominiums, and retail, primarily to serve the neighboring convention center. The city testified in the courtroom yesterday that the proposed agreement would help redevelop a nearly nine-acre stretch of riverfront land in downtown Detroit. FGIC would get roughly $150 million in cash from two note issues floated by the city, reports said. The insurer would also receive $4 million in so-called revitalization credits and $14 million in tax increment financing district credits. Detroit emergency manager Kevyn Orr will ask the Detroit City Council to approve the deal next week. If the council rejects the plan, Mr. Orr could instead petition Michigan’ state emergency loan board for its approval. The city plans to turn in an amended confirmation plan – its eighth—reflecting the new agreement by Monday.

Taking Stock of Crime in Stockton. As the City Stockton awaits U.S. Bankruptcy Judge Christopher Klein’s decision at the end of the month with regard to approving the city’s proposed plan of debt adjustment―which would allow the city to exit municipal bankruptcy, the city faces elects just days afterwards—elections which could rechart the city’s future, notwithstanding its plan, and which will have to address public safety. Stockton Mayor Anthony Silva this week, in the aftermath of eight recent homicides, including five over the weekend in a four-hour span (there have been 45 homicides in Stockton in 2014. There were 32 in all of 2013) warned that the city’s recent crime wave is indicative of a “state of emergency,” asking citizens for “input” into the deployment of police officers. In addition, the Mayor renewed his call for voters to oust two incumbent City Council members in the upcoming elections. The crime surge occurred shortly after last week’s city announcement of the hiring of Jessica Glynn as manager of Stockton’s new Office of Violence Prevention. Mayor Silva said he is pleased the new job — which includes overseeing the city’s Operation Ceasefire anti-gang measures — has been filled, but he added that the city needs an immediate prescription in addition to a long-range cure: “As the mayor, I feel it’s my job to help protect the residents.” Stewart Wakeling of the California Partnership for Safe Communities — one of the city’s partners in Operation Ceasefire — said Tuesday he believes Stockton’s long-range approach is the right course for a sustainable improvement: “The way to deal with it is to use all the resources you can that are rooted in the evidence of what works…There are no shortcuts to this. You just have to do it. An overnight reduction is not likely to happen.” Last year’s Stockton homicide total represented a decrease of 39 from the city’s all-time high of 71 killings in 2012, a drop which Mr. Wakeling attributed to the institution of the city’s “Ceasefire” at the start of 2013, but added, “To really enhance and sustain the effort, you have to have dedicated resources…”

Charting Stockton’s Future. In addition to Council elections next month, Stockton residents will vote on Measure C, a list of proposed changes to the city’s charter, among which are:
• Remove a provision requiring the mayor be paid at least as much as the chairman of the San Joaquin County Board of Supervisors.
• Clarify and rephrase certain conflict-of-interest provisions and remove outdated language pertaining to employment qualifications.
• Remove mention of the city manager’s spending authority from the charter and provide for adoption of an administrative spending limit by ordinance.
• Render the charter silent on methods for selecting top officers in the Stockton Fire Department.

On vote-by-mail ballots in the coming weeks, and in voting booths on Nov. 4, Stockton residents will be making key decisions on three election campaigns that will determine the makeup of the City Council for the next four years. Perhaps largely unnoticed amid the campaign rhetoric is Measure C, which proposes a variety of changes to Stockton’s charter, the city’s governing document—or as the co-chairs of the citizen’s commission describe it: “Measure C is about modern, efficient government…A YES vote means progress toward modern, efficient government with policies that reflect the new direction of Stockton and drive the City toward a brighter future.” The space on the ballot that was allotted for an argument by opponents to Measure C is blank. No opposing argument was submitted. At issue for the next two years will be the current system, under which candidates in Stockton’s six geographical areas first must compete in a primary in which only their district’s residents can vote, but then must win a November city-wide election. That system has been in place since voters approved it in 1986, but it has been facing challenges for years. Twelve years ago, for instance, a group of south Stockton clergymen sought to change the system, arguing that it funnels political attention and dollars away from their community. But the effort died in the City Council. Former City Councilman Ralph Lee White, who serves on the charter review commission, has been seeking to change the system almost from the moment it was adopted, even though those who support the current system have argue there is little historical evidence that it has disenfranchised voters. Since the 1986 measure took effect, according to election records, 40 of 46 City Council candidates who won their district primaries went on to capture their races in the city-wide vote.

Trouble in River City. San Bernardino Mayor Cary Davis this week warned of new obstacles to the city’s hopes for exiting municipal bankruptcy, stating that police union claims that the city’s management “misinterpreted” a tentative agreement are untrue. Rather Mayor Davis said, it was the union seeking to change the contract under the “guise of ‘clarification,’ with the union now seeking to change the terms of the agreement and add additional burdensome costs over the life of the contract. This action took place after the agreement was approved by both sides. A deal is a deal and the fact that union leadership, through their announcement, would attempt to set aside a judicially mediated agreement and renegotiate is disturbing.” The disagreement, moreover, is not small: as City Manager Allen Parker noted: “It’s a significant difference — there’s a significant dollar sign difference over the length of the contract.” The breakdown between the city and its police union over the tentative agreement – in the wake of a filing with U.S. Bankruptcy Judge Meredith Jury that the two sides are no longer actively negotiating—is indicative of the obstacles in the path to any long-term consensus on a plan of debt adjustment that would clear the way for the city to exit from municipal bankruptcy and move forward with a sustainable fiscal future—as well as with the signal differences compared to Detroit, where the active, contributory role of Governor Rick Snyder and bipartisan leaders of the state legislature—not to mention the attuned musical ear of Judge Rhodes and unrelenting efforts of Chief U.S. Judge Gerald Rosen have put Detroit on the brink of exiting municipal bankruptcy at a far faster pace than San Bernardino. Since union president Steve Turner two weeks ago announced that the city “chose to turn its back” on a tentative agreement, city officials have mostly kept to statements that they intend to continue negotiating but cannot provide their side in detail because a federal judicial gag order covers the agreement. Moreover, as with its northern counterpart, Stockton, the issues are further exacerbated by the looming elections—here, specifically, as the campaign for and against Measure Q — which would change the city charter to set police and firefighter salaries by collective bargaining rather than as the average of 10 like-sized cities — heats up―a measure on which the union recently ended its neutral stance and began actively opposing. Or, as Mayor Davis notes: “It’s curious that the change happened at the cusp of the election.”