The Importance of Property Taxes in Municipal Bankrupcy Recovery

November 11, 2015. Share on Twitter

Does the Motor City Have to Change its Property Tax? Detroit has one of the broadest tax bases of any city in the U.S.: municipal income taxes constitute the city’s largest single source, contributing about 21 percent of total revenue in 2012, or $323.5 million, the last year in which the city realized a general fund surplus. Thereafter, receipts declined each year through 2010, reflecting both a rate reduction mandated by the state and the Great Recession. But the path to municipal bankruptcy also reflected not just the significant population decline, but also the make-up of the decline: the census reported that one-third of current residents are under the poverty line and that the composition of businesses—unlike any other major city in the nation—are primarily made up of public organizations. The reduction also reflected state mandates. Only Chrysler and DTE Energy pay business taxes. Detroit’s revenues had been declining year-over-year. And, even while spending has declined, spending had exceeded revenues, on average, by more than $100 million every year since 2008. Moreover, state law prohibits cities from increasing revenues by adding a sales tax or raising residential property tax rates more than inflation. Now, having emerged from the largest municipal bankruptcy in U.S. history, Detroit is still hindered in its recovery by structural flaws in its property tax system, according to a new report published by the prestigious Lincoln Institute of Land Policy, which has reported that Detroit’s high property tax rates, delinquency problem, inaccurate assessments, and overuse of tax breaks—together with limitations imposed by the Michigan constitution and state statutes, continue to expose the post-bankruptcy city to fiscal stress, with authors Gary Sands, a professor emeritus of urban planning at Wayne State University and co-author Mark Skidmore, a visiting fellow at the Lincoln Institute and a professor of economics at Michigan State University, writing: “Property tax reform is just one of several challenges facing Detroit and its residents, but tackling it could have a real impact on the city’s economy and quality of life, and could serve as an example for other cities struggling with population and job losses and a shrinking tax base….Detroit has an opportunity to restore the basic covenant that should exist between every city and its residents — fair and efficient taxes in exchange for good public services and reliable infrastructure.” In the post-bankrupt city, where Mayor Mike Duggan has secured Council approval to lower assessments 5 percent to 20 percent in some neighborhoods, the report recommends Detroit cut its tax rate, which is the highest of any major U.S. city and more than double the average rate for neighboring cities (The rate for homeowners is 69 mills, $69 for every $1,000 of assessed value).The report, Detroit and the Property Tax: Strategies to Improve Equity and Enhance Revenue, suggests key, post-bankruptcy reforms which could help, including: improving the city’s assessment system—a pre-bankruptcy system under which significantly over-assessed properties was a key contributor to the Motor City’s exceptional property tax delinquency rate—a rate which, the report notes, has improved, yet remains still about 30 percent, or ten times the median rate for major U.S. cities—adding the city also should reconsider its property abatement practices: Detroit has granted property tax breaks to over three percent of its 11,400 private properties; yet the report notes that research shows that the fiscal benefits of abatements are often outweighed by the costs. Significantly, the authors recommended the city should implement a land-based tax, a municipal tax based purely on the value or size of a piece of land, but with no additional tax for new development or improvements—an approach favored over the traditional property tax by many economists because it discourages holding property vacant or underutilizing land, and encourages development. The report also recommends eliminate Michigan’s “taxable-value cap,” a mechanism adopted by the state’s voters in 1994 which restricts the growth of the city’s tax base as the real estate market recovers, and which, the authors warn, also provides preferential treatment to longtime homeowners, locking in low effective tax rates at the expense of new buyers. The authors finally recommend reducing the city’s statutory tax rates, noting Detroit has the highest tax rate of any major U.S. city, more than double the average rate for neighboring cities. Lowering the rate could reduce delinquency and help increase property values, and could help offset increased tax burdens that may otherwise result from reducing abatements or eliminating the taxable-value cap.

Unschooled in Pensionary Math? While fixing Detroit’s revenue and tax systems is an ongoing issue, addressing its bankrupt public school system is key to the city’s fiscal future. Yet, now that the Detroit Public Schools (DPS) has to count its pension obligations, DPS’ balance sheet, in the first set of annual financial statements since Detroit emerged from municipal bankruptcy, the system has reported a $1.66 billion net deficit—or more than double that of a year ago—a change in significant part attributed to a new line on the balance sheet: $858 million of unfunded pension liabilities—a change reported in the wake of the implementation of a new accounting law which requires shortfalls to be counted against an entity’s assets on its annual balance sheet: DPS’s pension funded ratio as of last June 30th was 66.2%, according to the document. In contrast, other parts of DPS’s finances appear to be improving: its operating deficit was $42 million, a significant drop from the previous $70 million, and DPS appears to be modestly reducing its expenditures, where figures released demonstrated a modest reduction from $887 last year to $863 million. DPS state-appointed Emergency Manager stated: “Our team is working diligently every day to become a solvent school system which will allow local control to be restored.” Nevertheless, under strong pressure from Michigan Governor Rick Snyder, the state continues to seek a fiscal sustainable solution through a potential restructuring plan which would split DPS into two divisions: one responsible for the math: financial management, and other for the arithmetic: education. Indeed, DPS remedial math is an issue: In the first set of annual financial statements since Detroit emerged from bankruptcy, the system reported a $1.66 billion net deficit—equivalent to a 118 percent increase over last year, with the increase most adversely impacted by some $858 million of unfunded pension liabilities—liabilities which the system reports issued yesterday show DPS’s pension funded ratio as of June 30, 2015, was 66.2 percent.

Betting on the Garden State? In the wake of his conditional vetoes of the New Jersey legislature’s Atlantic City relief package, Gov. and Republican Presidential contender Chris Christie yesterday vowed he would meet with state Senate President Steve Sweeney (D-Gloucester) in an effort to agree on an alternate relief package for Atlantic City—a relief package the legislature sent to him last June—with the pair rolling the dice in issuing a joint statement that they intend to “construct a final and fast (sic) resolution path for Atlantic City.” Given that his veto was not issued until the very last possible moment, it is unclear what the Governor’s concept of “fast” means, but the clock began yesterday, with the legislature’s session scheduled to end in early January. In their joint statement, they said: “We remain jointly committed to Atlantic City’s long term viability as a great resort destination for entertainment, gaming and sports…Additionally, we both now understand more clearly how challenging this revitalization will be as a result of all the hard work that ensued this past year.” The timing with regard to Gov. Christie’s commitment is further complicated by the looming $11 million debt service payment due in December—a payment which Atlantic City Revenue Director Michael Stinson said would be made even if the redirected casino funds from the conditionally vetoed bills is not approved. Atlantic City Mayor Donald Guardian, who apparently was not consulted about the Governor’s last minute vetoes, is seeking better explanations and understanding from the New Jersey Office of Community Affairs with regard to the state’s concerns—especially as the clock is ticking. Or, as Garden State Assemblyman Vince Mazzeo (D-Northfield) put it: “Since June, we’ve been hopeful that Gov. Christie would do the right thing and sign these bills without delay…These bills were designed to bring real long term sustainable reforms to Atlantic City, help stabilize the tax base and generate new investments and business opportunities in the region.”

Windy City Pension Instability. Credit rating agency Moody reports, gloomily, in a special credit report, that Chicago’s unfunded pension obligations could continue to grow for at least the next decade, notwithstanding the record property tax that Mayor Rahm Emanuel secured from the City Council for the city’s public safety pension funds—and even assuming Chicago is successful in its pending legal challenges. The city’s general obligation bond ratings have steadily dropped in large part due to its accumulation of some $20 billion in unfunded liabilities, with the steep path down accelerating last spring when the rating agency dropped Chicago’s investment grade rating and issued a negative outlook. Moody analyst Matthew Butler noted: “The analysis indicates that, despite significantly increasing its contributions to its pension plans, Chicago’s unfunded pension liabilities could grow, at a minimum, for another ten years…Chicago’s statutory pension contributions will remain insufficient to arrest growth in unfunded pension liabilities for many years under each scenario,” adding that growth in the city’s unfunded liabilities and pension costs will continue “for some time regardless of the outcomes of the state’s and court’s decisions.” The credit report setback comes despite the record tax hike—a hike committed to the city’s proposed re-amortization of the schedule to implement increases in public safety pension contributions under a 2010 Illinois state mandate to fund them on an actuarial basis. Moreover, while the state legislature has passed and sent that re-amortization proposal to the Governor—a proposal which would delay the Chicago’s shift to an actuarially required contribution payment, that bill has become part of the accumulating morass caught up in Illinois’ dysfunctional ability to adopt its FY2016 budget—an inaction which is only driving up Chicago’s liabilities more, even as it prepares for a showdown before the Illinois Supreme Court next week over pension reforms approved for its municipal and laborers’ funds in Public Act 98-0641 to preserve and protect the funds’ solvency—a showdown which is an effort to overturn the lower court’s decision that the reforms violated Illinois’ constitution. A lower court judge in July voided the reforms, finding benefit cuts violated the state constitution. Yet even a win with the Supremes, Moody testily noted, despite being a “credit positive,” would still fail to address what the rating agency termed its “expectation of future growth in unfunded liabilities and the associated credit risk.” In response to the report, the city said: “Mayor Emanuel is committed to ensuring that city employees and retirees have a pension to turn to. Both SB777 and SB1922 were passed after successful discussions with the impacted unions, securing the retirements of our employees and retirees without burdening taxpayers with unsustainable pension contributions…These pension reform plans are sensible and represent a shared path forward in addressing the pension challenges that threaten Chicago’s future, while reducing the impact on taxpayers, and as Moody’s accurately states, the passage of SB777 and upholding of SB1922 are credit positives for the city.”

Addressing Structural Municipal Deficits or Compelling Municipal Bankruptcy?

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November 11, 2015. Share on Twitter

Waiting for Godot. On the very last day before a package of legislation to help Atlantic City recover would have become law, New Jersey Gov. and GOP Presidential contender Chris Christie yesterday conditionally vetoed the bills, all intended as part of a state package the New Jersey Legislature approved last June, including legislation to establish a payments-in-lieu (PILOT) of taxes program for casinos over a 15-year period—meaning the $30 million the legislature had originally earmarked for Atlantic City will now be redirected to the state, boring a large fiscal hole in the struggling city’s fiscal recovery plans. The Governor conditionally vetoed:

• a bill to reallocate the casino alternative tax to pay debt service on Atlantic City-issued municipal bonds;
• a bill to cancel the Atlantic City Alliance’s partnership with the Casino Reinvestment Development Authority and direct its $60 million budget to the city for the next two years; and
• a bill in the legislation that would have required casinos to provide full-time employees with “suitable health care and retirement benefits.”

Gov. Christie did sign a bill in the relief package which authorizes supplemental school aid to the Atlantic City School District. In a statement accompanying his vetoes, Gov. Christie challenged Garden State lawmakers in his conditional veto message to devise a plan that “addresses the continuing structural deficit in a manner that does not merely shift the city’s obligations to the state,” noting: “While I commend the Legislature for attempting to devise measures to stabilize the City’s budget and finances, I am concerned that the bills, in their present form, fail to recognize the true path to economic revitalization and fiscal stability in the city…While these bills represent the bipartisan efforts of many to provide important, near-term support to the city’s immediate challenges, I do not believe they meet the goal of setting a course toward renewed, long-term prosperity, and economic growth. To achieve these goals, we must continue our work and go further to ensure that the next step leads to that economically vibrant future for Atlantic City.”

Gov. Chris Christie’s conditional veto of the Atlantic City payment in lieu of taxes legislation does not address how casino payments will be shared with the Atlantic County, thereby leaving local officials uncertain of its effect on their municipalities. The legislation had called for Atlantic City’s remaining casinos to pay $150 million in lieu of property taxes for two years, and $120 million annually for 13 years after that. Soon after the state Legislature passed the bill earlier this year, county and city officials called for a conditional veto because there was no agreement on how much of that money would go to the county, throwing a wrench into towns’ budgeting plans.

Next Steps. The New Jersey Senate and Assembly now have the option to make changes that might satisfy Gov. Christie’s objections, albeit with the Governor having been out of the state and in still another GOP Presidential debate tonight, the options for meaningful discussions appear to have been rare. Atlantic County Executive Dennis Levinson and Atlantic City Mayor Don Guardian had agreed Atlantic County would receive 13.5 percent of casino payments; however, that compromise was unacceptable to Atlantic City Council members; now some of the mayors in the County are calling for Atlantic City to file for municipal bankruptcy, rather than any proposal which they fear might put them at fiscal risk, such as the proposed PILOT agreement, under which there has been apprehension over the possibility of ever-larger county tax bills for 15 years.

Atlantic County Executive Levinson, in the wake of the vetoes, said he will sit down with Atlantic City and New Jersey officials to reach a compromise, noting: “I don’t want to gum things up and act like I didn’t get what I wanted…I don’t believe the Governor in his wisdom wanted winners or losers in this, but he wants a viable, good plan acceptable to everybody.” In fact, the Atlantic County freeholder board, the Atlantic County Mayors’ Association, and the League of Municipalities had joined the County Executive in calling for a conditional veto to specify the county share, arguing that anything less than 13.5 percent would transfer too big a county tax burden onto the other 22 municipalities in Atlantic County. By now, of course, the idea that there is a “good plan that is acceptable to everybody” appears more and more like a pipe dream.

Back to the Municipal Bankruptcy Option? In the wake of yesterday’s vetoes, several Atlantic County mayors said the best path forward now was for Atlantic City to file for chapter 9 municipal bankruptcy, with Galloway Township Mayor Don Purdy warning the region cannot have surrounding communities taking the hit for Atlantic City: “(Atlantic City) has too much old, lingering debt, and throwing good money at bad money won’t work…The only way to fix it is to go bankrupt at this point.” Egg Harbor Township Mayor James “Sonny” McCullough concurred, noting Egg Harbor suffered the most job losses after the casino closing and had the most foreclosures in Atlantic County, adding: “My recommendation — even before the PILOT — has been Chapter 9 bankruptcy…They need to reorganize their debt just like Detroit did. This is the best option of all, and it gives the municipality an opportunity to reevaluate its debt and reorganize its future.” Indeed, in the festering period while New Jersey municipal leaders awaited Gov. Christie’s 11th hour actions, mayors in surrounding municipalities had been warning taxpayers that their county tax rate would increase if Gov. Christie signed the PILOT bills. Atlantic County Mayors Association President Jack Glasser, the Mayor of Somers Point, said he had not had a chance to read the conditional veto, but said he would be disappointed if it did not clear up the issue of how payments would be shared, adding: “I’m going to have to discuss that with the mayors…Atlantic City needs help, but the bottom line is, it shouldn’t be on the backs of the rest of the county.” County Executive Levinson said he guessed that Gov. Christie was most likely intentionally vague about how Atlantic City and Atlantic County would share the payments in order to avoid creating winners and losers—something which no Presidential contender, after all, would wish to do. Mr. Levinson added: “Cool heads right now are what’s needed,” adding that he expects New Jersey’s Local Finance Board to have a lot of say in how the money is shared with the county, adding: “The Governor is always quoting Bruce Springsteen…“I’ll quote the Rolling Stones. ‘You can’t always get what you want, but if you try sometimes, you might find you get what you need.’”

With the issue thus sent back to the legislature, New Jersey Senate President Steve Sweeney (D-Gloucester) noted: “I am extremely disappointed in the Governor’s failure to enact the package of bills to aid Atlantic City’s financial recovery, and I am concerned by the time that was wasted since the plan was put on his desk close to six months ago…No one should ignore the fact that Atlantic City’s financial crisis continues and that a comprehensive, forward-looking plan is needed to prevent fiscal conditions from getting worse and that we need to act quickly. I am prepared to work constructively with everyone who is impacted by Atlantic City’s fate to help the city’s economy recover and grow.”

Should Municipal Bankruptcy Be a Last Resort?

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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, http://fiscal.cipp-pr.org: 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 [http://abrepr.org/], 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.

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….”

“Our city would become unlivable.”

A Most Serious Fiscal Challenge. Chicago Mayor Rahm Emanuel yesterday called on the Windy City’s 50 aldermen to summon the courage to pass the largest property tax increase in modern Chicago history: he told them they could justify such a hard vote by ensuring their voters understood the alternative: the dismissal of one out of five police officers, the closure of half the city’s fire stations, the elimination of the city’s rodent (read rats) control program, and the reduction of trash services to only twice a month—or, as he put it: “Our city would become unlivable…That would be totally unacceptable.” His proposed budget will total $9.3 billion when corporate, enterprise, and grant funds are added up, including a $3.6 billion general fund formally known as the corporate fund—up from $9.2 billion and $3.5 billion, respectively, for FY2015. In his budget address, Mayor Emanuel, in his second-term, laid out a grim assessment should the Council fail to act: “Our greatest financial challenge today is the exploding cost of our unpaid pensions. It is a big dark cloud that hangs over the rest of our city’s finances…Now the bill has come due,” referring to a mandate which will take effect next year to stabilize police and fire funds across Illinois: Chicago must pay the two public pension funds $550 million more as it moves to an actuarially required contribution—and, that is assuming positive action on state legislation to trim next year’s increase to $328 million. Even though his proposed budget includes some cuts and reform measures, the Mayor told his colleagues yesterday that the debt burden is so ponderous that the city cannot cut its way out of the crisis—cuts, he warned, which would require the loss of 2,500 police officers, the closure of 48 fire stations, and laying off 2,000 firefighters: “Our city would become unlivable.”

Chicago, after a significant effort to remake itself into a global city today confronts unprecedented challenges. Challenges facing the city’s fiscal future include: schools, which one commentator cited as “almost insoluble;” police—crime—gangs (also “almost insoluble”); infrastructure (on which Mayor Emanuel has earned very high marks); pensions, where Chicagoans’ long-term debt and pension obligations per capita have risen nearly 200% since 2002—and which are inextricably linked to the state; and bringing jobs back to Chicago—fiscal sustainability challenges exacerbated by the state dysfunction, by the Illinois constitution’s and Supreme Court’s rejection of efforts to modify public pension obligations, and as state and federal aid have been reduced. The Windy City, the third most populous city in the U.S. with 2.7 million residents, was a time bomb waiting to happen from the very moment Mayor Emanuel took office—an office in which he immediately confronted not only a $635 million operating deficit, but also a city which had experienced an exodus of 200,000 in the previous decade—and some 7.1% of its jobs. Now, revenues are coming back, but the city faces an exceptional challenge in trying to shape its future. By FY2014, Chicago had a debt level of $63,525 per capita, leading one expert to note that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Nevertheless, since his election, unemployment has been coming down, and census data demonstrated the city is returning as a destination for the key demographic group, the 25-29 age group, which grew from 227,000 in 2006 to 274,000 by end of 2011. Nevertheless, the city’s unrelenting pension liabilities and what Moody’s has termed it “unrelenting public safety demands” have left the city, increasingly, between a rock and hard place. Now Chicago, which has one of the largest city councils in the U.S., faces a momentous challenge to its future—a fiscal challenge, and, with his announcement, now a political challenge, or, as the Mayor put it yesterday: “I know this budget’s tough, and therefore I know it carries political risk. I get it…But there’s a choice to be made, make no mistake about it. Either we muster the political courage to deal with the mounting challenges we inherited, or we repeat the same practices and allow the financial challenges to grow.”

Now, in a vote unlike in other U.S. city, the mayor is asking the aldermen on the city council to put their own jobs on the line. Mayhap more daunting, should even modest public pension legislation pending in the stalemated Illinois legislature not be enacted, the Mayor’s proposed, record property tax increase would be more than $200 million short of the requisite level to meet Chicago’s public pension obligations. Under the Mayor’s proposed budget, property taxes would be increased $543 million over the next four years, beginning with a jolting $318 million next year; a separate $45 million property tax hike would go toward construction projects at Chicago Public Schools to alleviate overcrowding in some neighborhoods. In his proposal to the Council, Mayor Emanuel makes clear he has asked for an expanded homeowners’ exemption from Gov. Bruce Rauner and the legislature for Chicago homeowners who own and live in a home worth $250,000 or less. But the massive property tax increase alone comes at a time when Gov. Rauner is seeking a statewide property tax freeze. In his proposed budget, Mayor Emanuel also proposed new fees on taxi and ride-sharing services, such as Uber and Lyft, which would generate $48.6 million per year and a tax on electronic cigarettes which would reap another $1 million. Mayor Emanuel told the Council his budget includes $170 million in cuts and efficiencies; however, he has yet to release the fine print on what those reductions are. In asking for the unaskable, Mayor Emanuel, speaking from the City Council dais to his fellow elected leaders, said: “With this budget, we can be remembered for stepping up to the challenge rather than stepping aside. With this budget, we will be counted among the doers rather than among those who dithered…With this budget, when we look back at our public service, our individual names will be in the history book rather than the guest book. We owe it to our city and to the generations who come after us to do what is right — even when it is hard.”

The Civic Federation of Chicago defined the city’s problem concisely: “There’s no question that the mayor will need to ask taxpayers to pay more while they receive fewer services. Decades of ignoring fiscal reality have led us to this crisis: a pension system on the brink of disaster, an enormous debt burden, below-investment-grade credit. Most critically, Chicago Public Schools may not have the money to stay open for the entire school year….the question… will be whether the mayor’s budget provides enough certainty to residents and businesses that their investments will lead us beyond the morale-killing status quo to a more stable and vibrant city. A possible $500 million increase to the city’s property tax levy would be the largest tax increase in Chicago history, yet it would be only a first step. Chicago and its school system will need to make more difficult choices to close structural deficits and pay down nearly $30 billion in unfunded pension liabilities…We have to start to spend within our means — no more “scoop and toss” or borrowing for operating expenses. It would be irresponsible to raise taxes unless the city commits to significant cost reductions and efficiencies. Areas that have been considered untouchable should be reviewed, such as staffing for police and fire, the size of the City Council and the aldermanic menu program. Even with a tax increase, many services will have to be reduced or eliminated.

“Taxpayers will need answers to longer-range questions. How will the choices in this year’s budget impact future debt and taxation levels? How long before the city’s debt burden is reduced to a more manageable level? How does this budget take into account what will be asked of taxpayers to stabilize Chicago Public Schools, Cook County and the state of Illinois?

“Many of Chicago’s fiscal problems are embedded in state law. Any comprehensive solutions will require action from Springfield. State lawmakers should extend the sales tax to certain services, increase revenue sharing with local governments, merge the Chicago Teachers’ Pension Fund with the Illinois Teachers’ Retirement System and consolidate police and fire pension funds throughout the state.

“We cannot change the poor financial decisions that brought us to this crisis. With all that Chicago has to offer, however, we should make the sacrifices necessary to set the city on a more stable fiscal path. Leaders in Chicago and Springfield just need to give taxpayers the confidence that their sacrifice will pay off.”

The Difficult Road to Fiscal Sustainability

eBlog

August 20, 2015

The Hard Road to Recovery in Detroit could be paved by state legislative deal-making over the legislature’s efforts to agree on a highway infrastructure financing plan by freeing up state legislation designed to help Detroit collect city income taxes from residents who commute to the suburbs. Mayor Mike Duggan testified yesterday in Lansing in support of legislation to require employers to withhold city income taxes from paychecks of Detroit residents. Businesses with fewer than 10 employees and less than $500,000 in wages would be exempt. An alternative would authorize the state to use audit and penalty procedures when it takes over Detroit’s income tax collection in 2016. The Motor City’s income taxes constitute the city’s largest single source, contributing about 21 percent of total revenue in 2012. The legislature is back in session for a three-day session, with House members debating a still-emerging bill to provide some $600 million a year in additional fuel and vehicles taxes and set aside $600 million in general funds for deteriorating roads and bridges — a compromise between legislation approved by the House and Senate in recent months (indicating that state legislatures—unlike the federal legislature—are actually able to function). In May, voters defeated a sales tax increase that would have triggered more money for roads, education, and municipalities. If the House votes this week, the bills would go to the GOP-led Senate and then Gov. Rick Snyder for his signature. Each penny increase in the state’s current 19 cents per gallon in gas and diesel taxes would raise about $50 million more annually—the un-wooden nickel increase under consideration would generate roughly $300 million. No longer letting registration fees drop in the three years after the purchase of a new car — a component of the failed ballot proposal — and increasing truck fees would pump $100 million more a year into road upkeep within three fiscal years.

To Market, To Market to Finance a Recovery…Detroit’s post-municipal bankruptcy debut in the U.S. municipal bond market yesterday resulted in costly yields for $245 million of bonds, perhaps indicating investors are still leery about prospects for Detroit’s longer term road to fiscal sustainability. Even though the 4.5% rate was lower than anticipated on the city’s bonds maturing in 2029, the rate was significantly higher than for other cities and counties. The city also marketed nearly $110.3 million of taxable bonds maturing in 2022, which were priced at par with a 4.60 percent coupon – a 300-basis-point spread over comparable U.S. Treasuries, according to the deal’s pricing scale. John Naglick, Detroit’s finance director, said the pricing resulted in an overall interest rate of 4.44 percent, which is lower than the 5.75 percent rate assumed in the city’s court-approved plan of debt adjustment—achieving $2.2 million in average annual interest cost savings. Clearly one’s perspective matters—as the sale of the city’s debt was “substantially” oversubscribed, thereby permitting the city to reduce the interest it had initially priced—even though Detroit will have to pay approximately 100 basis points over similarly situated cities—a price some dubbed a “bankruptcy premium.” S&P had given the Motor City’s bonds an investment-grade A rating, in no small part due to the state’s statutory lien on the city’s income tax revenues pledged to pay off the debt, even as it retained Detroit’s underlying credit rating at a B, deep in the junk category, citing Detroit’s “very weak” economy, management, and budgetary flexibility, as well as its previous bond defaults. In the sale, the city including a warning to potential investors: “[T]here can be no assurance the city of Detroit will not file another bankruptcy petition in the future.” Proceeds from the initial $275 million of bonds, which were privately placed with Barclays Capital, were earmarked for retiring a prior $120 million Barclays loan to the city, to pay certain creditor claims from the bankruptcy and to finance city improvements. Detroit has said it was able to reduce the size of the upcoming borrowing by $30 million to $245 million after the city’s bankruptcy consultants reduced their fees.

Gambling on Property Taxes. The Atlantic City Metropolitan area continues to lead the nation in foreclosure activity, with a rate four times the national average, according to RealtyTrac—a serious issue for a city whose property tax base has declined by nearly two-thirds since 2010. According to the new report, however, one in every 258 housing units had a foreclosure filing in July, the worst showing of any statistical area with a population of 200,000 or more. Nationally, new foreclosure starts are down to their lowest level since 2005, even though overall foreclosure activity was up 7 percent from the previous month and 14 percent from last July; Atlantic County starts were up almost 72 percent from last July, even as RealtyTrac noted that “Atlantic City is in for a tougher and longer haul back to a healthy housing market,” adding that it was impossible to predict when the market might return to normal in Atlantic County, noting: “We believe some of the repossessions are still tied to the last crisis, while starts are more likely tied to recent economic problems,” adding that Stockton and Phoenix were both leading the nation’s foreclosure rates about five years ago, but that their respective markets have turned around in both regions—and that they now have foreclosure rates lower than the national average. It is not just Atlantic City, moreover: New Jersey’s statewide foreclosure starts are up 129 percent over last July, with the state posting the third-highest overall foreclosure rate for states, behind just Florida and Maryland.

Arriba! Víctor Suárez Meléndez, Chief of Staff for Puerto Rico Governor Alejandro García Padilla, yesterday said that the exchange of Government Development Bank notes is the most likely approach to Puerto Rico’s liquidity crunch. The issue is apprehension that the government could run out of operating funds prior to the end of its fiscal year: it needs an additional $400 million to $500 million beyond the funds it currently has on hand or anticipates—adding that without additional fiscal measures, Puerto Rico anticipated running out of money in November. Mr. Suárez Meléndez said Puerto Rico is exploring other options besides the notes exchange—options that would not require restructuring of debt. He added that the Government Development Bank’s net liquidity had risen in recent weeks: as of May 31st the GDB had a net liquidity of $778 million.

Is New Jersey Gambling with Atlantic City’s Future?

eBlog

March 2, 2015
Visit the project blog: The Municipal Sustainability Project

Spinning for Municipal Bankruptcy: In the Red or Black? Try and imagine the intractable quandary of Atlantic City Mayor Don Guardian: his Governor, Chris Christie, appears not only determined to crash land the city into municipal bankruptcy, but has also imposed an emergency manager—without any guidance which official is really in charge; the city’s assessed property values are plummeting; and the city’s plans to fix the way its casinos pay property taxes appears mired in inaction in the state legislature. These are all issues of time—a luxury the city does not have. In his State of the City presentation last week, Mayor Guardian had pledged to “do everything humanly possible” to avoid a property tax increase this year—even though the official budget he will present to the Council in June will come in at $235 million, a $30 million drop compared to FY2014: he noted that Atlantic City’s assessed total property values will soon be assessed at $7.35 billion, down from a high of about $20 billion. In the face of that decline, the city underspent its 2014 budget by $10 million, according to the Mayor―a savings that can be applied to cash-flow needs in the coming year. In addition, Mayor Guardian said city staffing will have been reduced by 200 positions as of June, but he told his colleagues that has not adversely affected the quality of municipal services, because of increases in efficiency: noting official statistics demonstrating drops in crime along with fewer public complaints lodged against the police. By the end of this month, Atlantic City will have reduced its police force by nearly 15 percent down to 285 active police officers from 330. Mayor Guardian reported, moreover, that all patrolling officers will receive body cameras, while a new computer system will allow the department to prioritize resources in real time; the city’s municipal court will operate 8-10 hours a day, four days a week, allowing officers to return to street patrol on the fifth day. Nevertheless, Mayor Guardian told his colleagues the city’s debt remains his front and center issue, noting he was supporting state legislation to redirect casino taxes to debt service, and that the city will, by the end of the month, attempt a $52 million bond sale covering the $12 million it recently borrowed and the $40 million it owes back to the state. On the revenue side, he praised new development initiatives, such as those taken on by Stockton University, Boraie Development LLC, and Bass Pro Shops―all of which have helped to create a double: create new jobs, and enhance the city’s tax base. Nevertheless, he made clear how critical new forms of state assistance are to Atlantic City’s solvency, telling his Councilmembers Atlantic City receives far less than many other municipalities in school and budgetary aid and advocating that a greater percentage of revenues from the city’s room, luxury, and parking taxes should be returned to the municipality generating them: “Atlantic City isn’t a step child.” Reminding his colleagues that last year – a “terrible” year ― Atlantic City still brought in $700 million in taxes, clarifying: “We’re not asking for a buyout…We’re asking for a little of that $700 million to come back to Atlantic City.” In response, Council President Frank Gilliam offered support for Mayor Guardian’s presentation, but said the council must continue to look for further ways to cut the 2015 budget. He said council aims to put forward its own budget in March, before emergency manager Kevin Lavin produces his findings.

Coming up Lemons? Mayor Guardian’s please for a better return of the revenues the city has previously sent to the state, however, risk coming up three lemons: A quarter of the year after the “Casino Property Taxation Stabilization Act,” or payment in lieu of taxes (PILT) plan was in the state legislature as a means to transform the way Atlantic City casinos pay property taxes, there has been little, if any progress. Under the proposed legislation, casinos would no longer pay property taxes; instead, they would cumulatively make $150 million in PILT payments annually for two years, then $120 million for each of the next 13 years. The key sponsors, New Jersey Senate President Stephen Sweeney, Sen. Jim Whelan, and Assemblyman Vince Mazzeo describe the bipartisan bill as one which would help Atlantic City escape from the perennial property-tax appeals which, for years, have made fiscal planning a nightmare for Atlantic City, because challenging the city’s assessments in court has become almost as routine as spinning the roulette wheel for casino operators. Nevertheless, the bill, part of President Sweeney’s five-card Monte package of bills to come to the fiscal rescue of Atlantic City remain spinning without stop in the legislature. Even the Casino Association of New Jersey, has pressed the legislature for favorable spins, lobbying that the legislative proposal was the only cure for Atlantic City’s reeling gambling industry, which has seen about half its revenue disappear since 2006: “Make no mistake. Without this plan, certain casinos that remain in Atlantic City are at risk.” Nevertheless, the proposal appears iced over: despite sailing through committees last December, state Democrats have repeatedly balked at putting the legislation to a general vote: but no one appears to have an explanation why. One issue could be uncertainty with regard to Gov. Christie’s position: he has never publicly supported the proposed legislation—and, last week, did not return a request for comment about the bill.

A Chilling Credit Wind in the Windy City. Credit rating agency Moody’s has dropped Chicago’s credit rating to its second lowest investment grade, with analysts Rachel Cortez and Matthew Butler noting: “The main thing is that another year has passed and gone by without a solution to the pension issues, both with respect to curbing the growth in the unfunded liabilities and dealing with the police and fire pension spike that is getting closer and closer.” The decision, coming in the midst of Mayor Rahm Emanuel’s runoff campaign for re-election (he faces an April 7 runoff versus Jesus “Chuy” Garcia, a Cook County board commissioner), risks both the city’s reputation—and likely will adversely impact its costs of borrowing—or, as the prescient president of the Chicago Civic Federation Laurence Msall put it: “This is wakeup call for anyone still asleep as to the precarious financial condition of the state of Illinois and many local units of government especially Chicago…The downgrade has immediate financial costs to the taxpayers and puts enormous additional financial pressure on the city’s budget which is dependent on access to the credit markets.” Last month, the Federation had noted that between FY2004 and FY2013 the long-term debt for eight major Chicago governments had risen by just under 60 percent over the last decade to $20.4 billion; but mayhap more worriedly, long-term direct debt per capita rose at a faster rate, increasing by 66.8% from $4,504 to $7,514. A key concern is the city’s $20 billion unfunded pension tab. Moody’s decision means the Windy City now has a lower credit rating than all other major cities with the exception of Detroit. Nuveen lists Chicago as a pre-distressed credit which is “getting to a pretty critical point.” In their report, the Moody analysts wrote that their lowered credit rating “incorporates expected growth in Chicago’s already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned in legal appeal,” adding that Chicago’s tax base is significantly leveraged by the direct debt and pension obligations of the city, as well as indirect debt and pension obligations of overlapping governments—albeit partially offset by the significant improvements Mayor Emanuel has achieved in structurally balancing its budget and strong economic base. Indeed, the Mayor’s office responded to Saturday’s moody report with a statement: “We strongly disagree with Moody’s decision to reduce the city’s credit rating and would note that Moody’s has been consistently and substantially out of step with the other rating agencies, ignoring the progress that has been achieved.” Fitch, indeed, last week affirmed its A-minus rating and negative outlook, whilst S&P affirmed its A-plus rating and negative outlook last Friday. The city has for years faced a reckoning on its public safety pensions in 2016 when a longstanding state mandate to stabilize public safety systems through actuarially based funding kicks in, driving Chicago’s annual contribution up by $550 million.