The Steep Road Out of Municipal Bankruptcy

eBlog
November 9, 2015. Share on Twitter

The Steep Road out of Municipal Bankruptcy. While falling into municipal bankruptcy can be a crisis involving fiscal, stewardship, ethical, and criminal failures; getting out is the steepest road possible, because one’s city or county begins at such a disadvantage to all other cities and counties across the country. So imagine the hard choices and steps for Detroit: It is now one year since now retired U.S. Bankruptcy Judge Steven Rhodes approved the plan of debt adjustment to pave the way for Detroit to exit the largest municipal bankruptcy in the nation’s history, a year during which the unique state-foundation-city partnership forged under the aegis of Judge Rhodes and U.S. District Court Chief Judge Gerald Rosen paved the way for the Motor City to get back on its wheels. Exiting municipal bankruptcy does not, however—at a cost to the city and its taxpayers of $165 million, guarantee a fiscally sustainable future. Thus, while Detroit’s revenue streams appear on track or better than expected, progress on restructuring and restoring basic municipal services is consuming time, with some delays in key initiatives, such as hiring police officers. The city’s dysfunctional and embarrassing street-lighting system is nearly overhauled, and the greater downtown seems to be taking off with new development: it has already earned Detroit a bond rating upgrade. Detroit has replaced thousands of broken streetlights, and has sufficient funds to meet its daily bills and meet its reduced pension obligations; nevertheless, the task of trying to tear down thousands of blighted homes and commercial buildings, while improving city services—including public safety—has proven expensive. Moreover, critical issues not directly addressed by the plan of debt adjustment: fixing the city’s high poverty rate, unemployment, and poorly performing, fiscally bankrupt public schools—were largely left out of the plan; yet they represent grave threats to Detroit’s future. Nonetheless, Judge Rhodes told the Detroit News: “My impression is that the city is actually doing better at this point in time than we had projected during the bankruptcy case.”

The judicially approved plan cut more than $7 billion in unsecured municipal liabilities and provided for $1.4 billion over the next decade for basic services to rehabilitate a municipality which had suffered a severe population loss, criminal behavior by former elected leaders, and an inability to collect income taxes from both incoming and outgoing commuters. On the day the Governor’s appointed Emergency Manager Kevyn Orr dismissed the Mayor and Council, he estimated Detroit’s liabilities to be about $18 billion. Notwithstanding the erasure of so much debt, the city’s fiscal future still hangs in the balance: the road to recovery must overcome significant public school and public pension issues. To date, early returns for the investments since the city exited bankruptcy appear to be falling short: City officials and their watchdogs are already considering paying more into funds much sooner than prescribed by the city’s plan of debt adjustment, but how the city can pay is unclear. One of the most critical issues involves Detroit’s multibillion-dollar pension debt, where the plan will require the city to make a balloon pension payment, a payment estimated at more than $100 million, in 2024 alone—and that is assuming the city’s pension investments perform as anticipated. Or, as Michigan Treasurer Nick Khouri, who now chairs Detroit’s state financial oversight commission created during the bankruptcy, puts it: “We certainly know many people were hurt during the bankruptcy, but what would have been the alternative, and how would they have been hurt under the alternative?”

Detroit has benefitted too, not just from the federal judges and state leadership and investment, but also from its own business leaders: Detroit business leaders such as Dan Gilbert and Mike Ilitch are continuing to reinvest in the Motor City’s core, investing hundreds of millions of privately raised dollars to re-create neighborhoods where their employees and others can live, work, and play—investments which appear to be infecting enthusiasm from outside investors, including some of the country’s largest foundations and leading businesses, such as the Ford Foundation to JPMorgan Chase, and even India-based Sakthi Automotive. That is, there is important private investment in the Motor City’s economic and fiscal future—including some of the largest creditors during Detroit’s bankruptcy, who, nevertheless, assumed significant financial stakes in Detroit’s future by taking over city parking garages and securing redevelopment rights to landmark properties such as Joe Louis Arena. A $245-million bond offering to finance reinvestment in city services this summer came at a premium for the city, but it also benefited investment grades from rating agencies for a city once seen as earning only junk status.

A Tale of Two Cities? Nevertheless, outside of the core areas, for a physically enormous city of 139 square miles, but now with just a third of its former population, the task of recovery is bedeviled by the difficulty of focus. Indeed, as the Detroit News notes, some residents in neighborhoods have coined the phrase “Two Detroits” to describe a disconnect between the extraordinary redevelopment taking place in the city’s greater downtown core, even as in its fragile neighborhoods, the FBI reports Detroit to be one of the country’s most crime-ridden cities, despite nationally declining violent crime in 2014, according to FBI statistics. It remains a city of abandoned homes and buildings, and, as Wayne State law Professor John Mogk told the News, like the game whack-a-mole: “I think the city’s off to a very good start in removing blight, but it’s a moving target: As vacant buildings are removed, other vacant buildings crop up because of the rash of tax and mortgage foreclosures that are ongoing,” adding that the city’s high hopes of eliminating blight in as little as five years appear over-optimistic, albeit he regards a decade as more realistic. Nevertheless, that will be a challenge: Detroit is still losing population—surely, in some part—because of its separate, failing public schools. Thus, the city is still experiencing an outflow of citizens/taxpayers: the Census Bureau reported a 1 percent outflow in 2013.

Post-bankruptcy Governance. Emerging from bankruptcy is, after all, not only about restoring normalcy, but also about finding critical resources to invest in a competitive future. It is far harder to recover from than to fall into municipal bankruptcy. First, it requires restoring key municipal services: Detroit Mayor Mike Duggan reports that Detroit’s buses, for the first time in two decades, are meeting posted schedules, and that police and ambulance response times have been significantly reduced. Second, it requires constructing a fiscally sustainable future; thus, the city has begun that process by tearing down more than 7,000 blighted homes in the last year and a half; it has reversed fiscal deficits: revenues are growing: Mayor Duggan reports Detroit now expects to bring in more revenue than expected in its current fiscal year: thanks to rebounding real estate prices in neighborhoods across the city, property tax revenues are up; however, Mayor Duggan notes that income tax collections, the city’s most critical source of revenues, are coming in below projections. The Mayor notes: “We’re OK for now, but if we don’t deal with that, it will become an issue.”

Defining Fiscal Choices for the Future & Pensionary Apprehensions. Emerging from bankruptcy is about making defining choices. The centerpiece of Detroit’s plan of debt adjustment was its blueprint for the city’s future: the so-called grand bargain, an $816-million investment by the State of Michigan, some of the nation’s leading foundations, and the Detroit Institute of Arts (DIA) to preserve the city-owned art museum collection in exchange for helping to both reduce pension obligations and pay down the city’s pension debt. After emerging from the shadow of the city’s bankruptcy, the DIA hit its $100-million fund-raising goal for the grand bargain earlier this year: it is about directly confronting the long-term fiscal challenge of public pensions—that is, thinking outside the current year fiscal calendar to the issue which is vital to both a full emergence from municipal bankruptcy, but also about having a competitive workforce. For Detroit, that remains a front and center challenge: notwithstanding the concessions incorporated in the plan of debt adjustment, Detroit’s post-bankruptcy pension fund investments have performed below expectations in the first year after bankruptcy. And this is amongst the hardest of choices and responsibilities, because it requires such a disciplined, long-term commitment. Jim Spiotto, the guru of municipal bankruptcy, referring to the task before the city described the city’s approved plan of debt adjustment as “not only a grand bargain, but a grand bet,” adding that while the federally approved plan largely absolves Detroit of its obligation to pay into the pension system for a decade; nevertheless, “projecting 10 years out is quite difficult, so I think they are going to have to pay attention to that.” That is, perhaps the key inattention which contributed the most—along, of course, with criminally-related behavior by the imprisoned former mayor, now will require the most: Mayor Duggan and key city officials concur that the remaining municipal pension obligations are significant—even as early returns since the city’s emergence from bankruptcy have not been good: Detroit’s two pension funds reported rates of return on its investments of less than 4% in the first half of the year, not disproportionately from other cities and counties, but rather reflecting a poorly performing market: the Detroit General Retirement System, which covers most city retirees, posted a 2.7% return for the six months ending last June 30th, and projections are that the General Retirement System fund with a market value today of $2 billion could be worse, with a warning: It “will likely show an investment loss,” according to an actuarial report the week before last commissioned by the fund, wherein the most recent figures show the General Retirement System has a funding level of 62.5%–a level assuming the city will earn a 6.75% return on its investments in the coming decades—a likely optimistic assumption. Indeed, according to an analysis last month by the actuarial firm Gabriel Roeder Smith & Co. for the General Retirement System, if the return is lower — say 4.29%, or the equivalent of the current long-term municipal bond rate — the funding level would decline to less than 50%, a drop which could have fiscal and taxing consequences for not just Detroit’s employees, but also its taxpayers. Martha Kopacz, who analyzed the plan of debt adjustment for Judge Rhodes and serves as a member of the Detroit Financial Review Commission, is apprehensive that low public pension investment returns, especially in the early years, could mean the payments still owed by the city will have to increase when it resumes its funding of the system. Under the city’s plan of adjustment, Detroit is already obligated to pay its largest pension fund $118 million in 2024—even if the funds met projected investment returns, according to one recent pension analysis. Worryingly, as the invaluable Ms. Lopacz notes: “There was really no Plan B if it doesn’t work…People just get tired of me chirping about this, but this is a really big number.”

Can Detroit grow its way out of a pension problem? As part of Detroit’s court-approved plan of adjustment, the pension systems lowered their annual expected growth rate to 6.75% from 7.9%; yet what appeared to be a conservative adjustment might not have been sufficient: Eric Scorsone, Professor and Director of the Center for Local Government Finance at Michigan State University, worries that even that lower assumed rate of return could be a challenge to achieve: “To be quite frank (no, not a pun), what they’re using is still pretty high.” At a meeting late last month, Detroit Financial Review Commission member Darrell Burks, a former senior partner at PricewaterhouseCoopers, noted: “We need to be prepared — whatever the number is — to accept the reality that it’s going to be a substantial amount in 2024,” adding that he estimates an adjustment in the upcoming city budget “somewhere between $100 to $200 million to accommodate this problem.” Original forecasts submitted to Judge Rhodes with regard to the city’s public pension obligations showed the city paying roughly $92 million into the pension funds between now through 2024, aided in no small part by the so-called grand bargain; however, by 2024, pension payments made by the city alone could explode in subsequent decades: Detroit’s pension payments between 2024 and 2034 are expected to be roughly $1 billion, according to forecasts produced by former Detroit Emergency Manager Kevyn Orr’s staff, with the debt owed by the city remaining at about $900 million between the years FY2034 through 2044, before dropping to about $629 million, according to the 40-year projection submitted as part of the bankruptcy. As with a teeter-totter, Detroit leaders are counting on investments today to reverse the city’s population outflow and, thereby, increase its tax base—an increase which would enhance its ability to pay off its pension debt without blowing a hole in its budget.

Reversing Detroit’s Outflow & Investing in its Future: Let there be light! Indeed, the hard choices about what investments would be most critical to reversing Detroit’s out-migration which has left a smaller workforce to meet a growing number of pensioners is central to the city’s viable fiscal and sustainable future. One of Detroit’s plan of adjustment revenue-related proposals included $483 million in anticipated new municipal revenues realized from higher bus fares and improved tax collection—an improvement in part dependent upon a change in state legislation so that the city could collect income taxed owed by commuters both into the city—and residents who commute out of the city. Thus, in its plan, Detroit proposed both a $1.4-billion reinvestment initiative to rebuild the city, as well as to enhance its ability to realize some $358 million in cost savings from establishing a more efficient city government, savings which could then be translated into an addition to its reinvestment plan. But doing a 180 degree turn from disinvestment to reinvestment is a challenge: Detroit CFO John Hill notes Detroit’s municipal budgeting process is, most unsurprisingly, deliberately cautious: in the wake of its bankruptcy, that city has imposed stricter rules for each city department in order to meet financial goals. But this is a bold step and the space between cup and lip can be great: A $185-million project to overhaul and modernize the Motor City’s ancient and non-performing street-lighting system is on budget; it is ahead of schedule with more than 56,000 new LED streetlights installed of the planned 65,000, according to officials, thanks to the newly created Public Lighting Authority of Detroit. Seeing the light, many Detroiters are, unsurprisingly, pleasantly surprised: As the city’s patron saint of its exit from municipal bankruptcy, Judge Rosen, notes: “The lights are coming back on…All these new young kids moving back to Detroit, it really creates a sense of optimism and momentum.” But shedding light is, unfortunately, an achievement with consequences: it might better enable citizens and property tax payers to fret that the estimate by former Emergency Manager Orr had envisioned of as much as $500 million to battle blight over the next decade now, under the harsher light of fiscal reality, will be only what Mayor Duggan is able to snag from beyond the city’s municipal revenues. For his part, Mayor Duggan has empowered the Detroit Land Bank Authority to take the lead: the Land Bank, confronted with nearly 80,000 blighted or abandoned parcels, has auctioned and closed the sale of 527 houses to new owners and sold 2,655 vacant side lots to current homeowners, according to city figures; it has also posted 5,133 “eyesore” properties with notices of coming action and filed 3,246 lawsuits against the owners of those properties, with more than half of those cases already resolved in the city’s favor. Moreover, there has been a bonus to this hard-fought turnaround: Executive Fire Commissioner Eric Jones reports that the blight removal, to date, has been crucial to reducing the number of fires: “If you remove 7,000 blighted, vacant structures, that is fuel that arsonists don’t have to burn…it’s gone.” Nevertheless, it is a small bite of a colossal challenge: With roughly 100,000 vacant lots in the Motor City, and tens of thousands of vacant buildings, Detroit could devote years at its current stepped-up pace before ridding the city of all eyesores—years during which how to continue to finance this critical but unprecedented effort for any major American city will be harder and harder to answer.

Workforce Challenges. As if Detroit does not face enough challenges, the one it confronts with regard to labor is one of epic proportions. The revived Detroit Workforce Development Board, which convened for the first time late last month to tackle the goal of creating 100,000 jobs in the city, is working toward streamlining programs to create a systematic, unified approach to employing Detroit residents—residents who are disproportionately unskilled, underemployed, and undereducated—and where the challenge is further complicated, complex, and massive, because jobs do not match the population. Today, just over half of Detroit residents work—and of those who do, a majority have no more than a high school diploma. The future is hardly heartening: with the Detroit Public School System itself failing, it is hardly serving as a pipeline for Detroit’s future sustainability; the harsh reality for Detroit’s leaders is how to put 49,000 of its residents to work just to match the Michigan state average of labor force participation. Indeed, notwithstanding dozens of labor training programs, new business investments, jobs are not coming fast enough: Last year, Detroit had 258,807 jobs and a population of 706,663, according to an April report by the Corporation for a Skilled Workforce and funded by J.P. Morgan Chase & Co.: e.g.: only 0.37 jobs for every resident — one of the lowest levels in the country. Consultants and the expert witness U.S. Bankruptcy Judge Steven Rhodes hired to assess Detroit’s plan of debt adjustment questioned the capacity and ability of the city’s workforce to adjust, reporting that large numbers of workers and even managers lacked skills and education that would be prerequisites for their responsibilities. Detroit’s plan of adjustment calls for spending millions on training and retraining workers, in addition to an overhaul of the city’s human resources operations. That will be a critical effort: today, of the 258,807 jobs in Detroit, 71 percent are held by employees commuting from the suburbs—ergo the extraordinary situation of reverse commuting in the region—a region where there are more middle-to high-skilled jobs in the city than in the suburbs, but where the city’s work force is largely under trained and under educated: 38 percent of jobs in Detroit are considered high-skill, requiring at least an associate degree—a higher level than any of the city’s surrounding counties; but 63 percent of working Detroiters possess no more than a high school diploma, increasingly leaving city residents unqualified for jobs where they live. As Mayor Duggan told Crain’s: “What this says is that we need to do a whole lot better with our buses…We need a whole range of jobs, and what we’ve done is make it easier for business to open in the city by simplifying the permitting process.”

Trying to Put Out Fiscal Fires. As if Detroit and Mayor Duggan do not face enough superhuman trials, now chronic problems at the Detroit Fire Department are converting into higher fire insurance rates—hardly a change for a city seeking to draw in new residents—especially to a city which already has the highest rates in Michigan—and which now appear likely to rise again in the wake of a downgrade by Insurance Services Office, which analyzes and rates city and county fire protection for insurance companies—and which has downgraded Detroit, making the first change in Detroit’s rating in a quarter century—a downgrade, in effect, with immediate impacts on Detroit’s homeowners—changes in some cases of as much as 70%, with the impact of the rate change varying by agency and policy. The average premium in Detroit is about $1,700 per year, more than double the Michigan statewide average. Statewide, it was $802 in 2012, the last year records were available from the National Association of Insurance Commissioners. Eric Jones, who was confirmed last week as Fire Commissioner by the Detroit City Council, told the Detroit News that Mayor Mike Duggan is committed to improving the rating: “Clearly, Detroit was hurt by the downgrading of the status…The Mayor made it one of my highest priorities….It’s huge.” The Insurance Services Office (ISO) ranks about 48,000 municipalities across the country with regard to their ability to respond to fires — and save homes — on a scale of 1 to 10: the lower the number, the better the protection offered, noting that two decades ago, Detroit received a 2 rating, which escalated to a 4 by November of 2013. These ratings remain in place for a decade unless communities apply to the ISO to be re-evaluated—an application Commissioner Jones reports he plans to do by next year, as, in keeping with the city’s plan of debt adjustment, the city has been focused on replacing fire engines, fixing its 9-1-1 service, investing in new gear, demolishing some 7,000 vacant homes—homes which became targets for arsonists, and increased its fire department by more than 25 percent. Last year, fires caused $229 million in damage in Detroit, or nearly half the damage realized statewide, according to National Fire Incident Reporting System. Arson and burglary appear to be the two key ingredients which contribute to Detroit’s record as having the highest homeowner insurance rates in the state—but, without question, the combination of higher rates and the apprehension about arson and fire will increase the heat on the Department.

Foundation for the Future. Critical for any future for Detroit is fixing its fiscally bankrupt public school system—a challenge if the city is to have realistic hopes of drawing young families. State lawmakers and Gov. Rick Snyder are seeking to do the math and design a state financial rescue of the Detroit Public Schools by the end of this calendar year, an arithmetically $715 million state rescue of the Detroit Public Schools, but one where it is less the math, and more the politics that are proving to be an obstacle. The governance challenges involve both the fiscal costs and the governance reforms. Republican leaders are apprehensive about any proposed bailout and reforms, while Democrats oppose any bailout unless power is taken from the state-appointed emergency manager and restored to Detroit’s elected school board. Part of the challenge is any perception that a state bailout would be still another drain on the state for the City of Detroit—or, as Senate Majority Leader Arlan Meekhof (R-West Olive) perceives it, a source other than the state’s School Aid Fund, which would be drained by $50 a pupil for each of Michigan’s 1.5 million students for the next decide under Gov. Snyder’s proposed plan; whilst House Speaker Kevin Cotter (R-Mount Clemens) notes: “We want to take our time and make sure we’re doing right by them.”

Voting for a City’s Post-Bankruptcy Future. The San Bernardino Sun, in an editorial, could hardly have written it better:

“You are one of the 7,000-plus who voted in Tuesday’s election to seat four San Bernardino City Council members, we thank you. And we have a job for you. Tell your neighbors why you voted. Tell them why it matters. Tell them that while you’re happy to make decisions on their behalf, you’d rather see them disagree with you at the polls. Tell them to get involved. Three years into what is the city’s biggest crisis in a generation — municipal bankruptcy — it’s discouraging to see that so few residents took the time to choose a batch of city leaders who will be tasked with moving San Bernardino toward a more fiscally sound future. In the race for city treasurer, the only contested citywide race on Tuesday’s ballot, 7,367 votes were cast, according to unofficial election results. That amounts to slightly less than 10 percent of the city’s registered voters. There are those working to boost the city’s appalling turnout — which, by the way, is not unique. Countywide, turnout was about 10 percent Tuesday. But in a city where so much is at stake — from whether the city can afford to pay police officers to whether it can maintain public parks — it’s difficult to understand why turnout is not higher. We’re not alone in asking this question. The League of Women Voters of San Bernardino is puzzling its way through a plan to engage voters. Other groups such as Generation Now are working to get out the vote. Candidates themselves do a huge amount of networking with their supporters in trying to bring people to the polls.

And yet.

In a report on Tuesday’s dismal turnout, staff writer Ryan Hagen showed that, in the past three elections, the only one to crack the still-not-enough 25 percent turnout rate involved a controversial measure that would have changed the way the city pays its public safety employees. It also happened to coincide with the general election, a switch for San Bernardino. The city has long-held its elections for local office in odd-numbered years, as dictated by the century-old City Charter. Efforts to overhaul the charter have been met with mixed results (see the November 2014 attempt to erase the charter section outlining how the city should set salaries for certain public safety employees). But, based on recent experience, a group working to bring charter reform measures to voters may have reason to consider pushing forward with a measure to switch San Bernardino’s elections to even-numbered years, as Los Angeles has done. In the meantime, those who already know the power they wield by turning out to the polls have a few months to convince relatives, friends and neighbors in the 6th and 7th wards to take the time to vote in the February runoff. Their job is just beginning.

Waiting for Godot. Five bills which, could help avert municipal bankruptcy for Atlantic City and put it on the path to a sustainable fiscal future will become law today unless Governor and Presidential candidate Chris Christie intervenes—including a controversial plan, the Casino Property Taxation Stabilization Act (PILOT), to allow casinos to make fixed annual payments instead of highly variable property-tax payments, legislation intended to help reduce the instability and uncertainty of the city’s property-tax system—but legislation which surrounding Atlantic County’s top officials believe could do more fiscal harm than good, with Atlantic County Executive Dennis Levinson calling it “one of the worst pieces of legislation that anyone has ever seen.” The bill, if enacted, would permit casinos to stop making property-tax payments to the city; instead, they could make payments in lieu of taxes equivalent to $150 million in payments annually for two years, dropping to $120 million for each of the next 13 years. The bill, which the legislature sent to the Governor last June, along with bills to dismantle the Atlantic City Alliance, Atlantic City’s nonprofit marketing arm, and sharply reduce funding for the Casino Reinvestment Development Authority (an authority which uses casino-paid taxes to finance large local events and development projects). Under the pending state legislation, funds would be diverted from those agencies and instead go toward paying down Atlantic City’s debt and expenses. Despite how long Gov. Christie has had to react to these bills, however, he has been uncharacteristically silent. The issue of property taxes has put Atlantic City into a Twilight Zone of governance—caught between a state-appointed Emergency Manager and City Hall, but the underlying issue has been the difficulty for the city to have budgeting certainty in the wake of annual casinos court appeals over the assessed values: almost like spinning the dials, the appeals force the city not only to expend resources addressing the challenges in court, but also at risk of being mandated to make out-sized property-tax refunds to the gaming resorts—refunds in excess of $100 million, in one instance. Thus, as Assemblyman Vince Mazzeo (D-Atlantic) notes, if the PILOT becomes law, “[T]there will be no more tax appeals from the casinos.” The city is not alone in hoping the bill becomes law: the Casino Association of New Jersey, which lobbies for Atlantic City casinos, worries that more casinos will close if the bill is not enacted. New Jersey Assemblyman Chris Brown (R-Atlantic), a supporter of the legislation, told Bloomberg Atlantic City has made progress in reducing its budget, but its outstanding liabilities are still too large to convince him it will not need to increase taxes in coming years, stating he would prefer the bill to be rewritten to shorten the duration of the PILOT program and amend the formulas that determine the payment amounts, noting: “We have to find a way to stabilize property taxes for everyone in Atlantic County.”

Safeguarding a City’s Sustainable Fiscal Future. Romy Varghese, writing for Bloomberg this morning examined another peril that could lead to a fiscal drowning in Atlantic City: Even as its over reliance on casinos has imposed great fiscal risk, so too, it turns out, its public pension benefits have not exactly been fiscally lifesaving, reporting that, in what she termed: “[O]ne of those relics from the lavish and loud Prohibition-era Atlantic City depicted in television and film. Despite just a four-month beach season and a battered casino industry, lifeguards who work 20 years, the last 10 of them consecutively, still qualify at age 45 for pensions equal to half their salaries. When they die, the payments continue to their dependents. About 100 ex-lifeguards and survivors collected anywhere from $850 to $61,000 from the city’s general fund last year, according to public records. In all, it comes to $1 million this year. That’s a significant chunk of cash for a municipal government with annual revenue of about $262 million and, more importantly, it’s emblematic of the city’s broader struggle to downsize spending and contain a budget deficit that has soared as the local economy collapsed. Kevin Lavin, the emergency manager appointed by Governor Christi, has cited lifeguard pensions as a possible item for “shared sacrifice” in a community already forced to fire workers and raise taxes. Mr. Lavin is expected to report this week on the likely timetable for his report and recommendations. Mr. Varghese notes the lifesaving benefits of lifesaving in the fiscally distressed city: “About 100 ex-lifeguards and survivors collected anywhere from $850 to $61,000 from the city’s general fund last year, according to public records. In all, it comes to $1 million this year—emblematic of the city’s broader struggle to downsize spending and contain a budget deficit that has soared as the local economy collapsed.” Mr. Lavin, in his report which could be completed this week, is not expected to throw a lifeline to the retired but unretiring lifeguards, citing the lifeguard pensions as a possible item for “shared sacrifice” in a community already forced to fire workers and raise taxes. By the same token, the retired lifeguards appear unlikely to sit on their lifeguard stands and idly play their beach ukuleles whilst their pensions are floated out to sea, with one noting: We worked under the precept that we were going to get a pension, and that’s a certain amount of money…I’m not responsible for the mismanagement of the politicians, and I’m not responsible for the casinos leaving.” Or, as they might say at one of the city’s casinos” ‘A card laid, is a card played.’

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?

eBlog
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

eBlog
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….”

Whither Federalism?

October 26, 2015. Share on Twitter

Congressional Disinterest in the Complexities of Federalism & Municipal Bankruptcy. Despite White House warnings that only swift Congressional action can avert a string of impending defaults on $73 billion in Puerto Rican debt that could lead to a “humanitarian crisis,” the reaction by the Senate Energy and Natural Resources Committee (the committee of jurisdiction, because it was, formerly, the Committee on Interior and Insular Affairs, ergo the inclusion of Puerto Rico and other U.S. territories under its jurisdiction) was almost nonexistent: only two members of the majority, Chair Lisa Murkowski (R-Alaska) and Sen. John Barrasso (R-Wy.) even made the effort to attend. U.S. Treasury Counselor Antonio Weiss testified last Thursday, formally requesting Congress to act swiftly to provide expanded Chapter 9 municipal bankruptcy protection to both the Commonwealth of Puerto Rico, as well as its public authorities, and to provide other relief. Under the White House plan, in order to gain access to expanded Chapter 9 municipal bankruptcy relief, Puerto Rico would have to agree to federal fiscal oversight. The second part of the plan, Mr. Weiss said, would be for Congress to authorize the creation of an oversight body made up of broad group of stakeholders that would preserve Puerto Rican authority, but would be independent from the territory’s government. In addition, the administration requested that Congress provide funding and authorize technical assistance to help Puerto Rico bring its accounting and disclosure practices into the 21st century, warning that Puerto Rico’s government is on the verge of running out of fiscal resources with which to provide its three and a half million U.S. citizens essential public services. The response from the Committee, however, was—at best—dismissive. Chair Murkowski claimed the Committee lacked accurate enough financial information, and that, even if it had such information, the White House proposal could not be considered without offsetting cuts in other areas of the budget. Indeed, after a relatively brief rounds of questions, she ended the hearing, saying, “I apologize that we can’t give more time to this.” Puerto Rican leaders and many financial and legal experts have been saying for months that the U.S. territory cannot repay the approximately $72 billion it owes to hedge funds, mutual funds, and other investors. Indeed, the economy is in a whirlpool: it is not growing, and tens of thousands of residents are leaving every year for the mainland U.S. to look for work. More than 300,000 have left in the last 10 years. Puerto Rico confronts a public pension debt in excess of $40 billion; its adopted spending cuts and tax increases have failed to stem the rising debt tide. Mayhap unsurprisingly, many investors and owners of Puerto Rican bonds—that is, investors who stand to lose under any debt restructuring–are bitterly opposed to the Administration’s proposals: they claim Puerto Rico can repay all of its debt if it tightens its fiscal belt and privatizes utilities and other government-owned businesses. The complexity of addressing Puerto Rico’s looming insolvency is complicated in that federal municipal bankruptcy, in recognition of dual sovereignty, provides that no mainland municipality may file for municipal bankruptcy without state authorization. Since Puerto Rico is not a state, but rather a territory, not only does Puerto Rico not have access to chapter 9, but nor does it have the requisite authority to authorize access to any of the island’s 87 municipalities. Current negotiations have involved some 18 different municipal debt issuers—so that 20 creditor committees have been created, focused on competing interests.

Late for an Important Date. San Bernardino, last Friday, finally received a letter from its independent audit firm with regard to the accuracy of the accuracy of its financial statements—but not the promised full audit. The delivery, more than a year and a half overdue—and technically still due—was delivered two days after it was last promised, and more than a year and a half after the deadline imposed by the State of California. Deputy City Manager Nita McKay, nevertheless, advised the City Council the audit was “basically what you pay for…It’s the signed letter from the auditors, and what you’re hoping for is an unqualified opinion, which means there’s nothing they need to disclose. Last year there were two comments, and they’re the same comments again, about successor land held for resale…and then, because we’re in bankruptcy, they add a paragraph about that.” The municipality’s audit firm Macias, Gini and O’Connell LLP (MGO), which had promised completion and delivery last week now reports it will “likely” be ready this Wednesday—that is, just six days before November 3rd’s municipal elections. Ms. McKay advised the Mayor and Council the audit firm would be ready to present to the city’s administrators and a selection of elected leaders on the audit committee this Thursday. With the fast approaching municipal election, city staff and auditors have been sparring over responsibility for the audit delay, with the auditing firm falling further behind schedule, even as it sought nearly double its original asking price. The bankrupt city, according to Ms. McKay, has paid about $451,000 of that contract so far, and it is still awaiting its single audit—the audit of federal grants, a key step, as it has held the city hostage for the receipt of $125,000 a month for the San Bernardino Employment and Training Agency from the State of California. The city has scheduled a pre-election day public presentation of the findings in the 2012-13 audit for the Nov. 2 City Council meeting, according to City Clerk Gigi Hanna.

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.

A Steepening Road to Municipal Recovery

October 9, 2015

Steeper Road to Recovery—where failure is not an option: U.S. Bankruptcy Judge Meredith Jury yesterday warned San Bernardino that the city will have to produce much more extensive information than the 77-page disclosure statement it has submitted if it is to gain the federal court’s approval of any plan of debt adjustment—the critical hurdle if the city is to emerge from the longest municipal bankruptcy in U.S. history. For the city, which has been attempting to put together its proposed plan of debt adjustment now for a longer period than any other applicant municipality for chapter 9 bankruptcy, the stern warning comes less than a month before looming municipal elections—a hurdle itself—and increases apprehensions about the city’s ability to meet any deadlines—and at what cost. Yesterday’s hearing on the adequacy of the disclosure statement the municipality had filed unsurprisingly drew objections from the city’s multiple creditors, undoubtedly raising further questions with regard to the city’s progress. For instance, the attorney for creditor Ambac Assurance Corp., the company which is the securer for San Bernardino’s $50 million in pension municipal obligation bonds, testified in the courtroom of his apprehensions, noting: “[I]t is pretty clear the city plans to pay unsecured (creditors) the least it can get away with, not the most it can afford…They’re trying to disclose a plan that is fundamentally flawed.”

For her part, Judge Jury raised mayhap a much more fundamental apprehension: can the bankrupt city present the federal court with convincing data and information to demonstrate the city’s proposed plan of debt adjustment would ensure the city would not collapse back into a second bankruptcy in a few years, noting: “I don’t really think it’s in anybody’s objection, but the public perception — the media perception –— of the two cities with confirmed (bankruptcy exit) plans, that being Vallejo and Stockton, is that they’re already in trouble because they didn’t impair CalPERS,” referring to the decision, a proposal also made by San Bernardino, to pay every cent of what the municipality owes to the CalPERS as those costs grow. Judge Jury added: “I don’t think there is adequate discussion of how much those raises are going to be. I have heard other things, I think in this court, that it is an exponentially increasing number that will have to be paid in order to keep retirement plans intact. There comes a point where no matter what I confirm it will fail.” San Bernardino’s actuaries project as part of the bankruptcy exit plan that $29 million a year will go to CalPERS by 2023-24—or an amount more than double its current annual payment. Ergo, for Judge Jury, the grave question is from whence will cometh those funds?

Equally unsurprisingly, San Bernardino’s creditors—all of whom understand that every day further into what has become the longest municipal bankruptcy ever—recognize that each additional day without an approved plan, the less resources remain to be divvied up amongst the city’s thousands of creditors. That apprehension led the attorney for creditor EEPK, a Luxembourg-based bank, which is the holder of San Bernardino’s municipal bonds secured by Ambac, to tell Judge Jury the city needed, in its proposed plan of debt adjustment, to show the value of properties held by the city and why many of them could not be sold to pay creditors—and explain why the city was not pursuing municipal tax increases—reminding the federal court of the critical and daunting fiscal action Stockton’s leadership took to anchor not just its plan of debt adjustment, but also its long-term recovery—or, as he told the court: “The city’s explanation for why it’s not pursuing some substantial potential revenue sources which require voter approval is ‘it would be hard…’ It’s not enough, when you’re paying creditors 1 cent on the dollar, to say ‘It’s hard.’ ” It is difficult to imagine Judge Jury could have emerged from the session with much optimism; nevertheless, she obtained a commitment from the city that it would provide more comprehensive information and responses by the day before Thanksgiving—at which point creditors will respond in writing, leading to still another day—and ever mounting costs—to assess the adequacy of the financial information provided by the city. Judge Jury also informed the parties she is trying to allow San Bernardino to exit bankruptcy as soon as is prudent: “I do intend to keep this pace moving, but not at a pace that is unreasonable.”