What Can Be Learned from Past Fiscal Disasters?

eBlog

March 9, 2015
Visit the project blog: The Municipal Sustainability Project

Stepping into the Fiscal Future. In commencing his first State of the City speech, San Bernardino Mayor Carey Davis refrained a message from the first nine public speakers at city hall: “I am San Bernardino.” So, Mayor Davis began with the line: “You are San Bernardino.” But the mayor used a format different than most cities; he mixed in other leaders, so that what residents and taxpayers were treated to was a program of leaders focusing on their efforts and partnerships with the city—clearly Mayor Davis’ theme as the bankruptcy city enters its home stretch in putting together its plan of debt adjustment for U.S. Bankruptcy Judge Meredith Jury, telling his audience: “Together, we are building a community and we are developing a series of strategic plans that will propel the city forward.” For San Bernardino taxpayers, it is hard to imagine a more diametrically opposite message than the last State of the City address, when former Mayor Pat Morris, a year and change ago, told the city’s citizens they were confronted by a “nightmare” and an urgent need to outsource services—including fire—and shutter some fire stations. Instead, Mayor Davis told them: “I come to you with a different message. In one year’s time, we have heeded these warnings…Our city is not paralyzed by bankruptcy. There are many things that are happening that are raising the quality of life for our residents.” Advising the audience that its federal bankruptcy protection had ensured its ability to balance its budget, he warned that hard choices lie ahead: a frank (no pun) assessment of the city’s fiscal condition and sustainability and public participation. He said he understood that choices city leaders had made, such as cuts to fire services, have garnered significant opposition; he noted that harder choices—choices he warned which would engender citizen resistance and hard choices lie ahead: “We have challenges and hard work ahead of us, but if we change our focus and concentrate on how to achieve our destiny, we can succeed…We are not where we want to be, but we will get there.”

State Interceptor Programs. As we have noted from North Carolina, Rhode Island, and Michigan; proactive state fiscal interception programs can be critical to avoiding severe fiscal distress or municipal bankruptcy—or vital to recovery. But state audits too can offer valuable fiscal lessons important to municipal, fiscal sustainability. Of course, we have also noted the tendency of states—and the federal government—to exercise a double standard: where a fiscal municipal crisis is caused by a severe storm disaster (in this case a tornado) a state—and the federal government—tends to respond physically and fiscally. In contrast, if the tornado is a fiscal rather than physical disaster, the response—or non-response—can be quite different. But in Indiana, Moody’s analyst Dan Seymour helps us to understand that a recent default by an Indiana school district can highlight the importance of underlying state credit analysis when bonds are enhanced with a post-default school intercept program. The issue here involves Indiana’s Joplin School District—in the wake of the fiscal woes it suffered following a 2011 tornado. According to a Hoosier state audit, which was critical of the school district for using the same firm as advisor and underwriter on its post-tornado borrowings ($62 million from a voter-approved referendum) to finance insurance reimbursements, and repair its buildings; the tornado damaged or destroyed 10 schools; it killed 161. In addition to the district’s damage, more than 8,000 homes and businesses were destroyed, along with St. John’s Regional Medical Center. It was one of the nation’s deadliest tornados on record.

But the municipality learned that trying to juggle the regular budget, fierce storm destruction, and promised debt payments can be a bridge too far: Munster missed two bond payments last January—misses and the ensuing default for which it made up by borrowing from a local bank. It was as if a fiscal tornado followed a physically devastating tornado. Mr. Seymour and other analysts thus note that the school district’s default demonstrates the importance of closely examining both underlying credit fundamentals and the mechanics of a state intercept program—especially noting the distinction between pre- and post-default interceptions—or, as Mr. Seymour wrote: “Unlike pre-default intercepts, a post-default intercept generally cures deficiencies only after a default has already taken place, meaning it does not necessarily reduce the probability of default…Therefore, for post-default-enhanced credits, the probability of default is primarily based on the underlying credit quality, and the enhanced rating starts with an analysis of the underlying obligor.” He helpfully adds that Moody’s bases its ratings on municipal bonds covered by pre-default intercept programs more on the state itself as opposed to the underlying credit.

Indiana’s state audit, released last week, of the Joplin School District found that the financial condition of the district’s general fund has been struck by its own fiscal storm—dropping nearly 75% from $16 million to $4.6 million; its capital projects fund has declined even more: to $5 million from $29 million in 2011, declines, according to the state audit, “due in large part to the impact of the May 22, 2011, tornado and atypical disaster related expenditures…Decreased property values and a tax increment financing agreement entered into between the city, master developer, and the district has also affected local funding.” The decline in the project’s fund will require additional financing to pay for construction expenditures until the district receives final federal and state disaster funding, according to the report. In its audit, the state audit criticized the school district for its use of the same firm to serve as both financial advisor and bond underwriter for all bond and lease participation certificate sales, noting: “Using the same provider to act in the dual capacity of underwriter and financial advisor for a bond issue creates an inherent conflict of interest.” The state audit was also critical of the Joplin School District for utilizing a negotiated sale rather than a competitive bid process, noting that in past general audits, it had determined that municipalities paid higher rates through negotiated sales than if they competitively bid their transactions.

The Messy, prohibitively Expensive, and daunting Challenges of Municipal Bankruptcy & The Remarkable Differences Imposed by Contrasting State Enabling Laws

eBlog

March 5, 2015
Visit the project blog: The Municipal Sustainability Project

Savoring the Comeback. Standard & Poor’s this week revised its long-term outlook on Central Falls—or Chocolateville’s―credit rating on its full faith and credit GO bonds from stable to positive, even as the small city retained its junk-level BB long-term rating. The post municipal bankruptcy city, Rhode Island’s smallest (19,000 population), continues on its road to recovery in the wake of then-Governor Lincoln Chaffee appointment of former Rhode Island Supreme Court Justice Robert Flanders as receiver in the wake of its filing for municipal bankruptcy protection in August 2011, reporting an $80 million unfunded pension liability. In one of Judge Flanders’ earliest actions, he imposed benefit cuts of up to 55% for retirees—albeit these reductions were subsequently modified by the former Chafee administration. S&P analyst Victor Medeiros wrote: “The outlook revision reflects our opinion of the city’s ongoing adherence to its established post-bankruptcy plan and improved financial management controls that we believe will likely be sustained and continue to translate into it maintaining stable operations…At the same time, we expect the city to remain proactive in funding its long-term liabilities, ensuring those costs and overall budgetary performance remain stable and strong over the long term.” According to Mr. Medeiros, for S&P to consider raising Central Falls’ rating, Chocolateville would need to adhere to its to its long-term plan of debt adjustment: “In our opinion, the city’s stable budgetary environment and continued progress toward funding long-term liabilities would be additional factors in our raising the rating.”

Expanding Municipal Bankruptcy Protection. California State Sen. Marty Block has introduced legislation to expand chapter 9 municipal bankruptcy protection to school district general obligation bonds. The bill, Senate Bill 222, would amend section 15251 of the California Education Code to clarify the process of lien perfection for general obligation bonds issued by or on behalf of California school and community college districts—a change which is intended to clarify that the lien that is created is a “statutory” lien, thereby potentially reducing the risk of bankruptcy for G.O. bonds issued by K-14 general obligation bond issuers in the Golden State—and, its author hopes, potentially enhancing the districts’ credit ratings and reducing their interest rates—an action which some believe would remove the extra step between the issuance of general obligation bonds by a school or community college district and the imposition of a lien on the future ad valorem property taxes that are the source of repayment of the G.O. bonds. The bill’s introduction comes in the wake of uncertainty over potential treatment of revenues pledged to pay a municipality’s general obligation bonds—and the mechanisms under differing state laws with regard to the imposition of liens to secure the repayment of full faith and credit bonds issued by cities, counties, and school districts—or as the ever-marvelous Municipal Market Analytics describes it, the bill “clarifies that voter-approved general obligation school district bonds benefit from a statutory lien on the levy and collection of the tax revenues without any further action, insulating them from impairment in a Chapter 9 proceeding,” an action which should, according to MMA, reduce the cost of the debt to the issuing school district—especially for more fiscally challenged ones. Fabulous Matt Fabian of MMA notes that recent municipal bankruptcy cases like Detroit’s have raised questions about the strength of a city or school district’s pledge, making it, in his words, “imperative that states examine statutes to ensure that they are clear in their intent.” The underlying issue (no pun) relates to – in bankruptcy – secured and unsecured claims, ergo, the need to ensure a lien is statutory, as opposed to one created by an agreement to create a security interest. Sen. Block’s proposed legislation would clarify that the statutory lien arises automatically without further action or authorization by the school or community college district.

Detroit’s Future. Michigan Gov. Rick Snyder expects “relatively quick legislative action” from the state’s legislature as soon as the Coalition for the Future of Detroit Schoolchildren submits its final report examining the school’s fractured, fragmented, and nearly insolvent school system and recommendations later this month. The coalition is co-chaired by Tonya Allen, president and CEO of the Detroit-based Skillman Foundation; the Rev. Wendell Anthony of Fellowship Chapel and the president of the Detroit branch of the NAACP; David Hecker, president of AFT Michigan/AFL-CIO; John Rakolta Jr., CEO of Detroit-based Walbridge Aldinger Co.; and Angela Reyes, executive director of the Detroit Hispanic Development Corp.

State of the City. San Bernardino Mayor Carey Davis, armed with 500 opinions from citizens in the wake of a series of community engagement events intended to both keep citizens apprised of the city’s plans to put together its plan of debt adjustment in order to secure U.S. Bankruptcy Judge Meredith Jury’s approval so that the city could exit municipal bankruptcy, but also to seek their input through a series of community events, tomorrow evening reports back on what he sees as the state of his city—and what he believes the city’s future could be, marking his first such speech since he took office a year ago. In a release from his office, the Mayor said: “The State of the City address brings together the business community, our educational institutions, residents, and others who have a vested interest in San Bernardino’s future…I look forward to highlighting accomplishments over the last year, and hope to build upon those successes as we move forward into 2015 and beyond.” The ambitious effort to both inform and seek input from citizens and taxpayers informs us of the significant differences prescribed or permitted under differing state statutes of those states which enable municipalities to file for federal bankruptcy protection—so that in Michigan and Rhode Island, for instance, cities’ elected leaders, citizens, and taxpayers are excluded from any say or input in the process; but in Alabama, California, and other states; the messy, prohibitively expensive, and daunting challenges of public, democratic practices compel local leaders to inform, engage, and involve citizens and taxpayers.

State of the Motor City

eBlog

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

State of the Motor City. Detroit Mayor Mike Duggan offered his citizens a vision of the recovering city’s road to tomorrow in his upbeat State of the City speech last night that sought to galvanize citizens towards the Motor City’s future. Mayor Duggan said the true measure of success would be measured by Detroit’s growth—a reversal of more than a decade of decline. He told the invite-only crowd at the Old Redford Theatre he will be judged based on whether Detroit’s population grows―and whether it can embrace both newcomers and longtime residents. Then he set down a series of markers or initiatives to help residents repair their homes, reuse vacant land, train for jobs, and start new businesses. Advising his fellow citizens that Detroit’s post-bankruptcy finances are sound and that Detroit would finish this fiscal year with a balanced budget for the first time in more than a decade, he sought to broaden recovery by defining the course he was proposing to be one of “economic inclusion” to ensure that all Detroiters take part in the city’s rebirth, telling his fellow citizens: “The talent in this world is distributed equally … what isn’t distributed equally is opportunity.” Speaking to an audience of more than 1500 citizens, Mayor Duggan noted the city’s progress towards the elimination of blight—telling them Detroit is now averaging demolishment of an average of 200 blighted structures per week. On a parallel track, he added the city’s nuisance abatement program has already led to 350 houses being repaired: “We are making progress.” Mayor Duggan appeared to be reaching out to ensure neighborhood groups have ownership in how the city’s vast expanses of land are used. Citing Detroit’s successful “side lot” program, which permits property owners to buy vacant lots next to their homes, Mayor Duggan said he plans to bring in a “world-class” planner to study how Detroit’s vast tracts of vacant land are used in the future — albeit stressing he intends to make sure residents will have a say in the process: “We are going to make sure as these neighborhoods grow that everyone is welcome…That’s what a city’s all about.”

Noting that safety is a critical priority, Mayor Duggan praised Police Chief James Craig’s efforts, telling his audience there were fewer carjackings and murders in the city last year than in half a century — and that average police response time has dropped from about 37 minutes, on route to what he promised would be 17 minutes: “We’re getting close to the national average and for serious crimes we’re getting there even faster,” adding his plan is to put more police officers on the street, with an agreement from the union to move them from desk jobs. He said police officers will go to high schools to build relationships with teens, and that Detroit will seek to be a leader in outfitting officers with body cameras “to build trust between police and the community,” adding that despite the signature improvement, 300 killings are too many: “We have got to change the culture in this community to recognize that every life matters.”
Speaking about politics, Mayor Duggan praised his City Council colleagues, Gov. Rick Snyder, and county leaders for working together on ways to rebuild Detroit. But he also focused on the role his commitment and goal to not only stem the outflow of citizens—but now to bring in new citizens. He said he was proposing a city-owned insurance company to help reduce high car insurance costs for Detroiters—noting the “injustice” of the city’s costly insurance rates, adding that his own had doubled when he moved to Detroit and telling his audience: “The farther we dig into this…the more that we find to get these rates down, we’re going to need some help…We’re going to find a way to do it. We are going through a whole number of scenarios.”