Tag Archives: Boomergeddon

As creditors close in and the City of Petersburg struggles to avoid default, it is spending large sums on legal and consulting fees. In the latest litigation, the city has hired the Richmond-based law firm Sands Anderson to fight an Oct. 4 order by a Petersburg Circuit Court Judge appointing a special receiver to ensure that city residents’ wastewater payments are forwarded to the regional sewage treatment agency.

In his order, Circuit Court Judge Joseph M. Teefey Jr. appointed an attorney from Richmond-based LeClair Ryan as the receiver. Presumably, the city will be responsible for covering LeClair Ryan’s fees as well.

The city is in more than $1 million in arrears in its payments to the South Central Wastewater Authority because it diverted wastewater revenues to other uses. The appointment of a receiver could trigger a default in other obligations, including more than $10 million in water, sewer and stormwater revenue-backed bonds.

Those debts include clauses specifying that the appointment of a receiver automatically constitutes an “Event of Default,” reports the Progress-Index.

“If the receivership is not vacated and the multitude of bond defaults described herein are triggered, it is expected that any short-term or long-term debt restructuring to facilitate … cash-flow relief for the city … will be extremely difficult to obtain,” states the city’s motion.

Meanwhile, City Council also hired the Robert Bobb Group, a municipal turn-around group, to help the city work through its financial woes. The principal of the group, Robert Bobb, was city manager of Richmond from 1986 to 1997 and was instrumental in rooting out corruption and turning around the deficit-plagued Detroit school system. Sources have told WRIC News that the consulting fees could cost $300,000.

Bacon’s bottom line: It has to be galling for secretaries, police, fire fighters and other city employees to swallow pay cuts while the city is doling out funds for high-priced lawyers and consultants. But what is the alternative? Roll over and play dead? Sadly, the city is caught in legal quicksand now. The harder it struggles to stay afloat, the more it racks up big professional fees that it can’t afford. The moral of the story for everyone else: Don’t let yourself get caught in Petersburg’s situation.

— JAB

by James A. Bacon

The City of Petersburg is on its own. There appears to be no sentiment in either  the McAuliffe administration or the General Assembly for cutting the fiscally ailing city any slack. Even the city’s own representatives in the legislature aren’t pushing for any special treatment by the Commonwealth.

“There is a feeling that the state doesn’t want to reward poor public performance,” Secretary of Finance Richard D. “Ric” Brown told the Richmond Times-Dispatch in an article appearing today.

A bailout of Petersburg is out of the question, said Del. Steven Landes, R-Augusta, who is heading a subcommittee to study the problem fiscally stressed localities. “I’m not aware where the state has ever stepped in to provide a locality a bailout,” he said. “I don’t see that happening.”

The state requires localities to file Comprehensive Annual Financial Reports (CAFRs) each year with audited financial data. Landes said his committee will look into what the state can do to shorten its response time when a locality is heading toward a fiscal cliff. “We want to make sure that audit information is getting to the money committees and the administration, because we would much rather be kept abreast sooner rather than later.”

Bankruptcy is not an option either. Federal law allows financially distressed localities, public utilities and school districts to see the protection of Chapter 9 bankruptcy court, and more than 50 localities nationwide have sought it over the past seven years. But Chapter 9 refuge requires state approval, and Virginia law does not allow localities to file for bankruptcy.

Bacon’s bottom line: It is reassuring to see the state drawing a cordon around the badly managed city. Citizens have to clean up their own mess. A likely first step is to throw the bums out and replace them with more competent individuals. If the crisis impels a new leadership to re-think how core government services are provided, Petersburg could emerge better and stronger than before.

Moreover, Landes’ subcommittee can play a helpful role in spotting financial warning flags in other localities before they reach crisis dimensions. Citizen leaders of many small localities (and even some large ones) lack the knowledge to read the CAFRs with any discernment. One useful thing that the state can do is to monitor the CAFRs of all jurisdictions and let their elected officials know if their numbers are looking problematic.

Melt down

by James A. Bacon

The City of Petersburg’s fiscal meltdown is reaching a new crisis stage as an Oct. 1 deadline nears to make a $1.4 million payment to the Virginia Resources Authority (VRA), a state funding source for local infrastructure financing.

In remarks to the Richmond Times-Dispatch following a House of Delegates Appropriations Committee hearing yesterday, Secretary of Finance Richard D. “Ric” Brown said that the state might have to “intercept” state aid to Petersburg in order to meet principal and interest payments on VRA bonds backed by the moral authority of the state.

The General Assembly had convened the session to discuss how to build a firewall between Petersburg and the rest of the state. The city faces a $12 million budget deficit this year as well as estimated backlog of $19 million in unpaid bills.

“I just hope we are not heading down this road where we are digging the state into a hole,” said Del. R. Steven Landes, R-Augusta, chairman of a task force formed to study the impact of fiscally stressed localities on the state.

“We’ve got to figure out what change we need to make from a state’s perspective; we need to protect ourselves,” said Committee Chairman Chris Jones, R-Suffolk, as reported by the Richmond Times-Dispatch. “VRA debt can be an issue that can affect our bottom line. We cannot allow [a default] to occur. It’s very distressing when you see what has occurred, and hopefully [the city] will continue to try — in a very straightforward way — to deal with the issues.”

So far, Petersburg officials have yet to ask for state bail-outs. Secretary of Finance Richard D. “Ric” Brown and his office have lent considerable “technical assistance” in disentangling the city’s finances. But other than shaking loose some funds to help the city’s school system, the McAuliffe administration has taken no concrete measure to ease the city’s burden — and it likely would meet considerable resistance if it tried to do so.

City Council has been enacting draconian cuts to the budget in a desperate effort to stem the red ink. Whether it can find $1.4 million to pay the VRA is an open question. The state has a lot at stake.

Created by the General Assembly in 1984, the VRA has funded more than $7 billion in investment in 1,000 projects across the Commonwealth. According to the VRA website, this is how the program works:

VRA sells bonds and then loans the proceeds to local governments to finance eligible infrastructure projects. The borrowers’ interest rates are based on the rates that VRA obtains in the public bond market. Based in part on the use of the Commonwealth’s moral obligation, VRA’s high credit ratings typically result in interest rate savings for localities. This translates to reduced rates, taxes and user fees for borrowers’ constituents.

Come Oct. 1, if Petersburg fails to make its $1.4 million payment to VRA, absent state intervention, the authority will be unable to make the interest and principal on the bonds sold to investors on Petersburg’s behalf. Those bonds are backed by the “moral authority” of the state, which does not legally obligate the state to made good, as it would if the bonds were backed by the full faith and credit of the state. But a failure to back Petersburg’s payment would damage the state’s moral authority, thus undermining the entire premise of the VRA, harming other localities who might wish to borrow from it, and perhaps even calling into question the creditworthiness of other categories of bonds backed by the state’s moral authority.

Allowing a default on the VRA bonds is, in a word, unthinkable. But bailing out Petersburg would create a moral hazard. If the state bails out Petersburg once, then why not twice? If the state bails out Petersburg, then why not some other hard-pressed locality? Fiscal discipline could unravel.

Brown clearly understands the state’s quandary. Speaking to reporter Markus Schmidt after the hearing, the finance director said he might have to “take certain steps to intercept aid” from the state to Petersburg to make sure the payments are made. He acknowledged the hardship such an action would create: “In many cases for the city, that would make matters a lot worse for them.”

And you thought the dead-baby-in-a-Petersburg-garbage-truck story was bad!  Photo credit: WTVR

by James A. Bacon

Here’s what happens when you run a city government like Petersburg into the ground: The regional waste management authority is threatening to suspend its trash removal and recycling services unless the city commits to a plan to repay the $632,000 it owes.

City residents and businesses have been paying their monthly fees to the city, but the city has fallen way behind in its remittances to the Central Virginia Waste Management Authority (CVWMA], which in turn contracts with a local vendor, Petersburg-based Container First Services.

“We have been paying that vendor and without receiving compensation from Petersburg, we won’t be able to sustain [the service] too much longer,” CVWMA Executive Director Kim Hynes, told the Richmond Times-Dispatch.

The unpaid bills are not trivial. CVWMA, which provides waste management services to 13 localities in Central Virginia, generated $13.4 million in operating revenues in Fiscal 2015, according to its 2015 comprehensive financial annual report.  Petersburg’s unpaid bills far outweighs the $48,000 operating surplus the authority generated that year and the $501,000 cash it reported on its balance sheet.

Years of fiscal mismanagement came to a head this summer. A recent state audit of Petersburg’s finances revealed that the city is facing a $12 million budget gap in the current fiscal year while also dealing with $19 million in unpaid bills.

Bacon’s bottom line: The cost of Petersburg’s fiscal ineptitude is not limited to Petersburg. The inability to pay $632,000 in back bills puts the waste authority in an untenable situation. Either it stops providing garbage and recycle pickup for the city, which creates a potential health hazard for Petersburg citizens who have dutifully paid their bills, or the authority puts its own finances in jeopardy. Petersburg’s inability to pay its bills could potentially force the other jurisdictions of the Richmond region to step in to support the authority financially.

The moral of the story: When local governments are tied together through various regional compacts, a financial meltdown of one locality can shock waves to its neighbors.

by James A. Bacon

The financial travails of the City of Petersburg has prompted some readers to wonder if other Virginia localities are fiscal time bombs waiting to go off. There are many causes of fiscal dysfunction but one sure sign of trouble is a heavy burden of long-term debt.

One way to measure that burden is to express debt as a percentage of the tax base, in particular as a percentage of the true value of property. Local governments have many revenue sources, but the property tax is the one major source which city councils and boards of supervisors can control. Therefore, the value of taxable property is a good proxy for a locality’s tax base, and the ratio of debt to the tax base is a good indicator of fiscal health.

To get a sense of which localities might be over-extended, Jim Weigand, a regular reader and concerned citizen of Lynchburg, calculated net debt as a percentage of true value of property (TVOP) for fiscal 2015. The ten most leveraged localities appear in the table above, with Accomack County heading the list at a fear-inducing 22.8%. The state average is 3.4%, and the least leveraged locality in Virginia, Mecklenburg County, is three-tenths of one percent.

Petersburg ranks fairly high on this list, 19th in the state, with a ratio of 6.8%. Buena Vista, another fiscal basket case we have written about on Bacon’s Rebellion, cracks the Top 10 with a ratio of 10.1%. The City of Richmond, whose inept fiscal management we have highlighted, does not appear on the list… because it could not comply with the data reporting requirements!

If I were a citizen of Norfolk, Portsmouth or any of the other localities atop the list, I would regard this ratio as a warning flag. This one metric along is not sufficient to declare a locality to be in poor fiscal shape. Many factors go into calculating a locality’s health. But a high debt-to-tax base ratio is undeniably a worrisome sign. Conversely, an exceedingly low ratio raises questions as well. Is Mecklenburg County spending enough money on utilities, school buildings, public safety buildings and the like?

To view a list of all Virginia cities and counties, click here.

by James A. Bacon

The city of Petersburg’s financial woes are so bad that it nearly defaulted on a $4.5 million Revenue Anticipation Note (RAN) due June 30, but was saved at the last minute by a team of auditors dispatched by Secretary of Finance Richard D. “Ric” Brown. “It was questionable up to June 29,” whether the city would be able to pay off the note on time, Brown told the Richmond Times-Dispatch.

The revelation of the near-default occurred deep in the T-D story tracing how Petersburg came close to financial collapse, but the story provides no details on how the default was averted.

The article does provide considerable new detail on how problems have been festering for years. The emergency auditors found that the city needs to close a $12 million budget gap this year even as it addresses $19 million in unpaid bills.

The city has been running structural deficits for years. Auditors with Davenport & Co., which has advised the city on-again, off-again for several years, issued recommendations in 2012 for shoring up the city’s finances but the city took no action. As the city’s finances deteriorated, S&P, the bond-rating agency, downgraded its debt to BBB, a below-investment grade rating.

One way Petersburg papered over the shortfalls was by draining its reserve accounts. “Strongly rated Virginia governments will have an unassigned cash balance in the 15% range, even higher. That’s a good target,” David P. Rose, senior vice president with Davenport, told the T-D.

Bacon’s bottom line: Let Petersburg be a warning to all other cities — and to citizens who take an interest in their local governments. In previous posts, I have alluded to the tricks to which fiscally stressed localities often resort to “balance” the budget: (1) short-changing pension payments, (2) under-investing in maintenance, and (3) slow-paying creditors. We can now add a fourth: (4) depleting cash reserves. I am sure there are others.

The comforting news (comforting to those of us not living in Petersburg) is that S&P was paying close enough attention to the evolving situation to lower its bond rating. Nearly all Virginia localities have investment-grade bond ratings — several have AAA ratings — so there may not be much to fear. Still, we should remember: bond-rating agencies have been caught napping before.

In related news… While Wall Street is urging state and local governments to take advantage of record-low interest rates and issue bonds to repair aging roads, bridges and buildings, most are resisting the siren call of piling on more debt. New government bond issues have dropped to the lowest level in 20 years — about $140 billion last year, about 53% lower (adjusted for inflation) than in 2006. (The pace of borrowing has picked up modestly this year.)

S&P Global ratings analyst John Sugden said told the Wall Street Journal that the reluctance to add debt often “reflects good budget management” by governments whose revenue projections leave no room for additional debt payments or upkeep costs for newly constructed projects.

Here’s the question: Are state and local governments spending enough to maintain their infrastructure, or is the condition of roads, bridges, water & sewer plants, commuter rail lines slowly deteriorating — a hidden form of structural deficit?

John Rubino, author of DollarCollapse.com, is my favorite financial blogger. He did some excellent reporting for Virginia Business magazine back in the day before he went on to become a successful author and financial pundit. In a recent post, he drove home a theme commonly expressed on this blog: that the near zero-interest rate policy pursued by the Federal Reserve Bank (and below-zero policy in some other central banks) is hidden with hidden costs and is creating systemic risk.

As global interest-rate yields are driven down, writes Rubino in his fourth post developing the theme, “We’re All Hedge Funds Now,” insurance companies are especially hard hit. They’re finding it increasingly difficult to meet their obligations to policy holders without assuming greater risk.

Such companies have no choice but to roll the dice on “growth” assets like junk bonds and equities, which fundamentally changes the nature of their business model. Instead of steady, predictable income that guarantees the ability to pay off on policies when retired, they’ll have flush years and lean years which might or might not coincide with the needs of their clients. They’ll become hedge funds, in other words, high-risk investment vehicles that do well in good times and frequently fold up shop in bad.

Globally, more and more capital is flowing into riskier and riskier investments. Sooner or later, the deck of cards will collapse. This time, when it does, the calamity will be global in nature. One thing you can bet on: The architects of the super-easy money policies will find someone to blame other than themselves. Meanwhile, here in Virginia, taxpayers will be left holding the bag for the state’s under-funded state pension fund — along with much else.

The Fed’s super-easy monetary policy is designed to keep interest rates low for the world’s largest debtor, the United States government. In effect, the Fed transfers yearly hundreds of billions of dollars of wealth from individual and institutional investors to the U.S. Treasury — no taxes necessary — by means of a process so opaque that few understand what is happening. I remain convinced that the hidden effects of loose monetary policy comprise a major reason why members of the white working/middle class are out their minds with political frustration.

— JAB

Town of Haymarket revenues and expenditures.The green bar shows net surplus/deficit.

Looks like Petersburg is not the only Virginia jurisdiction to close the 2016 fiscal year with a deficit. This chart comes to Bacon’s Rebellion by way of Haymarket citizen Robert Weir. Haymarket, a town of less than 2,000 people in Prince William County, overspent by $789,000 — equivalent to a quarter of its revenue.

Writes Weir: “It is not beyond the realm of possibility that in the coming years many of the smaller jurisdictions may prove to be an ever increasing drag on both the larger jurisdictions and the State as the financial woes rapidly expand.”

Virginia has dozens of towns, most of them tiny like Haymarket. Is there any sanction if they run deficits, a violation of the state constitution? Is anyone paying attention to what’s going on?

— JAB