Charting A City’s Fiscal Future

eBlog, 8/24/16

 In this morning’s eBlog, we continue to follow the run-up to municipal elections in November in Stockton—and how both the issue of housing and property taxes—not to mention pending trials of the incumbent mayor—could affect the city’s fiscal future. Then we turn to upstate New York, where a criminal investigation in the Town of Ramapo could have severe fiscal consequences. Finally, we turn the spinning wheel to Atlantic City as it hires a new firm to assist it in putting together a plan to avoid a state takeover.

Taking Stock in Stockton. Stockton Mayor Anthony Silva last evening unveiled new details of his plan to help Stockton’s homeless population at Tuesday’s City Council meeting, scaling back his goal to provide housing, but continuing to plead with city leaders to “make this happen.” In a presentation lasting half an hour, the mayor called for approval of a “homeless bill of rights,” including the right to food, shelter and clothing, clean water, showers and toilets and pet-friendly housing. Advocates believe this policy would help address the neglected issue of affordable housing within Stockton. Residents of all income levels — but especially those with low-, very low-, and extremely low-incomes — are being squeezed by a lack of affordable housing within Stockton, as local development of the past 30 years has focused almost exclusively on market-rate, single-family housing. A key, but undiscussed issue last night, was the signal importance of property tax revenues to the city: third quarter revenues, after all, show that 54.9 percent of revenues were derived from the property tax.

As part of the city’s plan of debt adjustment, Stockton had reduced spending by $90 million from 2008 levels in response to a plunge in revenue triggered by the collapse of its once red-hot housing market. (The city slashed the police department funding by 25 percent and cut other departments even more ahead of its chapter 9 filing for bankruptcy protection.)  Indeed, last evening, Mayor and candidate Councilmember Silva showed the City Council slides of homeless encampments where people and animals live. Well over a dozen speakers, including some who said they are or were homeless, later shared their stories in an in-depth, sometimes emotional community discussion that ultimately lasted close to three hours—or, as the Mayor noted: “Tonight has to be the night that we have a positive debate about moving the city forward, not talking about ‘This won’t work’ and ‘That won’t work.’ We can make this happen. There is enough heart in Stockton.”

Notwithstanding, some experts who work on local homeless issues cautioned that there are no easy answers and that the mayor’s plan needs work—the cornerstone of which is to convert a former motel into housing for 100 homeless people or families. However, after city officials last month expressed concern about the cost and other issues, the Mayor last evening he would now seek to provide housing for just 25 people or families, “to first prove to people that it can be done,” proposing to tap into $250,000 allocated specifically to homeless issues, with some of those funds made available to be used to award mini-grants to local organizations, to clean up small businesses, and to pay for the portable toilets and hand-washing stations. However, longtime Stockton homelessness advocate Bill Mendelson, director of Central Valley Low Income Housing, cautioned that it is an “extraordinarily complex problem, and the solutions are going to be as complex as the problems themselves,” noting that buildings that could be used for housing are privately owned, so that converting them could be very expensive. Joelle Gomez, with the Women’s Center-Youth and Family Services, said it’s not just a matter of providing housing. People need services, too. The smallest shelter operated by her organization houses just 12 people but costs more than $300,000 a year to run, she said, warning the Council the Mayor’s proposal “has the potential to do far more harm than good.”

The mayor’s plan was up for discussion only. City Councilman Michael Tubbs, who is challenging Mayor Silva in November’s election, said the revised plan was “radically different” and suggested that a committee of experts be convened by the city manager to meet over the next couple of months — along with volunteers and homeless residents — to see what kind of action might be taken.

Fastball? Last May, about 40 FBI agents swarmed Ramapo, a town in Rockland County, New York, formerly known as New Hempstead—a town of approximately 125,000: the federal agents removed boxes of documents and hard drives in yet another crackdown on alleged corruption in Rockland County. The search was likely triggered by suspicions related to the Ramapo Local Development Corporation (LDC) and a controversial $38 million baseball stadium it runs: the Rockland Boulders’ Provident Bank Park, the issuance of the municipal bonds for which could wind up costing taxpayers as much as $60 million, according to the New York State Comptroller. As LDC president and town supervisor, Christopher St. Lawrence has been targeted by local activists who claim that his dual duties result in an absence of adequate checks and balances, facilitating what they characterize as misallocation of government funds. Indeed, for the last five years, activists have been funneling information from distressed members of the community to the FBI and the New York Attorney General’s Office. So, now, Christopher St. Lawrence, a supervisor and Ramapo’s Finance Director, as well as president of the Ramapo Local Development Corp., and Aaron Troodler, the former executive director of the RLDC, face 22 counts of wire fraud, securities fraud, and conspiracy stemming from an indictment obtained last April by U.S. attorney for the Southern District of New York Preet Bharara: a criminal case alleging the two Ramapo officials misled investors and credit rating agencies in connection with municipal bonds—with U.S. District Court Judge Cathy Seibel setting the case to go to trial in January. Here the criminal case against the pair mark a first-of-a-kind for the Department of Justice. In addition to the criminal charges, the SEC brought civil charges against both the town, the RLDC, and two other town officials: Michael Klein, Ramapo’s town attorney, and Nathan Oberman, its deputy finance director, asserting the former and current officials used fraud to cover up the strain on Ramapo’s finances related to 16 municipal securities offerings made between September of 2010 and last year, and to prevent further political fallout over a baseball stadium project: fourteen of the offerings were from the town, with the remainder from the RLDC—yet even these were guaranteed by Ramapo—and related to the financing for the baseball stadium—a stadium which struck out with the voters, who had overwhelming voted by a 70% margin to disapprove said bonds to finance its construction. It appears here to be a case of spitball where the bonds were issued to cover up the municipality’s deteriorating general fund—a fund which, according to the SEC, was covered up by means of a series of fabricated receivables over that period in an effort to make it appear as if the fund actually had positive balances of between $1.4 million and $4.1 million.

Planning How a City Can Avoid a State Takeover. Warning that a “lot of the actions that will likely be necessary will be unpleasant…And they haven’t happened yet for a reason. Because absent the kind of challenge the city faces, (it) wouldn’t want to see them happen,” Michael Nadol, of PFM Group, yesterday led Atlantic City’s third public meeting on its five-year fiscal plan to avoid a state takeover. (Atlantic City has until Nov. 3rd to submit its plan to the state, rejection of which would result in a state takeover of the city’s finances and major decision-making powers for five years.) Warning citizens that many “unpleasant” actions would  likely be needed to address the city’s finances, he described the city’s dire financial situation—and outlined some steps that could help the city achieve fiscal stability. Indeed, in response to a citizen’s query, he warned it could mean changes in services, a city workforce reduction, changes in employee compensation, or tax increases. A key part of the fiscal challenge is the city’s roughly $100 million budget deficit before state aid, the $228 million in outstanding municipal bonds issued to cover tax appeals, and an additional $165 million in tax refunds due to Borgata Hotel Casino & Spa and MGM Mirage, according to Moody’s. Now the city will have a new bill: it will owe PFM up to a maximum of $225,000 for a year’s work, according to its contract with the city. Mr. Nadol said the firm is one month into its work and is conducting interviews, reviewing data, and developing five-year financial projections for the city. The firm intends to provide a “quantitative analysis” for the city and help inform city officials’ decisions. PFM is not the first firm to review the city’s dire finances. Most recently, Ernst & Young billed the state $2.6 million for its work in the city. But this time, the firm works for Atlantic City–not the state. After yesterday’s session, Mayor Don Guardian recalled a time the city asked Ernst & Young for financial planning advice: “They said ‘We can’t share that with you. We work for the state of New Jersey. Not for you.’”

Might there Be a Federal Role in Causing Severe Municipal Fiscal Distress?

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eBlog, 8/23/16

In this morning’s eBlog, we revisit Ferguson, Missouri—a small municipality in St. Louis County struggling to recover from racial violence and an expensive U.S. Justice Department imposition of subsequent unfunded fiscal mandates. Yesterday, a federal judge found the city’s school board election system biased against black voters. The judge’s findings and a Moody’s downgrade combine to raise questions with regard to the municipality’s solvency: has the U.S. Justice Department unintentionally made the small city a candidate for municipal bankruptcy? It brings back to mind, in addition, an old question: are there too many municipalities in St. Louis County? Can we afford so many? Could a municipality dissolve itself? Then we turn to archipelago of the U.S. Virgin Islands—seemingly a hop, skip, and a jump from Puerto Rico, where the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities put still another U.S. territory at risk of insolvency.

Public Schools & Arithmetic. U.S. District Judge Rodney Sippel yesterday, writing that “The ongoing effects of racial discrimination that have long plagued the region, and the District in particular, have affected the ability of African-Americans to participate equally in the political process,” ruled that Ferguson, Missouri’s school board elections are biased against black voters. The suit, filed by the American Civil Liberties Union, claimed that the Ferguson-Florissant School District makes it unlawfully difficult for black candidates to win positions on the school board. Voters in the district elect school board members at large, rather than on a ward or sub-district basis, a process, Judge Sippel wrote, which has reduced black representation. Currently, three out of seven board members are black, a ratio that reflects the demographics of the city, the school district has argued. Black students make up four-fifths of the 13,200-student population. During the trial, a demographer demonstrated that Ferguson’s black population is concentrated and politically unified enough to affect results if the FFSD were divided into voting districts: black voters would constitute a majority in four out of seven of those theoretical districts. U.S. District Judge Rodney W. Sippel said that while he does not see evidence of intentional discrimination, there is a more subtle “complex interaction” of political processes that deter black voters from electing the candidates of their choice, writing: “Rather, it is my finding that the cumulative effects of historical discrimination, current political practices, and the socioeconomic conditions present in the District impact the ability of African-Americans in (the school system) to participate equally in Board elections.” The Ferguson-Florissant district serves about 11,200 students in parts of 11 municipalities. About 80 percent of those students are black, and 12 percent are white. District residents are nearly evenly split between black and white. (The ACLU filed the lawsuit on behalf of the Missouri National Association of the Advancement of Colored People in the wake of protests over the shooting.) The court decision comes in the wake of Moody’s placing the city’s already junk-level rating on review for downgrade because of threats to the city’s solvency—with the downgrade of the city’s general obligation rating reflecting “the continued pressure on the city’s finances from a persistent structural imbalance and incorporating the recently approved U.S. Department of Justice (DOJ) consent decree, projected to increase annual General Fund expenses over the next several years. The downgrade also took into consideration the outcome of an April 5 ballot election, in which voters rejected a proposed property tax hike (but approved a sales tax for economic development). Both ballot measures were integral to city management’s proposed solution to close a large General Fund budget gap that existed before accounting for the additional consent decree costs. Moody’s had acted after the U.S. Justice Department filed a lawsuit in February, marking the latest setback in Ferguson’s struggle to recover from a controversial police shooting in 2014. The Justice Department accused Ferguson of policing and municipal court practices that violate constitutional and federal civil rights. The credit rating company had noted that its rating concerns had been driven by the uncertainty of the potential financial impact of litigation costs from the lawsuit and the price tag for implementing the proposed DOJ consent decree: “We believe fiscal ramifications from these items will be significant and could result in insolvency.”

Is there Promise from PROMESA? Fitch ratings has reduced the U.S. Virgin Islands’ bond ratings to junk level, citing the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities. Fitch noted that the enactment of the PROMESA legislation for neighboring Puerto Rico could open the door for a comparable restructuring of the Virgin Island’s debt. The territory, where the author trained for his Peace Corps service in Liberia, West Africa, is comprised of a number of islands in the Caribbean not far from Puerto Rico. The islands cover just under 134 square miles and boast a population of just over 100,000. Tourism is the primary economic activity, with the manufacture of rum a significant sector. The islands are classified as a non-self-governing territory—one which since 1954 has held five constitutional conventions—with its most recent, its fifth, adopting in 2009 a proposed Constitution—one rejected by Congress the following year, with Congress urging the convention to reconvene to address the concerns Congress and the Obama Administration had with the proposed document. The convention subsequently reconvened in October of 2012, but was not able to produce a revised Constitution before its October 31 deadline. In its ratings, Fitch downgraded the Virgin Island’s gross receipts tax bonds, affecting $722 million in debt; Fitch also downgraded the territory’s senior lien matching fund revenue bonds to BB from BBB and subordinate lien matching fund revenue bonds to BB from BBB-minus. In amounts of debt, the former affected $773 million and the latter affected $428 million. Fitch also downgraded the Virgin Islands’ issuer default rating to B-plus from BB-minus. In its release, Fitch noted that the Virgin Islands plans to sell $217 million in gross receipts taxes bonds, $126 million in senior lien matching fund bonds, and $69 million in subordinate lien matching fund bonds near the end of next month—noting that the U.S. territory has a “severely unbalanced operating budget” and multiple years of borrowing to fund operating needs—and is expected to feature ongoing budget imbalances: its debt burden has increased, and its unfunded public pension liability has increased at a faster pace.

What Is the State Role in Municipal Fiscal Distress?

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eBlog, 8/18/16

 In this morning’s eBlog, we consider the risk of, for the first time in American history, a city reverting back into municipal bankruptcy. Here the fall could come from any combination of governance failures—as well as deeply falling returns on public pension investments. Then we look at an almost comparable inability of governance in Atlantic City—a failure here which risks the city’s own autonomy. Finally, we revisit the historic city of Petersburg, Virginia, a small city in significant fiscal distress—but which appears most unlikely to receive any state aid—meaning it could become the first municipality in the Commonwealth’s history to be forced to seek municipal bankruptcy protection.

The Risk of Re-entry into Municipal Bankruptcy. In an open letter to the citizens and taxpayers of Stockton, the City, on February 25th, last year, wrote: “Over time, the City was facing over $2 billion in labor agreements, long-term debt, and other obligations that would not have been possible to address outside of [municipal] bankruptcy. However, unlike personal bankruptcy, municipal bankruptcy does not erase or ‘wipe out’ debt. Finding solutions required hard work and heavy lifting by everyone involved. Focused by our guiding principles, we have achieved significant, sustainable change. Our employees worked with us to accomplish equitable labor agreements that brought pay and benefits more in line with the average of the labor market. City retirees, represented by a Retirees Committee, recognized that lifetime City-paid healthcare benefits were not sustainable and agreed to a settlement which helped to address the biggest obligation facing the City’s General Fund—a $544 million unfunded liability for retiree medical.” But now, in the midst of a heated election—one which is almost certain to be interrupted and affected by the pending trial of the incumbent mayor who presided during the city’s entry into and exit from chapter 9 municipal bankruptcy—the California Public Employees’ Retirement System (CalPERS) has reported that its rate of return for the year ended June 30 was just 0.61%. What’s more, Ted Eliopoulos, the pension fund’s chief investment officer, said the poor year has pushed CalPERS’ long-term returns below expected levels.

In approving Stockton’s exit from bankruptcy, U.S. Bankruptcy Judge Christopher Klein had opined that public pension obligations can be impaired in California, even though Stockton had not, in its proposed plan of debt adjustment, proposed to impair pensions; nonetheless, Judge Klein made clear that public pensions could be restructured should there be a next time around. In his analysis, Judge Klein said under chapter 9 federal bankruptcy law Stockton could reject its contract with CalPERS, and, he added, the $1.6 billion termination fee that CalPERS said it would charge to break the contract would be voidable in bankruptcy. Now, however, the issue of pensions could be re-opened in the wake of CalPERS’ projections that its pension management system, which had projected a 7.5% return on its investments, investments it uses to defray the cost of public employee pensions to cities such as Stockton, instead gained a return of only 0.61%—an outcome which could force CalPERS to increase its charges to Stockton—an increase for which the current city budget appears ill-equipped to meet—a budget, after all, which is based upon a 7.25% investment return from CalPERS. That is, such a reduction could put Stockton back into chapter 9—making it the first municipality ever to go into chapter 9 a second time. Indeed, the harsh fiscal discipline of the city’s plan of debt adjustment appears to be slipping: the Council gave police an 11% raise; it voted to re-open the Fair Oaks library branch, overruling objections from city staff—a vote which, for the first time, breached the city’s plan of debt adjustment.

Risking Autonomy. The Atlantic City Council this week, in a 4-4-1 vote, failed to adopt an ordinance to dissolve the Municipal Utilities Authority, a failure which puts the city at risk of defaulting on a state loan. (The terms of the $73 million state loan made the Authority collateral and required the city to adopt an ordinance dissolving it by September 15th.) Under the Council’s rules, it may not reconsider a failed ordinance for six months—meaning the city is in breach of the state’s loan terms. Failure to meet the deadline would make loan repayment due immediately and could require the city “to deliver each item of collateral” to the Department of Community Affairs, according to the loan terms. City Council President Marty Small blasted those who voted against the ordinance, saying they just “gift-wrapped the city to the state….So when the city shuts down and people lose their jobs and we owe the state $73 million because we defaulted on a loan, they can look the people in the eye who voted against it and they can thank them.” Council President Frank Gilliam described a lack of transparency leading up to the vote. A statement from Mayor Don Guardian this month said the ordinance’s first reading was needed by Sept. 15, not yesterday; he pointed to the July 28 emergency council meeting, which was announced just earlier that day and only had four members approving the loan terms, adding: “When decisions like these are basically put on the table, I think it’s very important for the public to have an opportunity to chime in.”

SOS! Virginia Delegate Riley Ingram reports he is seeking an appropriation to help Petersburg, a small city of just over 30,000, get through its current financial crisis, after residents of the city spoke with him about the possibility of getting state money for Petersburg, which is facing a cash crunch that state auditors say could hit as early as this month. Del. Ingram made clear he would not support any bailout of the city, which he said would set a bad precedent, adding: “In my opinion it would be a big mistake for the state to get involved: You’ve got to live within your budget and live within your means.” Earlier this month, at a meeting between state auditors and Petersburg city officials, an audit group sent in by the state to review the city’s books, the group informed city leaders that they owe $18.8 million in unpaid bills, making clear the municipality was in a worse financial crisis than they initially thought—by at least $1 million, with debt which includes $14.7 million to external entities, such as contractors and $4.1 million for internal loans, with the auditors making clear the “historic overspending” started in 2012. The growing debt has now reached a point where the city payroll is at risk—a risk made clear last month when the Petersburg City Council agreed to a 10 percent pay cut for its full-time employees, as a method to help balance the budget deficit—a reduction intended to last just six months and projected to save the city about $1.5 million dollars over the six-month period. The deficit was thought to be $17 million at the time of the cuts. Virginia House Majority Leader Kirk Cox (R-66th), a member of the Appropriations Committee, said getting the General Assembly to appropriate funds to help the city shore up its finances “would be a very, very heavy lift” in the legislature, in part because “it would be a very dangerous precedent to set;” moreover, the Majority Leader added that no action could be taken before next year’s General Assembly meets next January—and even then, any such funds would not be available until the start of the next fiscal year on July 1, 2017. State Secretary of Finance Richard D. Brown, who presented the team’s findings, said a high priority for the city is to get control over its finances as quickly as possible so as to be able to assure potential lenders that Petersburg is a safe lending risk. Virginia does not specifically authorize its municipalities to file for chapter 9 municipal bankruptcy; the state does, in certain situations, allow for the appointment of a receiver with respect to municipal revenue bonds.

What Is the State Role in Municipal Fiscal Distress?

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eBlog, 8/16/16

 In this morning’s eBlog, we consider, again, the un-considerable: could a city fall back into municipal bankruptcy? Is Detroit’s recovery sustainable? Is it municipal-wide—or have we only really been able to witness the remarkable renaissance of its sparkling downtown? And, as we often have, we also consider the important state-local fiscal relationships and roles—especially in Michigan where the combination of seemingly relentless state reductions in revenue sharing to address such stark fiscal disparities has been a critical factor in the state’s takeover or so-called Emergency Manager program—a program which was seemingly the critical step to getting Detroit into and out of chapter 9 municipal bankruptcy, but which—in imposing a state actor with no accountability to the citizens and taxpayers of a city or public school system, not only displaces democracy, but—in the case of Flint, led to signal human and health risks and costs, and, in the case of the Detroit Public School System forced a massive state bailout.

Now, as the small Detroit municipal neighbor of Wayne nears insolvency, still another Michigan state takeover looms. It is difficult to balance how much the state has contributed to this looming insolvency and how the elimination of democracy and accountability to the citizens of a city whose fiscal misery is, in some significant part, caused by the state, not by the city, should be assessed.

Post Municipal Bankruptcy Blues II.  Perry Applebaum, writing about “Detroit’s Recovery, Downtown Roars and Neighborhoods Sputter,” in the New York Times, described post chapter 9 Detroit as “an urban dystopia of poverty, crime and blight,” adding that “Detroit used to be a pretty clear story. It was a symbol of American economic might and then it was a symbol of American urban ruin. But in a place not given to deep philosophizing — where the literary canon is defined by the razor-edged crime novels of Elmore Leonard — almost no one here seems entirely sure what to make of this moment’s Detroit.” He concurs that the “swift exit in 2014 from the city’s traumatic bankruptcy has been followed, almost everyone agrees, by significant progress on improving city services long deemed hopeless…But what that means for the rest of the city and who is benefiting have set in motion a layered conversation about development, equity, race and class. It is playing out with particular force here in what was once the nation’s fourth-largest city and is now a place at once grappling with poverty, crime and failing schools, but also still animated by the bones of its former glory.” Mr. Applebaum also notes that: “Downtown is 90 percent better than it was 10 years ago, but you go a few blocks in any direction, and it’s terrible,” according to Lulzim Shaqiri, whose wife’s family has owned a restaurant since 1983. Ms. Shaqiri told him: “You can talk about helping the neighborhoods, but there’s really no neighborhood at all here. It’s just as dead as dead can be.”

In contrast, he notes the enthusiasm of Mayor Mike Duggan, who told him: “People in this city understand where we are and where we are going…This city went from 1.8 million people in the 1950s to less than 700,000 now. There’s been a 60-year decline, where we lost more than a million people, and those people who left didn’t take their houses with them. So, the magnitude of what we’re recovering from is enormous, but the recovery has started,” adding that there is “ample evidence that he is right. No one doubts how serious the problems are from the disastrous state of the schools to the threadbare transit system to the challenges of adding enough jobs to fuel a sustainable recovery. But more than 10,000 blighted properties have been demolished, removing dangerous eyesores and usually allowing neighbors to buy the vacant lots for $100. An additional 2,000 homes are being rehabilitated and reoccupied…There are about 5,000 new housing units either planned for construction or being built. Housing prices have ticked up, and the city’s toxic foreclosure problem shows signs of improving…In a city notorious for not even being able to even light its streets, more than 62,000 new LED street lamps have been installed. Officials say the whole city will be relit by the end of the year. And the most recent Census Bureau estimate showed the smallest population decline in decades. Officials predict that next year’s figures will show a population gain.” But he closes his article with a darker perspective, based upon a blog post, “Why I Hate Detroit,” by Eric Thomas, who is black and a partner at a local marketing firm; the post focused on the discouraging situation with the city’s schools, the lack of opportunity for the majority of the city, and what he deemed “the weird way the resurgence in relatively privileged warrens, about 5 percent of the city’s 140 square miles, is seen as a proxy for the city as a whole.”

The Challenge which can pit Democracy against Solvency. Wayne, the small municipality in Wayne County, Michigan near Detroit, now awaits a state takeover in the wake of its voters’ rejection last week of a tax proposal to support police and fire protection. Wayne has struggled for some time to reign in expenses: city expenditures have exceeded revenue by roughly $2 million over the past few years, albeit the city balanced its books for the current fiscal year by draining other funds, including its internal service fund and its OPEB retiree healthcare trust—so that city officials report closing FY2016 with near depletion of the OPEB trust and a $400,000 draw on general operating reserves. The city expects to draw another $1.6 million of general fund balance in FY’2017 and estimates likely depletion of fund balance by December of 2017. Aside from property taxes, Michigan’s municipalities are mainly dependent on Michigan’s state revenue sharing program—a program which itself has consistently declined since 1998. Indeed, over the last 14 years, Michigan has led the nation in cuts to its municipalities of state aid. According to the US Census Bureau, from 2002 to 2012, municipal revenue from state sources increased in 45 states and the average increase was 48.1%; in Michigan, municipal revenue from state sources declined 56.9% from 2002 to 2012, according to a Michigan Municipal League report.

Now it appears the state is likely to reap what it has sowed: it appears more and more certain the state will take over the city—an action which the city’s elected leaders fear—especially in the wake of the human and fiscal devastation that came from the state’s takeover in Flint—a state action which has left a residue of state governmental fear and distrust. Indeed, despite the steep fiscal hole in which the small city finds itself, Wayne’s Mayor, Susan Rowe, after watching the extraordinary damage to human health and safety as well as fiscal distress caused by Flint’s state-appointed Emergency Manager (who later, inexplicably, was named by the Governor as Emergency Manager for the Detroit Public Schools) vowed she would never put her residents at the mercy of the state. However, in the wake of last February’s Moody’s downgrade, Mayor Rowe not unreasonably fears her city will become the first municipality since Flint to be placed in state emergency financial management. She notes: “I think it will happen, and I think it would be devastating…People tell us to live within our means, but we can’t shut the doors. We can’t say we’re not going to have police or fire or trash collection…We just have no way of bringing in any more money.”

Michigan’s emergency manager program, under which the Governor appoints a manager with extensive powers over a troubled municipality or school district that meets certain criteria, was initiated in 1990: to date, 11 Michigan municipalities and three school districts have had such emergency managers appointed. Unsurprisingly, it is a program that has drawn sharp criticism not only for its usurpation of local authority, but, in the wake of Flint and the Detroit Public Schools, it has, increasingly, been perceived as a damaging failure with signal unaccountability.

Nevertheless, for Mayor Rowe, a retiree whose munificent mayoral salary is $3,000 annually, the squeeze is almost unimaginable: assessed housing values cratered during the recession and revenue has plunged more than 40 percent since 2010. The city lost a property-tax appeal with Ford Motor Co., its largest employer. State limitations prevent local property taxes from increasing at a rate higher than annual inflation. If anything, the tipping point came last week when the city’s voters resoundingly rejected a tax increase that would have enabled the city to share public-safety expenses with two other municipalities. Mayor Rowe said people are frustrated, and she does not hold the vote against them. Now, because the small city lost its investment grade rating, its costs of borrowing seemingly are adding insult to fiscal injury: Moody’s has downgraded Wayne two notches to Ba1 from Baa2 and its general obligation limited tax (GOLT) rating fell to Ba2 from Baa3, with the credit rating agency noting: “The downgrade of the city’s issuer rating to Ba1 reflects a very stressed financial position given an ongoing structural imbalance with few remaining options for increasing revenues or cutting expenditures.” Further, Moody’s placed the ratings under review for a further downgrade pending developments related to the city’s request for a financial review by the state—a request made in the wake of the Aug. 2nd rejection of the city’s proposal to join a suburban authority and levy a tax to fund fire and rescue services. On the first item, the municipality’s voters rejected the proposal to join the South Macomb Oakland Regional Services Authority, which was created by the cities of Eastpointe and Hazel Park in 2015. On the second, voters rejected a millage proposal which would have raised approximately $5 million to help the city’s strained liquidity: the anticipated revenues had the citizens adopted the measure would have enabled Wayne to stabilize its general fund balance according to Moody’s; however, as Mayor Rowe noted: “Our residents do not want to give us the revenue we requested. Now, this is the avenue we have to take.”

9-1-1. If the state declares a fiscal emergency, the city will have four options:

  • a consent agreement with the state,
  • appointment of an emergency manager by the state,
  • request for approval to file Chapter 9 municipal bankruptcy, or
  • mediated negotiation among creditors.

Mayor Rowe has indicated that that city will likely opt for appointment of an emergency manager.

The review for a further downgrade is tied to the decision to seek a state review. “A declaration of fiscal emergency would give the city greater power to cut expenditures, it also increases the risk that the city may seek to restructure its debt,” according to Moody’s.

Can A City Go Back into Municipal Bankruptcy?


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eBlog, 8/15/16

In this morning’s eBlog, we consider the un-considerable: could a city fall back into municipal bankruptcy? While this eBlog has, since the completion of our MacArthur Foundation studies on Stockton, San Bernardino, Detroit, Chicago, Pittsburgh, and Baltimore, focused on the steep roads into and out of municipal bankruptcy—and the perilous paths into potential municipal bankruptcy in Atlantic City, Opa-locka, East Cleveland, etc.; we have also followed the rhythmic efforts of retired U.S. Bankruptcy Judge Steven Rhodes who, having graduated from overseeing the City of Detroit’s entry into and exit out of chapter 9 now is at the helm seeking to steer the Detroit Public Schools on a course to avoid chapter 9—a course itself critically intertwined with Detroit’s long-term solvency.

We have also sought to compare and contrast the different ways different municipalities have gone through quite different paths into and out of municipal bankruptcy (Federal law provides for municipal bankruptcy—if authorized under state law—something only 18 of the states have authorized—but no two states have the same provisions: there are remarkable differences in these respective state laws.) Detroit emerged in 16 months under a Gubernatorially imposed emergency manager—where the Mayor and Council were barred from any vestige of governance; Jefferson County emerged in about two years (with some provisions still under appeal), but with the County Board remaining in charge of governance throughout; Central Falls, Rhode Island—where the Governor appointed a state emergency manager—who barred the sitting Mayor and Council from City Hall—emerged from chapter 9 in just over a year; Stockton emerged from its chapter 9 in two and a half years; and San Bernardino appears on the verge of exiting chapter 9 as early as next month—the longest municipal bankruptcy in U.S. history, just about four years.

Never in U.S. history, however, has there been an instance of a city emerging from chapter 9 municipal bankruptcy—but then going back into municipal bankruptcy. Now, as we watch events in Stockton (see below), there is apprehension that November’s municipal elections could reverse the city’s fiscal course. Thus, we begin to consider, with untoward events happening in Stockton, post-municipal bankruptcy elections: how does a city choose a course for the future? Here, the choices seem bleak in Stockton—the city nearly one full year out of bankruptcy.

Post Municipal Bankruptcy Blues II.  Stockton Mayor Anthony Silva, who—in the midst of his re-election campaign, for the city’s first post-chapter 9 election—was arrested last week and had become engulfed in a major separate controversy the week before that, sent an email to District Attorney Tori Verber Salazar last Friday alleging that his challenger, Councilmember Michael Tubbs, and four other Council Members violated California open meeting laws when they held a joint news conference one week ago outside City Hall. Mayor Silva, who is out on $20,000 bail, publicly posted his allegation of a violation of California’s Ralph M. Brown Act on Facebook: “This letter is to call your attention to what I believe was a substantial violation of a central provision of the Ralph M. Brown Act, one which may jeopardize the finality of the action taken by the City of Stockton. (The Ralph M. Brown Act, §54950, is California’s open meeting law. The law’s intent is that the actions of public commissions, boards and councils in California be taken openly and that their deliberations be conducted openly.) The speakers described an ‘approval in concept,’ or some other reflection of a consensus that the body would act or not act in a certain manner in the future.” City Attorney John Luebberke, however, last week stated he does not believe the news conference convened by Councilman/candidate Tubbs (a news conference also attended by City Council members Michael Blower, Elbert Holman, Susan Lofthus and Dan Wright) was in violation of the Brown Act. At the press conference Councilman/candidate Tubbs noted: “This press conference was one in which the members of the Council sought to assure citizens and residents that the council was still functioning. Maybe there was some political grandstanding involved — I’ll leave that to others to decide — but even if that’s the case that does not run afoul of the Brown Act.”

With the citizens of Stockton less than 12 weeks from the first post-bankruptcy municipal elections, it appears the intervening weeks risk being consumed with charges and countercharges (two weeks ago, it was revealed that a long-missing gun owned by Mayor Silva had been recovered by police two months earlier—a gun which had been determined to have been the murder weapon in the unsolved killing of 13-year-old Rayshawn “Ray Ray” Harris in late February of 2015 in south Stockton—a gun which Mayor Silva had not reported stolen until one month after the victim was slain—even though the Mayor acknowledged last week he knew the gun was missing at least two weeks before Mr. Harris’ death.) The District Attorney’s Office has noted that Mayor Silva has not cooperated with investigators since the gun’s recovery two months ago—a claim which Mayor Silva has strongly disputed. In addition, as we have previously noted, last Thursday authorities had arrested Mayor Silva in Amador County on charges he illegally recorded teens while playing strip poker last summer at a youth camp he runs. A 16-year-old boy is reported to have been one of multiple naked teens. Mayor Silva is scheduled for his first court appearance Thursday afternoon.

Crime and public safety were critical public policy issues both in Stockton’s collapse into municipal bankruptcy—and emerging. Indeed, the annual budget for FY 2014-2015 was developed with an emphasis on Mayor Silva’s proposed budget priorities and City Council’s post-municipal bankruptcy strategic goals and targeted areas. The Mayor had identified three priorities in his Proposed Budget Direction, and the City Council had held a strategic planning session which identified seven target areas expanding upon the Mayor’s overall direction: Public Safety, Fiscal Sustainability, Organizational Development, Economic Development, Youth, Infrastructure, and Public Relations/Image—goals and target areas intended to renew and expand upon Council’s previous Strategic Priorities. There was a clear recognition that high rates of crime had to be addressed as part of any successful plan of debt adjustment. Today, however, Stockton crime statistics report an overall upward trend in crime based on data from 14 years with violent crime increasing and property crime increasing. Based on this trend, the crime rate in Stockton for 2016 is expected to be higher than in 2012—a year when the city violent crime rate for Stockton was higher than the national violent crime rate average by 300.11% and the city property crime rate in Stockton was higher than the national property crime rate average by 79.21%. The campaign news from Stockton can only be described as grim, mayhap portending the first-ever reversion back into municipal bankruptcy.

What Comes After Municipal Bankruptcy?

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eBlog, 8/12/16

In this morning’s eBlog, we consider post municipal bankruptcy elections: how does a city choose a course for the future? Here, the choices seem bleak in Stockton—the city nearly one full year out of bankruptcy. Then we consider the ongoing state-local challenges between the State of New Jersey and Atlantic City—a city not far from the knife edge of insolvency, followed by the rhythmic efforts of retired U.S. Bankruptcy Judge Steven Rhodes to get the new Detroit Public Schools the best possible leaders in his current position as the state-appointed emergency manager. Then we observe the process underway in Florida with a state oversight effort to assess the options for the future of Opa-locka. Finally, we consider the dire water situation in East Cleveland—the small city awaiting a determination of its fate: whether it will be chapter 9 municipal bankruptcy or incorporation into the City of Cleveland.

Post Municipal Bankruptcy Blues.  For a city emerging from municipal bankruptcy, the road from insolvency to recovery can be steep. In Stockton, California, where the frieze above the steps of City Hall reads: “To inspire a nobler civic life: to fulfill justice; to serve the people,” the question for the city’s voters appears to be a dispiriting choice in November’s mayoral election—the city’s first post municipal bankruptcy election—one pitting incumbent and just arrested Mayor Anthony Silva against a young City Councilmember with a pending DUI charge, Michael Tubbs. The election will mark the city’s first post-bankruptcy election in the wake of last year’s decision by U.S. Bankruptcy Judge Christopher Klein a year ago in February to approve the city’s plan of debt adjustment—a plan approved in the wake of the municipality’s success in securing voter support for more than a 10 percent increase in the local sales tax—with the bulk of the new revenues dedicated to address apprehensions about crime. The approved debt-adjustment plan provided for reductions in public employee benefits, funding cuts for police and fire, and reduced payments to the city’s creditors. (City Council members had already unanimously approved personnel cuts two years prior to the filing, but further cuts were made to parks, library, and senior programs.) The plan of debt adjustment approved by Judge Klein also eliminated post-retirement health care benefits valued at a minimum of $300 million, but continued payments for retirement benefits via the California Public Employees’ Retirement System (CalPERS). Now, in the first post-municipal bankruptcy municipal election, it seems key issues confronting voters are the city’s crime rate (albeit, now the two candidates’ crime rates)—and the question with regard to how the court-approved plan of debt adjustment will shape elections for mayor and three of six city council seats on November 8th. Mayoral candidates Mayor Anthony Silva and challenger Michael Tubbs have and are sparring over the best post-bankruptcy direction for the city.

Mayor Silva won election to his current office in November 2012 by tying his opponent to the consequences of the city’s bankruptcy, criticizing his predecessor for a year of high crime rates and failure to properly oversee the city’s finances. After securing election, he pressed for an increase in sales taxes to pay for law enforcement costs, which ultimately reached the ballot in November 2013 after adjustments by the city council. In the wake of the city’s emergence from chapter 9, Mayor Silva has promoted plans for new business development in Stockton to generate more revenue: he proposed a $170 million development plan in December of last year, a plan which included expanding the airport for international flights and spending $72 million to add arcades and rides on the river walk. The Mayor also proposed opening abandoned warehouses as shelters for the homeless. But his road to re-election took a significant detour earlier this month in the wake of his arrest at his Mayor’s Youth Camp in Silver Lake, California, where he was charged with playing strip poker with naked teenagers, providing alcohol to minors, and illegally recording the activities that are said to have occurred at last year’s camp in the wee hours of Aug. 7, 2015. That morning five unmarked law enforcement vehicles rolled onto the rustic grounds of the Stockton Municipal Camp at about 9:30 a.m.: two of them parked so they would block the one-lane road to enter and exit the site: Thirty minutes later, without incident, Mayor Silva was driven away by officers in one of the unmarked vehicles and taken to the Amador County Jail, where he was booked by Amador County sheriff’s officers. His first court date is scheduled for next week at Amador County Superior Court: the Amador County District Attorney’s Office and the FBI are the investigating agencies. The arrest does not bode well for his re-election campaign.

In the Clear? Moody’s credit ratings agency has reported that the state loan to Atlantic City should offer the requisite time for the Mayor and Council to draft a five-year budget plan which would avert not only municipal bankruptcy, but also a threatened state takeover. Moody’s yesterday wrote that the $73 million state loan is a positive for the city’s junk credit rating—and that, absent the loan, there would have been a high probability the city would default on its debt in the next few months. Moody’s, being more characteristically moody, however, added that the planned Trump Taj Mahal closure could further cut the amount of tax revenues to the municipality, writing that the city’s fiscal condition remains dire because of its dependence on the shrinking casino industry.

More Schooling on Insolvency. Retired U.S. bankruptcy Judge and current Detroit Public Schools state-appointed emergency manager Steven Rhodes yesterday reported he had met with Michigan Gov. Rick Snyder this week and had agreed to extend his contract as transition manager of the DPS until January—the date the new school board is to be sworn in. Judge Rhodes defined the election of the new board as “the single most critical issue” DPS confronts this fall, noting whomever is elected must come to the position committed to transforming DPS into a system that will not only adapt to the future needs of its 45,000 students and earn the support of the region’s businesses, but also its religious and civic communities—important enough indeed that the Judge spent two hours in a special session with 53 of the 68 candidates vying for office to fill them in on DPS’ condition and answer questions about the job. Judge Rhodes plans more such sessions. In addition, he has encouraged all of the candidates to get training on how to be an effective school board member. Judge Rhodes has been direct and clear about what those elected should bring to the table: “It may feel simplistic, but it’s the kind of stuff that can’t be emphasized enough…The No. 1 thing is commitment to serve as a trustee for the benefit of the district’s students. What that means is there’s no other agenda, no vision on higher office, no self-aggrandizement. It’s got to be all about the district’s students.” He added that new board members must recognize that DPS is not just for college-bound children, but for those whose future vocations can be taught outside of universities, and he said the board must find ways “to compensate teachers whose dedication and sacrifice.” They must commit themselves to excellence in academics and commit to hiring a permanent superintendent with that same commitment, while at the same time recognizing the diverse needs and interests of each of DPS’s 45,000-plus students: “They’re not all going to college. Many have special needs. Some want to do career technical education. Our academic offerings need to be as diverse as our student interests.” Judge Rhodes also warned that education “does not begin when the child walks into the school door and end when the child leaves the school door: “there has to be a continuing commitment to parental engagement in the educational process.”

Interestingly the electric rhythm guitar player of the famous Indubitable Equivalents also noted that he expects new DPS board members to respect the Financial Review Commission, a state entity created as part of the city’s plan of debt adjustment, but which has created some resentment in the city—stating: “This will be challenging, but the FRC is a fact of life, and they really do want to help…The nature of the FRC’s role and responsibilities in relation to DPSCD (Detroit Public Schools Community District) is going to be a matter of continuing discussion and negotiation. The school board…will continue that conversation. There will not be an emergency manager per se, but the enabling legislation for the Financial Review Commission is subject to interpretation, and that will take time to work out. There is a view which says it isn’t just to balance budgets and books of record, but no one over there wants to be involved in day-to-day academic issues.” Finally, Judge Rhodes urged that the new board would need to work with Mayor Mike Duggan—urging an end to what he called the “us versus them” mentality, both in and outside the city of Detroit: “[The school board has to figure out a way to break through that on both sides of the city boundaries.” Finally, and appropriately, he noted new school board members must be willing to learn: “Being an effective school board member is an art. It has to be learned so there has to be a commitment to learn how to do that.”

Oompapa. A south Florida public administrator, Merrett Stierheim, will determine if Opa-locka is solvent for a Florida state-appointed panel Gov. Rick Scott appointed last June 1st in the wake of the city’s entering into an agreement seeking the state’s assistance, which does not include funding. The panel is charged with overseeing the small municipality’s finances and to report upon the “gravity of the situation faced by Opa-locka,” as well as to oversee the hiring of a Finance Director for the city, according to Melinda Miguel, Chair of the Financial Emergency Board. Ms. Miguel made the announcement yesterday after noting the state appointed emergency board had received incomplete financial reports and requests for payments without details or invoices. Ms. Stierheim comes to the challenge with a background of experience with other fiscally challenged municipalities, including Miami in the late 1990’s, when it was in the midst of a corruption scandal and a financial crisis that led then-Gov. Lawton Chiles to appoint a Financial Emergency Board. Chair Miguel, who is Gov. Scott’s chief inspector general, yesterday said Opa-locka Mayor Myra Taylor had approached her for a second time requesting that the state provide the city a bridge loan, such as an advance on revenue-sharing funds—the city is apprehensive it could run out of cash before the end of next month. In addition to those fiscal and legal challenges, the SEC has opened an inquiry into whether proper disclosures were made about the city’s fiscal state, and there are federal corruption investigations ongoing: last week, the former city manager, David Chiverton, and former public works supervisor, Gregory Harris, were arrested and charged with taking kickbacks from business owners and individuals. Ms. Miguel mentioned the arrests in her opening statement, noting the city’s residents and taxpayers have “paid a steep price” by placing trust in their government officials, adding: “The citizens of Opa-locka have a right to know that their money is well spent…Instead, we see corruption. We must continue on our search for the truth.”

A Different Kind of Water Problem than Flint. East Cleveland, Ohio, a small municipality awaiting a decision whether it may file for chapter 9 municipal bankruptcy or become a part of the City of Cleveland is running out of time. Now hard decisions—such as whether to cut off water service or pay a $30,000 delinquent water bill owed to Cleveland Municipal Water Department demonstrate the fiscal chaos in the city—and bring back recollections of one of the most difficult issues in Detroit’s municipal bankruptcy: how does a city balance insolvency against the public health and safety issues of water? In this instance, East Cleveland opted to pay most of the massive balanced owed, a bill for which prior nonpayment had caused Cleveland’s water department to shut down water service to some East Cleveland properties. Now East Cleveland Council President Thomas Wheeler reports the city is facing an additional one million dollar shortfall in 2017.

Have We Learned Any Lessons from Flint?

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eBlog, 8/11/16

In this morning’s eBlog, we consider the fiscally bleak Detroit public school system—a system critical to the Motor City’s fiscal and human future—but where the state intervention appears to be unravelling; we then consider the related governance challenge with regard to municipalities and school systems at fiscal risk—specifically, in the wake of the state-imposed emergency manager in Flint, Michigan (a manager who was then, for still inexplicable reasons named by Michigan’s Governor to be the emergency manager for Detroit’s public school system)—an imposition that led to severe threats not just to the city’s own authority and fiscal future—but also to grave threats to human lives. We ask: is the state’s emergency manager law a state law which ought to be reconsidered? What lessons have been learned from Flint? Then we return to Puerto Rico with a brief look at this a.m.’s marvelous blog from the New York Federal Reserve—albeit, the report is hardly optimistic about the human capital so critical to Puerto Rico’s long-term economy.

Getting School on Debt. Michigan’s plan to bail out Detroit Public Schools (DPS) is putting debt backed by state aid at risk of falling into default if the bonds are not refinanced by mid-October, with S&P Global Ratings having, in the wake of two downgrades since June, reduced DPS’s debt to below a passing grade. In response, a DPS spokeswoman reports: “Detroit Public Schools and the Michigan Department of Treasury are in the process of refinancing the bonds with a goal to have this completed prior to Oct. 1, 2016.” The state restructuring of DPS’ finances diverts state payments on about $370 million of bonds sold in 2011 and 2012 to the new, debt-free Detroit school district—a district which bears no responsibility for the old debt; however, according to S&P, Michigan still lacks a plan to refinance the bonds. Absent such a plan, S&P warns, it would likely consider the DPS debt a distressed exchange that would merit being labeled as a default. The emerging, failing grade comes in the wake of the state legislature’s partisan decision to adopt a $617 million rescue plan under which, as we have previously noted, the Detroit district was split in two: a new, debt-free Detroit Public Schools Community District is set to open next month with about 46,000 students in 97 schools, while the debt of the former DPS is to be paid off with a combination of state aid and collections from the district’s 18-mill non-homestead levy, which is collected on businesses and second homes.

The new statute means the existing public school district is responsible to continue to pay off the district’s old debt, including about $2.2 billion of municipal bonds and pension liabilities from property taxes—with the state providing approximately $467 million to help repay the old debt: the Michigan Finance Authority, which issued the debt cut by S&P for DPS, is putting together a plan to refinance the debt by October 20th. However, since Michigan Governor Rick Snyder signed the bill, S&P has downgraded the bonds—which Moody’s has moodily graded Caa1 with a negative outlook. S&P notes its assessment is based “on the lack of a formal plan regarding bondholder repayment terms” and the elimination of one of the pledged revenue streams in the fiscal year that begins next October. The restructuring needs to be in place before October 20th when state aid moves to the new district, leaving the bonds rated with S&P with just the property-tax pledge—changes which S&P notes have created uncertainty for bondholders, raising the risk of default, with analyst Jane Ridley noting: “If they don’t get it refinanced, the loss of the revenue stream is going to seriously erode bondholder value,” adding last week that separating the state-aid payments from the bonds creates a more than 50 percent chance the debt could be cut again in the next two months, warning that it could use its D, or default category, if repayment is less than originally promised: “As October approaches and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment…If the actions taken through this process provide bondholders with anything less than the full promise of the original bonds, it is likely to be considered a distressed exchange and therefore a default under our criteria.” Note, as we have previously written, the partisan vote in the legislature to create two school districts in the city—one a public school district, the other charter schools—had already raised apprehensions about a recipe for failure. The new fiscal warning from S&P hardly heralds academic or fiscal high grades. The harder academic question is whether the bleak fiscal warnings could serve to deter young families with children from wanting to move to Detroit.

Not in Like Flint. Detroit’s fiscally devastated public schools and Flint’s life-threatening drinking water crisis were connected by two critical factors: the state’s Emergency Manager law—here specifically by one such manager who, after desperately failing in Flint, somehow was inexplicably appointed by Gov. Snyder to be the DPS emergency manager—and deep state cuts in revenue sharing. Coming out of the Great Recession, which disproportionately hammered assessed property values—values still deeply distressed in many Michigan municipalities—state tax limitations and reduced revenue sharing have left a legacy of municipal bankruptcy and fiscal instability at the local level. Reductions in aid to Michigan municipalities (cities, villages, and townships) totaled $5.5 billion between 1998 and 2016, according to a May report from Great Lakes Economic Consultants. It means that despite a nationwide recovery, Michigan municipalities are still struggling with depressed assessed housing values, tax limitations, and cuts in state revenue-sharing. It means the state still has the authority to preempt local democracy through the imposition of an Emergency Manager—an imposition which, unlike in Detroit, in the cases of Flint and the Detroit Public Schools have caused fiscal and severe physical harm.

The state actions have also left a residue of governmental distrust: indeed, despite deep cuts in spending, Wayne voters last week rejected a tax proposal to support police and fire protection. (Wayne is a small city of under 18,000 in Wayne County west of Detroit.) Wayne’s Mayor, Susan Rowe, after watching the extraordinary damage to human health and safety as well as fiscal distress caused by Flint’s state-appointed Emergency Manager vowed she would never put her residents at the mercy of the state. However, in the wake of last February’s Moody’s downgrade, Mayor Rowe not unreasonably fears her city will become the first municipality since Flint to be placed in state emergency financial management. She notes: “I think it will happen, and I think it would be devastating…People tell us to live within our means, but we can’t shut the doors. We can’t say we’re not going to have police or fire or trash collection…We just have no way of bringing in any more money.” For Mayor Rowe, a retiree whose munificent mayoral salary is $3,000 annually, the squeeze is almost unimaginable: assessed housing values cratered during the recession and revenue has plunged more than 40 percent since 2010. The city lost a property-tax appeal with Ford Motor Co., its largest employer. State limitations prevent local property taxes from increasing at a rate higher than annual inflation. If anything, the tipping point came last week when the city’s voters resoundingly rejected a tax increase that would have enabled the city to share public-safety expenses with two other municipalities. Mayor Rowe said people are frustrated, and she does not hold the vote against them.

Have There Been Lessons Learned from Flint? The terrible harm to human life and fiscal stability in Flint caused by the former state appointed emergency manager has increased political pressure to repeal the state’s law—one of the most preemptive of municipal authority in the nation, under which the state is authorized to intervene in fiscally struggling municipalities and school districts, and preempt all municipal or county authority, as well as to break union contracts if negotiations fail—or, as Michigan Municipal League COO Tony Minghine describes it: “They go in, they come out, and the cities become a less desirable place to live: The only tool they’re given is to cut.” (When first enacted in 1990, the state’s emergency manager law was designed as an early warning system to ward off defaults and bankruptcies. Under Gov. Rick Snyder, who was first elected in 2010, the pace of state intervention increased as the recession eroded local tax revenue, especially from property taxes. Unsurprisingly, voters repealed the measure in 2012 after forcing a statewide ballot question. Less than two months later, however, the legislature approved a similar law with a provision that preempted state democracy by barring it from being overturned by a referendum.)

Indeed, the experience under the state law, to date, is less than inspiring: most of the dozen Michigan towns and cities which have been under the direction of an emergency manager continue to lose population; their poverty rates remain between 20 percent and nearly 50 percent, according to U.S. Census data. In Flint, garbage collection stopped at the beginning of this month after a contract dispute. Or, as former State Treasurer Robert Kleine puts it: “The law’s pretty much a Band-Aid, because it never really addresses the fundamental issue; it’s mostly a lack of tax base.” My colleague and mentor in the field of municipal bankruptcy Jim Spiotto notes Michigan might be better served changing its law to allow local officials input into decision-making and reducing the “heavy hand” of an emergency manager: “Local government is representative of the people, and you don’t want to lose sight of that.”

What state voters also do not appear losing sight of is the exceptional damage the state oversight has wrought in Flint: Six state employees were criminally charged last month, accused of trying to cover up the poisoning of Flint’s drinking water. Three other government workers were charged earlier. Gov. Snyder publicly apologized last March for the contamination, but claimed the law has been a success. He said he would be open to improving the law, but not repealing it; state Sen. Jim Ananich (D-Flint) has a different perspective: “It’s a failure-driven model…They leave you with a city that’s impossible to run.” Indeed, as Eric Scorsone, who directs the Center for Local Government Finance and Policy at Michigan State University, puts it, there is no clear path forward, short of increasing state revenue-sharing and other assistance.

What to Do about a Declining Economy? Moody’s warns that the surge in Zika cases in Puerto Rico may harm the U.S. territory’s already declining economy—one already projected to decline by 2 percent in FY2017, with the warning coming as the crack New York Federal Reserve squad of Rajashri Chakrabarti, Giacomo De Giorgi, and Rachel Schuh, writing for the Fed’s Blog Liberty Street Economics, this morning noted, with regard to human capital, that: “The test results for both PISA and NAEP are alarming, and even more so given the migration trajectories out of Puerto Rico. The very slow growth of Puerto Rico seemed puzzling given previous estimates of the quantity of human capital—as proxied by the number of years of schooling—and its contribution to growth. However, this slow economic growth is in fact consistent with the evidence on the quality of human capital highlighted in this blog. As a caveat, the test scores cited here reflect the human capital of students who have not yet entered the labor force, so this analysis relies on the assumption that these poor educational outcomes persist. It seems clear, nonetheless, that boosting educational performance can help Puerto Rico substantially in establishing future economic growth.”