Can Municipal Insolvency Affect Neighboring Municipalities?

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eBlog, 9/23/16

In this morning’s eBlog, we consider the chances of getting high in San Bernardino—the city in municipal bankruptcy longer than any other in U.S. history—but now on the verge not only of elections, but also ballot questions, including the legalization of marijuana—something which could, presumably not only make citizens high, but mayhap municipal revenues higher. Then we veer East to Michigan, where the complex issues imposed by the legislature on the virtually insolvent Detroit Public Schools, via the creation of a state-imposed charter and public school system has created threatening credit problems—as well as governance problems for the Detroit Public Schools. Finally, we head further East to the small Virginia municipality of Petersburg, famous as a site during the Civil War where, in nine months of trench war in which vastly outnumbered confederate forces warded off Gen. Ulysses S. Grant, the city was the essential supply line to Confederate Commander Robert E. Lee. Today, the historic city faces a fiscal rather than armed challenge—it is virtually insolvent—and, as we note—because now, as then, the small city is connected to other cities in the state, its insolvency could have ever widening fiscal ramifications–or fiscal contagion– for other municipalities…We wonder what the tipping point into insolvency might be–or when the Commonwealth of Virginia might feel compelled to act.  

Electing a Higher Future for Post-Chapter 9 San Bernardino? San Bernardino City Manager Mark Scott has informed the City Council he will not allow any of the traditional election forums or local election broadcasts unless a majority of the council members vote to undo his decision—even as Councilman Henry Nickel responded he considered that to be a decision which ought to be determined by the city’s elected leaders, calling it a “suppression of the First Amendment rights of the public to hear items that are relevant to our government: It is not up to the unilateral decision of the city manager to deviate substantially from prior practice and policy until and unless it has been presented by the City Council, which has the policy-making power both under the current charter and the (proposed) new city charter.” In his email to his colleagues on the Council, he emphasized, however, that even though the Council could reinstate election events and broadcasts, there might be a conflict of interest: “Just so you know, UNLESS directed otherwise by Council action, we have told those who have asked that we will NOT allow use of the Council Chamber for any election events or taping between now and the November election, nor will we be doing any local election broadcasts on Channel 3,” acknowledging that even though this “has been done in the past,” it just seemed “smart to stay completely arms’ length” this election year. The discussion came as city officials worked on and endorsed a measure that would replace San Bernardino’s city charter and another that would allow marijuana in the city—with the first measure, Measure L, to allow voters to replace the existing city charter with a new one created by a charter review committee—which, by a 6-1 vote, Council adopted. The manager’s announcement would also—unless reversed—mean there would be no public discussion about getting high on the three pending marijuana legalization measures—where all three have been authored by advocates of legalization and none representing the view that dispensaries should remain illegal—in part because only one counter-argument is printed against each measure for the November ballot, and — by random chance — City Clerk Gigi Hanna had selected arguments against each measure that had been filed by proponents of competing measures. (If more than one measure receives more than 50 percent of the vote, whichever measure gets the most “yes” votes will become law…) The city has had a medical marijuana ban on its books since 2007, but enforcement was ineffective, with dispensaries dotting the city in open defiance. City officials had attempted on several occasions to replace the ban with what they hoped would be a more effective regulatory framework; however, they were preempted last July when the City Council determined resident Vincent Guzman had secured sufficient signatures that legally his measure had to be put November’s ballot—Measure O—with Mr. Guzman having written: “Measure O is the only one to generate significant tax revenue for San Bernardino: It funds both enforcement and general city services. It reduces the number of dispensaries and eliminates them near our schools and homes.” In his advocacy, Mr. Guzman cited a study by economist Beau Whitney estimating that Measure O [“The San Bernardino Regulate Marijuana Act of 2016”] would allow an outside special interest group to establish a marijuana monopoly in the city,” the argument against contends: “Measure O circumvents local control and does not comply with our local general plan and land use policies.” Nevertheless, proponents claim the measure, if adopted, would generate between $19.5 million and $24.8 million in revenue for San Bernardino in addition to 2,750 jobs. Opening the doors to getting municipally high stimulated a second group to secure sufficient signatures to place its own, alternative regulation plan on the ballot—all of which led the City Council to draft its own version, which would require separate licenses for marijuana cultivation, marketing, testing, distribution, and dispensaries; application fees and enforcement fees would be set yearly to match the cost of providing the service. Under the city’s version, dispensaries could only be within industrial zones, and could not be within 600 feet of a school, park, library or recreation center, nor within 100 feet of a residential zone or religious center; and no two dispensaries could be within 1,000 feet of each other, amounting to a significant limitation on the number of dispensaries, according to Graham, the primary author of the initiative. The city’s proposal is on the ballot as Measure P, and it’s supported by the same group that opposed Measure O: “Measure P is the only medical marijuana ordinance supported and put on the ballot by our local elected officials,” the group’s ballot statement reads:  “Measure P was drafted by the city attorney’s office – and not by marijuana industry special interest groups.” The argument says Measure P is the only one that would retain local control, “including a potential ban.” In the alphabetic voting guide for readers, the other citizen-submitted ballot item, Measure N, an anti-marijuana measure supported by several City Council members, who claim that even though the harmful effects of marijuana are well-documented, the proponents continue to advocate for its legalization: “The legalization experiment in Colorado and Washington is a disaster. The ‘Regulate and Control’ policy attempt has failed, yielding huge increases in underage and adult use, and drugged driving.” That opposition is signed by Mayor Davis and City Council Members Jim Mulvihill, Fred Shorett, and Virginia Marquez.

Under the math, if voters provide more than 50 percent on the city’s drafted measure and more “yes” votes than either of the citizen-submitted initiatives, the municipally-written measure would become law. Moreover, unlike those initiatives, it could be modified as state law regarding marijuana changes, which led the City Council to put the medical marijuana regulation on the ballot in a 5-2 vote—albeit reluctantly, in some cases. The most vocal advocate of the ban has been Mayor Carey Davis, who gave extensive evidence that marijuana legalization has been harmful in Colorado and suggested it would stretch thin an already understaffed police department. But the city had no legal alternative to putting the two citizen initiatives on the ballot — other than immediately adopting the framework they suggest, and Deputy City Attorney Steven Graham said that was not an option, either, for the measure that imposed a tax on marijuana. (California law forbids cities from passing a tax without a vote of the public. It is unclear legally whether a voter-originated tax can pass in an election at which Council Members are not up for a vote, which is the case in November according to Counselor Graham.) The City-drafted measure would require:

  • separate licenses for marijuana cultivation, marketing, testing, distribution, and dispensaries;
  • application fees and enforcement fees would be set yearly to match the cost of providing the service;
  • Dispensaries could only be within industrial zones, and could not be within 600 feet of a school, park, library or recreation center, nor within 100 feet of a residential zone or religious center;
  • And no two dispensaries could be within 1,000 feet of each other, amounting to a significant limitation on the number of dispensaries, said Graham, the primary author of the initiative.

Protecting Tomorrow’s Leaders? The Michigan Finance Authority has approved a plan to issue $235 million of debt to refund some Detroit Public Schools (DPS) municipal bonds before they lose their state aid backing at the end of this month, approving an authorizing resolution for the issuance to be backed solely by an existing 18-mill non-homestead levy—with the fabulous Matt Fabian of Municipal Market Analytics warning the “investor will be at risk if the levy produced by the 18 mills continues to decline or is disrupted by, for example, assessment appeals in the future. Some kind of state backstop or protection would be needed to make this investment grade.” The Michigan Finance Authority has not, however, provided any indication with regard to whether it intends to backstop the bond refunding, albeit the Authority has stated the outstanding bonds will be refunded and defeased at par “plus any applicable redemption premium and accrued interest,” suggesting that those bondholders will be made whole—albeit with the uncertainty remaining that should the state-aid pledge evaporate or shift, there would be likely adverse credit quality implications, because of the shift to entire reliance on a property tax pledge. The outstanding bonds lost their investment grade status amid uncertainty about the state planned to restructure the debt after the state-ordered restructuring of Detroit Public Schools took effect July 1. The state assistance is set to shift to the state-mandated newly formed public school district that operates schools while the former district remains intact only to collect taxes and repay bonds. Under the provisions, the operating levy of roughly $50 million to $60 million per year will go to pay off debt service on the refunding bonds, which will retire 2011 and 2012 DPS state aid bonds with a final maturity of 2023. The state Finance Authority intends to issue the refunding bonds on or before the end of this month—the date when the current, outstanding bonds lose their state aid backing because, without students, the old district will no longer be able to collect state aid. The pending switch could cause fiscal shivers: the existing municipal bonds had initially carried S&P A ratings because of the state aid pledge; they also carried a limited tax general obligation pledge—albeit DPS’s underlying GO credit ratings are junk level—or, in school parlance, D-, with S&P last week having demoted the credit rating from B to BB-minus, warning that with the October deadline looming closer and ushering in the new fiscal year, there is increasing doubt with regard to whether bondholders would receive full and timely payment on their bonds—with the new drop the third such comparable action over the last three months—moodily moving in some syncopation with Moody’s, which recently revised the outlook on DPS’ Caa1 issuer rating to “developing” from “negative.”

What External Event Can Force a Municipality into Chapter 9 Bankruptcy? The City of Petersburg, the small, independent city in Virginia, a municipality on the steep edge of insolvency, and in which there seems little indication the Virginia legislature is poised to step in, a new shoe has dropped that would seem likely to precipitate a defining event: the South Central Wastewater Authority has filed a $1.2 million lawsuit over unpaid sewer bills, noting the has failed to pay for any wastewater services since May: “The City of Petersburg charges its residents for wastewater service. Under the service agreement between South Central and the city, these fees should be used to pay the costs of that service, including the costs of having the wastewater treated by South Central.” The suit seeks the appointment of a receiver to make sure the more than $1 million the authority says it is owed is not spent by the city on other things. According to the suit, filed in Petersburg Circuit Court, the authority is not only seeking to recover past-due amounts, but also requesting that the court appoint a receiver to supervise Petersburg’s billing and collection of wastewater fees from its residents, writing: “South Central seeks this appointment to ensure that the money is used for its intended purposes and that residents continue to receive the wastewater service they pay for…South Central is particularly dependent upon the regular and timely payment by the city of Petersburg, whose share of these costs account for more than half of South Central’s budget for operations and maintenance.” In addition to seeking payment of about $1.5 million in overdue service charges and penalties, South Central said it was filing the lawsuit “to request the court to appoint a receiver to supervise Petersburg’s billing and collection of wastewater fees from its residents. South Central seeks this appointment to ensure that the money is used for its intended purposes and that residents continue to receive the wastewater service they pay for,” adding that while the utility “appreciates the difficult financial circumstances the city of Petersburg is experiencing. Nevertheless, efforts to resolve the arrearages have been unsuccessful and — if left unaddressed — threaten the continued operation of South Central and the finances of the other member localities and their residents.” That is, there is a fiscal interdependence, and insolvency by Petersburg could have consequences for other Virginia public authorities, including the other four Virginia municipalities served by South Central. For its part, the city had billed residents for the service, but has not been remitting the fees to the CVWMA — a situation similar to what prompted South Central’s lawsuit. In response, interim Petersburg City Attorney Mark Flynn unsurprisingly noted the city “is disappointed that the authority has chosen to file a lawsuit,” adding that the “city is and has been working with the authority to resolve the amounts it owes: The lawsuit does not help the city and the authority in achieving resolution for the city’s obligations. As the authority and citizens know, the City Council and management have been working to resolve the city’s financial difficulties.” Moreover, for the municipality, in which a recent state audit of its finances determined the city is facing a $12 million budget gap in the current fiscal year while dealing with nearly $19 million in unpaid bills, including those to South Central, the suit threatens to unravel efforts by city officials to close the budget gap and repay unpaid obligations—efforts including its approval earlier this month of a series of austerity measures aimed at freeing up much-needed cash flow, including tax increases, pay cuts of city staff members, and the closing of the city’s three museums.

When it Rains, it Pours. The suit could hardly have come at a more inopportune time—as Rochelle Small-Toney, a deputy city manager in Fayetteville, North Carolina, has just removed herself out of the competition to be the city’s next city manager, according to Petersburg Mayor W. Howard Myers III—she had been in the city last week as City Council convened to hire a city manager in the midst of an ongoing financial crisis; however, Council Members were unable to agree on a hire and adjourned the meeting without taking action after local media reported that Ms. Small-Toney had resigned in the midst of a financial controversy from a previous position as city manager of Savannah, Georgia; ergo, the Council had voted unanimously to hire an executive search firm to conduct a national search for a new city manager—albeit with what funds unclear. Indeed, when asked by Ward 4 Councilman Brian Moore what funding source could be tapped to pay for the search, he was advised to talk with the city’s Finance Department and negotiate the best possible financial arrangement: Petersburg has been operating without a permanent city manager since early last March, when William E. Johnson III was fired amid the municipality’s emerging fiscal crisis and a furor over the mishandling of a plan to replace water meters throughout the city. Former City Attorney Brian Telfair resigned at the same time for health reasons. Dironna Moore Belton, who was the general manager of Petersburg Area Transit at the time, was named shortly afterward as interim city manager. At the same time, Mark Flynn of the Richmond law firm of Woodley & Flynn was contracted to act as interim city attorney. Ms. Belton is one of the applicants for the permanent city manager position; however, it is unclear whether she and the other candidates will have to re-apply if a search firm is hired.

What Is the Role of A State When a Municipality Nears Insolvency?

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eBlog, 9/21/16

In this morning’s eBlog, we consider the difficult challenge for a state when one of its municipalities is on the brink of insolvency—and where its authority to file for chapter 9 municipal bankruptcy is uncertain—and the kinds of hard questions about its future. As we are noting, part of fiscal federalism involves signal differences in laws and authorities—on a state-by-state basis, with regard to options for municipalities on the brim of insolvency. Because only 18 states specifically provide authority to municipalities, that leaves a signal void in the remaining states and leaves those states in more awkward positions when a municipality within its borders likely will not be able, on its own, to avoid insolvency. Mayhap appropriately, we then delve further south to Jefferson County, Alabama, where the state’s actions were the critical lever to pushing the county into municipal bankruptcy—and where the County’s appeal efforts have been stymied for years.  

What Is a State to Do? The Richmond Free Press this morning ran an editorial about the foundering and near insolvency of the City of Petersburg, the small, independent city in Virginia, where the median income for a household in the city is under $29,000, and where the City Council this month adopted most of a package of tax increases and budget cuts, but rejected a proposal to close one of the city’s four fire stations—and where, it seems clear, the Commonwealth of Virginia is most unlikely to offer any fiscal relief. At heart, we noted, the Council was really holding a hearing about whether the small municipality has a future. Thus, this a.m., the editorial noted: “We remember the chilling headline in a New York newspaper when the Big Apple was facing bankruptcy…It was 1975, and President Gerald Ford declared he would veto any legislation calling for a federal bailout of New York City. The headline in the New York Daily News — ‘FORD TO CITY: DROP DEAD.’” Then the editorial noted that when Virginia Governor Terry McAuliffe was asked by a reporter earlier this month if there were plans to propose legislation to help financially stricken Petersburg, “the governor’s reply was a tad bit better than President Ford’s to New York City, but it may have had the same result: ‘I’m sure we’re not going to see legislation proposed to deal with this situation…We have no authority to give any money. But we do have the authority to send our team in to help get the books together, get the finances together…Our team has been here, they’ve been staying here, and we want to give all the assistance we can.’” However, as the editorial notes: “Clearly, the city needs technical experts in a lot of fields, including the state’s audit team. But it needs a lot more than that.”

The editorial adds that the state audit team learned, and disclosed in a public meeting, that Petersburg’s fiscal abyss was deeper hole than originally thought: it had about $14 million in unpaid bills as of June 30th: the auditors determined the municipality had been spending far more than it was bringing in nearly every year since 2012; the state team determined the city was planning to sink even deeper into red ink in its FY’2017 budget: that approved budget calls for the city to spend $12.5 million more than it expects to receive in revenue. The state team provided recommendations, such as pursue short-term financing to help meet immediate needs, but, as the editorial notes, “But so far, that has not worked, because the city is in such bad fiscal condition.” The editorial notes that state lawmakers, including House Majority Leader Kirk Cox (R-Colonial Heights), said a bailout for Petersburg was highly unlikely, in part, because it would set a bad precedent.

Caught between a Rock & a Hard Place: Virginia does not specifically authorize its municipal entities to file a petition for chapter 9 municipal bankruptcy—and only one entity, has ever attempted to file—an economic development authority, but its case was dismissed in 2001. The Virginia Constitution bars a city or town from incurring debt exceeding 10 percent of the assessed value of properties within its boundaries (see Virginia Constitution, article VII, §10); ergo, the editorial asks: “So what’s Petersburg to do?” Noting that the small municipality has slashed spending, including a $3.4 million cut to the city’s public schools budget, cut pay for its employees, frozen hiring, and raised taxes on everything from cigarettes, meals and lodging taxes to personal property taxes to bring the current budget into balance—but left untouched most of the $14 million in debt from previous years.”

It seems like a hot potato for Virginia lawmakers who appear to be apprehensive that the small municipality’s fiscal crisis could create a precedent for other cities, towns, or counties to seek bailouts from the state, or, as Del. R. Steven Landes (R-Augusta), Chairman of a newly formed task force studying the impact of fiscally stressed localities on the state and how to deal with such situations, put it: “I just hope we are not heading down this road where we are digging the state into a hole.” The Delegate’s question came in the wake of this week’s report to the legislature by Virginia’s Secretary of Finance Richard D. Brown on the city’s struggle to regain its financial footing, before members of the House of Delegates Appropriations Committee—even as Delegate Landes said that as far as he understood, Petersburg has not asked the state for financial help during its crisis. The audit findings presented by Sec. Brown had identified a projected $12 million budget deficit for the current fiscal year and found that by last June 30th, Petersburg had incurred $18.8 million in bills, of which $14.7 million were mostly unpaid obligations to “external entities” such as contractors, vendors, and a state agency. Secretary Brown alerted the committee to a looming October 1st payment deadline for $1.4 million owed to the Virginia Resources Authority, a premier funding source for local government infrastructure financing through bond and loan programs, reporting this was “a principal-and-interest payment,” adding that he would have to “take certain steps to intercept aid” from the state to Petersburg to make sure those payments are made, adding: “The state has never had to do that with our localities, so I think that this is a precedent that nobody really wants. That is why it is important for us to not even have to go there,” he testified, assuring the Committee members his department has provided “only technical assistance” to the city.

Unsurprisingly, some of the state lawmakers disbelieve the state’s aid has stopped there. Delegate Landes followed up: “You mentioned that we are not providing any direct financial assistance, but indirectly we are: Your time, your staff’s time and all these state agencies that are helping them move forward, it cost the Commonwealth money. Other localities have gotten into difficulties, and I don’t recall that we provided this kind of involvement…We are trying to help Petersburg on the school end, providing additional resources for their school system, and if they can’t pay their bills, how are they going to pay their superintendent?” Committee Chairman S. Chris Jones (R-Suffolk), said that although he agreed with Secretary Brown’s decision to intervene, he was concerned about Petersburg’s outstanding obligations to the Virginia Resources Authority: “We got to figure out what change we need to make from a state’s perspective; we need to protect ourselves…VRA debt can be an issue that can affect our bottom line. We cannot allow that to occur. It’s very distressing when you see what has occurred, and hopefully (the city) will continue to try to — in a very straightforward way — to deal with the issues.” To which, Secretary Brown responded that “[W]e wrestle with it, too,” but ultimately the state is tied to the city in terms of some of the debt obligations: “We can run, but we can’t hide from that. From my standpoint, it is better to be involved and help them over that hump…I have no intention to stay there long-term, but the consequences for the Commonwealth by not being involved, at this stage in the game with this critical Oct. 1 time frame on debt, is probably much worse than being involved.”

What is a County to do? The federal appeals court overseeing Jefferson County’s chapter 9 municipal bankruptcy appeal has, once again, delayed the case, with the previously scheduled December 12th arguments deferred by the 11th U.S. Court of Appeals to an uncertain future date—still another in a long, and increasingly costly, series of delays—of which there have been six so far this year. Jefferson County Commission President Jimmie Stephens noted: “It is very unusual to have this many delays, and I have expressed my frustration to counsel…Our team is ready and eager to have our day in court. We stand at their mercy.” Commission President Stephens has not addressed questions with regard to what these judicial delays are costing the county. Jefferson County exited Chapter 9 bankruptcy in December 2013, after selling $1.8 billion in sewer warrants to write down $1.4 billion of the sewer system’s debt. The plan of adjustment gives bondholders the right to go back to the bankruptcy court if the county fails to enact sewer system rate increases that service the debt. After the plan was implemented, a group of local ratepayers filed an appeal before U.S. District Judge Sharon Blackburn in the Northern District of Alabama. County attorneys argued that the appeal should be struck down, saying that it became moot when the plan of adjustment was implemented with the sale of new debt. In October 2014, Judge Blackburn rejected the county’s mootness contention, and ruled that she could consider the constitutionality of the plan—a decision Jefferson County appealed, and on which it now seems waiting for Godot.  

 

The State-Local Governing Challenge When Children Are at Risk

eBlog, 9/19/16

In this morning’s eBlog, we consider the state actions in Michigan to preempt the authority of the City of Flint to seek judicial redress over the state’s actions with regard to the drinking water crisis so toxic to its youngest and most vulnerable children. Those actions appear to have increased pressure to address the state’s so-called Emergency manager law—a unique state law that allows the Governor to, in effect, suspend democracy in the state’s local governments and public school districts—an action that was critical to Detroit’s exit from the largest municipal bankruptcy in U.S. history, but which has had devastating impacts on the youngest and most innocent children of the City of Flint. Then we look south to Detroit, where, even though the school year is underway, the fiscal math for the old Detroit Public Schools is in the D-minus range. What does that augur for the city’s fiscal future? Finally, we look at the most awkward governance challenges created by East Cleveland’s proposal to merge with the City of Cleveland—especially given the profound silence and absence of the State of Ohio in any of these discussions—much less in response to East Cleveland’s long-standing request for authority to file for chapter 9 municipal bankruptcy.

Preempting a City Governance & Ability to Protect the Health & Safety of its Residents. Days after Flint Mayor Karen Weaver served notice that her devastated city might file a lawsuit against the State of Michigan over the state-precipitated Flint drinking water crisis, the state responded by preempting her municipality’s authority to sue under its residual authority via a 4-0 vote of the five-member Receivership Transition Advisory Board, whose members are appointed by Gov. Rick Snyder—with the Board in this instance moving precipitously to amend its rules to prevent the city from filing suit absent permission from the very same state-appointed  board. (The lead contamination occurred when Flint, a city of nearly 100,000, which was under state emergency management, switched in 2014 from the metropolitan Detroit utility system to a temporary water source, the Flint River. State environmental regulators mistakenly said not to add a chemical to prevent lead from leaching out of old pipes, and state-appointed emergency managers came under scrutiny for blocking a switch back for financial reasons. Indeed, the Michigan emergency management law was blamed as a factor in the Flint disaster by Michigan Governor Rick Snyder’s own task force.) Thus, even though the board’s name would seem to suggest it has an “advisory” rather than preemptive role, the panel is authorized under state law to provide the Michigan Treasury Department powers under the emergency manager law to rein in Flint in the event the Mayor and City Council began spending beyond the city’s means. It does not appear that the intent of the law, as adopted, was to broadly preempt the elected leaders of Flint from making decisions with regard to the health and safety of the city’s youngest children.

Nevertheless, Gov. Rick Snyder’s administration quietly acted to ensure the state could not be sued by Flint over the city’s lead-contaminated water crisis by requiring that ligation be approved by an oversight board stacked with gubernatorial appointees. The Flint Receivership Transition Advisory Board passed a resolution last March 31st preempting Flint’s authority to initiate litigation without first getting approval from the board. The Board, rather than truly being advisory, was imposed by the state to have veto power on budgets after the city’s last emergency manager, imposed by Governor Rick Snyder, departed in April of last year. Unsurprisingly the panel’s members are all appointees of Gov. Snyder. Thus, the state appointed board acted swiftly to preempt the city’s authority some seven days after the City of Flint filed a notice in the Michigan Court of Claims preserving its right to sue the state over the city’s water becoming contaminated with toxic lead. Indeed. On the 31st, at the Flint Receivership Transition Advisory Board, Chairman Frederick Headen, a Michigan Treasury Department official, portrayed the resolution as being needed to give City Council more oversight of lawsuit settlements, according to a transcript of the meeting—making only a passing mention with regard to the provision mandating the Board’s approval in order for Flint to be able to file lawsuits, stating: “The purpose of the proposed RTAB resolution this afternoon is to restore, basically, the role which the City Council would otherwise have had, meaning that such litigation could not be settled without first being approved by City Council,” Mr. Headen said, according to the transcript, as he emphasized the new checks and balances being put in place for setting litigation. Indeed, according to Mr. Headen, the RTAB resolution eliminating the city administrator’s “complete decision-making authority” helped restore mayoral authority and powers, not restrict them: “We had started on a path of restoring powers to the locally elected the government,” Mr. Headen said yesterday: “We had given the Mayor back a lot of her authority to hire and fire employees. This was revising that (Ambrose) order to bring city council, the mayor in — and the board.”

Unsurprisingly, however, the state board members did not discuss the resolution’s broader preemption of municipal authority to protect the health and safety of the city’s families, much less the state imposition of control with regard to the rights of the municipality to seek any legal redress through the state’s judicial branch of government. Chair Headen, mayhap with his fingers crossed behind his back, added: “And, of course, the most important feature would, again, be the restoration of the City Council’s role in this process.” (Jerry Ambrose, Flint’s last state-appointed emergency manager, left a tightly-written city ordinance in place in April 2015 which granted his deputy, Natasha Henderson, considerable control over city finances and management, even though Flint City Hall was no longer technically being run by the state.)

Flint Mayor Karen Weaver’s filing with the Michigan Court of Claims cited “grossly negligent oversight” by the Michigan Department of Environmental Quality, whose decisions not to require corrosion control chemicals led to lead leaching into the drinking water and “irreversible” damage to municipal infrastructure—and, of course, an especially toxic threat to the city’s youngest children. For her part, Mayor Weaver this week graciously acknowledged how disappointed she was to learn of “the timing” of the state preemption—and its implications for local authority and governance, adding she hoped that barring the city from suing without state approval was a signal of the state’s commitment “to ensure the City of Flint is indemnified for any and all debts and obligations imposed upon the city while under state control.” Of course, in the wake of the state’s former Director with the Michigan Department of Health and Human Services plea of no contest this week to a misdemeanor charge in the Flint water crisis, it might be difficult to trust the state’s commitment. The municipality’s chief legal officer, Stacy Erwin Oakes, made clear Flint “cannot know” what motivated the state preemption, adding, however: “the timing of the amendment speaks for itself…Previously, the city administrator had discretionary authority regarding litigation, now the city, including but not limited to the chief legal officer, can’t  initiate litigation and assert its rights in court without state approval, through the (advisory board)…Whether the…resolution stripping the city’s authority would survive a direct legal challenge is a question for another day. In the meantime, the city continues to be significantly under state control, even after the departure of the Emergency Manager, and while accumulating significant obligations as a result of decisions made by, and/or at the direction of emergency managers.”

The state emergency manager—created Flint drinking water crisis has been costly to the state: to its reputation, to its governance vis-à-vis the enormous fiscal disparities amongst its municipalities, and now to its fisc: Michigan has allocated $234 million toward the public health emergency that exposed children to lead and has been linked to a deadly Legionnaires’ disease outbreak. Notwithstanding, Michigan has been slow, from a governance perspective, to act constructively, and now, it seems likely that no major action in the legislature will occur until next year to address the existing state law which essentially allows for the state appointment of virtual dictators to displace elected local officials—and policies essential to public health and safety. In the meantime, in the four months since a bicameral, Republican-led legislative committee concluded hearings about the Flint drinking water crisis, the Michigan legislature has yet to issue a report or to make policy recommendations; half a year has elapsed since a bipartisan task force named by Gov. Snyder made recommendations. Gov. Snyder has apologized for his administration’s mistakes which both caused and exacerbated the disaster; he claims he is addressing many of the items administratively, while others will require legislative approval. He has tasked a separate group to focus on response and recovery efforts, a group which includes Mayor Weaver and outsiders who uncovered the lead contamination last September—a group which forwarded its recommendations to Gov. Snyder three weeks ago. And his administration has proposed the nation’s toughest lead-testing rules, the replacement of all underground lead service pipes in the state, and the mandatory disclosure of lead plumbing in home sales and rental contracts.

All of which would seem at odds with his administration’s efforts to preempt such essential municipal rights. Unsurprisingly, Democrats in the state legislature this week intend to introduce legislation to create an ombudsman to hear the concerns of residents living in communities under emergency management. Another bill would lower the “action level” for lead in drinking water from 15 parts per billion — the federal standard — to 10 in 2021 and 5 in 2027. Other legislation expected would propose phasing out emergency managers while leaving intact other options for debt-impacted local governments and school districts.

School Days. As Chuck Berry sang: “Up in the mornin’ and out to school; the teacher is teachin’ the Golden Rule: American history and practical math…” but with October 1 fast approaching, a signal transition begins: that is the day the old Detroit Public Schools—which owns the school system’s legacy debt—will lose access to state aid pledged to support DPS’ 2011 and 2012 municipal bonds; however, with little information on the blackboard, or indeed anywhere, from Michigan, S&P got out its red pencil and downgraded yet once gain DPS’ debt deeper into junk status to B. For the system’s struggling algebra students, this increases the risk of payment interruption, especially due to the lack, according to the rating agency, of communicated progress on the state-desired refinancing of the state aid debt. S&P notes there is either a lack of urgency to address investor concerns (unsurprising) or challenges in crafting a take-out financing for the debt (even more unsurprising, noting the Michigan Legislature’s post-Detroit-bankruptcy fatigue with “bailing out” the city and related entities). Nevertheless, our respected colleague at Municipal Market Analytics still expect the state will come through by the deadline: they write: “[T]here is too much downside in allowing those bonds to even partially default. Still, the surrounding events serve as a reminder of the state’s willingness to punish investors for its own political mistakes.”

To Merge or Not to Merge: That is the Question. Cleveland, Ohio City Council President Kevin Kelley yesterday said he must figure out how to go about studying the pros and cons of annexing neighboring East Cleveland, but do so without locking Cleveland into a plan to do so. In a session of a Committee of the Whole, Councilmember Kelley told his colleagues that Cleveland must be certain it wants to move forward with a merger before formally expressing that interest through legislation, because, he noted: there is a point of no return after which Cleveland could no longer opt out. Presumably what his colleagues already understand is that such negotiations would be awkward—especially in the wake—as we have reported—of the uncertain, and constantly evolving, position of East Cleveland’s Mayor and Council—which last month, in an emergency meeting voted to adopt new legislation appointing three representatives to a commission impaneled to negotiate the annexation, replacing one passed earlier this summer, which was tied to such an ill-advised list of conditions that Councilmember Kelley rejected them out of hand terming the proposal a “non-starter.” So, under Ohio law, round two means the Mayor and Council in East Cleveland, in the wake of a brief public notice and comment period, will propose legislation to the Cleveland City Council, triggering, under Ohio’s laws, a thirty-day period during which the Mayor and Council will have to decide if they also will adopt legislation appointing three panelists to such a commission—note: if the 30 days lapse without action, the initiative must start all over with the circulation of new signature petitions. If Cleveland’s Council were to agree, the two municipalities would be legally committed to submitting some kind of plan for annexation. Indeed, failure to do so would warrant a judge’s intervention, Councilmember Kelley yesterday advised his colleagues: The commission would have 120 days to draft the terms of the merger that East Cleveland voters would consider. Cleveland City Council members would then either vote to adopt the plan or send the issue to the ballot.

From the City of Cleveland’s perspective, Councilmember Kelley suggested there ought to be three principles to guide Cleveland in its decision on whether to pursue the merger: There must be a funding source available – preferably from the State of Ohio, the missing player so far—to cover East Cleveland’s capital needs; East Cleveland’s millions of dollars in liabilities – which include debt, court judgments, and settlements – must be resolved; and such a merger must not harm Cleveland’s current residents, or the level of essential public services they receive, in any way. These are three “oughts” which the Councilmember advised his colleagues on which he had yet to receive any reassurances. Indeed, he made clear he does not believe 30 days—or even 120 days—will be sufficient time in which to determine the cost of addressing East Cleveland’s infrastructure problems, much less which government would be responsible to address them—making it more likely than not that Cleveland will not act in this thirty-day grace period, and await the answers to its questions—or, just maybe—the here-to-date absent State of Ohio will exercise some fiscal responsibility. In the nonce, Councilman Kelley suggested or proposed the assembling of an ad hoc committee made up of engineers, lawyers, and municipal finance experts to do an in-depth fiscal analysis of East Cleveland’s assets and liabilities before the Council formally appoints commission members and commits Cleveland to any final determination vis-à-vis annexation.

Amongst his colleagues, there have been mixed responses: some last night indicated they still support annexation and see a benefit to both cities; others, including Councilmembers Michael Polensek and TJ Dow, passed along constituents’ apprehensions that a merger would siphon resources and services from Cleveland neighborhoods. Indeed, with November looming, Councilman Matt Zone said this is a time when the Council should be “laser-focused” on the November election and a ballot which includes a school levy renewal, a proposed city income tax increase, and a City Charter amendment related to police reform.

 

Leadership–and the Lack thereof: what Might that Mean vis-a-vis Municipal Bankruptcy?

eBlog, 9/19/16

In this morning’s eBlog, we consider the green light the Detroit Financial Review has given to Detroit, before heading east to the capital city of Hartford—a city fighting to avert municipal bankruptcy, and then veering south to Opa-Locka, Florida: a city that seems doomed to go into chapter 9 municipal bankruptcy. It seems that severe municipal fiscal distress can arise from human failures—and recovery, as we are experiencing in Detroit—can arise from great leadership. Distress—and municipal insolvency—can arise from great, state-blessed inequity: an issue in Michigan, California, Kansas, Connecticut, etc. Even though the cost of municipal bankruptcy can far outweigh what it would have cost for states to address fiscal disparities—as the recent court decision in Connecticut found: “[T]he state’s current system ‘has left rich school districts to flourish and poor school districts to founder,’ betraying its promise in the State Constitution to give children a ‘fair opportunity for an elementary and secondary school education.’”  

A Major Step Forward. The Detroit Financial Review Commission, created as part of Detroit’s exit from the largest municipal bankruptcy in the nation’s history to oversee the city’s recovery, has declared the city was in substantial compliance with the terms of its plan of debt adjustment—both a measure of the hard work of Mayor Mike Duggan, but also a key step towards the city’s exit from state oversight. The thumbs up came in the wake of certification of an audit of the city’s FY2015 budget; the city faces comparable hurdles over its next two, consecutive fiscal years in order to remove the state yoke under the provisions of the Michigan law adopted two years ago to govern the city’s path out of chapter 9 municipal bankruptcy. Unsurprisingly, Mayor Duggan described the Good Housekeeping state seal of approval as a “major step forward: The Legislature set up a process that said the city can earn its way out of direct financial oversight, and it has to balance the budgets and pay its bills for three straight years…I couldn’t be more pleased that we have one year down, and we’ve been certified as being fully compliant with the statute.” The Motor City has posted surpluses in recent years on the city’s nearly $1 billion annual budget; the city administration projects a balanced FY2017 budget: the prize: If the city stays within budget, and an audit is certified in 2018, Detroit could end nearly a decade of direct oversight and go into a period when the review commission would be mostly dormant, freeing the city to operate without getting required approval from the review commission on matters including budgets, budget amendments, contracts, and labor agreements.

That does not, however, mean the long road to recovery is easy: Detroit still faces fiscal challenges in the long-term, including a $490-million shortfall in pension funding the city will have to pay in the coming years—a challenge which, if unmet, would retrigger a renewed three-year period of state oversight by the review commission. Nevertheless, State Treasurer Nick Khouri congratulated city officials for getting to this point, calling it a “milestone for the city,” even as Detroit CFO John Hill noted the declaration starts the clock on the city’s path back to local control: “It really does put us on a path to the city having almost full control of its financial operations…”It’s a major milestone and an acknowledgement that we’ve made a lot of progress.”

Staving Off Chapter 9 Municipal Bankruptcy. First-term Hartford, Connecticut Mayor Luke Bonin is scrambling to fix what he terms a “broken system” and keep his city out of chapter 9 municipal bankruptcy, albeit noting that he is confronted by a broken system that relies 100 percent on property taxes for local revenue—or, as he puts it: “You’ve got a city that just doesn’t have enough property. It’s got less property than the surrounding towns.” His uphill challenge as Mayor of the state’s capital city has garnered the support of the Connecticut Conference of Municipalities, whose Executive Director, Kevin Maloney, is supporting by seeking a regional approach through his organization: “Work cooperatively with the suburban towns to find where services can be shared and be done regionally, which would not only reduce the cost for the cities, but hopefully would reduce the costs for suburban towns.” The Conference has already created a panel with leaders from larger cities such as the chapter 9-experienced city of Bridgeport, as well as New Haven and Waterbury, as well as suburbs that will meet monthly to discuss this option. For his part, Mayor Bronin notes: “This isn’t about Hartford’s success or failure. This is about Connecticut’s success or failures, the region’s success or failure. You can’t be a suburb of nowhere, you can’t be a region or a growing state if you’ve got a city that’s in crisis.” Nevertheless, the challenge will be great: Hartford confronts nearly a $50 million hole in this year’s budget, which has left city services at a bare minimum, and the city could face another $50 million deficit next year. Or, as the mayor puts it: “You can’t cut your way to growth and you can’t tax your way to growth.” Indeed, it seems that he recognizes the city will be unable to get out of its fiscal debts by itself; consequently, he is pressing for regional tax and revenue measures to help Connecticut’s cities, urging the Connecticut Municipal Finance Advisory Commission: “We do not see a way the city of Hartford can avoid projected deficits on our own without some significant reforms at the state and regional levels.” Absent some fiscal assistance, the Mayor warns the state capital could run out of cash before the end of this year: he projects a nearly $23 million deficit in this fiscal year’s budget, but warns the fiscal chasm could more than double by next year—reaching a level of nearly 20% of total expenses by FY2018. Ergo, he suggests, regionalization could stave off municipal bankruptcy: “We want to do everything to avoid that, because I don’t think it would be good for the state of Connecticut; I don’t think would be good for the region, and I don’t think it would be ideal for the city of Hartford.”

Capital Bankruptcy? Hartford, were it to seek chapter 9 municipal bankruptcy, would only be the second state capital in U.S. history to file for municipal bankruptcy—but that earlier effort turned out to be a botched one: the filing, by Pennsylvania’s capital city, Harrisburg, a filing done over the objections of the Mayor, was rejected by the courts as being non-compliant with Pennsylvania’s municipal bankruptcy authority—indeed, five years ago on August 1, 2011, Pennsylvania’s Governor signed into law new legislation that would bar any “City of the Third Class” from filing a chapter 9 petition, specifically referencing Harrisburg. It would also be only the second time a municipality in the state had sought chapter 9 protection: Bridgeport, filed for Chapter 9 bankruptcy in 1991, but a federal judge rejected the filing, because the city did not meet the U.S. Bankruptcy court’s definition of insolvency. Nevertheless, unlike almost every other chapter 9 filing in U.S. history, the effort in Connecticut is unique, because Mayor Bronin and other Connecticut mayors are seeking to craft a legislative package in the state legislature which would lessen reliance on the property tax, and move towards a Denver or St. Paul-Minneapolis type of regional tax—in no small part because Hartford, not unlike other New England capital cities, has less taxable property than several its surrounding suburban cities. According to Moody’s Investors Service, general fund reserves for the three cities range from 0.3% to 3.7% of fiscal 2015 revenues, well below the 12.9% state median for Moody’s-rated cities. Our respected colleagues at Municipal Market Analytics suggest that Hartford could model its regional recovery approach after what Pittsburgh has accomplished, as we noted in our report on the city—but, as MMA put it: “If its problems are left unaddressed, its fiscal position and attractiveness as a regional business center will reasonably continue to decline.” Nevertheless, the Mayor’s road ahead will be steep: His request earlier this year to Connecticut General Assembly oversight panel failed to gain a response—forcing the City Council to approve what the Mayor had deemed a $553 million “doomsday” budget calling for across-the-board service cuts. Municipal debt service, according to Mayor Bronin, spiked more than 50 percent to $31 million this year: it is projected to soar to $61 million by FY2020-21.

It is not that Mayor Bronin is new to this municipal challenge: even though he is a first-year mayor, he has previous experience as former chief counsel to Gov. Daniel Malloy. Mayor Bronin is seeking increased payments in lieu of taxes, regional revenue sharing, ala the Twin Cities or Denver regional area, as well as widening options for local revenue generation—albeit knowing that in a state where Connecticut Superior Court Judge Thomas Moukawsher this month ordered the state to make changes in everything from how its schools are financed to which students are eligible to graduate from high school to how teachers are paid and evaluated, holding that “Connecticut is defaulting on its constitutional duty” to give all children an adequate education, Connecticut is a state here inequality appears to be the norm. Judge Moukawsher’s decision, in response to a lawsuit filed more than a decade ago claiming the state had undercut the allocation of school funding to its poorest district, is certain to require to reconsider nearly every aspect of public school financing—or as long-time Bridgeport Mayor Joseph Ganim put it: “This is a game changer…It’s an indictment of the application of the system, and of the system itself.” Inequity seems to be the rule of thumb in the state—a state where state-local collaboration is a tall order. Nonetheless, Connecticut Comptroller Kevin Lembo notes: “The mayor is on the absolute right track in trying to tie their fates together, but it’s not going to happen just because someone asks for it to happen, and the state is never likely to mandate that…You can look at ways to build partnerships. For example, not driving office parks out to the suburbs by giving the suburban communities a piece of the property tax action when they build downtown.” He added that such partnerships could include communities which are losing population, but have “very sophisticated and high-performing school districts” to attract more children from stressed city school districts. Nevertheless, he also noted the state should examine cities’ books and propose sustainable remedies: “Historically the state has always just thrown money at a perceived problem, less so in the suburbs, more so in the cities…We’ve always solved the short-term problem, and then walked on and dealt with something else.” Finally, he noted, the state has “a couple of more cards to play” to benefit Hartford, including the sale of vacant space—an interesting observation—and one that was of key concern to the nearby capital of Providence as it danced on the edge of municipal bankruptcy, even as nearby Central Falls went into chapter 9. As Comptroller Lembo notes: Connecticut has a “ton of property in Hartford and all over the state. Some producing, some of it is sitting there, just empty office buildings,” leading him to ask: “When was the last time somebody calculated the value of that asset? It may be putting more property back on the tax rolls in Hartford.” Moody’s last week deemed Judge Moukawsher’s ruling a credit positive for Hartford, Bridgeport, and New Haven: “If the court’s ruling holds, we believe funding levels for schools in low-income communities will increase and could occur in two ways: 1) Increased funding could be distributed through a reallocation, where funding is shifted from more affluent municipalities. Or, 2) the state could expand the total pie, increasing spending for some cities while allowing more affluent communities to maintain existing funding levels or receive some increases.”

On the Road to Chapter 9? It seems that municipal bankruptcy can be a product of criminal behavior—certainly a key factor in Detroit’s road to the nation’s largest-ever municipal bankruptcy—or incompetence. It might be that for the small city of Opa-locka, Florida: it is a combination. Now a business owner who worked with the FBI to uncover shakedowns by city officials has, this week, filed suit in federal court claiming he suffered years of what he described as “extortion, coercion, threats and intimidation” which violated his civil rights and right to due process. The owner, Mr. Francisco Zambrana, has laid out details of his efforts to obtain a business license—one which he was never able to gain. In his suit, he describes his version of his encounters with key city officials, including City Commissioner Luis Santiago, and a then-assistant city manager, David Chiverton, claiming each had demanded payoffs for a business license he never received—or, as his complaint cites: “From the onset, Zambrana simply sought to obtain an occupational license…Zambrana would repeatedly tell the city officials and employees who would care to listen that all he wanted to do was work and provide for his family, including teenage son who was battling cancer.” The suit could hardly have arisen at a more awkward moment: the small municipality, under investigation by the state and under the control of a state-appointed financial oversight board, is in the midst of public hearings to develop its FY2017 budget—but unable to pay its current bills. The suit, ergo, can hardly be settled—likely numbering the luckless Mr. Zambrana in a crowd of debtors for some future plan of debt adjustment. In his complaint, Mr. Zambrana described the municipality’s “practice and custom of threatening, intimidating, and extorting individuals” based on national origin to operate a business in the city. The suit adds: “The practice and custom was authorized by policymakers within the city, and it was a widespread practice so permanent and well-settled as to constitute a custom or usage with the force of law.” In this instance, Mr. Zambrana, finding an unresponsive municipality, leapt two levels to the federal government: he went to the Federal Bureau of Investigation and agreed to work with the FBI to uncover the shakedown scheme, an investigation whose findings led to by then City Manager Chiverton to plead guilty to pocketing payoffs. His suit cites the municipality as the sole defendant—likely recognizing the lack of any remote possibility from Mr. Chiverton—and he has requested a jury trial. In the category of fiscal misery loves company, the litigation costs to Opa-Locka’s taxpayers is accruing: the suit follows in the wake of one former City Manager Roy Stephen Shiver filed at the end of last month in U.S. District Court in the wake of receiving permission to so file from the U.S. Equal Employment Opportunity Commission to file a complaint alleging racial discrimination: the suit claims he was defamed by a trumped-up allegation that he accepted a bribe—and that, last November, he was fired without proper cause by city commissioners and the mayor, all of whom are black. Indeed, it was the former city manager who first reported Opa-Locka’s serious financial problems to Gov. Rick Scott just about a year ago—a report which contributed to the state appointment of a state financial oversight board to handle all city expenses, including legal fees. Even as the state ponders action, it will not be alone: the Securities and Exchange Commission has opened an inquiry into some of the city’s bonds, which were issued as its financial condition was severely deteriorating, and the FBI’s investigation is ongoing.

Voting on a Municipality’s Future

 

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eBlog, 9/16/16

In this morning’s eBlog, we consider the upcoming election in San Bernardino on what form of municipal governance the city’s voters want for their post-municipal bankrupt municipality; then we head East to Michigan to listen to Mayor Duggan and ponder on how very perilous and challenging the path out of municipal bankruptcy can be; before heading still farther East to inquire whether Atlantic City even has a future as a city—or will, instead, be taken over by the state. After which, we turn right back around to Ohio—where the fate of East Cleveland is very, very much in question: no one seems to have an answer—and the silence from the State of Ohio has been deafening. Finally, we fly south to the U.S. Territory of Puerto Rico—albeit, really to the nation’s Capitol, as U.S. House and Senate members struggle to consider how federal policies and actions could play a vital role in the island’s long-term economic future.

Voting on a Bankrupt City’s Future. Unlike November’s election farther north in Stockton, where the vote will be over which elected leader the voters will elect to keep that city on the road to recovery, voters in what could be post-chapter 9 San Bernardino will be deciding whether to adopt a new city charter [If approved by a majority of voters Nov. 8, Measure L will replace the existing charter with the 14-page new charter.] under which to operate in the wake of U.S. Bankruptcy Judge Meredith Jury’s upcoming confirmation hearing on October 14th with regard to the decision to approve the city’s plan of debt adjustment—albeit, as San Bernardino City Attorney Gary Saenz yesterday said, the city anticipates receiving a confirmation order from Judge Jury by the end of the year with an effective exit date around March. The municipality’s creditors had been projected to vote on the city’s plan of debt adjustment earlier this month; however, CalPERS and U.S. Bank each filed extensions seeking more time to vote, even as attorneys representing Ambac Assurance Corp., the insurer on $52 million in pension obligation bonds, have voted in favor of the exit plan contingent on finalizing what it called in a court filing “the definitive documents.” Or, as City Attorney Saenz notes: “It is all contingent on how things go…Voting has come in overwhelmingly in support of the plan, which helps with regard to confirmation.” Mr. Saenz added: “We are working on resolving the smaller cases, such as personal injury claimants, trip and falls, and a case involving one of our police officers…The more of those we settle, at this time, helps with respect to confirmation.” With regard to the city’s bigger creditors, he notes that when CalPERS files today, that could be a significant milestone, albeit the huge state retirement agency reached an agreement in substance with San Bernardino more than a year ago; and an agreement with pension bondholders in May. U.S. Bank, which holds several million dollars of commercial paper issued against city buildings, also had previously reached an agreement with the city. With regard to reaching an agreement with the city’s municipal bondholders, Mr. Saenz has previously noted the city was able to offer them 40 percent of what they are owed, rather than the measly one percent it had originally offered—in large part because the agreement also stretches out payments 20 years—an important score, as the city plan of debt adjustment is keenly focused on a long-term plan to make sure it does not make a round trip down the road back into chapter 9—an agreement, too, very much intended to gaining Judge Jury’s affirmation that the city’s pan is both feasible and dependable. Or, as Mr. Saenz notes: “One thing Judge Jury will look at is the feasibility of the confirmation plan…We believe we found a model that is dependable.” The proposed debt adjustment plan pension obligation bond agreement appears to—similar to the outcomes in Central Falls, Detroit, etc.—continue a trend of municipal bondholders faring worse than public pension obligations—albeit the powerful role of CalPERS is profoundly different than in Alabama, Rhode Island, or Michigan. Under the proposed, current proposed plan, Commerzbank Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, agreed to drop their opposition to San Bernardino’s plan of debt adjustment—under the pending resolution, the holders of $50 million in pension obligation bonds will receive payments equal to 40 percent of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.

Thus, in San Bernardino, the future will not be about whether there will be a future, but rather how—and what structure or form of municipal government it will be—or, rather the form of municipal governance. Indeed, last night, John Longville, one leader of the campaign in favor of Measure L, which would repeal San Bernardino’s existing charter and replace it with a new one created by a citizen committee, said such a new charter would promise the way to end decades of destructive political infighting rather than a surrendering of self-government. Mr. Longville, who comes with no small record—he is a former Mayor of Rialto, California Assemblyman, and the current President of the San Bernardino Community College District Board of Trustees that, like other jurisdictions in the region, San Bernardino has had a variety of leaders over the years, and the city has been affected by the same economic blows, including the loss of a major steel plant and a major Air Force Base—but, he pointedly noted, those cities did not file for chapter 9 municipal bankruptcy; in fact, he said they have been thriving, he said: “We see neighboring cities able to function better than we are…It’s just the reality. Some of them quite well. Why is San Bernardino functioning so poorly?” His answer? He told his audience the reason was the city’s 46-page charter first passed in 1905 and amended no less than 135 times since then. It was that history, he noted, which makes it unclear who is responsible for fixing problems and, therefore, breeds arguments.

In contrast, his debate opponent, James Penman, San Bernardino’s City Attorney from 1987 until 2013, countered that if San Bernardino’s charter were responsible for the city’s longest ever municipal bankruptcy, then the city would have gone bankrupt, as other cities did, during the Great Depression. “The city charter is not the reason for the bankruptcy. Poor leadership on the part of certain elected officials and certain appointed officials is the reason we went bankrupt,” pointedly reminding voters of the $4 million general fund reserve San Bernardino maintained when former Mayor Judith Valles left office in 2006,, as he added: “You can’t spend more money than you take in and not go bankrupt.” He told the audience the arguments at City Hall were not with regard to lines of power, but rather over issues officials were elected to address. The culprit, Mr. Penman maintained, has been the new charter’s elimination of elections for city attorney, city clerk, and city treasurer, and to its shifting of some responsibilities from an elected mayor to an unelected city manager: “The new charter takes away your rights and your leadership in electing City Hall,” he said, arguing that it is important those positions be directly responsible to voters, rather than to City Council members who would appoint them under the new charter.

But his opponent countered that in the century since the charter was passed, city government had become too complex to expect elected officials to understand it fully the day they are sworn in: “When I was mayor of Rialto, I was proud of what I did and I think I did a pretty darn good job…But when I first came in there was sure a lot that I didn’t know, and I was glad there was a professional city manager, as there is in almost every city in California.” Interestingly, Mr. Penman countered that following that argument to its logical conclusion would mean the state Legislature should choose the Governor and Congress should choose the President, since running the state and federal government also requires great expertise. He added, moreover, that an elected city attorney helps prevents scandals like those in Bell, Moreno Valley, and Beaumont.

347 miles north of San Bernardino, however, where there will also be elections in November—those elections will not affect Stockton’s city attorney, police chief, city clerk, or auditor: Stockton’s City Council charter review committee last year voted unanimously to reject a proposal by a citizen’s commission that could have given voters the chance to decide if the police chief, clerk, and auditor should have to run for office. Current candidate for re-election, Mayor Anthony Silva, had opposed the recommendations, warning: “Can you imagine getting ready for these upcoming elections (as a mayoral or council candidate) and in the middle of it our own clerk has to go out and start putting up signs for herself and then worry about her own election?…It would be chaos.”

The Hard Road out of Municipal Bankruptcy. Detroit Mayor Mike Duggan yesterday in an address during the third Detroit Homecoming, a special program created to attract ex-Detroiters and investors to come back home praised a recovering municipality from the nation’s largest chapter 9 bankruptcy with a call to entrepreneurs who have left to “come on back home.” Mayor Duggan spoke about improved service delivery, home values, and demolition efforts that are boosting many city communities—even as the Census Bureau reports that the city’s unemployment rate remains the highest in Michigan and newly released U.S. Census estimates rank Detroit the nation’s poorest major city. Mayor Duggan, in a city where the city’s schools are under the control of a state-appointed emergency manager and a state-created dual system of charter versus public schools, added: “The solution to poverty is jobs and making sure that our residents have the education and skills to take those jobs.” The Mayor’s remarks came as part of this long-term effort which began two years ago to help bring more than 300 ex-patriots with ties to Detroit “home” to re-experience the city—an effort which, to date, has resulted in committed investments of more than $260 million in city projects and businesses. Nevertheless, the new Census estimates underline how steep this road to recovery is: the U.S. Census American Community Survey reports that Detroit realized no change in poverty or incomes; an estimated 39.8 percent of its residents are below the poverty line. Nevertheless, as Mayor Duggan noted, a key measure, unemployment, has improved measurably: Detroit’s unemployment rate was 17.8 percent when he took office in two years ago in January; it was 12.5 percent by last July—or, as he put it: “We have 15,000 more jobs today than we did three years ago…Nobody is declaring victory, but we are making progress in a whole lot of neighborhoods in the city, and we have a lot more neighborhoods to go.” Mayor Duggan added, in another key issue to the city’s recovery, that since spring 2014, the city has razed more than 10,500 vacant houses, and is averaging the razing of 150 commercial buildings each year—and the results are encouraging: in some neighborhoods, he said, home sale prices are up more than 50 percent from two years ago.

Mayor Duggan expressed less confidence on the school front, noting he continues to be concerned over the so-called state rescue package for Detroit’s public school district that pays off $467 million in operating debt and provides startup funding for its new debt-free district—a package, however, which created a divided school system of charter and public schools, so that the city lacks uniform standards for all schools—and for all its children: “We’ve got to come back at it. We’ve got to get it fixed.” It is, as the Detroit News has opined: “a major American city where public education, namely the teaching of its young, is corrupted by grasping adults and mismanaged by state bureaucrats who seize control of a system they fail to fix…And not the fact that public education in Detroit, a necessary building block for any functioning democracy, is a disgrace and an indictment. Its recurring incompetence is a disincentive to families with school-aged children, households that form the bedrock of stable communities occupied by taxpayers and law-abiding citizens…The wonder is that it’s taken this long for prosecutors to root out corruption, or for someone to file a civil rights lawsuit against the state and whoever else for the generally deplorable state of Detroit’s public schools…This is a fundamental hurdle. Jobs in Detroit go wanting for Detroiters if their DPS secondary education fails to give them the skills to compete, and if folks refuse to recognize that education also needs the active participation of parents, students, even the business community.” Characteristically moody Moody’s credit rating service clearly shares Mayor Duggan’s apprehensions: the service worries that uncertainty over the future security of Detroit Public Schools state-aid backed bonds, its governance, as well as the poor arithmetic of tax collection issues in the wake of the state restructuring of DPS following the district’s restructuring merit a downgrade from “developing” to “negative,” deep in proverbial in junk territory, albeit advising the rating, like any student’s grade, could move in either direction once various issues tied to the state preemptive restructuring of DPS is resolved, adding that the further uncertainty over the outcome of a restructuring of limited tax state aid revenue bonds is a key concern—and noting that it moodily awaits the toting up of property tax collection trends and the success or failure of the eventual transfer of DPS’ governance from emergency management to a voter-approved Board of Education.

The Future or Un-future of a Great American City. Atlantic City, having now missed its deadline and violated the terms of a $73 million state loan, has asked the state for a “reprieve” on the matter—the deadline was one which required the city to initiate dissolution of its Municipal Utilities Authority—meaning that, as of today, the city is at the mercy of the state, which could ultimately demand immediate repayment of the loan or seize the city’s collateral. One of the terms in the July 29 bridge loan agreement called for the city to dissolve Atlantic Municipal Utilities Authority (ACMUA) by yesterday or use the water authority as collateral in the case of a default—a state demand the City Council has been unwilling to support: ergo, having defaulted under the loan terms, the state could demand immediate repayment of the monies. In a statement Wednesday, Mayor Donald Guardian noted: “Although the September 15 deadline will pass tomorrow without a city council resolution dissolving the MUA or designating it as collateral in case of default, we have asked the state for a reprieve on this because we believe that the MUA will actually be a better part of the overall financial solution if it is kept whole.” For its part, a New Jersey Local Finance Board spokeswoman had responded: “A decision has not been made and the Division is awaiting legal guidance as to its options.” The city had already been moodily downgraded last April, as we have reported, because of the difficult governance situation—a situation in which the city is under a state emergency manager who has been invisible, as well as a governance situation where the MUA is financially independent from the city—a utility estimated by New Jersey Senate President Steve Sweeney (D-Gloucester) at around $100 million—part of the reason Mayor Guardian has made clear, especially given its vital public safety role, that he would like to bring the MUA under city control and opposes privatization or a public-private partnership. The city, to some great extent caught between the rock and hard place of the Governor and the legislature, had averted a default in late May when the legislature approved a rescue package giving the city 150 days in which to deliver an acceptable five-year financial turnaround plan; however, if the plan is not approved by the early November deadline, state intervention kicks in with New Jersey’s Local Finance Board then empowered to alter debt and municipal contracts—that is, a different plan than insisted upon by Gov. Chris Christie. Indeed, on the 150 day calendar, Mayor Guardian notes: “Our 150-day plan is moving forward quickly, as we have some of the best in brightest minds in the country working on our behalf to solve this problem…We just need the time to finish the plan and to present it publicly. In the end, we think this will be the best plan to move Atlantic City forward while at the same time maintaining our sovereignty and decision-making rights now held by locally elected leaders.”

Governance & A City’s Future. East Cleveland, Ohio Mayor Gary Norton will face a recall vote in December, one that comes at a time of perilously depleted city coffers and a thick layer of political tension; so too will City Council President Tom Wheeler—or, as Mayor Norton notes: “This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” The small municipality, still, like Godot, awaiting a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, and awaiting potential negotiations from the neighboring City of Cleveland whether there would be a willingness to negotiate its incorporation into Cleveland, now also awaits the decisions of its citizens in November’s election—an election with a $25,000 price tag the city can ill afford.

A U.S. Territory’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico has been meeting with federal agencies and gathering input from some 335 organizations and individuals as it works to develop recommendations with regard to how to address the U.S. territory’s struggling economy—that is a wholly different group than the PROMESA oversight board (Chair Sen. Orrin Hatch (R-Utah), Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), and Reps. Pedro Pierluisi (Puerto Rico), Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y.) —one charged here by Congress to release a report by the end of the year on the impediments in current federal law and programs to economic growth in Puerto Rico along with recommended changes which could spur sustainable long-term economic growth, increase job creation, reduce child poverty, and attract investment to the U.S. territory. In its first joint release, the task force noted: “Residents of Puerto Rico and their families face numerous challenges to economic growth along with many dimensions affected by federal law and programs, including health care, government finances, economic stagnation, population loss, and sectoral inefficiencies…[We] are actively working to arrive at a consensus in order to provide Congress with findings and recommendations as called for under PROMESA.” The task force will continue accepting submissions from individuals until the middle of next month, having extended its previous deadline of September 2nd; the task force also said in its report that its members have been working with the Federal Reserve Bank of New York, which oversees Puerto Rico in the Federal Reserve System, and which recently provided a superb update at the City University of New York session convened to identify useful economic and financial developments in Puerto Rico and to analyze the Commonwealth’s economy and finances. The New York Fed has been providing not only useful reports and insights, but also blogs—and is now aiming to explore ways that federal statistical products used to measure economic and financial activity in the states could be applied to Puerto Rico. The task force is expecting help from the Joint Committee on Taxation (JCT), the Congressional Budget Office, and the Library of Congress’s Congressional Research Service. JCT will provide a briefing in the near future to discuss federal tax policy as it applies to Puerto Rico. The eight-member body will also consult with Puerto Rico’s legislative assembly, its Department of Economic Development and Commerce, as well as representatives of the private sector on the island.

Re-Thinking Municipalites’ Post-Bankruptcy Futures

eBlog, 9/14/16

In this morning’s eBlog, we consider the foundering fiscal state of the Detroit Public School system—a system so vital to the city’s long-term fiscal recovery; then we try to prep for next November’s elections in San Bernardino—its first post-bankruptcy election—when citizens will determine the city’s future charter. Can a city remake itself? Then we head east to another question about remaking of a city: for insolvent East Cleveland—and adjacent Cleveland, would consolidation make better sense than municipal bankruptcy? After that, we jet south to Dade County, Florida to ask what will be next – might it be municipal bankruptcy? – for the small municipality in Dade County of Opa-locka. Finally, we consider the inexcusably delayed state of the implementation of the new PROMESA law Congress adopted last June.

An Unpassing Grade? For the second time in two months, the Detroit Public Schools’ state-backed debt credit rating has been downgraded—raising apprehensions that the bonds may not be refinanced by the start of the state’s new fiscal year—with the schools already open, and that new fiscal year just 16 days away.  S&P Global Ratings wrote it had cut its rating on bonds held by the former Detroit public school district from BB to B for those issued in 2011 and BB- to B for those issued in 2012, noting: “The downgrade is based on the lack of a finalized plan regarding bondholder repayment terms following the district’s recent restructuring, and the resultant elimination of a pledged revenue stream at the end of the state’s fiscal year.” In her report, S&P credit analyst Jane Ridley noted: “Although the Michigan Finance Authority’s intent is to take out the existing debt at full value, in our view, as October looms closer and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment on their bonds.” Danelle Gittus, a spokeswoman for the Michigan Department of Treasury, attributed the downgrade to the $617 million rescue package: “The focus of the downgrade is on bonds that are being refinanced as part of the recent DPS legislation…This downgrade does not impact the ability to refinance the bonds. The Michigan Finance Authority continues to work on a financing plan to refund the bonds, which is expected to be completed later this month. Once the bonds are refunded, the rating becomes irrelevant.” What is, however, relevant, is that S&P has now displayed an increasing lack of confidence: it has cut its ratings on the Detroit school debt by six levels between late June and mid-August, placing them in junk status. The issue is if S&P is giving the system and state program such failing grades, what kind of message might that give to young families with kids who are thinking about moving into Detroit?

Actually, we are beginning to have the answer to that question, as, yesterday, lawyers representing Detroit schoolchildren filed suit against Gov. Rick Snyder and state officials in what they are terming the nation’s first federal case that pushes for literacy as a right under the U.S. Constitution: their complaint alleges that the state has denied Detroit students access to literacy — the most basic building block of education—through decades of “disinvestment…and deliberate indifference.” The suit seeks significant remedies, including a statewide accountability system in which the state “monitors conditions that deny access to literacy” and intervenes. In plain words, as attorney Mark Rosenbaum described it yesterday outside the U.S. District Court: “For the last 15 years, the state has run the Detroit schools, has run them into the ground.”  The suit documents the low reading and math proficiency rates of Detroit students, as well as classes without teachers and outdated or insufficient classroom materials; it also notes poor conditions, including vermin and building problems, at some schools as recently as this month. The seven plaintiffs are students listed by pseudonyms who attend some of Detroit’s lowest-performing schools, of which three are run by the Detroit Public Schools Community District. In addition to naming Gov. Rick Snyder as a defendant, the suit also names the Michigan state Board of Education, state school Superintendent Brian Whiston, David Behen, Director of the Michigan Department of Technology, Management and Budget, and Natasha Baker, the state school reform officer. In response, John Austin, President of the Michigan state Board of Education, said he did not believe the state board merited being the target of the suit, because it has made recommendations to the Governor and legislature for increased education funding — and it, itself, has no power to approve such funding—or, as he plainly put it: “It’s the Legislature that holds the purse strings, and the Governor who proposes budgets.” Indeed, for anyone who cares about Detroit’s long-term recovery from the nation’s largest ever municipal bankruptcy, Kathryn Eidmann, a staff attorney for Public Counsel, yesterday said attorneys in the case decided to focus on Detroit because it has the lowest proficiency rates of any large urban school district in the country on national assessment tests. The suit charges that students in Detroit do not have adequate supplies, the textbooks are outdated, classrooms are overcrowded, and school buildings are dangerous: or, as alleged in the suit: “In one elementary school, the playground slide has jagged edges, causing students to tear their clothing and gash their skin, and students frequently find bullets, used condoms, sex toys, and dead vermin around the playground equipment,” adding that students are taught by insufficient or unqualified staff, with many schools lacking properly trained teachers assigned to classes within their area of expertise. The suit charges that by its actions and inactions, “the State of Michigan’s systemic, persistent, and deliberate failure to deliver instruction and tools essential for access to literacy in plaintiffs’ schools, which serve almost exclusively low-income children of color, deprives students of even a fighting chance,” bringing its claims under the 14th Amendment of the U.S. Constitution and the Civil Rights Act.

Can a City Remake Itself? Leaders of the campaigns for and against implementing the proposed new city charter in San Bernardino are set to debate tomorrow evening as the city awaits next month’s likely exit from the nation’s longest ever municipal bankruptcy and then November’s election in which the city’s voters will consider Measure L, a proposal to replace the city’s existing charter. The debate, hosted by the Verdemont Neighborhood Association and moderated by Michael Craft, the association’s co-president and a member of the city’s charter review committee (Mr. Craft has been neutral on Measure L), will feature John Longville, president of the San Bernardino Community College District board of trustees and previously a member of the state Assembly and Mayor of Rialto versus James Penman, San Bernardino’s long-time (26 years) City Attorney until his retirement three years ago. The charter functions as the city’s constitution. The existing charter was first passed in 1905 and periodically amended, while the proposed new one was mostly based on a national model and how other mid-sized cities typically operate today. Three years ago, in our report, we noted—with regard to the charter: “In the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.”

Unlocking Opa-locka. David Chiverton, the former City Manager of insolvent Opa-locka, the small municipality of about 16,000 in Florida, plead guilty Monday to accepting pay-offs in his former capacity as city manager in entering a felony plea in federal District Court for improperly paying himself city benefits: his felony: extortion and accepting bribes; prosecutors charge Mr. Chiverton participated with other city officials to solicit pay-offs in exchange for using their official positions to help residents and businesses obtain city services and deal with billing issues. His plea is similar to one entered by the city’s former Public Works supervisor last month of guilt for bribery. In each instance, the former city officials have agreed to cooperate with investigators against other Opa-locka officials in return for lighter sentence recommendations. The pleas come as a Florida state financial oversight board is seeking to prevent Opa-locka from payment default on its bonds and, ultimately, filing for municipal bankruptcy. In Florida, one of eighteen states that authorize municipal bankruptcy, the statute §§218.01, requires that to file, a municipality must first receive prior approval from the Governor. While two utility and two transportation districts have previously filed, no Florida municipality ever has. Indeed, the state is already involved, with, as we have previously noted, Florida Chief Inspector General Melinda Miguel, chair of the Governor’s appointed state oversight board, having ordered city officials to develop procedures to segregate financial duties and prevent the kind of improper access Mr. Chiverton had obtained. (Note: Mr. Chiverton also faces an ethics complaint filed with Miami-Dade County for the benefit payouts.) Mr. Chiverton has also been accused of accepting bribes in return for using his influence to obtain city licenses and preventing water from being shut off for delinquent payments, according to court filings—this has been an exceptionally leaky problem for the city: after examination of its water and sewer accounts, the state oversight panel found Opa-locka’s collection rates are as low as 27% and that many properties are not even being billed—findings which contributed to the takeover of the billing by Miami-Dade County—which the small municipality has also requested to extend it a loan because Opa-locka’s general fund balance is so low it is projected to run out of funds soon to pay for basic services and make payroll.

Off to a Rocky Start? What Promise Is there in PROMESA? Last June, when Rep. Nydia M. Velázquez (D-NY) released her statement regarding the Senate passage of legislation allowing Puerto Rico to restructure its debt, she noted: “I know first-hand that the situation in Puerto Rico is extremely dire.  And as I stated on House passage, PROMESA is far from perfect, but it is better than the alternative of taking no action at all.  Debt restructuring is an essential first step – and without it, the island would not be able to move forward…Now that we have passed PROMESA, Congress has the legal and moral responsibility to come together again and finish its work regarding Puerto Rico. We must provide new tools so that the island can rebuild its economy for the long-term.  And, we have to resolve the island’s colonial status once and for all – without doing so, the people of Puerto Rico cannot truly move forward. In this regard, I look forward to working again with my colleagues to pass additional legislation in the coming months.” The implementation of PROMESA—especially the appointment of members of its oversight board, has, however, raised increasing questions about the federal commitment. The members were not named until August 31st; consequently, as the Board’s non-voting member, Richard Ravitch, yesterday noted after returning from Puerto Rico: members of the newly appointed Puerto Rico Oversight Board do not begin to fully understand or appreciate the depth of the fiscal problems they will have to address—comments he made both on the basis of his visits with senior Puerto Rican leaders and after talking with several of his colleagues on the oversight board; nevertheless, he noted: “I think they are going up a learning curve.” He added, he anticipates the board will probably hold its first meeting in Washington, D.C. next week—a meeting at which, presumably, he will report back on his meeting this week with Puerto Rico Gov. Alejandro García Padilla, who had advised him that Puerto Rico’s financial situation is substantially worse than it was this past winter, warning the government is in “deep” distress.

Will a City’s Residents Agree to Cede Autonomy? The ongoing uncertainty about insolvent East Cleveland’s future—whether it would be willing to cede its autonomy and control (not to mention a mostly-black community afraid of being subject to Cleveland’s police force, where, not unlike in Ferguson, the city has accepted and agreed to U.S. Justice Department exacting standards with regard to how and in which circumstances may its officers use force, as well as ongoing federal oversight—all as part of what the Justice Department has termed a pattern of unconstitutional policing and abuse, ergo triggering DOJ-mandated training in Cleveland—to be annexed or incorporated into the City of Cleveland is a harrowing issue—as well as one conflicted by Cleveland’s apprehensions that such incorporation would appear to create more negative fiscal downsides than upsides, both in terms of significant fiscal challenges, and significant new fiscal burdens on its police resources. Nevertheless, it might be that the discussion appears to be triggering what one blogger asked: should we be rethinking, after decades of glorifying the concept of home rule, that the accumulation of so many fragmented small political bodies makes fiscal sense. But, then, one has to consider not just the political challenges—but equity issues: does one propose to consolidate just the poor, struggling, disinvested entities together in one jurisdiction, but leave the well-off municipalities?  Last spring at my very favorite Lincoln Institute of Land Policy, at a journalist forum, Oklahoma City Mayor Mike Cornett spoke about his city’s amazing turnaround, followed by a searing speech from Sen. Dan Kildee (D-Mi.) contrasting the ways in which Flint been harmed by external forces. But the underlying issue is, when consolidating governments, it is one thing—as occurred in Oklahoma City—to annex wealthy enclaves and productive tax-generating areas. It is a whole other challenge to contemplate annexing adjacent jurisdictions with devastated tax bases and very high police needs.

Should States Bear a Greater Fiscal Responsibility to Address Disparities–especially when so many Lives and Futures are at Stake?

 

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eBlog, 9/12/16

In this morning’s eBlog, we consider the massive and cumulative service insolvency in public safety in the bankrupt City of San Bernardino. Even as the City nears its longest road out of bankruptcy of any city ever in U.S. history, the extraordinary absence of any state role to help the city confront its cancer of crime could bode ill for the city’s post-chapter 9 recovery. Then we turn to Michigan and the ongoing issue with regard to what a state’s role ought to be in addressing fiscal disparities. While the State of California appears to be disinterested in any such role; Michigan traditionally has; but, increasingly in recent years, it has eroded such support, with grim fiscal consequences in Flint, Detroit, etc.

Can the City Do it All by Itself? San Bernardino, still healing from last December’s terror attack—the city’s response to which has been praised by the FBI, nevertheless appears today caught between a rock and a hard place: it is experiencing a surge in violence this year unlike any it has faced in decades: with four months left in 2016, there have been 150 shootings and 47 slayings in the city of 216,000 residents, compared to 44 homicides all of last year, including the 14 people killed by terrorists at the Inland Regional Center. San Bernardino is now on track to have more murders than in any year since 1995, when 67 people were killed. There is no explanation why; by the same token, even as the city nears its exit from the longest municipal bankruptcy in American history, the terrible rise in violent crime hardly augurs well for its assessed property values—or for its hopes for attracting economic development. The violence might be adding to other tensions: the killings have disproportionately victimized San Bernardino’s black residents, who account for 14 percent of the population, but nearly half of those killed.  San Bernardino Police Chief Jarrod Burguan says the city has been especially hard hit by state initiatives that reduced some drug and property-related felonies to misdemeanors, leading to shorter sentences for criminals; he did not need to mention the reductions in the city’s public safety budget as it struggled to cobble together its proposed plan of debt adjustment now awaiting final approval for U.S. Bankruptcy Judge Meredith Jury. In 2008, there were more than 340 police officers on the force. Today, there are about 215. The Chief does note, however, “We don’t have the capacity to investigate everything that’s reported in the city.” Others point to the lack of economic opportunities, its years of cuts to diversion programs, and a lack of other basic services — such as working street lights in many neighborhoods—an issue, as readers remember, that both Detroit Emergency Manager Kevyn Orr and Mayor Mike Duggan made immediate and critical priorities—have contributed to this year’s violence. Those reduced fiscal resources have, no doubt, contributed to solve fewer than 40 percent of this year’s homicides.

Unsurprisingly, a new study, commissioned by Southern California law firm Graham Donath, using FBI data and looked at crime rates, police presence, and investment in police departments, as well as community factors, including poverty, education, unemployment, and climate, determined San Bernardino to be the state’s most dangerous city—just ahead of Stockton and Modesto: the study found a high correlation between crime rates and poverty: San Bernardino’s poverty rate exceeds 30 percent, or, as the report notes: “In taking a look at our collected data, no city in the bottom ten of crime rate (that is, has the lowest crime) has a poverty rate higher than 12.9 percent,…But for cities in the top ten, every one has a poverty rate of 14.5 percent or higher, topping out at 30.6 percent in San Bernardino.”

A Lonely Vigil. Understandably, in the wake of the State of California’s rejection of the city’s application for a state grant to help fund Operation Ceasefire, Chief Burguan must wonder whether the city is alone in its battle against killings—or, as he asks: “Who really is that concerned about San Bernardino? Or are people at the state level happy letting San Bernardino drown in this stuff?…We clearly have the most significant crime spike of any place in the state, and all that money went elsewhere.”

Getting to the Heart of Fiscal Disparities—or, What We Have Here Is a Failure to Communicate. Taxpayers for Michigan Constitutional Government, Eastpointe City Manager Steve Duchane Duchane (Eastpointe is a city of about 32,000 in Macomb County), and two other Eastpointe employees have filed suit against the State of Michigan, the Michigan Department of Technology Management and Budget, and the Michigan Office of the Auditor General in the Michigan Court of Appeals. Mr. Duchane says local governments in Michigan have been doing a lot of reacting to revenue sharing cuts through the years, slashing services, and programs impacting municipalities, because they have been receiving fewer state funds. Thus, he is at the forefront of more than a dozen Michigan local governments taking action, joining a nonprofit group which has filed the civil lawsuit for overstating various payments to local governments and causing a more than $1-billion shortfall to municipalities. Ow, the state has until the end of this month to file a response. Kurt Weiss, a spokesman for the Michigan budget office, has released a statement: “The Office of Financial Management within the State Budget Office works hard each year to properly identify expenditures to determine the amount of state spending that goes to the aid of local governments…Those expenditures are in turn submitted to the Office of Auditor General for validation to ensure the calculations are accurate. This is a methodology that has been applied consistently since the passage of Proposal A (Proposal A was a property tax measure adopted in 1994: prior to its adoption, local property taxes were based on a property’s assessed value or an amount equal to 50% of the property’s market value, meaning that property taxes went up and down in close relation to an increase or decrease in property value. With the passage of Proposal A, however, the tax was stabilized.). The State Budget Office will take time to further review the complaint, but it’s important to note that these calculations have been consistently applied over time.” The local governments disagree; they respond the state is violating the Michigan Constitution by overstating spending that is paid to local governments and engaging in an “illegal tax shift.” Their  complaint states that Michigan is including payments from Proposal A revenue and payments to charter schools, county road commissions, and others from the trunk line roads fund and payments to cover the costs of state mandates in its calculations of spending in the form of aid that is paid to local governments: “When these items are subtracted, state spending in the form of aid that is paid to local governments falls significantly below 48.97% of total state spending;” ergo, in violation of the Michigan Constitution, according to the complaint.

This the complainants are seeking these items be removed from the funding formula for aid paid to local governments, and asking the court to order the state to make up the funding shortages, claiming that the loss of billions of dollars in funding has forced local governments to make significant cuts to services and programs to stay solvent. Or, as Mr. Duchane puts it: “State spending continues without control, and the locals have paid the price.” The challengers’ organization here was founded by Mr. Duchane and its president, John Mogk, a law professor at Wayne State University; its members include the cities of Center Line, Eastpointe, Mt. Clemens, New Baltimore, Richmond, Roseville, Utica, and Warren and Clinton Township in Macomb County; Hazel Park in Oakland County; Harper Woods, Southgate and Grosse Pointe Woods in Wayne County; Grosse Pointe Shores, which straddles Wayne and Macomb counties, the city of Auburn in Bay County, the Sugar Law Center for Economic and Social Justice in Detroit, and Wayne City Councilman Tom Porter. In addition, other municipalities may be joining the group, whose attorneys include John Philo, executive and legal director of the Sugar Law Center; Tracy Peters, who specializes in education and the rights of students and parents, and Robert Sedlar, a constitutional law and legal conflict professor at Wayne State University School of Law.

For his part, Mr. Duchane said that while the group does not have data to explain where the more than $13 million in funds promised to Eastpointe to address municipal disparities has instead been used, he can, obviously, report where he believes it should have gone: That kind of money, he notes, would have meant that municipal leaders would not have had to raise taxes—especially in the wake of the Great Recession which brought so many Michigan municipalities to their fiscal knees, particularly because of the mortgage market meltdown that so devastatingly impacted real estate values, the state’s elimination of the personal property tax on businesses, and continued cuts in state revenue sharing. Combined with the state’s Proposal A and Headlee Amendments imposing state mandated limits on property tax growth, he noted Eastpointe and Hazel Park formed a unique taxing authority for 20 years to raise funds for police and fire services in their cities. The small City of Wayne attempted tried to join that authority; however, voters in that city and Eastpointe rejected the effort last month. Now, the City of Wayne, facing insolvency in as early as next year, has asked the state for an emergency financial review and could be facing a state-appointed emergency manager. Indeed, the city’s Mayor, Susan Rowe, last month reported that city officials are set to meet with the Michigan Treasurer later this month to discuss finances that communities are confronting, noting: “We’re just the tip of the iceberg…We’re not the only city in this (financial) situation. It’ll be happening to communities around us soon. We don’t have an expense problem. We have a revenue problem.”