03.20.14

Tempus Fugit.Even as this week’s filings before the U.S. Bankruptcy court in Detroit have threatened significant new costs and delays, Michigan Governor Rick Snyder yesterday warned that a critical component of any final agreement – the state contribution of $350 million, paired with $465 million from funds pledged by foundations and the Detroit Institute of Arts―could be in jeopardy, unless the legislature acts by May. The Governor made clear he believes legislators in Lansing are awaiting progress from negotiations between retirees, unions, and the city to reach some kind of preliminary agreement. Gov. Snyder viewed such an agreement as a critical one that could be key to enabling any funding package to gain approval from the Legislature. The Governor’s bipartisan proposal would divert $350 million over the next two decades from the state’s tobacco settlement fund, which together with the DIA $465 million, would be focused upon minimizing the impact of the bankruptcy on the Motor City’s lowest income retirees, as well as obviating a sale of the DIA artwork, noting that any Michigan funding would be contingent on a final settlement signed off on by retirees and city employee unions: “In many ways, to move forward in terms of what the state needs to do is to see if there is a conclusion or settlements going on between the retirees, the unions and the city itself…I’m really looking to them to take the point on this in terms of saying, can they come to some agreement?…If there’s an agreement, then it would be a much better process to get through the legislative process.” However, he warned, if there remains little significant progress by May, then “it becomes extremely difficult” for the Legislature to act before it breaks for the summer. The Governor made clear that absent action before the summer recess, it would “make it extremely difficult, period.”

Back to School.  Reduced federal aid, but sharply escalating operating costs are combining to impose a double whammy on the Motor City’s public schools. The Detroit Public Schools, which have now been under state control for five years, are experiencing a soaring budget deficit―it has risen from $38.8 million in the past three months, to a projected $120 million, even as the system has declined by 37,000 students, closed 100 school buildings, and eliminated 5,000 positions. Annual budgets have been slashed by $500 million in five years, but debts have risen. The system attributes some of the surge in debt this year to shortfalls of $10.7 million this year in property tax revenue and $21 million in Title I federal aid. The system had budgeted $130 million in Title I money for 2013-14, but now expects only $109 million; it had projected $68.4 million in property tax revenue, but now says it will receive just $57.7 million. Collection rates have fallen. On the opposite of the ledger, however, the system reports that operating costs are rising, including some $19 million in extra maintenance and operations spending after the city’s never-ending Polar Vortex winter. A spokesperson for the District said the district’s chief financial officer is “closely reviewing” the Title I cut, which the person said was made by the state, and reported that DPS cut its property tax collection rate to match the city’s rate, because new Mayor Mike Duggan reduced residential property assessments. The system’s state-appointed Emergency Manager, Jack Martin, whose term is scheduled to end next January, yesterday opined the district is two to three years from resolving its deficit, telling the media: “I’ve always said I would like to be the last emergency manager. There will have to be something in place that, if not an emergency manager, something that maybe looks like or functions with emergency manager powers.” Moreover, it is not just in the fiscal area where the system is experiencing low grades, but also academics: DPS students have made minimal progress and remain in the bottom for state and national test scores. In 2009, DPS students earned historically low math and reading scores on a test given to urban districts — the worst in the exam’s 40 years. Four years later, DPS scored the lowest in the nation in math and tied for lowest in reading. Dan Varner, chief executive officer of Excellent Schools Detroit and Secretary of the State Board of Education, said public education at DPS and other city schools has not improved. “I remain disappointed with the lack of progress and think the situation is as urgent as it was five years ago… kids in Detroit are still getting a mediocre education.”

More Small Community Fiscal Distress? Michigan Governor Gov. Rick Snyder yesterday confirmed a financial emergency for Royal Oak Township, pushing the Oakland County community closer toward an emergency manager to oversee its finances. Royal Oak is a charter township of Oakland County, a suburb of Detroit; it is part of the Metro Detroit area. As of the 2010 census, the population was 2,419. With the decision, elected officials in the half-square-mile township will have one week within which to select one of four options for moving forward, as prescribed by Michigan’s Public Act 436: Officials could choose between: 1) a state-appointed emergency manager, 2) a financial consent agreement with the state, 3) a neutral mediation with the township’s creditors, or 4) Chapter 9 municipal bankruptcy. The township board has until close of business next Tuesday to pass a resolution selecting one of the four options. At the end of January, the governor announced the financial emergency for Royal Oak Township, a process that allowed township leaders a hearing before state Treasurer Kevin Clinton. During that hearing, convened last month on the 12th, township officials argued they could continue governing without state intervention. They did not dispute their state review team’s findings, but blamed the township’s shrinking tax base and decisions by past officials for its financial woes. The Oakland County Sheriff’s Office terminated policing services to the township in November after officials failed to pay the bills.The state’s Royal Oak team found that, among other things, audit reports for the last three years showed variances between revenues and expenditures, with actual general fund revenues coming in short for two of the three years. Township officials also failed to adopt a budget for the current fiscal year that began on Jan. 1, 2014, according to the Michigan Treasury Department. The state had appointed the review team early last December, after a preliminary analysis showed that “probable financial stress” existed in the township. Counting Royal Oak, Michigan now has appointed or taken effective responsibility in the Motor City metropolitan area for: Detroit, Allen Park, Flint, Hamtramck and Pontiac, as well as several school districts, including the Detroit Public Schools. In addition, the Governor has also declared a financial emergency in Highland Park, although that Detroit suburb has not yet entered the stage of selecting one of the four options, and is currently assessing the finances of Lincoln Park, located just outside Detroit in Wayne County.

The Motor City Upcoming Calendar

March 28: Deadline to file objections to Detroit’s proposed plan of adjustment and disclosure statement.

April 3: Hearing on approval of $85-million swaps settlement.

April 14: Hearing to determine if the city’s disclosure statement offers sufficient information for its 170,000 creditors.

April 28: Hearing on legal issues related to Detroit’s proposed plan of adjustment.

June 11: Pretrial hearing to discuss logistical issues associated with the plan of adjustment confirmation hearing.

June 16, 17-20, 23-27: Hearing to determine whether Detroit’s plan of adjustment should be approved.

June 30: Deadline for retirees and bondholders to object to the plan of adjustment.

July 16: Beginning of confirmation hearing for plan of adjustment.

Sept. 14: Date on which the Detroit City Council could vote to reassume control of the city from Emergency Manager Kevyn Orr.

? : Hearing by the 6th U.S. Circuit Court of Appeals on challenge to the U.S. Bankruptcy Court’s December decision finding the Motor City eligible for chapter 9 federal bankruptcy protection.

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