October 14, 2014
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Corporate Governance. One of our most perspicacious readers with wisdom and insight far beyond my pithy reach wrote yesterday with a pertinent insight―especially given the recent actions taken by the Detroit Institute of Arts or in comparison to the major auto company bankruptcies in Detroit: whether in Newark (please see below), Detroit, or San Bernardino; an especially distinguishing characteristic of municipal versus private corporate bankruptcy relates to governance—and, in the case of municipalities, not only the difference between presumably trained corporate leaders versus elected municipal leaders, but also the frequency with which, in municipal bankruptcies, voters change who the elected officials are. Moreover, the process can be different, so that, for instance, in Central Falls, Rhode Island, and Detroit; the respective states of Rhode Island and Michigan appointed emergency managers to steer the two municipalities through the adjustment process and to new elected leaders; but neither Alabama, for Jefferson County, nor California for Vallejo, Stockton, or San Bernardino made any such appointments; rather the elected officials have continued to oversee their respective cities and processes—and changed in intervening elections. It is almost incomprehensible to comprehend how difficult such elected leadership could be—all made immeasurable more challenging by the changes in elected officials in the middle of a bankruptcy – certain negotiated items had to be done all over again. U.S. Bankruptcy Judge Thomas Bennett, at the Bankruptcy and Beyond Widener Law School forum in Harrisburg commented that the one party not represented in a municipal bankruptcy was the taxpayer – because, of course, the federal statute contains no such delineated role. But as we can see from the above, in fact municipal taxpayers have been represented—sometimes better, sometimes not so. The diversity of experiences we are now learning from will―hopefully―be of inestimable value to state and local leaders as we ponder on lessons learned.
Making do & Improvising. As the clock is winding down in U.S. Bankruptcy Judge Steven Rhodes’ trial to determine whether he will approve or reject the Motor City’s pending plan of debt adjustment—or whether his colleague U.S. Judge Gerard Rosen will succeed in obtaining a resolution with Detroit’s sole remaining significant creditor FGIC—one of the most critical decisions Judge Rhodes would be required to reach would be whether the plan cobbled together by emergency manager Kevyn Orr provides for a sustainable fiscal future. It’s not as if there is a rule book or guide—albeit two wizards at the Boston Federal Reserve have given us some equations and the ever so thoughtful Chris McKenzie of the California League of Cities has been seeking to translate those into municipal governance; nevertheless, cities, even in bankruptcy—have to work. Unlike dissolution for a non-municipal corporation, that is not an option for a city, county, or town. In effect, the need for revenue for the future is central to Detroit’s bankruptcy case. By law, the city is required to prove that it has a viable plan to improve services and avoid insolvency. That means Judge Rhodes will need to find certainty that the plan will secure or guarantee sufficient resources which could fix many broken things. That plan—or at least the current version pending before the federal court, calls for shedding $7 billion in debt and spending $1.5 billion on city improvements over the next decade, leaving to the city the challenge to convince Judge Rhodes that the plan is fair, feasible, and can be implemented. Thus, in the very fine coverage by both the Detroit Free Press and Detroit News, we have been able to spectate at the innovation hard times can create as presented by witnesses in Detroit’s bankruptcy trial, who have testified about what they term a “troubling yet tolerated way of life, where things can’t get fixed correctly — or fixed at all — because there’s not enough money, forcing residents to find creative solutions to get by.” Among the examples: Missing manhole covers and sewer grates get plugged with tires, or covered by boards and the fire department utilizing pop top soft drink cans as emergency alerts because Detroit simply has no modern-day alert system. Behind all the headlines, progress, by hook and crook, has been taking place. According to Mayor Mike Duggan’s office, in the last nine months alone:
• an average of 1,000 new streetlights are going up each week; blighted homes are coming down at record pace — 250 per week, compared with 50 a week historically;
• 250 city parks have been maintained, compared with 25 last year;
• the city is getting 50 new buses thanks to a new federal grant, and
• overall crime is down 7%.
Detroit’s municipal bankruptcy team reports its post-bankruptcy plan includes spending $500 million on blight removal, $150 million for the police department, and $80 million for the fire department.
But it’s little things that we do not always think about that present such unique challenges. For instance, over the last 18 months, five people have been found in manholes, three of them dead. Two of those victims were looking for metal; one was searching for his dropped keys. According to the Detroit Water and Sewerage Department (DWSD), since the beginning of this year, the Motor City has replaced or repaired 302 manhole and sewer covers, and still has 42 to replace. It has 180,000 covers total, of which 5% get replaced or repaired every year. DWSD has set a goal of replacing missing manhole covers within 24 hours of learning about them, but even that goal is challenging, with a spokesperson noting; “Sometimes, we replace manhole covers and they are stolen again, or we haven’t gotten another call about the manhole being missing.”
In a practice I know would draw concern from Arlington County Fire Chief Jim Schwartz, the Detroit Fire Department has, nevertheless, displayed critical creativity. Because the fire department has no modern-day emergency alert system, its firefighters make their own, with, according to reports, one popular method involving a pop can. Personnel fill it with coins or screws, and then place it on a fax machine. When a fax comes through, the paper knocks over the can. The noise alerts the on-call firefighter, who then rings the fire bell to wake everyone up. (The Free Press confirmed this technique and showed how it works in a video, which was featured on Comedy Central’s “The Colbert Report.”)
The Unfine Art of Municipal Bankruptcy. In the wake of seemingly unprecedented compensation increases for senior leaders of the Detroit Institute of Arts—the previously Detroit-owned Institute which Governor Rick Snyder and bipartisan state legislative leaders converted to an independent foundation to both retain its world-class location in Detroit, but also to leverage financing to ensure no Detroit retiree would fall below the federal poverty level, together with foundations, packaged one of the most artistic developments that became the fulcrum to the innovative state/foundation role in constructing Detroit’s pending plan of debt adjustment before the U.S. Bankruptcy court. But yesterday, in the wake of significant wage increases and bonuses ($50,000) to the Institute’s Director and executive vice president and COO—on top of 13% compensation increases to salaries in excess of $500,000 for the Director and nearly $400,000 for the COO; Michigan state representative Eileen Kowall and an Oakland County commissioner urged DIA officials to immediately reconsider the double-digit compensation increases, calling them a misuse of taxpayer funding. Rep. Kowall, who does not represent Detroit, but spearheaded a seven-bill legislative package that ensured the DIA and Detroit Zoo received 100 percent of their millage funding paid by taxpayers, reported she is asking the DIA’s board of directors to reconsider the pay boosts so tax dollars sent to the museum via a regional millage approved by voters in Oakland, Wayne, and Macomb counties go where they are supposed to — for museum operations. Rep. Kowall noted; “Given the DIA’s very public part in Detroit’s recent bankruptcy case, I was shocked to see such drastic raises being given out on our taxpayers’ dime I have worked hard to protect local taxpayers, and this is money that should have gone toward protecting the city’s art, not lining the pockets of top officials at the DIA.” The timing could hardly be worse: it was just two years ago that voters in Macomb, Oakland, and Wayne counties approved a $23 million millage to fund DIA operations for 10 years, leading Rep. Kowall to add: “As Detroit faced bankruptcy and the very real possibility some of our art would be auctioned off to help pay off the city’s debts, top officials at the DIA quietly took a larger paycheck and hoped no one would notice in the midst of this turmoil…As our state, its taxpayers and pensioners, and other groups banded together to protect Detroit’s art, these DIA officials accepted pay raises higher than many local employees’ annual salaries. Oakland County Commissioner Dave Woodward told the Detroit Free Press he has spoken with DIA leadership and asked them to act quickly to reduce the excessive compensation increases. If they do not, Commissioner Woodward said, he would take steps to dissolve the Oakland County Arts Authority that collects the voter approved $11 million annually for the DIA, indicating he has already commenced drafting a resolution, which, he reports, he will introduce at the next regular scheduled Oakland County Board of Commissioners Meeting, where he said he would request an immediate vote.
The Power of Oversight. Moody’s has determined that New Jersey’s active oversight of Newark, the Garden State’s largest city, based upon the New Jersey Local Finance Board’s decision we reported on last week, is a credit positive—with oversight denoting the Local Finance Board will oversee the city’s staffing and fiscal decisions, including firings, renegotiation with the city’s unions, imposing greater benefit contributions from municipal employees, and budget decisions. Indeed, the Board is scheduled to vote tomorrow on whether or not to accept Mayor Ras Baraka’s full $815 million budget for this fiscal year. In his report yesterday, Moody analyst Josellyn Yousef wrote: “By adopting budgets in the last quarter of the fiscal year, the city misses the time frame for proactive budgetary planning…It also threatens property-tax collections and their cash balances because fourth-quarter property-tax bills cannot be sent out unless the city has passed a budget.’’ For the new Mayor, who only took office in the last quarter, it promises to be a rude beginning. Moody’s lowered Newark’s credit rating in May to Baa1 on almost $575 million of general-obligation debt, citing depleted reserves and budget gaps. Nevertheless, the early state intervention stands in stark contrast to states such as California and Alabama where, if anything, state actions contributed to and exacerbated the municipal bankruptcies of Jefferson County, Stockton, and San Bernardino.