Is the Music Returning to Motown?


December 8, 2014

Visit the project blog: The Municipal Sustainability Project

The Unmanageable Challenges of Municipal Bankruptcy. San Bernardino Mayor Carey Davis stunned City Manager Allen Parker last Friday by requesting his resignation and blaming him for the slow progress in the city’s bankruptcy case―and Mr. Parker refused to quit. Indeed, under San Bernardino’s charter, the city manager may only be legally removed by the City Council at the request of the mayor—a request now anticipated for next Monday’s closed session, with Mayor Davis not commenting on the reasons, because, according to his chief of staff, it is a personnel matter. Meanwhile, Manager Parker said a number of factors had impeded the city’s progress in putting together its bankruptcy plan of adjustment, and that the mayor had not previously expressed dissatisfaction with his work: “There’s a lot of things that could be going on that I have no knowledge of. I don’t know…I was a little shocked when he said that to me because it absolutely came out of nowhere. My hope is I have enough credibility with the council that they’ll keep me on.” Last summer, two City Council members had requested a performance review of Mr. Parker in the wake of both the manager and then-City Finance Director David Cain missing the final budget hearing because of a scheduled vacation; however, that evaluation never happened—in part, it seems, because, according to Mr. Parker, he was never given written standards by which to judge his performance. City Councilman John Valdivia, who put the request for an evaluation on the closed-session agenda that month, said: “I think the time to act was then, but (Mayor Davis) didn’t have his bearings on the issue and didn’t bother to ask my opinion of where I was going with it…Fast forward six months, and the mayor’s deciding in a vacuum we need new leadership.” Councilmember Valdivia said he needed to hear the Mayor’s perspective and mull it over before deciding whether he should be asked to leave; yet he also wonders whether this was the best time to eliminate the top non-elective position: “We had David Cain leave: he was the director of finance; and we’ve had a few mid-level managers, then McKinney (Michael McKinney, Mayor Davis’ former Chief of Staff)…What does this mean for the [city’s municipal] bankruptcy?” Mayor Davis was rebuffed by the council last week, when it voted 5-2 against extending Mr. McKinney’s contract. Mr. Parker said the Mayor had asked him to advocate for Mr. McKinney to the council, but that he felt such action would have been inappropriate, adding the Mayor was “blaming me for the state of the bankruptcy that we haven’t pulled out yet, etc. etc….I’m taking him at face value. However, I think the Mayor is in error. I find it very difficult to attribute the state of the city’s bankruptcy to me. It took a long time to get into bankruptcy.”

Windy City Municipal Bankruptcy Blues. At its 101st annual league meeting, the Illinois Municipal League in held a session, “Finance: Lessons from Detroit and Pension Cases,” leading Better Government Association writers Andrew Schroedter and Patrick Rehkamp to note: “At the very least, these leaders are now, more than ever before, openly questioning if bankruptcy is a viable option to reorganize or slash their growing financial obligations, including public pensions for retirees and current workers,” even though—absent a change in state law—Illinois municipalities have very limited authority to seek such federal relief. Nevertheless, the increasing concerns about fiscal sustainability—especially on the public pension front—and the proximity of the events in Detroit have led to greater discussion in the league and in Springfield in the state legislature about options to modify the current Illinois law. Rockford Mayor Larry Morrissey, the elected leader of the state’s third largest city, has emerged as a strong proponent of bringing Illinois’ chapter 9 law in line with Michigan’s and many other states, noting: “I’m a big advocate of giving municipalities the same tools that have helped the private sector bounce back and reset…If it’s good enough for Chrysler and GM to restructure and become profitable again, it should be good enough for municipalities.” It appears that mounting public pension obligations, combined with flat or declining municipal tax revenues, are forcing municipalities into increasingly fiscally unsustainable futures. In the short term, they have little option but to sharply reduce public services, increase fees and taxes, and increase their debt load via increased borrowing. Last summer, the Illinois Better Government Association, after completing a review of the finances of 217 police and fire pension funds in suburban Cook County with collective assets of nearly $5 billion, determined the funds had a collective unfunded liability of $3.3 billion. Moreover, the Association’s research led it to find that dozens of these municipal funds are in immediate financial peril. However, absent judicial or state legislative changes, Illinois elected municipal officials lack any legal authority to make and implement public pension changes to reform the local police and fire pension systems. According to the Association, Rockford’s unfunded pension and post-employment benefit liabilities increased 15 percent to $217.4 million in 2013, from $188.8 million in 2008, even as the city’s pension contributions increased, records show. In Cook County, the most populous local jurisdiction in the state and the home to 40 percent of all Illinois residents, and the second largest county in the nation, with a population larger than that of 29 states—not to mention the quasi-parent of some 135 incorporated municipalities partially or wholly within its boundaries―the Association reports municipal fire and police pension debt is spiking, even as governments dump more cash into the systems, leaving less to spend on parks, roads and other important assets: thus, pressing the state legislators to create a clearer option for municipal bankruptcy protection has risen on the Illinois League’s radar screen. Nevertheless, the legislation to remove some of the obstacles offered by Illinois Sen. Kimberly Lightford with support from the Illinois Municipal League failed to garner much support; nor, it appears, does there seem to be a groundswell of support to reintroduce the bill.

Good Gnus? Maybe, with Motown scheduled to exit municipal bankruptcy as early as today and Emergency Manager Kevyn Orr to actually go home to suburban Maryland and reacquaint himself with his family, there is some good news: The Detroit Free Press reports that, at least in and around downtown Detroit, rents are rising, because the demand for apartments at all price ranges in downtown, Midtown and Corktown that still exceeds the supply of available units, and that’s despite what the paper describes as “a mini-boom of construction and building rehabs,” adding: “According to local experts, the going rent for newly built or newly restored Class A apartments is up to about $1.70 per square foot in Midtown and $2 per square foot in downtown. It was only five years ago that $1.25 was a common number.” Sue Mosey, president of the nonprofit Midtown Detroit Inc. notes that tenants in existing market-rate buildings in Midtown experienced rent hikes this year averaging about 5% and about 14% over the past three years. Landlords raised rents 3% to 10% this year in some market-rate apartment buildings as new, high-profile redevelopment projects opened with rents that “would have been unimaginable just three years ago.” The Free Press reports the momentum is carrying over into Detroit’s once-stalled condo market, which experienced similar price increases this year and saw the conversion of some former rental units—leading one tenant—who is paying $1,415 a month for a roughly 670-square-foot one-bedroom unit and a parking spot―to label the per-square-foot price “outrageous.” The condo market in greater downtown Detroit is also regaining momentum that it lost in the recession, when half-sold buildings had to convert vacant units to rentals. Now many of those rentals are going back up for sale, or, as Austin Black, the founder and president of City Living Detroit brokerage, put it: “The rents are going up to the point that many people now renting are converting over to ownership…At $2 a square foot that is $2,000 a month for a 1,000-square-foot unit, and you can get a decent condo with that kind of money.” One of the biggest Motor City projects in the pipeline is Orleans Landing, which calls for 278 apartments in 19 all-new buildings that will rise along the riverfront east of the Renaissance Center: its developer, McCormack Baron Salazar of St. Louis, is also a partner with Midtown Inc. for a total renovation of the old Strathmore Hotel in Midtown on Alexandrine Street into 129 units. (40% or more will be set aside as affordable.)
How Detroit rents compare:

■New or newly renovated building in Midtown Detroit: $1.70 per square foot
■Newly renovated in downtown Detroit: $2 per square foot
■New or newly renovated in downtown Cleveland: $1.75 per square foot, $2 for high-end building
■Typical rent in downtown Cincinnati: $1.50 to $1.70 per square foot, $2 for new construction
■Newly renovated in downtown Toledo: about $1 per square foot
■Average rent in downtown Chicago: $2.66 per square foot, $2.80 and above for luxury

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