What Is the Role of States in Municipal Bankruptcy?

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December 9, 2014
Visit the project blog: The Municipal Sustainability Project

The Federalism Differences in Municipal Bankruptcy

Municipal bankruptcy is unique in that it is authorized in federal law—but only if a state enacts legislation providing the right for a municipality to seek federal bankruptcy protection through the federal court system. Unsurprisingly, between the 12 states that specifically authorize municipal bankruptcies, the 12 which conditionally authorize municipal bankruptcies (and the three with limited authorization); states have created very different models. A key difference has to do with governance: does the state authorization retain municipal decision-making or governance authority—or does it usurp it? And, now with greater experience from the post-Great Recession spate of municipal bankruptcies, are there lessons to be learned from the different choices?

As the issue of governance appears to be disrupting San Bernardino’s ability to achieve consensus on how to agree upon a plan of debt adjustment to present to U.S. Bankruptcy Judge Meredith Jury—indeed now taking so long that Judge Jury has imposed a May 30 deadline—the governing dysfunction is threatening not only to add to the costs to the city and its taxpayers, but also raises the question about whether the Michigan and Rhode Island models which provide for the appointment of a receiver or an emergency manager might not offer greater efficiency and celerity to enabling a municipality to get back onto its own two feet. In California, as in Alabama, the respective state enabling statutes leave the respective municipally elected leaders to remain in charge. But it is the fraying process in San Bernardino―where the City Council has set a special meeting for tonight to discuss the performance of City Manager Allen Parker in closed session, in the wake of Mr. Parker’s refusal of Mayor Carey Davis’s request that he resign―where we can begin to see some questions emerge.

San Bernardino filed for federal bankruptcy protection under chapter 9 of the United States Bankruptcy Code on August 1, 2012 (The case was filed in the Court’s Riverside Division and was assigned case number 6:12-bk-28006.), or more than 28 months ago—so that a growing tab has been accruing and taking away from resources vital to not only providing essential public services, but also for investing in the city’s future. In contrast, Detroit exited in seven months and Central Falls, Rhode Island, in just over 13 months—compared to Stockton’s 15 months, and Jefferson County’s 23 months.

The comparisons bear consideration, because of the very different models: Under Rhode Island’s municipal bankruptcy enabling legislation, the Governor may appoint a receiver; in Michigan, the Governor appoints an emergency manager: in Michigan and Rhode Island, therefore, the respective municipalities’ elected leaders were effectively stripped of any governing authority. In contrast, in Jefferson County, Stockton, Vallejo, and San Bernardino; the respective Mayors and Councils remained in power with full responsibility for pulling together and putting into effect—with the federal bankruptcy court’s approval — so-called plans of debt adjustment in order to obtain U.S. judicial approval to exit municipal bankruptcy.

The process of putting together a proposed municipal bankruptcy plan of adjustment has now consumed so much time that U.S. Bankruptcy Judge Meredith Jury has taken the unprecedented step of imposing a deadline for the city to submit such a plan. In the seeming soap opera in San Bernardino, the City Council last week rebuffed Mayor Davis when it refused to extend his chief of staff’s contract. City Manager Parker said Mayor Davis asked him to advocate for the chief of staff, but he said that would be inappropriate. Thus, the attempt to force out the San Bernardino City Manager days later appeared like retaliation to many, including Councilman Fred Shorett, who notes: “Anyone would be really hard-pressed to think this isn’t somehow retaliatory or somehow connected to Monday night’s vote…I just find that hard to believe.” The chief of staff, Michael McKinney, did not respond to calls from the press last night, but earlier said the Mayor would not comment, because it was a confidential personnel matter. Similarly, City Council members have said they cannot comment; nor, it seems, will City Attorney Gary Saenz.

For his part, Mr. Parker said he would not have a problem working for a mayor who had requested his resignation, but he said it was important for the Mayor and Council to get on the same page: “What’s important to me is that the council and mayor continue to work together…Obviously, I’d like to continue be part of the team. I think that having them working together is more critical…There obviously was a schism that became apparent at Monday’s meeting, and that needs to be worked through by the Council and the Mayor.” Under San Bernardino’s city charter, the city manager can only be dismissed at the request of the mayor—together with a two-thirds vote of the City Council. The discussion evaluating Manager Parker’s performance will be private, but it will be preceded by an opportunity for members of the public to give their thoughts, this evening.

Is the Music Returning to Motown?

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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

The Long (seemingly unending) & Costly Road of Municipal Bankruptcy

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December 4, 2014
Visit the project blog: The Municipal Sustainability Project

The Seemingly Unforgiveable Costs of Municipal Bankruptcy. Motor City Mayor Mike Duggan yesterday confirmed that Detroit will have to pay more than $20 million to investment banking firm Miller Buckfire & Co. for its work in Detroit’s municipal bankruptcy in line with the company’s contract, renegotiated last June by Kevyn Orr, which specified the firm be paid a flat $28 million fee for its services in negotiating agreements tied to city water and sewer debt and securing Detroit loans to finance the city’s operations during its municipal bankruptcy and meet some of its obligations to creditors. Mr. Orr’s spokesperson, Bill Nowling, told the Detroit News that Miller Buckfire has been working for the city below “market rate for restructuring services,” adding that the fact the firm twice renegotiated its contract “is unusual for banks to do,” and telling the News that had Detroit been a regular customer, it likely would have owed upwards of $100 million. The numbers matter, because U.S. Bankruptcy Judge Steven Rhodes has given Mayor Duggan standing to challenge the legal bills. For his part, Mayor Duggan yesterday said: “We are in mediation and I’m under a gag order…I’ve expressed my opinion that I think the bills are too high, that they need to come down. There are huge dollars at stake.” As of late October, the bankrupt city had paid Miller Buckfire $5.76 million for its services, which have included negotiating debt settlements with financial creditors and pursuing opportunities for monetizing the city’s water department. Mr. Nowling noted the valuable services rendered by the firm in securing exit (from bankruptcy) financing and a quality of life loan at market rate, and with regard to assisting Detroit to restructure its debt on the Detroit Water and Sewer Department municipal bonds at a “substantial savings,” noting: “This is all a result of the work of our investment bank,” noting that refinancing its debt at a lower interest rate saved the city almost $2 billion in interest payments. Meanwhile, Jones Day, the city’s lead bankruptcy law firm, had billed Detroit $52.3 million as of late October, while Detroit’s accounting firm, Ernst & Young, billed the city some $19.9 million, and restructuring firm Conway MacKenzie billed Detroit’s taxpayers $17.2 million in fees. Mayor Duggan yesterday indicated he has been advised that just the tab for Detroit for legal fees will be at least $177 million before the city’s bankruptcy is over—and assuming there is not, as in Jefferson County (please see below) appeals: “That is money that is not going to services for the people of the city of Detroit…So I didn’t think those numbers were reasonable. In mediation, we’re going to see how the process plays out and I really can’t say anything.” As of late October, the city had $140 million in bills for attorneys and consultants, $130 million of which had already been paid out, according to a city report.

The Costly & Seemingly Unending Process of Exiting Municipal Bankruptcy. U.S. District Judge Sharon Blackburn yesterday ruled that Jefferson County can appeal her refusal to reject a lawsuit appealing the county’s approved plan of debt adjustment by a group of unhappy sewer customers. In successfully securing approval from U.S. Bankruptcy Judge Thomas Bennett a year ago yesterday―after completing the refinancing of its sewer debt, which was the linchpin of its exit plan, a group made up mostly of local elected officials appealed Judge Bennett’s decision to approve the county’s chapter plan of debt adjustment, telling the federal court the plan would impose unreasonably higher rates for sewer customers for decades to come. In response, Jefferson County had sought to have Judge Blackburn reject the appeal—in large part because, they pled, the appeal was moot, since the county’s bankruptcy exit plan had already been implemented. Judge Blackburn, however, wrote, in rejecting the County’s position: “The fact that the (bankruptcy) Confirmation Order has taken effect ― the new sewer warrants have issued and the old sewer warrants have been retired ― does not extinguish the controversy, although it may limit the scope of relief available.” In her order, however, Judge Blackburn gave permission for Jefferson County to make an interlocutory appeal to the 11th Circuit Court of Appeals with regard to whether the sewer ratepayers’ challenge of U.S. Bankruptcy Judge Bennett’s confirmation of the bankruptcy exit plan is moot, “either constitutionally, statutorily, and/or equitably,” based on consummation of the plan or the sewer customers’ failure to obtain a stay of the sewer refinancing pending appeal. Judge Blackburn, however, acknowledged in her order that an immediate appeal by Jefferson County of her September order could accelerate resolution of the sewer customers’ appeal, “especially if the Circuit Court finds in favor of the County, thus ending the ratepayers’ (sewer customers’) appeal of the Confirmation Order. Although some issues will remain, the heart of the ratepayers’ dispute concerns the constitutionality of certain terms of the confirmation order.” Judge Blackburn, however, denied a separate request by the county to certify another issue for interlocutory appeal – whether, under constitutional and federal law, and without the county’s consent, a federal judge has the authority to strike a selected provision of a Chapter 9 plan of adjustment (the county’s bankruptcy exit plan). Judge Blackburn, in her September order, had ruled that she legally could scrap the schedule for future sewer rate increases called for under that plan. Similarly, in her September ruling, Judge Blackburn had acknowledged that Jefferson County had already issued new sewer warrants to retire the outstanding debt, and that some parts of the county’s approved bankruptcy recovery plan “may be impossible to reverse;” nevertheless, Judge Blackburn had rejected the county’s contention that the appeal was moot just because it had been largely consummated; in addition, she had written she would consider the constitutionality of the plan that cedes the county’s future authority to set sewer rates to the bankruptcy court—in effect the cornerstone of Jefferson County’s exit plan, especially in the wake of its issuance of $1.8 billion of sewer refunding warrants to write down $3.2 billion of outstanding sewer debt in order to exit the nation’s second-largest municipal bankruptcy. Thus, Judge Blackburn, in her opinion, wrote that Jefferson County may frame its appeal to the 11th U.S. Circuit Court of Appeal to ask “whether the ratepayers’ appeal of the confirmation order is moot either constitutionally, statutorily, and/or equitably,” because the plan had been consummated. In addition, Judge Blackburn determined that the appellate court could decide if the appeal were moot because the ratepayers failed to obtain a stay from the U.S. bankruptcy court that would have delayed implementation of the plan as they sought an appeal. Jefferson County Commissioner Jimmie Stephens, who was reelected last month along with four other board members who were involved in the bankruptcy filing—and who was selected by his colleagues on the Board as Board President last month, noted: “Jefferson County looks forward to a speedy resolution of this matter.” The ever prescient godfather of municipal bankruptcy Jim Spiotto noted that the issue before the 11th Circuit is whether federal bankruptcy courts, in confirming a municipal bankruptcy plan of adjustment, can be the final determiner of issues that involve certain rights of citizens and state powers over utilities rates if the plan is not stayed on appeal and implemented, noting that in recent Chapter 11 court decisions, judges have determined that issues on appeal are moot after implementation of a plan that has not been stayed by the court. In addition, he noted there are also provisions in the federal bankruptcy code guiding Chapter 11 cases with respect to state regulatory approval of utility rates under state law. Those cases require that a utility commission approve of rate changes in a confirmed plan or that the plan be subject to the commission’s approval—noting that on the municipal or chapter 9 side of the aisle, Judge Blackburn’s decision seeks to clarify the limits of the federal bankruptcy court’s jurisdiction over sewer rates set by elected leaders of local governments: “The district court appears to be saying that you have constitutional and state statutory rights, and you have the 10th Amendment limitation over the jurisdiction of the bankruptcy court in Chapter 9 as opposed to Chapter 11, therefore can constitutional or a state statutory issue be mooted by the bankruptcy court’s confirmation of a plan and the implementation of that plan precluding any review at the district court or appellate level…The plan [of adjustment] just can’t run over those rights given the limitations of the jurisdiction of the bankruptcy court regarding constitutional and state statutory issues.”

Rethinking State Tax Policies & Transportation Finance. The FBI yesterday charged the Puerto Rico Highways and Transportation Authority Treasurer Silvino Cepeda-Ortiz with accepting bribes―just one day after the Puerto Rico House of Representatives had passed a bill bringing Puerto Rico closer to selling a $2.9 billion bond to support the authority. Mr. Cepeda-Ortiz was charged in United States District Court in San Juan with bribery concerning programs receiving federal funds: according to U.S. Attorney Rosa Emilia Rodríguez-Vélez in Puerto Rico, he solicited and received two kickbacks of $5,000 each for contracts with the authority. Ms. Rodríguez-Vélez stated: “Public officials who abuse their positions of trust for personal financial benefits, undermine the integrity of our public agencies and the availability of federal funds used to finance important projects, such as our highway infrastructure…We will not relent in our efforts to combat this type of corrupt scheme, whereby a public official requests bribes in order to pay for services duly rendered by third parties to an agency.” The arrest came in the wake of an FBI raid last week on the Puerto Rico Aqueduct and Sewer Authority headquarters in which no arrests were made and in the wake of this week’s action by the Puerto Rico House of Representatives to pass, 26-23, a bill to prop up the transportation authority through an oil tax increase. (The tax raise will increase taxes per barrel of oil to $15.50 from $9.25.) Currently all the tax goes to the PRHTA. Revenue from the new higher tax would go to the PRHTA, the Puerto Rico Infrastructure Finance Authority and the Integrated Transportation Authority, which operates Puerto Rico’s public transportation. If the legislation is adopted by the Senate and signed into law, Puerto Rico will replace its existing sales and use tax with a value added tax, paving the way for the territory to finance its commitment to eliminate income taxes for individuals with incomes of less than $35,000 or families with incomes less than $70,000.If adopted, in future years the tax would be adjusted upward for inflation.

Gambling on a City’s Future. Atlantic City Mayor Don Guardian is scheduled to address a New Jersey Assembly committee about the city’s future and the gambling industry—a city which is on the precipice of bankruptcy in the wake of experiencing some 8,000 workers lose their jobs so far this year after four of the city’s 12 casinos closed. Garden State Senate President Stephen Sweeney and state Sen. James Whalen have proposed a plan that would give the city certain revenue and casinos predictable tax bills: the plan would let casinos collectively pay $150 million in lieu of taxes for two years, and then $120 million a year after that, assuming gambling revenue stays at a certain level. As the aptly named Mayor Guardian prepares to testify this morning, New Jersey’s political and business leaders have become increasingly engaged in discussion about the future of New Jersey’s gaming industry and Atlantic City in particular. Yesterday, New Jersey Senate President Stephen Sweeney introduced several bills as part of these ongoing efforts to address the transitions in Atlantic City and New Jersey’s gaming industry, including:
• S2572 – Major Changes to Casino Property Taxes: Atlantic City’s casinos pay the majority share of the city’s property taxes, based on the assessed value of the property. Over the last several years, many casinos have successfully appealed the assessed value of their properties, because of the sharp downturn in Atlantic City’s gaming market—ergo, the amount of property tax revenues to the City of Atlantic City (which then must distribute a share to the School District and Atlantic County) has declined. The bill would dramatically change the property tax structure for Atlantic City casinos: It would provide that every casino property in Atlantic City would be exempt from traditional property taxes: the casinos will be organized into the Casino Operators’ PILOT Council (PILOT standing for Payment In Lieu Of Taxes). The members of the Council would agree to make a PILOT payment to the City of $120 million in 2015, adjusted for inflation thereafter. However, if annual gross gaming revenue were between $2.6 billion and $3 billion, the PILOT payment would increase to $130 million; $150 million if revenue were between $3 billion and $3.4 billion; and $165 million if revenue were between $3.4 billion and $3.8 billion. If revenue fell below $2.2 billion, the amount would be proportionally decreased.(Each casino’s share of the payment would be calculated by a formula that takes into account, in equal parts, (a) the amount of land in acres owned by the casino; (b) the number of hotel rooms and (c) the property’s gross gaming revenue. For next year and 2016 only the casinos would be obligated to pay an additional $30 million per year. If new casinos open or existing casinos close, the formula would be adjusted to reflect that.
• S2573 – Mandatory Health Benefits for Casino Employees: would require that a casino licensee submit proof to the Division of Gaming Enforcement that “all agreements it has entered into with each majority representative of its employees for collective bargaining purposes provide for suitable health care benefits and suitable retirement benefits for all full-time employees covered by such agreements.”
• S2574 – Aid to Schools: this bill would create a new form of state aid called Commercial Value Stabilization Aid: this aid would be made available to the Atlantic City school district. If the Commissioner of Education determined, based on a needs assessment, that the aid were warranted, then the Commissioner could authorize state aid to defer the school portion of the municipal tax levy. This aid would only be available until such time as assessed property values in Atlantic City return to the levels they were at in 2008.
• S2575 – Reallocation of Investment Alternative Tax: this bill would reallocate Casino Reinvestment Development Authority (CRDA). Currently, in addition to an 8% gross revenue tax, Atlantic City casinos pay 1.25% of gross gaming revenue to the CRDA. Until 2011, the funds collected by CRDA were used to invest in various projects around the state. Since that time, the funds are to be used exclusively to fund projects in Atlantic City. This bill would reallocate all CRDA funds paid by casinos to the City of Atlantic City for the next 15 years and would require that the City use those funds exclusively to pay down its municipal debt.
• S2576 – Elimination of the Atlantic City Alliance: this bill would eliminate this non-profit corporation funded by the casinos to serve as a public-private partnership to market Atlantic City.

When it Rains, it Pours. Garden State Superior Court Judge Julio Mendez yesterday ruled that Atlantic County’s government broke its own pay-to-play rules by giving a contract to an accounting firm that made political contributions to the county sheriff in his 2013 campaign for the state Senate. Judge Julio Mendez also disqualified Ford-Scott & Associates from receiving any contracts from Atlantic County for four years, but denied county Democrats’ request to block payment for work on a county auditing contract that the Ocean City-based firm has already finished. Judge Mendez, in his ruling, found “that the political contributions made by Ford-Scott to the State Senate campaign of Sheriff (Frank) Balles are subject” to the county’s pay-to-play ban, which the Board of Chosen Freeholders passed in 2007. The decision came in the wake of the suit by County Democratic leaders last May, claiming that the $4,600 contribution by Ford-Scott to a county official and an $88,000 county auditing contract for the firm violated Atlantic County’s 2007 pay-to-play law—a law, which they said was designed to ban the practice of rewarding political donors with government contracts.

The Crushing Costs of Municipal Bankruptcy

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December 3, 2014
Visit the project blog: The Municipal Sustainability Project

Escaping from Municipal Darkness. A major power failure struck downtown Motown yesterday, darkening City Hall and other municipal buildings, blocking fire stations, and forcing evacuations of workers—and closing schools. Fire trucks were parked in front of City Hall after reports that people were stuck in elevators; traffic signals downtown were dark. According to the Detroit Lighting Department: “The city’s public lighting grid suffered a major cable failure that has caused the entire grid to lose power at approximately 10:30 this morning…The outage is affecting all customers on the PLD grid. We have isolated the issue and are working to restore power as soon as possible.” Power went out about 10:30 a.m. just as about 900 school children were visiting the Detroit Institute of Arts, forcing their evacuation. The post-exit municipal bankruptcy event cast a shadow over the restoration of municipal power to the Mayor and Council, who await a final approval from U.S. Bankruptcy Judge Steven Rhodes as early as Monday. Yesterday’s blackout illustrates the challenges of implementing the city’s plan of debt adjustment, which involved the elimination of billions of its municipal debt, but also as Matt Posner of Municipal Market Advisors warns, likely significantly impedes the city’s access to capital borrowing—risking the city’s ability to invest enough in its future to lure in new investment and population, or, as Mr. Posner wrote: “MMA believes that barring a major population boost in the city that it could re-enter bankruptcy in the next five years…” The functioning of basic infrastructure, a critical factor if the Motor City is to reverse its sharp population decline, comes as some 40 percent of the Motor City’s 88,000 street lights have been ruined, many by scavengers who stole wiring. The city has almost 150,000 vacant parcels, abandoned as the population fell by half over six decades to fewer than 700,000 people.

Arrivaderci. In one of his last opportunities to talk about his experiences managing the largest municipal bankruptcy in American history, soon-to-depart Detroit Emergency Manager Kevyn Orr yesterday at the annual Oakland County Business Roundtable spoke about Detroit’s path to and emergence from the nation’s largest Chapter 9 municipal bankruptcy filing and the plan of adjustment, which Judge Steven Rhodes approved last month—noting that he plans to return to the private sector and might submit his letter of resignation to Michigan Gov. Rick Snyder within days. Mr. Orr, who was named by Governor Snyder to handle the city’s affairs as it labored through a record $18 billion municipal bankruptcy, said he was not interested in repeating his act in another troubled city, but hoped he had put the City of Detroit in position from which it can continue to prosper after decades of bad management, telling the crowd: “Somebody asked me, ‘How do you define success in Detroit?’…I said, ‘Getting out without getting indicted.’” Referring to Gov. Snyder’s decision to name Mr. Orr as the city’s quasi-local government in March of 2013, just as former Detroit Mayor Kwame Kilpatrick was being convicted in federal court of corruption while in office, Mr. Orr said the Governor “decided he was going to take on one of the most long-standing, troublesome issues in his state for the benefit of his residents by starting a review of Detroit,” in the wake of which, with Gov. Snyder’s permission and under Mr. Orr’s direction, Detroit filed for Chapter 9 municipal bankruptcy protection on July 18, 2013, claiming debts and projected long-term obligations of $18 billion. Mr. Orr then described to the audience the challenge—especially for an attorney from Washington, D.C. who had never served in any municipal capacity, of abruptly being named as a quasi-mayor of a fabled city (far from his home and small children) which had lost some 225,000 residents between 2000 and 2010, and legacy costs — payment to long-term creditors and retirees — that were 40% of the city’s billion-dollar general fund budget, and rising, noting: “You would not have been able to run this city…The numbers were nonsustainable.” Mr. Orr also spoke of his calls with Judge Rhodes’ appointed chief mediator, U.S. District Chief Judge Gerald Rosen, as negotiations persisted, and how the two had ended three calls contentiously one evening: “Anybody who says this was not robust…I wish I could’ve recorded some of those phone calls,” noting that the goal was to shed debt, improve city services, and leave the city in a sustainable fashion that would allow it to move out of the bankruptcy. Key for that continued success would be regional cooperation. He praised Oakland County Executive L. Brooks Patterson, who kicked off the meeting, for coming to the table with leaders from Detroit, as well as Wayne and Macomb counties, to form what is now the Great Lakes Water Authority.

The Terrible Cost of Municipal Bankruptcy. One of the remaining, festering issues in Detroit’s bankruptcy is on this morning’s docket in Judge Steven Rhodes’ federal court where closed-door negotiations are scheduled to proceed with regard to the reasonableness of more than $140 million in legal fees charged by the Motor City’s lawyers and consultants—with accounts that one of Detroit’s highest-paid bankruptcy lawyers charged the city Detroit almost $34,000 to travel between the bankrupt city and his Florida vacation home. According to the Detroit News, attorney David Heiman, a $1,075-an-hour partner at the Motor City’s bankruptcy law firm, Jones Day, also billed the city for private cars to ferry him between Detroit and his home in Cleveland, Ohio, and transportation between Florida airports and his vacation home near Fort Myers, Florida. Indeed, Detroit Mayor Mike Duggan is concerned that escalating legal fees could consume critical fiscal resources needed to revitalize Detroit—a point, if ever, hammered home by yesterday’s blackout. Today’s federal court session comes as U.S. Bankruptcy Judge Steven Rhodes has ordered the city and its team of professionals to participate in private negotiations which could result in lowering some of the outstanding bills. Mr. Heiman, one of Kevyn Orr’s legal team’s highest-paid bankruptcy lawyers has received a $100-an-hour raise since Detroit filed bankruptcy in July 2013; two other Jones Day partners bill at that same $1,075 hourly rate: Corinne Ball and Bruce Bennett. The News reports that Mr. Heiman has charged the city at least $33,837 for traveling to and from his Florida vacation home — or more than the average annual pension of retired Detroit police officers and firefighters ($30,607) and almost twice as much as a non-uniform retiree’s pension. The pay and travel add up, as the firm has—to date—charged Detroit’s taxpayers $52.3 million for its legal services in the city’s bankruptcy case. Nevertheless, there remains uncertain accounting to date with regard to how much the city’s hired guns have been paid since Detroit filed for bankruptcy in July of 2013—matters to be discussed today where the bills are detailed in thousands of pages of bills filed in Judge Rhodes’ federal court. This accounting of legal costs today comes as Mayor Mike Duggan and the City Council confront the task of revising the city’s two-year budget to incorporate the spending plans outlined in its plan of debt adjustment or bankruptcy structuring plan—including an accounting for the massive legal bills—all an element critical to clearing the way for the completion of financing to fund key creditor settlements—all to be settled so that Judge Rhodes can set an effective exit date. In addition, the city must also release detailed information about its debt restructuring plan to the municipal market before it can complete the settlements tied to the plan of adjustment, which will allow the city to eliminate $7 billion in liabilities and reinvest $1.7 billion over 10 years in key, municipal services.

Firing an Architect. The San Bernardino City Council Monday night voted 5-2 not to renew a contract under which Michael McKinney had been selected to serve as the chief of staff to San Bernardino Mayor Carey Davis. The one-year agreement, with two one-year options, carried an annual price tag of $125,000. The arrangement between Mr. McKinney and Mayor Davis was unusual in that rather than having the city hire him in a staff or personnel contract position, his firm was hired to provide chief of staff services. Prior to that municipal action, Mr. McKinney had served as Mayor Davis’ political consultant during his successful election campaign. The stumble comes as the city is working under a federally imposed deadline set by U.S. Bankruptcy Judge Meredith Jury to put together its proposed plan of debt adjustment in order to seek approval to exit municipal bankruptcy—and comes in the wake of the city’s decision late last month to hire former Stockton city manager, Bob Deis, who was one of our crack panelists in Austin last month on our panel on “Lessons learned from Municipal Bankruptcy” at the National League of City’s Congress of Cities, and who is regarded as the architect of Stockton’s plan of adjustment approved last month by U.S. Bankruptcy Judge Christopher Klein. Mr. Deis was hired by the City of San Bernardino to help develop its plan of debt adjustment to exit municipal bankruptcy by the new deadline set by federal bankruptcy Judge Meredith Jury. The San Bernardino city council had voted 6-to-1 to award a $300,000 contract to Management Partners, which under the direction of Mr. Deis worked on the Stockton “plan of adjustment” to cut debt and exit bankruptcy.

Gambling on a City’s Future. Senate President Steve Sweeney, New Jersey’s highest- ranking Democratic state lawmaker, and Senator Jim Whelan, a former mayor of Atlantic City, yesterday introduced proposed legislation intended to keep Atlantic City out of municipal bankruptcy. Under the proposal, the bill would channel taxes on gambling revenue to help pay down Atlantic City’s unsustainable municipal debt―and grant greater oversight to the state over the city’s public school system. The actions fall in the wake of Governor Chris Christie’s efforts over the last few months to implement a five-year plan to turn around the former East Coast gambling capital—where casino revenue has come up with more lemons of late than municipal tax revenues, plummeting from a peak of $5.2 billion in 2006 to $2.9 billion last year—leading Moody’s to reduce the city’s credit rating to junk last July because of its dependence on the casino industry. Atlantic City is dependent on casinos, whose earnings account for as much as 70 percent of the shore city’s tax base. Last month, Gov. Christie suggested the possibility of appointing a state emergency manager, noting that some of his potential reforms would require enactment of state legislation. Senate President Sweeney yesterday noted that since then conditions have “only gotten worse,” adding that: “My plan is designed to protect Atlantic City from bankruptcy and position the city for future economic growth.” The pair’s proposed legislation would authorize the casinos to make payments in lieu of taxes for a guaranteed revenue stream, redirect the Investment Alternative Tax to pay as much as $30 million annually in municipal debt, give the state a role in school oversight, and require casinos to provide health and retirement benefits. As the fabulous Matt Fabian of Municipal Market Advisors put it last month: “It looks like (municipal) bondholders were tying their fortunes to the casino, and that was an unfortunate bet.” The souring bets, as Moody’s has opined: “signal continued deterioration of the city’s taxable base and are credit negative” for Atlantic City: “Prospective purchasers of its [municipal] bonds should make an investment decision based on their assessment of the ability of Revel to operate the hotel and casino and to generate sufficient revenues to meet its obligations….If the Resort, including the hotel and casino, or the retail shops cease operations, or if they are transferred to ownership other than Revel, there is no assurance that there will be a need for the energy produced by the Project Facility or that subsequent owners will not obtain required energy elsewhere.”