eBlog

January 29, 2014
Visit the project blog: The Municipal Sustainability Project

Getting Ready to Rumble? New Jersey State Senate President Stephen Sweeney yesterday slammed Gov. Chris Christie for appointing an emergency manager in Atlantic City, warning that it was a clear sign the Governor and potential Presidential candidate intends to force the city into municipal bankruptcy; he pledged a “big fight” against such a move. Sen. Sweeney added: “This state is in trouble. This state has had eight bond rating downgrades. We all know about that. But the real problem is when the administration hires two bankruptcy experts to come into a city to assist the city. What do you think they’re going to assist them with?” Speaking at a meeting of the New Jersey Conference of Mayors, Sen. Sweeney told the municipal elected leaders: “We cannot nor will we ever allow the city to go bankrupt,” adding, in a statement directly to Atlantic City Mayor Don Guardian, who sat in the audience, “I’ve got your back….We will go to court, we will do whatever is necessary to stop this….We might have to get a big fight here. And I’m looking for the Conference of Mayors to get on board. Because if it’s him, who’s next?” Sen. Sweeney had been in the room with Gov. Christie when he made the announcement at an Atlantic City summit last week—at which time no objection was raised. Indeed, until yesterday, no public challenges had been made to the seeming road Gov. Christie appears to be taking towards forcing Atlantic City into municipal bankruptcy. Sen. Sweeney put it this way: “This administration is trying to force a bankruptcy. Trying to force it…So we — every one of you out there — should be concerned about that…How unfair is it to hire two bankruptcy experts to advise him? Guess what just happened? (Mayor Guardian) went out to try to sell some notes, and no one bought them…Why would you buy them? Your bond rating has dropped to junk bond status. Is that a surprise to anybody? It’s the wrong focus. It’s the wrong practice…And I’ll tell you, every one of us should be concerned and outraged over this. You don’t hire bankruptcy experts to dig out of a hole. You hire bankruptcy experts to bury it.” Sen. Sweeney has introduced a package of bills intended to offer fiscal help to the city, focused on redirecting $25 to $30 million from the state’s investment alternative tax that casinos pay towards economic development to pay down the city’s debt, and requiring casinos to pay $150 million in lieu of property taxes for two years to give the city some financial certainty in how much revenue it will collect. Highlights of the proposed legislation include:

• Requiring casinos to pay $150 million in lieu of property taxes for two years so city officials would know how much they could count on to pay the bills, with future payments tied to gaming revenues instead of property taxes.
• Redirecting about $25 million to $30 million a year from the investment alternative tax to pay down the city’s debt. Casinos pay a 1.25 percent on gross gaming revenues and 2.5 percent on internet gaming revenues to pay for economic development programs. About $30-$40 million is sitting in an account unspent.
• Finding $72 million in “cost savings” from the cost of running city government and the board of education.
• Amending casino licenses to require operators “provide a baseline health care and retirement package” for their workers, in response to the a judge’s decision last month to allow Taj Mahal billionaire investor Carl Icahn to void its contract with the union.

Contagious? As was a concern among Michigan cities in the wake of Detroit’s 2013 municipal bankruptcy filing, the possibility of Atlantic City seeking federal bankruptcy protection could cause fiscal tremors or contagion amongst other Jersey municipalities. Moody’s has, after all, not only downgraded Atlantic City, but also termed other municipalities “credit negative,” especially because the Atlantic City move, according to Moody’s, signaled “a limit to the state’s willingness to provide the financial support necessary to prevent a municipality from defaulting or declaring bankruptcy.” A number of other New Jersey communities, including Harrison, Paterson, Newark, Union City, Trenton, and Camden share Atlantic’s City’s struggles with an eroding property tax base.

Kern County Fiscal Emergency. Kern County, California, a county of 864,000, covering some 8,200 square miles in northern central California, with Bakersfield the county seat, this week is in emergency fiscal status in the wake of a severe oil and farm commodity price slump (some 60 percent since June), apprehensive the decline may reduce property-tax collections, Kern County’s largest revenue source, by almost 15 percent in the county’s fiscal year beginning July 1. Officials report the plunge in oil prices has cut projected property tax revenue for the 2015/16 fiscal year budget by $61 million—with oil companies accounting for about 30 percent of the county’s property tax revenues, according to Lee Smith, an assistant county assessor. Roughly two-thirds of Kern’s revenue is gleaned from property tax. Overall, according to Kern County Budget Director Nancy Lawson, the projected drop in property tax revenues, combined with rising pension costs, will cause a $44 million hit to the county’s general fund in 2015. Roughly two-thirds of the county’s revenue is gleaned from property tax. Kern’s general fund is currently $781 million and in surplus, but by 2015/16, officials predict a $27 million general fund deficit. By declaring a fiscal emergency, which the Kern County Board of Supervisors voted to do on Tuesday, officials have the legal authority to tap into a $40 million reserve fund to shore up the budget. The action also gives the Board greater power to cut staffing levels in the county fire department. Kern County is also under increasing strain because of pension costs. (Kern County does not pay into the California Public Employees’ Retirement System (CalPERS), which administers most public pensions in California.) Nevertheless, those pension costs are rising: estimated pension costs for fiscal year 2015/16 are $231 million. The county also has $213 million in outstanding pension obligation bonds the county issued in 2003 to shore up its pension fund—bonds which begin to mature in 2022. While the emergency status is a prerequisite to filing for Chapter 9 municipal bankruptcy under Golden State law, Ms. Lawson said the county’s declaration does not signal that the county will take that step. Instead, she notes, Kern will access the $40 million reserve and perhaps scale back firefighter staffing: “We were looking quite positive before this happened…Unfortunately, our advances in wind and solar power weren’t enough to offset the issues with oil prices.” In 2013, California produced more oil than every state except Texas and North Dakota, according to the U.S. Energy Information Administration. Kern County’s assessor factors in the price in determining the value of oil fields and natural-gas extraction operations: the assessor has indicated the local value for the year beginning July 1 will be $55 a barrel, or $44 less than this fiscal period, according to a report to the board. Cheaper oil may depress property-tax collections by $44 million next year, and consume $17 million from a $90 million special assessment for fire protection, according to Ms. Lawson.

Reassessing Detroit & Detroit from the Perspective of Atlantic City

eBlog

January 28, 2014
Visit the project blog: The Municipal Sustainability Project

Home, Assessing Home. Detroit Mayor Mike Duggan expects, today, to announce double-digit property assessment reductions for three-quarters of city homeowners, joined by Gary Evanko, the Motor City’s chief assessor. Despite having one of the broadest tax bases of any city in the U.S., Detroit revenue collections have been plagued by inefficiency. According to Mayor Duggan’s office: “By and large, Detroit properties have been over assessed for years…Correcting this problem will help to bring property assessments and taxes back in line with their actual value and make Detroit a more appealing place to purchase a home.” Indeed, the property tax accounted for 13.3 percent of Detroit’s revenues in 2012, even though the city had the highest property taxes among big cities in the U.S. Perhaps, more than any other city, Detroit’s property tax collections were assaulted by the recession, with assessed valuations declining nearly 46 percent from 2007 to 2012. But the Detroit property tax revenue problem is also adversely affected by state limitations as well as a city property tax administration system described as “riddled with errors and waste, and overseen by a pair of double-dipping officials who work just two days a week,” and a singular inability to address delinquencies. The Detroit News two years ago reported that 47 percent of property owners were delinquent on their property taxes and fees in 2012—with some delinquency “so pervasive that 77 blocks had only one owner who paid taxes last year.” The Detroit News also found yet another property tax problem: high taxes and low values. In the 2011 50-state property tax comparison study, Detroit ranked first among the 50 largest cities in taxes – and last among property values. Detroit taxes on a $150,000 house were $4,885, twice the national average of $1,983. The city’s average house price, $16,800, was nearly 10 times lower than the next lowest, Mesa, Ariz. Last year, Michigan state regulators approved a plan to overhaul the troubled Detroit department that sets property taxes, so that post-municipal bankruptcy Detroit is now in the midst of a citywide reassessment of all 386,000 parcels—which it hopes to complete by December 2016 based on the corrective action plan state regulators have approved. Early last year, Mayor Duggan announced the city would lower residential property assessments 5 percent to 20 percent in a move to address the city’s dysfunctional tax system―the city’s assessed property values have sharply declined since the housing crisis of 2008. Assessments have decreased over the years, falling 2.5 percent to 13 percent last year, but Mayor Duggan said they have not kept pace with market value.

The Sky’s the Limit. The peripatetic Kevyn Orr, returned from the forlorn, snowed in Atlantic City casino land yesterday to speak at the Detroit Economic Club in what he termed his “exit interview,” discussed his optimism about the Motor City’s post-bankruptcy future—noting strong economic development levels and record attendance at the North American International Auto Show were prime indicators that the city was on the rise and that he now thinks the sky could be the limit for Detroit. Mr. Orr told the audience he is confident in the city’s potential for the short- and medium-term, albeit he is apprehensive about the potential for backsliding: what happens in the long-term if city leaders fall back into the same patterns of mismanagement that in part sent it on a downward spiral toward the largest Chapter 9 municipal bankruptcy in the nation’s history? Nevertheless, he said: “The eyes of the state and world are on (city leaders)…They have the resources to achieve that, but it isn’t over. It’s not the end, it’s the start. Short-term, great. Mid-term, five years, still good. Seven-10 years from now…” Mr. Orr noted
that he warns developers that they are “a little late to the party” if they are just now getting interested in Detroit’s development and redevelopment opportunities: “I think there is no reason Detroit, especially in the short term, should not achieve” rebounds the likes of which were seen in Miami and Washington, D.C., both cities where Mr. Orr has lived. On why the bankruptcy process was so successful: The work that went into the city prior to his appointment in March 2013, Judge Steven Rhodes running “an exemplary process” and the willingness of stakeholders to negotiate. “Everyone was handicapping that this would be a story of conflict,” he said. “The citizens of Detroit handled themselves in a way that was exemplary.”

Sovereignty, Sharing Services, & Rolling the Die

eBlog

January 27, 2014
Visit the project blog: The Municipal Sustainability Project

Home, Sweet Motor City Home. Detroit Mayor Mike Duggan has announced a new initiative under which Detroit employees, retirees, and their immediate families will receive half off homes sold in a city auction. The initiative is aimed at creating more stable neighborhoods in the city by rehabilitating fixable homes in stable neighborhoods. Under the initiative, current city employees, those on the city payroll or working on contract with the city, and retirees will be eligible for 50 percent off the final auction price of homes put up to bid through the Detroit Land Bank—creating a potential Motor City pool, when immediate relatives, defined as siblings, children, and parents of the city’s current and retired work force — significantly greater than the city’s current workforce of about 32,000 employees and retirees. According to the Mayor’s office, the incentive is designed to serve as both a reward to city workers, past and present, and as a way to encourage more people to move back into the city. The auction program, which started in April, targets salvageable homes in stable neighborhoods. The city takes negligent owners to court to force them to repair the homes and get them reoccupied or hand the deeds over to the city, which then auctions them at http://www.buildingdetroit.org. Buyers have six months from the date of closing to have the homes repaired and occupied. Noting that the state in 1999 barred cities such as Detroit from requiring employees to live within city limits, this new program takes a different approach to encourage municipal workers to stick with the city that employs them. The land bank housing auctions by year’s end had sold just short of 400 homes with prices as low as the minimum $1,000 bid to as high as $97,900, depending on the size, location and condition of the property. Banks have been concerned about high loan-to-value ratios and receiving accurate appraisals, even as Detroit is in the midst of lowering tax appraisals citywide to better reflect market values after the foreclosure crisis, fueled by subprime mortgage lending, began hammering the city in 2008-09. The sale process has been a learning process for both the city and buyers; now the land bank has begun offering home-buyer education programs so that purchasers are better prepared to finance homes that, in most cases, need significant repairs.

Municipal Sovereignty: “The table of brotherhood is open.” Because Atlantic City is not in default and has not filed for federal chapter 9 municipal bankruptcy protection, it is in a vortex of a different kind of winter storm than is bollixing the Northeast today. Under the auspices of the New Jersey Local Government Supervision Act; the Municipal Rehabilitation and Economic Recovery Act of 2002, and the Special Municipal Aid Act, which provide provisional authority for Atlantic City to file for federal chapter 9 municipal bankruptcy protection; the city could have sought such protection. However, it has not. Instead, amid cries that New Jersey Gov. Chris Christie, the near-Presidential candidate, is robbing Atlantic City of its sovereignty and undercutting its mayor’s efforts to reduce operating costs, Gov. Christie appointed Kevin Lavin, a lawyer who worked for FTI Consulting Inc. in New York, as an emergency manager with significant authority to investigate and fix the city’s finances. That is, significant preemption of local authority, but nowhere near the broad powers that a state-appointed overseer had in Camden several years ago or the near absolute control former emergency manager Kevyn Orr—now an advisor to Mr. Lavin in Atlantic City―was given in Detroit. The moves—and questions―came as, at the third summit held on Atlantic City’s problems in the past five months, the aspiring Presidential contender, Gov. Christie, indicated that the extent of the state’s investment in the city gave the state much greater risk—obliging him to resort (no pun) to make a bold move, even as he noted that measures to help the city that have been proposed by local officials, state legislators, and his own advisory commission will come at significant cost to state taxpayers, noting: “I say this because all of them assume an investment of extensive state resources without a comprehensive and committed plan leading to long-term fiscal stability for Atlantic City,” adding: “This is what we should expect of ourselves. This is what the residents and taxpayers expect of us not only in Atlantic City, not only in Atlantic County, but across the entire state of New Jersey where people are being asked to pay some of this expense.” Indeed, New jersey provided Atlantic City for the first time last year with some $13 million in transitional aid—fiscal assistance in addition to its regular city and school aid—assistance which Mayor Don Guardian, who remains in office, has made clear he will request again this year, especially with the Garden State Legislature considering bills which would redirect casino taxes and other assessments directly to the city, including $30 million that goes annually to the Casino Reinvestment Development Authority to finance local projects and the Atlantic City Alliance’s $20 million marketing budget. Another bill would make the city school district eligible for a major boost in state aid. This all, of course, raises even more questions about sovereignty: if the legislature appropriates funding to go to Atlantic City—where, unlike in Detroit—the Mayor is still in office: where do the funds go? Who has the spending authority? In his Executive Order which he signed last Thursday, Gov. Christie included provisions:

4. All state agencies and all officers, employees, agents, divisions, departments, bureaus, and authorities of the City of Atlantic City shall cooperate in the implementation of this Order, and shall make available to the Emergency Manager at his request all financial and other information, documents, and records of, or pertaining to, Atlantic City.
5. Pending receipt of recommendations from the Emergency Manager, I reserve the right to take such additional actions, invoke such emergency powers, and issue such emergency orders or directives as may be necessary to protect the health, safety, and welfare of the people of Atlantic City and the State, and to ensure the continued provision of essential services in Atlantic City.
6. This Order shall take effect immediately and shall remain in full force and effect until rescinded, modified, or supplemented.

But those provisions address assumed state powers; they do not address preemption of the authority of the Mayor and Council. As the quasi-emergency manager and former Detroit Emergency Manager Kevyn Orr―in the wake of a 35-minute, closed-door summit meeting with Governor Christie, state legislators, area mayors, casino executives, union leaders, and others; Mr. Orr noted that Atlantic City should not be compared to Detroit, noting that a critical interest of the state is a bridge loan to Atlantic City which comes due on March 31st, referring to a $40 million state loan approved in December to help the city pay for tax appeals won by casinos. The city has issued $345 million in bonds since 2010 to cover tax appeals and settlements, and debt service represents 15 percent of the 2014 budget, according to a report by the governor’s advisory commission on Atlantic City. Nevertheless, Atlantic City Mayor Don Guardian has repeatedly argued against imposition of an emergency manager, saying that in the year since he took office he has eliminated hundreds of city positions, cut costs, and begun union negotiations―noting that the city already has a fiscal monitor as part of its transitional aid agreement with the state. Nevertheless, he emerged from the summit meeting saying the “table of brotherhood is open” to anyone who wanted to help, adding that the role of the appointment appeared less preemptive and less threatening than it had during the second Atlantic City summit last November, where one participant had indicated the Governor “wanted an emergency manager to fire the entire workforce of the city and take over.” Or, as Mayor Guardian framed it: “That’s a lot different than the governor saying we’re going to help the city, we’re going to provide you with additional tools that you need, and they’re going to work with the mayor and the city council president in order to help you find some financial stability.” Nevertheless, with the lines of authority so uncertain, Mayor Guardian noted that until he fully understood Gov. Christie’s executive order, he would not be able to say if he supported or opposed the emergency manager’s appointment. Likewise, Atlantic City Council President Frank Gilliam said that while he wanted to sit down and talk with Messieurs Lavin and Orr, he was “totally opposed to anyone coming in and taking over sovereignty of the city,” adding: “We’re open to working with them. But at the same time, any time they tend to basically usurp our power, we definitely have a problem with that.” Atlantic City has already been under supervision of the state’s Local Finance Board for a number of years in exchange for permission to issue special debt to fund property-tax appeals. Under its authority, the Local Finance Board may be able to reshape the city’s budget to conform to Lavin’s recommendations if the city fails to follow them. That is, there appears to be some form of emerging shared governance—but how “sharing” is defined remains most blurred.

Even as the blurred lines of governance in Atlantic City’s “Table of brotherhood” continue to evolve, the legislature continues to discuss competing tax reform plans for Atlantic City, with Assemblyman Chris Brown (R-Atlantic) proposing freezing the city’s property tax rate for the next five years—and redirecting some of its ensuing revenues. Assemblyman Brown has said his proposal would freeze taxes for everyone, not just casinos, but opponents like Assemblyman Vincent Mazzeo (D-Atlantic) say Brown’s measure would not suspend casino tax appeals as the payment in lieu of taxes (PILOT) program does, potentially allowing for further reductions in the city’s tax base and requiring more indebtedness to pay for the resulting tax refunds. The Garden State Legislature could vote on a tax-reform plan as soon as next month, but Gov. Christie has noted that many of the various efforts by the Legislature and other parties to improve the city’s situation had yet either to be approved or to take effect. These various discussions come against an hour clock where the sands are fast running out: the city has a loan due at the end of March—and the experienced, post-Detroit Kevyn Orr warns it will soon be a quarter of a year since the advisory commission called for an emergency manager, and it could be months more before a financial restructuring has an impact: “Even if you want to put something in place today, it would probably take another 90 days before it would become effective…It would probably take another 90 days after that before you start to see a result.” All of which means, according to Moody’s, an increased default risk from the looming maturity of $12.8 million of notes due next Tuesday, with the credit rating agency stating: “This is a rapid, dramatic change from the State of New Jersey’s prior policy of preventing default or bankruptcy of Atlantic City or any New Jersey local government.”

Rolling the Dice. One of the least publicly discussed, but most challenging issues for Atlantic City will be readjusting its fiscal dependence on casinos—the property taxes on which have long funded the bulk of Atlantic City’s budget. In the past few years, however, the collective value of those properties has fallen nearly 50%, from about $20 billion to about $11 billion, an amount projected to drop even lower. The extraordinary drop has forced the city to increase residential property taxes 50 percent over the last two years—and over 100 percent since 2008. The depreciation and casino bankruptcies – and the successful tax appeals by casinos have forced the city to issue nearly $400 million in debt to cover repayments, according to Revenue and Finance Director Michael Stinson, including about $140 million the city has added to its own debt. Today, nearly 15% of Atlantic City’s budget goes to debt service: payments totaled $36.8 million this past year—about an 80 percent increase from 2007. For Mayor Guardian, the question now is whether his hand will be coerced—and his city forced into bankruptcy; he notes: “The people who live in Atlantic City and the surrounding area have a very strong sense of community, adding that he thought resulting ties could prevent officials from taking drastic but necessary action, such as renegotiating contracts with city employees. Nevertheless, the Governor’s preemptive appointment represents the first time an emergency manager has ever been imposed in the Garden State. Notwithstanding the uncertainty with regard to how much power the Governor has, in effect, granted to Mr. Lavin―or exactly how much has been stripped from Mayor Guardian; the Governor’s executive order proposes no end date for preemption—much less any definition or discernment of the breadth of the authority.

Sharing Services. In an increasingly sharing economy, cities and counties seem to be behind the eight-ball, but in San Bernardino—where paring down the cost of essential public services is critical to its ability to finalize its proposed plan of debt adjustment to obtain Council approval and submit to U.S. Bankruptcy Judge Meredith Jury before her federally imposed deadline—a key effort has been with regard to public safety. City leaders are considering a potential suit against the California Department of Forestry and Fire Protection, or Cal Fire, in an effort to force the state agency to bid on providing fire and EMS services for the city. At its last City Council meeting, during closed session, City Attorney Gary Saenz said the council had added such an item to the closed-session agenda and voted 5-1 to provide “direction” with regard to such an action, confirming subsequent to the session that the council was trying to force a bid for services and plans to file a lawsuit by the end of this week, noting: “We need to look at all possibilities of contracting out our services rather than providing them in-house…The reason for that is sometimes an equal level of service — or a greater level — can be achieved by contracting out, and if that’s the case, the bankruptcy creditors that we’re impairing (by not paying everything they’re owed) are going to require that we achieve those efficiencies.” With the Memorial Day deadline for completing and submitting its proposal plan of debt adjustment to Judge Jury, the clock is running out on the time the city has to determine and weigh all its options. But, especially in the wake of last summer’s vote by the Council authorizing City Manager Allen Parker to seek bids that might allow the city to outsource fire services, including to the county or to Cal Fire, even though this was a proposal previously rejected by Cal Fire—which, more than a year ago, Cal Fire Chief Ken Pimlott had notified the Mayor and Council: “As public agencies look for models of good government to leverage the financial and operational benefits of working together to provide integrated public safety functions, CAL FIRE will continue to evaluate requests where appropriate and mutually desired…However, given the current fiscal instability faced by the City of San Bernardino, it does not meet the criteria to be considered for a cooperative agreement.” By some estimates, contracting with Cal

Taking Stock in Stockton. U.S. Bankruptcy Judge Christopher Klein on January 20th denied a request by Franklin Templeton Investments to impose a stay on the City of Stockton’s exit from municipal bankruptcy and implementation of its plan of debt adjustment. City Manager Kurt Wilson greeted the inaugural day news with remarks indicating how important the green light for the city to move on was: “As the judge indicated today in court today, it removes a lot of uncertainty for all of us—employees, retirees, creditors, businesses and investors…[it] allows Stockton to move forward without the stigma of bankruptcy.” Holdout creditor Franklin’s request for a stay had prevented the city from implementing its plan of adjustment while the appeal was being heard, but Judge Klein’s decision invokes an automatic stay through next Tuesday, after which time Stockton’s federally approved plan of adjustment can take effect, albeit the city still awaits a pending appeal before a three-judge U.S. Bankruptcy Appellate Panel of the Ninth Circuit. Nevertheless, Judge Klein, during the hearing in his courtroom said he was confident in his prior decisions and that he feels that the “likelihood of success of the appeal by Franklin is low.”

A Gamble that Failed?

January 22, 2014
Visit the project blog: The Municipal Sustainability Project

A Gamble that Failed? New Jersey Governor Chris Christie is bringing in an emergency manager to take over the day-to-day operations and troubled finances of Atlantic City, marking an unprecedented expansion of state control over a New Jersey municipality. The move came after former Detroit emergency manager Kevin Orr opted not to accept Gov. Christie’s offer of the position—but did say he would try and help. The appointment, with somewhat unclear legal authority, was based upon an earlier advisory commission by last November’s Governor’s Advisory Commission on New Jersey Gaming, Sports and Entertainment, where one of the recommendations was the creation and appointment of an emergency manager. The Governor is expected to make the formal announcement today during the third summit he has held in an effort pull the city from economic hardship—when he is expected to name Kevin Lavin, a lawyer who worked for FTI Consulting Inc. in New York—with Mr. Orr to serve as a consultant to work with Mr. Lavin—and the dynamic duo expected to get down to work immediately, assuming—and preempting–the powers now held by the mayor and council, and with authority to consider a range of solutions — including renegotiating public-employee contracts. In the Motor City, Orr spokesman Bill Nowling said Mr. Orr has no plans of becoming emergency manager of Atlantic City, just over a month after finishing his work managing Detroit’s bankruptcy, but has been advising Gov. Christie on how to handle a state takeover: “He met with (Christie) over the holidays to give him some advice, but he’s not going to be the emergency manager.” The New Jersey Local Government Supervision Act; the Municipal Rehabilitation and Economic Recovery Act of 2002 and the Special Municipal Aid Act provide provisional authority for Atlantic City to file for federal chapter 9 municipal bankruptcy protection; however, there have been no discussions as yet with regard to such a step—albeit reports are that all options are on the table, even including renegotiating labor contracts. The flurry of announcements came as a spokesman for Atlantic City Mayor Don Guardian, a Republican, said Mayor Guardian would oppose any sort of outside control, including an emergency manager, because he had already cut the city’s budget and more than 140 employees, working closely with state officials, with his spokesperson stating: “I don’t think the residents will be very happy…They elected the mayor to represent them. He has been fulfilling his duties to the best of his ability and we’d like to know what an emergency manager would do that the mayor hasn’t done already.” For his part, Gov. Christie has said he respected the Mayor’s efforts; however, he remained committed to having the state take a leading role: “The fact is we are going to do the things we need to do to try and make sure Atlantic City gets it act together.” With the casino closures, the city’s assessed property value has plunged from $18 billion in 2012 to an expected $9 billion at the end of this year, according to Moody’s Investors Service. Last November, a panel convened by the Governor had suggested the state impose an emergency manager for Atlantic City, along with restructuring the city’s school, tax and pension systems. At today’s summit, the Gov. and members of his panel are expected to only address the appointment and authority of the emergency-management team; the rest of the related issues are still under consideration with more steps to be announced, the senior administration official said.

Social Media, Municipal Fiscal Distress, & Contagion. Detroit neighbor Wayne County expects to receive more concrete numbers about its increasingly difficult financial situation in the coming weeks, according to County Executive Warren Evans, who, yesterday, at a meeting of the Detroit Economic Club, said that an ongoing financial review “to figure out how deep the (budget) hole is” likely will show that its depth “will be a little surprising…I expect it will be deeper than we thought.” The County Executive, who was on stage with Detroit Mayor Mike Duggan, Oakland County Executive L. Brooks Patterson, and Macomb County Executive Mark Hackel in the club’s sixth meeting of regional leaders (aka The Big Four) said: “Hopefully (the review) sends the message to people that we are going to fix the problem. We have a number of things outstanding, and it will be maybe 7-10 days from now when we can be more definitive about how deep the hole is. We are going to try to get a real grip on the problem.” Borders, in regions, after all, are permeable: distress can spread, as can economic growth. What seems important is that in the wake of Detroit’s bankruptcy and ongoing post-bankruptcy recovery, there appear to be increasing signs of a recognition that all the municipalities in the region are in this together. The meeting, which was attended by about 800 at Detroit’s Cobo Center, also included discussions about regional issues such as the new Great Lakes Water Authority and regional transit, as well as the May ballot proposal to hike the state sales tax to fund road construction—marking County Executive Evans’ first Big Four meeting hosted by the Economic Club since his November election.

Social Media & Municipal Fiscal Distress, & How Do We Define a Municipality Eligible for Bankruptcy Protection?

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January 20, 2014
Visit the project blog: The Municipal Sustainability Project

Social Media & Municipal Fiscal Distress. Wallet Hub, a Washington, D.C.-based social media company, allows people to search for and compare financial products and interact with a community interested in making what it deems “smarter financial decisions.” In the state and local sphere, the media company provides many kinds of state and local rankings, such as the “best places” to work, the best places to buy chili, the best places to get a divorce, etc. It does tax rankings, looking at a broad range of taxes, including property, income, sales, fuel, alcohol, and telecommunications taxes―but not cigarette taxes or corporate income or many other business taxes. The company reports it is designed to help people who are seeking to relocate for job opportunities to make the right decision. In our raising App age, then, its ranking of San Bernardino as last in its list of the 150 “Best and Worst Cities to Find a Job,” released by the financial information website is less than encouraging—albeit with more than 89,000 municipalities, it is difficult to comprehend an objective process to imagine that a social media site can really serve as an objective or precise tool to measure the unmeasurable. Nevertheless, utilizing metrics such as job opportunities, housing affordability, employment growth, median annual income, industry variety, safety, and the percentage of employed workforce living under the poverty line; the site awarded its quasi-booby prize to San Bernardino. In response, Mayor Carey Davis noted that the site’s rankings ought to come as little surprise, because the city’s municipal bankruptcy has garnered national attention: “I don’t know if it makes a lot of difference, because nationally there’s a recognition and acknowledgement (of the city’s situation)…I don’t know if this has any more impact than information already out there.” Moreover, after scanning the rankings, Mayor Davis said he had found a correlation among the states, with California the home of many cities ranked in the bottom half of the report, but only one in the top 20. In contrast, he added, nine of the top 20 are in Texas, suggesting, he notes, “[T]here’s more going on than what an individual city is doing,” that is that states can play a significant role in helping or hurting cities. In the case of California, he noted, it suggests that statewide factors — such as the dissolution of redevelopment agencies in California — played a significant role in cities’ job success. In fact, as we have noted, very much unlike Michigan or Rhode Island, but more like Alabama; California has contributed virtually no support to its singular number of cities that have filed for federal bankruptcy protection. Nevertheless, the rise of social media demonstrates an evolving arena which could and will affect state and local economies—and challenges to cities in fiscal distress. John Husing, chief economist for the Inland Empire Economic Partnership and an expert on the local economy, dismissed the list as “nonsense,” because he notes that we increasingly live in metropolitan economies: “If I live in San Bernardino, do I confine myself to San Bernardino to find a job? Of course not. Any one city is a piece of a much more complex area. It’s not important to look at particular cities. Does San Bernardino have economic problems? Yes. Enormous problems. But the ability to find jobs in the city is not one of them,” adding that Ontario, itself listed 115th, nevertheless was rated third, out of 150, for “fastest employment growth,” a subcategory within the report. John Andrews, economic development director for the city, said Ontario came off from double digit unemployment from 2013 to 2104. The latest unemployment figure for Ontario was at 8.2 percent, down from about 10 percent the year before, adding: “The bigger WalletHub survey (finding) is a very broad stroke, whereas, this smaller analysis just shows the employment growth we are seeing on the ground here in the city of Ontario: “We are all focused on attracting job opportunities so the region can thrive.” he added.

Democracy & Its Challenges to Recovery II. Because of the unique governance and federalism involved with municipal bankruptcy, where a city or county may only file for federal protection—and then only if it complies with the laws and procedures dictated by a state’s enabling act, each city or county’s situation can be unique. Such, indeed, is the case with the territory of Puerto Rico. Created by the Jones-Shafroth Act of 1917, the island territory with a population comparable to Oklahoma’s, but a GDP smaller than Kansas,’ the territory is fiscally teetering. The Act entitled Puerto Rico special tax status and granted Puerto Ricans U.S. citizenship. The tax incentives were key to the island’s ability to attract pharmaceutical, textile, and electronics companies; but Congress phased out the incentives from the mid-1990s to 2006, contributing not only to the loss of 80,000 jobs, but also an unrelenting contraction of the island’s economy, which has contracted every year except one since then, even as its poverty rate today is nearly twice that of Mississippi, the poorest state, at 14%. Unsurprisingly, jobs are disappearing: more Puerto Ricans are emigrating, and the tax base is disintegrating. The island’s population is headed toward a 100-year low by 2050. But it is a hybrid: it is neither a state, nor a municipality. Were it a municipality, it would have the option of bankruptcy—were it located in a state which authorized such a filing. The island, however, falls in the Twilight Zone. Now there are hard, hard questions about what its fiscal options are—fundamental questions. The old federal statute adopted by the 64th Congress provides (§2, chapter 145) that “Nothing contained in this Act shall be construed to limit the power of the legislature to enact laws for the protection of the lives, health, and safety of employees.” That writes almost as if it could be construed as a fiscal elixir, but we are in charted legislative seas. With its debt of $73 billion, its Government Development Bank experienced a liquidity meltdown of nearly 33% in December—so that the legislature’s newly enacted tax law is critical to the provision of some $2.2 billion. Puerto Rico faces the difficult prospect of boosting its economy while fixing its public finances. Since taking office in 2013, Governor Alejandro Garcia Padilla has acted to raise excise taxes and expand the sales tax base, to restructure public pensions, and reduce the deficit. Simultaneously, the territory has enacted tax incentives to improve revenues by seeking to lure non-residents to move to the island and invest. Now the question arises: with the island neither a state, nor a subset of a state which could enact legislation authorizing it to file for bankruptcy protection, could the territory rely on its enabling federal statute to take action to ensure governmental continuity? That question is increasingly urgent, as Moody’s at the end of October warned in its note, “Commonwealth Faces Narrowed Liquidity,” the Government Development Bank will have to find a way to refinance its loans to the Highways and Transportation Authority to shore up its liquidity, meaning that the government has to find a way for the Authority to pay off a large portion of the $2.2 billion it owes to the Bank. Last week, Puerto Rico Gov. Alejandro García Padilla signed a bill intended to accomplish just that: the legislation increases oil taxes, directing a portion of the new revenues to the Puerto Rico Infrastructure Finance Authority (PRIFA) to back the issuance of up to a $2.95 billion bond, so that, if successful, a portion of the issuance’s proceeds could be used by the Authority to pay off its $2.2 billion in debt to Bank—a critical step in enhancing the Bank’s liquidity—or, as Moody’s analyst notes: “The dwindling December net liquidity position underscores Puerto Rico’s continued reliance on actions such as the planned refinancing of GDB loans to the Highway and Transportation Authority…Failure to execute this planned transaction because of market access or other challenges would imperil Puerto Rico’s already precarious financial position.” For its part, the rating agency S&P is concerned that the government has made the territory eligible for the Public Corporations Debt Enforcement and Recovery Act, which is a bankruptcy process for public corporations’ debt. As a next step, Puerto Rico, as early as this month, plans to issue $2.9 billion of municipal bonds, with the proceeds intended to repay $2.2 billion that the territory’s highway authority borrowed from the Bank. But the investor base it the island’s bonds appears to be changing: as Bloomberg has noted, Puerto Rico is now turning to hedge funds, distressed-debt firms, and corporate high-yield funds―a turn that could well mean both greater risk and higher interest rates. Increasingly, it seems that Governor Padilla and the legislature will have to assess and interpret just what authority the federal government really granted it nearly a century ago to “enact laws for the protection of the lives, health, and safety of employees.”

Democracy & The Challenges It can Create to Municipal Bankruptcy Recovery & Sustainability

Democracy & Its Challenges to Recovery. Because of the unique governance and federalism involved with municipal bankruptcy, where a city or county may only file for federal protection—and then only if it complies with the laws and procedures dictated by the state enabling act, each city or county’s situation can be unique. In addition, of course, the role a state plays may also be a significant, contributing factor—so that, for instance, in Rhode Island and Michigan, local elected officials were preempted from any role; rather state-appointed emergency managers exercised the equivalent of dictatorial powers, but, in each state, the state itself evolved into roles of significantly contributing to resolution and eventual approval of the respective municipalities’ plans of debt adjustment by the federal courts. In stark contrast, in Alabama and California, there are no such provisions: in effect the municipalities (Jefferson County in Alabama; Vallejo, Stockton, San Bernardino, etc.) were or are left on their own to put together plans of debt adjustment. Indeed, if anything, as U.S. Bankruptcy Judge Thomas Bennett wrote in the case of Jefferson County with regard to its—at the time—largest municipal bankruptcy in the nation’s history: “The state of Alabama and its legislators are a significant, precipitating cause. Both before and after filing for its chapter 9 case, the county’s revenue-seeking activities with Alabama have been to no avail.” Thus, with a federally imposed May 30th deadline to put together its plan of debt adjustment for the U.S. Bankruptcy court, San Bernardino’s elected officials are working harder and harder through the democratic (small d) process to try through public hearings and legislating to put together a long-term strategic plan that would, in turn, create the foundation for the city’s plan of adjustment and the foundation for its fiscal and economic future. In effect, its elected leaders are seeking to put together a strategic plan which will articulate, via input from the community and guidance from leaders in the community, just where should the city be heading…and, in effect, laying the foundation for the city’s proposed Plan of Adjustment: the financial plan to set the City on course to realize those plans. So there are politics, art, and fiscal science or alchemy to determine—in a democratic process—how to return to solvency, reduce the factors that contributed to the insolvency, and agree upon a fiscal blueprint for a sustainable future. Absolutely unlike Detroit, that means the city’s leaders must figure out how to, in effect, construct a political or social infrastructure, or community involvement and leadership, so that the community itself takes ownership in this precipitous road ahead. Judge Bennett told me that one of his greatest concerns in the Jefferson County case was the absence of the county’s taxpayers from a key role in helping the county put together its exit plan—but of course, compared to Central Falls and Detroit, where taxpayers were totally excluded, Jefferson County and the California municipalities demonstrate the dual, challenging road of elected officials. Thus, in San Bernardino, the strategic plan will articulate, via input from the community and guidance from leaders in the community, just where the City should be heading. The city’s plan of adjustment will provide the financial plan to set the city on course to realize those plans. The goal is to, through this messy process of democracy, put together a process and plan about being service solvent again―in San Bernardino’s case, a plan modeled on similar strategic planning efforts by the county and San Bernardino City Unified School District, so that it will heavily borrow from the school district’s contacts and resources and require extensive meeting with the public. Or, as City Attorney Gary Saenz puts it: “We’re going to require a significant amount of engagement from all stakeholders — residents; businesses; important institutions, for example the school district…We’ve been under a gag order for much of this case… but we want to involve many more people now.” To date, work on the bankruptcy exit plan or plan of adjustment, which will expand on a usual municipal budget, detailing how the city’s creditors will be treated and include a 20-year forecast for the city — has been done behind closed doors—especially because of the pre-exiting gag order which expired at the end of last month and prohibited much of the information related to that plan from even being disclosed to City Council members. Now, with all seven council members privy to the information, Mayor Carey Davis has made clear the time for public involvement is coming: “We can’t have the strategic plan and the Plan of Adjustment pulling in two different directions,” noting that if the community wants the city’s focus to be on increasing education or reducing crime, the city’s plan of adjustment will need to fund those areas appropriately. According to San Bernardino’s timeline, a draft of the plan of adjustment will first be presented to the City Council — in closed session — in April, with the first public hearing in May. In the nonce, work will continue in parallel on the strategic plan, which is intended to be a longer-term plan of how the city should progress beyond bankruptcy and to be updated regularly. Mayor Davis reports his goal is to have four stakeholder meetings open to the public, followed by a “state of the city” in late February or early March.

San Bernardino’s Plan of Debt Adjustment Schedule
January, February
• Brief mediation judge
• Assess city organization
• Benchmark against other similar cities
• Develop staff recommendations for Recovery Plan
• Refine cost of Recovery Plan
• Develop components of Plan of Adjustment
• Check in with City Council collectively and individually
• Begin community engagement and strategic planning process
• Mediation and negotiation with creditors
March
• Finalize strategic planning/community engagement and integrate with preliminary Plan of Adjustment
• Mediation and negotiation with creditors
April
• Presentation of draft Plan of Adjustment to City Council in closed session
• Refinement of Plan of Adjustment
• Mediation and negotiation with creditors
• Ongoing public communication regarding Plan of Adjustment process
May
• Hold a public hearing on Plan of Adjustment and adopt it
• Submit the Plan of Adjustment to bankruptcy court
Source: City of San Bernardino

More Sticker Shock in the Motor City. Lazard, the global financial advisor representing city retirees during Detroit’s municipal bankruptcy, defended its fees yesterday, claiming it ate a $6 million bonus that had been promised if the city successfully exited bankruptcy court. The firm’s filing detailed the reduction the firm accepted during closed-door negotiations in the wake of Mayor Mike Duggan’s frustration about the threat that high fees could derail Detroit’s plan of debt adjustment—and waylay the city’s fiscal future sustainability. The action came with yesterday’s deadline for the vast array of the Motor City’s bankruptcy lawyers and consultants to justify the approximately $170 million in fees they have charged the city’s taxpayers—and for the ever patient U.S. Bankruptcy Judge Steven Rhodes to determine whether such charges are, in fact, reasonable. In a remarkable irony, Lazard was represented publicly by Ron Bloom, the former Obama administration auto czar. In its filing, Lazard claimed it accepted a 37 percent pay cut, which reduced its fees to $5.56 million, down from $8.44 million—under its contract with the city, Detroit was bound to pay the firm $175,000 a month plus a $6 million “success fee” payable if Detroit successfully exited bankruptcy court. The Segal Group Inc., a human resources and benefits consulting firm, also submitted a filing yesterday to defend its fees for its actuarial services to both the retiree committee and city. The firm advised the federal court that, when asked to cut its fees, it met in mediation with the city and “quickly agreed to a reduction of $99,000,” adding: “We believe that our billed amounts, coupled with the agreed-upon reduction of $99,000, were appropriate professional fees for sophisticated, high-level work that contributed significantly to the Retiree Committee’s acceptance of the Plan of Adjustment and to the successful resolution of the bankruptcy in a timeframe much shorter than initially anticipated.” The retiree committee retained Segal in September 2013 to provide consulting: Segal was initially responsible for providing financial analysis of the proposed changes to the pension and retiree health care benefits and to educate the committee on the impacts, but, as the bankruptcy progressed, the firm’s attorney yesterday told Judge Rhodes: “Our role was significantly expanded to include advising the city and serving as the pension expert at trial…We gave the Detroit bankruptcy engagement the highest priority, forfeiting other client opportunities.” In addition, Segal claimed that prior to agreeing to cuts in mediation, it had already provided a “substantial discount” in its fee structure, noting in its filing concessions of 14 percent in its overall bill of $3.9 million, not including the $99,000 reduction. Detroit’s legal and accounting tab came to some $170.2 million before a state reimbursement of $5.29 million: among the heaviest costs: the city’s lead law firm, Jones Day, at $57.9 million; investment banking firm Miller Buckfire, $22.82 million; restructuring firm Ernst & Young, $20.22 million; and operational restructuring firm Conway MacKenzie, $17.28 million. Dentons US LLP, a law firm that represented the official committee of city retirees, received $15.41 million. The city’s two pension funds paid attorneys at Clark Hill $6.25 million and financial advisers at Greenhill & Co. $5.71 million. The filing shows bankruptcy mediators were paid $980,000, although none of the money went to federal judges who served on the mediation team. Most of the money went to mediator Eugene Driker’s law firm.

The road to recovery from municipal bankruptcy is strewn with potholes and other obstacles.

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January 14, 2014
Visit the project blog: The Municipal Sustainability Project

Learning how to recover. The road to recovery from municipal bankruptcy is strewn with potholes and other obstacles. Clearly a key issue for a city or county if it is to attract citizens is the quality of its public schools; thus, yesterday, Michigan Gov. Rick Snyder, in naming the City of Flint’s emergency manager, Darrell Earley, to be the next leader of Detroit Public Schools (DPS), the 4th emergency manager, said he does not believe bankruptcy is a good option for DPS. Mr. Earley’s appointment comes amid a swirl of discussions around education reform in post-bankruptcy Detroit. Last month, officials from the Skillman Foundation and other groups formed a 31-member coalition charged with finding ways to address academic achievement, finances and other problems surrounding education. Nevertheless, the Governor’s announcement sparked criticism from citizens who believe the district should be returned to local control. Mr. Earley stated he intends to spend his first 90 days reviewing operations and to focus on improving academic achievement. His gubernatorial appointment marks the fourth emergency manager for DPS in six years. For his part, the Governor said that even though another emergency manager was not his preferred option, he believed it was necessary, given DPS’s financial and academic challenges: the system has a $169.5-million deficit. Mr. Earley, an ordained deacon, served as Flint’s emergency manager since October 2013. Prior to that, he worked as a city manager in Saginaw, a city administrator in Flint, and budget director and controller for Ingham County. In making the appointment, Gov. Snyder said Mr. Earley has a “legacy of success” in taking on fiscal challenges. According to state officials, Flint is on track to return to local control in about three months. Nevertheless, the new challenge for Mr. Earley will be distinct: how to address falling enrollment—and how to restore trust in DPS. Yesterday, Mr. Earley said that “educational achievement must be the focal point of all of our interests,” so that he intends to implement changes. Falling enrollment continues to be a concern as the district faces increased competition from charter and suburban schools. DPS has about 47,000 students. LaMar Lemmons, a member of the Detroit school board, this week worried that emergency management has been a huge failure: “Democracy has been removed from the citizens…It’s unconscionable, and a total disservice to our children.” In addition, unsurprisingly, Gov. Snyder’s appointment has reawakened state-local apprehensions about Michigan’s emergency manager law, PA 436, the state’s statute which provides that if an emergency manager has served for at least 18 months after being appointed, a governing body can remove the manager by a two-thirds vote: yesterday’s appointment came just shy of the system’s previous gubernatorial appointee’s 18-month anniversary. For his part, Gov. Snyder reported that while school safety had improved, enrollment losses have stabilized, and there has been progress toward improved academic achievement under the outgoing emergency manager; challenges remain, especially on the fiscal front: DPS last month announced that its deficit was nearly $170 million, up nearly 33% from the $127 million announced a few months earlier—a significant drop from 2010’s deficit of more than $300 million, but much larger than the nearly $80-million shortfall DPS had around the time of the Governor’s previous appointee.

Sticker Shock. For Detroit, still another pothole in its road to recovery will be an issue virtually never discussed in U.S. Bankruptcy Judge Steven Rhodes courtroom: the cost of auto insurance. But for a city desperately seeking to recover some of its drastic 2/3’s population loss, here is another critical challenge. According to an analysis by CarInsurance.com, Detroit has the highest auto-insurance premiums in the U.S. So even as the Motor City successfully emerged from its record municipal bankruptcy last month, the task of luring families and individuals to move back into what was once one of the largest cities in the country, especially new tax-paying residents, the cost of car insurance in a city without terrific public transportation is a significant issue. CarInsurance.com reports that the Motor City features the five most expensive zip codes in the U.S. for auto insurance: zip codes in Detroit which produced average annual rates of about $5,000, 29 percent more than the highest average premium in New York City—even though New York’s median household income of $52,259 is twice Detroit’s, according to the U.S. census. Indeed, the cost of automobile insurance is such a universal complaint in Detroit that Mayor Mike Duggan promised in his 2013 election campaign to start a municipal insurance agency to offer reduced premiums. The city, in fact, hired an actuary to study whether that would be feasible, and officials are looking at all possibilities, including state legislation; however, Michigan Rep. Harvey Santana said Detroit lacks the resources to provide insurance relief. The cost of insurance is so prohibitive that an estimated 21 percent of Michigan motorists are uninsured, according to CarInsurance.com, nearly double the nationwide rate of 12.6 percent. While there is little Detroit can do to bring down the insurance rates, it appears that the city will have to address the volume and higher cost of claims compared with surrounding areas: Detroit’s vehicle-theft rate in 2014 was 1,534 per 100,000 residents, almost seven times the national rate, according to data from both the FBI and Detroit Police Department—leading Detroit city attorney Butch Hollowell to say: “We do believe that we can construct a system that would deliver a low-cost policy and provide coverage for people at an affordable rate.”

San Bernardino & the Sounds of Silence. With the city under a federal court order to come up with a plan of debt adjustment by early Spring for U.S. Bankruptcy Judge Meredith Jury, San Bernardino Mayor Carey Davis is proposing to further limit the time members of the public can speak at City Council meetings, according to City Clerk Gigi Hanna, with the Mayor proposing a rule which would limit each public speaker to a total of 12 minutes per meeting—a change from the current rules, under which anyone in attendance can speak for up to three minutes on each of any (or all) items on the Council’s agenda—and even an additional three minutes for items not on the agenda. Effective next Tuesday, individuals will be limited to three minutes of comment about the entire consent calendar — and only a council member or the mayor will be allowed to “pull” any item for fuller discussion. While an attendee will still be permitted to discuss regular agenda items for up to three minutes per item, the city clerk noted that citizens will be limited to a “12-minute-total limit per person per meeting.” The council did not vote on the decision. Part of the concern appears to be the seemingly interminable length of some council meetings, so the mayor’s move appears not to have ruffled any feathers amongst the council: six of the seven council members were on the dais for this week’s meeting, and California’s open meeting law requires public agencies to give the public an opportunity to address items of public interest at every meeting, but the state law explicitly allows time limits: “Every notice for a special meeting shall provide an opportunity for members of the public to directly address the legislative body concerning any item that has been described in the notice for the meeting before or during consideration of that item…The legislative body of a local agency may adopt reasonable regulations to ensure that the intent of subdivision (a) is carried out, including, but not limited to, regulations limiting the total amount of time allocated for public testimony on particular issues and for each individual speaker.” San Bernardino’s own charter provides that the mayor “shall preside” at council meetings, but otherwise appears to be silent with regard to authority to set limits on public participation.

The Imbalance Between a City’s Bondholders & Retirees

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

Balancing a City’s Debtors in Municipal Bankruptcy. EEPK (Erste Europaische Pfandbrief-und Kommunalkreditbank AG), a Luxembourg-based corporation which holds about $50 million of the city of San Bernardino’s pension obligation bonds, this week filed suit in the U.S. Bankruptcy Court [Erste Europaische Pfandbrief- und Kommunalkreditbank AG v. City of San Bernardino 15-ap-01004, and the bankruptcy case is In re San Bernardino, 12-bk-28006, U.S. Bankruptcy Court, Central District of California (Riverside)] against the city in an effort to secure equal payment or balance in any final plan of debt adjustment submitted to U.S. Bankruptcy Judge Meredith Jury. The suit came in the wake of the city’s interim agreement, released last November, with its largest creditor, the California Public Employees’ Retirement System (CalPERS), under which the city agreed it would fully repay CalPERS and require the city to file its plan to exit bankruptcy by September 2015.(San Bernardino had initially quit paying CalPERS.) In its filing, EEPK was joined by Ambac Assurance Corp.—with both creditors arguing that treating one pension debt differently from the other is legally indefensible. The company, which holds about $50 million in pension obligation bonds, did not name CalPERS in the suit, but charged that “Any payment of the CalPERS pension obligation portion requires equivalent payment of the bondholder pension obligation portion.” The suit was filed in U.S. Bankruptcy Court in Riverside, charging that San Bernardino cannot legally keep up payments to the state’s public retirement system without giving equal treatment to pension-bond holders―presenting a novel legal challenge for CalPERS, which last year lost an argument in federal court over whether it deserved more protection than municipal bondholders. Nevertheless, San Bernardino City Attorney Gary Saenz responds this case is different, because not paying CalPERS fully would be disastrous and the city cannot afford to fully pay both. However, EEPK’s and Ambac Assurance’s attorneys have charged that San Bernardino has already admitted in court that the bondholder pension obligation portion and the CalPERS pension obligation portion are part of the same obligation: “Accordingly, there is no legal basis to differentiate between the Bondholder Pension Obligation Portion and the CalPERS Pension Obligation Portion…Payment of the CalPERS Pension Obligation Portion requires equivalent payment of the Bondholder Pension Obligation Portion…” City Attorney Saenz, however, noting that an official response will go to the court after consultation with the city’s bankruptcy attorneys, said that just because the two debts are similar for one purpose does not mean they should be treated similarly in federal bankruptcy court: “The reason they should not be treated similarly, is because the consequences of treating them similarly are extremely different…We need to have the pension system not be impaired and not have the perception of it being weakened. Chapter 9 (bankruptcy) is designed to have a city to have life and services post-bankruptcy, and in order to do that we need to have an adequate workforce. We need to have CalPERS whole for that.” But EEPK’s attorney had previously expressed apprehension that the city’s interim agreement with CalPERS might leave no money for other creditors, noting: “That deal is really more of surrender…At worst, the city will find there is no feasible plan that could incorporate the deal with CalPERS.” To which City Attorney Saenz yesterday responded: “Yes, the more money I pay to one creditor or one person, the less I have for another…There’s only so much to go around. That’s probably the reason why CalPERS, I believe, is probably going to chime in with the court and suggest there is a significant difference.”

San Bernardino Charter Changes. Almost like part of a strand of DNA, San Bernardino is not only trying to put together a plan of debt adjustment to submit to the federal bankruptcy court under Judge Meredith Jury’s deadline, but, simultaneously, members of the city’s citizen charter review committee are trying to reach consensus on proposed changes—especially in the wake of last November’s election when voters rejected one of the two suggested changes to the city charter, rejecting the proposed change to unlink the current charter provision under which police and firefighters have their pay set as the average of 10 like-sized California cities rather than by collective bargaining. This week, the City Council voted 5-1 to request proposals from a “charter expert” to advise the charter committee, as the committee requested. Proposals, including cost estimates, would come back within 60 days, according to City Attorney Gary Saenz, who plans to write up the request this week. San Bernardino has until the November 2016 ballot before city voters can vote on any additional charter revisions. At its charter review meeting this week, some attendees recommended that instead of working on an amendment by amendment basis, it might make more sense to simply replace the city’s current charter completely, instead of becoming bogged down in trying to identify piecemeal changes.

Potholes in the Motor City. It is one incredible accomplishment to obtain federal approval to exit from municipal bankruptcy, but quite another to implement a city’s plan of debt adjustment, fully recover, and to restore a sense of public integrity. So it was that a former Detroit treasurer and two others were found guilty of conspiracy Monday in a case alleging they defrauded the bankrupt city’s pension funds by accepting kickbacks and bribes in exchange for approving $200 million in corrupt deals. The three, former Detroit City Treasurer Jeffrey Beasley, former pension trustee Paul Stewart and pension fund lawyer Ronald Zajac, were accused of weakening a retirement system that faced takeover during the city’s landmark bankruptcy case. They face up to 20 years in federal prison and will be sentenced in late April. Some of the potholes to recovery could be gleaned this week in the Motor City, where Detroit’s Police and Fire pension fund fired an attorney yesterday in the wake of a bribery scandal that cost retirees almost $100 million. Unsurprisingly, members reported they had lost confidence in General Counsel Joseph Turner, and voted 9-7 to fire both Mr. Turner and his law firm, Clark Hill. Critics maintained that Mr. Turner’s continued involvement in the pension board raised questions about the Motor City’s ability to move past a history of corruption, mismanagement, and bad investments that played such a key role in hurtling it into the nation’s largest municipal bankruptcy in history. Nevertheless, Clark Hill will continue to represent the pension fund in matters related to the city’s bankruptcy case, and some ongoing lawsuits, according to pension fund spokesman Bruce Babiarz. For his part, Mr. Turner had testified during the two-month trial that ended last month with guilty verdicts against former Detroit Treasurer Jeffrey Beasley, ex-pension trustee Paul Stewart, and his own predecessor, Ronald Zajac, the former pension system’s general counsel in a corruption and pay-to-play scandal that drained more than $97 million from Detroit’s retirement system. According to a federal indictment, Mr. Turner, whose firm led the retirement system’s fight against pension cuts during Detroit’s bankruptcy case, contributed cash during birthday parties for pension board members before receiving a pay raise. During the corruption trial last month, in December, former Treasurer Beasley testified that Mr. Zajac handed him a birthday card at the January 2007 party filled with $100 bills―90 such bills.

The U.S. Congress & Municipal Bankruptcy. Rep. John Conyers (D-Mi.) on Tuesday introduced legislation, HR 96, to amend chapter 9 of title 11 of the United States Code to enhance protections for employees and retirees in municipal bankruptcies: the proposed bill would erect new barriers in the way of municipalities’ rights and authority to restructure their debt through bankruptcy. The bill, Protecting Employees and Retirees in Municipal Bankruptcies Act of 2015, would, according to the Congressman, provide protection for public employees and pensioners who have dedicated their lives to helping their fellow citizens: “When a municipality files for bankruptcy, its employees and retirees who have devoted their lives to public service — such as police officers, firefighters, sanitation workers and office personnel — risk having their hard-earned wages, pensions and health benefits cut or even eliminated…My legislation addresses this risk by requiring the municipality to engage in meaningful good faith negotiations with its employees and retirees before the municipality can apply for Chapter 9 bankruptcy relief.” The bill would increase the cost and authority of a city or county to file for federal bankruptcy protection by amending current federal municipal bankruptcy provisions by changing the rules and imposing a higher bar by means of modifying the current provision in the law mandating that a municipality negotiate “in good faith” with its creditors prior to having authority to file for protection before a federal bankruptcy court, proposing that “good faith” with regard to municipal, school, or county employees be interpreted as laid out in the National Labor Relations Act―a stricter standard which would impose not just greater barriers, but also higher costs on a municipality confronting insolvency than is currently applied by U.S. bankruptcy courts. The bill proposes a new federal unfunded mandate by barring a municipality’s proposed plan of debt readjustment from cutting municipal employee or pension benefits without the permission of the beneficiaries. In addition, the proposed legislation would amend chapter 9 to impose a different standard in determining when negotiations with creditors are futile: the bill proposes that the revised threshold would be “impossible,” as opposed to current law where the current standard is “impracticable.” Finally, the bill would federally mandate that a city, county, or school board would be required to demonstrate by “clear and convincing evidence” that it had met the filing eligibility requirements. In his introductory remarks, Rep. Conyers said the bill would speed the bankruptcy appeals process and ensure that municipal employees have a voice in the proceedings.

Post Municipal Bakruptcy Sustainability

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January 5, 2014
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Don’t Let it Happen Again. In his end of the year 213-page ruling approving Detroit’s plan of debt adjustment, determining that the plan was fair and feasible—and negotiated in good faith, U.S. Bankruptcy Judge Steven Rhodes wrote that the extraordinary swap of $195 million for a $3 billion liability was “reasonable, although perhaps at the lowest end of the range of reasonable settlements.” Addressing the complex federalism issue that had pitted Michigan’s constitutional guarantee of pensions versus his own, written opinion that federal municipal bankruptcy law trumped the state’s constitution, Judge Rhodes wrote that “The court has found that the state contribution of $194.8 million in exchange for a release of liability on the pensioners’ constitutional claims is a reasonable settlement…History will judge the correctness of this finding. It will judge that this finding was correct only if what happened here in Detroit never happens again. The state can sustain that finding in history only by fulfilling its constitutional, legal, and moral obligations to assure that the municipalities in this state adequately fund their pension obligations. If the state fails, history will judge that this court’s approval of that settlement was a massive mistake.” Judge Rhodes federalism ruminations—focused on his perceptions that states have a vital role, especially with regard to municipal fiscal sustainability―warned that Michigan needs to ensure its cities can pay their pension obligations to avoid other municipal bankruptcies―a clear warning that the fiscal health of Michigan’s municipalities is not independent from the role of the state. Or, as the exceptional Caitlin Devitt of the Bond Buyer this morning wrote: “Michigan needs to assure that its local governments in the future are able to adequately fund their pensions…A repeat of Detroit’s bankruptcy in the city or elsewhere in Michigan would show that the court’s approval of the grand bargain was a ‘massive mistake.’” Seemingly reflecting on last January’s noteworthy paper by Boston Federal Reserve writers Bo Zhao and David Coyne that states and local governments need to define a new measure of state and local fiscal sustainability—wherein they defined the “trend gap” to be “the long-term ability of state and local governments to provide public services that the public demands and is willing to pay for,” Judge Rhodes wrote that retirees and unions too must share in that responsibility by taking what he called a “longer-term and broader view of the best interests of their members and retirees” with the goal of helping revitalize the city while protecting pensions. In his prescriptive list, the noted electronic guitarist warned that neither the state nor Detroit’s unions would be able to adhere to his prescriptions absent Detroit providing honest and accurate financial information, going so far as to prescribe the city adopt a series of annual reporting requirements suggested by an independent municipal finance expert hired by the court. But he saved his most enduring message for last, writing that our country “holds dear the values of a fresh start and of second chances….The city will have the fresh start that it needs and deserves under our federal bankruptcy laws…The court urges the people of the city of Detroit not to forget [their] anger. Their enduring and collective memory of what happened here, and their memory of their anger about it, will be exactly what will prevent this from ever happening again. It must never happen again.”

Violent crimes. An inherent component of sustainability, as we noted in the remarkable turnaround in Compton, Ca. last week, is crime—especially violent crime. In the Motor City, then, the year is off to a safer start: 2014 saw significant drops: the decline in homicides likely fell to the lowest total in the city since 1967, according to preliminary Detroit police data. Robbery dropped some 34%; carjacking 32%: key data, as Detroit Police Chief James Craig yesterday noted: “Robberies and carjackings — those are the crimes that strike fear into most citizens.” Nevertheless, according to FBI statistics, Detroit still ranks among the most violent cities in the country. Nevertheless, the homicide rate per 100,000 residents dropped for the third straight year, from 55 in 2012, to 47.5 in 2013, to 42.9 last year. Chief Craig attributed the gains in safety to two key factors: holding people accountable, and building a strong relationship with the community—especially after, last year, expanding the Neighborhood Police Officers program to each precinct in an effort to build relationships with residents: “Those relationships absolutely have an effect on crime, because it lets residents become part of the solution, and they feel empowered.”

The Extraordinary Challenges of Municipal Leaders

How to Pay for the Extraordinary Costs of Municipal Bankruptcy. While filing for federal for federal bankruptcy protection might seem the only alternative, the process can leave a bad aftertaste—the final legal and accounting bills to out-of-city/state firms—even as the process of recouping higher municipal revenues is uncertain. Think about it: the final tally for Detroit and its taxpayers for the lawyers, consultants, and other professionals in Detroit’s historic bankruptcy is $170 million—the amount disclosed, by order of U.S. Bankruptcy Judge Steven Rhodes—an amount almost barely offset by the $5 million reimbursement from the state of Michigan. The disclosure revealed the city’s two pension funds paid attorneys at Clark Hill $6.25 million and financial advisers at Greenhill & Co. $5.71 million; the city’s bankruptcy mediator firms were paid $980,000, and that the city’s two pension funds paid consultants and attorneys about $12 million to fight the bankruptcy case. Federal judges who helped mediate the case were not compensated. U.S. Bankruptcy Judge Steven Rhodes will have to decide by next week whether the fees are reasonable, officials said. Before the deals were reached, federal mediators held at least four formal sessions over the plausibility of the fees billed to the city. The team held talks with about a dozen firms, while the city held earlier talks with another dozen smaller firms to reach settlements. By late October, Jones Day had charged $52.31 million. Their final payout of $57.90 million equates to fees totaling $5.59 million over the past two months during the city’s trial and its exit from receivership. Miller Buckfire had renegotiated its contract with the city twice, most recently in June. In its newest agreement, the firm was to receive a flat fee of $28 million for all of its services. Prior to revising its contract, the firm had already given the city a discounted rate, according to former Emergency Manager Kevyn Orr’s office. But the documents released by the city reveal the firm was paid $22.82 million, which represents an 18.5 percent reduction. The Miller Canfield law firm was paid nearly $7 million for its work with Detroit. Reached Tuesday about negotiations over its fees, CEO Michael P. McGee said the firm “thought it was a fair process.” He declined further comment. Mayor Mike Duggan has said that the role of consultants in the city will be “dramatically reduced” as full-time employees are brought in to take over. All of the consultants, he added, “are being phased out.” Even though Judge Rhodes must still must sign off on the professional fees—and they are, compared to the $7 billion in debt and reduced longer term pension and retiree health care liability savings under the approved plan of debt adjustment, significantly less; they mark a new, substantial liability: a liability for professional fees higher than any other city/county in history. It is hard enough for municipal elected leaders to assume charge of any city after more than a year and a half state takeover, but when one adds this new bill to the agenda, even as the Motor City confronts another daunting challenge going forward―a wave of foreclosure notices for unpaid property taxes―one understands the challenge of being between a rock and a hard place, and still another complication of federalism. In this instance, the second shoe to drop, arrived with the notice by Wayne County, which includes Detroit, which this month informed approximately 35,000 residents of 35,000 occupied homes that they are delinquent in their city taxes―that their homes are at risk of being auctioned off―a warning that could impact nearly one out of every seven Motor City residents, or nearly 100,000 folks. So just as Detroit is getting back on its feet, it Yuletide gift is a double whammy: a huge legal and accounting bill—and a coming human tsunami of displaced families and disrupted property tax revenues: the average assessed value of homes entering into foreclosure this year is $20,930—an amount which might be significantly higher than what they could be assessed at, according to Sean Jackson, who tracks blight and tax-foreclosure issues for Rock Ventures, an umbrella organization for companies owned by Quicken Loans founder and Detroit booster Dan Gilbert. Or, as the fine Wall Street Journal writer Matt Dolan notes: “More than 70,500 Detroit properties fell into county tax foreclosure from 2009 through 2013, resulting in $745 million in lost city property taxes, according to the White House-affiliated Detroit Blight Removal Task Force.” Moreover, the problem is apparently worsening: Wayne County’s new efforts to collect on many past-due accounts appear to mean that foreclosures in 2012 will triple to more than 60,000 foreclosures this year. Indeed, the situation is grave enough that Michigan Governor Rick Snyder has been supportive of state legislation to provide delinquent owners more time and a lower interest rate to pay off their accruing, owed debt, with the rate dropping to 6% from its current 18%, and also providing that a portion of unpaid taxes could be erased by capping what is owed at 25% of a home’s fair-market value—something Mr. Dolan notes that would be “especially important in a city where some homes have lost 90% of their value.”

The Hardest Leadership Job in America. I am not sure there exists a harder job in our country than being mayor. It’s not like there is training for the unique and too often overwhelming challenges that arise, especially the crises. There is no text book that provides how to inspire citizens—or how to decipher the hieroglyphics of Wall Street impresarios who want to sell your city and its taxpayers an instrument you cannot even pronounce. Certainly there is no little guidebook that provides instructions how to enable the critical chemistry to make your council a whole. As we have seen, if you are an elected leader in some states, such as California or Alabama, for instance, there is a certainty the state is not only not going to help, but rather is more likely than not to put your city in fiscal harm’s way. And, yes, whether in Detroit or other cities, the temptations to put your personal financial greed over your city’s—as we have experienced with former and now imprisoned Detroit Mayor Kwame Kilpatrick―demonstrates that elected leaders can put their personal interests above their citizens’. Yet, as we have written about cities and counties in severe fiscal stress and municipal bankruptcy, we have also been able to observe exceptional leaders—leaders such as Mayor James A. Diossa of recovering Central Falls, Rhode Island, and Mayor Mike Duggan in Detroit—whose Council last summer approved his proposed $17.2 million budget for FY2015―a budget that slashes spending and is less that the $18.9 million budgeted in Central Fall’s federally court approved plan of debt adjustment; but that budget also provides tax relief to city homeowners through an increase in the Homestead Exemption and the motor vehicle tax exemption climbs from $1,000 to $1,250—even as it spends more money on community policing and public safety, as well as city infrastructure such as roads, sidewalks and expanding green space and city parks. Here’s a key: the budget also invests in the city’s pension funds at a greater rate than 100 percent to pay down the unfunded liability that resulted in its municipal bankruptcy in August 2011. Funding also has been allocated for the paving of 10 more streets and funds a new Street Beautification program to keep Broad and Dexter streets litter free. How are we to know or really understand his gift of leadership? The Mayor’s parents emigrated from Medellín, Colombia to Central Falls in 1983, where he was born two years later. His mother Melva worked at a shoelace factory, his father Bernardo at a light bulb manufacturer―his parents often worked double shifts to save up for their three sons’ education, being able to send Mr. Diossa to Becker College in Worcester, Massachusetts, where he studied Criminal Justice, making him the first in his family to go to college. From a young age, Diossa knew that he would someday return to Central Falls. “This city gave my parents a job. It’s where they call home. I always knew that I wanted to come back here to give back to my city.” But now he is giving something very special back to his city. In Detroit, certainly, one would have seemed off one’s rocker to aspire to be elected mayor as the city was hurtling into the largest municipal bankruptcy in U.S. history—and, you could not even really be Mayor even if you were elected, because the state had usurped your authority and appointed a Washington, D.C. area bankruptcy attorney to run your city—a gifted and dedicated attorney, but one with no prior experience in municipal governance.

Compton & the Gangsta Rap. Mayhap, however, an even more inspiring story is from the capitol of Gangsta rap—Compton, California, a city of 100,000, where, thanks to a gifted young feller, Eric Silberstein at the University of Colorado, I received Nick Allen’s story from the Compton Telegraph http://www.telegraph.co.uk/news/worldnews/northamerica/usa/11313948/Straight-into-Compton-house-prices-soar-as-murderous-gangs-reach-truce.html about one of the country’s youngest mayors, Mayor Aja Brown—who for reasons that defy rational explanation has been an extraordinary agent of change in a small municipality that had become synonymous with gangsta rap, gang violence, and murder. Mayor Brown strode right to the heart of the issue—an issue in so many ways more challenging than other cities’: the terrible slaughter from the gang wars in her city between the Bloods and Crips―reaching out to the respective gang leaders and then meeting at a community center leaders from dozens of local gangs—noting, as Mr. Allen wrote: “It’s amazing to see the evolution and the transformation. It touches my heart…Gang activity really originated in this area because they (gang leaders) had the power to start it. But they also have the power to finish it and stop the negative cycle…Its real redemption when you can have people who were notorious for tearing down their community helping to build it up.” Today, she meets with a committee of gang leaders weekly: some are taking leadership courses: Mayor Brown hopes some will be able to travel to other trouble spots in the country to help other cities’ leaders reduce gang violence: that is she has chosen a path different than many cities: instead of trying to impose a much greater—and unaffordable—police presence, she has opted for an extraordinary alternative model of conflict mitigation: Mr. Allen reports that in the last several months, there has been nearly a 65 percent reduction in such violence—putting the city on course for its safest year in decades. Last year (2014) there were 26 homicides, reflecting nearly a 75% decline since 1990. Mayor Brown’s training?―degrees in public policy and urban planning. In a state where the Great Recession produced an unprecedented number of municipal bankruptcies, Mayor Brown’s first budget was in surplus; debts were paid down. The city’s tax base is solid. Her goals:
• attracting large businesses to bring their headquarters to Compton, and to draw in young families to live there.
• an e-commerce development project is due to break ground next year creating 1,000 jobs, and
• vocational training courses and job placements for residents.
Assessed property values have been surging, up more than 10 per cent in the last year. As the Mayor notes: one key to her success has been to examine unique attributes to her city that could be critical to its fiscal future; thus, she told Mr. Allen: “In California they’re not making any more land. And with the high cost of land, from a business standpoint, being able to move your goods quickly and cheaply makes Compton an attractive place to be….And traffic is so horrible here in Los Angeles, and getting worse, that if you want to have a quality of life not on the freeway, you may want to live nearer where you work. I think people are getting to grips with that. I think Compton is a really attractive place for young families.”

What Are the Odds of Insolvency? On the opposite coast, Atlantic City, New Jersey Mayor Don Guardian faces different odds after a year in which his gaming-based municipality experienced the loss of four casinos, and an increasing chorus that his city is on the train to municipal insolvency. Four of Atlantic City’s 12 casinos folded in 2014, leaving more than 9,000 people out of work. A perfect storm of out-of-state gambling destinations, record-low casino profits, the economy at large and offerings beyond slot and table games besieged Atlantic City. In November, at a fiscal crisis summit in Atlantic City, New Jersey Governor and potential GOP Presidential aspirant Chris Christie warned: “Band-Aids have been put on in the past. To the extent that folks suggest larger Band-Aids this time for bigger problems, that’s quite frankly not something that I’m going to be interested in…There has to be in my view fundamental, systematic change down here on both sides of the ledger for us to have an opportunity for success.” Mayor Guardian has demonstrated finesse in keeping the wolf at bay—at least through last year—and has been successful in getting Wells Fargo to agree to pay off $26 million of bankrupt Revel’s $32 million tax bill—with an anonymous bidder agreeing to take care of bankrupt Trump Entertainment’s $22 million tax bill, and some key assistance (unlike California) from the State of New Jersey, which, acting as banker, provided his city with a short-term, $40 million loan at a forgiving rate. He enters this New Year not as a despairing gambler, but with relentless enthusiasm: “I didn’t think I would have this opportunity to change the city as quickly as I have…I thought it would be much tougher to convince people that gaming was not in our best interests…That it was important – we don’t want to kill it – but we want to move away from it. When I was talking like this last year, people were kind of nodding and telling me it was an interesting concept. This year, everyone is willing to move.” Somehow, he seems to be a prestidigitator behind the scenes, even as the city’s public elected leader, presiding over a fundamental change in municipal direction in the wake of the bankruptcies of the Atlantic Club, Showboat, Trump Plaza, and Revel—the city’s key job and revenue centers: he foresees what he terms a “new Atlantic City” made up of young entrepreneurs who are creating very different bases of an economic not based on gambling, but rather entertainment: places such as Perfectly Innocent Amusement Co., the Iron Room, and Tony Baloney’s. With a university opening a new branch in his city, construction is underway on 500 new housing units. It is difficult (and highly political) to balance what all the guardian Mayor is scheming as he is fighting to retain power and block his fellow Republican, Gov. Christie from acting on his advisers’ proposal to have the state—as in Detroit, impose an emergency manager to run the city instead of the mayor—with Mayor Guardian telling the Philly Inquirer he takes this proposal very personally—even going so far as to tell the governor last month—adding to the reporter: “If this was a normal year, I’d be doing a year-end saying, ‘You know what? We reduced crime, we reduced use of force, and we’re cleaning our streets every day where we used to clean them every two weeks.’ There’s no neighborhood I go to that I say, ‘Isn’t public works doing a great job?’ that people don’t applaud.” He is working to leverage support for proposed state legislation which, if enacted, would lock in a collective $120 million-a-year payment from the remaining casinos; it would redirect other casino taxes to pay off city debt. Mayor Guardian plans a $40 million budget cut over four years, in part through what he calls “aggressive attrition;” he also plans to consolidate, privatize, or cut a half-dozen departments—and sharply reduce the city’s public vehicles, as well as consider asset sales—all this coming on top of an unprecedented 29% tax increase. So how does Mayor Guardian describe his high tension job? “I love my job…This is my favorite job.”