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 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.”

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