Sovereignty, Sharing Services, & Rolling the Die

eBlog

January 27, 2014
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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.”

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