March 31, 2015
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Gambling on Atlantic City’s Future. Atlantic City yesterday was granted a 60-day extension on a $40 million state loan that was due today, with Atlantic City Revenue Director Michael Stinson, noting that the city has been working with the state for the last month to seek more time for the loan payment. New Jersey had provided Atlantic City with the $40 million emergency loan after the city delayed a $140 million bond issue last November. Mr. Stinson noted that the extension marked a “first step,” and that it would be helpful in the city’s ability to “move forward.”
Keeping the Island’s Lights on. Michelle Kaske of Bloomberg yesterday wrote that Puerto Rico’s Electric Power Authority, or Prepa, the Commonwealth’s main electricity utility, won an agreement with its creditors to extend negotiations for 15 days over what could be the largest-ever U.S. municipal-debt restructuring in U.S. history. The extension provides the junk-rated public utility more time to negotiate with its creditor banks, bondholders, and insurance companies beyond the original deadline of tonight, according to a statement yesterday by Prepa—which had signed an agreement last August with its creditors that delayed repayment of $696 million of bank loans through the end of this month. Prepa’s chief restructuring officer, Lisa Donahue, yesterday noted: “All parties believe advances have been made, and there is merit to continue conversations with our creditors to find feasible solutions that will transform Prepa into a modern and sustainable utility.” Prepa, the largest U.S. public-power authority, has $8.6 billion in debt, and it is facing a July 1 deadline by which it must pay investors about $400 million in principal and interest. If bondholders agree to take a loss, it would be the largest debt restructuring in the $3.5 trillion municipal-bond market. Creditors have agreed not to take any enforcement actions while the pact to negotiate remains in effect, according to Prepa’s statement. The utility last year used funds designated for infrastructure improvements to purchase fuel. It had $1.75 billion of overdue accounts in September as residents, businesses, and government entities fail to pay bills on time.
A Fiscal & Children’s Municipal Bankruptcy? As we have written previously, a critical issue to the fiscal sustainability of post bankrupt Detroit is to rebuild its public school system as an integral part of reversing the tide of emigration by young families out of—instead of into the Motor City. The 36-member Coalition for the Future of Detroit Schoolchildren yesterday issued a report for the state of Michigan to return control of Detroit Public Schools to an elected school board, assume $350 million of the Detroit Public School (DPS) debt, and give a mayoral-appointed commission control of all school closures and openings in the city. The report, coming in the wake of three months’ of private meetings to examine the Motor City’s fractured system of public education and persistent financial problems at DPS—the largest school district in the state, and one which has been under state-controlled emergency management for six years―provides recommendations to Gov. Rick Snyder, proposing that all Education Achievement Authority schools be returned to DPS control and that the interlocal agreement between the DPS emergency manager and Eastern Michigan University be terminated. (This refers to the authority Gov. Snyder created in 2011 to turn around the state’s lowest performing schools, including 15 former DPS schools.) Yesterday’s report calls for allocating funding based on student need, as opposed to school governance type, and developing a strategy to recruit, develop, and retain high-quality educators citywide, with co-chair John Rakolta stating: “Detroit will never again be a world-class city if we don’t fix the schools…These recommendations preserve choice for families and are bold and comprehensive. They will get the DPS debt resolved and raise the standards of excellence for all schools in Detroit.” Among the recommendations, the coalition proposed changes to state law or local practices that would have charter authorizers and charter school boards improve transparency, focus more on quality, and better coordinate all charter schools, and for authorizers to ensure independence of charter boards from management companies. The report recommends the creation of a nonpartisan coordination entity, the Detroit Education Commission, or DEC, with authority to coordinate and rationalize citywide education functions, in partnership with regional councils, to incorporate neighborhood-level input. Its members would be appointed by the Mayor. The DEC’s primary function would be to serve as a gatekeeper for opening, closing, and siting all new schools in Detroit; but it would not be authorized to interfere with school decisions about hiring, budgets, or curricula: the DEC would coordinate citywide services to help parents take advantage of their options such as transportation, enrollment, and special education. The Coalition distinguished what their proposal vis-à-vis Mayor Duggan’s proposed role in the appointment of commissioners would be than in some other cities: “It’s not like in Chicago where (Mayor) Rahm Emanuel is down in the bowels of the schools….We will not operate the schools.” Rather, as coalition co-chair Wendell Anthony said: “We want the school board to be returned and the EAA infused back in to DPS. The timeline is based on what comes out of this, but sooner than later because the process needs to change.” Last evening, Gov. Snyder noted: “These are ideas that sprouted from people across the city, including educators, union leaders, business leaders and the philanthropic community. Their common traits are a love for Detroit and its people and the belief that we can and must do better as we prepare the next generations of leaders…There must be higher standards for all schools. Detroit can only be a stronger, more vibrant city if its schools provide the opportunity for all students to be successful academically and in life.” In addition to addressing its governance views of returning power to an elected school board and dissolving the EAA, the coalition also sought to address what it described as the “mediocrity in our schools,” recommending:
• closing low-performing schools,
• giving schools more autonomy (including the freedom to decide specific pathways to achieve a “world-class, rigorous and relevant education”), and
• ensuring that 90 percent of all students graduate from high school.
In finding that Motor City schools are in major trouble, not just financially, but academically, the report determined that only five schools serving Detroit students exceed the state average in reading, and only seven schools in math, including DPS schools, public charter schools inside the city, EAA schools, and the 25 suburban schools where Detroit students represent 75 percent or more of enrollment. To address these D- academic results, the coalition proposes to create 150 high-performing schools in the next 15 years with “essential supports, small classes, and quality staff that are generally retained over time.,” with high-performing schools described as those in which at least 80 percent of students show one year’s growth every school year; 80 percent of students read at or above grade level; 80 percent of students demonstrate grade-level proficiency in writing; 90 percent of students graduate from high school; and 90 percent of students attend school every day. Other recommendations include creating a city student data system to support school choice and quality neighborhood schools; establishing a citywide system to improve student transportation; and providing “high-quality wraparound services to support children’s social, emotional and physical needs.” Dan Quisenberry, president of the Michigan Association of Public School Academies, said the report calls for accountability, autonomy, and choice to fix Detroit’s educational environment, but expressed apprehension at what he called putting “a gatekeeper between parents and their schools by putting a politician in charge of when and where schools open.” Detroit Public School Emergency Manager Darnell Earley told the Detroit News he was pleased to see that the coalition’s work parallels, reinforces, and ultimately supports DPS’s own restructuring strategy. In a statement, Gov. Rick Snyder promised to “thoroughly review the coalition’s recommendations” as the state works on a “comprehensive approach to reform,” pledging to seek “areas of alignment and common ground in the weeks ahead.” Nevertheless, it appears far more likely that the Governor’s team will draft its own sweeping reforms—reforms which Detroit News columnist Daniel Howes wrote are “likely to be as sweeping as the historic bankruptcy he ordered for the city of Detroit,” noting the Gov. was hardly likely to fully endorse recommendations which “aim to reassert a status quo that culminated in emergency management in the first place. Second, they effectively demand the state abandon its efforts to reform education in Detroit.” Or, as Mr. Howes noted, the Coalition’s proposed reforms “do project an unmistakable grab to restore power and control to local hands without the kind of governance and managerial reform that could instill confidence and signal a fresh start,” adding that: “If any town should know better, it’s this one, the national epicenter of reckoning, restructuring, and bankruptcy. A timeless rule in all three is that financial and public support are tied to radical change in operations, management, and business model.”
Windy City Blues. With Chicago Mayor Rahm Emanuel awaiting the outcome against Cook County Commissioner Jesus “Chuy” Garcia in the first mayoral runoff election in Chicago history next Tuesday, Dick Ravitch, a former Lieutenant Governor of New York and an adviser to now retired U.S. Bankruptcy Judge Steven Rhodes who presided over Detroit municipal bankruptcy proceedings, yesterday wrote about the Windy City’s grave public pension challenges in an epistle to the Wall Street Journal:
I had the privilege of working with New York Gov. Hugh Carey in 1975 to avoid the bankruptcy of New York City, and I am currently assisting the Control Board overseeing the city of Detroit. Throughout these years, I have observed, researched and commented on the growing fiscal stress our cities and states have faced.
In Chicago, Detroit and across the U.S., local and state governments have made promises in good faith to their 19 million employees to provide retirement benefits and, in many cases, health-care benefits as well. Many government officials didn’t realize that the cost of these promises would rise faster than the tax revenues that were being generated to cover their operations.
As a result, the shortsighted strategy of using borrowed money or the proceeds from the sale of public assets to balance operating budgets has grown at a rapid rate. But such unwise and unsustainable practices are insufficient to avoid bankruptcy in some cases, and cuts to education and infrastructure in others. Above all, they jeopardize the sanctity of public commitments.
Chicago is the third-largest city in the U.S. It has a massive, diverse economy anchored by educational, financial and health-care institutions of national significance. It has the lowest per capita tax burden of any major city in the U.S., and the largest unfunded pension obligation on a per capita basis. It is located in a state that competes with New Jersey for the lowest credit rating in the nation.
The city’s indefensible practices came to a head in 2008, when Chicago hocked its parking revenues for 75 years and used some of the proceeds to balance its budget. But since Rahm Emanuel’s election as mayor in 2011, the city’s seemingly insoluble and growing structural deficit has finally been taken on directly. He sought legislation that slows the growth of pension obligations and has pursued employee contributions as well.
Mr. Emanuel has also taken the politically risky step of raising taxes and has said that he is prepared to do so again. He has made it clear that he doesn’t believe the burden of insolvency should be relieved exclusively on the backs of public employees, but that taxpayers should share in the solution to enable Chicago to grow and prosper.
He has also brought to City Hall a level of professional financial management and a determination to make sure the public understands the seriousness of the problems the city faces.
If Chicago were to reach the point of having insufficient cash to meet its obligations and defaulted, chaos and endless litigation would ensue. Municipal bankruptcy is not an option for Chicago under Illinois law, as it was for Detroit under Michigan law. But even if it were, it would be a sad acknowledgment that democracy can’t solve its problems.
In New York City in 1975, banks, unions and politicians came together to make extraordinary concessions that would avoid just such a lamentable outcome. Mayor Emanuel is trying to adjust obligations through the same process that we used 40 years ago in New York: Negotiations as a result of which politicians raised taxes, union leaders agreed to wage freezes and layoffs, and bankers agreed to defer interest payments and modify debt obligations.
No politician ever got elected on a platform of raising taxes. No politician who believes in government and the value of the services government provides runs for office with an eagerness to deprive public employees of deserved benefits. When the actions of one’s predecessors leave no alternative, that particular politician is always vulnerable to a competitor who runs for office by appealing to those citizens who paid more or received less.
Mr. Emanuel faces an April 7 runoff election against Cook County Commissioner Jesus “Chuy” Garcia. The mayor has laid out a clear program for restoring the city’s fiscal health, while his opponent so far has not. Chicago voters would do well to demand answers from Mr. Garcia, who hasn’t said how he intends to turn cloth into gold. Otherwise the choice appears to be a simple one, between a responsible future or one when even bigger, more ruinous bills finally come due.