March 20, 2015
Visit the project blog: The Municipal Sustainability Project

Honoring an Unsung Leader. Chief U.S. District Judge Gerald Rosen’s famous doodle which led to extraordinary “grand bargain” between Michigan Governor Rick Snyder and bipartisan leaders in the Michigan Legislature and the Detroit Institute of Art to both preserve the world renowned museum in Detroit, but also to leverage an unprecedented package of a state and non-profit assistance to protect public pension obligations for some of Detroit’s lowest income retirees in Detroit’s historic bankruptcy will be featured at the Detroit Institute of Arts during a private event next month. The DIA is hosting an invitation-only event April 10th to celebrate the sketch by Chief U.S. District Judge Gerald Rosen, who, at the request of now retired U.S. Bankruptcy Judge Steven Rhodes, led a federal mediation team. The doodle laid the conceptual foundation for creation of a fund to shore up city pensions and protect DIA artwork from sale during the bankruptcy. The $816 million deal included contributions from state taxpayers, private foundations, and DIA donors. On a legal pad, Rosen drew a box, labeled it “ART,” wrote “State” to the left and “Pensions” to the right. Who said the art of exiting municipal bankruptcy did not require artistry?

Trying to Create a Sustainable Future. The pace is quickening in San Bernardino as U.S. Bankruptcy Judge Meredith Jury’s May 30th deadline approaches: A proposed realignment of elected officials’ responsibilities and authority will be presented to the City Council for agreement on April 6th as the first concrete suggestion from the group that met Wednesday and Thursday to help the city adopt a long-term strategic plan; and Judge Jury has ruled the city can reject its bargaining agreement with the city’s police union―an agreement the city first asked for authority to do two years ago, so that it could impose a new contract that would leave more funds in its budget—funds critical to assembling the city’s plan of debt adjustment for the federal court. Judge Jury, in her decision, said she was not deciding whether the city may legally make union members pay part of their pension costs—a disputed issue, which, San Bernardino Police Officers Association attorney Ron Oliner contends would violate state law; nevertheless, it is similar to an earlier September ruling that San Bernardino could reject its contract with firefighters. Judge Jury explicitly wrote then that she was not blessing the city’s plan to impose a contract on firefighters to replace the one she was rejecting. Nevertheless, in the wake of that decision, Mayor Carey Davis had cast a tie-breaking vote in City Council to impose a contract on the fire union, which is suing the city on several related fronts. In its filing this week, San Bernardino claimed that five of its seven unions had agreed to “modifications,” including paying half of the cost of the CalPERS, with the fire and police unions resisting, noting: “As Mr. (consultant Michael) Busch pointed out in his most recent declaration, absent those modifications, the City would have continued to run a deficit in its General Fund,” the city’s attorneys wrote, while the Police Officers Association (POA) did not agree to the new Memorandum of Understanding: “Clearly, the POA MOU is a burden on the City and its ability to reorganize.” The legal action came after more than a year of attempting to work through a mediator to come to a consensus. It also comes because of deep and costly frustration because, under the city’s charter, San Bernardino may not directly reduce police or firefighter pay. Despite an effort supported by many city officials to change that, through Measure Q, citizens rejected the effort, in effect voting to continue setting pay as the average of 10 like-sized cities. On the realignment front, a proposed realignment of elected officials’ responsibilities and authority will be presented to the City Council for agreement on April 6th, marking the first action in response to recommendations emerging this week from this week’s meetings in the city to develop a long-term strategic plan: the three-page “interim charter agreement” is intended to address what the 17-member group recommended to address inefficiencies in the city charter—with the draft agreement noting: “It is very apparent to us that the City’s Charter is a compendium of conflicting provisions, a recipe for inefficiency and finger pointing given the overlapping of legislative (policy making) and managerial responsibilities between the Mayor, Common Council, the City Attorney and City Manager…It is unclear who is in charge and whom to hold accountable.” Group members, chosen by Mayor Davis as part of San Bernardino’s strategic planning process, reported that the city’s bankruptcy “confirms” the need to replace the city’s charter, albeit they understand that a replacement likely cannot absent a vote of the people in November 2016. Until then, City Council members will be asked to formally agree to an alignment of duties more closely matching the typical council-manager form of government: the council adopting policy, the mayor serving as a spokesman, the city attorney providing legal advice, and the city manager having sole authority for managing and directing staff. Mayor Davis, City Attorney Gary Saenz, and most of the six council members who attended at least some of the discussion explicitly agreed they support the document and would vote in its favor. Although California’s open meeting law prohibits a majority of the council discussing items that could come to them for a vote, City Attorney Saenz pointed to a provision indicating the law does not purport to prevent council members from attending a gathering open to the public and discussing policy “as part of the scheduled program.” Group members at the meeting, in addition to agreeing among themselves to follow the “interim charter agreement,” agreed the city should submit the document and its plans to replace the city charter to Judge Jury as part of its plan of debt adjustment.

Uh oh. The turnaround progress in San Bernardino has taken a stutter step, according to Reuters, which reports that San Bernardino has defaulted on nearly $10 million in payments on its privately placed pension bond debt since it filed for federal municipal bankruptcy protection nearly three years ago. Reuters added that the city has not negotiated with its bondholders since September, at least according to what the firm claimed based upon information from “a person familiar with the stalled negotiations.” The issue—and dispute—relate to the ongoing federalism challenge between state constitutions, such as in California, Michigan, and Illinois, which treat public pension obligations as contracts—versus the federal municipal bankruptcy law, which, as both U.S. Bankruptcy Judges Christopher Klein and Steven Rhodes have opined, trump the state constitutions. These had been issues on the road to the respective 9th and 6th U.S. Circuit Courts of Appeal coming out of the Detroit and Stockton municipal bankruptcy cases—but have since withered. Nevertheless, with San Bernardino’s declaration last year that it intends under its plan of debt adjustment or municipal bankruptcy exit plan to fully pay CalPERS―something the city has continued to pay monthly―in full, the issue will re-present itself to Judge Jury, as San Bernardino has withheld interest payments to its bondholders for nearly three years, according to the interest payment schedule on roughly $50 million of pension obligation bonds issued by the city in 2005.

Municipal Contagion. New Jersey Senate President Steve Sweeney fears that the appointment of an emergency manager in Atlantic City is creating financial repercussions for other cities in the state. In a statement yesterday, Senate President Sweeney yesterday said Gov. Chris Christie’s appointment of Kevin Lavin as emergency manager and Kevyn Orr as his advisor is “a principal factor” in Moody’s placing seven municipalities in New Jersey “on review for a possible credit downgrade.” Atlantic City has already seen its credit rating reduced following the appointment of Messieurs Lavin and Orr. Sen. Sweeney called on state officials to move forward on a recovery plan he and other state legislators have crafted for Atlantic City: “The administration has held three summits and has issued two reports, but has taken no real action in over a year. By appointing ‘bankruptcy experts’ who are identified with Detroit’s bankruptcy, they sent an alarmist message that had an impact on Atlantic City’s financial position and now threatens to harm the financial health of other cities in New Jersey.” The statement came in the wake of Moody’s warning of a possible credit downgrade for Trenton, Newark, Paterson, Asbury Park, Union City, Kearney, and Weehawken, with the credit rating agency citing both the appointment of the emergency manager in Atlantic City and the state’s problems funding pensions and other financial difficulties for the warning. “Of course, the immediate fallout from the appointments was Atlantic City’s bond rating falling close to junk bond status,” said Senator Sweeney: “Now, all of New Jersey’s financially-strapped cities could have their credit hurt, which will result in higher costs just to keep them operating.”

Lawrence of Massachusetts. Massachusetts Secretary of Administration and Finance Kristen Lepore has announced that Sean Cronin, the senior deputy commissioner of Local Services within the Mass. Department of Revenue, will take over the position as state overseer for the City of Lawrence, a city of 75,000 about 25 miles north of Beantown, replacing former overseer Robert Nunes, who Secretary Lepore credited for providing “valuable guidance and leadership to the City in achieving this goal” of helping Lawrence get back on its feet after decades of financial hardship. The Bay State does not specifically authorize its municipalities to file for federal bankruptcy protection—and, no municipality in the state has sought to in the past 30 years. Mr. Cronin, who in January had been named the senior deputy commissioner of Local Services, an agency within the Department of Revenue, after serving 17 years working in Brookline, the last 12 of them as deputy town administrator, appears likely to be warmly received: Mayor Daniel Rivera notes; “I think he has a good pedigree. All I’ve heard is that he has been great. People at the Statehouse were fighting for him. I’m glad he brings a strong mind to the game and a strong reputation, because that can only help Lawrence.” Mayor Rivera said his administration had a positive relationship with both Nunes and Pamela Kocher, who served as the city’s interim financial overseer from November until this week. Massachusetts had appointed Mr. Nunes to the position in 2010 as part of an agreement that allowed the municipality to borrow $27 million to pay off its operating deficit. Under his oversight, the city’s credit rating rose to its highest level in 29 years: he oversaw four consecutive balanced budgets, though he voiced opposition to some of former mayor William Lantigua’s more controversial financial decisions. Mr. Nunes concluded in a report that the city violated state procurement law in a car deal orchestrated by former Deputy Police Chief Melix Bonilla, who was recently acquitted of criminal charges and reinstated as a sergeant. Mr. Nunes also ordered reforms in the way the city collects parking garage fees after an attendant was indicted for allegedly skimming proceeds. In a recent Moody’s credit rating report, Moody’s moodily raised the city’s credit rating, with analysts noting a lower unemployment rate, but added that an “adoption and adherence to comprehensive financial policies” could boost the rating further. In its upgrade to an A3 from Baa1, the analysts wrote: “Since the appointment of the overseer, the city has stabilized its financial position through the issuance of deficit notes and the adoption of more conservative fiscal management practices, resulting in an improved reserve and liquidity position.” Mr. Nunes had ordered the city to adopt a capital budget annually for big ticket, one-time expenditures such as the new police cruisers the city purchased recently; nevertheless, this year will be the 11th year in a row that Lawrence operates without one. In a statement, Mr. Cronin said he plans to make that a priority.


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