Fiscal Resilience


May 1, 2015
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Detroit’s Future Leaders: It’s Time to Act. Michigan Gov. Rick Snyder yesterday announced plans to create a new debt-free Detroit public school district and pay off the current district’s debt with an additional state contribution of between $53 million and $72 million annually for up to 10 years. Gov. Snyder, in proposing a plan so critical to the Motor City’s fiscal sustainability, proposes establishing a “brand-new school district, not a charter” school system, the City of Detroit Education District, which would be governed by a new seven-member board initially appointed by the governor and the mayor. Under the proposal, Gov. Snyder would name four appointees to the board, Mayor Duggan would name three. In announcing the joint city-state plan for Detroit’s future generations, Gov. Snyder made clear he believes the proposed overhaul is critical to improve outcomes for Detroit’s children and to relieve the Detroit School District’s current municipal debt load―a load he described as “crushing.” Noting that nearly 95% of today’s students in the city are not proficient in math and science, he said: “It’s time to act…We’re not seeing the results these children deserve.” Gov. Snyder proposed a six-year transition from state back to local control—or a “pathway” as he defined it—under which the city’s locally elected school board would be filled via staggering elections for two seats in November of 2017, two seats in November of 2019, and the remaining three seats in November 2021. The current school board has, effectively, been under the state’s control for the last six years, during which time the school district has been under the control of a succession of four state-appointed emergency managers. The scale of state assistance the Governor proposed yesterday, as much as $700 million over the next decade, would require heavy lifting in the legislature—and stand in the starkest contrast to the budget resolution adopted by Congress this week in Washington—with the former calling for such significant investment in the city’s future, and the latter disinvestment. Yet, given the school system’s accumulated $483 million in debt, the bold initiative—asking the state to commit an extra $53 million to $72 million annually for 8-10 years from the School Aid Fund toward operating funding for the new DPS―the Governor aptly described it as critical to “setting up a successor school district that wouldn’t have the legacy debt.” Under the proposal, the existing Detroit Public School System (DPS) would continue to collect the 18-mill non-homestead property tax and use the money to pay down the current district’s operating debts—using a tax which currently generates about $72 million for the system annually. That debt, as the ever prescient Citizens Research Council of Michigan notes, diverts $1,100 per student away from classroom instruction and investment in the city’s economic prospects for the future. Under the proposal, the new DPS would inherit the current school district’s pension liabilities, union contracts, and employees; the newly created district would incorporate all the other components that would transfer to them, including operations, teachers and buildings, according to the Governor. Mindful of the current fiscal deterioration of DPS, Gov. Snyder proposed two other layers of academic and financial oversight: 1) The new appointed school board would be under the oversight of a financial review commission, which would be “similar in nature to what we used with the grand bargain” with the ingenious thinking of U.S. Chief Judge Rosen Judge, and 2) Darnell Earley, who became the fourth emergency manager of DPS since 2009 in January, would remain in place until his 18-month term ends in a little over a year to supervise the financial matters of the “old” DPS. In addition, Gov. Snyder endorsed a proposal put forward by the Coalition for the Future of Detroit Schoolchildren to create a new commission with oversight over the academics of all public schools in the city operated by DPS, charter authorizers, or the Education Achievement Authority: the proposed five-member Detroit Education Commission (DEC) would be able to hire an “education manager” who would be charged with closing schools with academic achievement tests in the bottom 5 percent of all Michigan schools for at least three years. Under the proposal, said education manager would serve as what was termed “the air traffic controller” with regard to where schools operate in Detroit and would be authorized to determine whether a closed school should be “bid out” to be run by another operator. Under the Governor’s proposal, the state would name three appointees to the DEC, and Mayor Duggan would name two—with the requirement that all appointees to all three boards — the new DPS school board, the financial review commission and the DEC — would have to be Detroiters; further, no one could serve on more than one board.

The Fiscal Challenge of Municipal Public Safety. “What is the plan if something like Baltimore happens in Detroit?” was the question posed yesterday at a meeting of the Detroit Police Board of Commissioners―or, as Commissioner Eva Garza Dewaelsche put it: “Corporations downtown want to know.” It is likely a question being asked in many cities across the country. But it is a more complicated question in the wake of a municipal bankruptcy: Although Detroit’s City Charter mandates the 11-member Police Board oversee the police department, its powers were usurped when Kevyn Orr was appointed emergency manager. When Mr. Orr departed, he issued Order 42, which transitioned power over the police department to Mayor Mike Duggan. That is, an unelected state-appointed official usurped authority from the City’s charter. Now, in the wake of the “What if?” questions arising in Detroit and other cities, Detroit’s leaders are working to make sure they are prepared. In fact, as Detroit Assistant Police Chief Steve Dolunt replied, the city has a strategy mapped out: “An evacuation plan would go through Homeland Security…We have plans in place if there’s a problem.” In the wake of the meeting, Detroit Police Chief James Craig told the Detroit News: “There has always been a plan in place to address civil unrest and the potential for unrest. People got a snapshot this week of how we would respond to problems: We talk to community leaders, we work with them, but if someone commits a crime, we’ll take appropriate action…I’m not going to publicly say how we’ll stage up if we anticipate unrest, but we continually train and make sure our officers have proper equipment. That’s not just something we’re doing now; we do that on a regular basis.”

Sizing up the Odds. Writing that, in its view, Atlantic City is “unlikely to pursue bankruptcy as an immediate course of action,” Standard & Poor yesterday added; “We note the possibility of debt service and other payment deferrals as early as fiscal 2015 as an option to address the city’s budget deficit,” as S&P kept the city on credit watch negative with a junk-level rating of BB, noting the city is looking for short-term options to avoid municipal bankruptcy. S&P credit analyst Lindsay Wilhelm, citing the 60-day report released last month by Atlantic City Emergency Manager Kevin Lavin mentioning the possibility of debt service and other payment deferrals for as early as the fiscal 2015 year to address a $101 million budget gap, wrote: “The emergency manager’s report reflects several possible solutions to the city’s fiscal 2015 deficit that are both recurring and one-time in nature…Ultimately, for the city to stabilize and improve, it must implement recurring and ongoing measures. However, short-term solutions can provide a financial cushion in operations while the city makes long-term adjustments.” Nevertheless, Wilhelm warned the city remains at fiscal risk because, if some of the short-term solutions Mr. Lavin outlined in his report turn out to be unsuccessful, that could leave the city little option but to seek federal bankruptcy protection. The report noted that among the more pressing fiscal challenges the city confronts are accessing the municipal markets to finance a $40 million loan from the state in the wake of a 60-day extension granted at the end of March 31, in addition to paying off some $12 million in bond anticipation notes, which are scheduled to mature this August. The report notes Atlantic City is currently enmeshed in negotiations with key stakeholders such as casinos and bondholders “to address its near-term financial and liquidity pressures.”

Fiscal Resilience. Despite the riots and widespread, expensive damage to Baltimore, Moody’s was affirmative yesterday in determining that it expects the city not to be confronted with any long-term, adverse credit impact. Writing for Moody’s, Jennifer Diercksen noted that notwithstanding some near-term fiscal challenges because of the civil unrest, the rating agency does not anticipate long-term problems, despite drops in tourism in the wake of the riots and the cancellation of two conventions. The city, which is rated Aa2 by Moody’s and AA by S&P, suffered, but Ms. Diercksen wrote the city should weather the storm, provided there is no sustained loss in visitors or population. The fiscal affirmation comes in the wake of unrest in the wake of Monday’s funeral services for Freddie Gray, who died a week after suffering spinal cord injuries while in police custody. The ensuing protests about the cause of Mr. Gray’s death, which is still being investigated, and past police killings of black suspects turned violent, leading to multiple fires of businesses along with looting; no official estimates of financial damages have yet been released; nor have any estimates of the fiscal projections of related expenditures and foregone projected revenues to the city been determined. As Ms. Diercksen noted, referring to the city, it will “definitely have some financial flexibility that should help out any unexpected costs,” adding the city, as we have reported in our in-depth fiscal analysis, has “a satisfactory financial position with multiple years of operating surpluses.” Compatriot Moody analyst Julie Beglin noted that key riot-related costs the rating agency will track will include: police overtime and emergency management expenses, as well as drops in sales and use tax revenues. Its fiscal assessments will seek to ascertain the economic impact – short-term and long-term – n the wake of the of the April 27th riots, ensuing city imposed curfew, and cancellation or out-of-city transfer of four Baltimore Orioles games.

Leadership in Adversity. It would seem that both the fiscal experience in the wake of similar events in Ferguson, Missouri, last year, where Moody’s subsequently reported that the civil unrest “does not present a direct credit pressure,” and the extraordinary partnership between the State of Maryland and the City of Baltimore are an important factor—or, as the ever marvelous Maryland State Treasurer Nancy Kopp (pictured here) puts it: “If [the unrest] is contained it can lead to a stronger Baltimore…The resilient spirit of the city can come through.” Treasurer Kopp noted that Mayor Stephanie Rawlings has helped spearhead the city to its strongest credit rating in half a century in large part due to her focus on reducing the property tax burden; she added the city is well positioned to withstand any near-term revenue losses and security expenses, noting that Maryland also has strong financial footing with triple-A ratings across the board. Ms. Kopp adds: “The events, as reprehensible as they were, are not going to impact the city’s ability to meet its debt…I don’t think this is going to have any long-term adverse impact.”


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