Unrelenting Municipal Leadership Challenges

May 29, 2015
Visit the project blog: The Municipal Sustainability Project

Municipal Bankruptcy Fallout. Wayne County Executive Warren Evans, who, from his bird’s eye perspective from the county surrounding Detroit, and who has himself expressed grave concerns about his own county’s fiscal sustainability, also has to think about risks to other municipalities from Wayne County’s dire fiscal condition. Thus the Wayne County Treasurer’s Office will have to provide assurances that the funds the county borrows to cover the delinquent taxes it collects for local communities would not be subject to diminution should the county be forced to file for federal bankruptcy protection―an assurance, which will come in a bankruptcy opinion which combines county legal opinions with those of an outside firm—or, as Christa McLellan, Wayne County Deputy Treasurer puts it: “There was just a lot of reaction to the comments. … (Bond markets are) very sensitive to what’s in the papers.” With County Executive Evans acutely aware of the unprecedented costs of municipal bankruptcy, ergo, he is laser-focused on what is now believed to be a $52-million structural deficit in the county and its “grossly” underfunded pension system—the triggering apprehensions for his proposed recovery plan to preempt municipal bankruptcy—a plan which proposes $230 million in cuts over four years. But the threat of municipal bankruptcy has forced the County’s hand, as—in order to prevent any diversion of funds the county collects for other jurisdictions or which it borrows to provide funding through its delinquent tax revolving fund—it has been forced by Merrill Lynch, which underwrites Wayne County’s borrowing for the fund this year, to obtain a municipal bankruptcy opinion in order to demonstrate that the funds are safe, “because they can’t be diverted,” or, as Deputy Treasurer McLellan puts it: “The county is never at risk…It’s a very secure program…It’s really structured that whatever happens, we can repay the notes,” adding there is no danger to creditors in the delinquent property tax program, because the communities must repay the money. The effort allows the Treasurer’s office to take over delinquent property tax collections for communities each year and provides the communities with revenue which they would otherwise be trying to collect.

The Fine Art of Diplomacy in Municipal Bankruptcy. As we have noted previously, the costs—especially legal and consulting fees—of municipal bankruptcy are withering. Few seemed more aware of this than U.S. Bankruptcy Judge Steven Rhodes and his appointed federal mediator, Chief Judge Gerald Rosen—so that, as part of the mediated settlement in the largest municipal bankruptcy in U.S. history, Miller Buckfire, which served as a paid consultant to Detroit emergency manager Kevyn Orr throughout the course of Detroit’s bankruptcy, has now contributed $1 million to help pay the water bills for Detroit residents in danger of getting service shut off―the largest nonutility contribution to the Motor City’s The Heat and Warmth Fund (THAW) in the charity’s history—a contribution that was part of the mediated settlement worked out by Judge Rosen and which came in the wake of strong objections from Detroit Mayor Mike Duggan to the unbelievable fees levied by Miller Buckfire. With water service—now to be shared via a regional authority, also a part of the resolution—even if still not resolved—of the city’s plan of debt adjustment, there remains a crushing, but prohibitive need: more than 64,000 Detroiters, disproportionately elderly, cannot afford water to pay their utility bills—and the bulk are likely seniors.

Schooling Governance. If too many Motor City residents cannot afford water, the whole city cannot afford its current school system—which is insolvent—an insolvency which is imposing strains on the relationship between Michigan Governor Rick Snyder and Detroit Mayor Mike Duggan—especially with regard to the authority to make appointments to the Detroit school board. Mayor Duggan this week urged Gov. Snyder not to appoint members of the city’s school board, but rather to leave those decisions up to Detroit’s voters, noting that Detroit school parents have demonstrated for years, through their withdrawals of their kids from the city’s school system that they have no confidence in schools under state control. Instead, Mayor Duggan said he would prefer a financial review commission to monitor and act as a check on excessive spending and borrowing, not dissimilar to the oversight commission incorporated into Detroit’s plan of debt adjustment as part of the grand plan worked out by Judge Rosen, the Governor, and bipartisan leaders of the state legislature. Mayor Duggan would like to have the state empower the current school board to be responsible for paying down the Detroit Public School (DPS) system’s hundreds of millions in debts, and a new school board charged with moving Detroit’s schools forward; moreover, Mayor Duggan believes a Detroit Education Commission should be created to allow the city to manage and coordinate all schools in the city, both public and charter schools—an element on which he is agreement with Gov. Snyder: under their concept, such a commission would be able to hold both types of schools accountable, and the authority to shutter failing schools, but also the authority to determine where schools are opened and closed to prevent too many schools in some neighborhoods—and none in others, as well as coordinated citywide bus service to all students, in public or charter schools, with a common enrollment system for all. The Mayor cites his goal to be the establishment of order in a chaotic system—a system, he believes rendered more unstable by years of failed state oversight that led to devastating enrollment declines and insolvency — in a city where 95 schools have opened or closed in the last six years, urging a governmental system of coordination and stability necessary to encourage families to keep their kids in city schools, noting: “We’re becoming a community where if you’re born rich you die rich, and if you’re born poor, you die poor.” DPS today has only five schools which meet the state average in reading; only seven meet the average in math; the district has gone from 180,000 students to 47,000 over the last decade—a period during which its schools have dropped from 13th to 45th in statewide student achievement. Mayor Duggan’s position contrasts with Gov. Snyder’s, who is, instead, proposing that DPS be split in two, under which the new district would be created debt free—and focus on educating kids, instead of debt; the existing system would continue to collect the local millage in order to retire DPS’s debt. But, as Gov. Snyder has acknowledged, getting his potential package through the legislature will be more than academically challenging: “Helping pay for their debt is a huge issue and the whole governance question…It’s a challenge to say, ‘We’d like to pay your debts and not have a role in the governance of the district.’”

Pensionary Musings. As San Bernardino enters its long awaited municipal bankruptcy trial to seek U.S. Judge Meredith Jury’s ok for its proposed plan of debt adjustment—a plan which proposes substantial cuts in what it would pay its municipal bondholders and its retiree health care obligations—but, as in Stockton and Vallejo, no reductions in its pension obligation to CalPERS; nevertheless, the plan is quite different in that it seeks to address pensions in a quite different manner: by contracting out for fire, waste management, and other services; the city projects substantial savings via a singular reduction in its employee base—especially for fire protection—via shared services, contract services expected to reduce city pension costs. The plan also proposes additional pension savings which would be derived by means of a substantial increase in employee payments toward pensions and from a payment of only 1 percent on a $50 million bond issued in 2005 to cover pension costs. Or, as Councilmember Henry Nickel put it before the Council vote to approve the city’s plan of adjustment: “The justification from what I’m understanding from the plan — the justification for contracting is more or less to save the city from the pension obligation. Is that correct?” The question came based on one of the slides staff had created to help explain the complex plan: the slide noted: “CalPERS costs continue to escalate, making in-house service provision for certain functions unsustainable.”

In response to the query, City Manager Allen Parker responded: “[T]hat’s part of it,” but not the “entirety,” advising Councilmember Nickel that in addition to pension savings, contracting with a private firm for refuse collection now handled through a special fund is expected to yield a “$5 million payment up front” into the deficit-ridden city general fund, adding that the CalPERS safety rate for firefighters is between 45 and 55 percent of base pay, “so if you have a fireman making say $100,000 a year, there is another $50,000 a year that goes to CalPERS,” further explaining that an actuary had estimated that contracting for fire services could save the city $2 million a year in pension costs, so that the change could achieve an annual savings of $7 million or more. Moreover, unlike other unions, firefighters had not voluntarily agreed to accept either the suggested 10 percent pay cut or to forego merit increases. Indeed, fire and waste management are the biggest opportunities for savings and revenue among 15 options for contracting city services listed in San Bernardino’s plan of debt adjustment—the plan whose mandated submission date from Judge Jury is today. Under the plan, many city employees are expected to be rehired by contractors, with estimated annual savings for contracting five other services: business licenses $650,000 to $900,000, fleet maintenance $400,000, soccer complex management $240,000 to $320,000, custodial $150,000, and graffiti abatement $132,600.

San Bernardino plan to return to solvency
Indeed, pension obligations have been very much at the heart of San Bernardino’s municipal bankruptcy: after its chapter 9 filing, San Bernardino—unlike Stockton or Vallejo, became the first California municipality to omit its annual payments to CalPERS—an expensive omission, as that, under the city’s proposed plan of debt adjustment, would be repaid over two fiscal years with equal installments of about $7.2 million, including some $400,000 annually in penalties and interest at the end of the proposed repayment period. Or, as Mr. Parker further explicated last week: San Bernardino’s public pensions have an “unfunded liability” of $285 million, but are only 74 percent funded, adding that the proposed plan of debt adjustment would protect pension amounts already earned by city employees, even with a new employer, and, like the Stockton and Vallejo plans, are proposed that way in recognition that cities—as employers—can ill afford not to offer competitive benefits. Further, noting the very deep pockets of CalPERS, Mr. Parker added: “We naively thought we could negotiate more successfully, but that didn’t necessarily happen,” and that San Bernardino’s pockets were not remotely deep enough for what would have been a costly and lengthy legal battle with deep-pocketed CalPERS is said to be 8 to 10 percent below market because of low benefits. The bankrupt city stopped paying the employee CalPERS share and raised police and firefighters rates to 14 percent of pay. On the post retirement health care side, the plan proposes to reduce health payments from a maximum of $450 per month to $112 per month, saving $213,750 last year.

Underwater in Puerto Rico—and Washington, D.C. The U.S. territory of Puerto Rico—neither a state, nor a municipality, but home to millions of Americans, is caught in a legal twilight zone, because it lacks the authority of every U.S. corporation—municipal or private—to seek federal bankruptcy protection; nor is the territory, again because it is not a state, authorized by the federal municipal bankruptcy law to authorize its municipalities with authority to seek such protection. While legislation to grant such authority has been pending before the House Judiciary Committee (HR 870, the Chapter 9 Uniformity Act of 2015), the bill appears to be in perpetual suspension, with many members confusing municipal bankruptcy with a federal bailout—almost as if to demonstrate a bankruptcy of comprehension. After all, they would be hard pressed to find any pennies devoted by the federal government to “bail out” Jefferson County, Stockton, Detroit, etc.; albeit they would find it far easier to find spell out the bailouts for Chrysler and General Motors—two of the three very large corporations in the Detroit metropolitan area to file for bankruptcy in the wake of the Great Recession. Thus, instead of acting on legislation which would—at no cost to the federal taxpayers—allow a federal judge to oversee the creation, adjudication, and approval of a plan to adjust debts between all the islands creditors, the issue has instead become, as Bloomberg observes, a bonanza for Washington lobbyists, who are developing websites, creating advertisements, and lining up the support of conservative advocacy groups, with one group posturing: “Puerto Rico may soon reach a height of budget crisis that can be addressed only through a massive bailout package from the federal government.” A website set up by 60 Plus Association, a senior-citizen advocacy group, opposes the legislation, while still another, NoBailout4PR.org., posts: “Make no mistake: Extending Chapter 9 bankruptcy protection to Puerto Rico is not a way to avoid a bailout…It is a bailout.” The legislation which is diverting so many dollars to Washington lobbyists and campaign coffers would amend the Federal Bankruptcy Code to treat Puerto Rico as a state: that is, it would enable Puerto Rico—as all 50 states are authorized, the option to authorize its municipalities and public agencies to file for Chapter 9 protection. It would not obligate Congress to appropriate one thin dime. Indeed, as Bloomberg notes: “The lobbying efforts focus on Republicans, who control the House. BlueMountain, Franklin Resources Inc. and several other investment managers have hired former high-ranking Republican staffers from the House Financial Services Committee and Senate Banking Committee who now work at Venable LLP, a law and lobby firm, to defeat the bill, according to disclosure records….Others that oppose the legislation include Tea Party activists and the Alexandria, Virginia-based 60 Plus, which describes itself as a “seniors advocacy group with a free enterprise, less government, less taxes approach.” Mayhap ironically, the issue has attracted 35 asset managers who favor the legislation and who support the Puerto Rico Fiscal Stability Coalition, co-chaired by former Puerto Rico Governor Luis Fortuno. The coalition’s spokesman, Phil Anderson, is a former special assistant to former Vice President Dan Quayle, who is now president and a founder of Navigators Global LLC, a Washington-based lobbying group that has set up English- and Spanish-language websites and produced video ads targeting the Puerto Rican public and Congressional members and staff—a coalition which has gained support from a group which could never be characterized as supportive of taxpayer-backed bailouts, including Citizens Against Government Waste and Grover Norquist’s Americans for Tax Reform. Their spokesperson noted that allowing Puerto Rico entities to file for bankruptcy would prevent what Anderson calls the “potential collapse” of the $3.6 trillion municipal-bond market, about 40 percent of which is held directly by U.S. households. An orderly restructuring would allow debtors and creditors to settle the dispute without involving taxpayers: “What solution is in the best interest of the U.S. taxpayer and what’s the most conservative solution to apply to the problem.”

May 29, 2015

Running on Empty. The Just before leaving town for its Memorial Day recess, and with no funding solution in the tank, Congress extended spending authority until the end of July, just before its five week vacation. The stopgap and start funding renders states and local governments unable to sign long-term contracts—and sharply increases the cost of issuing long-term municipal bonds for infrastructure financing.

“I will be stunned if the Republicans deal with the Highway Trust Fund responsibly…It’s not going to happen,” U.S. Sen. Bob Corker (R-Tenn.), the former Mayor of Chattanooga, who last year proposed a 12 cent per gallon increase in the federal gasoline tax, told reporters at a breakfast session sponsored by the Christian Science Monitor this week, adding that the short-term HTF extension favored by some in Congress is “incredibly irresponsible.”

Who, exactly, is getting bailed out? For all the provisions in the Congressional Budget resolution and individual bills and vows that there shall be no municipal bailouts, no Member of the U.S. House or Senate has yet been able to cite any bailout to a state or local government. In fact, of course, the federal government is munificent when it comes to bailouts to non-municipal corporations—whether it was the bailouts to General Motors and Chrysler—two of the three iconic corporations that filed for federal bankruptcy protection in the wake of the Great Recession—but not to the third, the City of Detroit. In fact, for all the Congressional sturm and drang about opposition to the so far non-existent municipal bailouts, the evidence points to ever increasing federal bailouts of private, non-municipal corporations. Indeed, as you can see from the chart, the Federal Reserve Bank of Richmond notes that the federal government is most generous with bailouts to private corporations. In its conveniently updated and most aptly named Bailout Barometer, the Richmond Fed reports that 60 percent of the U.S. financial system’s loans are explicitly or implicitly backed by the federal government—a 45% increase since 1999. According to the Richmond Fed: Implicit guarantees effectively subsidize risk. Investors in implicitly protected markets feel little need to demand higher yields to compensate for the risk of loss. Implicitly protected funding sources are therefore cheaper, causing market participants to rely more heavily on them. At the same time, risk is more likely to accumulate in protected areas since market participants are less likely to prepare for the possibility of distress — for example, by holding adequate capital to cushion against losses, or by building safeguarding features into contracts — and creditors are less likely to monitor their activities. This is the so-called “moral hazard” problem of the financial safety net: The expectation of government support weakens the private sector’s ability and willingness to limit risk, resulting in excessive risk-taking…The Richmond Fed’s view is that the moral hazard from the [Too Big To Fail] problem is pervasive in our financial system: the U.S. government’s history of market interventions — from the bailout of Continental Illinois National Bank and Trust Company in 1984 to the public concerns raised during the Long-Term Capital Management crisis in 1998 — shaped market participants’ expectations of official support leading up to the events of 2007-08. According to Richmond Federal Reserve Bank estimates, the proportion of total U.S. financial firms’ liabilities covered by the federal financial safety net has increased by one-third since our first estimate in 1999: The safety net covered 60 percent of financial sector liabilities as of 2013. More than 40 percent of that support is implicit and ambiguous.

Municipal Compliance. Cleveland this week agreed, as part of a settlement with the Justice Department, to create new watchdogs, retrain its police officers, and collect and analyze reams of new data as part of a settlement to resolve federal allegations that its police routinely used excessive force. The Cleveland police department, which has become a flash point in the racially charged debate over police tactics, has agreed to follow some of the most exacting standards in the nation over how and when its officers can use force, and will accept close oversight to make sure those rules are not ignored, city and federal officials said Tuesday. The agreement is part of a settlement with the Justice Department over what federal officials have termed a pattern of unconstitutional policing and abuse, with the Department having determined that police officers in Cleveland used stun guns inappropriately, punched and kicked unarmed people, and shot at people who posed no threat. In addition, the federal investigators determined the incidents often went unreported and uninvestigated. Under the agreement, Cleveland has agreed to document every time officers so much as unholster their guns: police supervisors will investigate the uses of force in much the same way that officers investigate crimes, or, as the agreement reads: “A fundamental goal of the revised use of force policy will be to account for, review, and investigate every reportable use of force.” The new federal rules prohibit officers from using force against people simply for talking back or as punishment for running away. Pistol whipping is prohibited, as is firing warning shots. In addition, the city has agreed to allow an independent monitor to track its progress. If the city does not put into effect the changes called for in the settlement, a federal judge has the authority to mandate them. (Under the Obama administration, the Justice Department has opened nearly two dozen civil rights investigations into the practices of police departments. Many of the elements in the Cleveland settlement — improved training, better internal oversight and an independent monitor — have become standard.) The Cleveland settlement came out of negotiations that commenced last year in the wake of discussions with the Justice Department after investigators determined that police in Cleveland engaged in a pattern of excessive force, although the settlement still must be approved by a judge. According to the U.S. Justice Department, problems in Cleveland involved both police shootings and blows to the head; Justice Department officials also cited what they called excessive or retaliatory use of Tasers, chemical sprays, and fists—including the department’s use of force against mentally ill people. As resolved, the agreement calls for a series of compliance actions intended to respond to the federal findings:
• Cleveland police would be required to try to de-escalate situations before using force and be barred from using force in retaliation;
• Officers will not be allowed to take their weapons out of their holsters “unless the circumstances create a reasonable belief that lethal force may become necessary,” and every time an officer takes out her or his weapon, an officer would have to document it; and
• A newly created inspector general is charged to monitor the department, while a civilian would oversee its internal affairs unit.

Cleveland U.S. Attorney Steven Dettelbach has called the agreement “a national model for any police department ready to escort a great city to the forefront of the 21st century,” while Cleveland Mayor Frank Jackson called the agreement a “very positive result.” Mayor Jackson reports the agreement, which will be overseen by an independent, court-appointed monitor, was the result of a long-running collaboration between the Justice Department and the city. He added, however, that the agreement will be not only complex, but costly: Cleveland and its taxpayers city will have to spend millions of dollars over several years in order to comply with the terms of the consent decree, according to Matt Zone, the chairman of the Cleveland City Council’s public safety committee, and will have to adopt a new ordinance to ensure that the city’s police officers are not able to use race and class as profiling techniques in their traffic stops and investigations. Unsurprisingly, several members of Cleveland city council expressed concern about the cost of implementing the consent agreement—a cost not disclosed by federal government officials involved in the new mandate, but one estimated to be in the millions of dollars.

Wealth Disparities. Christopher Ingraham this week wrote about an issue which has been the subject of governance discussion in Europe: wealth inequality, where it has been highlighted in a huge new report from the Organization for Economic Cooperation and Development (OECD). What is the distinction between income versus wealth inequality? Income is the amount of money one earns from work and/or investments, but wealth is what one owns: one’s home, car, savings, retirement accounts, etc. The OECD report finds that the richest 10 percent of American households earn about 28 percent of the overall income pie. In contrast, he writes, the wealthiest 10 percent of U.S. households now own or hold 76 percent of all the wealth in the U.S.—a percentage far greater than the globe’s other rich nations. Mr. Ingraham explains this extraordinary disparity by writing: “Let’s imagine that there are just 100 people in the United States. The richest guy―and, yes, he’s probably a guy―owns more than one-third of the total wealth in this country. He’s got a third of all the property, a third of the stock market and a third of anything else that can be owned. Not bad…The next-richest four people together own 28 percent of all the stuff. Divvied up four ways, that’s still not too shabby. The next five people together own 14 percent of all the things, and the next 10 own another 12 percent…We’ve accounted for just 20 percent of the people, but nearly 90 percent of the total wealth. Ninety percent! …The next 20 percent of people have only nine percent of the wealth to split among them…The next 20 percent, the middle wealth quintile, only have three percent of the wealth to split 20 ways…” Then, as he writes: “Now we’ve reached the bottom 40 percent of Americans, but guess what? We’ve run out of stuff. Sorry guys, you get nothing. In fact,…this bottom 40 percent actually has an overall negative net worth, which means that they owe more money than they own…” Unsurprisingly, this wealth disparity is most unevenly distributed across the country—and, since the General Revenue Sharing program created under the administration of former President Richard Nixon—a program explicitly recognizing that wealth and opportunity were unequally distributed across states and local governments, so that the federal government—and states—had a role in recognizing and leavening these disparities―but which was abandoned under the Reagan administration, the very apprehensions discussed by former President Nixon and the leaders of the nation’s governors, state legislators, and city and county leaders of increased disparities are transpiring. As one can see from the map of Baltimore below, this accelerating fiscal disparity can have explosive consequences—especially when it is constructed on federal policies.

Senate Appropriators Approve 302(b) Allocations. Before leaving for recess, appropriators in Congress made progress on moving spending bills. The table above provides House and Senate 302(b) allocations for FY2016, per the $1.017 trillion discretionary cap set by the Budget Control Act (BCA).

New Reporting Mandates. The Securities and Exchange Commission this week approved the Municipal Securities Rulemaking Board’s (MSRB) proposal to collect additional post-trade data for its electronic municipal reporting service EMMA; the new data reporting requirements, which will become effective next May 23d (2016) are included in amendments to MSRB Rule G-14 on trade reporting and the MSRB’s facility for its Real-Time Transaction Reporting System (RTRS). The amendments will require dealers to report new information through the RTRS, such as whether a trade occurred on an alternative trading system or involved a non-transaction based fee. They also would eliminate the requirement for dealers to report the yield for trades with customers.

2015 Schedule
March 13th. State & Local Governments Securities (SLGS). Congress’s failure to act to increase the nation’s debt ceiling triggered a federal unfunded mandate: the cost of refinancing state and local bonds and securities to increase.
July 31st. The current federal surface transportation law expires; the federal highway trust fund is projected to be out of money by mid-summer; state and local governments have already begun to cut back on projects. To date, there has been no progress in Congress.
June. The Export-Import Bank, which helps finance overseas purchases of American exports, might shut in the face of opposition to its mission.
Sept. 30. The Children’s Health Insurance Program faces expiration.
October 1. Sequester set to trigger.
September-October. Default? The government’s borrowing limit was reinstated on March 16, although Congressional Budget Office projects the government will likely come up against the ceiling in September or early October.
State & Local Finance

Mapping Challenges to Fiscal Sustainability. As can be perceived from the map to the left here, the increasing disparity in wealth discussed above is demonstrative of growing fiscal disparities in cities and counties across the nation. The ongoing, persistent federal reductions by means of sequesters and squeezing out of domestic discretionary investment—and significant growth in federal tax expenditure subsidies to those in least need has, it appears, significant and growing geographic and governance implications. Federal housing assistance today is dominated by federal tax expenditures—not federal housing programs from HUD. One only need look at the graphic here of the sea of vacant homes and buildings in Baltimore to appreciate how it is undercutting critical property tax revenues to the city—even as it is imposing ever greater public safety costs on the city’s depleting fisc. According to Scott Calvert of the Wall Street Journal, nearly 17,000 homes, or about 8% of the city’s housing stock, are deemed unfit for habitation. But, as in Detroit, the fiscal challenge confronting Baltimore is not just those residences that have become uninhabitable, but rather those that are abandoned: because the city’s population has declined more than a third over the last six decades. Whether it be Baltimore, Detroit, San Bernardino, or a growing list of cities throughout the nation, it appears a growing list of urban areas are confronting the twin fiscal risks of widespread vacancies: a risk not just to property tax revenues, but also as these neighborhoods become at risk to become magnets for criminal activity. Baltimore’s experiences demonstrate the exceptional challenges to the Mayor and Council: Between 2010, when it started a new program, and 2013, Baltimore sold 410 vacant houses for rehab; yet, as Mr. Calvert writes, more than 40% do not have use-and-occupancy permits, more likely than not meaning the house is vacant: a target not for property tax revenue, but rather for criminal use. Nevertheless, he writes, Baltimore has taken a three-pronged approach to tackling vacancies: enforcing city code more stringently by levying fines and persuading judges to force auctions if owners do not renovate; demolishing more than 1,500 houses, with hundreds more to be razed in coming years; and marketing some of its own vacant inventory, which accounts for about 15% of the total―adding: “‘Baltimore officials deserve credit for a higher-than-50% success rate on vacant homes sold by the city,’ said Frank Alexander, an Emory University law professor who co-founded the Center for Community Progress, a nonprofit that advises local governments on addressing vacant properties. ‘But they cannot fail to deal with those for which there has been no progress.’” While he said he understands officials’ reluctance to take properties back, failing to do so means the problem continues. More than 800 of the city’s 16,745 vacant homes are in Sandtown-Winchester, the site of Mr. Gray’s arrest and some of the worst looting of the protests.

In 1964, in his State of the Union address, former President Lyndon Johnson said:
This administration today, here and now, declares unconditional war on poverty in America. I urge this Congress and all Americans to join with me in that effort.
It will not be a short or easy struggle, no single weapon or strategy will suffice, but we shall not rest until that war is won. The richest Nation on earth can afford to win it. We cannot afford to lose it. One thousand dollars invested in salvaging an unemployable youth today can return $40,000 or more in his lifetime.

Poverty is a national problem, requiring improved national organization and support. But this attack, to be effective, must also be organized at the State and the local level and must be supported and directed by State and local efforts.

For the war against poverty will not be won here in Washington. It must be won in the field, in every private home, in every public office, from the courthouse to the White House.
The program I shall propose will emphasize this cooperative approach to help that one-fifth of all American families with incomes too small to even meet their basic needs.
Our chief weapons in a more pinpointed attack will be better schools, and better health, and better homes, and better training, and better job opportunities to help more Americans, especially young Americans, escape from squalor and misery and unemployment rolls where other citizens help to carry them.

Very often a lack of jobs and money is not the cause of poverty, but the symptom. The cause may lie deeper — in our failure to give our fellow citizens a fair chance to develop their own capacities, in a lack of education and training, in a lack of medical care and housing, in a lack of decent communities in which to live and bring up their children.
But whatever the cause, our joint Federal-local effort must pursue poverty, pursue it wherever it exists — in city slums and small towns, in sharecropper shacks or in migrant worker camps, on Indian Reservations, among whites as well as Negroes, among the young as well as the aged, in the boom towns and in the depressed areas.

Is Chicago Contagious? Our admired friends at Municipal Market Analytics this week raised concerns with regard to whether Chicago’s recent downgrade might be contagious, affecting the cost of municipal borrowing for other cities—a risk you can see (below) that can already be tracked to New Jersey municipalities. As my esteemed MMA colleagues wrote: “That such an important, economically vibrant city such as Chicago is considered junk credit by one of the major rating agencies makes for a perception problem that all issuers may have to contend with, adding: “The pension drumbeat only grows louder as it is the city’s pension liabilities that drove the credit action…In the days after the Moody’s downgrade, we saw significant retail selling of the city’s debt—even of other Chicago credits that were not downgraded. Additionally, many of the state’s own credits began to widen as many investors looked to shed any Illinois exposure whatsoever. Then the real contagion began to occur as other municipal credits that also have large [public] pension liabilities began to cheapen as retail accounts sold those bonds as well…Most notable was New Jersey appropriation debt [please note MMA chart below] but we also saw cheapening for Pennsylvania, Connecticut, and Louisiana general obligation debt.

The Sharing/Disruptive Economy

As we observe the changing economy—what with the sharing economy, the impact of the internet on work hours and locations, we can anticipate it will lead to profound changes in transportation and housing. Because the internet is permitting more people to work from anywhere, anytime, the old model of cities and suburbs is becoming increasingly obsolete.

The Disruptive, but Sharing Economy: What’sApp? Do States & Local Governments Need New Rules for the Sharing/Disruptive Economy?

Playing by the Tarheel Rules. Airbnb has announced that, effective Monday, June 1, it will begin collecting and remitting sales and hotel occupancy taxes to North Carolina—and sales and hotel occupancy taxes in four of the state’s counties (all of No. Carolina’s 157 counties and municipalities levy a local occupancy tax of at least 1 percent.) The agreement follows in the wake of the Raleigh City Council decision last December to declare Airbnb illegal—an action which led Councilmember Mary Ann Baldwin to work with the sharing company, noting: “Airbnb is a popular piece of this new economy that tourists and prospective residents expect to see in modern cities.” The state action makes North Carolina only the second state in which Airbnb collects a statewide tax—Airbnb does collect and remit occupancy taxes on behalf of its guests in several municipalities, including: Washington, D.C., Chicago, San Francisco, Portland (Ore.), Malibu, and San Jose.

Shairing. Airbnb will begin collecting taxes on behalf of D.C. residents: under the voluntary agreement, the District joins a smattering of municipalities with which Airbnb has worked out tax agreements to share some of its revenues—revenues for an emerging platform under which thousands of Americans have become innkeepers—but innkeepers not subject to the same tax, insurance, or public safety standards as their business competitors. The agreement could mean significant additional revenues for the city; for Airbnb, the promise to remit that money straight to D.C. treasury could help legitimize a service which, in many places, is still not strictly legal. In the cities where Airbnb has agreed or been required to do collect, Airbnb will automatically collect the local hotel or transient occupancy taxes, which run from about 5 percent to 14.5 percent in the District, on every transaction. Airbnb will then pay the municipalities cities in a regular lump sum, but will not include details about individual hosts or guests. Airbnb began collecting these taxes in Portland, Ore., last July and in San Francisco last October. Between those two cities so far, the company says it has already paid about $5 million in taxes (it has not, however, agreed to collect and remit back taxes anywhere). It will also be collecting and remitting in San Jose, Chicago, and Amsterdam—cities comprising some of Airbnb’s largest markets. As an Airbnb spokesperson helps us to understand: “In many cases, these taxes were designed for hotels and folks with teams of lawyers and accountants, and the reality is that the person who’s renting out his basement in Cleveland Park once a month probably doesn’t have tax experts on payroll…You shouldn’t need a lawyer and a tax specialist if you want to rent out your house.” On the newly receiving end, Stephen Cordi, the deputy CFO for D.C. explains to us: “It’s undoubtedly true that people particularly at the bottom end of this probably didn’t know what to do.” he says. Airbnb hosts should have been registering with the city and collecting the tax, which supports both a convention center fund and the city’s general fund — and, ultimately, services like the fire and police departments. Under this agreement, he notes: “This will eliminate the need for them to do that,” adding that Airbnb, rather than the District, took the initiative, which now means Airbnb hosts have a formal mechanism for paying taxes on an activity—even though it is still not exactly recognized by D.C. law: the District has yet to pass new regulation that would formally legalize the kind of short-term rentals Airbnb has made possible—unlike some municipalities, including Portland and San Francisco, which have adopted new laws explicitly legalizing the activity under certain conditions. Interestingly enough, Airbnb’s initiative to become a corporate citizen could send shock waves to other vacation rental companies, such as VRBO, because, unsurprisingly, Airbnb would like its competitors to compete on a level playing field, so that the company does not confront a disadvantage in a market where other platforms offer untaxed homes which may then be more attractive to potential lodgers. My colleague, Philip Auerswald, an associate professor at George Mason who studies innovation and entrepreneurship, argues that cities really ought to be responding to the rise of companies like Airbnb by broadly rethinking where and how they collect tax revenue in the 21st century: “It’s not particularly interesting or insightful to say ‘since hotels are taxed this way, it’s only fair,’” he says. “That makes sense as long as you think that whatever the status quo is is where we want to end up.”

Fractional Jobs: No Benefits. Christopher Mims of the Wall Street Journal this week described the new, emerging sharing economy as “a hodgepodge of mostly unrelated but often lumped-together startups, many originating in Silicon Valley, that involve ‘sharing’ things like cars and homes…’ adding: “The first thing everyone misses about the sharing economy is that there is no such thing, not even if we’re being semantically charitable…Increasingly, the goods being ‘shared’ in the sharing economy were purchased expressly for business purposes, whether it’s people renting apartments they can’t afford on the theory that they can make up the difference on Airbnb, or drivers getting financing through partners of ride-sharing services Uber and Lyft to get a new car to drive for those same services….What’s more, many of the companies under this umbrella, like labor marketplace TaskRabbit, don’t involve ‘sharing’ anything other than labor. If TaskRabbit is part of the sharing economy, then so is every other worker in America: The only thing these companies have in common is that they are all marketplaces, though they differ widely in the amount of control they give their buyers and sellers…perhaps the worst offender in how it controls its labor force is Uber: Uber sets the prices that its drivers must accept, and has lately been in the habit of unilaterally squeezing drivers in two ways, both by lowering the rates drivers are paid per trip and increasing Uber’s cut of those wages,” leading Britain’s Financial Times Izabella Keminska to note: “The uncomfortable truth is that the sharing economy is a rent-extraction business of the highest middleman order.”

Mr. Mims writes that Uber has reported it is hiring 20,000 new drivers a month, and in this report it claims that in major U.S. cities, such as Los Angeles and Washington, D.C., drivers are averaging more than $17 an hour; however, as he notes: this data hardly reflects what Uber drivers actually make, because Uber does not include drivers’ expenses: it turns out that being an Uber driver pays about $10/hour—and there are no benefits….It isn’t minimum wage, but it’s a far cry from Uber’s previous claims about what drivers make, which reached the height of absurdity in May 2014, when the company claimed that the median income for drivers in New York was $90,000 a year. Months of investigation of that claim by journalist Alison Griswold yielded not a single driver in New York making that much.” Then he adds; “What this all means is simple: Uber and its kin Lyft, which is more generous with its drivers but has a similar business model, are remarkably efficient machines for producing near minimum-wage jobs. Uber isn’t the Uber for rides—it’s the Uber for low-wage jobs: There is much gnashing of teeth by critics over whether or not jobs for ride-sharing companies are ‘good’ jobs, but data from both Uber and Lyft show that more than 80% of their drivers have other jobs or are seeking other work, and Uber has said that 51% of its drivers are driving less than 15 hours a week…Ride-sharing companies, like many other firms in the ‘sharing economy,’ allow for a new kind of employment—sometimes called fractional employment—in which people can take on extra work when and if they need it. The key to fractional employment is flexibility for both these companies and their workers. Economically, these companies have been explicit that their business model doesn’t work if their ‘driver partners,’ who are currently independent contractors, are treated like employees…And this is the final and most important thing that both critics and boosters get wrong about the sharing economy: That in order for it to move forward, regulators must decide whether its employees are independent contractors or employees….”

While he writes that drivers for Uber and Lyft, mostly part-time, appear relatively satisfied because of the flexibility with which they can earn their wages, he notes they are quite obviously neither employees nor freelancers: “Like Schrödinger’s cat, neither alive nor dead, they confound conventional definitions,” adding: “The only way forward is something that has gotten far too little attention, called “dependent contractors.” In contrast with independent contractors, dependent contractors work for a single firm with considerable control over their work—as in, Lyft or Uber or Postmates or Instacart or any of a hundred other companies like them. This category doesn’t exist in current U.S. law, but it does exist in countries such as Germany, where dependent contractors get more protections than freelancers but are still distinct from full-time employees…The alternative is the underappreciated possibility that ride-sharing companies could cease to exist entirely, owing to a class-action lawsuit that almost certainly represents an existential threat to their business. http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/: This is a link to a PBS speculative report about white collar jobs that can be performed by robots: three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and horrors, attorneys.”
RDDII? http://www.pbs.org/newshour/updates/3-white-collar-jobs-robots-can-already-better/. The above is a link to a PBS speculative report about white collar jobs that can be performed by robots. Three jobs are alleged to be capable of being performed by robots, pharmacists, journalists and, horrors, attorneys.

Fragmentation Index? According to crack researchers at the University of Illinois at Chicago, the Windy City metro area is the country’s most governmentally fragmented with its 1,550 local governments. Rebecca Hendrik of UIC, one of the authors, and dubbers of the so-called “fragmentation index,” which compares some 51 metropolitan regions of at least 51 million residents, reports that while such a panoply of municipalities is normally assumed to increase the cost of governance, it can also increase competition, and, thereby, drive down the cost of public services—as well as allow “people to choose a local government based on their values.” She asserts that it is rather special purpose districts, such as school districts, park and fire districts—many of which overlap municipal borders—which can prove “costly and confusing,” adding that “[m]ost local governments in metropolitan areas can’t function without affecting their neighbors: they either collaborate or compete: Collaboration is being promoted for efficiency, but we need to consider what conditions affect collaboration versus competition: competition and collaboration are related phenomena, not two ends of the same spectrum.”

Driving a Hard Bargain. The second day of testimony in Lyft’s hearing before the Pennsylvania Public Utility Commission’s administrative law judges dealt mainly with insurance issues, and how passengers would be protected in the event of an accident; however, in the midst of the trial, Administrative Law Judge Mary Long closed the courtroom so that Lyft’s director of public policy, Joseph Okpaku, could answer questions about the number of rides Lyft provided while it was under a cease-and-desist order. However, just as Uber’s attorney refused in its hearing earlier this month, Lyft attorney Adeolu Bakare claimed such information was proprietary: releasing it could put his company at a competitive disadvantage—in effect seemingly in direct conflict with a court order requiring the company to disclose the information, which was issued by the administrative law judges: indeed, at one point, Counsel Bakare sought to have information about Lyft’s insurance policy’s terms and conditions protected as well, but Judge Long told him not providing information about the policy would “almost certainly result in dismissal of your application,” albeit after the hearing, PUC spokeswoman Jennifer Kocher explained that the judges ruled to make that portion of the hearing private in order to receive the information and allow the hearing to move forward, not because the information was truly proprietary. Judge Long said she would issue a ruling on the protected information. Both the ride-sharing companies drove into the Steel City earlier this year, where they have not only tangled with each other, but also with the PUC: neither company had the proper licenses to operate in Allegheny County as an alternative to taxicabs, which led to proposed daily fines of $1,000 and cease-and-desist orders against the companies—instead each is operating under temporary authority in Allegheny County. In its hearing, Lyft’s attorney explained that Lyft’s insurance acts as excess to a driver’s personal policy, and would act as the primary policy if the driver’s personal insurance denied a claim, adding that there are three periods during which Lyft considers its insurance policy active: 1) when a driver has the app open, but does not have a passenger, 2) when the driver is en route to pick up a passenger, and 3) during the ride itself. But in response to the question with regard to how Lyft verifies its drivers have insurance coverage, the attorney responded that Lyft asks for proof of insurance in the form of the insurance card provided to drivers, but it does not further verify the policy.

Arrivaderci! An Italian court this week bid arrivaderci to unlicensed car-sharing services such as those offered by Uber, in another setback for the fast-growing U.S. car sharing service. The court in Italy’s business capital of Milan determined the Uber POP service, which links private drivers with passengers through a smartphone app, created “unfair competition,” and that the use of Uber POP was forbidden, as was the offering of paid car-ride services by unlicensed drivers in any other way. The court gave Uber 15 weeks to comply with the ruling or face a fine of 20,000 euros for each day’s delay in meeting the court ruling.

The Silver Tsunami. U.S. District Court Judge Kevin Castel this week held that the Empire State’s Constitution does not protect former city Bronx City councilman and state legislator Larry Seabrook’s pension from a $418,000 forfeiture judgment issued in the wake of his corruption conviction. Mr. Seabrook has been convicted on nine counts of corruption and wire fraud in Manhattan Federal Court in Manhattan in a case involving the “misdirection” of some $1.5 million of taxpayer funds which were supposed to go to community groups to his own pocket, according to U.S. Attorney Preet Bharara, who noted: “Today’s conviction ensures that the Councilman will pay for betraying the public trust. Rooting out public corruption and restoring the public’s faith in honest government remains a vital mission of this office.” Mr. Seabrook had argued in court that his pension was protected by a provision of the state Constitution barring public pensions from being “diminished or impaired;” however, Judge Castel wrote: “This section of the New York State Constitution yields to the federal forfeiture to the extent that the state provision purports to foreclose forfeiture of Seabrook’s pension benefits.”

Hooked Horns. The Texas Senate has voted to beef up (a terrible pun) the state’s underfunded retirement system for state employees by adding about $440 million to the program, with the bill increasing state employee contributions to the system to 9.5%―the equivalent of a 2 percent increase―as part of an effort to address an approximate $7 billion shortfall, after approving House Bill 9, which the House passed and sent to the Senate in April.

Ethics & Public Trust
From the Richmond Times Dispatch: “Successful government relies on trust. The breakdown of comity at all levels reflects the citizenry’s lack of confidence in institutions and individuals. Washington’s woes are well documented. Local jurisdictions suffer self-inflicted damage as well.”

Inexcusable behavior at City Council meetings
The Virginian-Pilot this week ran an editorial (please see below) on an issue key to public trust:

Decorum in city council chambers lately has reflected poorly on this region’s citizens. Perhaps when people speak to elected officials, they take a cue from online forums, where rants and attacks are de rigueur. Perhaps they see nothing wrong with booing, berating, hounding, even threatening those with different opinions.
In Norfolk, a resident regularly heckles Councilman Paul Riddick during the public comment portion of council meetings. Riddick last month lost his temper and told the man not to come within 5 feet.

Sadly, in Portsmouth, the attacks come from the dais as often as from the audience. Councilmembers have hurled insults and profanities as they criticized each other’s ideas.
Most of the time, their comments, however obnoxious, are protected by the First Amendment. Federal courts have ruled that comments sharply critical, even personal, about a city council or school board member are allowed under the Constitution.
Protected status doesn’t make such speech persuasive, however; often, it’s simply an embarrassment and a distraction that garners attention on TV and online.
Virginia Beach City Councilman Bobby Dyer says his city can do better. During the contentious budget hearings, residents compared the City Council to Nazis. Another made a racist remark to a councilwoman. One woman approached Councilwoman Rosemary Wilson and yelled that she was “coming after” her.
Dyer said he understands that some citizens are angry about the tax increase. They have every right to express their frustration. But there are ways to communicate that message respectfully, he said, proposing the council develop more guidelines “to make things easier in building bridges.”

According to the city’s rules of conduct, “Any person addressing the council shall confine himself to comments germane to the action under debate, avoid reference to personalities, and refrain from vulgarity or other breach of respect. For any failure to so conform, he shall be declared out of order by the presiding officer and shall forthwith yield the floor.”
The question is how much further the council can go in defining “breach of respect” and “reference to personalities.”

A federal court 14 years ago struck down a Virginia Beach School Board bylaw that prohibited personal attacks during public comments at meetings. The court ruled that the bylaw acted as a filter to screen out negative comments toward School Board members and the administration while allowing proponents to speak.

As the First Amendment Center explained in 2004, “Government officials may not silence speech because it criticizes them. They may not open a ‘public comment’ period up to other topics and then carefully pick and choose which topics they want to hear. They may not even silence someone because they consider him a gadfly or a troublemaker.”
But those constitutional rights aren’t absolute. Speakers can – and should – be silenced if they are disruptive.
As Beach Councilman John Moss noted, “a number of people went way, way over the line” in their comments to the council this spring. “It was way too personal.”
Councilmembers agreed to discuss possible solutions – asking speakers to affirm in writing the code of conduct, for example, or more aggressive use of a sergeant at arms.
Here’s the best idea of all: People – whether council member or citizen – should speak their mind, and mind their manners.

Untrustworthy Math? Jim Bacon, the fine writer of his Blog, “Bacon’s Rebellion,” this week wrote about the (see: “A Strike Force about as Effective as the Iraqi Army”) interparty feud from the Virginia gubernatorial election in 2013, when former Virginia Attorney General Ken Cuccinelli lost to now Gov. Terry McAuliffe by 56,000 votes in a gubernatorial race in which he was outspent by two to one, with Mr. Bacon asking: “Would $85,000 more in his campaign war chest have made a difference in the election?…Probably not — the number was a small fraction of the $21 million Cuccinelli spent — but it’s a point worth pondering, given news that the Conservative StrikeForce PAC has agreed to pay $85,000 and hand over fund-raising contact lists to Mr. Cuccinelli, according to the Washington Post.” He notes that Mr. Cuccinelli, in his suit, had accused the PAC of raising funds which were never delivered to his campaign, estimating that the group had succeeded in raising about $435,000 from emails using his name; thus, he alleged that he had received only $10,000. In fact, Mr. Bacon notes. between January 2013 and June 2014, according to Federal Election Commission records, Conservative StrikeForce raised more than $2.8 million overall, of which it paid only $82,000 toward candidates or campaign committees, unsurprisingly leading the former state Attorney General to note: “It’s just a thunderous precedent…to make it harder and more expensive to be deceitful and misleading with people in the political arena as far as donations go…In an already sour environment, people who think they’re supporting something they believe in are defrauded.” The Washington Post article provides no response from Arlington-based Conservative StrikeForce, its chairman, Dennis Whitfield, or its independent treasurer and outside consultant, Scott MacKenzie; but, as Mr. Bacon writes: “[A]n outside observer must wonder if this is a case of an opportunist mimicking the police and veteran fund-raising scams in a political context. In a similar case, the Post notes, a committee to recruit conservative physician Ben Carson to run in the 2016 presidential race spent $2.44 million to raise $2.4 million.” For his bottom line, Mr. Bacon writes that: “Maybe this was a case in which Conservative StrikeForce just wasn’t very effective at its job, which it defined on its website as raising small contributions for conservative candidates through mail, direct mail and telephone solicitations. Or maybe it was a cynical ploy for the organizers to pay themselves handsome salaries and perks. We don’t know. But, sad to say, in the wild, wild world of political financing, we’ll probably be reading about a lot more cases like this one.”

Daily Press Editorial: Running for public office takes courage, confidence and the committed support of family and friends. The endeavor is not easy — walking through neighborhoods and knocking on doors takes plenty of time and effort — nor is it cheap, since campaign signs do not grow on trees. So as we head down the stretch toward Election Day, we extend our gratitude to those who volunteered for the experience and seek a place in local government. And we encourage other civic-minded citizens to lend their time and talent to the calling of public service, since our communities will surely benefit as a result.

Bill Bolling, former—and now convicted—Governor Bob McDonnell’s lieutenant governor, and current Co-Chair of the Governor’s ethics commission, writes on his Facebook page:
“The public’s trust is hard to gain and easy to lose.”


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