Options for Averting Municipal Bankruptcy

January 28, 2016. Share on Twitter

Flint’s Future. The U.S. Senate expects to consider bipartisan legislation today to address the unsafe water crisis in Flint as part of a bipartisan bill on energy policy—during which Sens. Gary Peters and Debbie Stabenow (D-Mi.) are expected to offer an amendment aimed at protecting the water supply in Flint. The underlying bill would update building codes to increase efficiency, strengthen electric grid safety standards, and promote development of an array of energy forms, from renewables such as solar and wind power, to natural gas, hydropower and even geothermal energy—and would accelerate federal approval of projects to export liquefied natural gas to Europe and Asia and reauthorize a half-billion dollar conservation fund to protect parks, public lands, historic sites, and battlefields. The Senate action comes as Sen. Minority Whip Dick Durbin (D-Ill.) said as many as 7,000 children have been “poisoned because of lack of proper government oversight” in Flint, with Senate Minority Leader Harry Reid (D-Nev.) adding that Michigan Gov. Rick Snyder had tried to “save a few bucks with the water and, in the process, poisoned lots of people.”

Sen. Reid added, however, that he thought the Senate should focus on other municipal water supplies beyond Flint, noting: “We have a lot of communities around this country who have lead pipes, and a very deteriorating water system.” The federal action comes as, in Lansing, the Michigan Legislature is poised today to approve $28 million in additional funding to address the lead contamination of Flint’s water—appropriations which would include funds for more bottled water and filters and services to monitor for developmental delays in young children, as well as help the city with unpaid water bills and cover testing, monitoring, and other costs—the second round of state funding allocated since the lead contamination was confirmed in the fall in the wake of a decision by state regulators two years ago to allow Flint to not treat water for corrosion after the city switched its supply in 2014—a decision with likely fatal consequences because of the ensuing leaching of lead from old pipes into Flint’s drinking water. The action today comes a day after Gov. Rick Snyder promised he would seek more funding for Flint in his upcoming budget proposal. It also comes a day after the Governor named a group of 17 medical and field experts, including a doctor and Virginia Tech Professor Marc Edwards, who helped expose the Flint water contamination crisis, to a committee charged with identifying long-term solutions.

Spinning the Dial for Municipal Bankruptcy. New Jersey’s top elected officials Tuesday announced an agreement with Atlantic City Mayor Donald Guardian to allow increased state intervention in an effort to keep the municipality out of bankruptcy—an agreement proposed by Gov. Christie and backed by the city’s elected leaders under which the state would provide additional layers of state oversight and new revenue sources. Gov. Christie introduced the plan accompanied by New Jersey Senate President Steve Sweeney and Atlantic City Mayor Don Guardian; the Atlantic City Council passed a resolution late on Tuesday to support the new proposal. The dynamic duo said the new legislation would give the state increased power over Atlantic City finances, including restructuring municipal debt, changing collective bargaining agreements, and selling off city-owned assets: it would provide a five-year state takeover compared to the 15 years Sen. Sweeney had proposed.

With the state already effectively under some state control due to the Governor’s imposition of an emergency manager, Tuesday’s actions imposed a more sweeping state takeover. Gov. Christie said he wants action by the end of next month by the state legislature to allow the state to restructure the city’s debt and terminate municipal contracts, including with labor unions. Under the proposal, the state would control the city for five years, with authority to allow the state to dissolve city departments, consolidate and privatize municipal services, and sell city assets—all proposals which had been included in a recent report by the city’s state-imposed emergency manager, Kevin Lavin.

In addition, under the Governor and Presidential candidate’s new proposal, the state would reconsider a version of legislation that the Governor last month vetoed, legislation intended to boost cash flow and stabilize Atlantic City’s tax base with fixed payments in lieu of property taxes from its famed casinos. Gov. Christie did not say whether the takeover proposal would address $153 million Atlantic City owes the Borgata casino in tax refunds. (Atlantic City last month missed a $62 million tax refund payment owed to the Borgata on Dec. 19.)

The Governor’s action—and muted support by Mayor Guardian and the Council—came just as the Mayor had called for an City Council emergency meeting to consider whether to file for municipal bankruptcy—a decision which would have required a two-thirds’ approval to seek such authority from New Jersey’s Local Finance Board, which oversees the city’s budget. Mayor Guardian told his colleagues he could see “no human] way” Atlantic City could pay the $160 million of casino property tax appeals it owes to the Borgata Casino Hotel & Spa.

Mike Cerra, assistant executive director of the New Jersey League of Municipalities, called the agreement “a positive development” since neither a municipal bankruptcy nor long-term state takeover would be beneficial to the local governments in the state; he said a municipal bankruptcy would have sent negative message to the municipal bond markets that New Jersey would allow a distressed municipality to reach that stage of insolvency, noting: “Nothing good comes out of a bankruptcy for a local government: Neither a bankruptcy or a full state takeover were desirable options.” New Jersey, where a municipality may only file for chapter 9 municipal bankruptcy with state permission, has only had one city, Camden, previously file (in 1999, but the case was subsequently dismissed). The state’s Division of Local Government Services has that authority, as well as the authority to approve budgets for distressed localities to ensure they can pay their debts.

My Old Kentucky Home. With municipal bankruptcy an increasingly hot topic amongst state and local leaders across the country—and in the U.S. Territory of Puerto Rico, Kentucky State Rep. Brad Montell (R-Shelbyville) might want to be among those considering what is happening in New Jersey, as he is asking whether Kentucky should reconsider its municipal fiscal assistance and municipal bankruptcy laws and programs. Until last August, no Bluegrass city had ever filed for chapter 9 municipal bankruptcy in the state; counties are not permitted to file; two municipal entities—utility districts—have previously filed. As part of the look-back, Rep. Montell is wondering whether Kentucky should develop a program—perhaps similar to New Jersey’s—to assist fiscally distressed municipalities, noting: “It seems to me we need to have sort of a blueprint of what authority the state government has in these instances.” U.S. Bankruptcy Judge Alan C. Stout is currently considering whether to allow Hillview, the Louisville suburb of 9,000 to proceed with its case—a case triggered by the municipality’s loss and consequent $11.4 million legal judgment after losing a lawsuit to Truck America Training. House Concurrent Resolution 13, filed by Rep. Montell, said defaults and municipal bankruptcies in Alabama, California, Pennsylvania, and Rhode Island have increased awareness of municipal bankruptcy: his proposal would direct the Kentucky Legislative Research Commission to conduct a study of municipal bankruptcy, including laws, and prevention practices employed by other states.

Today, more than half of the states and the District of Columbia have implemented municipal debt supervision or restructuring mechanisms to assist municipalities: creating programs to offer assistance, refinancing, oversight, and other mechanisms to avoid default. Such state programs, moreover, appear to have been exceptionally successful in avoiding defaults or bankruptcies: municipal bankruptcy ace James Spiotto, with whom the National League of Cities worked for over a decade to secure Congressional approval and former President Reagan’s signing of municipal bankruptcy legislation, testified last month before the U.S. Senate Judiciary Committee that such state “second looks” appear to have been effective by a six-one margin in avoiding Chapter 9 bankruptcy in the 24 states which authorize a city, county, or other municipal entity to file.

Rep. Montell’s proposed study would include a review of other state laws, and the practices that they have employed in order to intervene in a city or county financial crisis, or, as he put it: “We just want to get some answers, and see how other states have handled this in case we need to take action next session.” His resolution also cites the possibility of credit rating downgrades for the entire state due to the unhealthy financial health of its governments, as another reason to study Chapter 9 further, adding that Kentucky should look at its bankruptcy law, because the budgets of cities, counties, and school districts could realize growing fiscal challenges due to their mandated costs to participate in state-run pension plans, along with other stressors such as labor costs, noting: “We want to get our financial house in order and I’m confident we will…That’s one reason we want to be on top of [the bankruptcy law] as well.”

In his testimony last month, Mr. Spiotto testified that effective programs aimed at avoiding municipal financial distress and bankruptcy have been “well demonstrated” by the Municipal Assistance Corporation for New York City in 1975, the Pennsylvania Intergovernmental Cooperation Authority for Philadelphia in 1991, and the District of Columbia Financial Responsibility and Management Assistance Authority for Washington, D.C. in 1995—adding that the states of Florida, Indiana, Michigan, Nevada, New Jersey, New York, North Carolina, Pennsylvania, and Rhode Island include a variation on a provision allowing for the appointment of a financial control board or commission, emergency managers, receivers, coordinators, or overseers for troubled local governments. Thus, unsurprisingly, the Kentucky League of Cities has said it supports Rep. Montell’s resolution, which could lead the state to institute an emergency assistance program.

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Getting Into–and Out of Municipal Bankruptcy

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January 26, 2016. Share on Twitter

Out Like Flint. Michigan Gov. Rick Snyder has restored additional executive powers to the besieged city of Flint, a city, which, under the aegis of state-preempted authority, faces a long-term health and fiscal crisis. Flint’s water utility could run out of money by the end of this year—as more citizens skip paying their bills amid the crisis with lead-tainted water, City Administrator Natasha Henderson told city council members at a meeting yesterday, warning that the public health emergency is driving down collections on water bills, describing it as an “imminent concern” which is leaving the city in a “very precarious situation.”

The city, where the population peaked in 1960 at almost 200,000, making it, at the time, the second largest city in the state, has, since then suffered from disinvestment and de-industrialization. Its population has dropped by half; median income in the city is less than half the state-wide average of $60,846. The city is majority minority by race: it is a city which over the last half century has suffered from disinvestment, deindustrialization, depopulation, and—now—failed governance by all three levels of government. Fourteen years ago, in the wake of a voter recall of former Mayor Woodrow Stanley, the state appointed an emergency manager, Ed Kurz, to run the city—displacing the temporary mayor, Darnell Earley—until voters elected former Mayor James Rutherford to complete the remainder of Mr. Stanley’s term of office. As emergency manager, Mr. Kurtz had commissioned a salary and wage study for top city officials from an outside accounting and consulting firm—at the completion of which he installed a new code enforcement program for annual rental inspections and emergency demolitions—as well as ordering steep cuts in the municipal budget (cutting the Mayoral salary by more than 75% from $107,000 to $24,000, and eliminating benefits for most officials)—even as the City Council devoted some $245,000 in a futile effort to oppose the imposition of an emergency manager. After spending $245,000 fighting the takeover, the City Council ended the lawsuits; immediately thereafter, Mr. Kurtz directed Flint’s municipal retirement board to halt the city’s pension benefit overpayments, seeking the return of overpayments to the pension fund—an effort that failed when Michigan’s then attorney general stated that Emergency Financial Managers lacked authority over the retirement system. Subsequently, in 2003, Mr. Kurtz ordered an 11 percent increase in the city’s water and sewer bills—but authorized $1 million in water, sewer, and road public infrastructure improvements. By the following June, Mr. Kurtz reported that the financial emergency was over. In a sense, however, it was just beginning: the city, which had been the home of nearly 80,000 residents who had worked for General Motors during its peak years in the late 1970s, found that number reduced by 72,000 jobs in the wake of GM’s 2006 buyouts.

The buyouts contributed to Gov. Rick Snyder’s appointment in September of 2011 of an eight-member review team to review Flint’s fiscal and financial status—a request made just over a month prior to the election of Mayor Dayne Walling on November 8th—the same day the Gov.’s review team declared Flint to be in the state of a “local government financial emergency.” The Gov.’s appointed panel recommended the state, once again, appoint a new Emergency Manager—a decision which the City Council voted 7 to 2 not to appeal—and, in response to which, Governor Snyder appointed Michael Brown—who, upon assumption of authority—promptly dismissed the then City Administrator, Human Resources Director, Citizen Services Director, and independent officials, including the City’s Ombudswoman and Civil Service Commission Director. Just over six months later, however, EM Brown’s appointment was overturned by the court—which determined his appointment by the Governor was in violation of the Michigan Open Meetings Act—effectively restoring authority to the city’s elected leaders, Mayor Walling and the City Council—albeit briefly; Michigan filed an emergency appeal, claiming the financial emergency still existed—an appeal which was granted, effectively returning the municipality to state control. Then, in the wake of an order by the Michigan Supreme Court to certify a statewide referendum on Public Act 4, which voters agreed to reject, Attorney General Bill Schuette issued a written opinion stating that Public Act 72 or 1990 would be permanently reinstated, e.g., state authority to appoint emergency managers would remain—albeit under a preexisting state law—and would continue to operate with limited powers in Flint, Benton Harbor, Pontiac, Ecorse, and Allen Park, in addition to public school districts in Detroit, Highland Park, and Muskegon Heights.

Michael Brown was re-appointed Emergency Manager for Flint in June of 2013—a position from which he resigned the following September—at which point he was temporarily replaced by Saginaw city manager (and former Flint temporary mayor) Darnell Earley—who named a blue ribbon committee on governance of 23 members the following January to review city operations and consider possible charter amendments: the committee recommended that the city move to a council-manager government, leading to voter approval the following November—and, the following May, of the election of a nine-member city charter review commission. Last April 30th, the state moved the city from under an emergency manager receivership to a Receivership Transition Advisory Board—a board which, last Friday, unanimously voted to return some powers, including appointment authority, to Mayor Karen Weaver. The Receivership Transition Advisory Board recommended that some powers be returned to the mayor, and state Treasurer Nick Khouri signed off on Friday. Gov. Snyder had recommended the move at the request of Mayor Weaver, praising, in a statement, the approval “to return additional executive powers to Mayor Weaver during this critically important time.”

Mayor Weaver now has authority to appoint the city administrator and all department heads; however, while the city is no longer under the auspices of an emergency manager, the state transition oversight board does retains oversight.

Poisoned Flint. A year ago last April, Flint, still under state control, switched its water supply from the Detroit Water and Sewerage System (DWSD) to the Flint River—a fateful decision driven by budget concerns, but made worse by the failure not to implement anti-corrosive measures—in the wake of which two independent studies have found lead poisoning—evidence of which has been discovered in Flint’s citizens, in the city’s pipes—which has triggered a federal lawsuit, the resignation of several officials, and a public health state of emergency for all of its surrounding Genesee County. The decision came while Flint was still under state emergency management, in 2014—with the idea that Flint would use the river water until this year, when it would draw its water from a new pipeline being built by the Karegnondi Water Authority. However, the Flint River water corroded pipes throughout the system, creating elevated lead levels.

Last fall, Michigan even provided Flint with $6 million to help cover the costs of reconnecting temporarily to DWSD, as residents complained of the water’s color and odor—but that return came too late: the connecting pipes had been contaminated with lead. The Michigan House last week approved $28 million in emergency state appropriations to assist Flint to deal with the state-engineered water crisis; the Michigan state Senate is expected to vote on the funding this week, and Gov. Snyder also is hoping to secure additional federal assistance in the wake, last week, of the White House denial of a federal disaster declaration which would have provided additional relief program funding for Genesee County—albeit the White House had previously approved an emergency declaration and said the federal government would speed up the delivery of $80 million in water infrastructure funding for the state that could help with the crisis. Gov. Snyder is expected to seek additional financial assistance from the legislature next month when he submits his budget—a budget which finished last year with an announced $575 million surplus.

Yesterday, Michigan Attorney General Bill Schuette announced former Wayne County prosecutor Todd Flood would serve as special counsel in the probe his office has launched into the water crisis—an investigation which will seek to determine whether Michigan laws were violated—all putting the state in an awkward position, as the AG has been forced to try to establish a “conflict wall,” because his office is representing the state in lawsuits filed by citizens and various groups against the State of Michigan, Flint, and others: suits filed against Gov. Snyder and the state will be handled by chief deputy Carol Isaacs and chief legal counsel Matthew Schneider. The so-called “conflict wall” is not new—but rather reflects upon the earlier action by the state in the Detroit bankruptcy, in which the office was involved in protecting police and firefighter pensions, while another group of attorneys in his office represented Gov. Snyder and the state.

Pulling the Pieces Together. Notwithstanding the terrible terrorist attacks at the end of last year, San Bernardino seems to be girding towards the completion of its proposed plan of debt adjustment—paving the way for its trial before U.S. Bankruptcy Judge Meredith Jury after the City Council yesterday approved a key component of that plan—final, unanimous approval of a contract to outsource trash and related services, and reached a tentative agreement with the fire union to end all of the legal disputes with it during a closed session meeting, according to City Attorney Gary Saenz.

Under the outsourcing contract, a key component of the city’s plan, San Bernardino would receive guaranteed revenue of nearly $18 million by April, 2017. That proposal gained unanimous City Council approval: over the next decade, according to the city’s consultant on the contract, the deal would guarantee payments to San Bernardino of nearly $38 million, plus another $50 million in estimated revenue, based on current revenue and how much can be recycled; yet customer rates will remain at 2009 levels ($22.84 per month for standard residential service) until July 1, 2017, and future increases will be based on the local Consumer Price Index, but capped at 5 percent per year. Moreover, the 58 full-time city employees who work in those positions will be offered full-time agreement (with six others remaining city employees to manage the contract and provide field inspection). The agreement, which includes $500,000 from the company to distribute among those employees to help with transitioning, came in the wake of last November’s vote by the Council to move forward with outsourcing solid waste, recycling, street sweeping, and right-of-way services. Prior to the vote, San Bernardino Deputy City Manager Bill Manis said the bidder (Burrtec’s) had made the best proposal, advising councilmembers: “They had the strongest technical proposal — they have experience with similarly-sized cities, they have a robust right-of-way-program, a good employee transition plan…and over the 10-year-term, their proposal is $5.6 million (in revenue to the city) higher than the next-highest proposer.” City Manager Manis said.

The terms of the proposal, as well as the agreement with the city’s firefighters will be available to the public no later than Thursday, when it is included with a packet for the City Council’s final approval February 1st—an approval which would end nearly a decade of legal disputes, including all pre- and post-litigation claims and disputes, according to a news release quoting officials from both the city and the San Bernardino City Professional Firefighters. In a statement, the firefighter union’s attorney Corey Glave wrote: “The SBCPF has come to the table with an equitable settlement that clearly is in the best interest of the City and the Firefighter Union, and gives the parties the best chance of moving forward in a fair and reasonable manner,” after City Council members yesterday said they could not comment on the tentative agreement to contract out city fire services—an agreement which, if ratified by the council and the union—would eliminate any union opposition to the city’s plan to be annexed into the San Bernardino County Fire District, effectively outsourcing the 137-year old municipal fire department to San Bernardino County. The agreement with the union also dots a few i’s of concern to Judge Jury, who last September had ruled that the city had not met its legal obligation to bargain in good faith with the fire union prior to outsourcing the Fire Department—directing the city to begin following a so-called “meet-and-confer process.” A hearing of the Local Agency Formation Commission on the city’s annexation proposal is scheduled for 9 a.m. tomorrow morning: that plan includes a parcel tax — $143 per year at the time the Council, in a 4-3 vote, approved the plan, and which would increase to $148 for FY2016-17 — a plan which, unsurprisingly, has drawn resident opposition.

“Ultimately, the City proposed transfer of its Fire Department through annexation to County Fire as the best and most fiscally responsible alternative for serving their residents,” staff of the Local Agency Formation Commission (LAFCO), a state mandated local agency established to oversee the boundaries of cities and special districts, advised the Council, noting: “This plan is important to the City in that provides a means to return to the City’s coffers an estimated of $7,000,000 to $8,000,000 for use in addressing other service deficiencies that currently exist, such as police protection, roads, parks, or even street lighting.”

City Attorney Saenz praised LAFCO and the agreement with the fire union, noting: “LAFCO’s conclusion is right on the mark…Although annexation comes with a special tax to property owners of $148.23 per year, those are funds which will go directly to improving fire service. This, in addition to settling with the Fire Union, will allow us to redirect revenue that would otherwise go to litigation or status-quo fire services, to crime prevention programs, parks and community services, and economic development.” In addition, San Bernardino County Fire Chief Mark A. Hartwig was also quoted in the news release pledging to provide sustainable emergency services: “We understand the City’s need to shift services to County Fire and have developed a plan that will rebuild and reinvest in, not only incident response service but, all services associated with the district…This includes fire prevention, dispatch and communications, administration, and facilities and equipment.”

What About Detroit’s Future? Perhaps children in Detroit’s public schools are learning about mold and rodent abatement—because those two, along with dysfunctional heating and electrical systems—and a seemingly dysfunctional Detroit Public Schools system—are, increasingly, the focus of Mayor Mike Duggan, who said inspections this month have turned up a “mixed bag” of findings and that the city has instructed the Detroit Public School District (DPS) to act promptly: “I have been very clear with DPS: claiming that you are short of money is not an excuse for not making the building and health codes in Detroit…We don’t accept that as a reason you can’t do it. So, we are going to take all legal means necessary to enforce the building codes and enforce the health codes.”

At Spain Elementary Middle School, where an inspector listed 16 violations, including damage to the ceiling, wall and floor of the gymnasium, rodents, loose door frames, missing floor tiles, broken glass, water damage and mold—a separate health inspection conducted by the city’s health department, assisted by DPS’ environmental division, found mold growing under wood flooring in the gym, with possible diffusion of mold spores throughout the building. Evidence of vermin infestation, including fecal matter and carcasses, was seen in various rooms. Operators must verify action is being taken to stop the mold spores from affecting air quality and that the “vermin infestation must be mitigated,” according to the health department inspection report. The report says if the district fails to properly repair the facility in a “timely manner,” the health department will recommend that the facility be closed and its certificate of occupancy be revoked. Each building must obtain a certificate of compliance, according to the orders, all initiated this month. The results come after Mayor Duggan, earlier this month, announced the city had launched the citywide inspection program for all buildings in response to complaints by teachers about health and safety problems. The inspections, which began at Spain Elementary Middle School, will be completed by the end of the month in the 20 DPS school buildings believed to be most problematic, and all 97 of the district’s school buildings by the end of April. City charters are also to be inspected. When determined necessary by building and safety inspectors, the city’s health department will conduct its own inspections. The call for inspections came after Mayor Duggan toured several DPS schools with city officials in the wake of sickouts by teachers who have complained about building conditions, among other issues.

Spinning the Dial for Municipal Bankruptcy. Atlantic City, N.J. is moving closer to default and a possible municipal bankruptcy after New Jersey Gov. Chris Christie’s veto last week of a financial rescue package, with Moody’s analyst Josellyn Yousef yesterday writing that three Atlantic City rescue bills rejected by Gov. Christie would have provided nearly $47 million in additional revenues in 2016 and “a predictive stream” from casino payment in lieu of taxes. The Atlantic City Council had scheduled a Tuesday meeting (weather permitting) to review the option of filing for bankruptcy, but that is not even an option absent state approval—and without any clear avenue: Atlantic City would be required to go to the New Jersey Local Finance Board (which would be acting under circa 1940’s law as the “Municipal Finance Commission”) to request authority to file a chapter 9 municipal bankruptcy application with the courts—a first-time route for the state. Nevertheless, Ms. Yousef noted that with Atlantic City’s debt to the Borgata casino of some $153 million in tax refunds, that could be the proverbial straw to break the camel’s back, noting: “The bills could be resurrected, but time is running out and the city’s cash position is dangerously low…Without another liquidity infusion from the state, the city is likely to default on debt service payments as early as April,” adding the city is in a “near-term liquidity crisis.” She added that the state could spin the dial and offer Atlantic City a loan in what she termed the “11th hour,” as it did two years’ ago, but that remains uncertain—or the state could also allow the city to defer an estimated $40 million of 2016 pension and health benefits which are due in Apristeps, she noted, which would merely “prolong Atlantic City’s crisis.”

For Mayor Guardian and the Council, the situation is aggravated by the uncertainty with regard to the state’s position: they are becoming increasingly frustrated and confused as key state elected leaders appear to be reversing positions and making important financial decisions without full consultation—noting, for instance, that after years of using state agencies and financial managers to prop up the city and months of stalling on critical decisions, Gov. Chris Christie is now blaming irresponsible fiscal management and foot-dragging on the part of city leaders for his veto of three Atlantic City rescue bills sent to him by the legislature. They also worry that the recent bipartisan agreement between the Gov. and state legislative leaders to allow New Jersey voters to vote on whether to allow casinos outside of Atlantic City for the first time—a version which would allow for two casinos to be built in different counties at least 75 miles outside of Atlantic City (with existing Atlantic City operators receiving first chances on obtaining new licenses), and winners must invest at least $1 billion in each property, and assurances that the city would benefit from 49 percent of public revenues generated by the casinos for the first 15 years—would only further erode the city’s fiscal future. They are also apprehensive in the wake of Gov. Christie’s pocket veto of a package of bills designed to infuse a steady stream of revenue into Atlantic City’s treasury by stabilizing precipitously declining casino property taxes and diverting tens of millions of dollars from two state agencies—this on the second time the bills had crossed his desk—and bills Atlantic City leaders had been waiting for enactment since the state legislature passed them a year ago—and bills which, when the Governor conditionally vetoed them, both chambers promptly accepted Gov. Christie’s changes and sent back to him—where he refused to sign them, allowing them to die. Instead, Gov. Christie’s spokesperson, Kevin Roberts, blamed Atlantic City’s leaders for wasting time and money and constantly seeking handouts from the state: “Atlantic City government has been given over five years and two city administrations to deal with its structural budget issues and excessive spending. It has not. The Governor is not going to ask the taxpayers to continue to be enablers in this waste and abuse.”
With the state apparently unwilling to help—and insolvency looming, Mayor Guardian reports that he and state-appointed emergency manager Kevin Lavin had successfully restructured enough of the city’s debt and renegotiated public workers’ contracts to the point that the only remaining reason to file for bankruptcy is the debt to the Borgata Casino—but, Gov. Christie and Sen. Sweeney have come out vociferously against it, saying that a declaration of municipal bankruptcy would further cripple the state’s already precarious bond rating, as well as those of struggling cities statewide. The City council is scheduled—weather permitting—to vote as early as today on whether to seek municipal bankruptcy.

The situation is further complicated, if that is possible, by the other state role: its appointed emergency manager, Kevin Lavin, who, a week ago submitted his final recommendations for the city’s fiscal and financial future to Gov. Christie—in which he expressed opposition to the city seeking to file for chapter 9—rather that the state enact the very PILOT bill the Gov. has allowed to die, a bill which, according to Mr. Lavin, would have cut the city’s tax refunds in half. He also suggested consolidating police and other services with Atlantic County and privatizing state-held assets like the money-losing convention center and Boardwalk Hall.

For his part, State Senate President Stephen Sweeney has introduced legislation for a state takeover of Atlantic City, similar to what calling for state oversight for exactly five years, telling his colleagues: “The city government has blithely refused to make the difficult political decisions needed to balance its budget — even with the governor making his intentions clear by appointing a bankruptcy lawyer as emergency manager a year ago,” citing the city’s high per-person spending compared with other cities and its highest-in-the-nation foreclosure rate.

State & Local Tugs of War: What Do they Imply for Future Fiscal Sustainability?

January 22, 2016. Share on Twitter

What About Detroit’s Future? The Michigan Court of Claims yesterday refused to issue a temporary restraining order sought by the Detroit Public Schools (DPS) to halt the recurring teacher sickouts which have closed dozens of schools—and, no doubt, begun to discourage families from thinking about moving to Detroit—a key goal, after all, of the so-called “Grand Bargain,” which saved the Detroit Institute of Art, the jewel in the city’s crown. The court also scheduled a hearing for 11 a.m. Monday in the lawsuit filed by DPS against 23 teachers, the Detroit Federation of Teachers, interim DFT president Ivy Bailey, and organized sickout supporters such as DPS Teachers Fight Back and By Any Means Necessary—at the hearing, the court will hear DPS’ request for a preliminary injunction barring further sickouts.

The increasingly failing grades of the governing, fiscal, and physical conditions of DPS pose a significant threat to Detroit’s future—and raise questions about the state role. Of the $7,450-per-pupil grant DPS will receive this year, $4,400 will be spent on debt service and benefits for retired teachers, according to the Citizens Research Council. That leaves an insufficient investment for Detroit’s future—and a D- message for any family with young children thinking about moving to Detroit. But it also raises hard and harsh questions about the state role.

In denying the request for a restraining order, Court of Claims Judge Cynthia Diane Stephens wrote that DPS had failed to meet court rules governing requests that are made without notifying the other parties. According to DPS’ complaint, more than 31,000 of the district’s 46,000 students have missed a day of school or more as the result of sickouts. The complaint requests a court order requiring teachers to follow Michigan law, which prohibits strikes by public employees, as well as damages of more than $25,000. All DPS schools were open yesterday, a day after a sickout forced the district to close 88 of its 97 schools. But in their current physical condition, it is, increasingly difficult in a harsh winter to imagine how much learning is taking place.

Rather than address the fundamental issues, however, which have impacted the city’s physically failing schools, majority Republicans in Michigan’s Legislature yesterday proposed, and promised to quickly pass, state legislation to make it easier to deem such work stoppages illegal strikes. (Teacher strikes are illegal in Michigan.) The proposed legislation would shorten the 60-day deadline for the state Employment Relations Commission to conduct a hearing on complaints to two days—it would do nothing to address the severely deteriorated physical or fiscal state of the schools—its nearly bankrupt finances, dilapidated buildings, overcrowded classrooms—much less its growing attendance of rats.

Spinning the Dial for Municipal Bankruptcy. Atlantic City leaders have scheduled a session for Tuesday to discuss the possibility of filing for chapter 9 municipal bankruptcy protection at an emergency city council meeting: Mayor Don Guardian announced the meeting yesterday in the wake of Gov. Chris Christie’s rejection of an Atlantic City financial rescue package which had been approved by the state legislature—a rejection which undercut the city’s FY2015 budget adopted last September in reliance on $33.5 million in anticipated revenues from redirected casino taxes included in the rescue bills to address a $101 million deficit: the state legislation would have enabled the city’s eight remaining casinos to enter into a payment-in-lieu of taxes program for 15 years and aggregately pay $120 million annually over 15 years instead of a traditional property tax. In his statement, Mayor Guardian noted: “With the veto of the Atlantic City PILOT bill earlier this week by Governor Chris Christie, the City of Atlantic City has been left with no other option but to explore bankruptcy…The time is now because the State has failed to deliver on their promises.”

In one sense, the action will at least remedy the double-headed governance system in the city since last year’s appointment by Gov. Christie of a so-called “emergency manager,” Kevin Lavin (a term the Governor’s office created out of whole cloth, since it does not exist under any state statute). Rather the appointment came via the New Jersey Local Finance Board’s authority under the state supervision law (the so-called “trigger” law). Prior to Gov. Christie’s appointment of Mr. Lavin, the Board, in fact, had its own “monitor” in place who was overseeing contracts and personnel actions and looking for savings. That, however, proved to be only a modest effort and ignored the toll of the impact of the dramatic fall-off of assessed property values that started in the Great Recession. The Christie administration did little to prod the former administration to act, but waited until the next Mayor (white Republican, replaced African-American democrat) took office in 2014.

Atlantic City, indeed, has been under state supervision since 2010—the beginning, as it were, of the end—or the “triggering” event.” The next step would be for Atlantic City to come to the New Jersey Local Finance Board (which would be acting under circa 1940’s law as the “Municipal Finance Commission”) to consider permitting Atlantic City to file a chapter 9 municipal bankruptcy application with the courts—a first-time route for the state—where the New Jersey statute to be invoked has never been used. Ergo a new process will have to be invented from scratch.

Castling? In the game of chess—much as in the political game of chess underway in New Jersey today—the thin line between the middle game and endgame is often not clear: it may occur gradually or with the quick exchange of a few pairs of pieces. The endgame, however, tends to have different fiscal and physical characteristics from the middle game, and the players have correspondingly different strategic concerns. In particular, pawns become more important as endgames often revolve around attempting to promote a pawn: the king, which has to be protected in the middle game owing to the threat of checkmate, becomes a strong piece in the endgame. It can be brought to the center of the board and act as a useful attacking piece. So what we are observing now are chess moves: Over the last year since the state’s appointment of Mr. Lavin, he and other New Jersey state actors have been pushing Atlantic City to monetize the municipal utility authority (MUA) asset to bring in cash to deal address the accumulating debts—a monetization which will likely be offset by increased water rates (while the MUA’s costs can be reduced by a savvy operator, the Garden State tradition has been to add a so-called “concession fee” to fund the deficits which the buyer receives back through rate increases). The City, however, said no; Gov. Christie said he would not sign the legislation into law; Senate President Stephen Sweeney, observing the gathering fiscal storm (both the one descending in a few hours and the fiscal one right behind it), reckons that the legislature will have to act on a takeover bill.

Bottom line, at least according to our brilliant, on site analysts: Atlantic City has no real way out: The state has a plan. Atlantic City needs to negotiate the best deal it can accomplish via asset sales and the state’s role in operations (which are burdened with overpriced labor contracts). Indeed, New Jersey has a long, hard-earned reputation in the muni markets for averting municipal bankruptcy—effectively acting to preempt chapter 9. The state’s alternative has been a state takeover—e.g., addressing the looming insolvency not via municipal bankruptcy and the federal courts, but rather without bankruptcy—which, in any event, would require the state’s affirmative approval. Stay tuned.

Puerto Rico. Financial Guaranty Insurance Co. (FGIC) filed suit in U.S. federal District Court against Puerto Rico Gov. Alejandro García Padilla and members of his government, the latest challenge over their diversion of revenues from Puerto Rico authority municipal bonds, charging that §8 of Article VI of the Puerto Rico Constitution and the Territory’s Management and Budget Office Organic Act, Act No. 147 of June 18, 1980 (the so-called “OMB Act”), and the executive orders (the “Executive Orders”) issued last November 30th and December 8th by the Governor are unconstitutional—and seeking a declaratory judgment that §8, the OMB Act, and the Executive Orders are preempted by the U.S. Constitution and federal law and are, ergo, without force and effect.

In the suit, FGIC also seeks an injunction enjoining Puerto Rico from taking or causing to be taken any and all actions pursuant to §8, the OMB Act, or the Executive Orders, claiming such actions would constitute violations of FGIC’s constitutionally-protected property interests and contractual rights—and adding that both the U.S. Constitution and federal law preclude Puerto Rico from enacting a bankruptcy law that adjusts the debts of its municipalities or public entities and binds non-consenting creditors, noting: “The United States Congress has enacted a federal Bankruptcy Code, expressly providing that States have no power to enact their own laws for adjusting debts, see 11 U.S.C. § 903(1), and excluding the Commonwealth’s instrumentalities from participating in the federal bankruptcy system, see 11 U.S.C. §§ 101(40), (52), 109(c). Despite these prohibitions, Section 8 of Article VI of the Commonwealth Constitution, the OMB Act and the Executive Orders purport to (a) authorize the Commonwealth to adjust debts, to defer repayment and to decrease interest and principal owed by the Commonwealth’s instrumentalities and public entities and to bind non-consenting creditors, (b) permit the Commonwealth to seize and use Plaintiff’s collateral without providing adequate protection, and (c) establish an overriding priority scheme to distribute Plaintiff’s collateral in contravention of binding contractual obligations and federal law.”

U.S. District Court Judge United States District Judge Gustavo Gelpi yesterday consolidated FGIC’s suit with a similar suit filed earlier this month by Assured Guaranty and Ambac Assurance in the same court: Judge José Fusté will hear the case. Here, Puerto Rico’s so-called claw-back was from the pledged funds for Puerto Rico Highways and Transportation Authority, the Puerto Rico Convention Center District Authority, and Puerto Rico Infrastructure and Finance Authority bonds. According to the Government Development Bank for Puerto Rico. Through the beginning of the year, Puerto Rico had clawed back $164 million from these municipal bonds for use for the January 1 general obligation bond payment: according to FGIC’s filing, the company had an exposure of close to $1 billion by different Puerto Rican authorities and a total outstanding bond principal of $$6.4 billion—adding that, in some instances, municipal debt service reserves have been exhausted—and that FGIC, as the insurer of some of these bonds, paid at least $6.4 million in claims. This complaint adds that the government rested its claw-back on §8 of article VI of Puerto Rico’s constitution, the Puerto Rico Management and Budget Office Organic Act of 1980, and gubernatorial executive orders of last Nov. 30th and December 8th—claiming, further, the Puerto Rico constitution and the orders violated the United States Constitution, specifically citing Article I, §10 of the U.S. Constitution, the Contracts Clause, writing: “[T]he authority bondholders are subject to payment first of public debt, that does not authorize the defendants to ‘claw back’ or divert the pledged funds under the circumstances described in the executive orders, namely where other available resources exist from which the public debt could be paid.”

In addition, the suit cited the “taking clause,” of the 5th Amendment, the due process clauses of the 5th and 14th Amendments, and the equal protection clause of the 14th Amendment—and, for good measure, that the Commonwealth’s actions are preempted by federal law–asking the federal court to void the two executive orders authorizing the claw-back of revenues and to bar Puerto Rico from introducing a claw-back of authority bond revenues in the future. FGIC asked the court to block Puerto Rico’s government from diverting revenue pledged to repay debt issued by some agencies—an action coming in the wake of Gov. Padilla’s decision last month to force Puerto Rico’s Infrastructure Financing Authority (PRIFA) to miss a $35.9 million interest payment due at the beginning of the month—an action which triggered FGIC to pay 22 percent of the $6.4 million in interest which it guarantees. FGIC’s suit follows in the wake of comparable suits filed by Ambac Financial Group Inc. and Assured Guaranty Ltd. this month—diversions which allowed the U.S. territory to avoid defaulting for the first time on its general-obligation bonds, which, under Puerto Rico’s constitution, have the highest legal priority. The court consolidated FGIC’s complaint with Ambac and Assured Guaranty’s suit yesterday. The insurers say the roughly $9 billion of revenue the island expects to collect in the fiscal year ending in June exceeds Puerto Rico’s $1.87 billion of debt-service costs, showing that it does not need to redirect funds away from PRIFA and other agencies. Gov. Padilla has said he has an obligation to protect residents from deep public and essential service cutbacks needed to cover its debts. (FGIC insures repayment of $768.8 million of PRIFA’s principal and interest through 2045: as of the end of last September, according to its website. It insures $10.6 million of debt service in 2016, according to Edward Turi, FGIC’s general counsel.

On the Edge of Municipal Bankruptcy

January 21, 2016. Share on Twitter

On the Edge of Municipal Bankruptcy. In the wake of Gov. Chris Christie’s veto of bipartisan legislation that would have helped the city by the sea revive its tax revenues and cash flow, the city, instead, is facing default—a position under which, if the Local Finance Board of the New Jersey Department of Community Affairs determines that a triggering event has occurred, Atlantic City would be placed under the board’s supervision—which would, in turn, enable the city to file a petition for chapter 9 municipal bankruptcy. Atlantic City Mayor Don Guardian City Council President Marty Small are planning an emergency city meeting next week to consider filing for bankruptcy, a motion which must be approved by the state, with Mayor Guardian noting: “If the state is not able to come up with the funding we need within the next few weeks, we will have no choice but to declare bankruptcy.”

The legislation aid package, worth $33.5 million for Atlantic City, was first passed by state lawmakers last June: it included measures to stabilize the municipality’s property tax base and establish fixed payments for tax appeals. After months of delay, Gov. Christie vetoed the bill, and he asked for certain changes. When the legislature, in a bipartisan effort, incorporated the Gov.’s proposed changes and re-passed the bill, Gov. Christie this week vetoed it again—virtually forcing the city into municipal bankruptcy. Should Atlantic City file for municipal bankruptcy, as appears nearly certain to be the case, it will mark only the second time a city has so filed: Camden filed in 1999; however, its case was subsequently dismissed.

In vetoing the key measure, Gov. Christie’s spokesperson stated: “Atlantic City government has been given over five years and two city administrations to deal with its structural budget issues and excessive spending…It has not. The governor is not going to ask the taxpayers to continue to be enablers in this waste and abuse.” Without the legislation, Atlantic City could be in default by April.

Mayor Guardian stated; “We’re shocked that the governor, who presented us with his bill, reneged on the funding,” and Assemblyman Vince Mazzeo (D-Atlantic City) said that the Governor’s vetoes demonstrated a “brazen disregard” for Atlantic City’s fiscal recovery. Nevertheless, the city, which already is in a unique position of dual governance—with both a state-appointed emergency manager as well as a Mayor and Council—appears to have no support at the state level: New Jersey State Senate President, Democrat Steve Sweeney, initially supported the aid package, but no longer does; instead he supports a state takeover of the city’s operations, a move strongly opposed by Mayor Guardian. Sen. Sweeney said: “We cannot afford to let Atlantic City go bankrupt…The best way out is for the State of New Jersey to take control of Atlantic City’s finances and the best way to do it is to act quickly.”

It is unclear exactly how what Sen. Sweeney is proposing would differ from the current role the state is playing in Atlantic City’s oversight through its appointment of emergency manager Kevin Lavin nearly a year after he was appointed by Gov. Christie to find ways to fix the dire state of Atlantic City’s fiscal condition. Indeed, Mr. Lavin released a final report late Friday which stops short of recommending that the city file for municipal bankruptcy—instead suggesting massive spending cuts, as well as consolidating and privatizing some parts of the local government. Ergo, Mr. Lavin said he supported efforts in the state Legislature that are currently underway to help Atlantic City — albeit, he was not specific with regard to the recently unveiled plan by state Senate President Stephen Sweeney calling for the state to take over Atlantic City’s finances. Mr. Lavin’s report, released a year after his appointment by the Governor to the $135,000-a-year job and more than six months after it was due, was posted on the New Jersey Department of Community Affairs website around 5 p.m. Friday.

For his part, the beleaguered Mayor Guardian said in a statement late Tuesday that the municipal bankruptcy option is “now back on the table” in the wake of Gov. Christie’s veto of state legislature’s package which would have enabled the city’s eight remaining casinos to enter into a payment-in-lieu of taxes (PILOT) program for 15 years and aggregately pay $120 million annually over 15 years instead of a traditional property tax. The city’s adopted FY2015 budget relied on some $33.5 million in anticipated revenues from redirected casino taxes included in the rescue bills to address a $101 million deficit. In his statement, Mayor Guardian warned that: “if the State is not able to come up with the funding we need within the next few weeks, we will have no choice but to declare bankruptcy…The signing of the PILOT bill would have saved us from looking at that, but unfortunately, the Governor did not sign the bill so we have to think realistically. The next few weeks will be very interesting.” That package, which would also have reallocated the state’s casino alternative tax to pay debt service on Atlantic City-issued municipal bonds, would have, in addition, given the city a chance to receive $60 million in funding directed to the city’s marketing arm, the Atlantic City Alliance for 2015 and 2016 had the legislation been signed by Tuesday’s high noon deadline.

The beleaguered Mayor Guardian also took aim at Sen. President Sweeney’s proposed state takeover of Atlantic City operations: “We will not tolerate the stripping of our God-given civil rights and right to self-governance…Atlantic City has worked too hard and has come too far to let that happen,” adding, in a statement, yesterday, that municipal bankruptcy is not the right course for Atlantic City, noting that, in the Garden State, only the state has power to declare bankruptcy and that doing so would have “disastrous results” and hurt the financial standing of other New Jersey municipalities.

EM’s Report. In his second, and almost certainly final report, Atlantic City Emergency Manager Kevin Lavin, whose contract with the state is scheduled to expire tomorrow, urged the consolidation and privatization of municipal services and massive spending cuts, but stopped short of recommending chapter 9 municipal bankruptcy. Mr. Lavin wrote that the city would run out of cash by April if New Jersey Gov. Chris Christie did not—as he did not—sign the package of rescue bills passed by the State Legislature. Mr. Lavin, in his final report, recommended regionalizing Atlantic City’s police force with neighboring municipalities and privatizing its fire department, noting that that these two departments, alone, comprise 69 percent of the city’s budget for salaries and wages. Mr. Lavin also recommended privatizing the Boardwalk Hall sports arena and the Atlantic City Convention Center, noting that these two properties operate at a combined loss of $15 million to $20 million annually with $75 million currently reserved for “substantial capital expenditures,” and adding that Atlantic City’s Municipal Utilities Authority has “significant assets” that present opportunities to increase revenue; he recommended dissolving the water authority and restructuring it to better benefit Atlantic City.

In his report, Mr. Lavin gave credit to Mayor Guardian and Atlantic City officials for the way in which they took on the city’s $101 million deficit in crafting their FY2015 budget, but he noted the overwhelming $190 million plus of casino tax appeals and other non-bond debt the city now faces, noting that the city’s ability to raise public funds to repay the non-bond debt is “highly unlikely” due in large part to an inability to quality for adequate Qualified Bond Act financing, according to the report. Atlantic City’s credit ratings have dropped to junk status. As Mr. Lavin noted: “As this report shows, over the past year we have accomplished much by working together with all stakeholders, and successfully kept the City from falling into fiscal ruin, including taking on a $100 million budget deficit that ballooned by nearly 20% in the course of the year…Atlantic City had been losing yardage for years, but we began to move the ball down the field. Unfortunately, our momentum has been stalled by parochial politics that continue to inhibit progress.”

For his part, Senate President Sweeney issued a statement after the Lavin report’s release emphasizing the need for state involvement to avoid bankruptcy: “New Jersey taxpayers cannot afford to let this crisis continue and that is why our takeover bill must be acted upon promptly…We can avoid bankruptcy, but only if we act now.”

Frustration. With the multiple, but conflicting state roles—between the state-appointed emergency manager, peripatetic Presidential candidate Chris Christie, and state legislative leaders—all sending conflicting, as opposed to constructive messages, one could sense the growing frustration in the city: as Mayor Guardian put it; “We have already made definitive progress within the confines of all the options made available to us…“So why have the plans not worked out in the time since I have been elected?” Ticking off the multiple and oft conflicting state oversight roles, including the past five years under a state monitor, with emergency manager Kevin Lavin added to the mix last year and a Local Finance Board that must approve the city’s budgets, Mayor Guardian said even a paperclip could not be mismanaged without review, noting: “The wake-up call to those above us is that this simple one-step answer to the problems that have been created over 35 years does not exist, and more to the point, we can certainly not fix everything in just two short years.”

A City Perspective: Atlantic City Council President Frank Gilliam, in an op ed yesterday, wrote:

The behavior of the New Jersey state government toward Atlantic City in recent days can be compared to that of a mugger — a robber who takes his victim’s money, demands his jewelry, and then threatens to shoot him for not having enough money.

Let me explain. While it’s without doubt that Atlantic City faces difficult financial circumstances, much of the difficulty is caused by the state. For decades, the state and its agencies have treated Atlantic City as their own bank, taking more than $1 billion.
It currently takes, through the Casino Reinvestment Development Authority (CRDA), more than $55 million each year:
• $26.6 million in sales and luxury taxes
• $20.5 million in parking fees
• $9.25 million in hotel room taxes

When Atlantic City occupied space as the unique gaming destination on the East Coast, this was tolerable. But as the state acknowledges, Atlantic City is no longer unique. The city must change to face this reality. But the state must also face this reality. It needs to allow Atlantic City to keep the revenue generated in Atlantic City. This alone will allow the city to finance city services.
The threat of takeover by the state because of city finances is a cynical ploy. The state has set up Atlantic City to fail, so that it can be plundered by outsiders. The reality is that the state is seeking to take away the constitutional rights of the residents of Atlantic City to choose their own leaders.

The state has had control of all hiring, firing, and contracts let by the city for several years through its appointed monitor

Again, let me explain.

Legislation passed last week that would allow for casinos in North Jersey would further reduce revenue to Atlantic City and increase competition. It’s a double whammy for Atlantic City:

The legislation creates $50 million in payments from the casinos, but the recipients are the Atlantic County government and city schools. No payment comes to the city. All payments from northern casinos would go to another CRDA-like state agency.

The state is seeking to reduce revenue to the city in a cynical manner to attempt a takeover. If revenue falls below 50 percent of expenses locally, the state has used that as an excuse for takeover. Witness Camden City.

For these reasons, those who know the city best have opposed the recent state moves. Republican Mayor Don Guardian calls the takeover threat “our Pearl Harbor.” Democratic state Sen. Jim Whelan, a former Atlantic City mayor, also opposes a takeover.

As (Sen.) Whelan points out, the state has had control of Atlantic City’s tourism district for nearly five years. During that time, four casinos have closed and convention bookings are down.

But it’s not enough that the state has taken our money. It now wants our assets, including the Municipal Utilities Authority. These are wrong moves and the state’s own monitor and the Department of Community Affairs has said so.
The state is one of the biggest offenders of owning assets that contribute nothing to Atlantic City. The CRDA owns 675 properties that pay no taxes. The state could sell these assets, get them back on the tax rolls, and help generate additional revenue for Atlantic City.

One of the most distressing thoughts related to a state takeover is the potential disenfranchisement of voters. It would be unfair, undemocratic, and un-American for the state to deny Atlantic City voters their constitutional right to choose their own government, a mayor and city council with real authority.

Atlantic City is vastly diverse, and to deny any voter his or her right would be wrong. But it would be particularly hurtful to deny African Americans, the largest group of residents in Atlantic City, the full value of their votes.

The best course of action for the state is recognize Atlantic City no longer occupies a unique place in the gaming market, but is still unique in New Jersey. The state should allow Atlantic City to keep the revenue generated there and let those who know the city best — its locally elected officials — the freedom to determine the city’s future.
What About the Future? Children are cities’ futures, so it is understandable that Detroit Mayor Mike Duggan is trying to change not only the math of the system’s failing fisc, but also the failed governance of a system currently under a state-imposed emergency manager. With black mold climbing the interior walls of some classrooms, and free ranging, non-laboratory rats occupying classrooms, the arithmetic of the schools’ finance merit an F: Of the $7,450-per-pupil grant the school district will receive this year, $4,400 will be spent on debt servicing and benefits for retired teachers, according to the Citizens Research Council. Absent a turnaround, the failing school system is hardly likely to spur young families to move into Detroit.

Air Force One. President Barack Obama visited—but did not attend school in—Detroit yesterday to witness the city’s iconic—and federally bailed out auto industry; yet today marks still another sick out for the teachers of Detroit Public Schools (DPS)—where state-appointed DPS Emergency Manager Darnell Earley has filed for a temporary injunction to keep teachers in the classroom. Rather than learning from the city’s bankruptcy, the next round in the deteriorating school system will likely play out in the court room, where DPS is seeking a temporary injunction as a remedy to the sick-outs which shut down about 88 schools yesterday, alleging the sickouts are “depriving students of their right to attend school, adversely impacting their academic progress, and forcing parents to miss work.” Detroit’s teachers are leaving the district, class sizes are swelling, and the conditions in many school buildings are deplorable. State-appointed DPS Emergency Manager Darnell Earley yesterday warned that the sickouts are not the way do it: “Closing schools for reasons such as today and on previous dates further jeopardizes the limited resources the district has available to educate its students and address the many challenges it faces. We have heard teachers’ concerns and identified short and long-term solutions to several key issues.”

Bluegrass Blues. Kentucky State Representative Brad Montell (R-Shelbyville) has proposed reconsideration of Kentucky’s municipal restructuring law (Kentucky Rev, Statute §66.400), as well as whether the state should develop a program to assist financially struggling local governments, noting: “In looking at our statutes, we simply don’t address it…It seems to me we need to have sort of a blueprint of what authority the state government has in these instances.” In fact, Hillview, a Louisville suburb of just over 8,000, became Kentucky’s first municipality to file a Chapter 9 municipal bankruptcy petition last August, in an effort to address an $11.4 million legal judgment after losing a lawsuit to Truck America Training—a filing which U.S. Bankruptcy Judge Alan C. Stout is currently considering. Previously, two Kentucky utility districts had filed chapter 9 petitions. Rep. Montell has proposed House Concurrent Resolution 13, which proposes that the state’s Legislative Research Commission conduct a study of municipal bankruptcy, including laws and preventative practices employed by other states. For a municipality to be eligible to file for chapter 9 municipal bankruptcy, it must be authorized by the respective state. Currently, twelve states specifically authorize municipal bankruptcies, while twelve states authorize the filing of a petition with conditions. In those states which have acted, as is required under federal law, for a city to be eligible, such state laws have implemented programs to provide assistance, refinancing, oversight, and other mechanisms, giving local governments a “second look” at ways to avoid taking the final, last-resort option. Municipal bankruptcy wizard Jim Spiotto last December testified before the U.S. Senate that, over the last 40 years, those municipalities with no state “second look” or oversight have been over six times more likely to file for municipal. In the Bluegrass State, any taxing agency or instrumentality can file for municipal bankruptcy, but Kentucky counties are prohibited from filing a petition unless their restructuring plans first are approved by the state local debt officer and the state local finance officer—a provision which does not apply to cities or any entity other than counties. Rep. Montell said he proposed the bill in an effort to be “proactive” in the event of filings other than Hillview’s: the proposed study would include a review of other state laws, and the practices that they have employed in order to intervene in a city or county financial crisis, but it also cites apprehensions with regard to the financial health of its governments, as another reason to study Chapter 9 further—especially the state’s pension liabilities: In a report last week, Moody’s listed the worst performing states in terms of making their actuarially determined contribution in FY2014: New Jersey (18.6%), California (48.2%), Texas (62.9%), New York (64.4%), Kentucky (64.5%), and Virginia (69.3%)—making Kentucky the state with the second-lowest pension funding ratio of any state behind Illinois, and the third worst if Puerto Rico were included, according to Atlanta-based Asset Preservation Advisors. Rep. Montell said the state should look at its current municipal bankruptcy statute, because the budgets of cities, counties, and school districts also could be pressured because of their costs to participate in state-run pension plans, along with other stressors such as labor costs.

Puerto Rico. U.S. Treasury Secretary Jacob Lew yesterday met with Puerto Rico Governor García Padilla in San Juan, stating: “I have tried to be very clear that restructuring and oversight have to move together, but that oversight has to be done in a way that is respectful of Puerto Rico’s system of self-government…There are no alternatives to Congressional action in terms of coming up with a solution that is lasting and that provides the avoidance of a long protracted period of pain on the island.” In addition, Secretary Lew met with a group of officials, including Puerto Rico Senate Pres. Eduardo Bhatia Gautier, House President Jaime Perelló Borrás, Senate Minority Leader Larry Seilhamer Rodríguez and House Minority Leader Jenniffer González Colón—as well as Puerto Rico’s non-voting member of Congress, Delegate Pedro Pierluisi, who said in a statement: “With respect to a possible fiscal oversight board, I insisted that I would only support such a measure if it were paired with more equitable treatment under federal programs and a mechanism that enables Puerto Rico to restructure debt in a way that is fair to creditors and that enables Puerto Rico to provide essential services to our people. The board should have the power to oversee the Puerto Rico government’s budgeting and fiscal practices, but the board must respect our constitution.” Delegate Pierluisi is running in the New Progressive Party primary to become its candidate for Governor against Ricardo Rosselló Nevares—who, earlier this week, wrote to Secretary Lew that the Padilla administration’s “focus on debt restructuring is a distraction from the urgent need to reduce government expenditures and restore economic growth.”

Who Will Take Responsibility for Detroit’s Future?

January 19, 2016. Share on Twitter

What About the Future? Children are cities’ futures, so it is understandable that Detroit Mayor Mike Duggan is trying to change not only the math of the system’s failing fisc, but also the failed governance of a system currently under a state-imposed emergency manager. With black mold climbing the interior walls of some classrooms, and free ranging, non-laboratory rats occupying classrooms, the arithmetic of the schools’ finance merit an F: Of the $7,450-per-pupil grant the school district will receive this year, $4,400 will be spent on debt servicing and benefits for retired teachers, according to the Citizens Research Council. Absent a turnaround, the failing school system is hardly likely to spur young families to move into Detroit.

Math, as in any school system, is a fundamental issue: in Michigan, unlike other states, for more than two decades, the Detroit Public School System (DPS) has been funded, not from property tax revenues, but rather through state sales and income taxes—a system which provides the state with a disproportionate role in how Detroit’s schools are managed—or mismanaged. In addition, DPS, which has been on fiscal life-support since 2009: DPS is currently managed by the fourth state-appointed emergency manager—hardly an augury of stability—and with little indication the series of state appointees have earned good grades: DPS currently carries debt of over $3.5 billion, which includes nearly $1.9 billion in employee legacy costs (such as unfunded pension liabilities) and cash-flow borrowing, as well as $1.7 billion in multi-year bonds and state loans. For the fourth time since 2009.

DPS last year ranked last among big cities for fourth- and eighth-graders (children aged 8-9 and 13-14) in the National Assessment of Educational Progress, a school-evaluation program mandated by Congress. If attendance is some measure of the public’s trust, the report card is miserable: over the last decade, attendance has declined more than 66 percent: a majority of families have moved their children to charter schools. Today, the majority of Detroit’s schoolchildren attend state-funded, but privately managed charter schools. Although the massive shift has enabled DPS to reduce its staff by nearly two-thirds, the system’s fixed costs remain high because of its former size. That augurs for a bad report card: Michelle Zdrodowski of DPS recently warned that DPS will run out of cash in April. Mayhap unsurprisingly, the legislature has been not just unenthusiastic about crafting another Detroit rescue plan, but also uneager to even consider the draft, $715 million bill proposed by Governor Rick Snyder: a bill which would create a debt-free DPS, run by a state-appointed board, and with a shell that assumed DPS’s debt. Gov. Snyder is also proposing closing poorly performing charter and traditional schools. Michigan’s constitution proclaims primary and high-school education to be a right. But in freezing, rat-infested Detroit schools, some 50,000 children who might someday determine Detroit’s future are soon to learn how the Michigan legislature defines that “right.”

For Detroit, now more than a year after emerging from the largest municipal bankruptcy in American history, a new municipal bankruptcy might be in the report cards, as DPS is within months of insolvency—especially if the state legislature continues to spurn Gov. Snyder’s proposals. By next month, the amount of state aid to DPS which will have to be sidetracked to pay off debt is projected to be roughly equivalent to what DPS is spending on salaries and benefits—or, as Hetty Chang of Moody’s describes it: “It’s not sustainable…” adding that absent action soon, “they will run out of money.” Her colleague, Andrew Van Dyck Dobos, added that the “Continued sickouts (by teachers) may further incentivize students to flee the district, resulting in lower per-pupil revenues from the State of Michigan and continuing a downward spiral of credit quality.” DPS, Moody’s projects, will see its expenses rise by $26 million a month beginning in February—after our friend in Pennsylvania sees—or does not see—his shadow: February is when DPS is on the line to begin repaying cash flow notes issued to paper over operations—part of the depressing math that will now, inexorably, begin to eat into DPS’s monthly expenses: the increasing debt service will equal about one-third of DPS’ monthly expenses, according to Moody’s. Indeed, without some form of restructuring, Moody’s warns that DPS could lose even more students as it is forced to divert funds from the classroom—adding that teeming long-term pressures on the near-term operational debt payments as the district will impose a $53 million annual expense to repay long-term operational debt through FY2020. In Lansing, Gov. Snyder’s proposal to ask the state legislature to approve the $715 million in state funding, as unappealing to the legislature as it may seem, would prove more affordable to state taxpayers than an eventual default or potential legal action due to a municipal bankruptcy filing.

DPS’s burdensome debts.  President Barack Obama plans to visit Detroit tomorrow to witness the Motor City’s progress firsthand as part of his trip that includes a tour of the auto show. The trip will also be an opportunity to assess the outcomes of his creation of a federal coordinator and an interagency Detroit Working Group to help 20 federal agencies assist Detroit—agencies through which the federal government has since invested $300 million in Detroit through grants and programs involving blight demolition, transportation, and public lighting. The President will also visit the North American International Auto Show in an effort to showcase the record auto sales of 2015, the 640,000 new auto-industry jobs created since the federal auto bailout, and emerging technologies that could help reduce U.S. dependence on oil and keep the industry competitive. The visit could also help the White House assess the successes and failures of its own efforts to help Detroit out of bankruptcy—efforts, obviously, profoundly different than the federal bailouts of the bankrupt automobile industry in Detroit, including “embedding” full-time federal staff inside city government to help identify federal resources to help Detroit and cut through red tape. Among the Administration-supported projects provided to Detroit has been $130 million in federal funds for blight removal, and allowing the city to demolish more than 7,500 blighted buildings in fewer than two years—federal funds made available from the 2009 Hardest Hit Fund mortgage aid program. Among the projects that Mayor Duggan’s office continues to discuss with federal officials are expanding Detroit’s youth employment program and securing more aid for blight elimination. It is hard to imagine that the future of DPS will not be on the table too.

The Hard Challengeof Governing for Tomorrow

January 15, 2016. Share on Twitter

What About the Future? Today’s children, are tomorrow’s future leaders; so the complex roles of states and local government leaders in providing for their education are vital. CNN, late yesterday, ran a headline: “Budgets leave children by wayside in 2 Michigan cities,” underlining both the state and municipal role in Flint and Detroit of a foundering system critical to the future of both cities and to the complex interrelationships in state and local school finance. Ingrid Jacques, of the Detroit News, late last night wrote: “The emergency manager of [the] Detroit Public Schools (DPS) is now irrevocably tainted by his time in that same role for the city of Flint. Whether he deserves blame is still in question, but [Darnell] Earley was the state-appointed manager who oversaw Flint’s transition from the Detroit water system to Flint River water. The switch in the spring of 2014 has led to disastrous consequences, including children now suffering from lead poisoning from the drinking water. Gov. Rick Snyder’s reputation has suffered for not acting quickly enough to ameliorate the situation in Flint and to demand accountability after. The Governor has a major perception problem having Earley at the helm of the financially failing DPS. And reports this week of school buildings that are unsafe and unclean for children only make it more obvious that this emergency manager is no longer a good fit. You can’t have the same man associated with the poisoning of Flint’s children now responsible for the safety of nearly 50,000 Detroit kids.”

After the wrenching struggle to emerge from the largest municipal bankruptcy in U.S. history, the fate of Detroit’s future is, once again, very much at stake—and it’s one that involves the complex interrelationship of governance of schools between the state, city, and school board. What is clear is that it is currently dysfunctional, risking broadcasting a message to families with children that Detroit is not a city in which to raise a family—a message which no city interested in its long-term fiscal sustainability wishes to broadcast.
While the number of school closings in Detroit appears to be ebbing, teacher “sickouts” yesterday continued to force school closings. Teachers in the fiscally challenged Detroit Public Schools (DPS)—under a state-imposed emergency manager—are upset about large class sizes, pay, and benefit concessions; they are also opposed to a state plan to create a new, debt-free Detroit school district; they are upset about the deplorable conditions in DPS school buildings: “As frustrations by educators, parents and the community continue to mount over deep concerns about Detroit Public Schools’ deplorable health, safety and learning conditions, we need real answers from Emergency Manager Darnell Earley and Gov. Rick Snyder…The community is crying out for help over what is clearly a crisis in our schools. The DFT has called for public hearings to fully reveal all of the problems in every school and for (Mr.) Earley to announce how he intends to mitigate the issues. Our students and their families deserve real answers.”

The statement came on the same day Mayor Mike Duggan—on a tour of a number of Detroit Public schools with city officials looking for health and safety violations witnessed a mouse—one apparently not enrolled. Mayor Duggan also witnessed school children wearing their coats in a chilly classroom—afterwards describing his visit as “deeply disturbing.” The school system, which has been subject to state control via a series of state-appointed emergency managers since March 2009, has accumulated $515 million in past debts and unpaid vendor and pension bills. There is no A for math, nor for state oversight. Gov. Rick Snyder yesterday noted: “What I would say is it’s really unfortunate, because it’s coming at the expense of the kids. There are other venues and ways — if people have issues or things that they’d like to present — to do that. They shouldn’t be doing it at the expense of not having kids in class, and that is something that we’re carefully monitoring,” adding that: “If it continues, I’m sure you’ll see action at some point. But the goal is, hopefully, they’ll stop that, and they’ll find other mechanisms and ways to communicate what issues they may have — and not do it at the expense of children.” But when reporters asked whether the solution might come from state enactment of legislation that better clarifies what constitutes “strike conditions,” the Governor said that could be something the Legislature eventually picks up. The city late Wednesday announced it has launched a citywide inspection of all Detroit Public School buildings in response to complaints by teachers about health and safety problems.

The inspections, which began Tuesday at Spain Elementary Middle School, will be completed by the end of this month in the 20 DPS school buildings believed to be most problematic, and all 97 of the district’s school buildings by the end of April. Charter schools will be inspected as well, according to Mayor Mike Duggan’s office. The call for inspections came a day after Mayor Duggan toured several DPS schools with city officials in the wake of sickouts by teachers who have complained about building conditions, among other issues. Mayor Duggan has vowed to seek immediate solutions to the “deeply disturbing” problems he observed in some of the schools, including a dead mouse on the floor of a classroom and students wearing coats in class to ward off 50-degree chill. “This effort isn’t about blaming anybody,” Mayor Duggan said in a statement released Wednesday: “It’s about making sure that every child and every teacher in Detroit goes to school in a safe and healthy environment.” The Mayor on Tuesday engaged the heads of the Building, Safety, Engineering and Environmental Department and Detroit Health Department to begin immediate inspections. If code violations are found, the building department will “take appropriate action to make sure that the violations are understood, along with the required repairs and the timeline for completing them,” according to the city.

The mayor has said that quick action is needed to fix up the district’s schools and revamp Detroit’s education system, which includes DPS, the state-run Education Achievement Authority and charter schools. Gov. Snyder has proposed a $715 million plan that would create a new, debt-free Detroit school district and a commission to oversee the opening and closing of the city’s schools. Indeed, legislation to restructure DPS is expected to be introduced straightaway—creating its own governance issues and challenges—a potential tug of war between the state, city, and DPS school board.

Ms. Jacques wrote: “Snyder hates politics. And he doesn’t like to stray from his relentlessly positive mantra. The governor is also fiercely loyal to those who work with him, and avoids doling out blame. But if the governor continues to stand by Earley, he can kiss goodbye his chances of getting restructuring legislation for Detroit schools passed. Snyder’s legislative proposal is a high priority for him. And DPS desperately needs the financial aid that would accompany the plans. Snyder has already admitted the emergency manager framework hasn’t worked for Detroit schools.”

Mr. Earley is the fourth appointee in a string of state-appointed emergency managers who have failed to solve the fiscal and academic shortfalls in the district, starting with the appointment of Robert Bobb by former Gov. Jennifer Granholm in 2009. The bills Gov. Snyder is supporting would end emergency management and would place control of schools in the hands of an appointed board that would transition to an elected board. Part of the legislation was introduced yesterday by Sen. Geoff Hansen (R-Hart). Sen. Hansen, vice-chair of the Senate Government Operations Committee and chair of the appropriations subcommittee on K-12 funding, has worked with the Governor for months getting the legislation ready—legislation in which Gov. Snyder envisions splitting DPS into two entities to separate more than $500 million in debt from a new district that could direct its funds to educating students rather than covering past borrowing. The governor’s office is hoping that legislation would take effect by the end of June — the same time Mr. Earley’s appointment is up.

Ms. Jacques, however, notes: “But Earley’s departure needs to happen now, even though Snyder thinks he did a good job getting Flint out of debt and that he’s tried to do his best for Detroit schools. Earley has also defended his record in Flint. In a guest column for this paper in October, he wrote: ‘Contrary to reports in the media and rhetoric being espoused by individuals, the decision was made at the local level, by local civic leaders.’ Mr. Earley says the decision to move to Flint River water was approved by the mayor and City Council months before he was appointed emergency manager in the fall of 2013. That may be accurate. But Mr. Earley was in charge when the actual implementation took place. And the buck stops with him and Snyder. What’s happened in Flint is tragic, and the outrage around the state and country is still building. That makes Earley toxic. Snyder may not like it, but he has to get tough and do the politically expedient thing. If he wants his plans for Detroit Public Schools to come to fruition, Earley needs to step aside.”

Meanwhile, in the Capitol, long-awaited legislation overhauling Detroit Public Schools was introduced yesterday which would, if enacted, put an elected school board back in power next year, but abandon an effort to subject charter schools to the same governance as the city school district. A two-bill package introduced in the Senate would provide for a $250 million transfer from the state’s general fund to start a new debt-free school district in Detroit. The package, however, does not address DPS’s $515 million operating debt. Under the proposed legislation, Detroit voters would elect a new city school board next November following the appointment of an interim board charged with starting a debt-free school district. The new Detroit Community School District’s board would be composed of seven members elected by City Council districts and two at-large members. Gov. Rick Snyder and Detroit Mayor Mike Duggan would get to jointly appoint the nine-member interim school board with five and four appointees, respectively.

The legislation does not include Gov. Snyder’s earlier proposal to create a Detroit Education Commission with power to open and close any public school operated by DPS or independent charter schools. Republican lawmakers supportive of charter schools and the charter school lobby have been opposed to placing charters under the authority of a new commission. Mayor Duggan, who not only holds sway with city legislators, but also still wants a citywide commission that could “establish a single standard of performance for all public schools in Detroit — district and charter,” said: “We will keep working on this issue until we have a framework for an educational system in Detroit that consistently provides our children with the quality education they deserve.”

The initial bills introduced yesterday, however, do not address how to relieve the DPS operating debt that has piled up since 2009 under the watch of state-appointed emergency managers. Unsurprisingly, there is little enthusiasm in Lansing to ask state taxpayers to bail out DPS at the expense of Michigan’s other 1.5 million schoolchildren. So while Gov. Snyder has asked legislators for $515 million to pay off DPS operating debts, unpaid pension obligation debts, and overdue vendors’ bills, he has also requested another $200 million for transition costs associated with creation of the proposed new school district.

The politics, however, are difficult—especially as weary lawmakers are apprehensive not just about syphoning more taxpayers’ funds to Detroit, but also the wave of mass teacher sickouts in the city which have caused schools to close over the past two weeks: Sen. Phil Pavlov (R-St. Clair Township), who chairs the Senate Education Committee Wednesday said he is drafting legislation that would treat mass sickouts as a form of illegal strike and levy sanctions against teachers, including a possible suspension of their state teaching certification. Even one of Detroit’s own delegation, State Rep. Harvey Santana (D-Detroit) said he would not vote for bailing out DPS until philanthropic foundations pushing for the overhaul commit more money to tackling the underlying poverty that affects Detroit schoolchildren: “I cannot put up a vote for $715 million to send all this taxpayer money to Detroit to deal with this issue, unless I see that there’s going to be a larger, comprehensive plan to deal with the issues that are walking into these schools with these kids…The system will all fall apart. I don’t care how you restructure, reorganize it or who you put in charge…“It’s all going to fall apart, because the deeper issues are just festering.”

Unpower Ball. The New Jersey Division of Gaming Enforcement Wednesday reported that Atlantic City’s casino operators lost 6.5% in revenue last year compared to 2014. The depressing numbers came out as the state is contemplating the opening of new casinos in other parts of the state—casinos which many fear would accelerate the adverse revenue impact on Atlantic City, where four of its 2 casinos were closed in 2014: the Atlantic Club, Showboat, Revel, and Trump Plaza; the remaining eight casinos took in $2.56 billion in 2016 compared to $2.74 billion the previous year—with Trump Taj Mahal experiencing the biggest decline last year, falling 16.5% to $180.2 million. Moody’s on Wednesday reported that revenue at Trump Taj Mahal, Bally’s Park Place, and Caesars and has cumulatively declined 9% the last two years—adding that the state’s proposed casino expansion into the northern part of the state is a potential credit negative for Atlantic City.

Gov. and GOP Presidential candidate Chris Christie, along with state legislative leaders on Monday announced plans to introduce a bill that would allow voters to decide whether to amend New Jersey’s constitution to permit two new casinos outside Atlantic City: The proposed legislation, which must be approved by three-fifths of each house of the Legislature in order to be on the Nov. 8th ballot, would allow two casinos that would have to be located at least 72 miles from Atlantic City—a legislative initiative which Moody’s characterized as “particularly bad news for the already struggling Atlantic City gaming market, which has seen gaming revenue decline about 7% for the year through [November 30, 2015] over the same year-ago period…In our view, the additional competition will likely cause more casinos to close, which would be credit negative for Atlantic City,” adding that revenue in three Atlantic City casinos—Bally’s Park Place, Caesars, and Trump Taj Mahal—has cumulatively declined 9% over the last two years, whilst four of Atlantic City’s 12 casinos were closed in 2014. Should such a constitutional ballot be approved this November, Moody’s expects a new casino in northern New Jersey could be up and running by the end of 2019. Details such as tax rates for the new casinos and revenue sharing agreements for Atlantic City remain to be determined.

The Critical Role of Public Schools in Municipal Sustainability & theRole of States in Municipal Bankruptcy

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January 13, 2016. Share on Twitter

What About the Future? While the number of school closings in Detroit appears to be ebbing, teacher “sickouts” continued to force school closings in the Motor City today. Teachers in the fiscally challenged Detroit Public Schools (DPS)—under a state-imposed emergency manager–are upset about large class sizes, pay, and benefit concessions. They are also opposed to a state plan to create a new, debt-free Detroit school district. In a statement yesterday, the interim president of the Detroit Federation of Teachers, Ivy Bailey, said district and state officials must address concerns about conditions in DPS school buildings: “As frustrations by educators, parents and the community continue to mount over deep concerns about Detroit Public Schools’ deplorable health, safety and learning conditions, we need real answers from Emergency Manager Darnell Earley and Gov. Rick Snyder…The community is crying out for help over what is clearly a crisis in our schools. The DFT has called for public hearings to fully reveal all of the problems in every school and for (Mr.) Earley to announce how he intends to mitigate the issues. Our students and their families deserve real answers.”

The statement came on the same day Mayor Mike Duggan—on a tour of a number of Detroit Public schools with city officials looking for health and safety violations witnessed a mouse—one apparently not enrolled. Mayor Duggan also witnessed school children wearing their coats in a chilly classroom—afterwards describing his visit as “deeply disturbing.” The school system, which has been subject to state control via a series of state-appointed emergency managers since March 2009, has accumulated $515 million in past debts and unpaid vendor and pension bills. There is no A for math, nor for state oversight. Gov. Rick Snyder yesterday noted: “What I would say is it’s really unfortunate, because it’s coming at the expense of the kids. There are other venues and ways — if people have issues or things that they’d like to present — to do that. They shouldn’t be doing it at the expense of not having kids in class, and that is something that we’re carefully monitoring,” adding that: “If it continues, I’m sure you’ll see action at some point. But the goal is, hopefully, they’ll stop that, and they’ll find other mechanisms and ways to communicate what issues they may have — and not do it at the expense of children.” But when reporters asked whether the solution might come from state enactment of legislation that better clarifies what constitutes “strike conditions,” the Governor said that could be something the Legislature eventually picks up.

For any city, the key to its future is the perceived safety and quality of its schools—an important indicator for assessed property values and long-term focus on the future. In Detroit, where the Detrpoit Public Schools (DPS), some 107 schools serving nearly 50,000 students, have been run by a series of state-appointed emergency managers since March of 2009, has $515 million in past debts and unpaid vendor and pension bills, a wave of teacher absences, described as “rolling strikes,” has thus captured the apprehension not just of city leaders, but also the state. That is a sharp contrast from the fall of 1999, when DPS had more than 150,000 students enrolled and no budget deficit—a year when teachers began the school year with a nine-day strike, in response to which, even though the strike was illegal, DPS imposed no fines, and teachers received a 6 percent raise, phased in over three years, better dental insurance, and smaller class sizes in some schools, according to Detroit News archives.

Yesterday more than half of Detroit’s 100 public schools were closed, keeping thousands of students at home as a “sickout” entered a second week: sixty-four of the city’s 97 schools were closed. Between the fierce winter weather, the school system, under an Emergency Manager appointed by Gov. Rick Snyder, with 46,000 students, has been in turmoil, struggling with poor morale among staff members, millions of dollars in debt and, increasingly, families that have other school choices for their kids. Indeed, as Ivy Bailey, interim president of the Detroit Federation of Teachers, noted, the city’s school classes have “too many students and rodents are plentiful.” State superintendent Brian Whiston said in a statement that DPS Emergency Manager Darnell Earley should set up a meeting with state, local, and district representatives in response to a press conference and a rally where teachers complained of buildings with leaky roofs, rat infestations, broken boilers and shortages of books and other supplies, noting: “I care deeply about the safety and well-being of teachers in Detroit, just as I do the students…They all still need to be in the classrooms teaching and learning, though. If buildings have health and safety issues, they need to be addressed immediately with the district administration and all appropriate agencies.” Mayor Mike Duggan said in response to “substandard conditions in school buildings” reported by the Detroit Federation of Teachers, he plans today to visit “a number of those schools” with the heads of the Detroit Health Department and the Detroit Buildings, Safety Engineering and Environmental Department, noting: “Based on what we find, the City of Detroit will take whatever enforcement action is necessary to make sure all Detroit Public Schools are compliant with all health and building codes.” The school system—in effect the future of Detroit—thus is in not just a state of near fiscal and physical bankruptcy—but also in a Twilight Zone with regard to governance. Yet it is the key to Detroit’s future.

Municipal Takeover? New Jersey State Senate President Stephen Sweeney (D-Gloucester), yesterday continued his abrupt push for the state to take over Atlantic City’s finances: he said he will soon introduce legislation, the “Municipal Stabilization and Recovery Act” — which would empower the state Department of Community Affairs’ Local Finance Board or a body it designates to take over the “functions, powers, privileges, immunities, and duties” of Atlantic City’s government. The bill, he said, would propose a formal takeover plan — and that the struggling gambling resort should declare municipal bankruptcy if the state Legislature does not approve the measure quickly. It seems, mayhap, Sen. Sweeney does not clearly understand New Jersey law, under which any county, municipality, or school district may only file for municipal bankruptcy with consent of the state’s municipal finance commission (New Jersey Statute Ann. §52:27-40). Nevertheless, Sen. Sweeney noted: “This is a very clear statement to Atlantic City: Get your act together. Knock off the B.S. and start addressing what you need to address…The state is not going to come in and bail you out anymore. You need to fix this.” The Senator’s statement also appeared to ignore the already significant state role in the city via the appointment by Governor and Presidential candidate Chris Christie of an Emergency Manager. Thus, unsurprisingly, the statement made without any consultation with the city’s emergency manager or elected leaders led Mayor Don Guardian yesterday to compare Sen. Sweeney’s proposal to Japan’s attack on Pearl Harbor in 1941.

The threatened takeover came as both houses of the state Legislature yesterday approved a revised version of a rescue bill that would allow Atlantic City’s eight casinos to make payments in lieu of taxes (the so-called PILOT program) to help stabilize Atlantic City’s finances. That bill now heads to Gov. Gov. Christie’s desk for his approval—even as the legislature put together another proposal with adverse implications for Atlantic City’s fiscal odds which, if approved by the Legislature, would ask voters next November to allow casinos in north New Jersey.

For decades, Atlantic City, the only municipality in which casinos are allowed in New Jersey, has been the East Coast’s premier gambling destination. But what had been a golden goose has become a cropper: over the last two years, four of the 12 casinos in the city closed amid ever-increasing competition from neighboring states, costing not just 10,000 jobs, but also significant property tax revenue losses—and, unsurprisingly, leading the city to increase taxes. Sen. Sweeney, seemingly ignoring the quasi state takeover of Atlantic City, accused the city of being fiscally irresponsible: he suggested the city could sell assets like Bader Field, a closed airport, and the Municipal Utilities Authority, which controls the city’s water department—adding that Mayor Don Guardian and the City Council “need to get their act together and start taking on and doing the tough things. Let’s get serious,” calling the city’s $262 million annual municipal budget “outrageous” for a municipality of only 40,000 residents, adding that, by comparison, Piscataway has 60,000 residents and only a $55 million budget—and adding that the state’s other ailing cities — such as Newark, Trenton, or Paterson — do not receive the same kind of attention, noting: “There is extreme Atlantic City fatigue in this Statehouse…My colleagues — every time we talk about doing something for Atlantic City now, they’re tired of hearing it.”

To which the beleaguered Mayor Guardian noted that he and the city council have worked hand in hand with both the state monitor and the state-imposed emergency manager to improve Atlantic City’s health, noting: “We’re not the Confederacy or Japan or Germany…We didn’t lose a war. We’re just a municipality in the state of New Jersey that’s always recognized the authority of the state…So the concept of a state takeover, it kinds of befuddles me.”

The seeming state takeover, appears to have garnered bipartisan support: State Assembly Minority Leader Jon Bramnick (R-Union) said he supports a takeover, noting: “You have two choices: You can simply send them an incredible amount of money from the taxpayers, or you give the state the opportunity to take it over.” Again, however, the Minority Leader’s statement appears to ignore the significant state role already imposed upon Atlantic City—much less, as State Sen. Jim Whelan (D-Atlantic), a former Atlantic City mayor, yesterday stated in opposing any such state takeover: “I’m not convinced the state can do a better job…It’s not going to solve the problem.”

On a more constructive front, the legislature yesterday passed its payment in lieu of taxes or PILOT bill, which, if signed by the Governor, would require the casinos to make $50 million in additional payments over seven years, and would share 13.5 percent of the money collected from the casinos with Atlantic County’s government and the city’s schools to help prevent tax increases. The bill also includes other revenue streams other than gambling when calculating how much the casinos owe, which effectively sets a collective minimum of $120 million per year for the casinos. In addition, the bill sets a goal of securing $10 million for economic development projects for the Casino Reinvestment Development Authority, and $8 million to continue marketing and tourism advertising for the resort after the abolition of the Atlantic City Alliance, which spent $30 million a year on that task. It will, as Mayor Guardian notes, provide “much-needed relief,” even if, as Moody’s has moodily noted, it will be insufficient, on its own, to stabilize the city’s finances.