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.

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