Defining the Fiscal Future of Schools, Cities, and U.S. Territories

February 3, 2016. Share on Twitter

Democracy. Elections, & Municipal Bankruptcy. In yesterday’s runoff elections in bankrupt San Bernardino, Bessine Littlefield Richard was easily elected to represent the 6th Ward on the City Council over Roxanne Williams, by an almost 2-to-1 margin, while incumbent Councilman Jim Mulvihill was re-elected over challenger Scott Beard in the 7th Ward based on final, unofficial results—albeit Mr. Beard has not yet conceded. Before the election, Ms. Littlefield Richard had garnered endorsements and financial support from a broad range of groups — from the police and fire unions to many of the city’s political heavyweights, including some who’ve sharply differed with each other on policy questions — but she said she would not be beholden to any of them. In the wake of the election, Councilmember Mulvihill, a certified city planner and urban planning professor at Cal State San Bernardino, said it was important to keep him on the council to stick to the plan of implementing a precarious bankruptcy exit plan. Last November in a then five-candidate race, Councilmember Mulvihill had finished first, while Mr. Beard edged third-place finisher Kim Robel, sending the two to yesterday’s runoff. The election results are not expected to become official until Lincoln’s birthday, a week from Friday, according to the Registrar of Voters. The newly elected council member is scheduled to be seated March 7. Ms. Littlefield Richard supervises a staff of 20 employees with San Bernardino County’s Workforce Development Department in Victorville.

Detroit’s Future. Even as hearings in the Michigan legislature to restructure Detroit’s schools (DPS) are poised to begin Thursday, Gov. Rick Snyder’s designated DPS Emergency Manager—the former Emergency Manager for Flint, Darnell Earley, has announced he will resign effective at the end of this month. This marks the second early departure for Mr. Earley: he was previously the state-appointed emergency manager of Flint during its controversial shift from Detroit’s regional water system to the Flint River—a switch with fatal human and fiscal consequences which will linger in some of Flint’s children for decades. The abrupt announcements came just before tomorrow’s scheduled hearings by the Michigan legislature on Gov. Rick Snyder’s proposed plans to restructure the nearly bankrupt Detroit Public School system. Senate Bills 710 and 711, sponsored by state Sen. Goeff Hansen (R-Hart), would split Detroit Public Schools into two entities, and would also change the legal structure of the school district’s outstanding debt, creating a lockbox to ensure that investors would be paid in full, and on time: under the proposed bill, the existing Detroit Public Schools entity would remain intact only for the purpose of collecting tax revenue until its outstanding debt is retired, while a new entity, the Detroit Community District, would operate the schools—all part of an effort by the state to convey to both Detroit and Michigan municipal bondholders that the state will make an extraordinary effort to avert any municipal bankruptcy by the Detroit Public School system—a system which has been under state oversight for the last seven years—and which has accumulated massive debts, including some $1.5 billion of unlimited-tax general obligation bonds, $199 million in borrowing from Michigan’s School Loan Revolving Fund, and $259 million in limited-tax GO debt paid by district operating revenues, rather than a dedicated debt service levy. The proposal by Gov. Snyder would include an appropriation of $715 million, with $515 million to eliminate the school system’s accumulated structural operating deficit and help with overdue pension payments and unpaid bills, and the remainder as start-up funding for the new operating entity—with the Gov.’s office warning that without action, DPS will be “virtually insolvent” by April.

It is uncertain either how quickly the legislature will act—or whether there will be consensus: Sen. Goeff Hansen, a veteran of four years’ service as a Hart Township supervisor, and the current Chair of the Senate Appropriations Subcommittee on K-12, School Aid, Education—as well as Assistant Senate Majority Leader, has proposed bills to appropriate $250 million from the state’s general fund for the start-up costs, but there appear to be no bills yet to address DPS’s operating deficits. Under Sen. Hansen’s proposed legislation, the new Detroit Community District would shift in 2017 to an elected board. Responsibility for the district’s $1.5 billion of unfunded pension liabilities would lie with the new district. The City of Detroit’s Financial Review Commission would have responsibility for overseeing the new school district’s finances.

Hearings before the state Senate’s Government Operations Committee are expected to continue for two weeks, with the Senator hoping his bill might mark a first step toward a long-term solution, noting: “Detroit is on the rebound, with a sound financial footing, improving economy and a rising population, but numerous efforts to improve K-12 education there have not worked.” Arithmetic will matter: DPS’ monthly expenses are projected, this month, to rise by $26 million to begin repaying cash flow notes issued to paper over operations—a level which is equal to about one-third of DPS’ monthly expenses, according to the mathematicians at Moody’s. Outgoing Emergency Manager Earley has warned that DPS will exhaust cash to maintain operations by April due to its debt overload.

So in Latin class, the words would be tempus fugit: time is flying, even as the proposed hearings will mark the first steps toward legislation and state appropriations since Gov. Snyder first unveiled a general outline nearly a year ago—a plan—with a budget match expected to be attached when the Governor proposes his FY2017 budget recommendations a week from today—budget recommendations which could pit Detroit’s school children versus Flint’s lead-threatened children. The state plan is expected to provide for a new Detroit public school system entity which would be in charge of educating students, and to continue to borrow and issue bonds for operating purposes on a longer-term basis. That will matter: this year, debt service payment obligations are projected to nearly triple to $2,982 per student from $1,105 last year in 2015, mainly because the district pushed its 2015, $83 million cash-flow note repayment onto the current school year’s budget. Just as negligence has put the children of Flint at risk, so too fiscal negligence has put Detroit’s children at risk—as increased debt service obligations compete directly with the fiscal resources critical to financing the education of the children who will define Detroit’s future—and drive families to either contemplate moving into—or out of—the city, where, as Moody’s has moodily noted, declining enrollment has already hurt DPS’s balance sheet and attendance—attendance which has declined more than one third in just the last five years.

There are risks and balances, because Detroit’s schools’ debt is backed by the state via Michigan’s Qualified School Bond and Loan Program—meaning, as the ever prescient Yvette Shields of the Bond Buyer writes: “That means that the state could ultimately be on the hook for a good portion of DPS’s operating debt in a municipal bankruptcy [Chapter 9], although the bankruptcy court would have the final word.”

Out Like Flint. Gov. Snyder is expected to propose $30 million in Michigan state funding to help pay the water bills of Flint’s residents confronted by the emergency over the city’s lead-contaminated water supply, with the Governor expected to brief Flint officials and pastors about the plan today–and outline it to the legislature next week as part of his FY’2017 budget proposal.

In Like Puerto Rico? House Natural Resources Committee Chair Rob Bishop (R-Utah) has announced he intends to begin drafting legislation intended to aid Puerto Rico in the near future in the wake of a hearing yesterday, which included testimony from several witnesses with histories of working with control boards. The goal is to meet House Speaker Paul Ryan’s (R-Oh.) March 31 deadline for House committees with jurisdiction over Puerto Rico to cobble together a legislative proposal—one which Chair Bishop yesterday said would involve Delegate Pedro Pierluisi (Puerto Rico), the U.S. territory’s sole representative in Congress—and a member of the Committee. Del. Pierluisi said he supports creating an independent financial control board to oversee Puerto Rico’s long-term financial plan, annual budgets, and efforts to complete accurate and timely financial information—adding, however, that if the Committee’s bill were to propose “to extinguish rather than enhance” Puerto Rico’s democracy at the local level, he would “do everything in [his] power to defeat it.” The sole pending legislation that appears to have any likelihood of garnering bipartisan support in the House is authored by Rep. Sean Duffy (R-Wis.), the Puerto Rico Financial Stability and Debt Restructuring Choice Act, which would provide public authorities in Puerto Rico with Chapter 9 municipal bankruptcy protection in exchange for Puerto Rico’s acceptance of oversight from a Presidentially-appointed five-member Financial Stability Council. Indeed, there appears to be consensus at the committee level that there should be—as there has been previously for New York City and Washington, D.C., some type of oversight authority; there has yet, however, been no consensus on just what specific powers such an authority should have. Former Washington, D.C. Mayor Anthony Williams, who had experience working with D.C.’s financial control board, yesterday stated that any discussions of restructuring the territory’s debt should follow a joint effort by Puerto Rico’s government and an appointed authority to put the commonwealth’s “basic housekeeping in order” by reforming key fiscal basics, such as Puerto Rico’s revenue collecting capabilities, adding that any federally-imposed authority should have to approve the Commonwealth’s financial plans and have goals of both achieving financial stability and a balanced budget for the Territory, adding that such an authority ought to be composed of no more than five to seven members who have the necessary experience to address Puerto Rico’s crisis—and that there would have to be some representatives on the panel who are Puerto Rican residents or of Puerto Rican ancestry.

Threats to San Bernardino’s Future. Francis Wilkerson, writing this week in Bloomberg [“The War in San Bernardino”] about the terrorist attack in San Bernardino last December—an attack which led GOP Presidential candidate Sen. Ted Cruz (R-Tx.) to claim: “This horrific murder underscores that we are in a time of war—” provoked Mr. Wilkerson to write that Sen. Cruz’s comments appear to find no such reflection in the bankrupt city. He wrote: “In long interviews with city leaders or short conversations with residents, none felt compelled to mention where he or she had been at the fateful hour. Some presidential candidates seem to view the attack in San Bernardino as evidence of an existential threat to the nation, and invoke it every chance they get. In San Bernardino, it hasn’t registered as an existential danger even to San Bernardino. It’s rarely mentioned.” Rather, as he recognizes, there are very real threats to the city’s future: “San Bernardino has long been at war, and losing. The steady erosion of the American working class, with a commensurate rise in local poverty, has been killing the city for decades. It is now emblematic of some of the nation’s most intractable problems – violent crime, drug addiction, joblessness, urban blight, political dysfunction, low-skill immigration, white flight, and widespread civic apathy. Like Detroit, the heaping culmination of those troubles ended in a municipal bankruptcy.” In his tour of the city with San Bernardino Police Department Lt. Richard Lawhead, he noted “a dozen prostitutes plied the streets 100 yards from a downtown school, walking, talking on phones, watching for signals from a man near the corner, assiduously avoiding eye contact with the occupants of the police car…working-class neighborhoods that had been commandeered by gangs and never relinquished.” Then he made a fascinating contrast:

The attack cast the city in a weirdly positive light. Famous for failure, San Bernardino unexpectedly basked in a glow of competence. The police rapidly tracked down the killers, cornered them and killed them, preventing a likely second round of mayhem.

He wrote that Lt. Lawhead was optimistic about the city’s future: “even a little infectious,” but then wrote that MIT economist David Autor had written him, via e-mail, “We have almost no firm knowledge of how to ‘turn around’ places in deep decline,” adding, “San Bernardino’s own efforts over the years have been flamboyantly luckless. Cited as an ‘All-American’ city in 1977, its long, ignominious skid reached a grim destination on Aug. 1, 2012, with Chapter 9 bankruptcy. Other battered cities have traveled a similar route. No one can be certain it’s the last stop.”

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