Michigan’s Role in Municipal Fiscal Fates

February 23, 2016. Share on Twitter

Out Like Flint. Does Flint have a fiscal future? University of Michigan-Flint Professor Marty Kaufman, who has been leading a research team studying the city’s denigrated water lines, has reported there are as many as 8,000 lead service lines—making the announcement yesterday at a news conference at City Hall, in the wake of his team’s painstaking analysis of handwritten records, paper maps, and scanned images to create a digital database of lead pipes. Professor Kaufman stressed that while the project is a full compilation of available data, the records, compiled from a 1984 survey, do not always indicate the types of pipes used—vastly complicating Mayor Karen Weaver’s efforts to get those lines removed as quickly as possible from what, once, was the state’s second largest city, but where, today, the fear of lead contamination, especially for children, can only threaten significant adverse fiscal consequences for the city as families with children become increasingly fearful of remaining in the city—not to mention the apprehension of other families about moving to Flint: fears that cannot bode well for the city’s assessed property values. Because at the time of the switch of its water supply, under then state-appointed emergency manager Darnell Earley, Flint did not treat the water with anti-corrosion chemicals: the omission allowed river water to scrape too much lead from aging pipes and into some residents’ homes. Nevertheless, yesterday, Gov. Snyder said 89 percent of water samples collected from key locations in Flint measured below the “action level” of 15 parts per billion for lead in an initial round of testing, adding that samples from the so-called “sentinel” sites will help determine when it is safe to drink unfiltered water again.

Out Like Snyder? Meanwhile, the Michigan State Board of Canvassers, which is responsible for canvassing and certifying statewide elections, elections for legislative districts that cross county lines and all judicial offices, except Judge of the Probate Court, conducting recounts for state-level offices, canvassing nominating petitions filed with the Secretary of State, canvassing state-level ballot proposal petitions, assigning ballot designations and adopting ballot language for statewide ballot proposals, and approving electronic voting systems for use in the state, has approved another petition seeking to recall Gov. Snyder, citing the governor’s declaration of a state of emergency in Flint after lead leached from the pipes into the city’s water supply. The Board approved the petition yesterday from the Rev. David Bullock of Detroit, who had filed his petition two weeks ago yesterday after the board rejected eight petitions to recall the Governor. Notwithstanding the approval, Rev. Bullock now must obtain at least 789,133 signatures. If approved, the recall effort would become a ballot question which would then need majority support from Michigan’s voters.

Schooling on Municipal Bankruptcy. As every city or county elected leader knows, the quality of a jurisdiction’s public schools are fundamental to such a jurisdiction’s fiscal balance: if the schools are excellent: they attract families to the city or county, with important, positive implications for assessed property values and property tax collections. If, in contrast, they appear to be physically dangerous or threatening, or incompetent; the schools can create the opposite fiscal outcome. Thus, even though many public school systems are nominally distinct from city or county-elected jurisdictions; those locally elected leaders have a very great stake in the perceived excellence of their public schools.

The city and Detroit Public Schools (DPS) have entered a consent agreement setting a timetable to address hundreds of safety and health violations in DPS’ school buildings. The agreement covers the first 26 schools inspected by the city that require repairs; additional schools will be added as inspections progress. Detroit Mayor Mike Duggan stated: “What we wanted was a commitment from DPS with specific time lines for making each repair and a binding agreement enforceable in court if those time lines are not met.” The action by the city comes in the wake of Detroit’s Building, Safety, Engineering & Environmental Department’s four-month inspection program for all 97 DPS buildings after complaints by teachers and parents about problems including water leaks, mold and heating—and rat infestation: at six schools with reported rodent infestations — Blackwell Institute, Clark Preparatory Academy, Cody High, Sampson-Webber Leadership Academy, Ronald Brown Academy and Spain Elementary-Middle — inspections are being done monthly by pest control contractors, according to the city report. Building checks were promptly conducted in 20 DPS buildings believed to be most problematic. Inspections of the remaining district buildings, plus Detroit charter schools, are to be completed by the end of April. The consent agreement, signed by Detroit’s City Attorney and Marios Demetriou, the DPS deputy superintendent of finance and operations, includes a spreadsheet listing progress on scores of projects and completion deadlines. City officials report that city inspectors have visited 64 DPS properties so far. In addition, the Detroit Health Department also conducted follow-up inspections in some cases. It is uncertain how the action taken by the city to deal with the dysfunctional DPS might impact—at least from a fiscal perspective—the suit filed last month by the Detroit Federation of Teachers with regard to building conditions, and seeking the removal of state-appointed Emergency Manager Darnell Earley, although Ivy Bailey, interim president of the DFT, said: “We do not plan to withdraw it until we are confident that the consent agreement’s commitments have been fulfilled.” Mr. Earley, who has previously served, or mayhap mis-served, as Gov. Rick Snyder’s appointed Emergency Manager for the City of Flint, will step down on Monday.

Recovery! Wayne County, the largest county in Michigan—and the home not just to Detroit, but also to 33 other cities and 9 townships—and where Michigan Gov. Rick Snyder last July had declared a financial emergency, and which is still operating under a consent agreement with the state—is now, according to the unmoody Moody’s, stable, with Moody’s Investors Service having revised its credit rating outlook on Wayne’s junk-level rating upward from negative in recognition of the Wayne County’s remarkable success in making substantial cuts to its public pension liabilities and other operating expenses, noting: “Revision of the outlook to stable from negative reflects diminished near-term fiscal challenges.” In response, Wayne County Executive Warren Evans noted: “Moody’s decision to upgrade our credit outlook to stable is a step in the right direction…Our successes last year in eliminating the structural deficit and reducing unfunded health care liabilities were definitely noteworthy, but, we aren’t resting on those successes. My administration continues to work to restore long term fiscal stability to Wayne County.”

The county has succeeded in reducing nearly $50 million in spending, achieved with elimination or modification of retirement benefits, a contraction of payroll, and other operating efficiencies over the last six months—having announced earlier this month that it is expecting $23 million in fiscal 2016 budget relief from cuts to retiree healthcare benefits—cuts which trimmed $850 million from its unfunded liabilities. In addition, the county now projects its annual savings are expected to grow, citing its post-employment benefit liabilities as one of the factors which had driven its deficit enough to raise the specter of municipal bankruptcy. Indeed, County Executive Evans noted: “The restructuring of the county retiree healthcare was the single largest contributor to restoring solvency.” Wayne County reduced its actuarial accrued OPEB liability by 65% in 2015, lowering it to $471 million from $1.32 billion, according to an actuarial analysis from Nyhart Actuary & Employment Benefits: the restructuring is projected to reduce Wayne County’s pay-as-you-go contribution this year down to $17.6 million from $40.4 million. In its upgrading, Moody’s analysts noted: “Enhanced control over expenditures was key to addressing the county’s fiscal concerns given limited options to raise revenue.”

Spinning the Debt Wheel in Atlantic City: “The city’s fiscal crisis is severe and immediate.” A new Atlantic City rescue bill, the “Municipal Stabilization and Recovery Act,” would give the State of New Jersey increased authority over Atlantic City’s finances as part of an effort to avoid the city going into chapter 9 municipal bankruptcy: the proposed legislation would empower the state to renegotiate Atlantic City’s outstanding municipal debt and municipal contracts for up to five years, while also giving the state the ability to leverage city assets and make staff cuts. Under the proposal, Atlantic City would be given one year to find a way to monetize its water authority. The quasi-state takeover of the city, coming in the wake of last month’s veto by then-Presidential candidate Gov. Gov. Chris Christie—a package which would have enabled Atlantic City’s eight remaining casinos to enter into a payment-in-lieu of taxes program for 15 years and aggregately pay $120 million annually during that period instead of a traditional property tax. The introduction of the bill came in the midst of ongoing governance confusion—with the role of the Governor’s appointed emergency manager for the city still in question. There has been, however, little question from the city’s perspective: Mayor Donald Guardian, joined by city council members and other elected officials, harshly criticized the takeover plan yesterday in a press conference, urging instead a new financial assistance bill which would allow the city to maintain “sovereignty,” with Mayor Guardian stating: “We cannot stand here today and accept any bill with the broad, overreaching powers as the one presented to us last week contained.” Or, as Atlantic City Council President Marty Small put it: “We were all troubled by this draft bill: It takes our sovereign right to govern our own city away.”

The legislation was introduced by New Jersey State Senate President Steve Sweeney (D-Gloucester), with Senators Kevin O’Toole (D-Wayne), and Paul Sarlo (D-Wood-Ridge), in an effort to avoid an Atlantic City chapter 9 municipal bankruptcy—with time beginning to run out at the home of the gaming tables: According to a January 21 report from Gov. Christie’s appointed emergency manager Kevin Lavin, Atlantic City could default as early as April absent a state rescue package. That is, there looms an Atlantic City fiscal hurricane—the red flag warnings of which now appear to have disrupted the year-beginning “new partnership” between Mayor Guardian, Gov. Christie, and Sen. Sweeney to avoid municipal bankruptcy—or, as Mayor Guardian described it: “The final piece of legislation that the State presented to us was far from a partnership…It was worse. Some would even say fascist.” Atlantic County Freeholder Ernest Coursey was no less upset, noting: “It will be a cold day in hell before we just stand by idly and just allow folks to run over the people of Atlantic City…I think we ought to work in partnership with the state of New Jersey and stop this hostile talk of a takeover.”

In Rome, they would say: tempus fugit, or time is flying: In this case, time is running out: in addition to addition to municipal bond debt, Atlantic City confronts a debt of $170 million to the Borgata casino from its tax appeals and a missed $62.5 million payment owed last December; moreover, Atlantic County Court Judge Julio Mendez ordered a 45-day mediation period commencing February 5th: Mayor Guardian yesterday said that if no resolution can be reached by then, he will have no choice but to petition the state’s Local Finance Board for a bankruptcy declaration, adding: “The sad irony is that we have a casino industry that wants to redirect their funds to the City of Atlantic City to help avoid all these doomsday scenarios,…There is a reasonable and practical solution out there, but that path has not been chosen by the state yet.”

Saving Puerto Rico. The U.S. House will convene simultaneous hearings on Puerto Rico Thursday as part of an accelerating effort to meet House Speaker Paul Ryan’s (R-Wi.) deadline for final House action by April first: The House Financial Services Committee’s Subcommittee on Oversight and Investigations will hold a hearing on the possible effects of Puerto Rico’s debt crisis on the municipal bond market; the House Natural Resources Committee will convene its hearing to discuss the Treasury Department’s analysis of the situation in Puerto Rico. The subcommittee hearing will feature three witnesses: Anne Krueger, a senior research professor of international economics at John Hopkins University who led a recent economic study of Puerto Rico; Juan Carlos Batlle, senior managing director of CPG Island Servicing, LLC; and William Isaac, senior managing director and global head of financial institutions for FTI Consulting. House Financial Services Subcommittee Chair Sean Duffy (R-Wis.) has, to date, been a key player in seeking to determine an exit from Puerto Rico’s looming insolvency: he introduced legislation last December to give Puerto Rico’s public authorities Chapter 9 bankruptcy protection in return for the creation of a five-person, Presidentially appointed financial stability council, seeking to balance the municipal bankruptcy authority Democrats have been pushing with the oversight authority for which Republicans have pressed. The Treasury proposal the Natural Resources Committee is scheduled to discuss is not dissimilar to Rep. Duffy’s, but it would propose restructuring for the entire commonwealth, a legislative concept deemed by some “Super Chapter 9” bankruptcy—a proposal which has not gained support in Congress over misplaced apprehensions by some that such a proposal could open up the possibility for states, such as Illinois, to try to restructure their constitutionally backed general obligation debts. These members are, apparently, unfamiliar with the dual sovereignty system unique to the United States of America. The Treasury position supports restructuring for the entire commonwealth, but that the extension of restructuring could come through Congress’s power under the Constitution’s Territorial Clause—a clause which gives Congress the power to “dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.” U.S. Treasury Secretary Jack Lew has backed comprehensive restructuring legislation for the territory, partially to make it easier for its officials to bring all the commonwealth’s creditors to the table.

It Ain’t Over ‘Til It’s Over: One would think that after the long, tortuous, expensive process of gaining approval for a plan of debt restructuring from a U.S. Bankruptcy Court to exit municipal bankruptcy, a municipality could get back to focusing on recovery. But then you might be misjudging. Jefferson County, Alabama, however, finally at least has its new day in court set to determine whether its approved bankruptcy plan of debt adjustment is final: The 11th Circuit Court of Appeals has tentatively set the week of May 16 for its expected schedule of oral arguments in an appeal of the county’s successful exit from Chapter 9 municipal bankruptcy—albeit the 11th Circuit has no timeframe within which it must rule after arguments are heard. But one could anticipate a long and arduous road: it has taken well over a year to prepare the record for the court to consider hearing arguments, meaning that Jefferson County has now been in appeal longer than it was in municipal bankruptcy case. The lingering issue relates to the county’s approved plan of debt adjustment which .enabled it to issue $1.8 billion in sewer refunding warrants to write down $1.4 billion in related sewer debt two years ago last December—an approval which provoked a group of ratepayers on the sewer system to appeal U.S. (now retired) Bankruptcy Judge Thomas Bennett’s approval, and after, nearly 18 months ago, U.S. District Judge Sharon Blackburn rejected the Jefferson County’s contention that the ratepayers’ bankruptcy appeal was moot, based in part on the fact that the plan was largely consummated when the refunding debt was sold.

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