How One Remarkably Gifted Leader Can Make a Difference in Averting Municipal Bankruptcy & Ensuring Continuity of Essential Public Services

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In this morning’s eBlog, we applaud, for the umpteenth time, the rhythm guitar lead of the Indubitable Equivalents, the peripatetic, retired (or so he claims…) U.S. bankruptcy Judge Steven Rhodes, who oversaw the rock and roll trial and exit of Detroit from the largest municipal bankruptcy in U.S. history, but who, since then, has made himself indubitably available to create solvency rhythm from Puerto Rico to the small municipality of Hillview, Kentucky. Somehow, his patience and ear for creating fiscal rhythm has proven unique and invaluable.  Judge Rhodes’ intellect, tact, and public commitment would be an invaluable factor to resolution of the nearing insolvency and default of Atlantic City.

A Different Hill Perspective. Hillview, Kentucky, the small municipal suburb of Louisville, has opted not to pursue municipal bankruptcy; instead the city will issue new municipal bonds and raise taxes to settle a legal judgment it owes to its largest creditor, Truck America, according to documents filed in the U.S. Bankruptcy court yesterday. In a joint filing, Hillview and Truck America Hillview’s municipal bankruptcy filing was the first sought by any U.S. municipality since Detroit had filed in 2013. Training LLC stated that in the wake of “exhaustive, arms-length negotiations” with three different mediators, they had reached agreement to permit the City of Hillview to settle Truck America’s $15 million claim at a discount. That agreement, in which the itinerant and electronically, musically retired U.S. Bankruptcy Judge Steven Rhodes served as a mediator, paved the way for U.S. Bankruptcy Judge Alan C. Stout to schedule an expedited hearing this morning to consider a motion which would provide for the dismissal of Hillview’s petition for chapter 9 municipal bankruptcy.

As part of the negotiations, the city intends to raise revenues and issue debt to resolve the claims emanating from a portion of the $15 million judgment owed to Truck America—an award which had been growing by $3,759.54 a day in interest, and which had initially triggered the city’s filing for chapter 9 last August. Under the proposed agreement, Hillview will make an up-front payment of $5 million from the proceeds of issuing new debt, and to channel approximately 8.3% of its general fund revenue to Truck America for the next two decades. The settlement also calls for Hillview to raise its occupational tax to 1.8% from the current rate of 1.5%, increase its insurance premium tax to 7% from 5%, which is collected on insured property and people within the city limits, according to the settlement. Hillview’s debt to Truck America of $15.23 million was based upon a court-ordered judgment it lost over a soured legal dispute involving a contract to purchase city land. The city lost that dispute in court, and has since transferred ownership of the property to the company, but until now had not come to terms over the monetary award—instead, hoping to absolve itself through filing for municipal bankruptcy. After ten years, Hillview can opt to take a discounted buyout option under a formula outlined under the settlement. Any violation of settlement terms constitutes a default, according to court filings. A resolution to the dispute will actually begin in Bullitt County Circuit Court where Truck America had filed a writ of mandamus to enforce the terms of the judgment. The lower court case was automatically stayed when Hillview filed for Chapter 9 bankruptcy on Aug. 20. A decision as to whether Hillview is insolvent, and eligible to continue its case, is still pending. At Thursday’s hearing, Hillview and Truck America will ask Stout to lift the stay so they can file the settlement in the circuit court. After the settlement is filed, Hillview is expected to dismiss the bankruptcy case. The mediators in the case were retired U.S. Bankruptcy Judge Steven Rhodes, who presided in Detroit’s Chapter 9 case; local attorney Walter A. Sholar; and Thomas Fulton, chief judge for the Bankruptcy Court in the Western District of Kentucky.

Unlike in Hillview, the odds of an agreement in Atlantic City as it nears an historic suspension of governmental services appear low: despite calls from any number of New Jersey Assembly members for Gov. Chris Christie to compromise on a state takeover bill and use tools at his disposal to help the East Coast gambling hub avoid default. Gov. Christie, who last week stated he will not support changes to Senate-passed “The Municipal Stabilization and Recovery Act,” which would empower New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years, also said he will not sign a companion bill which would enable Atlantic City’s eight remaining casinos to make payments in lieu of taxes for 10 years, including $30 million collectively in 2016 without the state intervention. He noted that Assembly Majority Leader Louis Greenwald (D-Vorhees Township) had canvassed his caucus and determined there were enough votes to pass both bills…leading Assemblywoman Marlene Caride (D-Ridgefield) to observe: “The Speaker has, time and time again, expressed his willingness to sit down and work out a compromise that protects the city and public workers, but his calls for responsible and fair negotiations have fallen on deaf ears…To oppose any dialogue with the Assembly given what’s at stake is irresponsible.” Assemblywoman Valerie Vainieri (D- Englewood), added: “The Governor would have everyone believe that the only way to save Atlantic City from insolvency is to trample public workers, step residents of their right to a representative government and sell off city assets, perhaps irrevocably…I commend Speaker Prieto for taking a measured and thoughtful approach to the situation and standing up against tremendous pressure while the Governor refuses to negotiate in good faith with one half of the state legislature.” Absent some quick resolution, Atlantic City is projected to both cease non-essential governmental services and default on its debt as early as next month. The City has an estimated $102 million deficit for 2016, according to Moody’s. The city budgeted $33.5 million last September in redirected casino taxes from a PILOT bill—but a bill Gov. Christie conditionally vetoed last November.

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Fundamental Federalism Challenges

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In this morning’s eBlog, we applaud what could be a signal breakthrough in San Bernardino that might pave the way towards the city’s exit from the longest municipal bankruptcy in U.S. history. The actions are something those at the Treasury and the U.S. House Committee on Natural Resources might be well advised to consider as they struggle to try and come up with a plan to prevent the rapidly onrushing insolvency in Puerto Rico. As much as the Committee, in its initial draft, has chosen to decry chapter 9 municipal bankruptcy, the process has, time and again, with great patience and an extraordinary federal role, proven prescient. We also try to get schooled on the possible municipal bankruptcy by the Chicago Public School system—something which would require state legislation, and something which would re-raise fundamental federalism challenges between state constitutions and federal law. Oh my.

A Significant Step by San Bernardino. The GE slogan made famous by former California Governor and later President Ronald Reagan in the 1950s was “progress is our most important product.” Yesterday, not so far from the former President’s old stomping ground, the City of San Bernardino, the city in municipal bankruptcy longer than any other in U.S. history, achieved its own significant progress when it reached agreement as part of its negotiation with creditors on a plan of debt adjustment to pay bond holders of its pension obligation bonds 40 percent of what they are owed, thereby achieving a reduction in the total payments to one of its largest creditors by about $45 million. While the deep discount is far short of the 1 percent the city had first proposed, whilst the bondholders sued in an effort to gain the entire amount the city agreed to for the California Public Employees’ Retirement System. In a written statement, City Attorney Gary Saenz noted: “The settlement will end the costly legal battles between the City and the settling creditors over confirmation of the City’s Chapter 9 Plan of Adjustment, as well as how much the creditors are to be paid.” Under the nine-page settlement agreement, those creditors — the Luxembourg-based bank EEPK, and Ambac Assurance Corporation — agreed to drop their litigation against San Bernardino and release the municipality from any future liability related to the pension obligation bonds. The two also agree to support the city’s disclosure statement — an amended version of which is due to U.S. Bankruptcy Judge Meredith Jury today. Under that agreement, San Bernardino agrees to pay its debt over a 30-year period beginning one year after Judge Jury approves its plan of debt adjustment and exit from chapter 9 municipal bankruptcy. The crucial step means the city funds will be freed up for additional investment in public safety of about $2 million per year, according to the city. As we experienced from the invaluable role of U.S. District Judge Gerald Rosen as an intermediary for now-retired U.S. Bankruptcy Judge Steven Rhodes in Detroit, in San Bernardino, U.S. Judge Gregg Zive—serving in a similar capacity—served as the key to the resolution—a resolution the San Bernardino City Council last week approved in closed session.

Getting Schooled on Municipal Bankruptcy. After receipt last month of a signed, sealed, and certified letter to the Chicago Public Schools (CPS) and the city’s board of education, Illinois’ State Board of Education last month commenced a formal investigation “of the financial integrity of Chicago Public Schools,” raising increasing apprehension the city’s massive public school system could become insolvent and bankrupt. Because Illinois does not currently authorize municipalities, including school systems, to file for chapter 9 municipal bankruptcy, the epistle raises the stakes in the Illinois legislature, where Illinois Governor Bruce Rauner has asked the legislature to authorize municipal bankruptcy. Should the state so act on an issue eerily comparable to Congress’s deliberations over the fast-approaching default in Puerto Rico, the impact on the nearly $6 billion in outstanding CPS debt would be at stake. CPS, in its most recent municipal bond sale, warned that one of its pledged repayment streams under the state’s alternate revenue bond structure would meet the bankruptcy code’s designation of “special revenues,” that is revenues that would be affected by a municipal bankruptcy. CPS currently has a failing fiscal grade with some $10 billion in unfunded pension obligations, a looming $1 billion deficit, and a rising annual teacher pension payment of about $700 million. With the issuance just last month of some $725 million in municipal debt—bonds which triggered an 8.5 percent tax-exempt rate in order to sell—and with an accompanying disclosure statement which incorporated language from a special opinion which provides the legal reasoning behind CPS’ position that the municipal bonds’ structure provides a security which preserves the statutory lien on pledged revenues and offers relief from the automatic stay provisions of chapter 9 municipal bankruptcy. The accompanying tax levy for debt service on the bonds is not subject to the property tax caps that non-home-rule units such as the school system operate under. Repayment would rely on a combination of pledged state aid, block grants, and tax-increment financing and personal property replacement tax revenues. Some credit rating agencies have assigned the new debt as junk because of CPS’ severely distressed overall credit profile. The uneasiness about the possibility of a municipal bankruptcy has triggered, unsurprisingly, questions with regard to the so-called “automatic stay” provisions arising from a chapter 9 filing: how would such a filing apply to the application of so-called “special revenues,” e.g. to the payment on the bonds secured by those special revenues? This is, at the moment, further roiled by the absence of any chapter 9 authority under Illinois law and further complicated by the exemption of CPS from some state oversight rules—where CPS is authorized to direct the county to deposit pledged property taxes with the bond trustee, albeit where said direction can may be revoked. All of this would, of course, be confounding to any math student in any Chicago public school, contributing even more to the cost to the system in higher interest rates.

All of this is contributing to the schooling of state legislators on the intricacies of chapter 9 municipal bankruptcy, state authorization of which the Governor had proposed as a key part of what he termed his “turnaround agenda” as a means to provide Illinois’ municipalities leverage in addressing pension negotiations, having, earlier this year, endorsed state legislation which would subject CPS to state statutes allowing for oversight and grading the way for municipal bankruptcy. Were the state legislature to agree, it would raise the kinds of federal-state legal confrontations raised in Detroit’s and Stockton’s chapter 9 municipal bankruptcies with irreconcilable issues because the respective pension programs, defined as contract, are protected by the respective state constitutions; however, those pensions, as reduced under Detroit’s federally approved plan of debt adjustment, reduced the city’s pension obligations—and the initial proposals to pursue appeals to the 6th and 9th U.S. Circuit Courts of Appeals never materialized. Thus, in the wake of the 2014 Illinois Supreme Court ruling two years ago that benefit cuts under Chicago’s 2014 pension reforms violated state law giving contractual status to membership in governmental pension funds, the same federal-state municipal bankruptcy challenge could well re-emerge. The scholarly professor of municipal bankruptcy, Jim Spiotto, yesterday noted to the Bond Buyer that only four school districts have filed for municipal bankruptcy in the last sixty years—in large part because most states hold oversight powers that can be critical to averting insolvency: he said that “Two of the four never got to a plan of adjustment. They realized once they got in there was a better way.” One, the San Jose Unified School District, filed for municipal bankruptcy in 1983 in the face of steep demands under a proposed salary increase plan; however, the parties reached an agreement on a new wage plan and the bankruptcy petition was dismissed. Subsequently, just up the highway, the Richmond Unified School District filed for municipal bankruptcy in 1991 due to fiscal and operational woes. In that instance, school parents sued the state—effectively scoring A’s when the state responded by loaning the district $29 million.

The Conflicting Roles & Challenges between States & Local Governments when Insolvency Threatens.

March 29, 2016
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In this morning’s eBlog, we examine two different municipal fiscal futures: those of Detroit and Atlantic City. In the former, we observe a city intently focused on long-term fiscal solvency; in the latter we observe an increasingly dysfunctional state-local fiscal relationship—in a state where the kind of intense focus on the long-term solvency of its public pension solvency is almost the exact opposite of post municipal bankruptcy Detroit. As much as the U.S. House of Representatives Natural Resources Committee, in its emerging proposal to address the onrushing insolvency of Puerto Rico has maligned chapter 9 municipal bankruptcy, it seems clearer each day that the dedicated and unrelenting pressure of now retired U.S. Bankruptcy Judge Steven Rhodes has proven invaluable towards a long-term, fiscally sustainable future for Detroit. In New Jersey, however, the emerging battle over political power instead of the fiscal fate of a city scheduled to suspend many of its public services and operations appears to, once again, raise the issue: does or should a state take an adversarial or constructive role when a municipality (or public school system) faces insolvency and/or municipal bankruptcy?

Playing Politics with a City’s Future. With the clock winding down on Atlantic City’s solvency and the city set to suspend most municipal services beginning at the end of next week, New Jersey General Assembly members appear to be increasing their support for Speaker Vincent Prieto’s calls for Governor Chris Christie to negotiate with Assembly lawmakers with regard to the balance of power and authority Atlantic City would have with regard to bargaining contracts for Atlantic City employees. The issue has arisen in the wake of state Senate passage of a bill pending before the state House of separate casino industry related legislation which could have the effect of freeing up as much as $60 million to ensure continuity of public operations and services in the city—money which otherwise would have been used for casino marketing—legislation pressed for by Gov. Christie and Senate President Stephen Sweeney (D-Gloucester). Assemblywoman Valerie Vainieri Huttle (D-Englewood) yesterday noted: “The Governor would have everyone believe that the only way to save Atlantic City from insolvency is to trample public workers, strip residents of their right to a representative government, and sell off city assets, perhaps irrevocably.” Ergo, she said: “I commend Speaker Prieto for taking a measured and thoughtful approach to the situation and standing up against tremendous pressure while the Governor refuses to negotiate in good faith with one half of the state legislature.” Adding to the governance disagreement, Assemblyman Ralph Caputo (D-Essex) termed the Governor’s unwillingness to negotiate: “an ineffective and dangerous way to govern — especially at a critical moment.” The two General Assembly members, together with Essex County Assembly Democrats Ron Rice and John McKeon, expressed apprehension with regard not just to the Governor’s obstinacy, but also to the Governor’s recent agreement to a provision in the Senate-passed version of the casino tax bill which would allow the new agreement to be voided if the North Jersey casino referendum were to pass in November—leading Assemblyman Caputo to dub the Governor “hypocritical” for negotiating only with the Senate, while also saying that the opt-out provision could “threaten to destabilize Atlantic City’s tax base all over again.” Nevertheless, Gov. Christie has warned the General Assembly should “not play chicken” with him—or test his patience—stating, in a radio interview: “I will not change my view on this.”

Investing in a City’s Future. Detroit Chief Financial Officer John Hill yesterday said the Motor City could add as much as $30 million this fiscal year to pay into the city’s two pension funds, some 300 percent more than initially planned, noting: “It’s our expectation that…we’ll have an additional $20 million-$30 million that we’ll be able to set aside for the pension plans…We’ll know that in a few days as we’re finalizing the audit.” The surprising commitment revealed how hard the city has worked since Mayor Mike Duggan in his State of the City Address last month, as we had noted, reported that a $491 million pension problem had emerged. The $28 million payment is part of an overall plan to contribute as much as $70 million in the near-term to address the public pension shortfall that must be repaid starting in 2024. Mayor Duggan had blamed the shortfall on an unnamed bankruptcy consultant using outdated mortality tables to calculate life expectancy of city retirees. It seems the unexpected proclivity of state and local employees (and our readers) to live longer than we used to may be disruptive to the forensics of computing public pension liabilities. In response, Detroit, under Mayor Duggan’s proposal, would dip into a projected $44 million surplus this year and possibly use money from its projected 2015 surplus, Mr. Hill informed members of the Detroit Financial Review Commission, to remedy the fiscal problem, adding: “We’ll know in a few days as we are finalizing the audit…I think this says the city is committed to finding a way to meet its obligations to pensioners.” As part of that forensic effort, Detroit is close to hiring a firm to conduct pension and actuarial services—with Mr. Hill yesterday testifying: “The number is about $500 million higher than expected…What we really want to come out of this contract is what that range is going to be. We should know around September.”

Detroit recognized the fiscal problem last November when the Motor City’s pension fund actuary performed an updated mortality study—a study which concluded that instead of $111 million, starting in 2024, Detroit instead will need to pay $194.4 million: Detroit has a kind of pyramid problem: as its population dramatically declined—so too, especially in the wake of its bankruptcy—has its work force, so that today there are far fewer employees paying in to a retiree force that is not only large, but also living longer than had previously been expected: today Detroit has more than 25,000 retirees, active workers, and beneficiaries who receive benefits from the city’s pension funds, one representing police and fire personnel and a fund representing non-uniformed employees: the Police & Fire Retirement System is 88.9 percent funded; it has $3.1 billion in assets; the General Retirement System pension fund is 62.5 percent funded and has $2 billion in assets. Under the city’s approved plan of debt adjustment, Detroit agreed to fully fund both retirement systems commencing in 2024. In his budget address last month, Mayor Duggan had proposed a $1 billion balanced general fund budget for the 2016-17 fiscal year, including kicking in $10 million to the pension funds each year through 2020—in effect making a jumpstart from the plan of debt adjustment provisions under which Detroit was relieved of much of its contributions to the General Retirement System and Police and Fire Retirement System through 2023—with a substantial portion coming due in later years. But the $34.1 million surplus which Mr. Hill spoke of in the general fund yesterday has given the city an opportunity to be proactive.

The Conflicting Roles & Challenges between States & Local Governments when Insolvency Threatens

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March 25, 2016. Share on Twitter

In this Good Friday morning’s eBlog, we examine two different, but related issues: does or should a state take an adversarial or constructive role when a municipality (or public school system) faces insolvency and/or municipal bankruptcy? (or, like California: no role or seeming interest at all); and, second, how does the role of essential services (public education in Detroit–police, fire, etc. in Atlantic City) affect long-term fiscal sustainability of a municipality?  Readers will note the extraordinarily different models emerging in New Jersey and Michigan with regard to these questions–and mayhap think about them with respect to the role the U.S. Congress might choose to play when it returns from its very long Spring vacation vis-a-vis the U.S. territory of Puerto Rico.

The ABC’s of Insolvency. The Michigan legislature yesterday approved $48.7 million in emergency aid for the Detroit Public Schools (DPS) to keep the nearly insolvent school district open for the rest of the academic year, with the House voting 104-4, and the Senate 29-7 in the wake of reaching an agreement on state oversight of DPS. Michigan Gov. Rick Snyder, who plans to sign the legislation, had warned the funding was “critically important.” The funding, adopted just before the legislature’s scheduled spring break, was key to ensuring that DPS teachers and employees would be paid after April 8th; however, the emergency appropriation is only a short-term band-aid: Gov. Snyder is pressing legislators to act on a more comprehensive $720 million restructuring plan to split the district and pay off $515 million in operating debt over a decade—a critical move if the 46,000-student district is to emerge from under seven years’ of state financial management, reeling from declining enrollment and low morale. Thus, a long-term fix is inextricably tied to the hopes for the long-term fiscal recover from Detroit’s record municipal bankruptcy.

The spending legislation is tied to a bill that would provide that a financial control commission made up largely of state appointees — created as part of Detroit’s court-approved plan of debt adjustment—be required to sign off on DPS’ budgets once it is no longer under emergency management. The school superintendent and school board chair would be added to the nine-member panel to vote on matters related to DPS. After passage, Gov. Snyder said the supplemental funding, by itself, would not lessen the urgency or necessity for a long-term solution to bring financial stability and better academics to the district—reiterating his call for an overhaul he first requested nearly a year ago. Nevertheless, while the state Senate approved the more comprehensive plan earlier this week, House Speaker Kevin Cotter (R-Mount Pleasant) yesterday said he had “a lot of concerns” with a proposed education commission whose permission would be needed to open some new traditional and publicly funded charter schools, stating there would be an “inherent motivation to hamper charters” to limit how long the district is under financial oversight.

Will New Jersey Force Atlantic City into Bankruptcy? Atlantic City Mayor Don Guardian yesterday stated that while his city may be insolvent in two weeks, the city is “not going to look any different” during a three-week City Hall shutdown, and the city will continue to fight against any state takeover. The Mayor reiterated that police, fire, sanitation, and other essential public services officials will work without pay from April 8 to May 2, when the city is scheduled to receive its next quarterly property-tax payment; employees will be reimbursed for the missed pay. At a press conference in Council chambers, Mayor Guardian reported that some 950 employees, virtually the entire city workforce, have volunteered to work without pay, even recognizing that it is unclear when and if they would be paid.

Nevertheless, the city has yet to fully ascertain its legal authority with regard to which employees can work without pay and who is considered an essential employee. As one example, the city noted that the ability to grant death certificates and marriage licenses could be considered essential, as could the services of school crossing guards—or, as Mayor Guardian put it: “If you had lost a loved one and want to bury them, you need to have the death certificate…So for your family, I think that would be an essential service.” The Mayor noted that notwithstanding the perceived grandstanding of Gov. Chris Christie, the reaction from city employees and citizens has been a strong demonstration of commitment to Atlantic City’s future.

Accepting, as Opposed to Avoiding Responsibility for Municipal Fiscal Distress & Putting Kids’ Health at Risk

March 24, 2016. Share on Twitter

The Hard Road of Municipal Bankruptcy. San Bernardino Mayor Carey Davis has vetoed a San Bernardino Council measure to continue municipal funding of the city’s last remaining job training center—a center therefore now slated to close next week, because of concerns the bankrupt city can no longer afford the $125,000 per month to keep it in operation. The move, in one sense, was not a surprise: the San Bernardino Employment and Training Agency has been on its last fiscal legs since October 2014, when the State of California cut off funding after San Bernardino failed to meet deadlines to audit its books; nevertheless, Council members had repeatedly renewed funding, perhaps in Don Quixote dreams that the state would reimburse the city: thus, the city, notwithstanding its bankrupt status, has expended some $2 million for the center dating back to October of 2014—spending nowhere to be found, much less accounted for in its proposed plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury—unsurprisingly educing a warning from San Bernardino City Attorney Gary Saenz that the city’s creditors could take umbrage. The bankrupt city, reeling under pressure from the State to complete its 2013-4 Comprehensive Annual Financial Report before lifting its cash hold, appears to have put itself between a rock and a hard place, as its failures to meet fiscal reporting deadlines have now jeopardized state assistance to provide critical job training funding—funding which, notwithstanding the Council majority’s vote, it simply does not have. The dilemma, as Councilman Henry Nickel deftly sized it up: “I can think of nothing better we should be doing as a city than helping people who are unemployed find work, become productive, and contribute…That to me is the basis of getting back on track…” (Under the city’s charter, the mayor is granted the authority to veto decisions which receive fewer than five “yes” votes.) In describing his decision to his colleagues, Mayor Davis indicated his apprehension with regard to the potential impact on the city’s budget and its pending plan of bankruptcy adjustment gave him little alternative.

In a city where more than 50 percent are receiving public assistance, the job training program’s loss will add to the steep road to long-term recovery—and will likely impose greater demands on the surrounding County, where its board would, presumably, assume responsibility from the San Bernardino Employment and Training Agency, depending upon final state decisions.

Out Like Flint: State Accountability to a Municipality & Its People. A task force appointed by Michigan Gov. Rick Snyder to investigate the drinking water contamination in Flint which has affected and endangered so many young lives yesterday released a withering report with 44 recommendations to improve state government policies and performance and to prevent similar crises from happening in other cities across the state, made clear the State of Michigan is “fundamentally accountable” for the City of Flint’s lead-contaminated water crisis because of decisions made by its environmental regulators and gubernatorially-appointed emergency managers who controlled the city, terming what happened in Flint to be “a story of government failure, intransigence, unpreparedness, delay, inaction and environmental injustice,” citing “intransigence and belligerence that has no place in government.” The scathing report described as “inappropriate” a frequent claim of Gov. Snyder and his representatives that the Flint water crisis represented a failure of the local, state, and federal governments—instead asserting: “The State is fundamentally accountable for what happened in Flint.” Among its recommendations, the panel wrote:

 Change the Department of Environmental Quality’s culture to focus primarily on protecting human health and the environment. Step up enforcement of safe drinking water rules without waiting for direction from the federal government. Make sure DEQ water management personnel have adequate training and experience.
 The governor’s office should improve its information flow, be more receptive to information that contradicts official positions and respect its critics.
 Test more children for lead; improve the reporting and analysis of results.
 Look for ways to compensate for the loss of checks and balances in cities with state-appointed emergency managers, perhaps allowing for appeals of their decisions. Make sure managers have adequate support and expertise.
 Assume a continued presence in the Flint water system of bacteria that causes Legionnaires ’ disease, and take steps to reduce the risk of further outbreaks.
 The U.S. Environmental Protection Agency should respond faster and more vigorously when violations of federal drinking water regulations endanger public health and improve its rule on lead and copper contamination.
 Provide extensive recovery assistance to Flint, including health care for children whose blood has been tainted with elevated levels of lead since the city switched its water source in 2014.
 Develop a statewide program to replace lead pipes and upgrade other water infrastructure. Establish a new cabinet-level post focused on public health.

Lessons Learned
Chris Kolb, co-chairman of the Flint Water Advisory Task Force, noted: “One of the biggest lessons we hope to impart in our report is the need for government leaders to listen to their constituents; in Flint that didn’t happen.” While investigators primarily blamed the state Department of Environmental Quality for the disaster—they initially did so in preliminary findings that led the agency’s director to resign last December — they also faulted a host of other government offices and officials for contributing to the fiasco or delaying action to fix it. Those include the Michigan Department of Health and Human Services, the U.S. Environmental Protection Agency, the Genesee County Health Department, the City of Flint, and Emergency Managers whom Gov. Snyder named to run the city of nearly 100,000 people.

The five-member task force interviewed 66 people during its months-long investigation and made a number of recommendations, including considering alternatives to the state’s emergency manager system. The task force reported that Michigan’s environmental agency erred in numerous ways: misinterpreting federal regulations; instructing the City of Flint not to treat its water with anti-corrosive additives after switching from the Detroit water system—which drew from Lake Huron—to the Flint River. The task force reported that the Michigan Department of Environmental Quality did not change course—even after an initial six-month testing period revealed elevated lead levels. Further, the Department provided inadequate guidance to Flint staffers on water sampling, snubbed offers of EPA assistance, and dragged its feet with regard to investigating the possibility that the city water system may have contributed to an outbreak of Legionnaires ’ disease. Noting that while there were others who contributed to the health care crisis, the report, unlike Flint’s water, was crystal clear: “MDEQ caused this crisis to happen…Moreover, when confronted with evidence of its failures, MDEQ responded publicly through formal communications with a degree of intransigence and belligerence that has no place in government.”

Emergency Manager Law. Notwithstanding its charge to address Flint’s drinking water crisis, the task force also turned to Michigan’s controversial Emergency Manager Law, a state law, enacted and modified twice with the support of Gov. Snyder and the state legislature, recommending the law should be reviewed, concerned that the state law removes the kinds of checks and balances in a democratic system which could have scrutinized or prevented deadly decisions made by a series of four Governor-appointed Flint Emergency Managers, finding that, in Michigan’s second-largest minority-majority city, the state actions had amounted to “environmental injustice” in a place beset with poverty and slumping property values. Or, as an editorial in the Detroit News this morning described it: “The state — and, by obvious extension, the governor — shoulders the bulk of the responsibility for the fiasco that tainted the city’s drinking water with lead and for too long ignored likely connections to an outbreak of Legionnaires’ disease that killed 10 people and sickened 87…The state’s Department of Environmental Quality failed to enforce safe drinking water regulations, the Department of Health and Human Services failed to ensure public safety, and a succession of four state-appointed emergency managers botched a series of decisions that could not be vetted by elected officials in Flint.”

Nevertheless, despite the state and congressional hearings, task force reports, and the evidence found in more than 43,000 pages of state documents, the questions with regard to responsibility and accountability with regard not only to the forever destroyed young lives, but also state—and local—accountability, one should expect more to come: Michigan State Attorney General Bill Schuette, the U.S. Justice Department, and the FBI continue investigations which could culminate in both civil and criminal charges; separate civil litigation is underway. The investigation did not explore the culpability of Congress and its decisions to make deep cuts in federal safe drinking and wastewater funding. The report was specific: “Though it may be technically true that all levels of government failed…the state’s responsibilities should not be deflected. The causes of the crisis lie primarily at the feet of the state by virtue of its agencies’ failures and its appointed emergency managers’ misjudgments.”

Putting Atlantic City into Bankruptcy: the Blame Game. New Jersey Gov. Chris Christie, no longer on the GOP Presidential campaign trail, is pressing state Assembly Speaker Vincent Prieto (D-Secaucus) to support a Senate-passed Atlantic City intervention bill, “The Municipal Stabilization and Recovery Act,” warning that failure to do so could lead to municipal bankruptcy of the gambling hub. Speaker Prieto, however, has opposed the bill, because it would empower New Jersey’s Local Finance Board to renegotiate contracts of Atlantic City workers for up to five years—and would also allow the state to alter outstanding municipal debt and reorganize or consolidate government operations to achieve cost savings—that is, it would preempt local control and authority. Gov. Christie has also been pressing the House to act on Senate-approved companion legislation to enable Atlantic City’s eight remaining casinos to make payments in lieu of taxes over a 10-year period. Gov. Christie Tuesday made clear he would not tolerate changes to either bill, noting: “If both bills do not come to my desk in exactly their current form, I will not sign them…If the legislature were to just send me the PILOT bill, I will not sign it. And if what that means is that Atlantic City goes bankrupt, then go to Vincent Prieto’s office and ask him why.”

In a further attack on Atlantic City Mayor Don Guardian, Gov. Christie added: “I am not opening the treasury of the State of New Jersey to people who cannot manage their affairs responsibly…I am no longer going to allow the taxpayers of the state of New Jersey to be responsible for the irresponsible decisions made by mayors before Mayor Guardian and Councils, and put a Band-Aid on this issue.” With the City scheduled to shut down essential municipal services for three weeks beginning next month to preserve critical cash flow, Speaker Prieto criticized Gov. Christie, emphasizing that the governor, rather than helping, has instead already vetoed bills that could have helped Atlantic City, noting: “If the Assembly decides to move a bill and the governor vetoes it, then it’s entirely the Governor’s fault, once again…The fact of the matter is the Governor already has the authority to help Atlantic City avoid financial catastrophe, and collective bargaining agreements must be protected.”

Getting Schooled on Municipal Bankruptcy

March 23, 2016. Share on Twitter

Getting Schooled in Bankruptcy. The Michigan Senate yesterday passed sweeping state legislation to split the Detroit Public School (DPS) system into a new district which would educate students and be funded by state appropriations, and to retain an old district responsible for the collection of local property taxes to pay off existing debt—a key step to avoid DPS going into chapter 9 municipal bankruptcy. The bill would create a controversial new education commission to determine which Detroit schools would remain open—and which would not—all as part of a proposed $720-million plan to restructure the debt-ridden district—legislation which now will face a severe test in the state House. Key Senate sponsor Sen. Goeff Hansen (R-Hart) said: “Today, we have the opportunity to change the lives of 47,000 children.” The Senate-passed version, which has the support of Detroit Mayor Mike Duggan and Governor Rick Snyder, would create the Detroit Education Commission, a body which would regulate the openings and closings of traditional public schools and charter schools throughout Detroit: Mayor Duggan would appoint the commission’s seven members: Three would have ties to charter schools and three to public schools, with one selected member from each group a parent, and the final member an expert in public school accountability systems. Key contested issues involved, unsurprisingly, governance: who should pick the superintendent. Under the Senate final version, a nine-member school board for the new district will be elected in August, and that newly elected board will hire the superintendent. Retired U.S. bankruptcy judge Steven Rhodes, the transition manager for DPS, yesterday said the Senate’s action signaled the start of a new future for the district, as he thanked legislators and district employees, noting: “As I have said previously, Detroit cannot complete its recovery without a fully functioning, viable school system. While there is still major work to be done, I believe this legislation moves both the city and the district in the right direction.” Most pieces of the six-bill package passed by a vote of 21-16, including the main bill that would create the new district, which evenly divided Senate Republicans. The vote came nearly a year after Gov. Rick Snyder publicly announced plans to reform DPS, which has been under state-appointed emergency managers for about seven years and could become insolvent as early as next month. The new district’s finances would be under the oversight of Detroit’s Financial Review Commission, the same commission which is overseeing post-bankruptcy Detroit. The commission will also have the authority to appoint and terminate the school district’s chief financial officer. In addition, the proposed legislation would create its own grading system (A—F) for schools, provide authority to make decisions about school openings, closings and location in the city: All seven members would be appointed by the Mayor: Three members would have ties to charter schools and three to public schools, with one person from each group a parent. The final member would be an expert in public school accountability systems. The commission would be in place for an initial period of five years, but could be extended for another five. The plan provides for the transitioning of DPS back to local control, with a nine-member school board elected this August 2016: most board members would be elected by city council districts. The board would appoint a new superintendent.

In addition, the plan would create a local public accountability plan to assign schools grades of A, B, C, D, E, or F. Schools with an A or B grade could replicate without the approval of the education commission, while other schools could only replicate or open with approval from the commission. The bill creates oversight of the new DPS to the same Financial Review Commission which currently oversees the city of Detroit’s finances, except that the commission would include the superintendent and school board president instead of the mayor and the City Council president.

Supporters claim the legislation would finally bring some order to Detroit’s physically unsafe and scholastically challenged system, even as it addressed DPS’ accumulated $515 million in operating debt. There is virtually no current coordination with regard to where schools can be located, leading to system-wide instability. Or, as key sponsor Sen. Hansen noted: “We have a plan that gives Detroit schools a chance to push the reset button, to begin anew…This plan will put $1,100 per student in back classroom instead of paying down debt.” The legislation passed yesterday does not include any state appropriations for the new district — that will come in a separate vote. Gov. Snyder has proposed spending $72 million annually in per-pupil funding over a decade, with the money coming from tobacco settlement revenue, to fund the new district. Yesterday’s vote does allow the new district to receive loans from the state of up to $300 million: Sen. Hansen said that figure includes $200-million in start-up costs for the new district which would come from tobacco settlement money, and not the state School Aid Fund.

After the Senate vote, House Speaker Kevin Cotter, R-Mt. Pleasant, issued a statement saying the Senate should immediately vote on the supplemental funding. “The future of Detroit’s schoolchildren, and their access to a quality education, is absolutely critical. That is why we must pass a funding plan that keeps the doors open through the end of the school year. Any funding for Detroit Public Schools must include legislation expanding the Financial Review Commission to oversee DPS finances. “Funding without oversight accomplishes nothing, and the House Republicans will not consider that a real solution. Without increased accountability, the district will simply end up in the same situation a few months down the line, and young students will once again be left with uncertain futures. We will not allow that to happen.”

Notwithstanding the urgency, the Michigan House does not expect to take up the Senate-passed bill until after its recess, in part due to a rule that each chamber must have most bills in possession before passing them, according to House Speaker Kevin Cotter, albeit the state Senate could still take action ahead of the Spring recess on a $48.7 million short-term funding measure to keep Detroit Public Schools operating through the end of the current school year. Moreover, unlike school assignments, the post-House spring vacation route does not promise early resolution: Michigan Representative Tim Kelly (R-Saginaw Township) yesterday noted the Senate-passed version had “very little chance” of passing the House—which has its own potential plan. Rep. Kelly, in his critical position as Chair of the House Appropriations Subcommittee of School Aid, noting the alternative House version, said he believed there was no need to split the Detroit school district, nor approve $200 million for start-up costs for the new district. Instead, Rep. Kelly said the state should just appropriate funding to cover DPS’s debt. The pending House DPS rescue plan provides sharp contrasts from the Senate-passed version, including adding restrictions on collective bargaining and putting off a fully elected school board for eight years.

How States Can Threaten a Municipality’s Fiscal Future

March 17, 2016. Share on Twitter

Because the federal government–and, increasingly, states no longer address fiscal disparities within states, that has provoked or invoked greater challenges for states–and increased fiscal despair for municipalities. Congressional elimination of general revenue sharing and countercyclical fiscal assistance has meant that states, such as New jersey and Michigan, for instance, now bear a burden and challenge. Will they opt for a constructive, passive, or destructive state fiscal policy?

Shutting Down a Municipality. Atlantic City Mayor Don Guardian yesterday reported that because of his city’s near insolvency (city officials have warned the city will run out of cash on April Fools’ Day), the city would be forced to halt all nonessential government services beginning in early April absent urgent state assistance: Mayor Guardian said the shutdown would start on April 8th and was likely to last until at least May 2nd, the date when quarterly tax revenues are due. During the shutdown, police, fire, and sanitation workers would perform their jobs—but without pay, which would be deferred pending receipt of taxes due; health care benefits would continue uninterrupted. Moreover, Mayor Guardian warned this was unlikely to be a one-time event, especially if the State of New Jersey does not step up with some kind of fiscal assistance, noting: “The city is in discussions with the state to avoid and forestall what may be an imminent financial predicament…Unfortunately, due to financial circumstances beyond our control, we will be forced to close City Hall.” The increasingly dire fiscal standoff comes as New Jersey Governor Chris Christie has warned he will not sign legislation to provide fiscal assistance to Atlantic City unless the New Jersey Legislature approves a state takeover of the city government. Atlantic City police union President Thomas Moynihan yesterday reported that Atlantic City’s police officers would report to work even if they “miss a paycheck or two in the meantime.”

Even though Gov. Christie claimed he had reached an agreement with New Jersey Senate President Steve Sweeney (D-West Deptford) to give the state control over the finances of Atlantic City for five years, that agreement has not secured House support, and has drawn criticism from New Jersey Assembly Speaker Vincent Prieto (D-N.J), who has made clear he would not ask the House to consider state legislation to alter or terminate union contracts unless and until local and state officials reach a compromise, noting: “The governor already has authority to help Atlantic City avoid financial disaster…It’s time for Gov. Christie to do his job and use his existing authority to resolve this once and for all.” In addition, Speaker Prieto’s spokesman notes that the New Jersey Local Government Supervision Act of 1947 already allows the state to control Atlantic City’s finances and government. For his part, Gov. Christie has made clear he will not sign any bill into state law that changes even a word of the Senate version.

Atlantic City, which has seen its tax base contract 64% since 2010, is deep in debt and not only unable to issue debt through the municipal bond market because of its low credit rating, but also faces a severe contraction of its tax base in the wake of the closure of four of its twelve casinos. It now faces worse odds of avoiding a state takeover. Even though Mayor Guardian yesterday said “We are making every effort to find solutions” prior to April 1st, his plan would mean that no employees would be paid until at least May 2nd, the date the city will receive its next installment of taxes. While essential services such as public safety and revenue collections will continue, other functions will cease and City Hall will close 4:30 pm local time on April 8. Moody’s Investors Service has warned that the city could default on debt as early as next month without state action, meaning its cost of borrowing is increasing—as are the possibilities the city could file for chapter 9 municipal bankruptcy.

Unbalancing. The Michigan Municipal League yesterday reported Michigan is the only state in the country in which there was an overall revenue decline for cities, townships, and counties over the decade from 2002 to 2012, due in large measure to state cuts in revenue sharing with cities, townships, villages, and counties by $7.5 billion over the decade—assistance vital to finance essential public services and to address fiscal disparities. The League, in its report, noted that U.S. Census Bureau data finds that Michigan’s municipalities experienced an 8 percent drop in revenues from what it has experienced from failed state fiscal policies toward cities and towns, noting that, according to the U.S. Census Bureau, Michigan is the only state in the country providing fewer economic resources to its cities in 2012 than it did a decade ago in 2002, adding that the tragic outcome in Flint reflects in many ways what should have been anticipated in a state which has adopted a state fiscal policy which incentivizes new building at the expense of what currently exists: “Our system attempts to balance budgets by only addressing the cost side of the equation. We have no mechanism to invest in our cities as a way of improving the financial well-being of a community.” The League’s report further points to the extraordinary state powers under Michigan law for Emergency Managers—powers the League warns which “virtually all relate in one way or another to cutting costs,” rather than taking into consideration the provision of essential services, such as drinking water, public safety, etc.: “Cost-cutting measures, with few very exceptions, result in a reduction in the services that the community will receive. Usually those reductions do not have tragic consequences, but make no mistake: the decision to switch from the Detroit Water and Sewer Department to the Flint River was an economic one driven by state laws and policies that significantly impact and restrain local government…This decision was not about improved service, water quality, infrastructure investment, or any other altruistic goal. This was an opportunity to save money and nothing more.”

A System Designed for Failing a Municipality: The special report notes that the state law and practice of appointing Emergency Managers has proven contrary to the long-term fiscal and human sustainability of the state’s communities, noting: “By design, emergency managers are outsiders with a single mission to reduce costs. I am in no way suggesting that this decision was made with malice or without forethought, but the emergency manager and, by extension, the state has only one objective during a financial emergency. That goal is to reduce costs until the budget is balanced. It is this approach that has brought us to where we are today. Emergency managers do not have to live, long-term, with service reductions and the diminishment to the community that they bring. When they have completed the mission, they move on. They have one focus: to balance the budget by cutting expenses until they equal revenues. But this approach fails to recognize, and in fact is in direct conflict with one of the fundamental tenants of Michigan’s municipal finance model, which is that the value of a community directly impacts the revenue that a community can generate to sustain services. It’s a system designed for failure.”

Think for a moment about how cities (& counties) generate revenue. Property taxes are a function of two variables: millage rates and taxable value. What makes taxable value higher in one community versus another, is, in essence, what makes one city or village more desirable than another. Great places can command higher prices, which translate into greater taxable value. This in turn generates more revenue. It is simple math. When an emergency manager balances the books by closing parks, eliminating programs and services and forgoing investments in infrastructure, he or she) makes it a less desirable place. This, of course, diminishes the value of the city and its revenue generating power. Consequently, the city offers even fewer services, which further diminishes it as a place where people want to live, which diminishes value, and so on. It’s a death spiral — a fundamentally flawed process that will never work given Michigan’s current municipal finance model. The system is broken.

Now think of that approach in the context of Flint. What have we bought with our cost-reduction approach to balancing budgets? A significantly damaged community in both a social and economic sense. If taxes are a function of value and millage, how have property values been impacted in Flint as a result of this cost-cutting decision? I think it is fair to suggest that the property values in Flint have been severely impacted as a result of the current crisis. Which will mean deep reductions in local tax revenue, which of course will mean reductions in service, which means a diminishment of value. The death spiral continues. Sadly, our only existing mechanism to address this will be through more cuts. We need a new way forward.

Our first priority must be to address the social and health impacts Flint is experiencing. Beyond that, we must address the policy that brought us here. We must invest in our local communities. Cuts beget more cuts. It is a race to the bottom, and in this case a tragic illustration of flawed public policy. Creating vibrant, desirable communities is proven to have positive economic impact as well as social value that we have lost sight of with our current approach. We must recognize that by investing to create great places we can improve both the quality of life and the economy of a city at the same time. A cut-only approach can only diminish the strength of a community and in extreme instances like this have a devastating human impact. We must learn from this disaster and redefine how we invest in Michigan cities.