The Tensions of Governance & Municipal Bankruptcy

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March 4, 2016. Share on Twitter

Unravelling in San Bernardino? A San Bernardino citizen has filed a notice of intent to circulate a recall petition of veteran Councilmember Fred Shorett: the notice claims the Councilman failed “in all aspects of his duties,” including through his hiring of consultants from outside the city while not coming up with original revenue ideas—or, as the petition puts it: “Council Member Shorett has acted with negligence by supporting fiscally irresponsible programs and general spending that has led to the downfall of our city and the depletion of our general fund.” It appears that if there is a real smoking gun, at least from Mr. Cioci’s perspective, the ill-disposition appears to be related to Councilman Shorett’s opposition to medical marijuana – from which Mr. Cioci apparently believes the city’s revenues could get appreciably higher—notwithstanding that the Councilmember has indicated he could be open to its legalization depending on public sentiment. Under San Bernardino’s city charter, the Councilmember will have an opportunity to publish an answer to the charges: the charter provides that, beginning a week after notice is given and an incumbent Councilmember’s response, a citizen will have 90 days to gather signatures from 25 percent of the registered voters in such a councilmember’s ward. That would mean that were Mr. Cioci able to secure some 3,143 signatures in that time-frame, a recall election will be held. For his part, the Councilmember has reported that the legislative review committee, which he chairs, has continued to study the issue since the City Council decided in 2014 to crack down rather than pursue possible legalization, telling the San Bernardino Sun: “We decided to do a poll and directed (former City Manager) Allen Parker to do that poll, but it fell through the cracks in the transition…The dispensaries are a serious issue. If the poll shows that people want to legalize it, I’m willing to consider that.”

The psychedelic challenge to the city’s most senior elected official can hardly help address the critical need for continuity as the city seeks approval from U.S. Bankruptcy Judge Meredith Jury—as it appears to echo what might be becoming a governance challenge in the bankrupt municipality, where, three years ago, former San Bernardino City Attorney James F. Penman and Councilwoman Wendy McCammack were recalled in 2013. Discontinuity in governance—especially in the middle of the longest municipal bankruptcy in U.S. history—is hardly likely to help. Of course, Mr. Cioci’s path of fiscal destruction is not limited: he has stated he also intends to simultaneously gather signatures to protest a parcel tax associated with the annexation of the city’s Fire Department—a petition, that were it to prove successful, would undo a critical element of the city’s plan of debt adjustment pending before Judge Jury.

Out Like Flint. A number of Flint residents Monday filed a federal, class action lawsuit against Michigan Gov. Rick Snyder as well as other current and former state government officials and corporation alleging that tens of thousands of residents have suffered physical and economic injuries and damages and, ergo, charging that Michigan officials failed to take action over “dangerous levels of lead” in drinking water and “downplayed the severity of the contamination.” The suit, filed on behalf of seven residents, adds to a growing list of lawsuits which have been filed on behalf of Flint residents since a public health emergency was declared last year. The suit was filed even as a report by Michigan’s the state auditor general last Friday found that state environmental regulators made crucial errors as Flint began using the new drinking water source that would become contaminated with lead: the report found that staff of the Michigan Department of Environmental Quality’s drinking water office failed to order the city to treat its water with anti-corrosion chemicals when the municipality switched to the river in April of 2014, but also said the rules they failed to heed may not be strong enough to protect the public. The report came as crews in the city started to dig up old pipes connecting water mains to homes. No level of lead in the human body is considered safe, especially in children. The river water also may have been a source of Legionnaires’ disease, which killed at least nine people in the region. Flint Mayor Karen Weaver last Sunday had announced that Union Labor Life Insurance Co. was committed to bring $25 million in low-cost loans to help remove lead pipes and improve water quality—as part of the “Fast Start” initiative the city has put together to replace all lead service lines in the city.

Federally Threatened Municipal Bankruptcy? According to the St. Louis Post-Dispatch, U.S. Department of Justice officials have assured Ferguson, Mo.’s elected leaders that the federal fiscal Sword of Damocles it is holding over their heads could still be resolved if they agree to a federal proposal to overhaul the municipality’s police and court practices. In addition, the Justice Department also appears to be claiming that its proposed fiscal fine would not be prohibitive and fiscally damaging to the city’s fiscal sustainability, e.g.: it would not force the small city into municipal bankruptcy. But, without question, the Justice Department has been clear it will continue to point a fiscal gun at the city’s leaders: the U.S. government is prepared to impose severe financial penalties to the already fiscally challenged municipality, or, as the head of the Department’s Civil Rights Division wrote to the city’s elected leaders: “We are fully prepared to litigate this matter…Should the city wish to avoid the litigation process we submit that the alternative is to sign the agreement…” The hard, hard question now for the city’s elected leaders–who are expected to vote to reconsider their vote less than a month ago to reject the federal fiscal penalty—effectively puts them between a rock and a fiscally hard place. In its most recent communication, the U.S. Justice Department rebutted the city’s understanding that a provision requiring Ferguson to offer police competitive salaries meant that the city would have to provide its police officers and other employees 25 percent pay increases, as the city appeared to have understood, rather, the Justice Department wrote: “We have always been clear that the salary provision neither requires any specific salary increase nor prohibits increases from being implemented over a reasonable time period.” With the Council set to vote next week, Ferguson Councilman Wesley Bell said the new epistle for the Justice Department appears to indicate that the Justice Department has no intention of bankrupting the city; rather, he told the Dispatch, the new federal communication should ease the fears of those opposed mostly for financial reasons to the agreement. Nevertheless, with the Council expected to vote early next week, weeks after a new appointment to the council created a shift in favor of accepting a consent decree, but before municipal elections next month, the political and fiscal issues will be hard.

In February, the Ferguson Council had voted to accept the federal decree, but only with certain conditions, one of which would have effectively diluted its power: the Council sought to eliminate the so-called “poison pill” clause that made the decree apply to any other agency providing policing in Ferguson—a rejection which would have allowed the city, effectively, to disband its police department and thereby avoid the significant and potentially unaffordable federal hit on its budget solvency—an action, however, which triggered a 56-page federal lawsuit the very next day, but also came concurrently with a key change in the city’s elected leadership: council members had appointed Laverne Mitchom, a retired educator, to fill a council seat vacated in the wake, in January, of former Mayor Brian Fletcher’s death due to a heart attack. The appointment of Ms. Mitchom, who had participated in the protests following Michael Brown’s death in August of 2014, appears to have shifted the majority and made some agreement with the federal government more likely—albeit at an uncertain fiscal price and cost to the city’s sustainability. Indeed, in town meetings, residents have expressed concerns that the expense of enacting the lengthy list of federally-demanded reforms could lead to the city’s dissolution — fears further heightened by a presentation from Ferguson’s Finance Director, Jeffrey Blume, who, under one of the 450 proposed federal mandates of Justice Department plan, would be tasked with developing a plan to offer police salaries that are among the “most competitive” with comparable agencies in St. Louis County—an unfunded federal mandate which Mr. Blume fears could mean the city would be required to award 25 percent raises not only to police officers, but also to all its employees — raises which would cost the city $3.7 million in the first year alone, not counting the longer term fiscal costs for its pension obligations.

For its part, the Justice Department appears to have recognized that—unlike the federal government—Ferguson must balance its budget. Ergo, the Justice Department appears to be signaling it will work collaboratively and that Ferguson may have some latitude in carrying out the federally-imposed reforms, or, as the Department wrote: “…as we made clear during our negotiations…the precise contours of implementation…would be developed over time in close coordination and consultation with City officials, the Department of Justice, the independent monitor and the court.” Moreover, the Justice Department appears now to recognize it has a significant stake in Ferguson’s financial health: “The Department of Justice has a strong interest in ensuring the sustainability of the reforms in our consent decrees and we understand that sustainability often, as a practical matter, requires attention to the financial condition of the local jurisdiction during the implementation stage.”

Schooling in Insolvency. Retired U.S. Bankruptcy Judge Steven Rhodes, who presided over the largest municipal bankruptcy in U.S. history in Detroit and who is currently serving as a quasi-emergency manager for the nearly insolvent Detroit Public Schools (DPS), has named Alycia Meriweather, a longtime educator in Detroit Public Schools, as interim superintendent—the chief academic officer. Ms. Meriweather, a Detroit resident and DPS graduate, will lead day-to-day operations in DPS’ academics, talent, and strategy divisions, while Judge Rhodes will continue with his responsibilities for the overall fiscal leadership of DPS. Judge Rhodes, no doubt is hankering to devote more time to his electric rock band, the Indubitable Equivalents, nevertheless he has accepted the task of trying to right the fiscal ship as Gov. Rick Snyder and the Michigan legislature in Lansing are seeking to address both the crisis in Flint and the looming DPS municipal bankruptcy. Gov. Rick Snyder has proposed spending some $770 million over a decade to pay down DPS debt and to create a new school district. All parties appreciate the stakes: failure could potentially reverse Detroit’s post-municipal bankruptcy progress.

Presidential Contender Bankruptcy. While the issue of municipal bankruptcy and the fiscal sustainability of the nation’s municipalities has been absent from Republican Presidential debates, bankruptcy has not. If anything, Mr. Trump has bragged with regard to how successfully he has utilized bankruptcy—mayhap emphasizing how different a Trump bankruptcy is than a chapter 9 municipal bankruptcy might be in Atlantic City, where his most recent bankruptcy filing, Trump Entertainment Resorts, has just been completed: with the equity transferred to the senior lenders. Former debt holder Carl Icahn provided Trump Entertainment Resorts with $82.5 million in exit financing, so that Mr. Icahn now owns its properties, including the Trump Taj Mahal and Trump Plaza Hotel and Casino in Atlantic City. Indeed, Trump-branded casinos have been through bankruptcy multiple times. Mr. Trump had equity ownership for the first three: he has successfully used the bankruptcy process to protect his brand against litigation, to cut labor costs, and to restructure debt that it could not pay. Previous to the Trump Entertainment Resorts bankruptcy, Trump Atlantic City went bankrupt, then Trump Hotels & Casino Resorts went bankrupt, then Trump Atlantic City went bankrupt again. The Trump Entertainment Resorts bankruptcy was necessary to deal with $285.6 million of outstanding secured debt as well as $13.5 million of trade debt and $6.6 million of unpaid interest. Mr. Trump, at least to date, appears not to have discussed what role federal bankruptcy might play were he to be elected President.

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