Can the Federal Government Force a City into Municipal Bankruptcy?

March 16, 2016. Share on Twitter

The Critical Choices of Municipal Bankruptcy. A city’s path to municipal bankruptcy is strewn with critical choices—choices that can make the difference between life or death. Kevyn Orr, on the very first day of Detroit’s filing for municipal bankruptcy, told me he had emailed all city employees the previous night to ensure they understood how critical it was they report to work—on time—especially those involved in public safety. So it is in San Bernardino, now in municipal bankruptcy longer than any city in U.S. history, that some of the hard budget choices on the city’s road to fiscal insolvency might be coming back to haunt it: years of cutbacks in the city’s public safety budget have left it short-handed to be able to promptly respond to a recent wave of gang-related violence—a wave which has contributed to the city’s 15 homicides so far this year. Response times to 911 calls are averaging up to 20 percent slower, or, as San Bernardino Police Chief Jarrod Burguan describes it: “We’re seeing the effect of years of public safety cutbacks in this community and statewide,” referring to both State of California initiatives which have reclassified six low-level drug and property offenses from felonies to misdemeanors and mandated that savings from reduced incarceration costs be put back into communities, largely for drug treatment, mental health care and supportive housing, but also sentencing changes which mean that persons arrested for low-level offenses now remain on the street.

But a real key has been a 30 percent reduction in the city’s public safety budget on its fiscal road to bankruptcy. The Council has voted to approve a plan to reverse the public safety cuts and raise $50 million in new public safety budgets over the next five years, but no plan how to pay for those restorations. In the meantime, Councilman Fred Shorett, whose ward was the site of this week’s shooting, believes the community needs to take responsibility, noting: “It’s a breakdown of the family, and I don’t know how a legislator can fix that,” while concurring that the state actions have contributed to the undercutting of the city’s public safety. The Councilman added that Proposition 47 and Assembly Bill 109 made the problem worse.

Out Like Flint: the Blame Game. Rep. Jason Chaffetz (R-Utah), Chairman of the House Oversight & Government Reform Committee, yesterday led a bipartisan attack on Michigan state and municipal leaders—as well as EPA officials over their roles in the Flint drinking water crisis. Needless to say, the Chairman made no mention of the deep cuts Congress has made to the chronically underfunded federal Safe Drinking Water program—where EPA estimates there to be a gap of some $540 billion over the next two decades after Congressional cuts in recent years. It turns out, it seems, that the years of Congressional sequesters have human as well as fiscal costs. Nevertheless, the Committee members appeared far more focused on blaming EPA and state and local officials instead of accepting either any responsibility or developing any substantive new federal plan to help. Thus, the session focused its own kind of contamination on the former Mayor of Flint, Gov. Rick Snyder’s appointed emergency manager, Darnell Earley, and the former EPA official, Susan Hedman, responsible for the region. Mr. Earley testified he had been overwhelmed by challenges facing a city on the edge of insolvency, and that he had relied on experts from the Michigan Department of Environmental Quality and EPA to advise him. For her part, Ms. Hedman tried to defend the EPA’s actions to address the contamination in what used to be Michigan’s second largest city, telling the Chairman: “I don’t think anyone at EPA did anything wrong, but I do believe we could have done more.”

Mr. Earley testified that he and other Flint leaders “were all totally dependent” on analysis and expertise provided by state and federal officials. For months after the April 2014 switch he believed information he was receiving — parts of it scientifically complex — was accurate, he added. (Michigan Governor Rick Snyder is scheduled to appear before the committee tomorrow, along with EPA Administrator Gina McCarthy.) Ms. Hedman testified that she first learned that Flint was not implementing corrosion control treatment in late June of last year—some 14 months after Flint began using Flint River water that was not treated with orthophosphate, a chemical used for corrosion control, adding that she believed EPA had responded within the “cooperative federalism framework” of the Safe Drinking Water Act, which assigns states the legal authority to implement drinking water regulations, noting that EPA’s enforcement options under the law are more constrained than in other federal environmental statutes—even as the dismissed former Emergency Manager, Mr. Earley, claimed he had been “grossly misled” by state and federal experts who never told him that lead was leaching into Flint’s water supply—even as a former Flint Mayor, Dayne Walling, blamed the crisis on the state of Michigan’s focus on balancing Flint’s books and “choosing low cost over human consequences.”

Mr. Walling also testified that Michigan’s state emergency manager law, which effectively authorizes state takeovers of fiscally failing municipalities, “takes away the natural checks and balances” of democratic government and “minimizes the voices of the citizens by placing control so far away from the community,” adding that the five emergency managers who have run Flint were appointed by and reported to the Governor—not to the citizens and residents of Flint.

Averting a Federally Imposed Municipal Bankruptcy. The City of Ferguson, Missouri, which had rejected an earlier consent decree demand from the U.S. Justice Department, has now accepted a modified version, which is intended to overhaul the city’s courts and police to protect citizens’ rights—an agreement described by the Director of the Justice Department’s Civil Rights Division as “[A]n important step towards guaranteeing all of its citizens the protections of our Constitution…We are pleased that they have approved the consent decree, a document designed to provide the framework needed to institute constitutional policing in Ferguson, and look forward to filing it in court in the coming days and beginning to work with them towards implementation.”

But the modified agreement carries a harsh fiscal price tag—one which could have serious fiscal consequences—including insolvency—and one which has the effect of a federally mandated municipal tax increase. Thus, yesterday’s unanimous City Council vote in favor of the plan came after the council first voted last month not to approve the decree, which had been negotiated extensively between city officials and the Justice Department. The council said part of the plan would be too costly. Knowing that rejecting the plan could result in a lawsuit against the city, as the Justice Department threatened last week, the Council voted to accept the 131-page decree agreement—an agreement which imposes stipulations on its police and court, including guidelines for training police officers and “[reorienting] Ferguson’s use-of-force policies toward de-escalation and avoiding force.”

The agreement also requires police body cameras and an overhaul of the municipal court system, along with requiring a pay increase for police officers. Compliance, however, will mandate the junk-rated municipality’s voters to agree to a series of tax increase proposals to help stabilize a balance sheet strained by rising costs in the aftermath of a controversial fatal police shooting and new federally mandated municipal expenditures. The city has estimated it would cost between $2.1 million to $3.7 million to implement the federally-imposed consent decree reforms in the first year, and then $1.8 million to $3 million in the third year and beyond. The city, which is currently operating in the red, has a $14.5 million budget. Thus, to avoid federally-triggered insolvency or municipal bankruptcy, the city will ask Ferguson voters to consider two proposals: one to raise property taxes by 40 cents per $100 of assessed value to raise an estimated $1.5 million annually, and a quarter-cent cent economic development sales tax which would generate about $1.2 million annually. The Justice Department, of course, has no authority to order the citizens of Ferguson—a city where average per capita income is just over $22,000 annually and over 20 percent of the citizens fall below the federal poverty level—to vote for higher taxes on themselves. Moody’s, which recently placed Ferguson’s $16.5 million of junk-rated debt on review, will have its own eyes on how the taxing propositions fare—noting that “Passage of the April ballot initiatives is integral to management’s proposed solution to close the existing budget gap. Absent passage of these initiatives, city management has indicated a balanced budget will be achieved with reductions in force.” While Justice Department officials have told the city that some technical assistance and grant funds could be provided to ease the fiscal burden, and the agreement with the city means the city will not face the costly litigation costs from the Justice Department’s lawsuit, it now confronts a democratic challenge to see if its citizens will agree to changes that would reduce its fiscal dependence on fine collections mostly levied on non-Ferguson residents to higher taxes on its own residents.

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