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


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.


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