Post Municipal Bankruptcy Innovation

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eBlog, 4/27/16

In this morning’s eBlog, we consider—again—post-municipal bankrupt Detroit—as the city uses innovation in place of disproportionately reduced fiscal resources to address critically neglected areas for redevelopment. Ironically the lessons learned from this innovative experimentation might provide valuable fodder for city and county leaders across the country. We also—with D-Day looming for Puerto Rico and Congress set to leave town—consider the critical inaction and disagreement in Washington, D.C. over the fiscal fate of Puerto Rico. In some key ways, the inability to act serves to confirm how valuable chapter 9 municipal bankruptcy has worked. Finally, we look at the intersection of state politics—and its implications for the fiscal fate of Atlantic City.

Pink Post Municipal Bankruptcy. One of the hardest challenges for a municipality emerging from municipal bankruptcy is the comparative dearth of fiscal resources. So it is that Detroit is attempting to address a critical set of issues: how to revitalize neglected areas—which are extensive in a city with one-third of its former population in one the largest land areas of any city in the U.S. Such revitalization is critical both to enhanced assessed property values, but also to reducing crime. Ergo, the city is trying to act outside the box: it is adapting by lifting its development regulations—what developers might call outdated rules—to create zones, which the city calls “pink zones,” where red tape will be cut to help small developers and entrepreneurs open new businesses and revive aging commercial strips. The goal: to ease some of the constraints confronted by developers, from environmental impact statements to parking rules. Thanks to a grant from the John S. and James L. Knight Foundation, the Detroit planning department intends to recruit designers and planners to come up with a general framework for anyone who wants to start a new business or build in such areas: e.g. a process to accelerate development and maybe bubble up some innovation, or, as the city’s Planning Director Maurice Cox describes it: “You can create a great place, and you won’t have to go through months of red tape.” The innovative concept might have a second benefit: it will reduce city staff demands to enforce some of its rules.

Critical Inaction. U.S. Treasury Secretary Jack Lew yesterday warned that Congress is running out of time to act on Puerto Rico, telling Univision: “The crisis is now…There is an urgent need for Congress to act because the alternative to Congressional action…is chaos for 3.5 million Americans who call Puerto Rico home. That’s not acceptable.” The dire warning came as the U.S. Territory appears set to default on a payment of over $420 million which is due on Sunday. That precedes a multi-billion dollar payment due July 1st. Nevertheless, the Administration has not yet signed off on the House Natural Resources Committee legislation championed by House Speaker Paul Ryan(R-Wis.)—even as Congress is scheduled to break for a ten-day recess beginning this Friday. Notwithstanding the Treasury’s pressing, the Treasury has yet to come out in support of House Natural Resources Committee Chair Rob Bishop’s (R-Utah) draft bill, while Senate leaders appear to have no inclination to act until the House sends them a package. If anything, the delays appear to have spurred greater complications: the AFL-CIO and the Service Employees International Union, unsurprisingly, want any final legislation to protect pension and worker rights. The situation has reached a stage where every day of delay now means there will be less fiscal resources to divvy up amongst the island’s creditors. House Majority Leader Kevin McCarthy (R-Ca.) said yesterday that he does not see any way Congress can get a bill done by May 1st, but he thinks a bill could be wrapped up by July 1. The key is that every day of delay now means there will be not just a greater threat of the Zika virus in Puerto Rico taxing its diminishing resources, but also whatever fiscal resources will be remaining to be divvied up amongst thousands and thousands of creditors.

Wherefore Atlantic City? Somehow an entire city’s future has become a pawn to state politics—at an awful cost in both fiscal resources and the trust and respect of American voters. Carl Golden, who served as press secretary for former Govs. Thomas Kean (R-N.J.) and (as Communications Director) for Gov. Christie Whitman (R-N.J.) yesterday framed the fate of Atlantic City as part of the “ongoing confrontations between the Democratic leaders of the Senate and Assembly, while presumably over weighty matters of public policy, in reality mask an early political strategy designed to establish a frame of reference for the 2017 gubernatorial campaign,” describing it as “a calculated effort to tie Senate President Steve Sweeney (D-Gloucester) closely to Gov. Chris Christie, to portray him as a willing ally of a governor whose record and philosophy are anathema to Democrats and particularly to the long-time party activists who control the primary election process.” He wrote that “for [Senate President] Sweeney, the more he shares with [Gov.] Christie, the farther away he moves from the Democratic Party base—organized labor in general, public employee unions in particular, women, minorities, urban leaders, and advocates for a broad array of social-service programs which have been curtailed by the Governor.” Key: he wrote that “Their previous cooperation on other issues has been overshadowed by their disagreements over the proposed state assumption of Atlantic City government—a step supported by Sweeney and Christie but opposed by [Mayor] Prieto and city government…” noting the battles have been framed by “dueling press conferences, edgy language in news releases, and accusations of political gamesmanship.” Interestingly, he wrote there had been “speculation as well—not entirely misplaced—that resentment has been simmering in the Assembly over a feeling it’s been treated unfairly, that it’s been ignored while Christie and Sweeney strike deals and present them to the lower house for approval.”

Thus, the ugly head of politics—rather than the fiscal fate of Atlantic City—have loomed—or, as he wrote: “It was not altogether without credibility when Christie accused Prieto of doing the bidding of Jersey City Mayor Steve Fulop, a potential gubernatorial candidate, in blocking legislation for state involvement in Atlantic City in an attempt to deny union support to Sweeney. Whether the Governor’s implicit defense of Sweeney helped the Senate President or provided another opportunity to depict him as too cozy with the chief executive is open to debate.”

Further discussing the politicization of the looming municipal bankruptcy, he added: “It places Prieto—and, by extension, Fulop—squarely on the side of public-employee unions while serving as a subtle reminder that it was Sweeney who joined forces with the Governor in 2011 to muscle a series of pension-system reforms through the Legislature, including mandating an increase in employee contributions to the benefits system. The greater contributions and the freeze on cost-of-living adjustments (COLA) for retirees are all that remains of the reforms after the administration—with support from a Supreme Court ruling—failed to meet its funding obligations in their entirety.”

He notes that Sen. President Sweeney has sought to re-ingratiate himself with organized labor by proposing a state constitutional amendment to guarantee pension and benefits rights, while Mayor Prieto—perhaps focusing on moving from City Hall to the Statehouse—has also expressed his opposition to eliminating the state’s inheritance or estate taxes except as part of a larger package to increase the motor-fuels tax to replenish the state’s dwindling state Transportation Trust Fund. The two potential gubernatorial combatants—but current critical players in determining Atlantic City’s fiscal future—have met several times in unsuccessful efforts to resolve their differences. Thus, Mr. Golden wrote that the Speaker has “dismissed suggestions that gubernatorial politics underlie the impasse. Prieto, they say, is merely attempting to wield his power to protect the contractual rights of Atlantic City municipal workers as well as ensuring that the revenue stream from the estate and inheritance taxes continues to support programs to benefit middle class New Jerseyans,” adding—most critically: “Time, though, is short: Atlantic City and the trust fund are running out of money rapidly. Should the apparent governmental dysfunction continue and lead to a failure to resolve the problems, the North will point South, and the South will point North.

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