Twin Miracles?

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eBlog, 5/03/16

In this morning’s eBlog, we consider the very hard choices and issues that could harm Detroit’s full recovery from municipal bankruptcy: its desperately failing schools–and addressing delinquencies in long overdue water payments–an issue which was an exceptional challenge during the city’s municipal bankruptcy and now–because of the events in Flint–an issue with signal resonance. The teacher walkout in Detroit could risk the chances of a vital state aid package–perhaps threatening classes not just for the remainder of this academic year–but also any vibrant future vital to the city’s early success in luring new families back into the city. We also look at a critical deferred issue from Detroit’s bankruptcy: how to address those who stopped paying their water bills–already a hypersensitive political issue for the city south of Flint. Finally, we consider yesterday’s twin miracles on both sides of the Atlantic–one in Leicester City, England, and the other in Atlantic City. But while the former lit up the globe, the latter might have only put off a day of fiscal reckoning in the face of the obdurate unwillingness of New Jersey’s Governor to demonstrate leadership in helping Atlantic City avoid insolvency–an insolvency which could have contagious consequences for neighboring municipalities. 

Another Sick Day for DPS. Some 93 Detroit schools will not be open today—the second day of a teacher sickout for the Detroit Public Schools—meaning the system’s 47,000 students, the largest school district in the state of Michigan—will have lost more than one million hours of classroom instruction. It is unclear what the tipping point might be for DPS, but yesterday, Michigan House Speaker Kevin Cotter (R-Mount Pleasant) said: “At an absolutely critical time for a city on the path to recovery, Detroit’s next generation has now lost more than 1,000,000 instruction hours they will never recover to cheap political stunts.” Indeed, it is uninstructive to imagine how the teachers’ actions are playing in the legislature in Lansing at the very moment they are considering a $715 million aid package for DPS—or, as Senate Majority Leader Arlan Meekhof (R-West Olive) yesterday described it: it makes the “likelihood of reaching a long-term solution for DPS more challenging.” State Rep. Harvey Santana (D-Detroit) warned: “You’ve got teachers who are facing no pay, you’ve got kids suffering, and you’ve got philosophical and ideological arguments getting launched back and forth. In the meantime, the situation is turning into utter chaos, and there doesn’t seem to be any room for compromise.” Detroit Federation Teachers President Ivy Bailey yesterday described the situation as a lockout—not a sickout, adding to the non-constructive and unlearning unfolding of the crisis affecting not just the chances of state aid, but also the faltering chances for the city’s children’s future.

While the Detroit Public School system is separate from the city, it is integrally related and fiscally distressed; yet the fate of the public school system is intertwined with the city’s fiscal future. Not only is the quality of the system essential to attracting families to the region and to ensuring opportunities for the children of families who reside in the city, but also to attracting city employees for whatever the “new” Detroit is becoming: after all, in the post-bankruptcy municipality, leaders would be expected—if not required—to put their children into the public school system. Consequently, DPS’ financial soundness and integrity cannot be separated from Detroit’s future. In an uncanny parallel, Gov. Rick Snyder, three years ago, appointed Jack Martin to serve as Emergency Manager of Detroit Public Schools effective July 15, 2013—in effect creating the first state takeover of this school system with below average graduation rates, historically low standardized test scores, rapidly declining enrollment, and a deficit that had grown from $200 million to $327 in the wake of its first two years under state control: a public school system termed “A national disgrace,” by Dan Rather, beset by massive deficits and widespread corruption. Based upon the prior approval of the electors, DPS is authorized by law to levy $18 million for school operating purposes on all taxable non-homestead property—in effect sharing or competing over a recession-wracked tax base with the city. Today, of course, the ever so remarkable retired U.S. Bankruptcy Judge Steven Rhodes is serving as the Emergency Manager for DPS. On his broad shoulders lie critical hopes and fears about the city’s future.

Detroit Water. One of the lingering issue from Detroit’s municipal bankruptcy dealt with the provision of water—with numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom: could the city cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Today, it seems, that time has come: Detroit’s Water and Sewerage Department is set to begin this morning shutting off service to customers who have failed to pay their bills—after granting one additional day of grace: DWSD guesstimates about 20,000 of its customers have defaulted on their payments and face a shutoff this a.m., although the threats of the coming shutoff were prompting thousands of calls yesterday—and a veritable torrent of payments. A DSWD official described the process of shutting off service to customers with unpaid bills as equitable and reported it was city-wide, rather than being focus on any particular neighborhood or part of the city. In addition, the official reported the agency was not targeting customers who owe less than a $150 and are only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD is reminding its delinquent customers who are having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who are at 150 percent of the poverty level or below can receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. Under the “10/30/50” plan, customers pay a minimum of 10 percent of their past due amount, with the remaining amount to be paid over 12 to 24 months. The DWSD has about 200,000 customers, of which about 175,000 are residential—for whom the average bill is about $75.

Teetering on the Edge. There were two miracles of a sort yesterday: first, Atlantic City, N.J., averted default Monday by making a $1.8 million debt service payment. Mayor Donald Guardian had said last week he was considering not making the payment, but announced Monday morning that the city was going to meet the obligations even though the city is running low on cash. Second, Leicester City captured the championship of the English Premier League defying 5000-1 odds in nabbing perhaps the most prestigious football title in the world. Leicester is the city and unitary authority in the East Midlands of England; it is the county town of Leicestershire—about half the size of Detroit.

For Atlantic City, facing not incomparable odds, Mayor Don Guardian yesterday reported that: “After careful review of the city’s finances and taking into consideration other debt including bond ratings for Atlantic County and other municipalities in New Jersey as well as the effects on my own city, we’ve made the decision to pay our [municipal] bond payments as of 10:00 a.m. this morning of $1.8 million dollars.” The announcement came as the city—already under quasi state control of an emergency manager with most uncertain authority and with the state legislature so far unable to reach consensus how to assist the fabled casino city facing a $102 million budget deficit with more than $400 million in debt outstanding—thus appears to have put off its day of reckoning by avoiding default this month. Nevertheless, it faces $24 million of other debt service payments coming due for the rest of the fiscal year, including $1.6 million on June 1 and $41,000 in July, according to credit rating agency Moody’s. Atlantic City’s road to recovery then becomes even steeper and the odds—at least as they might be toted up at one of its remaining famed casinos—greater of a default: Atlantic City owes $3.6 million in August, $1.9 million in September, $70,000 in October, $9.3 million in November, and $7.1 million in December—or, as Mayor Guardian put it yesterday: “Financially, we are running on fumes…We really are teetering on the edge.”

The city’s decision to pay could be vital to the prevention of fiscal contagion—or, as the ever so insightful Assistant Director of the Bloustein Local Government Research Center described it yesterday: Atlantic City avoiding default is important for the credibility of other New Jersey municipalities looking to enter the bond market: “As much as Atlantic City is an outlier, a default would have stained the state’s reputation…It is important from a reputation standpoint as far as how the [municipal] bond market views us.”

Nevertheless, yesterday’s payment might only be buying a disappearing commodity: time; indeed, New Jersey Governor Chris Christie—in his own press conference yesterday—predicted Atlantic City would be unable to make its June debt service payment, adding that yesterday’s $1.8 million payment did not give him any additional confidence in the city government: “They will not have the money to make their June payments under current circumstances…Nobody should be taking any bows for making a $1.8 million dollar debt payment, which you were supposed to make.” For his part, Mayor Guardian yesterday continued to express his opposition to a state takeover: he urged state legislators to support House Speaker Vincent Prieto’s proposal, which would have a five-member planning committee develop a five-year financial plan and monitor if certain benchmarks were being reached.

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