Is Michigan’s Model for Intergovernmental Finance Broken?

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eBlog, 5/18/16

In this morning’s eBlog, we applaud the exceptional municipal leadership of Central Falls Mayor James Diossa who has presided over a truly remarkable fiscal recovery from his very small city’s municipal bankruptcy; we look at the depressing challenges to the physical, educational, and fiscal solvency of the Detroit Public Schools—even as Michigan’s legislative leaders hope to better educate themselves on the idyllic retreat on Mackinaw Island. We wonder if the end game is nearing in Atlantic City; and we are in some awe as Wayne County Executive Warren Evans begins a statewide tour to learn and try to better understand growing fiscal disparities—an emerging issue to which governors, state legislators, Congress, and even the Administration appear disinterested.

Chocolateville. Central Falls, Rhode Island Mayor James A. Diossa has introduced a proposed $18.01 million budget for FY’17 fiscal year, which would, if adopted, for the first time in a decade, lower the city’s residential property tax rate. Wow! His budget proposal incorporates a one percent reduction in proposed spending: under his proposal, the residential tax rate would be reduced to $26.69 from $27.63, a decrease of 3.4 percent. The small, but densely populated city of just under 20,000—taking up about one square mile, emerged from municipal bankruptcy in 2012. Its first day in municipal bankruptcy occurred on the very day our George Mason class of senior employees of No. Virginia local governments met at City Hall with Judge Robert Flanders, who had been appointed by the then-Governor to serve as the quasi-Emergency Manager to steer the city out of chapter 9 municipal bankruptcy. Mayor Diossa has also proposed a one percent decrease in spending, noting: “Fiscally, we’ve been able to carefully plan and monitor and be responsible and transparent about the budget process. The city is doing much better fiscally,” adding that the budget proposal would provide relief to taxpayers who, over many years, have been taxed due to a court-approved five-year plan of debt adjustment.

The median income for a household in the city is just over $22,628, but approximately 26 percent of families and 29 percent of its population fall below the poverty line, including 40.8% of those under age 18 and 29.3% of those age 65 or over. Mayor Diossa’s FY2017 budget is the last under the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Frank Bailey, which called for a minimum four percent residential property tax increase each year. However, due to the city’s post-bankruptcy record of fiscal responsibility, CAO/CFO Leonard Morganis, who was charged by the court with monitoring implementation of the five-year plan of debt adjustment, approved the proposed lowering of the residential tax rate. As Mayor Diossa noted: “We’ve been very careful with our budget…It shows the city has come a long way…Every resident in Central Falls has had to do more with less and I think we have to do more with less.”

In addition to lowering the residential property tax rate, the Mayor’s proposed budget would provide for increasing the homestead exemption by 15%, increasing the senior citizen homeowner tax exemption by 25%, increasing the veterans’ exemption by 25%, and freezing the car tax rate. Additionally, his proposal calls for freezing the city’s commercial tax rate and tangible tax, which officials say should encourage economic development and provide predictability for local businesses. Mayor Diossa also believes the budget proposal would prove beneficial to Central Falls residents of all ages, from seniors to children: it includes youth investments, such as increased after-school programming and renovated space for the Innovation Lab in partnership with the Central Falls School District and Rhode Island College. His proposal also calls for $100,000 in funding for the Dexter and Broad street commercial corridor, façade improvements, and $600,000 for the Central Falls Redevelopment Agency; $200,000 for roadwork improvements, $200,000 for sidewalk repair and replacement, conversion of city streetlights to energy-efficient LED technology, and improvements at the Illinois Street Park and other recreational areas throughout the square-mile city.

Mayor Diossa notes that his budget proposal would provide relief to taxpayers who over many years have been taxed due to the U.S. bankruptcy court-approved five-year bankruptcy plan of debt adjustment. His budget proposal marks the last under the U.S. Bankruptcy court-approved plan, which called for a minimum four percent residential property tax increase each year. It also marks the first year the municipality had authority to set its own property tax rate. As Mayor Diossa noted: “We’ve been very careful with our budget…It shows the city has come a long way…Every resident in Central Falls has had to do more with less, and I think we have to do more with less.” The budget includes an additional $100,000 to other post-employment benefits, or OPEB, trust to match the city’s initial allocation last year. Mayor Diossa also submitted, for the second straight year, 107% of its actuarially required contribution to the city’s wobbly pension plan. The budget also calls for a 3.4% reduction in the city’s mill rate. Central Falls, Rhode Island’s poorest city with 19,000 residents in one square mile seven miles north of Providence, cited an $80 million unfunded pension liability in its bankruptcy filing. According to the Mayor, Central Falls has increased its pension funding level from 14% in 2010 to 22%. Its goal is to achieve 60% funding within 10 years.

In addition to lowering the residential property tax rate, his proposal calls for:
• increasing the homestead exemption by 15 percent,
• increasing the senior citizen homeowner tax exemption by 25 percent,
• increasing the veterans’ exemption by 25 percent,
• freezing the car tax rate, and,
• freezing the city’s commercial tax rate and tangible tax, which officials say should encourage economic development and provide predictability for local businesses.

The budget proposes $600,000 for the Central Falls Redevelopment Agency, $200,000 for roadwork improvements, $200,000 for sidewalk repair and replacement, conversion of city streetlights to energy-efficient LED technology, and improvements at the Illinois Street Park and other recreational areas throughout the square-mile city. The remarkable turnaround comes in the wake of then-Governor Lincoln Chaffee’s appointment of former Rhode Island Supreme Court Justice Robert Flanders as receiver in the wake of its filing for municipal bankruptcy protection in August of 2011, reporting an $80 million unfunded pension liability. In one of Judge Flanders’ earliest actions, he imposed benefit cuts of up to 55% for retirees—albeit these reductions were subsequently modified by the former Chafee administration. It is special for the eBlog, of course, because our distinguished class of senior Northern Virginia leaders had visited with Judge Flanders on the city’s first day in municipal bankruptcy, and, subsequently, written the GMU Financial Crisis Toolkit (created with digital tabs).

The Breaching of Public Trust & Pensions. U.S. Attorney Barbara McQuade may go after the state pensions of 13 former and current Detroit Public School officials after they have been sentenced for their crimes in a $2.7 million bribery scheme, although a spokesperson for her office reports the federal government still does not have legal standing to request the forfeiture of their pensions. A spokesperson added, however: “[O]nce the defendant has been sentenced and restitution ordered by the district judge, the government can and will take steps to enforce the restitution order, which may include garnishment of their pensions.” An unlucky number, thirteen, of school administrators face federal charges or have accepted plea agreements in connection with a scheme uncovered by an FBI investigation into the near-insolvent DPS: five of the 13 DPS officials retired from the district this spring in the wake of being criminally charged last March.

The U.S. Attorney’s office is seeking full restitution from all 13 defendants in the case, as well as school supplies vendor Norman Shy, who is accused of paying $908,518 in exchange for $5 million in business with his company, Allstate Sales. (Mr. Shy has pleaded guilty in the case: he was ordered to repay DPS $2,768,846.23 in restitution. A key factor in these decisions is that Michigan is one of a few states which has a pension forfeiture law for public employees: under Michigan law, a public employee or retiree convicted of a felony arising out of official duties “is considered to have breached the public trust” and may have his or her rights to a vested retirement benefit in forfeited. The statute, enacted twelve years ago, provides that a felony can be defined as misusing public funds or resulting from the receipt of a bribe or other financial benefit in that person’s capacity as a public employee.

A State Seminar on Debt & Insolvency. Michigan House Speaker Kevin Cotter plans to hold a session and votes during the legislature’s annual policy conference on Mackinac Island in June to give state legislators more time to settle and resolve the Detroit Public School debt issues. It appears the time away from Lansing will be vital to negotiating a compromise on legislation to overhaul DPS, as well as to make adjustments to a state budget with unanticipated revenue shortfalls. Speaker Cotter’s office announced the schedule change shortly after state economists yesterday agreed the state needs to scale back spending plans by $460 million in the current and upcoming fiscal years because of an unexpected decline in revenue. But as they used to recite in schools in Rome: tempus fugit (time flies): If the legislature is unable to reach resolution on the budget by the end of this month, the Senate will put off final votes until the week of June 6th. All of this comes as the Senate continues to struggle how to respond to House passage two weeks ago of a $500 million Detroit Public Schools debt relief plan—and as retired U.S. Bankruptcy Judge and DPS Emergency Manager Steven Rhodes faces a tight schedule to ensure the city’s schools can be fiscally and physically safe to open for the fast approaching new school year.

Running on Fumes—or Can Atlantic City Control Its Own Destiny? Atlantic City Mayor Don Guardian reported that the virtually insolvent municipality still had the fiscal resources to pay its bills this week: the city made its $8.5 million school tax payment last Friday and on Monday paid surrounding Atlantic County $7 million—funds owed for quarterly property taxes. And Atlantic City reports it has enough money to make a $7 million payroll payment June 3rd, as well as a $1.5 million bond payment due June 1st. These fiscal resources come—notwithstanding broken state promises of $33.5 million from a state relief package—in significant part thanks to Atlantic City workers’ agreement to be paid monthly to avoid a municipal government shutdown. Thus, with the Governor still focused on a state takeover and the legislature still considering options for a compromise, the city seems to endure in a Rod Serling fiscal Twilight Zone: it has $550 million in debt and a $100 million budget deficit. On Monday, Assembly Speaker Vincent Prieto reported: “We’re working on details…Wait till the final product, and you’ll see. Hopefully it’s going to be something fair, that Atlantic City actually has an opportunity to really have control of its own destiny.” The inability of the state to act, meanwhile, is imposing statewide costs: Standard & Poor’s has revised its view of the support system for New Jersey local governments to “strong” from “very strong” due to the state’s seeming inability to address Atlantic City’s financial crisis, noting that in the nearly half-year since Gov. Christie vetoed aid to Atlantic City, no progress on a plan to reduce the city’s budget deficit and no agreement addressing the city’s unfunded tax appeals has been passed, so that S&P’s Timothy Little wrote big: “In our opinion, these issues indicate a change in what has historically been very strong state support of its distressed entities…We maintain the view that should extraordinary state intervention occur in Atlantic City, we are not confident that it would be sufficient to prevent impairment of the city’s debt obligations.”

Is Michigan’s Model for Intergovernmental Finance Broken? Wayne County Executive Warren Evans today begins a statewide tour, a tour he calls: “Investing in Michigan Communities: Finding Fair Funding for Strong, Successful Communities,” beginning not in Trenton, New Jersey, but Trenton, Mi., to begin a discussion about innovative ways to fund communities. In the wake of his first visit today, he will meet with six other communities’ mayors, township supervisors, commissioners, city council members, and decision makers throughout the year to identify viable solutions to fix what he fears is the state’s broken model for funding local governments. These visits, or summits, have been designed to educate participants about the history of the current funding system, tell stories of how the current model is hurting local communities, examine past proposals to fix the system, and begin discussions on possible fiscal solutions. He begins this morning in Taylor, a city of about 63,000 in Wayne County, where Mayor Rick Sollars will be the featured elected official. As part of this ground-up initiative, Mr. Evans has assembled a team of research and policy institutions, many of whom or which have already been exploring options for addressing local finance issues, including the Michigan State University Extension Center for Local Government Finance and Policy, MML (the terrific Michigan Municipal League), the Citizens Research Council of Michigan—which was so invaluable a resource to us when we did our report on Detroit’s bankruptcy, the Michigan Association of Counties, and the Southeast Michigan Council of Governments. In announcing the tour, Mr. Evans noted: “For years, it’s been hard to pin down an agreement around the best solutions to fix local funding…Now, more than ever, municipalities are finding the cost-cutting measures they’ve taken are not enough to meet the long-term needs for their residents. It’s a struggle for many to properly fund basic services like police, fire, road, and infrastructure repairs. The tour will also take this leader to Grand Rapids, Michigan’s Upper Peninsula, Lansing, Traverse City, Flint, and Southeast Michigan.

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