Hard Choices about a City’s future

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eBlog, 6/01/16

In this morning’s eBlog, we consider the dwindling fiscal options for East Cleveland’s future: would Cleveland—on the verge of hosting the Republican Presidential Convention—be willing to agree to a merger? If not, what are the options? Then we look at the surprising override in Springfield of Gov. Bruce Rauner’s veto of pension relief legislation to help the City of Chicago, raising the question whether such a delay mortgages the Windy City’s fiscal future.

Focusing on a City’s Future. East Cleveland leaders appear to have dropped their opposition to being annexed by neighboring Cleveland—a move which, if agreed to—would avoid filing for chapter 9 municipal bankruptcy—and mean the city’s residents could receive basic municipal services the city has been unable to afford for years. The shift appears to recognize the leadership of Mayor Gary Norton, who has sought a merger with Cleveland for several years, but been stymied by a City Council that believed the city could survive on its own. But City Council President Thomas Wheeler told the Associated Press that a merger with Cleveland appears unavoidable, stating: “I’ve got pride…I don’t want to merge. But we’re fighting to save an East Cleveland that no longer exists.” The small city East Cleveland was once a middle-class community of around 40,000 people. Oil baron John D. Rockefeller’s expansive estate was in East Cleveland. A millionaires’ row of mansions once lined Euclid Avenue, the main thoroughfare. The city is only 3.2 square miles, and about half of that is a park.

Today, the population is around 17,000, nearly half what it was in 1990; its median household income is less than half the statewide $48,000; it is a municipality in which some 1,000 homes have been demolished in recent years with the help of the Cuyahoga County land bank; nevertheless, some estimate there are at least 1,000 more which need to be razed, along with more than 140 apartment buildings. The municipality owes $3.5 million in past-due bills and has been unable to issue debt for capital improvement projects or anything else for years. The city workforce has been cut in half since 2010; nevertheless, it is barely able to make payroll every two weeks. According to Ohio Auditor Dave Yost, a merger with Cleveland is East Cleveland’s best hope. Mr. Yost placed East Cleveland back into fiscal emergency four years ago—subjecting the small city to state oversight of its finances and fiscal recovery plans. Auditor Yost has noted: “The bottom line is the bottom has fallen out of their revenue bucket…And I don’t see a way to repair that bucket.” Mr. Yost has asked the Ohio Legislature for $10 million to finance capital improvements, such as road repairs if East Cleveland and Cleveland agree to merge. City Council President Thomas Wheeler said the council is waiting for a consultant to report on any alternatives to a merger.

If officials from both cities move ahead, a merger could take months to complete. Under the process, City Councils from both municipalities must appoint three persons to a commission charged with working out the logistics of such a merger. In the end, if such a merger is agreed to, East Cleveland voters would first have to vote—then, if they approved such a merger, the Cleveland City Council would then vote to accept East Cleveland or to allow its own voters to decide the issue. Neither the Mayor nor Chair of the Cleveland City Council have made any public statements with regard to whether they might support such a merger.

The only other alternative—one which Mayor Norton reports he has also been exploring, would be to file for municipal bankruptcy—which, while permitted under Ohio law, would be a first. Mayor Norton believes that such a filing would give East Cleveland some breathing room under an unbiased federal bankruptcy judge to work out adjustments with the municipality’s creditors; however, Mr. Yost is less certain, noting: “Even if the payoff (by the municipality to its bondholders and other creditors) was a nickel on the dollar, I don’t know where they’d get the nickel.”

Mortgaging a City’s Future? The Illinois legislature has overridden Gov. Bruce Rauner’s veto of a bill to provide Chicago with financial relief in paying for police and fire pensions. With the legislature scheduled to adjourn today, the surprise action came nearly one year after the legislature had sent the bill to the Governor, but only a few days after Gov. Rauner vetoed it. The override means Chicago will be off the hook with regard to being forced to adopt a second consecutive property tax increase in the wake of last year’s record hike. For the Windy City’s taxpayers, the override is projected to save them $1 billion in police and fire pension costs in the short-term: the House voted 72-43 to override the Gov.’s veto of the savings plan, which would have mandated Chicago to pump $4.62 billion into retirement accounts for police officers and firefighters through 2020—an increase which Mayor Rahm Emanuel had warned would have triggered a $300 million property tax increase. But Gov. Rauner countered that shorting payments will cost an extra $18.6 billion in interest during the next four decades. Currently, the City’s police and fire funds are $12 billion short of what it would need to cover current and future obligations. Chronic underfunding over the decades is largely to blame, as it is responsible for the $111 billion shortfall Illinois faces in its state-employee accounts. Gov. Rauner had warned the legislation simply put off to a future day the pain accompanying fiscal balance.

For Chicago, the legislative action is projected to provide near-term relief to the city by reducing, at least for the near term how, the critical need to increase funding in the hundreds of millions to meet the city’s burgeoning public pension obligations; at the same time, it likely adds billions of dollars in long-term costs while the city’s pension debt continues to grow. Nonetheless, Mayor Rahm Emanuel stated: “I particularly want to thank the Democrats and Republicans in the General Assembly for putting politics aside and doing the right thing for Chicago taxpayers, and for our first responders…We in the city agreed to step up and finally do our part to responsibly fund these pensions, and I want to thank Springfield for doing their part as well.”

For his part, Gov. Rauner, who has sharply criticized Mayor Emanuel for not taking on the Chicago Teachers Union, stated: “Clearly, those who supported this measure haven’t recognized what happens when governments fail to promptly fund pension obligations…Instead of kicking the can down the road, local and state governments should instead focus on reforms that will grow our economy, create jobs and enable us live up to the promises we’ve made to police and firefighters,” adding that the “the cost to Chicago taxpayers” in the longer term would be “truly staggering.”

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