Focusing on Two Iconic Cities’ Futures

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eBlog, 6/01/16

In this morning’s eBlog, we consider the challenges the City of Detroit confronts in addressing the future of its public schools—an issue both within the city and before the legislature, and we consider the credit positive outcome for Atlantic City in the wake of Gov. Chris Christie’s signing into state law legislation to provide the city a bridge loan to its fiscal future.

Focusing on a City’s Future. The fate of Detroit Mayor Mike Duggan’s proposed commission to oversee Detroit schools may hinge on the Mayor’s ability to win over charter operators in the city. Last Friday, Mayor Duggan made clear his commitment, referring to the state of education in Detroit during a meeting at the Detroit Free Press: “We don’t need to be blaming anybody. We’ve got to change the way we’re educating these children.” Part of the challenge will be dealing with the city’s charter schools—whose operators’ support he has been seeking—and whom he has asked to show up for a morning news conference to provide a counterpoint to what he calls increasingly “nasty and vicious” rhetoric from charter advocacy groups which have fiercely lobbied against such a commission—with his proposed Detroit Education Commission part of a $715-million legislative fix for the insolvent Detroit Public Schools (DPS). However, opponents of the proposed Commission and some charter school advocacy groups warn such a DEC would favor DPS over charters and take choice away from parents—in effect challenging the Mayor’s belief that such a commission would be critical to improving education in Detroit. A key part of the divisive issue is that today more than 57 percent of the city’s kids attend charter schools in the city and traditional public schools outside the city limits—compared to about 43 percent in the current city public school system DPS. Mayor Duggan believes a Commission would help establish an accountability system for schools in the city that would assign letter grades to schools based on academic achievement, improvement in academic achievement, and other factors. In addition, as proposed, such a commission would be given authority over the openings of schools in the city—except with regard to charter and traditional public schools that receive an A or B grade under the accountability system: they would be able to open new schools without the commission’s approval. Or, as the Mayor puts it: “What the DEC would do is set a single standard that would be based primarily on growth…If you take over a school where 2% of the kids are reading at grade level, and you get it to 5%, or 9% and 12%, you’re going to get good grades because you’re growing.” The Mayor has gained the support of the Detroit business community, Gov. Rick Snyder, the Michigan Senate and many Democrats in the Michigan House of Representatives; however, many Republicans in the House and some charter school groups remain adamantly opposed.

Atlantic City Surfs. New Jersey Gov. Chris Christie has signed legislation to give Atlantic City 150 days and a $60 million bridge loan to balance its budget for the upcoming fiscal year and to develop a sound spending management plan for the next five years, stating: “These new laws will ultimately accomplish my mission to reform Atlantic City’s overblown municipal government and, in turn, protect local and state taxpayers from being perpetually abused by the special political interests who admit to owning this city’s elected officials…We all agree that Atlantic City’s government has not demonstrated the competence to properly manage the people’s money without state guidance and oversight and, as I’ve said all along, they will not be getting any more blank checks from state taxpayers as the Legislature had proposed last summer…This legislation means no more business as usual. It embraces my demand that Atlantic City immediately account for every dollar it receives and spends, and triggers a series of strict conditions and rigorous requirements the city must meet immediately…For Atlantic City officials, the final countdown starts today: They now have 150 days to develop and implement fiscally responsible reforms and finally meet the obligations of every other municipal government in our state. They know that if they fail to change their tendencies of wasteful spending and mismanagement, my administration will be empowered to immediately step in and do the job for them.” Gov. Christie added that the recovery plan must address how the city will pay back obligations owed to bondholders and tax appeal judgement orders. (State officials have estimated the city has more than $500 million in total debt outstanding including $170 million in tax refunds owed to the Borgata casino.) Senate President Stephen Sweeney (D-Gloucester) said that, rather than a cause for celebration, Friday’s bill signing was a “clear indication that much of the hard work down in Atlantic City is about to begin: “What we have accomplished in Trenton is to set the stage for Atlantic City’s restructuring into an economically stable, culturally vibrant, keystone to the New Jersey’s tourism industry: But the only way that happens is if the local government delivers on their commitment to live up to the spirit of this reform legislation.”

Moody’s analyst Douglas Goldmacher called the action by the Governor and legislature “a credit positive development that provides short-term financial relief for Atlantic City, and removes the immediate threat of a default or bankruptcy filing.” Nevertheless, Mr. Goldmacher noted, the city will continue to be monitored closely for the possibility of debt restructuring and eventual default. Mr. Goldmacher wrote that the legislation, which includes a $60 million bridge loan, provides short-term relief while also avoiding the immediate threat of a default or bankruptcy filing, and it stabilizes the city’s cash flow by having casinos make payments in lieu of taxes, as opposed to highly variable property taxes, for a 10-year period starting in 2017. As enacted, the legislation gives Atlantic City officials five months to balance a more than $80 million budget deficit and prepare a five-year financial plan or face a state takeover that would involve altering outstanding municipal debt and contracts, with Mr. Goldmacher writing that his credit rating agency “will continue monitoring how Atlantic City develops and implements its financial plan within the 150-day window, including the possibility of debt restructuring…The latter would be considered a default if it includes any bondholder loss or impairment. We will also analyze how the city plans to return to long-term fiscal stability as the casino industry continues to consolidate.” He noted the enactment was a “credit positive development” that removes the immediate threat of the city defaulting on its debt or needing to file for bankruptcy.

Atlantic City Mayor Donald Guardian said in a statement late Friday he will begin the process of implementing a stabilization and recovery plan immediately, noting that he is planning monthly meetings and welcomes feedback from stakeholders as the process takes hold: “There will be a lot of tough decisions that will be need to be made over the next 150 days and there will a lot of sacrifices asked for by all…But I believe that by working together we will be able to accomplish this historic mission. We will create a new Atlantic City that will be the shining example for years to come: “There will be a lot of tough decisions that will be need to be made over the next 150 days, and there will a lot of sacrifices asked for by all…but I believe that by working together we will be able to accomplish this historic mission. We will create a new Atlantic City that will be the shining example for years to come.”

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