The Critical Role of State Leaders if Distressed Cities and Public Schools Are to Get Back on their Feet

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eBlog, 6/02/16

In this morning’s eBlog, we consider, again, the challenges the City of Detroit confronts in addressing the future of its public schools—an issue debated at some length yesterday at an annual retreat on Mackinaw Island of state legislative leaders—who have less than two weeks to act, and we consider the significant fiscal challenges that Atlantic City confronts in the wake of Gov. Chris Christie’s signing into state law legislation to provide the city a bridge loan to its fiscal future—a law which leaves in place not only significant constitutional challenges, but also shortcoming in the state law which could severely limit Atlantic City’s ability to recover. We would also like to note that feedback from the likes of retired U.S. Bankruptcy Judge Thomas Bennett; Marc Pfeifer of the Bloustein Local Government Research Center; Bob Deis, a former Stockton City Manager, the ever invaluable Jim Spiotto, Richard Ravitch, and others are invaluable to our efforts to try to provide not only emerging municipal fiscal distress information, but, more critically, analysis which might be valuable to other state and local leaders.

Atlantic City Surfs. Marc Pfeifer, ‎the remarkable Assistant Director at the Bloustein Local Government Research Center, and perhaps the most insightful expert about the precipitous fiscal future of Atlantic City, notes “It’s not over yet,” warning that notwithstanding the compromise between Gov. Chris Christie and the legislature to grant a time extension for Atlantic City to get back on its fiscal feet, the city, nevertheless, confronts significant challenges to address in order to come up with a balanced budget (under the terms of the law) for FY2017, not to mention assumptions it will make for its five-year plan. He adds, moreover, that because there are no standards for the New Jersey Department of Community Affairs (DCA)—the State agency created to provide administrative guidance, financial support and technical assistance to local governments, and community development organizations—the DCA Commissioner will have a great challenge in assessing and determining whether to approve or deny any budget and recovery plan put together by Atlantic City Mayor Don Guardian and his City Council, noting: to apply, “The only additional tool the law gave the city is authority for early retirement incentives (ERI) for employees. Lacking any of the tools the state gave itself under the takeover part of the law, this makes the city’s problem more challenging. The law did not give the city any new authority to negotiate or impose changes to labor contracts – which are some of the most expensive in the state. Unless the unions feel the need to cooperate (a potential state takeover did not faze them prior to this), the ERI will allow individuals with already lucrative retirement benefits to experience them early, with future city taxpayers paying the bill. This is further complicated by the ‘brain drain’ of losing experienced individuals and bringing in new, inexperienced ones.” He recognizes that other solutions (and tools) to address these issues should have been explored.

Mr. Pfeifer also points out that the new statute leaves in place substantial constitutional challenges were the State of New Jersey to seek to take over Atlantic City, noting such a takeover could be challenged on “constitutional principles of home rule, due process, and sanctity of contracts.” He added that even if the Garden State were to prevail on some of these issues, if the state wound up imposing this form of takeover, the court challenges would consume additional time.

Finally, he notes that the fact that this state last-minute action was needed pointed to the state’s failure to act sooner: “In the fall of 2010, the state gave itself, but did not use the full authority under pre-existing law, to oversee and manage the city’s finances. While Atlantic City now has problems which exceed ones faced by other cities in the past, we lost a good deal of time that could have been used to prevent the high-profile, politically bombastic process that we wound up with. We should have learned from our history and not try to invent solutions until the existing solutions fail.”

What makes this all so remarkable is New Jersey’s long and successful record at constructive intercession before a fiscal crisis arises. The state, under the Local Government Supervision Act, has authority, if the Local Finance Board determines that a triggering event has occurred, to not just monitor such a municipality’s financial affairs, but also to act to limit its debts and other financial obligations. It is clear the state’s past leaders recognized the constructive role the state could play to avert a municipal fiscal crisis. The state failure to act in a constructive way here appears to have imposed significant long-term costs not just on Atlantic City, but also on municipalities across the state. The question will be whether there are lessons learned.

R-O-L-A-I-D-S. Detroit will receive an additional $88 million in Troubled Asset Relief Program funding from funds provides to Michigan to raze blighted homes, allowing the city to clear thousands more houses in the next few years. Those funds could be essential to Mayor Mike Duggan commitment made last week to assist the city to meet its goal of demolishing 5,000 houses this year and 6,000 next year.

Focusing on Not Leaving a City’s Children Behind. The fate of Detroit’s children’s futures might hinge on the ability of Mayor Mike Duggan to convince Michigan’s business and civic leaders to oppose a proposed, compromise $617 million bailout of the Detroit Public Schools bailout which does not include a citywide commission to oversee where schools can open in the city. At the Mackinac Policy Conference, Mayor Duggan yesterday said Michigan’s largest school district would be set up for failure without such a Detroit Education Commission to oversee what would otherwise be a “chaos” of rapid school turnover in parts of the city where his administration is focused on rebuilding blight-ravaged neighborhoods. His comments came at a key moment as House Republican legislative leaders had been seeking support for a vote yesterday in Lansing on a package to address the $467 million school district, giving a new debt-free school district $150 million in transition money, but to exclude the proposed commission plan. However, the House adjourned last evening without voting on any Detroit school legislation, although House Speaker Kevin Cotter (R-Mount Pleasant) told reporters after the session: “We’re working on something, but it’s still not there yet.” Rep. Tim Kelly, Chair of the House Appropriations Subcommittee on School Aid, said he supports the tentative deal and is encouraging support from colleagues who voted last month for the original House package—a package which included $33 million in transition aid, but no commission—explaining the potential tradeoffs: “[W]without the commission” more dollars would go to DPS…That’s the exchange.” To which Mayor Duggan warned such a state aid package would be wasted unless there were a commission to help stabilize enrollment and finances at DPS, noting: “They know DPS is going to fail and that $600 (million) or $700 million is going to be blown…They know it. The Governor knows it. And they’re trying to pass it anyway.” Getting to the heart of the issue, Mayor Duggan was succinct: “Bringing back the riverfront and all of the houses isn’t going to mean a damn thing if we leave the children behind.”

The Mayor’s hopes seem to be earning a higher grade in the state Senate, where GOP leaders have been trying to preserve an education commission that could regulate where public and charter schools locate in the city. There the emerging compromise would include allowing a school board election for a new, debt-free Detroit school district to happen in November, according to an outline obtained by The Detroit News. Sen. Goeff Hansen (R-Hart), the lead sponsor of the state legislation overhauling Detroit’s public schools, and Gov. Rick Snyder both said yesterday they are still pushing for the House to include an education commission in the Detroit Public School District legislation.

For his part, Gov. Ric Snyder, who has been working with state Senate leaders in support of creating the proposed Detroit Education Commission, yesterday said: “I’m not willing to give up on the concept at this point in time,” in an interview with The Detroit News Editorial Board, although he signaled his main priorities for a DPS overhaul are mostly focused on paying off DPS’ $467 million in outstanding debt, so that a new Detroit Public School district would not only be debt-free, but also have access to $200 million in transition funding as well an elected school board, telling the News: “We need a financial solution, and I want the school board back, in particular.”

The final exam deadline for DPS and state leaders lapses in two weeks when the Legislature adjourns for its summer recess. Failure, warned John Rakolta Jr., Chairman and CEO of the Detroit-based Walbridge construction company, would trigger a mass exodus from Detroit Public Schools this fall if lawmakers fail to agree on a plan without the commission: “If we don’t pass the Senate bill, we’re going to have enormous student loss this October, and you better be prepared to go through this whole thing again next year at this conference, because we’re going to be another $150 million in the hole after we’ve paid off all of this debt.”


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