The Unique Governance Challenges of Looming Insolvency

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eBlog, 6/08/16

In this morning’s eBlog, we observe the continuing—excruciating–governance challenges in Michigan as the Governor and legislature struggle to find funds critical to averting insolvency—both fiscal and educationally—of Detroit’s public school system. That involves the hard political work of taking funds from one hand and transferring them to another city’s fiscal future: trusting that voters and taxpayers will appreciate and respect the importance of such an investment in a city’s fiscal future. Then we turn to San Bernardino—recognizing that in the uniqueness of our system, there is not only great diversity in the state laws providing for municipalities to file for chapter 9 municipal bankruptcy protection—but also amazing ways in which local democracy can work.

Will It Pass or Fail? A $617 million compromise plan to save the Detroit Public Schools from a potential municipal bankruptcy encountered an un-passing grade yesterday in the Michigan Senate yesterday—even as a new, long-term fiscal projection appeared to demonstrate Michigan taxpayers would have to pony up an additional $88 million—so that the total state cost would reach $705 million, according to a Senate Fiscal Agency report released yesterday. That report made clear there could be a ripple effect, as the higher costs could well dictate a potential withdrawal of funds from the Michigan School Aid Fund that supports public school districts across the state. Majority Leader Arlan Meekhof (R-West Olive) explained the heavy fiscal lifting: “This is a very difficult thing for people to understand and to vote for. We’ve got some work to do yet,” as the Senate adjourned without voting on the six-bill package approved last week in the House. The pending bill would call for the state to provide DPS with $72 million a year in tobacco settlement revenue — up to the $617 million total — but now Leader Meekhof said the Senate will look to authorize and identify a source for the additional $88 million, telling his colleagues: “We recognize there was not an accounting for some of the finance costs, so we’ve got to change that.” Such a math change will hinder the process, necessitating House approval, and likely dimming leaders’ hopes to complete consideration this week. There is even greater apprehension, however, that the additional fiscal assistance could be the proverbial straw to break the camel’s back, amid some growing apprehension about how to identify the financing costs and fiscal resources the state needs to move around in its own bank accounts. That is, there is recognition of the political reality that each additional dollar to go to DPS will have to come from someone else. Moreover, there is a recognition that any final package will require bipartisan support—or, as Sen. Goeff Hansen (R-Hart) told his colleagues: “I’m trying to make sure we put something through that works for Detroit, that works for the Detroiters, and that they’re part of the solution,” adding that he does not support the new proposal, because it does not include the Detroit Education Commission to regulate school openings, a concept backed by Gov. Rick Snyder and Mayor Mike Duggan, but opposed by the charter school lobby. Senate Finance Committee Chair Jack Brandenburg noted that the proposed $617 million bailout would provide better value for taxpayers than allowing the district to go bankrupt, starkly pointing out that a chapter 9 DPS municipal bankruptcy could cost the state “three or four times” more—adding, however, this would mark the last time he would be willing to provide fiscal assistance, or, as he put it: “It’s a rope…Pick it up and run with it and succeed. If you want to hang yourself with it, be my guest.”

Do You Recall or Remember at All? A remarkable consideration of governing, federalism, and municipal bankruptcy is the signal diversity of that process in the minority of states which have enacted laws to allow municipalities to seek chapter 9 protection—running the gamut from states such as Rhode Island and Michigan which provide for the appointment of quasi czars (receiver in the case of Rhode Island, Emergency Manager in Michigan) to states such as California and Georgia where the existing elected leaders remain in charge. Thus, in California, San Bernardino—proceeding through not just the longest municipal bankruptcy in American history, but also through a signal terrorist event, has now experienced the end of a recall campaign against Councilman Fred Shorett. The petitioner who had filed to circulate and lead the effort to have the Councilmember recalled last March failed to gain even a single signature by last Friday’s deadline. Perhaps fittingly, William Cioci, who had filed the motion of intent to circulate a recall petition, said he and other supporters of the effort decided it would be better to focus their resources on another issue: opposition to an attempted regulatory framework for marijuana in San Bernardino. The city currently bans the weed, but has been considering a change. For his part, the emerging Don Quixote of San Bernardino, Mr. Cioci, notwithstanding a failure to gain sufficient signatures last year, is proposing an alternative path toward marijuana regulation in San Bernardino: the creation of a city commission to decide the best marijuana policy—or, as he described it: “The people of the city deserve to have a say…Not all regulation, not all legalization, is always good or good for the city. These folks have already cost different cities a lot of money in lawsuits and the way that they do things.”

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