Any Hope for a Municipality’s Fiscal Future?

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eBlog, 6/09/16

In this morning’s eBlog, we consider the compromise agreed to by the Michigan Legislature last night on a $167 million compromise plan to salvage Detroit’s schools and avert a municipal bankruptcy filing. School financing—as we are watching the Governor and legislature in Kansas struggle to comply with the Kansas Supreme Court deadline to equalize public school financing or face a shutdown, is a complex balance—or imbalance—of local versus state control and public finance. Part of the challenge is with regard to local control—versus state authority when the state is putting up a disproportionate share of the revenue. Thus, the debate in Lansing so vital to Detroit’s future weighs these hard governing challenges. Then we run—in full—an incredible interview by Alexia Fernandez Campbell in the Atlantic with East Cleveland Mayor Gary Norton as Mayor Norton and his Council await a response to its request to file for chapter 9 municipal bankruptcy. It is, I think readers will agree, an extraordinary interview.

What Does it Mean to Detroit’s Future? Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) last night told his colleagues: “This (referring to the House-Senate $167 million agreement plan to help the Detroit Public School District to pay off debt and avoid a chapter 9 municipal bankruptcy filing) represents a realistic compromise for a path to the future. At the end of the day our responsibility is to solve the problem…Without legislative action, the Detroit Public Schools would head toward bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan.” Leader Meekhof added that—as adopted, the conference agreement would pay off DPS’ debt, provide transition costs for when DPS splits into a new and old district. Michigan Gov. Rick Snyder hailed the final agreement and restructuring, describing it as an “unprecedented investment” in Detroit’s children. The final late night, bipartisan vote on the six-part rescue package came near midnight—and in the wake of a closed-door caucus session with Gov. Rick Snyder—and notwithstanding harsh criticism from Democrats, who warned the package would not save DPS from collapse, yelling: “Shame, shame!” Sen. Bert Johnson (D-Highland Park) decried the lack of local input in shaping the plan, warning: “policies don’t work when they’re jammed down the throats of the people” in urban communities…If you do this, you are systematically destroying” Detroit’s public schools. Nevertheless, Gov. Snyder described the compromise as one that “represents a fresh start with more money in the classrooms for Detroit’s students, career stability for Detroit’s teachers, and fiscal accountability for all Michigan taxpayers: “This is a new day for education in Michigan’s comeback city.”

How the package will work is another question. As adopted, the legislation omits the proposed commission strongly advocated by Detroit Mayor Mike Duggan to regulate traditional and charter school locations in the city; it does include provisions to crack down on teacher “sickouts,” implement a merit pay system, and allow the Detroit school board to approve non-certified teachers in Detroit schools. Sen. David Knezek (D-Dearborn Heights) described the agreement as one which was “little more than a stay of execution: Once the money runs out, and it will run out, the district will plunge back into debt and jeopardize the future of Detroit children.” Under the conference report, Detroit voters would elect a new school board next November; those elected would take office in January, and a state-appointed transition manager—presumably the current emergency manager. Retired U.S. Bankruptcy Judge Steven Rhodes—would run DPS until that time. In addition, Detroit’s post-municipal bankruptcy Financial Advisory Commission would be expected provide oversight over DPS finances and have final say with regard to some employment decisions.
Equity & Balance. Rep. Brian Banks (D-Detroit), in opposing the plan, warned it would create an uneven playing field for Detroit schools, telling his colleagues: “Some district have the best and brightest teachers, but we’re now allowed to have uncertified teachers…Don’t our kids matter? Our school kids deserve the same things as kids in Holland and any of these other Republican districts.” Just as the Kansas legislature is struggling to comply with a Kansas Supreme Court deadline to craft a fiscally balanced plan for that state’s public schools, the debate and outcome in Lansing last night demonstrated the hard and harsh realities involved in appropriating funds and determining equitable balance in a highly charged political atmosphere. In addition to the question of funds, the debate also triggered fierce governance debate over school governance: Sen. Goeff Hansen (R-Hart), the author of the original bipartisan Senate plan, ended up opposing last night’s compromise, because it omitted the school location commission strongly advocated by Mayor Mike Duggan—but opposed by the charter school lobby, warning his colleagues: “We should be focused on creating an environment where good schools of all type have an opportunity to flourish and provide the education services our children truly deserve.” Instead of a commission named by the Mayor, the new package calls for an advisory council which would produce reports highlighting where schools are needed and study a potential city-wide transportation system to serve all students: said six-member council would include district officials and charter representatives. Under the package, the School Reform Office would be charged with developing an A-F letter grade system to evaluate schools: poor-performing traditional public or charter schools could be closed.

Any Hope for a Municipality’s Fiscal Future? Alexia Fernandez Campbell, writing for the Atlantic yesterday (“A Suburb on the Brink of Bankruptcy”), asked if there was any hope for the city of East Cleveland—soon to be the closest bystander to the GOP convention to nominate Donald Trump. The city, which is awaiting a response from the state to its petition for chapter 9 municipal bankruptcy, is nearing its own Twilight Zone when it will run out of the fiscal means to pay for the provision of essential public services, including police, fire, and trash collection. So Ms. Campbell took the proverbial bull by the horns and tried to get at the heart of the municipal fiscal dilemma: she did an interview (please see below) with Mayor Gary Norton:

Q: How did East Cleveland become financially insolvent?

A. Mayor Norton: The lion’s share of a city’s revenue, for almost every city in Ohio, would be the income tax. The income tax is essentially the revenue that is generated from the number of working people who live in your city, and the number of people who come to your city to work within your borders each day. In 1970, the population of East Cleveland was 40,000. The number of people working was 20,000. The average household income in today’s dollars was $50,000. Now, I’m going to give you that same set of numbers today: The population is 17,000, the number of people working is 5,000, and the average household income is $20,000. Just that set of numbers tells the story.

To fill in the gaps are huge things like global economic shifts, manufacturing, and labor-intensive industries moving south, west, and overseas. This is not an East Cleveland phenomenon. But GE Lighting, for instance, used to do its manufacturing in East Cleveland. They had a workforce of about 2,500 people. With offshoring and other changes, they’re down to about 600 employees. We used to have the auto industry here. We used to have a lot of manufacturing here in East Cleveland.

Q: This phenomenon happened in many Rust Belt cities. Cleveland seems to be making a bit of a comeback. Why not East Cleveland?

A: Cleveland is big. It has all of the assets and income-generating centers that a big city has. Think about the tall office buildings and types of businesses that operate in those buildings. Law firms, professional services, professional sports teams, airports, all those things. Each one of those high rise buildings generates millions of dollars in tax revenue for Cleveland. It is diverse enough to weather the storm of a tough economy, even a tough 50 years.

A smaller place can do very, very well if the right elements are within its borders, or it can do very, very poorly if the right elements leave. The right elements left our borders, and without all the assets that a big city has, without the diversification, that’s a bad situation. In East Cleveland, the population that left has not been replaced. Not only do you have a 60 percent drop in population, the people who left did not pick up their houses and take them with them. We have a large population of vacant and abandoned housing.

Q: So why would anyone want to be mayor of a place like this?

A: Because I care about the community and want to go in a different direction.

Q: Did you think that there was a different solution at the time you ran for office?

A: Sure. Absolutely. At that time, the revenue problems were not as pronounced. During the time I became mayor, the state of Ohio took away revenue streams from cities. They took away the local government revenue fund. It is essentially all of the taxes and stuff collected by the State of Ohio. Revenues like sales tax, and income tax, and property tax, etc., they’re generated in the cities, so the state disburses some of the money back to local government, like shared revenue. The state cut that in half. When 20 percent of your budget is from the local-government revenue fund, and that’s cut in half, that’s cutting 10, 12 percent of your budget. That’s what happened to us. Cities in Ohio also used to receive estate tax, the state cut that out.

There were other revenue streams, but one in particular that affected us. The state of Ohio, at one time, allowed traffic cameras to generate automated tickets. For all intents and purposes, the state legislature outlawed those or made it so difficult and costly to provide them that they were just abandoned by the cities. Taking away these revenue streams is like taking legs from a table or chair. East Cleveland now has a revenue problem.

Q: How will [municipal] bankruptcy solve East Cleveland’s problems? Will it solve them?

A: Bankruptcy is a tool. It will not solve the problem. The real problem is generating revenue to run a city. If we were able to generate more revenue, about six billion dollars every year—60 percent more than we are getting now—we could limp along. Bankruptcy is a cost-side solution. A cost-side solution will not work in East Cleveland. Bankruptcy is designed for debt-laden, future-obligation-laden organizations and institutions. East Cleveland, unlike Detroit, does not have future liabilities to past employees. In Detroit, the city was on the hook for the monthly pension payments to its retirees, plus their healthcare. We don’t have those major issues. East Cleveland has no debt, because we have not had a bond rating since 1988.

Q: It’s just not rated at all?

A: Not at all, since 1988. Cities use their bond ratings to get public financing for major projects, convention centers, stadiums, big development projects of a private nature, replacing entire streets, things like that. You pay them back over 25 to 30 years. You pledge your revenue stream, and if you don’t get that, use your bond rating. East Cleveland can’t do that because it doesn’t have a bond rating. Without the ability to bond that, we have no operating capital to do the major infrastructure replacements and upgrades that are necessary in a normal functioning city.

In East Cleveland there is very little real debt. The debt in East Cleveland is not debt, because we borrowed for projects. It’s the $500,000 balance on our light bill. We’ll call it debt simply because it’s past due, is probably about $3 million bucks, maybe a little bit more. In a bankruptcy situation, you settle those things for some amount of cents on the dollar, theoretically. If we did that, that would mean that we pay less, which could be beneficial.

Q: No city in Ohio has ever gone bankrupt. Wouldn’t bankruptcy make it hard for East Cleveland to ever get any kind of loan or investment in the future?

A: The possibilities are already eliminated. East Cleveland was in fiscal emergency from 1988 until now, with the exception of just a couple of years. Cities in fiscal emergency have a single tool available to them that is calling local-government borrowing. Basically, it’s a pledge of the revenue that you received from the state of Ohio, in order to pay back an amount that you borrowed for certain purposes. That was East Cleveland’s one shot, in the past ten years, of borrowing money. We applied for it, the city council authorized the application, and it was denied by the state of Ohio.

Q: When you ran for mayor, you said the solution was to get people to move here, and to attract businesses. Did you ever think that it would come to this?

A: I hoped it wouldn’t come to this, but I’m a realist, and it has come to this. What I realize is that we assumed that the tools that we had would always be available to us, but significant sources of revenue were taken away.

Q: Do you blame the state of Ohio for your present situation?
A: The state did not take East Cleveland’s population from 40,000 to 17,000. It was the result of collective decisions by individuals, families, and employers to locate outside of East Cleveland. The reason I don’t point fingers anymore is because I see it as the systemic problem that it is. There’s an economic problem in the city of East Cleveland. Our borders are so small that the downturn in the economy, given our lack of size and diversification, has negatively impacted our ability to raise enough revenue to run the city.

Q: Is there any way to raise revenue, or do you just give up? What are you hoping will happen?

A: I was hoping and I thought that we would be able to attract new residents, because of our proximity to the second-fastest job growth center: University Circle, right down the street. People want housing within a stone’s throw of University Circle. The problem is, developers want financing, and they want municipal participation in financing, which East Cleveland—because of no bond rating—cannot do. They also want a stable and competent political infrastructure. We haven’t had that in East Cleveland. All of those elements that are required to have a successful climate for investment, we’ve always scored very low in those categories.

Q: There’s also been some talk about merging with the city of Cleveland. Is that something you would like to see?

A: I’d like to see us explore it. The revenue necessary to run a city is no longer generated by the East Cleveland local economy. These borders cannot and will not, for any length of time, generate the amount of revenue, no matter what happens. The solution to that is to change the borders of the economic unit. In Cleveland, you have a very large economic unit, with multiple sources of revenue generation. Cleveland has in place a fire fleet, a police fleet, a trash fleet, a street fleet, road fleet, auto company, all those things that you need.

Q: This sounds like it would cost the city of Cleveland a lot.

A: It would.

Q: Why would they do it?

A: When you add East Cleveland to the already existing city services, the already existing economic development infrastructure, the already existing bond rating, we get instant access to the tools to develop that area close to University Circle. There is an economy of scale that exists in Cleveland, and if we were to join that, it would probably create some efficiency.

Q: Is there any hope at all for East Cleveland?

A: Yeah, there’s plenty of it. There are great people here, there are hardworking people here, there is great property here. But there comes a point where you have to consider whether the best option is putting yourself out of business. I entered public service to help people and help the community. If the best service we can provide to people is dissolving our own city government, so be it. The first person put out of work during a merger is the mayor. I’m fine with that.

 

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