Getting Out of-and Into Municipal Bankruptcy

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eBlog, 7/27/16

In this morning’s eBlog, we consider the truly extraordinary recovery from the nation’s largest ever municipal bankruptcy in Detroit, where the city appears to be in the forefront of becoming the nation’s newest Silicon Valley: a center of innovation and technology—but one where the future—as with every city and county—will depend upon its ability to educate its next generation. Then we consider the state-local relationships that could constitute the blueprint for shaping Detroit’s emergence to being, once again, the nation’s motor city. Finally, with the Republican convention over in Cleveland, we consider the options under consideration for neighboring East Cleveland, a municipality awaiting  permission to file for chapter 9 municipal bankruptcy, but also whether its importuning of the City of Cleveland might obviate the need to seek federal municipal bankruptcy protection.  

The Motor City’s Kids’ Future. It is difficult to imagine a city or county building its future without addressing its next generation. Yet, in America, the governance and provision of education is a messy complex of state and local revenues—and governance. It has, of course, been further muddied in Detroit by the city’s bankruptcy—and the Detroit Public School system’s insolvency–even as it now appears the city is on the edge of becoming the nation’s new Silicon Valley. That is, even as automotive innovation is emerging in California’s Silicon Valley, where the innovative center of 22 cities and counties, Stanford, and San Jose State universities, and a host of corporations have long-held sway in the world of innovation; Bill Ford, Ford’s Executive Chair, today advises that Detroit now has the opportunity to become the country’s center when it comes to all things involving the movement of goods and people: “The way people move, the way goods move, the way health care is delivered…is going to change in a very short period of time…And I love the fact that Detroit can be and should be ground zero for this change.” Indeed, it seems the pace of partnerships between the automotive industry and Silicon Valley tech companies will continue to accelerate as the two industries work together to develop autonomous cars and reshape the automotive industry—or, as Mr. Ford notes: automakers face a stark choice: either join the game, or face the prospect of being left behind: “In Michigan and Detroit, we have more engineers here than any other state. We have a huge customer base here with (automakers) and tier one suppliers, and this should be mobility central. Not Silicon Valley. Not Austin, Texas. Not Boston.”

If anything, the Indy 500 pace of innovation in Detroit has been eye-snapping: earlier this month:

  • GM completed its acquisition of Cruise Automation, a 3-year-old San Francisco start-up, for an estimated $1 billion;
  • FCA reached a deal to build 100 Chrysler Pacifica hybrid minivans for Google’s Self-Driving Car Project in May, and
  • Mr. Ford announced two weeks ago it has invested $182 million to fund and collaborate on software development with San Francisco-based Pivotal. (Ford, reportedly, has also been in discussions with Google as well, and FCA’s partnership with Google is not exclusive.

Mr. Ford notes that the Motor City is a city where the cost of living is low, and entrepreneurs can make a difference: he describes the people who start new companies here as brave: “You guys want to be trailblazers and you guys want to be brave. You could go to Silicon Valley…and have a great life…But if you are successful here…people are really going to notice and they are going to love you for it and you are going to be part of something special.”

But the future depends upon the rising generation—ergo from whence will the talent critical to Detroit’s future arise? Some, clearly, will be imported from the Silicon Valley, but a vital part—if Detroit is to have a competitive future—will have to emerge from its currently insolvent (physically and fiscally) public school system. Thus, next November’s election of a new Detroit school board will be a key to Detroit’s ability to compete with the Silicon Valley. The race has attracted a, shall we say “huge,” field of candidates: 72 have filed to compete for seven seats—seats on a board in a city where municipal services had been failing, in a metropolitan region ranked 10th worst of 942 metro regions in the U.S.1 in a measure which considers both the number of units administering common services and each government’s related expenditures. As we had noted in our report: “Detroit, nearly encircling two failing municipalities, must redesign and coordinate and share services with other jurisdictions in the metropolitan area to both reduce costs and ensure far more effective delivery of essential services…the city’s 78,000 vacant structures and 60,000 vacant land parcels ‘present an ongoing public safety and public health concern,’ forcing the city, despite the signal loss of population, to provide and maintain services over its 139 square miles—an area that contains 78,000 abandoned and blighted structures, nearly half of which are thought dangerous, and 66,000 blighted and vacant lots which encourage fires and crime.” As we had opined, the exceptional challenge for the City of Detroit was not just to exit the largest municipal bankruptcy in the nation’s history, but also to ensure a post-bankruptcy growth plan. How can a city, after all, create a future without taking into consideration its own public school system? What could be more important not just to a city’s ability to invest in innovation, but also to attracting families to want to live within its boundaries?

Thus, if there is any good news, it is the plethora of candidates vying in November—a number which includes former board members, educators, and parents—with whomever the victors are who emerge responsible to select a superintendent for the new Detroit Public Schools Community District—to relieve the exceptional rhythm guitar playing, former U.S. Bankruptcy Judge Steven Rhodes. Their task will be vastly complicated by the complex navigation required to emerge from state control of the district under a series of emergency managers dating back seven years—and the existing state-approved rescue package, including fiscal oversight by the Detroit Financial Review Commission.

Downsizing to Rightsizing. Michigan’s economic development board this week approved an additional $17 million state investment in a project to transform Willow Run’s one-time World War II bomber plant into a hub for autonomous vehicle testing—where some $20 million of Michigan’s Strategic Fund investment in the American Center for Mobility will be used toward purchasing land at the site of the former General Motors powertrain plant, designing and constructing a high-speed loop test track, or, as John Maddox, president and CEO of the American Center for Mobility, out it: “We’re getting a lot of attention around the nation and really around the world, and that’s really because the state of Michigan is investing in this.” Steve Arwood, president and CEO of the Michigan Economic Development Corp. and Chairman of the Michigan Strategic Fund board, added that the state’s taxpayers’ vital investment in the facility is critical to maintaining Michigan’s stronghold in the development of autonomous vehicles, noting: “Ultimately it’s in the best interest of the state to preserve the future of our automotive industry.” The Center is aiming to complete a 335-acre test site that would include tunnels, bridges, traffic stops, suburban cul-de-sacs and city streets to test the driverless cars of tomorrow: an almost city of innovation where the autonomous vehicle nonprofit organization hopes to attract federal grants and additional private investment for automated driving technology at a site owned by RACER Trust, the entity set up in GM’s own 2009 bankruptcy to sell off land left vacant by closed and abandoned auto plants: Mr. Maddox reports an entity called the Willow Run Arsenal of Democracy, or WRAD, will purchase the land from RACER Trust, adding that Michigan’s risk-based investment in the infrastructure of building and testing autonomous vehicles keeps Michigan competitive with California and foreign countries racing to develop the technology.

Wherefore East Cleveland’s Future? With the RNC convention over in adjacent Cleveland—and still no word back from the State of Ohio with regard to authorizing East Cleveland to file for chapter 9 municipal bankruptcy, the small city may consider adopting an ordinance (#4-16) this week to commence the opening stages of annexation negotiation with Cleveland: Council President Thomas Wheeler said the Council will have a special meeting in the next week to vote on two ordinances: the first would declare East Cleveland’s intent to enter annexation talks with Cleveland and appoint three commissioners who were interviewed by council after an open application process; the second would require Mayor Gary Norton to deliver a letter to the Cleveland Foundation seeking funding for a financial study by the firm Conway MacKenzie, an adviser in Detroit’s bankruptcy. The study for the nearly insolvent municipality would cost approximately $50,000-70,000. Of course, it takes two to party, so any steps towards annexation would require reciprocation from the City of Cleveland—where, as one can imagine, the prospects of annexation might not hold great attraction.

For East Cleveland, the proposed ordinance would lay out some of the guidelines for such commissioners, including the process for requesting information from the city and the requirement that the selected commissioners should report to council every two weeks. Mayor Gary Norton said the appointments would be great progress on the annexation idea which has been discussed for years. 

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