The Key Role of States in Acting to Allow Fiscally Sustainable Municipalities.

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eBlog, 8/31/16

In this morning’s eBlog, we consider the narrowing fiscal options for Atlantic City—in a state which appears to have abandoned its long and strong reputation for working with—rather than against—its cities. Then we return to the seeming inability of  near-insolvent East Cleveland—the small Ohio municipality still awaiting authority to file for chapter 9 municipal bankruptcy—to craft a proposal to seek consolidation with neighboring Cleveland. Finally, we turn to grim fiscal findings in Michigan, where—notwithstanding a strong state fiscal recovery—the state’s municipalities—for the first time since the Great Recession are reporting a decline in fiscal health.

Is the Fiscal Deck Stacked Against Atlantic City? Atlantic City has reduced its budget by about 10 percent from a year ago; however, the new, proposed budget assumes requested state aid—assistance the city appears unlikely to receive. The proposed $243 million budget assumes some $106 million in state aid, including $37 million of requested Transitional Aid, or state funds for financially distressed municipalities. The request is more than double the $13 million in Transitional Aid the city received last year (along with eleven other municipalities), and Council President Marty Small, Chair of the city’s Revenue and Finance Committee, warns: “If they say they’re only going to give $15 million and the fund doesn’t come from another source, it will be a monumental tax increase on the city side.” To carve the budget as much as the city did, salaries and wages were cut by nearly 25 percent or $30 million from the current $110 million, according to a summary of budget appropriations—or, as Mayor Guardian put it: “I think everybody took a hit, a haircut…No one group represented the big savings.” The cuts were partially offset by the city making up for deferred group health insurance obligations and higher debt service. And although the budget assumes no change in the municipal tax rate, increases in county and school tax rates raised the total rate nearly 29 cents to an estimated $3.71 per $100 of assessed value, according to the tax assessor’s office. But even with those increases, the total revenues are down about 15 percent from last year, because the city’s ratable base has plunged from $20.5 billion in 2008 to about $6.6 billion today. The next step is to forward the proposed budget to the New Jersey Local Finance Board for adoption, albeit a spokesperson for the Board warns that any Department of Community Affairs said Transitional Aid “must be resolved prior to the adoption of the budget.” Councilman Frank Gilliam, who has proposed a public hearing on the budget, has expressed apprehension and stated: “I don’t think we should basically move forward with a line item in the budget that does not have either something committed in writing or some type of credits set aside for the city,” while his colleague, Councilman Jesse Kurtz, is urging the state to “sign an affidavit that they’re going provide this pledged revenue,” adding: “Because last time they didn’t, and as far as I’m concerned they still owe us over $30 million from last year’s budget.” Equally apprehensive, Councilman Moisse Delgado said he has “the smallest bit of trust that the state will provide the funds that we need.”

Play it Again, Sam. The East Cleveland City Council has voted once again to enter into annexation negotiations with Cleveland, with City Council President Thomas Wheeler noting: “When you make a mistake, you realize you make a mistake, and you correct your mistake. I think that’s big of us.” As we noted last week, Cleveland City Council President Kevin Kelley had termed East Cleveland’s proposal a “non-starter” because of the conditions that came with it. East Cleveland, with little tax base and almost no economic development, appears to offer little attraction to Cleveland—especially when, as last week, East Cleveland came to the table with significant demands. The situation governance-wise is complicated, as each city would have to opt to approve a proposal—and East Cleveland appears to have no other irons in the fire—except to press the state to allow it to file for chapter 9 bankruptcy.

Why is what’s good for the goose not so for the gander? A new study by the University of Michigan’s Center for Local, State, and Urban Policy reports that for the first time since the Great Recession, more of the state’s municipalities are reporting a decline in fiscal health: of Michigan’s 1,856 units of local government, 31 percent report they are better able to meet their financial needs this year—compared to 38 percent last year—all of which denotes a singular reversal in the wake of what had been five years of steady statewide improvement. If anything, the state’s exceptional role as a center of innovation in the emerging self-driving emergence has been a keystone to the state’s economic rise. However, according to Centers Director Tom Ivacko, the reversal in fiscal health at the municipal level is what he terms “an early warning sign here that even though the Michigan economy is still improving, [but] what we have seen this year in fiscal health in terms of local governments is reversal in a trend that we’ve been tracking since 2010…It appears that there is a disconnect now between economic growth and local fiscal health in Michigan.” He attributes that to what he calls Michigan’s broken funding system for local governments. The findings have emerged from eight statewide surveys conducted annually since the sharp economic decline of the Great Recession, with local governments responding to questions about changes in fiscal health: whether their jurisdictions are better able or less able to meet their financial needs at that time, compared to the previous year.

Perhaps the most important marker of the turn in local fiscal fortunes can be gleaned from local property tax revenues—the most important source of funding for Michigan municipalities: according to the report, the slow increase in property tax revenues dating from 2010 appears to have topped: this year 42% of Michigan municipalities reported their property tax revenues as increasing compared to 25% reporting them decreasing; last year, 45% reported such revenue growth. Mr. Ivacko notes the trend is of such great concern, because, should the economy falter, the state’s municipalities will face an even greater risk for fiscal declines. And, worryingly, the University of Michigan Research Seminar in Quantitative Economics expects both the U.S. and Michigan economies to expand at a slightly slower rate in the coming year—and Michigan is generally expected to grow more slowly than the nation as a whole.

Adding a double whammy, the report also found a worsening trend in state aid to local governments: only 18% of local governments reported an increase in state aid compared to 28% the previous year—the first such decline since 2011. The state preemption or limitation—the so-called Headlee Amendment and Proposal, which preempt local revenue authority have, as Mr. Ivacko notes: “really restricted revenue growth for local governments even as the economy has improved and many housing markets and home values have improved significantly…I think that is probably the single most important factor in why we are seeing local governments’ finances not improving as much as they should.” Worse, the state preemption is more than offsetting the gradual increase by the state in general revenue sharing—which, even if rising slightly, is down some 25% or $6 billion since 2000. Or, as the ever insightful Richard Ciccarone, President & CEO of Merritt Research Services, puts it: “When you look at the credit of Michigan cities, you have some that are ranked among the worst in the county like Wayne, Lincoln Park, Detroit, Flint, and even Lansing are among the bottom 1% of all cities; One thing that makes it worse is that their debt levels are up and that put more burden on these cities…Their flexibility is limited…It looks like cities in Michigan are headed for challenges yet. Some of the most challenged cities in America are in Michigan and yet the majority also look like they are faced with the challenge of rising debt and decreasing reserves.” According to the report, 60% of Michigan’s local jurisdictions claim their general fund balances are at the right level.

A guest editorial, “Lansing, are you listening to Michigan cities?” was posted yesterday by the Tribune News Services.

For the first time since 2010, a growing number of local governments are worried about money — and the future.

We hope Lansing is listening.

After the 2008 economic crash, local governments lost tax revenue, in part because the state continued to cut the amount of tax dollars it sends back to cities, but also because a wave of foreclosures dropped the value of commercial and residential property on which owners are taxed. Think about your own tax bill — if you paid less, it means your city, county and school district had less money to pay cops and firefighters, pave roads and pay teachers.

But since 2010, things have been looking up, according to the University of Michigan’s Center for Local, State, and Urban Policy’s annual survey of local leaders. As the state’s economy has improved, those leaders have reported improved financial stability, and a positive outlook.

This year, that changed.

Just 31% of Michigan local leaders said they’re better able to meet their community’s fiscal needs, down from 38% in 2015. While 42% say property tax growth is increasing, that’s also down from last year, when 45% of leaders saw growth — and the number of communities who say state aid is declining grew, from 18% in 2015 to 20% this year. Thirty percent say they’ll rely on savings to cover budget gaps, up from 26% last year. And only 28% believe their area will be better able to meet its financial needs next year, down from 36% in 2015.

In other words, thanks to stagnant property-tax growth and declining state aid, as well as rising costs for infrastructure — many communities delayed or deferred necessary maintenance during the recession — and higher personnel costs, including pensions and retiree health care, a growing number of local leaders say they’re worried about the financial future.

It’s true that the study’s findings don’t represent radical jumps. But taken in total, it’s a worrisome reversal of a six-year long trend of improving conditions.

And it’s just another reminder that our elected officials in Lansing should amend the way our state funds cities.

Because Proposal A and the Headlee amendment cap the way cities collect property tax, dramatic losses in value like the ones our state experienced in the foreclosure crisis — an unprecedented crash that the authors of Prop A couldn’t have foreseen — can’t be quickly recouped.

The state has aggressively cut the number of tax dollars it returns to cities. Between 2003 and 2013, a Michigan Municipal League analysis found, the state cut $6 billion in revenue-sharing. In 2003, the state sent about $900 million to cities each year. In 2013, it was $250 million. The impulse to disconnect state and local government financial health is a peculiar understanding that’s informed Gov. Rick Snyder’s budgetary priorities. Snyder has focused on improving the state’s fiscal health, even if that means making cuts to local governments. But the plain truth is that the state cannot claim financial health while its cities, counties and townships struggle to provide services.

Neither Snyder nor the legislative leaders who set Lansing’s agenda have shown willing to take these problems on. But a reconsideration of the way we fund cities — the way we pay for retiree pensions and health care, the way cities collect property tax, and the state’s obligation to fund local government — is long overdue.


Trumping a Post-Bankrupt City?


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eBlog, 8/30/16

In this morning’s eBlog, we consider the imminent visit of candidate Donald Trump to Detroit—a city which he has harshly criticized, and the reaction of Daniel Howes, a fine columnist who has chronicled the fall and rise of the once and future Motor City. Then we return to the awkward un-mating efforts by near-insolvent East Cleveland—the small Ohio municipality still awaiting authority to file for chapter 9 municipal bankruptcy—with neighboring Cleveland.

Daniel Howes, the perceptive writer of editorials for the Detroit News, this morning writes—in response to GOP candidate Trump’s criticism and visit to the City:

“It is a city cleansed by the kind of Chapter 9 procedure a serial bankrupt like Trump should love, it is on a narrow path to financial sustainability. The private sector, unofficially led by mortgage mogul Dan Gilbert, is investing billions to redevelop downtown and Midtown. Political leadership in City Hall is more aligned than any time in decades, and its posture toward business and developers generally is less adversarial than most anyone can remember.

“Perfect? No. Free of violent crime? No. Able to supply a solid public education for its children? Often not. But Detroit’s reimagination (not a comeback, because there is no going back to the Old Detroit) is a process. It’s not a destination, and it’s not a guarantee.

“The Detroit that Trump is scheduled to visit this weekend is less the place of lazy coastal caricature and more a place of reinvention and renewal. It’s a city where the Democratic mayor is more willing to work with Republicans in Lansing than any Detroit mayor in the past 40 years; where a Republican governor has assembled a record of assistance and advocacy not seen since Millikin was governor and Coleman Young was mayor.”

Unmergering. At an emergency City Council meeting in East Cleveland last night, after Council President Thomas Wheeler said requests made in a memorandum of understanding with regard to the municipality’s efforts to be annexed into Cleveland, and that the way the Mayor and Council had proposed its memorandum of understanding had been misconstrued and blown out of proportion, Councilmember Wheeler stated East Cleveland is moving forward with an ordinance toward annexation with Cleveland, but without the list of recommendations that had elicited such consternation. Councilman Wheeler then added, however, that he did not fully support the proposed consolidation—notwithstanding its unanimous passage by the Council; nevertheless, he noted: “When you make a mistake, you realize you make a mistake and you try to correct it. I think that’s big of us and that’s what we’re going to try to do.”

East Cleveland Mayor Gary Norton, who did not attend last night’s emergency meeting, sent the following statement:

“Tonight East Cleveland City Council reconsidered and passed an ordinance appointing three members to the Cleveland/East Cleveland merger commission. East Cleveland City Council removed the list of discussion items that last week garnered much public attention. The new ordinance will be forwarded to Cleveland City Council.

“I commend the members of our city council for accepting public input and doing what is right. Council president Tom Wheeler acted quickly to call a special meeting and urge the Council to change course. This type of action is not an easy thing for a city council. It is my hope that the merger discussions will move forward with a renewed spirit of cooperation between the two cities.”

There will be a public meeting tomorrow afternoon at the East Cleveland Library for residents to weigh in before a new memorandum of understanding is drafted. Three commissioners that have been appointed as part of annexation negotiations will be present.

Unsurprisingly, Cleveland has not appointed anyone to negotiate.

The Awkward Mix of Democracy, Governance & Insolvency.

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eBlog, 8/29/16

In this morning’s eBlog, we consider the important debate between candidates in November’s municipal election in what could be post-bankrupt San Bernardino on the critical issue of the city’s charter—an issue we had noted in our original report on San Bernardino to be “a key challenge” if the city was to have a future. Then we turn, again, to the aftermath of the City of Cleveland’s rejection of nearly insolvent East Cleveland’s proposal to be annexed by Cleveland: what options are next? Then we veer south to consider the enduring confrontation in municipal distress and bankruptcy between public pension obligations and essential public services—and municipal bondholders—today in not just Puerto Rico, but also in the nearby Virgin Islands.

Is Post Chapter 9 as Simple as a Coin Flip? In our original report on critical factors which forced San Bernardino into the longest municipal bankruptcy in U.S. history, we wrote that in the estimation of most individuals, “a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” So too does the city’s plan of debt adjustment awaiting final approval from U.S. Bankruptcy Judge Meredith Jury’s approval next month. Indeed, the city’s plan calls for the city to “update the charter to operate in a more efficient, accountable, and transparent way.” So now it is that a new version of the charter — in essence, a constitution that structures the city’s government and limits what officials may do — will be on the ballot Nov. 8, after a citizen committee determined that the existing charter contributed to the city’s problems and spent nearly two years writing a new one. But whether it will remain has become a political football.

The argument in favor of the new city charter is signed by Jill Vassilakos-Long, president, League of Women Voters of San Bernardino; Albert Karnig, president emeritus, Cal State San Bernardino; Margaret Hill, board member, San Bernardino City Unified School District; Gloria Macias Harrison, small businesswoman; and Chris Mann, founder, Inland Empire Taxpayers Association.

“The Bankruptcy Court’s Recovery Plan called for the city to update the charter to operate in a more efficient, accountable, and transparent way,” they argue, listing some of the components of the proposed new charter. “Measure L does that so San Bernardino can get back on the right track and begin to move forward.”

Because, now it is that former City Attorney James Penman and his opponent in November’s election, Tim Prince, each believes that changing the city charter would be a bad idea; moreover, they represent groups which have submitted ballot arguments against the charter change proposal. Their arguments, however, are different—creating a distinct challenge for City Clerk Gigi Hanna: on which may voters opine? Being on vacation in Oregon, she opted to flip a coin to decide—an action which the loser, Mr. Penman, the former city attorney, ergo, objected to as a “clandestine” coin toss, saying she should have selected the argument signed by himself and other current and former elected officials: “You have chosen to print an opposition argument with little or no substance, one signed by citizens whom we assume are well-intended but who, unfortunately are not as well informed as to how the repeal of our current, pro-public city charter and its replacement by a voter unfriendly substitute, will impact San Bernardino City governance…Just as disturbing is the fact that you purportedly made your decision based on a ‘coin toss,’ held without any notice or public announcement beforehand.” In a follow-up email, he added that his interpretation of the law his group’s argument should be put on the ballot, warning: “Failure to do so could result in a subsequent invalidation of the election outcome, in our opinion.”

Mr. Prince, who ran to replace Mr. Penman as City Attorney, responded: “That’s typical banter from a really disastrous city attorney who took over this city at its top as an All-America City, as a city that had a bright future, and, through his personality, flaws, and defects literally ran us into the ground and wouldn’t let go his clutches until we were gasping for our very life in [federal] bankruptcy court…and he still thinks he has the answer.”

Under California’s election laws, when more than one argument is submitted, the code states that the city election official (Mr. Hanna in this case) “shall select one of the arguments in favor and one of the arguments against the measure for printing and distribution to the voters,” instructing said official to give preference, in order, to members of the legislative body authorized by that body, the sponsors of the measure, bona fide associations of citizens, and individual eligible voters. Although Mr. Penman’s first contention was that the coin toss should have been public, in the wake of consulting the election code, he noted that his argument was the only one signed by a member of a legislative body — Councilman John Valdivia, the only councilman to vote against putting the charter on the ballot; thus he acknowledged that Council Member Valdivia was not authorized by the City Council, but said it would be unrealistic for the majority that voted against him to make that authorization. Ergo, he wrote: “Nonetheless, the intent of the Legislature in passing §9287 is clearly shown by stating that a member of the legislative body was to be given preference in writing a ballot measure argument under the conditions stated…We contend that the spirit of the law, giving preference to a member or members of the legislative body, should be applied by you in this case and the argument against Measure L signed by Council Member Valdivia should be the one printed.”

City Attorney Gary Saenz said his deputy, Jolena Grider, recommended a coin toss — or the roll of a dice in the case of marijuana legalization measures that also drew more than one argument against, but not the controversy.

Mr. Prince’s argument was signed by Clifton Peters III, president, San Bernardino City Library Foundation; Roger Henderson, ambassador, San Bernardino Area Chamber of Commerce; Robert Porter, founder of the Facebook group “I Love San Bernardino;” Richard Avila, business owner; and Prince, who is vice president of the Democratic Luncheon Club of San Bernardino. It notes “checks and balances” of allowing people to elect the city attorney, city clerk and city treasurer, which would be appointed positions under the new charter, and emphasizes San Bernardino’s heritage: “This proposal to throw away our historic charter follows outsourcing City departments and giving away our historic fire department, reflecting loss of pride in our history and hope in San Bernardino’s future…We stand apart from cookie cutter cities in Orange County (from which our politicians’ high-priced consultants hail). Orange County suburbs lack San Bernardino’s time-tested charter, heritage and follows.”

In contrast, Mr. Penman’s argument is signed by John P. Wade, a retired Superior Court judge; former mayors Evlyn Wilcox and Judith Valles; Valdivia; and Mr. Penman: who claim Measure L would eliminate citizens’ votes, lessen accountability, mean no independence, and remove power from the elected mayor to give it to the unelected city manager, claiming it would take away voter choice and reduce “accountability to the people and increase exposure to mismanagement and corruption similar to that alleged in Bell, Beaumont and Moreno Valley.” Rebuttals to those arguments will also be distributed to voters—with the rebuttals due by sundown this evening.

Unmergering. In the wake of Cleveland’s unsurprising rejection of a merger with neighboring East Cleveland, the latter’s Mayor Gary Norton reports his city’s proposed “merger will be delayed until disaster and/or multiple preventable deaths occur; then there will be a shotgun wedding.” Indeed, as we noted last week, it was virtually inconceivable that Cleveland would be able to find any benefit out of what East Cleveland had proposed. If anything, the laundry list of demands likely poisoned the waters for any serious consolidation or merger. That puts the governance ball back before the Mayor and Council in East Cleveland–and the State of Ohio: should it press for the state to give it the green light to file for chapter 9? Should it opt for dissolution? Should it put together a realistic proposal to be incorporated into Cleveland? As they used to say in Rome: tempus fugit. (Time flies.) East Cleveland’s Police and Fire departments have been degraded to skeletal status; the city’s Service Department has only eight overworked souls responsible for the physical upkeep of municipal property. In the end, this is a difficult governance question: who will accept and assume responsibility for the children in East Cleveland so they have some chance for a future?

Balancing Unbalance. Even as the inexplicable and unaccountable delay in naming the PROMESA oversight board responsible for addressing Puerto Rico’s insolvency and determining its quasi-plan of debt adjustment debt crisis is deciding how to balance a $70 billion debt load with nearly $43 billion in unfunded pension liabilities pends, fabulous Matt Fabian of Municipal Market Analytics has noted the sharp conflict between the Commonwealth’s constitution, under which Puerto Rico is obligated pay the holders of its general-obligation bonds before making payments for essential public services or public pensions, the new PROMESA law does the opposite: it directs the as yet unnamed board to ensure pensions are adequately funded. It is a Gordian knot—with the option of reducing public pension payouts running the risk of accelerating the out-migration of younger, employed Puerto Ricans: accelerating the loss of those most critical to the island’s future economic growth. It is a problem, moreover, complicated by bondholder creditors, who have sued Puerto Rico in federal court, because the Commonwealth’s adopted budget increases funding for pensions, but does not set aside budget resources to address municipal bond obligations, or, as the hedge funds’ claim puts it: diverts “vast resources to purposes that apparently enjoy political favor but are indisputably junior to constitutional debt.” Municipal bondholders, not surprisingly, are looking to the outcomes of the plans of debt adjustment approved in U.S. Bankruptcy Courts in Stockton and Detroit under which pensioners emerged in better shape than municipal bondholders. (Puerto Rico’s public pension funds have about $2 billion in assets against $45 billion in liabilities: with young professionals leaving for the mainland, the imbalance, moreover, is worsening: Puerto Rico’s pensions are on track to be empty in just three years. The plight was summed up by Treasury Secretary Jacob Lew last May when he noted: “If people leave the island because they’re not willing to work and pay into a system that isn’t going to pay any benefits, how is that going to help the bondholders?”

In Puerto Rico’s Footsteps? Fitch has now joined Moody’s in downgrading the Virgin Islands, a U.S. territory not far from Puerto Rico, dropping its rating on the Virgin Island’s matching fund bonds, backed by the flow of rum tax revenues, and on V.I. Gross Receipts bonds, backed by the Virgin Islands’ Gross Receipts Tax revenues. Fitch added a twitch by dropping the territory’s general credit, or issuer default rating, more deeply into junk status. The downgrade appears to have been the outcome of Fitch’s decision early last month to put the Virgin Islands’ gross receipts bonds and matching funds bonds on a negative watch, in order to assess how the fiscal impact of PROMESA might be. That seems to have translated into Fitch’s decision to lift the Virgin Islands’ bond ratings two notches above its general credit rating, “reflecting Fitch’s assessment that the bonds are exposed to operating risks of the territory but benefit from enhanced recovery prospects assuming passage of legislation by the USVI legislature to provide a statutory lien on the respective revenue streams for bondholders.” Monday’s announcement said…Fitch believes a statutory lien would enhance the recovery prospects for bondholders should the federal government adopt legislation in the future allowing for a restructuring of USVI-backed debt.” In its ratings actions, Fitch noted: “The adoption of PROMESA demonstrated the capacity of the federal government to adopt legislation controlling territorial bankruptcy in much the same manner that a state might do to control the ability of municipalities to seek bankruptcy protection.” Ergo, Fitch plans to treat the territory similarly to a local government in applying dedicated tax bond criteria.

The Exceptional Challenges of Post-Bankruptcy Municipal Governance

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eBlog, 8/26/16

In this morning’s eBlog, we consider the exceptionally swift rejection by the City of Cleveland of nearly insolvent East Cleveland’s proposal to be annexed by Cleveland. Then we attempt to get schooled in the complex governance triangle between public schools, states, and local authority in Detroit—where the newly enacted Michigan statute to provide fiscal assistance to the virtually insolvent Detroit Public Schools has—now—created significant governance questions: who will be in charge of critical education policy questions? Finally, we return to the grim November election outlook for the City of Stockton—where not just the incumbent Mayor and his chief challenger—but now another member of the City Council face serious charges—and an election in just 72 days. The post chapter 9 path of reconciling a future to comply with a city’s court-approved plan of debt adjustment can, as we have seen in Central Falls—or Chocolateville—Rhode Island, succeed with flying colors under strong and gifted political leadership. The outlook in Stockton, however, is one which might give voters and taxpayers great apprehension.  

An Alternative to Municipal Bankruptcy? Or an Offer that Could Be Refused? It appears East Cleveland’s efforts to have its cake and eat it too have been swiftly dashed—indeed, almost no sooner than the City of East Cleveland—as we reported yesterday (please see list below), delivered what appeared almost more an ultimatum than a plea for help, Cleveland officials rejected the proposal outright. Those demands, which even East Cleveland Mayor Gary Norton described as “a kidnapper list,” were rejected outright by Cleveland City Council President Kevin Kelley, who noted: “It’s not a starting point for negotiations; I’m concerned about the city of Cleveland and we need — the conditions that we need to talk about, the real conditions are some relief from East Cleveland’s liabilities, the extreme, the expensive capital needs that they have and some transition of operating expenses.” So now, East Cleveland, which is awaiting authorization from the State of Ohio to file for chapter 9 municipal bankruptcy, must go back to the drawing board.

East Cleveland’s proposed the list of demands:

  • The City of East Cleveland wishes to be a “semi-autonomous” ward of the city of Cleveland.
  • The City of East Cleveland plus portions of the University Circle area would become a new ward to be named “East Cleveland.”
  • The initial councilperson representing the new East Cleveland ward would be elected from the current elected government officials, and then would stand for election with current Cleveland City Council members. (It is unclear whether the councilperson would be elected by the public or by other government officials.)
  • Current East Cleveland Council Members would become members of an East Cleveland Advisory Council and would continue to be elected and compensated at the same level as current East Cleveland Council Members. The East Cleveland Advisory Council members would be voting members of the East Cleveland Community Development Corporation (CDC), and the five members of the advisory council would be the majority of the CDC’s voting members.
  • The CDC would be funded by Community Development Block Grant Funds or grant donations from foundations.
  • The State of Ohio would grant the Cuyahoga County Land Bank $20 million for a revolving loan fund for rehabilitation of housing in East Cleveland. The loans would be subject to approval by the East Cleveland Community Development Corporation, which would jointly administer the fund with the Land Bank.
  • All city owned property and all property currently owned by the Cuyahoga County Land Bank would be transferred to the East Cleveland CDC.
  • East Cleveland residents working in the East Cleveland ward would receive a 1 percent income tax credit, and the State of Ohio would be required to reimburse the city of Cleveland for the difference between the city of Cleveland’s 2 percent rate and the 1 percent East Cleveland rate in the form of an annual local government fund payment.
  • Ohio would issue an annual $10 million “merger incentive payment” to cover East Cleveland’s debts, street improvements and capital costs, including police and fire equipment.
  • East Cleveland would constitute a separate police and fire district within the city.
  • East Cleveland would maintain its own municipal court.
  • East Cleveland would continue its red light camera program—and, presumably, the related revenue therefrom.
  • Maintenance of East Cleveland parks would be transferred to the Cleveland Metro Park System; however, local management and control would remain with the East Cleveland Park Association.
  • East Cleveland would maintain its current voting boundaries for 10 years.

Unschooled in Governance? In what could become a major flash point for future leaders of Detroit’s new school district, Ron Rose, the executive director of the Detroit Financial Review Commission—indeed, someone who recently assisted the City of Highland Park through a neutral evaluation process, pursuant to Michigan’s Public Act 436, the Local Financial Stability and Choice Act, wrote in a memo last month that the state oversight commission can exercise oversight of administrative matters and even academics, not just finances—a memorandum which led retired U.S. Bankruptcy Judge Steven Rhodes, the Detroit Public School System’s emergency manager, to request that the memo be retracted. Judge Rhodes, who has been a strong supporter of DPS’ return to local control after seven years of state oversight, is apprehensive that the memorandum would frustrate that return—especially with voters scheduled to elect a new Detroit school board in November. Nevertheless, Mr. Rose has not retracted his memorandum; instead he offered to consider any changes recommended by DPS attorneys, adding he believes his commission has no intention of making policy decisions for the new Detroit Public Schools Community District—rather, he asserts, he was simply outlining the commission’s powers under state law.

Mr. Rose’s memo asserted that the state statute that created the state oversight commission—and subsequently amended that law to also include DPS, “recognizes that fiscal stability consists not only (of) a broad combination of accounting and financial practices, but also policies, procedures, operating decisions, administrative and academic matters that impact financial outcomes.” So now, Judge Rhodes, who told the Detroit Free Press, “I took this job because I believe in local control over public education in Detroit,” intends to recommend modifications of the state oversight board’s memo in an effort to clarify the oversight commission’s authority over the school district—albeit warning that “If the FRC agrees to the substance of Mr. Rose’s memo here, that goal is severely, if not completely, undermined.” Similarly, Alycia Meriweather, DPS’ interim superintendent, said achieving clarity about the oversight commission’s role would be important: “When looking at an academic organization, people with academic expertise should be in charge and able to make decisions that are best for kids, based on what we know are best practices.”

While the new and partisan, $617-million school restructuring state law provided a critical mechanism for DPS debt relief and restored control to the school board—and created a quasi-dual school system of charter and public schools, the state legislation also extended the power of the Financial Review Commission to include oversight of district finances: the FRC must approve the school board’s decision to fire a superintendent or hire or fire a chief financial officer. But it is less clear—especially on matters relating to education public policy—to what extent the state commission may preempt local authority. In his memorandum, Mr. Rose wrote that the FRC is legally bound to ensure the district complies with the Revised School Code, “which primarily addresses administrative, academic, and educational matters, not financial or fiscal matters.” In speaking to the Free Press, Mr. Rose added that he envisions the FRC working with DPS in the same way it works with the city, noting the FRC has never overruled a policy decision made by the City Council or the mayor: “I don’t believe that it’s the FRC’s intention to make policy decisions that the school district should be making.”

For his part, Judge Rhodes yesterday noted: “I’m not opposed to providing really any information that the FRC wants about the operations of DPSCD…I’m not opposed to hearing their advice on operations…They are smart people, they have dealt with the issues we face before. I look forward to soliciting their input, but there’s a difference between input and control.” He noted that his apprehensions about the latter surfaced almost from the get-go in the wake of the Governor’s signing of the new law last June when FRC members began asking district officials for information unrelated to the DPS’ finances—a concern which prompted him to raise those concerns with Commission members last month.

The Complex Mix of Post Municipal Bankruptcy Democracy. In Georgia, California, New Jersey, and some others of the 18 states which authorize municipalities to file for chapter 9 municipal bankruptcy, the elected officials remain in office and responsible for both putting together such a city or county’s plan of debt adjustment—and then, implementing it—unlike, say Detroit—where Michigan’s law, like Rhode Island’s, provides authority for the Governor to name an emergency manager—and blocks the elected municipal leaders of any authority. Thus, in Stockton, as in San Bernardino, it is municipal elected leaders charged with both drafting and approving plans of debt adjustment—and then implementing them. Now, in Stockton, where the incumbent Mayor is facing criminal charges—and an upcoming re-election, there appear to be growing apprehensions with regard to who will be steering the fiscal ship after November’s elections. In addition, Stockton City Council candidate Sam Fant, who was charged last April with conspiracy and election fraud (He is accused of providing two Manteca Unified School District board candidates, Ashley Drain and Alexander Bronson, with false addresses to help them get on the ballot in 2014.), yesterday warned he might request the San Joaquin County District Attorney’s Office be removed as the agency prosecuting his case—a process which could delay his hearing—mayhap beyond the looming municipal election just 72 days from now. Mr. Fant yesterday, after a brief court appearance, claimed he has “profound respect” for District Attorney Tori Verber Salazar; however, he cited a number of reasons it would be best if the case were transferred from her stewardship. Among those reasons: Mr. Salazar’s 2014 campaign manager is currently managing his city council opponent’s campaign. He also questioned the timing of his prosecution, saying the charges were filed a matter of hours after he launched his bid for the council.

Governance requires trust—especially for the steep road out of municipal bankruptcy.

Alternative Municipal Paths to Avoid Insolvency

eBlog, 8/25/16

In this morning’s eBlog, we consider the future of nearly insolvent East Cleveland—and its proposed offer to the City of Cleveland to annex it. Then we look south to the small municipality of Petersburg, Virginia—itself facing potential chapter 9 bankruptcy—and the hard fiscal and human choices it confronts early next month if it wants to avoid insolvency.  

An Alternative to Municipal Bankruptcy? Or an Offer that Could Be Refused? East Cleveland, which is awaiting authorization from the State of Ohio to file for chapter 9 municipal bankruptcy, has also proposed—as an alternative—annexation by the City of Cleveland. The small municipality, however, has, in its proposed memorandum of understanding, imposed conditions on such a merger, at least some of which would appear designed to preserve the power of East Cleveland’s current Mayor and Council—as well as preserve the salaries of the municipality’s elected officials, who, in the city’s proposal, would be deemed members of an “advisory council” with control over a community development corporation and all of the publicly owned land in what would become a new ward. In addition, East Cleveland proposes to retain operations of its own municipal court and maintain its red-light camera program, notwithstanding the fact that voters banned such cameras in Cleveland two years ago. These so-called conditions of understanding (please note below) between East Cleveland City Council members and their three newly appointed commissioners, impaneled last month to negotiate the terms of a merger with representatives from Cleveland, leave the City of Cleveland 30 days to choose its appointees to such a commission—in the wake of which the respective negotiators will have 120 days to determine if they can reach agreement on terms for an annexation. If East Cleveland voters approve the proposal, Cleveland City Council members would either vote to adopt it or send the issue to the ballot.

East Cleveland’s proposed the list of demands:

  • The City of East Cleveland wishes to be a “semi-autonomous” ward of the city of Cleveland.
  • The City of East Cleveland plus portions of the University Circle area would become a new ward to be named “East Cleveland.”
  • The initial councilperson representing the new East Cleveland ward would be elected from the current elected government officials, and then would stand for election with current Cleveland City Council members. (It is unclear whether the councilperson would be elected by the public or by other government officials.)
  • Current East Cleveland Council Members would become members of an East Cleveland Advisory Council and would continue to be elected and compensated at the same level as current East Cleveland Council Members. The East Cleveland Advisory Council members would be voting members of the East Cleveland Community Development Corporation (CDC), and the five members of the advisory council would be the majority of the CDC’s voting members.
  • The CDC would be funded by Community Development Block Grant Funds or grant donations from foundations.
  • The State of Ohio would grant the Cuyahoga County Land Bank $20 million for a revolving loan fund for rehabilitation of housing in East Cleveland. The loans would be subject to approval by the East Cleveland Community Development Corporation, which would jointly administer the fund with the Land Bank.
  • All city owned property and all property currently owned by the Cuyahoga County Land Bank would be transferred to the East Cleveland CDC.
  • East Cleveland residents working in the East Cleveland ward would receive a 1 percent income tax credit, and the State of Ohio would be required to reimburse the city of Cleveland for the difference between the city of Cleveland’s 2 percent rate and the 1 percent East Cleveland rate in the form of an annual local government fund payment.
  • Ohio would issue an annual $10 million “merger incentive payment” to cover East Cleveland’s debts, street improvements and capital costs, including police and fire equipment.
  • East Cleveland would constitute a separate police and fire district within the city.
  • East Cleveland would maintain its own municipal court.
  • East Cleveland would continue its red light camera program—and, presumably, the related revenue therefrom.
  • Maintenance of East Cleveland parks would be transferred to the Cleveland Metro Park System; however, local management and control would remain with the East Cleveland Park Association.
  • East Cleveland would maintain its current voting boundaries for 10 years.

A Hard Path to Avoid Municipal Bankruptcy? The Petersburg City Council (Virginia) has approved consideration of recommendations from outside financial advisors to help get the small municipality out of a near $19 million deficit: some major department cuts, including closing one fire station and laying off as much as 20 percent of the fire department’s employees—and increasing taxes. The Council has scheduled a session September 6th to obtain public feedback. While the changes would not go into effect until October 1st, they would be a first step for the city to secure short-term funding to remain operational. Underscoring the urgency of the situation, interim City Manager Dironna Moore Belton has warned that without cash flow, the city would be unable to meet payroll and its monthly debt-servicing obligations next month, resulting in a shutdown of all city functions with the exception of public safety. Indeed, it was standing room only at Union Station Tuesday when the municipality’s citizens learned that the city’s proposed path to solvency would mean higher taxes, cuts to school funding and other departments, and layoffs—proposals made without any public input. As Mayor Howard Myers warned: “These are hard cuts that we need to take, the hard decisions we need to make to get the city moving forward.” The signal cuts and tax increases were made based upon the recommendations of the PFM Group of Financial Investment Advisors, who had recommended a 19-step regimen for a $12 million budget cut, which includes 24 layoffs, 18 of them from the fire department with one fire station closure. The PFM Group also recommended more than a $4 million cut from school funding, hiring freezes for police, and an increase in taxes. The proposal aimed at saving Petersburg recommends a mix of layoffs, tax increases, a reduction or the shutdown of several public services and facilities, hiring freezes, the termination of museum and tourism funding, and the consolidation of various city departments. The 54-page plan calls for a staff reduction of at least 24 of the city’s nearly 600 full-time employees — 18 of them in the city’s Fire Department. The consultants’ report states that locally elected leaders would prefer to avoid tax increases and layoffs in public safety agencies, but “unfortunately, the magnitude of the city’s fiscal challenges demands that every revenue and spending option be fully explored and considered.”

Now, the Mayor and Council will seek public input before taking final actions. The final decision on the proposed 19-step budget reduction and tax increase plan will await public comment, with the public input session scheduled to be heard at a city council meeting on September 6th. PFM managing director David Eichenthal advised the city’s elected officials: “The city has to take some action at this point. The $12 million deficit is a real issue from a budgeting perspective, but also for the city’s ability to obtain long-term financing…I wish we had more time, but the problem is, the clock is ticking.” While the changes would not go into effect until October 1st, they would be a first step for the city to secure short-term funding to remain operational.

City Manager Belton noted the proposed changes would produce approximately $12.5 million in savings and new revenue in the current fiscal year, and about $15.1 million in FY2018, warning that the city leaders are presented with some very difficult choices: “[B]ut we know they are the choices the city needs to make to control its own destiny.” In their report, the consultants also encourage the city to form stronger partnerships with neighboring localities, starting with “an honest assessment” of existing relationships. Neighboring local governments and city-funded entities like Petersburg’s school system have been “directly affected by the city’s inability to make timely payments on outstanding obligations.” Of the city’s $18.8 million debt, more than $8.5 million is owed to other government entities, according to the report.

Charting A City’s Fiscal Future

eBlog, 8/24/16

 In this morning’s eBlog, we continue to follow the run-up to municipal elections in November in Stockton—and how both the issue of housing and property taxes—not to mention pending trials of the incumbent mayor—could affect the city’s fiscal future. Then we turn to upstate New York, where a criminal investigation in the Town of Ramapo could have severe fiscal consequences. Finally, we turn the spinning wheel to Atlantic City as it hires a new firm to assist it in putting together a plan to avoid a state takeover.

Taking Stock in Stockton. Stockton Mayor Anthony Silva last evening unveiled new details of his plan to help Stockton’s homeless population at Tuesday’s City Council meeting, scaling back his goal to provide housing, but continuing to plead with city leaders to “make this happen.” In a presentation lasting half an hour, the mayor called for approval of a “homeless bill of rights,” including the right to food, shelter and clothing, clean water, showers and toilets and pet-friendly housing. Advocates believe this policy would help address the neglected issue of affordable housing within Stockton. Residents of all income levels — but especially those with low-, very low-, and extremely low-incomes — are being squeezed by a lack of affordable housing within Stockton, as local development of the past 30 years has focused almost exclusively on market-rate, single-family housing. A key, but undiscussed issue last night, was the signal importance of property tax revenues to the city: third quarter revenues, after all, show that 54.9 percent of revenues were derived from the property tax.

As part of the city’s plan of debt adjustment, Stockton had reduced spending by $90 million from 2008 levels in response to a plunge in revenue triggered by the collapse of its once red-hot housing market. (The city slashed the police department funding by 25 percent and cut other departments even more ahead of its chapter 9 filing for bankruptcy protection.)  Indeed, last evening, Mayor and candidate Councilmember Silva showed the City Council slides of homeless encampments where people and animals live. Well over a dozen speakers, including some who said they are or were homeless, later shared their stories in an in-depth, sometimes emotional community discussion that ultimately lasted close to three hours—or, as the Mayor noted: “Tonight has to be the night that we have a positive debate about moving the city forward, not talking about ‘This won’t work’ and ‘That won’t work.’ We can make this happen. There is enough heart in Stockton.”

Notwithstanding, some experts who work on local homeless issues cautioned that there are no easy answers and that the mayor’s plan needs work—the cornerstone of which is to convert a former motel into housing for 100 homeless people or families. However, after city officials last month expressed concern about the cost and other issues, the Mayor last evening he would now seek to provide housing for just 25 people or families, “to first prove to people that it can be done,” proposing to tap into $250,000 allocated specifically to homeless issues, with some of those funds made available to be used to award mini-grants to local organizations, to clean up small businesses, and to pay for the portable toilets and hand-washing stations. However, longtime Stockton homelessness advocate Bill Mendelson, director of Central Valley Low Income Housing, cautioned that it is an “extraordinarily complex problem, and the solutions are going to be as complex as the problems themselves,” noting that buildings that could be used for housing are privately owned, so that converting them could be very expensive. Joelle Gomez, with the Women’s Center-Youth and Family Services, said it’s not just a matter of providing housing. People need services, too. The smallest shelter operated by her organization houses just 12 people but costs more than $300,000 a year to run, she said, warning the Council the Mayor’s proposal “has the potential to do far more harm than good.”

The mayor’s plan was up for discussion only. City Councilman Michael Tubbs, who is challenging Mayor Silva in November’s election, said the revised plan was “radically different” and suggested that a committee of experts be convened by the city manager to meet over the next couple of months — along with volunteers and homeless residents — to see what kind of action might be taken.

Fastball? Last May, about 40 FBI agents swarmed Ramapo, a town in Rockland County, New York, formerly known as New Hempstead—a town of approximately 125,000: the federal agents removed boxes of documents and hard drives in yet another crackdown on alleged corruption in Rockland County. The search was likely triggered by suspicions related to the Ramapo Local Development Corporation (LDC) and a controversial $38 million baseball stadium it runs: the Rockland Boulders’ Provident Bank Park, the issuance of the municipal bonds for which could wind up costing taxpayers as much as $60 million, according to the New York State Comptroller. As LDC president and town supervisor, Christopher St. Lawrence has been targeted by local activists who claim that his dual duties result in an absence of adequate checks and balances, facilitating what they characterize as misallocation of government funds. Indeed, for the last five years, activists have been funneling information from distressed members of the community to the FBI and the New York Attorney General’s Office. So, now, Christopher St. Lawrence, a supervisor and Ramapo’s Finance Director, as well as president of the Ramapo Local Development Corp., and Aaron Troodler, the former executive director of the RLDC, face 22 counts of wire fraud, securities fraud, and conspiracy stemming from an indictment obtained last April by U.S. attorney for the Southern District of New York Preet Bharara: a criminal case alleging the two Ramapo officials misled investors and credit rating agencies in connection with municipal bonds—with U.S. District Court Judge Cathy Seibel setting the case to go to trial in January. Here the criminal case against the pair mark a first-of-a-kind for the Department of Justice. In addition to the criminal charges, the SEC brought civil charges against both the town, the RLDC, and two other town officials: Michael Klein, Ramapo’s town attorney, and Nathan Oberman, its deputy finance director, asserting the former and current officials used fraud to cover up the strain on Ramapo’s finances related to 16 municipal securities offerings made between September of 2010 and last year, and to prevent further political fallout over a baseball stadium project: fourteen of the offerings were from the town, with the remainder from the RLDC—yet even these were guaranteed by Ramapo—and related to the financing for the baseball stadium—a stadium which struck out with the voters, who had overwhelming voted by a 70% margin to disapprove said bonds to finance its construction. It appears here to be a case of spitball where the bonds were issued to cover up the municipality’s deteriorating general fund—a fund which, according to the SEC, was covered up by means of a series of fabricated receivables over that period in an effort to make it appear as if the fund actually had positive balances of between $1.4 million and $4.1 million.

Planning How a City Can Avoid a State Takeover. Warning that a “lot of the actions that will likely be necessary will be unpleasant…And they haven’t happened yet for a reason. Because absent the kind of challenge the city faces, (it) wouldn’t want to see them happen,” Michael Nadol, of PFM Group, yesterday led Atlantic City’s third public meeting on its five-year fiscal plan to avoid a state takeover. (Atlantic City has until Nov. 3rd to submit its plan to the state, rejection of which would result in a state takeover of the city’s finances and major decision-making powers for five years.) Warning citizens that many “unpleasant” actions would  likely be needed to address the city’s finances, he described the city’s dire financial situation—and outlined some steps that could help the city achieve fiscal stability. Indeed, in response to a citizen’s query, he warned it could mean changes in services, a city workforce reduction, changes in employee compensation, or tax increases. A key part of the fiscal challenge is the city’s roughly $100 million budget deficit before state aid, the $228 million in outstanding municipal bonds issued to cover tax appeals, and an additional $165 million in tax refunds due to Borgata Hotel Casino & Spa and MGM Mirage, according to Moody’s. Now the city will have a new bill: it will owe PFM up to a maximum of $225,000 for a year’s work, according to its contract with the city. Mr. Nadol said the firm is one month into its work and is conducting interviews, reviewing data, and developing five-year financial projections for the city. The firm intends to provide a “quantitative analysis” for the city and help inform city officials’ decisions. PFM is not the first firm to review the city’s dire finances. Most recently, Ernst & Young billed the state $2.6 million for its work in the city. But this time, the firm works for Atlantic City–not the state. After yesterday’s session, Mayor Don Guardian recalled a time the city asked Ernst & Young for financial planning advice: “They said ‘We can’t share that with you. We work for the state of New Jersey. Not for you.’”

Might there Be a Federal Role in Causing Severe Municipal Fiscal Distress?

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eBlog, 8/23/16

In this morning’s eBlog, we revisit Ferguson, Missouri—a small municipality in St. Louis County struggling to recover from racial violence and an expensive U.S. Justice Department imposition of subsequent unfunded fiscal mandates. Yesterday, a federal judge found the city’s school board election system biased against black voters. The judge’s findings and a Moody’s downgrade combine to raise questions with regard to the municipality’s solvency: has the U.S. Justice Department unintentionally made the small city a candidate for municipal bankruptcy? It brings back to mind, in addition, an old question: are there too many municipalities in St. Louis County? Can we afford so many? Could a municipality dissolve itself? Then we turn to archipelago of the U.S. Virgin Islands—seemingly a hop, skip, and a jump from Puerto Rico, where the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities put still another U.S. territory at risk of insolvency.

Public Schools & Arithmetic. U.S. District Judge Rodney Sippel yesterday, writing that “The ongoing effects of racial discrimination that have long plagued the region, and the District in particular, have affected the ability of African-Americans to participate equally in the political process,” ruled that Ferguson, Missouri’s school board elections are biased against black voters. The suit, filed by the American Civil Liberties Union, claimed that the Ferguson-Florissant School District makes it unlawfully difficult for black candidates to win positions on the school board. Voters in the district elect school board members at large, rather than on a ward or sub-district basis, a process, Judge Sippel wrote, which has reduced black representation. Currently, three out of seven board members are black, a ratio that reflects the demographics of the city, the school district has argued. Black students make up four-fifths of the 13,200-student population. During the trial, a demographer demonstrated that Ferguson’s black population is concentrated and politically unified enough to affect results if the FFSD were divided into voting districts: black voters would constitute a majority in four out of seven of those theoretical districts. U.S. District Judge Rodney W. Sippel said that while he does not see evidence of intentional discrimination, there is a more subtle “complex interaction” of political processes that deter black voters from electing the candidates of their choice, writing: “Rather, it is my finding that the cumulative effects of historical discrimination, current political practices, and the socioeconomic conditions present in the District impact the ability of African-Americans in (the school system) to participate equally in Board elections.” The Ferguson-Florissant district serves about 11,200 students in parts of 11 municipalities. About 80 percent of those students are black, and 12 percent are white. District residents are nearly evenly split between black and white. (The ACLU filed the lawsuit on behalf of the Missouri National Association of the Advancement of Colored People in the wake of protests over the shooting.) The court decision comes in the wake of Moody’s placing the city’s already junk-level rating on review for downgrade because of threats to the city’s solvency—with the downgrade of the city’s general obligation rating reflecting “the continued pressure on the city’s finances from a persistent structural imbalance and incorporating the recently approved U.S. Department of Justice (DOJ) consent decree, projected to increase annual General Fund expenses over the next several years. The downgrade also took into consideration the outcome of an April 5 ballot election, in which voters rejected a proposed property tax hike (but approved a sales tax for economic development). Both ballot measures were integral to city management’s proposed solution to close a large General Fund budget gap that existed before accounting for the additional consent decree costs. Moody’s had acted after the U.S. Justice Department filed a lawsuit in February, marking the latest setback in Ferguson’s struggle to recover from a controversial police shooting in 2014. The Justice Department accused Ferguson of policing and municipal court practices that violate constitutional and federal civil rights. The credit rating company had noted that its rating concerns had been driven by the uncertainty of the potential financial impact of litigation costs from the lawsuit and the price tag for implementing the proposed DOJ consent decree: “We believe fiscal ramifications from these items will be significant and could result in insolvency.”

Is there Promise from PROMESA? Fitch ratings has reduced the U.S. Virgin Islands’ bond ratings to junk level, citing the U.S. territory’s unbalanced budget, rising debt burden, and unfunded pension liabilities. Fitch noted that the enactment of the PROMESA legislation for neighboring Puerto Rico could open the door for a comparable restructuring of the Virgin Island’s debt. The territory, where the author trained for his Peace Corps service in Liberia, West Africa, is comprised of a number of islands in the Caribbean not far from Puerto Rico. The islands cover just under 134 square miles and boast a population of just over 100,000. Tourism is the primary economic activity, with the manufacture of rum a significant sector. The islands are classified as a non-self-governing territory—one which since 1954 has held five constitutional conventions—with its most recent, its fifth, adopting in 2009 a proposed Constitution—one rejected by Congress the following year, with Congress urging the convention to reconvene to address the concerns Congress and the Obama Administration had with the proposed document. The convention subsequently reconvened in October of 2012, but was not able to produce a revised Constitution before its October 31 deadline. In its ratings, Fitch downgraded the Virgin Island’s gross receipts tax bonds, affecting $722 million in debt; Fitch also downgraded the territory’s senior lien matching fund revenue bonds to BB from BBB and subordinate lien matching fund revenue bonds to BB from BBB-minus. In amounts of debt, the former affected $773 million and the latter affected $428 million. Fitch also downgraded the Virgin Islands’ issuer default rating to B-plus from BB-minus. In its release, Fitch noted that the Virgin Islands plans to sell $217 million in gross receipts taxes bonds, $126 million in senior lien matching fund bonds, and $69 million in subordinate lien matching fund bonds near the end of next month—noting that the U.S. territory has a “severely unbalanced operating budget” and multiple years of borrowing to fund operating needs—and is expected to feature ongoing budget imbalances: its debt burden has increased, and its unfunded public pension liability has increased at a faster pace.

What Is the State Role in Municipal Fiscal Distress?

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eBlog, 8/18/16

 In this morning’s eBlog, we consider the risk of, for the first time in American history, a city reverting back into municipal bankruptcy. Here the fall could come from any combination of governance failures—as well as deeply falling returns on public pension investments. Then we look at an almost comparable inability of governance in Atlantic City—a failure here which risks the city’s own autonomy. Finally, we revisit the historic city of Petersburg, Virginia, a small city in significant fiscal distress—but which appears most unlikely to receive any state aid—meaning it could become the first municipality in the Commonwealth’s history to be forced to seek municipal bankruptcy protection.

The Risk of Re-entry into Municipal Bankruptcy. In an open letter to the citizens and taxpayers of Stockton, the City, on February 25th, last year, wrote: “Over time, the City was facing over $2 billion in labor agreements, long-term debt, and other obligations that would not have been possible to address outside of [municipal] bankruptcy. However, unlike personal bankruptcy, municipal bankruptcy does not erase or ‘wipe out’ debt. Finding solutions required hard work and heavy lifting by everyone involved. Focused by our guiding principles, we have achieved significant, sustainable change. Our employees worked with us to accomplish equitable labor agreements that brought pay and benefits more in line with the average of the labor market. City retirees, represented by a Retirees Committee, recognized that lifetime City-paid healthcare benefits were not sustainable and agreed to a settlement which helped to address the biggest obligation facing the City’s General Fund—a $544 million unfunded liability for retiree medical.” But now, in the midst of a heated election—one which is almost certain to be interrupted and affected by the pending trial of the incumbent mayor who presided during the city’s entry into and exit from chapter 9 municipal bankruptcy—the California Public Employees’ Retirement System (CalPERS) has reported that its rate of return for the year ended June 30 was just 0.61%. What’s more, Ted Eliopoulos, the pension fund’s chief investment officer, said the poor year has pushed CalPERS’ long-term returns below expected levels.

In approving Stockton’s exit from bankruptcy, U.S. Bankruptcy Judge Christopher Klein had opined that public pension obligations can be impaired in California, even though Stockton had not, in its proposed plan of debt adjustment, proposed to impair pensions; nonetheless, Judge Klein made clear that public pensions could be restructured should there be a next time around. In his analysis, Judge Klein said under chapter 9 federal bankruptcy law Stockton could reject its contract with CalPERS, and, he added, the $1.6 billion termination fee that CalPERS said it would charge to break the contract would be voidable in bankruptcy. Now, however, the issue of pensions could be re-opened in the wake of CalPERS’ projections that its pension management system, which had projected a 7.5% return on its investments, investments it uses to defray the cost of public employee pensions to cities such as Stockton, instead gained a return of only 0.61%—an outcome which could force CalPERS to increase its charges to Stockton—an increase for which the current city budget appears ill-equipped to meet—a budget, after all, which is based upon a 7.25% investment return from CalPERS. That is, such a reduction could put Stockton back into chapter 9—making it the first municipality ever to go into chapter 9 a second time. Indeed, the harsh fiscal discipline of the city’s plan of debt adjustment appears to be slipping: the Council gave police an 11% raise; it voted to re-open the Fair Oaks library branch, overruling objections from city staff—a vote which, for the first time, breached the city’s plan of debt adjustment.

Risking Autonomy. The Atlantic City Council this week, in a 4-4-1 vote, failed to adopt an ordinance to dissolve the Municipal Utilities Authority, a failure which puts the city at risk of defaulting on a state loan. (The terms of the $73 million state loan made the Authority collateral and required the city to adopt an ordinance dissolving it by September 15th.) Under the Council’s rules, it may not reconsider a failed ordinance for six months—meaning the city is in breach of the state’s loan terms. Failure to meet the deadline would make loan repayment due immediately and could require the city “to deliver each item of collateral” to the Department of Community Affairs, according to the loan terms. City Council President Marty Small blasted those who voted against the ordinance, saying they just “gift-wrapped the city to the state….So when the city shuts down and people lose their jobs and we owe the state $73 million because we defaulted on a loan, they can look the people in the eye who voted against it and they can thank them.” Council President Frank Gilliam described a lack of transparency leading up to the vote. A statement from Mayor Don Guardian this month said the ordinance’s first reading was needed by Sept. 15, not yesterday; he pointed to the July 28 emergency council meeting, which was announced just earlier that day and only had four members approving the loan terms, adding: “When decisions like these are basically put on the table, I think it’s very important for the public to have an opportunity to chime in.”

SOS! Virginia Delegate Riley Ingram reports he is seeking an appropriation to help Petersburg, a small city of just over 30,000, get through its current financial crisis, after residents of the city spoke with him about the possibility of getting state money for Petersburg, which is facing a cash crunch that state auditors say could hit as early as this month. Del. Ingram made clear he would not support any bailout of the city, which he said would set a bad precedent, adding: “In my opinion it would be a big mistake for the state to get involved: You’ve got to live within your budget and live within your means.” Earlier this month, at a meeting between state auditors and Petersburg city officials, an audit group sent in by the state to review the city’s books, the group informed city leaders that they owe $18.8 million in unpaid bills, making clear the municipality was in a worse financial crisis than they initially thought—by at least $1 million, with debt which includes $14.7 million to external entities, such as contractors and $4.1 million for internal loans, with the auditors making clear the “historic overspending” started in 2012. The growing debt has now reached a point where the city payroll is at risk—a risk made clear last month when the Petersburg City Council agreed to a 10 percent pay cut for its full-time employees, as a method to help balance the budget deficit—a reduction intended to last just six months and projected to save the city about $1.5 million dollars over the six-month period. The deficit was thought to be $17 million at the time of the cuts. Virginia House Majority Leader Kirk Cox (R-66th), a member of the Appropriations Committee, said getting the General Assembly to appropriate funds to help the city shore up its finances “would be a very, very heavy lift” in the legislature, in part because “it would be a very dangerous precedent to set;” moreover, the Majority Leader added that no action could be taken before next year’s General Assembly meets next January—and even then, any such funds would not be available until the start of the next fiscal year on July 1, 2017. State Secretary of Finance Richard D. Brown, who presented the team’s findings, said a high priority for the city is to get control over its finances as quickly as possible so as to be able to assure potential lenders that Petersburg is a safe lending risk. Virginia does not specifically authorize its municipalities to file for chapter 9 municipal bankruptcy; the state does, in certain situations, allow for the appointment of a receiver with respect to municipal revenue bonds.

What Is the State Role in Municipal Fiscal Distress?

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eBlog, 8/16/16

 In this morning’s eBlog, we consider, again, the un-considerable: could a city fall back into municipal bankruptcy? Is Detroit’s recovery sustainable? Is it municipal-wide—or have we only really been able to witness the remarkable renaissance of its sparkling downtown? And, as we often have, we also consider the important state-local fiscal relationships and roles—especially in Michigan where the combination of seemingly relentless state reductions in revenue sharing to address such stark fiscal disparities has been a critical factor in the state’s takeover or so-called Emergency Manager program—a program which was seemingly the critical step to getting Detroit into and out of chapter 9 municipal bankruptcy, but which—in imposing a state actor with no accountability to the citizens and taxpayers of a city or public school system, not only displaces democracy, but—in the case of Flint, led to signal human and health risks and costs, and, in the case of the Detroit Public School System forced a massive state bailout.

Now, as the small Detroit municipal neighbor of Wayne nears insolvency, still another Michigan state takeover looms. It is difficult to balance how much the state has contributed to this looming insolvency and how the elimination of democracy and accountability to the citizens of a city whose fiscal misery is, in some significant part, caused by the state, not by the city, should be assessed.

Post Municipal Bankruptcy Blues II.  Perry Applebaum, writing about “Detroit’s Recovery, Downtown Roars and Neighborhoods Sputter,” in the New York Times, described post chapter 9 Detroit as “an urban dystopia of poverty, crime and blight,” adding that “Detroit used to be a pretty clear story. It was a symbol of American economic might and then it was a symbol of American urban ruin. But in a place not given to deep philosophizing — where the literary canon is defined by the razor-edged crime novels of Elmore Leonard — almost no one here seems entirely sure what to make of this moment’s Detroit.” He concurs that the “swift exit in 2014 from the city’s traumatic bankruptcy has been followed, almost everyone agrees, by significant progress on improving city services long deemed hopeless…But what that means for the rest of the city and who is benefiting have set in motion a layered conversation about development, equity, race and class. It is playing out with particular force here in what was once the nation’s fourth-largest city and is now a place at once grappling with poverty, crime and failing schools, but also still animated by the bones of its former glory.” Mr. Applebaum also notes that: “Downtown is 90 percent better than it was 10 years ago, but you go a few blocks in any direction, and it’s terrible,” according to Lulzim Shaqiri, whose wife’s family has owned a restaurant since 1983. Ms. Shaqiri told him: “You can talk about helping the neighborhoods, but there’s really no neighborhood at all here. It’s just as dead as dead can be.”

In contrast, he notes the enthusiasm of Mayor Mike Duggan, who told him: “People in this city understand where we are and where we are going…This city went from 1.8 million people in the 1950s to less than 700,000 now. There’s been a 60-year decline, where we lost more than a million people, and those people who left didn’t take their houses with them. So, the magnitude of what we’re recovering from is enormous, but the recovery has started,” adding that there is “ample evidence that he is right. No one doubts how serious the problems are from the disastrous state of the schools to the threadbare transit system to the challenges of adding enough jobs to fuel a sustainable recovery. But more than 10,000 blighted properties have been demolished, removing dangerous eyesores and usually allowing neighbors to buy the vacant lots for $100. An additional 2,000 homes are being rehabilitated and reoccupied…There are about 5,000 new housing units either planned for construction or being built. Housing prices have ticked up, and the city’s toxic foreclosure problem shows signs of improving…In a city notorious for not even being able to even light its streets, more than 62,000 new LED street lamps have been installed. Officials say the whole city will be relit by the end of the year. And the most recent Census Bureau estimate showed the smallest population decline in decades. Officials predict that next year’s figures will show a population gain.” But he closes his article with a darker perspective, based upon a blog post, “Why I Hate Detroit,” by Eric Thomas, who is black and a partner at a local marketing firm; the post focused on the discouraging situation with the city’s schools, the lack of opportunity for the majority of the city, and what he deemed “the weird way the resurgence in relatively privileged warrens, about 5 percent of the city’s 140 square miles, is seen as a proxy for the city as a whole.”

The Challenge which can pit Democracy against Solvency. Wayne, the small municipality in Wayne County, Michigan near Detroit, now awaits a state takeover in the wake of its voters’ rejection last week of a tax proposal to support police and fire protection. Wayne has struggled for some time to reign in expenses: city expenditures have exceeded revenue by roughly $2 million over the past few years, albeit the city balanced its books for the current fiscal year by draining other funds, including its internal service fund and its OPEB retiree healthcare trust—so that city officials report closing FY2016 with near depletion of the OPEB trust and a $400,000 draw on general operating reserves. The city expects to draw another $1.6 million of general fund balance in FY’2017 and estimates likely depletion of fund balance by December of 2017. Aside from property taxes, Michigan’s municipalities are mainly dependent on Michigan’s state revenue sharing program—a program which itself has consistently declined since 1998. Indeed, over the last 14 years, Michigan has led the nation in cuts to its municipalities of state aid. According to the US Census Bureau, from 2002 to 2012, municipal revenue from state sources increased in 45 states and the average increase was 48.1%; in Michigan, municipal revenue from state sources declined 56.9% from 2002 to 2012, according to a Michigan Municipal League report.

Now it appears the state is likely to reap what it has sowed: it appears more and more certain the state will take over the city—an action which the city’s elected leaders fear—especially in the wake of the human and fiscal devastation that came from the state’s takeover in Flint—a state action which has left a residue of state governmental fear and distrust. Indeed, despite the steep fiscal hole in which the small city finds itself, Wayne’s Mayor, Susan Rowe, after watching the extraordinary damage to human health and safety as well as fiscal distress caused by Flint’s state-appointed Emergency Manager (who later, inexplicably, was named by the Governor as Emergency Manager for the Detroit Public Schools) vowed she would never put her residents at the mercy of the state. However, in the wake of last February’s Moody’s downgrade, Mayor Rowe not unreasonably fears her city will become the first municipality since Flint to be placed in state emergency financial management. She notes: “I think it will happen, and I think it would be devastating…People tell us to live within our means, but we can’t shut the doors. We can’t say we’re not going to have police or fire or trash collection…We just have no way of bringing in any more money.”

Michigan’s emergency manager program, under which the Governor appoints a manager with extensive powers over a troubled municipality or school district that meets certain criteria, was initiated in 1990: to date, 11 Michigan municipalities and three school districts have had such emergency managers appointed. Unsurprisingly, it is a program that has drawn sharp criticism not only for its usurpation of local authority, but, in the wake of Flint and the Detroit Public Schools, it has, increasingly, been perceived as a damaging failure with signal unaccountability.

Nevertheless, for Mayor Rowe, a retiree whose munificent mayoral salary is $3,000 annually, the squeeze is almost unimaginable: assessed housing values cratered during the recession and revenue has plunged more than 40 percent since 2010. The city lost a property-tax appeal with Ford Motor Co., its largest employer. State limitations prevent local property taxes from increasing at a rate higher than annual inflation. If anything, the tipping point came last week when the city’s voters resoundingly rejected a tax increase that would have enabled the city to share public-safety expenses with two other municipalities. Mayor Rowe said people are frustrated, and she does not hold the vote against them. Now, because the small city lost its investment grade rating, its costs of borrowing seemingly are adding insult to fiscal injury: Moody’s has downgraded Wayne two notches to Ba1 from Baa2 and its general obligation limited tax (GOLT) rating fell to Ba2 from Baa3, with the credit rating agency noting: “The downgrade of the city’s issuer rating to Ba1 reflects a very stressed financial position given an ongoing structural imbalance with few remaining options for increasing revenues or cutting expenditures.” Further, Moody’s placed the ratings under review for a further downgrade pending developments related to the city’s request for a financial review by the state—a request made in the wake of the Aug. 2nd rejection of the city’s proposal to join a suburban authority and levy a tax to fund fire and rescue services. On the first item, the municipality’s voters rejected the proposal to join the South Macomb Oakland Regional Services Authority, which was created by the cities of Eastpointe and Hazel Park in 2015. On the second, voters rejected a millage proposal which would have raised approximately $5 million to help the city’s strained liquidity: the anticipated revenues had the citizens adopted the measure would have enabled Wayne to stabilize its general fund balance according to Moody’s; however, as Mayor Rowe noted: “Our residents do not want to give us the revenue we requested. Now, this is the avenue we have to take.”

9-1-1. If the state declares a fiscal emergency, the city will have four options:

  • a consent agreement with the state,
  • appointment of an emergency manager by the state,
  • request for approval to file Chapter 9 municipal bankruptcy, or
  • mediated negotiation among creditors.

Mayor Rowe has indicated that that city will likely opt for appointment of an emergency manager.

The review for a further downgrade is tied to the decision to seek a state review. “A declaration of fiscal emergency would give the city greater power to cut expenditures, it also increases the risk that the city may seek to restructure its debt,” according to Moody’s.

Can A City Go Back into Municipal Bankruptcy?


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eBlog, 8/15/16

In this morning’s eBlog, we consider the un-considerable: could a city fall back into municipal bankruptcy? While this eBlog has, since the completion of our MacArthur Foundation studies on Stockton, San Bernardino, Detroit, Chicago, Pittsburgh, and Baltimore, focused on the steep roads into and out of municipal bankruptcy—and the perilous paths into potential municipal bankruptcy in Atlantic City, Opa-locka, East Cleveland, etc.; we have also followed the rhythmic efforts of retired U.S. Bankruptcy Judge Steven Rhodes who, having graduated from overseeing the City of Detroit’s entry into and exit out of chapter 9 now is at the helm seeking to steer the Detroit Public Schools on a course to avoid chapter 9—a course itself critically intertwined with Detroit’s long-term solvency.

We have also sought to compare and contrast the different ways different municipalities have gone through quite different paths into and out of municipal bankruptcy (Federal law provides for municipal bankruptcy—if authorized under state law—something only 18 of the states have authorized—but no two states have the same provisions: there are remarkable differences in these respective state laws.) Detroit emerged in 16 months under a Gubernatorially imposed emergency manager—where the Mayor and Council were barred from any vestige of governance; Jefferson County emerged in about two years (with some provisions still under appeal), but with the County Board remaining in charge of governance throughout; Central Falls, Rhode Island—where the Governor appointed a state emergency manager—who barred the sitting Mayor and Council from City Hall—emerged from chapter 9 in just over a year; Stockton emerged from its chapter 9 in two and a half years; and San Bernardino appears on the verge of exiting chapter 9 as early as next month—the longest municipal bankruptcy in U.S. history, just about four years.

Never in U.S. history, however, has there been an instance of a city emerging from chapter 9 municipal bankruptcy—but then going back into municipal bankruptcy. Now, as we watch events in Stockton (see below), there is apprehension that November’s municipal elections could reverse the city’s fiscal course. Thus, we begin to consider, with untoward events happening in Stockton, post-municipal bankruptcy elections: how does a city choose a course for the future? Here, the choices seem bleak in Stockton—the city nearly one full year out of bankruptcy.

Post Municipal Bankruptcy Blues II.  Stockton Mayor Anthony Silva, who—in the midst of his re-election campaign, for the city’s first post-chapter 9 election—was arrested last week and had become engulfed in a major separate controversy the week before that, sent an email to District Attorney Tori Verber Salazar last Friday alleging that his challenger, Councilmember Michael Tubbs, and four other Council Members violated California open meeting laws when they held a joint news conference one week ago outside City Hall. Mayor Silva, who is out on $20,000 bail, publicly posted his allegation of a violation of California’s Ralph M. Brown Act on Facebook: “This letter is to call your attention to what I believe was a substantial violation of a central provision of the Ralph M. Brown Act, one which may jeopardize the finality of the action taken by the City of Stockton. (The Ralph M. Brown Act, §54950, is California’s open meeting law. The law’s intent is that the actions of public commissions, boards and councils in California be taken openly and that their deliberations be conducted openly.) The speakers described an ‘approval in concept,’ or some other reflection of a consensus that the body would act or not act in a certain manner in the future.” City Attorney John Luebberke, however, last week stated he does not believe the news conference convened by Councilman/candidate Tubbs (a news conference also attended by City Council members Michael Blower, Elbert Holman, Susan Lofthus and Dan Wright) was in violation of the Brown Act. At the press conference Councilman/candidate Tubbs noted: “This press conference was one in which the members of the Council sought to assure citizens and residents that the council was still functioning. Maybe there was some political grandstanding involved — I’ll leave that to others to decide — but even if that’s the case that does not run afoul of the Brown Act.”

With the citizens of Stockton less than 12 weeks from the first post-bankruptcy municipal elections, it appears the intervening weeks risk being consumed with charges and countercharges (two weeks ago, it was revealed that a long-missing gun owned by Mayor Silva had been recovered by police two months earlier—a gun which had been determined to have been the murder weapon in the unsolved killing of 13-year-old Rayshawn “Ray Ray” Harris in late February of 2015 in south Stockton—a gun which Mayor Silva had not reported stolen until one month after the victim was slain—even though the Mayor acknowledged last week he knew the gun was missing at least two weeks before Mr. Harris’ death.) The District Attorney’s Office has noted that Mayor Silva has not cooperated with investigators since the gun’s recovery two months ago—a claim which Mayor Silva has strongly disputed. In addition, as we have previously noted, last Thursday authorities had arrested Mayor Silva in Amador County on charges he illegally recorded teens while playing strip poker last summer at a youth camp he runs. A 16-year-old boy is reported to have been one of multiple naked teens. Mayor Silva is scheduled for his first court appearance Thursday afternoon.

Crime and public safety were critical public policy issues both in Stockton’s collapse into municipal bankruptcy—and emerging. Indeed, the annual budget for FY 2014-2015 was developed with an emphasis on Mayor Silva’s proposed budget priorities and City Council’s post-municipal bankruptcy strategic goals and targeted areas. The Mayor had identified three priorities in his Proposed Budget Direction, and the City Council had held a strategic planning session which identified seven target areas expanding upon the Mayor’s overall direction: Public Safety, Fiscal Sustainability, Organizational Development, Economic Development, Youth, Infrastructure, and Public Relations/Image—goals and target areas intended to renew and expand upon Council’s previous Strategic Priorities. There was a clear recognition that high rates of crime had to be addressed as part of any successful plan of debt adjustment. Today, however, Stockton crime statistics report an overall upward trend in crime based on data from 14 years with violent crime increasing and property crime increasing. Based on this trend, the crime rate in Stockton for 2016 is expected to be higher than in 2012—a year when the city violent crime rate for Stockton was higher than the national violent crime rate average by 300.11% and the city property crime rate in Stockton was higher than the national property crime rate average by 79.21%. The campaign news from Stockton can only be described as grim, mayhap portending the first-ever reversion back into municipal bankruptcy.