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.


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