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.

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