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.


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