The Exceptional Challenges of Municipal Recovery: Can a State–or the Federal Government–Make It Even More Challenging?

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eBlog, 9/02/16

In this morning’s eBlog, we consider the ongoing challenges to Detroit’s long-term recovery from the nation’s largest municipal bankruptcy: can it restore—via a unique Emergency Manager—its public schools to a level sufficient to attract families with children back into the city? Then we look southeast to the fiscal challenges and rising crime challenges of Ferguson, Missouri; and we ask to what extent has the federal government aggravated each of those challenges, potentially putting the municipality on a course to insolvency.   

New Math? According to a list released yesterday by the Michigan School Reform Office, more than a third of the lowest performing schools in the State of Michigan are in the Detroit Public Schools Community District (DPS): the list of 124 schools in the bottom 5 percent for academic achievement includes 47 in DPS. The School Reform Office also announced seven schools in which it found sufficiently improved student achievement to be removed from the list of failing schools, only one of which was in Detroit: a charter school, Frontier International Academy. The release of the highly anticipated priority schools list comes less than two weeks after the School Reform Office said low-performing schools across the state could be in jeopardy of closing; nevertheless, notwithstanding the large number of DPS schools on the list, a top aide to Gov. Rick Snyder said the Snyder administration believes the state’s $617 million DPS package would prevent any DPS school from being closed in the next three years. (Michigan law allows the School Reform Office to close schools which fall into the lowest 5 percent academically for three straight years.) John Walsh, Governor Snyder’s director of strategic policy, cited an August 2nd memo from the Miller Canfield law firm to DPS Emergency Manager Steven Rhodes which suggested the three-year countdown to close struggling schools was reset when those buildings were moved to a new, debt-free Detroit district last July. A spokeswoman for the Governor, Anna Heaton, yesterday said that no schools have been closed by the state since the priority schools list was established in 2010, noting: “We are following the law as written…Because Detroit is a new district, schools that were failing under the old district can’t be closed by the School Reform Office. Please note that they could still be closed by the district.” Interim DPS superintendent Alycia Meriweather said putting school closures on hold would provide the new Detroit district time to improve student performance: “The students of Detroit have a fresh start for a new educational opportunity as a result of this decision…I’d like to thank the Governor’s Office, State Legislators, and the SSRO for recognizing DPSCD as a new district as it relates to data, in the same way we are recognized as a new district legally and financially.”

Unsurprisingly, however, the Governor’s position attracted mathematical opposition from state Republican legislative leaders and charter school advocates, who argued that a three-year reset would give the Detroit public district an unfair advantage. In a statement, House Speaker Kevin Cotter said: “As a simple matter of common sense, it cannot be said with a straight face that the Legislature intended for the worst-of-the-worst schools in Detroit to remain open…This mistaken interpretation would also require failing charter public schools to be closed while failing traditional public schools are allowed to persist and drag down class after class of Detroit students, which is an absurd conclusion.” Senate Majority Leader Arlan Meekhof (R-West Olive) said he was disappointed by the Governor’s decision “to use the opinion of one law firm as a reason to eliminate a tool intended to help students in the Detroit Public School Community District,” noting the schools in question are persistently failing schools that are not educating Detroit children: “The Senate passed multiple bills that included mechanisms to close failing schools…Part of delivering a better education to the students of Detroit includes the ability to right-size the district to meet the needs of the community.”

The Trend Gap & Federal Intervention: What Are the Implication’s for Municipal Solvency? A year ago last March, the U.S. Justice Department released a report finding racial bias and discrimination pervading police and court practices in Ferguson, Missouri, the small city of just over 20,000, majority black, with nearly one-third female householders with no husband present. Mayhap ironically, the report came just over a year after the Boston Federal Reserve tag team of Bo Zhao and David Coyne released their working paper, “Walking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?” In its report, the Department of Justice argued that the Ferguson Police Department and the City of Ferguson relied on unconstitutional practices in order to balance the city’s budget through racially-motivated excessive fines and punishments. U.S. Attorney General Eric Holder said the federal government would use all the power it had, including dismantling the Ferguson Police Department—a threat which the city’s then-Mayor warned could mark the first time in U.S. history that the federal government might force a city into chapter 9 municipal bankruptcy. Indeed, Moody’s has placed 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 what the credit rating agency described as “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 last April’s 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 federal consent decree costs. (Moody’s had updated its assessment after the U.S. Justice Department filed a lawsuit last February, marking the latest setback in Ferguson’s struggle to recover from a controversial police shooting in 2014.) The Justice Department also accused the City of Ferguson of policing and municipal court practices that violated 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.”

Today, two years after the shooting of Michael Brown put a national spotlight on Ferguson police and provoked the Justice Department fiscal intervention, Ferguson is fiscally pressed to maintain the number of police officers it needs: its department is facing 13 vacancies; the staff is more than 30% reduced from just two years ago. The combination of federal unfunded mandates and fines combined with officer fatigue and stress from months of Ferguson protests may be emboldening criminals and contributing to an uptick in crime. Ferguson Police Chief Sam Dotson and St. Louis County Chief Jon Belmar suggest that their forces may not be large enough to handle the “new normal:” Aggravated assaults and robberies are up in both jurisdictions since Michael Brown was shot to death, but arrests are down. Or, as Chief Dotson calls it: “It’s the Ferguson effect: I see it not only on the law enforcement side, but the criminal element is feeling empowered by the environment.”

Financial constraints, including federally imposed financial penalties, related to the fallout since Mr. Brown’s death, including legal fees, reduced municipal court revenue, and costs for Justice Department-mandated changes have given the city little choice but to reduce the authorized number of officers to 49 compared to 55 two years earlier.

Ferguson voters last month approved a utility tax hike which is projected to generate $700,000 annually, the municipality’s second voter-approved tax increase this year—and, in this instance, a critical step: had the measure failed, the police force’s authorized number would have been reduced to 44, and firefighter jobs would also have been cut. Mayor Knowles said last month’s action by the Council to increase the tax was intended to make clear the city is fiscally stable; he added that the city has received 20 new applicants for the police force since it was approved, noting: “I think we’re seeing more confidence in Ferguson now, and hopefully we’ll get more qualified candidates.”  

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