Municipal Sovereignty: What’s at Stake?

eBlog, 9/26/16

In this morning’s eBlog, we wonder whether the end for Atlantic City is nigh: will the state, in fact, take it over? Then we turn to the beleaguered cities of Cleveland and East Cleveland as they contemplate a potential merger: could that avert a chapter 9 municipal bankruptcy—an option which the State of Ohio has made like waiting for Godot? Then we veer east to Connecticut, where the capital City of Hartford faces insolvency—captive to fiscal and physical borders bequeathed from Pilgrim times. Just as inequality in that state’s schools propelled a powerful Connecticut Supreme Court decision, so too, we consider an insightful piece about the inequity of the post municipal bankruptcy Detroit school situation. What might it augur for the city’s post-bankruptcy future? Then, as Horace Greeley asked, we go west, where the governance challenges in San Bernardino and the upcoming ballot question about marijuana have made for heated debate about what kind of debates can the city hold to inform voters on an upcoming election critical to the city’s post-municipal bankruptcy charter. Finally, we look south to the U.S. Virgin Islands—just a hop, skip, and a jump from Puerto Rico to consider how this U.S. Territory is addressing its fiscal challenges. Phew!

Can a City Maintain its Sovereignty? The New Jersey Division of Local Government Services has notified Atlantic City that it has until next Monday to comply with the terms of a $73 million state loan or face the possibility of default because it is in violation of its loan terms, so that it must act swiftly to “cure the breach to come into compliance with the agreement,” albeit LGS spokesperson Tammori Petty noted: “We decline to speculate on next actions.” The notification appears to be a response to Mayor Don Guardian’s request last week for a reprieve after the City Council failed to agree to meet one of the terms in the loan agreement: dissolving the Atlantic Municipal Utilities Authority by September 15th. Should the city not comply by the looming deadline, the state can demand full repayment of the $73 million as well as withhold any state aid. In addition, the state could also to seize the city’s municipal utility authority or its airport as collateral, based on the terms by which the city had agreed to the bridge loan terms in order to avoid defaulting on a $3.4 million debt payment—a payment, which under the terms of the agreement, fell due at the beginning of last month. Doug Goldmacher of Moody’s noted that the city’s “inability to meet its loan covenants is a credit negative and indicative of the city’s severe fiscal distress.” Should the state take over Atlantic City, the Local Finance Board would be authorized and empowered to alter debt and municipal contracts. For the beleaguered city which has tried to weather the closure of four of its casinos—closures reducing its tax base by as much as 70 percent, in addition to undercutting assessed property values—the options appear to be waning. Nevertheless, the Mayor’s Chief of Staff, Chris Filiciello, stated: “We continue to focus on putting together the 150 day plan…If we are given the time to complete and present it, we know it will be the best plan to move Atlantic City forward while still maintaining our local sovereignty.”

To Be or Not to Be? Two of the nation’s poorest cities, East Cleveland and Cleveland, (East Cleveland’s per capita income of $12,602 ranks it 1,000th in Ohio, while Cleveland’s $14,291 ranks it 887th) are undertaking so far informal discussions about a potential merger, albeit with recognition even a combined municipality would need a sizable boost in taxpayer dollars to make it happen. From Cleveland’s perspective, the city is exploring whether there might be development possibilities through such a combination—albeit recognizing the potential pitfalls: East Cleveland is so impoverished that some residents fill their own potholes. Moreover, from a governance perspective, there appears little initiative: East Cleveland has learned that requesting authority from the State of Ohio to file for chapter 9 municipal bankruptcy is like waiting for Godot. Nevertheless, after long balking at the concept of dissolving their city, its elected leaders agreed last month to pursue annexation by the City of Cleveland without the list of demands it had earlier made as a prerequisite, such as continuing the pay of its Mayor and elected officials as its Council had originally submitted to the dismay of Cleveland officials. Nevertheless, with the writing seemingly on the wall, Thomas Wheeler, President of East Cleveland City Council, notes: “Without a revenue stream, I don’t know how we would exist,” adding he and East Cleveland Mayor Gary Norton recognize their city is out of options: it has millions in unpaid bills, and it has had no access to borrow on the municipal credit market for years; it is so cash strapped that in the wake of deep cuts in its workforce, only five firefighters were available to respond to a recent house fire: it is becoming a municipality of crumbling streets, abandoned buildings, uncertain waits for essential emergency 9-1-1 services, and, increasingly, so dangerous that citizens have armed themselves, knowing it could be a long wait for police. Nevertheless, some Cleveland politicians are enthusiastic about the possibility of a merger, citing development possibilities along a main thoroughfare which connects East Cleveland with Cleveland’s fastest-growing neighborhood, University Circle, the home of its fine research hospitals, Case Western Reserve University, and most of Cleveland’s cultural institutions. Ergo: negotiations by a commission consisting of three members from each municipality could begin sometime in the next few months.

Hard Fiscal Times for Hartford. S&P Global Ratings has downgraded the City of Hartford four notches, with the downgrade coming in the wake of the Connecticut Supreme Court decision’s [Connecticut Coalition for Justice in Education Funding v. Rell] finding unconstitutional the state’s fiscal disparities in school funding—or, as Hartford Mayor Luke Bronin put it: “The rating agency action reflects what I’ve been saying for many months, which is that the city of Hartford can’t cut or tax its way out of this challenge by itself.” Or, as S&P credit analyst Timothy Little put it, “Until the city can adopt a credible plan and sustain improved budgetary performance, the rating reflects our weak view of management conditions.” The city, which is on course to insolvency by the end of the year, reflects what S&P, in its downgrade, cited continued deficits and the “lack of a credible plan” to balance the 125,000-population city’s budget and curb out-year fiscal gaps—and it cited a one-third chance of further downgrades within a year. Mayor Bronin has repeated his call for help from the state and the region’s suburbs, pressing for consideration of a regional tax and state reconsideration of tax laws to abate municipal reliance on property taxes, noting: “We can put Hartford and the capital region on a path to fiscal health and economic growth, but it’s going to take everyone coming together—in Hartford, the region and the state—to face the realities that we need to face.” As our respected colleagues at Municipal Market Analytics put it, Hartford’s struggles parallel those of many older cities: the city confronts high, escalating fixed costs: debt service, pension obligations, and other post-employment benefits—fixed costs which now consume nearly 20 percent of its annual budget, even as it has a depleting or disparate municipal tax base, because more than one-third of its population lives below the poverty line. Unemployment reached nearly 11% in July, nearly double the statewide rate of 5.6 percent. As MMA notes, the fiscal numbers appear to more than offset the capital city’s concentrations of art, entertainment, and hospital clusters—even as its dependence on state aid meant that this year’s $45 million state aid reduction triggered a spike in its reliance on short-term debt—meaning the city’s debt service could nearly double to about $46 million by FY2018, according to forecasts by city officials. Mayor Bronin notes that past budget practices made Hartford a disaster waiting to happen, or, as he puts it: “When governments are in fiscal crisis, one approach is to hide it or minimize it just to buy a little more time. That’s what Hartford did for many years…That’s not the approach I take. We’re opening the books and telling the real story, because that’s the only way we’re going to be able to make real and lasting change.” The city band-aided its FY2017 $553 million budget on reserves and labor concessions—neither of which the city has yet to realize; the fiscal cliff looms larger in the out-years, when there are anticipated gaps of more than $30 million in FY2018, rising to $50 million thereafter.” … Judge Thomas’ ruling in the 11-year case, like those of Horton v. Meskill in 1977 and Sheff v. O’Neill in 1996, spotlights the most glaring feature of Connecticut’s taxing arrangements — the inequity of school funding.

Sins of the Founding Fathers? Connecticut, like much of New England, traces its municipal roots to the four century-old system of towns, towns based on the parish boundaries of the Puritans, which required that every resident be able to walk to church, meaning, in the case of Connecticut municipalities, many remain approximately the same size geographically, albeit that some of its cities are among the smallest towns (17 square miles in the case of Hartford, 5.5 square miles in New London). From the original parish boundaries have devolved municipal boundaries, each town with taxing power and its own elected council, police department, public works department, fire department and school system. That appears to have contributed to a governance system in which the state is made up of several medium-to-large Metropolitan Statistical Areas, defined as having one or more adjacent counties or county equivalents with at least one urban core of 50,000 population, plus adjacent area tied to the core through a high degree of social and economic integration measured by commuting ties. Of the 382 MSAs nationally, the New York City MSA is ranked No. 1 in population; the Boston MSA is No. 10; the largest MSA in Connecticut, the Hartford-West Hartford-East Hartford MSA, is made up of 29 towns: it is ranked 47th in the country in population. In 2015, it had a population of 1,211,324, just below the New Orleans-Metairie MSA at 1,262,888, and just above the Salt Lake City MSA at 1,170,266. The Bridgeport-Stamford-Norwalk MSA ranks 57th, with a population just under a million; the New Haven-Milford MSA ranks 65th with a population 859,470; the Norwich-New London MSA ranks 175th with a population of 271,863. If one transposed these places: if Simsbury were in Louisiana, it would be a neighborhood of New Orleans; if it were in Utah, it would be a neighborhood of Salt Lake City. That seems to mean a double fiscal whammy bedevils the state’s municipalities: 1) the terrible disparities or inequities so devastatingly painted by Connecticut Supreme Court Justice Moukawsher in his school decision, but 2) the inefficiency of the arrangement. Or, as Toni Gold, a transportation and community development consultant and a member of the board of the Connecticut Main Street Center, last Saturday wrote: “Regionalism is the dirtiest word in the Connecticut political vocabulary because real regionalism would require small towns and affluent suburbs alike to stop pretending that they have no connection to or responsibility for the center cities on which they depend. This snipping of a state into a lot of minuscule towns is not what the rest of the country does — and for good reason. It is financially irrational…If all legislative remedies fail in the wake of the CCJEF decision, one must ask whether there isn’t a broader legal remedy. All the school funding cases have been brought under the state constitution. Why couldn’t there be a federal case, brought on the broader issue under the 14th Amendment to the federal Constitution, which says in part, “nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws?”

Schooling on Detroit’s Future. The State of Michigan, as we have noted, in the wake of the insolvency of the Detroit Public School System, has created a dual system of public and charter schools, with the former now under the auspices of retired U.S. Bankruptcy Judge Steven Rhodes. Vikram David Amar, last Friday, writing in Justia, “In a Case with Blockbuster Potential, Detroit School Children Assert a Federal Constitutional Right to Literacy,” wrote about a class action lawsuit, Gary B. v. Snyder, pending in the U.S. District Court for Eastern Michigan, which has been filed on behalf of children who attend some of the most dilapidated and lowest-performing Detroit public schools, in which the plaintiffs allege Gov. Rick Snyder and other state officials are violating the constitutional rights of Detroit children by depriving students of their “fundamental right” to literacy under the Fourteenth Amendment’s due process and equal protection clauses. The 129-page complaint “recites in heart-wrenching detail the physical, curricular, and human resource shortcomings of the schools attended by the plaintiffs;” it also documents what he describes as the “woeful underperformance of the students at these schools, as compared to other schools in the state and also to the state’s competency baselines established for various grade levels. It is hard to believe the conditions laid out in the Complaint exist in 21st Century America; at times the allegations seem more like the setting of a Dickens novel.” He notes that the complaint also proposes what he deems an “an ambitious legal theory, effectively asking the federal court to apply ‘heightened scrutiny’ to what is going on in Detroit, and urging it not to apply the deference ordinarily given to state and local school officials [author’s emphasis]concerning their administration of public education.” The complaint identifies two related, but distinct grounds for judicial skepticism—the first being equal protection (describing the plaintiffs as a “discrete class,” almost all of whom are “low income children of color.”), but the second asserts that “heightened judicial oversight is warranted, because in the Fourteenth Amendment’s due process clause there is a ‘fundamental right of access to literacy,’ which presupposes better facilities, better instructional materials, and better teacher training than exist in Detroit. It asserts a federal “fundamental right” to literacy under the so-called “substantive due process doctrine” of the Fourteenth Amendment, the lawsuit is path-breaking, and perhaps ultimately destined for the Supreme Court. The complaint here asserts that many “Detroit public school children lack any realistic chance at literacy; the Complaint links its concept of literacy directly to expressive and political rights (including military service), saying that literacy is essential not only to success in the workplace and higher education, but also (importantly) to ‘be[ing] an informed citizen capable of participating in democracy.’” He notes that the complaint repeatedly points out, “the State of Michigan (like other states) has made attendance in some kind of state-approved school compulsory, so the State is already interfering with private choices in this realm, and in ways that allegedly make it nigh impossible for Detroit children to attain literacy.” Finally, he writes:

But the affirmative/negative rights line does implicitly bring up probably the biggest hurdle for the plaintiffs—the practical and logistical concerns about appropriate remedies that might disincline federal courts to become deeply involved in decisions about school facilities, curricula, teacher training, and the like. Most of the other settings in which the Court has recognized a fundamental right do not involve the remedial complexity the Snyder case implicates. And as the Court cautioned in Rodriguez, at a time when the federal judiciary was in the midst of a mixed experience of federal judicial oversight over busing, pupil reassignment, and other aspects of the federal judicial effort to eliminate the vestiges of racial school segregation:

He writes: “We stand on familiar ground when we continue to acknowledge that the Justices of this Court lack both the expertise and the familiarity with local problems so necessary to the making of wise decisions with respect to the raising and disposition of public revenues. . . . In addition to matters of fiscal policy, this case also involves the most persistent and difficult questions of educational policy, another area in which this Court’s lack of specialized knowledge and experience counsels against premature interference with the informed judgments made at the state and local levels. Education, perhaps even more than welfare assistance, presents a myriad of ‘intractable economic, social, and even philosophical problems.’ The very complexity of the problems of financing and managing a . . . public school system suggests that ‘there will be more than one constitutionally permissible method of solving them,’ and that, within the limits of rationality, ‘the legislature’s efforts to tackle the problems’ should be entitled to respect.”

Electing a Higher Future for Post-Chapter 9 San Bernardino? With an exit from chapter 9 bankruptcy finally within sight—and elections just around the corner, the San Bernardino City Council has voted to schedule not one, but at least two sets of debates at City Hall, after the Council overruled City Manager Mark Scott’s decision not to permit such debates. Mr. Scott had emailed those seeking or proposing such pre-election debates, debates customary in previous election years, that none would be permitted this election year,  out of a concern about a conflict of interest since the city had placed two measures on the ballot—albeit, in his email, Mr. Scott had written the City Council could vote to reverse him if it wished—an email which, unsurprisingly, drew a response from Council Members, some of whom attacked him for seeking to shut down free speech, while others defended him as implementing the implied direction of a Council that has directed staff not to spend any funds to educate the public about the city charter ballot measure. However, the Council has been unanimous in the vote to allow pre-election debates at City Hall and on the public access channel, waiving fees for both—or, as Councilman John Valdivia put it: “The actual statement from Mr. Scott is that there is a council discretion to overturn his decision, so I think he left it completely wide open for the Council to make the ultimate decision…This is unacceptable on behalf of what Mr. Scott is attempting to do.” Surprisingly, Mr. Scott was not at the meeting; however, he wrote in an email that it seemed “smart to stay completely arms-length” because the city was behind both Measure L (to replace the city charter), and Measure P, to replace the city’s marijuana ban with a regulatory scheme. City Attorney Gary Saenz noted: “It’s necessary to take precaution and care that you don’t cross over the line into endorsement and you stick within the parameters of education…Sometimes that’s hard to do. I personally encountered a forum – or a couple of forums, actually – when I was campaigning and there was a conflict of interest that I believe tainted the discussions.”

Entering Virgin Territory.  Just 17 miles from Puerto Rico lies the insular area, the U.S. Virgin Islands, which consist of the main islands of Saint Croix (where the author trained for his Peace Corps service in Liberia, West Africa) Saint John, and Saint Thomas, as well as many other surrounding minor islands reaching a total land area of 133.73 square miles with a population just over 106,000. Tourism is the primary economic activity, although there is a significant rum manufacturing sector. Previously part of the Kingdom of Denmark-Norway, they were sold to the United States in 1917: they are considered an organized, unincorporated U.S. Territory. The Territory has convened five constitutional conventions; however, its most recent and only proposed Constitution, adopted in 2009, was rejected by Congress in 2010. Thus, its status vis-à-vis the U.S. government, as it confronts severe fiscal challenges, is more difficult than Puerto Rico’s. Now U.S. Virgin Islands Gov. Kenneth Mapp has introduced legislation to authorize issuance of some $396 million in municipal bonds, with the goal of issuance this this fall—with the proposal for the fiscally challenged U.S. territory coming as his government is seeking approval of revenue increases and spending reductions. A confidential draft of the territory’s five-year financial plan of September 15th shows that, absent any changes in revenue measures or spending, the government anticipates operating deficits between $130 million and $140 million from FY2017—FY 2021, thus triggering the government to propose a wide array of revenue and spending initiatives—an array which the government projects would lead to operating deficits of $0.8 million in FY2017, $14.3 million in FY2018, and $13.8 million in FY2019—but followed by surpluses of $50 million in fiscal 2020 and $77.5 million in fiscal 2021. Gov. Mapp has, ergo, proposed revenue initiatives to increase the marine terminal user’s tax (adding $7 million in annual revenue), a new internet gross receipts tax ($5.1 million annually), an increase in cigarette taxes ($6.9 million a year), and an increase in beer taxes ($12.8 million annually)—both to reduce the current and projected deficits, but also to apply to economic development. The cuts he has proposed would affect hat it would produce at least $25 million annually. In the five year plan, Gov. Mapp proposes to take out a $55 million working capital loan and a $55 million draw on a line of credit; he projects using nearly 40 percent of the bond proceeds for operating expenses, and the balance for capital projects. Under his proposal, the interest rate on the bonds may not exceed 9.5%, nor a term of more than 30 years, with the draft legislation providing that the municipal bond issuance will be sold as either: a matching fund revenue bond, paid back with a portion of taxes on the sale of rum in the 50 states that the federal government sends to the Virgin Islands; or a gross receipts taxes bond, paid back from a government sales tax. Compared to Puerto Rico, the Virgin Islands have significantly higher unemployment and murder rates, but a significantly better rate with regard to infant mortality.

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