Should States Bear a Greater Fiscal Responsibility to Address Disparities–especially when so many Lives and Futures are at Stake?

 

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eBlog, 9/12/16

In this morning’s eBlog, we consider the massive and cumulative service insolvency in public safety in the bankrupt City of San Bernardino. Even as the City nears its longest road out of bankruptcy of any city ever in U.S. history, the extraordinary absence of any state role to help the city confront its cancer of crime could bode ill for the city’s post-chapter 9 recovery. Then we turn to Michigan and the ongoing issue with regard to what a state’s role ought to be in addressing fiscal disparities. While the State of California appears to be disinterested in any such role; Michigan traditionally has; but, increasingly in recent years, it has eroded such support, with grim fiscal consequences in Flint, Detroit, etc.

Can the City Do it All by Itself? San Bernardino, still healing from last December’s terror attack—the city’s response to which has been praised by the FBI, nevertheless appears today caught between a rock and a hard place: it is experiencing a surge in violence this year unlike any it has faced in decades: with four months left in 2016, there have been 150 shootings and 47 slayings in the city of 216,000 residents, compared to 44 homicides all of last year, including the 14 people killed by terrorists at the Inland Regional Center. San Bernardino is now on track to have more murders than in any year since 1995, when 67 people were killed. There is no explanation why; by the same token, even as the city nears its exit from the longest municipal bankruptcy in American history, the terrible rise in violent crime hardly augurs well for its assessed property values—or for its hopes for attracting economic development. The violence might be adding to other tensions: the killings have disproportionately victimized San Bernardino’s black residents, who account for 14 percent of the population, but nearly half of those killed.  San Bernardino Police Chief Jarrod Burguan says the city has been especially hard hit by state initiatives that reduced some drug and property-related felonies to misdemeanors, leading to shorter sentences for criminals; he did not need to mention the reductions in the city’s public safety budget as it struggled to cobble together its proposed plan of debt adjustment now awaiting final approval for U.S. Bankruptcy Judge Meredith Jury. In 2008, there were more than 340 police officers on the force. Today, there are about 215. The Chief does note, however, “We don’t have the capacity to investigate everything that’s reported in the city.” Others point to the lack of economic opportunities, its years of cuts to diversion programs, and a lack of other basic services — such as working street lights in many neighborhoods—an issue, as readers remember, that both Detroit Emergency Manager Kevyn Orr and Mayor Mike Duggan made immediate and critical priorities—have contributed to this year’s violence. Those reduced fiscal resources have, no doubt, contributed to solve fewer than 40 percent of this year’s homicides.

Unsurprisingly, a new study, commissioned by Southern California law firm Graham Donath, using FBI data and looked at crime rates, police presence, and investment in police departments, as well as community factors, including poverty, education, unemployment, and climate, determined San Bernardino to be the state’s most dangerous city—just ahead of Stockton and Modesto: the study found a high correlation between crime rates and poverty: San Bernardino’s poverty rate exceeds 30 percent, or, as the report notes: “In taking a look at our collected data, no city in the bottom ten of crime rate (that is, has the lowest crime) has a poverty rate higher than 12.9 percent,…But for cities in the top ten, every one has a poverty rate of 14.5 percent or higher, topping out at 30.6 percent in San Bernardino.”

A Lonely Vigil. Understandably, in the wake of the State of California’s rejection of the city’s application for a state grant to help fund Operation Ceasefire, Chief Burguan must wonder whether the city is alone in its battle against killings—or, as he asks: “Who really is that concerned about San Bernardino? Or are people at the state level happy letting San Bernardino drown in this stuff?…We clearly have the most significant crime spike of any place in the state, and all that money went elsewhere.”

Getting to the Heart of Fiscal Disparities—or, What We Have Here Is a Failure to Communicate. Taxpayers for Michigan Constitutional Government, Eastpointe City Manager Steve Duchane Duchane (Eastpointe is a city of about 32,000 in Macomb County), and two other Eastpointe employees have filed suit against the State of Michigan, the Michigan Department of Technology Management and Budget, and the Michigan Office of the Auditor General in the Michigan Court of Appeals. Mr. Duchane says local governments in Michigan have been doing a lot of reacting to revenue sharing cuts through the years, slashing services, and programs impacting municipalities, because they have been receiving fewer state funds. Thus, he is at the forefront of more than a dozen Michigan local governments taking action, joining a nonprofit group which has filed the civil lawsuit for overstating various payments to local governments and causing a more than $1-billion shortfall to municipalities. Ow, the state has until the end of this month to file a response. Kurt Weiss, a spokesman for the Michigan budget office, has released a statement: “The Office of Financial Management within the State Budget Office works hard each year to properly identify expenditures to determine the amount of state spending that goes to the aid of local governments…Those expenditures are in turn submitted to the Office of Auditor General for validation to ensure the calculations are accurate. This is a methodology that has been applied consistently since the passage of Proposal A (Proposal A was a property tax measure adopted in 1994: prior to its adoption, local property taxes were based on a property’s assessed value or an amount equal to 50% of the property’s market value, meaning that property taxes went up and down in close relation to an increase or decrease in property value. With the passage of Proposal A, however, the tax was stabilized.). The State Budget Office will take time to further review the complaint, but it’s important to note that these calculations have been consistently applied over time.” The local governments disagree; they respond the state is violating the Michigan Constitution by overstating spending that is paid to local governments and engaging in an “illegal tax shift.” Their  complaint states that Michigan is including payments from Proposal A revenue and payments to charter schools, county road commissions, and others from the trunk line roads fund and payments to cover the costs of state mandates in its calculations of spending in the form of aid that is paid to local governments: “When these items are subtracted, state spending in the form of aid that is paid to local governments falls significantly below 48.97% of total state spending;” ergo, in violation of the Michigan Constitution, according to the complaint.

This the complainants are seeking these items be removed from the funding formula for aid paid to local governments, and asking the court to order the state to make up the funding shortages, claiming that the loss of billions of dollars in funding has forced local governments to make significant cuts to services and programs to stay solvent. Or, as Mr. Duchane puts it: “State spending continues without control, and the locals have paid the price.” The challengers’ organization here was founded by Mr. Duchane and its president, John Mogk, a law professor at Wayne State University; its members include the cities of Center Line, Eastpointe, Mt. Clemens, New Baltimore, Richmond, Roseville, Utica, and Warren and Clinton Township in Macomb County; Hazel Park in Oakland County; Harper Woods, Southgate and Grosse Pointe Woods in Wayne County; Grosse Pointe Shores, which straddles Wayne and Macomb counties, the city of Auburn in Bay County, the Sugar Law Center for Economic and Social Justice in Detroit, and Wayne City Councilman Tom Porter. In addition, other municipalities may be joining the group, whose attorneys include John Philo, executive and legal director of the Sugar Law Center; Tracy Peters, who specializes in education and the rights of students and parents, and Robert Sedlar, a constitutional law and legal conflict professor at Wayne State University School of Law.

For his part, Mr. Duchane said that while the group does not have data to explain where the more than $13 million in funds promised to Eastpointe to address municipal disparities has instead been used, he can, obviously, report where he believes it should have gone: That kind of money, he notes, would have meant that municipal leaders would not have had to raise taxes—especially in the wake of the Great Recession which brought so many Michigan municipalities to their fiscal knees, particularly because of the mortgage market meltdown that so devastatingly impacted real estate values, the state’s elimination of the personal property tax on businesses, and continued cuts in state revenue sharing. Combined with the state’s Proposal A and Headlee Amendments imposing state mandated limits on property tax growth, he noted Eastpointe and Hazel Park formed a unique taxing authority for 20 years to raise funds for police and fire services in their cities. The small City of Wayne attempted tried to join that authority; however, voters in that city and Eastpointe rejected the effort last month. Now, the City of Wayne, facing insolvency in as early as next year, has asked the state for an emergency financial review and could be facing a state-appointed emergency manager. Indeed, the city’s Mayor, Susan Rowe, last month reported that city officials are set to meet with the Michigan Treasurer later this month to discuss finances that communities are confronting, noting: “We’re just the tip of the iceberg…We’re not the only city in this (financial) situation. It’ll be happening to communities around us soon. We don’t have an expense problem. We have a revenue problem.”

What Will the Tides of November Bode for Struggling Cities’ Futures?

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eBlog, 9/09/16

In this morning’s eBlog, we consider the tightening noose around Atlantic City’s fiscal future as a state takeover looms. We consider the grim political and legal complications in post-chapter 9 Stockton, where a criminal trial of the incumbent Mayor who helped steer the city out of municipal bankruptcy looms just weeks before his campaign for re-election. What might it augur for the recovering city’s fiscal fate? Then we head east to Detroit, where elections of a very different sort will be on November’s ballot for a perspective from the Mayor on key ballot issues; finally, we consider the inability to achieve any clarity or resolution with regard to the fiscal fate of nearly fiscally and politically insolvent East Cleveland.  

A City on the Road to Nowhere? The Atlantic City Council has failed to accede to state terms and vote to dissolve its Municipal Utilities Authority, moving the city closer to default—the non-vote occurred after discussion in executive session, where, according to Council President Marty Small, there was insufficient support to reintroduce the requisite authority-related measures. Because the Council did not vote Wednesday evening, the municipality is nearly certain to violate the terms of its $73 million state loan—a loan which made the authority’s assets collateral and required the city to adopt an ordinance by next Thursday—and dissolves the authority if the city does not pay back the loan. The ball now moves to the state, which, under the terms, could then demand immediate repayment of money loaned to date. The city would be unable to repay the loan at this time, putting the authority at risk of monetization by the state, as we had noted from the op-ed Council President Small and Mayor Don Guardian wrote last Monday—or, as Council President Small put it: “It’s sad to say, but whatever the state does, we deserve…People didn’t take it seriously. They missed meetings. They claimed meetings were illegal.”

For the citizens of the beleaguered city, their future is unclear: they packed Council chambers Wednesday: some urged the Council to rescind a July 28 resolution that authorized the loan—a request which Councilman Frank Gilliam so motioned, in the wake of which Council voted 5-3-1 to support; however, Legislative Counsel Robert Tarver later said the measure needed a two-thirds majority to pass since prior notice of the vote had not been given; moreover, he noted that Council cannot rescind the resolution, since the state already performed on the agreement by loaning the city money. As in the old expression “misery loves company,” the actions have also triggered a pending lawsuit against the city, which seeks to void the resolution; the suit asserts a two-thirds majority of the full council was needed to pass the resolution, since it was an “emergency appropriation.” No matter what such future court battles might mean, however, the new reality is that the city’s inability to act means the state can demand it immediately pay back the $73 million loan—a demand the city cannot fiscally meet—but funds the city desperately needs if it is to meet the state-imposed November deadline to develop and submit a five-year fiscal plan to avoid a state takeover.

A Most Uncertain Road out of Municipal Bankruptcy. California Superior Court Judge Leslie Nichols has set an October 18 date for the trial of incumbent Stockton Mayor Anthony Silva—a candidate for re-election in November, where he is being challenged in his bid for a second term by City Councilman Michael Tubbs. The Mayor was arrested last month on charges he participated in and illegally recorded an alcohol-fueled game of strip poker with teenagers in 2015 at his annual summer youth camp in Silver Lake. His attorney reports the Mayor has no intention of dropping out of the race, noting: “That would never happen, for a really good reason…He is the People’s Mayor. He works very hard for the people of Stockton. I don’t think anyone would dispute that he gives every part of himself to being the Mayor of Stockton. He should be re-elected based on the merit that he gives the city.” The Mayor pleaded not guilty at his initial court appearance last month, complaining he is the victim of a political smear campaign being waged because he is a “threat” to Stockton’s establishment; nonetheless, it will be a jury which determines his fate with regard to the felony charge for allegedly making the audio recording without the consent of the strip poker participants and three misdemeanors related to the alleged providing of alcohol to underage drinkers.

A Motown Post Municipal Bankruptcy Future & Community Benefits. While Stockton’s post-chapter 9 recovery appears clouded by the looming criminal trial of the Mayor who was in office throughout his city’s long and arduous adoption of a plan of debt adjustment and emergence from municipal bankruptcy, his counterpart in Detroit, Mayor Mike Duggan, elected in the wake of the Motor City’s emergence from municipal bankruptcy under Michigan’s law, under which—in sharp contrast to California—the Governor had appointed an emergency manager, Kevyn Orr, who barred the city’s former Mayor and Council of any governance authority. Now Mayor Duggan is voting for what he calls the more manageable version of two proposed ordinances requiring “community benefits” be provided by would-be developers. In discussion with reporters and editors from Crain’s, Mayor Duggan warned that if a community benefits ordinance proposed by Rise Together Detroit passes in his city’s November general election, it would “guarantee we never see a (new) auto parts plant in this city again,” because of the requirements it places on developers: “Getting manufacturing jobs in the city will be over if Proposal A passes.” Mayor Duggan made clear he intends to vote for Proposal B, which is the alternative proposed community benefits ordinance.

Proposal A, put together by Rise Together Detroit, would require that projects of $15 million or more which receive $300,000 or more in city actions such as tax abatements or incentives enter into a legally binding community benefits agreement with a group of “representative residents, businesses and nonprofit organizations” within the “host community,” based on U.S. Census tract information. Such agreements would specify what the developer would provide to the community in which the development is located, such as education and land use programs, local small business and resident inclusion, and participation in the project. Environmental protections could also be considered community benefits—albeit, as the mayor noted: “You’d have to send a notice to the city clerk…The clerk and the council somehow contact people in the surrounding Census tract. Those people somehow form a committee, but Proposal A doesn’t say how they form a negotiating committee, doesn’t say how many people are on the negotiating committee. They could be negotiating with 50 or 100 people. It doesn’t say how long the negotiations go on, if they go on months or even years. If the site happens to be near the city border, the neighboring Census tracts would include the suburbs and you could have suburbanites who would get to say no to a development in Detroit.”

In contrast. Proposal B, which was developed by Detroit City Councilmember Scott Benson, appears to offer a less onerous alternative to Proposal A: it would mandate community benefits agreements for developments of $75 million or more and receiving $1 million or more in public incentives or on property with a cumulative market value of $1 million or more that was sold or transferred to a developer. In his conversation with the paper, Mayor Duggan made clear his comments were not a public endorsement of Proposal B; however, he noted there are compelling arguments toward the idea of institutionalizing these agreements for large projects: “Endorsing suggests a level of public campaigning that is different than a personal decision. But right now, I’m going to vote for it.”

In his comments, Mayor Duggan also addressed other pressing issues in his city, including on the pressing issues of the city’s struggling schools. Noting that while enrollment numbers will not be officially disclosed for about a month, Mayor Duggan said he would not discuss any new initiatives between the city and the Detroit Public Schools (DPS) until there is further certainty with regard to how many students the district has—that is, until there is a better sense whether DPS has emerged from its crisis mode, noting the serious “truancy issue in the city that we need to deal with.” With regard to the related Detroit Education Commission, a contentious sticking point in the DPS bailout legislation passed by the GOP-led Legislature and signed by Gov. Rick Snyder this past summer, the Mayor made clear he is not finished with pressing the issue: “To get things through a Republican Legislature, I need allies in addition to the Governor. I’ve learned my lesson and we’ll come back in a different way.”

To Merge or Not to Merge: That Is the Question. The Cuyahoga County, Ohio sheriff’s office is looking into the collection of signatures for a merger petition which was circulated in East Cleveland this summer, according to spokespersons for the sheriff and prosecutor. East Cleveland Mayor Gary Norton and his allies had collected more than 1,600 signatures on petitions to mandate the City Council to begin merger negotiations with neighboring Cleveland—of which the Cuyahoga County Board of Elections determined slightly over half were valid—albeit enough to begin negotiating an annexation agreement (Cleveland willing) that would be decided by voters in November; however, the Council did not appoint any negotiators; instead, Council Members asked the county prosecutor to investigate what they believed to be irregularities in the petitions. Or, as Council President Barbara Thomas reported to Ohio state officials: “East Cleveland City Council has serious questions about annex petitions, related certification, and has declared the petitions to be invalid.” Now the sheriff’s office has received the case from the prosecutor and is investigating, according to the County communications director—albeit she has declined to elaborate on what specifically the probe is examining. Adding to the state of confusion, Mayor Norton’s chief of staff, Michael Smedley, recently filed a lawsuit asking the court to compel East Cleveland’s City Council to move forward with merger talks—merger talks in which the City of Cleveland has expressed no interest. The suit also asks the judge to consider appointing annexation negotiators himself. Even as East Cleveland still awaits a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, the municipality has heard from the State Auditor’s office—the office which last month laid out stark financial options for the struggling municipality, noting the road out of fiscal emergency may require the city to cut between 20 to 40 percent of its staff.

Municipal Governance in the Wake of Bankruptcy

eBlog, 9/08/16

In this morning’s eBlog, we consider the ongoing challenge in Detroit and Wayne County related to tax foreclosures. Then we turn to the looming election in San Bernardino to determine the city’s post-municipal bankruptcy governance. Then we head east to the small municipality of Petersburg, Virginia, which has been left on its own with hard choices in its efforts to stave off municipal insolvency and bankruptcy.  Finally, we turn to the awkward transition in governance in Puerto Rico under the recently enacted PROMESA, quasi-chapter 9 legislation signed last month by President Obama to steer the U.S. territory of Puerto Rico out of insolvency.

The Imbalance of Taxes & Affordability. Wayne County and Detroit officials have reduced the number of tax foreclosures by half as they began yesterday’s annual auction—one in which they put a record 23,000 occupied properties on repayment plans; nevertheless, after decades of population decline (In 1950, there were 1,849,568 people in Detroit. In 2010, there were 713,777), the city still confronts a significant backlog. At the inception of its chapter 9 bankruptcy, Detroit was home to an estimated 40,000 abandoned lots and structures: between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base. It was, as my esteemed colleague and fine writer Billy Hamilton noted “either the ghost of a lost time and place in America, or a resource of enormous potential.” Ironically, as we have noted, Detroit has one of the broadest tax bases of any city in the U.S.: municipal income taxes constitute the city’s largest single source, contributing about 21 percent of total revenue in 2012, or $323.5 million in 2002, the last year in which the city realized a general fund surplus. Thereafter, receipts declined each year through 2010, reflecting both a rate reduction mandated by the state and the Great Recession. The declining revenues also reflect not just the significant population decline, but also the make-up of the decline: the census reported that one-third of the city’s residents were under the poverty line and that the composition of businesses—unlike any other major city in the nation—was primarily made up of public organizations. The reduction also reflects state mandates. Worse, we had noted, state law prohibits cities from increasing revenues by adding a sales tax or raising residential property tax rates more than inflation. But even in the wake of its emergence from the largest municipal bankruptcy in U.S. history, the Detroit News notes tax debt on some 6,000 homes “may have just delayed a crisis.” The News notes that owners of these occupied properties owe tax debt that is a quarter or more of what the houses are worth, according to the analysis that compared county payment plan data and city assessments as of last month. The problem comes amid growing recognition that the level of debt is unsustainable—likely meaning many owners will default (The average debt for homeowners on payment plans is nearly $6,000.) Or, as the ACLU’s legal director Michael Steinberg put it: the city is “simply kicking the can down the road.” (The ACLU filed suit this summer to halt homeowner foreclosures until city assessments can be corrected, arguing the city’s residents have been hit with unfair tax bills for years because of inflated city assessments—assessments which, the organization asserts, have further fueled Detroit’s foreclosure crisis. (The Wayne County Treasurer has processed more than 140,000 foreclosures countywide since 2002.) Moreover, even though the legislature acted last year to impose a cap on high property tax assessments at no more than a quarter of a home’s value, the News reports Wayne County “has barely used the option even though officials, including Mayor Mike Duggan and Gov. Rick Snyder, touted it last year when it was signed into law.” While Wayne County has modified its enforcement actions by reducing the interest rates it is imposing on such delinquent debt from 18 percent to 6 percent using another new law change designed to help homeowners; the County is understandably apprehensive that too much tax relief could reduce revenues for other vital public services, such as schools, city government and libraries.

This year only 14,300 properties will be offered up at the tax auction, compared with 28,000 the previous year. Wayne County Treasurer Eric Sabree said 85 percent of the 31,000 occupied and vacant properties on payment plans are making payments; nevertheless, he is uncertain whether such onerous debt for some families could presage greater numbers being forced into foreclosure next year. It is one of the hardest balancing tasks of governing. Indeed, Margaret Dewar, a University of Michigan professor of urban and regional planning, warns that debt could be too much for many—especially some 6,000 owners who owe at least a quarter of what their houses are worth: “I don’t think a lot of them can sustain that…Why would you pay that? It’s way too much.”

Elections, Leaving Municipal Bankruptcy, & A City’s Future. San Bernardino has commenced what it hopes will be the final step on its path to exit the nation’s longest municipal bankruptcy; U.S. bankruptcy Judge Meredith Jury has scheduled a hearing to consider confirmation of the city’s “Third Amended Plan for the Adjustment of Debts of the City of San Bernardino” for 10 a.m. on Friday, October 14^th. Now, as the city can begin to anticipate that exit, weeks before November’s elections, a key issue before the city and its voters revolve around big campaigns for and against the ballot measure to replace the city’s charter — essentially a municipal constitution which, if changed, could either finally free city leaders to fix the city and increase voter participation or could throw away the city’s heritage and citizen protections. In our report on San Bernardino, indeed, we had written: “In the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” Unsurprisingly, however, most voters—in any jurisdiction—are unfamiliar with the mechanics of municipal governance: in San Bernardino, some two-thirds of likely voters have neither seen, heard, nor read anything about efforts to replace the city’s charter, according to a poll of 400 people. But with election day not so far off, a citizen committee has undertaken such efforts—especially in the wake of voters, earlier this year, rejecting one of their two suggested charter amendments, Measure Q, the proposed change to how police and firefighters are paid. Betsy Starbuck, Chairwoman of the campaign to replace San Bernardino’s charter, notes: “Most voters don’t know the charter is 111 years old, written when there were fewer than 10,000 people in San Bernardino, and now as a city of over 200,000, we need a charter that is comparable to all the other cities around us, that brings us into modern, efficient and transparent government.” Nevertheless, opponents to any changes charge: “They don’t want to give up their right to vote…They don’t trust placing the city’s business in the hands of appointed officials.”

As we have previously noted, San Bernardino has operated under its own city charter since 1905: the charter serves as the governing framework with regard to which positions are elected and which are appointed, the responsibilities of those officials, and certain other restrictions. The proposed new charter is more similar to the model of other charter cities: its intent is to increase clarity, flexibility, and efficiency. One of those changes would increase the power of the city manager, the position appointed by the mayor and council to run day-to-day operations: the change would shift responsibility away from the elected officials directly, converting San Bernardino to a council-manager form of government, or what ICMA notes is the structure for 58 percent of cities with a population over 100,000—a change advocated by the current mayor, who supports that change and the charter as a whole, even if it means less power for him: “This is how modern governments work, with the mayor and council setting the policy and professionals implementing it.” In contrast, former San Bernardino Mayor Judith Valles believes such a change would weaken the city: “There’s a pecking order among cities, and the cities where the mayor is a strong mayor are able to take leadership,” she said, noting that can be especially the case in affecting decisions in regional bodies.

The proposed charter change, if adopted by voters, would eliminate elections for the city attorney, city clerk, and Finance Director: the mayor and council would appoint the city attorney (as is done in 16 of 17 peer agencies) and city clerk (as 14 of those cities do), while the decision and appointment of a treasurer would be at the discretion of the Finance Director. San Bernardino’s incumbent elected attorney, clerk and treasurer have all said they support being appointed; however, the former city attorney, James F. Penman, believes the city’s voters will not and should not give up their power to vote: “When he was a Congressman in the House of Representatives, on July 27, 1848, Abraham Lincoln gave a speech in which he said, quote, ‘In leaving the people’s business in their hands, we cannot be wrong,’ ” Mr. Penman said: “It’s such a fundamental part of American democracy,” who notes that: “The mayor and council are free to ignore the city attorney’s advice…The difference is an elected city attorney is not afraid to call it to the attention of the public. The mayor and city council can’t kick the city attorney out — the elected city attorney.”

Elections: San Bernardino’s current charter sets elections for the mayor and council members in November of odd-numbered years, with a “run-off” in February of the following year if no candidate gets more than 50 percent of the vote; the new charter would move elections to match the state’s — November of even-numbered years—when there tends to be a much higher voter turnout.

Personnel Rules. San Bernardino’s current charter has some bedeviling personnel rules, such as the one mandating that police and firefighter pay be set as the average of 10 like-sized California cities, rather than by collective bargaining like nearly all other municipalities—nevertheless, a charter requirement voters in the city two years ago retained by a ten point margin. In the vote this time, if the charter were changed, employee pay would be set by collective bargaining. Likewise, whereas the current charter sets City Council salary at $600 per year, if changed, the new salary would be determined by the mayor and council after a public hearing, after hearing from an advisory commission. Any raises would go into effect following the next election after the increase.

Budgetary Stipulations: The ballot statement in favor of replacing the charter says the new one will require a balanced budget, strict financial controls, and an annual independent audit that must be shared publicly. (These include the two most popular components, according to the charter reform group’s poll: 91 percent favor the balanced budget requirement and 84 percent favor independent audits.) Ironically, these stipulations already exist: the current charter provides: “The Mayor shall have the books and records of all public departments, pertaining to the finances of the City, experted by a competent person at least once in every year.” (I hope readers appreciate that word “experted.”)

Staving Off Municipal Bankruptcy. Petersburg, the small, independent city in Virginia perched on the very edge of insolvency, where the median income for a household in the city is under $29,000, drew a crowd of some 500 mostly unhappy citizens as the City Council Tuesday evening adopted most of a package of tax increases and budget cuts, but rejected a proposal to close one of the city’s four fire stations; the City Council had previously voted two weeks ago to adopt a package of recommendations from financial consulting firm PFM Group in hopes the fiscal surgery would provide the municipality access to the market to enable it to borrow sufficiently to rescue itself from its severe cash crunch; it has been clear throughout the state is most unlikely to offer any fiscal relief. At heart, the session was about whether the municipality has a future; indeed, as one young citizen addressed the elected leaders, she stated: “I am 18 years old, and I have watched all of my friends move to Richmond because they feel they have no future here…You have a chance to try and fix things, but you need to care, and you need to listen.”

This week’s sessions came as the municipality is mandated by Virginia law to hold public hearings on changes to tax rates and amendments to the current year’s budget. The citizen concern about the dire fiscal straits meant that the Council agreed to convene at Petersburg High School, because of its 800-seat auditorium. Nevertheless, and unsurprisingly, residents appeared to be confused about the municipality’s budget process, with many stepping up to make comments about the proposed budget cuts during the public hearings on the tax rates. On the agenda: five public hearings on the proposed increases in tax rates: the Council voted to adopt most of the proposed increases:

• The tax rate on hotel room rentals (lodging tax) was raised, as recommended, to 10 percent from 6 percent.
• The tax on restaurant meals was raised from the current 6 percent to 7 percent, less than the 7.5% rate recommended by its advisor PFM Group. (The 0.5% difference will mean about $150,000 less revenue to the city, according to Interim City Manager Dironna Moore Belton.)
• The tax on cigarettes was raised, as recommended, to 90 cents per pack from the current 10 cents.
• The personal property tax rate was increased to $4.90 per $100 per $100 of value from $4.40. (Initially, council members voted to table the proposed increase until their next regular meeting, but after a short break, they voted to rescind the motion to table and adopt a motion to raise the rate.)
• The monthly charge for solid waste removal was raised to $20 from $14.

On the other side of the teeter-totter, recommended budget cuts, the Council voted to reject a proposal to close one fire station—a closing projected to reduce the city’s deficit by $675,000, and voted to continue funding of the nonprofit Southside Virginia Emergency Crew.

Unsurprisingly, numerous speakers during the public hearings raised alarms about what they said was a potential safety threats to homes and residents, to reducing funding for the school system by $4.1 million, and to cutting funding for museums and visitor centers, estimated to save the city $300,000. The proposed and recommended budget cuts and tax increases were drawn from a report by state auditors and other financial experts—a report which found the municipality facing a backlog of nearly $19 million in unpaid bills from FY2016, and a looming $12 million deficit in the current fiscal year. This week’s difficult session came as the municipality’s access to short-term loans has evaporated: no lender is currently willing to extend a loan; thus the difficult budget decisions, as well as reforms to the city’s accounting and cash-control processes, are aimed at persuading lenders that the municipality is serious about stabilizing its finances.

Puerto Rico’s Fiscal Future. A federal judge in Puerto Rico has refused to temporarily halt a lawsuit in which holders of Puerto Rico municipal bonds are claiming Puerto Rico Gov. Alejandro García Padilla violated the newly enacted federal PROMESA law by declaring a moratorium on constitutional debt payments after the law was signed by President Obama, but before the establishment of the new control board. The suit, filed by Delaware-based Lex Claims LLC and other companies which hold the U.S. territory’s constitutionally backed debt, focuses on three actions the territory took which, the bondholders charge violated the new federal law, seeking an injunction to halt the claimed violations. U.S. District Court Judge Francisco Besosa has ruled out Puerto Rico’s request for a stay. In their claim, the plaintiffs have charged that Gov. Pasdilla’s June 30^th Executive Order 2016-30 violated a provision of the new law which bars Puerto Rico from enacting new laws that either permit the transfer of any funds or assets outside the ordinary course of business or that are inconsistent with the constitution or laws of the territory between the date of PROMESA’s enactment and the time the oversight board and its chair have been appointed. In addition, the suit claims that Puerto Rico’s FY2017 budget violates the law because it “makes huge transfers outside the ordinary course of business and diverts vast resources to purposes that apparently enjoy political favor but are indisputably junior to constitutional debt.” The companies cite a roughly $800 million contribution to the pension system in the budget as well as about $250 million from Puerto Rico’s general fund to “prop up its insolvent Government Development Bank,” adding “All of this is well outside the ‘ordinary course of business’ and flouts the Puerto Rico constitution, which expressly requires appropriations for full payment of constitutional debt.” The suit alleges Puerto Rico, without approval of the PROMESA oversight board, took on responsibility for debts owed to the GDB by other, independent entities in violation of §207 of the newly enacted federal law which bars Puerto Rico from issuing “debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to its debt” absent approval of the new oversight board. In its response, the island argued it had acted to trigger a provision of PROMESA which puts an automatic stay on debt litigation against the Commonwealth, noting: “This is, in short, precisely the sort of bondholder litigation against Puerto Rico that PROMESA sought to halt for a temporary period to allow the commonwealth to stabilize its financial situation and to give the oversight board time to set up and review.” Judge Besosa’s ruling that the stay did not apply noted that it was primarily based on considerations with regard to the timing of the suit and whether the plaintiffs’ requested relief could be considered monetary relief. In his decision, Judge Besosa wrote that a suit could be subject to the stay if it were a judicial action to recover a “liability claim” against the government of Puerto Rico which arose before the enactment of PROMESA, noting that the new federal the judge associates “liability claim” with monetary relief, defining it as a claim that relates to liability, right to payment, or right to an equitable remedy for breach of performance if such breech gives rise to a right to payment”—or, as Judge Besosa wrote: “In their amended complaint, plaintiffs expressly state that their lawsuit ‘does not seek to compel payment on plaintiffs’ bonds.’ Rather, plaintiffs seek only declaratory and injunctive relief…Thus, plaintiffs do not seek to recover a right to payment that arose before PROMESA’s enactment.” Ergo, he noted, the suit does not meet that requirement for a stay.

Who Decides Post-Bankruptcy Futures?

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eBlog, 9/07/16

In this morning’s eBlog, we consider the risk that state legislative interference in Detroit’s public schools—even after the schools have opened—could have harsh fiscal consequences for a city emerging from the largest municipal bankruptcy in the nation’s history. Then we turn to the grim tidings from post-municipal bankrupt Stockton, where the incumbent mayor—and candidate for re-election in November, and who was Mayor when Stockton emerged from its chapter 9 municipal bankruptcy, is on trial, raising serious questions about his moral fitness for public office. Finally, we turn to the steps underway to initiate the promise of PROMESA, the quasi-chapter 9 legislation signed last month by President Obama to steer the U.S. territory of Puerto Rico out of insolvency–and to a very unique American leader whose contributions to Washington, D.C., New York City, and New York’s subway system are legend–and who now will utilize that experience and expertise to help the U.S. territory of Puerto Rico.

Who Will Decide Detroit’s Future?  Last year, not a single Detroit public school complied with Detroit’s public health and safety codes, one reason teachers protested with widespread sickouts that temporarily crippled the system. This year, 92% of schools are in full compliance; the more significant changes for the nation’s most challenged big-city school system, however, will be governance: who will be in charge of changes so critical to the city’s long-term fiscal recovery? There will be a learning process not just in the schools, but also between Detroit and Lansing, because the city’s kids are returning to a brand-new public school district—one no longer encumbered with mountains of debt, but one, however, encumbered by politics even as it struggles to overcome its physical and fiscal insolvencies.

As we have attempted to chronicle, Governor Rick Snyder last June signed a sweeping education package to provide financial support for Detroit’s public schools modeled on the 2009 restructuring of post-bankrupt General Motors: that legislation left the old Detroit public school district behind as a shell to pay down $515 million in operating debt, similar to GM’s Chapter 11 which had created an “old” and “new” General Motors, with the intent of restructuring a public school system that was all but bankrupt: the state allocated more than $600 million to repair the DPS’s aging facilities, and the legislation allowed the schools—which include some of the nation’s worst and have been under state-run emergency management since 2009—to return to a locally run school board. Or, as John Walsh, Gov. Snyder’s director of strategy put it: “DPS is fiscally sound now.” Today, Detroit has more than a third of the state’s lowest-performing schools, according to a recently released list from the state’s School Reform Office, which has the authority to close those schools after three consecutive years. But the state office has not closed any low-performing schools since it was created in 2010. The School Reform Office could close more than 100 failing schools that qualify for shuttering, which has spurred panic among parents, teachers and other education groups.

The issue comes to the fore in the wake of Governor Rick Snyder last June signing a sweeping education package to provide financial support for Detroit’s public schools modeled on the 2009 restructuring of General Motors. The legislation left the old district behind as a shell to pay down $515 million in operating debt, similar to GM’s Chapter 11 that created an “old” and “new” General Motors, with the aim of restructuring a public school system that was all but bankrupt. Millions of dollars were allocated to repair the district’s aging facilities, and the legislation allowed the schools—which include some of the nation’s worst and have been under state-run emergency management since 2009—to return to a locally run school board. “DPS is fiscally sound now,” says John Walsh, Gov. Snyder’s director of strategy. Snyder’s use of state-appointed emergency managers has been widely scrutinized since the water crisis in Flint, where lead leached into the municipal water supply while the city’s finances were being overseen by the state. The water crisis raised questions about Snyder’s reliance on state managers to step in and fix local issues. But the state legislation created a dual school system in the Motor City of charter and public schools—potentially undercutting the intent of ensuring that DPS will be able to provide quality education in the long-term to compete with the growing number of charter schools throughout Detroit. Indeed, there are apprehensions in the city that state legislative meddling might, unwittingly, have paved the way to potentially end the Detroit public schools altogether. Because the state legislation created not just a dual system of public versus charter schools, but also of dozens of authorizers who determine where charter schools can open or close—that is, outside of any coherent, local process, but rather one in which any number of authorizers who do not work together to plan comprehensively can create chaotic situations in some neighborhoods: according to Detroit Mayor Mike Duggan’s office, 80% of Detroit’s public and charter schools have opened or closed in the last seven years. This would hardly seem a bright, shining beacon to attract families with young children to want to move to Detroit.

Moreover, even as the state interference has created a seeming Charlie Chaplin gold rush to open up any number of uncoordinated charter schools, the state education package for Detroit fell far short in the math department: less than a sixth of the appropriated funds went to DPS for transition costs: indeed, Alycia Meriweather, DPS’s interim superintendent, reports that $105 million of the $150 million allocated to help get the new DPS up and running is already earmarked for financial obligations from the old Detroit Public School District, while only $5 million is available for repairing school facilities. While Detroit will be able to spend all of the $7,400 that is allocated per student on actual education costs this year—as opposed to last year, when $1,100 of that funding per student went to pay the district’s debt—the district still has needs that will not be met, including at least eight schools that still need facility upgrades.

The state package, because of the way it was imposed on Detroit, has already led fears of the city becoming divided: more than 51,000 children attended Detroit charter schools last year; less than 48,000 kids attended its public schools. There are apprehensions the state legislation is creating its own tale of two cities: one for low-income minority children, and one not; and raising the governance question: should the state or the city have a greater say in the city’s children’s futures? What seems growing clear is that running a school system is hard—but having dual managers with very different political perspectives seems to be putting children’s futures at stake. Arlyssa Heard, a member of 482Forward, a group of local parents who raise awareness about the state of the schools, perhaps has the best perspective: after all, she has a son who has started fifth grade this fall and has already been in three different Detroit schools so far—one public, one charter, one private. She notes: “We have people making decisions who do not have children here and don’t know anything about what educators are facing in the classroom…My dream is that there is some way to take this decision out of the hands of politicians and put it in the hands of educators and parents. Those are the two groups that have the most vested in the school system.”

Distant School Managers. No doubt, Ms. Heard is referring to the distant attempts at Detroit school governance emanating from the Michigan Legislature, where, yesterday, Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) said they would consider requesting that Michigan Attorney General Bill Schuette involve himself in a dispute between the state legislature and Gov. Rick Snyder with regard to how soon some of the worst schools in Detroit could be closed. That is, even though the Detroit Public Schools has both a gubernatorial appointed Emergency Manager and an elected public school board, the two Republican state leaders insist Detroit’s public schools can still be closed immediately if they have been among the state’s lowest five percent of performing public schools for three consecutive years. Gov. Snyder’s administration, however, relying on a law firm’s interpretation of the $617 million bailout legislation for DPS, contends that none of the city’s 47 schools that are in the bottom five percent for academic achievement can be closed until July of 2019. Indeed, last month, Gov. Snyder’s director of strategic policy had provided a memorandum to DPS Emergency Manager and retired U.S. Bankruptcy Judge Steven Rhodes which opined that the three-year countdown to close schools had been reset when DPS was transferred to a new debt-free district in July. Nevertheless, Majority Leader Meekhof yesterday disagreed; he said the law clearly allows a state office to close schools prior to that date and is “confused” how the Governor’s office could have reached a different conclusion. With the issue coming to a head, even as the school year has already commenced, Leader Meekhof also emphasized his Republican caucus would not likely support allowing Gov. Snyder’s interpretation of the law to stand and that passing a clarifying law would not be a good option because “a lot of folks have fatigue on Detroit issues.” This, apparently, passes as a reason for far away state legislators to preempt local authority—and disrupt an already chaotic school year.

Detroit has more than a third of the state’s lowest-performing schools, according to a recently released list from the state’s School Reform Office, which has the authority to close those schools after three consecutive years. But the state office has not closed any low-performing schools since it was created in 2010. The School Reform Office could close more than 100 failing schools that qualify for shuttering, which has spurred panic among parents, teachers and other education groups. Perhaps, appropriately, the last wise word should come from Chris Wigent, director of the Michigan Association of School Administrators, who opposes closing poorly performing school districts: “I think anytime you walk into a community and mention closing a school, that creates a lot of concern,” said “There is no data that shows moving a child from one school to another school has any positive” impact on students’ test scores.”

Post Municipal Bankruptcy Blues. With elections just around the corner in post-bankrupt Stockton, incumbent/candidate Mayor Anthony Silva’s attorney yesterday charged his client has been victimized by “outrageous government conduct,” as he sought the suppression of evidence from a warrantless federal search and seizure of his electronic devices nearly a year ago at San Francisco International Airport. The candidate/Mayor is scheduled this afternoon for his second court date since his arrest last month on charges he participated in and illegally recorded an alcohol-fueled game of strip poker with teenagers in 2015 at his annual summer youth camp in Silver Lake. The Mayor pleaded not guilty at his initial court appearance last month: he claims he is the victim of a political smear campaign being waged because he is a “threat” to Stockton’s establishment; however, the court proceedings come as he faces his colleague in his bid for re-election against City Councilman Michael Tubbs in November. The “outrageous government conduct” allegation referred to by Mayor Silva’s attorneys apparently refer to the website of the U.S. Attorney’s Office, claiming the conduct by law enforcement agents was “so outrageous that due process principles would absolutely bar the government from invoking judicial process to obtain a conviction.” However, Amador County Chief Assistant District Attorney Robert Trudgen said the government is confident in its case, though he acknowledged that the amount of discovery the defense has received to date has been sparse. If the role of municipal elected leaders—especially in municipalities emerging from chapter 9 municipal bankruptcy—is to inspire confidence, the road ahead in Stockton could be rocky.

Puerto Rico’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico yesterday announced it is extending to October 14^th its deadline for interested stakeholders to submit recommendations on how to promote economic growth within the U.S. territory—extending the original deadline of last Friday: in part that appears to stem from the 300 plus submissions already received—none of which have, however, been made public. Congress crated the task force as part of the PROMESA law to explore critical issues related to potential improvements that could bolster job creation, reduce child poverty, and attract investment to the U.S. territory; it is distinct from the newly appointed seven-member oversight board charged with restructuring the island’s debt and fiscal future; it is chaired by Sen. Orrin Hatch (R-Utah) and includes Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), along with House members Pedro Pierluisi (P.R), Rep. Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y). The task force is charged with submitting a report by the end of this year which identifies any current impediments federal law and programs which might impede economic growth or healthcare coverage for the territory and, importantly, recommendations to fix them.  

Experience & Insight. Few Americans have better background or experience in the kind of expertise the Congressional Task Force was looking for than Richard Ravitch, who served on similar oversight boards for both Washington, D.C. and New York City. Ergo, unsurprisingly, Puerto Rico Gov. Alejandro García Padilla yesterday named the former New York Lt. Governor to represent his positions to the PROMESA oversight board, noting Mr. Ravitch has advised Puerto Rico’s government on an unpaid basis for three years. Under the new PROMESA statute, Gov. Padilla was authorized to either serve as a nonvoting, ex officio member of the board or to designate someone for this role. The governor has made clear his urgency in getting the new board to address the commonwealth’s fiscal problems—noting, especially, the urgency from his perspective of restoring democracy in Puerto Rico. Gov. Padilla noted, in his statement, that Mr. Ravitch has advised Puerto Rico’s government on an unpaid basis for three years.

Might There Be a Presidential Campaign Issue or Debate about the Nation’s Cities?

eBlog, 9/06/16

In this morning’s eBlog, we consider the open letter from the Mayor and City Council President of Atlantic City to the city’s citizens about the fate of this great and historic American city. Then we consider a countervailing perspective.  Following, we listen as GOP candidate Donald Trump visits Detroit, where he reported he intends to develop a national municipal policy. Finally, we look at a new, discouraging report on chronic absenteeism, something which must be addressed if there is to be a long-term recovery in Detroit.    

The Fate of a Great American City. In an open letter this morning, Atlantic City Mayor Donald Guardian and City Council President Marty Small wrote:

This week’s City Council meeting will determine the fate of Atlantic City and the Atlantic City Municipal Utilities Authority (ACMUA) for years to come.

The question is: Why should City Council vote for the upcoming pieces of legislation surrounding the ACMUA before Sept. 15? The answer is simple: If City Council does not pass these pieces of legislation, the city will default on the terms of the loan agreement with the state, ultimately resulting in the city shutting down and in liquidation of the ACMUA.

Passage of the legislation is absolutely critical in ensuring that the city maintains its sovereignty and the ACMUA remains under local control. To be clear, the legislation does not dissolve the ACMUA and any argument to the contrary is false.

Failure by the city to adhere to the terms of the loan agreement would result in a default. Once there is a default, the state could, and most likely would, demand that the city immediately repay all monies advanced to the city. If the city weren’t able to repay the advanced monies on demand (which it could not), the city’s failure to repay would result in a “payment” default. Under the terms of the loan agreement, the state could only reach the ACMUA if there were a payment default.

In the event of a default, the state could take the following actions: 1) Stop all loan advances to the city; 2) Require that the city deliver each item of collateral on demand; and 3) withhold state aid. Any of these actions by the state would absolutely devastate the city of Atlantic City and essentially destroy its sovereignty.

Furthermore, in the event of a “payment” default, and only a payment default, the state could demand immediate production of the collateral resources outlined in the loan agreement, which include Atlantic City Alliance (ACA) monies of $60 million, Investment Alternate Tax (IAT) monies of between $13 million and $18 million, or any state aid received to date, or in the worst case scenario monetize the MUA to recover the outstanding payments if the above sources were insufficient.

Pursuant to the loan agreement, the city may borrow up to $73 million. The city anticipates paying that $73 million back through the ACA and IAT monies. Therefore, the state will never reach the ACMUA as the city’s other sources of collateral should more than cover the loan.

Unfortunately, the ACA and IAT monies will not be released until after the city submits its budget plan in November. A default that led to a payment default now would directly contradict the efforts of everyone who has defended the city’s sovereignty and right to home rule.

These potential defaults are absolutely preventable. Dissolution of the ACMUA is preventable. Loss of the city’s sovereignty is preventable. Again, the legislation does not dissolve the ACMUA.

We are asking that City Council put aside any differences or disagreements and come together for the future of Atlantic City.

In an editorial yesterday, The Press of Atlantic City, wrote:

Three months ago, in spring, state politicians finally reached a compromise on the rescue and reorganization of Atlantic City government. It gave city officials five months to produce a responsible five-year financial plan that would balance the city budget starting next year.

The city has lots of revenue, reassured now by casino payments in lieu of taxes that are part of the rescue. Officials just need to reduce municipal spending in line with that revenue.

As summer ends, we see little sign that is happening. Instead, city officials have floated a bunch of desperate, implausible grabs for money from elsewhere.

These have shared some characteristics. They’re not possible under existing law. Legislators won’t change the laws to make them possible. They’d actually damage the city if they were somehow allowed to happen. And they have nothing to do with reducing city spending to a responsible level.

First came a proposal for a major new income tax on everyone who works in the city. That could never get the votes of a majority of state legislators, nor the signature of the governor, and it would be fiercely opposed by those who work in or have a business in the city.

This was accompanied by a proposal to slap a $10 surcharge on the existing room taxes paid by all staying in the city.

Despite the near certainty that state officials would never approve this for an already well-funded city, the Meet AC marketers had to strongly condemn the proposal and point out how it would sabotage the city’s growing convention business.

About a week ago, City Council unanimously voted to hold a referendum on providing school vouchers to city parents. Perhaps they’ve forgotten that the governor’s half-hearted push to allow school vouchers went nowhere in 2013. They are illegal and will remain so for the foreseeable future. The city referendum is not just nonbinding, it’s nonsense.

The referendum will include another proposal also absurd for a bankrupt city: tax credits for those who home school their children. Four states allow some form of tax credits for homeschooling, but not New Jersey.

And since Atlantic City’s problem is that it is spending too much money, new spending on tax credits hardly seems like part of a responsible financial plan.

Then there’s the anguish of city officials over possibly having to change their top priority in running local government to something other than providing jobs to people.

As last month ended, the city proposed a budget that imagines – with no reason to do so – that the state and its taxpayers will not only keep giving Atlantic City extra aid money, but will increase that gift by $24 million.

The rescue and reorganization law technically gives city officials another two months to develop the five-year, balanced-budget plan.

But if no progress on that plan is evident by early October, the state should finish preparations to take over the city’s finances come November.

Atlantic City’s instability has dragged out for far too many months already. This all should have been settled and work started on a sound fiscal future last winter. Let’s have no more delays.

Municipalities & November’s Election. With Fall upon us, Republican Donald Trump intends to unveil a new plan to attract employers to cities like Detroit with high unemployment rates, as well as travel to Flint; it appears his sudden focus on distressed cities might lead to his announcement of a proposed federal policy (it was Richard Nixon, after all, who was the originator not only of General Revenue Sharing, but also the Advisory Commission on Intergovernmental Relations.) Mr. Trump this weekend said his appeal for support from African-Americans in Detroit was tied to the cornerstone of his outsider bid for the White House: a complete overhaul of international trade agreements, agreements which he blames for gutting inner cities: “That’s a big part of what I’m doing in terms of outreach,” he said in an interview with The Detroit News., adding he intends to detail plans in the next three to four weeks to create “enterprise zones” to give business tax incentives to relocate to cities like Detroit that he says “are suffering greatly: No jobs, tremendous crime, bad education, and we’re going to take care of the African-American population, which has really been mistreated…They’ve been promised so much, Hispanics have been promised so much – and nothing ever happens.” Candidate Trump added that he intends to tour of Flint “at some point,” explaining: “I think it’s a horror show that it was allowed to happen and, to be honest with you, it should have never, ever been allowed to happen…I will be visiting Flint. This is a situation that would have never happened if I were president.”

New Math? A new report from the Attendance Works and the Everyone Graduates Center at the Johns Hopkins University School of Education on chronic school absenteeism (“Preventing Missed Opportunity: Taking Collective Action to Confront Chronic Absence.”) has reported that half of the country’s chronically absent children are in just in 4 percent of the nation’s public school districts — including Detroit, where more than half the children in the Detroit Public Schools system are chronically absent. The report noted that Detroit is one of the cities, along with Philadelphia, Baltimore, Milwaukee, and Cleveland. The report defines chronic absence as something which occurs when a child misses so many days of school — whether the absences are excused, unexcused, or due to suspensions. The report finds that such absenteeism negatively impacts academic achievement, finding that in DPS nearly 58% of students are chronically absent, compared to a national rate of about 13%, with researcher Robert Balfanz reporting that Detroit is the only city of 25 major cities to have a higher rate of chronic absenteeism in elementary school than in high school. Hedy Chang, another researcher and executive director of Attendance Works, added: “Chronic absence is really a proven early indicator of academic risk, starting as early as preschool and kindergarten…By middle and high school, it is a sure-fire predictor of kids being on the path to drop out.” DPS’s interim superintendent, Alycia Meriweather, has said the district is planning to crack down on chronic absenteeism through better tracking of student data. 

Among other findings:

• Chronic absence at varying levels impacts 89% of school districts in the U.S.
• Half of the chronically absent students nationwide are in just 4% of school districts and 12% of schools
• Some of the places with the largest numbers of chronically absent students are affluent, suburban districts known for academic achievement, such as the Washington, D.C., suburbs of Montgomery County, Md. and Fairfax County, Va. 
• Districts serving disadvantaged urban neighborhoods with high rates of poverty typically have both high rates and large numbers of chronically absent students. In these places, researchers said, chronic absence “reflects a web of structural challenges,” such as the lack of adequate affordable housing and the absence of well-resourced schools. These places are also highly segregated communities of color, researchers said.  
• Many poor, small rural school districts have extremely high rates of chronic absenteeism. 

The new report came as the Detroit Federation of Teachers last night reached a tentative agreement with the Detroit Public School District, with details to be provided about the tentative contract at a special meeting today, the first day of the school year for the 46,000-student district now formally known as the Detroit Public Schools Community District. The deal, which covers more than 2,900 teachers and paraprofessionals, must be ratified in a vote by union members. School-by-school voting is to begin later this week. The contract must also be approved by the Financial Review Commission, which was established during Detroit’s bankruptcy to oversee the finances of the city as well as its school district.

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 2^nd 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.”  

Structures for Restructuring Fiscal Futures

eBlog, 9/01/16

In this morning’s eBlog, we consider yesterday’s appointments by President Obama of the PROMESA oversight board—a step which, as in Washington, D.C. and New York City a generation ago—challenge traditional concepts of democracy, but offer a fiscal chance for the U.S. Territory’s fiscal future—albeit it in a far more complex way than in the two mainland cities. Then we turn, once again, to the grim fiscal, ethical, and legal challenges confronting the Detroit Public Schools—the public system critical to a city hoping to begin to regrow—and, ergo, so dependent on attracting young families with children back into the city.

Is There Promise in Promesa? President Obama yesterday, describing the White House/Congressional PROMESA financial control board to oversee the restructuring of Puerto Rico’s $70 billion debt burden, noted the panel came“[W]ith a broad range of skills and experiences: these officials have the breadth and depth of knowledge that is needed to tackle this complex challenge and put the future of the Puerto Rican people first.” The newly named panel is mandated to, in effect, will manage the U.S. territory’s finances for at least five years. House Speaker Paul Ryan (R-Wis.), who steered the bipartisan legislation through Congress, said: “Drawing from a wide variety of practical experiences and policy prowess, the members have what it takes to serve Puerto Rico and help get the territory on a path to fiscal health.”

As announced, the board is comprised of four Republicans and three Democrats, was drawn by the White House were made from a list provided by Congressional leaders of both parties. Under the new law, the board is expected to serve similarly to previous such boards in Washington, D.C. and New York City—with the PROMESA legislation shielding Puerto Rico from bondholder litigation: the Democrats on the panel are: Arthur Gonzalez, a senior fellow at New York University’s School of Law and former Chief Judge of the U.S. Bankruptcy Court for the Southern District of New York; Jose Ramon Gonzalez, president and chief executive officer of the Federal Home Loan Bank of New York; and Ana Matosantos, who served as California’s budget director from 2009 to 2013. The Republicans are: Carlos Garcia, former president of Puerto Rico’s Government Development Bank and founder and chief executive officer of BayBoston Managers LLC, a minority-owned private equity firm; Andrew Biggs, a resident scholar at the American Enterprise Institute; David Skeel, a University of Pennsylvania law professor; and Jose Carrion III, co-founder of Carrion, Laffitte & Casellas Inc. Kin addition to political balance, the board also appears to mitigate apprehensions from Puerto Rico with regard to its own citizens by the inclusion of four of the new appointees being Puerto Rican.

The federally appointed control board will oversee Puerto Rico’s budget and any debt reduction, which can now be enforced by a court, similar to a municipal bankruptcy. The board will designate a chair within 30 days of the panel’s formation, according to PROMESA. For the newly named board, the first challenge will be governance: how can the board coordinate with Puerto Rico Governor Garcia Padilla on a quasi-plan of debt adjustment or fiscal plan that will enable it to—as in a municipal bankruptcy negotiation with creditors—work out a plan of debt adjustment. However, the federal legislation does not specify how to prioritize Puerto Rico’s many classes of municipal bonds—bonds which are backed by various revenues and legal protections, but the new federal law requires that any fiscal plan “provide adequate funding for public pension systems.”

Gov. Padilla is expected to submit a blueprint as early as the second week of September, according to one Puerto Rican official. The challenge—as in Detroit, San Bernardino, Stockton, etc.—will be double: what will the new board’s relationship be with the island’s elected leaders, and how will the board balance the financing of essential public services and public pension obligations versus obligations to creditors—especially given the ravaging explosion of Zika cases. Moreover, the amounts at stake are significant: the U.S. territory has been defaulting on a growing share of its debt: in July, Puerto Rico missed nearly $1 billion of principal and interest, the first time a state-level borrower skipped payments on its direct debt since the 1930’s. Puerto Rico and its agencies owe municipal bondholders in all fifty states $70 billion; Puerto Rico’s three retirement systems have an unfunded liability of about $43 billion. If that were not enough of a challenge, the courts will be involved in a separate lane: hedge funds holding Puerto Rico full faith and credit debt filed suit last July against the government, claiming Gov. Garcia Padilla is re-directing cash in violation of Puerto Rico’s constitution.

Unsurprisingly, David Bernier, the gubernatorial nominee for Puerto Rico’s Popular Democratic Party, was less enthusiastic about yesterday’s announcement: “We oppose the board, because we understand that it lacerates our own government and is anti-democratic…Given the reality of PROMESA, we will defend the interests of our people always before the board or any forum necessary so that what prevails is the welfare of Puerto Rican families.”

New Math? Detroit Inspector General Bernadette Kakooza yesterday issued a report detailing a new wave of alleged theft and fraud cases in the Detroit Public Schools Community District—a district already at the center of a federal probe of a kickback scandal involving more than a dozen employees and a vendor. The new report, coming as schools ready to open in what will be a quasi-divided city between charter and Detroit Public Schools, outlines an unreported payroll error that overpaid an employee more than $50,000, fraudulent teaching credentials, and missing equipment and money. Inspector General Kakooza notes that a June 2014 tip over fraudulent procurement practices ultimately led to a federal kickback scandal investigation in which 12 former DPS employees were convicted, along with district vendor Norman Shy.

The report comes in the wake of retired U.S. Bankruptcy Judge Steven Rhodes, DPS’s Emergency Manager, reinstatement last of the Office of Inspector General—reinstated to include two primary functions: investigations and internal audits—or, as Judge Rhodes described it: “The Office of the Inspector General (OIG) is a critical element for the new District and our commitment to zero tolerance for wrongdoing and misconduct by any individual or organization affiliated with this District…The OIG will serve an active role as the District’s watchdog to protect our resources, employees, children and families.” The office had originally been established in March 2009, but eliminated at the end of June 2015 by then-Emergency Manager Darnell Earley—the Gubernatorially-appointed Emergency Manager who served to the human health and fiscal detriment of Flint, before being transferred by Gov. Rick Snyder to the Detroit Public Schools—where he presided over DPS’ near municipal bankruptcy—before being ousted.

Among the investigative highlights: The removal of a district principal following claims in 2014 that the administrator had approved the operation of a food store in a district building that violated DPS’ fundraising guidelines and cash management policies. There was no evidence provided for accountability of sales proceeds; nor was there any evidence the proceeds were used to benefit the students, as required; an investigation last year revealed a district employee had claimed and received about $14,000 in unemployment compensation while partially on an approved Family and Medical Leave of absence. The employee also received $49,000 in earnings from the district during the same period.

Former DPS school supply vendor Norman Shy and 12 DPS officials are to be sentenced next month after taking plea deals in connection with the FBI investigation into public corruption at the district this spring. Federal prosecutors allege the scheme, which started in 2002 and ran through January 2015, was hatched by Shy, 74, of Franklin, who billed DPS for $5 million in school supplies but delivered less than what was promised. Mr. Shy, in return for the business, allegedly paid bribes and gave kickbacks to 12 former DPS principals and one assistant superintendent in the form of cash and gift cards totaling $908,518. The report comes in the wake of a two-year investigation of DPS in the wake of a tip from state auditors.  

The deep fiscal and trust chasm created and fostered by Mr. Earley has signal implications for Detroit’s kids’ future. It makes the task for Judge Rhodes all the more critical.