To Takeover, or Not to Takeover: That Is the Question


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eBlog, 10/31/16

Good Morning! In this a.m.’s eBlog, we consider the long wait until tomorrow for the State of New Jersey to determine whether to approve Atlantic City’s recovery plan—or to take over the municipality. States have different legal means and experiences in taking over municipalities: eighteen provide authority for municipal bankruptcy—which, of course, means thirty-two do not. In New Jersey, there has been a complex interplay with the state naming an emergency manager, a la Michigan, nut a manager who appeared to play little if any role. In New Jersey’s case, the state, in fact, does have experience with a state takeover: Camden. So, as we await the state decision tomorrow, we consider some of these intergovernmental factors.  

Saving Grace? The State of New Jersey is expected to decide the fate of Atlantic City by tomorrow with regard to how much—if any—of the city’s proposed 123-page recovery plan—a plan which, as we have described, sharply reduces the number of employees, addresses liabilities from past overtaxing of casino properties, reduces employee benefits, cuts the number of fleet vehicles, and would sell off its municipal airport. The plan, despite guarantees of substantial payments from casinos and diversion to the city of tens of millions in state revenue, proposes ongoing state transitional aid for five years. The plan proposes the city’s Municipal Utilities Authority would borrow $110 million in order to purchase city’s Bader Field airport property—with the financing of the loan to be repaid by raising water rates, selling the property, or a combination of both. The plan does not seek any tax increases. Finally, the plan seeks extra state transitional aid, winding down from $26 million in the first year to $14 million in 2021. The State has until tomorrow to opine whether this proposal would restore “fiscal stability:” rejection would allow the state to move to take over the city government and seize assets. Gov. Chris Christie’s office has, so far, directed all questions to the Department of Community Affairs. His long, winding, one hundred fifty day period granted the City by the legislature to come up with a recovery plan comes in the wake of a seeming series of experiments by the state—including the appointment of an emergency manager—apparently styled after Michigan’s system; however, in Atlantic City, it remains unclear whether the Governor’s appointed emergency manager ever had any authority: he was a non-player. Gov. Christie called Mayor Guardian a liar. Yet, at the end of a day, it seems unlikely the Governor’s desire to wrest control over the city is still there: Rutgers University political scientist Ross K. Baker has described Gov. Christie’s playbook of bravado and verbal aggressiveness as something that ‘no longer works for him:’ “He let a lot of people down…The revelation of his conduct, his pettiness, his vengefulness are not attractive human qualities.” One of the rationales for a state takeover was to reassure legislators from the norther part of the Garden State that it would not be reckless to send a projected $200 million from proposed North Jersey casinos down to Atlantic City in a major tax transfer; however, even that plan is unlikely to lead to any cash-in of chips; the referendum to allow casinos in the northern part of the state appears unlikely to hit the right numbers in next week’s elections.

For the state, this will not be a first-time decision, and its experience with the state takeover of Camden might provide us some insights: New Jersey took over the nation’s poorest city and one of the most violent in the country in 2002 at a cost of $175 million in extra state dollars. In Camden, the state takeover appeared to result in an inability to improve the city’s failing infrastructure, schools, or economy. There, the state takeover lasted more than seven years, a period during which the state appropriated hundreds of millions of dollars in aid in an effort to overcome decades of corruption in City Hall: the state imposed its own chief operating officer to run the city; New Jersey set aside $175 million in special state aid—aid theoretically intended to repair crumbling streets and sewers, improve schools, and put more police officers on the streets. Former New Jersey Assembly Speaker Joe Roberts noted that if Camden was going to have any chance of survival long-term, the state takeover was vital, along with a fiscal plan to grow the city’s tax base. Yet the city, with a poverty rate close to 40 percent—a municipality which as recently as 2012 experienced the highest crime rate in the United States—some more than 600 percent greater than the national average, might not be a poster child for signs that a state takeover necessarily guarantees a brighter and safer fiscal or physical future. Camden, with a population of 77,000, once home to several major manufacturing firms, has received hundreds of millions of dollars in loans, grants and direct aid from the State of New Jersey; yet, over the years, and despite the state takeover and assistance, the city remains one of the nation’s poorest.

Nevertheless, on its own, according to Camden Mayor Dana L. Redd, the city, a year ago last June, had gained substantial fiscal progress: S&P affirmed the City of Camden’s investment grade bond rating of BBB+, noting that while many urban cities across the country with similar challenges were experiencing downgrades in their ratings, Camden was bucking the trend: “Camden’s current financial standing has surpassed everyone’s expectations…The fact that S&P affirmed our investment grade rating sends a clear message that Camden’s resurgence is real and investors and businesses have confidence in investing in our City. While this is certainly welcomed news, my Administration will continue to take appropriate steps to ensure the City can receive an upgrade in the near future.” In its upgrade, S&P noted: “We believe that its liquidity will remain very strong given expected financial stability and continued improvements in the economy, coupled with a proactive administration,” adding “recent development includes the construction of student residential housing for the Cooper Medical School of Rowan University. Also, currently under construction is a new corporate headquarters and practice facility for the Philadelphia 76ers. Furthermore, the city is experiencing quite a bit of development. Most notable, are two commercial properties, the U.S. headquarters of Subaru and Holtec, which are expected to add a significant number of jobs and boost the economy. Additional investments are likely, given the city’s improving economy and lower crime rate. The city has continued to make progress in economic development and its crime rate and has gained White House attention.”

Gauging Municipal Recovery at Election Time

eBlog, 10/28/16

Good Morning! In this a.m.’s eBlog, we consider the seeming progress and positive response to Atlantic City’s recovery plan and effort to avert a state takeover; then we venture to Michigan, where the state’s judicial branch has opened the door for a suit against the State of Michigan related to the state’s actions in Flint, action the court described as “so arbitrary in a constitutional sense, as to shock the conscience;” finally, with election day around the corner, we consider the candidates running for the School Board in Detroit. 

Saving Atlantic City.  Moody’s Investors Service yesterday described Atlantic City’s fiscal recovery plan as “robust and detailed,” albeit a plan which relies on cooperation from “outside forces,” adding that if accepted by the state, it would mean additional state assistance, which would be a credit positive. Should the state not accept the proposed plan, it would result in a five-year state takeover of the city’s finances and major decision-making powers. The rating agency wrote that the city’s proposed cost-cutting actions are the easiest to execute, but other key parts of the plan would require outside assistance, including the Borgata Casino signing of a settlement agreement and the successful issuance of bonds by the Municipal Utilities Authority to finance the purchase of the city’s Bader Field airport, adding that the MUA’s debt would increase sevenfold, and it would have to increase water rates to make debt payments, albeit city officials said rate hikes would primarily affect commercial properties, not residents. Moody’s noted: “The plan does, however, note that current rates are well below the regional average, so potential increases may not have as much negative impact on the base as would otherwise be the case.” (Atlantic City plans to use New Jersey’s Municipal Qualified Bond Act to borrow $105 million to settle tax-appeal debt—with Moody’s noting that the Act is “well established and would greatly increase the odds of the city successfully accessing the market, an otherwise difficult proposition.” Moody’s further noted that: “While the city has stated that it remains committed to making the debt service payment, its ability to do so decreases daily…Absent successful implementation of its turnaround plan, or a state takeover with a funding infusion, default may be merely a matter of time as the city owes an additional $7.1 million in debt service before the end of the year.”

Second Thoughts? While it was as recently as May that New Jersey State Senate President Stephen Sweeney was arguing for a sweeping state takeover of Atlantic City, saying it was the only way to get the seaside resort out of its fiscal jam, this week the Senator, on the city’s famed Boardwalk to tout the start of construction of a beachfront campus for Stockton University and an innovative apprentice program created by the Joseph Jingoli & Sons Construction Co., said: “No one wants to take over Atlantic City…They really don’t.” Mayor Don Guardian and City Council President Marty Small, however, were not present to hear the seeming change of heart; rather they were in Trenton, accompanied by their fiscal consultants, describing their five-year, 123-page recovery plan to the Assembly Judiciary Committee, which had authored the legislation to give Atlantic City a 150-day reprieve to come up with a plan to prevent a state takeover. And their trip seemed worthwhile: Committee Chairman John McKeon said he saw “no reason why the Department of Community Affairs would reject this plan,” calling it a “sober and responsible approach that creates a much-needed level of stability.” For his part, Senate President Sweeney said he had not reviewed the plan, but noted that despite the recent history of both himself and Gov. Christie calling for the Atlantic City takeover, the current decision was in the hands of department Commissioner Charles Richman, and he noted that the state is providing the early retirement incentives that are helping trim Atlantic City’s budget and payroll.

Meanwhile, in Trenton, the Mayor was questioned with regard to the proposed sale of Bader Field; he assured Assembly members that the plan was legal and would have the advantage of keeping valuable assets in public hands and out of the hands of special interests. Atlantic City bond consultant Joe Baumann, also testifying in Trenton, described the Bader-MUA deal as a “win-win,” noting it allowed the city’s water utility to “remain in public hands,” which would keep rates among the lowest in the state, adding: “It allows Bader Field to be monetized in the future after Atlantic City has recovered…In the meantime, from the perspective of the MUA, there’s an opportunity to use that land to further its mission in the area of renewable energy,” such as creating a solar field or wind farm: “It played the role of satisfying both missions.” Chairman McKeon, at the end of the 21/2-hour hearing, remarked that “when this process started, takeover was nearly preordained….Those who felt that was not equitable, fair, and reasonable put together a Herculean effort to present an alternative…It has since enabled the city to preserve collective bargaining while negotiating a fair compromise with the unions, and enabled the city to keep crucial assets in its portfolio for the benefit of the people.”

Out Like Flint. Michigan Court of Appeals Judge Mark T. Boonstra has ruled Flint residents are permitted to sue Michigan state officials with regard to their decisions that led to Flint’s drinking water contamination problems, holding that residents have provided sufficient facts in their lawsuit against the state over contaminated water that, “if proven,” would show actions by the state were “so arbitrary in a constitutional sense, as to shock the conscience;” he rejected the state’s arguments that Flint residents did not file their lawsuit within six months of the water crisis date, calling them “unpersuasive,” writing: “Were the court to accept defendants’ position, it would have to find that the plaintiffs’ claims are barred because they should have filed suit (or notice) at a time when the state itself was stating that it lacked any reason to know that the water supply was contaminated. The court is disinclined to so find.” the opinion stated. The suit, filed in January, charged Gov. Rick Snyder, Michigan’s departments of Environmental Quality and Health and Human Services, and two former Flint emergency managers for roles that allegedly contributed to the city’s water crisis. The plaintiffs are seeking monetary damages from alleged violations of the due process of the Michigan Constitution. In his ruling, Judge Boonstra, noting the state did not acknowledge a lead problem existed in the water until a year ago, dismissed some claims in favor of the state of Michigan; he focused on the issue of injury to bodily integrity, which Flint residents allege they are entitled to unspecified monetary damages. Judge Boonstra wrote: “Such conduct on the part of the state actors, and especially the allegedly poisoning of the water users of Flint, if true, may be fairly characterized as being so outrageous as to be ‘truly conscience shocking.’” (In their suit, Flint residents alleged their property values have dropped and damage to plumbing, water heaters, and service lines caused by the introduction of corrosive water caused by the April 2014 switch to the Flint River as the city’s water source, a cost-cutting move that began in June 2013 done by state-appointed emergency managers.) In response, Michigan state officials had asserted the Court of Claims lacked jurisdiction over the claims, because neither former Flint emergency managers Darnell Earley or Jerry Ambrose acted in the capacity of a state officer while serving Flint; the state asserted they acted as local officials—notwithstanding their appointments by Governor Rick Snyder. Judge Boonstra, however, rejected the state’s argument; he wrote that both men operated as officers of the state, which means the court has jurisdiction over the case. (In Michigan, the Court of Claims handles citizen lawsuits against the state with potential damage values of more than $1,000.)

In their case, the Flint residents also have proposed three theories of recovery for tort damages: 1) a claim based on the idea of a state-created danger theory; 2) a claim based on violation of a due process clause; and 3) a claim based on violation of a fair and just treatment clause. Judge Boonstra said the state was entitled to summary disposition to the first and third claims, but he allowed the second to stand, saying the residents have provided information to form a “cognizable substantive due process claim for a violation of their respective individual rights to bodily integrity,” and finding that the plaintiffs had pleaded sufficient facts to state a cause for “inverse condemnation: The allegations are sufficient, if proven, to allow a conclusion that the state actors’ actions were a substantial cause of the decline of the property’s value and that the state abused its power through affirmative actions directly aimed at the property, i.e., continuing to supply each water user with corrosive and contaminated water with the knowledge of the adverse consequences associated with being supplied such water.”

School Choice. November 8th could be an important day for Detroit’s future: it will be Election Day not just for the Presidency, but also for choosing a new Detroit Public School Board. The $617-million restructuring plan passed by the Michigan Legislature last June split the Detroit Public Schools into two entities as of last July 1st. The former Detroit Public Schools now exists solely for tax-collection purposes to pay off debt over the next decade; its former, powerless 11-person board was dissolved. The new district, the Detroit Public Schools District, will have seven school board members who will take office in January, charged with restoring local control—even as the state has created a wholly separate system of charter schools in the city. Enrollment has fallen by more than two-thirds since 2000, as Detroit’s population has declined and students have fled to charter schools and suburban districts. More than 100 schools have closed since 2005. The state has controlled DPS for all but three years since 1999: state-appointed emergency managers have run the district since 2009. (DPS was also under state control from 1999 until 2005.)

If bankruptcy experience were a prerequisite in a city just out of the largest municipal bankruptcy ever, this upcoming election will feature a slate in which more than half the candidates have filed for bankruptcy, or have had a foreclosure or an eviction, or have lost a lawsuit over unpaid bills, according to a local media partnership investigation. The stakes will be high in the wake of the Legislature’s approval of the historic $617-million financial restructuring plan for DPS as it became insolvent, because many of the city’s leaders recognize that a strong public school system is imperative to the city’s future. But voting will necessitate much homework: voters will confront an exhausting list of 63 candidates, because there was no primary: it is likely an election unlike any other the city has seen: It was called four months ago, there was no primary, and only the top seven finishers will win seats on the board.

As part of an effort to provide information for voters, the Detroit Free Press, Fox 2 Detroit, Bridge Magazine and WDET Detroit Public Radio formed a partnership to investigate the backgrounds and positions of the candidates, reviewing hundreds of pages of court documents, property records, voting histories, tax liens, and other public records—as well as résumés and lists of their priorities and qualifications. The questionnaire also asked candidates to list missteps the public should know. Unsurprisingly, not a single candidate disclosed a shortcoming, even though their investigation found to the contrary. To wit: 12 candidates have filed for bankruptcy, 13 candidates lost properties for failing to pay taxes or mortgages, or are facing liens for unpaid income taxes; 28 candidates were sued for unpaid bills and defaulted or agreed to make payments. One candidate has been ticketed twice for soliciting prostitution. (That candidate is currently a teacher’s aide at the Trix Performance Academy, a Detroit charter school.) In all, 36 of the 63 candidates vying for seven at-large seats on the board have had either a bankruptcy, a foreclosure or lien for unpaid taxes, or been sued for unpaid debts. More than a dozen of them have experienced more than one type of financial setback.

Like the state reconstituted school system, which is now public and charter schools, the new board’s powers will be limited: it will hire the new superintendent and have policy-making authority; however, it cannot fire the superintendent on its own, and the board will be overseen by the Detroit Financial Review Commission, which has authority over board’s proposed budget and the appointment of key administrators. (Under Michigan law, three straight years of deficit-free budgets could prompt a return to true local control for the district, something Detroiters have demanded after years of state oversight.)  

Cities’ Battles for Recovery


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eBlog, 10/27/16

Good Morning! In this a.m.’s eBlog, we consider the first reactions in the New Jersey General Assembly to Atlantic City’s recovery plan—will it suffice to avert a state takeover? Then we venture west to the challenges Detroit continues to meet as it is pressed to justify its efforts to raze thousands upon thousands of abandoned properties; before turning back east to the famous Civil War municipality of Petersburg, Virginia—a city in the midst of an unelected takeover in another last stand to determine its fiscal future.

Saving Atlantic City. At a hearing yesterday before the New Jersey Assembly’s Judiciary Committee, Atlantic City officials presented their fiscal recovery plan—a plan to which the response appeared receptive, albeit questions arose with regard to key proposed provisions. Mayor Don Guardian and Council President Marty Small proposed the plan as a sensible alternative to a state takeover, which would occur if the state Department of Community Affairs (DCA) rejects the plan. The Department has until Tuesday to make a decision. Thus, in urging approval, Mayor Guardian testified: “It’s not necessary. Why would you burden the rest of the state when we’re telling you we want to be fiscally responsible, and we understand there is going to be continued state supervision?” Mayor Guardian added that Atlantic City would be the least desirable municipality for the state to take over, and that it would cost state taxpayers millions of dollars. Council President Small said the city’s proposal is the only plan to save the city, which has about $500 million in debt and $100 million annual budget deficits. He mentioned previous state summits and reports on the city’s finances, but said there is a “big difference between a report and a plan,” noting: “This is the only plan…Even on Tuesday, if we get a result none of us sitting across here want, and they take the city of Atlantic City over, this is the only playbook the state could run to make it work.”

In response, Assemblyman Chris Brown (R-Atlantic) and Assemblyman Vince Mazzeo (D-Atlantic), members of the House Judiciary Committee, asked one of the city’s legal advisers how the plan would impact Atlantic County taxpayers and about proposed savings from the city’s early retirement buyouts and new medical plan, with Assemblyman Brown noting: “After 30 years without any fiscal discipline or a transparent plan from the state, Mayor Guardian and Council President Small’s bipartisan plan is a step in the right direction,” adding the proposed plan would reduce spending, but not increase taxes and keep the city’s assets “out of the hands of outside special interests.”  Assemblyman Mazzeo called the plan “viable;” he said he hopes it can be accepted. He credited the so-called takeover law, which he sponsored, for forcing the city to draft the plan, noting: “I think the big question is about the Municipal Utilities Authority right now…I think that Atlantic City did their job. They got to the goal line. It’s up to the DCA to get them across the line now.” He added it would be a “travesty” if the DCA does not approve the city’s plan, and noted the state can take over later if the city doesn’t follow the plan: “Atlantic City and their consultants put forth a plan that fell right within the spirit of the legislation…Why would we look to take over and take on half a billion dollars in debt?”

However, Assembly Majority Leader Louis Greenwald (D-Camden) expressed apprehensions that the proposed capital sale of the municipal airfield, Bader Field, to the city’s water authority may not be legal—the proposed sale is regarded as the key to the plan, as it would generate $110 million to pay down Atlantic City’s debt. However, the Majority Leader noted it is unclear if state law would allow the authority, which provides the city’s drinking water, to buy the 143-acre former airstrip, noting the legislature might have to amend New Jersey’s law for the sale to take place: “There seems to be some dispute as to whether or not it is an appropriate authority of the Municipal Utilities Authority to be able to buy land.” In response, one of the city’s financial advisers testified that New Jersey law allows authorities to purchase land “necessary or useful and convenient” for their purposes, adding that “one of their purposes is they have visions of using it for alternative energy to power the system…Those are all part of the purposes for expanding.”

On a second issue, in the wake of the Borgata Hotel Casino & Spa’s denial Tuesday that it had agreed to the settlement included in Atlantic City’s plan for $103 million related to tax refunds the city owes the casino (the casino was owed $150 million in tax refunds and has withheld $23 million in property taxes this year to offset the refunds—the casino would withhold another $8 million tax payment this year, under the plan), Assemblyman John McKeon (D-Essex), asked if the city had any assurances Borgata would accept the settlement. In response, the city’s financial adviser testified: “They’ve come to an agreement. Borgata was unwilling to sign the document until the financial plan was approved. All we have today is the word of the representatives from Borgata, and my partner has had numerous conversations with them and he is confident that they were honest.”

Demolition Derby? Detroit, which when it filed for the largest municipal bankruptcy in American history, was home to an estimated 40,000 abandoned lots and structures; ergo demolition of the bulk was a critical part of the city’s bankruptcy plan of debt adjustment—and key to restoring public health and safety. But now a Michigan state investigation, which prompted a recent two-month suspension of the city’s demolition program in the wake of an audit that commenced a year ago related to questionable low bids being passed over for higher ones and lax documentation, has forced Mayor Mike Duggan to defend it before the Detroit City Council—especially with regard to revelations that demolition costs had increased more than 60%. Thus, Mayor Duggan explained that higher standards to protect the environment created more work, which, ergo, drove up prices, telling the Council: “To suggest these costs went up because we’re doing something wrong, I don’t believe is true,” earlier this month—the day before the Michigan State Housing Development Authority (HDA), which oversees federal funding for the city’s demolition program, dispatched staff to the city for an audit—an audit which appears to have figured into the suspension by the U.S. Treasury of the city’s demolition program funded through the federal Hardest Hit Fund. Those contributions have, to date, financed nearly three-quarters of the more than 10,600 demolitions in Detroit since Mayor Duggan took office. According to the state inspection, the city’s program provide: inconsistent bid scoring, incomplete documentation, and a system that routinely awarded demolition contracts to companies which did not have the lowest bid, noting in the summary of its findings that while the “DLB (Detroit Land Bank) must document and explain deviations of 30% or more of the bid selected compared to the lowest bid…“One bid that was reviewed had a deviation of $828,571, or 46%, from the winning bid compared to the lowest bid.” Notwithstanding those flaws, the HDA had already released millions of federal dollars to reimburse the Detroit Land Bank Authority for demolitions its contractors performed: HDA authority Executive Director Kevin Elsenheimer concluded that “the review did not find any glaring or significant problems,” according to a memo he wrote a year ago, just 12 days after the audit began. Late last April, however, a federal criminal investigation into the program was made public. In addition, the HDA and Detroit’s Auditor General’s Office are investigating Detroit’s demolition activities. Thus, the federal Special Inspector General for the Troubled Asset Relief Program (TARP), the law enforcement agency known as SIGTARP, has been leading the criminal investigation. The federal agency is a watchdog for TARP spending, including the funds that pay for Detroit’s demolition program.

The completion of that investigation last week opened the way for resumption of the program and the release of $42 million from the Hardest Hit Fund, funds which had been previously earmarked for Detroit, but held back during the suspension. (Altogether, Detroit has been allocated more than $250 million from the fund.) Mayor Duggan said at a news conference last week that he was disappointed in some of the things he learned from the investigation, but that he had seen no sign of criminal activity, noting: “The speed at which we went outstripped the controls that we had in place.” In fact, the HDA’s audit last October identified several issues the Detroit Land Bank was expected to correct: In reviewing the first round of federal funding, which amounted to about $50 million, the housing authority found that 40 out of 59 low bids reviewed were not awarded contracts. In many instances, when the low bidder was not selected, that audit found, Detroit demolition officials decided the company did not have the “capacity” for the job—apparently referencing inadequate resources to complete the work on time. However, the authority found that this rationale was not always applied in a way that made sense: “For example, the bid package was for 16 properties, and the scoring committee gave points based on the contractor indicating they can demo 40; therefore they gave that bidder more points…” The premium Detroit officials placed with regard to a company’s ability to work fast resulted in the majority of contracts being awarded to larger companies: two of those, for instance, according to the audit, received 53% of the first $116 million in demolition contracts reimbursed with federal dollars according to a Detroit Free Press analysis. Unsurprisingly, the housing authority requested that the Detroit Land Bank respond to the audit by late November of last year. A housing authority spokesperson, citing the agency’s ongoing investigation, declined to answer questions from the Free Press about exactly what problems led to the suspension of demolition activities in Detroit.

The Battle for Petersburg. 252 years ago, Robert E. Lee noted: “Thus, after thirty days of marching, starving, fighting, and with a loss of more than sixty thousand men, General Grant reached the James River, near Petersburg, which he could have done at any time he so desired without the loss of a single man. The baffling of our determined foe so successfully raised the spirits of our rank and file, and their confidence in the commander knew no bounds.”  Today, there is no such confidence in the historic city as a consulting team has reportedly been awarded a $300,000 contract for six months by the insolvent municipality. A team from the Robert Bobb Group arrived at City Hall Tuesday morning and immediately ordered Acting City Manager Dironna Moore Belton back to her previous position as general manager of Petersburg Area Transit, replacing her in the top position with retired U.S. Marine Corps colonel Tom L. Tyrrell, who, since his retirement, has served in a number of state and local government roles and as an executive for several nonprofit groups. Col. Tyrrell, who is also the founder and CEO of a Connecticut-based financial services company, Via Novus Financial, said he previously worked with the Robert Bobb Group when he was chief operating officer of the Chicago Public School system in Chicago, where between 2012 to 2015, he oversaw the closure of almost 50 schools and saving the school system a total of more than $700 million—and where, reportedly, his annual salary was $180,000, according to media reports. Col. Tyrrell noted: “I’m going to find out more,” as he began meeting Tuesday with all the city’s department heads.

In response to the query whether he was familiar with the turnaround plan the city has been following since August, a plan put together by experts from the Virginia Department of Finance and two financial advisory firms, Col. Tyrrell noted: “You can read about things in the press, but until you get on the ground you don’t have a complete picture…Our philosophy basically is to look at everybody’s input, take the best ideas, and leave the city with a viable plan for a viable future,” adding his team “will bring a fresh set of eyes, tap into the experience of staff, bring in any experts we need, and give the city the best plan they can get.” Under the terms of his contract, the Colonel’s team will provide personnel to fill the positions of interim city manager and budget director, as well as an unspecified number of accounting positions. In addition to providing an interim city manager, finance director, and accounting personnel, the company’s services to the city appear to include providing an “Administrative and Organizational Assessment.” Unsurprisingly, questions have been raised with regard to whether the City Council violated its charter in hiring the firm: under the agreement with the Bobb Group executed this week under emergency hiring rules, the agreement grants the group “all powers” provided to the city manager under the city’s charter and code: those duties include appointing, disciplining or firing city workers; making and executing contracts on the city’s behalf; supervising and controlling all divisions created by the City Council; and ensuring that all laws and ordinances are enforced.

The challenge ahead will be significant, as the small municipality confronts mounting pressure from lawsuits and creditors, and struggles to keep pace with municipal bond interest payments and mandatory obligations to the Virginia retirement system. Payments to that system on behalf of the city and school system were nearly $3.5 million behind as of last week. The challenge with regard to governance is also significant: Petersburg residents concerned with the scope of the group’s responsibilities and the way the deal was approved have reached out this week to City Attorney Joe Preston and Commonwealth’s Attorney Cassandra Conover to question whether the actions violate the city’s charter. The council had voted on hiring the firm twice last week: first on Tuesday and then again during a special meeting last Thursday called for consideration of the contract and a forensic audit, on which city officials advised the council not to spend money, since a special grand jury investigation of city finances already is underway. Last week’s vote to approve the Bobb Group deal failed 3-3-1. Under the City Council’s rules, reconsideration of an item must wait 30 days unless a motion to reconsider is made before the group adjourns. No such formal motion was made. The City Attorney advised council members that the Thursday vote was acceptable and defended that decision this week in an interview this Tuesday, saying in part that “council has a right to conduct its business.”

The fiscal challenge might even be enough to make Robert E. Lee quiver: Petersburg began this fiscal year $19 million in debt, and $12 million over budget. The Council voted raised taxes, it slashed more than $3 million in funding from the city’s chronically underperforming schools, eliminated a popular youth summer program, and shuttered cultural sites to make up the difference.

When the Fate of a Municipality Is in the State’s Hands

eBlog, 10/25/16

Good Morning! In this a.m.’s eBlog, we consider the denouement in Atlantic City, as it submits its final fiscal plan in a last-minute effort to avert a state takeover; then we jet to the warmer Caribbean, where the PROMESA board is in federal court to lift the provision in the new PROMESA law which imposes a stay on Puerto Rico debt-related litigation until at least next February 15th.

To Be or Not to Be A Municipality. The Atlantic City Council yesterday voted 5-3, with one abstention to approve a fiscal recovery plan, with the intention of staving off a state takeover. Atlantic City will submit the plan to the state Department of Community Affairs today—a submission that will trigger a seven-day window during which the State of New Jersey will have to accept or reject the plan—in which case the State of New Jersey would preempt local authority and take over the city’s finances for five years. Under the plan, Atlantic City would cut 100 more full-time workers (a year ago, the city’s payroll included about 1,150 employees serving a population of 39,551—or about 29 workers for every 1,000 residents—a percentage higher than Newark, the state’s largest city, which has 11 employees for every 1,000 residents, and Jersey City, with about 10 employees on the payroll for each 1,000 people.) Mayor Guardian, under the plan, has proposed selling the municipally owned airport to its water authority, and a settlement with the Borgata Hotel Casino & Spa over tax refunds, among other cost-cutting and revenue-raising measures. If implemented, the city’s revenues, which are projected to decline by about 10 percent this fiscal year from last, would balance because of projected salary and wage savings in excess of 30 percent (the plan proposes reducing the municipality’s full-time workforce from 965 to 865)—enough to produce total projected budget savings of $20 million, or about a 10 percent reduction from last year. The reductions are proposed to be gained by transferring a majority of the city’s senior and health services to Atlantic County, bidding out 10 services to the private sector, and utilizing early retirement buyouts in order to create “as few disruptive layoffs as possible,” according to the plan’s summary. The city has offered buyouts to 165 senior employees. The key to the proposed plan is the proposed sale of the municipal airport to the city’s Municipal Utilities Authority for $110 million: those proceeds, plus $105 million in low-interest financing, would pay down all outstanding debt to Borgata, MGM, and the state for deferred employee benefit costs, according to the summary; that would leave Atlantic City with $30 million in reserves. Under the proposed settlement, Atlantic City and the casino would settle for $103 million on tax refunds the city owes the casino (Atlantic City owed Borgata $150 million in tax refunds before interest after successful tax appeals by the casino; however, the settlement has not been finalized as Borgata waits to see if the state will accept the city’s plan.) In addition, the plan proposes savings via renegotiated labor agreements which propose:

• no salary increases,

• an elimination of longevity for future workers,

• a more affordable medical plan, and

• a reduction in overtime pay.

The labor deals also end terminal-leave payments and use a new salary scale with longer pay progressions for future police hires. The plan omits any proposal of a tax increase for five years; it relies on state aid to balance budgets. (New Jersey provided $13.5 million in Transitional Aid in the last fiscal year.) By 2021, the city projects receiving $13.8 million. The city will receive $26.2 million in Transitional Aid for 2016, according to city officials. Demonstrating the challenge of navigating between the state’s demands and the hard fiscal option, the vote was divided; some residents and four Members of the Council held a news conference ahead of the meeting, where they accused city officials of not being transparent about the plan and the city’s finances: Councilman George Tibbitt complained he had not received the 120-page document until 11 a.m. yesterday, just six hours before he was expected to vote, leading him and fellow Councilmembers Frank Gilliam, Moisse Delgado, and Chuen “Jimmy” Cheng to seek to adjourn the session in order to gain more time to review the proposal—or, as Gilliam said. “The public doesn’t have a clear understanding (of the plan).

Wherefore the Promise of PROMESA? The Puerto Rico Oversight Board has urged a U.S. District Court in four key Puerto Rico debt cases to continue a freeze on the litigation (see, viz.: Brigade Leveraged Capital Structures Fund, Ltd. et al v. Alejandro Garcia Padilla, et al, U.S. District Court, No. 16-1610). In order to proceed, the plaintiffs have asked the court to lift the provision in the new PROMESA law which imposes a stay on Puerto Rico debt-related litigation until at least next February 15th, unless cause could be shown: it is this stay which the plaintiffs in these four cases, as well as in other cases, have asked U.S. Judge Francisco Bessoa to lift. For its part, the oversight board noted its contention that “ongoing litigation is a major distraction that interferes with the Oversight Board’s Congressional mandate and that all parties’ time and resources would be better spent negotiating the fiscal plans required by PROMESA…It does not appear to the Oversight Board that any of the plaintiffs would suffer irreparable or even material harm during the pendency of the stay,” urging the court that the need for Puerto Rico’s government to spend its resources on providing services to its constituents in the midst of a fiscal crisis is paramount—and that forcing it to defend itself in a federal court would undercut Congress’ intent to develop and implement an economic and fiscal recovery plan, asking Judge Bessoa to lift the stay. In the alternative, in order for the PROMESA board to proceed during the stay, the board requested that the court order:

  • The Commonwealth to account for security interest funds, future revenues and expenditures, and any transfers to and from the Government Development Bank for Puerto Rico since the spring;
  • That reserve funds be used to make debt payments;
  • The Commonwealth provide the board with already requested information by deadlines this month;
  • The Commonwealth provide an explanation of the procedures and priorities that guide its disbursement of funds; and
  • The Commonwealth to be allowed to use security interest funds including intercepted funds for essential government services.

In its own submission, the Justice Department last Friday told the court that a lift of the stay would undermine Congress’s clear purpose in enacting PROMESA, writing: “If Puerto Rico’s revenues are diverted from essential services for the health, safety, and welfare of the inhabitants of Puerto Rico to payments of debt service, the human costs of such a decision would be significant,” requesting that Judge Bessoa use a strict measure of when there was cause to lift a stay and to wait for any potential action by the board in the cases.

Can Municipal Insolvency Be Contagious?

eBlog, 10/24/16

Good Morning! In this a.m.’s eBlog, we consider the risks of fiscal contagion emanating from the historic city of Petersburg, Virginia, where the city’s virtual insolvency risks the solvency of the regional wastewater authority—and, therefore, the other participating municipalities. Next, with Election Day approaching, we travel to post-chapter 9 Stockton where the ballot issue of a sales tax increase on next month’s municipal ballot has divided the city’s candidates for Mayor and Council. Finally, we consider the exceptional challenges for the U.S. territory of Puerto Rico in the wake of the first PROMESA board meeting.

Can Municipal Insolvency Be Contagious? The South Central Wastewater Authority (SCWA), which provides wastewater treatment services to protect and enhance the environment for the City of Petersburg, the City of Colonial Heights, Chesterfield County, Dinwiddie County, and Prince George County, Virginia, may have to dip into its cash reserves and raise rates for its four other member municipalities if Petersburg fails to resume making its monthly payments very soon: to make up for the gap, each of the other four member jurisdictions would have to increase its monthly payments by approximately 61 percent. At a special meeting at the end of last week, the boards of the SCWA and the Appomattox River Water Authority were briefed on the outlook for SCWA’s finances due to Petersburg’s looming insolvency—with SCWA accounting manager Melissa B. Wilkins warning that unless the authority can tap some of its cash reserves, without Petersburg’s monthly payments, the Authority will be insolvent by the middle of next month—or, as she put it: “Right now, mid-October, we’re broke.” Indeed, forecasts provided to the directors, all municipal government officials from Petersburg, Chesterfield County, Colonial Heights, Dinwiddie County, and Prince George County, make clear that if SCWA does not begin to receive payments consistently by Petersburg and does not tap into its reserves, its operating cash will go into the red as early as next month: by the end of the fiscal year next June, the figures show the authority’s cash balance will be nearly $3 million in arrears. Ms. Wilkens advised that if Petersburg were to start making regular monthly payments beginning with the amount due for this month, and if SCWA were to shift about $996,000 in unused construction funds from a reserve account to the authority’s operating account, the authority would end the fiscal year with a positive cash balance of $35. Ms. Wilkin’s forecast assumes that SCWA will continue to operate under a “bare bones” budget—one which would not include any deposits into the authority’s reserves and puts a hold on any non-mandated construction projects. The key issue is that Petersburg imposes a disproportionate burden on the joint authority: the city accounts for approximately 55 percent of SCWA’s treatment load; ergo its share is of SCWA’s operating and maintenance costs. Its failure to do so means that to make up for the non-payment, each of the other four member municipalities would have to increase its monthly payments by about 61 percent.

The urgency and briefing come in the wake of the suit the authority filed against Petersburg last month, seeking the appointment of a receiver to oversee the city’s utility revenue and make sure the money collected from residents is used to pay SCWA and not for other purposes: the authority claims Petersburg owed it more than $1.5 million in overdue payments. Two weeks ago, Petersburg Circuit Court Judge Joseph M. Teefey Jr. opined that the suit contained “sufficient information that an emergency exists, and it is necessary that this court appoint a special receiver” to make sure residents’ wastewater payments are not used for other purposes, naming attorney Bruce Matson of the Richmond-based law firm LeClairRyan as the receiver. In addition, Judge Teefey, on his own initiative, ordered the city and the wastewater authority to meet with a mediator, McCammon Group of Richmond, because of “the special relationship of the parties to this action and the potential conflicts that are a consequence of these relationships.” In response, the City of Petersburg’s attorneys have filed a motion asking Judge Teefey to issue a stay of his order or to vacate it, because the appointment of a receiver automatically puts the city in technical default on more than $12 million in debt. The court has scheduled a hearing in the case for next Monday.)

For her part, Petersburg Interim City Manager Dironna Moore Belton, who represents the city on the SCWWA’s board, indicated she was hopeful the city would be able to resume making its monthly payments in the very near future, stating that the city is currently seeking a short-term loan to help that effort, advising the board Petersburg has identified a list of “key obligations” to be paid each month, which includes payments to regional authorities such as SCWWA, the Appomattox River Water Authority, and Riverside Regional Jail—albeit acknowledging that to keep current on those payments, that would “still not address some past-due payments.” Ms. Belton stated that city officials and their financial advisers “have a long-term package we are working on to address fiscal year 2016 past-due payments.”

Financing Post Municipal Bankruptcy City Services. Stockton residents in two weeks will have a say on whether to approve a quarter-cent restricted sales tax increase where the new revenues would be dedicated toward funding libraries, a recreation program, and other services in the city. The vote on Measure M is projected to generate $9 million a year and $144 million overall for library and recreation services, including after-school programs, homework centers, and children’s story times. It will be a heavy lift: Measure M requires approval of two-thirds of voters to pass. Since 1980, proponents argue, the city has underfunded its library and recreation services; they add that the city’s municipal bankruptcy and the recession “only compounded previously existing problems;” moreover, they argue that since 1980, the city’s population has doubled, but not a single new library has been built. The main goal for proponents of the tax is to get Stockton to go from an average spending per resident of $15 on public libraries and recreation to California’s median of $35 per capita. Last June, the City Council voted 5-2, with councilmen Michael Tubbs and Dan Wright opposing, to reopen the Fair Oaks Library; however, the facility is not expected to open for several months. The City’s Community Service Director John Alita, speaking as a private citizen, told the Stockton Record the city has had to close pools, has under maintained playing fields, and has reduced the average time libraries are open to less than 30 hours per week, noting: “The more that those things continue, then the less and less there is opportunity for our community members to actually benefit from these amenities that we made and created to provide for them…(The) combined benefit of restoring what would be a normal schedule to residents and then being able to enhance that in areas where there’s nothing right now, I think we see that as Measure M’s greatest benefit.” (Last year, the Stockton Unified School District had the lowest third-grade literacy rate in San Joaquin County at 16 percent, according to University of the Pacific’s annual San Joaquin Literacy Report Card.) All six of the city’s Council Members have endorsed Measure M, as have civil rights leader Dolores Huerta, San Joaquin County Superintendent of Schools James Mousalimas, the League of Women Voters, and the Greater Stockton Chamber of Commerce. As proposed, Measure M would essentially leave the sales tax unchanged, as a state sales tax increase approved by the passage of Proposition 30 in 2012 will expire this year.

Nonetheless, incumbent Mayor and candidate for re-election Anthony Silva, City Council candidate Steve Colangelo, and former Councilman Ralph Lee White have expressed apprehensions, testifying before the City Council last May they opposed approving a new tax when Measure A funds are not being used to fund library services. (Measure A, a three-quarter cent tax, was a tax increase approved by voters in 2014 with no restrictions, but with the city’s promise funds would be used to hire more police officers—a promise as yet unmet.) Mayor Silva, at a candidate’s forum last week, said: “I’m kind of caught in the middle on this one: All that money that we promised has not been spent exactly on what it was promised to you. So here comes another tax,” adding that Measure A had also promised to fund essential services, including opening libraries and pools; however, but none of those things were done…I love libraries…I love books, but the schools already have libraries.” Another opponent. Ned Leiba, a CPA, who closely monitors the Stockton’s finances, noting what he termed was poor management of Measure A funds and the city’s overall “problem with accounting and auditing,” stated: “You don’t want to give money to an entity that can’t be responsible.” Mr. Leiba, a member of the Measure A oversight committee, said that instead, Measure M proponents should pressure the city into using budgeted but unspent funds and not a new tax to open libraries. Stockton wants to “hold on to every shekel,” but there’s no basis for management’s claim that there’s no money, he added: “You want to exhaust all other remedies before you turn to taxes.” Were voters to adopt Measure M, a seven-member oversight committee would be appointed to do an annual review of how much money is generated and how funds are used. It appears that were the measure to pass, all dollars collected by the restricted sales tax would be placed in a separate city fund to be used for libraries and recreation services in Stockton.  

Wherefore the Promise of PROMESA? The process of unravelling insolvency is slow and frustrating: it can be even more trying where it involves a quasi-state and there are issues of sovereignty. Ergo, despite two meetings, the federal control board has, to date, evidenced scant progress—likely awaiting the outcome of both U.S. and Puerto Rico elections. Moreover, despite the ongoing recovery from the Great Recession, our respected colleagues at Municipal Market Analytics note that the fifty-two year-to-date first time payment defaulters so far this year has broken above last year’s trend (forty-eight between January and October), noting that in order for this year to finish with fewer defaults than last year (a trend that has held every year since MMA began collecting this data in 2009), “there can be no more than six additional defaults in November and December. Those two months have together averaged 14 defaults since 2013, strongly suggesting that 2016 will see a break in the downtrend.” For its part, the representatives of the U.S. territory advised the PROMESA Board it lacked any fiscal ability to finance any of its debt service over the next decade absent changes in federal laws to address both the island’s economy—and those provisions which harm its ability to compete against other Caribbean nations, noting that Puerto Rico’s GDP has contracted for nine of the last ten years in real terms, driven by the expiration of incentives provided under §936 of the U.S. tax code and the U.S. financial crisis, both of which were exacerbated by out-migration and extraordinary austerity measures taken by the Commonwealth, measures including reducing government consumption by 12% in real terms from 2006 through 2015, cutting the public administration headcount by approximately a quarter; reducing or deferring critical capital expenditures; delaying tax refunds and vendor payments; implementing significant new revenue measures, including recent sales and petroleum products tax increases generating approximately $1.4 billion annually; depleting liquidity and undertaking extraordinary short-term borrowings from pension and insurance systems; reforming pensions, converting defined benefit plans to defined contribution plans—austerity measures which they said had been insufficient to eliminate deficits, thereby incurring significant deficit financing, a ballooning debt load, and persistent economic decline, as evidenced by driving emigration to the U.S. mainland: a loss of not just some 9% of the island’s population—but disproportionately a loss for the best-educated.

The statistics, part of a 100-page fiscal plan submitted to the PROMESA Board, sought to identify the resources available to support basic governmental services and promote growth; it promised to put together a specific debt restructuring proposal in the wake of receipt of input from the Oversight Board. The plan warns that if the U.S. territory were to take various steps to improve revenues, reduce spending, and improve economic growth, it would still face a $6 billion gap over the decade—leaving no resources to meet commonwealth-supported debt. The plan addressed neither the financial outlook for Puerto Rico’s public corporations or municipalities (which also owe roughly $17 billion of debt). The plan treats $50.2 billion of debt as being addressed by the fiscal plan and the remainder of Puerto Rico’s debt as independent of it, because it is supported by the public corporations, municipalities, and other public entities. For priorities, Puerto Rico’s first is for Congress to continue Affordable Care Act funding to the Commonwealth beyond its planned end in FY2018—a continuation which the territory projects this could mean an additional $16.1 billion in direct Puerto Rico government revenues and an additional $8.4 billion in indirect revenues due to improved economic performance. Gov. Padilla also asked for an indefinite extension of the Affordable Care Act and that Congress treat Puerto Rico similarly to the 50 states with regard to Medicaid spending—and the extension of the earned income tax credit program to Puerto Rico, noting that such changes would lead to an $18.9 billion surplus, which could be used for the payments. This would be out of a total scheduled debt service of $34.2 billion. In its plan, the Governor recommended seven principals critical to reducing the government financing gap and restoring economic growth: any austerity must be minimal; the government must introduce improved budgetary controls and financial transparency; Puerto Rico needs to improve tax enforcement, consolidate agencies, reduce workforce, and reform its tax policy to eliminate the revenue impact of the planned end of the Act 154 tax in fiscal 2018; change local labor regulations, simplify permitting in order to promote economic growth, and invest in strategic growth-promoting projects. Fifth, Puerto Rico’s government must continue to protect vulnerable members of the population, such as the elderly, young, disabled, and poor through government services. The territory must reduce its debt to a “sustainable” level. And, seventh, the federal government must be involved to help generate economic growth.

He identified other concerns, as well, including caution in balancing amongst the island’s creditors, noting a “contingent value right or growth bond that pays creditors in the event growth targets set in the plan are exceeded should therefore be considered as part of any debt restructuring,” and that, because local municipal bondholders are believed to hold $8 billion to $12 billion of Puerto Rico’s debt, according to an official with the Puerto Rico Fiscal Agency and Financial Authority, the plan says there must be consideration of the impact of debt restructuring on the local economy. Finally, Puerto Rico Secretary of the Treasury Juan Zaragoza advised the board that Puerto Rico currently owes $1.3 billion to $1.35 billion to suppliers.


What Distinguishes a Municipality’s Fiscal Path to Success or Failure?

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eBlog, 10/21/16

Good Morning! In this a.m.’s eBlog, we consider the fiscal and children’s health challenges in Flint, Michigan—problems created under the state’s Emergency Manager system; we consider the ongoing challenge to municipal sustainability in Atlantic City as an impending state takeover threatens; we update readers as San Bernardino nears its municipal elections—and nears its emergence early next year from the nation’s longest-ever chapter 9 municipal bankruptcy; then we consider a new legal challenge to try to provide for an education for Detroit’s children in a system under a state-imposed emergency manager, but also a state-impose dysfunctional system; then we visit Petersburg, Virginia—where the small, historic city is grappling with hard, hard choices if it is to avoid insolvency, before finally trying to shed a bright spotlight on the signal success of Wayne County, Michigan as it celebrates its formal exit from state fiscal oversight.

Not in Like Flint. A new suit was filed this week charging that public officials failed children in Flint, Michigan by allowing the city’s supply of drinking water to remain contaminated with lead, a known neurotoxin, for a year and a half—with the suit alleging the government is again falling short by failing to provide the city’s children with educational services that they legally deserve and that could counter the effects of the Flint lead exposure: the complaint, filed in U.S. District Court in the Eastern District of Michigan, argues that the public school system in Flint is not meeting its legal obligation to screen lead-exposed children for disabilities or provide services and interventions that could make a difference in their ability to learn and thrive. It also alleges that the Michigan Education Department has failed to provide Flint schools, which have cut teachers and other staff in the face of a $10 million deficit, with the resources and funding they need to provide those services: the suit notes there are 30,000 children and teenagers under the age of 19 in Flint, and 8,000 of them are younger than 5—those particularly vulnerable to the effects of lead exposure—exposure which can result in diminished academic achievement and a greater tendency to be hyperactive, impulsive, and aggressive. Without meaningful action soon, the complaint says, children’s opportunities to reach their full potential will be “permanently foreclosed,” or, as the complaint states: “In the wake of the Flint lead crisis, Flint children face an unprecedented educational and civil rights disaster.” The complaint seeks class certification to represent all Flint children who were exposed to lead and are—or may be—eligible for special-education services: the plaintiffs are 15 children, ages 3 to 17, each of whom was exposed to lead in Flint; it alleges that they have been denied the special-education services they need and deserve under the federal Individuals with Disabilities Education Act, the Americans with Disabilities Act, and Michigan state law. The suit requests the court to order sweeping changes in Flint schools, including high-quality universal preschool for all 3-to 5-year-olds; enhanced screening of all Flint children to determine their physical, social, emotional and behavioral needs; training for teachers in managing students’ behavior without resorting to physical restraint and seclusion; and regular lead testing of drinking water in Flint schools. It also seeks a comprehensive review of all education plans for children currently identified for special education, to make sure their needs have been properly identified, requesting the federal court to convene a group that would lay out a comprehensive plan for addressing children’s physical, emotional and behavioral trauma in the aftermath of lead exposure, and for a special monitor to oversee the implementation of that plan over the next seven years. (Note: nine current or former government workers have been criminally charged since doctors detected elevated levels of lead in some children due to the discolored and smelly water supply in the impoverished city of nearly 100,000, in the wake of the city’s change from the metropolitan Detroit utility system to a temporary water source, the Flint River, in 2014, a decision made not by the city, but rather a gubernatorially appointed state emergency manager. One of the outcomes could be adoption of a recommendation in a report issued by a panel of four Republican and two Democratic state legislators focused on preventing recurrence of such a crisis. Among the recommendations is lifting emergency managers’ general immunity from civil lawsuits and prohibiting them from using cost as the primary factor in any decision that will affect public health and safety. Other recommendations include the adoption of the country’s toughest lead-in-water rules, increased transparency about water rates and shut-off practices, and the creation of a commission to oversee the state Department of Environmental Quality, which has been deemed primarily responsible for Flint’s water problems. The recommendations also propose that a community’s water source should not be changed absent voter approval. A key recommendation related to Michigan’s 2012 emergency manager law—widely criticized as a key factor in Flint’s city’s water crisis: the report recommends that Michigan’s Emergency Manager emergency managers be replaced with financial management teams that include a financial expert, a local government operations expert, and an ombudsman. Emergency managers would also be mandated to post a $5 million bond that would be forfeited for negligence or misconduct on the job and to host a website to solicit and respond to public comments on their key decisions. Or, as Senate Minority Leader Jim Ananich (D-Flint) noted: “The more we encourage…oversight and citizen involvement, the better our government’s going to be.”  The report also calls for:

  • testing water for lead in schools and other facilities for children and fragile adults;
  • the mandatory disclosure of lead services lines in home sales and rental contracts;
  • a constitutional amendment making it easier to discipline state employees and the appointment of an ombudsman to hear confidential state employee reports of misconduct;
  • enhanced criminal penalties for public officials whose misconduct causes bodily harm to others;
  • more robust lead screening of school-age children;
  • assessing children’s past lead exposure by testing their baby teeth, because blood tests only reveal recent exposure; and
  • requiring water systems to inventory their service pipes and other infrastructure and, within 10 years, adopt a full lead service pipe replacement program.

The Edge of the Boardwalk. Chris Filiciello, Atlantic City Mayor Don Guardian’s chief of staff this week confirmed that the city did not submit a revised budget to the state, as Mayor Guardian warned in a letter that a tax increase would be “devastating” for Atlantic City, which he said increased taxes by 50 percent over 2013 and 2014. With the debt clock from the state ticking, Atlantic City is now nearly two weeks past its deadline in violation of its $73 million state loan; the next deadline is just over two weeks away—by which time the city must submit a five-year fiscal stability plan. It appears the Mayor believes his five-year budget will save roughly $73 million by 2021, in no small part related to the sale of its municipal airport, Bader Field, and its water authority for $110 million. In addition, the City Council is slated to vote on new labor agreements between the city and its seven worker unions, as well as consider privatizing payroll services. Under Mayor Guardian’s proposed five-year fiscal recovery plan, the city projects $72.9 million in savings from 2017 through 2021 (Atlantic City has annual budget deficits of about $100 million before state aid.). In his statement, Mayor Guardian listed 26 items on which Atlantic City has or intends to cut costs and raise revenues, including 400 fewer full-time workers since 2013, a recent shared-services deal with Atlantic County, bidding out city services, and land sales worth $7.1 million. In addition, Atlantic City has offered early retirement buyouts to 165 senior workers. The plan anticipates saving $7.4 million next year; $12.7 million in 2018; $17 million in 2019; $17.3 million in 2020; and $18.5 million in 2021, according to Mayor Guardian’s statement. The city currently has a fortnight in which to submit its plan to the state—the rejection of which would result in a five-year state takeover. The Mayor described the plan as one which “will include increasing revenue, reducing costs, maximizing redirected funds from casinos, receiving state aid, restructuring of debt payments, early retirement incentives, realizing the value of City owned properties and the MUA, and much more, all while maintaining Atlantic City’s sovereign right to local self-governance.” Nevertheless, how the plan will fare in City Council remains uncertain: the Council has pulled or voted down measures to dissolve the authority five times amid pressure from residents to keep the authority independent. (The Council must approve the sale at two meetings. The sale is also subject to state approval.) In addition, the Council will vote on seven memorandums of understanding with its police, fire, white-collar, blue-collar, electrical, and supervisory employees—with, according to Mayor Guardian, the city renegotiating contracts to include multiple years with no wage increases, restructured pay scales, health care cuts, and reduced overtime and paid-leave costs.

Getting Back to Fiscal Recovery. San Bernardino, the California municipality seeking to become the first U.S. municipality to overhaul its political structure while in chapter 9 municipal bankruptcy, and asking its voters next month to approve a new charter that strips the Mayor and city council of day-to-day operational control, has completed all of its required audits for the first time in six years, with the City Council having this week filed its FY2015 final audit, marking the first time since 2010 the city has all of its legally required audits. The FY2016 audit is due by March 31, 2017, a deadline the city will meet, according to Finance Director Brent Mason—albeit the audits were “qualified”—denoting the auditors were unable to find enough evidence the financial statements were accurate in four of 10 areas, leading Councilman Henry Nickel to note: “This is a job well done, but now I think the next step is implementing some corrective actions to get back to where we need to be.” Part of the challenge for the city stems from the 2012 state-mandated dissolution of the city’s redevelopment agency, requiring a significant expansion of the audit, or, as Finance Director Mason notes: “They’re not small-ticket issues to get our hands around, but they’re all doable.” One of the qualified opinion concerns was with regard to the liability for compensated absences, such as vacation and sick time, which San Bernardino has proposed adjusting as part of its bankruptcy exit plan—a plan which appears to have the qualified approval of U.S. Bankruptcy Judge Meredith Jury.

Detroit’s Future? Lawyers representing Detroit schoolchildren last month filed a lawsuit against Gov. Rick Snyder and state officials in what has been viewed as the nation’s which pushes for literacy as a right under the U.S. Constitution: the complaint alleges that the state has denied Detroit students access to literacy, the most basic building block of education, through decades of “disinvestment … and deliberate indifference.” The suit seek broad remedies, including implementation of evidence-based literacy programs, universal screening for literacy problems, and a statewide accountability system in which the state “monitors conditions that deny access to literacy” and intervenes. It documents the low reading and math proficiency rates of Detroit students, as well as classes without teachers and outdated or insufficient classroom materials, it also notes poor conditions, including vermin and building problems, at some schools as recently as this month, seeking class action status on behalf of students who attend the schools. In addition to Governor Snyder, the lawsuit names the state Board of Education, state school Superintendent Brian Whiston, David Behen, director of the Michigan Department of Technology, Management and Budget, and Natasha Baker, the state school reform officer.

Petersburg’s Future? Mayhap ironically the person once appointed as emergency manager by Michigan Governor Rick Snyder to address the Detroit Public Schools’ fiscal and educational insolvency, Robert Bobb, under whose tenure DPS’s deficit steadily worsened, rather than improved—and where now a federal class-action lawsuit a class action suit has been filed, contending that under state control, the Detroit Public Schools have deteriorated to such an extent they violate students’ civil rights. (DPS’s current emergency manager, retired U.S. Bankruptcy Judge Steven Rhodes, has called the latest corruption allegations “outrageous;” he has placed all the accused principals still with DPS on unpaid leave, and instituted new oversight measures for approving contracts. Nevertheless, the ongoing events have meant that many Michigan legislators appear to be increasingly antithetical to ever allowing the district to revert to local control—with some even suggesting it should be permitted to become insolvent and be dissolved—leaving the state on the hook for at least $500 million of its massive debt.)

Now, after the Petersburg, Virginia City Council this week was on the verge of hiring Mr. Bobb as a turnaround specialist, the Council developed cold feet: late into a meeting in which the Council took a lashing from city residents upset over what they characterized as a lack of transparency surrounding negotiations with its search firm, Councilman Samuel Parham put the contract to a vote: it failed 3-3-1, meaning the Council must wait at least 30 days before reconsidering a potential agreement which for the insolvent municipality is rumored to cost about $350,000 according to the elected leaders. The delay would mean pushing off any decision about the city’s future—if it is to have one—until after the election—one in which two of three council races on the ballot are contested. The unscheduled vote came minutes after a public acknowledgment from Councilmember Darrin Hill that members’ recent closed-session meetings and interference with the administration of city business deserved scrutiny, or as Councilmember Hill noted: “Ethically I think we can do better as a council as a whole,” he said. “I think a lot of us are being thrown under the bus over the actions of a few.” If the old expression is “time is money,” the delay—even as lawsuits and threats of legal action, much of it over unpaid bills, are building for a small city for which Virginia state auditors have determined is approximately $19 million in the hole, comes after the Council began this fiscal year by slashing about $12 million from the current year’s operating budget—eliminating youth summer programs, unfilled positions, millions in public school funding, and money for travel and training—even borrowing a fire truck from the city of Colonial Heights’ reserve fleet for day-to-day operations. Yet, the anatomy of debt and deficits and how the municipality got there remains clouded; ergo Council members have been asking since last February for the administration to hire a forensic auditor to scrutinize the city’s books. Interim City Manager Dironna Moore Belton this week said the city had winnowed a list down to two firms which could do the work—but of course at a cost of as much as $300,000—leading incoming City Attorney Joseph Preston to request that the Council not authorize a forensic audit, noting that a newly expanded grand jury investigation by a Chesterfield County prosecutor might yield the answers council members are seeking—at County rather than municipal taxpayers’ expense. The inability to act and uncertain state willingness to help has provoked residents, who report they are tired of seeing the city make negative headlines: they are pleading with the City Council to stop holding special meetings at the last-minute and to engage in more robust public discussion before taking votes on consequential matters—or, as one constituent put it: “I would like to know what you’re afraid of talking about in public…It’s very strange, and it’s part of why people are looking at Petersburg.”

Free at Last. The State of Michigan has formally released Wayne County, Michigan from state oversight. The County, whose general obligation bonds Moody’s upgraded at the end of last month, cited several factors, including: improvement in the county’s financial position following substantial reductions in retirement liabilities and associated costs, which will aid the budgetary capacity to address outstanding capital facility needs…,” as well as noting the “county continues to enhance its operating reserves while accommodating increased costs associated with outstanding criminal justice facility needs…” as well as reflect “substantial expense reductions…” thanks to its development and implementation of a “financial recovery plan in May 2015 to correct a structural imbalance that developed during years of rapidly falling property tax revenue. The recovery plan culminated in nearly $50 million of cost reductions achieved with elimination or modification of retirement benefits, contraction of payroll, and other operating efficiencies…” Or, as Wayne County Executive Warren C. Evans noted: the report by the credit rating agency “speaks to the depth of our Recovery Plan and the fiscal responsibility we’re instituting in every facet of County government…This positions us to do more with the resources we have and continue to move in the right direction. While the news is good, there’s a lot of work to do. We’re committed to staying the course and taking on the challenges that remain.” Mr. Evans added, however: “It’s a positive step, but not cause for any long celebrations…The consent agreement allowed us to do what we needed to do, but it was never going to be a cure-all to Wayne County’s finances. It was the necessary means to get our fiscal house in order so we could tackle the remaining challenges.” The strong fiscal discipline brought other good news with it: the State of Michigan formally granted the county’s request to be released from oversight yesterday—just a year and a month after the oversight agreement allowed the county to work with the state to renegotiate contracts, improve its cash position, and reduce underfunding in the pension system, resulting in elimination of a structural deficit. Michigan Treasurer added: “I am pleased to see the significant progress Wayne County has made while operating within the best practices established by the consent agreement.” Under that agreement, Wayne County established a recovery plan and eliminated a nearly $100 million accumulated deficit and a yearly structural deficit of approximately $52 million through various measures that aimed to bring recurring revenues in line with liabilities. The county reduced its unfunded pension liabilities from $817 million to $636 million—reductions, ergo, which also meant some retirees experienced significant reductions in post-retirement healthcare benefits. Wayne County—the county in which the City of Detroit is centered—has now balanced its budget two years in row and recorded surpluses: it ended the last fiscal year with an accumulated unassigned surplus of $35.7 million, of which $5.7 million is available for general fund operations. County Executive Evans said he expects to report a surplus in excess of $35.7 million when the books are closed on 2016. However, he also warned that Wayne County still must address some $635 million in unfunded pension liabilities and over $400 million in other post-employment benefits liabilities, areas where he made clear future budget surpluses are likely key.

How Might Next Month’s Elections Affect Municipalities’ Fiscal Futures?


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eBlog, 10/19/16

Good Morning! In this a.m.’s eBlog, we consider the fiscal challenges Detroit Mayor Mike Duggan is encountering which could interrupt the city’s recovery from the nation’s largest-ever municipal bankruptcy, but note the city’s continuing progress towards becoming a national center of innovation;  then we head east to the exceptional challenge and nearing deadline for Atlantic city if it is to have a future versus being taken over by the State of New Jersey; then we fly to the West Coast where next month’s elections will determine the future municipal status of San Bernardino—the nation’s city on the road to exiting the longest municipal bankruptcy in American history, before jogging north to Stockton—where the post-chapter 9 municipality has a difficult mayoral election, but also where voters will decide what kind of municipal governance they want. Finally, we look south to observe the first steps in Puerto Rico under the new PROMESA law to address the U.S. territory’s quasi municipal bankruptcy.

Demolition Derby? Detroit Mayor Mike Duggan this week disclosed the Motor City’s controversial demolition program had been suspended by the U.S. Treasury Department this summer to address “mistakes” and “errors.” The federally funded program, according to Mayor Duggan, had been at a standstill since the middle of August—as the city and Detroit Land Bank Authority met with officials from the U.S. Treasury and the Michigan State Housing and Development Authority to reach agreement on a new set of procedures—procedures accepted by the Treasury at the end of last week, albeit Mayor Duggan declined to cite specific examples of what went wrong, albeit noting: “No amount of error in the rules is tolerable…We’re going to eliminate those mistakes with these new controls.” The contretemps comes as the city’s demolition program has become the focus of a federal criminal investigation, related to issues involving bidding practices and soaring costs. Based upon its approval of the city’s new rules, the Treasury has officially released $42 million allocated for the city’s fourth round of the program, albeit, as Mayor Duggan noted: “They didn’t do it casually,” adding the city’s “land bank did not have sufficient procedures in place to make sure we had proper documentation for all the bills and didn’t have sufficient controls to assure Treasury would not be charged for ineligible expenses.” Among the changes, Michigan State Housing authority employees will now be embedded at the land bank, along with the Detroit Building Authority to provide compliance support, input, and on-site assurance “that all contracts are bid appropriately.” The housing authority will also conduct quality control audits to assure ongoing compliance. In addition, the land bank has established a $5 million escrow fund for any demolition costs not eligible for Hardest Hit funding. Or, as Mayor Duggan put it, he was “very disappointed” by some of the things he learned during the review, but said federal and state officials will disclose those “when they are ready.”

The Treasury last August instructed housing authority officials to suspend disbursement of federal TARP funds to Detroit for blight elimination, including payment of invoices received from the land bank with the state’s second and third funding allocations under the program. Treasury, in addition, asked the housing authority to halt approval of demolition and other blight elimination activities by Detroit or its affiliates. (Detroit has been awarded more than $258 million under the federal program—with which the city has razed more than 10,000 homes early 2014. The new federal allocation is part of $130 million awarded to the Motor City in recent months. Mayor Duggan noted the new rules are in response to concerns over practices as well as Detroit’s volume of demolitions, stating: “It’s a far more intense review, because we are handing far more demolitions…The speed at which we went outstripped the controls that we had in place.”

Detroit’s auditor general last year had commenced an audit of the city’s demolition activities at the request of Detroit’s City Council in response to growing apprehension with regard to soaring costs and bidding: last April, Detroit Auditor General Mark Lockridge confirmed his office received a federal subpoena after releasing preliminary findings from the months-long audit. Adamo Group, one of the program’s largest contractors, also was served with a subpoena from the Office of the Special Inspector General for the Troubled Asset Relief Program, as was the land bank and Detroit’s Building Authority. Last May, the FBI’s Detroit office confirmed it was also investigating the program, and Detroit’s Office of Inspector General has been conducting a review of its own into an aspect of the program. The city has said it is cooperating fully with all investigations. Nevertheless, this week, Mayor Duggan stated he had seen “no evidence of criminal activity,” but declined to comment on the federal probe. Nevertheless, the fiscal costs are tolling: Detroit has more than $80,000 in legal fees for the investigation—and now faces more. The city came under scrutiny last fall over a pilot program aimed at attracting larger players to rapidly take down larger bundles of homes. At the time, a WJBK-TV report accused city building officials of improperly meeting with contractors in 2014 to set prices for the bulk demolition work before requests for bids were official. The administration has said there was nothing improper about the set-price contract initiative, which was discontinued shortly after it failed to attract national players. Last October, the Michigan State Housing Development Authority reviewed the land bank’s bid selection process related to Hardest Hit funds and did not uncover any significant issues. The agency, which distributes the federal funding once invoices are reviewed, did. however, require changes to “further strengthen their selection of contractors.” Detroit’s demolition costs have soared from an average of about $13,600 per house in 2014 to about $16,400 last year—more than 25 percent. According to the city, those rising prices were tied in part to new environmental safeguards: today, the average residential demolition is $12,575 per house, according to estimates listed on the city’s website. Detroit only stopped its federally funded demolition over the last two months. It has continued doing 25-30 city funded demolitions per week, Mayor Duggan notes.

Innovating an Old City. Matt Simoncini, President and CEO of Southfield, Michigan-based supplier Lear Corp., officially opened its Detroit Innovation Center yesterday, calling it an idea to boost technological transformation for the company and a return to the city in which it was founded: to Mr. Simoncini, the near $10 million investment represents a pivotal moment in Lear’s trajectory as a seating supplier turned advanced automotive technologies developer; yet he also perceives it as a foundation to Detroit’s resurgence, noting: “This city is on the cusp of changing the world: Urbanization, mass transit, that’s all going to come out of this town. While other places, like Silicon Valley, have players in a big pond…We are the pond. Detroit is going to have an amazing role in our future. We’re going to be part of that.” The workers there will focus on next-generation automotive battery charging, seating designs and technology integration and non-automotive projects. He adds: “We’re at a pivot point: So much of the work we do sucks everyone in. If I can get those workers out of the mainstream at Lear (in Southfield) and leverage what the city has to offer, we can send big things up the food chain.” Noting he is working with Wayne State University and the College for Creative Studies to develop curriculum and provide opportunities for those universities’ students, he added: “We (the auto industry) haven’t fully utilized what the city, and its universities, have to offer: These universities are in our backyard. I’m surprised more (companies) haven’t rushed down here to access that talent and help drive innovation.” He also is focused on opening a manufacturing plant in the city: he has discussed creating jobs in the Motor City instead of Mexico if he could attain a new wage tier with the United Auto Workers that pays in the mid-teens per hour with some benefits. A specified pay rate and benefits would need to be negotiated and are subject to moving up or down, according to the company: Lear currently pays $35 per hour, which includes the cost of benefits, at its just-in-time seating plants and upward of $25 per hour at its component plants.  Mr. Simocini notes: “This is my hometown. Of course I want to be part of its success.”  

The Edge of the Boardwalk. Chris Filiciello, Atlantic City Mayor Don Guardian’s chief of staff this week confirmed that the city did not submit a revised budget to the state, as Mayor Guardian warned in a letter that a tax increase would be “devastating” for Atlantic City, which he said increased taxes by 50 percent over 2013 and 2014. With the debt clock from the state ticking, Atlantic City is now nearly two weeks past its deadline in violation of its $73 million state loan; the next deadline is just over two weeks away—by which time the city must submit a five-year fiscal stability plan. It appears the Mayor believes his five-year budget will save roughly $73 million by 2021, in no small part related to the sale of its municipal airport, Bader Field, and its water authority for $110 million. In addition, the City Council is slated to vote on new labor agreements between the city and its seven worker unions, as well as consider privatizing payroll services. Under Mayor Guardian’s proposed five-year fiscal recovery plan, the city projects $72.9 million in savings from 2017 through 2021 (Atlantic City has annual budget deficits of about $100 million before state aid.). In his statement, Mayor Guardian listed 26 items on which Atlantic City has or intends to cut costs and raise revenues, including 400 fewer full-time workers since 2013, a recent shared-services deal with Atlantic County, bidding out city services, and land sales worth $7.1 million. In addition, Atlantic City has offered early retirement buyouts to 165 senior workers. The plan anticipates saving $7.4 million next year; $12.7 million in 2018; $17 million in 2019; $17.3 million in 2020; and $18.5 million in 2021, according to Mayor Guardian’s statement. The city currently has a fortnight in which to submit its plan to the state—the rejection of which would result in a five-year state takeover. The Mayor described the plan as one which “will include increasing revenue, reducing costs, maximizing redirected funds from casinos, receiving state aid, restructuring of debt payments, early retirement incentives, realizing the value of City owned properties and the MUA, and much more, all while maintaining Atlantic City’s sovereign right to local self-governance.” Nevertheless, how the plan will fare in City Council remains uncertain: the Council has pulled or voted down measures to dissolve the authority five times amid pressure from residents to keep the authority independent. (The Council must approve the sale at two meetings. The sale is also subject to state approval.) In addition, the Council will vote on seven memorandums of understanding with its police, fire, white-collar, blue-collar, electrical, and supervisory employees—with, according to Mayor Guardian, the city renegotiating contracts to include multiple years with no wage increases, restructured pay scales, health care cuts, and reduced overtime and paid-leave costs.

Getting Back to Fiscal Recovery. San Bernardino, the California municipality seeking to become the first U.S. municipality to overhaul its political structure while in chapter 9 municipal bankruptcy, and asking its voters next month to approve a new charter that strips the Mayor and city council of day-to-day operational control, has completed all of its required audits for the first time in six years, with the City Council having this week filed its FY2015 final audit, marking the first time since 2010 the city has all of its legally required audits. The FY2016 audit is due by March 31, 2017, a deadline the city will meet, according to Finance Director Brent Mason—albeit the audits were “qualified”—denoting the auditors were unable to find enough evidence the financial statements were accurate in four of 10 areas, leading Councilman Henry Nickel to note: “This is a job well done, but now I think the next step is implementing some corrective actions to get back to where we need to be.” Part of the challenge for the city stems from the 2012 state-mandated dissolution of the city’s redevelopment agency, requiring a significant expansion of the audit, or, as Mr. Mason notes: “They’re not small-ticket issues to get our hands around, but they’re all doable.” One of the qualified opinion concerns was with regard to the liability for compensated absences, such as vacation and sick time, which San Bernardino has proposed adjusting as part of its bankruptcy exit plan—a plan which appears to have the qualified approval of U.S. Bankruptcy Judge Meredith Jury.

Taking Stock in Stockton. Just four years ago, then Mayoral candidate Anthony Silva rode the city’s misery to an easy upset victory over incumbent Mayor Ann Johnston: the city was insolvent, in chapter 9 municipal bankruptcy, and besieged by violent crime. Now, as he ends his four-year term and faces re-election, Mayor Silva is himself confronting not just serious personal charges, but also serious crime. Unsurprisingly, he is being challenged by City Councilman Michael Tubbs, who believes the city’s mayor should be an “ambassador” for the city: he vows, if elected, that he will use the “bully pulpit” to showcase Stockton’s assets, like University of the Pacific, the Delta, the city’s proximity to the Bay Area, and its inexpensive real estate. He says Stockton is well-positioned to attract companies looking to expand in California; he also says he will maintain an open line of communication with the media to ensure awareness of the city’s accomplishments. Councilman Tubbs is seeking to become Stockton’s first black mayor and its youngest mayor. Unsurprisingly, the Mayor who was in charge when the city emerged from municipal bankruptcy, Mayor Silva, wants to be the city’s first two-term mayor since Gary Podesto left office at the end of 2004.

As we have noted, however, Mayor Silva’s tenure has, especially this election year, been marked by controversy, most recently a revelation that a gun stolen from him was used in the unsolved killing of a 13-year-old boy—followed almost immediately by allegations that he secretly made an audio recording of a strip poker game involving naked teenagers and provided alcohol to minors—even as he was serving concurrently as Mayor and CEO of the Boys & Girls Clubs of Stockton. But Councilmember Tubbs is confronting his own high-profile controversy: two years ago he was arrested by the California Highway Patrol for driving under the influence; he publicly apologized within days and pleaded no contest to the charges two months later.

A key issue for this post-bankruptcy city’s future could be governance: Mayor Silva has long claimed that Stockton residents would be better served by a governance system that provides more power to the mayor; he has previously advocated working to put a “strong mayor” ballot initiative before voters; he has never followed through, however. Unsurprisingly, Councilmember Tubbs disagrees, stating: “Stockton is incredibly blessed that we don’t have a strong mayor city…If you had a strong mayor city, your police chief would be gone…a lot of your staff would be gone. And the city would be run not with any thought, but be run based on the whims and feelings and ego of one central figure, which is incredibly dangerous.” These are not their only differences which the voters will have to consider: a key difference is Mayor Silva’s statement of nearly a year ago:  “The government of Stockton does not work…If you’re frustrated by why things haven’t changed, every day of my life is the same. Everything I’ve done, I’ve done without their help.” The election promises to be close: last June, Councilman Tubbs prevailed in the eight-candidate primary with 33.4 percent of the vote; Mayor Silva finished second with 26.4 percent.

Federal Oversight Governance in Puerto Rico. The Puerto Rico Oversight Board directed six of the U.S. Territory’s public entities to develop and present fiscal plans: the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC), and the University of Puerto Rico, having voted unanimously to tack on additional oversight responsibilities for itself to include some 24 island public entities—all as part of an emerging effort by the federal oversight board to create a ten-year plan. The Board’s Executive Director, Javier Quintana noted: “PREPA is beginning the process of preparing the fiscal plan as required by the Oversight Board: According to PROMESA, the fiscal plan should span at least 5 years. Because the Oversight Board has not yet set a deadline, PREPA does not know when it will be required to be completed.” In addition, the board barred all governmental covered entities from carrying out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or municipal bond sales. Board Chairman José Carrión, in the wake of Gov. Alejandro García Padilla’s presentation of Puerto Rico’s fiscal plan to the PROMESA board, the board would “confer with him about the central government and instrumentality plans…Then the board will seek public comment and consult with the government about the schedule for bringing their plans to eventual approval and certification,” in the wake of which the board will give the Governor a schedule for the process of submission, approval, and certification of the fiscal plans. The Puerto Rico Oversight Board also directed the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC)—six of Puerto Rico’s twenty-four public entities, and the University of Puerto Rico to put together plans—albeit without any explanation of why that specific six. Under the newly signed Congressional PROMESA law, the fiscal plan should span at least 5 years. Finally, the board ordered all of its covered entities to not carry out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or bond sales.

Getting into–and out of Municipal Bankruptcy.


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eBlog, 10/18/16

Good Afternoon! In this p.m.’s eBlog, we consider the nearing end of the longest municipal bankruptcy in U.S. history in San Bernardino; we peer south to the great challenge in Puerto Rico; the seeming inability of East Cleveland to pull itself out of insolvency; the threatened fiscal future of Petersburg, Virginia; and, finally, and finally, we ask if time is running out for Atlantic City.

Momentous Day. U.S. Bankruptcy Judge Meredith Jury Friday noted: “This is a momentous day,” as she ruled that San Bernardino had met most of its chapter 9 municipal bankruptcy requirements already and added that she does “not think the city should worry” that she will not confirm the rest at a later hearing. The day marked the end of nearly four years for a confirmation hearing to confirm settlements with thousands of the municipality’s creditors—and moves ever closer next March’s expected final exit from bankruptcy.  Friday’s hearing marked the first in a series that the city’s leaders anticipate will culminate in the completion of the nation’s longest ever chapter 9 municipal bankruptcy. The city’s plan of debt adjustment, which includes paying certain creditors only one cent for every dollar which they are owed, was for the most part tentatively confirmed Friday; Judge Jury reserved judgment on two substantial issues, which are related:

  • a major dispute between the city and the Big Independent Cities Excess Pool, which provides liability coverage for the city, and
  • potential lawsuits involving individual employees such as police accused of excessive force.

Those issues will be addressed beginning Nov. 15. Noting that: “I can now say that today is a promise and hope for a better future for the city,” Judge Jury praised the city for its progress and said she was convinced by the city’s financial models and declarations to show it could not afford to pay more than 1 percent of its debts to unsecured creditors, opening the way for her to swiftly rule the plan of debt adjustment was feasible — a decision made easier by the absence of arguments objecting to it.

San Bernardino City Attorney Paul Glassman took a moment at the beginning of the hearing to mark the milestone of the first confirmation hearing, telling the court: “The very first hearing in this case back in August of 2012, I told the court that the day that the city entered Chapter 9 (bankruptcy) was a solemn day, but since that day the city has come a long way down a difficult path and has made great strides forward, thanks to the efforts of a number of people, many of whom are in the courtroom today…Surprisingly, your honor, the aspect of a bankruptcy case that’s most often disputed is not disputed in this case,” Glassman said, regarding the plan’s feasibility.

Unsurprisingly, however, the 1 percent payout sat less well with attorney Duane Folke, who appeared in court Friday for the first time on behalf of Paul Triplett, for whom a judgment from another court which had found Mr. Triplett was entitled to $7.7 million after San Bernardino police in 2006 broke Triplett’s jaw, arm, ribs, leg, ankle and foot, leaving him comatose for three days, according to Mr. Folke. Under the city’s plan, because Mr. Triplett is an unsecured creditor, he would receive only $77,000—or one percent of what he was owed under the judgment against the city, leading to the sole objection, with the attorney telling Judge Jury:

“My client, unfortunately, given the fact that he’s facing blindness, cannot accept the settlement as it stands.” In response, Judge Jury said she sympathized, but could come upon no legal reason to argue he did not belong in the unsecured class of creditors, which overwhelmingly voted in favor of the plan—leaving only the option of showing that experts the city hired were wrong when they argued, with extensive documentation, that the city could not afford to pay more than 1 percent to its unsecured creditors: “Here’s what stands between you and your ability to be persuasive to the court: You would need to employ a cadre of experts similar to those the city has employed, probably on the tune of hundreds of thousands of dollars, to refute the evidence that they have presented.”

Other civil rights creditors, with different attorneys, have reached settlements for more than 1 percent, albeit far less than 100 percent of the amount they would be owed.

San Bernardino filed for bankruptcy protection Aug. 1, 2012, swamped by a deficit of more than $45 million — equivalent to 40 percent of the $112 million in revenues the city expects this year — and fearing it wouldn’t be able to make payroll unless a bankruptcy judge stopped creditors from collecting their debts. The chapter 9 filing, however, has been expensive: From 2012 until May 2016, the city spent $18.8 million on bankruptcy-related expenses—attorneys and consultants—according to one of those consultants, Teri Cable of Management Partners.

Puerto Rico. Gov. Alejandro García Padilla has warned that any efforts to avoid insolvency in the U.S. territory of Puerto Rico will come at a steep price: addressing the first session of the PROMESA oversight board, Gov. Padilla said that even if Puerto Rico’s 3.4 million residents continued to reduce spending—and even if the island’s creditors were to agree to less than full restitution of the nearly three quarters of $100 billion they are owed, the island would  still “need the assistance of the federal government to bring this economic and humanitarian crisis to an end,” as he urged the board’s seven members to join him “in one voice before Congress” to seek help. The first session focused on the Governor’s fiscal plans—it expects next to turn to whether that plan will serve—or needs to be changed, with the oversight board trying to first understand the territory’s debt structure. At the session, Puerto Rico Treasury Secretary Juan Zaragoza provided a detailed description of revenues coming into the Puerto Rico Treasury—as well as what steps the government has been taking to more efficiently collect revenues; he testified there were about $1 billion worth of unpaid bills outstanding, and that the government had written about $350 million in checks but had not yet sent them. Board member Carlos M. García, 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, questioned Gov. Padilla’s fundamental premise that Puerto Rico’s government lacked sufficient fiscal resources to govern, noting: “You’re currently at high tax collections, and you’re currently not paying debt service…Why does the government not have enough money to pay vendors or provide essential services?” In response, Gov. Padilla said that his fiscal plan called for Puerto Rico to

  • improve its financial reporting,
  • to merge branches of government to end duplication,
  • to ease certain regulations, and
  • to court investors, especially those interested in financing infrastructure and energy projects.

Gov. Padilla also told the Board that current efforts to collect more tax revenue and reduce government spending would continue; however, he pled with the board not to “double down on austerity: You will soon realize that any reduction in spending implies intolerable effects in aggregate demand, and will further throw Puerto Rico into a death spiral that will directly affect creditors’ recoveries across the board.” Absent federal assistance, the Governor warned, Puerto Rico could end up with a total accumulated debt of $59 billion over the next 10 years. In contrast, enhanced Medicaid and Medicare, as well federal tax changes to address discrimination against the territory compared to other Caribbean countries could help Puerto Rico become more competitive as an offshore manufacturing site for United States companies.

Seemingly unfocused upon, was the mismatch of fiscal capacity versus desperate human need: Puerto Rico, just 762 miles from Cuba, which has a population 3.5 times the population of Puerto Rico, currently has only 14 Zika cases—Puerto Rico has in excess of 25,955 confirmed Zika cases. It has 3.7 times the rate of unemployment; nearly six fold a murder rate, and nearly a 65 percent higher infant mortality rate—compared to Cuba’s 14 percent.  

Do You Recall or Remember at All? East Cleveland’s Mayor Gary Norton and City Council President Tom Wheeler will be on next month’s ballot, but to be recalled—not re-elected. The Cuyahoga County Board of Elections and East Cleveland City Council Clerk’s office on Friday certified more than 600 petition signatures to force a recall vote—a vote likely to be scheduled for December 6th—but which, for the virtually insolvent city, is projected to cost between $25,000 and $30,000; moreover, the election will come just 10 months before the next mayoral primary election and while the city is locked in merger negotiations with the city of Cleveland. The residents needed about 560 valid signatures to force a special recall election. The clerk sent Mayor Norton a letter late last Thursday informing him of the election: under the East Cleveland charter, if Mayor Norton does not resign by Wednesday, he will face a recall election within 60-90 days. Unsurprisingly, the Mayor does not plan to resign. In a phone interview Saturday he characterized the election as a waste of funds the nearly insolvent municipality can ill afford:  “East Cleveland will select its next mayor 10 months after this needless recall election…This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” Mayor Norton said the money the election will cost will have to be cut from other city services, pointing to possible cuts in police and fire: “There’s little to nothing left to cut in the city.” The election—if held—would be the third attempt at a recall. Indeed, an amendment to East Cleveland’s charter meant to limit the ease with which residents can trigger a recall is currently being reviewed by the board of elections: it has yet to be finalized and signed off on for the November ballot. Mayor Norton refused to say whether he was going to run for re-election next year, and declined to answer why voters should vote to keep him as mayor in December.

Not the Odor of Verbena. The appointment of a receiver to take charge of Petersburg’s utility funds could result in the city being declared in default on more than $12 million in bonds and other obligations. Petersburg has hired a law firm (Sands Anderson) to help it fight an order issued last week by Petersburg Circuit Court Judge Joseph M. Teefey Jr. appointing a special receiver to make sure residents’ wastewater payments are not used for other purposes: the Judge’s order was issued in response to a lawsuit filed by the South Central Wastewater Authority in which the regional sewage treatment agency alleged that Petersburg was more than $1 million behind on its payments for wastewater treatment. Last Friday, the city’s law firm requested a stay or vacate of the order, asserting “The ordering of receivership itself, without an immediate vacation, stay or discharge, automatically causes an event of default in a multitude of significant city bonds and other obligations,” including: $7.4 million in Water and Sewer Revenue Bonds issued through the Virginia Resource Authority (VRA); $3 million in Stormwater System Revenue Bonds; and $1.275 million in Recovery Zone Economic Development Bonds issued in a “pool” through the Stafford County Industrial Development Authority and the city of Staunton. (Petersburg’s contracts for all of those bonds include clauses which specify that the appointment of a receiver is automatically an “Event of Default,” according to the motion. The details of the city’s agreement with VRA make the appointment of a receiver especially problematic, according to the motion: “The city pledged all of its revenues from the city’s utility system to VRA as bondholder, providing a preferential lien to VRA on all such revenues…VRA has an existing lien on such revenues (and counsel to SCWWA acted as bond counsel to the city and VRA in such financing).” Under the agreement, according to the motion, “Payments that the city receives for the use of the wastewater and/or sewer utilities are used to make bond payments to VRA.” In addition, the city’s motion claims: “Because SCWWA does not possess a lien on the revenues and, at law, is a general unsecured creditor of the city, there is no legal justification for SCWWA to receive the preferential treatment that the receiver order provides to it.” In addition, the municipality’s motion asserts: “If the receivership is not vacated and the multitude of bond defaults described herein are triggered, it is expected that any short-term or long-term debt restructuring to facilitate…cash-flow relief for the city to meet its past-due and ongoing payment obligations will be extremely difficult to obtain.” In the filing, the city asserts that a receiver is not necessary, because Petersburg is not disputing the fact that it is behind on its payments to the wastewater authority: “The delayed payments are not the result of a dispute between the parties; the issue is simply one of the city needing to obtain the funding necessary to pay its debts, both to SCWWA and to other creditors. The city’s cash-flow problems are well known [to] the court, SCWWA and the public at large.”

For his part, Judge Teefey responded to the motion the day it was filed by declining to stay or vacate his previous order—instead setting a date for a hearing on the city’s motion: in his new order, Judge Teefey noted that his appointment of a receiver was issued as an emergency order, which meant that the appointment would automatically expire after 30 days unless SCWWA requested an extension, writing; “This court has not received plaintiff’s request to extend the special receiver appointment, but the court finds no harm to either party to place the defendant’s motion on the docket for a hearing,” as he set a hearing date for the last day of this month.

In an earlier order, Judge Teefey named a Richmond attorney as the receiver, at the request of the wastewater authority. , which had filed a lawsuit on Sept. 21st seeking such an appointment. South Central is a regional agency of which the cities of Colonial Heights and Petersburg and the counties of Chesterfield, Dinwiddie, and Prince George are members. It provides wastewater treatment for all five localities at its facility on Pocahontas Island in Petersburg: the authority’s lawsuit claimed that Petersburg officials were using residents’ utility payments to cover the city’s other costs instead of using them to reimburse the authority for its services. As the largest user of the authority’s services, the city also provides the largest share of its funds. The authority said Petersburg “has failed to pay for any wastewater services provided after May of 2016.” According to court documents, the authority claims the city was already falling behind on its payments as long ago as 2011. Not mentioned in the city’s court filing: A bond default would almost certainly result in another downgrade in Petersburg’s bond rating. Credit-rating agency Standard & Poor’s already cut its rating on the city’s debt by three notches in August, to BB from BBB, with a “negative outlook.” Petersburg’s previous BBB rating is the lowest rating considered “investment grade” by bond buyers, according to the American Association of Individual Investors. The new BB rating is “low grade” and “somewhat speculative,” according to the association. Anything lower would generally be considered “junk” status.

Tax Attacks? Atlantic City Mayor Don Guardian has warned New Jersey that a municipal tax hike would be “devastating,” writing in response to New Jersey Local Government Services Director Tim Cunningham, who had imposed a deadline of today for the city to submit a new budget—critical in his demand that the current proposed budget does not seek tax increases—and asks for too much state aid. In his response, the mayor wrote that city taxpayers had already been faced with a 50 percent tax increase over a two-year period, increases that “taxpayers should have had a decade to absorb…A tax-rate increase would have a devastating effect on the remaining residents and businesses of the city,” adding: “More importantly, it is not necessary.” Atlantic City introduced a $242 million budget in August—a budget down nearly 10 percent from FY2015, but one which assumed $106 million in state aid. The proposed budget counted on a $117 million tax levy, itself below last year’s $132 million—even though the municipal tax rate was constant, the city’s ratable base has continued to decline steeply from $20 billion in 2008 to about $6.6 billion today. (Atlantic City’s FY2016 estimated tax rate is $3.71 per $100 of assessed value, including municipal, county and school taxes.) For his part, Director Cunningham also criticized Atlantic City for requesting $37 million in state Transitional Aid, a figure which he called “far more than the Division has available to provide to the city or ever indicated that the city should expect to receive.” Director Cunningham noted he had responded to the city’s introduced budget in late August “outlining fundamental concerns,” but that, however, he had yet to receive a response. In addition to submitting an FY2016 budget, Atlantic City has until the first week of next month to draft a five-year fiscal-recovery plan if it is to avoid a state takeover.

Threatened Municipal Insolvencies


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eBlog, 10/14/16

Good Morning! In this a.m.’s eBlog, we consider the threatened insolvency of the small municipality of Wayne, Michigan; then we puff our way West to consider the puffy revenue options confronting San Bernardino voters next month with regard to legalizing marijuana—as the city nears exit from the longest municipal bankruptcy in U.S. history; then we offer an editorial from the Stockton News with regard to next month’s election in post-municipally bankrupt Stockton, before zooming to the small, virtually insolvent municipality of Petersburg, Virginia as it considers spending its way out of insolvency, before—finally—heading northeast to Atlantic City, where Mayor Don Guardian is seeking to stave off municipal bankruptcy through the sale of some nearly 500 abandoned buildings. Wow.

Where Is Batman? Moody’s has lowered the credit rating of Wayne, Michigan, a city of just under 18,000 just west of Detroit in Wayne County, where the median age in the city is under 40, into junk territory: the small city is on the brink of insolvency with the State of Michigan opting not to help.  Moody’s, in its downgrade, noted: “The downgrade of the city’s issuer rating reflects a very stressed financial position given an ongoing structural imbalance with few options to make timely expenditure cuts or revenue enhancements.” The fiscal challenge comes in the wake of the voters’ rejection last August to approve joining the South Macomb Oakland Regional Services Authority, a scheme hatched by Hazel Park and Eastpointe to allow the two communities to circumvent state constitutional limits on property taxes: indeed, had the measure passed, it would have enabled Wayne to more than double its local property taxes. While Michigan state law strictly caps the amount of taxes a single community may levy, it allows two or more communities to create authorities for providing police and fire services, and levy a separate tax. For instance, neighboring Eastpointe and Hazel Park add an extra 14 mills. The rejected tax levy would have imposed an estimated $354 per household on the winter tax bill alone—but might too have raised sufficient revenue to stave off a chapter 9 municipal bankruptcy filing if it had passed. The municipality has been hard hit by falling property values and rising legacy costs; it has been doing cost-cutting, but will have to deal with how much of its budget goes to support benefits for current workers, and especially, retirees. Some have suggested the municipality should consider consolidation with a neighboring community, especially as the city has limited flexibility to raise revenues elsewhere. In early August, it requested a state financial review, but last week the state said the city retains options to address its structural gap such as making further reductions to retiree healthcare coverage and so direct state oversight is not warranted. For its part, Moody’s wrote that, based on the state review, it concluded that the city has sufficient liquidity to cover operations this year, but will fall short next year without operating adjustments. At the beginning of the week, the city council met to discuss selling the city’s recreation center and retiring approximately $2.8 million of bonds sold through the local building authority which are tied to the center. City leaders are also mulling over a fourth attempt at getting voters to pass a levy increase to fix its structural imbalance as well as additional reductions to retiree healthcare benefits: Wayne began charging retirees 30% of their healthcare premiums last month; however, savings from the change have fallen short of the requisite amount needed to offset the current operating gap. The small city’s request for the state financial review followed voters’ rejection in August of the city’s proposal to join a suburban authority and levy a tax to fund fire and rescue services; voters similarly rejected the proposal to join the South Macomb Oakland Regional Services Authority, which was created by the nearby cities of Eastpointe and Hazel Park last year—as well as a millage proposal that would have raised approximately $5 million to help the city’s strained liquidity. The additional revenue would have enabled the city to stabilize its general fund balance to $2.9 million, according to Moody’s. On the cost side, where expenditures have exceeded revenue by roughly $2 million over the past few years, Wayne balanced its books for the current fiscal year by draining other funds, including its internal service fund and a retiree healthcare trust. City budget officials report closing FY2016 with near depletion of the city’s OPEB trust and a $400,000 draw on general operating reserves. The city expects to draw another $1.6 million of general fund balance in fiscal 2017 and estimates likely depletion of fund balance by December 2017.

Puffing Up Revenues? As San Bernardino nears its exit from the longest municipal bankruptcy in U.S. history early next year, the city’s voters are huffing and puffing over a proposed revenue proposal at the ballot next month: Measure N allowing marijuana in the city is projected to raise more than $18 million in net revenue to the city, several times more than either of the competing marijuana measures, according to a study released by the campaign for Measure N: that study, prepared by Whitney Economics on behalf of the committee for Measure O, concluded Measure O would bring between $19.5 and $24.8 million in revenue. In contrast, New ERA calculates Measure N would bring in $18.2 million, Measure O would bring in $2.4 million, and Measure P would bring in $4.8 million, after the costs related to each measure are accounted for. The huffing and puffing and fiscal visions related to possible estimated revenues which might be generated from sales tax, permit fees, and other assessments stipulated in each initiative, as well as job creation potential from retail, manufacturing, and cultivation allowed by each initiative. Indeed, the confusing array of psychedelic revenue options for voters in a city where marijuana is technically prohibited—but where there are currently 22 dispensaries, is certain to toke voters as they enter the polls to opt between three different measures on November’s ballot—each of which would replace the current ban with a different approach to regulation: if more than one of them gets higher (a pun) than 50 percent of the vote, whichever measure has more “yes” votes will become law in the city. The three options for voters:

  • Measure N, submitted by San Bernardino citizen Katharine Redmon, would establish a 5 percent tax on gross receipts and allow at least 20 medical marijuana dispensaries, if at least 20 apply.
  • Measure O, submitted by citizen Vincent Guzman, would establish an application fee of $250 and annual fees of $5 per square foot of canopy for cultivation, $5 per square foot occupied by the business for manufacturing/test, $100 per vehicle used in transportation, $5 per square foot of dispensary and $1 per square foot of canopy for nurseries.
  • Measure P, prepared by the city attorney’s office, was intended by the City Council as a way to maintain more control over marijuana businesses if residents are inclined to allow them. Because of that, state law would allow fees equal to the cost of enforcement.

Gross receipts for dispensaries are based on the maximum dispensaries allowed under the restrictions of each measure—20 under Measure N, 5 under Measure O, and 10 under Measure P, with the demand at each dispensary estimated based on Palm Springs. That would then be combined with the gross receipts tax, with some $2.3 million expected for Measure N, zero for Measures O and P, and sales tax revenue of $930,027, $744,022 and $837,025, respectively. There are similar calculations for cultivation, manufacturing, and distribution. For instance, proposed Measure P allows the most cultivation, with expected output totaling more than 500,000 pounds of product and employing 840 people, according to one study: Measure N compares at 155,000 pounds and 380 employees, while Measure O would be close to 116,000 pounds and 285 employees in cultivation, according to the study. In contrast, Beau Whitney of Whitney Economics in Portland provided the City with a four-page study which criticizes Measure N for exempting cooperatives and nonprofits, which is how existing illegal dispensaries in the city are organized; ergo, he notes, Measure P offers limited revenue potential: “Other proposals put forth by comparison, either have limited amounts of revenue generation or provide protectionist policies and carve outs for special groups.” Both authors also anticipate significant positive indirect economic impact, dismissing critics’ concerns that dispensaries would hurt property values and other aspects of the economy. Marijuana opponent Darren Espiritu, of the San Bernardino Chair of Citizens Against Legalizing Marijuana, said revenue forecasts in Colorado fell short of industry promises—advising that Colorado state officials now expect about $150 million per year in marijuana tax revenue, out of the state’s $10 billion general fund. He adds: “No amount of revenue can replace a child’s life…Marijuana is ending up in the hands of children at an increasingly younger age. Marijuana use has dramatic negative impacts on the growing brain up to the age of 25.”

Hard Choices for a City’s Fiscal Future. Michael Fitzgerald, a columnist for the Stockton Record, yesterday wrote:  “Stockton voters have one major piece of unfinished business left over from the (chapter 9 municipal bankruptcy), one last gotta-do so the city can move forward: ousting Mayor Anthony Silva…Silva is a loose end of the bankruptcy in the sense that he came in through the side door of that extreme and unprecedented event. Were it not for the electorate’s outraged determination to punish incumbents, he never would have been elected. Which is not to say disadvantaged voters who felt ignored by City Hall were not justified in voting for someone who listened. But it has long been clear Silva is an epic mistake…The only two substantial policies Silva championed, the fiscally suicidal Safe Streets crime-fighting plan and a reduction in building fees, were handed to him by developers…Politically, he botched his first six months so badly, denouncing fellow council members, exhorting his supporters to harangue them, he ensured he’d never command a council majority. He marginalized himself:

But then it appears Silva did not understand the office for which he ran. He has been publicly shocked and perturbed by the statutory limitations placed on the mayor’s power.

Ethical lapses followed. Silva promised if elected not to work two jobs. But he did. He promised not to take a mayor’s salary until crime tumbled. But he did. There were more.

What did not follow was policy. It became clear that “The People’s Mayor” had no real ideas for governing and no real interest in the hard work that goes into civic improvements.

When I asked him what his position on growth was — on sprawl vs. infill — he looked at me as if I had spoken to him in Mandarin.

His treatment of the homeless issue is typical. First he did publicity stunts, sleeping in a box overnight as TV cameras rolled. Next, he used a homeless man as a prop at his State of the City address, then left the poor man to become homeless again.

Finally he proposed the city purchase a hotel. His proposal included no realistic idea of cost, funding or affordability. He ignored entirely how the hotel should link to county/private services to transition homeless people into permanent housing

To top it off, he proposed “any person who refuses our services and simply just wishes to live where they want … will (be) escorted to the city line.” Which is illegal. The proposal was DOA.

Then there was Silva’s farfetched “Stockton Proud” agenda. This plan calls for terraforming beaches onto the waterfront, building a space needle “100% funded by private money,” attracting cruise ships, and other ideas so unrealistic it could have been dreamed up by Michael Jackson for Neverland Ranch.

Administratively, Silva is no better. He leaked the name of a city manager hire, sabotaging the process, leading to the hire of next-in-line Kurt Wilson; yet he complains about Wilson, oblivious that his bungling put Wilson in the job.

But it is as a distraction from the serious business of governance where Silva has been a Hall-of-Famer. I doubt anyone will ever surpass him.

It’s not only the things he intended to do, such as his Chicken Little act over adding chloramines to the water (after he voted to do it!); he brought in Erin Brockovich and her alarmist sidekick who frightened the public with wildly irresponsible warnings of brain-eating amoeba.

It’s also his inadvertent, soap-opera string of goofs, scandals, brushes with the law and strange, almost creepy-clown behavior.

I am not going to rehash those. It is tragic, though, that while Sacramento made bold progress under (badly flawed) Mayor Kevin Johnson, and Fresno gained national recognition for its progress under Mayor Ashley Swearingen, Stockton stuck itself with Silva.

Worse, Silva is refusing to cooperate with investigators trying to understand how his stolen gun came to be used to kill a 13-year-old. And he has been indicted on felony and misdemeanor charges related to his alleged participation in an alcohol-fueled strip poker game with teens.

He deserves his day in court.

Hating City Hall is part of Stockton’s civic culture. But if it must be done, it must be done wisely. Hate incompetence. Hate failure to adequately serve the city’s disadvantaged. Above all, hate the charlatans, because they hold the city back.

Spending When a City Has No Money to Spend. The Petersburg City Council has voted 5-1 to spend more than a quarter-million dollars, as the municipality teeters on insolvency, to enter into emergency negotiations with the Robert C. Bobb Group, claiming the purpose was intended “to preserve the interests of the City to maintain the proper functioning of the government,” with the vote coming in the wake of two closed-door sessions. Mr. Bobb is a former Richmond city manager who also served briefly as an emergency financial manager for the Detroit Public Schools—where, under his watch, DPS’s deficit tripled—in no small part because of a series of arrangements with armies of “consultants,” as he sought, under Michigan’s emergency manager law,  to address DPS’s $327 million budget shortfall by closing nearly half of Detroit’s schools and increasing class sizes in the remaining ones to as high as sixty—even as he submitted an AMEX bill with more than $1 million in travel charges, but proposed closing half the district’s schools and increasing class sizes up to 60 children in a classroom and cutting all general bus service—and proposed putting DPS into chapter 9 municipal bankruptcy. Nevertheless, Petersburg Mayor W. Howard Myers noted: “We felt that this is an emergency situation, because of the situation the city is in,” even as he declined to state how much the contract would cost the insolvent municipality—already confronted with the effects of a $12 million shortfall in the current fiscal year’s budget even as it is desperately trying to pay down nearly $19 million in debts identified at the close of the previous fiscal year. For his part, Mr. Bobb said: “Our goal is not to be the permanent solution, but to help stabilize them and help recruit permanent leadership.” It remains unclear what the decision might mean with regard to the municipality’s request for state assistance. Virginia Sen. Rosalyn R. Dance (D-Petersburg) voiced concern about the cost and timing of the proposal, noting: “We just committed to spend some money, and I don’t know how much money we’ve committed to spend…If we have extra money to spend, it should be going to the schools.” There was no public comment period; the Council first took 90 minutes to discuss personnel measures related to the performance of the interim city manager. Afterward, the members broke for discussion of procurement and pending litigation.

Mayor Myers said the city faces several possible lawsuits but declined to elaborate. He said money to fund the Bobb Group’s work will come from savings the city has incurred from not filling open positions. For his part, Mr. Bobb declined to comment on his firm’s fees, citing ongoing negotiations; however, he noted he planned to take an active role in assisting the city, although the day-to-day work will be conducted mostly by other staff members of the Washington, D.C.-based business. Indeed, at the request of Petersburg Commonwealth’s Attorney Cassandra S. Conover, Petersburg Circuit Court Judge Joseph M. Teefey has signed an order directing Chesterfield County Commonwealth’s Attorney William W. Davenport to expand his ongoing probe of the Petersburg Bureau of Police—and, widening the scope, to include “any and all” issues involving the City of Petersburg’s finances: the investigation now will include “allegations regarding financial improprieties of the City of Petersburg which warrant investigating and/or any prosecutions resulting from any charges placed pursuant to said investigation.” Counselor Davenport was appointed last December after the Commonwealth Attorney requested a special prosecutor to look into a case of money alleged to have disappeared from the police evidence room. (The Virginia State Police and the FBI have been assisting with that probe.) Ms. Conover reports she met with representatives of several state and federal agencies last week, including the Virginia State Police, to discuss the status of that investigation as well as questions related to Petersburg’s finances, noting that, as a result of that meeting, she had submitted an order calling for an expansion of the investigation “to include all financial matters/improprieties of the City of Petersburg.” Meanwhile, a team of auditors and other financial experts led by state Secretary of Finance Ric Brown subsequently reported that Petersburg’s system of accounting for revenue and spending had numerous shortcomings, including more than 30 “exit points” for city funds – individuals or departments who or which were allowed to write checks without specific authorization: as a result of the system’s flaws, the state team said, city officials literally did not know exactly how much annual revenue the city had received or how much it had spent until after the end of the fiscal year, when an outside consultant “reconciled” the various departments’ income and spending ledgers.

Tempus Fugit. Atlantic City Mayor Don Guardian yesterday the city would use tax liens, emergency condemnation, or eminent domain proceedings to take control of nearly 500 abandoned buildings and sell them to developers who would either repair or raze them, demarking the city’s latest effort to raise revenues to avert a state takeover. According to Mayor Guardian, in addition to being a fiscal boost, the move could address a longstanding gripe among visitors about the seaside gambling resort: “It has frustrated the community for decades that it seemed almost impossible to do anything about these abandoned properties.” The proposal appears to stem from the Mayor’s efforts this year to successfully enlist six neighborhood associations to walk their communities and come up with a list of properties which appeared to be abandoned—an outreach that has resulted in identifying some 598 properties—albeit, since then, the owners of more than 100 of them have begun repair work on their structures after the city threatened to take possession of them, according to Mayor Guardian. (Atlantic City differentiates between buildings in good shape which are simply currently vacant versus properties in unsafe or uninhabitable condition, many of which have not generated taxes in months or years.) Mayor Guardian said he does not have a target figure in mind in terms of how much revenue the city might bring in by selling abandoned properties, yet notes that every little bit helps as it tries to cobble together a financial plan to stave off a threatened state takeover of its assets and major decision-making powers by next month.

Balancing Fiscal & Physical Futures in Municipal Bankruptcy


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eBlog, 10/04/16

Good Morning! In this a.m.’s eBlog, we consider yesterday’s decision by the U.S. 6th Circuit Court of Appeals in favor of the City of Detroit in a challenge to the reductions the city made as part of its plan of debt adjustment affecting retirees’ benefits; then we look east where time is fast running out on some resolution to Atlantic City’s fiscal disharmony, before journeying just north of Atlantic City to New York City, where the first PROMESA oversight board meeting occurred to begin to seek to unravel Puerto Rico’s insolvency has commenced. Finally, we head back west to observe how the fiscal insolvency of East Cleveland is now putting human lives at increasing risk.

Preserving a Future. The U.S. 6th Circuit Court of Appeals has ruled in favor of Detroit in a lawsuit brought by city retirees whose pensions were reduced as part of Detroit’s plan of debt adjustment to emerge from the largest municipal bankruptcy in U.S. history two years ago (In its approved plan of debt adjustment, Detroit had proposed reducing payments to its retirees by $7.8 billion, as well as $4.3 billion in retirement health care benefits.) The 4.5 percent reduction led some retirees to sue, claiming three years ago they deserved the pension they had been promised before the city filed for bankruptcy in 2013. In Judge Alice Batchelder’s 2-1 decision yesterday, however, she noted it was “not a close call,” with the majority finding that altering the pension cuts would be a “drastic action” which “would unavoidably unravel the entire plan, likely force the city back into emergency oversight and require a wholesale recreation of the vast and complex web of negotiated settlements and agreements.” In her dissent, Judge Karen Nelson Moore wrote that the city’s retirees deserved their day in court, writing that they have been left “with the impression that their rights do not matter,” adding that Judge Batchelder and Judge David McKeague were citing a “questionable” legal standard to dismiss the case—and noting: “It has real-world consequences for the litigants before us — retirees who spent their lives serving the people of Detroit through boom and bust, and who feel that the city’s bankruptcy was resolved through a game of musical chairs in which they were left without a seat.” The court’s decision to reject the pensioners’ claims came after the state-mandated Financial Review Commission last month reported the city was in compliance with the Commission’s annual requirements to meet financial milestones. Indeed, if a January audit confirms it, then the Motor City would have just one more fiscal year to demonstrate good budget practices, and the state would consider lifting the demands that an outside board approve Detroit’s fiscal spending. Indeed, it seems the court’s decision could mark one of final remaining legal fights from the landmark case, which had multiple appeals pending in the U.S. Court of Appeals over the last year and a half.

Tempus Fugit. Time is running out for Atlantic City, with Moody’s reporting the city is in danger of missing its November debt service payment after it violated a term of a state bridge loan. Indeed, New Jersey’s Local Finance Board informed the city on September 22nd that it has until the end of Monday to cure the breach of a $73 million bridge loan agreement term that required dissolving the Atlantic City Municipal Utilities Authority by September 15th Moody’s had noted, writing that the technical default is a credit negative because it “indicates a disconnect between the city council, mayor, and state.” Instead, city officials had, as we reported, last week announced their own plan that would have the utility buy its closed Bader airfield from the city for about $100 million and asked state officials to wave the terms of the loan—a proposal which led Moody’s last week to term the city’s “impending technical default” as a credit negative, indicating “a disconnection between the city, mayor, and state.” The dysfunctional political gridlock now puts Atlantic City’s next municipal bond payment at risk, some $9.4 million due Nov. 4th, or, as Moody’s Doug Goldmacher put it: “Even if the city were to have market access, borrowing $100 million would increase debt by a factor of seven, raising the question of how the authority would pay for this debt — assuming the plan went through, which is far from certain.” Having already missed its state deadline to adopt a resolution to dissolve the Municipal Utilities Authority, the city could now be confronted by a state demand for immediate repayment of the $62 million already advanced. All of these accelerating demands come one month before Atlantic City is scheduled to submit a satisfactory five-year fiscal stability plan to the state, or risk state takeover. New Jersey could sell its assets and void or change labor contracts through expansive powers awarded by the legislation and signed by Governor Chris Christie when the state provided the loan.

For Mayor Don Guardian, who faces reelection in December, the runway ahead is perilous: first, the effort to capitalize the city’s airfield, the municipal utility authority (MUA), in order to borrow money, must appear before the Local Finance Board for “findings”—that is, the board can make “positive” or “negative” findings. (It seems there may have been maybe five cases of negative findings over the last two decades.) While negative findings would not bar Atlantic City from borrowing, such findings would likely impose higher borrowing costs. Of greater challenge, however, are a series of hurdles, including: 1) The city would need to file an application with the Local Finance Board, which would then need to schedule a hearing within 31 days of an application being filed, after which the LFB has 10 days to issue findings. (NJSA 40A:5A-6 and 7)—that is a schedule inconsistent with the timing to repay debts and submit a plan. It seems the city would have to prove that the proposed purchase of Bader Field meets complies with the statutory authority that an MUA has—a legal challenge which experts believe would be difficult to scale—and which would, in any case, likely trigger litigation—as well as consume the increasingly decreasing time frame for some resolution, e.g.: how to conclude these items in time to fulfill the municipality’s cash flow loan obligations to avoid another violation of the state loan agreement.

All of these pressures come, moreover, amidst the profound silence from the state: that is, while the state has set deadlines, it appears it has opted not to take a constructive role: it has, as one expert advised, been silent on the “state on all things Atlantic City.” That is, the state appears to have offered no opinion with regard to the failure to move forward on dissolving the MUA—an increasingly critical issue, especially were Atlantic City to end up in court defending the state’s action to move on the collateral the city “pledged” through the loan agreement. Under either path, moreover, there would be costly litigation and delay instead of a constructive path towards resolution.

To Takeover or Not to Takeover. In some sense, it would seem the state intent from the beginning has been aimed at a takeover of Atlantic City; however, such a takeover would not only be costly for the state, but also would raise substantial grounds for challenging its constitutionality: Article 4, Section 7 of the New Jersey Constitution provides:

  1. The Legislature shall not pass any private, special or local laws:

             (12) Appointing local officers or commissions to regulate municipal affairs.

            (13) Regulating the internal affairs of municipalities formed for local government and counties, except as otherwise in this Constitution provided.

Moreover, the New Jersey Constitution only allows special laws upon petition of the municipality.

La Vaina. The Puerto Rico Oversight Board created under the PROMESA legislation convened its first session—not in Puerto Rico—but in New York City, amid further fiscal deterioration in the U.S. territory, yet without any seeming intent to act swiftly: the Board’s first action was to look for a head hunter who would be hired to scout for an executive director for the Board—a remarkable contrast to Detroit, for instance, where Kevyn Orr, almost immediately upon his selection by Michigan Governor Rick Snyder, acted within 24 hours to ensure the operation of vital or essential public services—and the halt of non-essential services. In New York, the Board named José Carrión III chairman and ordered Puerto Rico’s government to provide a fiscal plan in October—and adjourned. For his part, Mr. Carrión, an official in the administration of former Puerto Rico Governor Luis Fortuño, stated: “We will strive to work in a collegial matter for the benefit of the people of Puerto Rico.” Board member David Skeel introduced the bylaws, which Mr. Skeel said were intended to be consistent with the Puerto Rico Oversight Management and Economic Stability Act. The board also worked to clarify the rules on voting. Ordinarily, measures will have to be passed with four votes even if not all the seven board members are present. The board voted to direct Puerto Rico’s government to provide about eight types of fiscal and financial information to the board on a regular basis—and for the Governor or his representative to provide a fiscal plan to the board by a week from Friday—a five-year plan which, under the new federal law is to address fiscal responsibility, access to capital markets, fund essential public services, funding for pensions, and a sustainable debt burden. Even though the initial meeting was in New York City, Chairman Carrión said a main office for the board will be in San Juan, where the Board is scheduled to meet in mid-November. For his part, Puerto Rico Gov. Alejandro García Padilla said that notwithstanding his opposition to the “excessive powers [Congress provided] to the board,” he had to agree to it, because the alternative would have been catastrophic for the government’s provision of human services. He added that the board was a product of years of unwise government borrowing and the economic contraction that Puerto Rico has experienced in the aftermath of federal tax law changes—adding that he had appointed municipal finance expert Richard Ravitch, who had played a key role in a similar oversight situation involving Washington, D.C., to argue for the interests of Puerto Ricans.

Emergency Abandonment? The small, virtually insolvent Ohio municipality of East Cleveland was left without an ambulance after a loaned vehicle from neighboring Mayfield Heights broke down last weekend—meaning that while the city’s firefighters can drive to a scene in their fire engine and give medical care, they were forced to become reliant on mutual aid from neighboring departments to transport anyone to the hospital. The city’s own three EMS vehicles are dysfunctional. The small, distressed municipality, in which all firefighters are paramedics, began using the Mayfield Heights ambulance last Friday, courtesy of Mayfield Heights’ recent approval of its donation to the city, pending acceptance from East Cleveland City Council.