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.

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