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.

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