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.

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