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.)  


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