What Happens When a State Takes over a City?

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eBlog, 11/02/16

Good Morning! In this a.m.’s eBlog, we consider the State of New Jersey decision to usurp authority over Atlantic City’s government after rejecting its recovery plan—albeit offering little guidance on when—or exactly how—such a transfer of governing power and authority will proceed. 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; however, that manager seemed to lack either the ability or the authority to play a meaningful role. The state does have previous experience in taking over a city: Camden. Then we journey to Flint to consider some of the governance challenges between the judicial and executive branches of the State of Michigan as they relate to the tragic state actions with such lasting adverse human health and safety for the city and citizens of Flint. Finally, we visit Petersburg, Virginia’s municipal library—where the virtually insolvent city appears to be caught between competing municipal priorities.   

Saving Grace? Gov. Chris Christie’s administration yesterday rejected Atlantic City’s five-year fiscal recovery plan, apparently precipitating a state takeover: Department of Community Affairs Commissioner Charles Richman said the city’s proposal was “not likely to achieve financial stability.” Commissioner Richman noted in his decision that if Atlantic City failed to propose a suitable plan, the state could assume “certain functions, powers, privileges and immunities of the governing body” of Atlantic City. However, the statement was silent with regard to invoking a state takeover—much less how such a takeover would work; the statement noted that the rejection was based on “not only what is in the plan submitted by city that is deficient, but also on what the city does not have in its plan,” with Commissioner Richman noting: “I would have much preferred to leave management of the city’s recovery in the hands of its municipal officials…However, I am constrained by the plan the city has placed before me. The enormous problems confronting the city did not occur overnight. City leadership has had ample time to improve the city’s financial condition, yet has avoided doing so in any meaningful way. The plan is not likely to achieve financial stability for the city.” The Commissioner stated that the city’s plan underestimated debt service over the next five years by approximately $18 million; assumed the city would receive $31 million more in redirected casino investment taxes than is likely; and overstated property tax revenues by $20.5 million. In addition, he faulted the plan for not including tax increases as part of its recovery plan. He added that the city’s proposed $110 million sale of the city-owned Bader Field former airport property to the city’s municipal utilities authority was “structurally flawed.” Commissioner Richman said the plan does not include a proposed balanced 2017 budget which complies with the law, underestimates debt service, failed to accurately estimate revenues, and overestimated property tax revenues, adding that key parts—such as the proposed sale of Bader Field plan—were “speculative in terms of their viability.”

Where’s the Beef? Notwithstanding the announcement, there was no immediate trigger of the takeover for which Governor Christie has long called—and which many city leaders and state lawmakers have fought for months to avoid; rather Tammori Petty, a spokeswoman for the Department of Community Affairs said the next step will be for New Jersey’s Local Finance Board to “consider whether to assume powers of the governing body that may be substantially related to the city’s fiscal condition or financial rehabilitation and recovery;” while Brian Murray, a spokesman for Gov. Christie’s office, said: “We are reviewing the extensive report, along with everyone else, and will not be making any statements at this time.”

For his part, Mayor Don Guardian has vowed to appeal an adverse decision in court; while New Jersey General Assembly Speaker Vincent Prieto stated: “Taxpayers better now beware: State takeovers of school districts have been disastrous. The administration needs to immediately detail whether a takeover would cost taxpayer money and how much. It must also detail whether it will push a property tax hike upon Atlantic City residents that the city’s plan showed was unnecessary.” City Council President Marty Small told the Associated Press the state’s decision was “misinformed, misguided, and biased…The fix was in, and it will be dealt with…This is far from over.” In a joint statement with Mayor Don Guardian, the two said the city is “truly disappointed that the state did not recognize the value of this thoughtful and comprehensive plan.” Mayor Guardian, who has previously warned the city would appeal a takeover in court, noted yesterday that the city is “reviewing all of our options.” In the New Jersey General Assembly, State Assembly Speaker Vincent Prieto, the lawmaker who led the fight in Trenton to stave off a takeover, said the city’s plan “should have been approved,” adding: “I doubt the state can do better…Taxpayers better now beware. State takeovers of school districts have been disastrous.” 

In recent days, local leaders had appeared optimistic the Christie administration would accept their plan. Credit rating agency Moody’s Investors Services, after all, had called the plan “robust and detailed.”

What’s Next? The announced takeover opens the door to unprecedented state authority over Atlantic City’s affairs, including the right to:

  • dissolve agencies,
  • override decisions by elected local leaders, and
  • sell off assets, including land and a water utility coveted by private operators.

Commissioner Richman, however, offered no insights with regard to how the state intends to use that authority, with a spokesperson for the state agency stating that “the next step” will be up to the state Local Finance Board; however, she provided no timetable for a decision. The city’s 120-page package had proposed 100 job cuts, early retirement for some employees, a tax settlement with casinos, and a plan to sell the former Bader Field airport site to the city’s municipal utilities authority for $110 million, among other cost-saving measures.

If Past Is Prologue? The takeover is not the state’s first: fourteen years ago the New Jersey legislature stripped Camden of most of its municipal authority; the state provided $175 million in extra state dollars; however, it appears that state takeover failed to improve the city’s failing infrastructure, schools, or economy. The takeover lasted seven years. It was promised to be a new start for Camden—coming in the wake of very different circumstances than Atlantic City: decades of corruption in City Hall, e.g. a situation much more akin to Detroit under former, convicted, and imprisoned Mayor Kwame Kilpatrick. In the case of Camden, New Jersey imposed a chief operating officer to run Camden and provided some $175 million in special state aid.

Indeed, looking back, Former New Jersey House Speaker Joe Roberts, who helped to write New Jersey’s takeover legislation eight years ago, when asked—in retrospect—whether that $175 million was wisely spent wisely, responded the answer had to be yes to all of them, noting, at the time: “If Camden is going to have any chance of survival long-term, we have to grow the tax base. And that’s only going to occur by building up the downtown and creating an environment where companies can come in and invest in the cities.” Yet, today, Camden’s poverty rate remains near 40 percent, and it still ranks among the most dangerous cities in the U.S. America. Professor Richard Harris of Rutgers, discussing the state’s takeover authority law, has previously noted he did not believe anyone who authored New Jersey’s takeover state statute thought that by putting large state investments in play in Camden that that was going to “flip a switch” so that Camden’s problems were magically going to be fixed; rather, he described the state’s takeover authority as one with more modest goals: to spur private investment while also rebuilding city government, noting, in retrospect: “There’s actually been a significant amount of progress on revitalizing the downtown and the city, but in terms of revitalizing or making more robust government, that you’d have to mark down as not being a success.

But yesterday, in reaction, New Jersey House Speaker Vincent Prieto said: “Taxpayers better now beware: state takeovers of school districts have been disastrous. The administration needs to immediately detail whether a takeover would cost taxpayer money and how much. It must also detail whether it will push a property-tax hike upon Atlantic City residents that the city’s plan showed was unnecessary…Today’s announcement means that a state takeover is still in the cards. That would be a profoundly undemocratic scheme, one that puts corporate interests over people and uses the city’s financial crisis to seize control over its most valuable asset: the municipal water system. Gary Hill, the Executive director of the Metropolitan Business and Citizens Association, said, referring to the Christie administration: “They think they have a better plan, but nobody knows what that is. I can’t wait to hear what it is;” Frank Formica, an Atlantic County freeholder director put it this way: “It’s a shame after 30 years of failed local leadership, five years of failed state oversight, two summits and spending over $2 million in taxpayers’ money for expert reports, the state’s answer is to reject the only plan prepared in 30 years and simply hand over the keys of the city to outside special interests with no plan of its own, no transparency and no leadership.”

Out Like Flint. The State of Michigan has asked the Michigan Court of Appeals to rescind protective orders intended at barring the state Department of Health and Human Services from access to potential evidence and witnesses in future Flint water criminal prosecutions, arguing that such orders violate the Michigan Constitution. The new filing asserts that the protective orders violate the separation of powers clause in Michigan’s Constitution and disrupt an executive agency’s statutory authority to respond to the lead and Legionella public health issues. Special prosecutors, and representatives of McLaren-Flint hospital have argued in their own filings with the Court of Appeals, however, that lifting the protective orders would compromise ongoing criminal investigations tied to the Flint water crisis. But in the state’s filing, the state argued that protective orders aimed at keeping the state Department of Health and Human Services away from potential evidence and witnesses in future Flint water criminal prosecutions would violate the Michigan Constitution, as it asked the court to rescind protective orders issued by Genesee County Circuit Court Judge Geoffrey Neithercut earlier this year—orders that the agency first sought to block in a filing with the court two months ago: the newest DHHS filing warns the protective orders violate the separation of powers clause in Michigan’s Constitution and disrupt an executive agency’s statutory authority to respond to the lead and Legionella public health issues; special prosecutors, and representatives of McLaren-Flint hospital have argued in their own filings with the Court of Appeals that lifting the protective orders would compromise ongoing criminal investigations tied to the Flint water crisis. Three DHHS employees have been charged with criminal wrongdoing related to their actions in Flint; however, the state agency argues it cannot be the subject of a criminal prosecution—and that the “investigation of a handful of its employees cannot be used as a pretense for unconstitutionally stripping a state department of its legislatively assigned responsibilities.” (Michigan is alleging that the hospital has been linked with nearly a dozen healthcare related Legionella deaths from the use of water from the Flint River.).

Misappropriation? The Petersburg (Va.) Circuit Court Law Library committee has filed a lawsuit alleging that funds from the law library have been misappropriated, claiming the amount could be between $100,000 and $200,000. (Funds taken in daily through court fees are deposited into a fund for the law library.)  In the suit, representatives claim that funds being collected specifically for the Law Library are instead being diverted to pay general debt for the City, albeit Commonwealth’s Attorney Cassandra Conover has indicated that, if anything: “I think we know where the monies haven’t gone…it’s for different departments, such as the Commonwealth Attorney, the Sheriff, the Law Library.” Two years ago, the Law Library Fund was around $112,000; it has likely grown since library operational costs are not expensive—indeed, less so since its relocation from the circuit court building into the Petersburg Public Library; however, recently, several big bills have gone unpaid, even as the court has continued to send the city money. There was a $14,000 bill for shelving and more than $1,500 for computer software.

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