Preempting Local Governance?

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eBlog, 11/07/16

Good Morning! In this a.m.’s eBlog, we observe the ongoing efforts by Atlantic City to respond to and avert a state takeover of the city—with a key hearing now scheduled one day after the Presidential election; then we look south to the small city of Petersburg, Virginia, where a wholly distinct takeover of a municipal government is underway in the virtually insolvent city, even as, tomorrow, its citizens will have a chance to vote for candidates who will at some indeterminate point in the future be able to resume responsibility and authority to reshape the beleaguered city’s fiscal future.   

State Preemption of a Municipality? In response to Atlantic City’s information and efforts to avert a state takeover, as well as Mayor Don Guardian’s epistle late last week to the New Jersey Department of Community Affairs, the Department, created to provide administrative guidance, financial support, and technical assistance to local governments, community development organizations, businesses and individuals, has scheduled the following agenda items for its meeting Wednesday:

11:15 AM City of Atlantic City
Atlantic – NJSA 52:27BB-87 0 Proposed Adoption of Municipal Budget

11:20 AM City of Atlantic City
Atlantic – NJSA 52:27BBBB-1 et seq. – Confirmation of Powers under Municipal Stabilization and Recovery Act. 

Under said Act, the Commissioner of the Department of Community Affairs has 150 days in which to approve or reject the city’s five-year plan. Should the Department find that the proposed plan failed to achieve fiscal stability, a state takeover would take effect. Moreover, the statute also provides authority for a state takeover if Atlantic City, at any point, fails to follow the five-year plan—although it permits Atlantic City the right to appeal the Commissioner’s decisions to a Superior Court judge.

In its 25-page document, as we previously noted, the city sought to respond to the criticisms of the state to its report and urge that the city’s proposed plan is the best way to address its fiscal future. The timing, one day after the Presidential election, is mayhap ironic, coming after last week’s closure of candidate Donald Trump’s Taj Mahal casino—one he once called “the eighth wonder of the world,” despite, ironically, taking his Atlantic City casinos through bankruptcy four times. Nevertheless, he last week said: “There’s no reason for this,” in a recent interview as his friend and fellow billionaire Carl Icahn prepared to close the casino. Thus, in another blow to the city’s tax base and employment and other sales and hotel tax revenues, the Taj Mahal closed its doors amid a strike by union members that had lasted more than 100 days, making it the fifth Atlantic City casino to close since 2014. Mr. Trump claimed both sides should have been able to work out an agreement to keep the casino open. Local 54 of the Unite-HERE union had gone on strike July 1st, after the Local was unable to agree with Mr. Icahn on a new contract to restore health insurance and pension benefits—benefits which were terminated two years ago in a federal bankruptcy court. So last August, Mr. Icahn decided to close the casino, stating it lacked a “path to profitability.” That path, according to candidate Trump, is now forever closed: “Once it closes, it’s too expensive to ever reopen it.” The casino’s closure of course impacted Atlantic City’s fiscal challenges: its impact in lost jobs (nearly 3,000 workers—bringing the total jobs lost by Atlantic City casino closings to 11,000 since 2014), reduced assessed property values.

An Affordable Cost for an Insolvent City? The Petersburg City Council and the small municipality’s residents have finally been able to get a sense at what services or responsibilities they will receive in return for the insolvent municipality’s very expensive payments to a consulting firm over the next five months after Robert C. Bobb, the founder and president of the Robert Bobb Group, provided a detailed presentation at last week’s City Council meeting with regard to how his firm plans to help Petersburg solve its financial problems and what the company had completed in its first week on the job. In the wake of meeting with Councilmembers and city officials, and reviewing scores of reports and other documents, the Bobb Group’s experts concluded that “by not addressing growing structural deficits since 2009, the city faces great risk in funding essential and critical public services. The fiscal crisis deepens.” (Among the reviewed documents was the August 3rd report by auditors from the Virginia Department of Finance alerting the small city’s officials to a backlog of nearly $19 million in unpaid bills from FY2016, as well as a looming $12 million deficit in the current fiscal year.) In addition, the group noted additional problems with regard to how the city government manages its money, adding that it had determined that some of the steps taken to deal with the fiscal crisis may not have done enough—indeed, may have done more harm than good: “The fiscal year 17 budget is unrealistic, lacks transparency, and has not been appropriated or made available to the public…Even with the $12.5 million reduction from the original budget to the amended budget, there is a lack of accountability and information…to ensure that the city can meet what is planned.”

Indeed, the report noted that some of the fiscal steps taken by the city may well have been counter-productive, noting that the early action imposing an across-the-board 10 percent pay cut for city employees—an imposition which, according to the Bobb Group, triggered a “mass exodus” of city workers, “was taken over-dramatically, eliminating services:” The pay cut, the group reported, led to the resignations of 146 city employees.

The city had already issued a solicitation for a $6.5 million loan against its expected tax revenue before the Bobb Group arrived on scene. Nelsie L. Birch, the Bobb Group staffer currently acting as Petersburg’s interim budget and finance director, reported that negotiations with potential lenders are about to get underway. Already, however, it appears the proceedings might be delayed: Petersburg officials had expected the loan proceeds to be available this month; however, according to the Bobb Group, “the proceeds may not be available until December (at the earliest). This leaves November vulnerable to ensuring payroll obligations are able to be met.”

Governance by Contract? The terms of the firm’s effective preemption of municipal governance which the Bobb Group provided to the city—a plan which included a so-called “plan of entry” featuring an “immediate ‘All Hands’ discussion with the Mayor and City Council on the city’s goals, service levels, and future direction; immediate one-on-one meetings with the individual members of the City Council…[and] a documents review, including but not limited to budgets, audits, special studies on the city’s current financial operations, organizational structure [and] city charter.” Among the key services the contract calls for the consulting firm to provide:

  • “Perform a financial review of the city, including but not limited to a review and assessment of financial information that has been, and that will be, provided by the city to its creditors, including without limitation its short- and long-term projected cash flows and operating performance.”
  • “Assist in the identification and implementation of cost-reduction and operations-improvement opportunities.”
  • “Assist the mayor and City Council and other city-authorized professionals in developing for the City Council’s review possible restructuring plans or strategic alternatives for maximizing the enterprise value of the city’s various economic development opportunities.”

For these and other services, the Bobb Company is to be paid $350,000 plus expenses up to $25,000 to cover the company’s employees’ travel, lodging and meals. The contract requires that “All hotel and apartment rental for the period of the engagement will be within the City of Petersburg.”

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