Post Municipal Bankruptcy Governance

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eBlog, 11/09/16

Good Morning! In this a.m.’s eBlog, we observe election results in San Bernardino, where the voters, by a wide margin in a city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, voted to move to a city manager type of governance; then we head sharply across the nation to New Jersey, where, this morning, the New Jersey Local Finance Board will begin the process for the state to determine if and how it would wrest governance authority from Atlantic City. Finally, we do a U-turn back to the West coast, where voters in post-chapter 9 Stockton voted to reject the incumbent mayor and elect one of the youngest new mayors in the nation—Councilmember Michael Tubbs, who jubilantly crowed:  “We have a great opportunity to show the nation, ‘How do you reinvent yourself?”  

Post Municipal Bankruptcy Governance. Voters in the nation’s city nearing the denouement of the longest-ever municipal bankruptcy are on the verge of replacing a governing document which many city leaders and, in our in-depth report, we believe has hobbled the city for years, voting by an official 60 percent margin to adopt Measure L, which would replace the San Bernardino City Charter with a new one—that is, the rules of the road that govern how the city is run, comparable to a state’s constitution, essentially moving the city to a city manager form of government, will change dramatically. The measure replaces San Bernardino’s charter with a new one, written over a two-year period by a committee based on state and national models. Or, as the head of the drafting committee which authored the new charter noted, “This is the beginning of a new day for the city, one that a lot of people worked very hard for, and I want to thank all of you: This city can now become what it used to be and what it should be.” His comments were in sharp contrast to former City Attorney James Penman, one of the leading opponents of Measure L, who said he was not surprised by the apparent defeat and hoped he was wrong in his predictions that the charter change would enable corruption, adding he prayed he was “wrong: I want to see San Bernardino do well, and I hope that whoever the future city managers are led well.” Mr. Penman stated that a city manager form of government works best when voter engagement is high—something which, historically, has not been the case in San Bernardino. However, advocates of Measure L believe that gloom will change, because turnout in future elections is projected to increase substantially, because it moves future elections for city officials from odd-number years to match California state elections—November of even-numbered years. (Four years ago, 61 percent of San Bernardino voters came out to vote for President, compared to the last Mayoral election in 2013 when the election turnout was below 16 percent.) Measure L was drafted over a two-year period by a committee based on state and national models. As adopted it provides that the offices of city attorney, city clerk, and city treasurer—currently elective offices—will instead be appointed, and responsibility for some day-to-day operations will shift from elected City Council members to the city manager, who is appointed by the City Council. In addition, pay for police will be set through collective bargaining, instead of through the unique formula San Bernardino has used for decades, which bases the pay on the average of 10 like-sized California cities. San Bernardino has operated under its own city charter, albeit amended several times, since 1905.

State Preemption of a Municipality? The New Jersey Local Finance Board will consider in the next few hours whether to wrest power and authority from Atlantic City’s Mayor and Council and grant them to a state official to turn around the city’s near insolvency in the wake of last week’s rejection of the city’s turnaround plan, when New Jersey Department of Community Affairs Commissioner Charles Richman, in a 14-page reply, said the city’s supplemental information did not change his view, in some part because it was still overly reliant on state aid and a partnership with the state: “The extent to which the city minimizes the plan’s weaknesses by invoking the value of a partnership to propel the plan forward is, to me, confirmation that the plan does not stand on its own. Ergo, this morning, following are the ten powers the state can take under the so-called takeover law:

State Usurpation Powers. The state’s takeover law provides for state authority powers, including authority to “unilaterally modify, amend, or terminate any collective negotiations agreements, except those related to school districts.” The law also permits the state authority of “selling, conveying, leasing, monetizing, or otherwise disposing of any interest in any municipally-owned assets.” (The city’s Bader Field, a 143-acre former airstrip, and the Municipal Utilities Authority, the city’s waterworks, are considered two of the city’s most prized assets—and monetizing those assets had been a signal part of the city’s proposed, but rejected recovery plan.) The state can unilaterally “appoint, transfer, or remove employees” of the city, up to and including department and division heads; such state authority excludes appointed officials who have received tenure.

  • Enter shared services agreements.The state, under the law, may strike agreements with Atlantic County, other municipalities, or “any instrumentality of the state” to share or consolidate municipal services. (Atlantic City recently reached a shared services deal with Atlantic County for senior and health services.)
  • Restructure debt.The state can retain bond counsel, adopt bond ordinances, and take “any other steps necessary” to restructure and adjust debt. (Atlantic City has roughly $500 million in total debt.)
  • File papers in bankruptcy court. The State of New Jersey may file a chapter 9 municipal bankruptcy petition and other pleadings and papers with any United States court or federal bankruptcy court for the purpose of “effecting a plan of readjustment or composition of debts;” however, the state must first have the approval of the legislative Joint Budget Oversight Committee.
  • Abolish city departments.The state’s sweeping powers also include “dissolving, terminating, transferring, abolishing, or otherwise disposing of any municipal authority, board, commission, or department.”
  • Control legal affairs.The state can take over the city’s litigation and legal affairs, including suing in the city’s name, prosecuting, defending, and resolving litigation, arbitration, disputes, and controversies.
  • Purchasing goods and services.The state may procure any “goods, services, commodities, information technology, software, hardware, or other items” on behalf of Atlantic City; and
  • Veto meeting minutes.The state can veto minutes from the governing body and “any board, commission, or department” of the city. Copies of meeting minutes must be sent to the director of Local Government Services, who can approve or veto any action taken by the city.

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 today:

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.

New Hands at the Tiller. Stockton City Councilman Michael Tubbs appeared certain this morning to become Stockton’s first black mayor after vaulting to a resounding lead over incumbent Anthony Silva in an election upsetting night across the country. At the age of 26, the Mayor-elect of the formerly bankrupt city stated: “We have a great opportunity to show the nation, How do you reinvent yourself? I’m tired of talking about where we’ve been. I’m more interested in talking about where we’re going. We have to mature as a community and start demanding solutions.” Outgoing and defeated former Mayor Tony Silva said: “The people have spoken…I respect the will of the people. I want to thank everyone who believed in me and stood by me…My heart will always belong to Stockton. I will always be remembered as the People’s Mayor and I will support the new mayor and I will ask my supporters to also support him and help us make Stockton an amazing city.” Mayor-elect Tubbs’ victory margin was an overwhelming 40-percent. In his acceptance speech, Mayor-elect Tubbs noted: “You don’t get 70 percent of the vote out of nowhere…This victory is yours and ours. This room is what Stockton looks like. It’s people from gated communities and Conway Homes, black people, Asians, white people. Each of us is what it will take to move Stockton forward.” Indeed, it is a remarkable pinnacle for the new Mayor-elect, who was raised by a single mother in south Stockton, earned his bachelor’s and master’s degrees from Stanford University and was elected to the Stockton City Council in 2012. The new Mayor noted, last night: “Stockton has a long history of turning tragedy into triumph…The Stockton I know, I met in this campaign…I am more resolute than ever that Stockton’s best days are ahead. This is a prelude to a beautiful chapter. Michael Tubbs will not write it himself. We will write it together.”

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