State Preemption of a Municipality: Moving into Uncharted Territory

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eBlog, 11/10/16

Good Morning! In this a.m.’s eBlog, we consider yesterday’s granting of authority for a state takeover of the City of Atlantic City by the New Jersey Local Finance Board—a state takeover which will likely be impacted by Tuesday’s Presidential election—as New Jersey Governor Chris Christie appears to be a potential Cabinet or other senior advisor to President-elect Donald Trump. Actual governance will shift from local accountability to the state’s Division of Local Government Services—marking the second state takeover of a municipality in New Jersey’s history. Then we consider an election result in post-chapter 9 Detroit affecting future community development, before trying to become schooled with regard to the downgrading of Chicago’s Public Schools—a downgrading that could undercut some of Mayor Rahm Emanuel’s leadership efforts to draw young families into the nation’s third largest city.

State Preemption of a Municipality? In the wake of yesterday’s 5-0 vote by the New Jersey Local Finance Board, Gov. Chris Christie’s administration was granted the authority to immediately seize control of financially distressed Atlantic City, with the unanimous vote paving the way for a five-year state takeover—a takeover Governor Christie referred to as the best way to keep the city from becoming the first New Jersey municipality since 1938 to go into chapter 9 municipal bankruptcy. By way of the vote, the state usurped the authority to assume key functions usually controlled by local elected leaders: renegotiating union contracts, hiring and firing employees, and selling municipal assets. The right to wrest governance authority was power included under the Municipal Stabilization and Recovery Act approved by New Jersey lawmakers last May when Atlantic City was given 150-days to craft an acceptable rescue plan to avert a June default. The action, which City Council President Marty Small described as “definitely a sad day in the history of Atlantic City,” marks the first state takeover of a municipality since New Jersey took over Camden more than a decade ago. The New Jersey Local Finance Board, however, did not grant the state the authority to file for chapter 9 municipal bankruptcy on behalf of the city. Under the terms of the state preemption, Timothy Cunningham, the Director of the Division of Local Government Services, will assume responsibility during the takeover—albeit he indicated he was uncertain what duties or responsibilities would remain with the city’s elected local leaders—describing the decision as moving into “unchartered territory,” as well as an “unbelievable responsibility.” The decision continues to leave murky the exact role of the emergency management team.

Yesterday’s developments mark an escalation of state preemption of local authority which commenced six years ago when the Governor announced the state was taking over the city’s tourism district and installing a state monitor. Last year, the Governor appointed an emergency management team. It seems very unclear what the role of those state appointees was—albeit it seems clear they were not accountable to the taxpayers of Atlantic City and, seemingly, were not held to any accountability to the Governor. The situation will now likely be further muddled by the likely role of Governor Christie in the new Trump Administration—meaning Lt. Governor Kim Guadagno would become Governor. Nevertheless, Moody’s Investor Services, in the wake of the state decision, termed the takeover a “credit positive,” because the state will be able to ensure the city’s debt payments due on the first and fifteenth of next month will be made. Notwithstanding the state takeover, the state preemption creates uncertainty with regard to whether Atlantic City can meet its upcoming debt service requirements: Atlantic City made its $9.4 million November 1 bond payment and next owes $2.3 million on the first of December—and then $4.8 million on December 15th, according to Moody’s Investors Service.

Community Development in the Motor City. Detroit voters approved a ballot measure, Measure B, backed by some union and business groups which will require developers of major projects to engage residents to negotiate jobs, affordable housing, or other benefits, according to unofficial election results, but rejected Proposal A, a competing grassroots plan which would have further increased the benefits to residents. The prevailing version, Proposal B, which was earlier approved by Detroit’s City Council, earned adoption by a 53 percent to 47 percent margin: the new ordinance makes Detroit the first city in the nation with such a sweeping requirement, according to Detroit Councilman Scott Benson, who worked on the community benefits agreement for more than a year with consultation from stakeholders. Councilmember Benson noted: “The city of Detroit is the tip of the spear when it comes to community benefits: We are the only city to have a CBA that’s going to be enacted that’s structured this way. The only one in the country.” The ordinance is set to take effect at the beginning of next year. The battle over the benefits plan had sharply divided voters: developers and unions opposed it, claiming it would be a “jobs killer” that will drive away much-needed development in the city. The community-led Proposal A would have required more enforcement and larger investments by developers. According to unofficial results, 54 percent of voters turned it down. Proposal B will require developers to provide community benefits for projects worth at least $75 million or for those that would expand or renovate structures where a developer seeks city-owned land or tax breaks of at least $1 million. Under the proposal, a neighborhood advisory council will be established for areas affected by development with appointments from the city’s planning director and in consultation with the council.

Failing Municipal Grades. S&P Global Ratings yesterday downgraded the Chicago Board of Education’s credit rating to B from B-plus with a negative outlook, with analyst Jennifer Boyd writing: “The rating action reflects our view of the district’s continued weak liquidity in its most recent cash flow forecast and reliance on cash flow borrowing, combined with the increased expenditures in the district’s new labor contract that exacerbate the district’s structural imbalance challenges.” The lowered grade came at a bad time: Chicago Public Schools has been planning the sale of millions of dollars of long-term municipal bonds next week—bonds which will now be much more costly to the city. The rating agency noted, in its downgrade, CPS’s reliance on short-term borrowing to cover daily expenses, plus $55 million in costs added to this year’s budget by the recent agreement with the Chicago Teachers’ Union, noting, “The Board’s extremely weak cash position is a significant credit weakness, in our view.” For its part, CPS, among other assumptions in its budget this year, has been optimistically assuming the state legislature will come through with $215 million in aid, warning it will cut that amount from schools if that assistance fails to materialize. CPS’s chief financial officer yesterday said “CPS continues to make important strides in improving the district’s financial stability,” and that CPS would continue to press for an overhaul of Illinois’ education funding formula, which he said would “lay the groundwork for fiscal stability” at CPS and other school systems. However, S&P warned there was at least a 33% chance of another downgrade within the next year—with the credit warnings coming at a most inopportune time: CPS is scheduled to sell roughly $420 million in bonds to refinance some of its old debts along with what S&P described as “computer servers and equipment.” For its part, Fitch Ratings noted: “The lack of an adequate financial cushion leaves CPS ill-prepared to withstand even a moderate economic downturn.” With Mayor Rahm Emanuel’s key focus on schools and public safety as essential to bringing young families into the city, the fresh downgrade as well as a recent one from Moody’s cannot be good news—and it appears to undercut CPS’ claims that the nation’s third largest public school district is on better fiscal footing with the help of additional state aid and a property tax levy. In its own report card, Fitch reported that its B-plus rating for CPS reflects what it termed “chronic structural imbalance, slim reserves, and a weak liquidity position which are exacerbated by rising long-term liability costs, a historically acrimonious labor relationship, and the lack of an independent ability to raise revenues.” All of this marks a distinct setback to the recent CPS efforts to obtain a passing credit grade in the wake of a one-time increase in state aid, passage of a $250 million property tax levy for teachers’ pensions, and $81 million drawn from its nearly drained reserves. Moreover, CPS has been relying on $215 million in state aid for teachers’ pensions—based on optimistic assumptions that the legislature will act on pension reforms in its next session—and that such reforms would not be found unconstitutional.

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