Driving Out of Municipal Bankruptcy

eBlog, 12/11/16

Good Morning! In this p.m.’s eBlog, we consider the economic resurgence of post-bankrupt Detroit, using human and, increasingly, artificial intelligence to focus on the city’s future. Then we head to East Cleveland, where, in the wake of the narrowest of recalls of both the Mayor and Council President in an insolvent municipality—the question is what (and whether) its fiscal future might be. Then we head to the snowy north, where Michigan House Speaker Kevin Cotter has issued a dire warning of many municipal bankruptcies unless there is a state-local plan to address its seemingly unpayable public pension obligations. Then, we zoom East as the State of New Jersey begins to fill in the blanks with regard to how it is and will be implementing its state takeover of Atlantic City. Finally, we head south to the fiscally beleaguered city of Petersburg to observe both the near-term fiscal actions to address its insolvency and ask what will ensue.

Detroit: a Resurgent Home of Innovation. Detroit, an early home of the automobile (I have a photo of my two grandfathers in the first automobile ever on the Ann Arbor campus of the University of Michigan), and now recovering from the largest chapter 9 bankruptcy in history, is one of the nation’s foremost cities in investing strategically in the future. Using its history with the automobile industry and its web of universities, the city appears to be at the forefront now of connecting artificial intelligence (AI) to the industry—a strategic investment in its future. Spatial Labs Inc., an artificial intelligence (AI) company which was founded in Cincinnati, but which has opted to keep its headquarters in Detroit, is one of 12 startups which was part of the Techstars Mobility accelerator program last summer in Detroit—a startup round of $2 million led by Serra Ventures of Champaign, Ill., and joined by Connectic Ventures of Covington, Ky.; the M25 Group of Chicago; Fulcrum Equity Partners of Atlanta; and Caerus Investment Partners of Chicago. Spatial, last September, had announced a development agreement with Ford Motor Co. at the Techstars Demo Day. As part of its participation in the program, Spatial received $20,000 in equity funding from Techstars and $100,000 from Detroit-based Fontinalis Partners LLC. Spatial CEO Lyden Faust told Crains: “We didn’t expect to move to Detroit, but personally, I’ve loved being here, and there are so many more opportunities here compared to Cincinnati.” The company was offered space at Ford Field by Ted Serbinski, managing director of the Techstars program in Detroit, and received a grant, which Mr. Faust said the company will use to hire several data scientists and ramp up marketing. Spatial’s co-founder and chief technology officer is Will Kiessling, who had been lead engineer and technologist at GE Aviation in Evandale, Ohio, from 2007 to last January—there he was used to managing huge amounts of data during engine development and testing, which he likened as bringing “the same logic to remote test jet engines as it is to remote test cities: Billions of people interact with maps across multiple devices every day. Bringing social context to maps using Spatial’s patent-pending technology will improve map usability in many industries, including travel, real estate and automotive.” With the rise of AI and machine learning and the shift to mobility and location, Spatial is at the intersection of a massive shift in the industry. And Detroit seems to be working hard to be first in the right lane.

Michigan Municipalities on the Brink. Michigan House Speaker Kevin Cotter (R-Mt. Pleasant), in an Op Ed for the Detroit News, wrote:

Many local communities in Michigan are drowning in debt and on the brink of bankruptcy, and yet almost no one is talking about it. Even fewer people are working on a plan to try to fix it…This is unacceptable and could have dire consequences for every Michigan resident. Something needs to be done now, before disaster strikes.

Reforming retirement systems is a controversial topic, but inaction is simply not an option. We recently made some waves by starting the discussion in the Michigan House, and it is my hope that we all continue that conversation into the new year. Debating the problem openly and honestly is an important first step, but we need to go further and find a permanent solution. It is well past time to put people over politics and do the right thing.

For decades, bad deals were made all over the state, handing out generous and unrealistic health care benefits left and right. Those debts are now weighing down our local governments, which is why we don’t have as many police officers on the streets as we could have and why our fire protection is spread thinner than it could be. This isn’t just a problem on a spreadsheet; you and I are still paying for those deals today in very real ways.

Local governments are struggling to make their payments on this debt, and they are falling further behind every year. A few are on the brink of bankruptcy, and many more will be there soon. Municipal bankruptcies mean fewer police, holes in fire coverage, and a busy signal when you dial 911. Imagine what happened in Detroit a few years ago happening in Kalamazoo, Jackson or Midland. Think of it happening in your city.

Bankruptcy also means former employees with retirement benefits could lose them all. Bankruptcy courts end deals like that with no recourse, and retirees are an easy target for them. Local governments, police and firefighter unions and politicians from both parties publicly agreed we need to solve this crisis now to prevent deep and destructive cuts in our cities and to save the retirements our first responders are planning on.

Our plan asked local public employees to contribute just 20 percent toward their own retirement healthcare plan, the same percentage state employees have been contributing for years. That is still far better than what private sector employees receive. We went further and completely eliminated our own coverage in the state Legislature when I took office six years ago, because it was the right thing to do.

That plan didn’t have the support to pass before our current term ends, but having everyone acknowledge the problem together is a great first step. We’ve heard their constructive criticism, but now we need to hear their ideas. Our committees won’t have the chance to hear from the thousands of police recruits and trainee firefighters who were never hired over the years because of busted budgets. Our representatives will never hear from the people who have died because of slow emergency response times due to budget cuts.

Denial is no longer an alternative, but bankruptcy unfortunately is. Our plan was the only plan out there to save our cities, protect critical services and guarantee first responder benefits for life. Now we need a new plan, and a better plan.

State Governance in Municipal Insolvency. In the wake of the Atlantic City’s Municipal Utilities Authority’s Nov. 28 special meeting; in particular, its vote to give outgoing members a $3,000 ‘gift’ in addition to their regular compensation and benefits package, as we have previously noted, Jeff Chiesa, who is heading up the state’s takeover of the boardwalk city has announced New Jersey will use its new power over the municipality to veto the water authority’s decision to give its board members $3,000 gifts, with his spokesperson noting: “The Division of Local Government Services rejects the action taken at the Atlantic City.” The statement from Mr. Chiesa’s office noted: “This action is further evidence of the MUA’s disregard for the ratepayers they serve, and clearly demonstrates the authority does not understand the severity of the city’s financial condition.” Local Government Services Director—along with Mr. Chiesa—made clear they will also review the remainder of the MUA board meeting minutes, making clear the breadth of authority granted to the state under its takeover powers—including the ability to hire or fire employees, sell city assets, or break union contracts. The state power, moreover, reaches farther to the authority to veto the minutes of municipal governmental meetings. 

What’s Next for Governance in an Insolvent Municipality? Recalled East Cleveland Mayor Gary Norton has now provided details of the city’s handover of power in the wake of his narrow loss in last week’s recall election by twenty votes—along with City Council President Thomas Wheeler. The Mayor stated: “Because that election is so close, we will hold off until December 27th and wait the 21 days to ensure East Cleveland that the election results are final, the election results are certified, and the appropriate individuals enter the mayor’s office and leave council or stay on council.” Should a recount find that Council President Wheeler was not, in fact, recalled, he would become Mayor; if he does not and the current results stand, Council Vice President Brandon King will be mayor until next year’s regular mayoral election. Outgoing Mayor Norton said the government’s business will continue without interruption while the mayor’s office and any openings on council are filled. At the press conference, Council Vice President Brandon King was asked about the status of the city proposed merger with Cleveland—a proposal both Mayor Norton and Council President Wheeler had supported. In response, he noted: “I think when you look at that issue, that’s something that is not over and it will continue to be discussed. And I think that’s probably going to be my only comment on that.” To continue, however, the Mayor and Council will have to act: The ordinance appointing commissioners to study annexation expired before the City of Cleveland chose its representatives. Indeed, according to a Cleveland city council spokesperson, the city has not received a new list of merger commissioners, so East Cleveland’s newly constituted Council would have to pass a new ordinance to restart the merger process. East Cleveland has been in fiscal emergency since 2012. 

Back to a City’s Viable & Fiscally Stable Future. Just as once stagecoaches carry Wells Fargo safe boxes were once guarded by tough characters, like Wyatt Earp, armed with sawed-off shotguns loaded with deadly buckshot to fend off attacks from dastardly outlaws; now it appears that Wells Fargo might pay a favor back: it has agreed to provide a loan of some $6.5 million to the small, insolvent municipality of Petersburg, Virginia—a decision arrived at in the wake of steep municipal budget cuts, tax increases, and greater financial vigilance.  Interim City Manager Tom Tyrrell announced that the city was approved for the loan by Wells Fargo—a loan carrying an interest rate of 4.5 percent, but where the repayment of all principal and interest is due by next October. City Manager Tyrell, in a press release, noted: “This is part of the plan to provide short-term financing to allow city functions to continue. It is not an infusion of cash to pay off past obligations…We will pay our past obligations and will announce our program to accomplish those payments as Phase Two of our Fiscal Stability Plan.” The loan comes in the wake of efforts to secure one that commenced last summer after the lender who previously had provided short-term revenue anticipation notes declined to lend the municipality funds. Thus, last September, as we have previously noted, the City Council had adopted a package of budget cuts and tax increases recommended by consulting firm PFM Group as a way to reassure potential lenders that Petersburg was working seriously to remedy its fiscal plight—and, subsequently, hired another consulting firm, the Robert Bobb Group—headed by former Richmond City Manager Robert Bobb, to take over operation of the city government. The Wells Fargo loan will not address the roughly $19 million the city owes in past-due payments left over from its FY2016 fiscal year; however, according to the city: “It does give us enough breathing room to continue to meet our current expenditures…[It is a] short-term loan [that] allows us to pay our current fiscal 2017 expenses while meeting city payroll, current debt financing and emergency first responder services.” Indeed, Mr. Bobb noted: “We are still in a crisis mode, and this is not the time to interpret short-term financing as a long-term accomplishment.” His company noted that its focus for the next few months will remain on maintaining normal municipal operations and delivering essential public services while reinforcing city finances. Next year, the plan is to commence on “Phase Two,” in which the goal will be to begin paying down longer-term debt and past-due bills.

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