Good Morning! In this a.m.’s eBlog, we consider the political and legal turmoil in the insolvent municipality of East Cleveland, before turning to the continued uncertainty with regard to Atlantic City’s future. Then we try to get schooled in the new governance set to commence for Detroit’s public schools, before returning to what appears to be a state of emergency declared this week by the new Governor of Puerto Rico.
Bankrupt Municipal Governance? The insolvent city of East Cleveland is confronted not just with fiscal insolvency, but, increasingly, governance chaos in the wake of the recall of its former Mayor and the city’s Law Director, Willa Hemmons, yesterday issuing a legal opinion that appointments made to the City Council last week were illegal. That opinion was countered late yesterday by East Cleveland Councilwoman Barbara Thomas, who issued a statement contradicting Ms. Hemmons’ opinion that appointments to council made in a December 29th meeting were illegal, writing that not only was there an absence of a quorum, but also the actions were in violation of the city’s charter. The Councilwoman, who represents Ward 2, and Nathaniel Martin, at-large council member, had selected Devin Branch and Kelvin Earby to fill the Ward 3 and at-large seats left open when voters recalled former Council President Thomas Wheeler and Mayor Gary Norton. Ward 4 councilwoman Joie Graham had left the meeting last week during executive session, because she did not agree with the interview process for new members. In response, Councilwoman Thomas, in a statement, claimed she had met with an unnamed attorney and believes that Law Director Hemmons has confused “charter positions which apply to organizational meetings of City Council following a regular election with the procedures Council is required to follow to fill a vacancy on Council.” In addition, the Councilwoman charged the document was improperly served. Thus, she stated: “I am disappointed, because I had hoped that having a new mayor would give us an opportunity for a fresh start and that the administration and Council would work together for the benefit of the citizens of East Cleveland.”
Confused Governance. Meanwhile, in Atlantic City—which has a Mayor and Council and a state appointed Emergency Manager, but which is under a state takeover, Mayor Don Guardian yesterday offered his now unofficial State of the City speech. Unsurprisingly, he listed the numerous challenges facing his city, including a state takeover and hundreds of millions of dollars in debt. Mayor Guardian also requested billionaire investor Carl Icahn to sell the abandoned Trump Taj Mahal Casino, stating the city cannot afford to allow such a critical component of its historic boardwalk to continue vacant indefinitely, deeming such inactions the “the worst of the worst” in terms of outcomes for the property—and the city’s tax rolls. The Tropicana, which was boarded up last October, not only hammered the city’s anticipated property tax revenues, but meant 3,000 people lost their jobs, and, of course, the city lost a key attraction for visitors. Mr. Icahn had shuttered it last fall in the wake of a strike by the casino’s workers’ union. Mr. Icahn, however, responded by saying he would be happy to sell the casino to the insolvent city, but only if the city made Mr. Icahn whole by paying him the $300 million he claims he had lost on his real estate gamble, adding Mayor Guardian was wrong to attack an investor who had previously rescued the city’s Tropicana casino and attempted to do the same with the Tropicana. Prior to last summer’s strike to restore health insurance and pension benefits—which had been terminated in federal bankruptcy court—and the subsequent closure, Mr. Icahn had promised to invest some $100 million into the casino—a promise never kept.
Learning to Govern in the Big D. With the retirement of former U.S. Bankruptcy Judge Steven Rhodes, who had so generously accepted the Governor’s challenge to serve as the Detroit Public School Emergency Manager, Detroit’s newly elected school board is planning a major celebration this month as it will assume control of city schools which have been under gubernatorial-appointed emergency managers for years. Moreover, with the state having creating a dual system of public and charter schools, the governing challenge for these new school board members promises to be daunting. Whom will the newly elected board select to be superintendent? Will a majority vote to file suit to prevent further school closures? How will the new board address the challenge of balancing state-created charter schools versus public schools? How can the new Board create balance so that there can be a smooth transition with long-struggling schools which will rejoin the district this summer? The seven board members who were elected by Detroit voters in November have been doing some prep learning themselves: they have devoted the last two months in an intensive orientation on Detroit schools, trying to comprehend a complicated district which now serves about 45,000 children in 97 schools—children who will be future civic leaders, but, mayhap more importantly, a school system whose reputation will be critical in determining whether young families with children will opt to move into Detroit—or leave the city.
Extraordinary Governmental Authority & Promising Insurance? In Puerto Rico, Governor Ricardo Rosselló Nevares this week signed a decree which provides him extraordinary authority, similar to those granted a governor in the wake of a natural disaster. The new executive order declares a state of emergency, with the emergency creating a “risk of accelerating capital flight from the territory, putting at risk natural resources, and risking public health and safety.” The new Governor’s actions came as the U.S. territory of Puerto Rico and some of its instrumentalities failed to make municipal bond interest payments this week, Puerto Rico’s largest municipal bond insurer, Assured Guaranty Ltd. subsidiaries, made $43 million of interest payments to holders of insured general obligation and other municipal bonds. The payments came as Puerto Rico’s infrastructure financing authority PRIFA was unable to transfer funds to its bond trustee to pay debt due New Year’s Day on certain tax-exempt bonds, according to a regulatory filing on Tuesday, further confirmation of a default by the U.S. territory. The trustee for PRIFA’s series 2005B and 2006 bonds claimed it had not received sufficient funds from PRIFA for the payment of debt, although it held a small residual amount from prior payments that it allocated to pay interest. In addition, the trustee for its series 2005 C bonds reported it did not receive funds from PRIFA to pay debt service. The territory had said last week that PRIFA would have insufficient funds to make the full payment on its special tax revenue bonds, Series 2005A-C and Series 2006; ergo, $36 million was expected not to be paid. As of midweek, the island’s largest bond insurer, Assured Guaranty Municipal Corp. and Assured Guaranty Corp. had received and processed $43 million of claim notices for missed January 1 payments, out of $44 million of total expected claims, with the expected claims including $39 million of Puerto Rico general obligation payments and $5 million for Puerto Rico Public Buildings Authority payments. In addition, on Tuesday, the Puerto Rico Electric Power Authority made the full interest payment due on its bonds insured by Assured Guaranty; thus, no insurance claims were filed. In a statement, Assured President and CEO Dominic Frederico said: “While the outgoing Puerto Rico administration has once again chosen to violate Puerto Rico’s constitution by ignoring the senior payment priority securing the Commonwealth’s general obligation bonds, we look forward to working with the new administration, PROMESA Oversight Board and other creditors to achieve consensual restructuring agreements that respect the constitutional, statutory, contractual and property rights of creditors while also supporting the island’s economic recovery…We were pleased that PREPA made its bond interest payment, and we continue to join PREPA and the other participating creditors in seeking implementation of the consensual restructuring contemplated by the PREPA restructuring support agreement.” In its release, the company wrote that any obligor where amounts were due but no claims are expected, the payments were made by the obligor from its available funds or reserves, adding that municipal bond investors owning Puerto Rico-related bonds insured by Assured Guaranty will continue to receive uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of the insurance policies.