Municipal Challenges from State Control & Preemption of Local Authority

 

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eBlog, 1/0917

Good Morning! In this a.m.’s eBlog, we consider more outcomes from the Flint drinking water crisis—outcomes which raise issues with regard to the State of Michigan’s Emergency Manager law—and accountability, before taking a run to Atlantic City, a municipality in the midst of a state takeover, and, now, apparently caught between state-mandates to reduce police capacity amid an apparent dramatic surge in public safety concerns. Finally, we note a challenge to the Municipal Securities Rulemaking Board’s so-called pay-to-play rules, under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions.

Out Like Flint. Michigan Gov. Rick Snyder Friday signed into law new state legislation mandating municipalities in the state to warn residents of dangerous lead levels in drinking water within three days’ notification by the state of contamination, marking the enactment of the first piece of legislation stemming from the Flint water crisis. Gov. Snyder described it as an “important step…This is not the last piece of legislation we should see on this. This is a good start of getting faster notification to the public when there is a water issue.” The bill, sponsored by state Rep. Sheldon Neeley (D-Flint), a former Flint council member, is aimed at strengthening water quality control in Michigan to ensure a water crisis such as Flint’s will not happen in a Michigan municipality again, or, as Rep. Neeley put it: “The water crisis in Flint has left the community and its allies reeling with a sense of urgency, and rightfully so…During this difficult time, I have valued the governor’s partnership in helping to steward legislation that will have a positive impact on the residents of Flint.” Previously, owners or operators of municipal water plants were legally required to notify customers of any noncompliance with state drinking water standards, within 30 days, according to the representative; now, under the new law, operators must issue a public advisory within three business days of notification from the Michigan Department of Environmental Quality. Such alerts may be disseminated via radio or television, notices delivered to customers or advisories posted in conspicuous areas throughout the community. The bill had been adopted unanimously in both the Michigan House and Senate. The new state law comes in the wake of criminal charges filed against more than a dozen government officials related to the Flint water crisis. Last month, the Michigan Attorney General’s Office filed criminal charges against former Flint emergency manager Darnell Earley, former emergency manager Gerald Ambrose, and two former city public works employees. Mr. Earley had served as Flint’s emergency manager from 2013-15, before going on to be named by Gov. Snyder as Emergency Manager for the Detroit Public Schools, where he resigned nearly a year ago in the face of severe criticism. Mr. Earley, who had refused to testify about his role and responsibility with regard to the Flint drinking water crisis, was subsequently charged with false pretenses, conspiracy to commit false pretenses, misconduct in office, and willful neglect of duty while in office–charges which carry up to 20 years in prison.

Recent testing of Flint water suggests lead levels have dropped, but residents in the city of roughly 100,000 residents continue to rely on bottled and filtered water for their daily needs.

A City’s Fiscal and Physical Safety. According to a review of crime data by The Press of Atlantic City, the two-decade long decline in crime in Atlantic city has not only halted, but reversed itself in 2015, according to the Press’s review of New Jersey state crime data, reporting that in 2015, crime increased in nearly every major category, including homicides, rapes, and aggravated assaults—with the homicide increase extending into last year. The city’s violent crime rate is more than 500 percent higher than the statewide average—the murder rate a thousand percent—posing a stark governing challenge as, last week, New Jersey’s Local Finance Board, which is managing the city, alerted the city’s police and fire unions that it would press drastic cuts, including reduced staffing and imposing longer shifts. The Board has the authority to hire and fire employees, authorize raises and promotions, renegotiate service and labor contracts, restructure or pay off debt, approve the municipal budget, and make changes with regard to the delivery of municipal services. The state is seeking to force a restructuring of the city’s police department, including salary reductions, higher health care benefit contributions, moving to 12-hour shifts, and a more aggressive police response to nuisance issues in neighborhoods. Nevertheless, Anthony Marino, a retired executive with the South Jersey Transportation Authority, who has studied Atlantic City’s crime figures, reports that crime statistics have been on the wane since a high in 1989 and that the trend shows Atlantic City is, for the most part, a reasonably safe city, noting that in 1977, before the city had casinos, its crime index, or the total number of the seven categories tracked by State Police, was 4,391. In 1989, it peaked at over 16,000 before declining almost annually. Nevertheless, the apparent turnaround—in addition to the state-mandated changes in the city’s police department could not only limit the city’s capacity to address the seeming turnaround, but also adversely affect tourism and assessed property values.

Paying to Play. Tennessee and Georgia Republican groups are challenging the Municipal Securities Rulemaking Board’s (MSRB) so-called pay-to-play rules under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions (the pay-to-play rule also prohibits an investment adviser from soliciting contributions for a government official or the official’s political party at the same time the adviser is providing services to the government entity for which the official works.). The two political organizations have filed the suits charging that the rules violate their First Amendment rights; in addition, they claim that the Securities and Exchange Commission (SEC) and MSRB exceeded their authority and have not demonstrated a sufficient legal interest in restricting political contributions. In response, the Campaign Legal Center, in its brief to the 6th U.S. Court of Appeals, argues the rules are important to prevent municipal advisors from engaging in pay-to-play practices—and the rules are needed to address the potential for corruption in the municipal market. The amicus brief opposes attempts by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee seeking to have the court vacate the SEC’s approval of the rule changes.

Last summer, the SEC issued notice that it intends to approve the rules proposed by the MSRB and the Financial Industry Regulatory Authority, noting it would issue orders finding that the self-regulatory organizations’ rules impose “substantially equivalent or more stringent restrictions” on municipal advisors and broker-dealers than its own pay-to-play rule. The Center’s brief notes: “Substantial campaign contributions from a municipal advisor to officeholders with control over awards of municipal advisory business are likely to give rise to quid pro quo exchanges, or at a minimum, the appearance of such exchanges…That is the premise not only of the challenged amendments, but also the underlying rule, which was upheld by the D.C. Circuit.” Under the proposed changes to the rule, municipal advisors, like dealers, are barred from engaging in municipal advisory business with a municipal issuer for two years if the firm, one of its professionals, or a political action committee controlled by either the firm or an associated professional, makes significant contributions to an issuer official who can influence the award of municipal advisory business. As proposed, the modified rule contains a de minimis provision, which allows a municipal finance professional associated with a dealer or a municipal advisor professional to make a contribution of up to $250 per election to any candidate for whom she or he can vote without triggering the two-year ban. This is not a first: there was a previous challenge to an earlier version of Rule G-37 by an Alabama bond dealer in Blount v. SEC after it was first approved for dealers in 1994—a challenge which the U.S. Court of Appeals for the D.C. Circuit rejected, noting, in its opinion, the rule had been “narrowly tailored to serve a compelling government interest.”

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