How Do State & Local Leaders Confront & Respond to Significant Population Declines?

eBlog, 04/21/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: how does it deal with the fiscal challenges—challenges also confronting cities such as Cleveland, Philadelphia, Toledo, Dayton, Baltimore, and Philadelphia—which are experiencing significant population declines? What to do with vacant lots which no longer bring in property tax revenues—but enhance criminal proclivities?  

Fiscal & Physical Municipal Balancing. While Detroit has emerged fiscally from the nation’s largest ever municipal bankruptcy, it continues to be fiscally and governmentally bedeviled by the governance challenge of such a significant population contraction—it is, after all, a city of about 132 square miles, dotting with neighborhoods which have become splotches of vacant lots and abandoned homes: post-bankrupt Detroit, with neighborhoods that have been gradually emptying out, in a physical sense, is a shadow of its former self, with a population nearly 60% smaller than it was in 1950, but with a stock of some 40,000 abandoned homes and vacant lots—space which brings in no property taxes, but can breed crime and safety costs for the city: between 1978 and 2007, Detroit lost 67% of its business establishments and 80% of its manufacturing base. This untoward, as it were, “ungrowth” has come even as the city has spent $100 million more, on average, than its revenues since 2008: Census figures inform us that more than one in three of the city’s citizens fall below the poverty level—ranking the Motor City, along with Cleveland, Dayton, Toledo, Philadelphia, and Baltimore, as cities realizing major depopulation. Thus, while downtown Detroit today is gleaming towers along a vibrant waterfront, one need not drive far from the internationally acclaimed Detroit Institute of Arts to witness neighborhoods which are nearly abandoned as residents continue to move to the suburbs. Thus, with some of the fiscal issues effectively addressed under the city’s approved plan of debt adjustment, Detroit is commencing a number of initiatives to try to address what might be deemed its physical devastation—a challenge, in some ways, more complex than its finances: How does an emptier city restore blighted neighborhoods and link the islands of neighborhoods which have been left? Or, mayhap better put: how does the city re-envision and rebuild?

Here it seems the city is focused on four key initiatives: draw new families into the city (look at Chicago and how Mayor Emanuel succeeded); convert vacant lots from crime havens to community gardens; convert vast empty spaces to urban farms; devise a strategy to fill empty store fronts; and, again as did Mayor Emanuel, create a strategy to bring back young families with children to live in the city.

Already, Detroit’s downtown core is a new world from my first visit when the National League of Cities convened its annual meeting there in the 1980’s—a time when at the front desk of the hotel I was staying, the attendant told me that even though I could see the convention site from the hotel, it would be a grave risk to life and limb to even think about taking the bus or walking—a situation unchanged on a similar day, Detroit’s very first day in chapter 9 bankruptcy, when I had proposed setting out to walk to the Governor Rick Snyder’s Detroit office to meet just-appointed Emergency Manager Kevyn Orr. Today, the revived downtown has attracted young people, often in redeveloped historic buildings; but that emerging vibrancy does not include housing options for people at different stages of life. Thus, the city is making an effort to offer more differentiated housing options, including townhouses, apartments, carriage homes and more—as well as housing for seniors. Or, as Melissa Dittmer, director of architecture and design for Bedrock LLC, the company leading the development, notes with regard to an initiative just outside of downtown: “For so long, Detroit had a low-self-confidence issue and was willing to take just about” any residential development: “Now the city of Detroit has crossed a threshold. We can do better.”

Outside of the downtown area, one sample neighborhood, Fitzgerald, today has 131 vacant houses and 242 vacant lots; but the city’s Director of Housing and Revitalization, Arthur Jemison, notes these lots need not be filled with houses; instead, the city is moving to invest more than $4 million into the neighborhood to renovate 115 homes, landscape 192 vacant lots, and create a park with a bicycle path, or, as Mr. Jemison notes: “We can’t possibly rebuild every vacant lot with new construction…What we can do is rehabilitate a whole lot of houses, and we can have an intentional landscape scene. The landscape is important, because frankly, if it’s done and managed well, it’s inexpensive and people like it.”

But the comprehensive effort also recognizes the city does not need additional housing stock: it needs less; so it has unearthed a program, RecoveryPark Farms, to construct greenhouses on a 60-acre plot, a plot which until recently represented two dozen blighted blocks on Detroit’s east side. This unique project has diverse goals: it eliminates breeding territory for crime, eliminates blight, and creates opportunities for the unemployed, especially ex-offenders and recovering addicts. The program’s CEO Gary Wozniak, who spent more than three years in federal prison, notes farming offers a career with a lower bar for hiring and gives immediate feedback because “plants grow relatively quickly, so people can start to feel really good about building skill sets. Plus, Detroit has a lot of land.” Already, its harvests are purchased by some of Detroit’s top restaurants on a year-round basis, or, as CEO Wozniak put it: “What we’re doing is commercial-scale agriculture in an urban environment.”

On Detroit’s first day of bankruptcy, the walk from my downtown hotel to the Governor’s uptown office almost seem to resemble post-war Berlin: empty, abandoned buildings and storefronts. Thus, another post-bankruptcy challenge has been how to fill the vacant storefronts along Detroit’s half-abandoned commercial corridors—and, here, a partnership between the City of Detroit and other economic-development organizations, Motor City Match, works to create links between selected landlords and new small businesses, with a goal of converting blighted commercial districts to make them both more livable and more effective at providing job opportunities for residents—or, as Michael Forsyth, Director of small-business services at the Detroit Economic Growth Corp., notes: Motor City Match “helps get businesses from ideas to open.” The program awards $500,000 in grants every quarter, assisting businesses in completing a business plan, finding a place to open, and renovating office space: its CEO, Patrick Beal, CEO of the Detroit Training Center, received $100,000 during the first round of the program and matched it with a $100,000 loan. Now, with the help of Motor City Match, the company has trained more than 5,000 Detroiters in construction, heavy-equipment operation and other skills.

Finally, again as with Mayor Emanuel, the City respects the importance of children—meaning it must focus on public safety, and schools—governance challenges of the first order, especially as we have been long-writing, the parallel financial insolvency of the Detroit public schools. Thus, Ethan Lowenstein, the Director of the Southeast Michigan Stewardship Coalition, is working with educators and local organizations in the region to help young people address environmental challenges in their communities, noting that families with children “leave because they don’t see the strength in their community and they don’t feel recognized as someone who has knowledge.” Mr. Lowenstein is seeking to reverse the city’s depopulation trend by working with the Detroit Public Schools. At two schools he works with in southwest Detroit, he says, students were on a walk around their community and noticed tires were being illegally dumped. The schools helped the students and worked with community members to identify areas with illegally dumped tires, and eventually the tires were recycled into doormats.  

In recovery from chapter 9 bankruptcy, sometimes the fiscal part can seem easy compared to the human dimension.

The Challenge of Recovering from or Averting Municipal Bankrupty

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eBlog, 03/28/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in U.S. history, before spinning the tables in Atlantic City, where the state takeover of the city has been expensive—and where the state’s own credit rating has been found wanting.

Home Team? A Detroit developer, an organization, Dominic Rand, has initiated a project “Home Team,” seeking to purchase up to up 25 square miles of property on the Motor City’s northwest side with a goal of keeping neighborhoods occupied by avoiding foreclosures and offering renters a path to homeownership. Nearly four years after the city’s chapter 9 filing for what former Emergency Manager Kevyn Orr deemed “the Olympics of restructuring,” to ensure continuity of essential services while developing a plan of debt adjustment to restructure the city’s finances—and to try to address the nearly 40 percent population decline and related abandonment of an estimated 40,000 abandoned lots and structures, as well as the loss of 67 percent of its business establishments and 80 percent of its manufacturing base, Mr. Rand reports he is excited about this initiative by an organization for purchases of homes slated for this year’s annual county tax foreclosure auction. His effort is intended to rehabilitate the homes and help tenants become homeowners. The effort seeks to end the cycle of home foreclosures due to unpaid property taxes. 

This is not the first such effort, however, so whether it will succeed or not is open to question. Officials at the United Community Housing Coalition note that previous such initiatives have failed, remembering Paramount Mortgage’s comparable effort, when the company purchased 2,000 properties, in part financed through $10 million from the Detroit police and fire pension fund—an effort which failed and, in its wake, left 90 percent of those in demolition status. Fox 2 reported that the City “does not support this proposal,” questioning its “ability to deliver on such a massive scale with no particular track record to indicate they would be successful,” adding the organization, if it wants to “start out by becoming a community partner through Detroit Land Bank and show what they can do with up to nine properties, they are welcome to do so.”

At first, the Home Team Detroit development group considered purchasing every property in Detroit subject to this year’s annual county tax foreclosure auction; instead, however, the group focused on the northwest quadrant covering 25 square miles and 24 neighborhoods—an area larger than Manhattan—with founder David Prentice noting: our “game plan is pretty simple: You are going to have a quadrant of (Detroit) with properties that are primarily occupied.” Mr. Prentice believes this initiative would address what he believes is one of Detroit’s biggest problems: halting the hemorrhaging of home foreclosures due to unpaid property taxes—an initiative one Detroit City Council member told the Detroit News was “unique and comprehensive.” Thus, city officials are reviewing the entity’s proposal—even as it reminds us of the Motor City’s ongoing home ownership challenge—a city where, still, more than 11,000 homes a year have ended in foreclosure over each of the last four years. Under the city’s process, the city warns property owners in January if their properties are at risk of tax foreclosure: as of last January, the Home Team group reports its targeted area has 11,073 properties headed for foreclosure.

Home Team is seeking approval from Detroit to purchase the properties via a “right of first refusal,” under which Mayor Mike Duggan and the Detroit City Council would have to approve the sale—and Wayne County and the State of Michigan would at least have to agree to not buy them as well, since both also have the option to buy the properties prior to such public auctions. Home Team claims it has the resources and expertise to buy the properties, rehab the homes, find new residents, and allow it to work with people traditional lenders would not consider due to poor credit ratings or because of the locations of the properties. The group claims its land contract system, or contracts for deeds, under which tenants make payments directly to the property owner and often have no ownership stake until the entire debt is paid, would work as an alternative to traditional mortgages—even as housing advocate groups such as the United Community Housing Coalition warn that land contracts are financial traps, and the nonprofit Michigan Legal Services told the Detroit News that many land contract deals are “gaming the system,” referencing a recent Detroit News story about many residents with land contracts losing out on actually getting a home—and others warning that those families sign contracts may end up owing significantly more than they would by renting, yet, at the end of such transactions, “have nothing to show for it.” (In recent years, the News reports, land contracts have outnumbered traditional mortgages in Detroit.) Mr. Prentice, while agreeing that “most land contracts are designed for the tenants to fail,” suggested his company’s land contracts would come without the high penalties, high monthly payments—payments which increase in time, and rising interest rates which have trapped unwary families in the past—and, he has vowed the company would fix up every property before putting it back on the market.

Detroit City Councilman George Cushingberry, who represents a major portion of the targeted area, told the News: “I like that it’s comprehensive and takes into account that one of the issues that prevents home ownership is financial literacy.” Yet, the ambitious proposal has also encountered neighborhood opposition: the Northwest Detroit Neighborhood Coalition has launched a petition drive to block the plan—and drawn support from eight neighborhood groups, with the Coalition issuing a statement: “We the people of northwest Detroit hereby declare our strong opposition to high-volume purchases of tax-foreclosed properties (10+ parcels) and other high-volume transfers of properties to real estate investors…Proposals like the one currently being circulated by (Home Team Detroit) do not serve the needs or interests of Detroit neighborhood residents. These bulk purchases only accelerate vacancy, blight, and further erosion of our community.” However, Melvin “Butch” Hollowell, Detroit’s Corporation Counsel, said the city opposes the effort, which would require the city to authorize a purchase agreement for the properties, noting: “The city does not support this proposal: We have a number of serious concerns, especially Home Team Detroit’s ability to deliver on such a massive scale with no particular track record to suggest they would be successful. If they want to start out by becoming a community partner through the Detroit Land Bank (Authority) and show what they can do with up to nine properties, they are welcome to do so and go from there.”

Robbery or the Cost of Municipal Fiscal Distress? The law firm of Jeffrey Chiesa, whom New Jersey Governor Chris Christie named to oversee the state takeover of Atlantic City, has billed the State of New Jersey about $287,000 for its work so far, according to multiple reports, including some $80,000 alone for Mr. Chiesa. The fiscal information came in the wake of the release by the state of invoices that showed the law firm submitted more than $207,000 in bills for the first three months of work, November through January—with some twenty-two members of the firm billing the state. In addition, Mr. Chiesa, who bills the State $400-an-hour for his time, reports he himself has billed $80,000 over that same period, noting to the Press those invoices were not included in the state’s data released last Friday, because they have yet to be fully reviewed. He added that the state has imposed “no cap” on the fees his firm may charge—leading State Assemblyman Chris A. Brown (R-Atlantic), who has been critical of the takeover, to note: “The governor handing over the city to a political insider without a transparent plan is like leaving your home without locking the door, and it looks like we just got robbed.”  The release of the data could not have come with more awkward timing, with the figures aired approximately a week after Mr. Chiesa wrote to Atlantic City police officers announcing the state was seeking to cut salaries, change benefits, and introduce longer shifts to save the city money—and as the state is calling for similar cuts and 100 layoffs in the city’s fire department—efforts in response to which Atlantic City’s police and fire unions have filed suit to prevent, with a judge last week ruling the state cannot yet move forward with the fire layoffs until he determines whether the state proposal is constitutional—even as Mr. Chiesa has defended the cuts, calling negotiations with the unions “money grabs.” For his part, at the end of last week, Mr. Chiesa defended his bills, claiming his firm helped negotiate a $72 million settlement with the Borgata casino in a long-running tax dispute with the city, gaining more than a 50 percent savings to the city from the refund it owed in the wake of tax appeals, deeming that an “important success on behalf of the city.”

Nevertheless, as S&P Global Ratings noted last week in upgrading Atlantic City’s credit rating from “CC” to “CCC,” despite assistance from the state, there is still the distinct possibility the city could still default on its debt over the next year and that filing for chapter 9 municipal bankruptcy remains an option down the line.  Nevertheless, S&P analyst Timothy Little wrote that the upgrade reflected S&P’s opinion that “the near-term likelihood” of Atlantic City defaulting on its debt has “diminished” because of the state takeover and the state’s role in brokering the Borgata Casino agreement—an upgrade which a spokesperson for the Governor described as “early signs our efforts are working, that we will successfully revitalize the Atlantic City and restore the luster of this jewel in the crown.”  However, despite the upgrade, Atlantic City still remains junk-rate, and S&P reported the city’s recovery remains “tenuous:” It has a debt payment of $675,000 due on April Fool’s Day, $1.6 million on May Day, $1.5 million on June 1st, and another $3.5 million on August 1st—all payments which S&P believes will be made on time and in full, albeit warning that more substantial debts will come due later in the year, meaning, according to S&P, that the city’s recovery remains “tenuous,” and that Atlantic City is unlikely “to have the capacity to meet its financial commitment…and that there is at least a one-in-two likelihood” of a default in the next year.” Or, as Mr. Little wrote: “Despite the state’s increased intervention, [municipal] bankruptcy remains an option for the city and, in our opinion, a consideration if timely and adequate gains are not made to improve the city’s structural imbalance.”

 

Challenges in Rebounding from Insolvency or Municipal Bankruptcy

eBlog, 02/27/17

Good Morning! In this a.m.’s eBlog, we consider new development plans for the insolvent, state-taken over Atlantic City, before turning to the post-chapter 9 municipal bankruptcy electoral challenges in Detroit—where the son of a former Mayor is challenging the current Mayor—and where the post-bankrupt city is seeking to confront its exceptional public pension obligations in a city with an upside down population imbalance of retirees to taxpayers.

Spinning the Fiscal Turnstile in Atlantic City? Since New Jersey’s Casino Reinvestment Development Authority (CRDA) developed its Tourism District master plan for Atlantic City five years ago, five casino have closed—casinos with assessed values of $11 billion. Those closures appeared to be the key fiscal destabilizers which plunged the city into near municipal bankruptcy and a state takeover. Now the Authority, which handles redevelopment projects and zoning in the Tourism District (The rest of Atlantic City is under the city’s zoning jurisdiction—albeit a city today taken over by the state, and where the Development Authority was given authority by the state over the Tourism District in 2011) has approved spending $2 million for refurbishing. Robert Mulcahy, the Chairman of the authority’s board of directors, states: “The master plan is done to streamline zoning, help eliminate red tape, encourage proper development in the appropriate district, and stimulate investment in commercial, entertainment, housing, and mixed-use properties…This provides a vision to what we want to do.” The proposed land-use regulations’ twenty-five objectives include providing a zoning scheme to stimulate development and maintain public confidence in the casino gaming industry as a unique tool of the city’s urban redevelopment. The new zones would allow for mixed use near the waterfront, and retail development around the Atlantic City Expressway and its waterfront under the state agency blueprint intended to make it easier for companies to turn old industrial buildings into commercial and waterfront areas, to build amusement rides off the Boardwalk, maybe even incentivize craft brewers and distillers to open businesses.  

CRDA Director Lance Landgraf noted: “The city last changed the zoning along the Boardwalk when casinos came in.” Similarly, Atlantic City Mayor Don Guardian, who is a CRDA board member, noted: “If we talked 10 years ago about the Southeast Inlet, I think most people saw it as a Miami Beach with a bunch of high-rises that would go from Revel to Brigantine Inlet…Times have changed. People are now looking for mixed-use type of things, which is certainly what is important.” According to the proposed plan, the new tourism district would be intended to maximize recreational and entertainment opportunities, including the growing craft beer trend. Smaller breweries and distilleries have expressed interest in operating in the city, according to the draft plan, which notes it “seeks to reinvigorate the Atlantic City experience by enhancing the Boardwalk, beach and nearby streets through extensive entertainment and event programming; creating an improved street-level experience on major thoroughfares; offering new and dynamic retail offerings and increasing cleanliness and safety.”

Post Chapter 9 Leadership.  Coleman Young II, a state Senator in Michigan representing Detroit, sitting beneath a photograph of his late father and former Detroit Mayor Coleman Young, has officially launched his challenge against current Detroit Mayor Mike Duggan, claiming the Motor City needs a leader who focuses on helping residents who are struggling with unemployment and other hardships, and criticizing Mayor Duggan for what he called a lack of attention to Detroit’s neighborhoods, noting: “We need change, and that is why I am running for mayor: I will do whatever it takes—blood, sweat, tears, and toil—and I will fight to the very end to make sure that justice is done for the City of Detroit…In announcing his challenge, Sen. Young recalled his father’s focus on jobs when he served as Detroit’s first black mayor: “I want to put people back to work just like my father, the honorable Coleman Alexander Young did…He is turning over in his grave right now!”

Interestingly, Sen. Young’s challenge came just days after last week’s formal State of the City address by Mayor Duggan—an address in which he focused on putting Detroiters to work and investing in neighborhoods—announcing a new city program, Detroit at Work, which is focused on training Detroit residents for available jobs—a speech which candidate Young, in his speech, deemed a “joke,” stating: “I think it’s kind of funny he waits for four years and now starts talking about the neighborhoods…As far as I’m concerned, he’s just somebody that’s in the way and needs to go. It’s time for change. It’s time for reform.” (Detroit’s primary will be in August; the election is Nov. 7th.)

Rebound? Whomever is elected next November in Detroit will confront lingering challenges from Detroit’s largest municipal bankruptcy in U.S. history. That July 19th filing in 2013, which then Emergency Manager Kevyn Orr described  as “the Olympics of restructuring,” had been critical to ensuring continuity of essential services and critical to rebuilding an economy for the city—an economy besieged after decades of population decline (dropping from 1,849,568 in 1951 to 713,777 by 2010), leaving the city to confront an estimated 40,000 abandoned lots and structures and the loss of 67 percent of its business establishments and 80 percent of its manufacturing base. The city had spent $100 million more, on average, than its revenues since 2008. According to the census, 36 percent of its citizens were below the poverty level, and, the year prior to the city’s bankruptcy filing, Detroit reported the highest violent crime rate for any U.S. city with a population over 200,000. Thus, as the city’s first post-bankruptcy Mayor, Mayor Duggan has faced a city with vast abandoned properties.

Interestingly, Steve Tobocman, the Director of Global Detroit, an economic-development nonprofit which focuses on maximizing the potential of immigrants and the international community, said that enacting municipal policies which welcome foreign-born residents could be a critical strategy to reverse the population loss: “No American city has been able to rebound from population loss without getting serious about immigration growth…In 1980, 29 of the 50 largest cities lost population. Most of the cities that lost population have since reversed course due to an influx of immigrants. No American city has been able to rebound from population loss without getting serious about immigration growth.” Now that avenue could be closing with President Trump’s efforts to curtail immigration, especially from Mexico and the Middle East, leading Mr. Tobocman to note he had no reason to anticipate any help from Washington, D.C. in helping rebuild Detroit’s population, or energizing its economy, with immigrants. Rather, he warns, he is apprehensive that other policy promises, particularly the proposed border wall with Mexico, actively threaten Michigan’s economy: “Mexico is our second-largest trading partner after Canada…Metro Detroit is the largest metro area trading with Mexico. One hundred thousand jobs are supported by our trade with Mexico.”

Upside Down Fiscal Challenge. A key challenge to Detroit, because of the inverted fiscal pyramid creating by its population decline, is there are far fewer paying into to Detroit’s public pension system, against far more receiving post-retirement pensions, sort of an upside down fiscal dilemma—and one which, increasingly, confronts the city’s fiscal future. Now Mayor (and Candidate) Duggan has announced a plan he believes will help Detroit to city meet its 2024 balloon payment on its public pension obligation, or, as Detroit Chief Financial Officer John Hill puts it, a plan designed to be more than adequate to address the looming future payment of more than $100 million owed beginning in 2024: “What the mayor is proposing is that we take money now and put into a pension protection fund and then use that money in 2024 and beyond to help make some of those payments: So part of the money would come from the budget, and the other would come from the fund,” describing the provisions in Detroit’s plan of debt adjustment for down payments to the city’s pension obligation in Mayor Duggan’s $1 billion general fund budget for the 2017-18 fiscal year the Mayor presented to the Detroit City Council at the end of last week. Mr. Hill said that the payment plan would give the city budget longer to catch up to the $132 million it would have to pay going forward, describing it as “really a way for us to proactively address the future pension obligation payment and not wait to deal with it down the road.”

However, there appears to be a fiscal fly in the ointment: last year, in his 2016 State of the City speech, Mayor Duggan said that consultants who advised the city through its chapter 9 municipal bankruptcy had miscalculated the city’s pension deficit by $490 million—actuarial estimates at the time which projected a payment of $111 million in 2024—a figure subsequently increased by the actuary to $194.4 million—leading Mayor Duggan to assert that the payment had been “concealed” from him by former Detroit emergency manager Kevyn Orr during the city’s bankruptcy, with, according to the Mayor, Mr. Orr’s team using overly optimistic assumptions which made Detroit’s future pension payout obligations appear artificially low. The revised estimates have since forced the city to address the large future payment, beginning in FY2016, when the city set aside $20 million and another $10 million to start its pension trust fund, with the payment coming in addition to the $20 million contribution to the legacy plans the city is mandated to make under Detroit’s plan of debt adjustment. Now Mayor Duggan is proposing Detroit set aside an additional $50 million from a general fund surplus and another $10 million into the trust fund this year: the city projects it will have $90 million in the trust at the end of FY2017. In the following fiscal years, the city is proposing to add another $15 million to the fund, $20 million in FY2019, $45 million in FY2020, $50 million in FY2021, $55 million in FY2022, and $60 million for FY2023. Or, as Detroit Finance Director John Naglick describes it: “All total, we propose that the City would deposit $335 million into the trust fund through the end of FY23, with interest, the fund is projected to grow to $377 million.” Mr. Naglick adds that Detroit expects that the general fund would be required to contribute a total of $143.2 million beginning in FY2024: “We propose to make that payment by pulling $78.5 million out of the trust and appropriating $64.7 million from the general fund that year.” CFO Hill noted that by addressing the 2024 obligation payment with the plan, Detroit would remain on track to exit state oversight as projected, stating: “We believe that after we have executed three balanced budgets and met a number of other requirements that the Detroit Review Commission could vote to waive their oversight…We believe that one of the factors that they are going to want to see to support that waiver is that we have proactively dealt with the pension obligations in 2024.” There could, however, be a flaw in the ointment: Mayor Duggan warned last week that Detroit may decide to sue Mr. Orr’s law firm, Jones Day, if the city finds that Mr. Orr had an obligation to keep the city informed on the pension payments.

Governance Insolvency?

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eBlog, 1/0617

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.

The Challenges of Fiscal Disparities

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eBlog, 12/29/16

Good Morning! In this a.m.’s eBlog, we consider Detroit’s ongoing challenges to recovery from the nation’s largest ever municipal bankruptcy—a city unbailed out by the federal government, but which, as we noted earlier this week, Detroit News editorial writer Daniel Howes described as “perceptively changing,” especially as we write this rainy morning with regard to its thousands of abandoned homes and buildings. Then we turn to Virginia’s Petersburg, the historic city which danced on the edge of municipal bankruptcy—threatening the solvency of regional public utilities—as it faces challenges to its future. Finally, we look at the newly released census figures to better grasp the scope of fiscal disparities in the State of Ohio—especially with regard to the fiscally depleted municipality of East Cleveland.

Unbuilding & Rebuilding a City’s Future. In the final week of the year, Detroit neared the razing of an industrial building which once covered an entire city block—marking the razing of some 3,130 structures razed this year, bringing the total razed since the city emerged from chapter 9 bankruptcy to around 10,700 over the last three years—with the vast bulk of those owned by Detroit’s Land Bank Authority. Nevertheless, giving some idea of the vast scope of the city’s challenge, its blight task force in 2014 had projected that the city would need to tear down 40,000—and that some 38,000 others were at risk of collapse. Indeed, still today, many blocks in the city have more abandoned houses and empty lots than lived-in homes, a scar reminding us of the exodus of whites and much of the black middle class from the city: an exodus of more than half the city’s population since the 1950’s. In 1950, there were 1,849,568 people in Detroit, but, by 2010, there were 713,777. The city today is home to an estimated 40,000 abandoned lots and structures. Between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base. Thus, as Detroit Mayor Mike Duggan has stated, he believes the mass demolitions are necessary for Detroit if it is to attract families to city neighborhoods and staunch the decades of population loss.

Detroit Fire Investigations Division Capt. Winston Farrow adds that the removal of dangerous buildings and empty houses is vital to public safety and the quality of life in Detroit: “It eliminates the opportunities for criminals to set fires in vacant houses…The problem was more just the sheer numbers of dwellings that we had.” In another sign that the strategy is working, the average sale prices of over 100 houses sold in Detroit has increased over the past three years, according to the Land Bank.

Nevertheless, the challenge to the city’s future remains: the Detroit News quoted the owner of 3D Wrecking, Sheila Davenport: “You can tear down a house on one block and go back several months later and where houses were occupied (they) are now abandoned and need to be demolished…It just seems like it never ends.” And, of course, it is a costly process; on average, the city expends $12,616 to knock down a house—a process made fiscally easier through the receipt of more than $128 million in federal funds over the past three years—with another $130 million in the pipeline—along with $40 million from the city’s general fund set aside for further demolitions. (Federal funding had been temporarily halted earlier this year, but resumed after an audit determined demolition costs above a federal cap of $25,000 per house were redistributed to 350 other properties to have those houses appear to meet the cap.)

Syncopating Time. Notwithstanding the cold rain falling in Petersburg this morning, work has finally commenced to restore one of the city’s highest-profile landmarks after months of delay caused by the city’s budget crisis—with the construction to repair a nearly 180-year-old clock tower and roof, a $1.2 million project financed by the Virginia Resource Authority—financed, according to a city spokesperson who stated the VRA municipal bond was “approved prior to the financial crisis.” The work—to properly coordinate the clocks on the clock tower, had been deferred last year when the city discovered its fiscal cupboards were bare—even as city officials had been ordered to close the building two years because of structural problems with the historic edifice—during which time Circuit Court jury trials were temporarily moved to the Dinwiddie County Circuit Courthouse. But it is now in a different courthouse where the U.S. Fourth Circuit Court of Appeals is weighing a lawsuit over a Petersburg Bureau of Police policy concerning social media which could result in a finding that would cost the fiscally challenged municipality millions of dollars after a federal court ruled that a lower court must decide whether the city government can be held liable for damages in the case. In its ruling, the court determined that the police department’s social media policy, put in place in 2013, violated employees’ First Amendment free speech rights. Moreover, the federal judges ordered the case be sent back to U.S. District Court in Richmond to determine whether “the city may also be held liable for the injuries that were caused by the applications of that policy.” The case arose two years ago last March, when two former Petersburg police officers claimed they were unjustly punished for posting comments on Facebook which criticized the department for promoting officers they considered too inexperienced. Their comments were reported to former Police Chief John I. Dixon III. The two officers were found to have violated a policy that Chief Dixon had instituted in April of 2013—a policy which prohibited department employees from giving out information “that would tend to discredit or reflect unfavorably upon the [department] or any other City of Petersburg department or its employees,” according to the appeals court opinion. The two officers were reprimanded and placed on probation—ergo, because they were on probation, they were barred from taking a test to qualify for promotion to sergeant. In addition, the officers had also been investigated over allegations of misconduct, which they claimed were filed in retaliation after the police department learned of their intent to file suit. The appeals court, however, has upheld the district court’s ruling that those investigations were not retaliatory, because “each arose from discrete allegations of misconduct” not related to the Facebook postings or the social media policy. For a municipality on the edge of chapter 9, the stakes on this appeal are high: the two officers are seeking compensatory damages of $2 million, plus punitive damages amounting to $350,000, plus attorney fees.

Ohio Fiscal Disparities. It was a generation ago that Congress eliminated the General Revenue Sharing program signed into law by former President Richard Nixon to address signal fiscal disparities. Today, it is possible to see how significant those disparities are becoming. According to the latest estimates available from the U.S. Census Bureau, median family incomes in Ohio cities range from $221,148 in the Columbus suburb of New Albany to $30,411 in East Cleveland, the city unbalanced between its waiting for Godot efforts to file for chapter 9 municipal bankruptcy or a response to its efforts to become part of the City of Cleveland. The new Census figures make clear the extraordinary fiscal disparities in the state: after New Albany, the rest of the top five in Ohio are: Indian Hill near Cincinnati ($208,158), the Cleveland suburb of Pepper Pike ($162,292), and two Columbus suburbs: Powell at ($147,344) and Dublin ($139,860). The statistics are from surveys conducted from 2011 through 2015 and released this month—the latest estimates available from the U.S. Census Bureau for smaller areas.

Muhnicipal Bankruptcy in the Home Stretch

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eBlog, 11/18/16

Good Morning! In this a.m.’s eBlog, we consider San Bernardino’s home stretch to emerging from the nation’s longest-ever chapter 9 municipal bankruptcy—and guidance by U.S. Bankruptcy Judge Meredith Jury to steps the city might consider to avoid its emergence early next year from being appealed—a la Jefferson County, Alabama. Indeed, we then visit Jefferson County, where it appears the County’s elected leaders appear on the verge of finally getting their day in court with regard to the appeal related to the county’s plan of debt adjustment. From thence, we observe the political waves rolling ashore where Donald Trump’s bankrupt casinos grace Atlantic City’s beaches—and where the New Jersey League of Municipalities featured Gov. Chris Christie in town and some more discussion of the evolving state takeover of Atlantic City by what Mayor Don Guardian deemed the “occupation force.” We consider the role of the state and mechanisms for a state takeover—as well as the options for the municipality. Finally, we journey back to Detroit where a federal investigation is underway with regard to the city’s unique and innovative demolition program: The challenge for a city in which in 1950, there were 1,849,568 people, but, by 2010, only 713,777, ergo, at the time of its chapter 9 filing, a city home to an estimated 40,000 abandoned lots and structures: Between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base. In its efforts to address the issue, Detroit undertook extraordinary measures to address vast tracts of abandoned homes—nests of crime—but maybe triggering a federal investigation.

The Last Hurdle? U.S. Bankruptcy Judge Meredith Jury this week has ordered San Bernardino officials into mediation with one of the municipality’s few creditors still challenging the city’s chapter 9 plan of debt adjustment, writing that she is weeks away from the “final confirmation hearing” of what has been the longest chapter 9 municipal bankruptcy in history. Judge Jury added she had been prepared to make a ruling on some of the issues still blocking her ability to confirm San Bernardino’s plan, more than fifty-one months after the city filed with the U.S. Bankruptcy Court. Judge Jury made clear she now intends to rule on December 6th on both issues raised by one creditor, the Big Independent Cities Excess Pool (BICEP), as well as on other remaining issues, noting, efficiently, that that ought to prevent the mediations from prolonging what is already the record holder for the longest municipal bankruptcy in the nation’s history. Moreover, Judge Jury noted, the mediation could save time, in no small part by preventing an appeal—an outcome with which Jefferson County, Alabama leaders would surely agree. As Judge Jury noted: “This really doesn’t slow down the process, and it might, over the years, if you reach a mediated solution, speed things up.” Judge Jury added that the confirmation hearing would be labeled on the calendar as final, which, while not a 100 percent guarantee it would be the final, does offer hope it shall, writing: “I’m not requesting anything from the city, except to come prepared to potentially put a bow on this case on the 6th – but potentially not.” The mediation in question commences today in Reno, Nevada with retired U.S. Bankruptcy Judge Gregg Zive. (San Bernardino and creditors have noted with respect Judge Zive’s previous mediation sessions as having been key to brokering major settlements as part of the city’s chapter 9 case, including the resolution with the city’s largest creditor, CalPERS. Nonetheless, the proposed mediation has both sides publicly discounting its chances of success: San Bernardino’s attorney, Paul Glassman, noted: “BICEP could have sought mediation six months ago, but instead placed the legal dispute before the court and pressed to block confirmation of the plan unless it got its way…Caving in to BICEP’s intransigence and efforts at delay is not in the best interests of the City’s creditors. It’s too late for mediation.” (BICEP is a risk-sharing pool of large Southern California cities for claims against any of the member cities, and its disputes with San Bernardino involve whether the city or BICEP is responsible for claims of more than $1 million.) Providing an idea of how complex the challenge of extricating one’s municipality from chapter 9 municipal bankruptcy can be, the BICEP issue is related to another outstanding issue in this record-length, complicated chapter 9 case: objections from the group referred to in court as the civil rights creditors. Juries previously awarded those creditors compensation for their claims, such as the $7.7 million awarded to Paul Triplett after a jury found San Bernardino police in 2006 broke Mr. Triplett’s jaw, arm, ribs, leg, ankle, and foot, leaving him comatose for three days. Under the city’s proposed plan of debt adjustment, because these creditors are in the unsecured class, the pending plan of debt adjustment would pay 1 percent or $77,000, in Mr. Triplett’s case. Nevertheless, Judge Jury, in a previous hearing, noted that while she sympathized with Mr. Triplett, she saw no legal reason to argue he did not belong in the unsecured class of creditors, 95 percent of whom voted in favor of the city’s plan of debt adjustment. That would mean any avenue of relief would be for the challenge to demonstrate that experts the city hired were wrong when they argued, with extensive documentation, that San Bernardino could not afford to pay more than 1 percent to its unsecured creditors. However, Judge Jury this week noted that those creditors’ interest now aligned with the city in its battle with BICEP, and that they could attend the mediation in Reno. On a high note, from the city’s perspective, Judge Jury also rejected the proposal by another of the challenging civil rights attorneys, Richard Herman, that the plan be modified in light of the possible “financial bonanza” recently legalized marijuana would bring: Judge Jury said the amount of those revenues would not be known for years, and she was unwilling to delay the case that long, especially when city services were underfunded in many other ways.

An Appealing Route to Full Recovery? Jefferson County Commission President Jimmie Stephens yesterday noted: “I am delighted that our case is now set and that we will have our day in court,” referring to yesterday’s announcement that the 11th U.S. Circuit Court of Appeals has scheduled oral arguments on the appeal of Jefferson County’s chapter municipal bankruptcy plan. The court set December 16th as the date—albeit, this marks the eighth time the court has set a date, so that whether this will finally prove to be the date which could offer the final exit from the county’s municipal bankruptcy remains incompletely certain. It has now been nearly three years since Jefferson County filed with the court an adjustment to its post-chapter 9 filing to adjust debt primarily related to it sewer system obligations (the county had exited its chapter 9 bankruptcy in the wake of issuing some $1.8 billion in sewer refunding warrants to write down $1.4 billion of the sewer system’s debt.) As structured, the agreement incorporates a security provision for the county’s municipal bondholders to allow investors to return to federal bankruptcy court should County Commissioners fail to comply with their promise to enact sewer system rates that will support the 40-year warrants. It was that commitment which provoked a group of sewer ratepayers—a group which includes local elected officials and residents—to challenge the constitutionality of the provision. Ergo, they filed their appeal to Jefferson County’s plan of debt adjustment in January of 2014 with the U.S. District Court in the Northern District of Alabama. Jefferson County has argued that the U.S. Bankruptcy court oversight has been a key security feature to give investors in its bonds reason to purchase its 2013 warrants, and that the ratepayers’ appeal became moot when the chapter 9 plan of adjustment was implemented with the sale of new debt; however, U.S. District Court Judge Sharon Blackburn two years ago opined in the opposite, writing that she could consider whether portions of the County’s plan are constitutional, including the element allowing the federal bankruptcy court to retain oversight. It is Judge Blackburn’s decision that the County has appealed; and it is Jefferson County President Stephens who notes: “I am very confident that the facts and prevailing law support Jefferson County’s position.”

What Does a State Takeover of a City Mean? Atlantic City convened its first City Council meeting since the state officially took the municipality over earlier this week—and since it appeared to be clear that Gov. Chris Christie will not become a member of President-elect Donald Trump’s cabinet—so that the state’s unpopular Governor was himself in Atlantic City for the annual meeting of the New Jersey State League of Municipalities—indeed, where six mayors representing urban areas gathered at the conference to discuss what they would like to see in a new governor and how he or she can help people who are living and struggling in cities across the state—but where, as one writer noted, the elephant in the room, and throughout the entire conference, has been the state’s decision to take over Atlantic City’s government. Indeed, Mayor Don Guardian addressed that and other issues during a speech at The Governor’s Race and the Urban Agenda seminar, noting: “We need a governor that won’t take over Atlantic City, but rather one that will lend us a helping hand,” adding: “I talk to 10 business leaders and developers every single week, and all they tell me is they can’t afford to do business in New Jersey.” Mayor Albert Kelly, of Bridgeton, said he’s frustrated because he feels towns like his get forgotten with the current administration. He said Bridgeton has lost state funding for various programs: “Because we’re a smaller town in New Jersey, we often get overlooked.”

As for the city itself, Mayor Guardian, speaking to his colleagues from around the state, noted, referring to the state takeover: “They can use all of the power, they can use some of the power, and in a very shocking instance, they can use none of the power…This is uncharted territory in our city.” He noted this unrestricted power means any of the items named in the so-called state takeover act enacted earlier this year, including breaking union contracts, vetoing any public-body agenda, and selling city assets. Atlantic City’s state takeover leader, former New Jersey Attorney General and U.S. Senator Jeffrey Chiesa, was in Atlantic City, where he noted he had impressed upon himself the importance of making himself known to the city and the City Council. Earlier in the week, during a radio interview, Governor Christie had lauded Mr. Chiesa as “someone who has provided extraordinary service to the state” and is now determined to revive one of New Jersey’s most iconic cities, adding: “More importantly than that, he’s an outstanding person who cares about getting Atlantic City back on track and working with the people of Atlantic City and the leaders of Atlantic City to get the hard things done. Because if we make the difficult decisions now and do the difficult things, there is no limit to Atlantic City’s future.”

Under the terms of the state takeover, Mr. Chiesa is granted vast power in the city for up to five years, including the ability to break union contracts, hire and fire workers, and sell city assets and more. In his first session with Mayor Don Guardian and members of the city council, Mr. Chiesa noted he had “a chance to listen to (the mayor’s) concerns” and looks forward to gathering more information “so we can make decisions in the city’s best interest,” adding he did not know what his first decisions would be. Atlantic City Councilman Kaleem Shabazz said after the meeting he remains optimistic the city and state can still work together to pull the resort back on its feet: “I’m taking (Chiesa) at his word, what he said he wanted to do, which is work in cooperation with the city.”

With Gov. Christie in Atlantic City yesterday for the League meeting, the Mayor preceded Gov. Christie in speaking to the session, and later sat to the Governor’s right; however, the two avoided any takeover talk at the annual conference luncheon at Sheraton Atlantic City Convention Hotel: that is, the elephant in the room of greatest interest to every elected municipal leader in the room went unaddressed. Or, as Mayor Guardian put it: “Obviously, I was surprised he did not.” Instead of Atlantic City, Gov. Christie discussed his possible future in a Donald Trump White House and defended raising the gas tax to fund road and bridge projects. For his part, the Mayor, in what was described as a fiery speech at an urban mayors’ roundtable discussion, said he needed a new governor with heart, brains and courage—and one who “won’t take over Atlantic City, but rather one that will lend us a helping hand.” New Jersey Senate President Steve Sweeney, who introduced the so-called takeover law, was also a guest at the conference: he noted that, in retrospect, Atlantic City officials would have been better advised to have provided a draft recovery plan to the state much sooner, rather than wait until just before the deadline, adding: “You hope that we can move forward and find a way to put this city back together in a place where the taxpayers can afford it.”

Fiscal Demolition Threat? The U.S. Attorney’s Office yesterday ordered FBI agents to acquire documents yesterday from the Detroit Land Bank Authority, an authority which is under federal criminal investigation relating to Detroit’s demolition program, albeit the office clarified it was a “scheduled visit to provide records, not a raid.” Ironically, the raid occurred in a building owned by Wayne County, which had received a courtesy call from building security that the FBI was present inside the building. The FBI actions relate to a federal investigation related to the city’s federally funded demolition program, which has been under review since last year when questions were raised about its costs and bidding practices. The raid comes just a month after Mayor Mike Duggan revealed that U.S. Treasury had prohibited the use of federal Hardest Hit Funds for demolitions for two months beginning last August in the wake of an investigation conducted by the Michigan Homeowner Assistance Nonprofit Housing Corp., in conjunction with Michigan State Housing Development Authority, which turned up questions with regard to “certain prior transactions” and indicated specific controls needed to be strengthened. In addition, a separate independent audit commissioned last summer by the land bank revealed excessive demolition costs were hidden by spreading them over hundreds of properties so it appeared no demolition exceeded cost limits set by the state—turning up mistakes over a nine month period between June 2015 and February, including inadequate record keeping, bid mistakes, and about $1 million improperly billed to the state. Mayor Duggan has admitted the program has had “mistakes” and “errors.” That admission came after the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, sent the city a federal subpoena for records.

Auditor General Mark Lockridge acknowledged his office received the federal subpoena after it released preliminary findings from a months-long audit into the city’s demolition activities. The federal subpoena was seeking documents supporting the preliminary audit; now a Wayne County Circuit judge next month is expected to revisit a battle over the release of the subpoena the land bank received from SIGTARP, after Judge David Allen had, last August, ruled the subpoena could stay secret for the time, albeit he believed it ultimately was “the public’s business.” Judge Allen has scheduled an update on the stage of the investigation during a hearing slated for Pearl Harbor Day. In addition, Detroit’s Office of Inspector General is also conducting a review of an aspect of the program.

The city has taken down more than 10,600 blighted homes since 2014.

Cities’ Battles for Recovery

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eBlog, 10/27/16

Good Morning! In this a.m.’s eBlog, we consider the first reactions in the New Jersey General Assembly to Atlantic City’s recovery plan—will it suffice to avert a state takeover? Then we venture west to the challenges Detroit continues to meet as it is pressed to justify its efforts to raze thousands upon thousands of abandoned properties; before turning back east to the famous Civil War municipality of Petersburg, Virginia—a city in the midst of an unelected takeover in another last stand to determine its fiscal future.

Saving Atlantic City. At a hearing yesterday before the New Jersey Assembly’s Judiciary Committee, Atlantic City officials presented their fiscal recovery plan—a plan to which the response appeared receptive, albeit questions arose with regard to key proposed provisions. Mayor Don Guardian and Council President Marty Small proposed the plan as a sensible alternative to a state takeover, which would occur if the state Department of Community Affairs (DCA) rejects the plan. The Department has until Tuesday to make a decision. Thus, in urging approval, Mayor Guardian testified: “It’s not necessary. Why would you burden the rest of the state when we’re telling you we want to be fiscally responsible, and we understand there is going to be continued state supervision?” Mayor Guardian added that Atlantic City would be the least desirable municipality for the state to take over, and that it would cost state taxpayers millions of dollars. Council President Small said the city’s proposal is the only plan to save the city, which has about $500 million in debt and $100 million annual budget deficits. He mentioned previous state summits and reports on the city’s finances, but said there is a “big difference between a report and a plan,” noting: “This is the only plan…Even on Tuesday, if we get a result none of us sitting across here want, and they take the city of Atlantic City over, this is the only playbook the state could run to make it work.”

In response, Assemblyman Chris Brown (R-Atlantic) and Assemblyman Vince Mazzeo (D-Atlantic), members of the House Judiciary Committee, asked one of the city’s legal advisers how the plan would impact Atlantic County taxpayers and about proposed savings from the city’s early retirement buyouts and new medical plan, with Assemblyman Brown noting: “After 30 years without any fiscal discipline or a transparent plan from the state, Mayor Guardian and Council President Small’s bipartisan plan is a step in the right direction,” adding the proposed plan would reduce spending, but not increase taxes and keep the city’s assets “out of the hands of outside special interests.”  Assemblyman Mazzeo called the plan “viable;” he said he hopes it can be accepted. He credited the so-called takeover law, which he sponsored, for forcing the city to draft the plan, noting: “I think the big question is about the Municipal Utilities Authority right now…I think that Atlantic City did their job. They got to the goal line. It’s up to the DCA to get them across the line now.” He added it would be a “travesty” if the DCA does not approve the city’s plan, and noted the state can take over later if the city doesn’t follow the plan: “Atlantic City and their consultants put forth a plan that fell right within the spirit of the legislation…Why would we look to take over and take on half a billion dollars in debt?”

However, Assembly Majority Leader Louis Greenwald (D-Camden) expressed apprehensions that the proposed capital sale of the municipal airfield, Bader Field, to the city’s water authority may not be legal—the proposed sale is regarded as the key to the plan, as it would generate $110 million to pay down Atlantic City’s debt. However, the Majority Leader noted it is unclear if state law would allow the authority, which provides the city’s drinking water, to buy the 143-acre former airstrip, noting the legislature might have to amend New Jersey’s law for the sale to take place: “There seems to be some dispute as to whether or not it is an appropriate authority of the Municipal Utilities Authority to be able to buy land.” In response, one of the city’s financial advisers testified that New Jersey law allows authorities to purchase land “necessary or useful and convenient” for their purposes, adding that “one of their purposes is they have visions of using it for alternative energy to power the system…Those are all part of the purposes for expanding.”

On a second issue, in the wake of the Borgata Hotel Casino & Spa’s denial Tuesday that it had agreed to the settlement included in Atlantic City’s plan for $103 million related to tax refunds the city owes the casino (the casino was owed $150 million in tax refunds and has withheld $23 million in property taxes this year to offset the refunds—the casino would withhold another $8 million tax payment this year, under the plan), Assemblyman John McKeon (D-Essex), asked if the city had any assurances Borgata would accept the settlement. In response, the city’s financial adviser testified: “They’ve come to an agreement. Borgata was unwilling to sign the document until the financial plan was approved. All we have today is the word of the representatives from Borgata, and my partner has had numerous conversations with them and he is confident that they were honest.”

Demolition Derby? Detroit, which when it filed for the largest municipal bankruptcy in American history, was home to an estimated 40,000 abandoned lots and structures; ergo demolition of the bulk was a critical part of the city’s bankruptcy plan of debt adjustment—and key to restoring public health and safety. But now a Michigan state investigation, which prompted a recent two-month suspension of the city’s demolition program in the wake of an audit that commenced a year ago related to questionable low bids being passed over for higher ones and lax documentation, has forced Mayor Mike Duggan to defend it before the Detroit City Council—especially with regard to revelations that demolition costs had increased more than 60%. Thus, Mayor Duggan explained that higher standards to protect the environment created more work, which, ergo, drove up prices, telling the Council: “To suggest these costs went up because we’re doing something wrong, I don’t believe is true,” earlier this month—the day before the Michigan State Housing Development Authority (HDA), which oversees federal funding for the city’s demolition program, dispatched staff to the city for an audit—an audit which appears to have figured into the suspension by the U.S. Treasury of the city’s demolition program funded through the federal Hardest Hit Fund. Those contributions have, to date, financed nearly three-quarters of the more than 10,600 demolitions in Detroit since Mayor Duggan took office. According to the state inspection, the city’s program provide: inconsistent bid scoring, incomplete documentation, and a system that routinely awarded demolition contracts to companies which did not have the lowest bid, noting in the summary of its findings that while the “DLB (Detroit Land Bank) must document and explain deviations of 30% or more of the bid selected compared to the lowest bid…“One bid that was reviewed had a deviation of $828,571, or 46%, from the winning bid compared to the lowest bid.” Notwithstanding those flaws, the HDA had already released millions of federal dollars to reimburse the Detroit Land Bank Authority for demolitions its contractors performed: HDA authority Executive Director Kevin Elsenheimer concluded that “the review did not find any glaring or significant problems,” according to a memo he wrote a year ago, just 12 days after the audit began. Late last April, however, a federal criminal investigation into the program was made public. In addition, the HDA and Detroit’s Auditor General’s Office are investigating Detroit’s demolition activities. Thus, the federal Special Inspector General for the Troubled Asset Relief Program (TARP), the law enforcement agency known as SIGTARP, has been leading the criminal investigation. The federal agency is a watchdog for TARP spending, including the funds that pay for Detroit’s demolition program.

The completion of that investigation last week opened the way for resumption of the program and the release of $42 million from the Hardest Hit Fund, funds which had been previously earmarked for Detroit, but held back during the suspension. (Altogether, Detroit has been allocated more than $250 million from the fund.) Mayor Duggan said at a news conference last week that he was disappointed in some of the things he learned from the investigation, but that he had seen no sign of criminal activity, noting: “The speed at which we went outstripped the controls that we had in place.” In fact, the HDA’s audit last October identified several issues the Detroit Land Bank was expected to correct: In reviewing the first round of federal funding, which amounted to about $50 million, the housing authority found that 40 out of 59 low bids reviewed were not awarded contracts. In many instances, when the low bidder was not selected, that audit found, Detroit demolition officials decided the company did not have the “capacity” for the job—apparently referencing inadequate resources to complete the work on time. However, the authority found that this rationale was not always applied in a way that made sense: “For example, the bid package was for 16 properties, and the scoring committee gave points based on the contractor indicating they can demo 40; therefore they gave that bidder more points…” The premium Detroit officials placed with regard to a company’s ability to work fast resulted in the majority of contracts being awarded to larger companies: two of those, for instance, according to the audit, received 53% of the first $116 million in demolition contracts reimbursed with federal dollars according to a Detroit Free Press analysis. Unsurprisingly, the housing authority requested that the Detroit Land Bank respond to the audit by late November of last year. A housing authority spokesperson, citing the agency’s ongoing investigation, declined to answer questions from the Free Press about exactly what problems led to the suspension of demolition activities in Detroit.

The Battle for Petersburg. 252 years ago, Robert E. Lee noted: “Thus, after thirty days of marching, starving, fighting, and with a loss of more than sixty thousand men, General Grant reached the James River, near Petersburg, which he could have done at any time he so desired without the loss of a single man. The baffling of our determined foe so successfully raised the spirits of our rank and file, and their confidence in the commander knew no bounds.”  Today, there is no such confidence in the historic city as a consulting team has reportedly been awarded a $300,000 contract for six months by the insolvent municipality. A team from the Robert Bobb Group arrived at City Hall Tuesday morning and immediately ordered Acting City Manager Dironna Moore Belton back to her previous position as general manager of Petersburg Area Transit, replacing her in the top position with retired U.S. Marine Corps colonel Tom L. Tyrrell, who, since his retirement, has served in a number of state and local government roles and as an executive for several nonprofit groups. Col. Tyrrell, who is also the founder and CEO of a Connecticut-based financial services company, Via Novus Financial, said he previously worked with the Robert Bobb Group when he was chief operating officer of the Chicago Public School system in Chicago, where between 2012 to 2015, he oversaw the closure of almost 50 schools and saving the school system a total of more than $700 million—and where, reportedly, his annual salary was $180,000, according to media reports. Col. Tyrrell noted: “I’m going to find out more,” as he began meeting Tuesday with all the city’s department heads.

In response to the query whether he was familiar with the turnaround plan the city has been following since August, a plan put together by experts from the Virginia Department of Finance and two financial advisory firms, Col. Tyrrell noted: “You can read about things in the press, but until you get on the ground you don’t have a complete picture…Our philosophy basically is to look at everybody’s input, take the best ideas, and leave the city with a viable plan for a viable future,” adding his team “will bring a fresh set of eyes, tap into the experience of staff, bring in any experts we need, and give the city the best plan they can get.” Under the terms of his contract, the Colonel’s team will provide personnel to fill the positions of interim city manager and budget director, as well as an unspecified number of accounting positions. In addition to providing an interim city manager, finance director, and accounting personnel, the company’s services to the city appear to include providing an “Administrative and Organizational Assessment.” Unsurprisingly, questions have been raised with regard to whether the City Council violated its charter in hiring the firm: under the agreement with the Bobb Group executed this week under emergency hiring rules, the agreement grants the group “all powers” provided to the city manager under the city’s charter and code: those duties include appointing, disciplining or firing city workers; making and executing contracts on the city’s behalf; supervising and controlling all divisions created by the City Council; and ensuring that all laws and ordinances are enforced.

The challenge ahead will be significant, as the small municipality confronts mounting pressure from lawsuits and creditors, and struggles to keep pace with municipal bond interest payments and mandatory obligations to the Virginia retirement system. Payments to that system on behalf of the city and school system were nearly $3.5 million behind as of last week. The challenge with regard to governance is also significant: Petersburg residents concerned with the scope of the group’s responsibilities and the way the deal was approved have reached out this week to City Attorney Joe Preston and Commonwealth’s Attorney Cassandra Conover to question whether the actions violate the city’s charter. The council had voted on hiring the firm twice last week: first on Tuesday and then again during a special meeting last Thursday called for consideration of the contract and a forensic audit, on which city officials advised the council not to spend money, since a special grand jury investigation of city finances already is underway. Last week’s vote to approve the Bobb Group deal failed 3-3-1. Under the City Council’s rules, reconsideration of an item must wait 30 days unless a motion to reconsider is made before the group adjourns. No such formal motion was made. The City Attorney advised council members that the Thursday vote was acceptable and defended that decision this week in an interview this Tuesday, saying in part that “council has a right to conduct its business.”

The fiscal challenge might even be enough to make Robert E. Lee quiver: Petersburg began this fiscal year $19 million in debt, and $12 million over budget. The Council voted raised taxes, it slashed more than $3 million in funding from the city’s chronically underperforming schools, eliminated a popular youth summer program, and shuttered cultural sites to make up the difference.