Fiscal & Physical Health & Safety: What Are the Options?

eBlog, 1/18/17

Good Morning! In this a.m.’s eBlog, we consider the deteriorating fiscal situation in East Cleveland, as epitomized by a seeming breakdown in essential municipal services—combined with an absence of any effective state response to its fiscal insolvency. Then we turn to a seemingly forgotten aspect of the change of administrations in Washington, D.C.: what might that mean to Puerto Rico, where a new study delineates the physical and fiscal impacts on mental health from the disparate treatment the U.S. territory receives—and raises the issue—largely unexplored in the campaign: what will the change in Administrations this Friday mean with regard to the fiscal—and health—situation in Puerto Rico?

Hold Your Nose. As if insolvent East Cleveland did not have enough problems affecting its fiscal dilemmas, Ohio—which in the Urban Institute’s new, incredible, handy-dandy fiscal guide to the states, ranks 45th out of the 50 states with regard to expenditures per capita on corrections and has a high share of its population in state prisons, local jails, or under probation or parole supervision (take-up); EPA Director Craig Butler yesterday ordered mountains of construction and demolition debris removed from an open dump located in a residential neighborhood in East Cleveland, issuing a notice of violation and orders to Arco Recycling to stop accepting construction and demolition debris, and to remove the acres of waste from the site, action taking place in the wake of inspection of the site last week in response to citizen complaints, as well as a determination that the site was an open dump, not a recycling facility as claimed by the company’s owner. The dump was supposed to contain only construction and demolition debris, with the bulk coming from hundreds of abandoned nuisance homes demolished by the Cuyahoga Land Bank. Ohio EPA last June had, in response to citizen complaints, ordered Arco officials to draw down the piles of rubble; however, when the EPA inspectors revisited the site last week, they found four-story piles of rubble and debris which had grown over the past year, not shrunk, triggering the notice of violation and the unilateral EPA order. The mountain of garbage no doubt is part of what appears to have contributed to the 36% population decline in the municipality since 2000. The estimated median income in the city is $20,435—lower than it was in the year 2000, and less than half the statewide median household income.

Is there a Trump Promise for PROMESA? In an epistle to Congressional leaders yesterday, U.S. Treasury Secretary Jack Lew and Health and Human Services Secretary Sylvia Burwell urged Congress to pass legislation to help Puerto Rico before the commonwealth is forced to confront more serious health care and economic challenges—where a new set of findings from the first epidemiological study on the state of mental health in Puerto Ricans since 1985 by the Behavioral Sciences Research Institute for the Puerto Rico Administration of Mental Health and Anti-Addiction Services (PRHIA) found that—as part of an effort to justify the allocation of federal funds—7.3% of Puerto Ricans have serious mental conditions—albeit the level is likely considerably greater, but the study does not include homeless persons, which is a vast population thought to also have a large amount of people with mental illnesses or substance dependence. Of these 165,497 people with serious mental health conditions, 36.1% had not received specialized services in the past year, which would sappear to indicate that there are thousands of undiagnosed or untreated mentally ill people in the streets of the country. The study warns of the danger that the critical fiscal situation Puerto Rico faces could end up affecting the services of mental health patients. The Health Insurance Administration (PRHIA)—which administers the Puerto Rico Government Health Plan, upon which almost two million Puerto Ricans rely—faces a fiscal and physical insufficiency crisis that has forced it to incur millions of dollars of debt with their providers—and which, according to PRHIA, has set off a chain reaction, with longer wait times for clinical and therapeutic procedures, overcrowded emergency rooms, attempts to directly charge patients for services, and an increasing exodus of physicians from Puerto Rico. According to the Puerto Rico College of Physicians and Surgeons, “364 physicians left Puerto Rico in 2014, and 500 in 2015,” so that the “PRHIA debt represents a significant threat to maintaining an operational healthcare system.” The study further cautions that the uncertainty and deterioration of the quality of life in Puerto Rico, due to the fiscal crisis, have the potential of increasing the prevalence of mental health conditions in the years to come: “Since 2008, the Island has been affected by an economic recession. As a consequence, Puerto Rico has been facing greater chronic stressors that might have a negative impact on mental health: high levels of unemployment or underemployment, poverty, a drastic reduction of population, and higher levels of crime.”

Puerto Rico has an unemployment rate of over 10%, and a poverty level of 46%. So it was unsurprising that Secretaries Lew and Burwell had sought to “underscore the need for additional legislation early in this [Congressional] session to address the economic and fiscal crisis in Puerto Rico.” The authors noted that the PROMESA legislation enacted last summer was an example of “important progress achieved to date with bipartisan support.” They wrote, however, that the “the work is not done,” focusing on the critical need to pass legislation to avert what they deemed a “Medicaid Cliff” for Puerto Rico and implement an Earned Income Tax Credit (EITC) to incentivize employment—actions made even more critical because the President-elect’s vows to work with Congress to eliminate the Affordable Care Act will put at early risk significant amounts of Puerto Rico’s Medicaid—putting, according to the two outgoing Cabinet Secretaries, up to 900,000 Americans on the island currently receiving health care under the Affordable Care Act at risk. The two added that while the Congressional Task Force on Economic Growth in Puerto Rico, created under PROMESA to analyze challenges in Puerto Rico and propose federal solutions, had only recommended studying the possibility of an EITC for the territory, they wrote that an EITC would be a “powerful driver to bolster Puerto Rico’s future,” describing it as a “most effective and powerful tool” to address structural challenges like the high unemployment and lesser participation in the formal economy, adding that it will be important for Congress to consider solutions such as an expanded Child Tax Credit, continued authorization for Treasury to provide the Commonwealth with technical assistance, reliance on data in benchmarking economic growth, and initiatives to incentivize small business development.

The See-Saw of Municipal Fiscal Solvency

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eBlog, 12/27/16

Good Morning! In this a.m.’s eBlog, we consider the remarkable turnaround in fiscal fortunes in Detroit—a city unbailed out by the federal government, but now, as Detroit News editorial writer Daniel Howes writes, is “perceptively changing,” albeit, interestingly in light of the President-elect’s choice to be the new Secretary of Education, the state of Detroit’s public schools “burdens an already difficult financial picture.” Then we turn to the challenge of trying (in the frigid Winter no less!) to describe fiscal contagion from the insolvent East Cleveland, before finally trying to escape the cold by journeying south to Puerto Rico to explore the worsening demographic trends and their implications for the changing administrations both in Washington, D.C. and Puerto Rico.

Winnerville? Daniel Howes, an editor for the Detroit News, in his editorial “Loserville,” wrote that two years “after Detroit emerged from the largest municipal bankruptcy in the nation’s history, the city America gave up for dead is showing that it is anything but,” writing that vacant space downtown is “is growing increasingly hard to find,” a stark contrast from the city’s first day of municipal bankruptcy when I was specifically warned not to walk from my downtown hotel to the Governor’s Detroit offices to meet Kevyn Orr, the then newly named Emergency Manager. Thus, Mr. Howes writes:

He tempered his column by noting that violent crime continues to be an issue in parts of the city—and that neighborhood revitalization “lags the pace set by downtown,” adding that the “exodus from Detroit Public Schools burdens an already difficult financial picture,” albeit writing that Detroit’s makeover is “a process, not a destination with guaranteed arrival,” indeed, comparing it the comparable (and related) comeback of the auto industry—albeit with the profound difference that the latter was bailed out—something Detroit was not, noting: “Detroit’s automakers, effectively a ward of the federal government at the outset of the Obama administration, are closing an eight-year span their leaders used to re-engineer companies that tottered on the edge of collapse on Election Day 2008…Eight years later, at least two of Detroit’s three automakers — as well as many of its suppliers—are emerging as players to be reckoned with in both the traditional car and truck business as well as the emerging mobility space. Loserville? Hardly…The creation of the American Center for Mobility at Willow Run and the Michigan Legislature’s move to enact the most far-reaching autonomous-vehicle laws in the country underscore the state’s bid to become the nation’s epicenter of mobility development and testing.”

Loserville? Fiscal Contagion? Just as the flu can be contagious, so too municipal fiscal distress does not necessarily stop at municipal borders. So it is that a growing number of residents of Forest Hill, a twenty-five acre historic neighborhood spanning parts of Cleveland Heights and East Cleveland, Ohio, founded by John D. Rockefeller and a seeming stark contrast from the virtually bankrupt East Cleveland, are upset by the increasing number of long-abandoned homes in both municipalities: assessed property values are tanking, and there is increasing apprehension at the seeming inability of the municipality to provide even basic services. There is also a sense that East Cleveland’s possible merger with Cleveland will not happen soon enough (if ever) to help Forest Hill’s issues: incorporating as a village would take cooperation from both cities, several voter elections, and the approval of Cuyahoga County. Similarly, there are no answers to the questions of where tax dollars would come from to hire police, firefighters, and provide basic, essential public services. Ironically, the neighborhood hosts municipally influential citizens—or at least formerly so, including East Cleveland’s recalled Mayor Gary Norton, the city’s new mayor Cheryl Stephens, and former Mayor Ed Kelley. The silence of the State of Ohio must weigh heavily on their hopes for the New Year.

Unfeliz Navidad? Puerto Rican demographer Raul Figueroa released information this morning that if the current demographic trends in the U.S. territory continue, by 2020, citizens older than 60 will—for the first time ever—surpass the number of those under 18, writing that between July of 2015 and July of this year, some 60,000 island residents had departed—and that this year marked the first in which the number of deaths exceeded the number of births. He noted increasing apprehensions of an increasing schism for the young generation—whose most productive members have “established themselves outside of the U.S. territory” and are forming families there, while their counterparts who have stayed behind are, increasingly, becoming caught up in criminal activities. Thus, he wrote, “Only a significant reduction in emigration or increase in immigration could reverse this demographic trend…it will be necessary to search for a strategy to permit and facilitate strategies to create employment opportunities.” Indeed, island economists like Elías Gutiérrez and José Alameda have expressed apprehension that the island is converting into a “gueto” of the poor and aged, likening it to a “Greek tragedy.” Mr. Gutiérrez added that the middle class has receded on “every front.” He noted, too, that the increasing demographic imbalance will increase the public pension imbalance: as the young flee, fewer will be paying in, while the number of retirees will continue to grow.

The demographic pressures on the island’s fiscal challenges come as soon-to-depart Puerto Rico Gov. Alejandro García Padilla released more pessimistic figures for the next decade—as he cast increasing doubt with regard to the viability of a negotiated debt solution—explaining that his updated projection of Puerto Rico’s financial shortfall over the next decade would be $8.8 billion worse than its forecast of just two months ago, when he had submitted a 10-year fiscal plan to the PROMESA Puerto Rico Oversight Board—a plan in which the government had projected that if the government stayed on its then current fiscal course—its so-called “Baseline”—it would be short some $58.7 billion, that is, in an ever accelerating state of debt. Moreover, in a revision released yesterday, that figure had increased by nearly $10 billion to $67.5 billion—the deficit reduction target the outgoing administration estimated it would have to achieve in reductions to achieve a balanced budget by 2026. That is, the debt situation has reached such an extreme that even were all its $35 billion in debt service to be magically eliminated, the island would still be overburdened with debt.

The newly released baseline also uncovers a related fiscal challenge which the new one does: what are the fiscal implications on Puerto Rico’s economy? The government’s new baseline projects government spending cuts would lead to a more negative nominal gross national product trajectory over the next decade, with the nominal, annual GNP shrinking by 1.03 percent instead of the previously projected growth from the October plan—even as the revised assumptions about economic growth and inflation added some $3.4 billion to the new baseline compared to the October baseline. The tab? The revised projections over the next decade project $232 billion in government spending, but only $165 billion in revenue—with the difference to be bridged by unspecified budget cuts.

The revised projections come as the PROMESA Oversight Board has commenced its discussions with creditors as part of its mission, similar to a chapter 9 municipal bankruptcy, to achieve a negotiated and consensual debt cut under Title VI of the new PROMESA law. But, to Gov. Padilla, the increasingly deteriorating fiscal and economic projections over the next decade mean that “that a comprehensive restructuring under Title III (the debt restructuring title) of PROMESA is inevitable.” Yet this all comes in the midst of changing administrations in Washington, D.C. and against an encroaching deadline: under the new federal law, creditors’ rights to sue have only been suspended until the middle of February. Ergo, Gov. Padilla’s office notes: “If Puerto Rico does not seek Title III protection before the termination of the claims on February 15, 2017, the government will run out of money and essential services will be severely affected.”

The Daunting Road to Recovery from the Nation’s Longest Ever Municipal Bankruptcy

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eBlog, 12/09/16

Good Morning! In this a.m.’s eBlog, we look back on the long and rocky road from the nation’s longest municipal bankruptcy back to solvency taken by the City of San Bernardino, a city in a Dillon Rule state, which we described in our original study as the former gateway from the East to Midwest of the L.A. basin and former home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad, but which in the 1990’s, with the departure of those industries and employees, fell into hard times. By the advent of the Great Recession, 46% of its residents were on some form of public assistance—and nearly one-third below the poverty line. By FY2012, the city faced a $45 million deficit; its fund balance and reserves were exhausted—leading the city to file for chapter 9 municipal bankruptcy (note California codes §§53760, 53760.1, 53760.3, 53760.5, and 53760.7—and where, effective on the first day of this year, new statutory state language specifically created a first lien priority for general obligation debt issued by cities, counties, schools, and special districts, so long as the debt was secured by a levy of ad valorum taxes pursuant to California’s Constitution.) As we have noted, in the 18 states which authorize chapter 9 filings, states have proscribed strikingly different legal mechanisms relating to the state role—varying from a state takeover, such as we have described in the case of the nation’s largest municipal bankruptcy in Detroit, but to a very different regime in Jefferson County and San Bernardino—where the elected municipal officials not only remained in office, but here the respective states—if anything—contributed to the severity of the fiscal challenges. Then we turn to what might be Congress’ last day in town this year—and whether funding to help the City of Flint might be enacted: Will Congress pass and send to the President a bill to provide emergency assistance to Flint?

Back to a City’s Viable Future. San Bernardino leaders this week issued a detailed statement on the arduous road to recovery they have travelled and what they intend for the road ahead, albeit noting the city is already well along its own blueprint for its recovery, as it awaits formal approval from U.S. Bankruptcy Judge Meredith Jury from its chapter 9 municipal bankruptcy early next year. In its statement, San Bernardino reported it had implemented about 70 percent of its recovery plan. That’s turned once-dire projections for the future upside down—a virtual u-turn from when the city’s fiscal analysts three years ago projected that in FY2023, the city would have a deficit of $360 million if dramatic changes were not achieved. But today, the city instead projects an unallocated cash balance for FY2023 of $9.5 million, or, as the statement reads: “Now, the city is on the cusp of emerging from bankruptcy as a changed city with a brighter future.” The municipal statement is primarily focused on the governance and fiscal changes made to create a virtual u-turn in the city’s fiscal ship of state since entering what became the nation’s longest municipal bankruptcy—a change in fiscal course without either state aid or state imposition of an emergency manager or a state takeover. The statement notes: “Given the emergency nature of its filing, it took the city several months to assess its financial condition—until April 2013, at which time the city adopted a final budget for fiscal years 2012-13 and 2013-14…The city’s initial financial assessment, however, only reflected further concern over its financial future. In September 2013, Mayor [Pat] Morris announced that absent fundamental modernization and change the city faced a 10-year deficit of a staggering $360 million. The future of San Bernardino looked bleak.”

The statement itemized what appeared to be the key steps to recovery, including achieving labor agreements—agreements which resulted in savings in excess of $100 million, and involved the termination of virtually all health insurance subsidies coverage for employees and retirees, writing that the city calculated the resulting savings to amount to about $44 million for retirees and $51 million for current employees. The statement notes some $56 million in other OPEB changes. A key—and hard-fought change—was achieved by contracting out for essential public services, with one of the most hard fought such changes coming from the annexation agreement with the San Bernardino County Fire Protection District: an agreement under which the county assumed responsibility for fire and emergency medical response—a change projected to save San Bernardino’s budget nearly $66 million over the next two decades just in public pension savings, but also as much as $5 to $6 million in its annual operating budget—and that is before adding in the parcel tax revenues which were incorporated in that agreement. San Bernardino also switched to contracting out for its trash and recycling—an action with a one-time franchise payment of $5 million, but increased estimated annual revenues of approximately $5 million to $7.6 million. The switch led to significant alterations or contracting out for an increasing number of municipal services. Or, as the paper the city released notes: “Modern cities deliver many services via contracts with third-party providers, using competition to get the best terms and price for services…The city has entered into a number of such contracts under the Recovery Plan.”

Governance. The city paper writes that the voters’ approval of a new city charter will allow San Bernardino to eliminate ambiguous lines of authority which had created a lack of authority, or, as U.S. Bankruptcy Judge Meredith Jury put it earlier this week: “(City officials) successfully amended their charter, which will give them modern-day, real-life flexibility in making decisions that need to be made…There was too much political power and not enough management under their charter, to be frank, compared to most cities in California.”

Rechartering San Bernardino’s Public Security. San Bernardino’s Plan of Debt Adjustment calls for increasing investment into the Police Department through a five-year Police Plan—a key step, as a study commissioned to consider the city’s public safety found the city to be California’s most dangerous municipality based on crime, police presence, and other “community factors.” The study used FBI data and looked at crime rates, police presence, and investment in police departments as well as community factors including poverty, education, unemployment, and climate: The report found a high correlation between crime rates and poverty—with San Bernardino’s poverty rate topping 30.6 percent. Thus, in the city’s Police Plan portion of its plan of adjustment, the report notes:  “The Mayor, Common Council, and San Bernardino’s residents agree that crime is the most important issue the city faces,” the city says in the Police Plan, submitted to the federal bankruptcy court as part of its plan. The plan calls for $56 million over five years to add more police, update technology, and replace many of the Police Department’s aging vehicles.

The Cost of Fiscal Inattention. Unsurprisingly, the fiscal costs of bankruptcy for a city or county are staggering. The city estimates that the services of attorneys and consultants will cost at least $25 million by the time of the city’s projected formal emergence from chapter 9 next March—albeit those daunting costs are a fraction of the $350 million in savings achieved under the city’s pending plan of debt adjustment—savings created by the court’s approval of its plan to pay its creditors far less than they would have otherwise been entitled: as little as 1 cent on the dollar owed, in many instances. Or, as the city’s statement wryly notes: “In addition, the city’s bankruptcy has allowed the city a reprieve during which it was able to shore up its finances, find greater cost and organizational efficiencies and improve its governance functions…Thus, all told, while the city’s exit from bankruptcy will have been a hard-fought victory, it was one that was critical and necessary to the city’s continued viability for the future.”

Out Like Flint. The House of Representatives on what it hopes to be its penultimate day yesterday approved two bills which, together, would authorize and fund $170 million for emergency aid to Flint and other communities endangered by contaminated drinking water. The emergency assistance came by way of a stopgap spending bill to keep the federal government operating next April in a bipartisan 326-96 vote and, separately, a water infrastructure bill which directs how the $170 million package should be spent by a 360-61 vote. Nevertheless, the aid for the city is not certain in the U.S. Senate: some have vowed to stop it, at least in part because the bill includes a controversial drought provision which would boost water deliveries to the San Joaquin Valley and Southern California.

Who’s in Charge of a Municipality’s Future?

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eBlog, 9/29/16

Good Morning! In this a.m.’s eBlog, we consider, the always difficult state-local governance challenges for cities in fiscal stress: first, we look at yesterday’s editorial from the Detroit Free Press raising serious concerns with regard to Michigan’s emergency manager law—a state law which authorizes the state to appoint an emergency law with dictatorial type authority and without accountability to citizens, voters, or taxpayers in a city, county, or public school district. The issue relates to the kinds of challenges we have been following in New Jersey, Connecticut, Virginia, and other states where the hard questions relate to what the role of a state might be for a municipality in severe fiscal distress—especially where such distress might risk municipal fiscal contagion. Then, mayhap appropriately, we journey back to Atlantic City, which is nearing its own state-imposed deadline to avert a state takeover. Finally, we examine the ongoing plight of East Cleveland —a small, poor municipality in some state of negotiation with the adjacent City of Cleveland with regard to the possibility of a merger—while awaiting a response from the State of Ohio with regard to its specific request for authority to file for chapter 9 bankruptcy. It remains unclear if the State of Ohio will ever even notify the city it has received said request, much less act. Thus, in a week, we have watched the States of Virginia, Connecticut, Michigan, and New Jersey struggle with what the role of a state might be—and how the fiscal ills of a city might adversely impact the credit ratings of said state.

Who’s in Charge of a Municipality’s Future? The Detroit Free Press in an editorial this a.m. wrote that, “[F]our years on, it’s hard to argue that Gov. Rick Snyder’s retooled emergency manager law, [Gov.] Snyder’s second revision of Michigan’s long-standing law, is working,” referring to Michigan’s Emergency Manager Law (Act 436), a state law unique to the state of Michigan: one which authorizes authority to the governor to appoint emergency managers with near-absolute power in cash-strapped cities, towns, and school districts; it authorizes such emergency managers to supersede local ordinances, sell city assets, and break union contracts; it leaves local elected officials without real authority. It provides that an Emergency Manager may be appointed by the Local Emergency Financial Assistance Loan Board. In the case of Detroit, it served as the mechanism by which Governor Rick Snyder appointed Kevyn Orr as Detroit’s emergency financial manager. The law, the Local Financial Stability and Choice Act reads: “The financial and operating plan shall provide for all of the following: The payment in full of the scheduled debt service requirement on all bonds and notes, and municipal securities of the local government, contract obligations in anticipation of which bonds, notes, and municipal securities are issued, and all other uncontested legal obligations (See §141.155§11(1)(B)). The editorial went on: “The crux of the problem lies in the limited impact accounting can have on the myriad factors that affect quality of life or efficient service delivery within a city:

“Sure, an emergency manager (in theory) can balance a city or school district’s books. But no amount of budget slashing or service cuts can make a city somewhere people want to live, or a school district the kind of place that offers quality education. In fact, it’s often the reverse: When residents leave, the tax base slims, meaning cities or school districts stretch to provide the requisite level of service with significantly less money. Cuts exacerbate the population decline, which depletes revenue more, which means more service cuts. And so on and so on and so on.

Nowhere is this object lesson in sharper contrast than Flint, where the city — under a success {I suspect the editors meant “excess’} of emergency managers — started pumping drinking water from the Flint River in 2014, pending the start-up of a new regional water system, a cost-saving switch prompted by the city’s ongoing budget woes. Almost immediately, botched water treatment caused bacterial contamination that altered the color, taste and odor of the city’s drinking water, and 18 months later, the state would acknowledge that improper treatment of which had caused lead to leach from aging service lines, contaminating the city’s drinking supply, and exposing nearly 9,000 children under age 6 to the neurotoxin, which can cause behavioral and developmental problems.

Why play games with something as important as drinking water? When the mandate is to cut, cut, cut, everything is on the table.

But it shouldn’t be.

A task force appointed by [Gov.] Snyder to review the Flint water crisis recommended a slate of changes to the state’s emergency manager law, like a mechanism for local appeal of emergency manager decisions, outside review, and other controls that Flint residents, alarmed by the smell, taste and color of their drinking water, could have employed to halt Flint’s water disaster before it reached crisis proportions.

Snyder says he’s waiting for the completion of a legislative report into the task force’s recommendation.

Why?

Snyder took office in 2011 knowing the bill was about to come due for a wave of municipal crises that threatened to cascade across the state.

There was the City of Detroit, where systemic budget troubles had been building for decades; Pontiac, Flint, and Benton Harbor, Allen Park, Ecorse, and Highland Park, where emergency managers were already waging uphill battles with incremental results, or whose substantial financial challenges put them firmly in emergency management’s crosshairs. And Detroit Public Schools, under state control for most of the last decade, with no fix in sight.

Inexplicably, in this climate, [Gov.] Snyder chose to cut state revenue sharing, continuing a trend of bolstering the state’s fiscal health at the expense of its cities to the tune of about $6 billion in cuts to cities over a decade.

Snyder and then-Treasurer Andy Dillon believed that the state’s long-standing emergency manager act was insufficient to truly remedy cities’ and school districts’ fiscal woes. An emergency manager, Snyder and Dillon believed, should have clear authority over operations, not just finances, and have greater power to impact labor agreements. Through two revisions (the first emergency manager law passed in Snyder’s tenure was repealed by voters; its replacement carries a budget appropriation and is thus repeal-proof), Snyder crafted a law that granted his emergency managers the authority to make the broad fixes he believed necessary.

There’s no question that a temporary usurpation of local elected control, as happens during an emergency manager’s appointment, is a serious matter. But Snyder seemed to understand that ensuring the health and well-being of Michigan residents — by ensuring that Michigan cities and school districts could provide the services necessary to create those conditions — was properly a governor’s job. It still is.

In the meantime, there’s promising news out of Lansing: Michigan State University professor Eric Scorsone, long a champion of funding cities properly and sustainably, has been appointed state deputy treasurer for finance. Scorsone has been a strong advocate for municipal governments and school districts, and we hope, deeply, that his appointment indicates that Snyder has come around to a point of view we’ve advanced for years: Fund cities properly, and whether or not to appoint an emergency manager may become a question that never needs answering.

Tempus Fugit? In ancient Rome, the query was ‘Is time running out,’ now an increasingly anxious question for Atlantic City’s leaders, where, having already missed one state-imposed deadline to initiate dissolution of its authority, the state has given the city until Monday to cure the violation. New Jersey Senate President Steve Sweeney (D-Salem) said Atlantic City must make a “realistic plan” to dig out of its fiscal hole; however, he declined to weigh in on the city’s most recent proposal. Noting that “Atlantic City has roughly 30-something days” left, Sen. Sweeney noted: “It’s incumbent upon them to put a realistic plan forward. You know, we’ve been at this for a while, and they really need to put a plan forward that’s going to make sense and work.” With the state-imposed deadline just six days before election day, Sen. Sweeney said he would “reserve judgment” on the city’s proposal to avail itself of its public water utility to purchase its airport, Bader Field, for at least $100 million. His comments came in the wake of the city’s unveiling earlier this week the first of seven parts to its plan in which city officials announced the Municipal Utilities Authority has agreed to purchase as part of an effort to raise revenues for the city, yet retain the water system in public hands, with the proceeds to go toward paying down the city’s roughly $500 million debt. The deadline comes as Moody’s has warned that the city not only risks defaulting on terms of a $73 million state loan agreement, but could also miss a $9.4 million municipal bond interest payment due on November 1. Analyst Douglas Goldmacher noted Atlantic City “does not have sufficient funds to immediately repay the $62 million already received from the state…Furthermore, unless the state continues to disburse additional funds from the bridge loan, or releases the Atlantic City Alliance and investment alternative tax funds owed to the city, it is highly improbable that the city will be able to make its (Nov. 1) $9.4 million balloon payment.” Mr. Goldmacher wrote, however, that the city’s repayment challenges would be addressed if the proposed Bader Field sale goes through—even as he again said the plan raises questions, such as whether the authority can afford to borrow $100 million and whether the state would even approve the plan—a plan to which the New Jersey Department of Community Affairs has yet to comment—perhaps confirming Mr. Goldmacher’s apprehension that: “Atlantic City’s impending technical default is credit negative for it, and indicates a disconnect between the city council, mayor, and state: “The impending default was caused by political gridlock.”

What Kind of City Do the Voters Want? The Cuyahoga County, Ohio Board of Elections and the East Cleveland City Council Clerk’s office this week certified more than 600 petition signatures to force a recall vote of East Cleveland Mayor Gary Norton and City Council President Tom Wheeler, so that the two highest ranking elected officials in this virtually insolvent municipality will face a recall election this fall, albeit not on the November ballot: the election likely will occur on December 6th—appropriately one day before Pearl Harbor Day. The election, however, will not be without cost to the virtually insolvent city: it could cost the city between $25,000 and $30,000—and will be a run-up just 10 months before the next mayoral primary election, even as the city is locked in so far seemingly non-existent merger negotiations with the City of Cleveland and awaiting a non-existent response from the Ohio State Treasurer with regard to its request for authorization to file for chapter 9 municipal bankruptcy. Nevertheless, the citizens of East Cleveland gathered more than twice the requisite number of signatures necessary to force a special recall election, triggering the City Clerk to send a letter to Mayor Norton informing him of the election. Under the East Cleveland charter, if he does not resign, he will face a recall election within 60-90 days. Unsurprisingly, Mayor Norton does not plan to resign. In a phone interview last Saturday, he characterized the election a waste of money in a city that cannot afford it: “East Cleveland will select it’s next mayor 10 months after this needless recall election…This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” Mayor Norton said the money the election will cost will have to be cut from other city services, noting that would include possible cuts in police and fire, because, he added: “There’s little to nothing left to cut in the city.” In East Cleveland, violent crime, on a scale from 1 (low crime) to 100, is 91. Violent crime is composed of four offenses: murder and non-negligent manslaughter, forcible rape, robbery, and aggravated assault. The US average is 41.4. In the city, property crime, on a scale from 1 (low) to 100, is 75. The U.S. average is 43.5. A recall election, if it happens, would be the third for the Mayor.

Mayor Norton’s success rate in overcoming recall votes could change, however, as voters in November—before the next scheduled recall election, will consider an amendment to the city’s charter intended to curtail the ease with which residents can trigger a recall, although it is currently being reviewed by the Board of Elections and has not been finalized for the November ballot. For his part, the beleaguered Mayor Norton has so far refused to say whether he was going to run for re-election next year, and declined to answer why voters should vote to keep him as mayor in December.

The State-Local Governing Challenge When Children Are at Risk

eBlog, 9/19/16

In this morning’s eBlog, we consider the state actions in Michigan to preempt the authority of the City of Flint to seek judicial redress over the state’s actions with regard to the drinking water crisis so toxic to its youngest and most vulnerable children. Those actions appear to have increased pressure to address the state’s so-called Emergency manager law—a unique state law that allows the Governor to, in effect, suspend democracy in the state’s local governments and public school districts—an action that was critical to Detroit’s exit from the largest municipal bankruptcy in U.S. history, but which has had devastating impacts on the youngest and most innocent children of the City of Flint. Then we look south to Detroit, where, even though the school year is underway, the fiscal math for the old Detroit Public Schools is in the D-minus range. What does that augur for the city’s fiscal future? Finally, we look at the most awkward governance challenges created by East Cleveland’s proposal to merge with the City of Cleveland—especially given the profound silence and absence of the State of Ohio in any of these discussions—much less in response to East Cleveland’s long-standing request for authority to file for chapter 9 municipal bankruptcy.

Preempting a City Governance & Ability to Protect the Health & Safety of its Residents. Days after Flint Mayor Karen Weaver served notice that her devastated city might file a lawsuit against the State of Michigan over the state-precipitated Flint drinking water crisis, the state responded by preempting her municipality’s authority to sue under its residual authority via a 4-0 vote of the five-member Receivership Transition Advisory Board, whose members are appointed by Gov. Rick Snyder—with the Board in this instance moving precipitously to amend its rules to prevent the city from filing suit absent permission from the very same state-appointed  board. (The lead contamination occurred when Flint, a city of nearly 100,000, which was under state emergency management, switched in 2014 from the metropolitan Detroit utility system to a temporary water source, the Flint River. State environmental regulators mistakenly said not to add a chemical to prevent lead from leaching out of old pipes, and state-appointed emergency managers came under scrutiny for blocking a switch back for financial reasons. Indeed, the Michigan emergency management law was blamed as a factor in the Flint disaster by Michigan Governor Rick Snyder’s own task force.) Thus, even though the board’s name would seem to suggest it has an “advisory” rather than preemptive role, the panel is authorized under state law to provide the Michigan Treasury Department powers under the emergency manager law to rein in Flint in the event the Mayor and City Council began spending beyond the city’s means. It does not appear that the intent of the law, as adopted, was to broadly preempt the elected leaders of Flint from making decisions with regard to the health and safety of the city’s youngest children.

Nevertheless, Gov. Rick Snyder’s administration quietly acted to ensure the state could not be sued by Flint over the city’s lead-contaminated water crisis by requiring that ligation be approved by an oversight board stacked with gubernatorial appointees. The Flint Receivership Transition Advisory Board passed a resolution last March 31st preempting Flint’s authority to initiate litigation without first getting approval from the board. The Board, rather than truly being advisory, was imposed by the state to have veto power on budgets after the city’s last emergency manager, imposed by Governor Rick Snyder, departed in April of last year. Unsurprisingly the panel’s members are all appointees of Gov. Snyder. Thus, the state appointed board acted swiftly to preempt the city’s authority some seven days after the City of Flint filed a notice in the Michigan Court of Claims preserving its right to sue the state over the city’s water becoming contaminated with toxic lead. Indeed. On the 31st, at the Flint Receivership Transition Advisory Board, Chairman Frederick Headen, a Michigan Treasury Department official, portrayed the resolution as being needed to give City Council more oversight of lawsuit settlements, according to a transcript of the meeting—making only a passing mention with regard to the provision mandating the Board’s approval in order for Flint to be able to file lawsuits, stating: “The purpose of the proposed RTAB resolution this afternoon is to restore, basically, the role which the City Council would otherwise have had, meaning that such litigation could not be settled without first being approved by City Council,” Mr. Headen said, according to the transcript, as he emphasized the new checks and balances being put in place for setting litigation. Indeed, according to Mr. Headen, the RTAB resolution eliminating the city administrator’s “complete decision-making authority” helped restore mayoral authority and powers, not restrict them: “We had started on a path of restoring powers to the locally elected the government,” Mr. Headen said yesterday: “We had given the Mayor back a lot of her authority to hire and fire employees. This was revising that (Ambrose) order to bring city council, the mayor in — and the board.”

Unsurprisingly, however, the state board members did not discuss the resolution’s broader preemption of municipal authority to protect the health and safety of the city’s families, much less the state imposition of control with regard to the rights of the municipality to seek any legal redress through the state’s judicial branch of government. Chair Headen, mayhap with his fingers crossed behind his back, added: “And, of course, the most important feature would, again, be the restoration of the City Council’s role in this process.” (Jerry Ambrose, Flint’s last state-appointed emergency manager, left a tightly-written city ordinance in place in April 2015 which granted his deputy, Natasha Henderson, considerable control over city finances and management, even though Flint City Hall was no longer technically being run by the state.)

Flint Mayor Karen Weaver’s filing with the Michigan Court of Claims cited “grossly negligent oversight” by the Michigan Department of Environmental Quality, whose decisions not to require corrosion control chemicals led to lead leaching into the drinking water and “irreversible” damage to municipal infrastructure—and, of course, an especially toxic threat to the city’s youngest children. For her part, Mayor Weaver this week graciously acknowledged how disappointed she was to learn of “the timing” of the state preemption—and its implications for local authority and governance, adding she hoped that barring the city from suing without state approval was a signal of the state’s commitment “to ensure the City of Flint is indemnified for any and all debts and obligations imposed upon the city while under state control.” Of course, in the wake of the state’s former Director with the Michigan Department of Health and Human Services plea of no contest this week to a misdemeanor charge in the Flint water crisis, it might be difficult to trust the state’s commitment. The municipality’s chief legal officer, Stacy Erwin Oakes, made clear Flint “cannot know” what motivated the state preemption, adding, however: “the timing of the amendment speaks for itself…Previously, the city administrator had discretionary authority regarding litigation, now the city, including but not limited to the chief legal officer, can’t  initiate litigation and assert its rights in court without state approval, through the (advisory board)…Whether the…resolution stripping the city’s authority would survive a direct legal challenge is a question for another day. In the meantime, the city continues to be significantly under state control, even after the departure of the Emergency Manager, and while accumulating significant obligations as a result of decisions made by, and/or at the direction of emergency managers.”

The state emergency manager—created Flint drinking water crisis has been costly to the state: to its reputation, to its governance vis-à-vis the enormous fiscal disparities amongst its municipalities, and now to its fisc: Michigan has allocated $234 million toward the public health emergency that exposed children to lead and has been linked to a deadly Legionnaires’ disease outbreak. Notwithstanding, Michigan has been slow, from a governance perspective, to act constructively, and now, it seems likely that no major action in the legislature will occur until next year to address the existing state law which essentially allows for the state appointment of virtual dictators to displace elected local officials—and policies essential to public health and safety. In the meantime, in the four months since a bicameral, Republican-led legislative committee concluded hearings about the Flint drinking water crisis, the Michigan legislature has yet to issue a report or to make policy recommendations; half a year has elapsed since a bipartisan task force named by Gov. Snyder made recommendations. Gov. Snyder has apologized for his administration’s mistakes which both caused and exacerbated the disaster; he claims he is addressing many of the items administratively, while others will require legislative approval. He has tasked a separate group to focus on response and recovery efforts, a group which includes Mayor Weaver and outsiders who uncovered the lead contamination last September—a group which forwarded its recommendations to Gov. Snyder three weeks ago. And his administration has proposed the nation’s toughest lead-testing rules, the replacement of all underground lead service pipes in the state, and the mandatory disclosure of lead plumbing in home sales and rental contracts.

All of which would seem at odds with his administration’s efforts to preempt such essential municipal rights. Unsurprisingly, Democrats in the state legislature this week intend to introduce legislation to create an ombudsman to hear the concerns of residents living in communities under emergency management. Another bill would lower the “action level” for lead in drinking water from 15 parts per billion — the federal standard — to 10 in 2021 and 5 in 2027. Other legislation expected would propose phasing out emergency managers while leaving intact other options for debt-impacted local governments and school districts.

School Days. As Chuck Berry sang: “Up in the mornin’ and out to school; the teacher is teachin’ the Golden Rule: American history and practical math…” but with October 1 fast approaching, a signal transition begins: that is the day the old Detroit Public Schools—which owns the school system’s legacy debt—will lose access to state aid pledged to support DPS’ 2011 and 2012 municipal bonds; however, with little information on the blackboard, or indeed anywhere, from Michigan, S&P got out its red pencil and downgraded yet once gain DPS’ debt deeper into junk status to B. For the system’s struggling algebra students, this increases the risk of payment interruption, especially due to the lack, according to the rating agency, of communicated progress on the state-desired refinancing of the state aid debt. S&P notes there is either a lack of urgency to address investor concerns (unsurprising) or challenges in crafting a take-out financing for the debt (even more unsurprising, noting the Michigan Legislature’s post-Detroit-bankruptcy fatigue with “bailing out” the city and related entities). Nevertheless, our respected colleague at Municipal Market Analytics still expect the state will come through by the deadline: they write: “[T]here is too much downside in allowing those bonds to even partially default. Still, the surrounding events serve as a reminder of the state’s willingness to punish investors for its own political mistakes.”

To Merge or Not to Merge: That is the Question. Cleveland, Ohio City Council President Kevin Kelley yesterday said he must figure out how to go about studying the pros and cons of annexing neighboring East Cleveland, but do so without locking Cleveland into a plan to do so. In a session of a Committee of the Whole, Councilmember Kelley told his colleagues that Cleveland must be certain it wants to move forward with a merger before formally expressing that interest through legislation, because, he noted: there is a point of no return after which Cleveland could no longer opt out. Presumably what his colleagues already understand is that such negotiations would be awkward—especially in the wake—as we have reported—of the uncertain, and constantly evolving, position of East Cleveland’s Mayor and Council—which last month, in an emergency meeting voted to adopt new legislation appointing three representatives to a commission impaneled to negotiate the annexation, replacing one passed earlier this summer, which was tied to such an ill-advised list of conditions that Councilmember Kelley rejected them out of hand terming the proposal a “non-starter.” So, under Ohio law, round two means the Mayor and Council in East Cleveland, in the wake of a brief public notice and comment period, will propose legislation to the Cleveland City Council, triggering, under Ohio’s laws, a thirty-day period during which the Mayor and Council will have to decide if they also will adopt legislation appointing three panelists to such a commission—note: if the 30 days lapse without action, the initiative must start all over with the circulation of new signature petitions. If Cleveland’s Council were to agree, the two municipalities would be legally committed to submitting some kind of plan for annexation. Indeed, failure to do so would warrant a judge’s intervention, Councilmember Kelley yesterday advised his colleagues: The commission would have 120 days to draft the terms of the merger that East Cleveland voters would consider. Cleveland City Council members would then either vote to adopt the plan or send the issue to the ballot.

From the City of Cleveland’s perspective, Councilmember Kelley suggested there ought to be three principles to guide Cleveland in its decision on whether to pursue the merger: There must be a funding source available – preferably from the State of Ohio, the missing player so far—to cover East Cleveland’s capital needs; East Cleveland’s millions of dollars in liabilities – which include debt, court judgments, and settlements – must be resolved; and such a merger must not harm Cleveland’s current residents, or the level of essential public services they receive, in any way. These are three “oughts” which the Councilmember advised his colleagues on which he had yet to receive any reassurances. Indeed, he made clear he does not believe 30 days—or even 120 days—will be sufficient time in which to determine the cost of addressing East Cleveland’s infrastructure problems, much less which government would be responsible to address them—making it more likely than not that Cleveland will not act in this thirty-day grace period, and await the answers to its questions—or, just maybe—the here-to-date absent State of Ohio will exercise some fiscal responsibility. In the nonce, Councilman Kelley suggested or proposed the assembling of an ad hoc committee made up of engineers, lawyers, and municipal finance experts to do an in-depth fiscal analysis of East Cleveland’s assets and liabilities before the Council formally appoints commission members and commits Cleveland to any final determination vis-à-vis annexation.

Amongst his colleagues, there have been mixed responses: some last night indicated they still support annexation and see a benefit to both cities; others, including Councilmembers Michael Polensek and TJ Dow, passed along constituents’ apprehensions that a merger would siphon resources and services from Cleveland neighborhoods. Indeed, with November looming, Councilman Matt Zone said this is a time when the Council should be “laser-focused” on the November election and a ballot which includes a school levy renewal, a proposed city income tax increase, and a City Charter amendment related to police reform.

 

What Will the Tides of November Bode for Struggling Cities’ Futures?

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eBlog, 9/09/16

In this morning’s eBlog, we consider the tightening noose around Atlantic City’s fiscal future as a state takeover looms. We consider the grim political and legal complications in post-chapter 9 Stockton, where a criminal trial of the incumbent Mayor who helped steer the city out of municipal bankruptcy looms just weeks before his campaign for re-election. What might it augur for the recovering city’s fiscal fate? Then we head east to Detroit, where elections of a very different sort will be on November’s ballot for a perspective from the Mayor on key ballot issues; finally, we consider the inability to achieve any clarity or resolution with regard to the fiscal fate of nearly fiscally and politically insolvent East Cleveland.  

A City on the Road to Nowhere? The Atlantic City Council has failed to accede to state terms and vote to dissolve its Municipal Utilities Authority, moving the city closer to default—the non-vote occurred after discussion in executive session, where, according to Council President Marty Small, there was insufficient support to reintroduce the requisite authority-related measures. Because the Council did not vote Wednesday evening, the municipality is nearly certain to violate the terms of its $73 million state loan—a loan which made the authority’s assets collateral and required the city to adopt an ordinance by next Thursday—and dissolves the authority if the city does not pay back the loan. The ball now moves to the state, which, under the terms, could then demand immediate repayment of money loaned to date. The city would be unable to repay the loan at this time, putting the authority at risk of monetization by the state, as we had noted from the op-ed Council President Small and Mayor Don Guardian wrote last Monday—or, as Council President Small put it: “It’s sad to say, but whatever the state does, we deserve…People didn’t take it seriously. They missed meetings. They claimed meetings were illegal.”

For the citizens of the beleaguered city, their future is unclear: they packed Council chambers Wednesday: some urged the Council to rescind a July 28 resolution that authorized the loan—a request which Councilman Frank Gilliam so motioned, in the wake of which Council voted 5-3-1 to support; however, Legislative Counsel Robert Tarver later said the measure needed a two-thirds majority to pass since prior notice of the vote had not been given; moreover, he noted that Council cannot rescind the resolution, since the state already performed on the agreement by loaning the city money. As in the old expression “misery loves company,” the actions have also triggered a pending lawsuit against the city, which seeks to void the resolution; the suit asserts a two-thirds majority of the full council was needed to pass the resolution, since it was an “emergency appropriation.” No matter what such future court battles might mean, however, the new reality is that the city’s inability to act means the state can demand it immediately pay back the $73 million loan—a demand the city cannot fiscally meet—but funds the city desperately needs if it is to meet the state-imposed November deadline to develop and submit a five-year fiscal plan to avoid a state takeover.

A Most Uncertain Road out of Municipal Bankruptcy. California Superior Court Judge Leslie Nichols has set an October 18 date for the trial of incumbent Stockton Mayor Anthony Silva—a candidate for re-election in November, where he is being challenged in his bid for a second term by City Councilman Michael Tubbs. The Mayor was arrested last month on charges he participated in and illegally recorded an alcohol-fueled game of strip poker with teenagers in 2015 at his annual summer youth camp in Silver Lake. His attorney reports the Mayor has no intention of dropping out of the race, noting: “That would never happen, for a really good reason…He is the People’s Mayor. He works very hard for the people of Stockton. I don’t think anyone would dispute that he gives every part of himself to being the Mayor of Stockton. He should be re-elected based on the merit that he gives the city.” The Mayor pleaded not guilty at his initial court appearance last month, complaining he is the victim of a political smear campaign being waged because he is a “threat” to Stockton’s establishment; nonetheless, it will be a jury which determines his fate with regard to the felony charge for allegedly making the audio recording without the consent of the strip poker participants and three misdemeanors related to the alleged providing of alcohol to underage drinkers.

A Motown Post Municipal Bankruptcy Future & Community Benefits. While Stockton’s post-chapter 9 recovery appears clouded by the looming criminal trial of the Mayor who was in office throughout his city’s long and arduous adoption of a plan of debt adjustment and emergence from municipal bankruptcy, his counterpart in Detroit, Mayor Mike Duggan, elected in the wake of the Motor City’s emergence from municipal bankruptcy under Michigan’s law, under which—in sharp contrast to California—the Governor had appointed an emergency manager, Kevyn Orr, who barred the city’s former Mayor and Council of any governance authority. Now Mayor Duggan is voting for what he calls the more manageable version of two proposed ordinances requiring “community benefits” be provided by would-be developers. In discussion with reporters and editors from Crain’s, Mayor Duggan warned that if a community benefits ordinance proposed by Rise Together Detroit passes in his city’s November general election, it would “guarantee we never see a (new) auto parts plant in this city again,” because of the requirements it places on developers: “Getting manufacturing jobs in the city will be over if Proposal A passes.” Mayor Duggan made clear he intends to vote for Proposal B, which is the alternative proposed community benefits ordinance.

Proposal A, put together by Rise Together Detroit, would require that projects of $15 million or more which receive $300,000 or more in city actions such as tax abatements or incentives enter into a legally binding community benefits agreement with a group of “representative residents, businesses and nonprofit organizations” within the “host community,” based on U.S. Census tract information. Such agreements would specify what the developer would provide to the community in which the development is located, such as education and land use programs, local small business and resident inclusion, and participation in the project. Environmental protections could also be considered community benefits—albeit, as the mayor noted: “You’d have to send a notice to the city clerk…The clerk and the council somehow contact people in the surrounding Census tract. Those people somehow form a committee, but Proposal A doesn’t say how they form a negotiating committee, doesn’t say how many people are on the negotiating committee. They could be negotiating with 50 or 100 people. It doesn’t say how long the negotiations go on, if they go on months or even years. If the site happens to be near the city border, the neighboring Census tracts would include the suburbs and you could have suburbanites who would get to say no to a development in Detroit.”

In contrast. Proposal B, which was developed by Detroit City Councilmember Scott Benson, appears to offer a less onerous alternative to Proposal A: it would mandate community benefits agreements for developments of $75 million or more and receiving $1 million or more in public incentives or on property with a cumulative market value of $1 million or more that was sold or transferred to a developer. In his conversation with the paper, Mayor Duggan made clear his comments were not a public endorsement of Proposal B; however, he noted there are compelling arguments toward the idea of institutionalizing these agreements for large projects: “Endorsing suggests a level of public campaigning that is different than a personal decision. But right now, I’m going to vote for it.”

In his comments, Mayor Duggan also addressed other pressing issues in his city, including on the pressing issues of the city’s struggling schools. Noting that while enrollment numbers will not be officially disclosed for about a month, Mayor Duggan said he would not discuss any new initiatives between the city and the Detroit Public Schools (DPS) until there is further certainty with regard to how many students the district has—that is, until there is a better sense whether DPS has emerged from its crisis mode, noting the serious “truancy issue in the city that we need to deal with.” With regard to the related Detroit Education Commission, a contentious sticking point in the DPS bailout legislation passed by the GOP-led Legislature and signed by Gov. Rick Snyder this past summer, the Mayor made clear he is not finished with pressing the issue: “To get things through a Republican Legislature, I need allies in addition to the Governor. I’ve learned my lesson and we’ll come back in a different way.”

To Merge or Not to Merge: That Is the Question. The Cuyahoga County, Ohio sheriff’s office is looking into the collection of signatures for a merger petition which was circulated in East Cleveland this summer, according to spokespersons for the sheriff and prosecutor. East Cleveland Mayor Gary Norton and his allies had collected more than 1,600 signatures on petitions to mandate the City Council to begin merger negotiations with neighboring Cleveland—of which the Cuyahoga County Board of Elections determined slightly over half were valid—albeit enough to begin negotiating an annexation agreement (Cleveland willing) that would be decided by voters in November; however, the Council did not appoint any negotiators; instead, Council Members asked the county prosecutor to investigate what they believed to be irregularities in the petitions. Or, as Council President Barbara Thomas reported to Ohio state officials: “East Cleveland City Council has serious questions about annex petitions, related certification, and has declared the petitions to be invalid.” Now the sheriff’s office has received the case from the prosecutor and is investigating, according to the County communications director—albeit she has declined to elaborate on what specifically the probe is examining. Adding to the state of confusion, Mayor Norton’s chief of staff, Michael Smedley, recently filed a lawsuit asking the court to compel East Cleveland’s City Council to move forward with merger talks—merger talks in which the City of Cleveland has expressed no interest. The suit also asks the judge to consider appointing annexation negotiators himself. Even as East Cleveland still awaits a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, the municipality has heard from the State Auditor’s office—the office which last month laid out stark financial options for the struggling municipality, noting the road out of fiscal emergency may require the city to cut between 20 to 40 percent of its staff.

The Key Role of States in Acting to Allow Fiscally Sustainable Municipalities.

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eBlog, 8/31/16

In this morning’s eBlog, we consider the narrowing fiscal options for Atlantic City—in a state which appears to have abandoned its long and strong reputation for working with—rather than against—its cities. Then we return to the seeming inability of  near-insolvent East Cleveland—the small Ohio municipality still awaiting authority to file for chapter 9 municipal bankruptcy—to craft a proposal to seek consolidation with neighboring Cleveland. Finally, we turn to grim fiscal findings in Michigan, where—notwithstanding a strong state fiscal recovery—the state’s municipalities—for the first time since the Great Recession are reporting a decline in fiscal health.

Is the Fiscal Deck Stacked Against Atlantic City? Atlantic City has reduced its budget by about 10 percent from a year ago; however, the new, proposed budget assumes requested state aid—assistance the city appears unlikely to receive. The proposed $243 million budget assumes some $106 million in state aid, including $37 million of requested Transitional Aid, or state funds for financially distressed municipalities. The request is more than double the $13 million in Transitional Aid the city received last year (along with eleven other municipalities), and Council President Marty Small, Chair of the city’s Revenue and Finance Committee, warns: “If they say they’re only going to give $15 million and the fund doesn’t come from another source, it will be a monumental tax increase on the city side.” To carve the budget as much as the city did, salaries and wages were cut by nearly 25 percent or $30 million from the current $110 million, according to a summary of budget appropriations—or, as Mayor Guardian put it: “I think everybody took a hit, a haircut…No one group represented the big savings.” The cuts were partially offset by the city making up for deferred group health insurance obligations and higher debt service. And although the budget assumes no change in the municipal tax rate, increases in county and school tax rates raised the total rate nearly 29 cents to an estimated $3.71 per $100 of assessed value, according to the tax assessor’s office. But even with those increases, the total revenues are down about 15 percent from last year, because the city’s ratable base has plunged from $20.5 billion in 2008 to about $6.6 billion today. The next step is to forward the proposed budget to the New Jersey Local Finance Board for adoption, albeit a spokesperson for the Board warns that any Department of Community Affairs said Transitional Aid “must be resolved prior to the adoption of the budget.” Councilman Frank Gilliam, who has proposed a public hearing on the budget, has expressed apprehension and stated: “I don’t think we should basically move forward with a line item in the budget that does not have either something committed in writing or some type of credits set aside for the city,” while his colleague, Councilman Jesse Kurtz, is urging the state to “sign an affidavit that they’re going provide this pledged revenue,” adding: “Because last time they didn’t, and as far as I’m concerned they still owe us over $30 million from last year’s budget.” Equally apprehensive, Councilman Moisse Delgado said he has “the smallest bit of trust that the state will provide the funds that we need.”

Play it Again, Sam. The East Cleveland City Council has voted once again to enter into annexation negotiations with Cleveland, with City Council President Thomas Wheeler noting: “When you make a mistake, you realize you make a mistake, and you correct your mistake. I think that’s big of us.” As we noted last week, Cleveland City Council President Kevin Kelley had termed East Cleveland’s proposal a “non-starter” because of the conditions that came with it. East Cleveland, with little tax base and almost no economic development, appears to offer little attraction to Cleveland—especially when, as last week, East Cleveland came to the table with significant demands. The situation governance-wise is complicated, as each city would have to opt to approve a proposal—and East Cleveland appears to have no other irons in the fire—except to press the state to allow it to file for chapter 9 bankruptcy.

Why is what’s good for the goose not so for the gander? A new study by the University of Michigan’s Center for Local, State, and Urban Policy reports that for the first time since the Great Recession, more of the state’s municipalities are reporting a decline in fiscal health: of Michigan’s 1,856 units of local government, 31 percent report they are better able to meet their financial needs this year—compared to 38 percent last year—all of which denotes a singular reversal in the wake of what had been five years of steady statewide improvement. If anything, the state’s exceptional role as a center of innovation in the emerging self-driving emergence has been a keystone to the state’s economic rise. However, according to Centers Director Tom Ivacko, the reversal in fiscal health at the municipal level is what he terms “an early warning sign here that even though the Michigan economy is still improving, [but] what we have seen this year in fiscal health in terms of local governments is reversal in a trend that we’ve been tracking since 2010…It appears that there is a disconnect now between economic growth and local fiscal health in Michigan.” He attributes that to what he calls Michigan’s broken funding system for local governments. The findings have emerged from eight statewide surveys conducted annually since the sharp economic decline of the Great Recession, with local governments responding to questions about changes in fiscal health: whether their jurisdictions are better able or less able to meet their financial needs at that time, compared to the previous year.

Perhaps the most important marker of the turn in local fiscal fortunes can be gleaned from local property tax revenues—the most important source of funding for Michigan municipalities: according to the report, the slow increase in property tax revenues dating from 2010 appears to have topped: this year 42% of Michigan municipalities reported their property tax revenues as increasing compared to 25% reporting them decreasing; last year, 45% reported such revenue growth. Mr. Ivacko notes the trend is of such great concern, because, should the economy falter, the state’s municipalities will face an even greater risk for fiscal declines. And, worryingly, the University of Michigan Research Seminar in Quantitative Economics expects both the U.S. and Michigan economies to expand at a slightly slower rate in the coming year—and Michigan is generally expected to grow more slowly than the nation as a whole.

Adding a double whammy, the report also found a worsening trend in state aid to local governments: only 18% of local governments reported an increase in state aid compared to 28% the previous year—the first such decline since 2011. The state preemption or limitation—the so-called Headlee Amendment and Proposal, which preempt local revenue authority have, as Mr. Ivacko notes: “really restricted revenue growth for local governments even as the economy has improved and many housing markets and home values have improved significantly…I think that is probably the single most important factor in why we are seeing local governments’ finances not improving as much as they should.” Worse, the state preemption is more than offsetting the gradual increase by the state in general revenue sharing—which, even if rising slightly, is down some 25% or $6 billion since 2000. Or, as the ever insightful Richard Ciccarone, President & CEO of Merritt Research Services, puts it: “When you look at the credit of Michigan cities, you have some that are ranked among the worst in the county like Wayne, Lincoln Park, Detroit, Flint, and even Lansing are among the bottom 1% of all cities; One thing that makes it worse is that their debt levels are up and that put more burden on these cities…Their flexibility is limited…It looks like cities in Michigan are headed for challenges yet. Some of the most challenged cities in America are in Michigan and yet the majority also look like they are faced with the challenge of rising debt and decreasing reserves.” According to the report, 60% of Michigan’s local jurisdictions claim their general fund balances are at the right level.

A guest editorial, “Lansing, are you listening to Michigan cities?” was posted yesterday by the Tribune News Services.

For the first time since 2010, a growing number of local governments are worried about money — and the future.

We hope Lansing is listening.

After the 2008 economic crash, local governments lost tax revenue, in part because the state continued to cut the amount of tax dollars it sends back to cities, but also because a wave of foreclosures dropped the value of commercial and residential property on which owners are taxed. Think about your own tax bill — if you paid less, it means your city, county and school district had less money to pay cops and firefighters, pave roads and pay teachers.

But since 2010, things have been looking up, according to the University of Michigan’s Center for Local, State, and Urban Policy’s annual survey of local leaders. As the state’s economy has improved, those leaders have reported improved financial stability, and a positive outlook.

This year, that changed.

Just 31% of Michigan local leaders said they’re better able to meet their community’s fiscal needs, down from 38% in 2015. While 42% say property tax growth is increasing, that’s also down from last year, when 45% of leaders saw growth — and the number of communities who say state aid is declining grew, from 18% in 2015 to 20% this year. Thirty percent say they’ll rely on savings to cover budget gaps, up from 26% last year. And only 28% believe their area will be better able to meet its financial needs next year, down from 36% in 2015.

In other words, thanks to stagnant property-tax growth and declining state aid, as well as rising costs for infrastructure — many communities delayed or deferred necessary maintenance during the recession — and higher personnel costs, including pensions and retiree health care, a growing number of local leaders say they’re worried about the financial future.

It’s true that the study’s findings don’t represent radical jumps. But taken in total, it’s a worrisome reversal of a six-year long trend of improving conditions.

And it’s just another reminder that our elected officials in Lansing should amend the way our state funds cities.

Because Proposal A and the Headlee amendment cap the way cities collect property tax, dramatic losses in value like the ones our state experienced in the foreclosure crisis — an unprecedented crash that the authors of Prop A couldn’t have foreseen — can’t be quickly recouped.

The state has aggressively cut the number of tax dollars it returns to cities. Between 2003 and 2013, a Michigan Municipal League analysis found, the state cut $6 billion in revenue-sharing. In 2003, the state sent about $900 million to cities each year. In 2013, it was $250 million. The impulse to disconnect state and local government financial health is a peculiar understanding that’s informed Gov. Rick Snyder’s budgetary priorities. Snyder has focused on improving the state’s fiscal health, even if that means making cuts to local governments. But the plain truth is that the state cannot claim financial health while its cities, counties and townships struggle to provide services.

Neither Snyder nor the legislative leaders who set Lansing’s agenda have shown willing to take these problems on. But a reconsideration of the way we fund cities — the way we pay for retiree pensions and health care, the way cities collect property tax, and the state’s obligation to fund local government — is long overdue.