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.

The Roads out of Municipal Bankruptcy

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eBlog, 2/24/17

Good Morning! In this a.m.’s eBlog, we consider the post-chapter 9 municipal bankruptcy trajectories of the nation’s longest (San Bernardino) and largest (Detroit) municipal bankruptcies.

Exit I. So Long, Farewell…San Bernardino City Manager Mark Scott was given a two-week extension to his expired contract this week—on the very same day the Reno, Nevada City Council selected him as one of two finalists to be Reno’s City Manager—with the extension granted just a little over the turbulent year Mr. Scott had devoted to working with the Mayor, Council, and attorneys to complete and submit to U.S. Bankruptcy Judge Meredith Jury San Bernardino’s proposed plan of debt adjustment—with the city, at the end of January, in the wake of San Bernardino’s “final, final” confirmation hearing, where the city gained authority to issue water and sewer revenue bonds prior to this month’s final bankruptcy confirmation hearing—or, as Urban Futures Chief Executive Officer Michael Busch, whose firm provided the city with financial guidance throughout the four-plus years of bankruptcy, put it: “It has been a lot of work, and the city has made a lot of tough decisions, but I think some of the things the city has done will become best practices for cities in distress.” Judge Jury is expected to make few changes from the redline suggestions made to her preliminary ruling by San Bernardino in its filing at the end of January—marking, as Mayor Carey Davis noted: a “milestone…After today, we have approval of the bankruptcy exit confirmation order.” Indeed, San Bernardino has already acted on much of its plan—and now, Mayor Davis notes the city exiting from the longest municipal bankruptcy in U.S. history is poised for growth in the wake of outsourcing fire services to the county and waste removal services to a private contractor, and reaching agreements with city employees, including police officers and retirees, to substantially reduce healthcare OPEB benefits to lessen pension reductions. Indeed, the city’s plan agreement on its $56 million in pension obligation bonds—and in significant part with CalPERS—meant its retirees fared better than the city’s municipal bondholders to whom San Bernardino committed to pay 40 percent of what they are owed—far more than its early offer of one percent. San Bernardino’s pension bondholders succeeded in wrangling a richer recovery than the city’s opening offer of one percent, but far less than CalPERS, which received a nearly 100 percent recovery. (San Bernardino did not make some $13 million in payments to CalPERS early in the chapter 9 process, but did set up payments to make the public employee pension fund whole; the city was aided in those efforts as we have previously noted after Judge Jury ruled against the argument made by pension bond attorneys two years ago. After the city’s pension bondholders entered into mediation again prior to exit confirmation, substantial agreement was achieved for th0se bondholders, no doubt beneficial at the end of last year to the city’s water department’s issuance of $68 million in water and sewer bonds at competitive interest rates in November and December—with the payments to come from the city’s water and sewer revenues, which were not included in the bankruptcy. The proceeds from these municipal bonds will meet critical needs to facilitate seismic upgrades to San Bernardino’s water reservoirs and funding for the first phase of the Clean Water Factor–Recycled Water Program.

Now, with some eager anticipation of Judge Jury’s final verdict, Assistant San Bernardino City Attorney Jolena Grider advised the Mayor and Council with regard to the requested contract extension: “If you don’t approve this, we have no city manager…We’re in the midst of getting out of bankruptcy. That just sends the wrong message to the bankruptcy court, to our creditors.” Ergo, the City Council voted 8-0, marking the first vote taken under the new city charter, which requires the Mayor to vote, to extend the departing Manager’s contract until March 7th, the day after the Council’s next meeting—and, likely the very same day Mr. Scott will return to Reno for a second interview, after beating out two others to reach the final round of interviews. Reno city officials assert they will make their selection on March 8th—and Mr. Scott will be one of four candidates.

For their part, San Bernardino Councilmembers Henry Nickel, Virginia Marquez, and John Valdivia reported they would not vote to extend Mr. Scott’s contract on a month-to-month basis, although they joined other Councilmembers in praising the city manager who commenced his service almost immediately after the December 2nd terrorist attack, and, of course, played a key role in steering the city through the maze to exit the nation’s longest ever municipal bankruptcy. Nevertheless, Councilmember Nickel noted: “Month-to-month may be more destabilizing than the alternative…Uncertainty is not a friend of investment and the business community, which is what our city needs now.” From his perspective, as hard and stressful as his time in San Bernardino had to be, Mr. Scott, in a radio interview while he was across the border in Reno, noted: “I’ve worked for 74 council members—I counted them one time on a plane…And I’ve liked 72 of them.”

Exit II. Detroit Mayor Mike Duggan says the Motor City is on track to exit Michigan state fiscal oversight by next year , in the wake of a third straight year of balancing its books, during his State of the City address: noting, “When Kevyn Orr (Gov. Rick Snyder’s appointed Emergency Manager who shepherded Detroit through the largest chapter 9 municipal bankruptcy in U.S. history) departed, and we left bankruptcy in December 2014, a lot of people predicted Detroit would be right back in the same financial problems, that we couldn’t manage our own affairs, but instead we finished 2015 with the first balanced budget in 12 years, and we finished 2016 with the second, and this year we are going to finish with the third….I fully expect that by early 2018 we will be out from financial review commission oversight, because we would have made budget and paid our bills three years in a row.”

Nonetheless, the fiscal challenge remains steep: Detroit confronts stiff fiscal challenges, including an unexpected gap in public pensions, and the absence of a long-term economic plan. It faces disproportionate long-term borrowing costs because of its lingering low credit ratings—ratings of B2 and B from Moody’s Investors Service and S&P Global Ratings, respectively, albeit each assigns the city stable outlooks. Nevertheless, the Mayor is eyes forward: “If we want to fulfill the vision of a building a Detroit that includes everybody, we have to do a whole lot more.” By more, he went on, the city has work to do to bring back jobs, referencing his focus on a new job training program which will match citizens to training programs and then to jobs. (Detroit’s unemployment rate has dropped by nearly 50 percent from three years ago, but still is the highest of any Michigan city at just under 10 percent.) The Mayor expressed hope that the potential move of the NBA’s Detroit Pistons to the new Little Caesars Arena in downtown Detroit would create job opportunities for the city: “After the action of the Detroit city council in support of the first step of our next project very shortly, the Pistons will be hiring people from the city of Detroit.” The new arena, to be financed with municipal bonds, is set to open in September as home to the Detroit Red Wings hockey team, which will abandon the Joe Louis Arena on the Detroit riverfront, after the Detroit City Council this week voted to support plans for the Pistons’ move, albeit claiming the vote was not an endorsement of the complex deal involving millions in tax subsidies. Indeed, moving the NBA team will carry a price tag of $34 million to adapt the design of the nearly finished arena: the city has agreed to contribute toward the cost for the redesign which Mayor Duggan said will be funded through savings generated by the refinancing of $250 million of 2014 bonds issued by the Detroit Development Authority.

Mayor Duggan reiterated his commitment to stand with Detroit Public Schools Community District and its new school board President Iris Taylor against the threat of school closures. His statements came in the face of threats by the Michigan School Reform Office, which has identified 38 underperforming schools, the vast bulk of which (25) are in the city, stating: “We aren’t saying schools are where they need to be now…They need to be turned around, but we need 110,000 seats in quality schools and closing schools doesn’t add a single quality seat, all it does is bounce children around.” Mayor Duggan noted that Detroit also remains committed to its demolition program—a program which has, to date, razed some 11,000 abandoned homes, more than half the goal the city has set, in some part assisted by some $42 million in funds from the U.S Department of Treasury’s Hardest Hit Funds program for its blight removal program last October, the first installment of a new $130 million blight allocation for the city which was part of an appropriations bill Congress passed in December of 2015—but where a portion of that amount had been suspended by the Treasury for two months after a review found that internal controls needed improvement. Now, Major Duggan reports: “We have a team of state employees and land bank employees and a new process in place to get the program up and running and this time our goal isn’t only to be fast but to be in federal compliance too.” Of course, with a new Administration in office in Washington, D.C., James Thurber—were he still alive—might be warning the Mayor not to count any chickens before they’re hatched.

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 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.

Re-Thinking Municipalites’ Post-Bankruptcy Futures

eBlog, 9/14/16

In this morning’s eBlog, we consider the foundering fiscal state of the Detroit Public School system—a system so vital to the city’s long-term fiscal recovery; then we try to prep for next November’s elections in San Bernardino—its first post-bankruptcy election—when citizens will determine the city’s future charter. Can a city remake itself? Then we head east to another question about remaking of a city: for insolvent East Cleveland—and adjacent Cleveland, would consolidation make better sense than municipal bankruptcy? After that, we jet south to Dade County, Florida to ask what will be next – might it be municipal bankruptcy? – for the small municipality in Dade County of Opa-locka. Finally, we consider the inexcusably delayed state of the implementation of the new PROMESA law Congress adopted last June.

An Unpassing Grade? For the second time in two months, the Detroit Public Schools’ state-backed debt credit rating has been downgraded—raising apprehensions that the bonds may not be refinanced by the start of the state’s new fiscal year—with the schools already open, and that new fiscal year just 16 days away.  S&P Global Ratings wrote it had cut its rating on bonds held by the former Detroit public school district from BB to B for those issued in 2011 and BB- to B for those issued in 2012, noting: “The downgrade is based on the lack of a finalized plan regarding bondholder repayment terms following the district’s recent restructuring, and the resultant elimination of a pledged revenue stream at the end of the state’s fiscal year.” In her report, S&P credit analyst Jane Ridley noted: “Although the Michigan Finance Authority’s intent is to take out the existing debt at full value, in our view, as October looms closer and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment on their bonds.” Danelle Gittus, a spokeswoman for the Michigan Department of Treasury, attributed the downgrade to the $617 million rescue package: “The focus of the downgrade is on bonds that are being refinanced as part of the recent DPS legislation…This downgrade does not impact the ability to refinance the bonds. The Michigan Finance Authority continues to work on a financing plan to refund the bonds, which is expected to be completed later this month. Once the bonds are refunded, the rating becomes irrelevant.” What is, however, relevant, is that S&P has now displayed an increasing lack of confidence: it has cut its ratings on the Detroit school debt by six levels between late June and mid-August, placing them in junk status. The issue is if S&P is giving the system and state program such failing grades, what kind of message might that give to young families with kids who are thinking about moving into Detroit?

Actually, we are beginning to have the answer to that question, as, yesterday, lawyers representing Detroit schoolchildren filed suit against Gov. Rick Snyder and state officials in what they are terming the nation’s first federal case that pushes for literacy as a right under the U.S. Constitution: their complaint alleges that the state has denied Detroit students access to literacy — the most basic building block of education—through decades of “disinvestment…and deliberate indifference.” The suit seeks significant remedies, including a statewide accountability system in which the state “monitors conditions that deny access to literacy” and intervenes. In plain words, as attorney Mark Rosenbaum described it yesterday outside the U.S. District Court: “For the last 15 years, the state has run the Detroit schools, has run them into the ground.”  The suit documents the low reading and math proficiency rates of Detroit students, as well as classes without teachers and outdated or insufficient classroom materials; it also notes poor conditions, including vermin and building problems, at some schools as recently as this month. The seven plaintiffs are students listed by pseudonyms who attend some of Detroit’s lowest-performing schools, of which three are run by the Detroit Public Schools Community District. In addition to naming Gov. Rick Snyder as a defendant, the suit also names the Michigan state Board of Education, state school Superintendent Brian Whiston, David Behen, Director of the Michigan Department of Technology, Management and Budget, and Natasha Baker, the state school reform officer. In response, John Austin, President of the Michigan state Board of Education, said he did not believe the state board merited being the target of the suit, because it has made recommendations to the Governor and legislature for increased education funding — and it, itself, has no power to approve such funding—or, as he plainly put it: “It’s the Legislature that holds the purse strings, and the Governor who proposes budgets.” Indeed, for anyone who cares about Detroit’s long-term recovery from the nation’s largest ever municipal bankruptcy, Kathryn Eidmann, a staff attorney for Public Counsel, yesterday said attorneys in the case decided to focus on Detroit because it has the lowest proficiency rates of any large urban school district in the country on national assessment tests. The suit charges that students in Detroit do not have adequate supplies, the textbooks are outdated, classrooms are overcrowded, and school buildings are dangerous: or, as alleged in the suit: “In one elementary school, the playground slide has jagged edges, causing students to tear their clothing and gash their skin, and students frequently find bullets, used condoms, sex toys, and dead vermin around the playground equipment,” adding that students are taught by insufficient or unqualified staff, with many schools lacking properly trained teachers assigned to classes within their area of expertise. The suit charges that by its actions and inactions, “the State of Michigan’s systemic, persistent, and deliberate failure to deliver instruction and tools essential for access to literacy in plaintiffs’ schools, which serve almost exclusively low-income children of color, deprives students of even a fighting chance,” bringing its claims under the 14th Amendment of the U.S. Constitution and the Civil Rights Act.

Can a City Remake Itself? Leaders of the campaigns for and against implementing the proposed new city charter in San Bernardino are set to debate tomorrow evening as the city awaits next month’s likely exit from the nation’s longest ever municipal bankruptcy and then November’s election in which the city’s voters will consider Measure L, a proposal to replace the city’s existing charter. The debate, hosted by the Verdemont Neighborhood Association and moderated by Michael Craft, the association’s co-president and a member of the city’s charter review committee (Mr. Craft has been neutral on Measure L), will feature John Longville, president of the San Bernardino Community College District board of trustees and previously a member of the state Assembly and Mayor of Rialto versus James Penman, San Bernardino’s long-time (26 years) City Attorney until his retirement three years ago. The charter functions as the city’s constitution. The existing charter was first passed in 1905 and periodically amended, while the proposed new one was mostly based on a national model and how other mid-sized cities typically operate today. Three years ago, in our report, we noted—with regard to the charter: “In the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.”

Unlocking Opa-locka. David Chiverton, the former City Manager of insolvent Opa-locka, the small municipality of about 16,000 in Florida, plead guilty Monday to accepting pay-offs in his former capacity as city manager in entering a felony plea in federal District Court for improperly paying himself city benefits: his felony: extortion and accepting bribes; prosecutors charge Mr. Chiverton participated with other city officials to solicit pay-offs in exchange for using their official positions to help residents and businesses obtain city services and deal with billing issues. His plea is similar to one entered by the city’s former Public Works supervisor last month of guilt for bribery. In each instance, the former city officials have agreed to cooperate with investigators against other Opa-locka officials in return for lighter sentence recommendations. The pleas come as a Florida state financial oversight board is seeking to prevent Opa-locka from payment default on its bonds and, ultimately, filing for municipal bankruptcy. In Florida, one of eighteen states that authorize municipal bankruptcy, the statute §§218.01, requires that to file, a municipality must first receive prior approval from the Governor. While two utility and two transportation districts have previously filed, no Florida municipality ever has. Indeed, the state is already involved, with, as we have previously noted, Florida Chief Inspector General Melinda Miguel, chair of the Governor’s appointed state oversight board, having ordered city officials to develop procedures to segregate financial duties and prevent the kind of improper access Mr. Chiverton had obtained. (Note: Mr. Chiverton also faces an ethics complaint filed with Miami-Dade County for the benefit payouts.) Mr. Chiverton has also been accused of accepting bribes in return for using his influence to obtain city licenses and preventing water from being shut off for delinquent payments, according to court filings—this has been an exceptionally leaky problem for the city: after examination of its water and sewer accounts, the state oversight panel found Opa-locka’s collection rates are as low as 27% and that many properties are not even being billed—findings which contributed to the takeover of the billing by Miami-Dade County—which the small municipality has also requested to extend it a loan because Opa-locka’s general fund balance is so low it is projected to run out of funds soon to pay for basic services and make payroll.

Off to a Rocky Start? What Promise Is there in PROMESA? Last June, when Rep. Nydia M. Velázquez (D-NY) released her statement regarding the Senate passage of legislation allowing Puerto Rico to restructure its debt, she noted: “I know first-hand that the situation in Puerto Rico is extremely dire.  And as I stated on House passage, PROMESA is far from perfect, but it is better than the alternative of taking no action at all.  Debt restructuring is an essential first step – and without it, the island would not be able to move forward…Now that we have passed PROMESA, Congress has the legal and moral responsibility to come together again and finish its work regarding Puerto Rico. We must provide new tools so that the island can rebuild its economy for the long-term.  And, we have to resolve the island’s colonial status once and for all – without doing so, the people of Puerto Rico cannot truly move forward. In this regard, I look forward to working again with my colleagues to pass additional legislation in the coming months.” The implementation of PROMESA—especially the appointment of members of its oversight board, has, however, raised increasing questions about the federal commitment. The members were not named until August 31st; consequently, as the Board’s non-voting member, Richard Ravitch, yesterday noted after returning from Puerto Rico: members of the newly appointed Puerto Rico Oversight Board do not begin to fully understand or appreciate the depth of the fiscal problems they will have to address—comments he made both on the basis of his visits with senior Puerto Rican leaders and after talking with several of his colleagues on the oversight board; nevertheless, he noted: “I think they are going up a learning curve.” He added, he anticipates the board will probably hold its first meeting in Washington, D.C. next week—a meeting at which, presumably, he will report back on his meeting this week with Puerto Rico Gov. Alejandro García Padilla, who had advised him that Puerto Rico’s financial situation is substantially worse than it was this past winter, warning the government is in “deep” distress.

Will a City’s Residents Agree to Cede Autonomy? The ongoing uncertainty about insolvent East Cleveland’s future—whether it would be willing to cede its autonomy and control (not to mention a mostly-black community afraid of being subject to Cleveland’s police force, where, not unlike in Ferguson, the city has accepted and agreed to U.S. Justice Department exacting standards with regard to how and in which circumstances may its officers use force, as well as ongoing federal oversight—all as part of what the Justice Department has termed a pattern of unconstitutional policing and abuse, ergo triggering DOJ-mandated training in Cleveland—to be annexed or incorporated into the City of Cleveland is a harrowing issue—as well as one conflicted by Cleveland’s apprehensions that such incorporation would appear to create more negative fiscal downsides than upsides, both in terms of significant fiscal challenges, and significant new fiscal burdens on its police resources. Nevertheless, it might be that the discussion appears to be triggering what one blogger asked: should we be rethinking, after decades of glorifying the concept of home rule, that the accumulation of so many fragmented small political bodies makes fiscal sense. But, then, one has to consider not just the political challenges—but equity issues: does one propose to consolidate just the poor, struggling, disinvested entities together in one jurisdiction, but leave the well-off municipalities?  Last spring at my very favorite Lincoln Institute of Land Policy, at a journalist forum, Oklahoma City Mayor Mike Cornett spoke about his city’s amazing turnaround, followed by a searing speech from Sen. Dan Kildee (D-Mi.) contrasting the ways in which Flint been harmed by external forces. But the underlying issue is, when consolidating governments, it is one thing—as occurred in Oklahoma City—to annex wealthy enclaves and productive tax-generating areas. It is a whole other challenge to contemplate annexing adjacent jurisdictions with devastated tax bases and very high police needs.

Down the Road Questions about the State of the Motor City

February 24, 2016. Share on Twitter

State of the Motor City. In his third State of the City address, Detroit Mayor Mike Duggan described the significant changes in Detroit since its emergence from the nation’s largest ever municipal bankruptcy—but warned of serious challenges to the city’s fiscal sustainability. He outlined the significant human and public infrastructure gains since the city’s plan of debt adjustment was approved by retired U.S. Bankruptcy Judge Steven Rhodes, including significant reductions in violent crime and homicides, improved public safety responses, and the massive upgrading of bus service and street lighting. He pointed to ongoing blight removal and demolition efforts, adding jobs, and cutting car insurance rates. He noted his leadership efforts to restore the quality of Detroit’s public schools—an issue which, absent both significant state aid and a signal turnaround in the wake of abysmal leadership under the state-appointed emergency manager, threatens his goal of restoring the city to be one to which young families with children would want to move—reiterating the urgency of restoring an elected school board. He noted the city had successfully razed 8,000 abandoned homes—part of the city’s significant efforts to lure more people to Detroit. The city has cut ambulance response times in half from 18 minutes, and Mayor Duggan said the city will soon work on improving pay for emergency medical technicians and firefighters. Detroit will hire 200 officers this year, he said, and equip them with technology to recognize license plates in a bid to help arrest more than 1,000 people with outstanding warrants for a gun crime. Detroit Police Chief James Craig has put together a new fugitive apprehension unit to go after the more than 1,000 people with outstanding warrants for gun crimes, including car-jackings and armed robbery, Mayor Duggan, noting they will be using technology equipped with photos and license plate information of suspects: “We are tired of the gun violence. We are not putting up with it anymore.” The mayor added he will propose plans to continue with Detroit’s massive demolition effort with a goal of 20,000 houses by the end of 2017. In two years, the city has razed 8,000 houses and last week it was announced that Michigan was eligible for $323 million in federal funds to tackle blight. Starting Tuesday, residents can call 911 to report scrappers, he said, in still another sign of the city’s recovery since emerging from bankruptcy. “They’re going to arrest them and haul them away,” Mayor Duggan said. He also referenced several new initiatives unveiled in recent weeks. Last week, Mayor Duggan announced a $40 million fund to help 1,000 buyers obtain mortgages in Detroit and overcome a gap in property appraisals that has thwarted neighborhood revitalization.

Detroit’s Fiscal Sustainability. In his address, Mayor Duggan reported his office would submit its FY’2017 budget, one, which he noted: “will be balanced for a third straight year.” Nevertheless, the Mayor warned of serious fiscal threats to Detroit’s nascent recovery, especially with regard to the looming $491 million deficit in Detroit’s public pension liabilities, reminding listeners that if the city takes no action to reduce those obligations, the general fund will have to contribute $83 million more a year to the two funds, commencing in FY’2024. Noting that he did not intend to “panic” over the pension fund deficit, he said his office is acting to bring in an expert to review and analyze pension liability estimates used as part of the city’s plan of debt adjustment—and that his budget would include $20 million over two years from the city’s budget surplus specifically targeted to reducing that deficit: “We are going to get on it now…We are not asking anybody for a bailout. We are going to have to address this problem. We are going to do it honestly.”

The public pension warning comes in the wake of last fall’s report from the Detroit Financial Review Commission which found in its actuarial projections that Detroit’s required annual contribution or ARC to its two pension funds in FY2024 could increase by $80 million compared to the projections used in its federally approved plan of debt adjustment. Thus, while the city’s plan of debt adjustment provided significant pension relief to the city with regard to contributions to the General Retirement System and Police and Fire Retirement System through 2023, it is after that, beginning in FY2024, that the document requires the city to start funding a substantial portion of the pension obligations from its general fund—an amount projected under the approved plan to be $113.9 million, but raised more than 80% late last year to $196 million in a report by the actuarial firm for the city’s retirement systems—based in part on mortality data contemplated in the bankruptcy plan projections. Yesterday, Mayor Duggan said former Detroit Emergency Manager Kevyn Orr and the city’s bankruptcy consultants may have “used the wrong assumptions,” adding that he has directed the city’s Law Department to evaluate any claims against the city’s former bankruptcy consultants, who were paid $177 million dollars: “I don’t know whether it’s actionable or not, but we’re going to pursue it,” noting he had authorized the city’s chief litigation officer to review the bankruptcy consultants’ work during Detroit’s municipal bankruptcy to determine if there are possible legal claims. 

The Costs of Municipal Bankruptcy. Detroit Mayor Mike Duggan, in his address, said he would assess whether the City of Detroit should file suit against some of the city’s bankruptcy consultants for using what he said were outdated data—here creating a miscalculation of jaw-dropping proportions: the total $491 million pension fund shortfall. The Mayor, as noted above, aimed especially harsh criticism at former Detroit Emergency Manager Kevyn Orr and his consulting team, albeit adding: adding: “We’re going to manage it, and we are not going to ask anybody to bail us out…We are going to keep our pension funds solvent…We are going to keep our promises to retirees. They were broken once and we are going to make darn sure it doesn’t get broken again.” 

The costs to a city or county of filing for and going through municipal bankruptcy are costs for which there is little choice but to pay in order to ensure the provision of critical public services–yet, as we have seen in Stockton, San Bernardino, and Detroit–the costs are not just a signal drain on the city’s coffers–but they come at the expense of funds and investments critical to a municipality’s long-term fiscal sustainability.