Atlantic City Blues

 

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eBlog, 12/01/16

Good Morning! In this a.m.’s eBlog, we consider the evolving state role in New Jersey’s takeover of Atlantic City. It might be the state has learned from its only previous history of a municipal takeover (Camden); it is clear that the takeover will prove critical today and this month in ensuring the city avoids critical non-payments and likely ensuing chapter 9 municipal bankruptcy.

Atlantic City Blues. The State of New Jersey, as part of its takeover of Atlantic City, has imposed a nearly 9 percent increase in the property tax rate as part of the boardwalk city’s $241 million budget: the new rate, $1.898 per $100 of assessed value, is up 15 cents from a year ago—overall, the city’s property tax rate has nearly doubled in the last six years even as the revenue derived from taxing its once formidable array of casinos has sharply declined. All told, the combination of county, school, and library taxes, Atlantic City’s total tax rate of $3.86 per $100 of assessed value is up nearly 13 percent from last year—but up some 113 percent since 2010. Yet, even as the rates have soared, the collection total has declined: Atlantic City collected nearly $20 billion in tax revenues in 2010; the total has since dropped sharply to about $6 billion today. The tax levy for the 2016 operating budget is $123 million, down from $128 million last year. While that is no doubt comforting to some of the city’s taxpayers who have seen their average residential tax bill decline sharply due to plummeting assessed property values (a resident residing in a home assessed at $154,778 will pay $5,974 in property taxes this year: last year, the average resident paid $5,988 in taxes on a home assessed at $174,993), the effort by the city’s elected leaders against the State of New Jersey to keep the tax rate flat appears to have fallen on deaf ears: city leaders have argued that its taxpayers had already swallowed a 50 percent tax hike in 2013 through 2014. Unsurprisingly, ergo, Atlantic City’s proposed FY2016 budget and five-year fiscal recovery plan sought no municipal tax increase. It was this lack of proposed local tax increases that drew criticism from the State—which charged the city needed more revenue if it was to be serious with regard to closing its nearly $100 million budget hole—a criticism reflected in its rejection of both the Council’s budget and recovery plan; instead, the New Jersey Local Finance Board last month imposed a revised municipal budget with the tax-rate hike last month on the precise day it assumed control of the city. In his opposition, Atlantic City Mayor Don Guardian noted: “I fought tooth and nail against this state-imposed tax increase…I told the state over and over again that our residents couldn’t handle any more tax increases because they’ve been taxed to death over the past 10 years. That’s why last year, when we had complete sovereignty over the city, we didn’t have a tax increase.” It might be that the city’s adopted budget was the final straw from the state perspective, for it drew sharp criticism from New Jersey Local Government Services Director Tim Cunningham, who, in October, had warned Mayor Guardian: “While no elected official desires to increase taxes, it is irresponsible not to maintain the current levy let alone not increase the rate in a way that brings in additional revenue;” thus, under the now state-imposed takeover, it was the state which imposed a revised $241 million budget which reduced state aid by $10 million, but increased local tax levies by $9 million.

Nevertheless, Moody’s Investors Service this week described the state takeover as a “credit positive” for Atlantic City, describing the unlikely threat of immediate default through 2017 as the single most important factor in its outlook—and reflecting the first fiscal assessment since Governor Chris Christie’s appointment of Jeffrey Chiesa to oversee the state takeover (Mr. Chiesa was the designee of Timothy Cunningham, the New Jersey Director of the Division of Local Government Services in New Jersey’s Community Affairs Department, who, under state law, was given reins of the city once the state took over). Thus the state endowed Mr. Chiesa with broad, preemptive authority to take on and bolster Atlantic City’s fiscal condition—authority which Moody’s, in its outlook, described thusly: “While the state has not officially guaranteed Atlantic City’s debt, Director Cunningham has said the state intends to prevent any default.”  The timing matters: Atlantic City has some $2.3 million in debt payments due today—and then $4.8 million more at mid-month. Ergo, as Moody’s noted: Mr. Cunningham’s “willingness to go to the state treasury for assistance if necessary to pay debt service” is a credit positive.

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What Happens When a State Takes over a City?

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eBlog, 11/02/16

Good Morning! In this a.m.’s eBlog, we consider the State of New Jersey decision to usurp authority over Atlantic City’s government after rejecting its recovery plan—albeit offering little guidance on when—or exactly how—such a transfer of governing power and authority will proceed. States have different legal means and experiences in taking over municipalities: eighteen provide authority for municipal bankruptcy—which, of course, means thirty-two do not. In New Jersey, there has been a complex interplay with the state naming an emergency manager, a la Michigan; however, that manager seemed to lack either the ability or the authority to play a meaningful role. The state does have previous experience in taking over a city: Camden. Then we journey to Flint to consider some of the governance challenges between the judicial and executive branches of the State of Michigan as they relate to the tragic state actions with such lasting adverse human health and safety for the city and citizens of Flint. Finally, we visit Petersburg, Virginia’s municipal library—where the virtually insolvent city appears to be caught between competing municipal priorities.   

Saving Grace? Gov. Chris Christie’s administration yesterday rejected Atlantic City’s five-year fiscal recovery plan, apparently precipitating a state takeover: Department of Community Affairs Commissioner Charles Richman said the city’s proposal was “not likely to achieve financial stability.” Commissioner Richman noted in his decision that if Atlantic City failed to propose a suitable plan, the state could assume “certain functions, powers, privileges and immunities of the governing body” of Atlantic City. However, the statement was silent with regard to invoking a state takeover—much less how such a takeover would work; the statement noted that the rejection was based on “not only what is in the plan submitted by city that is deficient, but also on what the city does not have in its plan,” with Commissioner Richman noting: “I would have much preferred to leave management of the city’s recovery in the hands of its municipal officials…However, I am constrained by the plan the city has placed before me. The enormous problems confronting the city did not occur overnight. City leadership has had ample time to improve the city’s financial condition, yet has avoided doing so in any meaningful way. The plan is not likely to achieve financial stability for the city.” The Commissioner stated that the city’s plan underestimated debt service over the next five years by approximately $18 million; assumed the city would receive $31 million more in redirected casino investment taxes than is likely; and overstated property tax revenues by $20.5 million. In addition, he faulted the plan for not including tax increases as part of its recovery plan. He added that the city’s proposed $110 million sale of the city-owned Bader Field former airport property to the city’s municipal utilities authority was “structurally flawed.” Commissioner Richman said the plan does not include a proposed balanced 2017 budget which complies with the law, underestimates debt service, failed to accurately estimate revenues, and overestimated property tax revenues, adding that key parts—such as the proposed sale of Bader Field plan—were “speculative in terms of their viability.”

Where’s the Beef? Notwithstanding the announcement, there was no immediate trigger of the takeover for which Governor Christie has long called—and which many city leaders and state lawmakers have fought for months to avoid; rather Tammori Petty, a spokeswoman for the Department of Community Affairs said the next step will be for New Jersey’s Local Finance Board to “consider whether to assume powers of the governing body that may be substantially related to the city’s fiscal condition or financial rehabilitation and recovery;” while Brian Murray, a spokesman for Gov. Christie’s office, said: “We are reviewing the extensive report, along with everyone else, and will not be making any statements at this time.”

For his part, Mayor Don Guardian has vowed to appeal an adverse decision in court; while New Jersey General Assembly Speaker Vincent Prieto stated: “Taxpayers better now beware: State takeovers of school districts have been disastrous. The administration needs to immediately detail whether a takeover would cost taxpayer money and how much. It must also detail whether it will push a property tax hike upon Atlantic City residents that the city’s plan showed was unnecessary.” City Council President Marty Small told the Associated Press the state’s decision was “misinformed, misguided, and biased…The fix was in, and it will be dealt with…This is far from over.” In a joint statement with Mayor Don Guardian, the two said the city is “truly disappointed that the state did not recognize the value of this thoughtful and comprehensive plan.” Mayor Guardian, who has previously warned the city would appeal a takeover in court, noted yesterday that the city is “reviewing all of our options.” In the New Jersey General Assembly, State Assembly Speaker Vincent Prieto, the lawmaker who led the fight in Trenton to stave off a takeover, said the city’s plan “should have been approved,” adding: “I doubt the state can do better…Taxpayers better now beware. State takeovers of school districts have been disastrous.” 

In recent days, local leaders had appeared optimistic the Christie administration would accept their plan. Credit rating agency Moody’s Investors Services, after all, had called the plan “robust and detailed.”

What’s Next? The announced takeover opens the door to unprecedented state authority over Atlantic City’s affairs, including the right to:

  • dissolve agencies,
  • override decisions by elected local leaders, and
  • sell off assets, including land and a water utility coveted by private operators.

Commissioner Richman, however, offered no insights with regard to how the state intends to use that authority, with a spokesperson for the state agency stating that “the next step” will be up to the state Local Finance Board; however, she provided no timetable for a decision. The city’s 120-page package had proposed 100 job cuts, early retirement for some employees, a tax settlement with casinos, and a plan to sell the former Bader Field airport site to the city’s municipal utilities authority for $110 million, among other cost-saving measures.

If Past Is Prologue? The takeover is not the state’s first: fourteen years ago the New Jersey legislature stripped Camden of most of its municipal authority; the state provided $175 million in extra state dollars; however, it appears that state takeover failed to improve the city’s failing infrastructure, schools, or economy. The takeover lasted seven years. It was promised to be a new start for Camden—coming in the wake of very different circumstances than Atlantic City: decades of corruption in City Hall, e.g. a situation much more akin to Detroit under former, convicted, and imprisoned Mayor Kwame Kilpatrick. In the case of Camden, New Jersey imposed a chief operating officer to run Camden and provided some $175 million in special state aid.

Indeed, looking back, Former New Jersey House Speaker Joe Roberts, who helped to write New Jersey’s takeover legislation eight years ago, when asked—in retrospect—whether that $175 million was wisely spent wisely, responded the answer had to be yes to all of them, noting, at the time: “If Camden is going to have any chance of survival long-term, we have to grow the tax base. And that’s only going to occur by building up the downtown and creating an environment where companies can come in and invest in the cities.” Yet, today, Camden’s poverty rate remains near 40 percent, and it still ranks among the most dangerous cities in the U.S. America. Professor Richard Harris of Rutgers, discussing the state’s takeover authority law, has previously noted he did not believe anyone who authored New Jersey’s takeover state statute thought that by putting large state investments in play in Camden that that was going to “flip a switch” so that Camden’s problems were magically going to be fixed; rather, he described the state’s takeover authority as one with more modest goals: to spur private investment while also rebuilding city government, noting, in retrospect: “There’s actually been a significant amount of progress on revitalizing the downtown and the city, but in terms of revitalizing or making more robust government, that you’d have to mark down as not being a success.

But yesterday, in reaction, New Jersey House Speaker Vincent Prieto said: “Taxpayers better now beware: state takeovers of school districts have been disastrous. The administration needs to immediately detail whether a takeover would cost taxpayer money and how much. It must also detail whether it will push a property-tax hike upon Atlantic City residents that the city’s plan showed was unnecessary…Today’s announcement means that a state takeover is still in the cards. That would be a profoundly undemocratic scheme, one that puts corporate interests over people and uses the city’s financial crisis to seize control over its most valuable asset: the municipal water system. Gary Hill, the Executive director of the Metropolitan Business and Citizens Association, said, referring to the Christie administration: “They think they have a better plan, but nobody knows what that is. I can’t wait to hear what it is;” Frank Formica, an Atlantic County freeholder director put it this way: “It’s a shame after 30 years of failed local leadership, five years of failed state oversight, two summits and spending over $2 million in taxpayers’ money for expert reports, the state’s answer is to reject the only plan prepared in 30 years and simply hand over the keys of the city to outside special interests with no plan of its own, no transparency and no leadership.”

Out Like Flint. The State of Michigan has asked the Michigan Court of Appeals to rescind protective orders intended at barring the state Department of Health and Human Services from access to potential evidence and witnesses in future Flint water criminal prosecutions, arguing that such orders violate the Michigan Constitution. The new filing asserts that the protective orders violate the separation of powers clause in Michigan’s Constitution and disrupt an executive agency’s statutory authority to respond to the lead and Legionella public health issues. Special prosecutors, and representatives of McLaren-Flint hospital have argued in their own filings with the Court of Appeals, however, that lifting the protective orders would compromise ongoing criminal investigations tied to the Flint water crisis. But in the state’s filing, the state argued that protective orders aimed at keeping the state Department of Health and Human Services away from potential evidence and witnesses in future Flint water criminal prosecutions would violate the Michigan Constitution, as it asked the court to rescind protective orders issued by Genesee County Circuit Court Judge Geoffrey Neithercut earlier this year—orders that the agency first sought to block in a filing with the court two months ago: the newest DHHS filing warns the protective orders violate the separation of powers clause in Michigan’s Constitution and disrupt an executive agency’s statutory authority to respond to the lead and Legionella public health issues; special prosecutors, and representatives of McLaren-Flint hospital have argued in their own filings with the Court of Appeals that lifting the protective orders would compromise ongoing criminal investigations tied to the Flint water crisis. Three DHHS employees have been charged with criminal wrongdoing related to their actions in Flint; however, the state agency argues it cannot be the subject of a criminal prosecution—and that the “investigation of a handful of its employees cannot be used as a pretense for unconstitutionally stripping a state department of its legislatively assigned responsibilities.” (Michigan is alleging that the hospital has been linked with nearly a dozen healthcare related Legionella deaths from the use of water from the Flint River.).

Misappropriation? The Petersburg (Va.) Circuit Court Law Library committee has filed a lawsuit alleging that funds from the law library have been misappropriated, claiming the amount could be between $100,000 and $200,000. (Funds taken in daily through court fees are deposited into a fund for the law library.)  In the suit, representatives claim that funds being collected specifically for the Law Library are instead being diverted to pay general debt for the City, albeit Commonwealth’s Attorney Cassandra Conover has indicated that, if anything: “I think we know where the monies haven’t gone…it’s for different departments, such as the Commonwealth Attorney, the Sheriff, the Law Library.” Two years ago, the Law Library Fund was around $112,000; it has likely grown since library operational costs are not expensive—indeed, less so since its relocation from the circuit court building into the Petersburg Public Library; however, recently, several big bills have gone unpaid, even as the court has continued to send the city money. There was a $14,000 bill for shelving and more than $1,500 for computer software.

To Takeover, or Not to Takeover: That Is the Question

 

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eBlog, 10/31/16

Good Morning! In this a.m.’s eBlog, we consider the long wait until tomorrow for the State of New Jersey to determine whether to approve Atlantic City’s recovery plan—or to take over the municipality. States have different legal means and experiences in taking over municipalities: eighteen provide authority for municipal bankruptcy—which, of course, means thirty-two do not. In New Jersey, there has been a complex interplay with the state naming an emergency manager, a la Michigan, nut a manager who appeared to play little if any role. In New Jersey’s case, the state, in fact, does have experience with a state takeover: Camden. So, as we await the state decision tomorrow, we consider some of these intergovernmental factors.  

Saving Grace? The State of New Jersey is expected to decide the fate of Atlantic City by tomorrow with regard to how much—if any—of the city’s proposed 123-page recovery plan—a plan which, as we have described, sharply reduces the number of employees, addresses liabilities from past overtaxing of casino properties, reduces employee benefits, cuts the number of fleet vehicles, and would sell off its municipal airport. The plan, despite guarantees of substantial payments from casinos and diversion to the city of tens of millions in state revenue, proposes ongoing state transitional aid for five years. The plan proposes the city’s Municipal Utilities Authority would borrow $110 million in order to purchase city’s Bader Field airport property—with the financing of the loan to be repaid by raising water rates, selling the property, or a combination of both. The plan does not seek any tax increases. Finally, the plan seeks extra state transitional aid, winding down from $26 million in the first year to $14 million in 2021. The State has until tomorrow to opine whether this proposal would restore “fiscal stability:” rejection would allow the state to move to take over the city government and seize assets. Gov. Chris Christie’s office has, so far, directed all questions to the Department of Community Affairs. His long, winding, one hundred fifty day period granted the City by the legislature to come up with a recovery plan comes in the wake of a seeming series of experiments by the state—including the appointment of an emergency manager—apparently styled after Michigan’s system; however, in Atlantic City, it remains unclear whether the Governor’s appointed emergency manager ever had any authority: he was a non-player. Gov. Christie called Mayor Guardian a liar. Yet, at the end of a day, it seems unlikely the Governor’s desire to wrest control over the city is still there: Rutgers University political scientist Ross K. Baker has described Gov. Christie’s playbook of bravado and verbal aggressiveness as something that ‘no longer works for him:’ “He let a lot of people down…The revelation of his conduct, his pettiness, his vengefulness are not attractive human qualities.” One of the rationales for a state takeover was to reassure legislators from the norther part of the Garden State that it would not be reckless to send a projected $200 million from proposed North Jersey casinos down to Atlantic City in a major tax transfer; however, even that plan is unlikely to lead to any cash-in of chips; the referendum to allow casinos in the northern part of the state appears unlikely to hit the right numbers in next week’s elections.

For the state, this will not be a first-time decision, and its experience with the state takeover of Camden might provide us some insights: New Jersey took over the nation’s poorest city and one of the most violent in the country in 2002 at a cost of $175 million in extra state dollars. In Camden, the state takeover appeared to result in an inability to improve the city’s failing infrastructure, schools, or economy. There, the state takeover lasted more than seven years, a period during which the state appropriated hundreds of millions of dollars in aid in an effort to overcome decades of corruption in City Hall: the state imposed its own chief operating officer to run the city; New Jersey set aside $175 million in special state aid—aid theoretically intended to repair crumbling streets and sewers, improve schools, and put more police officers on the streets. Former New Jersey Assembly Speaker Joe Roberts noted that if Camden was going to have any chance of survival long-term, the state takeover was vital, along with a fiscal plan to grow the city’s tax base. Yet the city, with a poverty rate close to 40 percent—a municipality which as recently as 2012 experienced the highest crime rate in the United States—some more than 600 percent greater than the national average, might not be a poster child for signs that a state takeover necessarily guarantees a brighter and safer fiscal or physical future. Camden, with a population of 77,000, once home to several major manufacturing firms, has received hundreds of millions of dollars in loans, grants and direct aid from the State of New Jersey; yet, over the years, and despite the state takeover and assistance, the city remains one of the nation’s poorest.

Nevertheless, on its own, according to Camden Mayor Dana L. Redd, the city, a year ago last June, had gained substantial fiscal progress: S&P affirmed the City of Camden’s investment grade bond rating of BBB+, noting that while many urban cities across the country with similar challenges were experiencing downgrades in their ratings, Camden was bucking the trend: “Camden’s current financial standing has surpassed everyone’s expectations…The fact that S&P affirmed our investment grade rating sends a clear message that Camden’s resurgence is real and investors and businesses have confidence in investing in our City. While this is certainly welcomed news, my Administration will continue to take appropriate steps to ensure the City can receive an upgrade in the near future.” In its upgrade, S&P noted: “We believe that its liquidity will remain very strong given expected financial stability and continued improvements in the economy, coupled with a proactive administration,” adding “recent development includes the construction of student residential housing for the Cooper Medical School of Rowan University. Also, currently under construction is a new corporate headquarters and practice facility for the Philadelphia 76ers. Furthermore, the city is experiencing quite a bit of development. Most notable, are two commercial properties, the U.S. headquarters of Subaru and Holtec, which are expected to add a significant number of jobs and boost the economy. Additional investments are likely, given the city’s improving economy and lower crime rate. The city has continued to make progress in economic development and its crime rate and has gained White House attention.”

On the Edge of Municipal Bankruptcy

January 21, 2016. Share on Twitter

On the Edge of Municipal Bankruptcy. In the wake of Gov. Chris Christie’s veto of bipartisan legislation that would have helped the city by the sea revive its tax revenues and cash flow, the city, instead, is facing default—a position under which, if the Local Finance Board of the New Jersey Department of Community Affairs determines that a triggering event has occurred, Atlantic City would be placed under the board’s supervision—which would, in turn, enable the city to file a petition for chapter 9 municipal bankruptcy. Atlantic City Mayor Don Guardian City Council President Marty Small are planning an emergency city meeting next week to consider filing for bankruptcy, a motion which must be approved by the state, with Mayor Guardian noting: “If the state is not able to come up with the funding we need within the next few weeks, we will have no choice but to declare bankruptcy.”

The legislation aid package, worth $33.5 million for Atlantic City, was first passed by state lawmakers last June: it included measures to stabilize the municipality’s property tax base and establish fixed payments for tax appeals. After months of delay, Gov. Christie vetoed the bill, and he asked for certain changes. When the legislature, in a bipartisan effort, incorporated the Gov.’s proposed changes and re-passed the bill, Gov. Christie this week vetoed it again—virtually forcing the city into municipal bankruptcy. Should Atlantic City file for municipal bankruptcy, as appears nearly certain to be the case, it will mark only the second time a city has so filed: Camden filed in 1999; however, its case was subsequently dismissed.

In vetoing the key measure, Gov. Christie’s spokesperson stated: “Atlantic City government has been given over five years and two city administrations to deal with its structural budget issues and excessive spending…It has not. The governor is not going to ask the taxpayers to continue to be enablers in this waste and abuse.” Without the legislation, Atlantic City could be in default by April.

Mayor Guardian stated; “We’re shocked that the governor, who presented us with his bill, reneged on the funding,” and Assemblyman Vince Mazzeo (D-Atlantic City) said that the Governor’s vetoes demonstrated a “brazen disregard” for Atlantic City’s fiscal recovery. Nevertheless, the city, which already is in a unique position of dual governance—with both a state-appointed emergency manager as well as a Mayor and Council—appears to have no support at the state level: New Jersey State Senate President, Democrat Steve Sweeney, initially supported the aid package, but no longer does; instead he supports a state takeover of the city’s operations, a move strongly opposed by Mayor Guardian. Sen. Sweeney said: “We cannot afford to let Atlantic City go bankrupt…The best way out is for the State of New Jersey to take control of Atlantic City’s finances and the best way to do it is to act quickly.”

It is unclear exactly how what Sen. Sweeney is proposing would differ from the current role the state is playing in Atlantic City’s oversight through its appointment of emergency manager Kevin Lavin nearly a year after he was appointed by Gov. Christie to find ways to fix the dire state of Atlantic City’s fiscal condition. Indeed, Mr. Lavin released a final report late Friday which stops short of recommending that the city file for municipal bankruptcy—instead suggesting massive spending cuts, as well as consolidating and privatizing some parts of the local government. Ergo, Mr. Lavin said he supported efforts in the state Legislature that are currently underway to help Atlantic City — albeit, he was not specific with regard to the recently unveiled plan by state Senate President Stephen Sweeney calling for the state to take over Atlantic City’s finances. Mr. Lavin’s report, released a year after his appointment by the Governor to the $135,000-a-year job and more than six months after it was due, was posted on the New Jersey Department of Community Affairs website around 5 p.m. Friday.

For his part, the beleaguered Mayor Guardian said in a statement late Tuesday that the municipal bankruptcy option is “now back on the table” in the wake of Gov. Christie’s veto of state legislature’s package which would have enabled the city’s eight remaining casinos to enter into a payment-in-lieu of taxes (PILOT) program for 15 years and aggregately pay $120 million annually over 15 years instead of a traditional property tax. The city’s adopted FY2015 budget relied on some $33.5 million in anticipated revenues from redirected casino taxes included in the rescue bills to address a $101 million deficit. In his statement, Mayor Guardian warned that: “if the State is not able to come up with the funding we need within the next few weeks, we will have no choice but to declare bankruptcy…The signing of the PILOT bill would have saved us from looking at that, but unfortunately, the Governor did not sign the bill so we have to think realistically. The next few weeks will be very interesting.” That package, which would also have reallocated the state’s casino alternative tax to pay debt service on Atlantic City-issued municipal bonds, would have, in addition, given the city a chance to receive $60 million in funding directed to the city’s marketing arm, the Atlantic City Alliance for 2015 and 2016 had the legislation been signed by Tuesday’s high noon deadline.

The beleaguered Mayor Guardian also took aim at Sen. President Sweeney’s proposed state takeover of Atlantic City operations: “We will not tolerate the stripping of our God-given civil rights and right to self-governance…Atlantic City has worked too hard and has come too far to let that happen,” adding, in a statement, yesterday, that municipal bankruptcy is not the right course for Atlantic City, noting that, in the Garden State, only the state has power to declare bankruptcy and that doing so would have “disastrous results” and hurt the financial standing of other New Jersey municipalities.

EM’s Report. In his second, and almost certainly final report, Atlantic City Emergency Manager Kevin Lavin, whose contract with the state is scheduled to expire tomorrow, urged the consolidation and privatization of municipal services and massive spending cuts, but stopped short of recommending chapter 9 municipal bankruptcy. Mr. Lavin wrote that the city would run out of cash by April if New Jersey Gov. Chris Christie did not—as he did not—sign the package of rescue bills passed by the State Legislature. Mr. Lavin, in his final report, recommended regionalizing Atlantic City’s police force with neighboring municipalities and privatizing its fire department, noting that that these two departments, alone, comprise 69 percent of the city’s budget for salaries and wages. Mr. Lavin also recommended privatizing the Boardwalk Hall sports arena and the Atlantic City Convention Center, noting that these two properties operate at a combined loss of $15 million to $20 million annually with $75 million currently reserved for “substantial capital expenditures,” and adding that Atlantic City’s Municipal Utilities Authority has “significant assets” that present opportunities to increase revenue; he recommended dissolving the water authority and restructuring it to better benefit Atlantic City.

In his report, Mr. Lavin gave credit to Mayor Guardian and Atlantic City officials for the way in which they took on the city’s $101 million deficit in crafting their FY2015 budget, but he noted the overwhelming $190 million plus of casino tax appeals and other non-bond debt the city now faces, noting that the city’s ability to raise public funds to repay the non-bond debt is “highly unlikely” due in large part to an inability to quality for adequate Qualified Bond Act financing, according to the report. Atlantic City’s credit ratings have dropped to junk status. As Mr. Lavin noted: “As this report shows, over the past year we have accomplished much by working together with all stakeholders, and successfully kept the City from falling into fiscal ruin, including taking on a $100 million budget deficit that ballooned by nearly 20% in the course of the year…Atlantic City had been losing yardage for years, but we began to move the ball down the field. Unfortunately, our momentum has been stalled by parochial politics that continue to inhibit progress.”

For his part, Senate President Sweeney issued a statement after the Lavin report’s release emphasizing the need for state involvement to avoid bankruptcy: “New Jersey taxpayers cannot afford to let this crisis continue and that is why our takeover bill must be acted upon promptly…We can avoid bankruptcy, but only if we act now.”

Frustration. With the multiple, but conflicting state roles—between the state-appointed emergency manager, peripatetic Presidential candidate Chris Christie, and state legislative leaders—all sending conflicting, as opposed to constructive messages, one could sense the growing frustration in the city: as Mayor Guardian put it; “We have already made definitive progress within the confines of all the options made available to us…“So why have the plans not worked out in the time since I have been elected?” Ticking off the multiple and oft conflicting state oversight roles, including the past five years under a state monitor, with emergency manager Kevin Lavin added to the mix last year and a Local Finance Board that must approve the city’s budgets, Mayor Guardian said even a paperclip could not be mismanaged without review, noting: “The wake-up call to those above us is that this simple one-step answer to the problems that have been created over 35 years does not exist, and more to the point, we can certainly not fix everything in just two short years.”

A City Perspective: Atlantic City Council President Frank Gilliam, in an op ed yesterday, wrote:

The behavior of the New Jersey state government toward Atlantic City in recent days can be compared to that of a mugger — a robber who takes his victim’s money, demands his jewelry, and then threatens to shoot him for not having enough money.

Let me explain. While it’s without doubt that Atlantic City faces difficult financial circumstances, much of the difficulty is caused by the state. For decades, the state and its agencies have treated Atlantic City as their own bank, taking more than $1 billion.
It currently takes, through the Casino Reinvestment Development Authority (CRDA), more than $55 million each year:
• $26.6 million in sales and luxury taxes
• $20.5 million in parking fees
• $9.25 million in hotel room taxes

When Atlantic City occupied space as the unique gaming destination on the East Coast, this was tolerable. But as the state acknowledges, Atlantic City is no longer unique. The city must change to face this reality. But the state must also face this reality. It needs to allow Atlantic City to keep the revenue generated in Atlantic City. This alone will allow the city to finance city services.
The threat of takeover by the state because of city finances is a cynical ploy. The state has set up Atlantic City to fail, so that it can be plundered by outsiders. The reality is that the state is seeking to take away the constitutional rights of the residents of Atlantic City to choose their own leaders.

The state has had control of all hiring, firing, and contracts let by the city for several years through its appointed monitor

Again, let me explain.

Legislation passed last week that would allow for casinos in North Jersey would further reduce revenue to Atlantic City and increase competition. It’s a double whammy for Atlantic City:

The legislation creates $50 million in payments from the casinos, but the recipients are the Atlantic County government and city schools. No payment comes to the city. All payments from northern casinos would go to another CRDA-like state agency.

The state is seeking to reduce revenue to the city in a cynical manner to attempt a takeover. If revenue falls below 50 percent of expenses locally, the state has used that as an excuse for takeover. Witness Camden City.

For these reasons, those who know the city best have opposed the recent state moves. Republican Mayor Don Guardian calls the takeover threat “our Pearl Harbor.” Democratic state Sen. Jim Whelan, a former Atlantic City mayor, also opposes a takeover.

As (Sen.) Whelan points out, the state has had control of Atlantic City’s tourism district for nearly five years. During that time, four casinos have closed and convention bookings are down.

But it’s not enough that the state has taken our money. It now wants our assets, including the Municipal Utilities Authority. These are wrong moves and the state’s own monitor and the Department of Community Affairs has said so.
The state is one of the biggest offenders of owning assets that contribute nothing to Atlantic City. The CRDA owns 675 properties that pay no taxes. The state could sell these assets, get them back on the tax rolls, and help generate additional revenue for Atlantic City.

One of the most distressing thoughts related to a state takeover is the potential disenfranchisement of voters. It would be unfair, undemocratic, and un-American for the state to deny Atlantic City voters their constitutional right to choose their own government, a mayor and city council with real authority.

Atlantic City is vastly diverse, and to deny any voter his or her right would be wrong. But it would be particularly hurtful to deny African Americans, the largest group of residents in Atlantic City, the full value of their votes.

The best course of action for the state is recognize Atlantic City no longer occupies a unique place in the gaming market, but is still unique in New Jersey. The state should allow Atlantic City to keep the revenue generated there and let those who know the city best — its locally elected officials — the freedom to determine the city’s future.
What About the Future? Children are cities’ futures, so it is understandable that Detroit Mayor Mike Duggan is trying to change not only the math of the system’s failing fisc, but also the failed governance of a system currently under a state-imposed emergency manager. With black mold climbing the interior walls of some classrooms, and free ranging, non-laboratory rats occupying classrooms, the arithmetic of the schools’ finance merit an F: Of the $7,450-per-pupil grant the school district will receive this year, $4,400 will be spent on debt servicing and benefits for retired teachers, according to the Citizens Research Council. Absent a turnaround, the failing school system is hardly likely to spur young families to move into Detroit.

Air Force One. President Barack Obama visited—but did not attend school in—Detroit yesterday to witness the city’s iconic—and federally bailed out auto industry; yet today marks still another sick out for the teachers of Detroit Public Schools (DPS)—where state-appointed DPS Emergency Manager Darnell Earley has filed for a temporary injunction to keep teachers in the classroom. Rather than learning from the city’s bankruptcy, the next round in the deteriorating school system will likely play out in the court room, where DPS is seeking a temporary injunction as a remedy to the sick-outs which shut down about 88 schools yesterday, alleging the sickouts are “depriving students of their right to attend school, adversely impacting their academic progress, and forcing parents to miss work.” Detroit’s teachers are leaving the district, class sizes are swelling, and the conditions in many school buildings are deplorable. State-appointed DPS Emergency Manager Darnell Earley yesterday warned that the sickouts are not the way do it: “Closing schools for reasons such as today and on previous dates further jeopardizes the limited resources the district has available to educate its students and address the many challenges it faces. We have heard teachers’ concerns and identified short and long-term solutions to several key issues.”

Bluegrass Blues. Kentucky State Representative Brad Montell (R-Shelbyville) has proposed reconsideration of Kentucky’s municipal restructuring law (Kentucky Rev, Statute §66.400), as well as whether the state should develop a program to assist financially struggling local governments, noting: “In looking at our statutes, we simply don’t address it…It seems to me we need to have sort of a blueprint of what authority the state government has in these instances.” In fact, Hillview, a Louisville suburb of just over 8,000, became Kentucky’s first municipality to file a Chapter 9 municipal bankruptcy petition last August, in an effort to address an $11.4 million legal judgment after losing a lawsuit to Truck America Training—a filing which U.S. Bankruptcy Judge Alan C. Stout is currently considering. Previously, two Kentucky utility districts had filed chapter 9 petitions. Rep. Montell has proposed House Concurrent Resolution 13, which proposes that the state’s Legislative Research Commission conduct a study of municipal bankruptcy, including laws and preventative practices employed by other states. For a municipality to be eligible to file for chapter 9 municipal bankruptcy, it must be authorized by the respective state. Currently, twelve states specifically authorize municipal bankruptcies, while twelve states authorize the filing of a petition with conditions. In those states which have acted, as is required under federal law, for a city to be eligible, such state laws have implemented programs to provide assistance, refinancing, oversight, and other mechanisms, giving local governments a “second look” at ways to avoid taking the final, last-resort option. Municipal bankruptcy wizard Jim Spiotto last December testified before the U.S. Senate that, over the last 40 years, those municipalities with no state “second look” or oversight have been over six times more likely to file for municipal. In the Bluegrass State, any taxing agency or instrumentality can file for municipal bankruptcy, but Kentucky counties are prohibited from filing a petition unless their restructuring plans first are approved by the state local debt officer and the state local finance officer—a provision which does not apply to cities or any entity other than counties. Rep. Montell said he proposed the bill in an effort to be “proactive” in the event of filings other than Hillview’s: the proposed study would include a review of other state laws, and the practices that they have employed in order to intervene in a city or county financial crisis, but it also cites apprehensions with regard to the financial health of its governments, as another reason to study Chapter 9 further—especially the state’s pension liabilities: In a report last week, Moody’s listed the worst performing states in terms of making their actuarially determined contribution in FY2014: New Jersey (18.6%), California (48.2%), Texas (62.9%), New York (64.4%), Kentucky (64.5%), and Virginia (69.3%)—making Kentucky the state with the second-lowest pension funding ratio of any state behind Illinois, and the third worst if Puerto Rico were included, according to Atlanta-based Asset Preservation Advisors. Rep. Montell said the state should look at its current municipal bankruptcy statute, because the budgets of cities, counties, and school districts also could be pressured because of their costs to participate in state-run pension plans, along with other stressors such as labor costs.

Puerto Rico. U.S. Treasury Secretary Jacob Lew yesterday met with Puerto Rico Governor García Padilla in San Juan, stating: “I have tried to be very clear that restructuring and oversight have to move together, but that oversight has to be done in a way that is respectful of Puerto Rico’s system of self-government…There are no alternatives to Congressional action in terms of coming up with a solution that is lasting and that provides the avoidance of a long protracted period of pain on the island.” In addition, Secretary Lew met with a group of officials, including Puerto Rico Senate Pres. Eduardo Bhatia Gautier, House President Jaime Perelló Borrás, Senate Minority Leader Larry Seilhamer Rodríguez and House Minority Leader Jenniffer González Colón—as well as Puerto Rico’s non-voting member of Congress, Delegate Pedro Pierluisi, who said in a statement: “With respect to a possible fiscal oversight board, I insisted that I would only support such a measure if it were paired with more equitable treatment under federal programs and a mechanism that enables Puerto Rico to restructure debt in a way that is fair to creditors and that enables Puerto Rico to provide essential services to our people. The board should have the power to oversee the Puerto Rico government’s budgeting and fiscal practices, but the board must respect our constitution.” Delegate Pierluisi is running in the New Progressive Party primary to become its candidate for Governor against Ricardo Rosselló Nevares—who, earlier this week, wrote to Secretary Lew that the Padilla administration’s “focus on debt restructuring is a distraction from the urgent need to reduce government expenditures and restore economic growth.”

eBlog

March 24, 2015
Visit the project blog: The Municipal Sustainability Project

Getting Ready to Rumble. Today is likely to be D-Day for Atlantic City: emergency manager Kevin Lavin is expected to issue his report and recommendations with regard to whether he and Kevyn Orr will recommend to New Jersey Governor Chris Christie whether or not the city should file for federal chapter 9 municipal bankruptcy protection. A spokesperson for the New Jersey Department of Community Affairs said he thought it was unlikely the report would recommend a declaration of bankruptcy, noting: “It is my understanding that Kevin Lavin and Kevyn Orr were sent here to help [Mayor] Don Guardian restructure short-term and long-term debt so we can find a long-term solution and not a band-aid fix,” adding that he had spoken with Mr. Orr in recent days: “Obviously their goal is to restructure the debt, analyze the city’s ratable base, and ensure the city’s finances are stable without hitting hard-working families over the head with a tax increase or a municipal bankruptcy.”

York Distress. Pennsylvania Auditor General Eugene DePasquale yesterday, standing next to York Mayor Kim Bracey, warned that York, known as the White Rose City, will need to come up with $10 million by the end of this year to meet its minimum pension payment obligations. Like other Pennsylvania municipalities, the AG noted the city has fallen behind on its required annual payments: based upon its most recent audit, Mr. De Pasquale reports the municipality owes more than $4.13 million to its employee pension funds for missed payments for the last two years—and, another $5.7 million is due by the end of 2015―$3.4 million for the police fund, $1.5 million for the firefighter fund, and $757,667 for the non-uniform fund. Failure to make up the payments, the AG warned, could trigger withholding of state aid. Nevertheless, the Attorney General noted that, “[D]espite Mayor [Kim] Bracey’s best efforts, York simply does not have the money, and there is no realistic way the city will ever catch up without help.” Mayor Bracey asked for state help, stating: “The system is simply broken. Unfortunately, our situation in York is not unique.” She and the AG urged the legislature to act on a bill which would shift new state hires to a cash-balance hybrid pension plan, and require the calculation of pensions based on base pay and a small percent of overtime to curb the practice of “spiking,” or increasing final average salary with excessive overtime and unused sick or vacation days.

Municipalities in Crisis. In response to a request from House Judiciary Committee Ranking Member John Conyers (D-Mi.) of Detroit and Sen. Gary Peters (D.-Mi.), Rebecca O’Connor and Peter Del Toro of the U.S. Government Accountability Office submitted a report, http://www.gao.gov/products/GAO-15-222, Municipalities in Crisis, advising Congress that municipalities in fiscal crisis confront diminished abilities to manage federal grants because of: workforce reductions, decreased financial capacities, and outdated information technologies. The report was compiled after interviews with grant administrators at the federal, state, and local levels; local officials in Detroit, Flint, Camden, and Stockton, as well as academic researchers and practitioners (including this author) with expertise on the topics of local government administration, local fiscal distress, and Chapter 9 municipal bankruptcy. In the GAO report, the dynamic duo examined eight federal grant programs in housing, transportation, and public safety to better understand the repercussions of municipal fiscal distress on their ability to access and utilize such federal grants—finding, for instance, that in Detroit, Flint, and Stockton, downsizing directly affected staffing responsible for grant management and oversight―Detroit’s Planning and Development Department, which administers CDBG and HOME Investment Partnerships Program grants received by the city, lost more than one third of its workforce between 2009 and 2013, according to the report, undercutting the ability of the remaining staff to carry out all of the grant compliance and oversight tasks; similarly, staff attrition created by the respective municipal fiscal distress led to “grant management skills gaps” in the Detroit, Flint, and Stockton workforces: in Detroit and Stockton, turnover in senior and mid-level staff particularly created challenges―the skills shortages sometimes led to violations of grant agreements or unspent grant money in Detroit and Flint. In both cities, according to the report, decreased financial capacity undercut the municipalities’ abilities to apply for certain federal grants. To the extent there were lessons learned, the GAO noted that Flint, Stockton, and the Motor City have consolidated management processes—especially writing that under Kevyn Orr in Detroit, Mr. Orr had directed Detroit’s CFO to establish a central grant-management department. The GAO report also found that Detroit, Flint, and Camden have collaborated with local nonprofit organizations to apply for federal grants, helping them deal with limited staffing. The duo also examined eight federal grant programs: they reported these programs “used, or had recently implemented, a risk-based approach to grant monitoring and oversight.” When federal officials of such grant programs found deficiencies, they often required grantees to take corrective actions, but the municipalities did not always take these actions. The report also determined that a White House Working Group on Detroit and individual federal agencies had taken steps to improve collaboration with municipalities in fiscal crisis: “These actions included improving collaboration between selected municipalities and federal agencies, providing flexibilities to help grantees meet grant requirements, and offering direct technical assistance.” Nevertheless, the report notes that federal agencies have not formally documented and shared the lessons learned from the federal efforts to help Detroit, adding: “If these lessons are not captured in a timely manner, experiences from officials who have first-hand knowledge may be lost,” recommending that OMB mandate federal agencies involved in the Detroit working group to collect good practices and lessons learned and share them with other federal agencies and local governments.