Getting Schooled on Fiscal Challenges

June 19, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal challenge in the Connecticut legislature with how to get the state’s capitol city back on its feet, before turning, as the new hurricane season gets underway, to assess the Detroit-kinds of challenges to a public school system when so many families are leaving.

Recovering from Near Municipal Bankruptcy. With the new fiscal year fast approaching, Connecticut Governor Gov. Dannel P. Malloy vetoed bi-partisan legislation last Thursday which would have changed how the state board overseeing Hartford’s finances would have operated, and which would have required the continued financial support of Hartford for five years, but would allow the state to reduce other municipal aid to Hartford in the sixth year if the city failed to meet its obligations. The proposed legislation did not modify the debt assistance agreement signed by state Treasurer Denise Nappier and the provision which required the state to pay off the entire principal of Hartford’s bonded debt over the next 20 to 30 years, under which the state will make about $40 million in annual payments on the debt—all steps taken in the wake of the city’s teetering, last year, on the edge of municipal bankruptcy—when the state intervened to take on the city’s debt through the Municipal Accountability Review Board—a step, in retrospect, which has helped the city begin to rebalance its finances. However, it appears the city needs more time.

Republican legislators believed they should have been allowed to lower other municipal aid to Hartford in order to account for the obligations elsewhere in the budget, but the legislation Gov. Malloy vetoed sought to delay those types of decisions for at least five years. The Governor, however, noted: “The legislature may elect to offset contract assistance to Hartford in the future, and must approve state aid amounts for all communities; but it makes little sense to make an out year reduction without giving the program the opportunity to see results before imposing what amounts to a sanction.” In contrast, Senate Republican President Len Fasano (R-Wallingford) said the veto “demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars,” adding: “Once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature: this veto practically ensures a rough road ahead for Hartford, because, absent this fix, the legislature probably won’t be willing to help Hartford in the future.”

In his veto message—legislation which had gained bipartisan support, and which would have modified the $534 million bailout the legislature had approved last year in order to help the city it avoid filing for chapter 9 municipal bankruptcy, the Governor wrote that Senate Bill 528, an Act Concerning State Contract Assistance Provide to Certain Municipalities, would make “significant, detrimental impacts to the new Account Review Board and its operations,” noting that the changes to the Hartford bailout were “a reflection of indignation on the part of some legislators,” who were upset that the Municipal Accountability Review Board “exercised its statutory authority in coming to the aid of our capital city.” Instead, he told legislators, it is critical for the state to have “a viable mechanism in place to allow it to intervene in the case of other troubled municipalities in a way that is both effective and that holds those municipalities highly accountable.” He noted that the Municipal Accountability Review Board works; ergo there was no reason for the legislature to seek to change it at this point in time.

The vetoed measure had been passed in the House 105-45, with all Republicans voting in favor, but more than half of the House Democrats rejected the proposal, arguing that five years was insufficient to assist Hartford with its financial difficulties—even as opponents insisted the bailout was a “major misunderstanding,” because they had understood they were voting only for a two-year bailout, not a long-term $500 million deal that stretched into the future. Now, it will be, unlike in neighboring New Jersey, the legislature’s budget and tax committees which would need to vote on any future financial bailout, with a series of fiscal trip wires if any municipality were seeking an agreement similar to the one which was approved last year for Hartford. For his part, Senate Republican Leader Len Fasano (R-North Haven) noted: “This veto demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars: once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature. This veto practically ensures a rough road ahead for Hartford, because absent this fix, the Legislature probably won’t be willing to help Hartford in the future…This bill was the result of extensive bipartisan negotiations, supported by the Hartford delegation and the Mayor of Hartford: it defines what state assistance Hartford will be receiving and also puts into place needed protections to ensure taxpayer dollars are not squandered.’’

His counterpart, Senate President Pro Tem Martin Looney (D-New Haven) said no final decisions have been made with regard to whether the Senate would override the two latest vetoes, noting: “We will review the Governor’s veto messages and consult with our caucus members in order to determine any next steps the caucus may want to take.’’ A veto-override session is slated for Monday, because a little-known provision in the state Constitution provides that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz (D-Berlin) said the House, where the measure had passed 105-45, is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

A key niggle is a growing recognition that whatever final legislation is signed into law will, in effect, create a fiscal blueprint: thus the legislature has adopted a bill to clarify the process for the state’s municipalities in the future, under which the legislature’s budget and tax committees would need to vote on any future fiscal rescues, in advance, with a series of financial trip wires if any municipality were seeking an agreement similar to the one which had been approved last year for Hartford.

A veto-override session is scheduled for Monday, June 25, because a little-known provision in the state Constitution says that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz of Berlin said the House is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

El Fin. Puerto Rico’s legislature is nearing the end of its regular session—even as the new hurricane season is opening its season, so the gale budgetary challenges are anticipated to dominate its closing days—with the key issues being approval of the new year’s fiscal budget and repeal of the island’s Unjustified Dismissal Law (Law 80-1976). The focus, this week, will be on getting revenues for FY2019, some $9.1 billion—or some $700 million greater than the amount proposed by the PROMESA Oversight Board, promising a fierce legislative battle. Víctor Parés, president of the Commission for Economic Development, Planning, Telecommunications, Energy and Public-Private Partnerships, and president of the Finance Committee, Antonio Soto,  had indicated they would meet this week with personnel from the Department of the Treasury to define how the income estimates included in the Board’s proposal will be readjusted. Mr. Parés noted:Government revenues have increased this fiscal year; it is new money; it has to be allocated; and it is part of what is going to be negotiated and agreed with the Executive,” identifying key priorities as education, health, and safety.

The first in that list is, perhaps, of greatest apprehension, with the Department of Education facing a cut of $191.5 million—a cut of such severity that as many as eight programs could be put at risk, including special education, where the proposed cut would be $78.2 million. The Board has also recommended a cut of $16.1 million to the Department of Health, and just under $50 million to the Department of Public Security—that is, a reduction which would likely mean laying off as many as 1,300 police officers. That sets up a challenge, this week, with the Puerto Rico House, on Thursday, scheduled to act on the budget.

The regular session will defer to a special session consideration of the Incentive Code, described as a “very technical document,” which could be approved in July during an extraordinary session that Governor Ricardo Roselló Nevares would convene. With regard to the version of pending legislation to repeal the House-passed Law 80, the future is uncertain: Senate President Thomas Rivera Schatz announced the Senate would not agree to the amendments.  

A New Civil Code? Rep. Maria Milagros Charbonier is expected to introduce a proposed, renewed Civil Code, with debate deferred to August on the proposal—a comprehensive document dealing with family, persons, royals, obligations, contracts, and successions, but which does not address the issues of surrogate motherhood, domestic partnerships, and the minimum age. It proposes to increase the age to marry from 14 to 18 years, and limit marriages to the third degree of consanguinity. It would maintain the grounds for divorce for cruel treatment, adultery, as well as those of mutual consent and irreparable rupture. The new proposals come in the wake of four years of evaluation of the Civil Code.

Dying Communities? Verónica Dávila, a second-grade teacher at Pasom Palmas, in rural Puerto Rico, yesterday noted that a “community without a school…is a vacant community: It’s actually a dead community.” Pasom Palmas, located in Utuado in the central mountains of the island, is, in land area, the third-largest municipality in Puerto Rico (after Arecibo and Ponce): it has a population over 35,000 spread over 24 wards. The community derives its name from the Taíno word Otoao, which translates as “between mountains.” It is also known as La Ciudad del Vivi, because of the river which runs through it. It is the 11th oldest municipality in Puerto Rico—founded two hundred seventy-nine years ago. Her school has been teaching children for more than  70 years, but it closed its doors forever this month—one of some nearly 300 in Puerto Rico which are shutting down permanently this summer in the wake of Hurricane Maria’s devastation: it smote Utuado especially hard. It took two months to reopen Paso Palmas after the storm, and the school remained without water and had only limited electricity from a generator, which took the Federal Emergency Management Agency seven months to provide. The school’s population fell to 55, as about a dozen students and their families left the area after Maria.

In April, the government listed 283 schools for permanent closure—subsequently granting relief to 18, a number further revised after a court, last week, ordered a halt to the closure of still nine others. Whatever the final number, the school math paints a grim fiscal and demographic picture. After spending cuts for public education of about $1.5 billion over the last six years, and school closures forcing relocation of about 60,000 students—and the new laws providing vouchers for students to attend private schools and paving the way for charter schools, one can sense the physical challenges ahead. In Paso Palmas, kids, no longer able to attend school there, are confronted with the closest school being a forty minute drive along difficult roads—and that is without counting the walk several students make each morning to reach a road passable by car—or that some families simply do not have cars or money for gasoline. It, of course, renders futile concepts of parents’ days or PTA participation.

Whose Math? The income estimate for the next fiscal year could be readjusted by the PROMESA Board to reflect an increase that would have a direct impact on the coffers of countless agencies, in response to issues such as this which have been raised in three days of public hearings with regard to how the proposed cuts by the Board will impact Puerto Rico. A key issue at the top of the list is the $78 million decrease in the budget dedicated to the Special Education Program of the Department of Education. Representative Antonio Soto said that in a meeting with the technical staff of the PROMESA Board, he told them that the income of this fiscal year should reach $9,100 million. In his opinion, it made “no sense” that the estimated income of the U.S. territory for the upcoming fiscal year would decline by $700 million when the government projects estimated economic growth, benefitting from the injection of federal assistance to provide a 6.3% boost to the economy—or, as he put it: “It’s simple math: They tell me that the estimated income they have is what we provided, so we have to validate the information.”

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Municipal Fiscal Distress & State Oversight.

June 18, 2018

Good Morning! In this morning’s eBlog, we consider a new study assessing the potential role of property tax assessments in Detroit’s historic chapter 9 municipal bankruptcy; then we observe, without gambling on the odds, the slow, but steady progress back to self-governance in Atlantic City, and weaning off of state fiscal oversight; before, finally noting the parallel efforts to exit state oversight in Flint, Michigan—where the proximate cause of the city’s fiscal and physical collapse occurred under a quasi-state takeover.

Foreclosing or Creating a City’s Fiscal Recovery? One in 10 Detroit tax foreclosures between 2011 and 2015 were caused by the city’s admittedly inflated property assessments, a study by two Chicago professors has concluded. Over-assessments causing foreclosure were concentrated in the city’s lowest valued homes, those selling for less than $8,000, and resulted in thousands of Detroit homeowners losing their properties, according to the study: “Taxed Out: Illegal property tax assessments and the epidemic of tax foreclosures in Detroit,” which was written by  Bernadette Atuahene and Christopher Berry. Chicago-Kent Law School Professor Atuahene noted: “The very population that most needs the city to get the assessments right, the poorest of the poor, are being most detrimentally affected by the city getting it wrong: “There is a narrative of blaming the poor that focuses on individual responsibility instead of structural injustice. We are trying to change the focus to this structural injustice.” (Professor Atuahene is also a member of the Coalition to End Unconstitutional Tax Foreclosures.) Their study came as the Wayne County Treasurer has foreclosed on about 100,000 Detroit properties for unpaid property taxes for the period from 2011 through 2015, about a quarter of all parcels, as the Motor City suffered the after-effects of population decline, the housing market crash, and the Great Recession.

Professors Atuahene and Berry acknowledged many factors can trigger tax foreclosure, estimating that the number of foreclosures was triggered by over-assessments, in part by calculating the foreclosure rate if all properties were properly assessed. The study also controlled for properties various purchase prices, neighborhoods and sale dates.

Detroit Mayor Mike Duggan has, as we have noted, acknowledged such over assessments; yet he has made clear accuracy has improved with double-digit reductions over the last four years—and completed the first comprehensive such assessment two years ago for the first time in more than half a century. The city’s Deputy Chief Financial Officer, Alvin Horhn, last week stated he had not reviewed the study; however, he noted that “most of their assumptions rely on data that does not meet the standards of the State Tax Commission and would not be applicable under Michigan law,” a position challenged by Professor Atuahene, who had previously stated the data does comply with the law, noting: “We believe the citywide reappraisal has been an important part of the major reduction in the number of foreclosures occurring in the city, which continue a steady decline and will provide a solid foundation for future growth: The number of foreclosures of owner occupied homes, specifically, has gone down by nearly 90% over the past few years.”

The city’s authority to foreclose, something which became a vital tool to address both property tax revenues and crime in the wake of the city’s chapter 9 municipal bankruptcy, was enabled under former Gov. John Engler 29 years ago under a statewide rewrite of Michigan’s property tax code: changes made in an effort to render it faster and easier to return delinquent properties to productive use. On a related issue, the Motor City is currently facing a lawsuit by the American Civil Liberties Union of Michigan—a suit which maintains the city’s poverty tax exemption, which erases property taxes for low-income owners, violated homeowner’s due process rights because of its convoluted application process, arguing that the practice violates the federal Fair Housing Act by disproportionately foreclosing on black homeowners. However, the Michigan Court of Appeals has upheld a ruling by Wayne County Judge Robert Colombo, dismissing Wayne County from the lawsuit, ruling the suit should have been brought in front of the Michigan Tax Tribunal. 

Pole, Pole. In Bush Gbaepo Grebo Konweaken, Liberia, a key Gbaepo expression was “pole, pole” (pronounced poleh, poleh), which roughly translated into ‘slowly, but surely’—or haste makes waste. It might be an apt expression for Atlantic City Mayor Frank Gilliam as the boardwalk city has resumed control back from the state to forge its own fiscal destiny—presumably with less gambling on its fiscal future. In his new $225 million budget, the Mayor has proposed to keep property taxes flat for the second consecutive year, and is continuing, according to the state’s Department of Community Affairs, charged with the municipality’s fiscal oversight and providing transitional assistance, to note that the Mayor and Council President Marty Small’s announcement demonstrated that “an understanding of the issues that Atlantic City faces, and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Under Mayor Frank Gilliam’s proposed $225 million budget, property taxes would remain flat for a second straight year, there would be some budget cuts, as well as savings realized from municipal bond sales to finance pension and healthcare obligations from 2015. The Mayor also was seeking support for capital improvements, additional library funding, and one-time $500 stipends for full-time municipal employees with salaries below $40,000. The ongoing fiscal recovery is also benefitting from state aid: the state Department of Community Affairs reported the state is providing $3.9 million in transitional aid, a drop from the $13 million awarded to the City of Trenton in 2017 and $26.2 million from 2016. Last year Atlantic City adopted a $222 million budget, which lowered taxes for the first time in more than a decade. The Department’s spokesperson, Lisa Ryan, noted: “Yesterday’s announcement by Mayor Gilliam and Council President [Marty] Small demonstrates city officials are showing an understanding of the issues that Atlantic City faces and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Gov. Phil Murphy scaled back New Jersey’s intervention efforts in April with the removal of Jeffrey Chiesa’s role as state designee for Atlantic City. Mr. Chiesa, a former U.S. Senator and New Jersey Attorney General, was appointed to the role by former Gov. Chris Christie after the state takeover took effect.

Not in Like Flint. The Flint City Council was unable last week to override Mayor Karen Weaver’s veto of its amendments to her proposed budget: the Council’s counter proposal had included eight amendments to the Mayor’s $56 million proposed budget for 2018-2019—all of which Mayor Weaver vetoed in the wake of CFO Hughey Newsome’s concerns. The situation is similar to Atlantic City’s, in that this was Flint’s first budget to be considered and adopted in the wake of exiting state oversight. Mayor Weaver advised her colleagues: “This is a crucial time for the City of Flint: this is the first budget we are responsible for since regaining control…I am proud of the budget that I submitted, and I have full faith in the City’s Chief Financial Officer. Just as I have the right to veto the budget, the City Council has the right to override that veto. It is my hope that they would strongly consider my reasons for vetoing and that the Council and I can work together to create a budget that can sustain the City for years to come.” Her veto means the budget will be before the Council for a final vote in order to have it in place for the new fiscal year beginning on the first of next month.

Among the Council proposals the Mayor rejected was employee benefits, including a proposed pay raise for the City Clerk of $20,000, the creation of a new deputy clerk position, a new parliamentarian position, and full health benefits for part-time employees. Or, as CFO Newsome noted: “The risk these added costs could pose on the city’s budget is not in the best interest of the city nor the citizens of Flint,”  as he expressed disappointment over the time wasted on arguing over what amounted to $55,000 in the Mayor’s budget, especially when the city was currently tackling bigger fiscal challenges, such as its $271 million unfunded pension liability and keeping the city’s water fund out of red ink, noting: “These are things that we are looking at, and during all of these [budget] proceedings so little attention was paid to that.”

That is to note that while sliding into chapter 9 municipal bankruptcy, or, as in Atlantic City, state oversight, can be easy; the process of extricating one’s city is great: there is added debt. Indeed, Flint remains in a precarious fiscal position, confronted by serious fiscal challenges in the wake of its exit from state financial receivership the month before last. Key among those challenges are: employee retirement funding and the aging, corroded pipes (with a projected price tag of $600 million) which led to the city’s drinking water crisis and state takeover.

On the public pension front, in the wake of state enactment of public pension reforms at the end of 2017 which mandate that municipalities report underfunded retirement benefits, Flint reported a pension system funded at only 37% and zero percent funding of other post-employment retirement benefits, which, according to the state Treasury report, Flint does not prefund.

The proposed budget assumes FY2019 general fund revenues of approximately $55.8 million, of which $4.7 million is expected to come from property taxes. This would be an increase of about $120,000; Flint’s critical water fund will have a $4 million surplus at the end of FY2018; however, CFO Newsome warned the fund will fall into the red within the next five years if it fails to bring in more money.

Not in Like Flint, and Unschooled for Motor City Recovery

June 15, 2018

Good Morning! In this morning’s eBlog, we consider the seemingly unremitting efforts by the State of Michigan to force the City of Flint to sign a consent agreement; then we dip south to the Motor City, where, notwithstanding its exit from chapter 9 municipal bankruptcy, the city’s ital. efforts to encourage families to move back to the city from the suburbs depends upon turning around a school district which appears to be stumbling under its own quasi plan of debt adjustment from a state takeover.

Not in Like Flint. Flint Mayor Karen Weaver this week made clear she believes state officials cannot force her to sign a consent agreement seeking to make fixes to her city’s water system, challenging them to “bring it on” and take her to court. Her battle parallels a trial of Michigan Department of Health and Human Services Director Nick Lyon, who is anticipating, next month, to find out whether or not he will face a jury trial on involuntary manslaughter and misconduct charges tied to the Flint water crisis. Genesee District Judge David Goggins has signed an order detailing how the remainder of Secretary Lyon’s preliminary examination will play out: he has been charged involuntary manslaughter and misconduct in office, making him the highest-ranking state government official charged with crimes with regard to how he mishandled Flint water problems—making his the first of 15 criminal cases to advance to a preliminary exam. Ironically, the trial of the state leader is occurring even as, in parallel, the State of Michigan is threatening to withhold funds to Flint not just in an effort to try to force responsibility for ensuring the safety of its drinking water, but that state action could have devastating fiscal impacts, undercutting the city’s effort to preserve its assessed property values: between 2008 and 2016, Flint lost more than three-quarters of its taxable assessed property value. There is almost a David versus Goliath feeling: Flint household income has been declining, even as statewide income has been increasing: household income in the city, at just under $42,000 annually last year, is more than 20% below statewide income.

The issue, a federalism issue involving all three levels of government, involves findings from  last August’s state sanitary survey, which found the city’s water system had “significant deficiencies,” including with the water distribution, finances, “security,” and “operations and management.” The state further charges that the city has not fixed the problems within 120 days as mandated state law, according to the Michigan Department of Environmental Quality.

Mayor Weaver, however, told The Detroit News the Department of Environmental Quality (DEQ) is making “false accusations or lies” with regard to the city’s compliance with state and federal drinking water laws, among other allegations; rather she appears to perceive the proposed consent order to repair the problems as retaliation against her vigorous protest when Gov. Rick Snyder ordered, in April, the end of the state’s free bottled water deliveries to the city, noting: “We have been meeting our requirements every step of the way: There are some other things that need to be done by the end of this month, and some things aren’t required to be done until the end of the year. But every step of the way, we’ve done what we’re supposed to do.” The city currently purchases treated water from the Great Lakes Water Authority; however, Flint’s wastewater treatment plant performs additional treatment for acidity levels, corrosion control, and chlorine, according to the state.

In a letter at the beginning of this week, Michigan Assistant Attorney General Richard Kuhl threatened Flint with federal legal action if the municipality does not enter into and comply with a consent agreement addressing the city’s outstanding violations, writing that the state would prefer voluntary cooperation—having previously written that violations of the Michigan Safe Water Drinking Act mean the city needs to sign a consent decree in which state officials outline unfunded state mandates with which the city would have to comply, including the provision of a “permanent or contractual” manager to oversee control program activities.

At the beginning of this month, Michigan Drinking Water and Municipal Division Director Eric Oswald wrote that correcting the violations would help ensure Flint’s public water supply system prevents “contaminants from entering” the drinking water and prevent “imminent and substantial endangerment of public health.”

Flint is still recovering from a lead contamination water crisis first discovered in the late summer of 2015. The city’s water has tested below federal lead standards for nearly two years, but many residents still refuse to drink from the tap. In his June 4 letter, Director Oswald wrote that state officials had summarized in a March letter the “corrective actions that had been completed” and provided “dates to complete other corrective actions.” In his statement this week, the Director claimed: “The matter at hand is working together to address these deficiencies to help ensure that the city continues to have quality drinking water.”

Mayor Weaver is still considering what legal options might be available to protect her citizens—and the assessed property values of residences and business properties in the city—as well as the fiscal and physical implications of the end of free bottled water shipments—noting she is still pondering over the option of returning to federal court to the judge overseeing the replacement of Flint’s lead service lines, because the state has indicated that the funds may be withheld. Mayor Weaver noted, with regard to the seeming state retaliation: “I just believe this is absolutely retaliation, and then they want to blame us for what they did,” she said, referring to the water crisis that Snyder’s task force was caused by state-appointed emergency managers and negligent DEQ officials.

In her June 11 response epistle and proposed unfunded state mandate as “unnecessary and unwarranted,” adding she was “troubled by the timing of this proposed enforcement action, in the wake of the cessation of state funding for bottled water in Flint.” She further noted that “During two years of collaborative remediation efforts, an ACO has not been necessary,” calling it a “deliberate and willful misuse of the DEQ’s authority for political purposes and not as a good faith effort to address the issues faced by the City of Flint.” Mayor Weaver said she hoped to bring more contractors to Flint to begin the next phase of pipe replacement, but state officials, she said, want everything to be hydro-vacuumed to save money that would return to the state: “Now, after the state and MDEQ have been publicly castigated for their abrupt and unilateral termination of bottled water funding, MDEQ proposes an ACO that raises no issues not previously agreed upon…I thus see this ACO as a deliberate and willful misuse of the DEQ’s authority for political purposes and not a good faith effort to address the issues faced by the city of Flint.”

That would undercut her ongoing efforts to invest in new plumbing for Flint’s citizens: “We’re really trying to, and what I’ve been trying to do all along, is work together and put differences aside for getting what’s best for the people.”

What Will it Take to Earn a Passing Grade? Detroit’s public school district has 200 teaching vacancies, and with the new school year not so far off, a campaign is underway to try to draw kids back to its public schools. That effort, however, confronts an awkward challenge: only half the teachers and support staff and fewer than 40% of central office staff would recommend the Detroit Public School District according to survey data Detroit Public Schools Superintendent Nikolai Vitti released this week during a Board of Education meeting—a meeting that provided a temperature reading with regard to how the system’s students, their parents, and school staff perceive the school system. For instance, in response to the question, “How likely are you to recommend Detroit Public Schools Community District to a friend or family member or as a place to work. 40% responded they would not recommend the school district: only 38% replied they would be extremely likely to recommend the city’s schools. Even amongst teachers and support staff, the enthusiasm was missing: 50% were detractors—with the percentage near two-thirds by staff at the central office: overall, a majority in the system replied they would not recommend the system—or, as Superintendent Vitti put it: “That so many staff members were detractors is a problem…There’s nothing that hurts our brand…more than our actual employees. If our own employees are not favorable toward the organization, then how can we ever recruit new parents to schools or new employees to the district?”

The survey, conducted earlier this year, asked for feedback from more than 52,000 students, parents and guardians, teachers, support staff, instructional leaders, and central office staff. The results hardly seemed passing—and make clear that efforts to incentivize families with children in Detroit’s suburbs to move into the city face an uphill struggle. Or, as Superintendent Vitti noted: “If we’re truly going to be transformative, our employees are going to have to take ownership.”

The surveys addressed issues such as school climate, engagement, bullying, rigorous expectations and school safety. But Superintendent Vitti said the data surrounding promoting the district is “the most relevant data point we’re going to be looking at tonight.”

Here are other survey result highlights:

  • Just 42% of students in grades 3-5, 46% in grades 6-8 and 50% of students in grades 9-12 had positive feelings about school safety—an indication that a large number of students do not feel safe in district schools.
  • 69% of students in grades 3-5, 63% in grades 6-8, and 55% in grades 9-12 had positive feelings about rigorous expectations.
  • 56% of students in grades 3-5, 45% of students in grades 6-8, and 40% of students in grades 9-12 had positive feelings about school climate.
  • A larger percentage of parents and guardians, 72%, felt positively about school safety; however, just 26% felt positively about the engagement of families in the district.

Investing in Fiscal & Human Futures

June 11, 2018

Good Morning! In this morning’s eBlog, we consider the issue of keeping Puerto Rico’s schools open in the face of quasi municipal bankruptcy; then we veer north to assess post-state taken over Atlantic City: What Are the City’s Fiscal Odds for Its Future?  

The Governance Challenge for Schools and Demographic Changes. Puerto Rico Superior Court Judge Santiago Cordero Osorio has ordered the suspension of the closure of three of the U.S. territory’s schools in Morovis, pending an explanation from Secretary of Education Julia Keleher of the reasoning behind her orders. His ruling came as part of a lawsuit brought by the Municipality of Morovis challenging the closures of Alverio Pimentel, Manuel Alonso Díaz, and the Second David Colón Vega schools—and in the wake of the Judge’s earlier decisions ordering the closure of six other schools in the Arecibo region—closures also being challenged by the Teachers’ Association. In his order, Judge Osorio noted that all these claims will be evaluated in a court hearing scheduled for this morning—one to which he has invited the Secretary of Education or a representative to attend, noting: “This Court appreciates and recapitulates that the State must come prepared to justify in accordance with its regulations the closure, not only of the schools subject to this interdict, but of all the schools of the Commonwealth of Puerto Rico that the Department of Education has under its jurisdiction, and that it pretends according to the regulation to close.”

For his part, Mayor Carmen Maldonado of Morovis explained the suit was filed in the wake of a non-response to her request for a meeting with Secretary Keleher, stating, in a press release: “Today we are taking an important step in the defense of public education for Moroveño children. To all parents, principals, teachers and school staff, I invite you to attend that hearing on Monday at the Arecibo Court, so that together we can continue to fight to keep schools open. As I assured them in the many meetings we had, although the power is in the hands of the central government, the reason is on our side and we are going to defend that reason. The fiscal and governance challenge-as we had experienced in Detroit’s chapter 9 municipal bankruptcy, is a state versus local authority issue. Indeed, as the Department’s legal division stated: “The opening and closing of the schools is under the authority of the Secretary of Education and this is established by Law 85 of 2018 (Law on Educational Reform).”

The Rebirth of an Iconic American City?  Victor Fiorillo, writing in the Philadelphia Magazine, asked in his article, “The Re-Re-Re-Birth of Atlantic City,” what if everyone was wrong about the fiscal implications of the closure of the city’s famed casinos. Writing that Atlantic City had first drawn him in about 15 years ago with the opening of the Borgata Casino—at a time when “most other casinos in Atlantic City were in various stages of decay, and here was this brand-new Vegas-style resort with casino restaurants that were actually good and the best shows in town.” But he also noted that, back then, it was really a family focus: “My wife and I spend as much of the summer as possible on the A.C. beach with our 10-year-old and 12-year-old, opting for the relative solitude of the town’s southern end, far from any casinos or bars.” But in revisiting the municipality today, he noted he is not one of the only “believers in Atlantic City,” noting there are “some surprising signs of life these days, not to mention some serious investment—from small ventures, like Longacre’s projects, to big bets like Stockton University’s new beachfront campus and this month’s opening of the $550 million Hard Rock Hotel & Casino in the old Trump Taj Mahal.

Betting on the City’s Future. Mr. Fiorillo then turned to the recent U.S. Supreme Court decision allowing sports gambling, noting: “There’s more money pouring into A.C. right now than in all of Philadelphia,” according to development mogul Bart Blatstein, but, as with gambling, quoting Temple Professor Bryant Simon, author of 2004’s Boardwalk of Dreams: Atlantic City and the Fate of Urban America: “Atlantic City has risen and fallen innumerable times: “This is the story that has been told for a hundred years.” He added: “The irony, of course, is that this new resurgence is happening just a few short years after nearly half the city’s casinos went under, thousands of jobs disappeared, and Atlantic City itself seemed to be left for dead. Then again, maybe there’s no irony here at all. Maybe this more organic, up-from-the-ground rebirth of Atlantic City is exactly the kind of action that could mean sustained success for the city by the sea.”

Leaving on a Jet Plane. Mr. Fiorillo examined the city’s road to its state takeover from a non-fiscal perspective, writing: “It was right around this time that Atlantic City began to fade. Dissertations and books have been written about the many factors that led to the resort’s demise in the late 1960s and early 1970s, but a big one was the sudden ease of jet travel. You could get on a plane after breakfast and be on a beach in Miami for lunch. Atlantic City? Pfft. The Shore town began to disintegrate. By the mid-’70s, the city found itself at a pivotal crossroads. It could do nothing, ride out the downward trend, and see what happened. Or it could come up with some novel and wholly artificial way to inject new life into itself. It opted for the latter, betting that gambling would be Atlantic City’s salvation. Until that point, Nevada was the only place in the United States where you could open up a full-fledged casino. But in 1976, New Jersey citizens voted to make slots and table games legit in Atlantic City. The first casino, Resorts—which just turned 40 and is still standing — opened less than two years later.”

Noting that, for a time, business was booming, he credited Atlantic City’s casinos for bringing hundreds of millions of tourists to the Boardwalk during Atlantic City’s gambling heyday” “Some years, this city of 40,000 residents topped 34 million tourists. But outside the casino walls, the city struggled. The casino owners—including, for a time, Donald Trump—got fat, politicians got their kickbacks, and the impoverished residents of Atlantic City remained just that: And then everything went wrong. The new Atlantic City created in the late 1970s was premised almost entirely on maintaining a casino duopoly with Nevada; once casinos started popping up all over—including in Pennsylvania in 2006—Atlantic City imploded.”

Noting, as we have traced, the city’s fiscal nadir came to a head in January of 2014, when the Atlantic Club, which had opened as the Golden Nugget in 1980, collapsed, followed by Showboat, followed by the Revel, followed shortly thereafter by the Trump Plaza, noting: “Finally, in October 2016, one month before its namesake was elected to the Oval Office, the lights went out at Trump Taj Mahal. In just two and a half years, five casinos vanished, their cavernous buildings shuttered. Atlantic City had bottomed out economically in the most spectacular fashion possible.”

Tracing a Fiscal Turnaround. Writing that when assessed property values drop low enough, neighborhoods become more and affordable—and, ergo, more attractive to developers who could “pick up buildings for pennies on a dollar,” he noted that “Atlantic City suddenly became a risk worth taking”—adding: “Investing in Atlantic City now makes a lot more sense than it did five years ago, but it’s hardly a no-brainer. The city, with its 37% poverty rate) is overwhelmingly poor. Taxes are overwhelmingly high. And walking around on Atlantic or Pacific Avenue, the city’s two main north-south boulevards, which run parallel to and within blocks of the Boardwalk—can be nerve-racking after hours. In daylight, panhandlers accost and prostitutes solicit. Politically, things are hardly ideal: Then-governor Chris Christie instituted a state takeover in 2016.

John Longacre, who has acquired a reputation for building a business by spotting potential where others see potential disaster, and he works primarily in South Philadelphia, where he specializes in recovery projects that save buildings, convert seedy bars into trendy restaurants and turn vacant eyesores into neighborhood hubs, told Mr. Fiorillo: “Every bank in the region is terrified of Atlantic City.” Indeed, Mr. Longacre added: “If you look at the policy surrounding everything that exists in Atlantic City, it’s the perfect storm to keep investors out: From the state handling the zoning to the tax base to rent control, everything that happens from a policy level makes it seem like New Jersey is trying to make Atlantic City fail.” Nevertheless, he seems convinced the fabled city will not fail. Or, as Mr. Fiorillo described it, there are a new breed interested in the fabled city who likely will play an essential role in the city’s future: “It’s not about Aunt Edna and Uncle Fred and their casino bus trips anymore. It’s about younger people who aren’t into Atlantic City for the gambling. It’s about people who don’t just feel comfortable in but desire urban environments, with all their flaws and character. It’s about people who respect and require diversity. It’s about people like me and my wife, who, to be honest, cringe when we drive into a place like Avalon.”

Describing this fiscal and physical revival, he writes about the relationship of small projects complemented by large ones: “The Hard Rock Hotel is finally going to open on the Boardwalk later this month, where the Taj Mahal was until October 2016. Pottstown native Todd Moyer, senior vice president of marketing for this new outpost of the rock-and-roll-themed company, got his start in the casino business in 1990, when he worked as a tuxedoed greeter at, coincidentally, the Taj. I was working for Hard Rock out West, when I got the chance to come home: I jumped at it. Sometimes I would be at a bar or restaurant and hear people talking about Atlantic City being dead, and I’d jump in. I’m a defender and a giant supporter of A.C. We’re building hotels all around the world, but really, all the focus lately has been on Atlantic City.”

As for Mr. Longacre, his view is that he would “love for every casino to go out of business and see Atlantic City re-create itself without them, as an urban beach town.” Nevertheless, he believes there is one massive Atlantic City development which will be a game-changer: Stockton, the nearly 50-year-old public university, which has its main campus in Galloway Township, about 20 minutes from the Boardwalk: it is set to debut a brand-new beachfront Atlantic City campus this September, when one thousand students will use the campus, and many of them plan to live in town. Thus, he notes: “Stockton is huge. It’s the first real institutional investment in years that’s not a casino.”

Rolling the Fiscal Dice? As significant as these fiscal changes appear to be, they almost seem to pale against the city’s real world challenges: Atlantic City has a poverty level three times higher than the statewide rate: more than three times the number below the poverty level—and a disability rate among non-poor residents of just under 25%. In its rental housing, the percentage of residents below the federal poverty level is over 90%. A consequent governing challenge for the post-taken over city and the Garden State remains. Mr. Fiorillo notes that whether the gambles being made by Mr. Blatstein, Mr. Longacre, and others are successful remains to be seen—as does the question with regard to whether all the investment will put much of a dent in Atlantic City’s poverty rate or help the town’s current residents. He adds: “And it’s not going to be this summer or next summer when we find out who, if anyone, wins. Nevertheless, he wrote: “When I consider Point Breeze circa 2008 and that same area today, I have hope for this complicated Shore town. There will always be casinos here, for better or worse, and there will always be crime and poverty and grime. This is, after all, a city. But, 10 years from now, when my own kids are (I hope) in very good colleges, it’s not too hard to imagine us spending a summer weekend at some boutique hotel on New York Avenue. We’ll stop into the Boardwalk La Colombe for a draft latte, served up by a very hip-looking third-year Stockton student on break. For lunch, HipCityVeg down in the inlet. Happy hour will be at some John Longacre-owned brewpub overlooking the Atlantic.”

Breaking Up Is Hard to Do

June 8, 2018

Good Morning! In this morning’s eBlog, we consider the issue of unincorporated areas: what are the fiscal implications?

In many U.S. states, it’s not uncommon for homeowners to reside in what are known as “unincorporated” areas, meaning portions of the state or county that are not contained within the boundaries of an incorporated city, town, village or similar local governmental entity. From a municipal perspective, that means a community not governed by its own local municipal corporation, but rather is administered as part of larger governmental administrative division—such as a township, parish, borough, county, or city—governance entities which, depending upon the pertinent state laws, may file for chapter 9 municipal bankruptcy, dissolve, disincorporate, or, as we noted in today’s eGnus, make even separate. Widespread unincorporated communities and areas are a distinguishing feature of both the U.S. and our neighbor Canada—but rare in any other countries around the globe. In fact, unincorporated areas are mostly found in this country in Texas—an enormous state, but which has the nation’s smallest municipality: McAllen, in Jim Hogg County, with a population of 6.

When it comes to unincorporated areas within states, Pennsylvania appears unique: it is, after all, the state with the greatest number of local governments or political subdivisions: the Census Bureau puts the number at 5,000—putting the state only behind Texas and Illinois; but maybe ranks it first in terms of imposing vast and conflicting arrays of taxes—taxes which, however, are imposed on shrinking tax bases. Indeed, the fiscal stress has reached such a point that the state’s House Urban Affairs Committee recently convened a public hearing on legislation intended to assist smaller municipalities mired in cycles of financial distress—threatened with insolvency absent outside assistance. House Bill 2122 would allow these communities, after gaining approval in a voter referendum, to dissolve themselves and have their functions absorbed by the county. The co-sponsors, Representatives Dom Costa and Harold English, offered the bill as a means they described to provide for the voluntary dissolution of municipal corporations (cities, boroughs, towns, & townships) within counties of the second class (Allegheny), and the substitution of an unincorporated districts as a new form of government to be administered by the county. Under the proposed legislation, the process of dissolution would be initiated by the governing body of the municipal corporation through passage of a non-binding resolution to engage in discussion with the county over a period of six months, during which time they would develop a proposed essential services-transition plan as part of an intergovernmental cooperation agreement.: such a plan would be subject to public meetings in the community and would have to be voted on by the governing body of the municipal corporation, as well as the County Council: should both the municipal corporation and county governing bodies approve said plan, a referendum would be scheduled—an election where, if approved by the voters, a six-month winding down of the affairs of the municipal corporation would begin. At the conclusion of such a period, an unincorporated district administered by the county would go into effect, and the essential services-transition plan would become an official ordinance of the county. That would entail significant powers to said county to administer and manage such a district; the county would also retain the tax levying power and authority to assess fees and service charges previously authorized to that particular class of municipal corporation. All taxes and fees levied within the service district would have to be used for the benefit of the district.

Finally, the bill provides for the potential merger and consolidation of the unincorporated district with another municipal corporation or would permit the district to re-incorporate itself as another type of municipal corporation in accordance with the existing municipal codes applicable to such entities.

They reported the legislation was carefully crafted with input from the staff of the bicameral/bipartisan Local Government Commission, confident that it represents a unique voluntary agreement between municipalities – one in which a given city, borough or township would be able to ensure a more efficient and effective delivery of services to their residents while retaining their municipal identity. 

Pennsylvania’s Department of Community and Economic Development administers Act 47, as we have previously noted, a program to help “distressed” communities as designated under the terms of the state’s Act 47, under which the state could ultimately take on the task of providing local services. However, it appears that Deputy Secretary for Community Affairs Rick Vilello, the department’s deputy secretary for community affairs and development, HB2122 might provide a better option, or, as he testified: “We’ve not timed out [on recovery options] on a community who we felt wasn’t ready to try to make it on their own…But we are fast approaching a time when several municipalities will time out. When municipalities time out, there are very few good solutions from that point forward. House Bill 2122 provides a potential solution for local leaders facing hard decisions and is a tool worth trying.” Secretary Vilello testified that to date, only 31 municipalities in the state had ever reached “distressed” status out of 2,560. Of those 31, nine were in Allegheny County.

The Secretary noted: “House Bill 2122 could be a life-preserver for communities that have been treading water for a very long time: Who knows, if it works in [Allegheny County], what would be possible next. House Bill 2122 is a tool for the elected officials and for the citizens of distressed municipalities to make a choice about their future.”

Allegheny County Executive Rich Fitzgerald testified that the proposed legislation could be useful, not only to those communities whose finances have spiraled out of control, but also to those that have managed to avoid financial disaster by cutting essential services to minimal levels:  “Some of them, quite frankly, have not gone into Act 47…They just quit providing the services. They haven’t gone into the debt problem, but they haven’t provided the services their citizens have wanted. And what [residents have] basically been doing is voting with their feet. They’ve been leaving, [and] those municipalities have been shrinking in population.” The County Executive emphasized that the legislation could not lead to any municipality being dissolved against its will; similarly, he testified that no county could be forced to absorb a municipality against its will: both governments would have to agree to the terms of the disincorporation before it even went to the voters for approval.

Under the proposed legislation, the unincorporated community would retain some level of local governance through the establishment of a district advisory committee appointed by the county council. The advisory committee would hold open meetings in the former municipality and issue reports to the county on matters pertaining to local residents.

Nevertheless, Melissa Morgan, legislative and policy analyst for the Pennsylvania State Association of Township Supervisors, warned the proposed legislation would go too far in wresting local power and vesting it in a higher level of government, telling legislators her organization, which she said represents 1,454 townships in the state, opposes the passage of HB2122 or any other legislation that would allow for the dissolution of municipalities: “County government should not be given additional powers to administer unincorporated territory…Instead, the Legislature should consider relieving unfunded mandates for municipalities, such as those requiring benefits to uniform employees to help alleviate financial challenges.” County Executive Fitzgerald said he was in favor of the Legislature taking other steps such as those suggested by Ms. Morgan to ease the plight of struggling communities; however, he noted that HB2122 was also a good option to have on the books in case those other steps fail to provide relief: “It’s a voluntary program: It’s just giving people an option. And to me, that’s what democracy is about, giving people the choice. Right now, they don’t have that choice.”

Assessing the Promise of PROMESA

D-Day, 2018

Good Morning! In this morning’s eBlog, we consider the status—and promise—of the quasi chapter 9 municipal bankruptcy process in the U.S. territory of Puerto Rico.

Nearly two years after the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was enacted to establish a federally appointed oversight board to oversee a quasi-chapter 9 municipal bankruptcy process for restructuring or adopting a plan of debt adjustment of the U.S. territory’s debt—a statute which enabled the territory to suspend debt payments effective July 1st in 2016 on its debt in excess of $123 billion, the end might be looming. The statute also cleared the way for deep cuts in Puerto Rico’s public service budget—including cuts to health care, pensions, and education. Just over a year ago, Judge Laura Taylor Swain began the process of overseeing the quasi chapter 9 municipal bankruptcy process in search of some consensus on a quasi-plan of debt adjustment. Now that plan is beginning to take shape, with, this week, the Puerto Rico Financial Advisory Authority and Fiscal Agency (Fafaf) ) informing Judge Swain that, as early as next month, there will be a plan to adjust the debt of the Government Development Bank. Attorneys for the Agency have indicated to Judge Swain that as early as June 22nd they intend to provide drafts of the legal documents which are prerequisites to renegotiate the debt of the Government Development Bank (GDB) and the deposits of third parties which the Bank has retained in its custody since its decapitalization about two years ago. The adjustment with the creditors, whether bondholders or depositors, would occur in light of Title VI of the PROMESA statute—the title which provides for a voluntary negotiation between the parties and on which the judicial branch does not issue direct judgment regarding its reasonableness. The goal is to complete such submission by August, according to Christian Sobrino, the Governor’s chief advisor for economic development, who noted: “It is anticipated that at some point in August, the transaction must be closed,” as he discussed details of the quasi plan of debt adjustment process that would mark a milestone in the restructuring of Puerto Rico’s quasi municipal bankruptcy, noting: “This is the only agreement that has both the government and the Oversight Board, and this will demonstrate the ability of Puerto Rico to reach consensual agreements,” as he stressed the importance of the agreement reached with many of the government’s creditors, adding: “Given that they will be negotiable instruments, it will be the first issue of restructured debt issued by Puerto Rico since 2014.”

According to the agency’s motion, the government would open the application process to seek the consent of the creditors on July 5th. According to Mr. Sobrino, the process of compliance with Title VI of PROMESA would begin one day later, when it is expected that Aafaf, after receiving the approval of the Oversight Board, will file a request for a qualified modification of the GDB debt in court. He notes that PROMESA’s Title VI process requires presenting a breakdown of claims by creditors according to their guarantee or priority, but that process would have already been substantially completed upon the approval of the Debt Restructuring Agreement with various funds. (At present, some six credit unions have sued the government for the renegotiation of GDB debt.)

According to the RSA, the agreement between the Puerto Rico Electric Power Authority (PREPA) and its creditors to extend several deadlines under their restructuring support agreement, will be modified again to reflect the changes in the transaction calendar: the GDB bondholders would receive 55 cents of each dollar they lent to the former fiscal agent. Meanwhile, the depositors, including muncipios, would recover a similar amount for the deposits they have put in custody with the GDB—with, in their case, Mr. Sobrino stressing they would receive 55% of the deposits held in the bank. However, if the muncipios have loans in the GDB, their deposits would be used to settle dollar-to-dollar financing, without reflecting the 45 cents which will apply to the rest of the credits: “The approval request will seek to establish clear procedures related to the approval of the qualified amendment, including the timetable for the parties to object the vote portfolio, the request and the tabulation processes, thus ensuring that all parties with an interest in the restructuring of the GDB have an opportunity to be heard in relation to Title VI.”

To date, according to the RSA (the restructuring support agreement), through last December, the GDB owed approximately $3,765 million; it also owed $376 million in deposits to private and similar companies; and another $507 million in deposits from agencies and government entities. The proposed transaction contemplates repaying the bondholders of the municipal loans and government agencies that the GDB still hopes to recover, as well as the sale of properties of the institution, which closed its doors last March.

The Puerto Rican agency’s motion came less than 48 hours before Judge Swain is due back to preside over the general hearing of the Title III cases today—a hearing where Judge Swain must decide whether to authorize a second payment to the professionals involved in PROMESA cases.

Post Municipal Bankruptcy Election, and How Does a City, County, State, or Territory Balance Schools versus Debt?

June 4, 2018

Good Morning! In this morning’s eBlog, we consider tomorrow’s primary in post-chapter 9 municipally bankrupt Stockton, and the harsh challenges of getting schooled in Puerto Rico.

Taking New Stock in Stockton? It was Trick or Treat Day in Stockton, in 2014, when Chris McKenzie, the former Executive Director of the California League of Cities described to us, from the U.S. Bankruptcy Court courtroom, Judge Christopher Klein’s rejection of the claims of the remaining holdout creditor, Franklin Templeton Investments, and approved the City of Stockton’s proposed Chapter 9 Bankruptcy Plan of Adjustment. Judge Klein had, earlier, ruled that the federal chapter 9 municipal bankruptcy law preempted California state law and made the city’s contract with the state’s public retirement system, CalPERS, subject to impairment by the city in the Chapter 9 proceeding. Judge Klein determined that that contract was inextricably tied to Stockton’s collective bargaining agreements with various employee groups. The Judge also had stressed that, because the city’s employees were third party beneficiaries of Stockton’s contract with CalPERS, that, contrary to Franklin’s assertion that CalPERS was the city’s largest creditor; rather it was the city’s employees—employees who had experienced substantial reductions in both salaries and pension benefits—effectively rejecting Franklin’s assertion that the employees’ pensions were given favorable treatment in the Plan of Adjustment. Judge Klein, in his opinion, had detailed all the reductions since 2008 (not just since the filing of the case in 2012) which had collectively ended the prior tradition of paying above market salaries and benefits to Stockton employees. Moreover, his decision included the loss of retiree health care,  reductions in positions, salaries and employer pension contributions, and approval of a new pension plan for new hires—a combination which Judge Klein noted meant that any further reductions, as called for by Franklin, would have made city employees “the real victims” of the proceeding. We had also noted that Judge Klein, citing an earlier disclosure by the city of over $13 million in professional services and other costs, had also commented that the high cost of Chapter 9 municipal bankruptcy proceedings should be an object lesson for everyone about why Chapter 9 bankruptcy should not be entered into lightly.

One key to the city’s approved plan of debt adjustment was the provision for a $5.1 million contribution for canceling retiree health benefits; however a second was the plan’s focus on the city’s fiscal future: voter approval to increase the city’s sales and use tax to 9 percent, a level expected to generate about $28 million annually, with the proceeds to be devoted to restoring city services and paying for law enforcement.

Moody’s, in its reading of the potential implications of that decision opined that Judge Klein’s ruling could set up future challenges from California cities burdened by their retiree obligations to CalPERS, with Gregory Lipitz, a vice president and senior credit officer at Moody’s, noting: “Local governments will now have more negotiating leverage with labor unions, who cannot count on pensions as ironclad obligations, even in bankruptcy.” A larger question, however, for city and county leaders across the nation was with regard to the potential implications of Judge Klein’s affirmation of Stockton’s plan to pay its municipal bond investors pennies on the dollar while shielding public pensions.

Currently, the city derives its revenues for its general fund from a business tax, fees for services, its property tax, sales tax, and utility user tax. Stockton’s General Fund reserve policy calls for the City to maintain a 17% operating reserve (approximately two months of expenditures) and establishes additional reserves for known contingencies, unforeseen revenue changes, infrastructure failures, and catastrophic events.  The known contingencies include amounts to address staff recruitment and retention, future CalPERS costs and City facilities. The policy establishes an automatic process to deposit one-time revenue increases and expenditure savings into the reserves.  

So now, four years in the wake of its exit from chapter 9 municipal bankruptcy, Republican businessman  and gubernatorial candidate John Cox has delivered one-liners and a vow to take back California in a campaign stop in Stockton before tomorrow’s primary election, asking prospective voters: “Are you ready for a Republican governor in 2018?”

According to the polls, this could be an unexpectedly tight race for the No. 2 spot against former Los Angeles Mayor Antonio Villaraigosa, a Democrat. (In the primary, the two top vote recipients will determine which two candidates will face off in the November election.) Currently, Democratic Lt. Gov. Gavin Newsom is ahead. Republicans have the opportunity to “take back the state of California,” however, candidate Cox said to a group of more than 130 men and women at Brookside Country Club—telling his audience that California deserves and needs an honest and efficient government, which has been missing, focusing most of his speech on what he said is California’s issue with corruption and cronyism worse than his former home state of Illinois. He vowed that, if elected, he would end “the sanctuary protections in the state’s cities.”

Seemingly absent from the debate leading up to this election are vital issues to the city’s fiscal future, especially Forbes’s 2012 ranking Stockton as the nation’s “eighth most miserable city,” and because of its steep drop in home values and high unemployment, and the National Insurance Crime Bureau’s ranking of the city as seventh in auto theft—and its ranking in that same year as the tenth most dangerous city in the U.S., and second only to Oakland as the most dangerous city in the state.

President Trump, a week ago last Friday, endorsed candidate Cox, tweeting: “California finally deserves a great Governor, one who understands borders, crime, and lowering taxes. John Cox is the man‒he’ll be the best Governor you’ve ever had. I fully endorse John Cox for Governor and look forward to working with him to Make California Great Again.” He followed that up with a message that California is in trouble and needs a manager, which is why Trump endorsed him, tweeting: “We will truly make California great again.”

Puerto Rico’s Future? Judge Santiago Cordero Osorio of the Commonwealth of Puerto Rico Superior Court last Friday issued a provisional injunction order for the Department of Education to halt the closure of six schools located in the Arecibo educational region—with his decision coming in response to a May 24th complaint by Xiomara Meléndez León, mother of two students from one of the affected schools, and with support in her efforts by the legal team of the Association of Teachers of Puerto Rico. The cease and desist order applies to all administrative proceedings intended to close schools in the muncipios of Laurentino Estrella Colon, Camuy; Hatillo; Molinari, Quebradillas; Vega Baja; Arecibo; and Lares—with Judge Cordero Osorio writing: “What this court has to determine is that according to the administrative regulations and circular letters of the Department of Education, there is and has been applied a formula that establishes a just line for the closure without passion and without prejudice to those schools that thus understand merit close.”  

With so many leaving Puerto Rico for the mainland, the issue with regard to education becomes both increasingly vital, while at the same time, increasingly hard to finance—but also difficult to ascertain fiscal equity—or as one of the litigants put it to the court: “The plaintiff in this case has clearly established on this day that there is much more than doubt as to whether the Department of Education is in effect applying this line in a fair and impartial manner.” Judge Osorio responded that “this court appreciates the evidence presented so far that the action of the Department of Education regarding the closure of schools borders on arbitrary, capricious, and disrespectful;” he also ruled that the uncertainty he saw in the testimonies of the case had created “irreparable emotional damage worse than the closing of schools,” as he ordered Puerto Rico Education Secretary Julia Keleher to appear before him a week from today at a hearing wherein Secretary Keleher must present evidence of the procedures and arguments that the Department took into consideration for the closures.  

Meléndez León, the mother who appears as a plaintiff in the case, stated she had resorted to this legal path because the Department of Education had never provided her with concrete explanations with regard to why Laurentino Estrella School in Camuy, which her children attend, had been closed—or, as she put it: “The process that the Department of Education used to select closure schools has never been clarified to the parents: we were never notified.” At the time of the closure, the school had 186 students—of which 62 belonged to Puerto Rico’s Special Education program—and another six were enrolled in the Autism Program. Now, she faces what might be an unequal challenge: one mother versus a huge bureaucracy—where the outcome could have far-reaching impacts. The Education Department, after all, last April proposed the consolidation of some 265 schools throughout the island.