The Roads out of Municipal Bankruptcy

Share on Twitter

eBlog, 2/24/17

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

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

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

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

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

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

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

The Challenge of Post-Insolvency Governance

Share on Twitter

eBlog, 2/21/17

Good Morning! In this a.m.’s eBlog, we consider the role of citizens when a municipality emerges from municipal bankruptcy—and at how little effort seems to have been taken for such cities to share with each other. Then we take a gamble at the roulette wheels in Atlantic City, where the third branch of government, the judiciary, is weighing in even as candidates for next year’s Mayoral election from the City Council are announcing.  

The Challenge of Emerging from Chapter 9 Municipal Bankruptcy. San Bernardino Neighborhood Association Council President Amelia Lopez recently asked if the city’s emergence from municipal bankruptcy might mark the moment to change the city from the ground up, or, as Ms. Lopez put it: “Coming out of bankruptcy is an opportunity…The city is looking for direction. We’re here to have a say in that direction.” No U.S. city has ever been in bankruptcy for as long as San Bernardino, so the question she is raising might singularly impact the city’s future. Yet it comes at a time when citizen activism has altered: of San Bernardino’s 60 neighborhoods, 19 or 20 are active, compared to 30 a decade ago. But the Neighborhood Association Council plans to send representatives to a national convention of neighborhood associations in March and to try to work more closely with elected San Bernardino leaders. It would be interesting were the Council to try to contact comparable neighborhood organizations in Stockton, Jefferson County, and Detroit to both learn what efforts had worked—and which had failed.

Thinking about Tomorrow: A City’s Post Insolvency & State Takeover Future? Notwithstanding Atlantic City’s current status as a ward of the State of New Jersey, there appears to be strong interest in the city’s future elected leadership—albeit, at least to date, an absence of substantive proposals from aspiring candidates. Atlantic City Councilman Frank Gilliam yesterday officially jumped into the mayor’s race, joining previously announced candidate Edward Lea.  Mr. Gilliam, a Democrat, kicked off his campaign with his slate of council running mates—where he spoke about addressing high taxes, unemployment, foreclosures, and other issues, vowing brighter days would come under new leadership: “The Atlantic City that we see right now will not be the Atlantic City we will see in the future…There will be prosperity. There will be equality. There will be fairness from the bottom to the top.” Councilmember Gilliam has served on the City Council since 2010; now he joins a crowded primary: he will face Council President Marty Small and Fareed Abdullah in the June Democratic primary, with the winner set to take on Republican Mayor Don Guardian next November. Councilman Gilliam’s running mates are incumbent Councilmen Moisse “Mo” Delgado, George Tibbitt, and candidate Jeffree Fauntleroy II, who are all seeking at-large seats. Last Friday, candidate Abdullah, a substitute teacher and former City Council candidate, said would also be running for Mayor—meaning a three-way Democratic primary, with the winner to challenge incumbent Republican Mayor Don Guardian.

Councilman Gilliam last year voted against a number of proposals to address the city’s finances, including measures to seek bids for services, dissolve the city’s water authority and approve the administration’s fiscal recovery plan to avoid a state takeover. In some cases, he cited a lack of information about the proposals, or in the case of the fiscal plan, not enough time to review the information. In announcing his bid, he noted: “People elected me to vote on what I think is best for them, not what my other colleagues think is best for them…When you give an individual a document five hours before a vote, that doesn’t give me the proper opportunity to have my fellow folks aware that I’m making the best-informed decision…For too long Atlantic City’s politics and the leaders of this city have sucked the blood out of our town…The time for new leadership is right now.”

Fire in the Hole. Aspiring to be an elected leader in a municipality where the state has preempted such authority comes as the challenge of governing an insolvent city has become more complex and challenging in the wake of Atlantic City Superior Court Judge Julio Mendez restraining order early this month barring the State of New Jersey from cutting Atlantic City’s firefighter workforce or unilaterally altering any of their contracts as part of its state takeover—a judicial decision which caused Moody’s Investors Services to be decidedly moody, deeming Judge Mendez’s decision a credit negative for the cash-strapped city. Or, as the crack credit rating analyst for Moody’s Douglas Goldmacher last week noted: “These developments signal that any actions the state takes to reduce the city’s work force or abrogate labor contracts will prompt a legal challenge, leading to considerable delays in the Atlantic City recovery process, a credit negative for the city…The success or failure of the state to implement broad expenditure cuts for Atlantic City is of tremendous import to the city’s credit quality.” Mr. Goldmacher noted that negotiations with the firefighters and other unions would typically be handled by city officials; however, the Municipal Stabilization and Recovery Act legislation approved by New Jersey lawmakers last year enables the state to alter outstanding municipal contracts, an authority which has now been rendered uncertain. Mr. Goldmacher noted that the firefighters’ court challenge could pave the way for other unions to challenge staffing cuts—effectively handcuffing both municipal and state efforts. He wrote that current city revenues are “insufficient” for debt service and routine expenditures making budget cuts the most likely avenue for permanent financial improvement: “Leaving aside the question of constitutionality, extensive litigation will delay negotiations…Even if other unions refrain from filing suit, the state’s negotiations will be materially impacted by the ongoing lawsuit, delaying or even preventing cost-cutting efforts.”

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

Share on Twitter

eBlog, 12/09/16

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

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

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

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

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

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

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

What Is the State Role in Municipal Solvency/Recovery?

 

Share on Twitter

eBlog, 11/21/16

Good Morning! In this a.m.’s eBlog, we consider the state role in addressing municipal fiscal distress and bankruptcy: what are the different models—and how are they working? Then we consider one especially dysfunctional model: Ohio, where the City of East Cleveland could find its two Mayoral candidates in municipal jail before the voters go to the polls early next month. From thence, we strike east to consider this month’s elections in Massachusetts on charter schools—examining an issue that goes to the heart not only of state local relations and authority, but also to the potential impact on municipal assessed property values. What may be learned? Finally, we wish readers a Happy Thanksgiving!

What Is the State Role in Municipal Solvency/Recovery? Under our country’s system of dual federalism created by the founding fathers, while federal law authorizes municipalities to file for chapter 9 bankruptcy, a city, county, or school district may only do so if authorized by a state. Today, only 18 of the 50 states provide such authority. Ergo, one of the issues we have sought to consider through this eBlog has been the evolving State role in municipal distress in a field of seeming constant flux. This month, for instance, we experienced the uncertain governance situation in New Jersey in the wake of the state takeover of the City of Atlantic City—a state takeover in which the process and how it will play out could be further impacted by the potential selection by President-elect Trump of New Jersey Governor Chris Christie, who might be a potential Cabinet or other senior advisor to the President-elect.

Actual governance has shifted from local accountability to the state’s Division of Local Government Services—but with the state already having imposed a state emergency manager in the city, what the new state takeover means continues to be uncertain. In Ohio, which authorizes chapter 9 municipal bankruptcy, the City of East Cleveland’s request to do so appears to be on the desk of Rod Serling in the Twilight Zone: there has simply been no response of any kind. Similarly, in California, state policies have clearly contributed to some of the fiscal distress that led Stockton and San Bernardino into chapter 9 municipal bankruptcy, but the state played absolutely no role in helping either Stockton or San Bernardino to emerge. Michigan, a state which has been deeply enmeshed in municipal fiscal distress—albeit not necessarily in a constructive manner—has acted in different ways—going from its imposition of an emergency manager—a process with deadly consequences in Flint, but seemingly key to Detroit’s turnaround. Alabama, by refusing to allow Jefferson County to raise its own taxes, directly aided and abetted the County’s chapter 9 municipal bankruptcy. Rhode Island, on the day of Central Falls’ chapter 9 filing—the very day Providence, the state’s capitol city, was itself poised on the rim of filing, but opted not to—and the state, thanks to the exceptional ingenuity of its then Treasurer (now Governor), created an ingenious model of creating teams of city managers and retired state legislators to act in teams to offer assistance to cities in danger of insolvency—so that there was a team effort before—instead of after such a precipitous event.

Part of what has made this effort to assess what is happening in the arena of severe municipal fiscal challenges and bankruptcy so much more difficult is the surprise that, in the wake of recovery from the Great Recession, one would have assumed severe municipal fiscal distress and insolvency would have dissipated. It has not. What has changed? Why are States not reacting more uniformly? With only 18 states permitting municipal bankruptcy, what state models exist which offer a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion? What is a state’s role in recovery from a chapter 9 municipal bankruptcy? What is a state’s role in addressing increasing fiscal disparities?

Ungoverning in a Fiscal Twilight Zone. In East Cleveland, Ohio, the mall city which is seeking authority from the State of Ohio to file for chapter 9 bankruptcy—a plea to which it remains unclear whether there will ever be a response, and where there have been on and off discussions with adjacent Cleveland about a consolidation of the two municipalities; the city’s election day activities provide a sense of the increasing dysfunctional nature of the small city: it was, after all, on election day this month at Mayfair Elementary School where both candidate Devin Branch and current Mayor Gary Norton were working the polls trying to convince registered voters to go with their respective causes. Mayor Norton was pressing potential voters not to recall him at the city’s upcoming election on December 8th; Devin Branch was going door-to-door to obtain the 550 requisite signatures to ensure the recall would officially be on the ballot. Their respective efforts, however, came up against each other when they encountered each other going after the same person and their battle became an event where they pressed their respective clip boards in front of registered voters—leading to a confrontation so that Mayor Norton decided to order the Chief of Police and a squad of police to arrest Mr. Branch. Moreover, dissatisfied with the police response, Mayor Norton then ordered his personal lawyer, Willa Hemmons, to issue a warrant for the arrest of Mr. Branch. Thus, in an insolvent municipality, several squads of police and detectives were directed to make the arrest of Devin Branch last Thursday. Mr. Branch was arrested and placed in East Cleveland’s jail; last Friday, Judge William Dawson opened the door for his release after posting bond. This morning, Judge Dawson will hear from both men, albeit, what the voters and city’s taxpayers will hear seems unlikely to be enlightening for the city’s fiscal future.

Schooled in Fiscal Solvency? Massachusetts voters this month overwhelmingly rejected a major expansion of charter schools, rejecting Question 2 by nearly a 2-1 margin, in what was perceived as a significant setback for Governor Charlie Baker, who had aggressively campaigned for the referendum, saying it would provide a vital alternative for families trapped in failing urban schools. As proposed, the measure would have allowed for 12 new or expanded charters per year, adding significantly to the existing stock of 78 charters statewide. Had the measure been approved, it would have—as state-imposed charter schools in Detroit are, shifted thousands of dollars in state aid from public to charter schools—shifting as much as an estimated $451 million statewide this year. During the campaign, opponents such as Juan Cofield, president of the New England Area Council of the NAACP, warned that charters were creating a two-tiered system, draining money from the traditional schools that serve the bulk of black and Latino students, telling voters “a dual school system is inherently unequal.” Worcester Mayor Joseph Petty, an opponent, noted: “Here in Worcester we will spend $24.5 million dollars on charter schools in our city…that is money that could be used to hire more teachers, improve our facilities, and invest in our students,” in effect underscoring the reason municipal leaders in the Bay State opposed the measure: their apprehension with regard to the fiscal impact on cities, towns, and school districts when more children attend charter schools. Had the measure been adopted, district schools would have received less money: the money to educate a child would have followed the child: over time, expanding access to charter schools could cost local property taxpayers more, since district schools will need more funding, forcing local elected leaders to either raise property taxes more, or cut public services. Indeed, opponents of charter school expansion claimed, based on state data, that school districts would have lost some $450 million this year to charter school tuition, even after accounting for state reimbursements.

Unsurprisingly, ergo, municipal officials generally opposed expanding charter schools, with the mayors of Springfield, Boston, Chicopee, Holyoke, Northampton, Pittsfield, Westfield, and West Springfield all coming out publicly opposed. Geoff Beckwith, the Executive Director of the Massachusetts Municipal Association, said the current funding system is already difficult for cities and towns to deal with, noting that, for one, the formula transferring money from district to charter schools does not take into account the fact that many of a school’s costs are fixed and do not vary by child, noting that with regard to the fiscal impact on cities, towns and school districts: “You have to a have a classroom, you have to heat the building, you still have principals…It’s extremely hard for communities to actually cut costs…The only thing they can do is cut back on the overall quality of the programming they’re offering the vast majority of kids who stay behind in the regular public school system.” Ergo, he noted: “Until the financing system is fixed, the ballot question providing for the expansion of charter schools would exacerbate and deepen the financial trouble that these local school systems are dealing with…And the communities that are most impacted by charter school expansion are in most cases the most financially challenged communities.” (Unsurprisingly, the Massachusetts Municipal Association board voted unanimously to oppose the ballot question.) Indeed, Moody’s reported the rejection to be a credit positive for the Commonwealth’s urban local governments: “It will allow those cities and towns to maintain current financial operations without having to adjust to increased financial pressure from charter school funding.” According to Moody’s, since the last charter school expansion in 2010, cities such as Boston, Fall River, Lawrence, and Springfield have experienced significant growth in charter school assessments, averaging 83% due to increasing charter school enrollment. To which, Moody’s notes: “So far, the growing cost of charter schools on municipalities has not been a direct credit challenge; rather the effect is more indirect because Massachusetts school districts are integrated within cities and towns with relatively healthy credit profiles.” The agency went on to write: “Education in the commonwealth is a primary budget item within a municipality’s overall budget, which allows city budgets to absorb some of the education financial stress with other municipal sources….This integration is a key distinction from school districts in other states that operate separately from the communities they serve.”

The Teeter-Totter of Municipal Bankruptcy

eBlog, 8/02/16

In this morning’s eBlog, we consider the 4th anniversary of the nation’s longest ever municipal bankruptcy in San Bernardino: what lessons are there to be learned? How does its municipal bankruptcy compare to Detroit? Then we look to south Florida, where the small city of Opa-locka appears to be on the slippery slope into municipal bankruptcy.

Happy Anniversary? The City of San Bernardino yesterday completed its 4th full year in chapter 9 municipal bankruptcy—the longest in U.S. history. It is almost certain it will earn U.S. Bankruptcy Judge Meredith Jury’s gavel to emerge from bankruptcy this October: ballots for creditors to vote on the city’s proposed plan of debt adjustment were set to be mailed Friday, giving creditors until Sept. 2nd to object and the city until Sept. 30th to respond to those objections. U.S. Bankruptcy Judge Meredith Jury has scheduled a confirmation hearing — the final stage of bankruptcy — for Oct. 14, noting: “This case has gone at the speed it has to go…Now we have confirmation in view, and we’ll get there when we are supposed to get there. We are not Detroit, we are not Stockton; we came into this case in a very different posture, and therefore the fact that it took much longer to get to confirmation was to be expected.”

Confronted by a deficit exceeding nearly $50 million, or about forty percent of the $112 million in revenues the city expects this year, the city had filed for municipal bankruptcy when it reached the point of inability to provide for essential public services and recognized that without filing, the city’s creditors would overwhelm its future. In comparison, Vallejo, California emerged from chapter 9 in three and a half years, while Stockton emerged from chapter 9 in two and a quarter years. Detroit, which went through the nation’s largest municipal bankruptcy, was out of chapter 9 in less than 16 months; Central Falls, Rhode Island, in a much briefer time.

But the cost to the city of filing has been significant—estimates run to nearly $19 million alone in fees to the city’s attorneys and consultants, $6.2 million just over the last twelve months. But the price has not just been in dollars: the city’s voters have elected a new mayor, city attorney, and four of the seven City Council members—as well as the top unelected positions. Councilmember Fred Shorett, one of the few who has remained in elected office, notes: “I see us in much better shape: We balanced our budget, albeit with some deferrals. We have good new projects coming in, like the Carousel Mall…We’re still stretched very thin with our staff, and (City Manager) Mark Scott continues to remind us of that, but we’re going to continue to build that back up. I’m optimistic about the future of San Bernardino.”

Ground Zero. Opa-locka, Florida, the small city of the just 0ver 15,000 inside Miami-Dade County, is running out of funds—and leadership: City Manager David Chiverton stunned elected leaders by resigning his office in the course of a federal criminal investigation, and Opa-locka officials have announced the city is virtually insolvent and will be unable to pay its employees, including police officers next month. Mr. Chiverton had been a target of an ongoing FBI probe into corruption in Opa-locka; he had taken a leave of absence last spring after the Miami Herald revealed he paid himself tens of thousands in unused sick and vacation pay to which he was not entitled. (Other targets of the probe: Mayor Taylor and Commissioner Luis Santiago.) The city violent crime rate for Opa-locka in 2012 was higher than the national violent crime rate average by 618.54% and the city property crime rate in Opa-locka was higher than the national property crime rate average by 181.05%. Florida Inspector General Melinda Miguel last Thursday warned city leaders during an emergency oversight board meeting that with just $350,000 left in the city’s general fund, Opa-locka may have to consider bankruptcy. The warning came in a stunning sequence for the small city—one which has been under the oversight of a state financial emergency board since June, but has been unable to halt a mushrooming municipal deficit. The Florida Inspector General said she was upset by the city’s failure to meet yesterday’s deadlines to file a budget and recovery plan; the IG blasted the city’s elected leaders, stating they were not doing enough to keep costs down or tackling the critical problems that threaten the entire operation of the city: “I believe that we found that we are at ground zero of fiscal irresponsibility: While the city teeters on the verge of bankruptcy, we’ve had people ask what’s in it for me…From creditors, to commissioners, to employees, to crooks: what’s in it for me has to change. And we must all do our part…One of the biggest tests to resolving a problem is realizing you have one,” she said by phone from Tallahassee, as Opa-locka Mayor Myra Taylor and city commissioners sat in the front row staring at the local members of the state board. The new revelations about the city’s fiscal distress were significantly worse than Opa-locka’s own projections of last month.

In the meeting centered on the municipality’s impending insolvency—a municipality which just weeks ago had pledged that it was going to balance its budget, I.G. Miguel criticized the city for failing to stem spending at a time it is losing hundreds of thousands every month in revenue; she said the city had been raiding restricted funds to fill budget gaps and was in danger of defaulting on major payments: “Our message has been and continues to be: Not business as usual. And it still appears to be a leadership deficit in the city…While the city teeters on the brink of bankruptcy, we’ve had people ask: ‘What’s in it for me?’ From predators to commissioners to employees to crooks.”

Because Mr. Chiverton resigned yesterday, he qualifies for healthcare benefits through the end of the month; however, the oversight board chair put an end to any other perks, mainly because IG Miguel said she was troubled by his decision to cash in his unused vacation and sick time — totaling nearly $40,000 — before he went on temporary leave in May. Ms. Miguel said she did not want Mr. Chiverton to receive any final salary-related payment from the city until the board reviews it; she also demanded that Mr. Chiverton turn in his city-leased Ford Expedition along with his cellphone and laptop. In addition, she insisted that city officials cut off his access to all Opa-locka government computers and to City Hall immediately. IG Miguel urged city commissioners and administrators to continue to make “drastic cuts,” warning the city needed to be far more judicious about how much it was spending on items such as cellphones for employees.

The most serious issue now confronting the city: the city’s cash flow: Acting City Manager Yvette Harrell, who had replaced Mr. Chiverton in May, told the board Opa-locka currently has just $354,121 in its general fund — far below the millions it once maintained; the municipality also has $1.7 million in its water and sewer fund, and $1.2 million in a restricted reserve account. Nevertheless, with all of the city’s obligations, including payroll for Opa-locka’s 160-plus employees, Ms. Harrell warned the city will run out of money by next month: “Optimistically, by the end of September…Realistically, it will be closer to the beginning of September.” Indeed, so grave is the fiscal crisis that board members even debated whether the city could dip into the water and sewer fund — money set aside to fund Opa-locka’s badly deteriorating water system, with Ms. Harrell warning that if the city did not tap into the fund, Opa-locka would be broke within a couple of weeks: “Then, it’s lights out.” As it stands, Opa-locka will not be able to pay scores of its vendors — including contractors and health insurers —if it is to meet its next payroll early this month.

Uh oh. In addition to the city’s looming fiscal insolvency, it also confronts an ethics insolvency: the FBI’s corruption probe, which was launched three years ago. City Attorney Vincent Brown said several Opa-locka employees have been interviewed by FBI agents and have testified before the grand jury in Miami, adding the investigation was “ongoing,” and urging members of the community to contact the FBI in case they witness suspicious activities among elected leaders or city administrators. The city may also be in default of privately placed notes held by a local bank that could be accelerated – a fiscal challenge to be addressed in consultation with Florida Division of Bond Finance Director Ben Watkins.

Last June, the Governor had named a nine-member oversight board after Miami-Dade County determined the municipality was in a financial emergency and entered an agreement to get professional assistance from the state. Gov. Scott named IG Miguel as chair. At a recent session, board member Frank Rollason, City Manager for nearby North Bay Village, queried: “Can a municipality go bankrupt?” (In Florida, [see §§218.01 and 218.503], a municipality is authorized to file for chapter 9, but only after first obtaining prior approval from the governor.) Already the city has been barred from issuing any new municipal debt without IG Scott’s approval. That approval, itself, is almost certain to also depend upon the outcome of pending investigations by the Securities and Exchange Commission and the FBI, with the SEC examining whether Opa-locka properly disclosed its financial condition in its municipal bond documents for as many as two issuances that were privately placed with local banks; the FBI has raided city offices and removed documents which are believed to be related to spending irregularities. Meanwhile, the State of Florida has, to date, offered no state assistance to assist in Opa-locka’s recovery: the state oversight board has discussed the possibility of an advance from revenue-sharing funds to help the city through the lean months ahead before property tax collections come in; however IG Miguel has noted: “There’s got to be some other demonstration of fiscal responsibility: I’m not inclined to make that recommendation,” noting: “I must just point out that absent a budget, absent a financial recovery plan, absent an audit, and further demonstration of a cooperation issue or lack of cooperation issue constitutes malfeasance and misfeasance under the agreement,” she was most reluctant to recommend such assistance.

Charting a City’s Post Municipal Bankruptcy Future Governance

In this morning’s eBlog, we consider the key actions taken yesterday by the Mayor and Council in San Bernardino to put a new charter before the city’s voters—a critical step towards a post municipal bankruptcy future.  

Charting a New Governance for a Post Municipal Bankruptcy Future. In our report on the critical factors and the fiscal challenges for local governments in the wake of the Great Recession, we noted that while considerable effort had been devoted to understanding macroeconomic trends, far less attention had been giving to understanding the recession’s impact at the municipal level. Thus, in our study of one of those six municipalities, San Bernardino, we noted: “In the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development, and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” Now, more than half a decade later, the San Bernardino City Council is poised to vote on a new governing document for the city. Yesterday, the Council, after adopting some amendments, agreed to vote early next month on a motion to set a date for the city’s voters to vote in November on the proposed new charter: one which includes major changes in which officials are elected and how they are authorized to govern the city. The amendments adopted yesterday will keep the election policy closer to the city’s current practice: first a primary election; subsequently, unless one candidate wins more than 50 percent of the vote, a runoff election between the top two vote recipients—instead of, as the committee had proposed, just one election in which the leading vote recipient was automatically elected. Councilman Fred Shorett, at the session, noted: “If we had (had) that in effect in 2013, we’d have a mayor who received only 20 percent of the vote — and it wouldn’t be the person sitting to my left (Mayor Carey Davis),” referring to an election in which (Mayor) Davis finished behind Wendy McCammack, but prevailed in the subsequent February runoff, adding: “When Mayor Davis ran, there were 11 candidates. You run the risk of a very, very low number of people (choosing the winner).” But, as part of the newly proposed charter, if approved by the city’s voters, the timing of San Bernardino’s elections will change: instead of primaries in November of odd-numbered years and runoffs the following February, the primary will match the state of California’s, presently in June, with any runoff in November of even-numbered years. That recommendation, from the city’s committee, appeared to stem from reviews of practices of other municipalities who had realized both lower costs and better voter turnouts. Indeed, the election change, proposed by Councilman Henry Nickel, was adopted unanimously; the Council also changed the proposed charter from saying certain officials would be “appointed” to “hired,” based on advice from the League of Women Voters. Another change would eliminate elections for city attorney, city clerk, and city treasurer; under the proposed new charter, the mayor and council would vote for the city attorney and city clerk. Nevertheless, this adopted change, proposed early in the charter review process, shows the difficulty of change: it is a proposal rejected by the city’s voters previously by opponents who claimed they wanted leaders directly accountable to the people. During consideration and markup, Councilmember Nickel also proposed an amendment to modify the proposed new charter to make the Mayor’s term two years instead of four, a change, he stated, that would mean that mayoral elections would be on the same day as elections for half of the council members, meaning those council members — but not others — must choose between seeking re-election or the citywide office, but his motion failed on a 3-3 tie, with Mayor Davis abstaining.

San Bernardino’s budget includes up to $150,000 to “educate” the public on the proposed changes to the charter; the next step is for the Council now to separately approve the details of that education — including the scope of the education, which, by law, cannot be advocacy, and the cost — in order for it to occur.

Is San Bernardino in the Home Stretch?

eBlog

Share on Twitter

eBlog, 6/20/16

In this morning’s eBlog, we welcome the good news that as San Bernardino holds its FY2017 budget hearing tonight, it will hear of an unexpected budget surplus, creating the option to finance municipal bankruptcy related services—and, lo and behold—compliment the city’s pending plan of debt adjustment.

The Last Full Measure? The San Bernardino City Council is scheduled to review the bankrupt city’s proposed FY2017 budget this evening—as it closes out a year in which revenues exceeded projections, even as spending was less than budgeted—so that, tonight, the Council will consider a motion to move some $2 million of the unexpected surplus into the fund the city has set up to finance municipal bankruptcy related services. The current, adopted budget had been projected to achieve a surplus of $18,608 by the end of the fiscal year; however, that is now projected to grow to a surplus of $12 million—with the savings attributed primarily to the city’s large numbers of vacancies, according to the Finance Department, but also from a number of one-time moves, including a franchise fee of $5 million for the sale of the San Bernardino’s Integrated Waste Management operation, as well as: some $3.2 million in greater sales and use tax revenues than projected; $600,000 in higher utility user’s tax revenues, and $1.2 million in higher than projected transient occupancy tax revenues—with the transient occupancy tax revenue 46 percent higher than the city had projected and some 20 percent over last year, reflecting increased occupancy at nearly all hotels and motels.

Is the End in Sight? The good news on the budget front compliments the city’s Recovery Plan, which, as of mid-May, rests on four key areas of change and improvement by the City, all aimed at improving the fiscal position of the organization: 1) Efficiency improvements – largely regionalizing or contracting for services; 2) Debt and Other Post-Employment Benefits (OPEB) restructuring; 3) New revenue and tax increases / extensions; and 4) Organizational improvements. In the wake of the city’s adoption of its plan of debt adjustment or Recovery Plan, San Bernardino has posted on its municipal bankruptcy site the table below [http://www.ci.san-bernardino.ca.us/home_nav/chapter_9_bankruptcy/default.asp], which provides a summary of where the City currently stands with respect to the major elements of the Plan. This Table is based on Table 1 – Cost Savings and Revenue Enhancement Actions and Estimates (General Fund) in the May 2015 Recovery Plan. The table shows for each opportunity area the estimated economic benefit, a summary of actions taken towards implementation and the currently anticipated economic benefit either realized or planned. Of note is that implementation is complete or underway on all actions targeted for 2015. In addition, implementation of several elements targeted for 2016 are already underway.

Cost Savings and Revenue Opportunities Estimated Ongoing (Annual) Savings unless otherwise noted Status 
Efficiency Improvements    
Regionalize or Contract fire and EMS services $7,000,000 – 10,000,000 Implementing – Council voted to annex into San Bernardino County Fire District. Local Agency Formation Commission (LAFCO) assessed and approved annexation, subject to conditions of approval, which included an annual parcel tax of $148.32, and protest hearing/votes. Less than 5% of landowners and registered voters submitted protest votes, moving the annexation forward to the implementation stage. Based on LAFCO and City estimates net economic benefit to the City ranges from $7.4 to $12.0 million annually of which approximately $7.4 million is expected to come from landowners new parcel tax contribution. The higher savings estimate includes resumption of payments for facilities maintenance, equipment replacement and overhead support eliminated from City budget.
Contract business license administration $650,000 to $900,000 Pending – Organizational analysis recommending moving function to Finance completed. RFP in development. Will be complete in 2016.
Contract fleet maintenance $400,000 Pending – 2016
Contract soccer complex management and maintenance  $240,000 to $320,000 Completed. The City has contracted for the operation of the complex by a private vendor effective October 1, 2015. Annual savings are estimated at $300,000. Private vendor has begun a $1M renovation and established a new National Premiere Soccer League team.
Contract custodial maintenance $150,000 Pending – 2016
Contract graffiti abatement $132,600 Pending – 2016
Implement other efficiency improvements $1,000,000 or more Completed. Right of way maintenance and street-sweeping are being implemented with solid waste contracting.
Health care savings (retirees) Up to $60 million in total savings Completed. Actuarial report is being finalized.
Debt Restructuring    
General Secured Bond Obligations $487,450 Implementing – Agreement has been reached. Documentation is underway.
General Unsecured Bond Obligations – Pension Obligation Bonds Up to all but 1% of obligation or approximately $95 million Implementing – City has reached agreement with creditor. Obligation reduced from $95.8 million to $50.7 million. Annual payments reduced from $3.3 to $4.7M per year to $1.0 to $2.5M per year
Restructuring of other creditor obligations Up to $4,300,000 in total savings Pending – Tentative agreement reached with holder of $527,490 lease purchase obligation
New Fee Revenue and Tax Adjustments  
Seek reauthorization of the Measure Z sales tax in 2021 (requires voter approval) $8,300,000 Pending – 2021. Police resources plan for rebuilding police capacity and improving public safety adopted by City Council
Perform a transient occupancy tax (TOT) audit $200,000 Pending – 2016
Collect new waste management franchise fee (once service has been contracted) $5,000,000 Completed. Council approved a contract with Burrtec. Service began April 1, 2016. Paid a $5M one-time fee plus will increase annual franchise payment to $5M from $2.2M. Sale of equipment nets City $12M.
Increase waste management franchise fee  $2,800,000 Completed. Will increase annual franchise payment to $5M from $2.2M.
Implement water/sewer utilities franchise fee  $1,050,000 Completed. New agreement adopted by City and Water Department.
Update master fees and charges schedule $200,000 Pending – 2016
Implement program for collecting street sweeping parking violations $200,000 Pending. Will be done in conjunction with move to private vendor – 2016
Implement compensation adjustments for all City employees $400,000 and growing (2% adjustment for non-safety employees) Completed. Agreements have been reached with all employee bargaining groups.
Provide resources to Charter Task Force and schedule election to consider revised Charter $150,000 (one time cost) Pending. A new draft charter is under development and has been reviewed at public meetings. Charter Committee to provide recommendations to Council in May and anticipate November 2016 election. Costs have been less than estimated
Organizational Improvements Ongoing Costs Implementation Schedule
Implement strategic planning initiatives $1,000,000 to $3,000,000 depending on timing and ability to fund Pending. Have completed Police Five Year Resources Plan which calls for additional investment of from $6.7M to $13.3M in annual funding over next five years starting in July 2016. Current model can only fund a portion of total needed
Rebuild corporate support functions $100,000 with a one-time cost of $500,000 Pending. Organizational reviews in process and have preliminary observations and recommendations for Finance, Human Resources and Information Technology

The third amended Disclosure Statement, Plan for the Adjustment of Debts and revised/new exhibits were filed with the bankruptcy court on May 27, 2016.