Municipal Fiscal Accountability

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eBlog, 03/31/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Atlantic City after its “lost decade,” before venturing inland to one of the nation’s oldest cities, Wilkes-Barre, Pennsylvania (founded in 1769) as it confronts the challenges of an early state intervention program, and, finally, to Southern California, where the City of Compton faces singular fiscal distrust from its citizens and taxpayers.  

A Lost Fiscal Decade? Atlantic City’s redevelopment effort appears to be gathering momentum following a “lost decade” which featured the closing of five casinos, a housing crisis and major recession, according to a new report released by the South Jersey Economic Review, with author Oliver Cooke writing: “The fact remains that Atlantic City’s redevelopment will take many years…The impact of the local area’s economy’s lost decade on its residents’ welfare has been stark.” The study finds the city to be in recovery—to be stable, but that it is still in critical condition with some work to do.  Nevertheless, its vital signs from developers and its improving economy are all good: that is, while the patient may not regain all its previous strength and capability,  it can thrive: it is “over(cost),” and needs to lose some of the fat it built up by going on a (budget) diet—a road to recovery which will remain steep and tortuous, because it lacks the fiscal capacity it had 15 or 20 years ago—and has to slim down to reflect it.  That is, the city will have to stress itself more in order to get better.  

The analysis, which was conducted in conjunction with the William J. Hughes Center for Public Policy at Stockton University, notes that vital signs from developers and its improving economy are in good condition—maybe even allowing the city to thrive, even if it is unable to regain all its previous strength and fiscal capacity—put in fiscal cookbook terms: Atlantic City is over(cost)weight and needs to lose some of the fat it built up by going on a (budget) diet.  The report also noted that Atlantic City is on track with some positive developments, including the decision at the beginning of this month by Hard Rock International to buy and reopen the closed Trump Taj Mahal property, as well as a recent $72 million settlement with the Borgata Hotel Casino & Spa related to $165 million in owed tax refunds. Mr. Cooke also highlighted other high-profile projects underway, including the reopening of the Showboat casino by developer Bart Blatstein and a $220 million public-private partnership for a new Stockton University satellite residential campus. Nonetheless, he warned that Atlantic City still faces a deep fiscal challenge in the wake of the loss to the city’s metropolitan area of more than 25,000 jobs in the last decade—and its heavy burden of $224 million in municipal bond debt, tied, in large part, to casino property tax appeals. Ultimately, as the ever insightful Marc Pfeiffer of the Bloustein Local Government Research Center and former Deputy Director with the state Division of Local Government Services, the city’s emergence from state control and fiscal recovery will depend on the nuances of the that relationship and whether—in the end—the state imposed Local Finance Board acts with the city’s most critical interests at heart.  

Don’t Run Out of Cash! Wilkes-Barre, first incorporated as a Borough in 1806, is the home of one of Babe Ruth’s longest-ever home runs. It became a city in 1871: today it is a city of over 40,000, but one which has been confronted by constant population decline since the 1930s: today it is less than half the size it was in 1940 and around two-thirds the size it was in 1970. It is a most remarkable city, made up of an extraordinary heritage of ethnic groups, the largest of which are: Italian (just over 25%), Polish (just under 25%), Irish (21%), German (17.9%) English (17.1%) Welsh (16.2%) Slovak (13.8%); Russian (13.4%); Ukranian (12.8%); Mexican (7%); and Puerto Rican (6.4%). (Please note: my math is not at fault, but rather cross-breeding.) Demographically, the city’s citizens and families are diverse: with 19.9% under the age of 18, 12.6% from 18 to 24, 26.1% from 25 to 44, 20.8% from 45 to 64, and 20.6% who are 65 years of age or older. The city has the 4th-largest downtown workforce in the state of Pennsylvania; its family median income is $44,430, about 66% of the national average, and an unemployment rate of just under 7%. The municipality in 2015 had a poverty rate of 32.5%, nearly double the statewide average. Last year, the City of Wilkes-Barre was awarded a $60,000 grant through the Pennsylvania Department of Economic Development (DCED) Early Intervention Program (EIP) to develop a fiscal, operational and mission management 5 year plan for the city—from which the city selected Public Financial Management (PFM) as its consultant to assist in working with the city on its 5 year plan—and from which the city has since received PFM’s Draft Financial Condition Assessment and Draft Financial Trend Forecasting related to the city’s 5 year plan. As part of the intervention, two internal committees were created to develop new sources of revenue for the city. The Revenue Improvement Task Force is comprised of employees from Finance, Tax, Health, Code, and Administration and was directed to analyze and improve upon existing revenue streams; the Small Business Task Force was designed to develop guidance for those interested in opening small businesses in Wilkes-Barre and is comprised of employees from Zoning, Health, Code, Licensing, and Administration. Overall, Mayor Anthony “Tony” George and his administration are confident that they have made significant progress is restoring law and order via the city’s goals of strengthening intergovernmental relationships, improving public safety, fixing infrastructure, fighting blight, restoring and improving city services and achieving long-term economic development.

Nevertheless, the quest for fiscal improvement and reliance on consultants has proven challenging: some of PFM’s proposed options to address city finances have caused a stir. City council Chairwoman Beth Gilbert and City Administrator Ted Wampole, for instance, agreed privatizing the ambulance and public works services as a cost-saving measure was one of the most drastic steps proposed by The PFM Group of Philadelphia, with Chair Gilbert noting: “I stand vehemently against any privatization of any of our city services, especially as an attempt to save money;” she warned the city could end up paying more for services in the long run, and residents could receive less than they get now—adding: “If privatization is on the table, then so is quality.” The financial consultant hired last year for $75,000 to assist the city with developing a game plan to fix its finances under the state’s Early Intervention Program was scheduled to present the options at a public meeting last night at City Hall. PFM representatives, paid from the combination of a $60,000 state grant and $15,000 from the city, have appeared before council several times since December.

Gordon Mann, director of The PFM Group, last night warned: “If the gunshot wound to the city’s financial health doesn’t kill it, the cancer will: both need to be treated, but not at the same time…You need to address the bullet wound, and you need to put yourself in the position to address the cancer.” Mr. Mann, at the meeting, provided an update on where the city stands and where it’s going if nothing is done to address the municipality’s structural problems of flat revenues and escalating expenses for pensions, payroll and long-term debt; then he identified a number of steps to stabilize the city and balance its books, beginning with: “Don’t run out of cash,” and “[D]on’t bother playing the blame game and pointing the finger at prior administrations either,…It may not be your fault, but it is your problem.”

Wilkes Barre is not unlike many of Pennsylvania’s 3rd class cities (York, Erie, Easton, etc.), all in varying degrees of fiscal distress, albeit with some doing better than others. The municipal revenues derived from the property tax and earned income tax will simply not sustain a city like Wilkes Barre—that it, unless and until the state’s municipalities have access to collective bargaining/binding arbitration and pension reform: the current, antiquated revenue options leave the state’s municipalities caught between a rock and a hard place. Worse, mayhap, is the increasing rate of privatization—where an alarming trend across the Commonwealth of communities selling off assets (water, sewer, parking, etc.), more often than not to plug capital into pensions, is, increasingly, leaving communities with no assets and with no pension reform facing the same issue in the future. 

Not Comping Compton: Corruption & Fiscal Distress. In Compton, California, known as the Hub City, because of its location in nearly the exact geographical center of Los Angeles County, the City of Compton is one of the oldest cities in the county and the eighth to incorporate.  The city traces its roots to territory settled in 1867 by a band of 30 pioneering families, who were led to the area by Griffith Dickenson Compton—families who had wagon-trained south from Stockton, California in search of ways to earn a living other than in the rapidly depleting gold fields, but where, the day before yesterday, the city’s former deputy treasurer was arrested for allegedly stealing nearly $4 million from the city. FBI agents arrested Salvador Galvan of La Mirada on Wednesday morning, as part of a federal criminal complaint filed Tuesday, alleging that, for six years, Mr. Galvan skimmed about $3.7 million from cash collected from parking fines, business licenses, and city fees: an audit found discrepancies ranging from $200 to $8,000 per day. Mr. Galvan, who has been an employee of the city for twenty-three years, has been charged with theft concerning programs receiving federal funds. If convicted, he could face up to five years in prison. As Joseph Serna and Angel Jennings of the La Times yesterday wrote: “The money adds up to an important chunk of the budget in a city once beset with financial problems and the possibility of [municipal] bankruptcy.” Prosecutors claim that one former city employee saw all these payments as an opportunity, alleging that the former municipal treasurer, over the last six years, skimmed more than $3.7 million from City Hall, taking as much as $200 to $8,000 a day—small enough, according to federal prosecutors, to avoid detection, even as Mr. Galvan’s purchase of a new Audi and other upscale expenses on a $60,000 salary, raised questions.

The arrest marks a setback for the Southern California city which has prided itself in recent years for its recovery from some of the crime, blight, and corruption which had threatened the city with municipal insolvency—or, as Compton Mayor Aja Brown noted: the allegations “challenge the public’s trust.”  Mayor Brown noted the wake-up call comes as the city has been working in recent months to improve financial controls and create new processes for detecting fraud—even as some of the city’s taxpayers question how the city could have missed such criminal activity for so many years. The Los Angeles County Sheriff’s Department had arrested Mr. Galvan last December in the wake of City Treasurer Doug Sanders’ confirmation with regard to “suspicious activity” in a ledger discovered by one of his employees: his position in the city involved responsibility for handling cash: as part of his duties, he collected funds from residents paying their water bills, business licenses, building permits, and trash bills. According to reports, Mr. Galvan maintained accurate receipts of the cash he received for city fees, but he would submit a lower amount to the city’s deposit records and, ultimately, on the deposit slips verified by his supervisors and the banks, according to federal prosecutors. Indeed, an audit which compared a computer-generated spreadsheet tracking money coming in to the city with documents Mr. Galvan prepared made clear that he had commenced skimming cash in 2010—starting slowly, at first, but escalating from less than $10,000 to $879,536 by 2015, a loss unaccounted for in the city’s accounting system. While Mr. Galvan faces a maximum of 10 years in federal prison, if convicted, the city faces a trial of public trust—or, as Mayor Brown, in a statement, notes: “Unfortunately, the actions of one employee can challenge the public’s trust that we strive daily as a City to rebuild…The alleged embezzlement and theft of public funds is an egregious affront to the hard-working residents of Compton as well as to our dedicated employees. The actions of one person does not represent our committed City employees who — like you — are just as disappointed.”

The Extraordinary Challenges of Municipal Leaders

How to Pay for the Extraordinary Costs of Municipal Bankruptcy. While filing for federal for federal bankruptcy protection might seem the only alternative, the process can leave a bad aftertaste—the final legal and accounting bills to out-of-city/state firms—even as the process of recouping higher municipal revenues is uncertain. Think about it: the final tally for Detroit and its taxpayers for the lawyers, consultants, and other professionals in Detroit’s historic bankruptcy is $170 million—the amount disclosed, by order of U.S. Bankruptcy Judge Steven Rhodes—an amount almost barely offset by the $5 million reimbursement from the state of Michigan. The disclosure revealed the city’s two pension funds paid attorneys at Clark Hill $6.25 million and financial advisers at Greenhill & Co. $5.71 million; the city’s bankruptcy mediator firms were paid $980,000, and that the city’s two pension funds paid consultants and attorneys about $12 million to fight the bankruptcy case. Federal judges who helped mediate the case were not compensated. U.S. Bankruptcy Judge Steven Rhodes will have to decide by next week whether the fees are reasonable, officials said. Before the deals were reached, federal mediators held at least four formal sessions over the plausibility of the fees billed to the city. The team held talks with about a dozen firms, while the city held earlier talks with another dozen smaller firms to reach settlements. By late October, Jones Day had charged $52.31 million. Their final payout of $57.90 million equates to fees totaling $5.59 million over the past two months during the city’s trial and its exit from receivership. Miller Buckfire had renegotiated its contract with the city twice, most recently in June. In its newest agreement, the firm was to receive a flat fee of $28 million for all of its services. Prior to revising its contract, the firm had already given the city a discounted rate, according to former Emergency Manager Kevyn Orr’s office. But the documents released by the city reveal the firm was paid $22.82 million, which represents an 18.5 percent reduction. The Miller Canfield law firm was paid nearly $7 million for its work with Detroit. Reached Tuesday about negotiations over its fees, CEO Michael P. McGee said the firm “thought it was a fair process.” He declined further comment. Mayor Mike Duggan has said that the role of consultants in the city will be “dramatically reduced” as full-time employees are brought in to take over. All of the consultants, he added, “are being phased out.” Even though Judge Rhodes must still must sign off on the professional fees—and they are, compared to the $7 billion in debt and reduced longer term pension and retiree health care liability savings under the approved plan of debt adjustment, significantly less; they mark a new, substantial liability: a liability for professional fees higher than any other city/county in history. It is hard enough for municipal elected leaders to assume charge of any city after more than a year and a half state takeover, but when one adds this new bill to the agenda, even as the Motor City confronts another daunting challenge going forward―a wave of foreclosure notices for unpaid property taxes―one understands the challenge of being between a rock and a hard place, and still another complication of federalism. In this instance, the second shoe to drop, arrived with the notice by Wayne County, which includes Detroit, which this month informed approximately 35,000 residents of 35,000 occupied homes that they are delinquent in their city taxes―that their homes are at risk of being auctioned off―a warning that could impact nearly one out of every seven Motor City residents, or nearly 100,000 folks. So just as Detroit is getting back on its feet, it Yuletide gift is a double whammy: a huge legal and accounting bill—and a coming human tsunami of displaced families and disrupted property tax revenues: the average assessed value of homes entering into foreclosure this year is $20,930—an amount which might be significantly higher than what they could be assessed at, according to Sean Jackson, who tracks blight and tax-foreclosure issues for Rock Ventures, an umbrella organization for companies owned by Quicken Loans founder and Detroit booster Dan Gilbert. Or, as the fine Wall Street Journal writer Matt Dolan notes: “More than 70,500 Detroit properties fell into county tax foreclosure from 2009 through 2013, resulting in $745 million in lost city property taxes, according to the White House-affiliated Detroit Blight Removal Task Force.” Moreover, the problem is apparently worsening: Wayne County’s new efforts to collect on many past-due accounts appear to mean that foreclosures in 2012 will triple to more than 60,000 foreclosures this year. Indeed, the situation is grave enough that Michigan Governor Rick Snyder has been supportive of state legislation to provide delinquent owners more time and a lower interest rate to pay off their accruing, owed debt, with the rate dropping to 6% from its current 18%, and also providing that a portion of unpaid taxes could be erased by capping what is owed at 25% of a home’s fair-market value—something Mr. Dolan notes that would be “especially important in a city where some homes have lost 90% of their value.”

The Hardest Leadership Job in America. I am not sure there exists a harder job in our country than being mayor. It’s not like there is training for the unique and too often overwhelming challenges that arise, especially the crises. There is no text book that provides how to inspire citizens—or how to decipher the hieroglyphics of Wall Street impresarios who want to sell your city and its taxpayers an instrument you cannot even pronounce. Certainly there is no little guidebook that provides instructions how to enable the critical chemistry to make your council a whole. As we have seen, if you are an elected leader in some states, such as California or Alabama, for instance, there is a certainty the state is not only not going to help, but rather is more likely than not to put your city in fiscal harm’s way. And, yes, whether in Detroit or other cities, the temptations to put your personal financial greed over your city’s—as we have experienced with former and now imprisoned Detroit Mayor Kwame Kilpatrick―demonstrates that elected leaders can put their personal interests above their citizens’. Yet, as we have written about cities and counties in severe fiscal stress and municipal bankruptcy, we have also been able to observe exceptional leaders—leaders such as Mayor James A. Diossa of recovering Central Falls, Rhode Island, and Mayor Mike Duggan in Detroit—whose Council last summer approved his proposed $17.2 million budget for FY2015―a budget that slashes spending and is less that the $18.9 million budgeted in Central Fall’s federally court approved plan of debt adjustment; but that budget also provides tax relief to city homeowners through an increase in the Homestead Exemption and the motor vehicle tax exemption climbs from $1,000 to $1,250—even as it spends more money on community policing and public safety, as well as city infrastructure such as roads, sidewalks and expanding green space and city parks. Here’s a key: the budget also invests in the city’s pension funds at a greater rate than 100 percent to pay down the unfunded liability that resulted in its municipal bankruptcy in August 2011. Funding also has been allocated for the paving of 10 more streets and funds a new Street Beautification program to keep Broad and Dexter streets litter free. How are we to know or really understand his gift of leadership? The Mayor’s parents emigrated from Medellín, Colombia to Central Falls in 1983, where he was born two years later. His mother Melva worked at a shoelace factory, his father Bernardo at a light bulb manufacturer―his parents often worked double shifts to save up for their three sons’ education, being able to send Mr. Diossa to Becker College in Worcester, Massachusetts, where he studied Criminal Justice, making him the first in his family to go to college. From a young age, Diossa knew that he would someday return to Central Falls. “This city gave my parents a job. It’s where they call home. I always knew that I wanted to come back here to give back to my city.” But now he is giving something very special back to his city. In Detroit, certainly, one would have seemed off one’s rocker to aspire to be elected mayor as the city was hurtling into the largest municipal bankruptcy in U.S. history—and, you could not even really be Mayor even if you were elected, because the state had usurped your authority and appointed a Washington, D.C. area bankruptcy attorney to run your city—a gifted and dedicated attorney, but one with no prior experience in municipal governance.

Compton & the Gangsta Rap. Mayhap, however, an even more inspiring story is from the capitol of Gangsta rap—Compton, California, a city of 100,000, where, thanks to a gifted young feller, Eric Silberstein at the University of Colorado, I received Nick Allen’s story from the Compton Telegraph about one of the country’s youngest mayors, Mayor Aja Brown—who for reasons that defy rational explanation has been an extraordinary agent of change in a small municipality that had become synonymous with gangsta rap, gang violence, and murder. Mayor Brown strode right to the heart of the issue—an issue in so many ways more challenging than other cities’: the terrible slaughter from the gang wars in her city between the Bloods and Crips―reaching out to the respective gang leaders and then meeting at a community center leaders from dozens of local gangs—noting, as Mr. Allen wrote: “It’s amazing to see the evolution and the transformation. It touches my heart…Gang activity really originated in this area because they (gang leaders) had the power to start it. But they also have the power to finish it and stop the negative cycle…Its real redemption when you can have people who were notorious for tearing down their community helping to build it up.” Today, she meets with a committee of gang leaders weekly: some are taking leadership courses: Mayor Brown hopes some will be able to travel to other trouble spots in the country to help other cities’ leaders reduce gang violence: that is she has chosen a path different than many cities: instead of trying to impose a much greater—and unaffordable—police presence, she has opted for an extraordinary alternative model of conflict mitigation: Mr. Allen reports that in the last several months, there has been nearly a 65 percent reduction in such violence—putting the city on course for its safest year in decades. Last year (2014) there were 26 homicides, reflecting nearly a 75% decline since 1990. Mayor Brown’s training?―degrees in public policy and urban planning. In a state where the Great Recession produced an unprecedented number of municipal bankruptcies, Mayor Brown’s first budget was in surplus; debts were paid down. The city’s tax base is solid. Her goals:
• attracting large businesses to bring their headquarters to Compton, and to draw in young families to live there.
• an e-commerce development project is due to break ground next year creating 1,000 jobs, and
• vocational training courses and job placements for residents.
Assessed property values have been surging, up more than 10 per cent in the last year. As the Mayor notes: one key to her success has been to examine unique attributes to her city that could be critical to its fiscal future; thus, she told Mr. Allen: “In California they’re not making any more land. And with the high cost of land, from a business standpoint, being able to move your goods quickly and cheaply makes Compton an attractive place to be….And traffic is so horrible here in Los Angeles, and getting worse, that if you want to have a quality of life not on the freeway, you may want to live nearer where you work. I think people are getting to grips with that. I think Compton is a really attractive place for young families.”

What Are the Odds of Insolvency? On the opposite coast, Atlantic City, New Jersey Mayor Don Guardian faces different odds after a year in which his gaming-based municipality experienced the loss of four casinos, and an increasing chorus that his city is on the train to municipal insolvency. Four of Atlantic City’s 12 casinos folded in 2014, leaving more than 9,000 people out of work. A perfect storm of out-of-state gambling destinations, record-low casino profits, the economy at large and offerings beyond slot and table games besieged Atlantic City. In November, at a fiscal crisis summit in Atlantic City, New Jersey Governor and potential GOP Presidential aspirant Chris Christie warned: “Band-Aids have been put on in the past. To the extent that folks suggest larger Band-Aids this time for bigger problems, that’s quite frankly not something that I’m going to be interested in…There has to be in my view fundamental, systematic change down here on both sides of the ledger for us to have an opportunity for success.” Mayor Guardian has demonstrated finesse in keeping the wolf at bay—at least through last year—and has been successful in getting Wells Fargo to agree to pay off $26 million of bankrupt Revel’s $32 million tax bill—with an anonymous bidder agreeing to take care of bankrupt Trump Entertainment’s $22 million tax bill, and some key assistance (unlike California) from the State of New Jersey, which, acting as banker, provided his city with a short-term, $40 million loan at a forgiving rate. He enters this New Year not as a despairing gambler, but with relentless enthusiasm: “I didn’t think I would have this opportunity to change the city as quickly as I have…I thought it would be much tougher to convince people that gaming was not in our best interests…That it was important – we don’t want to kill it – but we want to move away from it. When I was talking like this last year, people were kind of nodding and telling me it was an interesting concept. This year, everyone is willing to move.” Somehow, he seems to be a prestidigitator behind the scenes, even as the city’s public elected leader, presiding over a fundamental change in municipal direction in the wake of the bankruptcies of the Atlantic Club, Showboat, Trump Plaza, and Revel—the city’s key job and revenue centers: he foresees what he terms a “new Atlantic City” made up of young entrepreneurs who are creating very different bases of an economic not based on gambling, but rather entertainment: places such as Perfectly Innocent Amusement Co., the Iron Room, and Tony Baloney’s. With a university opening a new branch in his city, construction is underway on 500 new housing units. It is difficult (and highly political) to balance what all the guardian Mayor is scheming as he is fighting to retain power and block his fellow Republican, Gov. Christie from acting on his advisers’ proposal to have the state—as in Detroit, impose an emergency manager to run the city instead of the mayor—with Mayor Guardian telling the Philly Inquirer he takes this proposal very personally—even going so far as to tell the governor last month—adding to the reporter: “If this was a normal year, I’d be doing a year-end saying, ‘You know what? We reduced crime, we reduced use of force, and we’re cleaning our streets every day where we used to clean them every two weeks.’ There’s no neighborhood I go to that I say, ‘Isn’t public works doing a great job?’ that people don’t applaud.” He is working to leverage support for proposed state legislation which, if enacted, would lock in a collective $120 million-a-year payment from the remaining casinos; it would redirect other casino taxes to pay off city debt. Mayor Guardian plans a $40 million budget cut over four years, in part through what he calls “aggressive attrition;” he also plans to consolidate, privatize, or cut a half-dozen departments—and sharply reduce the city’s public vehicles, as well as consider asset sales—all this coming on top of an unprecedented 29% tax increase. So how does Mayor Guardian describe his high tension job? “I love my job…This is my favorite job.”