The Roads out of Municipal Bankruptcy

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eBlog, 2/24/17

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

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

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

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

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

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

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

Are Municipal Bankruptcies at the End of the Longest Stretch in U.S. History?

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eBlog, 1/29/17

Good Morning! In this a.m.’s eBlog, we consider an extraordinary ending to mayhap the most significant string of chapter 9 municipal bankruptcies in American history, with U.S. Bankruptcy Judge Meredith Jury’ milestone decision that she will issue a written confirmation order to confirm San Bernardino’s plan of debt adjustment. When San Bernardino emerges from the longest municipal bankruptcy in U.S. history, it will mean that for the first time since the Great Recession, no municipality is in bankruptcy—albeit, in the case of East Cleveland, Ohio, the absence appears to be more a matter of incompetency than governance.   

The End of the Longest Road. Nearly four and a half years after filing for what has become the longest municipal bankruptcy in U.S. history, the California municipality of San Bernardino is ready to celebrate its likely last appearance before U.S. Bankruptcy Judge Meredith Jury, after Judge Jury on Friday agreed to issue a written confirmation order consistent with the fifty page proposal the city’s attorneys had submitted, noting: “The last words I will say is congratulations to the city…I look forward to the order and I look forward to the city having a prosperous future.” Expectations are that San Bernardino will remain in its current bankruptcy status for about two more months, as Judge Jury deals with a smattering of creditors who have said they intend to appeal her decision. One such creditor, as we have previously noted, is a citizen of the city who alleged he had been beaten by San Bernardino police officers six years ago—a beating in which he testified he had incurred brain damage; ergo he is appealing that he should be entitled to more than the one percent of the amount a jury had awarded—and should also be allowed to be to sue the officers individually, with his attorney having testified before the court that, notwithstanding San Bernardino’s municipal bankruptcy, an appellate court, in the City of Vallejo’s chapter 9 bankruptcy, had ruled that individual police officers should be held liable for excessive force. However, Judge Jury had ruled that, unlike Vallejo, San Bernardino’s plan of debt adjustment did include an injunction against claims against city employees, holding that San Bernardino “has demonstrated, with unrefuted evidence, that the city does not have the financial resources to pay the holders of litigation claims except pursuant to the terms of the plan…There certainly are no legal bases or equitable grounds for treating the four objectors any differently than all of the other holders of litigation claims.” Judge Jury did not advise the city when she would sign the confirmation order—a date which will start the two-week clock for any appeals—but not interfere with the projected official exit from the nation’s longest ever municipal bankruptcy projected for April.

In the wake of the momentous day, Mayor Carey Davis said: “The bankruptcy has been a major focus, and now we can work more on our other goals.” That is, the city’s plan of debt adjustment could best be likened to a municipal fiscal blueprint demonstrating both for the federal bankruptcy court, but also for the city’s citizens as well as credit rating agencies: a detailed 20-year recipe and guidance with regard to the city’s blueprint for reinvesting in police and infrastructure in a future of constrained fiscal options—a blueprint that emerged from a strategic plan developed via a series of meetings two years ago, where, Mayor Davis noted, leaders “had to make one of the first goals fiscal stability, although we have begun to turn that corner already, with three years of balanced budgets, two years of surpluses.”

Nevertheless, as the records demonstrate, filing for chapter 9 municipal bankruptcy is a politically and fiscally expensive undertaking: San Bernardino will end up expending at least $25 million for attorneys and consultants—albeit that will likely turn out to be a pretty smart investment: the city estimates the final, court-approved plan of debt adjustment will provide for some $350 million in savings—savings reflected in substantial concessions by retirees, unions, and payment obligations to the city’s municipal bondholders—or, as San Bernardino City Attorney Gary Saenz said outside the courtroom: “I’m very proud that all of our creditors recognize that, while the deals are tough, they’re best for all involved…Each of those decisions, we made with the people of San Bernardino in mind. They are the most important reason we did anything. This was all done so they can get the service levels they deserve.”

The Many & Daunting Challenges of Municipal Bankruptcy

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eBlog, 12/30/16

Good Morning! In this a.m.’s eBlog, we consider the retirement of an exceptional public leader, retired U.S. Bankruptcy Judge Steven Rhodes, who presided over Detroit’s largest in U.S, history chapter 9 municipal bankruptcy and then went on to accept the unforgiving position of emergency manager for the Detroit Public Schools—a key role in the ongoing challenges to recovery from the nation’s largest ever municipal bankruptcy. Then we head into the gale of the Northeaster to New Jersey’s Atlantic City—as the state slowly begins to unroll the mechanics of its takeover of the fiscally insolvent municipality, before finally heading to the warmer West Coast, where San Bernardino leaders are preparing for the restoration of municipal authority and coming back from the nation’s longest-ever chapter 9 municipal bankruptcy.

Retirement after Extraordinary Work.  Electronic rhythm guitar player and retired U.S. bankruptcy judge Steven Rhodes, to whom Michigan Gov. Rick Snyder presented the challenge of becoming emergency manager, an offer he accepted, came out of retirement, and became the school district’s fifth emergency manager—with the official title “transition manager”—on March 1 for a salary of $18,750 a month. Now, nearly 10 months later, a Detroit district plagued by about $515 million in operating debt has been replaced with a new, debt-free Detroit district, courtesy of a $617 million bailout for which Judge Rhodes had lobbied the Republican-led Legislature. But the legacy of Judge Rhodes, who is set to depart tomorrow, remains to be fully appreciated. Judge Rhodes, who presided over Detroit’s chapter 9 municipal bankruptcy before leaving to accept the Governor’s appointment to serve as the emergency manager for the Detroit Public Schools system—a position in which he served for about 10 months to be in charge of the state’s largest school district during one of its most tumultuous periods—and during which, last June, the state created, in effect, a dual system of charter and public schools. At the inception of this harrowing task, he inherited a school system collapsing from a string of teacher sick-outs that closed dozens of schools, sparked a lawsuit, and from a system of unsafe public buildings. As we have previously posted, the legislature and Governor had enacted a $617-million financial rescue package which created the new district to replace the old Detroit Public Schools—even as it created a separate system of charter schools—and put Judge Rhodes in charge of overseeing the complex task of overseeing the new, 45,000 student district. He leaves, unsurprisingly, with a system in fiscally and physically significantly improved condition—helping, in his final chapter of public service, to help bring in additional fiscal resources via the sale of more than a dozen small, unused parcels of land for $3 million to Olympia Development, the developer of the new Little Caesars Arena in Detroit, and future home to the Red Wings and Pistons. In addition, the school district agreed to sell its license for the radio station at the Detroit School of Arts to Detroit Public Television in an agreement valued at $9 million, pending regulatory approval. (Detroit Public TV already pays the district for being able to operate the station, WRCJ-FM (90.9). Under the agreement, the station will stay in the district. (Students will have enhanced opportunities to learn about broadcasting as a result of the deal, according to DPS officials.) As part of the transition, Judge Rhodes has transferred authority to a seven-member elected public school board which will take office in January, making it the first school board with any significant decision-making power since 2009, when a series of state-appointed emergency managers began controlling the district.

In an interview with the Detroit Free Press, Judge Rhodes said that at the “very highest level, the most challenging part of the job for me was the politics of it. Because, as a judge, I was never involved in politics. We had a fixed process. We engaged that process, the process concluded with a result, and we moved on. But here, there are political considerations to everything, and I was not prepared for that.” In response to a follow-up question with regard to the greatest challenges of his emergency position, Judge Rhodes responded: “What surprised and disappointed me the most was the level of antagonism between Detroit on one side and the rest of the state and Lansing on the other side. Each side has predisposed views of the other side that are not based on fact, and that are not only unproductive, but counterproductive, and are not in the best interest of the children in the city. Both sides need to find very specific ways and methods to break through that, and they need to do it very soon.”

Now, he notes, the newly elected school board will have to take “very specific actions to reach out to decision- and policy-makers in Lansing to work with them on achieving Detroit’s goals, to educate them on where DPSCD is, the progress it has made, and how it’s going to make progress in the future. And it has to do that outreach in a spirit of collaboration, cooperation, and reaching out for help, and with the assumption that people in Lansing want to help, not with the assumption that they are anti-Detroit.” He added that the school board will also have to do something few other school boards in the U.S. must: it will have to carve out a constructive relationship with the Detroit Financial Review Commission (FRC): “I hope and expect that the board’s relationship will simply continue the relationship that I and the staff here have already established, which is a cooperative, collaborative working relationship that recognizes our autonomy, (and) at the same time recognizes the value that the FRC brings to enhancing the credibility of DPSCD…We have an example, a concrete example, of how the work of the FRC benefited DPSCD financially. It was the adviser that the FRC retained that helped us to identify a health insurance provider that was more comprehensive and less money.

Arithmetic. As to the new system’s fiscal viability, Judge Rhodes noted: “It’s better than where I hoped it would be. My goal was to have a balanced budget for this year, meaning revenues equaling expenditures. It turned out, through the hard work of the staff, and selling certain assets that we were not using and would never use, we actually will have a surplus this year, which we will use to create a much-needed fund balance…It’s not as much of a fund balance as we need, but it’s a really good start, and not one that I would have predicted or foreseen when we were putting our budget together last spring. (The school district has a $48.2-million projected fund balance, or reserve fund. It’s roughly $650-million, the FY2017 budget is balanced.) With regard to the system’s fiscal stability going forward, Judge Rhodes noted: “I’m confident that we are in a position to maintain a balanced budget going forward. I think there are also opportunities to increase the fund balance, which is something we should be doing. There are aspects of school finance, however, that do concern me. In order to achieve academic success, which is our goal, as it is every school district’s, funding provided by the Legislature has to recognize two fundamental distinctions between Detroit and other school districts. No. 1 is that 60 percent of our students live in poverty, which means it’s more challenging to educate them, and therefore more expensive to educate them. And you can attribute those expenses to enhanced reading services, enhanced wraparound services, and enhanced truancy and attendance services.

He noted a second, distinguishing factor and challenge: “A second factor (is) our special needs and special education children. We have a higher percentage than other districts. They are of course more expensive to educate, and in some cases, significantly more expensive to educate. And I don’t want to give the impression that we don’t want those students. We do, we absolutely do. They are as entitled to an education as any other child. But the reality is they are more expensive to educate. While some of that difference is made up by federal grants, it’s not all of it. And so, that puts an extra strain on the budget….School funding is based now, generally speaking, on the concept that equality is equity. We give the same amount for every child in the state. The problem is equality is not equity, or I should say is not always equity. In this case, it’s not.”

The State of the City. As the State of New Jersey takeover of Atlantic City continues to unroll, it appears one of the final actions of 2016 will be a state imposed mandate to the city for an across-the-board pay cut, a 15-step salary guide with pay capped at $90,000, increased health-care contributions from employees, and the imposition of 12-hour work shifts for police officers.  The orders by Mr. Chiesa, the quasi-ruler of the city, appear to be the beginning of what will be a more comprehensive effort on how part to address the city’s $500 million of debt–with Mr. Chiesa indicating he now intends to meet with all of the groups involved. In an email to members obtained by the Press of Atlantic City, union President Matt Rogers recapped a meeting the union delegation had the day before yesterday with representatives from the state who are in command of Atlantic City as part of the state takeover. Among the state’s emerging demands are an across-the-board pay cut, a 15-step salary guide with pay capped at $90,000, increased health-care contributions from union members, and tasking officers to work 12-hour shifts. It seems that some of the state’s demands were similar to a new contract the city and union had already agreed upon; however, the state had refused to approve. It appears the state will insist upon the layoff of an additional to 250 members. The actions mark some of the first under the reign of former New Jersey Attorney General Jeffrey Chiesa as he has insisted upon meeting with all of the groups involved in the city’s budget and vital operations prior to focusing on addressing the city’s $500 million of debt.

Prepping to Exit Chapter 9. As San Bernardino prepares to exit municipal bankruptcy—the nation’s longest ever—next month, City Manager Mark Scott reports he will be meeting with Mayor Carey Davis and the City Council, as well as his key managers to put together an action-focused work plan, noting: U.S. Bankruptcy Judge Meredith Jury will put out a “written ruling on January 27, and then there will be several months of paperwork before we officially exit bankruptcy.” Ergo, his goal is to be ready by that date in the wake of approval of its plan of debt adjustment under which the beleaguered city eliminated some $350 million in one-time and ongoing expenditures—a goal immeasurably helped by city voter approval last November of a new charter—albeit a charter which still awaits approval by California Secretary of State Alex Padilla, paving the way for the city to transition from a strong mayor council-manager form of governance—and one without an elected city attorney—which the manager described as one which led to multiple agendas and infighting which had contributed to pushing “the city into bankruptcy. No one was working together.” Under the newly adopted charter, the mayor will have a tiebreaker vote except when it comes to appointing or removing the city attorney, city manager, or city clerk positions, at which point, the mayor would have one vote. Indeed, as part of his agreement to work for the city, Mr. Scott informed the city’s elected officials he was unwilling to stay at San Bernardino long-term absent adoption of a new charter, noting: “I was not interested in working in such a confusing form of government for long…I wanted to help, but it was contingent on the charter being able to pass. The pre-existing form of governance was unrecognizable to anyone who studied government.”

If it can be deemed easy to slide into municipal bankruptcy, getting out and long-term recovery is a challenge—one which will require innovative policies to attract new economic growth via zoning and land use policies that attract investment in key locations—a challenge made more difficult in the city’s case not only because of its bankruptcy, but also because of last year’s terrorism incident—one which could hardly be expected to serve as an incentive for new families or businesses. Another critical hurdle is the city’s 34% poverty rate–the highest of any large city in the state, along with the worst homicide rate per capita in the state. Thus, unsurprisingly, Mr. Scott notes that San Bernardino will be fiscally solvent before it is service level solvent: he has predicted the city’s police service levels will be where they should be in a few years; however, it will probably take a decade for parks and recreation to reach pre-bankruptcy levels; moreover, the city is in no position to issue new capital debt, because it lacks the requisite fiscal resources to pay bondholders.  

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

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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.

The Stark Differences in How Cities May Exit Municipal Bankruptcy, & The Hard Challenges of Municipal Governance in Insolvencies.

eBlog, 12/07/16

Good Morning! In this a.m.’s eBlog, we consider the green light flashed by U.S. Bankruptcy Judge Meredith Jury yesterday, clearing the way for San Bernardino to exit the longest chapter 9 municipal bankruptcy in U.S. history—and in ways profoundly different than Detroit because of the very different state roles and laws with regard to chapter 9 and governance in municipal bankruptcy, and that San Bernardino—like Jefferson County—remained under elected local leadership throughout their respective journeys into and out of municipal bankruptcy. Then we turn to last night’s recall by voters in the small, insolvent municipality of East Cleveland, in the wake of the narrowest of margins—but at an unaffordable cost.

Smooth Sailing Out of Municipal Bankruptcy. In what San Bernardino Mayor Carey Davis yesterday described as a “monumental day…[where] the hard work has paid off,” referring to U.S. Bankruptcy Judge Meredith Jury’s statement yesterday: “We have a lot left to do, but this clears the way for us to do much of that work,” as she yesterday confirmed the City of San Bernardino’s plan of debt adjustment, confirming its path early in the new year to exit from the nation’s longest ever chapter 9 municipal bankruptcy as early as next March. San Bernardino City Attorney Gary Saenz expressed elation at Judge Jury’s green light, noting: “I’m so pleased and excited about where the city is now compared to where we were when we filed bankruptcy and what we were able to accomplish and that we now have a solid foundation upon which to build this city. The confirmation should certainly help the rest of the city and the world recognize that San Bernardino is back.” Even Judge Jury joined in praising the city for its endurance and stamina over the long road, noting that over the four-year span she had observed that had improved not just its finances, but also its governance, pointing to the municipality’s voter-approved new charter and better working relationships among elected officials: “The city came in financial chaos, and it’s leaving in much better shape…I have lived in this region for 40 years…and I’ve always said the city needed help. I’m glad it got it.” Under the city’s now approved plan of adjustment, it will pay the bulk of its creditors far less than they would otherwise be entitled to—in many instances merely one cent for every dollar such a creditor is owed; however, the city’s plan also outlines changes to the structure of the city, some of which, including outsourcing of refuse and fire services, and the passage of a new city charter, have already been implemented. City Attorney Saenz estimated that even though the costs to the city of its filing will be in excess of $20 million, its now approved chapter 9 plan of debt adjustment will save the city’s taxpayers more than $300 million worth of debts that will be officially discharged.

With regard to the record length of time, Judge Jury said the case, which hinged significantly on deals with major creditors, took the right amount of time. Moreover, several of the city’s major creditors in the case concurred in the congratulations, contrasting the city’s process and efforts specifically to Detroit, the nation’s largest-ever chapter 9 municipal bankruptcy, by noting both the significant state role and imposition of an emergency manager in the former—in contrast, the State of California was simply an absent, if not contributor to San Bernardino’s insolvency and consequent chapter 9 filing. Indeed, attorney Vincent J. Marriott, who represented municipal bondholders who held approximately $50 million of the city’s tax-exempt bonds, noted: “Here the city had the challenge of being not only economically viable but politically palatable,” said. “As is appropriate, that took time. I think the result today is really a tribute to all the work and thought that went in from the city.” Further challenging San Bernardino was the inability to gain any concessions on its public pension liabilities—in sharp contrast to the Detroit plan of debt adjustment, which provided for reductions in both Detroit’s public pension and post-retirement benefit obligations after San Bernardino’s attempts to negotiate with the California Public Employees’ Retirement System (CalPERS), therefore forcing the city to negotiate steeper concessions from all its other creditors. (The San Bernardino police union did reach an agreement with the city last year which includes concessions on leave time from before the bankruptcy filing, legal claims related to the imposition, and retiree health care.)

The last hurdle, as we have recounted previously, came after Judge Jury held for the city against efforts by attorneys representing clients injured by the San Bernardino Police—who had argued that the exceptionally low offer demonstrated the city, in its plan of debt adjustment efforts, had not acted “reasonably,” nor “in good faith,” provisions required for the federal court to confirm a municipality’s plan of debt adjustment. In rejecting those debtors’ claims, Judge Jury told their attorney: “I’m not trying to diminish the injuries to your client…But I’m also saying at a human level what the police and others have given back do affect the livelihoods of their families. It’s not a dispassionate institutional creditor.” Finally, Judge Jury concurred in one of the very few areas in the city’s plan of debt adjustment calling for increased spending: for the city’s police department. Judge Jury noted: “Anybody that lives in this area knows that the crime problem in San Bernardino is substantial…They have to get safe for people to want to live there.”

Pearl Harbor Day on East Cleveland. East Cleveland voters yesterday recalled both Mayor Gary Norton Jr. and City Council President Thomas Wheeler in a special election, with the final, unofficial results finding that Mayor Norton lost by a margin of 20 votes (548 to 528), according to the Cuyahoga County Board of Elections website, while City Council President Wheeler lost by an even narrow margin of 18 votes—with the official tally to be released on December 19th. Yesterday’s recall election marked the third time Councilmember Wheeler had been subject to recall: he prevailed exactly one year ago, and then, again, last June—albeit by a mere 51-49 percent margin, and with a turnout of only 7 percent of the city’s registered voters. For the ousted Mayor, the recall marked the first such election. In a statement last night, Mayor Norton noted: “I love the people of East Cleveland, and it has been an honor to have served them.” In the wake of the recall, Council Vice President Brandon King will be sworn in as the new Mayor in three weeks, and the remaining City Council members will have to appoint two leaders to the Council to fill the empty slots: under the Council’s procedures, should the Council find itself unable to agree upon such appointments, Mayor-to-be King will choose who fills those seats, according to Council President Wheeler.

For the small, insolvent municipality of East Cleveland, a city which Ohio Auditor Dave Yost’s office four years ago declared to be in a state of fiscal emergency, and last year stated that municipal bankruptcy or merging with Cleveland were the two most viable options for the suburb, the interim has been like waiting for Godot. Indeed, the small municipality has been awaiting some response from the State of Ohio with regard to its request for authorization to file for chapter 9 municipal bankruptcy, and some response from both the state and City of Cleveland with regard to its proposal to be annexed, the disruptive election carries a fiscal cost: yesterday’s election could cost the city between $25,000 and $30,000. (The city explored filing for chapter 9 municipal bankruptcy in May, but has been stymied by the state, because the Ohio Tax Commissioner’s office said the Council should ask permission from the state, not the Mayor.) Now, in the wake of last night’s results, the outcome could mean what outgoing Council President Wheeler last night described as “dramatic chaos:” “They wanted me out, and it took them three times…Obviously they don’t want the city to move forward; they want to go back to the way things used to be.” In contrast, Devin Branch, who led the effort to recall the city’s elected leaders last night said the people of East Cleveland had spoken, and while voter turnout was low, the majority of the city opposes the current mayor: “Working class people of the City of East Cleveland are soundly against Mayor Norton.” The city explored filing for bankruptcy in May, but hit a roadblock when the Tax Commissioner’s office said council should ask permission from the state, not the mayor. The letter from the commissioner also detailed the plans that the city must have prior to filing for bankruptcy.

Muhnicipal Bankruptcy in the Home Stretch

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eBlog, 11/18/16

Good Morning! In this a.m.’s eBlog, we consider San Bernardino’s home stretch to emerging from the nation’s longest-ever chapter 9 municipal bankruptcy—and guidance by U.S. Bankruptcy Judge Meredith Jury to steps the city might consider to avoid its emergence early next year from being appealed—a la Jefferson County, Alabama. Indeed, we then visit Jefferson County, where it appears the County’s elected leaders appear on the verge of finally getting their day in court with regard to the appeal related to the county’s plan of debt adjustment. From thence, we observe the political waves rolling ashore where Donald Trump’s bankrupt casinos grace Atlantic City’s beaches—and where the New Jersey League of Municipalities featured Gov. Chris Christie in town and some more discussion of the evolving state takeover of Atlantic City by what Mayor Don Guardian deemed the “occupation force.” We consider the role of the state and mechanisms for a state takeover—as well as the options for the municipality. Finally, we journey back to Detroit where a federal investigation is underway with regard to the city’s unique and innovative demolition program: The challenge for a city in which in 1950, there were 1,849,568 people, but, by 2010, only 713,777, ergo, at the time of its chapter 9 filing, a city home to an estimated 40,000 abandoned lots and structures: Between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base. In its efforts to address the issue, Detroit undertook extraordinary measures to address vast tracts of abandoned homes—nests of crime—but maybe triggering a federal investigation.

The Last Hurdle? U.S. Bankruptcy Judge Meredith Jury this week has ordered San Bernardino officials into mediation with one of the municipality’s few creditors still challenging the city’s chapter 9 plan of debt adjustment, writing that she is weeks away from the “final confirmation hearing” of what has been the longest chapter 9 municipal bankruptcy in history. Judge Jury added she had been prepared to make a ruling on some of the issues still blocking her ability to confirm San Bernardino’s plan, more than fifty-one months after the city filed with the U.S. Bankruptcy Court. Judge Jury made clear she now intends to rule on December 6th on both issues raised by one creditor, the Big Independent Cities Excess Pool (BICEP), as well as on other remaining issues, noting, efficiently, that that ought to prevent the mediations from prolonging what is already the record holder for the longest municipal bankruptcy in the nation’s history. Moreover, Judge Jury noted, the mediation could save time, in no small part by preventing an appeal—an outcome with which Jefferson County, Alabama leaders would surely agree. As Judge Jury noted: “This really doesn’t slow down the process, and it might, over the years, if you reach a mediated solution, speed things up.” Judge Jury added that the confirmation hearing would be labeled on the calendar as final, which, while not a 100 percent guarantee it would be the final, does offer hope it shall, writing: “I’m not requesting anything from the city, except to come prepared to potentially put a bow on this case on the 6th – but potentially not.” The mediation in question commences today in Reno, Nevada with retired U.S. Bankruptcy Judge Gregg Zive. (San Bernardino and creditors have noted with respect Judge Zive’s previous mediation sessions as having been key to brokering major settlements as part of the city’s chapter 9 case, including the resolution with the city’s largest creditor, CalPERS. Nonetheless, the proposed mediation has both sides publicly discounting its chances of success: San Bernardino’s attorney, Paul Glassman, noted: “BICEP could have sought mediation six months ago, but instead placed the legal dispute before the court and pressed to block confirmation of the plan unless it got its way…Caving in to BICEP’s intransigence and efforts at delay is not in the best interests of the City’s creditors. It’s too late for mediation.” (BICEP is a risk-sharing pool of large Southern California cities for claims against any of the member cities, and its disputes with San Bernardino involve whether the city or BICEP is responsible for claims of more than $1 million.) Providing an idea of how complex the challenge of extricating one’s municipality from chapter 9 municipal bankruptcy can be, the BICEP issue is related to another outstanding issue in this record-length, complicated chapter 9 case: objections from the group referred to in court as the civil rights creditors. Juries previously awarded those creditors compensation for their claims, such as the $7.7 million awarded to Paul Triplett after a jury found San Bernardino police in 2006 broke Mr. Triplett’s jaw, arm, ribs, leg, ankle, and foot, leaving him comatose for three days. Under the city’s proposed plan of debt adjustment, because these creditors are in the unsecured class, the pending plan of debt adjustment would pay 1 percent or $77,000, in Mr. Triplett’s case. Nevertheless, Judge Jury, in a previous hearing, noted that while she sympathized with Mr. Triplett, she saw no legal reason to argue he did not belong in the unsecured class of creditors, 95 percent of whom voted in favor of the city’s plan of debt adjustment. That would mean any avenue of relief would be for the challenge to demonstrate that experts the city hired were wrong when they argued, with extensive documentation, that San Bernardino could not afford to pay more than 1 percent to its unsecured creditors. However, Judge Jury this week noted that those creditors’ interest now aligned with the city in its battle with BICEP, and that they could attend the mediation in Reno. On a high note, from the city’s perspective, Judge Jury also rejected the proposal by another of the challenging civil rights attorneys, Richard Herman, that the plan be modified in light of the possible “financial bonanza” recently legalized marijuana would bring: Judge Jury said the amount of those revenues would not be known for years, and she was unwilling to delay the case that long, especially when city services were underfunded in many other ways.

An Appealing Route to Full Recovery? Jefferson County Commission President Jimmie Stephens yesterday noted: “I am delighted that our case is now set and that we will have our day in court,” referring to yesterday’s announcement that the 11th U.S. Circuit Court of Appeals has scheduled oral arguments on the appeal of Jefferson County’s chapter municipal bankruptcy plan. The court set December 16th as the date—albeit, this marks the eighth time the court has set a date, so that whether this will finally prove to be the date which could offer the final exit from the county’s municipal bankruptcy remains incompletely certain. It has now been nearly three years since Jefferson County filed with the court an adjustment to its post-chapter 9 filing to adjust debt primarily related to it sewer system obligations (the county had exited its chapter 9 bankruptcy in the wake of issuing some $1.8 billion in sewer refunding warrants to write down $1.4 billion of the sewer system’s debt.) As structured, the agreement incorporates a security provision for the county’s municipal bondholders to allow investors to return to federal bankruptcy court should County Commissioners fail to comply with their promise to enact sewer system rates that will support the 40-year warrants. It was that commitment which provoked a group of sewer ratepayers—a group which includes local elected officials and residents—to challenge the constitutionality of the provision. Ergo, they filed their appeal to Jefferson County’s plan of debt adjustment in January of 2014 with the U.S. District Court in the Northern District of Alabama. Jefferson County has argued that the U.S. Bankruptcy court oversight has been a key security feature to give investors in its bonds reason to purchase its 2013 warrants, and that the ratepayers’ appeal became moot when the chapter 9 plan of adjustment was implemented with the sale of new debt; however, U.S. District Court Judge Sharon Blackburn two years ago opined in the opposite, writing that she could consider whether portions of the County’s plan are constitutional, including the element allowing the federal bankruptcy court to retain oversight. It is Judge Blackburn’s decision that the County has appealed; and it is Jefferson County President Stephens who notes: “I am very confident that the facts and prevailing law support Jefferson County’s position.”

What Does a State Takeover of a City Mean? Atlantic City convened its first City Council meeting since the state officially took the municipality over earlier this week—and since it appeared to be clear that Gov. Chris Christie will not become a member of President-elect Donald Trump’s cabinet—so that the state’s unpopular Governor was himself in Atlantic City for the annual meeting of the New Jersey State League of Municipalities—indeed, where six mayors representing urban areas gathered at the conference to discuss what they would like to see in a new governor and how he or she can help people who are living and struggling in cities across the state—but where, as one writer noted, the elephant in the room, and throughout the entire conference, has been the state’s decision to take over Atlantic City’s government. Indeed, Mayor Don Guardian addressed that and other issues during a speech at The Governor’s Race and the Urban Agenda seminar, noting: “We need a governor that won’t take over Atlantic City, but rather one that will lend us a helping hand,” adding: “I talk to 10 business leaders and developers every single week, and all they tell me is they can’t afford to do business in New Jersey.” Mayor Albert Kelly, of Bridgeton, said he’s frustrated because he feels towns like his get forgotten with the current administration. He said Bridgeton has lost state funding for various programs: “Because we’re a smaller town in New Jersey, we often get overlooked.”

As for the city itself, Mayor Guardian, speaking to his colleagues from around the state, noted, referring to the state takeover: “They can use all of the power, they can use some of the power, and in a very shocking instance, they can use none of the power…This is uncharted territory in our city.” He noted this unrestricted power means any of the items named in the so-called state takeover act enacted earlier this year, including breaking union contracts, vetoing any public-body agenda, and selling city assets. Atlantic City’s state takeover leader, former New Jersey Attorney General and U.S. Senator Jeffrey Chiesa, was in Atlantic City, where he noted he had impressed upon himself the importance of making himself known to the city and the City Council. Earlier in the week, during a radio interview, Governor Christie had lauded Mr. Chiesa as “someone who has provided extraordinary service to the state” and is now determined to revive one of New Jersey’s most iconic cities, adding: “More importantly than that, he’s an outstanding person who cares about getting Atlantic City back on track and working with the people of Atlantic City and the leaders of Atlantic City to get the hard things done. Because if we make the difficult decisions now and do the difficult things, there is no limit to Atlantic City’s future.”

Under the terms of the state takeover, Mr. Chiesa is granted vast power in the city for up to five years, including the ability to break union contracts, hire and fire workers, and sell city assets and more. In his first session with Mayor Don Guardian and members of the city council, Mr. Chiesa noted he had “a chance to listen to (the mayor’s) concerns” and looks forward to gathering more information “so we can make decisions in the city’s best interest,” adding he did not know what his first decisions would be. Atlantic City Councilman Kaleem Shabazz said after the meeting he remains optimistic the city and state can still work together to pull the resort back on its feet: “I’m taking (Chiesa) at his word, what he said he wanted to do, which is work in cooperation with the city.”

With Gov. Christie in Atlantic City yesterday for the League meeting, the Mayor preceded Gov. Christie in speaking to the session, and later sat to the Governor’s right; however, the two avoided any takeover talk at the annual conference luncheon at Sheraton Atlantic City Convention Hotel: that is, the elephant in the room of greatest interest to every elected municipal leader in the room went unaddressed. Or, as Mayor Guardian put it: “Obviously, I was surprised he did not.” Instead of Atlantic City, Gov. Christie discussed his possible future in a Donald Trump White House and defended raising the gas tax to fund road and bridge projects. For his part, the Mayor, in what was described as a fiery speech at an urban mayors’ roundtable discussion, said he needed a new governor with heart, brains and courage—and one who “won’t take over Atlantic City, but rather one that will lend us a helping hand.” New Jersey Senate President Steve Sweeney, who introduced the so-called takeover law, was also a guest at the conference: he noted that, in retrospect, Atlantic City officials would have been better advised to have provided a draft recovery plan to the state much sooner, rather than wait until just before the deadline, adding: “You hope that we can move forward and find a way to put this city back together in a place where the taxpayers can afford it.”

Fiscal Demolition Threat? The U.S. Attorney’s Office yesterday ordered FBI agents to acquire documents yesterday from the Detroit Land Bank Authority, an authority which is under federal criminal investigation relating to Detroit’s demolition program, albeit the office clarified it was a “scheduled visit to provide records, not a raid.” Ironically, the raid occurred in a building owned by Wayne County, which had received a courtesy call from building security that the FBI was present inside the building. The FBI actions relate to a federal investigation related to the city’s federally funded demolition program, which has been under review since last year when questions were raised about its costs and bidding practices. The raid comes just a month after Mayor Mike Duggan revealed that U.S. Treasury had prohibited the use of federal Hardest Hit Funds for demolitions for two months beginning last August in the wake of an investigation conducted by the Michigan Homeowner Assistance Nonprofit Housing Corp., in conjunction with Michigan State Housing Development Authority, which turned up questions with regard to “certain prior transactions” and indicated specific controls needed to be strengthened. In addition, a separate independent audit commissioned last summer by the land bank revealed excessive demolition costs were hidden by spreading them over hundreds of properties so it appeared no demolition exceeded cost limits set by the state—turning up mistakes over a nine month period between June 2015 and February, including inadequate record keeping, bid mistakes, and about $1 million improperly billed to the state. Mayor Duggan has admitted the program has had “mistakes” and “errors.” That admission came after the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, sent the city a federal subpoena for records.

Auditor General Mark Lockridge acknowledged his office received the federal subpoena after it released preliminary findings from a months-long audit into the city’s demolition activities. The federal subpoena was seeking documents supporting the preliminary audit; now a Wayne County Circuit judge next month is expected to revisit a battle over the release of the subpoena the land bank received from SIGTARP, after Judge David Allen had, last August, ruled the subpoena could stay secret for the time, albeit he believed it ultimately was “the public’s business.” Judge Allen has scheduled an update on the stage of the investigation during a hearing slated for Pearl Harbor Day. In addition, Detroit’s Office of Inspector General is also conducting a review of an aspect of the program.

The city has taken down more than 10,600 blighted homes since 2014.

How Might Next Month’s Elections Affect Municipalities’ Fiscal Futures?

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eBlog, 10/19/16

Good Morning! In this a.m.’s eBlog, we consider the fiscal challenges Detroit Mayor Mike Duggan is encountering which could interrupt the city’s recovery from the nation’s largest-ever municipal bankruptcy, but note the city’s continuing progress towards becoming a national center of innovation;  then we head east to the exceptional challenge and nearing deadline for Atlantic city if it is to have a future versus being taken over by the State of New Jersey; then we fly to the West Coast where next month’s elections will determine the future municipal status of San Bernardino—the nation’s city on the road to exiting the longest municipal bankruptcy in American history, before jogging north to Stockton—where the post-chapter 9 municipality has a difficult mayoral election, but also where voters will decide what kind of municipal governance they want. Finally, we look south to observe the first steps in Puerto Rico under the new PROMESA law to address the U.S. territory’s quasi municipal bankruptcy.

Demolition Derby? Detroit Mayor Mike Duggan this week disclosed the Motor City’s controversial demolition program had been suspended by the U.S. Treasury Department this summer to address “mistakes” and “errors.” The federally funded program, according to Mayor Duggan, had been at a standstill since the middle of August—as the city and Detroit Land Bank Authority met with officials from the U.S. Treasury and the Michigan State Housing and Development Authority to reach agreement on a new set of procedures—procedures accepted by the Treasury at the end of last week, albeit Mayor Duggan declined to cite specific examples of what went wrong, albeit noting: “No amount of error in the rules is tolerable…We’re going to eliminate those mistakes with these new controls.” The contretemps comes as the city’s demolition program has become the focus of a federal criminal investigation, related to issues involving bidding practices and soaring costs. Based upon its approval of the city’s new rules, the Treasury has officially released $42 million allocated for the city’s fourth round of the program, albeit, as Mayor Duggan noted: “They didn’t do it casually,” adding the city’s “land bank did not have sufficient procedures in place to make sure we had proper documentation for all the bills and didn’t have sufficient controls to assure Treasury would not be charged for ineligible expenses.” Among the changes, Michigan State Housing authority employees will now be embedded at the land bank, along with the Detroit Building Authority to provide compliance support, input, and on-site assurance “that all contracts are bid appropriately.” The housing authority will also conduct quality control audits to assure ongoing compliance. In addition, the land bank has established a $5 million escrow fund for any demolition costs not eligible for Hardest Hit funding. Or, as Mayor Duggan put it, he was “very disappointed” by some of the things he learned during the review, but said federal and state officials will disclose those “when they are ready.”

The Treasury last August instructed housing authority officials to suspend disbursement of federal TARP funds to Detroit for blight elimination, including payment of invoices received from the land bank with the state’s second and third funding allocations under the program. Treasury, in addition, asked the housing authority to halt approval of demolition and other blight elimination activities by Detroit or its affiliates. (Detroit has been awarded more than $258 million under the federal program—with which the city has razed more than 10,000 homes early 2014. The new federal allocation is part of $130 million awarded to the Motor City in recent months. Mayor Duggan noted the new rules are in response to concerns over practices as well as Detroit’s volume of demolitions, stating: “It’s a far more intense review, because we are handing far more demolitions…The speed at which we went outstripped the controls that we had in place.”

Detroit’s auditor general last year had commenced an audit of the city’s demolition activities at the request of Detroit’s City Council in response to growing apprehension with regard to soaring costs and bidding: last April, Detroit Auditor General Mark Lockridge confirmed his office received a federal subpoena after releasing preliminary findings from the months-long audit. Adamo Group, one of the program’s largest contractors, also was served with a subpoena from the Office of the Special Inspector General for the Troubled Asset Relief Program, as was the land bank and Detroit’s Building Authority. Last May, the FBI’s Detroit office confirmed it was also investigating the program, and Detroit’s Office of Inspector General has been conducting a review of its own into an aspect of the program. The city has said it is cooperating fully with all investigations. Nevertheless, this week, Mayor Duggan stated he had seen “no evidence of criminal activity,” but declined to comment on the federal probe. Nevertheless, the fiscal costs are tolling: Detroit has more than $80,000 in legal fees for the investigation—and now faces more. The city came under scrutiny last fall over a pilot program aimed at attracting larger players to rapidly take down larger bundles of homes. At the time, a WJBK-TV report accused city building officials of improperly meeting with contractors in 2014 to set prices for the bulk demolition work before requests for bids were official. The administration has said there was nothing improper about the set-price contract initiative, which was discontinued shortly after it failed to attract national players. Last October, the Michigan State Housing Development Authority reviewed the land bank’s bid selection process related to Hardest Hit funds and did not uncover any significant issues. The agency, which distributes the federal funding once invoices are reviewed, did. however, require changes to “further strengthen their selection of contractors.” Detroit’s demolition costs have soared from an average of about $13,600 per house in 2014 to about $16,400 last year—more than 25 percent. According to the city, those rising prices were tied in part to new environmental safeguards: today, the average residential demolition is $12,575 per house, according to estimates listed on the city’s website. Detroit only stopped its federally funded demolition over the last two months. It has continued doing 25-30 city funded demolitions per week, Mayor Duggan notes.

Innovating an Old City. Matt Simoncini, President and CEO of Southfield, Michigan-based supplier Lear Corp., officially opened its Detroit Innovation Center yesterday, calling it an idea to boost technological transformation for the company and a return to the city in which it was founded: to Mr. Simoncini, the near $10 million investment represents a pivotal moment in Lear’s trajectory as a seating supplier turned advanced automotive technologies developer; yet he also perceives it as a foundation to Detroit’s resurgence, noting: “This city is on the cusp of changing the world: Urbanization, mass transit, that’s all going to come out of this town. While other places, like Silicon Valley, have players in a big pond…We are the pond. Detroit is going to have an amazing role in our future. We’re going to be part of that.” The workers there will focus on next-generation automotive battery charging, seating designs and technology integration and non-automotive projects. He adds: “We’re at a pivot point: So much of the work we do sucks everyone in. If I can get those workers out of the mainstream at Lear (in Southfield) and leverage what the city has to offer, we can send big things up the food chain.” Noting he is working with Wayne State University and the College for Creative Studies to develop curriculum and provide opportunities for those universities’ students, he added: “We (the auto industry) haven’t fully utilized what the city, and its universities, have to offer: These universities are in our backyard. I’m surprised more (companies) haven’t rushed down here to access that talent and help drive innovation.” He also is focused on opening a manufacturing plant in the city: he has discussed creating jobs in the Motor City instead of Mexico if he could attain a new wage tier with the United Auto Workers that pays in the mid-teens per hour with some benefits. A specified pay rate and benefits would need to be negotiated and are subject to moving up or down, according to the company: Lear currently pays $35 per hour, which includes the cost of benefits, at its just-in-time seating plants and upward of $25 per hour at its component plants.  Mr. Simocini notes: “This is my hometown. Of course I want to be part of its success.”  

The Edge of the Boardwalk. Chris Filiciello, Atlantic City Mayor Don Guardian’s chief of staff this week confirmed that the city did not submit a revised budget to the state, as Mayor Guardian warned in a letter that a tax increase would be “devastating” for Atlantic City, which he said increased taxes by 50 percent over 2013 and 2014. With the debt clock from the state ticking, Atlantic City is now nearly two weeks past its deadline in violation of its $73 million state loan; the next deadline is just over two weeks away—by which time the city must submit a five-year fiscal stability plan. It appears the Mayor believes his five-year budget will save roughly $73 million by 2021, in no small part related to the sale of its municipal airport, Bader Field, and its water authority for $110 million. In addition, the City Council is slated to vote on new labor agreements between the city and its seven worker unions, as well as consider privatizing payroll services. Under Mayor Guardian’s proposed five-year fiscal recovery plan, the city projects $72.9 million in savings from 2017 through 2021 (Atlantic City has annual budget deficits of about $100 million before state aid.). In his statement, Mayor Guardian listed 26 items on which Atlantic City has or intends to cut costs and raise revenues, including 400 fewer full-time workers since 2013, a recent shared-services deal with Atlantic County, bidding out city services, and land sales worth $7.1 million. In addition, Atlantic City has offered early retirement buyouts to 165 senior workers. The plan anticipates saving $7.4 million next year; $12.7 million in 2018; $17 million in 2019; $17.3 million in 2020; and $18.5 million in 2021, according to Mayor Guardian’s statement. The city currently has a fortnight in which to submit its plan to the state—the rejection of which would result in a five-year state takeover. The Mayor described the plan as one which “will include increasing revenue, reducing costs, maximizing redirected funds from casinos, receiving state aid, restructuring of debt payments, early retirement incentives, realizing the value of City owned properties and the MUA, and much more, all while maintaining Atlantic City’s sovereign right to local self-governance.” Nevertheless, how the plan will fare in City Council remains uncertain: the Council has pulled or voted down measures to dissolve the authority five times amid pressure from residents to keep the authority independent. (The Council must approve the sale at two meetings. The sale is also subject to state approval.) In addition, the Council will vote on seven memorandums of understanding with its police, fire, white-collar, blue-collar, electrical, and supervisory employees—with, according to Mayor Guardian, the city renegotiating contracts to include multiple years with no wage increases, restructured pay scales, health care cuts, and reduced overtime and paid-leave costs.

Getting Back to Fiscal Recovery. San Bernardino, the California municipality seeking to become the first U.S. municipality to overhaul its political structure while in chapter 9 municipal bankruptcy, and asking its voters next month to approve a new charter that strips the Mayor and city council of day-to-day operational control, has completed all of its required audits for the first time in six years, with the City Council having this week filed its FY2015 final audit, marking the first time since 2010 the city has all of its legally required audits. The FY2016 audit is due by March 31, 2017, a deadline the city will meet, according to Finance Director Brent Mason—albeit the audits were “qualified”—denoting the auditors were unable to find enough evidence the financial statements were accurate in four of 10 areas, leading Councilman Henry Nickel to note: “This is a job well done, but now I think the next step is implementing some corrective actions to get back to where we need to be.” Part of the challenge for the city stems from the 2012 state-mandated dissolution of the city’s redevelopment agency, requiring a significant expansion of the audit, or, as Mr. Mason notes: “They’re not small-ticket issues to get our hands around, but they’re all doable.” One of the qualified opinion concerns was with regard to the liability for compensated absences, such as vacation and sick time, which San Bernardino has proposed adjusting as part of its bankruptcy exit plan—a plan which appears to have the qualified approval of U.S. Bankruptcy Judge Meredith Jury.

Taking Stock in Stockton. Just four years ago, then Mayoral candidate Anthony Silva rode the city’s misery to an easy upset victory over incumbent Mayor Ann Johnston: the city was insolvent, in chapter 9 municipal bankruptcy, and besieged by violent crime. Now, as he ends his four-year term and faces re-election, Mayor Silva is himself confronting not just serious personal charges, but also serious crime. Unsurprisingly, he is being challenged by City Councilman Michael Tubbs, who believes the city’s mayor should be an “ambassador” for the city: he vows, if elected, that he will use the “bully pulpit” to showcase Stockton’s assets, like University of the Pacific, the Delta, the city’s proximity to the Bay Area, and its inexpensive real estate. He says Stockton is well-positioned to attract companies looking to expand in California; he also says he will maintain an open line of communication with the media to ensure awareness of the city’s accomplishments. Councilman Tubbs is seeking to become Stockton’s first black mayor and its youngest mayor. Unsurprisingly, the Mayor who was in charge when the city emerged from municipal bankruptcy, Mayor Silva, wants to be the city’s first two-term mayor since Gary Podesto left office at the end of 2004.

As we have noted, however, Mayor Silva’s tenure has, especially this election year, been marked by controversy, most recently a revelation that a gun stolen from him was used in the unsolved killing of a 13-year-old boy—followed almost immediately by allegations that he secretly made an audio recording of a strip poker game involving naked teenagers and provided alcohol to minors—even as he was serving concurrently as Mayor and CEO of the Boys & Girls Clubs of Stockton. But Councilmember Tubbs is confronting his own high-profile controversy: two years ago he was arrested by the California Highway Patrol for driving under the influence; he publicly apologized within days and pleaded no contest to the charges two months later.

A key issue for this post-bankruptcy city’s future could be governance: Mayor Silva has long claimed that Stockton residents would be better served by a governance system that provides more power to the mayor; he has previously advocated working to put a “strong mayor” ballot initiative before voters; he has never followed through, however. Unsurprisingly, Councilmember Tubbs disagrees, stating: “Stockton is incredibly blessed that we don’t have a strong mayor city…If you had a strong mayor city, your police chief would be gone…a lot of your staff would be gone. And the city would be run not with any thought, but be run based on the whims and feelings and ego of one central figure, which is incredibly dangerous.” These are not their only differences which the voters will have to consider: a key difference is Mayor Silva’s statement of nearly a year ago:  “The government of Stockton does not work…If you’re frustrated by why things haven’t changed, every day of my life is the same. Everything I’ve done, I’ve done without their help.” The election promises to be close: last June, Councilman Tubbs prevailed in the eight-candidate primary with 33.4 percent of the vote; Mayor Silva finished second with 26.4 percent.

Federal Oversight Governance in Puerto Rico. The Puerto Rico Oversight Board directed six of the U.S. Territory’s public entities to develop and present fiscal plans: the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC), and the University of Puerto Rico, having voted unanimously to tack on additional oversight responsibilities for itself to include some 24 island public entities—all as part of an emerging effort by the federal oversight board to create a ten-year plan. The Board’s Executive Director, Javier Quintana noted: “PREPA is beginning the process of preparing the fiscal plan as required by the Oversight Board: According to PROMESA, the fiscal plan should span at least 5 years. Because the Oversight Board has not yet set a deadline, PREPA does not know when it will be required to be completed.” In addition, the board barred all governmental covered entities from carrying out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or municipal bond sales. Board Chairman José Carrión, in the wake of Gov. Alejandro García Padilla’s presentation of Puerto Rico’s fiscal plan to the PROMESA board, the board would “confer with him about the central government and instrumentality plans…Then the board will seek public comment and consult with the government about the schedule for bringing their plans to eventual approval and certification,” in the wake of which the board will give the Governor a schedule for the process of submission, approval, and certification of the fiscal plans. The Puerto Rico Oversight Board also directed the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC)—six of Puerto Rico’s twenty-four public entities, and the University of Puerto Rico to put together plans—albeit without any explanation of why that specific six. Under the newly signed Congressional PROMESA law, the fiscal plan should span at least 5 years. Finally, the board ordered all of its covered entities to not carry out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or bond sales.