Motoring Back from Chapter 9 Bankruptcy

March 9, 2018

Good Morning! In this morning’s eBlog, we consider the state of the City of Detroit, the state of the post-state takeover Atlantic City, and the hard to explain delay by the U.S. Treasury of a loan to the U.S. Territory of Puerto Rico.

An Extraordinary Chapter 9 Exit. Detroit Mayor Mike Duggan yesterday described the Motor City as one becoming a “world-class place to put down your roots” and make an impact: “We’re at a time where I think the trajectory is going the right way…We all know what the issues are. We’re no longer talking about streetlights out, getting grass cut in the parks. We’re making progress. We’re not talking all that much about balancing the budget.” His remarks, coming nearly five years after I met with Kevin Orr on the day he had arrived in Detroit at the request of the Governor Rick Snyder to serve as the Emergency Manager and steer the city into and out of chapter 9 municipal bankruptcy, denote how well his plan of debt adjustment as approved by U.S. Bankruptcy Judge Steven Rhodes has worked.

Thus, yesterday, the Mayor touted the Detroit Promise, a city scholarship program which covers college tuition fees for graduates of the city’s school district, as well as boosting a bus “loop” connecting local charter schools, city schools and after-school programs. Maybe of greater import, the Mayor reported that his administration intends to have every vacant, abandoned house demolished, boarded up, or remodeled by next year—adding that last year foreclosures had declined to their lowest level since 2008. Over the last six months, the city has boarded up 5,000 houses, sold 3,000 vacant houses for rehab, razed nearly 14,000 abandoned houses, and sold an estimated 9,000 side lots. The overall architecture of the Motor City’s housing future envisions the preservation of 10,000 affordable housing units and creation of 2,000 new ones over the next five years.

The Mayor touted the success of the city’s Project Green Light program, noting that some 300 businesses have joined the effort, which has realized, over the last three years a 40% in carjackings, a 30% decline in homicides since 2012, and 37% fewer fires, adding that the city intends to expand the Operation Ceasefire program, which has decreased shootings and other crimes, to other police precincts. On the economic front, the Mayor stated that Lear, Microsoft, Adient, and other major enterprises are moving or planning to open sites: over the last four years, more than 25 companies of 100-500 jobs relocated to Detroit. On the public infrastructure radar screen, Mayor Duggan noted plans for $90 million in road improvements are scheduled this year, including plans to expand the Strategic Neighborhood Fund to target seven more areas across the city, add stores, and renovate properties. Nearly two years after Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) shepherded through the legislature a plan to pay off the Detroit School District’s debt, describing it to his colleagues as a “realistic compromise for a path to the future…At the end of the day, our responsibility is to solve the problem: Without legislative action, the Detroit Public Schools would head toward bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan,” the Mayor yesterday noted that a bigger city focus on public schools is the next front in Detroit’s post-bankruptcy turnaround as part of the city’s path to exiting state oversight. He also unveiled a plan to partner with the Detroit Public Schools Community District, describing the recovery of the district as vital to encourage young families to move back into the city, proposing the formation of an education commission on which he would serve, as well as other stakeholders to take on coordinating some city-wide educational initiatives, such as putting out a universal report card on school quality (which he noted would require state support) and coordinating bus routes and extracurricular programs to serve the city’s kids regardless of what schools they attend.

The Mayor, who at the end of last month unveiled a $2 billion balanced budget, noted that once the Council acts upon it, the city would have the opportunity to exit active state oversight: “I expect in April or May, we’re going to see the financial review commission vote to end oversight and return self-determination to the City of Detroit,” adding: “As everybody here knows, the financial review commission doesn’t entirely go away: they go into a dormancy period. If we in the future run a deficit, they come back.”

His proposed budget relies on the use of $100 million of an unassigned fund balance to help increase spending on capital projects, including increased focus on blight remediation, stating he hopes to double the rate of commercial demolition and get rid of every vacant, “unsalvageable” commercial property on major streets by the end of next year—a key goal from the plan he unveiled last October to devote $125 million of bond funds towards the revitalization of Detroit neighborhood commercial corridors, part of the city’s planned $317 million improvements to some 300 miles of roads and thousands of damaged sidewalks—adding that these investments have been made possible from the city’s $ billion general fund thanks to increasing income tax revenues—revenues projected to rise 2.7% for the coming fiscal year and add another $6million to $7 million to the city’s coffers. Indeed, CFO John Hill reported that the budget maintains more than a 5% reserve, and that the city continues to put aside fiscal resources to address the  higher-than-expected pension payments commencing in 2024, the fiscal year in which Detroit officials project they will face annual payments of at least $143 million under the city’s plan of debt adjustment, adding that the retiree protection fund has performed well: “What we believe is that we will not have to make major changes to the fund in order for us to have the money that we need in 2024 to begin payments; In 2016 those returns weren’t so good and have since improved in 2017 and 2018, when they will be higher than the 6.75% return that we expected.” He noted that Detroit is also looking at ways to restructure its debt, because, with its limited tax general obligation bonds scheduled to mature in the next decade, Detroit could be in a position to return to the municipal market and finance its capital projects. Finally, on the public safety front, the Mayor’s budget proposes to provide the Detroit Police Department an $8 million boost, allowing the police department to make an additional 141 new hires.

Taking Bets on Atlantic City. The Atlantic City Council Wednesday approved its FY2019 budget, increasing the tax levy by just under 3%, creating sort of a seesaw pattern to the levy, which three years ago had reached an all-time high of $18.00 per one thousand dollars of valuation, before dropping in each of the last two years. Now Atlantic City’s FY2019 budget proposal shows an increase of $439,754 or 3.06%, with Administrator Lund outlining some of the highlights at this week’s Council session. He reported that over the years, the city’s landfill has been user fee-based ($1 per occupant per month) to be self-sufficient; however, some unforeseen expenses had been incurred which imposed a strain on the landfill’s $900,000 budget. Based on a county population of 14,000, the money generated from the assessment amounts to roughly $168,000 per year, allowing the Cass County Landfill to remain open. However, the financing leaves up to each individual city the decision of fee assessments. Thus, he told the Council: “The Per Capita payment to the landfill accounted for about .35 to .40 cents of the increase.”  Meanwhile, two General Department heads requested budget increases this year and five Department Heads including; the Police Department and Library submitted budgets smaller than the previous year. Noting that he “never advocate(s) for a tax increase,” Mr. Lund stated: “But it is what it is. It was supposed to go up to $16.98 last year and now we are at $16.86, so it’s still less,” adding that the city’s continuous debt remains an anchor to Atlantic City’s credit rating—but that his proposed budget includes a complete debt assumption and plan to deleverage the City over the next ten years.

Unshelter from the Storm. New York Federal Reserve Bank President, the very insightful William Dudley, warns that Puerto Rico should not misinterpret the economic boost from reconstruction following hurricanes that hit it hard last year as a sign of underlying strength: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster,” as he met with Puerto Rican leaders in San Juan: “We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” warning, however, he expects economic growth to slow again in 2019 or 2020: “It’s “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”

President Dudley and his team toured densely populated, lower-income, hard hit  San Juan neighborhoods, noting the prevalence of “blue roofs”—temporary roofs overlaid with blue tarps which had been used as temporary cover for the more permanent structures devastated by the hurricanes, leading him to recognize that lots of “construction needs to take place before the next storm season,” a season which starts in just two more months—and a season certain to be complicated by ongoing, persistent, and discriminatory delays in federal aid—delays which U.S. Treasury Secretary Steven Mnuchin blamed on Puerto Rico, stating: “We are not holding this up…We have documents in front of them that [spell out the terms under which] we are prepared to lend,” adding that the Trump Administration has yet to determine whether any of the Treasury loans would ultimately be forgiven in testimony in Washington, D.C. before the House Appropriations Subcommittee on Financial Services and General Government.

Here, the loan in question, a $4.7 billion Community Disaster Loan Congress and the President approved last November to benefit the U.S. territory’s government, public corporations, and municipalities—but where the principal still has not been made available, appears to stem from disagreements with regard to how Puerto Rico would use these funds—questions which the Treasury had not raised with the City of Houston or the State of Florida.  It appears that some of the Treasury’s apprehensions, ironically, relate to Gov. Ricardo Rosselló’s proposed tax cuts in his State of the Commonwealth Speech, in which the Governor announced tax cuts to stimulate growth, pay increases for the police and public school teachers, and where he added his administration would reduce the size of government through consolidation and attrition, with no layoffs, e.g. a stimulus policy not unlike the massive federal tax cuts enacted by President Trump and the U.S. Congress. It seems, for the Treasury, that what is good for the goose is not for the gander.

At the end of last month, Gov. Rosselló sent a letter to Congress concerned that the Treasury was now offering only $2.065 billion, writing that the proposal “imposed restrictions seemingly designed to make it extremely difficult for Puerto Rico to access these funds when it needs federal assistance the most.” This week, Secretary Mnuchin stated: “We are monitoring their cash flows to make sure that they have the necessary funds.” Puerto Rico reports it is asking for changes to the Treasury loan documents; however, Sec. Mnuchin, addressing the possibility of potential loans, noted: “We’re not making any decision today whether they will be forgiven or…won’t be forgiven.” Eric LeCompte, executive director of Jubilee USA, a non-profit devoted to the forgiveness of debt on humanitarian grounds, believes the priority should be to provide assistance for rebuilding as rapidly as possible, noting: “Almost six months after Hurricane Maria, we are still dealing with real human and economic suffering…It seems everyone is trying to work together to get the first installment of financing sent and it needs to be urgently sent.”

Part of the problem—and certainly part of the hope—is that President Dudley might be able to lend his acumen and experience to help. While the Treasury appears to be most concerned about greater Puerto Rico public budget transparency, Mr. Dudley, on the ground there, is more concerned that Puerto Rican leaders not misinterpret the economic boost from reconstruction following the devastating hurricanes as a sign of underlying strength, noting: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster: We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” before the economic growth slows again in 2019 or 2020, adding, ergo, that it was “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”


Physical & Fiscal Tempests

September 26, 2017

Good Morning! In today’s Blog, we consider the physical and fiscal threats to Connecticut’s capitol city, and the comparable crime apprehensions which could adversely affect Detroit’s ongoing recovery from the nation’s largest ever municipal bankruptcy, before assessing the equity of the U.S. response to the devastating hurricane in Puerto Rico–and what that might mean to its efforts of physical and fiscal recovery. 

Visit the project blog: The Municipal Sustainability Project 


Bleeding Hartford. As the City of Hartford reeled from a violent weekend during which two men were killed just hours apart, city leaders yesterday promised to bring more police to fearful neighborhoods, with Mayor Luke Bronin vowing the police department will continue increased staffing in areas where crime statistics show “a spike in violence or a risk of increased violence.” The Mayor’s vows came, however, at the same time he yesterday warned the holders of the city’s outstanding municipal bonds that Hartford has exhausted its fiscal capacity to levy new or higher taxes‒or to cut its way out of its insolvency: he reiterated that Hartford needs a substantial amount of state funding to avoid a Chapter 9 municipal bankruptcy. In a call with investors, Mayor Bronin detailed the city’s fiscal trauma, as well as its potential chapter 9 considerations—with one person describing the blueprint as relying on the “Detroit timeline as template for success,” referring to Detroit’s initial offer for pennies on the dollar. In this instance, the pre-planned investor call was made in the wake of Assured Guaranty’s public offer to support a refinancing of Hartford’s debt under a new Connecticut state law‒a plan under which the city would realize reduced debt service costs over the next 15 years‒with the remaining costs like a ball and chain extended far into the future, or, as Assured described it: “We believe a consensual agreement among stakeholders offers the city a better path forward than bankruptcy.”

Mayor Bronin, for his part, noted: “I appreciate Assured’s willingness to have constructive discussions…We are interested in long-term solutions that leave the city with a path to sustained solvency and strength.” The statements came as the city is biding time awaiting how much aid it might receive from the state, which itself is struggling, confronting high taxes, falling revenues, $73 billion of pension and debt obligations, and the risk of a greater out-migration of its citizens and businesses, as it is confronted by a $3.5 billion deficit over the next two years, even as its budget is nearly three months overdue. That is, Hartford’s fiscal deterioration has become part of a context of broader credit deterioration in the state—which, in response, appears likely to struggle within a context of worsening local credit quality in Connecticut. Not only is the state likely to make deep cuts to local aid in the current biennium: the state is already assuming that its municipalities will draw down reserves as a result—meaning that the fiscal ripples are likely to adversely the borrowing costs of municipalities throughout the state.

The Dangerous Road to Recovery. The FBI released data yesterday, which found that violent crime in Detroit surged 15.7 percent last year, ranking the city as the nation’s most violent big city, albeit a finding city police officials disputed. Last year, there were 13,705 violent crimes reported—murder, rape, assault, and robbery—more than 10 percent greater than the previous year. Nevertheless, Detroit Police Chief James Craig described the FBI numbers as wrong: he blamed an antiquated software system (CRISNET), which he said caused crimes to be double reported. The system, which was replaced in December, shows a 5 percent reduction in violent crime last year, according to Chief Craig. According to the FBI, Detroit’s rate of 2,047 violent crimes per 100,000 people placed it highest among cities with more than 100,000 residents, higher than St. Louis and Memphis, Tennessee—and seemingly reversing the city’s post chapter 9 implementation of its plan of debt adjustment: violent crime in the Motor City had declined 13% in 2015, making it second in the country behind St. Louis.  According to the FBI report, murders rose in Detroit last year as well: 303 in 2016 from 295 in 2015, up 3 percent, albeit that lagged the national violent crime rate increase, which rose for the second year in a row, up 4.1 percent from last year. Murders in the United States were up by 8.6 percent, according to the FBI data. Thus, notwithstanding the headlines the Windy City, Chicago, has garnered for its rise in murders: 765 in 2016 compared with 478 in 2015, a 60 percent increase, Chicago’s is significantly lower than Detroit’s.

A Double Standard for Puerto Rico? Puerto Rico Gov. Ricardo A. Rosselló yesterday warned the U.S. territory was on the brink of a “humanitarian crisis,” even as U.S. Navy vessels docked in Virginia which could be invaluable in rendering the kinds of critical recovery the federal government provided to communities in Texas and Florida remain docked nearly a week after Hurricane Maria knocked out all of Puerto Rico’s electricity, most of its potable water, and fearful of the collapse of a major dam. The Governor urged Congress to act swiftly to avert a deepening disaster, asking that Puerto Rico be accorded the same treatment as hurricane-ravaged states. Despite the silence from President Trump, the Governor urged Republican leaders in Congress to move swiftly to send more funds, supplies, and relief workers: “Puerto Rico, which is part of the United States, can turn into a humanitarian crisis…To avoid that, recognize that we Puerto Ricans are American citizens; when we speak of a catastrophe, everyone must be treated equally.”

The dire physical situation, moreover, could bode even more dire fiscal consequences: as Gov. Rosselló warned Puerto Ricans are expected to flee in droves to the continental U.S., increasingly leaving behind the old and the poor, aggravating the fiscal hurricane—or, as the Governor put it: “If we want to prevent, for example, a mass exodus, we have to take action. Congress, take note: Take action, permit Puerto Rico to have the necessary resources.”

In the wake of criticism for a lack of public support for Puerto Rico, President Trump yesterday took time from tweeting about the NFL to post a pair of tweets which nevertheless identified the devastating connections between the natural disaster to Puerto Rico’s increasingly desperate fiscal situation, writing that while Florida and Texas were coping well from hurricane damage, “Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble,” adding in a subsequent tweet: “…owed to Wall Street and the banks which, sadly, must be dealt with. Food, water and medical are top priorities—and doing well.” Congressional leaders yesterday claimed they were awaiting assessments of the damage in Puerto Rico, as well as a formal disaster request from the Trump administration, before Congress can act; unfortunately, such a request is not expected until early to mid-October, even as House Appropriations Committee Chairman Rodney Frelinghusyen (R-N.J.) issued a statement noting that Puerto Ricans on the island “are entitled to equal treatment under the law.”

FEMA is currently drawing from the same $15.3 billion appropriation approved this month by Congress in response to Hurricane Harvey, which hit Texas, and Hurricane Irma, which hit Florida and damaged Puerto Rico and the United States Virgin Islands. FEMA Director Brock Long, and Thomas P. Bossert, the President’s Homeland Security adviser, were both in Puerto Rico yesterday to assess the damage, with Director Long asserting that the federal government had 10,000 people “working around the clock” to help Puerto Rico. Puerto Ricans can now file damage claims with FEMA, which has sent teams to 10 municipios to go house to house to collect information and pass it on, according to Gov. Rosselló; nevertheless, more than half the territory is without potable water—100 percent is without electricity. All of Puerto Rico’s wastewater and water treatment plants lack electricity.

Some Democrats want Congress to quickly approve a relief bill, but to, at the same time, temporarily forgive Puerto Rico’s loan repayments and remove a requirement that Puerto Rico contribute into the federal emergency pot. Indeed, the physical and fiscal damage to the U.S. Virgin Islands and Puerto Rico, has meant the halt of all PROMESA-related creditor and debtor considerations: in the wake of the storm, and the diversion of all Puerto Rico governmental focus on saving lives, it is unlikely Puerto Rico will be making interest payments on its debts for the foreseeable future: the restoration of vital public utilities to ensure the provision of water and electricity is a much higher priority: there is access to safe drinking water to only a quarter of Puerto Rico’s residents. In the three decades that National Guard Brigadier General Wendul G. Hagler II has served, he described the situations as “about as large a scale damage as I have ever seen.” 

A related fiscal danger could be an accelerating exodus of more educated and skilled Puerto Ricans, likely in the thousands, to leave for the continental U.S., leaving behind a population in need of far greater vital public services, but a deteriorated tax base—with some estimates that such an exodus could be greater than 10%.  

The Art of State Fiscal Intervention


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Good Morning! In this a.m.’s blog, we consider the political and fiscal challenges to recovery for a municipality with disproportionate levels of crime and low income—but aided by state intervention.

Ending the Fiscal Siege of Petersburg. More than a century ago, from June 9, 1864, to March 25, 1865, during the American Civil War, the Richmond–Petersburg Campaign was torn by a series of battles around Petersburg, Virginia. In the past few years, the battle waged has been fiscal rather than physical for the independent city of about 32,420, where, last year, Virginia Finance Secretary Ric Brown, in providing a fiscal update, based on a state audit of the city’s books dating to 2012, had reported the municipality was facing a $12 million budget gap—and nearly $19 million in unpaid bills. But now, Sec. Brown has just announced that the small municipality’s bond rating outlook has been upgraded from “negative” to “stable,” confirming the value of the Commonwealth’s fiscal intervention. S&P’s announcement, coming nearly one year of weathering one of the lowest possible municipal bond ratings, led Mayor Samuel Parham to note: “We are proud of everyone’s efforts who made this positive reassessment possible.” But it is one small, fiscal step: At last week’s session, the City Council agreed to develop a deficit-reduction plan at its next meeting, scheduled for a week from Thursday: more fiscal work portends in the wake of last month’s action by the Council to approve a salary cut for the city’s 600 full-time employees: layoffs of staff and other austerity measures are now a real possibility.

That fiscal endeavor will proceed under a newly appointed City Manager, Aretha R. Ferrell-Benavides, who was appointed last month to be responsible for the day-to-day operations of the city and report directly to the City Council. She does not come unprepared for the task, having served as the interim city manager, where she was put in the awkward role of informing the City Council and a packed hall of residents about the requisite critical cuts to city services and reduced funding for the city’s schools—already among the lowest-performing in the Commonwealth—as well as cuts to fire and police services in a city which has an unusually high rate of crime: some 87% higher than in comparison to the Virginia mean and are 35% higher than the national mean. With regard to violent offenses, Petersburg, has a rate that is 313% higher than the Virginia average; its property crime is 63% higher than the statewide mean. Nearly 30% of the city’s residents live in poverty, more double the statewide rate, and the city has a disproportionate percentage of its population older than 65.  As the population has declined from its peak in 1980, it has also aged — more than 15 percent of residents are 65 or older, vs. 13 percent statewide., and 22% higher than the country’s average—all steps necessary she warned, because, otherwise, Petersburg had about a month before it would confront the unthinkable: total collapse—it was a fiscal state which Virginia Finance Secretary Ric Brown noted to be unlike anything he had ever observed in his 46 years minding state ledgers in various roles.

In describing its upgrade to a “stable” outlook, Standard and Poor’s states that a “stable” outlook means the rating is unlikely to change. This is a slight improvement from a “negative” outlook. Standard and Poor’s Primary Credit Analyst, Timothy Barrett, said that the city had “taken several key steps toward financial recovery, including repaying a portion of past due obligations in addition to creating a viable plan to strengthening budgetary flexibility and liquidity, supported by some recently adopted financial policies.”

Petersburg Finance Director Blake Rane notes that the improved fiscal outlook will enhance the city’s fiscal “flexibility: It’s clear [the city] has changed trajectory in the past year, to a point where there is no risk beyond what the “BB” already says,” adding: “It’s really hard to move Standard and Poor’s [rating], and get the kind of movement we did.” In its report, Standard and Poor’s noted Petersburg has “taken several key steps toward financial recovery, including repaying a portion of past due obligations in addition to creating a viable plan to strengthening budgetary flexibility and liquidity, supported by some recently adopted financial policies.”

Notwithstanding the good gnus, Petersburg’s leaders recognize this is no time to let up: Despite the good news,  interim Finance Director Nelsie Birch and the other city officials recognize much fiscal effort remains: “It should help the investment community have confidence that the city is moving in the right direction, though we are still non-investment grade credit.” Until the city restores its fund balance, which would require at least $7.7 million dollars, the city’s credit rating will have to await a boost to investment grade—some two notches higher than its current grade—meaning it must pay higher interest rates for capital investment and borrowing than most Virginia municipalities.

How Do State & Local Leaders Confront & Respond to Significant Population Declines?

eBlog, 04/21/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: how does it deal with the fiscal challenges—challenges also confronting cities such as Cleveland, Philadelphia, Toledo, Dayton, Baltimore, and Philadelphia—which are experiencing significant population declines? What to do with vacant lots which no longer bring in property tax revenues—but enhance criminal proclivities?  

Fiscal & Physical Municipal Balancing. While Detroit has emerged fiscally from the nation’s largest ever municipal bankruptcy, it continues to be fiscally and governmentally bedeviled by the governance challenge of such a significant population contraction—it is, after all, a city of about 132 square miles, dotting with neighborhoods which have become splotches of vacant lots and abandoned homes: post-bankrupt Detroit, with neighborhoods that have been gradually emptying out, in a physical sense, is a shadow of its former self, with a population nearly 60% smaller than it was in 1950, but with a stock of some 40,000 abandoned homes and vacant lots—space which brings in no property taxes, but can breed crime and safety costs for the city: between 1978 and 2007, Detroit lost 67% of its business establishments and 80% of its manufacturing base. This untoward, as it were, “ungrowth” has come even as the city has spent $100 million more, on average, than its revenues since 2008: Census figures inform us that more than one in three of the city’s citizens fall below the poverty level—ranking the Motor City, along with Cleveland, Dayton, Toledo, Philadelphia, and Baltimore, as cities realizing major depopulation. Thus, while downtown Detroit today is gleaming towers along a vibrant waterfront, one need not drive far from the internationally acclaimed Detroit Institute of Arts to witness neighborhoods which are nearly abandoned as residents continue to move to the suburbs. Thus, with some of the fiscal issues effectively addressed under the city’s approved plan of debt adjustment, Detroit is commencing a number of initiatives to try to address what might be deemed its physical devastation—a challenge, in some ways, more complex than its finances: How does an emptier city restore blighted neighborhoods and link the islands of neighborhoods which have been left? Or, mayhap better put: how does the city re-envision and rebuild?

Here it seems the city is focused on four key initiatives: draw new families into the city (look at Chicago and how Mayor Emanuel succeeded); convert vacant lots from crime havens to community gardens; convert vast empty spaces to urban farms; devise a strategy to fill empty store fronts; and, again as did Mayor Emanuel, create a strategy to bring back young families with children to live in the city.

Already, Detroit’s downtown core is a new world from my first visit when the National League of Cities convened its annual meeting there in the 1980’s—a time when at the front desk of the hotel I was staying, the attendant told me that even though I could see the convention site from the hotel, it would be a grave risk to life and limb to even think about taking the bus or walking—a situation unchanged on a similar day, Detroit’s very first day in chapter 9 bankruptcy, when I had proposed setting out to walk to the Governor Rick Snyder’s Detroit office to meet just-appointed Emergency Manager Kevyn Orr. Today, the revived downtown has attracted young people, often in redeveloped historic buildings; but that emerging vibrancy does not include housing options for people at different stages of life. Thus, the city is making an effort to offer more differentiated housing options, including townhouses, apartments, carriage homes and more—as well as housing for seniors. Or, as Melissa Dittmer, director of architecture and design for Bedrock LLC, the company leading the development, notes with regard to an initiative just outside of downtown: “For so long, Detroit had a low-self-confidence issue and was willing to take just about” any residential development: “Now the city of Detroit has crossed a threshold. We can do better.”

Outside of the downtown area, one sample neighborhood, Fitzgerald, today has 131 vacant houses and 242 vacant lots; but the city’s Director of Housing and Revitalization, Arthur Jemison, notes these lots need not be filled with houses; instead, the city is moving to invest more than $4 million into the neighborhood to renovate 115 homes, landscape 192 vacant lots, and create a park with a bicycle path, or, as Mr. Jemison notes: “We can’t possibly rebuild every vacant lot with new construction…What we can do is rehabilitate a whole lot of houses, and we can have an intentional landscape scene. The landscape is important, because frankly, if it’s done and managed well, it’s inexpensive and people like it.”

But the comprehensive effort also recognizes the city does not need additional housing stock: it needs less; so it has unearthed a program, RecoveryPark Farms, to construct greenhouses on a 60-acre plot, a plot which until recently represented two dozen blighted blocks on Detroit’s east side. This unique project has diverse goals: it eliminates breeding territory for crime, eliminates blight, and creates opportunities for the unemployed, especially ex-offenders and recovering addicts. The program’s CEO Gary Wozniak, who spent more than three years in federal prison, notes farming offers a career with a lower bar for hiring and gives immediate feedback because “plants grow relatively quickly, so people can start to feel really good about building skill sets. Plus, Detroit has a lot of land.” Already, its harvests are purchased by some of Detroit’s top restaurants on a year-round basis, or, as CEO Wozniak put it: “What we’re doing is commercial-scale agriculture in an urban environment.”

On Detroit’s first day of bankruptcy, the walk from my downtown hotel to the Governor’s uptown office almost seem to resemble post-war Berlin: empty, abandoned buildings and storefronts. Thus, another post-bankruptcy challenge has been how to fill the vacant storefronts along Detroit’s half-abandoned commercial corridors—and, here, a partnership between the City of Detroit and other economic-development organizations, Motor City Match, works to create links between selected landlords and new small businesses, with a goal of converting blighted commercial districts to make them both more livable and more effective at providing job opportunities for residents—or, as Michael Forsyth, Director of small-business services at the Detroit Economic Growth Corp., notes: Motor City Match “helps get businesses from ideas to open.” The program awards $500,000 in grants every quarter, assisting businesses in completing a business plan, finding a place to open, and renovating office space: its CEO, Patrick Beal, CEO of the Detroit Training Center, received $100,000 during the first round of the program and matched it with a $100,000 loan. Now, with the help of Motor City Match, the company has trained more than 5,000 Detroiters in construction, heavy-equipment operation and other skills.

Finally, again as with Mayor Emanuel, the City respects the importance of children—meaning it must focus on public safety, and schools—governance challenges of the first order, especially as we have been long-writing, the parallel financial insolvency of the Detroit public schools. Thus, Ethan Lowenstein, the Director of the Southeast Michigan Stewardship Coalition, is working with educators and local organizations in the region to help young people address environmental challenges in their communities, noting that families with children “leave because they don’t see the strength in their community and they don’t feel recognized as someone who has knowledge.” Mr. Lowenstein is seeking to reverse the city’s depopulation trend by working with the Detroit Public Schools. At two schools he works with in southwest Detroit, he says, students were on a walk around their community and noticed tires were being illegally dumped. The schools helped the students and worked with community members to identify areas with illegally dumped tires, and eventually the tires were recycled into doormats.  

In recovery from chapter 9 bankruptcy, sometimes the fiscal part can seem easy compared to the human dimension.

Municipal Challenges from State Control & Preemption of Local Authority


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eBlog, 1/0917

Good Morning! In this a.m.’s eBlog, we consider more outcomes from the Flint drinking water crisis—outcomes which raise issues with regard to the State of Michigan’s Emergency Manager law—and accountability, before taking a run to Atlantic City, a municipality in the midst of a state takeover, and, now, apparently caught between state-mandates to reduce police capacity amid an apparent dramatic surge in public safety concerns. Finally, we note a challenge to the Municipal Securities Rulemaking Board’s so-called pay-to-play rules, under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions.

Out Like Flint. Michigan Gov. Rick Snyder Friday signed into law new state legislation mandating municipalities in the state to warn residents of dangerous lead levels in drinking water within three days’ notification by the state of contamination, marking the enactment of the first piece of legislation stemming from the Flint water crisis. Gov. Snyder described it as an “important step…This is not the last piece of legislation we should see on this. This is a good start of getting faster notification to the public when there is a water issue.” The bill, sponsored by state Rep. Sheldon Neeley (D-Flint), a former Flint council member, is aimed at strengthening water quality control in Michigan to ensure a water crisis such as Flint’s will not happen in a Michigan municipality again, or, as Rep. Neeley put it: “The water crisis in Flint has left the community and its allies reeling with a sense of urgency, and rightfully so…During this difficult time, I have valued the governor’s partnership in helping to steward legislation that will have a positive impact on the residents of Flint.” Previously, owners or operators of municipal water plants were legally required to notify customers of any noncompliance with state drinking water standards, within 30 days, according to the representative; now, under the new law, operators must issue a public advisory within three business days of notification from the Michigan Department of Environmental Quality. Such alerts may be disseminated via radio or television, notices delivered to customers or advisories posted in conspicuous areas throughout the community. The bill had been adopted unanimously in both the Michigan House and Senate. The new state law comes in the wake of criminal charges filed against more than a dozen government officials related to the Flint water crisis. Last month, the Michigan Attorney General’s Office filed criminal charges against former Flint emergency manager Darnell Earley, former emergency manager Gerald Ambrose, and two former city public works employees. Mr. Earley had served as Flint’s emergency manager from 2013-15, before going on to be named by Gov. Snyder as Emergency Manager for the Detroit Public Schools, where he resigned nearly a year ago in the face of severe criticism. Mr. Earley, who had refused to testify about his role and responsibility with regard to the Flint drinking water crisis, was subsequently charged with false pretenses, conspiracy to commit false pretenses, misconduct in office, and willful neglect of duty while in office–charges which carry up to 20 years in prison.

Recent testing of Flint water suggests lead levels have dropped, but residents in the city of roughly 100,000 residents continue to rely on bottled and filtered water for their daily needs.

A City’s Fiscal and Physical Safety. According to a review of crime data by The Press of Atlantic City, the two-decade long decline in crime in Atlantic city has not only halted, but reversed itself in 2015, according to the Press’s review of New Jersey state crime data, reporting that in 2015, crime increased in nearly every major category, including homicides, rapes, and aggravated assaults—with the homicide increase extending into last year. The city’s violent crime rate is more than 500 percent higher than the statewide average—the murder rate a thousand percent—posing a stark governing challenge as, last week, New Jersey’s Local Finance Board, which is managing the city, alerted the city’s police and fire unions that it would press drastic cuts, including reduced staffing and imposing longer shifts. The Board has the authority to hire and fire employees, authorize raises and promotions, renegotiate service and labor contracts, restructure or pay off debt, approve the municipal budget, and make changes with regard to the delivery of municipal services. The state is seeking to force a restructuring of the city’s police department, including salary reductions, higher health care benefit contributions, moving to 12-hour shifts, and a more aggressive police response to nuisance issues in neighborhoods. Nevertheless, Anthony Marino, a retired executive with the South Jersey Transportation Authority, who has studied Atlantic City’s crime figures, reports that crime statistics have been on the wane since a high in 1989 and that the trend shows Atlantic City is, for the most part, a reasonably safe city, noting that in 1977, before the city had casinos, its crime index, or the total number of the seven categories tracked by State Police, was 4,391. In 1989, it peaked at over 16,000 before declining almost annually. Nevertheless, the apparent turnaround—in addition to the state-mandated changes in the city’s police department could not only limit the city’s capacity to address the seeming turnaround, but also adversely affect tourism and assessed property values.

Paying to Play. Tennessee and Georgia Republican groups are challenging the Municipal Securities Rulemaking Board’s (MSRB) so-called pay-to-play rules under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions (the pay-to-play rule also prohibits an investment adviser from soliciting contributions for a government official or the official’s political party at the same time the adviser is providing services to the government entity for which the official works.). The two political organizations have filed the suits charging that the rules violate their First Amendment rights; in addition, they claim that the Securities and Exchange Commission (SEC) and MSRB exceeded their authority and have not demonstrated a sufficient legal interest in restricting political contributions. In response, the Campaign Legal Center, in its brief to the 6th U.S. Court of Appeals, argues the rules are important to prevent municipal advisors from engaging in pay-to-play practices—and the rules are needed to address the potential for corruption in the municipal market. The amicus brief opposes attempts by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee seeking to have the court vacate the SEC’s approval of the rule changes.

Last summer, the SEC issued notice that it intends to approve the rules proposed by the MSRB and the Financial Industry Regulatory Authority, noting it would issue orders finding that the self-regulatory organizations’ rules impose “substantially equivalent or more stringent restrictions” on municipal advisors and broker-dealers than its own pay-to-play rule. The Center’s brief notes: “Substantial campaign contributions from a municipal advisor to officeholders with control over awards of municipal advisory business are likely to give rise to quid pro quo exchanges, or at a minimum, the appearance of such exchanges…That is the premise not only of the challenged amendments, but also the underlying rule, which was upheld by the D.C. Circuit.” Under the proposed changes to the rule, municipal advisors, like dealers, are barred from engaging in municipal advisory business with a municipal issuer for two years if the firm, one of its professionals, or a political action committee controlled by either the firm or an associated professional, makes significant contributions to an issuer official who can influence the award of municipal advisory business. As proposed, the modified rule contains a de minimis provision, which allows a municipal finance professional associated with a dealer or a municipal advisor professional to make a contribution of up to $250 per election to any candidate for whom she or he can vote without triggering the two-year ban. This is not a first: there was a previous challenge to an earlier version of Rule G-37 by an Alabama bond dealer in Blount v. SEC after it was first approved for dealers in 1994—a challenge which the U.S. Court of Appeals for the D.C. Circuit rejected, noting, in its opinion, the rule had been “narrowly tailored to serve a compelling government interest.”

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.