The Challenge of Recovering from or Averting Municipal Bankrupty

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eBlog, 03/28/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in U.S. history, before spinning the tables in Atlantic City, where the state takeover of the city has been expensive—and where the state’s own credit rating has been found wanting.

Home Team? A Detroit developer, an organization, Dominic Rand, has initiated a project “Home Team,” seeking to purchase up to up 25 square miles of property on the Motor City’s northwest side with a goal of keeping neighborhoods occupied by avoiding foreclosures and offering renters a path to homeownership. Nearly four years after the city’s chapter 9 filing for what former Emergency Manager Kevyn Orr deemed “the Olympics of restructuring,” to ensure continuity of essential services while developing a plan of debt adjustment to restructure the city’s finances—and to try to address the nearly 40 percent population decline and related abandonment of an estimated 40,000 abandoned lots and structures, as well as the loss of 67 percent of its business establishments and 80 percent of its manufacturing base, Mr. Rand reports he is excited about this initiative by an organization for purchases of homes slated for this year’s annual county tax foreclosure auction. His effort is intended to rehabilitate the homes and help tenants become homeowners. The effort seeks to end the cycle of home foreclosures due to unpaid property taxes. 

This is not the first such effort, however, so whether it will succeed or not is open to question. Officials at the United Community Housing Coalition note that previous such initiatives have failed, remembering Paramount Mortgage’s comparable effort, when the company purchased 2,000 properties, in part financed through $10 million from the Detroit police and fire pension fund—an effort which failed and, in its wake, left 90 percent of those in demolition status. Fox 2 reported that the City “does not support this proposal,” questioning its “ability to deliver on such a massive scale with no particular track record to indicate they would be successful,” adding the organization, if it wants to “start out by becoming a community partner through Detroit Land Bank and show what they can do with up to nine properties, they are welcome to do so.”

At first, the Home Team Detroit development group considered purchasing every property in Detroit subject to this year’s annual county tax foreclosure auction; instead, however, the group focused on the northwest quadrant covering 25 square miles and 24 neighborhoods—an area larger than Manhattan—with founder David Prentice noting: our “game plan is pretty simple: You are going to have a quadrant of (Detroit) with properties that are primarily occupied.” Mr. Prentice believes this initiative would address what he believes is one of Detroit’s biggest problems: halting the hemorrhaging of home foreclosures due to unpaid property taxes—an initiative one Detroit City Council member told the Detroit News was “unique and comprehensive.” Thus, city officials are reviewing the entity’s proposal—even as it reminds us of the Motor City’s ongoing home ownership challenge—a city where, still, more than 11,000 homes a year have ended in foreclosure over each of the last four years. Under the city’s process, the city warns property owners in January if their properties are at risk of tax foreclosure: as of last January, the Home Team group reports its targeted area has 11,073 properties headed for foreclosure.

Home Team is seeking approval from Detroit to purchase the properties via a “right of first refusal,” under which Mayor Mike Duggan and the Detroit City Council would have to approve the sale—and Wayne County and the State of Michigan would at least have to agree to not buy them as well, since both also have the option to buy the properties prior to such public auctions. Home Team claims it has the resources and expertise to buy the properties, rehab the homes, find new residents, and allow it to work with people traditional lenders would not consider due to poor credit ratings or because of the locations of the properties. The group claims its land contract system, or contracts for deeds, under which tenants make payments directly to the property owner and often have no ownership stake until the entire debt is paid, would work as an alternative to traditional mortgages—even as housing advocate groups such as the United Community Housing Coalition warn that land contracts are financial traps, and the nonprofit Michigan Legal Services told the Detroit News that many land contract deals are “gaming the system,” referencing a recent Detroit News story about many residents with land contracts losing out on actually getting a home—and others warning that those families sign contracts may end up owing significantly more than they would by renting, yet, at the end of such transactions, “have nothing to show for it.” (In recent years, the News reports, land contracts have outnumbered traditional mortgages in Detroit.) Mr. Prentice, while agreeing that “most land contracts are designed for the tenants to fail,” suggested his company’s land contracts would come without the high penalties, high monthly payments—payments which increase in time, and rising interest rates which have trapped unwary families in the past—and, he has vowed the company would fix up every property before putting it back on the market.

Detroit City Councilman George Cushingberry, who represents a major portion of the targeted area, told the News: “I like that it’s comprehensive and takes into account that one of the issues that prevents home ownership is financial literacy.” Yet, the ambitious proposal has also encountered neighborhood opposition: the Northwest Detroit Neighborhood Coalition has launched a petition drive to block the plan—and drawn support from eight neighborhood groups, with the Coalition issuing a statement: “We the people of northwest Detroit hereby declare our strong opposition to high-volume purchases of tax-foreclosed properties (10+ parcels) and other high-volume transfers of properties to real estate investors…Proposals like the one currently being circulated by (Home Team Detroit) do not serve the needs or interests of Detroit neighborhood residents. These bulk purchases only accelerate vacancy, blight, and further erosion of our community.” However, Melvin “Butch” Hollowell, Detroit’s Corporation Counsel, said the city opposes the effort, which would require the city to authorize a purchase agreement for the properties, noting: “The city does not support this proposal: We have a number of serious concerns, especially Home Team Detroit’s ability to deliver on such a massive scale with no particular track record to suggest they would be successful. If they want to start out by becoming a community partner through the Detroit Land Bank (Authority) and show what they can do with up to nine properties, they are welcome to do so and go from there.”

Robbery or the Cost of Municipal Fiscal Distress? The law firm of Jeffrey Chiesa, whom New Jersey Governor Chris Christie named to oversee the state takeover of Atlantic City, has billed the State of New Jersey about $287,000 for its work so far, according to multiple reports, including some $80,000 alone for Mr. Chiesa. The fiscal information came in the wake of the release by the state of invoices that showed the law firm submitted more than $207,000 in bills for the first three months of work, November through January—with some twenty-two members of the firm billing the state. In addition, Mr. Chiesa, who bills the State $400-an-hour for his time, reports he himself has billed $80,000 over that same period, noting to the Press those invoices were not included in the state’s data released last Friday, because they have yet to be fully reviewed. He added that the state has imposed “no cap” on the fees his firm may charge—leading State Assemblyman Chris A. Brown (R-Atlantic), who has been critical of the takeover, to note: “The governor handing over the city to a political insider without a transparent plan is like leaving your home without locking the door, and it looks like we just got robbed.”  The release of the data could not have come with more awkward timing, with the figures aired approximately a week after Mr. Chiesa wrote to Atlantic City police officers announcing the state was seeking to cut salaries, change benefits, and introduce longer shifts to save the city money—and as the state is calling for similar cuts and 100 layoffs in the city’s fire department—efforts in response to which Atlantic City’s police and fire unions have filed suit to prevent, with a judge last week ruling the state cannot yet move forward with the fire layoffs until he determines whether the state proposal is constitutional—even as Mr. Chiesa has defended the cuts, calling negotiations with the unions “money grabs.” For his part, at the end of last week, Mr. Chiesa defended his bills, claiming his firm helped negotiate a $72 million settlement with the Borgata casino in a long-running tax dispute with the city, gaining more than a 50 percent savings to the city from the refund it owed in the wake of tax appeals, deeming that an “important success on behalf of the city.”

Nevertheless, as S&P Global Ratings noted last week in upgrading Atlantic City’s credit rating from “CC” to “CCC,” despite assistance from the state, there is still the distinct possibility the city could still default on its debt over the next year and that filing for chapter 9 municipal bankruptcy remains an option down the line.  Nevertheless, S&P analyst Timothy Little wrote that the upgrade reflected S&P’s opinion that “the near-term likelihood” of Atlantic City defaulting on its debt has “diminished” because of the state takeover and the state’s role in brokering the Borgata Casino agreement—an upgrade which a spokesperson for the Governor described as “early signs our efforts are working, that we will successfully revitalize the Atlantic City and restore the luster of this jewel in the crown.”  However, despite the upgrade, Atlantic City still remains junk-rate, and S&P reported the city’s recovery remains “tenuous:” It has a debt payment of $675,000 due on April Fool’s Day, $1.6 million on May Day, $1.5 million on June 1st, and another $3.5 million on August 1st—all payments which S&P believes will be made on time and in full, albeit warning that more substantial debts will come due later in the year, meaning, according to S&P, that the city’s recovery remains “tenuous,” and that Atlantic City is unlikely “to have the capacity to meet its financial commitment…and that there is at least a one-in-two likelihood” of a default in the next year.” Or, as Mr. Little wrote: “Despite the state’s increased intervention, [municipal] bankruptcy remains an option for the city and, in our opinion, a consideration if timely and adequate gains are not made to improve the city’s structural imbalance.”

 

Confronting the Challenges of Insolvencies

eBlog, 03/17/17

Good Morning! In this a.m.’s eBlog, we consider the suit filed by the Detroit Public Schools District seeking to prevent the closure of any additional schools in the city; then we snow shovel our way through the high drifts in Cambridge, Massachusetts to explore its creative issuance of mini municipal bonds, before racing to the warmth of Puerto Rico to observe the legal challenge between different kinds of municipal bondholders against Puerto Rico.

Schools of Hard Fiscal Knocks. In response to a threat by the Michigan School Reform Office (SRO) to target up to 16 Detroit public schools for closure in the newly created Detroit Public School District, created in the wake of the old system’s physical and fiscal insolvencies: to move as many as 7,700 students—permitting them to transfer to DPSCD schools, charter schools, or nearby districts; the Detroit Public Schools Community District is seeking to make a preemptive strike against said state plans to shutter some of its schools: the district board has voted to sue the state’s School Reform Office (SSRO) over the threat of school closures in the newly state-created district, suing to prevent the State of Michigan from closing any of its struggling schools, after the Board of Education, in the wake of a five-hour meeting, voted unanimously to file suit against the state School Reform Office, the State of Michigan, and Michigan School Reform Officer Natasha Baker. Detroit School Board Vice President Sonya Mays noted: “The action preserves the full range of our options.” The vote appeared to be in response to the state office’s identification last January of 38 schools statewide for potential closure, because they have ranked in the bottom 5% academically for three straight years: more than two-thirds of those public schools were in Detroit: 16 in the Detroit district, 8 in the Education Achievement Authority, and one charter school. However, a Moody’s report last month said that the student loss would have been somewhat offset by the school district’s absorption of 3,700 students who are currently educated by the Education Achievement Authority and nearly 500 students from one charter school closure

The suit was filed even though the Michigan Department of Education (MDE) had offered a proposal to school districts with schools on that closure list under which, if said districts reached agreement with the state agency on a plan to turn the schools around, then the school reform office would hold off on closure decisions. Detroit Public Schools Interim Superintendent Alycia Merriweather not only had said the district is interested in entering into such an agreement with the MDE, but also is planning to schedule a meeting soon—even as, notwithstanding, the board remains intent on moving forward with the lawsuit. It is unclear how much of the District’s resources will be siphoned out of the city’s ailing physically and educationally system’s budget to finance the litigation. Board President Iris Taylor stated: “We want to make it clear that filing suit is not a rejection of MDE’s offer to enter into a partnership agreement…It is simply the Board and the district ensuring that all options are available to us as we work through these challenges.” Ms. Taylor told the Detroit News that the board believes the school reform office actions were unlawful, because the board believes legislation approved last June which provided a financial rescue to the Detroit Public Schools—and which created the Detroit Public School District—provided the new district a clean slate: “Our district is entitled to operate schools for at least three years without even the threat of closure.” However, Michigan Attorney General Bill Scheutte last summer issued an opinion noting that if the Michigan Legislature had intended to give the district a three-year reprieve, the legislature would have clearly stated such an intent, noting that it had not.

In a city seeking to be a beacon to young families with children as critical towards re-growing its tax base, the suit seeks to bar the state from taking any additional steps to close any DPSDC schools until the court decides whether or not the SSRO has authority to close schools and whether the action taken to create the SSRO and the legislation itself is constitutional. That is, it is a suit regarding governance power and authority—and one in relation to which DPSCD Interim Superintendent Alycia Merriweather stated: “Closing schools creates a hardship for students in numerous areas including transportation, safety, and the provision of wrap around services…As a new district, we are virtually debt free, with a locally elected board, and we deserve the right to build on this foundation and work with our parents, educators, administrators, and the entire community to improve outcomes for all of our children.”

The lawsuit was filed, however, even as the Michigan Department of Education had offered the district and all others impacted by the threat of school closures a proposal under which duly elected school boards and district leadership would remain in full control of their schools, the curriculum, and their districts—an offer which Board President Taylor said the School Board was not necessarily rejecting, but rather in an effort to ensure “all options are available to us as we work through these challenges,” adding: “We appreciate Governor Snyder for hearing our concerns and taking action; however, we continue to believe that SSRO’s actions were unlawful. Among other things, we believe the legislation that created DPSCD in 2016 gave us a clean slate, which means, under the law, our district is entitled to operate schools for at least three years without even the threat of closure.” (Michigan’s legislation enacted in 2009 provides authority for the state to close schools ranked in the bottom 5% academically for three straight years.) This year, however, was the first time the SSRO has announced potential closures of schools under the state legislation—closures which carry a potential cost of foregone state aid from the $617 million state bailout of the fiscally and physically insolvent Detroit Public Schools district, under a state statute to overhaul the old Detroit Public Schools system. The newly created district operates schools and is scheduled to receive future state aid payments under the restructuring backed by Gov. Rick Snyder and state lawmakers. The SSRO threat has targeted up to 16 schools: the Detroit public school system would be at risk of the loss of not just 7,700 students, but also the state revenues that those students would have brought. Under the state proposal, students in the district could opt to transfer to DPSCD schools, charter schools, or nearby districts. Moody’s, last month, had reported that any such student loss would have been somewhat offset by DPSCD’s absorption of 3,700 students who are currently educated by the Education Achievement Authority and nearly 500 students from one charter school closure. The state-run Education Achievement Authority is scheduled to close in July.

Mr. Roger’s Neighborhood Municipal Bonds? Cambridge, Mass., a municipality of just over 107,000 across the Charles River from Boston, has succeeded in raising some $2 million through a sale of community-sourced general obligation minibonds, which the city’s underwriter, aptly named Neighborly, notes could reshape the municipal marketplace. The firm’s head of finance, James McIntyre, notes: “Our intention is to democratize access to municipal bonds.” Here the city will use the proceeds to fund capital projects such as school building renovations, and street and sidewalk improvements. The municipal bonds themselves were offered only to city residents, even though neither my daughter nor her husband, residents, seemed to be aware: individual orders are limited to $20,000, and lowered to a minimum investment amount to $1,000 from the customary $5,000. The opening for orders began selling at the close of business last month, closing last week: the Series A minibonds bonds pay a tax-exempt interest rate of 1.6% and will mature in five years. The firm notes that more than 240 individuals invested in the minibonds—municipal bonds to which Fitch Ratings, S&P Global Ratings, and Moody’s Investors Service assigned AAA ratings, with Cambridge City Manager Louie DePasquale noting: “This will not only engage residents, but we will make them a financial partner in our infrastructure investments.” Indeed, the city has helped via the distribution of “invest in Cambridge” mass-transit posters, a video, and a huge sign in front of City Hall. According to Neighborly founder Jase Wilson, “The most exciting thing about the Cambridge minibond issue is that it’s not a new idea at all…in fact the way our nation’s communities used to borrow money to build public projects.” Indeed, it was just 27 years ago that Denver issued its first minibonds; three years ago the Mile High City generated $12 million through a crowdfunding in $500 increments, as part of a $550 million transaction to finance city road improvements, leading Elizabeth FU of GFOA to note: “The minibonds definitely met Denver’s goal of helping residents invest in the community, so the project was well worth the additional resources and effort…Of course, this tool isn’t for everyone,” she added, noting some municipalities might experience trouble with the additional workload, the level of resources needed for administration, or the additional cost. Meanwhile, back in Cambridge, the municiplity also sold $56.5 million in general obligation municipal purpose loan of 2017 Series B bonds competitively on March 1. Morgan Stanley submitted the winning bid with a true interest cost of 2.303%. Proceeds from that sale will benefit sewer and stormwater, energy efficiency and street repair citywide, including Cambridge Common and Harvard Square. Neighborly’s director of business development, Pitichoke Chulapamornsri, said the firm structures municipal bond financings to connect a city’s capital plan with its residents—or, as he put it: “We are excited to help redefine the ‘public’ in public finance….Communities that are innovative and engaged are usually college towns: They are the ones with the most participation.”

Stay or Not? Puerto Rico Resident Commissioner Jennifer González Colón reports that an extension the stay on litigation of the PROMESA debt litigation stay is unlikely, notwithstanding Gov. Ricardo Rosselló’s proposed extension as incorporated in his proposed fiscal plan the Governor said he was seeking, with Del. González Colón (D-P.R.), Puerto Rico’s non-voting representative Congress noting there simply was insufficient time for Congress to act to amend PROMESA before the end of the stay. (PROMESA set the stay on debt-related suits against the Commonwealth on Feb. 15th, but allowed the PROMESA Oversight Board the option of moving it to May 1, which it did at the end of January.) Gov. Rosselló, in his plan, has argued that it was reasonable to ask for an extension, because his predecessor failed to use his time in office after PROMESA’s enactment to seek a negotiated debt restructuring: he said the extension would allow his administration time to release FY2015 and 2016 financial information, noting he would prefer reaching a negotiated agreement with creditors, rather than having a court impose restructuring terms. (Title VI of PROMESA allows the Oversight Board to reach negotiated solutions with municipal bondholders while the stay is in effect.) Indeed, in his plan he submitted at the end of last month, Gov. Rosselló said the Board probably will start PROMESA Title III’s court-supervised bankruptcy process before the stay elapses. Unsurprisingly, groups representing holders of both general obligation and Puerto Rico Sales Tax Financing Corp. (COFINA) senior bonds have said they are opposed to extending the litigation stay: José F. Rodríguez, an individual investor, as well as several investment firms, such as Decagon Holdings, GoldenTree Asset Management, and Whitebox Advisors—who are the main bondholders of the Puerto Rico Sales Tax Financing Corporation (COFINA)—will appeal U.S. District Court Judge Francisco A. Besosa’s ruling in favor of several general obligation bondholders, spearheaded by the Lex Claims and Jacana Holdings funds.  Mr. Rodríguez’s intentions—and those of several investments funds—to appeal the ruling at the First Circuit Court of Appeals was disclosed on Monday, making this the sole lawsuit against the U.S. territory which is currently active, after the approval of PROMESA last year, and in the midst of the automatic stay on litigations decreed by the federal statute. The plaintiffs are holding nearly $2 billion in COFINA senior notes.

According to the court’s notice, Mr. Rodríguez and the funds led by Decagon will go to the federal court to request revocation of Judge Besosa’s ruling: the Judge had agreed to hear Lex’s case, notwithstanding the request made by the main COFINA bondholders, Puerto Rico, and the PROMESA Oversight Board to apply the automatic stay on litigation. Last month, Judge Besosa—who had previously ordered Puerto Rico not to lose any time in commencing negotiations with its creditors—concluded that Lex’s lawsuit should be examined on its merits, with this judicial effort coming, even as the territory’s general obligation bond holders have asked Judge Besosa to declare the Emergency Moratorium Act unconstitutional, arguing that the enactment of the statute prompted Puerto Rico to default on its general obligation bonds other debt obligations. GO bondholders have also asked Judge Besosa to ban the government from paying COFINA bondholders—who are essentially the only ones who continue receiving payments for the amount they are owed, and to declare COFINA a null structure, since it served to divert the funds which it believes belong to the central Government. In his verdict, Judge Besosa denied the Government’s petition to halt the case and authorized the PROMESA Oversight Board to intervene in the lawsuit; however, he rejected the request made by COFINA’s primary bondholders to be part of the lawsuit to determine if the stay on litigations is applicable or not. In the wake of his decision, the Oversight Board filed a motion to appeal the decision—a request to which Puerto Rico has yet to intervene—notwithstanding apprehensions that the Lex Claims litigation could result in certain of the territory’s assets being frozen, something which would be likely were Judge Besosa to determine that the Moratorium Act is unconstitutional. According to the case file at the Court of Appeals, the Oversight Board has until March 24th to act.  

COFINA Under Attack. Likewise, the appeal made by the group of COFINA’s primary bondholders in the Lex Claims case arrives at a time when the GO bondholders have launched a media campaign asking for the elimination of the public corporation that issues debt payable with the Puerto Rico Sales and Use Tax (IVU, by its Spanish acronym). Last week, Senate President Thomas Rivera Schatz and House Speaker Carlos “Johnny” Méndez backed COFINA and pointed out that the entity was lawfully created with the endorsement of both main political parties. However, in the fiscal plan prepared by Ricardo Rosselló Nevares’s administration and certified by the OB on Monday, the IVU funds that are sent every year to COFINA appear as part of the revenues the Government would use to pay for public services. In that sense, Rosselló Nevares’s plan is an echo of what former Governor Alejandro García Padilla did, which was to combine all revenues that, according to the bond contracts, should have been reserved for the repayment of the debt. According to Gov. Rosselló Nevares’s plan, one of the revenues would be what is allocated to the General Fund—10.5% of the IVU—, but the plan also adds an allocation identified as “Additional IVU”. In this allocation, which is referred to COFINA, the IVU allotments to foster the film industry and for the Municipality Financing Corporation add up to $850 million this fiscal year. The amount increases to $906 million in FY 2019, and continues to increase until it reaches $9.936 billion in 10 years.

 

Breaking Up Is Hard to Do.

eBlog, 03/06/17

Good Morning! In this a.m.’s eBlog, we consider the trials and tribulations of really emerging from the largest chapter 9 municipal bankruptcy in American history; then we turn to an alternative to municipal bankruptcy: dissolution.

The Hard Road of Exiting Municipal Bankruptcy: A Time of Fragility. Christopher Ilitch, the Chief Executive Officer of Ilitch Holdings Inc., companies in Detroit which represent leading brands in the food, sports, and entertainment industries (including Little Caesars, the Detroit Red Wings, the Detroit Tigers, Olympia Entertainment, Uptown Entertainment, Blue Line Foodservice Distribution, Champion Foods, Little Caesars Pizza Kit Fundraising Program, and Olympia Development), notes that “We are at a critical time in Detroit’s history,” speaking at the Detroit Regional Chamber’s Detroit Policy Conference: “There’s been no community that’s been through what Detroit has been through. Through the depths, there’s been a lot of choices.” Indeed, as the very fine editor of the Detroit News, Daniel Howeswrote: “There still is, and how they’re made could meaningfully impact Detroit’s arc of reinvention: despite a booming development scene spearheaded now by the Ilitch family’s $1.2 billion District Detroit, Quicken Loans Inc. Chairman Dan Gilbert’s empire-building, more effective policing and a burgeoning downtown scene, four words loom: “We’re not there yet.” Mr. Howes notes that the cost of new construction projects still cannot be fully recouped through commercial and residential rents, adding: “The business climate, including taxes and regulation, still is not as attractive as it could be. And longstanding residents in the city’s neighborhoods worry that the reinvention of downtown and Midtown risks leaving them behind.” Or, as Detroit City Council President Brenda Jones puts it: “We have been talking about downtown and Midtown so much, and we know downtown and Midtown are important…If we are going to subsidize development, we would like to see something in it for us as well.” That is, exiting chapter 9 bankruptcy is not a panacea: one’s city still confronts a steep hill to execute its plan of debt adjustment—and a hill the scaling of which comes at higher borrowing costs than other cities of the same size. That is to say, long-term recovery has to involve the entire community—not just the municipal government. Or, as Mr. Howes notes: “Business leaders stepped in to acquire new police cruisers and EMT trucks, even as some of them finance ‘secondary patrols’ of downtown districts. The moves by General Motors Co. and Gilbert’s Rock Ventures LLC, to name two, to employ off-duty Detroit police officers are supported by Detroit Police Chief James Craig…The partnership has been bipartisan and regional. It’s been public and private, city and suburb. It’s required Republicans to act less Republican and Democrats to act less Democratic. That’s not because either side is suddenly non-partisan, but because the long history of confrontation and suspicion chronically under-delivers.” But he adds the critical point: “[A]s the city moves into an election year, as the memories of recessionary hardship dim, as the construction and investment boom continues. None of it is guaranteed, including collaboration forged by leaders under difficult circumstances…If there’s any town in America that can make its virtuous circle become a vicious cycle, Detroit is it. Remembering what’s worked, what hasn’t, and how inclusion can improve the chances for success remains critical…It’s a tricky balance that depends most on leadership and transparency so long as the macro-economic environment remains positive. If there are two themes connecting the reinvention of Detroit with its present, they are that a) experts expect the building and redevelopment boom to continue and b) neighborhood concerns are real and should not be dismissed.” In Detroit, it turned out going into chapter 9 municipal bankruptcy—a slide enabled by criminal behavior of its Mayor, and the profound failure to make it a city on a hill—a city which would draw families and businesses—was easy. That means getting out—and staying out—is the opposite in this fragile time of recovery, or, as Moddie Turay, executive vice president of real estate and financial services at the Detroit Economic Growth Corp., notes: “There’s a ton that’s happening here. We’re just not there yet…We have another five or so years to go. We are at a fragile time — a great time in the city, but still a fragile time.”

Disappearville? Breaking Up Is Hard to Do. Mayor Margaret J. Nelms and her Council Members in Centerville, North Carolina have voted to dissolve the town’s charter and become unincorporated in the wake of voters’ rejection, in January, of an effort to raise property taxes. The municipality (town), founded in 1882, in the rural northeastern corner of Franklin County had a population of 89 as of the 2010 census, a ten percent decline from the previous census: this is a municipality without a post office or a zip code—or, now, a future. It was incorporated during the same time period as the dissolution of the nearby town of Wood in 1961, roughly 80 years after first settlement. Unlike elected officials of other Franklin County municipalities (as well as the county itself) which have four-year terms, in Centerville, the Mayor and its three-member Town Council are elected every two years. The city’s downtown consists of two small old-fashioned country stores—Arnold’s and The Country Store, with one also the local gas station. The City has its own volunteer fire department: there is no police department, so Centerville—like the surrounding unincorporated area—is patrolled by the Franklin County sheriff.

Sen. Chad Barefoot (R), whose district includes Centerville, the sponsor of the state legislation [Senate Bill DRS45094-LM-35 (02/16)] to dissolve the municipality, noted: “There are a lot of towns like Centerville in North Carolina…What they’re doing is pretty courageous. They’re acting like adults. It’s something very hard to do, but it’s very responsible.” His proposed bill, the Repeal Centerville Charter, will allow the dissolution of the town, except that the governing board of the Town of Centerville would be continued in office for days thereafter for the sole purpose of liquidating the assets and liabilities of the Town and filing any financial reports which may be required by law, with any remaining net assets to be paid over to the Centerville Fire Department, which would be directed to use those funds for some public purpose. (In Centerville, the main municipal services provided to residents are: streetlights in the town center; Centerville also pays for an annual audit and holds municipal elections, although only a dozen citizens voted in the most recent municipal election, in 2015.) Centerville will continue to exist as a community, but any local-government services will be provided by the county: any remaining municipal funds left over after the town is unincorporated will be donated to the local volunteer fire department, according to the legislation. Dissolution is a painful choice: Frank Albano, the owner of an antique store in Centerville, rued the city did not consider other fiscal options, such as charging businesses like his an $100 annual operating fee, or asked $5 per float in the New Year’s Day parade. He notes: “The more local the government is, the better.”

The decision to dissolve is, however, not new: it was nearly a century ago that Farrington Carpenter, a Harvard-educated rancher in Colorado, noted that—at the time—there were 20 counties in the Mile High state with populations under 5,000. Municipalities—and their voters—rarely agree to give up their identities, leading him to query: “How can such small counties afford the cost of a complete county government?”  On the other end of the country, in Pennsylvania, home to more municipalities than any state in the union, running the gamut from metropolitan cities to first, second, and third class townships, it has long been a vexing governance conundrum how such a governing model is sustainable. Indeed, James Brooks, my former colleague from when I workd at the National League of Cities, where he serves as Director of City Solutions, reports that according to NLC’s 2015 report examining the economic vitality of cities, the smallest cities have generally been slower to recover—or, as one commentator describes it: “They can’t solve their problems themselves…Wealth has left these little cities to such a degree that they’re basically bankrupt.”

Challenges in Rebounding from Insolvency or Municipal Bankruptcy

eBlog, 02/27/17

Good Morning! In this a.m.’s eBlog, we consider new development plans for the insolvent, state-taken over Atlantic City, before turning to the post-chapter 9 municipal bankruptcy electoral challenges in Detroit—where the son of a former Mayor is challenging the current Mayor—and where the post-bankrupt city is seeking to confront its exceptional public pension obligations in a city with an upside down population imbalance of retirees to taxpayers.

Spinning the Fiscal Turnstile in Atlantic City? Since New Jersey’s Casino Reinvestment Development Authority (CRDA) developed its Tourism District master plan for Atlantic City five years ago, five casino have closed—casinos with assessed values of $11 billion. Those closures appeared to be the key fiscal destabilizers which plunged the city into near municipal bankruptcy and a state takeover. Now the Authority, which handles redevelopment projects and zoning in the Tourism District (The rest of Atlantic City is under the city’s zoning jurisdiction—albeit a city today taken over by the state, and where the Development Authority was given authority by the state over the Tourism District in 2011) has approved spending $2 million for refurbishing. Robert Mulcahy, the Chairman of the authority’s board of directors, states: “The master plan is done to streamline zoning, help eliminate red tape, encourage proper development in the appropriate district, and stimulate investment in commercial, entertainment, housing, and mixed-use properties…This provides a vision to what we want to do.” The proposed land-use regulations’ twenty-five objectives include providing a zoning scheme to stimulate development and maintain public confidence in the casino gaming industry as a unique tool of the city’s urban redevelopment. The new zones would allow for mixed use near the waterfront, and retail development around the Atlantic City Expressway and its waterfront under the state agency blueprint intended to make it easier for companies to turn old industrial buildings into commercial and waterfront areas, to build amusement rides off the Boardwalk, maybe even incentivize craft brewers and distillers to open businesses.  

CRDA Director Lance Landgraf noted: “The city last changed the zoning along the Boardwalk when casinos came in.” Similarly, Atlantic City Mayor Don Guardian, who is a CRDA board member, noted: “If we talked 10 years ago about the Southeast Inlet, I think most people saw it as a Miami Beach with a bunch of high-rises that would go from Revel to Brigantine Inlet…Times have changed. People are now looking for mixed-use type of things, which is certainly what is important.” According to the proposed plan, the new tourism district would be intended to maximize recreational and entertainment opportunities, including the growing craft beer trend. Smaller breweries and distilleries have expressed interest in operating in the city, according to the draft plan, which notes it “seeks to reinvigorate the Atlantic City experience by enhancing the Boardwalk, beach and nearby streets through extensive entertainment and event programming; creating an improved street-level experience on major thoroughfares; offering new and dynamic retail offerings and increasing cleanliness and safety.”

Post Chapter 9 Leadership.  Coleman Young II, a state Senator in Michigan representing Detroit, sitting beneath a photograph of his late father and former Detroit Mayor Coleman Young, has officially launched his challenge against current Detroit Mayor Mike Duggan, claiming the Motor City needs a leader who focuses on helping residents who are struggling with unemployment and other hardships, and criticizing Mayor Duggan for what he called a lack of attention to Detroit’s neighborhoods, noting: “We need change, and that is why I am running for mayor: I will do whatever it takes—blood, sweat, tears, and toil—and I will fight to the very end to make sure that justice is done for the City of Detroit…In announcing his challenge, Sen. Young recalled his father’s focus on jobs when he served as Detroit’s first black mayor: “I want to put people back to work just like my father, the honorable Coleman Alexander Young did…He is turning over in his grave right now!”

Interestingly, Sen. Young’s challenge came just days after last week’s formal State of the City address by Mayor Duggan—an address in which he focused on putting Detroiters to work and investing in neighborhoods—announcing a new city program, Detroit at Work, which is focused on training Detroit residents for available jobs—a speech which candidate Young, in his speech, deemed a “joke,” stating: “I think it’s kind of funny he waits for four years and now starts talking about the neighborhoods…As far as I’m concerned, he’s just somebody that’s in the way and needs to go. It’s time for change. It’s time for reform.” (Detroit’s primary will be in August; the election is Nov. 7th.)

Rebound? Whomever is elected next November in Detroit will confront lingering challenges from Detroit’s largest municipal bankruptcy in U.S. history. That July 19th filing in 2013, which then Emergency Manager Kevyn Orr described  as “the Olympics of restructuring,” had been critical to ensuring continuity of essential services and critical to rebuilding an economy for the city—an economy besieged after decades of population decline (dropping from 1,849,568 in 1951 to 713,777 by 2010), leaving the city to confront an estimated 40,000 abandoned lots and structures and the loss of 67 percent of its business establishments and 80 percent of its manufacturing base. The city had spent $100 million more, on average, than its revenues since 2008. According to the census, 36 percent of its citizens were below the poverty level, and, the year prior to the city’s bankruptcy filing, Detroit reported the highest violent crime rate for any U.S. city with a population over 200,000. Thus, as the city’s first post-bankruptcy Mayor, Mayor Duggan has faced a city with vast abandoned properties.

Interestingly, Steve Tobocman, the Director of Global Detroit, an economic-development nonprofit which focuses on maximizing the potential of immigrants and the international community, said that enacting municipal policies which welcome foreign-born residents could be a critical strategy to reverse the population loss: “No American city has been able to rebound from population loss without getting serious about immigration growth…In 1980, 29 of the 50 largest cities lost population. Most of the cities that lost population have since reversed course due to an influx of immigrants. No American city has been able to rebound from population loss without getting serious about immigration growth.” Now that avenue could be closing with President Trump’s efforts to curtail immigration, especially from Mexico and the Middle East, leading Mr. Tobocman to note he had no reason to anticipate any help from Washington, D.C. in helping rebuild Detroit’s population, or energizing its economy, with immigrants. Rather, he warns, he is apprehensive that other policy promises, particularly the proposed border wall with Mexico, actively threaten Michigan’s economy: “Mexico is our second-largest trading partner after Canada…Metro Detroit is the largest metro area trading with Mexico. One hundred thousand jobs are supported by our trade with Mexico.”

Upside Down Fiscal Challenge. A key challenge to Detroit, because of the inverted fiscal pyramid creating by its population decline, is there are far fewer paying into to Detroit’s public pension system, against far more receiving post-retirement pensions, sort of an upside down fiscal dilemma—and one which, increasingly, confronts the city’s fiscal future. Now Mayor (and Candidate) Duggan has announced a plan he believes will help Detroit to city meet its 2024 balloon payment on its public pension obligation, or, as Detroit Chief Financial Officer John Hill puts it, a plan designed to be more than adequate to address the looming future payment of more than $100 million owed beginning in 2024: “What the mayor is proposing is that we take money now and put into a pension protection fund and then use that money in 2024 and beyond to help make some of those payments: So part of the money would come from the budget, and the other would come from the fund,” describing the provisions in Detroit’s plan of debt adjustment for down payments to the city’s pension obligation in Mayor Duggan’s $1 billion general fund budget for the 2017-18 fiscal year the Mayor presented to the Detroit City Council at the end of last week. Mr. Hill said that the payment plan would give the city budget longer to catch up to the $132 million it would have to pay going forward, describing it as “really a way for us to proactively address the future pension obligation payment and not wait to deal with it down the road.”

However, there appears to be a fiscal fly in the ointment: last year, in his 2016 State of the City speech, Mayor Duggan said that consultants who advised the city through its chapter 9 municipal bankruptcy had miscalculated the city’s pension deficit by $490 million—actuarial estimates at the time which projected a payment of $111 million in 2024—a figure subsequently increased by the actuary to $194.4 million—leading Mayor Duggan to assert that the payment had been “concealed” from him by former Detroit emergency manager Kevyn Orr during the city’s bankruptcy, with, according to the Mayor, Mr. Orr’s team using overly optimistic assumptions which made Detroit’s future pension payout obligations appear artificially low. The revised estimates have since forced the city to address the large future payment, beginning in FY2016, when the city set aside $20 million and another $10 million to start its pension trust fund, with the payment coming in addition to the $20 million contribution to the legacy plans the city is mandated to make under Detroit’s plan of debt adjustment. Now Mayor Duggan is proposing Detroit set aside an additional $50 million from a general fund surplus and another $10 million into the trust fund this year: the city projects it will have $90 million in the trust at the end of FY2017. In the following fiscal years, the city is proposing to add another $15 million to the fund, $20 million in FY2019, $45 million in FY2020, $50 million in FY2021, $55 million in FY2022, and $60 million for FY2023. Or, as Detroit Finance Director John Naglick describes it: “All total, we propose that the City would deposit $335 million into the trust fund through the end of FY23, with interest, the fund is projected to grow to $377 million.” Mr. Naglick adds that Detroit expects that the general fund would be required to contribute a total of $143.2 million beginning in FY2024: “We propose to make that payment by pulling $78.5 million out of the trust and appropriating $64.7 million from the general fund that year.” CFO Hill noted that by addressing the 2024 obligation payment with the plan, Detroit would remain on track to exit state oversight as projected, stating: “We believe that after we have executed three balanced budgets and met a number of other requirements that the Detroit Review Commission could vote to waive their oversight…We believe that one of the factors that they are going to want to see to support that waiver is that we have proactively dealt with the pension obligations in 2024.” There could, however, be a flaw in the ointment: Mayor Duggan warned last week that Detroit may decide to sue Mr. Orr’s law firm, Jones Day, if the city finds that Mr. Orr had an obligation to keep the city informed on the pension payments.

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.

Post Chapter 9 Challenges

eBlog, 2/22/17

Good Morning! In this a.m.’s eBlog as we remember the first President of our country,  we consider the accomplishments and challenges ahead for the city recovering from the largest ever municipal bankruptcy; then we visit the historic Civil War city of Petersburg, Virginia—as it struggles on the edge of fiscal and physical insolvency; from thence, we roll the dice to witness a little fiscal Monopoly in the state-taken over City of Atlantic City, before finally succumbing to the Caribbean waters made turbulent by the governance challenges of a federal fiscal takeover of the U.S. territory of Puerto Rico, before considering whether to take a puff of forbidden weed as we assess the governing and fiscal challenges in San Bernardino—a city on the precipice of emerging from the longest municipal bankruptcy in American history.   

State of a Post Chapter 9 City. Pointing to FY2015 and 2016 balanced budgets, Detroit Mayor Mike Duggan, in his fourth State of the City address, pointed to the Motor City’s balanced budgets for FY2015 and 2016 and said the city’s budget will be balanced again at the close of this fiscal year in June—progress he cited which will help the city emerge from state get oversight and back to “self-determination” by 2018. Mayor Duggan cited as priorities: job training, affordable housing, and rebuilding neighborhoods, orating at the nonprofit human rights organization Focus: HOPE on Oakman Boulevard on the city’s northwest side, where residents and others for decades have received critical job training. Mayor Duggan was not just excited about what he called the transformation of city services and finances in a city that exited municipal bankruptcy three years ago, but rather “what comes next,” telling his audience: “We’ve improved the basic services, but if we’re going to fulfill a vision of building a Detroit that includes everybody, then we’ve got to do a whole lot more…You can’t have a recovery that includes everyone if there aren’t jobs available for everyone willing to work.” Ergo, to boost job opportunities, Mayor Duggan announced a new initiative, “Detroit at Work,” which he said would help connect the Motor City’s job seekers with employers, deeming it a portal which would provide a “clear path to jobs.” He also discussed his administration’s program to help city youth secure jobs and the Detroit Skilled Trades Employment Program, a recent partnership with local unions to increase Detroit membership and boost job opportunities.

With regard to neighborhoods, Mayor Duggan touted his Neighborhood Strategic Fund, his initiative to encourage neighborhood development, especially in wake of the exceptional success of Detroit’s new downtown: this fund allocates $30 million from philanthropic organizations toward development, commencing with the engagement of residents in the areas of Livernois/McNicols, West Village, and in southwest Detroit to create revitalized and walkable communities—under the city’s plan to align with the city’s vision for “20-minute neighborhoods” to provide nearby residents with close, walkable access to grocery stores and other amenities—or, as Mayor Duggan noted: “If we can prove that when you invest in these neighborhoods, the neighborhoods start to come back. The first $30 million will only be the beginning. I want everybody to watch…If we prove this works…then we go back for another $30 million and another $30 million as we move across the neighborhoods all through this city.”

In a related issue, the Mayor touted the return of the Department of Public Works’ Street Sweeping Unit, which is preparing to relaunch residential cleanings for the 2017 season, marking the first time in seven years for the program. On the affordable housing front, Mayor Duggan addressed affordable housing, saying that future projects will ensure such housing exists in all parts of the city, referencing a new ordinance, by Councilwoman Mary Sheffield, which seeks to guarantee that 20 percent of the units in new residential projects which receive financial support from the city will be affordable: “We are going to build a city where there is a mix of incomes in every corner and neighborhood and we’re going to be working hard.”

But in his address—no doubt with his re-election lurking somewhere behind his words, Mayor Duggan reflected not just on his successes, but also some missteps, including his administration’s massive federally funded demolition program, now the focus of a federal probe and state and city reviews: that initiative has been successful in the razing of nearly 11,000 abandoned homes since the spring of 2014, but has also triggered federal and state investigations over spiraling costs and bidding practices: an ongoing state review of the program’s billing practices turned up $7.3 million in what the State of Michigan deems “inappropriate” or “inaccurate” costs: the vast majority in connection with a controversial set-price bid pilot in 2014 designed to quickly bring down big bundles of houses—an initiative over which Mayor Duggan has so far rejected the state’s assertion that about $6 million tied to costs of the pilot were inappropriate. Thus, yesterday, he conceded that the federal government’s decision to suspend the demolition program for 60 days beginning last August had been warranted, but noted the city has since overhauled procedures and made improvements to get the program back on track, so that, he said, he is confident the city will raze an additional 10,000 homes in the next two years.

For new initiatives, Mayor Duggan said the Detroit Police Department will hire new officers, and invest in equipment and technology, and he announced the launch of Detroit Health Department’s Sister Friends program, a volunteer program to provide support to pregnant women and their families. On the school front, the Mayor noted what he deemed a “complete alliance” between his office and the new Detroit Public Schools Community District school board, saying the city has joined the Board in its attempt to convince the state’s School Reform Office not to close low-performing schools. (As many as 24 of 119 city schools could potentially be shuttered as soon as this summer.) In a hint of the state-local challenge to come, Mayor Duggan said: “The new school board hasn’t had an opportunity to address the problem…We have 110,000 schoolchildren in this city, which means we need 110,000 seats in quality schools. Closing a school doesn’t add a quality seat. All it does is bounce our children around from place to place. Before you close a school, you need to make sure there’s a better alternative.”

Fiscal & Physical Repair. In a surprising turn of events in Virginia, the Petersburg City Council accepted a motion by Councilman Charlie Cuthbert to postpone the vote on moving forward with the bids for Petersburg’s aging water system, after the Council had been scheduled to vote on whether to move forward with the bids the city had received from Aqua Virginia and Virginia American Water Company to purchase the nearly insolvent city’s water and wastewater system. While the vote, by itself, would not have authorized such a sale, it would have paved the way for formal consideration of such proposals. Under his motion, Councilman Cuthbert outlined a plan to delay the vote, so the Council and the City would have more time to consider options, in part through the formation of a seven person committee, which would be separate from the one the Robert Bobb Group, which is currently overseeing the city in place of the Mayor and Council, has been proposing. Mayhap unsurprisingly, citizens’ reactions to a potential sale has been negative; thus there was approbation when Councilmember Cuthbert’s motion passed—even as it appears many citizen/tax/ratepayers appeared to be hoping for the bids to be scrapped entirely: many had spoken in strong opposition, and there were numerous signs held up in chambers for the Mayor and Council to read: “Listen to us for once, do not sell our water,” or, as one citizen told the elected officials: “We have a choice to make: to make the easy, wrong decision, or the hard, right decision,” as he addressed the Council. The city’s residents and taxpayers appear to want other options to be explored, with many citing reports of Aqua Virginia having trouble with the localities with which it holds contracts.

On the fiscal front, many citizens expressed apprehension that any short-term profit the city would realize by selling its system would be paid back by the citizens in the form of rate-hikes by Aqua Virginia or Virginia American, or as one constituent said: “Never have I seen private industry interested in what the citizens want…They’re going to come in here and raise the rates.” Interim City Manager Tom Tyrell had begun the meeting by giving a presentation outlining the problems with the system. Due to past mismanagement and a lack of investment over decades, the Petersburg water system is in urgent need of upgrades. Tyrell outlined certain deficiencies, such as water pumps that need replacing, and pipes nearly blocked by sediment build up. The water quality has never come into question, but Mr. Tyrell said that the system is very close to needing a complete overhaul: the projected cost needed to get the system completely up to standard is about $97 million. Mr. Tyrell stressed that water rates will need to increase whether or not the city sells the system, going over Petersburg’s water rates, which have been relatively low for many years, ranking near the lowest amongst municipalities across the Commonwealth of Virginia. Even if the rates were to double, he told citizens, the rates still would still not be in the top 15 amongst Virginia localities. The Council had received two unsolicited bids for the system in December, one from Aqua Virginia, a second from the Virginia American Water Company. The Robert Bobb Group recommended to the Council that it move forward to examine the detailed proposals in order to “keep all options open.” The cost of moving forward with the proposals will cost approximately $100,000, which includes the cost of examining each proposal. Thus, the Robert Bobb Group recommended that the Council put together a citizens’ advisory group as an outside adviser group. The council gave no timetable on when they will officially vote to see if the bids will go forward. The people who will make up the seven person committee were not established.

Monopoly Sale. Atlantic City has sold two of its Boardwalk properties and several lots along the Inlet for nearly $6 million, closing on three properties at the end of last week, according to city officials—meaning that a Philadelphia-based developer has gained control of five waterfront properties since 2015. His purchases, he said, reflect his belief in Atlantic City’s revival. Mayor Don Guardian reported the city had received wire transfers for the former Boardwalk volleyball court on New Jersey Avenue ($3.8 million), Garden Pier ($1.5 million) and 12 lots bordered by the Absecon Inlet, Oriental Avenue and Dewey Place ($660,000), according to Atlantic City Planning and Development Director Elizabeth Terenik, all part of a way to raise money for the insolvent municipality – and to spur redevelopment, or, as Ms. Terenik noted: “The effort was part of the Guardian administration’s initiative to leverage underutilized or surplus public lands for economic development and jobs, and to increase the ratable base.” How the new owner intends to develop the properties or use them, however, is unclear—as is the confusing governance issue in a city under state control. The Inlet lots were sold in a city land auction last summer, purchased through an entity called A.C. Main Street Renaissance, according to city officials: the Atlantic City Council approved the auction and voted to name the purchaser, conditional redeveloper of Garden Pier and the volleyball court last year. Unsurprisingly, Council President Marty Small deemed the sales as great news for the city, saying they would bring revenue, jobs, and “new partners to the Inlet area…This instills investor confidence…It lets me know that we made the right decision by going out to auction for land and getting much-needed revenue for the city.”

Paying the Piper. Atlantic City has also announced its intention to issue $72 million in municipal bonds to pay for its tax settlement with the Borgata casino, securing the funds to cover its property tax refunds by borrowing though New Jersey’s Municipal Qualified Bond Act (MQBA), according to Lisa Ryan, a spokeswoman for the New Jersey Department of Community Affairs, which is overseeing the state takeover which took effect last November, with her announcement coming just a week after the state announced it had struck a deal for Atlantic City to pay less than half of the $165 million it owes the Borgata in tax appeals from 2009 to 2015, or, as Ms. Ryan noted: “Qualified bonds will be issued in one or more tranches to achieve the settlement amount…The parties are confident in the City’s ability to access the capital market and raise the necessary amount needed to cover the financing,” albeit adding that the city’s borrowing costs would not be known until the sale. (The Garden State’s MQBA is a state intercept program which diverts a municipality’s qualified state aid to a trustee for debt service payments.) Prior to the New Jersey’s state takeover of Atlantic City, city officials had proposed paying $103 million for a Borgata settlement through MQBA bonding as part of a five-year rescue plan—a plan which the state’s Department of Community Affairs had rejected.

As the state taken over city struggles to adjust, Mayor Don Guardian, in a statement, noted: “I’m glad the state is seeing the wisdom in what we proposed in our fiscal plan back in November…I applaud them for getting the actual amount due upfront lower, even though they have had over two years to do it. It remains to be seen how the other $30 million will be taken care of, but the quicker we can get this issue off the table, the quicker we can move forward tackling the remaining legacy debt.” Atlantic City last utilized New Jersey’s state credit enhancement program in May of 2015 to pay off an emergency $40 million loan and retire $12 million of maturing bond anticipation notes, paying a substantial fiscal penalty for a $41 million taxable full faith and credit general obligation municipal bond sale to address its loan payment with Bank of America Merrill Lynch pricing the bonds to yield at 7.25% in 2028 and 7.75% in 2045. Today, the city, under state control, is seeking to recover from five casino closures since 2014, closures which have bequeathed it with $224 million in outstanding municipal bond debt—debt sufficient according to Moody’s to have saddled the city with some $36.8 million in debt service last year.

Grass Fire? Two separate groups have now filed lawsuits challenging San Bernardino’s Measure O, the initiative citizens approved last November to allow marijuana dispensaries in the city—a measure yet to be implemented by the city—and one which now, according to City Attorney Gary Saenz, will almost surely be further delayed because of the suit. Should Measure O be struck down, the related, quasi-backup Measure N, a second marijuana initiative San Bernardino voters approved last November, but which received fewer votes, would pop up, as it were. The twin suits, one filed by a group of marijuana-related entities, the second by interested property owners in San Bernardino, challenge Measure O on multiple grounds, including the measure’s language determining where dispensaries may operate in the city. One suit charges: “The overlay zones together with the parcel numbers and the location criteria limit the locations within the City of San Bernardino where marijuana businesses may be permitted to only approximately 3 to 5 parcels of land within the entire city, and all of these parcels of land are either owned or controlled by the proponents of Measure O…The locations of these 3 to 5 parcels of land, furthermore, are incompatible for a medical marijuana business by virtue of the locations and surrounding land uses and for this reason are in conflict with the City of San Bernardino General Plan.” Unsurprisingly, Roger Jon Diamond, the attorney for the proponents of Measure O, disputes that number and predicts the challenge will fail, noting that thirteen marijuana dispensaries and related groups that describe themselves as non-profits are operating in San Bernardino or which have invested substantial sums of money in plans to operate in San Bernardino. The soon to be out of chapter 9 municipal bankruptcy city, prior to citizen adoption of Measure O, means, according to Counselor Diamond, that the dispensaries have been operating illegally, or as he put it: “There’s a concept in the law called clean hands: If you don’t have clean hands, you can’t maintain a lawsuit…Here we have people who don’t qualify (to operate a dispensary in their current location), complaining that they would not become legal under the new law. It sounds like sour grapes.”

The second, related suit, filed earlier this month, calculates a somewhat higher (not a pun) number of eligible locations—between three to twelve, but makes the same observation regarding physical location: “We think there is a financial interest in the people who wrote it up,” said Stephen Levine of Milligan, Beswick Levine & Knox: “We don’t think that is fair, because it was so narrowly constricted. Zoning by parcel numbers is a highly unusual practice in California. Let’s include Colorado and Washington State in there, too; they don’t use parcel numbers for this.” (Measure O restricts marijuana businesses to marijuana business overlay districts, which are identified by parcel number, and further prohibits the businesses from being within 600 feet of schools or residentially zoned property.) In this case, Mr. Levine is representing a consortium of property owners calling themselves AMF as well as Wendy McCammack, a business owner and former San Bernardino Councilmember. According to Mr. Levine, the plaintiffs’ interest is in possible changes in assessed property values due to the location of the dispensaries.

Getting High on the City Agenda. The City Council last week, in a closed session, discussed the lawsuit in closed session; however, City Attorney Saenz reported he was unaware aware of the lawsuit and had yet to decide upon a response to either, noting: “We haven’t totally assessed the merits of the lawsuit, nor how we’ll respond.” Nevertheless, the lawsuits’ arguments appear likely to interfere with the city’s process of incorporating Measure O into the development code and beginning to issue permits, or, as Mr. Saenz notes: “It (the AMF lawsuit) very much calls into question the validity of Measure O…Being a city of very limited resources, we don’t want to expend resources on an implementation that’s never going to occur. That would be a waste of resources.” The suits will also complicate governance: last month the city, on its website, and in a letter to interested parties, said it would provide an update in March on when the marijuana measure would be implemented: “City departments are in the process of integrating the provisions of Measure O into the City’s existing Development Code, developing procedures for receiving applications, and identifying provisions that may require interpretation and clarification prior to implementation…The San Bernardino Development Code and Measure O are both complex legal regulatory frameworks and it will require time to properly implement this new law.”

Governance & Challenges. Puerto Rico Gov. Ricardo Rosselló has arrived in Washington, D.C., where he will meet with his colleagues at the National Governors Association and join them at the White House tomorrow; he will also dine with Vice President Mike Pence this week. Last week, in Puerto Rico, he had hosted Chairman Sean Duffy (R-Wisc.), of the House Financial Services Subcommittee on Housing & Insurance, and an author of the Puerto Rico Oversight, Management and Economic Stability Act – in San Juan.  Chairman Duffy told the Governor he is available to amend PROMESA to ensure that the PROMESA oversight board treats Puerto Rico fairly, according to an office press statement. The lunch this week might occasion an interesting discussion in the wake of the Governor’s claim that the PROMESA Oversight Board’s plans for austerity may violate federal law: the Governor’s Chief of Staff, William Villafañe, this week stated: “The Fiscal Supervision Board officials cannot act outside of the law that created the body. If the board were to force the implementation of a fiscal plan that affects people’s essential services, it would be acting contrary to the PROMESA law.” His complaints appear to signify an escalation of tensions between the U.S. territory and the PROMESA Board: Mr. Villafañe added: “The [PROMESA] board is warned that it must act in conformance with the law…The commitment of Governor Ricardo Rosselló is to achieve economies that allow government efficiency, doing more with fewer expenses, without affecting essential services to the people and without laying off public employees.” If anything, Mr. Villafañe added fuel to his fire by criticizing the Board’s new interim executive director, Ramón Ruiz Comas, in the wake of Mr. Ruiz’ radio statement this week that if Gov. Rosselló did not present an acceptable fiscal plan by the end of February, the PROMESA Board would provide its own—and the plan would be deemed the legally, binding plan—in reaction to which, Mr. Villafañe had responded: “To make expressions prejudging a fiscal plan proposal that the board has not yet seen demonstrates on the part of the board improvisation and lack of a collaborative attitude for the benefit of the Puerto Rican people,” adding that “The board must be aware that the federal Congress will supervise the board.” He went on to say that when the Governor presents a fiscal plan, Congress will be aware of the way the board evaluates it.

Mr. Villafañe’s complaints and warnings extend tensions between the board and the U.S. territory: even before the Governor took office in January, a Rosselló official complained that the board was seeking a $2 billion cut in spending. On Feb. 13 the governor rejected the board’s claimed right to review bills before they are submitted to the Puerto Rico legislature. On Jan. 18 the board sent a letter to Gov. Rosselló stating that spending cuts and/or tax raises equaling 44% of the general fund would have to be made in the next 18 months. At its Jan. 28 meeting, board chairman José Carrion, for emphasis, said twice that some governor-proposed changes to the board’s Jan. 18 proposals may be OK, “as long as the ultimate fiscal plan is based on solid savings and revenue projections, a once and done approach, and not simply on hope or predictions that various changes will generate more revenues in the future.”

A Midwestern Tale of Two Cities

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eBlog, 2/14/17

Good Morning! In this a.m.’s eBlog, we consider the tale of two cities in Detroit: is a city set to displace Chicago as the capitol of the Midwest—or is a city with its fiscal future in re-jeopardy, because of its inability and conflicts with the state over how to educate its children in a way that will create incentives for families to want to move back into the city?

Post Chapter 9 Reinvention? In opting to relocate its regional headquarters to downtown Detroit, Microsoft has sent a message that the city’s emergence from the largest chapter 9 municipal bankruptcy in American history is a success: the city is even threatening to displace Chicago as a regional headquarters of choice for the Midwest. That’s an honor long owned by Chicago. The extraordinary changes in the city—fashioned through the path-breaking efforts not just of former emergency manager Kevyn Orr and now retired U.S. Bankruptcy Judge Steven Rhodes, but also the fiscal rebuilding blueprint, the city’s court-approved plan of debt adjustment, a plan aptly described by the Detroit News an “arc of change, the redemptive power of reinvention, and critical facts on the ground say a bid by Detroit and southeast Michigan to be part of that conversation could be real for those with the courage to take a real, hard look.”  The paper, continuing its own comparison of Detroit to the Windy City—two cities which appear to be fiscally headed in opposite directions, aptly notes the respective state roles, contentious as they are, but noting that while the Michigan government is “aggressively attacking its unfunded liabilities,” instead of being (in Illinois) a state legislature “deaf to the fiscal ticking time bomb of its state pensions.” An iconic city’s recovery from bankruptcy is, after all, not just designing and implementing an architectural and fiscal turnaround, but also reversing the fiscal and economic momentum; thus, unsurprisingly, in a reminder of the old aphorism: “Go West, young man;” today it is civic leader, Quicken Loans Inc. Chairman Dan Gilbert who actively recruits young talent to the Motor City, telling potential new Detroiters: anyone can go work in Chicago and most will change nothing, but you could make a difference working and living in Detroit. Or, as the News describes it: “So could companies looking to reduce costs, find a vibrant food, arts and culture scene, and join an enthusiastic business community with global connections. They could find both in Detroit. Or in Ann Arbor, with the University of Michigan.”  

Might There Be a Fly in the State Ointment? Yet for a city one-third its former size, the more pressing challenge to its fiscal future is likely to rest on the perceived quality of its public schools—schools in a city where the Detroit Public School system became physically and fiscally insolvent—and where the state intervened to not just appoint an emergency manager, but also where the legislature created and imposed what some deem the nation’s most economically disparate school system—or, as the New Jersey nonprofit EdBuild, in its report “Fault Lines: America’s Most Segregating School District Borders,” described it: nearly half of the households in Detroit Public Schools—49.2%—live in poverty, compared with 6.5% in Grosse Pointe Public Schools—with the non-profit noting to the Detroit News: “Fault Lines shows how school finance systems have led to school segregation along class lines within communities around the country, and how judicial and legislative actions have actually served to strengthen these borders that divide our children and our communities:” its report traces the economic gap between Detroit and Grosse Pointe schools to a 1974 U.S. Supreme Court ruling, Milliken v. Bradley, which blocked busing between districts to achieve racial integration, writing: “Income segregation in the Detroit metropolitan area parallels the racial segregation that inspired the Milliken case and has worsened since the case was first argued.” Today, there are some 97 traditional public schools in Detroit, 98 charter schools, and 14 schools in the Education Achievement Authority, a controversial state-run district created in 2012—that is, there are an estimated 30,000 more seats than students in the city in the wake of the state’s 2015 “rescue” of the Detroit Public Schools—a rescue of a public school district which had been under state control, and a rescue which pledged some $617 million to address the debt, but also invoked a number of unorthodox “reforms” which state legislators argued would promise a brighter future: the reforms included provisions which permit the hiring uncertified teachers, penalization of striking employees, and the outsourcing of academic roles, like the superintendent position, to surrounding districts, and the state closure of all schools that fall in the bottom 5 percent of academic performance for three years in a row: a category into which dozens of Detroit public schools fall. The state also authorized charter schools for Detroit.

Now, a new Michigan School Reform Office school closing plan has reignited debate in Detroit over how to fix the Motor City’s fractured system of public schools, less than seven months after the Michigan Legislature spent $617 million relieving Detroit Public Schools of crushing debt which had hovered on the brink of its own chapter 9 municipal bankruptcy. Indeed, the perceived fiscal threat to the city’s future has led Mayor Mike Duggan to deem the state school closing plan “irrational,” because many of the other nearby public schools in Detroit are on the brink of being deemed failing schools—or, as Mayor Duggan noted: “You don’t throw people out of the boat without looking out to see if there’s a life raft.” Moreover, the Mayor and the newly elected Board of Education for the Detroit Public Schools Community District have threatened to sue Gov. Rick Snyder’s administration to stop the proposed closures—closures which the state is evaluating to determine whether such closures would create unreasonable hardships for students, such as distance to other schools with capacity, if the buildings are closed. Ergo, unsurprisingly, Governor Snyder is confronting pressure from school leaders, parents, businesses and civic groups to consider the impact that another round of school closings might have on Detroit’s ongoing recovery—and on its neighborhoods and commercial corridors hard hit by decades of abandonment and disinvestment—or, as Veronica Conforme, Chancellor of the Education Achievement Authority, notes: such closures would “cause disruption in the neighborhoods.”

The state-municipal tussle relates to the tug-of-rope state-local challenge about how to address Detroit’s worst-performing schools under a 7-year-old state statute which has never been fully enforced—and comes as the Michigan School Reform Office has announced that twenty-five Detroit schools may be closed in June due to persistently low student test scores—creating apprehension that these closures, coming at a time when then city’s focus on fuller implementation of its approved plan of debt adjustment envisions revitalization shifting from downtown and Midtown to Detroit’s vast neighborhoods and commercial corridors. Unsurprisingly, some business and community leaders are concerned that the impact mass school closings could undercut the city’s efforts to turn around pockets of the city which have been showing signs of rebirth, or, as Sandy Baruah, President and CEO of the Detroit Regional Chamber, who worries that abruptly closing two dozen schools could “create other crises” in city neighborhoods, puts it: “I don’t want to see neighborhoods that are on the early path to recovery be dealt a setback.” That is, in the post chapter 9 city, rebuilding neighborhoods must go hand in hand with schools: the presence of a school, after all, affects the assessed values of properties, residential and commercial, in a neighborhood.