Governance Insolvency?

eBlog, 2/10/17

Good Morning! In this a.m.’s eBlog, we consider an increasing governance insolvency in Petersburg, Virginia—a virtually fiscally insolvent municipality, Michigan Governor Rick Snyder’s request to the Michigan legislature for an additional $48 million for the City of Flint, and the efforts of Puerto Rico to adjust itself to the new administration and Congress in Washington, D.C.

Governance Insolvency? Petersburg, Virginia City Council members, at the first council meeting since residents had petitioned a court to remove the Mayor and a Councilmember from office, were confronted with copies of “Robert’s Rules of Order,” and an organizational chart explaining that the voters are in charge. Nonetheless, that was insufficient to prevent the Council from suspending its own rules over complaints from its own members and city residents to allow for a vote to permit the use of taxpayers’ dollars for the hiring of a private lawyer to defend Mayor Samuel Parham and Councilman W. Howard Myers from removal petitions. The move appeared to further inflame tensions between Petersburg’s governing body and the community it serves at a time when the Council has come under fire from good-government advocates and the ACLU of Virginia. The vote followed a brief recess called after Petersburg resident Ron Flock requested to learn when the Council had (publicly) voted to hire an attorney to defend Mayor Parham and Councilmember Myers, noting: “There should be no reason why (the City Attorney) cannot represent the defendants in this hearing…At what point did you as City Council approve this expenditure?” The query came in the wake, at the beginning of this week, of Richmond attorney, James Cornwell, appearing in court to defend the Mayor and Councilmember against allegations of “neglect, misuse of office, and incompetence” that voters from their respective wards had lodged in January in Petersburg Circuit Court. Councilmember Wilson-Smith noted: “This resolution does not say how much this is costing and where the money is coming from, and I would like to know that,” with regard to the proposed resolution in advance of her vote in opposition. Neither the Mayor nor Councilmember recused themselves from voting: each voted on the measure over the dissent of audience members, who at first murmured, then hooted their disapproval at their decision not to recuse themselves from the vote. The petitioners who are seeking to oust the two elected officials have supported their ouster in large part because of their perceptions about not only their roles in the city’s collapse into insolvency, but also allegations with regard to their ethical breaches and violations of open-government law. (Virginia statutes allow for the removal of elected officials for specific reasons, which include certain criminal convictions.)

City Council Ethics, Conduct, & Insolvency. The kerfuffle came as Robert Bobb, the former Richmond City Manager, whom the city hired last October to help address its insolvency, unveiled proposed revisions to the City Council’s rules, including provisions for Councilmembers’ conduct and a detailed explanation of state laws on open records. Mr. Bobb spent time on how those laws applied to public meetings, an issue identified by the ACLU of Virginia last November in an epistle sharply critical of Council practices which the ACLU wrote violated “the spirit of open-government laws.” Mr. Bobb also formally named Joseph Preston, whom the city had retained last October as the new City Attorney, as Petersburg’s official parliamentarian. (In fact, it was in October that Mr. Preston had defended a Council vote to hire the Bobb Group that several registered parliamentarians then said appeared to be in violation of both the Council’s rules at the time and Petersburg’s charter.) Mr. Preston told the Mayor and Council it was too soon to estimate what the cost to the city’s budget and taxpayers would be to defend that Mayor and Councilmember—with the case to commence before Petersburg Circuit Judge Joseph M. Teefey Jr. next week.

Not in like Flint. State of Michigan officials have decided to end the state-funded water subsidies which, since 2014, had helped Flint residents—a city where more than 40 percent of the residents live below the federal poverty level—and where the median household income is $24,862—pay their water bills after the city’s water system became contaminated with lead due to decisions and actions taken by Gov. Rick Snyder’s former appointed Emergency Manager. Word of the abrupt state cutoff spread yesterday in the wake of a senior advisor to the Governor sending a letter to the city’s interim chief financial officer, David Sabuda, that the state credits, which applied to the water portion of Flint utility customers’ accounts, would end at the end of this month: the March billing statement will be the last to include the water usage credits, which were 20 percent for commercial customers and 65 percent for residential. In addition, the state will also no longer provide $1.2 million in monthly funding for the water the city receives from the Great Lakes Water Authority. Flint Mayor Karen Weaver issued a statement expressing concern at the manner and abruptness of the state’s action; nevertheless, she described it as a welcome sign that the city’s water is improving. The Governor’s decision comes after, last December, charges were filed against two of Gov. Snyder’s former appointed state emergency managers for the city—they were accused of misleading the Michigan Department of Treasury into issuing millions in municipal bonds, but then misused the proceeds to finance the construction of a new pipeline and force Flint’s drinking water source to be switched to the contaminated Flint River. The decision also came just ten days after the filing of a $722 million class action lawsuit against the EPA on behalf of more than 1,700 residents impacted by the water crisis. In response to the abrupt state cutoff, however, Mayor Weaver described the Governor’s action as a sign that the city’s water quality had improved—albeit stopping short of saying it was entirely safe: “I am aware that the water quality in the City of Flint is improving and that is a good thing…We knew the state’s assistance with these water-related expenses would come to an end at some point. I just wish we were given more notice so we at City Hall, and the residents, had more time to prepare for the changes.”

Federalism, Governance, & Hegemony. Former Puerto Rico Governor Anibal Acevedo Vilá yesterday brought a message from the Popular Democratic Party (PDP) to U.S. Senate leaders, saying that the New Progressive Party has legislated “another rigged status consultation” to fabricate a majority in favor of statehood, meeting with Sen. Roger Wicker (R-Miss.), an old ally of his collective, and advisors of the Chair Lisa Murkowski (R-Alaska), Chair of the Senate Environment and Natural Resources Committee and Sen. Maria Cantwell (D-Washington). The apparent intention was to begin to build a relationship with Jeff Sessions, whom the U.S. Senate yesterday confirmed as the new U.S. Attorney General. It would be in his newly confirmed capacity that the Attorney General would be in a position to approve a plebiscite’s ballot definitions and educational campaign between statehood and political sovereignty (free association or independence), which the NPP Government has set for this coming June 11th. Mr. Acevedo Vilá noted that by excluding a Commonwealth definition from the consultation, be it sovereign or developed, “a very high percentage of the Puerto Rican population” has been excluded. The former Governor of the U.S. territory is pursuing the presidency of his party; he will face former Representative Héctor Ferrer by the end of the month. He was accompanied by a delegation of legislators from his party, such as Luis Vega Ramos and Brenda López de Arrarás, who have also had their own meetings with Members of Congress concerning status, healthcare, and federal tax incentives for investment in Puerto Rico.

The meetings came as the PROMESA Puerto Rico Oversight Board fired off two letters this month asserting its authority over Puerto Rico’s legislature as its effort to oversee the island’s economy and address the debt crisis have, unsurprisingly, encountered resistance from Puerto Rico’s elected officials. Last week, the PROMESA Board sent a letter to the governor’s representative on the board, Elías Sánchez, asserting that it has many ways it can control the legislature even though Puerto Rico has yet to adopt a fiscal plan, pointing to §207 and §303 of the Puerto Rico Oversight, Management and Economic Stability Act, which address the board’s oversight of the government’s handling of debt. In addition, the board noted §204(a)(1)-(2), which states, “Except to the extent that the oversight board may provide otherwise in its bylaws, rules, and procedures, not later than seven business days after a territorial government duly enacts any law during any fiscal year in which the oversight board is in operation, the Governor shall submit the law to the oversight board.” The federal law adds that such submission is supposed to be accompanied by an independent entity’s estimate of the law’s cost: if the board finds the law inconsistent with the fiscal plan, the board can ask for it to be corrected or blocked. In the PROMESA Board’s epistle of last week, the letter notes that its review of the laws “is independent of the existence of a certified fiscal plan.” Since this PROMESA section is titled “Review of activities to ensure compliance with fiscal plan,” however, this is unclear.

The issue arose even as, this week, the PROMESA Board fired off another missive stating: “We believe that all government entities need to do the utmost to reduce expenses, including those relating to professional service contracts, as soon as possible and as much as possible,” noting the board “is currently focused on the goal of certifying a ten-year fiscal plan for Puerto Rico.” (Puerto Rico Gov. Ricardo Rosselló is supposed to submit a proposed fiscal plan covering government revenues and spending by February 21st—while the PROMESA Board has set a March 15th deadline to certify the plan. Yet the nature of the U.S. hegemony remains at issue: Puerto Rico’s Senate President Thomas Rivera Schatz has threatened to sue the Oversight Board if it attempts to exercise authority over the legislature, according to the El Vocero news website.  

 

 

How Does a Leader Balance Fiscal Versus Human Health & Safety?

Share on Twitter

eBlog, 1/24/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and human health and safety challenges—and fiscal implications—in the City of Flint, as city residents have sued the State of Michigan; then we look east to Ohio, where the question with regard to a similar human and fiscal health related to East Cleveland appears to be worsening with regard to health, fiscal health, and governance. Finally, we peer south to the warm Caribbean, but where the warmth in weather is exceeded by the increasing political heat between the PROMESA oversight board and the new Governor—a challenge with parallels to the fiscal struggle Washington, D.C. underwent nearly two decades ago.

Fighting for Flint’s Fiscal Future. U.S. District Judge David Lawson has described an attempt by Michigan Attorney General Bill Schuette to side with Flint residents in a lawsuit against the state as “superficial posturing,” stating that the AG has created a “troubling ethical issue” that could delay the case that seeks to provide the city with bottled water delivery. In his opinion, Judge Lawson denied Mr. Schuette’s request to file an amicus brief in the case on behalf of “the people of the State of Michigan,” saying the motion is problematic for several reasons, including that assistant attorneys general have already appeared in the case on behalf of state defendants, including Gov. Rick Snyder, writing: “The proposed amicus brief has not introduced any new arguments or offered a perspective that has not been presented by the parties already. Instead, the attorney general has taken a position aligned with the plaintiffs and at odds with other attorneys in his own office…In doing so, he has managed to inject a troubling ethical issue into this lawsuit, potentially complicating adjudication of the serious legal questions before the court, without adding anything of substance.” A spokesperson for the Michigan Attorney General said he would not appeal this ruling, noting that while the attorney general respectfully disagreed with the ruling, “We originally obtained concurrence from all parties prior to filing, and because it failed to include mention of the conflict wall in this case…Attorney General Schuette will continue to fight aggressively for Flint families and remains thankful to the many Flint residents and elected officials who expressed their support of his actions.” The denial came the day before Judge Lawson is to take up an emergency motion in the case: today, Judge Lawson must decide whether and how the State of Michigan and both state and Flint officials should—or must—comply with a largely ignored federal court order requiring door-to-door delivery of bottled water to Flint homes lacking a working water filter.

The legal challenge dates back to last November, when Judge Lawson ordered the state and City of Flint to provide and finance the provision of four cases of bottled water per resident per week if officials cannot prove faucet filters are working to remove harmful lead. That was an order Gov. Snyder’s administration opposed, arguing it is “overbroad,” and one which the city is fiscally unable to meet; indeed, Michigan has filed an emergency motion with the U.S. Sixth Circuit Court of Appeals to block the order, arguing before the court that while the state was not “reluctant “to comply with the order, rather it was confronted by “financial, logistical, and practical difficulties” in doing so. According to state officials, the order would be a five-fold increase over current efforts and require another 137 trucks, hiring at least 150 additional people and “a warehouse so large it is not clear if one even exists in the Flint area” at a cost of more than $11 million per month. In his order at the beginning of last month, Judge Lawson wrote: “The main thrust of the ordered relief is the proper installation and maintenance of tap water filters. For those homes that have properly installed and maintained water filters in place—which is the vast majority of residences, if the state defendants’ witnesses are to be believed—bottled water delivery is not necessary and was not ordered.” While testing shows lead levels in Flint water are on the decline, Flint residents have been instructed to use only filtered or bottled water for consumption, and researchers have encouraged those practices until further notice from state or federal officials: no amount of lead is considered safe.

Does East Cleveland Have a Future? Ohio’s Environmental Protection agency has shut down a waste site in East Cleveland which currently holds an estimated 2 million yards of waste and construction debris, piled up over the past few years by Arco Recycling, declaring it an unpermitted landfill. In the nonce, former East Cleveland Mayor Eric Brewer worked with Auburn Environmental to understand the harm which might already have occurred at a site which features a combination of toxic gas and toxic particles both on the outside and inside of the property—and which appears to have been operating without any legal authority granted by the municipality. The EPA has given Arco Recycling two weeks to clean up or face further actions. Given the small city’s fiscal depletion and insolvency—and the lack of any state response, it would almost appear to be another Flint-like situation, with grave implications for public health and safety, and a fiscal inability by the small city to address on its own—either fiscally or governmentally.

Is there Unpromise in PROMESA? According to Governor Ricardo Rosselló Nevares, it is time for the PROMESA Oversight Board created by the U.S. Congress and former Obama Administration to turn into Puerto Rico’s representative in Washington, D.C., because, otherwise, the various efforts coordinated to strike a fiscal balance and attain socioeconomic development in the U.S. territory will be in vain. The Governor was responding to a lengthy letter from the Board demanding austerity—a demand which appeared to reflect little flexibility with regard to demanding $4.5 billion in spending cuts and/or tax increases per year. While the PROMESA board said it was open with regard to how the Governor achieves that bottom line, the epistle noted: “To be clear, presenting a plan that can achieve at least this level of savings is a pre-requisite to certifying a fiscal plan.”

According to Governor Rosselló Nevares, the delicate state of the island’s public finances, as well as the grave risk of disruption to Puerto Rico’s healthcare services creates what he described as an “unambiguous need” to obtain the federal government’s support in overcoming the crisis, a message that pertains to his administration, but also the Oversight Board—or, as the Governor put it: “The Board has, I believe, that role to fulfill. They need to be the voice for Puerto Rico’s credibility, as did other fiscal boards, like the board in Washington, D.C…For two and a half years, the members of the board in Washington, D.C., using all available financial tools, but were unable to, failed, or attained only marginal improvements. Which is why they had to return to the Capitol to explain two huge faults they had found.” According to Governor Rosselló Nevares, the PROMESA legislation that ordained the oversight board lacked economic development tools critical to the island’s economy and future revenues, and, he added, as with the District of Columbia, where a comparable oversight body was created—that body went back to Congress to ask for fiscal support. But, in addition, the Governor noted, the second element the legislation for D.C. lacked was “equal treatment as a state.”

The Governor was referring to the period nearly three decades ago when the nation’s capitol, Washington, D.C., succumbed to a comparable fiscal crisis which resulted in credit downgrades and the city’s inability to pay its required pension contributions, all while experiencing disruption in public services. In response, Congress intervened by creating an entity similar to the Oversight Board, in 1997, via the National Capital Revitalization Act, a statute which allowed for the transfer of hundreds of programs funded by DC’s administration to the federal government. The act, among other things, had the federal government take over the criminal justice programs and the actuarial deficiencies in the pensions for teachers, police officers, firemen, and judges. In addition, the federal government also increased its contribution to the District’s Medicaid program, from 50% to 70%—changes which, Governor Rosselló Nevares noted, when made, provided for a nation’s capital city that “was able to thrive.” According to the Governor, under PROMESA, “We have a report from that group, which could presumably help our economic development, but it’s not binding and we don’t know what we’re going to do…The Board, like us, should be a spokesperson to our credibility, and they should tell those who put them there (Congress) that Puerto Rico is taking action, and we’re making good progress.” Although the Governor urged the board members to take up a position in favor of the U.S. territory, while PROMESA regulates the pension and public debt payments, the federal entity’s mandate is explicit: restoring fiscal discipline and achieving Puerto Rico’s return to the capital markets under reasonable conditions.

Consequently, Gov. Rosselló Nevares has focused on providing tools for the private sector, enabling the development of infrastructure projects, and ensuring the continuity of certain collections by approving the extension of Act 154 (which created the 4% tax on foreign companies); but he still counsels “there needs to be action from the federal government,” noting: “You may take fiscal measures to check them off the list, but without economic development, it would have a noxious effect, possibly on emigration, on the quality of life for citizens, and the social environment,” as he rejected the Financial Oversight and Management Board for Puerto Rico’s demands for quick and deep austerity measures, deriding the letter from the oversight board as one demanding an “average 79% haircut,” insisting, instead, “We will reflect a fundamental willingness to pay based upon available resources, while satisfying the need for essential services, adequate funding for public pensions and providing a platform for economic growth, all as required by [the Puerto Rico Oversight, Management and Economic Stability Act].”

Assessing a City’s Fiscal Future

eBlog

Share on Twitter

eBlog, 1/17/17

Good Morning! In this a.m.’s eBlog, we consider—again—the ongoing fiscal and physical challenges to the City of Flint, Michigan in the wake of the disastrous state appointment of an Emergency Manager with the subsequent devastating health and fiscal subsequent crises, before turning to political stirrings in Atlantic City, New Jersey—where, notwithstanding the city’s state takeover, there appears to be rising aspirations with regard to the City Council’s next election.

Out Like Flint. When Michigan Gov. Rick Snyder delivered his State of the State speech a year ago, he addressed Flint’s water crisis by directly speaking to the city’s residents to say: “I am sorry, and I will fix it.” Today, one year later, as Gov. Snyder preps for his seventh annual address to state legislators, filtered and bottled remain the only safe way for its residents—any resolution of the health care crisis and threat caused by the state’s then-appointed Emergency Manager’s actions that led to such life-endangering contamination problems could be more than two years away from reaching every home. The city’s elected officials contend that Gov. Snyder has not secured sufficient funding to address the city’s problems, while the Governor’s office points to the state’s allocation of $234 million in aid and Congressional approval of $170 million in Flint-inspired funding from which the city may be able to tap tens of millions of dollars. In addition, a year-long Michigan Attorney General’s Office investigation into the Flint crisis has resulted in the filing of charges against 13 city and state workers and officials, including former state-imposed Emergency Managers Darnell Earley and Gerald Ambrose. (From April 2014 until the fall of 2015, while Flint was under state control via Gov. Snyder-appointed emergency managers, the city drew its water from the Flint River, but failed to treat it properly to prevent pipe corrosion, thus allowing lead to not only leach into the drinking water, but also damage the pipes themselves, creating a need for replacement.) It was just a year ago, in his annual address to the Michigan Legislature that Gov. Snyder devoted the first 20 minutes of address to outline the mistakes made in Flint—and his battle plan to overcome them, telling legislators: “There can be no excuse—when Michiganders turn on the tap, they expect and deserve clean, safe water…It’s that simple. It’s that straightforward. So that’s what we will deliver. To the families in Flint, it is my responsibility, my commitment, to deliver…I give you my commitment that Michigan will not let you down.”

Indeed, in that year, crews have replaced service lines in 780 homes so far, according to retired Brig. Gen. McDaniel, who heads the replacement program, who yesterday noted: “If we can do 6,000 homes per year, for the next three years, we should address the problem we have.” Under Gen. McDaniel’s timeline, however, completion and restoration of trust in governance will not be complete until late 2019 or early 2020—and, mayhap more worrisome, funding to pay for the work has not yet been secured.

For her part, Flint Mayor Karen Weaver has constantly lobbied the state for more funding, but reports that the response from Gov. Snyder’s office has been disappointing: one of the reasons for the slow movement of her Fast Start replacement program, which was designed to target neighborhoods with seniors, homes with high lead readings, and high concentrations of children age 6 and under who are most vulnerable to lead exposure. Or, as she put it yesterday: “We should have had money right then…We had $500,000 to start…We’re in our third year of not being able to drink our water. Now where does that make sense in the United States of America? No place that I know of.”

Sen. Jim Ananich (D-Flint) reported he would, as a former teacher, give Gov. Snyder an “incomplete.” While crediting the state’s efforts to provide health services and monitoring, he said funding in general is lacking—and the provision of state aid has, at times, been bungled, noting an original state appropriation of $2 million intended to support families facing water shut-off for non-payment: “That plan included a stipulation that in order to get the money, 70 percent of customers, commercial and residential, have to be up to date on payments,” even though customers were being asked to pay for water they could not use safely, so that, as he put it: “To rectify a problem of undrinkable water, the fix is to make people pay or cut them off.” Sen. Ananich and Genesee County health officer Mark Valacak have praised the state’s immediate health efforts targeting Flint’s most vulnerable populations, its youngest children and pregnant women, but have stressed the need to create a database to track the impacts of residents’ exposure to contaminated water, so that there is a critical understanding of potential long-term human impacts—a request, in response to which, the Michigan Department of Health and Human Services last Friday announced there would be a one-year $500,000 grant to Michigan State University for “long-term tracking of residents exposed to Flint water” between April 2014 and now. It would seem the state ought to–at the same time–undertake an effort to examine the impact on Flint’s assessed property values.

Nevertheless, Mayor Weaver and Flint City Councilman Eric Mays are concerned that the state’s efforts have not closely involved local residents, or, as Councilman Mays put it: “We know (Snyder) has another State of the State address coming up…and we’ll see if he spends as much time on this one talking about Flint as he did on that one…But I don’t believe he’s pushed the Legislature to do what they could do.”

Succession? Even in a city taken over by its garden state, there appears strong interest in who might be the next Mayor. Thus, in Atlantic City, Fareed Abdullah, a substitute teacher and former City Council candidate, has thrown his hat into the ring: he will face Council President Marty Small and Councilman Frank Gilliam in the June Democratic primary, where the winner will take on Republican Mayor Don Guardian. Mr. Abdullah reports: “I want to re-do Atlantic City…People feel left out. And we have to make sure that Atlantic City residents’ voices are heard, and that’s what I’m focused on.” He adds that his priorities include reducing taxes, creating jobs, making re-entry programs for those convicted of crimes and youth programs tied to science and technology, and improving police-community relations: “I want to work with private-sector companies throughout the country, and throughout the world really, to bring more businesses to Atlantic City, which in return would reduce our taxes because we will have more ratables…Building up small businesses and absolutely trying to realize that this is what has made Atlantic City great. The barber shops. The corner stores,” he said. “We don’t want people to forget there’s a whole culture in the barber shop.” (Mr. Abdullah has twice run unsuccessfully for City Council (in 2009 and 2013, just missing election by 72 votes in the most recent), after losing the first effort in no small part because of a 1997 cocaine possession conviction.

Are American Cities at a Financial Brink?

eBlog, 1/13/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and physical challenges to the City of Flint, Michigan in the wake of the disastrous state appointment of an Emergency Manager with the subsequent devastating health and fiscal subsequent crises, before turning to a new report, When Cities Are at the Financial Brink” which would have us understand that the risk of insolvency for large cities is now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” before briefly considering the potential impact on every state, local government, and public school system in the country were Congress to adopt the President-elect’s proposed infrastructure plan; then we consider the challenge of aging: what do longer lifespans of city, county, and state employees augur for state and local public pension obligations and credit ratings?

Not In Like Flint. Residents of the City of Flint received less than a vote of confidence Wednesday about the state of and safety of their long-contaminated drinking water, precipitated in significant part by the appointment of an Emergency Manager by Governor Rick Snyder. Nevertheless, at this week’s town hall, citizens heard from state officials that city water reaching homes continues to improve in terms of proper lead, copper, alkaline, and bacteria levels—seeking to describe Flint as very much like other American cities. The statements, however, appeared to fall far short of bridging the trust gap between Flint residents and the ability to trust their water and those in charge of it appears wide—or, as one Flint resident described it: “I’m hoping for a lot…But I’ve been hoping for three years.” Indeed, residents received less than encouraging words. They were informed that they should, more than 30 months into Flint’s water crisis, continue to use filters at home; that it will take roughly three years for Flint to replace lead water service lines throughout the city; that the funds to finance that replacement have not been secured, and that Flint’s municipal treatment plants needs well over $100 million in upgrades: it appears unlikely the city will be ready to handle water from the new Karegnondi Water Authority until late-2019-early 2020. The state-federal presentation led to a searing statement from one citizen: “I’ve got kids that are sick…My teeth are falling out…You have no solution to this problem.”

Nevertheless, progress is happening: in the last six months of water sampling in Flint, lead readings averaged 12 parts per billion, below the federal action level of 15 ppb, and down from 20 ppb in the first six months of last year. Marc Edwards, a Virginia Tech researcher who helped identify the city’s contamination problems, said: “Levels of bacteria we’re seeing are at dramatically lower levels than we saw a year ago.” However, the physical, fiscal, public trust, and health damage to the citizens of Flint during the year-and-a-half of using the Flint River as prescribed by the state-appointed Emergency Manager has had a two-fold impact: the recovery has been slow and residents have little faith in the safety of the water. Mayor Karen Weaver has sought to spearhead a program of quick pipeline replacement, but that process has been hindered by a lack of funding.

State Intervention in Municipal Bankruptcy. In a new report yesterday, “When Cities Are at the Financial Brink,” Manhattan Institute authors Daniel DiSalvo and Stephen Eide wrote the “risk of insolvency for large cities in now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” adding that “states…should intervene at the outset and appoint a receiver before allowing a city or other local government entity to petition for bankruptcy in federal court—and writing, contrary to recent history: “Recent experiences with municipal bankruptcies indicates that when local officials manage the process, they often fail to propose the changes necessary to stabilize their city’s future finances.” Instead, they opine in writing about connections between chapter 9, and the role of the states, there should be what they term “intervention bankruptcy,” which could be an ‘attractive alternative’ to the current Chapter 9. They noted, however, that Congress is unlikely to amend the current municipal bankruptcy chapter 9, adding, moreover, that further empowering federal judges in municipal affairs “is sure to raise federalism concerns.” It might be that they overlook that chapter 9, reflecting the dual sovereignty created by the founding fathers, incorporates that same federalism, so that a municipality may only file for chapter 9 federal bankruptcy if authorized by state law—something only 18 states do—and that in doing so, each state has the prerogative to determine, as we have often noted, the process—so that, as we have also written, there are states which:

  • Precipitate municipal bankruptcy (Alabama);
  • Contribute to municipal insolvency (California);
  • Opt, through enactment of enabling legislation, significant state roles—including the power and authority to appoint emergency managers (Michigan and Rhode Island, for instance);
  • Have authority to preempt local authority and take over a municipality (New Jersey and Atlantic City.).

The authors added: “The recent experience of some bankrupt cities, as well as much legal scholarship casts doubt on the effectiveness of municipal bankruptcy.” It is doubtful the citizens in Stockton, Central Falls, Detroit, Jefferson County, or San Bernardino would agree—albeit, of course, all would have preferred the federal bailouts received in the wake of the Great Recession by Detroit’s automobile manufacturers, and Fannie Mae and Freddie Mac. Similarly, it sees increasingly clear that the State of Michigan was a significant contributor to the near insolvency of Flint—by the very same appointment of an Emergency Manager by the Governor to preempt any local control.

Despite the current chapter 9 waning of cases as San Bernardino awaits U.S. Bankruptcy Judge Meredith Jury’s approval of its exit from the nation’s longest municipal bankruptcy, the two authors noted: “Cities’ debt-levels are near all-time highs. And the risk of municipal insolvency is greater than at any time since the Great Depression.” While municipal debt levels are far better off than the federal government’s, and the post-Great Recession collapse of the housing market has improved significantly, they also wrote that pension debt is increasingly a problem. The two authors cited a 2014 report by Moody’s Investors Service which wrote that rising public pension obligations would challenge post-bankruptcy recoveries in Vallejo and Stockton—perhaps not fully understanding the fine distinctions between state constitutions and laws and how they vary from state to state, thereby—as we noted in the near challenges in the Detroit case between Michigan’s constitution with regard to contracts versus chapter 9. Thus, they claim that “A more promising approach would be for state-appointed receivers to manage municipal bankruptcy plans – subject, of course, to federal court approval.” Congress, of course, as would seem appropriate under our Constitutional system of dual sovereignty, specifically left it to each of the states to determine whether such a state wanted to allow a municipality to even file for municipal bankruptcy (18 do), and, if so, to specifically set out the legal process and authority to do so. The authors, however, wrote that anything was preferable to leaving local officials in charge—mayhap conveniently overlooking the role of the State of Alabama in precipitating Jefferson County’s insolvency.  

American Infrastructure FirstIn his campaign, the President-elect vowed he would transform “America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains with a deficit-neutral plan targeting substantial new infrastructure investments,” a plan the campaign said which would provide maximum flexibility to the states—a plan, “American Infrastructure First” plan composed of $137 billion in federal tax credits which would, however, only be available investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Left unclear is how such a plan would impact the nation’s public infrastructure, the financing of which is, currently, primarily financed by state and local governments through the use of tax-exempt municipal bonds—where the financing is accomplished by means of local or state property, sales, and/or income taxes—and some user fees. According to the Boston Federal Reserve, annual capital spending by state and local governments over the last decade represented about 2.3% of GDP and about 12% of state and local spending: in FY2012 alone, these governments provided more than $331 billion in capital spending. Of that, local governments accounted for nearly two-thirds of those capital investments—accounting for 14.4 percent of all outstanding state and local tax-exempt debt. Indeed, the average real per capita capital expenditure by local governments, over the 2000-2012 time period, according to the Boston Federal Reserve was $724—nearly double state capital spending. Similarly, according to Census data, state governments are responsible for about one-third of state and local capital financing. Under the President-elect’s proposed “American Infrastructure First” plan composed of $137 billion in federal tax credits—such credit would only be available to investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Similarly, because less than 2 percent of the nation’s 70,000 bridges in need of rebuilding or repairs are tolled, the proposed plan would be of no value to those respective states, local governments, or users. Perhaps, to state and local leaders, more worrisome is that according to a Congressional Budget Office 2015 report, of public infrastructure projects which have relied upon some form of private financing, more than half of the eight which have been open for more than five years have either filed for bankruptcy or been taken over by state or local governments.

Moody Southern Pension Blues. S&P Global Ratings Wednesday lowered Dallas’s credit rating one notch to AA-minus while keeping its outlook negative, with the action following in the wake of Moody’s downgrade last month—with, in each case, the agencies citing increased fiscal risk related to Dallas’ struggling Police and Fire Pension Fund, currently seeking to stem and address from a recent run on the bank from retirees amid efforts to keep the fund from failing, or, as S&P put it: “The downgrade reflects our view that despite the city’s broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, expected continued deterioration in the funded status of the city’s police and fire pension system coupled with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant and negatively affects Dallas’ creditworthiness.” S&P lowered its rating on Dallas’ moral obligation bonds to A-minus from A, retaining a negative outlook, with its analysis noting: “Deterioration over the next two years in the city’s budget flexibility, performance, or liquidity could result in a downgrade…Similarly, uncertainty regarding future fixed cost expenditures could make budgeting and forecasting more difficult…If the city’s debt service, pension, and OPEB carrying charge elevate to a level we view as very high and the city is not successful in implementing an affordable plan to address the large pension liabilities, we could lower the rating multiple notches.” For its part, Fitch Ratings this week reported that a downgrade is likely if the Texas Legislature fails to provide a structural solution to the city’s pension fund problem. The twin ratings calls come in the wake of Dallas Mayor Mike Rawlings report to the Texas Pension Review Board last November that the combined impact of the pension fund and a court case involving back pay for Dallas Police officers could come to $8 billion—mayhap such an obligation that it could force the municipality into chapter 9 municipal bankruptcy, albeit stating that Dallas is not legally responsible for the $4 billion pension liability, even though he said that the city wants to help. The fund has an estimated $6 billion in future liabilities under its current structure. In testimony to the Texas State Pension Review Board, Mayor Rawlings said the pension crisis has made recruitment of police officers more difficult just as the city faces a flood of retirements.

 

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

Share on Twitter

eBlog, 12/09/16

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

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

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

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

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

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

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

TheExceptional Governing Challenges on Roads to Fiscal Recovery

Share on Twitter

eBlog, 12/02/16

Good Morning! In this a.m.’s eBlog, we consider the hard role to recovery not just from San Bernardino’s longest-ever municipal bankruptcy, but also the savage terrorist attack a year ago. Then we venture East to observe the evolving state role in New Jersey’s takeover of Atlantic City, where the new designee named by Gov. Chris Christie, Jeffrey Chiesa, yesterday introduced himself to residents and taxpayers, but offered little guidance about exactly how he will usurp the roles of the Mayor and City Council in governing and trying to get the famed boardwalk city out of insolvency and back to fiscal stability. Finally, we look north to the metropolitan Hartford, Connecticut region, where the municipalities in the region are seeking to work out fiscal mechanisms to address Hartford’s potential municipal bankruptcy in order to ensure no disruption of metropolitan water and sewer services—a different, but in this case critical element of a “sharing economy.”  

The Jagged Road to Chapter 9 Recovery. It was one year ago today that terrorists struck in San Bernardino—the city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, marking, then, a day of 14 deaths—with victims caught in the crossfire of gun shots and carnage in the wake of the wanton attack by Syed Rizwan Farook and Tashfeen Malik—and a horror still not over, as it will be another nine months before the trial against Enrique Marquez Jr., who has been charged with buying some of the weapons which were used in the attack, commences in September—months after the beleaguered city anticipates exiting from bankruptcy. Because the shootings took place at a San Bernardino County facility in San Bernardino, the long-term recovery has been further complicated from a governance perspective: many of the shooting survivors are accusing San Bernardino County of cutting off much-needed support for the survivors of the attack, including refusing to approve counseling or antidepressant medication. Others, who were physically wounded are seeking, so far unsuccessfully, to get surgeries and physical therapy covered. The San Bernardino County Board of Supervisors earlier this week convened a closed-door session at which survivors said they felt betrayed and abandoned, left to deal with California’s complicated workers’ compensation program without guidance or help. Their health insurers will not cover their injuries because they occurred in a workplace attack. Congressman Pete Aguilar (D-Ca.), whose district includes San Bernardino, reports that his hometown had been added to a list of cities with which people are familiar for a terrible reason, such as Littleton, Colo., or Newtown, Conn. Nevertheless, he is defiant, insisting “We will not be defined by this tragedy.”

However, murder rates in the city have been climbing: the city of just over 200,000 is grappling with a spike in violent crime, homicides especially: to date, this year, the city has reported 49 killings, already more than last year’s total, which included the terrorist victims—its homicide rate tops that of Chicago, which has become the poster child for big-city violent crime and is on pace for more than 600 killings this year. San Bernardino Police Chief Jarrod Burguan, however, said the crime wave is not unique to the chapter 9 municipality—a currently bankrupt city where empty storefronts and pawn shops have long lined downtown streets. Nevertheless, Brian Levin, a criminal justice professor at California State University, San Bernardino, who studies hate crimes, yesterday noted: “we’re a better community now, even though we’re hurt.” Professor Levin is one who, in the days and weeks which ensued after the mass tragedy, met with faith leaders, law enforcement, and families of the victims—where he discovered a unity of shock and shared pain. Today, he notes: “The attack will always be a part of our history…But here’s the thing: so will the heroics of those police officers and first responders and medical staff, and so will the grace of the families. We’re writing the rest of the history. The bastards lost.” Now the city awaits early next year for emerging not just from the physical tragedy, but also the longest chapter 9 municipal bankruptcy ever.  

Atlantic City Blues.  Jeffrey Chiesa, a former New Jersey Attorney General, U.S. Senator, and, now, Governor Chris Christie’s designee to run the state takeover of Atlantic City, yesterday introduced himself at a City Council meeting and took questions from city taxpayers and residents. He provided, however, in this first public meeting no details on plans to address either the city’s fiscal plight—or its interim governance. He reported the State of New Jersey does not yet have a plan to address the city’s $100 million budget hole, much less to pay down the Atlantic City’s $500 million debt, noting: “It has been two weeks…My plan is to do what I think is necessary to create a structural financial situation that works not for six months, not for a year, but indefinitely so that this place can flourish in a way that it deserves to flourish.” He noted he and his law firm will be paid hourly for their work, albeit he did not report what that hourly rate will be—especially as the state retention agreement remains incomplete, albeit promising: “We’ll make sure that’s available once it’s been finalized.” Related to governance, he noted that—related to his state-granted authority to sell city assets, hire or fire workers or break union contracts, among other powers—he would listen to residents and stakeholders before making major decisions: “What this designation has done is consolidate authority, per the legislation, in the designee to make those decisions…That does not mean that I’m not listening. That does not mean I’m pretending I have all the answers without consulting with other people.” Describing the seaside city as a “jewel” and “truly unique,” he added that he understood concerns about an outsider overseeing the city: “I know that most of you don’t know who I am…All I can do is be judged by my actions and the decision that I make, and I hope you give me time to do that.” He did say that he would have to move swiftly to address immediate issues, likely referring to reaching agreements with casinos to make payments in lieu of property taxes, and then focusing on the city’s expenses—noting: “That timeframe is pretty compressed…So we will take the steps we need to take.”

Fiscally Hard for Hartford. As we have recounted in the fiscally strapped municipality of Petersburg, Virginia, municipal fiscal insolvency cannot occur in a geographic vacuum: whether in Detroit—or as we note above today, in San Bernardino, fiscal insolvency has repercussions for adjacent municipalities. So too in Hartford, the Metropolitan District Commission (MDC) completed its planned $173 million municipal bond sale late last week, temporarily ending the controversy over a $5.5 million reserve fund. Under the provisions, that fund would be paid by seven of the eight MDC municipalities to cover the sewage fee for the second half of 2017 if the City of Hartford is unable to contribute its share, as it has indicated it will be unable to do. Ergo, it means that adjacent Windsor, the first English settlement in the state which abuts Hartford on its northern border, with a population of under 30,000 would contribute over $700,000, with East Hartford contributing about $900,000. The other group members in the metro region, Bloomfield, Newington, Rocky Hill, West Hartford, and Wethersfield, would pay the remaining $900,000, proportionately. One outcome of this watery alliance and experience is that the MDC will, when the state legislature convenes next February, propose two laws to avoid the necessity for a reserve fund in the future, with MDC Chairman William DiBella suggesting that the eight member municipalities be required to set aside as untouchable the percentage of their property taxes the cities and towns already know they will owe to the MDC for sewage services. (Currently, property taxes go into the municipalities’ general funds, and the cities extract the sewage fee when it is due, provided the funds are, in fact, available; however, like water at the tap, that has not always been the experience.) In effect, the consortium is recommending a selves-imposed budgeting municipal mandate, with Chairman DiBella noting: “Every town would have to do it. That way, one town can’t stiff us. You wouldn’t have to go out and borrow money or take charity and hope you get it back.” As the Chairman noted: “We never had a problem like this…Who thought a town would go bankrupt? With the proposed law, if a town were to go bankrupt, the sewage fund would be in a dedicated account and can’t be reached,” or touched in a bankruptcy proceeding. Another potential resolution would be to allow the MDC to borrow money over a long-term for operating expenses. The MDC would then be able to pay Hartford’s $5.5 million bill and look for a city reimbursement in other ways.

There has been increased pressure for a resolution—especially in the wake of municipal bond holders of the MDC, holders who, last week, made clear to the authority they would not buy its municipal bonds if a reserve fund was not put into place. That appeared to be a key incentive for the board’s action earlier this week for the MDC board, including representatives of all eight municipal members, to vote unanimously to adopt the water and sewer service provider’s 2017 budget, which contains the unwelcome “bail-out” fund for Hartford—albeit Chair DiBella said there would be no guarantee the agency could cover a Hartford default or continue operating or pay the bondholders. A key part of the incentive to try to work together relates to potential fiscal contagion: because of concerns over Hartford’s finances and fiscal condition, credit rating agencies have recently downgraded MDC’s bond rating from AA+ to AA, a downgrade expected to cost the agency and its member towns an estimated $500,000 in a higher interest rate for the bonds. The towns, unsurprisingly, are apprehensive the credit rating agencies will now consider changing their credit ratings. In contrast, creating the reserve fund would keep MDC’s credit rating where it is: thus, MDC officials hope that passing the two proposed laws would prompt the credit rating agencies to return its rating to AA+.

 

What Distinguishes a Municipality’s Fiscal Path to Success or Failure?

Share on Twitter

eBlog, 10/21/16

Good Morning! In this a.m.’s eBlog, we consider the fiscal and children’s health challenges in Flint, Michigan—problems created under the state’s Emergency Manager system; we consider the ongoing challenge to municipal sustainability in Atlantic City as an impending state takeover threatens; we update readers as San Bernardino nears its municipal elections—and nears its emergence early next year from the nation’s longest-ever chapter 9 municipal bankruptcy; then we consider a new legal challenge to try to provide for an education for Detroit’s children in a system under a state-imposed emergency manager, but also a state-impose dysfunctional system; then we visit Petersburg, Virginia—where the small, historic city is grappling with hard, hard choices if it is to avoid insolvency, before finally trying to shed a bright spotlight on the signal success of Wayne County, Michigan as it celebrates its formal exit from state fiscal oversight.

Not in Like Flint. A new suit was filed this week charging that public officials failed children in Flint, Michigan by allowing the city’s supply of drinking water to remain contaminated with lead, a known neurotoxin, for a year and a half—with the suit alleging the government is again falling short by failing to provide the city’s children with educational services that they legally deserve and that could counter the effects of the Flint lead exposure: the complaint, filed in U.S. District Court in the Eastern District of Michigan, argues that the public school system in Flint is not meeting its legal obligation to screen lead-exposed children for disabilities or provide services and interventions that could make a difference in their ability to learn and thrive. It also alleges that the Michigan Education Department has failed to provide Flint schools, which have cut teachers and other staff in the face of a $10 million deficit, with the resources and funding they need to provide those services: the suit notes there are 30,000 children and teenagers under the age of 19 in Flint, and 8,000 of them are younger than 5—those particularly vulnerable to the effects of lead exposure—exposure which can result in diminished academic achievement and a greater tendency to be hyperactive, impulsive, and aggressive. Without meaningful action soon, the complaint says, children’s opportunities to reach their full potential will be “permanently foreclosed,” or, as the complaint states: “In the wake of the Flint lead crisis, Flint children face an unprecedented educational and civil rights disaster.” The complaint seeks class certification to represent all Flint children who were exposed to lead and are—or may be—eligible for special-education services: the plaintiffs are 15 children, ages 3 to 17, each of whom was exposed to lead in Flint; it alleges that they have been denied the special-education services they need and deserve under the federal Individuals with Disabilities Education Act, the Americans with Disabilities Act, and Michigan state law. The suit requests the court to order sweeping changes in Flint schools, including high-quality universal preschool for all 3-to 5-year-olds; enhanced screening of all Flint children to determine their physical, social, emotional and behavioral needs; training for teachers in managing students’ behavior without resorting to physical restraint and seclusion; and regular lead testing of drinking water in Flint schools. It also seeks a comprehensive review of all education plans for children currently identified for special education, to make sure their needs have been properly identified, requesting the federal court to convene a group that would lay out a comprehensive plan for addressing children’s physical, emotional and behavioral trauma in the aftermath of lead exposure, and for a special monitor to oversee the implementation of that plan over the next seven years. (Note: nine current or former government workers have been criminally charged since doctors detected elevated levels of lead in some children due to the discolored and smelly water supply in the impoverished city of nearly 100,000, in the wake of the city’s change from the metropolitan Detroit utility system to a temporary water source, the Flint River, in 2014, a decision made not by the city, but rather a gubernatorially appointed state emergency manager. One of the outcomes could be adoption of a recommendation in a report issued by a panel of four Republican and two Democratic state legislators focused on preventing recurrence of such a crisis. Among the recommendations is lifting emergency managers’ general immunity from civil lawsuits and prohibiting them from using cost as the primary factor in any decision that will affect public health and safety. Other recommendations include the adoption of the country’s toughest lead-in-water rules, increased transparency about water rates and shut-off practices, and the creation of a commission to oversee the state Department of Environmental Quality, which has been deemed primarily responsible for Flint’s water problems. The recommendations also propose that a community’s water source should not be changed absent voter approval. A key recommendation related to Michigan’s 2012 emergency manager law—widely criticized as a key factor in Flint’s city’s water crisis: the report recommends that Michigan’s Emergency Manager emergency managers be replaced with financial management teams that include a financial expert, a local government operations expert, and an ombudsman. Emergency managers would also be mandated to post a $5 million bond that would be forfeited for negligence or misconduct on the job and to host a website to solicit and respond to public comments on their key decisions. Or, as Senate Minority Leader Jim Ananich (D-Flint) noted: “The more we encourage…oversight and citizen involvement, the better our government’s going to be.”  The report also calls for:

  • testing water for lead in schools and other facilities for children and fragile adults;
  • the mandatory disclosure of lead services lines in home sales and rental contracts;
  • a constitutional amendment making it easier to discipline state employees and the appointment of an ombudsman to hear confidential state employee reports of misconduct;
  • enhanced criminal penalties for public officials whose misconduct causes bodily harm to others;
  • more robust lead screening of school-age children;
  • assessing children’s past lead exposure by testing their baby teeth, because blood tests only reveal recent exposure; and
  • requiring water systems to inventory their service pipes and other infrastructure and, within 10 years, adopt a full lead service pipe replacement program.

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

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

Detroit’s Future? Lawyers representing Detroit schoolchildren last month filed a lawsuit against Gov. Rick Snyder and state officials in what has been viewed as the nation’s which pushes for literacy as a right under the U.S. Constitution: the complaint alleges that the state has denied Detroit students access to literacy, the most basic building block of education, through decades of “disinvestment … and deliberate indifference.” The suit seek broad remedies, including implementation of evidence-based literacy programs, universal screening for literacy problems, and a statewide accountability system in which the state “monitors conditions that deny access to literacy” and intervenes. It documents the low reading and math proficiency rates of Detroit students, as well as classes without teachers and outdated or insufficient classroom materials, it also notes poor conditions, including vermin and building problems, at some schools as recently as this month, seeking class action status on behalf of students who attend the schools. In addition to Governor Snyder, the lawsuit names the state Board of Education, state school Superintendent Brian Whiston, David Behen, director of the Michigan Department of Technology, Management and Budget, and Natasha Baker, the state school reform officer.

Petersburg’s Future? Mayhap ironically the person once appointed as emergency manager by Michigan Governor Rick Snyder to address the Detroit Public Schools’ fiscal and educational insolvency, Robert Bobb, under whose tenure DPS’s deficit steadily worsened, rather than improved—and where now a federal class-action lawsuit a class action suit has been filed, contending that under state control, the Detroit Public Schools have deteriorated to such an extent they violate students’ civil rights. (DPS’s current emergency manager, retired U.S. Bankruptcy Judge Steven Rhodes, has called the latest corruption allegations “outrageous;” he has placed all the accused principals still with DPS on unpaid leave, and instituted new oversight measures for approving contracts. Nevertheless, the ongoing events have meant that many Michigan legislators appear to be increasingly antithetical to ever allowing the district to revert to local control—with some even suggesting it should be permitted to become insolvent and be dissolved—leaving the state on the hook for at least $500 million of its massive debt.)

Now, after the Petersburg, Virginia City Council this week was on the verge of hiring Mr. Bobb as a turnaround specialist, the Council developed cold feet: late into a meeting in which the Council took a lashing from city residents upset over what they characterized as a lack of transparency surrounding negotiations with its search firm, Councilman Samuel Parham put the contract to a vote: it failed 3-3-1, meaning the Council must wait at least 30 days before reconsidering a potential agreement which for the insolvent municipality is rumored to cost about $350,000 according to the elected leaders. The delay would mean pushing off any decision about the city’s future—if it is to have one—until after the election—one in which two of three council races on the ballot are contested. The unscheduled vote came minutes after a public acknowledgment from Councilmember Darrin Hill that members’ recent closed-session meetings and interference with the administration of city business deserved scrutiny, or as Councilmember Hill noted: “Ethically I think we can do better as a council as a whole,” he said. “I think a lot of us are being thrown under the bus over the actions of a few.” If the old expression is “time is money,” the delay—even as lawsuits and threats of legal action, much of it over unpaid bills, are building for a small city for which Virginia state auditors have determined is approximately $19 million in the hole, comes after the Council began this fiscal year by slashing about $12 million from the current year’s operating budget—eliminating youth summer programs, unfilled positions, millions in public school funding, and money for travel and training—even borrowing a fire truck from the city of Colonial Heights’ reserve fleet for day-to-day operations. Yet, the anatomy of debt and deficits and how the municipality got there remains clouded; ergo Council members have been asking since last February for the administration to hire a forensic auditor to scrutinize the city’s books. Interim City Manager Dironna Moore Belton this week said the city had winnowed a list down to two firms which could do the work—but of course at a cost of as much as $300,000—leading incoming City Attorney Joseph Preston to request that the Council not authorize a forensic audit, noting that a newly expanded grand jury investigation by a Chesterfield County prosecutor might yield the answers council members are seeking—at County rather than municipal taxpayers’ expense. The inability to act and uncertain state willingness to help has provoked residents, who report they are tired of seeing the city make negative headlines: they are pleading with the City Council to stop holding special meetings at the last-minute and to engage in more robust public discussion before taking votes on consequential matters—or, as one constituent put it: “I would like to know what you’re afraid of talking about in public…It’s very strange, and it’s part of why people are looking at Petersburg.”

Free at Last. The State of Michigan has formally released Wayne County, Michigan from state oversight. The County, whose general obligation bonds Moody’s upgraded at the end of last month, cited several factors, including: improvement in the county’s financial position following substantial reductions in retirement liabilities and associated costs, which will aid the budgetary capacity to address outstanding capital facility needs…,” as well as noting the “county continues to enhance its operating reserves while accommodating increased costs associated with outstanding criminal justice facility needs…” as well as reflect “substantial expense reductions…” thanks to its development and implementation of a “financial recovery plan in May 2015 to correct a structural imbalance that developed during years of rapidly falling property tax revenue. The recovery plan culminated in nearly $50 million of cost reductions achieved with elimination or modification of retirement benefits, contraction of payroll, and other operating efficiencies…” Or, as Wayne County Executive Warren C. Evans noted: the report by the credit rating agency “speaks to the depth of our Recovery Plan and the fiscal responsibility we’re instituting in every facet of County government…This positions us to do more with the resources we have and continue to move in the right direction. While the news is good, there’s a lot of work to do. We’re committed to staying the course and taking on the challenges that remain.” Mr. Evans added, however: “It’s a positive step, but not cause for any long celebrations…The consent agreement allowed us to do what we needed to do, but it was never going to be a cure-all to Wayne County’s finances. It was the necessary means to get our fiscal house in order so we could tackle the remaining challenges.” The strong fiscal discipline brought other good news with it: the State of Michigan formally granted the county’s request to be released from oversight yesterday—just a year and a month after the oversight agreement allowed the county to work with the state to renegotiate contracts, improve its cash position, and reduce underfunding in the pension system, resulting in elimination of a structural deficit. Michigan Treasurer added: “I am pleased to see the significant progress Wayne County has made while operating within the best practices established by the consent agreement.” Under that agreement, Wayne County established a recovery plan and eliminated a nearly $100 million accumulated deficit and a yearly structural deficit of approximately $52 million through various measures that aimed to bring recurring revenues in line with liabilities. The county reduced its unfunded pension liabilities from $817 million to $636 million—reductions, ergo, which also meant some retirees experienced significant reductions in post-retirement healthcare benefits. Wayne County—the county in which the City of Detroit is centered—has now balanced its budget two years in row and recorded surpluses: it ended the last fiscal year with an accumulated unassigned surplus of $35.7 million, of which $5.7 million is available for general fund operations. County Executive Evans said he expects to report a surplus in excess of $35.7 million when the books are closed on 2016. However, he also warned that Wayne County still must address some $635 million in unfunded pension liabilities and over $400 million in other post-employment benefits liabilities, areas where he made clear future budget surpluses are likely key.