Post Municipal Bankruptcy Leadership

08/07/17

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Good Morning! In this a.m.’s blog, we consider the fiscal challenge as election season is upon the Motor City: what kind of a race can we expect? Then we observe the changing of the guard in San Bernardino—as the city’s first post-chapter 9 City Manager settles in as she assumes a critical fiscal leadership role in the city emerging from municipal bankruptcy. Third, we consider the changing of the fiscal guard in Atlantic City, as outgoing (not a pun) Gov. Chris Christie begins the process of restoring municipal authority. Then we turn to what might be a fiscal turnaround underway in Puerto Rico, before, fourth, considering the special fiscal challenge to Puerto Rico’s municipios—or municipalities.

Post Municipal Bankruptcy Leadership. Detroit Mayor Mike Duggan, the city’s first post-chapter 9 mayor, has been sharing his goals for a second term, and speaking about some of his city’s proudest moments as he seeks a high turnout at tomorrow’s primary election mayoral primary election‒the first since the city exited municipal bankruptcy three years ago, noting he is: “very proud of the fact the unemployment rate in Detroit is the lowest it has been in 17 years: today he notes there are 20,000 more Detroiters working than 4 years ago. In January 2014, there were 40,000 vacant houses in the city, and today 25,000. We knocked down 12,000 and 3,000 had families who moved in and fixed them up,” adding: “For most Detroiters, that means the streetlights are on, grass is cut in the parks, busses are running on time, police and ambulances showing up in a timely basis and trash picked up and streets swept.” Notwithstanding those accomplishments, however, he confronts seven contenders—with perhaps the signal challenge coming from Michigan State Senator Coleman Young, Jr., whose father, Coleman Young, served as Detroit’s first African-American Mayor from 1974 to 1994. Mr. Young claims he is the voice for the people who have been forgotten in Detroit’s neighborhoods, noting: “I want to put people to work and reduce poverty of 48% in Detroit. I think that’s atrocious. I also want mass transit that goes more than 3 miles,” adding he is seeking ‘real change,’ charging that today in Detroit: “We’re doing more for the people who left the city of Detroit, than the people who stayed. That’s going to stop in a Young administration.” Remembering his father, he adds: “I don’t think there will ever be another Coleman Young, but I am the closest thing to him that’s on this planet that’s living.” (Other candidates in tomorrow’s non-partisan primary include Articia Bomer, Dean Edward, Curtis Greene, Donna Marie Pitts, and Danetta Simpson.)  

According to an analysis by the Detroit News, voters will have some interesting alternatives: half of the eight candidates have been convicted of felony crimes involving drugs, assault, or weapons—with three charged with gun crimes and two for assault with intent to commit murder, albeit, some of the offenses date back as far as 1977. (Under Michigan election law, convicted felons can vote and run for office, just as long as they are neither incarcerated nor guilty of crimes breaching public trust.

Taking the Reins.  San Bernardino has named its first post-chapter 9 bankruptcy city manager, selecting assistant City Manager and former interim city manager, Andrea Miller, to the position—albeit with some questions with regard to the $253,080 salary in a post-chapter 9 recovering municipality where the average household income is less than $36,000 and where officials assert the city’s budget is insufficient to fully address basic public services, such as street maintenance or a fully funded police department. Nevertheless, Mayor Cary Davis and the City Council voted unanimously, commenting on Ms. Miller’s experience, vision, and commitment to stay long-term, or, as Councilman Fred Shorett told his colleagues: “As the senior councilmember—I’ve been sitting in this dais longer than anybody else—I think we’ve had, if we count you twice, eight city managers in a total of 9 years: We have not had continuity.”  However, apprehension about continuity as the city addresses and implements its plan of debt adjustment remains—or, as Councilmember John Valdivia insisted, there needs to be a “solemn commitment to the people of San Bernardino” by Ms. Miller to serve at least five years, as he told his colleagues: “During Mayor (Carey) Davis’ four years in office, the Council is now voting on the third city manager: San Bernardino cannot expect a successful recovery with this type of rampant leadership turnover at City Hall…Ms. Miller is certainly qualified, but I am concerned that she has already deserted our community once before.” Ms. Miller was the city’s assistant city manager in 2012, when then-City Manager Charles McNeely abruptly resigned, leaving Ms. Miller as interim city manager to discover that the city would have to file for chapter 9 bankruptcy—a responsibility she addressed with aplomb: she led San Bernardino through the first six months of its municipal bankruptcy, before leaving without removing “interim” from her title, instead assuming the position of executive director of the San Gabriel Valley Council of Governments.

Ms. Miller noted: “I would remind the Council that I was here as your interim city manager previously, and I did not accept the permanent appointment, because I felt like I could not make that commitment given some of the dynamics…(Since then) this Council and this community have implemented a new city charter, the Council came together in a really remarkable way and had a discussion with me that we had not been able to have previously: You committed to some regular discussion about what your expectations are, you committed to strategic planning. And so, with all those things and a strategic plan that involves all of us in a stronger, better San Bernardino, yes I can make that commitment.” Interestingly, the new contract mandates at least two strategic planning sessions per year—and, she told the Council additional sessions would probably be wise. The contract the city’s new manager signed is longer than the city’s most recent ones—mayhap leavened by experience: the length and the pay are higher than the $248,076 per year the previous manager received. Although Ms. Miller is not a San Bernardino resident, she told the Mayor and Council she is committed to the city and said the city should strive to recruit other employees who do live in the city.

Not Gaming Atlantic City’s Future. New Jersey Governor Chris Christie’s administration last week announced it had settled all the remaining tax appeals filed by Atlantic City casinos, ending a remarkable fiscal drain which has contributed to the city’s fiscal woes and state takeover. Indeed, it appears to—through removal of fiscal uncertainty and risk‒open the door to the Mayor and Council to reduce its tax rate over the long-term as the costs of the appeal are known and able to be paid out of the bonds sold earlier this year—effectively spinning the dial towards greater fiscal stability and sustainability. Here, the agreements were reached with: Bally’s, Caesars, Harrah’s, the Golden Nugget, Tropicana, and the shuttered Trump Plaza and Trump Taj Mahal: it comes about half a year in the wake of the state’s tax appeal settlement with Borgata, under which the city agreed to pay $72 million of the $165 million the casino was owed. While the Christie administration did not announce dollar amounts for any of the seven settlements announced last week, it did clarify that an $80 million bond ordinance adopted by the city will cover all the payments—effectively clearing the fiscal path for Atlantic City to act to reduce its tax rate over the long term as the costs of the appeal are known and can be paid out of the municipal bonds sold earlier this year.  

In these tax appeals, the property owners have claimed they paid more in taxes than they should have—effectively burdening the fiscally besieged municipality with hundreds of millions in debt over the last few years as officials sought to avoid going into chapter 9 municipal bankruptcy. Unsurprisingly, Gov. Christie has credited the state takeover of Atlantic City for fostering the settlements, asserting his actions were the “the culmination of my administration’s successful efforts to address one of the most significant and vexing challenges that had been facing the city…Because of the agreements announced today, casino property tax appeals no longer threaten the city’s financial future.” The Governor went on to add that his appointment of Jeffrey Chiesa, the former U.S. Senator and New Jersey Attorney General to usurp all municipal fiscal authority in Atlantic City when, in his words, Atlantic City was “overwhelmed by millions of dollars of crushing casino tax appeal debt that they hadn’t unraveled,” have now, in the wake of the state takeover, resulted in the city having a “plan in place to finance this debt that responsibly fits within its budget.” The lame duck Governor added in the wake of the state takeover, the city will see an 11.4% drop in residents’ overall 2017 property tax rate. For his part, Atlantic City Mayor Don Guardian described the fiscal turnaround as “more good news for Atlantic City taxpayers that we have been working towards since 2014: When everyone finally works together for the best interest of Atlantic City’s taxpayers and residents, great things can happen.”

Puerto Rican Debt. The Fiscal Supervision Board in the U.S. territory wants to initiate a discussion into Puerto Rico’s debt—and how that debt has weighed on the island’s fiscal crisis—making clear in issuing a statement that its investigation will include an analysis of the fiscal crisis and its taxpayers, and a review of Puerto Rico’s debt and issuance, including disclosure and sales practices, vowing to carry out its investigation consistent with the authority granted under PROMESA. It is unclear, however, how that report will mesh with the provision of PROMESA, §411, which already provides for such an investigation, directing the Government Accounting Office (GAO) to provide a report on the debt of Puerto Rico no later than one year after the approval of PROMESA (a deadline already passed: GAO notes the report is expected by the end of this year.). The fiscal kerfuffle comes as the PROMESA Oversight Board meets today to discuss—and mayhap render a decision with regard to furloughs and an elimination of the Christmas bonus as part of a fiscal oversight effort to address an expected cash shortfall this Fall, after Gov. Ricardo Rosselló, at the end of last month, vowed he would go to court to block any efforts by the PROMESA Board to force furloughs, apprehensive such an action would fiscally backfire by causing a half a billion dollar contraction in Puerto Rico’s economy.

Thus, we might be at an OK Corral showdown: PROMESA Board Chair José Carrión III has warned that if the Board were to mandate furloughs and the governor were to object, the board would sue. As proposed by the PROMESA Board, Puerto Rican government workers are to be furloughed four days a month, unless they work in an excepted class of employees: for instance, teachers and frontline personnel who worked for 24-hour staffed institutions would only be furloughed two days a month, law enforcement personnel not at all—all part of the Board’s fiscal blueprint to save the government $35 million to $40 million monthly.  However, as the ever insightful Municipal Market Advisors managing partner Matt Fabian warns, it appears “inevitable” that furloughs and layoffs would hurt the economy in the medium term—or, as he wrote: “To the extent employee reductions create a protest environment on the island, it may make the Board’s work more difficult going forward, but this is the challenge of downsizing an over-large, mismanaged government.” At the same time, Joseph Rosenblum, the Director of municipal credit research at AllianceBernstein, added: “It would be easier to comment about the situation in Puerto Rico if potential investors had more details on their cash position on a regular basis…And it would also be helpful if the Oversight Board was more transparent about how it arrived at its spending estimates in the fiscal plan.”

Pensiones. The PROMESA Board and Puerto Rico’s muncipios appear to have achieved some progress on the public pension front: PROMESA Board member Andrew Biggs asserts that the fiscal plan called for 10% cuts to pension spending in future fiscal years, while Sobrino Vega said Gov. Ricardo Rosselló has promised to make full pension payments. Natalie Ann Jaresko, the former Ukraine Minister of Finance whom former President Obama appointed to serve as Executive Director of PROMESA Fiscal Control Board, described the reduction as part of the fiscal plan that the Governor had promised to observe: the fiscal plan assumed that the Puerto Rican government would cut $880 million in spending in the current fiscal year. Indeed, in the wake of analyzing the government’s implementation plans, the PROMESA Board appeared comfortable that the cuts would save $662 million—with the Board ordering furloughs to make up the remaining $218 million. The fiscal action came as PROMESA Board member Carlos García said that the board last Spring presented the 10 year fiscal plan guiding government actions with certain conditions, Gov. Rosselló agreed to them, so that the Board approved the plan with said conditions, providing that the government achieve a certain level of liquidity by the end of June and submit valid implementation plans for spending cuts. Indeed, Puerto Rico had $1.8 billion in liquidity at the end of June, well over the $291 million that had been projected, albeit PROMESA Board member Ana Matosantos asserted the $1.8 billion denoted just a single data point. Ms. Jaresko, however, advised that this year’s government cuts were just the beginning: the Board fiscal plan calls for the budget cuts to more than double from $880 million in this year, to $1.7 billion in FY 2019, to $2.1 billion in FY2020.  No Puerto Rican government representative was allowed to make a presentation to the board on the issue of furloughs.

Not surprisingly, in Puerto Rico, where the unemployment rate is nearly triple the current U.S. rate, the issue of furloughs has raised governance issues: Sobrino Vega, the Governor’s chief economic advisor non-voting representative on the PROMESA Oversight Board, said there was only one government of Puerto Rico and that was Gov. Rosselló’s, adding that under §205 of PROMESA, the board only had the powers to recommend on issues such as furloughs, noting: “We can’t take lightly the impact of the furloughs on the economy,” adding the government will meet its fiscal goals, but it will do it according its own choices, but that the Puerto Rican government will cooperate with the Board on other matters besides furloughs. His statement came in the wake of PROMESA Board Chair José Carrión III’s statement in June that if Puerto Rico did not comply with a board order for furloughs, the Board would sue.

Cambio?  Puerto Rico Commonwealth Treasury Secretary Raul Maldonado has reported that Puerto Rico’s tax revenue collections last month were was ahead of projections, marking a positive start to the new fiscal year for an island struggling with municipal bankruptcy and a 45% poverty rate. Secretary Maldonado reported the positive cambio (in Spanish, “cambio” translates to change—and may be used both to describe cash as well as change, just as in English.): “I think we are going to be $20 to $30 million over the forecast: For July, we started the fiscal year already in positive territory, because we are over the forecast. We have to close the books on the final adjustment but we feel we are over the budget.” His office had reported the revenue collection forecast for July, the start of Puerto Rico’s 2017-2018 fiscal year, was $600.8 million: in the previous fiscal year, Puerto Rico’s tax collections exceeded forecasts by $234.9 million, or 2.6%, to $9.33 million, with the key drivers coming from the foreign corporations excise tax, the sales and use tax, and the motor vehicle excise tax. Sec. Maldonado, who is also Puerto Rico’s CFO, reported that each government department is required to freeze its spending and purchase orders at 95% of the monthly budget, noting: “I want to make sure that they don’t overspend. By freezing 5%, I am creating a cushion so if there is any variance on a monthly basis we can address that. It is a hardline budget approach but it is a special time here.” Sec. Maldonado also said he was launching a centralized tax collection pilot program, with guidance from the U.S. Treasury—one under which three large and three small municipalities have enrolled in an effort to assess which might best increase tax collection efficiency while cutting bureaucracy in Puerto Rico’s 78 municipalities, noting: “We are going to submit the tax reform during August, and we will include that option as an alternative to the municipalities.”

Leadership Challenges to Fiscal & Physical Recoveries

08/04/17

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Good Morning! In this a.m.’s blog, we consider the ongoing fiscal and physical recovery of Flint, Michigan—as well as the fiscal recoveries of Pontiac and Lincoln Park, and we look at the special fiscal challenge to Puerto Rico’s debts.

In Like Flint. EPA has okayed the State of Michigan’s plans to forgive $20.7 million in past water infrastructure loans owed by the City of Flint, relying on federal legislation enacted at the end of last year to provide states the Safe Drinking Water Revolving Loan program to forgive past loans owed to a state. EPA Administrator Scott Pruitt noted: “Forgiving Flint’s past debt will better protect public health and reduce the costs associated with maintaining the city’s water system over time…Forgiving the city’s debt will ensure that Flint will not need to resume payments on the loan, allowing progress toward updating Flint’s water system to continue.” In response, Mayor Karen Weaver stated: “We appreciate the EPA’s continued assistance as we work to recover from the water crisis: We have come a long way, but there is still much more work that needs to be done. With help and support like this from federal, state as well as local entities, Flint will indeed bounce back.”

Emerging from State Fiscal Oversight. The Michigan Treasury Department reports that the Michigan municipalities of Pontiac and Lincoln Park have both sufficiently improved their fiscal conditions to warrant release from eight long years of state oversight: they may return to local control in the wake of Michigan Treasurer Nick Khouri’s announcement that the Pontiac and Lincoln Park Receivership Transition Advisory Boards would be dissolved and effective immediately, thereby returning full fiscal authority to the elected leaders of the respective municipalities. The Michigan Receivership Transition Advisory Boards, which have been monitoring the cities’ finances since the departure of emergency managers, have been dissolved—clearing the way for locally elected officials to resume complete control of the respective municipal governments again, with Lincoln Park now making regular contributions to its pension fund, with the Detroit suburb emerging from state oversight which commenced in 2014. Nearby Pontiac had sought a state financial review a decade ago—operating in the wake thereof under a consent agreement and an emergency manager. The Treasury today reports the municipality has a general fund balance of $14 million. Thus, the two municipalities join Wayne County, Benton Harbor, Highland Park, and four other municipalities in exiting such fiscal oversight; however, nine municipalities and school districts remain under some sort of state oversight, although the state has imposed an emergency manager only in Highland Park Schools. In making the announcement, Gov. Rick Snyder reported: “Under the guidance of the Receivership Transition Advisory Boards, both Lincoln Park and Pontiac have made significant progress to right their finances and build solid, fiscal foundations for their communities: This is a great achievement for the cities.”

In the case of Pontiac, the city’s debt long-term debt dropped nearly 80% under state oversight, from over $45 million to about $8.2 million since 2009, according to the Michigan Treasury Department, culminating at FY2016 year-end with a general fund balance of $14 million. At the same time, a blight remediation program in the city has succeeded in razing nearly 680 blighted residential properties since 2012, in no small part through CDBG assistance. Secretary Khouri noted: “Pontiac has seen great economic progress and opportunity since the lost decade.” The city of Lincoln Park cut its long term debt from more than $1 million in 2014 when it entered state oversight to $260,707. At the end of fiscal-year 2016, Lincoln Park ended with a general fund balance of $24.4 million.  The city entered state controlled emergency management in February 2014 and began its transition to local control in December 2015. “Today marks an important achievement for Lincoln Park residents, the city and all who have contributed to moving the city back to a path of fiscal stability,” Khouri said. Lincoln Park, with a population of close to 40,000, where Brad Coulter, who has served as the Emergency Manager, noted that the Hispanic and Latino population make up about 15% of Lincoln Park residents, describing the diversity as a “growing and an important part of the city” which as really helped “to stabilize the city.”

Puerto Rican Debt. The Fiscal Supervision Board in the U.S. territory wants to initiate a discussion into Puerto Rico’s debt—and how that debt has weighed on the island’s fiscal crisis—making clear in issuing a statement that its investigation will include an analysis of the fiscal crisis and its taxpayers, and a review of Puerto Rico’s debt and issuance, including disclosure and sales practices, vowing to carry out its investigation consistent with the authority granted under PROMESA. It is unclear how that report will mesh with the provision of PROMESA, §411, which already provides for such an investigation, directing the Government Accounting Office (GAO) to provide a report on the debt of Puerto Rico no later than one year after the approval of PROMESA (a deadline already passed: GAO notes the report is expected by the end of this year.). The fiscal kerfuffle comes as the PROMESA Oversight Board meets today to discuss—and mayhap render a decision with regard to furloughs and an elimination of the Christmas bonus as part of a fiscal oversight effort to address an expected cash shortfall this Fall, after Gov. Ricardo Rosselló, at the end of last month, vowed he would go to court to block any efforts by the PROMESA Board to force furloughs, apprehensive such an action would fiscally backfire by causing a half a billion contraction in Puerto Rico’s economy.

Thus, we might be at an OK Corral showdown: PROMESA Board Chair José Carrión III has warned that if the Board were to mandate furloughs and the Governor were to object, the board would sue. As proposed by the PROMESA Board, Puerto Rican government workers are to be furloughed four days a month, unless they work in an excepted class of employees: for instance, teachers and frontline personnel who worked for 24-hour staffed institutions would only be furloughed two days a month, law enforcement personnel not at all—all part of the Board’s fiscal blueprint to save the government $35 million to $40 million monthly.  However, as the ever insightful Municipal Market Advisors managing partner Matt Fabian warns, it appears “inevitable” that furloughs and layoffs would hurt the economy in the medium term—or, as he wrote: “To the extent employee reductions create a protest environment on the island, it may make the Board’s work more difficult going forward, but this is the challenge of downsizing an over-large, mismanaged government.” At the same time, Joseph Rosenblum, the Director of municipal credit research at AllianceBernstein, added: “It would be easier to comment about the situation in Puerto Rico if potential investors had more details on their cash position on a regular basis…And it would also be helpful if the Oversight Board was more transparent about how it arrived at its spending estimates in the fiscal plan.”

The Difficult Interplay of State & Local Physical & Fiscal Challenges, especially those that can threaten lives, health, and public safety.

07/26/17

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Good Morning! In today’s iBlog, we consider the fiscal and physical challenges confronting the City of Flint, Michigan as it seeks to settle on a permanent drinking water source.

Out Like Flint. Michigan Attorney General Bill Schuette has provided an update on his criminal investigation of the Flint drinking water crisis—a crisis which evolved from the state’s appointment of an emergency manager in place of the city’s elected leaders, and which has, since, led to steadily higher in the ranks of the state government, with the update coming as the Michigan Department of Environmental Quality has sued the City of Flint over claims the City Council has been foot-dragging in approving a switch to the Great Lakes Water Authority (GLWA) to provide its long-term drinking water. Mr. Schuette was joined by Genesee County Prosecutor David Leyton, his special counsel Todd Flood, and his chief criminal investigator Andrew Arena—with, to date, some baker’s dozen current or former Michigan or City of Flint officials charged, including two gubernatorially-appointed emergency managers who were reported to the State Treasurer. The suit alleges “the City Council’s failure to act will cause an imminent and substantial endangerment to public health in Flint.”

Michigan Department of Environmental Quality officials have acknowledged a mistake in failing to require corrosion-control chemicals to be added to the water—a mistake costly to health care, the city’s fisc, and trust in government, in the wake of lead leaching from pipes, joints, and fixtures into Flint homes and drinking water—leaving a situation today where residents are still advised not to drink tap water without a filter: five current or former state employees charged previously are from the Michigan Department of Environmental Quality and three from the Department of Health and Human Services, in the wake of outbreaks of Legionnaires’ disease after the state-ordered water switch—a switch which health investigators have since tied to 12 deaths.

Even though state and federal health officials have yet to definitively link the water switch to the disease, Michigan Attorney General Scheutte and his investigators have come close to doing so in public statements and documents related to the criminal charges. Last September, he warned Michigan Health and Human Services Director Nick Lyon he was a focus of the investigation, although, since, there has been no additional notification. But there are difficult fiscal, as well as physical and intergovernmental issues. Richard Baird, a senior advisor to Gov. Rick Snyder, at a meeting with the Flint Water Interagency Coordinating Committee, last Friday noted: “Given that the City of Flint is paying for two water sources and does not have a favorable long-term contract with the Great Lakes Water Authority (GLWA), the lack of action is costing the city an extra $600,000 each month: The city has projected that it will deplete its water and sewer fund reserves by the 4th quarter of 2018, which will necessitate a significant rate increase for residents and business if the matter is not resolved.”

Such an increase would be hard on the city’s citizens: per capita income for Flint was $23,593 in 2015—nearly 20% below the statewide average. Thus, it is most unsurprising that Mayor Karen Weaver, last April, recommended, with the support of Genesee County, GLWA, and state officials that the city extend its contract with GLWA for 30-years: such a contract would result in about $9 million in savings, because it would lock in a more favorable rate with GLWA and address the $7 million in debt service payments Flint is currently obligated to pay—with Mayor Weaver noting the decision ensured water quality for the city that is still recovering from a water contamination crisis that stemmed from the decision of its previous state-appointed emergency managers to shift water sources and participate in the KWA project. Under her proposed plan, Flint would recoup roughly $7 million in annual debt service by transferring its KWA water rights to the GLWA. (The city was preparing to shift to KWA supplied, untreated water in 2019, with plans to make much-needed upgrades to its treatment plant to comply with federal EPA drinking water standards; however, last April, the Mayor dropped the plan to make the switch to the bond-financed pipeline and recommended the city continue to purchase water from GLWA—claiming the GLWA supplied and treated water is more affordable and would save the city the fiscal and physical risk of still another supply shift: the switch is projected to result in a $2.4 million savings, because GLWA would impose a better rate than is currently available under the current short-term contract with the city.)

The City Council, last Wednesday, voted to postpone the vote on the water plan for another 30 days, after, last month, voting to extend Flint’s contract with GLWA to September in an effort to provide more time to examine and weigh the costs and benefits of the longer term water contract—a delay which Mayor Weaver described as triggering the need to petition the federal court to determine the contours of the legal authority for the city and state to properly execute the requisite agreements to secure a long-term water source “on behalf of the people of Flint.” The state complaint, filed in the U.S. District Court, seeks a declaration that the Flint City Council’s failure to act is a violation of the federal Safe Drinking Water Act and an order that Flint must enter into the long-term agreement with GLWA.

Flint City Councilman Eric Mays believes the federal court should give the City Council 30 days in which to call state officials to testify about the deal and allow the City Council to tweak it, stating he wants to amend the agreement to ensure Flint does not lose its investment in the Karegnondi Water Authority—a new pipeline to Lake Huron which was instrumental in Flint switching away from Detroit water while under the control of a state-appointed emergency manager. However, Michigan Department of Environmental Quality Director Heidi Grether had given the City Council a deadline to approve the agreement last month, writing: “The City is currently paying $14.1 million per year to obtain water from the GLWA through a 72-inch line that was previously transferred to Genesee County…Due to its decision to transfer the line, Flint will lose use of the 72-inch line on Oct. 1, 2017, absent approval of the Mayor’s recommendation: No other alternate pipeline currently exists to supply GLWA water to Flint.”

At the end of last week, ergo, Mr. Baird told Flint and Genesee County officials that the City Council’s indecision on a long-term water source was not only costing more than a half million dollars each month, but also risking “significant” water rate increases next year if something were not done soon, adding that the city’s stalling on selecting a long-term water source was imposing an extra $600,000 each month, because the city is currently purchasing water from two water sources—the Great Lakes Water Authority, from which it currently gets its treated water, and the Karegnondi Water Authority, from which it contractually would take water by 2019 to 2020. His remarks were given as part of an update on a federal lawsuit the Michigan Department of Environmental Quality filed late last month against the Flint City Council—a suit in which the state alleges the elected council members have endangered the public health by failing to approve a long-term drinking water source. He added that if the Flint City Council continues to delay its vote on the 30-year contract offer, the city’s water and sewer fund reserves are expected to be tapped out by the end of 2018—an outcome which, he warned, would “necessitate a significant rate increase for residents and businesses if this is not resolved.”

Mayor Weaver has recommended the Council approve the 30-year contract with the Detroit area Great Lakes authority, in part to ensure the cleanest water at the most inexpensive price. (The city already pays some of the nation’s highest water rates: approximately $53.84 per month on the water portion of residents’ monthly bill, according to a report from Raftelis Financial Consultants of Missouri). A 2016 report from Food and Water Watch, which surveyed the nation’s 500 biggest water systems, found that Flint residents paid almost double the national average for water and the highest rates in the country despite the city’s water being undrinkable without a filter.

Trying to Recover on all Pistons

07/19/17

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Good Morning! In this a.m.’s eBlog, we look back at the steep road out of the nation’s largest ever municipal bankruptcy—in Detroit, where the Chicago Federal Reserve and former U.S. Chief Bankruptcy Judge Thomas Bennett, who presided over Jefferson County’s chapter 9 municipal bankruptcy case, has noted: “[S]tates can have precipitating roles as well as preventative roles” in work he did for the Chicago Federal Reserve. Indeed, it seems the Great Recession demarcated the nation’s states into distinct fiscal categories: those with state oversight programs which either protected against or offered fiscal support to assist troubled municipalities, versus those, such as Alabama or California—with the former appearing to aid and abet Jefferson County’s descent into chapter 9 bankruptcy, and California, home to the largest number of chapter 9 bankruptcies over the last two decades, contributing to fiscal distress, but avoiding any acceptance of risk. Therefore, we try to provide our own fiscal autopsy of Detroit’s journey into and out of the nation’s largest municipal bankruptcy.

I met in the Governor’s Detroit offices with Kevyn Orr, whom Governor Rick Snyder had asked to come out from Washington, D.C. to serve as the city’s Emergency Manager to take the city into—and out of chapter 9 municipal bankruptcy: the largest in American history. Having been told by the hotel staff that it was unsafe to walk the few blocks from my hotel to the Governor’s Detroit offices on the city’s very first day in insolvency—a day in which the city was spending 38 cents on every dollar of taxes collected from residents and businesses on legacy costs and operating debt payments totaling $18 billion; it was clear from the get go, as he told me that early morning, there was no choice other than chapter 9: it was an essential, urgent step in order to ensure the provision of essential services, including street and traffic lights, emergency first responders, and basic maintenance of the Motor City’s crumbling infrastructure—especially given the grim statistics, with police response times averaging 58 minutes across the city, fewer than a third of the city’s ambulances in service, 40% of the city’s 88,000 traffic lights not working, “primarily due to disrepair and neglect.” It was, as my walk made clear, a city aptly described as: “[I]nfested with urban blight, which depresses property values, provides a fertile breeding ground for crime and tinder for fires…and compels the city to devote precious resources to demolition.” Of course, not just physical blight and distress, but also fiscal distress: the Motor City’s unbalanced fiscal condition was foundering under its failure to make some $108 million in pension payments—payments which, under the Michigan constitution, because they are contracts, were constitutionally binding. Nevertheless, in one of his early steps to staunch the fiscal bleeding, Mr. Orr halted a $39.7 million payment on $1.4 billion in pension debt issued by former Detroit Mayor Kwame Kilpatrick’s administration to make the city pension funds appear better funded than they really were; thus, Mr. Orr’s stop payment was essential to avoid immediate cash insolvency at a moment in time when Detroit’s cash position was in deepening debt. Thus, in his filing, Mr. Orr aptly described the city’s dire position and the urgency of swift action thusly: “Without this, the city’s death spiral I describe herein will continue.”

Today, the equivalent of a Presidential term later, the city has installed 65,000 new streetlights; it has cut police and emergency responder response times to 25% of what they were; it has razed 11,847 blighted buildings. Indeed, ambulance response times in Detroit today are half of what they were—and close to the national average—even as the city’s unrestricted general fund finished FY2016 fiscal year with a $143 million surplus, 200% of the prior fiscal year: as of March 31st, Detroit sported a general fund surplus of $51 million, with $52.8 million more cash on hand than March of last year, according to the Detroit Financial Review Commission—with the surplus now dedicated to setting aside an additional $20 million into a trust fund for a pension “funding cliff” the city has anticipated in its plan of debt adjustment by 2024.  

Trying to Run on all Pistons. The Detroit City Council has voted 7-1 to approve a resolution to allow the Motor City to realize millions of dollars in income tax revenues from its National Basketball Association Pistons players, employees, and visiting NBA players—with such revenues dedicated to finance neighborhood improvements across the Motor City, under a Neighborhood Improvement Fund—a fund proposed in June by Councilwoman (and ordained Minister) Mary Sheffield, with the proposal coming a week after the City Council agreed to issue some $34.5 million in municipal bonds to finance modifications to the Little Caesars Arena—where the Pistons are scheduled to play next season. Councilwoman Sheffield advised her colleagues the fund would also enable the city to focus on blight removal, home repairs for seniors, educational opportunities for young people, and affordable housing development in neighborhoods outside of downtown and Midtown—or, as she put it: “This sets the framework; it expresses what the fund should be used for; and it ultimately gives Council the ability to propose projects.” She further noted the Council could, subsequently, impose additional limitations with regard to the use of the funds—noting she had come up with the proposal in response to complaints from Detroit constituents who had complained the city’s recovery efforts had left them out—stating: “It’s not going to solve all of the problems, and it’s not going to please everyone, but I do believe it’s a step in the right direction to make sure these catalyst projects have some type of tangible benefits for residents.”

Detroit officials estimate the new ordinance will help generate a projected $1.3 million annually. In addition, city leaders hope to find other sources to add to the fund—sources the Councilmember reports, which will be both public and private: “We as a council are going to look at other development projects and sources that could go into the fund too.” As adopted, the resolution provides: “[I]t is imperative that the neighborhoods, and all other areas of the City, benefit from the Detroit Pistons’ return downtown …In turn, the City will receive income tax revenue, from the multimillion dollar salaries of the NBA players as well as other Pistons employees and Palace Sports & Entertainment employees.” The Council has forwarded the adopted proposals to Mayor Duggan’s office for final consideration and action. The proposed new revenues—unless the tax is modified or rejected by the Mayor—would be dedicated for use in the city’s Neighborhood Improvement Fund in FY2018—with decisions with regard to how to allocate the funds—by Council District or citywide—to be determined at a later date. The funds, however, could also be used to address one of the lingering challenges from the city’s adopted plan of debt adjustment from its chapter 9 bankruptcy: meeting its public pension obligations when general fund revenues are insufficient, “should there be any unforeseen shortfall,” as the resolution provides.

This fiscal recovery, however, remains an ongoing challenge: Detroit CFO John Hill laid up the proverbial hook shot up by advising the Council that the reason the city reserved the right to use the Pistons tax revenue to cover pension or debt obligation shortfalls was because of the large pension obligation payment the city will confront in 2024: “We knew that in meeting our pensions and debt obligation in 2024 and 2025 that those funds get very tight: If this kind of valve wasn’t there, I would have a lot of concerns that in those years its tighter and we don’t get revenues we expect we don’t get any of those funds to meet those obligations.”

But, as in basketball, there is another side: at the beginning of the week, the NBA, Palace Sports & Entertainment, and Olympia Entertainment were added to a federal lawsuit—a suit filed in late June by community activist Robert Davis and Detroit city clerk candidate D. Etta Wilcox against the Detroit Public Schools Community District. The suit seeks to force a vote on the $34.5 million public funding portion of the Pistons’ deal, under which Detroit, as noted above, is seeking to capture the school operating tax, the proceeds of which are currently used to service $250 million of bonds DDA bonds previously issued for the arena project in addition to the $34.5 million of additional bonds the city planned to issue for the Pistons relocation.

Emerging from Chapter 9–and the conflict between fiscal and physical safety.

07/07/17

Good Morning! In this a.m.’s eBlog, we consider the final emergence of Orange County, California from chapter 9 municipal bankruptcy; then we consider the ongoing fiscal and fiscal challenges for Flint’s leaders from its fiscal & physical challenges.

Free at Last? Twenty-three years ago, when the former Orange County, California Treasurer, Robert Citron, then managing an investment pool for southern California municipalities, speculated unwisely, the municipal pool he managed lost $1.64 billion—plunging the county into the first chapter 9 municipal bankruptcy of the modern era (California §53760)—a chapter 9 bankruptcy from which the County emerged this week in the wake of its final payment on the $1 billion worth of municipal bonds it had issued. Orange County, however, still owes approximately $20 million to various cities and agencies that have a separate repayment agreement—debt Orange County expects to resolve by late next year. (A subsequent grand jury investigation later found that Mr. Citron, who had earned praise for his investment skills, relied on a mail order astrologer and a psychic for interest rate predictions as Orange County’s Treasurer.)

For this writer, the emergence evokes memories of how controversial the concept of municipal bankruptcy had been—at the time—for the National League of Cities to advocate for the changes in chapter 9: the then Executive Director and the then President of NLC (former New York City Council Chair Carol Bellamy) decried the notion that an association of municipal elected leaders would support facilitating filing for municipal bankruptcy; yet the Orange County case illuminated its importance by demonstrating how important it was to have a mechanism in federal law to ensure continuity in the provision of essential municipal public services.  

In the case of Orange County, the insolvency of an investment pool it ran on behalf of itself and other municipalities in the region would have, absent the kinds of protections provided under chapter 9, risked plunging municipalities in the region into insolvency without a mechanism to ensure vital public services and operations. The County’s insolvency and threat to the other municipalities in the region was its own kind of tremor: a fiscal, rather than physical tremor. In the end, the access to chapter 9 meant the county was able to issue $1 billion in municipal bonds to avoid a critical default and ensure avoidance of any disruption in essential municipal services—bonds the payments on which ($1.5 billion including interest) were finally completed at the beginning of this month when the County made its final payment on that bankruptcy bond debt. While the price to its taxpayers was steep–repayments averaged $68 million a year, and the loss of vital public improvements and services great; the shock it sent to the nation’s cities was key in helping Congress better understand that while an Eastern Airlines could file for federal bankruptcy protection and simply walk away from its services and debts; that could never be the case for a city or county: there had to be a mechanism in federal law to ensure that a city, county, or public school system could continue to operate during insolvency.  

In managing these municipalities’ investment pool, Mr. Citron made unlucky/unwise wagers on interest rates—so unwise that the multi-jurisdiction investment pool suffered a crippling $1.64 billion loss. Now California State Senator John Moorlach, who prior to his Senate service was twice re-elected Orange County Treasurer-Tax Collector after running against Mr. Citron in 1994, has noted: “The bankruptcy dramatically changed my life…I sort of feel like I lived in a movie. I was an officer of the county when those recovery bonds were issued, and I wondered if I’d live long enough to see them paid off. It was a great turn-around opportunity. A lot has changed since then, and the county is better for it. It’s been nearly 23 years, and no one has been able to pull a stunt like this again. It’s a good day.”

While the “day” is not quite over: there are still another $19.7 million which must be settled before all municipal bankruptcy-related bills are resolved; the fiscal lesson appears to have been learned—or as current Supervisor William Steiner put it: “Despite the checks and balances now, and a commitment to strategic planning, there is always the chance that institutional memory will fade as time goes by and as leadership changes…The county has essentially fared well over the years despite the bankruptcy. Still, millions of dollars have been diverted from other important county departments and priorities.” The godfather of modern-day chapter 9 municipal bankruptcy, the incomparable Jim Spiotto, with whom I had the great fortune to work for so many years to achieve enactment of today’s municipal bankruptcy laws, appropriately notes: “Chapter 9 is the most extreme remedy, the last resort, if you can even call it a last resort.” Nevertheless, as he puts it, it creates a powerful tool for a municipality to avoid a potentially devastating “run on the bank.”

Out Like Flint? The State of Michigan, whose former Emergency Manager law played the critical role precipitating the grave physical and fiscal crisis affecting Flint, is now pressing the Flint City Council to vote on a long-term water contract under which Flint would lose rights to a municipal bond financed water pipeline—after the City Council two weeks ago voted to extend the city’s water delivery contract with the Great Lakes Water Authority (GLWA) until September, but delayed a vote on a longer term proposal by Mayor Karen Weaver to extend the contract for 30-years. Unsurprisingly, the state is now ramping up the pressure: in the wake of this week’s City Council vote, the state Department of Environmental Quality (MDEQ) filed suit against the city over the delay on a long-term arrangement, with the state alleging that the City Council’s refusal to approve a long-term water contract is endangering public health in the wake of the city’s lead contamination crisis. The complaint seeks a declaration that the Council’s failure to act is a violation of the federal Safe Drinking Water Act and a mandate that the city must enter into the long-term agreement with the GLWA negotiated by Mayor Weaver. The MDEQ charges that the city would be wasting its resources if it refuses to quit its current Karegnondi water pipeline plan: “The MDEQ has determined that the City Council’s failure to approve the agreement with GLWA and continued consideration of other options that may require operation of the water treatment plant places public health at risk.”

Under the proposed long-term contract, Flint would lose water rights to the Karegnondi Water Authority (KWA) (a new pipeline to Lake Huron, which is currently under construction). Thus, as Flint has awaited completion of the Karegnondi pipeline, it has been drawing its water from the Flint River—withdrawals which contributed to corroding pipes and lead contamination. Flint has been preparing to shift to KWA supplied, un-treated water in two years—with plans to construct vital upgrades to its treatment plant to meet EPA-mandated standards. In April, Mayor Weaver dropped the plan to make the switch to the bond-financed pipeline and recommended the city continue to purchase water from GLWA, believing that the GLWA supplied and treated water is more affordable—and apprehensive about the risk of another supply shift. With the city’s fiscal and physical health scarred by the water contamination crisis which came in the wake of the state-appointed emergency manager’s fateful decision to allow the city’s contract with Detroit for Lake Huron-treated water to expire—Mayor Weaver advised: “The recommendation I put forward months ago is the best option to protect public health and is supported by the public health community…[It] would also allow the City to avoid a projected 40 percent water rate increase and ensure the City of Flint gets millions of dollars to continue replacing lead tainted pipes and make much-needed repairs to our damaged infrastructure so we are able to deliver quality water to residents. The people of Flint have waited long enough for a reliable, permanent water source. Implementing my recommendation will provide that, and will allow us to move forward as a community and focus more on rebuilding our City.” Under her plan, Flint would recoup the roughly $7 million in annual debt service by transferring its KWA water rights to the GLWA.

Nevertheless, as Flint Councilmember Eric Mays described his apprehensions with regard to Flint losing its rights to the KWA pipeline, he recommended the city retain the asset: “My position is that the since the Governor won’t apologize, and the state has the money they can pay the bond; and whether we ever use the KWA asset, I don’t want, at this juncture, to turn over that asset and lose those rights under the deal with GLWA…I would be almost ready to vote for the GLWA deal if we could tweak it and get that bond off to the state and still retain the asset.” He added that he is the only Councilmember to propose an alternative to Mayor Weaver’s plan—a plan, he added, on which the Council “has done nothing.” Rather, he believes the State of Michigan, the precursor of the fiscal and physical crisis, should bear the burden for the municipal bond payments: “Since the MDEQ issued a suspicious administrative consent order for minor repairs and put it into the bond prospectus at the initial bond sale, my position is that Governor has the money and can pay the bond.”

Disparate Fiscal Solvency Challenges

06/23/17

Good Morning! In this a.m.’s eBlog, we consider the serious municipal fiscal challenges in Ohio, where the decline in coal-fired power has led Adams County auditor David Gifford to warn that if its existing power plants close, the county could be forced to raise its property tax rates at least 500% in order to make its requisite school district bond interest payments. Then we turn to the steep fiscal trials and tribulations of implementing San Bernardino’s post-chapter 9 exit, before finally considering the governing challenges affecting the City of Flint’s physical and fiscal future, and then to the criminal charges related to Flint’s fiscal and moral insolvency. Finally, we turn to the potential for a new fiscal chapter for the nearly insolvent Virginia municipality of Petersburg.

Fiscal Municipal Distress in Coal Country. While President Trump has stressed his commitment to try to protect the U.S. coal industry, less attention has been focused on the municipal fiscal challenges for local elected leaders. For instance, in Adams County, Ohio, where the median income for a household is about $33,000, and where approximately 20% of families fall below the federal poverty line, the county, with a population near 22,000, has been in fiscal emergency for more than two years—making it one of 23 such jurisdictions in the state.  But now its auditor, David Gifford, warns that if its coal-fired power plants close, the county could be forced to raise the property tax by at least 500% in order to make the bond payments on its public school districts debt. (In Ohio, when so designated, the average time a municipality spends in fiscal emergency averages about five years.) Since 1980, when the state auditor was empowered to place municipalities in fiscal emergency, Ohio has declared and released 54 communities—with time spent in fiscal emergency averaging five years, albeit the Village of Manchester in Adams County (approximately 2,000 residents) holds the record for time spent in fiscal emergency — nearly 20 years and still counting. Over the past five years, some 350 coal-fired generating units have closed across the country, according to the Energy Information Administration: closures, which have cost not just jobs, but key tax revenues vital to municipal solvency. It is uncertain whether any actions by the White House could make coal viable as a source of energy generation; it is clear that neither the Trump Administration, nor the State of Ohio appear to have put together fiscal options to address the resulting fiscal challenges. Ohio Municipal League Director Kent Scarrett, in testimony before the Ohio Legislature last February, on behalf of the League’s 733 municipal members, in which close to 90% of Ohio’s citizens live, reminded legislators that “a lack of opportunity to invest in critical infrastructure projects” and “the myriad of challenges that present themselves as a result of the escalating opioid epidemic,” would require “reigniting the relationship between the state and municipalities.” 

Post Municipal Bankruptcy Challenges. San Bernardino Mayor Carey Davis this Wednesday declared the city’s municipal bankruptcy process officially over, noting San Bernardino had come “to the momentous exit from that process,” a five-year process which resulted in the outsourcing of its fire department to San Bernardino County, contracting out waste removal services, and reductions in healthcare benefits for retirees and current employees to lessen the impact on pensions. Mayor Davis noted: “The proceedings guided us through a process of rebuilding and restructuring, and we will continue to rebuild and create systems for successful municipal operations,” as the City Council confronted by what City Manager Mark Scott warned was “without a doubt among the lowest in per capita revenues per capita and in city employees per capita,” yet still confronted by what he described as:  “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Nevertheless, the Council adopted its first post-chapter 9 budget—a budget which is projected to achieve a surplus of $108,000, sufficient to achieve a 15% reserve. To give a perspective on the fiscal challenge, Mr. Scott warned the Mayor and City Council: “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Adding that San Bernardino’s property values and business spending are lower than other cities, contributing to its low revenue, he added: “At the same time, it costs roughly the same to repair a street in Rancho Cucamonga as in San Bernardino: California’s tax system rewards wealth.”

Nevertheless, even though San Bernardino’s plan of debt adjustment calls for minimal revenue growth over the next two decades, he advised that the plan is focused on making the city more attractive. Ergo, he proposed three criteria: 1) urgent safety concerns, including the relocation of City Hall to address unreinforced masonry concerns; 2) restoration of public safety, 30 new police officers, vehicle and safety equipment replacement, radio maintenance, and a violence intervention initiative; 3) greater efficiencies, via information technology upgrades, and economic development and revenue growth—to be met by hiring a transportation planner, associate planner, grant-writing, and consulting. In addition to the operating budget, the manager also focused on the city’s capital budget, proposing significant investment for the next two to three years. Some of these increased costs would be offset by reducing the city’s full-time city employees by about 4%. Nevertheless, the Manager noted: “The community’s momentum is clearly increasing, and we are building internal capacity to address our management challenges…We look forward to the next year and to our collective role in returning this city to a more prosperous condition.”

Under its plan of debt adjustment, San Bernardino began making distributions to creditors this month: Mayor Carey Davis noted: “From the beginning, we understood the time, hard work, sacrifice and commitment it would take for the city to emerge from the bankruptcy process,” in asking the Council to adopt the proposed $160 million operating budget and a $22.6 million capital budget.

Moody Blues. The fiscal challenge of recovering from municipal bankruptcy for the city was highlighted last April when Moody’s Investors Service analysts had warned that the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Meredith Jury would “lead to a general fund unallocated cash balance of approximately $9.5 million by fiscal 2023, down from a $360 million deficit the city projected in 2013 for the fiscal years 2013-23,” adding, however, that the city still faces hurdles with pensions, public safety, and infrastructure. Noting that San Bernardino’s plan of debt adjustment provided more generous treatment of its pension obligations than its municipal bondholders—some of its unsecured creditors will receive as little as 1% of what they are owed—and the city’s pension obligation bondholders will take the most severe cuts—about 60%–or, as Moody’s moodily noted: “The [court-approved] plan calls for San Bernardino to leave bankruptcy with increased revenues and an improved balance sheet, but the city will retain significant unfunded and rapidly rising pension obligations…Additionally, it will face operational challenges associated with deferred maintenance and potential service shortfalls…which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.”

The glum report added that San Bernardino’s finances put its aging infrastructure at risk, noting the deferral of some $180 million in street repairs and $130 million in deferred facility repairs and improvements, and that the city had failed to inspect 80 percent of its sewer system, adding: “Cities typically rely on financing large capital needs with debt, but this option may no longer exist for San Bernardino…Even if San Bernardino is able to stabilize its finances, the city will still face a material infrastructure challenge.”  Moody’s report added: “Adjusted net pension liability will remain unchanged at $904 million, a figure that dwarfs the projected bankruptcy savings of approximately $350 million.”

Justice for Flint? Michigan Attorney General Bill Schuette has charged Michigan Health and Human Services Director Nick Lyon with involuntary manslaughter and misconduct in office, making the Director the fifth state official, including a former Flint emergency manager and a member of Gov. Rick Snyder’s administration, to be confronted with involuntary manslaughter charges for their alleged roles in the Flint water contamination crisis and ensuing Legionnaire’s disease outbreak which has, to date, claimed 12 lives, noting: “This is about people’s lives and families and kids, and it’s about demonstrating to people across the state—it doesn’t matter who you are, young, old, rich, poor, black, white, north, south, east, west. There is one system of justice, and the rules apply to everybody, whether you’re a big shot or no shot at all.” To date, 12 people have died in the wake of the switch by a state-appointed Emergency Manager of the city’s drinking water supply to the Flint River—a switch which led to an outbreak of Legionnaires’ disease that resulted in those deaths. Flint Mayor Karen Weaver, in response, noted: “We wanted to know who knew what and when they knew it, and we wanted someone to be held accountable. It’s another step toward justice for the people Flint,” adding that: “What happened in Flint was serious: Not only did we have people impacted by lead poisoning, but we had people who died.”

In making his charges, Attorney General Schuette declined to say whether he had subpoenaed Governor Rick Snyder—with the charges coming some 622 days after Gov. Snyder had acknowledged that Flint’s drinking water was tainted with lead—and that the state was liable for the worst water tragedy in Michigan’s history—a tragedy due, in no small part, from the state appointment of an emergency manager to displace the city’s own elected leaders.

The state Attorney General has charged HHS Director Lyon in relation to the individual death of Robert Skidmore, who died Dec. 13, 2015, “as a result of [Mr.] Lyon’s failure to warn the public of the Legionnaires’ outbreak; the court has also received testimony that the Director “participated in obstructing” an independent research team from Wayne State University which was investigating the presence of Legionella bacteria in Flint’s water. In addition, four defendants who have been previously charged, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality drinking water Director Liane Shekter-Smith, DEQ drinking water official Stephen Busch, and former City of Flint Water Department manager Howard Croft, each now face additional charges of involuntary manslaughter in Mr. Skidmore’s death—bringing, to date, 15 current or former Michigan or Flint city officials to have been charged.

Attorney General Scheutte, at a press conference, noted: “Involuntary manslaughter is a very serious crime and a very serious charge and holds significant gravity and weight for all involved.” He was joined by Genesee County Prosecutor David Leyton, Flint Water Investigation Special Prosecutor Todd Flood, and Chief Investigator Andrew Arena. (In Michigan, involuntary manslaughter is punishable by up to 15 years in prison and/or a $7,500 fine.) The announcement brings to 51 the number of charges leveled against 15 current and former local and state leaders as a result of the probe during which 180 witnesses have been interviewed—and in the wake of the release this week of an 18-page interim investigation report, which notes: “The Flint Water Crisis caused children to be exposed to lead poisoning, witnessed an outbreak of Legionnaires’ disease resulting in multiple deaths, and created a lack of trust and confidence in the effectiveness of government to solve problems.”

A New City Leader to Take on Near Insolvency. Petersburg, Virginia has hired a new City Manager, Aretha Ferrell-Benavides, just days after consultants charged with the fiscal challenge of extricating the city from the brink of municipal bankruptcy advised the Mayor and Council the municipality needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies: increased taxes, they warned, would not do the trick; rather, in the wake of a decade of imbalanced budgets that drained the city’s rainy day funds, triggered pay cuts, disrupted the regional public utility, and forced steep cuts in public school funding, the city needed a new manager. Indeed, on her first day, Ms. Ferrell-Benavides said: “To have the opportunity to come in and make a difference in a community like this, it’s worth its weight in gold.” The gold might be heavy: her predecessor, William E. Johnson III, was fired last year as the city fiscally foundered—leading Mayor Sam Parham to note: “We’re looking forward to a new beginning, better times for the city of Petersburg.”

Manager Ferrell-Benavides won out in a field of four aspirants, with Mayor Parham noting: “She was definitely head and shoulders above the other candidates…She had clear, precise answers and a 90-day plan of action,” albeit that plan has yet to be shared until after she meets with department heads and residents in order to get a better understanding of the city’s needs. Nevertheless, City Councilman Charles Cuthbert noted: “Her energy and her warm personality and her expressions of commitment to help Petersburg solve its problems stood out…My sense is that she truly views these problems as an opportunity.” In what will mark a fiscal clean slate, Manager Ferrell-Benavides will officially begin on July 10th, alongside a new city Finance Director Blake Rane, and Police Chief Kenneth Miller, who is coming to Petersburg from the Virginia Beach Police Department. She brings considerable governmental experience, including more than 25 years of work in government for the State of Maryland, the Chicago Public Housing Authority, the City of Sunnyvale, Calif.; and Los Alamos, New Mexico—in addition to multiple jobs with the District of Columbia.

 

The Fiscal Imbalances & Human & Fiscal Consequences of Fiscal Distress

06/16/17

Good Morning! In this a.m.’s eBlog, we consider the lessons learned from Flint—lessons not unrelated to the largest municipal bankruptcy in U.S. history in Detroit.

Michigan Attorney General Bill Scheutte, stating “People have died because of the decisions people made, has charged five Michigan state employees with involuntary manslaughter over their actions and involvement with Flint’s lead-contaminated water, including Nick Lyon, the Director of the Michigan Department of Health and Human Services, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality Drinking Water Chief Liane Shekter-Smith, state Water Supervisor Stephen Busch, and former Flint Water Department Manager Howard Croft. The quintet is accused of failing to alert the public about an outbreak of Legionnaires’ disease in the Flint area related to its contaminated drinking water—contamination which was suspected in the 12 deaths, Legionnaires’ disease sickening 79 others, and near insolvency of the City of Flint. Mr. Scheutte has not ruled out potential charges against Michigan Governor Rick Snyder, and he announced a new list of charges in a sweeping investigation that has already led to cases against 13 officials

Mayor Karen Weaver, in the wake of the press conference, noted: “It’s terrible what has occurred, but it’s a good day for the people of the city of Flint…We’ve had people die as a result of this water crisis. And for justice to be had is wonderful.”

Attorney General Bill Schuette, at the press conference, stated that the state’s health Director had failed to protect the residents of Flint, resulting in the death of at least one person, 85-year-old Robert Skidmore of Genesee Township. He also charged Michigan’s Chief medical officer, Dr. Eden Wells, with obstruction of justice and lying to a police officer, noting: “People have died because of the decisions people made…There are two types of people in the world: Those who give a damn and those who don’t. This is a case where there has been willful disregard.”

Mr. Scheutte’s charges mark the first time investigators have drawn a direct link between the acts of state government officials in Flint’s water contamination crisis and the deaths of residents which followed. Since 2014, when this city switched water suppliers, partly to save money, the water has been linked to the lead poisoning of children and the deaths of 12 people and 79 other residents of the city sickened by Legionnaires’ disease in 2014-15, which experts have linked to the contaminated water after the city, on the directions of the Governor’s then appointed Emergency Manager, Darnell Earley, switched to Flint River water in April of 2014.

At the press conference, Attorney General Schuette indicated he has not ruled out possible charges against the Governor. His actions came in the wake of his earlier charges of obstruction of justice against Michigan’s chief medical officer, Dr. Eden Wells, charged with obstruction of justice and lying to a police officer, noting: “People have died because of the decisions people made,” so that his actions were critical to the restoration of trust and accountability. “There are two types of people in the world: Those who give a damn and those who don’t. This is a case where there has been willful disregard” for the health and safety of others, Flood said.

The charges against Mr. Earley, the gubernatorially appointed former emergency manager on whose watch the city switched to Flint River water, include false pretenses, conspiracy to commit false pretenses, misconduct in office and willful neglect of duty while in office—charges which a carry a sentence of up to 20 years in prison. Attorney General Schuette noted: “The health crisis in Flint has created a trust crisis in Michigan government.”

Governor Snyder issued a statement of support for Mr. Lyons and Dr. Wells; he appeared critical of the legal process, noting that other state employees had been charged more than a year ago, but had yet to have their cases tried in court: “That is not justice for Flint, nor for those who have been charged.”

The state actions do not address the fundamental underlying fiscal issue of equity—or what Grand Rapids Mayor Rosalynn Bliss notes is the state’s broken state system of funding municipalities, or, as she told her colleagues at the Mackinac Policy Conference the week before last, she had been forced to adopt more local taxes and cut staff in order to make up for consistent cuts in state revenue sharing. Noting a lack of any fiscal bridge to address fiscal disparities, she told her colleagues that even as her city’s population has continued to grow towards the 200,000 mark, it has been forced to cut its staff by 25% since 2005: she reported the city has 100 fewer police officers now than there were 15 years ago—meaning that during Grand Rapids’ budget discussions this year, the city’s voters and taxpayers, to bridge gaps in state funding, agreed to taxes for public safety, streets, and parks. She described this “shift to the local units, because people care about their local services and what’s available to them, because we know that’s what makes cities great. That’s what attracts families to want to live in cities and businesses to move to cities: people want to live in safe neighborhoods. They want to drive on streets where the tires don’t pop from potholes. They want to be able to walk to a park that’s safe where their kids can play on a playground. Where the swimming pool is actually open. Those are decisions we grapple with at the local level every single day. And the decisions being made in Lansing impact every single city, including Grand Rapids…People move to Michigan for the quality of life – but funding issues can impact what services cities are able to provide to residents that they value…Long-term, relying on local taxes to keep up quality of life initiatives isn’t the answer: It’s inequitable, not every city has those resources.”

In Michigan, a municipal financial emergency is defined as a state of receivership. The state’s financial  emergency status, along with the Emergency Financial Manager was first created in in 1988, but replaced in 2011, and then, in 2012, voters replaced that with Public Law 436, the Local Financial Stability and Choice Act, which includes several triggers for a preliminary review:

  • board requesting a review via resolution,
  • local petition of 5 percent of gubernatorial election voters requesting one,
  • creditor’s written request,
  • missed payroll,
  • missed pension payments,
  • deficit-elimination plan breach or lack of such a plan within 30 days after its due day,
  • a legislative request.