Physical & Fiscal Solvency & the Unremitting Challenges of Water

Good Morning! In this morning’s eBlog, we consider the route to fiscal solvency taken by the small Virginia municipality of Petersburg, the major legal challenges to the physical and fiscal future of Flint; and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road Back to Fiscal Solvency. Forensic auditors earlier this week presented their findings from the audit they conducted into the city of Peters burg’s financial books during a special City Council meeting in the small, historic Virginia City of Petersburg, and answered questions from Council Members. Their key focus was on the “ethical tone” of the city government: they noted they had found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time: The culture led employees to do things they might not otherwise do.” The list of misdeeds included misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. They added that the ethical problems appeared to be more “systemic” rather than individual, testifying, for instance, that they had examined fuel consumption and “[W]e could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.” Because of the city’s limited budget, the scope of the auditor’s (PBMares) work could only go so far. Council Members Darrin Hill and Treska Wilson-Smith both expressed sentiments that the audit did not go far enough; however, former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more money than the nearly insolvent city had. In fact, the city spent approximately $1 million on turnaround services, with the vast bulk of that amount to the Bobb Group to obtain outside help from the firm led by the former Richmond City Manager in its efforts to pull Petersburg back from the brink of insolvency and scrutinize the cash-strapped government’s books. The city devoted nearly $195,000 to a forensic audit by the firm PBMares. Former Mayor and now City Councilman Howard Myers believes Petersburg’s taxpayers have gotten their money’s worth: “They brought us from the depths of indebtedness…I think the resistance then was mainly misinformed about the nature of how things had gotten to the point they were.” But from the abyss of insolvency, city officials now project Petersburg will have $2 million in savings left over from the fiscal year which ended June 30. To get there, the city has deeply reduced pay for emergency workers, cut funding for public schools, and eliminated programs for children in an effort to close a $12 million hole in the city’s budget—even as those efforts still left the Council confronted by some $18.8 million in past-due bills, as well as litigation over the city’s mounting debts—not to mention growing taxpayer pressure to cease to exist, but rather to dissolve its charter and revert to becoming part of one or more counties. Nevertheless, as Mayor Samuel Parham put it: “We had to take a chance: We were at a point where all the banks were laughing at us, saying: ‘We’re not going to pay you a dime; you couldn’t afford to mail an envelope.’”

Today, it seems that gamble has paid off: the contract with Mr. Bobb’s firm ended last month, and, as Mayor Parham stated: “Look, God bless Robert Bobb…We couldn’t get anyone — nobody wanted to come risk their career to save Petersburg. The storm was so massive, it was sinking all of us, but he told us he had dealt with many storms in his 40-year career.” The appointment of Mr. Bobb, however, was a political gambit which drew the opposition of a “good government group,” Clean Sweep Petersburg, which had helped launch an effort to recall Mr. Myers and Mayor Parham. The issue which created the greatest political discord: privatization of the city’s water and sewer authority.  In an interview this week, Mr. Bobb noted that the city’s future fiscal success will depend largely on the City Council’s ability to be accountable to taxpayers through their own decisions and those of the fresh administration hired in a municipal reset. Critical to that success will be firm municipal oversight of cash flow, strong leadership in the finance department, and a newly created revenue collection department designed to wrest responsibility away from the Treasurer’s office, which, according to Mr. Bobb, was not under the Council’s purview: he added the city’s elected leaders “have a tremendous fiduciary responsibility to perform at a high level on behalf of the city’s taxpayers: I think they have a chance, absolutely. They really have to control spending, though, and be careful.” He added that  of the $10 million the firm calculated it had helped save or bring in through a combination of state money it pursued, savings achieved by restructuring debt, the sale of city assets and other actions: “We’ve given the administration and the City Council a reset and an opportunity to build moving forward: “It really is up to the City Council now.”

Out Like Flint. Thousands of Flint, Michigan’s citizens are still grappling with the effects of the city’s state-caused lead-poisoning drinking water crisis, one occasioned by a gubernatorially appointed Emergency Manager, which has, today, confronted the city with many citizens facing possible tax liens and even foreclosure on their homes due to unpaid water bills: more than 8,000 residents have received notices that past-due water bills—categorized as those left unpaid for six months or more—must be resolved to avoid a lien being placed on their property. The bills in question cover two years: they total more than $5 million in delinquent water and sewer charges, according to the city. The ongoing fiscal and physical stress comes amid an involuntary manslaughter trial after  Federal Judge Judith Levy last June ruled that the conduct of government officials was “so egregious as to shock the conscience,” approving a $97 million settlement from the State of Michigan to replace water lines in at least 18,000 households.

Nevertheless, today, the water in Flint remains unsafe to drink without a filter. Unsurprisingly, in the city, where the estimated median household income in 2015 ($25,342) was more than 10 percent lower than in 2000, and where assessed housing (home/condo) values have dropped by nearly 50 percent to a level 75 percent lower than the statewide average, the city is ensnared in a vicious fiscal quandary: the liens threatened by the city, if implemented, represent the first step in making a claim on an individual’s property, setting off a legal process which could ultimately result in families losing their homes—further depressing assessed property values. And that is in a municipality where the city’s residents face some of the highest water bills in the country.  (To bring some relief, Michigan Gov. Rick Snyder last year approved a $30 million plan to reimburse residents for a portion of payments made since April 2014 on water used for drinking, bathing, and cooking.) That state assistance ended early this year, however, so now the city’s leaders are faced with the grim task of condemnation: once water payments are missed on water or sewer accounts for more than six months, the city’s ordinance requires the Treasurer to transfer the lien to a homeowner’s property tax bill—or, as Mayor Karen Weaver puts it: “We must follow the law…I understand the concerns that have been raised, and I am working to see if any changes or something can be done to help those affected by this, especially given the extraordinary circumstances we have endured due to the water crisis.”

But Flint’s fiscal and physical crisis has become a legal entanglement for the State of Michigan, where, in another courtroom, Michigan Gov. Rick Snyder, whose original appointment of a series of state-appointed emergency managers who ran Flint city government from 2011 until mid-2015, making key decisions related to city’s water system (under former Emergency Manager Darnell Earley, the city changed its water source in what was explained as a cost-saving move, switching from pre-treated water from Lake Huron to raw water from the Flint River—and after which the DEQ did not require the city to treat the water to make it less corrosive to lead pipes and plumbing, causing lead to leach into the water supply).

That decision to preempt the city’s local elected officials had led to the fateful decision to switch the city’s water supply to a contaminated system; while state responsibility appears to be a hot potato—with state leaders not saying who initially opposed issuing a  state emergency over the Flint water crisis. During a preliminary examination this Wednesday, in the criminal case against Nick Lyon, Director of the Michigan Department of Health and Human Services, special prosecutor Todd Flood read from a November 2015 email from Richard Baird, a senior advisor to Gov. Snyder, in which Mr. Baird had written “the ‘boss’ wanted to avoid triggering the emergency, which authorizes the Michigan State Police to coordinate relief efforts and requests for assistance from the federal government.” (Former President Obama signed an emergency declaration for Flint days after Gov. Snyder ultimately requested it, clearing the way for federal assistance to replace damaged lead and galvanized water service lines in the city.) Thus, the ongoing criminal trials in which the State of Michigan and City of Flint employees have been charged with criminal wrongdoing related to the water crisis (of which there are a total of 13 pending in Genesee District Court). In the trial, Corinne Miller, the former head of Disease Control for the State of Michigan, testified in a key court hearing Wednesday that the court must determine if Nick Lyon, the then Director of the Michigan Department of Health and Human Services, must face an involuntary manslaughter charge. (Note, Mr. Lyon, has remained on the job while facing charges of involuntary manslaughter and misconduct in office.)

Indeed, the Michigan courtrooms have become filled: attorneys for 21 law firms have filed a consolidated class-action lawsuit against two engineering firms, Flint officials, and Michigan officials, including Gov. Rick Snyder and former state Treasurer Andy Dillon over Flint’s lead-contaminated water—so egregious that last June, Judith Levy ruled that Flint residents have sufficiently argued that the conduct of government officials “was so egregious as to shock the conscience.” The complaint before her had noted that approximately 100,000 Flint residents “have experienced and will continue to experience serious personal injury and property damage caused by defendents’ deliberate, reckless and negligent misconduct…Defendents caused a public health crisis by exposing (Flint residents) to contaminated water” and “exacerbated the crisis by concealing and misrepresenting its scope, failing to take effective remedial action to eliminate it, and then lying about it to cover up their misconduct.”

The lawsuit, filed on behalf of Flint’s 100,000 residents and other users of its water system, says the defendants acted recklessly and did not respect residents’ due process rights argues that the engineering firms and government officials unconstitutionally did not treat the predominantly black residents of Flint the same as the predominantly white residents of great Genesee County. In late July, a three-judge panel of the 6th U.S. Circuit Court of Appeals allowed plaintiffs in one case before Judge Levy to try to seek relief from Gov. Snyder in the form of compensation for education, medical monitoring and evaluation services for ongoing harm from Flint’s lead-contaminated water. In the other case, the appeals judges dismissed the possibility of seeking penalties for Gov. Snyder, the State of Michigan, the Michigan Department of Environmental Quality, and the Michigan Department of Health and Human Services. All three of the judges, however, wrote that the 11th Amendment gives the state and Snyder immunity against damages sought by private citizens.

Undercutting Sovereignty. President Trump set off a broad sale of Puerto Rico’s municipal bonds this week when he said: “You can say goodbye to that,” referring to the U.S. territory’s $73 billion debt as one option to help Puerto Rico recover from Hurricane Maria in an interview on Fox News during his visit to Puerto Rico—a suggestion which OMB Director Mick Mulvaney discounted just hours later, stating the White House does not intend to become involved in Puerto Rico debt restructuring—debt which, in any case, the President has no unilateral authority to forgive. The President had stated: “We’re going to work something out. We have to look at their whole debt structure. They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out…you can wave goodbye to that,” unsurprisingly leading some to understand that the Trump administration would force municipal bondholders to forgive Puerto Rico’s debt. (The price of Puerto Rico’s municipal bonds, already down in the wake of Hurricane Maria, fell another 31 percent—only recovering in the wake of comments by Office of Management and Budget Director Mulvaney, attempting to backtrack, stating: “I wouldn’t take it word for word with that. I talked to the President about this at some length yesterday as we flew home on Air Force One: The primary focus of the federal effort is to make sure the island is safe and that we’re rebuilding the island,” adding that the federal government would not pay off debts or bail out municipal bondholders: “I think what you heard the President say is that Puerto Rico is going to have to figure out a way to solve its debt problem.”

The White House Wednesday asked Congress to approve $29 billion in additional hurricane relief and municipal debt forgiveness, seeking to help Puerto Rico and the U.S. Virgin Islands, as well as shore up the debt-ridden federal flood insurance program which provides flood insurance to homes and small businesses. The latest request seeks $12.8 billion for the Federal Emergency Management Agency, to stay current with the nearly $200 million a day the agency is spending on recovery work; the request also seeks action by Congress to erase some $16 billion in debt that the National Flood Insurance Program owes to the Treasury: under the White House proposal, premiums for flood insurance would rise, at least for homeowners who could afford to pay more, while private insurers would be encouraged to start writing their own flood insurance.

For the devastated U.S. territory, however, the physical and fiscal destruction has only worsened Puerto Rico’s short and long-term fiscal plight—or, as Gov. Rossello noted: “As far as the comment made about wiping the debt clean, that is the opinion of the President,” noting, carefully, he could not comment further because of the ongoing legal proceedings. Fortunately, in Congress, House Natural Resources Committee Chairman Rob Bishop (R-Utah) is putting together a funding package to aid Puerto Rico, and he said members of his committee and other Representatives were meeting to discuss temporary measures to reduce government rules slowing Puerto Rico’s recovery: his group will examine options for ways to make Puerto Rico’s and the U.S. Virgin Island’s electrical systems more resistant to storms, as well as consider how to improve things in both territories in the short-, medium-, and long-term.

Advertisements

Municipal Fiscal & Physical Challenges

September 27, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, physical, and human challenges to Flint, Michigan.

Visit the project blog: The Municipal Sustainability Project 

In or Out Like Flint? The contamination of Flint’s drinking water, created under a state-imposed emergency manager, forced the city, more than 1200 days ago, to temporarily use the Flint River as a source of drinking water—when the then Flint emergency manager determined not to accept the City of Detroit’s Water and Sewerage Department’s request to reconnect the city’s water supply to Lake Huron, Flint’s original source of drinking water. That prompted Gov. Rick Snyder to appoint a state overseer, so that today, there remain a number of people in Flint still living with gross, brown water that is smelly and still lead-contaminated. In the wake of the state-created disaster, there have been lingering fiscal and physical consequences: the fertility rate in Flint has dropped dramatically; infant death rate has been on the rise. Those consequences, in turn, have fiscal implications: they affect assessed property values. EPA granted Flint $100. In the wake of litigation, a federal judge approved a settlement for $98 million—with the funds intended to fix the pipes that have destroyed the lives of families; the seemingly significant fund, however, is only expected to cover the cost of repairing pipes for about a third of Flint’s citizens. Yesterday, U.S. District Judge David Lawson said he was considering a 30-day extension to Flint’s short-term contract with the Great Lakes Water Authority in order to provide the City of Flint more time to approve a long-term drinking water source—and time is becoming shorter: Flint’s contract with the GLWA is set to expire on Sunday; an extension would allow the water supply to continue for an additional 30 days. Attorneys from Flint and the state have been in mediation trying to resolve their differences regarding the future of Flint’s drinking water, after the Michigan Department of Environmental Quality sued Flint last June, arguing the Flint City Council’s refusal to approve a 30-year agreement with the Great Lakes authority was endangering public health in the wake of a lead-contamination crisis that has largely been blamed on the state itself. The agreement is projected to cost Flint $12.1 million a year, and Michigan has argued that Flint has no feasible alternate water source. Judge Lawson said that extending the contract beyond 30 days could result in further fiscal and governance challenges, noting: “It seems to me that inaction is inviting intervention.” He has scheduled another hearing this afternoon where he wishes to discuss the option of a 30-day extension. The suit here seeks to have the court “declare the City Council’s inaction will result in a violation of applicable” state and federal Safe Drinking Water laws and compel elected officials to enter into the Great Lakes Authority agreement which Flint Mayor Karen Weaver negotiated.

The Sinking Ships of States?

September 15, 2017

Good Morning! In this a.m.’s Blog, we consider the ongoing recovery in Detroit from the nation’s largest ever municipal bankruptcy, the unrelenting fiscal challenges for Flint; who voters in the fiscally insolvent municipality of East Cleveland will elect, the steep fiscal erosion for Pennsylvania’s local governments, and the uncertain fiscal outlook for Hartford.

Visit the project blog: The Municipal Sustainability Project 

The Steep Road to Chapter 9 Recovery. Poverty declined and incomes rose last year in the Motor City, marking the first significant income increase recorded by the U.S. Census Bureau since the 2000 census, with Detroiters’ median household income up last year by 7.5% to $28,099 in 2016, according to U.S. Census’ American Community Survey estimates; ergo poverty dropped 4 percentage points to 35.7%‒the lowest level in nearly a decade—perhaps offering a boost to Mayor Mike Duggan’s reelection hopes in November.  Despite the gains, however, Detroit is still the city with the greatest level of poverty in the country—and a city where racial income disparities continue to fester: income data indicates that the incomes of Hispanic and white Detroit residents grew significantly compared to blacks, who make up 79 percent of the city, according to Kurt Metzger, a demographer and director emeritus of Data Driven Detroit, or, as Mr. Metzger writes: “Overall it’s a great story for Detroit…But when you look beneath the surface, we still have a lot of issues. There is a constant narrative out there: Are all boats rising together?” Mayor and candidate for re-election Mike Duggan has made clear he understands there is more work to do: noting that forty-four people graduated last month from the Detroit At Work job training program, which launched last February and from which half have already received job offers, the Mayor told the Detroit News: “Income goes up when one, there is a job opportunity and two, when you have the skills to take advantage of it: As we raise the skills of our residents we will raise the standard of living.” Nevertheless, he added: “Nobody is celebrating a (35.7) percent poverty rate, but the progress is important and it took us years to get here.”

If one looks farther ahead, there might be even more hope: the new data found that fewer of Detroit’s children are living in poverty: the under 18 poverty rate has declined about 14 percent to its lowest level since 2009—albeit still over 50 percent, with the decline attributed to higher numbers of jobs, and, ergo, greater incomes, with Xuan Liu, the manager of research and data analysis for the Southeast Michigan Council of Governments noting that with more residents of the city working (the unemployment rate dropped nearly 25% from 20.6% to its lowest level (16.5%) since 2009), or, as Mr. Liu noted: “Eight years after Great Recession, (census) data is finally show some significant economic benefits for more Detroiters.”

Notwithstanding that good news, it has not been city-wide, but rather concentrated: the city’s 2016 median income remains 14.6% lower today than what residents were earning a decade ago: just $32,886 adjusted for inflation, and while the new census figures show some economic improvements in Detroit, a recent Urban Institute report finds the recovery is not even through the city, noting that tax subsidies and investments are disproportionately favoring downtown and Midtown, with the bulk of the recovery along Detroit River, the Central Businesses District and Lower Woodward Corridor—or, as Mr. Metzger noted, the Motor City still faces a challenge if all of its citizens and families are to participate in the recovery: he notes the 2016 income data shows the gains were realized by Hispanic and white residents, but not for blacks, or as he described it: “The people who are ready and able to take advantage of the turnaround are doing it but those who aren’t, haven’t.” Detroit’s Workforce Development Board has set an employment goal of an additional 40,000 residents to find jobs in the next five years.

Not in like Flint. Unlike Detroit, Flint realized no change in poverty or income: the city so fiscally and physically mismanaged by the State of Michigan via its appointment of a gubernatorial Emergency Manager remains the poorest city in the nation amongst all cities with populations over 65,000: the city’s poverty rate last year was 44.5%; median household income was $25,896—less than half Macomb County’s median household income of $60,143.

Vote! Brandon King is a step closer to remaining Mayor of East Cleveland. Mr. King won the Democratic primary in East Cleveland, with 44.3% of the 1,760 citizens who voted, so that he has narrowed the field: he will continue to defend his seat in November against activist Devin Branch, who is running as a Green Party candidate, after beating out three other candidates for the nomination: former Councilman Mansell Baker, school board President Una Keenon, and community leader Dana Hawkins Jr. Ms. Keenon was the runner-up with 30.3 percent of the vote: she previously served as East Cleveland’s judge. The incumbent, who became Mayor last December after a contentious recall election ousted former Mayor Gary Norton Jr. and Council President Thomas Wheeler, leading to two vacancies on City Council, which council members Barbara Thomas and Nathaniel Martin filled with Mr. Branch and Kelvin Earby—appointees Mr. King decided to be “unlawful,” claiming there were insufficient elected leaders to choose the members, so that he usurped that authority and then appointed his own: Christopher Pitts and Ernest Smith. Unsurprisingly, a lawsuit regarding the appointments is now before the Ohio Supreme Court, even as the city’s petition for chapter 9 remains before the State of Ohio. November will bring elector contests in Ward 3 and for two at-large seats. Notwithstanding that the small municipality of 18,000 is in a state of fiscal emergency, Mayor King has pivoted away from former Mayor Norton’s strategy of trying to merge the city with Cleveland or declare the city in chapter 9 bankruptcy: instead he and the rest of the Democratic candidates want to focus on economic development.

Keystone Municipal Fiscal Erosion. The Pennsylvania Economy League reports that fiscal decay has accelerated in all sizes of municipalities throughout the in its new report: “Communities in Crisis: The Truth and Consequences of Municipal Fiscal Distress in Pennsylvania, 1970-2014,” a report which examines 2,388 of the state’s 2,561 municipalities where consistent data existed from 1970, 1990, and 2014, considering, as variables, the available tax base per household, as well as the tax burden, a percentage of the tax base taken in the form of taxes to support local government services‒after which the municipalities were then divided into five quintiles, from  the wealthiest and most fiscally healthy to the most distressed—with Philadelphia and Pittsburgh excluded due to their size and tax structure. The League found that the tax burden has grown on average for all municipalities since 1990, but that the tax base has fallen, on average, in the state’s municipalities since 1970. In addition, the study determined that municipalities in Pennsylvania’s Act 47 distressed municipality program generally performed worse than average despite state assistance.

The study also found that communities which finance their own local police force, as opposed to those which rely solely on Pennsylvania State Police coverage, had double the municipal tax burden and ranked lower. (Readers can find the report in its entirety on the Pennsylvania Economy League’s website.) The League’s President, Chairman Greg Nowak, noted: “The first part of understanding and doing something about a crisis is understanding what it is,” adding that clearly the League believes the state’s local governments are in a fiscal crisis, comparing the new report to one the League released in 2006, which had warned of oncoming fiscal distress—a report, he noted, which had not galvanized either the state or its municipalities to take action. Gerald Cross, the Executive Director for Pennsylvania Economy League Central, said the study also found that tax bases in cities largely remained stagnant even as the local tax burden increased from 1990 to 2014, noting that all the state’s cities were in bottom-quintile rankings in 2014—and that while tax base generally grew in boroughs and first-class townships, the tax burden there also grew from 1990 to 2014; he added that the trend for second-class townships was mixed: while the tax base increased and more second-class townships moved into healthier quintiles, the tax burden also climbed from 1990 to 2014. Or, as Kevin Murphy, the President of the Berks County Community Foundation, put it: “Pennsylvania’s system of local governments is broken and is harming the people living in our communities: It’s a system that was created here in Harrisburg [the state capitol], and it is Harrisburg which needs to fix it.” Pennsylvania has 4,897 local governments, including 1,756 special districts, cities, towns, and first, second, and third class townships.

The Sinking Ship of State? Notwithstanding Gov. Dannel Malloy’s warning before dawn this morning that “The urgency of the present moment cannot be overstated,” the state’s legislators went home in the wake of failing to approve a two-year, $41 billion budget which would have created an array of new taxes and fees, but avoided any increase in the sales or income tax. Thus, in the wake of all-day fiscal marathon, Republicans sent their members home in a chaotic ending, blaming the inability of the other side had failed to marshal the requisite votes: House Speaker Joe Aresimowicz, after the Connecticut Senate had earlier given final legislative approval to a package of concessions expected to cover $1.5 billion of the estimated $5 billion state budget deficit through June of 2019, noted that still to be completed, however, is work on the rest of the budget, with the focus on financial aid to cities and towns (the biggest chunk of spending): he add ed that the detailed legal language in the budget, which had been delayed all day long, would not be ready until at least 6 a.m. this morning—with the Senate scheduled to convene at high noon. Notwithstanding the fiscal chaos, Senate Pro Tem leader Martin Looney (New Haven) said the Senate would convene at high noon today to vote on the budget, noting: “The problem is it’s not fully drafted… and what we agreed upon with the governor had not been fully reduced to language that everyone had signed off on: We didn’t have a hold-up in the Senate. We were ready to go forward,’’ raising the possibility that the House could vote later today.

Unsurprisingly, the sticking point appears to be taxes: A big problem appears to have stemmed from a proposal to tax vacation homes—a proposal which encountered opposition among Democrats, because non-residents cannot be taxed differently than residents of Connecticut. Negotiators had been relying on the tax to generate $32 million per year, fiscal resources which would not be available without support from moderate Democrats. The Democratic plan would add new taxes on cellphone bills and vacation homes, along with higher tax rates on hospitals, cigarettes, smokeless tobacco, and hotel rooms—and in an overnight development, a $12 surcharge on all homeowners’ insurance policies statewide for the next five years was proposed in order to help residents with crumbling concrete foundations. (Connecticut homeowners have been grappling for years with problems, and government officials have been unable to reach a comprehensive solution—mayhap Harvey and Irma have sent a physical fiscal message: more than 500 homeowners in 23 towns have filed complaints with the state; however Gov. Malloy fears that more than 30,000 homes could be at risk. The emerging fiscal compromise would also add new taxes on: ride-sharing services, non-prescription drugs, and companies that run fantasy sports gambling. In addition, the package includes more than $40 million as a set aside as part of a multi-pronged effort to help Hartford avert chapter 9 municipal bankruptcy—as well as increased funding for municipalities, even as it avoids deep cuts in public education which had been promised by Gov. Malloy via an executive order to trigger effective October 1st, warning: “The urgency of the present moment cannot be overstated: Local governments, community providers, parents, teachers and students—all of them are best served by passing a budget, and passing it now.”

The fiscal roilings came in the wake of Moody’s statement earlier in the week that Hartford’s “precarious liquidity position could result in insufficient cash flow to meet upcoming debt obligations…Additionally, the city has debt service payments in every month of the fiscal year, compounding the possibility of default at any time.” Interestingly, Gov. Malloy, earlier this week, noted that municipal bondholders and unions hold the key to whether Hartford would file for chapter 9 bankruptcy: “Hartford looks to be going bankrupt, and that ultimately may be the only way for them to resolve their issues…on the other hand, if all of the stakeholders in Hartford, including the unions and the bondholders and others come to the table, maybe that can be avoided.”

Fiscal & Physical Challenges to the Nation’s State & Local Leaders

eBlog

August 17, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and physical challenges to municipal and state leaders in the wake of the physical violence this week in Charlottesville, Virginia—and the wavering response from President Donald Trump. Then we return to the City of Flint, where federal court decisions appear to have opened the way for help to assist in access to safe drinking water for the city’s beleaguered residents. Finally, we ask to what degree there might be promise in PROMESA, as the PROMESA Board appears to be seeking independent fiscal analysis in an effort to better address options for fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal & Physical Municipal Mayhem. Municipal leaders across the nation are suddenly on notice that the federal government cannot be counted upon to help respond to threats of violence and mayhem by alt-right groups in the wake the events last Saturday in Charlottesville, Virginia, as alt-right leaders and white nationalist groups have vowed to stage more rallies in coming days: a group claiming it is advocating free speech has planned a rally for Saturday on the historic Boston Common, with a group advocating racial justice planning its own gathering in opposition. Boston officials have responded by setting strict conditions, including no sticks, weapons, or backpacks—or, as Mayor Marty Walsh stated: “Make no mistake: We do not welcome any hate groups to Boston, and we reject their message.” A similar rally scheduled for the end of this month in San Francisco has prompted House Minority Leader Nancy Pelosi (D-Ca.)) and several California lawmakers to urge the National Park Service to rescind the permit to gather on federal parkland there. Indeed, the events this week in Charlottesville—and the President’s response, has confronted municipal leaders with hard questions with regard to how to deal with their Confederate monuments, an issue that has suddenly become much more urgent.

In the wake of the violent public clashes, mayors, governors, and other civic leaders are taking steps that even a week ago might not have seemed necessary. Now, however, uncertain of any federal support, city and county leaders will be confronted by costly decisions both with regard to granting permits, but also with regard to what resources to make available to avert injuries to citizens and destruction of local businesses—fearing that the white nationalist movement could attract a larger following, a following perhaps abetted by the remarks yesterday of President Trump. Darrel Stephens, the Executive Director of the Major Cities Chiefs Association, noted that many of the people who came to Charlottesville wore helmets and carried shields: “These guys, the shields that they showed up with. . . you don’t bring that stuff to a demonstration to just express a view…You bring that there prepared for violence. Why else would you have them?”

From time immemorial in our country, demonstrations in cities have been part of the fabric of the nation, so this challenge is not new: there were certain members of Parliament in the mid-1775’s who very much wanted to ban “hate groups” from Colonials in places such as Chesapeake, Williamsburg, Petersburg, Yorktown, that Virginia municipality where a combined French and American army under Alexandria’s George Washington pinned down and besieged a British force under Lord Cornwallis, forcing his surrender on Oct. 19, 1781. The marches and rallies in Virginia, it seemed, were vital to securing independence from Britain. One may well imagine Lord Cornwallis’ response.

We have, in this country, a long and honored tradition of marches and rallies—the writer even spent unmitigated hours negotiating with authorities in the U.S. Embassy in Vienna, the City of Vienna, and Austria to obtain a permit to demonstrate against the killings at Kent State. It is hard to imagine a more important tradition in our young nation than the right to demonstrate: the challenge of governance, however, is how to ensure such demonstrations do not risk life and limb. That is the hard task upon which Virginia Governor Terry McAuliffe is now proposing to embark upon, appropriately recognizing the Commonwealth—and its cities and counties—really need to rethink how to protect citizens and their rights—much as former President Kennedy and Johnson had to do in a different era. That responsibility will also require determining how to define “hate groups”?  Was the Confederate Army a hate group? Was George Washington’s army a hate group?

In Like Flint? The United States 6th Circuit Court of Appeals’ reversal on July 28th of a federal court’s decision in two lawsuits filed by Flint, Michigan residents over the contamination of their drinking water, has emboldened lawyers and their plaintiffs, who said residents of the predominately African-American city still are being billed for dirty water they cannot use, clearing the way for tens of thousands of Flint residents to continue their lawsuit against the State of Michigan and local officials—or, as the prevailing attorney noted: “The court’s decision means that the trial court’s dismissal of the case was legally incorrect and the appeals court has sent it back…A lot of our case deals with the fact that residents in Flint have been charged three-times the national rate for water, because the city is trying to balance their budget and these charges and fees come at the exact time that they couldn’t use the water…Not only did they come during the period in which they were getting contaminated water and having their children poisoned, but the water bills kept coming and they were told not to drink the water by an EPA mandate, and they were also told that if they didn’t pay their bill, they’d have a lien placed on their home and face foreclosure. That’s not America.”

In its ruling, the federal appeals court overturned a lower federal court ruling which had dismissed a major class-action lawsuit filed in 2015 on behalf of tens of thousands of Flint residents against Gov. Rick Snyder, the city of Flint, and Flint municipal officials who were involved in deciding to switch to the Flint River as its water source. The decision allows the plaintiffs to seek relief from the State of Michigan in another case in the form of compensation for education, medical monitoring and evaluation services for ongoing harm from Flint’s contaminated water crisis, as well opening the way for cases seeking financial damages against individual state employees, the city of Flint, city employees, and state-appointed emergency managers to proceed. The decision came as Michigan Attorney General Bill Schuette and his legal team have pursued criminal and misdemeanor charges against or accepted plea deals with 15 persons, including former Flint employees and former and current state officials, as well as two former Flint emergency managers appointed by Governor Snyder. (The class-action lawsuits involve Flint residents who experienced personal injury and property damage from the Flint River decision, after they were exposed to toxic lead that leached from the city’s pipes into the water supply.) The trial court ruled that the federal Safe Drinking Water Act stopped the plaintiffs from seeking damages, but the appeals panel ruling allows U.S. District Judge Judith Levy to continue weighing the issue.

The appeals court decision came just prior to dismissal, this week, in federal District Court, of a whistleblower lawsuit against Flint Mayor Karen Weaver filed by a former city official who alleged she was fired for raising alarms over possible misuse of water crisis contributions. Former City Administrator Natasha Henderson sued Mayor Weaver and the City of Flint in May of last year, claiming she was wrongfully terminated two days after sending then-city attorney Anthony Chubb an email asking him to look into an “allegation of unethical conduct” by Mayor Weaver; however, U.S. District Court Judge Sean Cox permanently dismissed the three-count complaint, ruling Ms. Henderson failed to prove Mayor Weaver was aware of her complaint prior to firing her, writing: “The Court concludes that Henderson has not produced sufficient circumstantial evidence from which a reasonable jury could infer that Weaver knew of Ms. Henderson’s complaint to Mr. Chubb before she fired Henderson.”

Ms. Henderson had emailed Mr. Chubb one day after a purported conversation with Mayor Weaver’s administrative assistant, Maxine Murray. Ms. Murray “fearfully” told Ms. Henderson that the Mayor had asked her and a volunteer to direct water crisis contributions into the Mayor’s political fund, Karen about Flint, according to the suit. Mr. Chubb was serving as interim chief legal officer during Ms. Henderson’s suit, and said he was seeking the permanent appointment. Ms. Henderson speculated he gave the Mayor a “preview of information about her accused malfeasance” in order to “curry favor,” a speculation with which Mr. Chubb took exception. Judge Cox, in his opinion, noted: “Henderson seeks to prove Weaver’s knowledge by circumstantial evidence,” as he also dismissed a First Amendment claim by Ms. Henderson, ruling that her speech was not constitutionally protected, because she was operating in an official government capacity, not as a private citizen. At the same time, he was entitled to “absolute immunity” against defamation claims by Ms. Henderson, who alleged the Mayor had made false statements about her after her firing, writing: “Weaver is entitled to immunity, because her alleged statements were made in the scope of her executive authority.”

Is There Promise in PROMESA? The PROMESA Board has issued an RFP in an effort to secure an independent research team to conduct an investigation into Puerto Rico’s debt and its connection with the U.S. territory’s fiscal crisis, defining the scope to include:

  • a review of the factors contributing to the fiscal crisis in Puerto Rico, including changes in the economy, expansion of spending commitments and benefit programs, changes in the federal financing it receives and its dependence on debt to finance a structural budget deficit,
  • a review of Puerto Rico’s debt, the general use of the proceeds of borrowing, the relationship between debt and the structural budget deficit of Puerto Rico, the extent of its debt instruments and how Puerto Rico’s debt practices compare with the debt practices of large municipal states and jurisdictions, and
  • a review of debt issuance, disclosure and sale practices of Puerto Rico, including its interpretation of Puerto Rico’s constitutional debt limit.

It was also stated that proposers will be evaluated and selected based on their professional qualifications, the competitiveness of their economic proposal, the integrity and quality of their response to the RFP, their relevant experience in conducting research, their knowledge and experience in federal securities law, knowledge and experience in the municipal bond market, government budget and fiscal management, and the ability to commence work immediately—albeit failure to meet all the above areas will not necessarily disqualify a proposal.

The independent investigative team will report to the Special Investigation Committee of the Supervisory Board, composed of members Ana Matosantos, David Skeel, and Arthur González.

Leadership Challenges to Fiscal & Physical Recoveries

08/04/17

Share on Twitter

eBlog

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.”

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.