Municipal Government Reorganization to Achieve Cost Savings & Greater Efficiency

August 14, 2018

Good Morning! In this morning’s eBlog, we consider the perennial challenge of governmental reorganization: how does a government achieve that to reduce costs, but achieve greater efficiency?

Governmental Reorganization in Puerto Rico. Puerto Rico Governor Ricardo Rosselló Nevares yesterday announced his pocket veto of the proposed Department of Labor and Human Resources reorganization plan, advising he will submit this plan again in the next session, noting: “Several changes introduced prevent us from achieving the necessary savings with consolidation, and we understand that they limit the executive powers to effectively implement the reorganization.” The Governor added: “As always, we will work with the Legislative Assembly to reach the consensus that will allow us to go forward with this consolidation.” Almost simultaneously, the Governor signed into law the proposed reorganization project of the Board of Education, which will create a new Board of Post-Secondary institutions, stating: “With this new reorganization, we will be able to have a more efficient process to encourage accreditation by private entities of recognized trajectory. This allows us a government structure in line with our fiscal reality, which responds to current needs while contributing to a better quality of life.” The goal is to achieve an outsourcing of the licensing process, where projections indicate very substantial fiscal savings for the government. Secretary is outsourced and the intervention of the State is eliminated in a task that is not specific to the Government and that costs millions of dollars to the Treasury. Current Puerto Rico Secretary of State Luis Rivera Marín added that “with this measure, Puerto Rico adopts the model followed by 47 states which do not require licensing processes to private institutions, since they work in an outsourced manner with accreditations by recognized non-governmental organizations,” adding: “However, a registration process will be required before the Department of State with compliance with basic criteria of educational facilities and programs.” Indeed, the measure mandates that post-secondary institutions, including universities and technical programs, will be required to apply to the Board of Postsecondary Institutions in order to operate or continue to operate. That mandate will not apply to K-12, albeit those institutions will have the obligation to register with the Department of State and certify that they meet the necessary requirements, such as having adequate facilities, possessing the corresponding permits, have teaching staff, and the competency to teach the requisite subjects. Church schools will continue to be governed by the registration of Law 33-2017 so as not to interfere with the constitutional right of religious freedom. (Puerto Rico’s Article II Sections 16d of its Constitution affirms the right of employees to choose their occupation, to have a reasonable minimum salary, a regular workday not exceeding eight hours, and to receive additional compensation for work in excess of this daily limit.)  

The Governor is projecting this consolidation project will achieve, in its first year, savings in excess of $5 million in its first year, and as much as $40 million over the next five  years, with said consolidations achieved via Law 122 of 2017, known as the New Government Law—enacted to seek greater efficiency in the consolidation of agencies. Indeed, consolidations by the Department of Public Security appear to have achieved more than $25 million in savings in the first year, leading the Governor to note: “We have completed the legislative process related to seven reorganizations, which impact on 30 government agencies. In the seven reorganizations approved by the Legislature, savings of over $30 million in the first year and close to $ 250 million in five years are estimated.”

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Breaking Up Is Hard to Do

June 8, 2018

Good Morning! In this morning’s eBlog, we consider the issue of unincorporated areas: what are the fiscal implications?

In many U.S. states, it’s not uncommon for homeowners to reside in what are known as “unincorporated” areas, meaning portions of the state or county that are not contained within the boundaries of an incorporated city, town, village or similar local governmental entity. From a municipal perspective, that means a community not governed by its own local municipal corporation, but rather is administered as part of larger governmental administrative division—such as a township, parish, borough, county, or city—governance entities which, depending upon the pertinent state laws, may file for chapter 9 municipal bankruptcy, dissolve, disincorporate, or, as we noted in today’s eGnus, make even separate. Widespread unincorporated communities and areas are a distinguishing feature of both the U.S. and our neighbor Canada—but rare in any other countries around the globe. In fact, unincorporated areas are mostly found in this country in Texas—an enormous state, but which has the nation’s smallest municipality: McAllen, in Jim Hogg County, with a population of 6.

When it comes to unincorporated areas within states, Pennsylvania appears unique: it is, after all, the state with the greatest number of local governments or political subdivisions: the Census Bureau puts the number at 5,000—putting the state only behind Texas and Illinois; but maybe ranks it first in terms of imposing vast and conflicting arrays of taxes—taxes which, however, are imposed on shrinking tax bases. Indeed, the fiscal stress has reached such a point that the state’s House Urban Affairs Committee recently convened a public hearing on legislation intended to assist smaller municipalities mired in cycles of financial distress—threatened with insolvency absent outside assistance. House Bill 2122 would allow these communities, after gaining approval in a voter referendum, to dissolve themselves and have their functions absorbed by the county. The co-sponsors, Representatives Dom Costa and Harold English, offered the bill as a means they described to provide for the voluntary dissolution of municipal corporations (cities, boroughs, towns, & townships) within counties of the second class (Allegheny), and the substitution of an unincorporated districts as a new form of government to be administered by the county. Under the proposed legislation, the process of dissolution would be initiated by the governing body of the municipal corporation through passage of a non-binding resolution to engage in discussion with the county over a period of six months, during which time they would develop a proposed essential services-transition plan as part of an intergovernmental cooperation agreement.: such a plan would be subject to public meetings in the community and would have to be voted on by the governing body of the municipal corporation, as well as the County Council: should both the municipal corporation and county governing bodies approve said plan, a referendum would be scheduled—an election where, if approved by the voters, a six-month winding down of the affairs of the municipal corporation would begin. At the conclusion of such a period, an unincorporated district administered by the county would go into effect, and the essential services-transition plan would become an official ordinance of the county. That would entail significant powers to said county to administer and manage such a district; the county would also retain the tax levying power and authority to assess fees and service charges previously authorized to that particular class of municipal corporation. All taxes and fees levied within the service district would have to be used for the benefit of the district.

Finally, the bill provides for the potential merger and consolidation of the unincorporated district with another municipal corporation or would permit the district to re-incorporate itself as another type of municipal corporation in accordance with the existing municipal codes applicable to such entities.

They reported the legislation was carefully crafted with input from the staff of the bicameral/bipartisan Local Government Commission, confident that it represents a unique voluntary agreement between municipalities – one in which a given city, borough or township would be able to ensure a more efficient and effective delivery of services to their residents while retaining their municipal identity. 

Pennsylvania’s Department of Community and Economic Development administers Act 47, as we have previously noted, a program to help “distressed” communities as designated under the terms of the state’s Act 47, under which the state could ultimately take on the task of providing local services. However, it appears that Deputy Secretary for Community Affairs Rick Vilello, the department’s deputy secretary for community affairs and development, HB2122 might provide a better option, or, as he testified: “We’ve not timed out [on recovery options] on a community who we felt wasn’t ready to try to make it on their own…But we are fast approaching a time when several municipalities will time out. When municipalities time out, there are very few good solutions from that point forward. House Bill 2122 provides a potential solution for local leaders facing hard decisions and is a tool worth trying.” Secretary Vilello testified that to date, only 31 municipalities in the state had ever reached “distressed” status out of 2,560. Of those 31, nine were in Allegheny County.

The Secretary noted: “House Bill 2122 could be a life-preserver for communities that have been treading water for a very long time: Who knows, if it works in [Allegheny County], what would be possible next. House Bill 2122 is a tool for the elected officials and for the citizens of distressed municipalities to make a choice about their future.”

Allegheny County Executive Rich Fitzgerald testified that the proposed legislation could be useful, not only to those communities whose finances have spiraled out of control, but also to those that have managed to avoid financial disaster by cutting essential services to minimal levels:  “Some of them, quite frankly, have not gone into Act 47…They just quit providing the services. They haven’t gone into the debt problem, but they haven’t provided the services their citizens have wanted. And what [residents have] basically been doing is voting with their feet. They’ve been leaving, [and] those municipalities have been shrinking in population.” The County Executive emphasized that the legislation could not lead to any municipality being dissolved against its will; similarly, he testified that no county could be forced to absorb a municipality against its will: both governments would have to agree to the terms of the disincorporation before it even went to the voters for approval.

Under the proposed legislation, the unincorporated community would retain some level of local governance through the establishment of a district advisory committee appointed by the county council. The advisory committee would hold open meetings in the former municipality and issue reports to the county on matters pertaining to local residents.

Nevertheless, Melissa Morgan, legislative and policy analyst for the Pennsylvania State Association of Township Supervisors, warned the proposed legislation would go too far in wresting local power and vesting it in a higher level of government, telling legislators her organization, which she said represents 1,454 townships in the state, opposes the passage of HB2122 or any other legislation that would allow for the dissolution of municipalities: “County government should not be given additional powers to administer unincorporated territory…Instead, the Legislature should consider relieving unfunded mandates for municipalities, such as those requiring benefits to uniform employees to help alleviate financial challenges.” County Executive Fitzgerald said he was in favor of the Legislature taking other steps such as those suggested by Ms. Morgan to ease the plight of struggling communities; however, he noted that HB2122 was also a good option to have on the books in case those other steps fail to provide relief: “It’s a voluntary program: It’s just giving people an option. And to me, that’s what democracy is about, giving people the choice. Right now, they don’t have that choice.”

Post Municipal Bankruptcy Election, and How Does a City, County, State, or Territory Balance Schools versus Debt?

June 4, 2018

Good Morning! In this morning’s eBlog, we consider tomorrow’s primary in post-chapter 9 municipally bankrupt Stockton, and the harsh challenges of getting schooled in Puerto Rico.

Taking New Stock in Stockton? It was Trick or Treat Day in Stockton, in 2014, when Chris McKenzie, the former Executive Director of the California League of Cities described to us, from the U.S. Bankruptcy Court courtroom, Judge Christopher Klein’s rejection of the claims of the remaining holdout creditor, Franklin Templeton Investments, and approved the City of Stockton’s proposed Chapter 9 Bankruptcy Plan of Adjustment. Judge Klein had, earlier, ruled that the federal chapter 9 municipal bankruptcy law preempted California state law and made the city’s contract with the state’s public retirement system, CalPERS, subject to impairment by the city in the Chapter 9 proceeding. Judge Klein determined that that contract was inextricably tied to Stockton’s collective bargaining agreements with various employee groups. The Judge also had stressed that, because the city’s employees were third party beneficiaries of Stockton’s contract with CalPERS, that, contrary to Franklin’s assertion that CalPERS was the city’s largest creditor; rather it was the city’s employees—employees who had experienced substantial reductions in both salaries and pension benefits—effectively rejecting Franklin’s assertion that the employees’ pensions were given favorable treatment in the Plan of Adjustment. Judge Klein, in his opinion, had detailed all the reductions since 2008 (not just since the filing of the case in 2012) which had collectively ended the prior tradition of paying above market salaries and benefits to Stockton employees. Moreover, his decision included the loss of retiree health care,  reductions in positions, salaries and employer pension contributions, and approval of a new pension plan for new hires—a combination which Judge Klein noted meant that any further reductions, as called for by Franklin, would have made city employees “the real victims” of the proceeding. We had also noted that Judge Klein, citing an earlier disclosure by the city of over $13 million in professional services and other costs, had also commented that the high cost of Chapter 9 municipal bankruptcy proceedings should be an object lesson for everyone about why Chapter 9 bankruptcy should not be entered into lightly.

One key to the city’s approved plan of debt adjustment was the provision for a $5.1 million contribution for canceling retiree health benefits; however a second was the plan’s focus on the city’s fiscal future: voter approval to increase the city’s sales and use tax to 9 percent, a level expected to generate about $28 million annually, with the proceeds to be devoted to restoring city services and paying for law enforcement.

Moody’s, in its reading of the potential implications of that decision opined that Judge Klein’s ruling could set up future challenges from California cities burdened by their retiree obligations to CalPERS, with Gregory Lipitz, a vice president and senior credit officer at Moody’s, noting: “Local governments will now have more negotiating leverage with labor unions, who cannot count on pensions as ironclad obligations, even in bankruptcy.” A larger question, however, for city and county leaders across the nation was with regard to the potential implications of Judge Klein’s affirmation of Stockton’s plan to pay its municipal bond investors pennies on the dollar while shielding public pensions.

Currently, the city derives its revenues for its general fund from a business tax, fees for services, its property tax, sales tax, and utility user tax. Stockton’s General Fund reserve policy calls for the City to maintain a 17% operating reserve (approximately two months of expenditures) and establishes additional reserves for known contingencies, unforeseen revenue changes, infrastructure failures, and catastrophic events.  The known contingencies include amounts to address staff recruitment and retention, future CalPERS costs and City facilities. The policy establishes an automatic process to deposit one-time revenue increases and expenditure savings into the reserves.  

So now, four years in the wake of its exit from chapter 9 municipal bankruptcy, Republican businessman  and gubernatorial candidate John Cox has delivered one-liners and a vow to take back California in a campaign stop in Stockton before tomorrow’s primary election, asking prospective voters: “Are you ready for a Republican governor in 2018?”

According to the polls, this could be an unexpectedly tight race for the No. 2 spot against former Los Angeles Mayor Antonio Villaraigosa, a Democrat. (In the primary, the two top vote recipients will determine which two candidates will face off in the November election.) Currently, Democratic Lt. Gov. Gavin Newsom is ahead. Republicans have the opportunity to “take back the state of California,” however, candidate Cox said to a group of more than 130 men and women at Brookside Country Club—telling his audience that California deserves and needs an honest and efficient government, which has been missing, focusing most of his speech on what he said is California’s issue with corruption and cronyism worse than his former home state of Illinois. He vowed that, if elected, he would end “the sanctuary protections in the state’s cities.”

Seemingly absent from the debate leading up to this election are vital issues to the city’s fiscal future, especially Forbes’s 2012 ranking Stockton as the nation’s “eighth most miserable city,” and because of its steep drop in home values and high unemployment, and the National Insurance Crime Bureau’s ranking of the city as seventh in auto theft—and its ranking in that same year as the tenth most dangerous city in the U.S., and second only to Oakland as the most dangerous city in the state.

President Trump, a week ago last Friday, endorsed candidate Cox, tweeting: “California finally deserves a great Governor, one who understands borders, crime, and lowering taxes. John Cox is the man‒he’ll be the best Governor you’ve ever had. I fully endorse John Cox for Governor and look forward to working with him to Make California Great Again.” He followed that up with a message that California is in trouble and needs a manager, which is why Trump endorsed him, tweeting: “We will truly make California great again.”

Puerto Rico’s Future? Judge Santiago Cordero Osorio of the Commonwealth of Puerto Rico Superior Court last Friday issued a provisional injunction order for the Department of Education to halt the closure of six schools located in the Arecibo educational region—with his decision coming in response to a May 24th complaint by Xiomara Meléndez León, mother of two students from one of the affected schools, and with support in her efforts by the legal team of the Association of Teachers of Puerto Rico. The cease and desist order applies to all administrative proceedings intended to close schools in the muncipios of Laurentino Estrella Colon, Camuy; Hatillo; Molinari, Quebradillas; Vega Baja; Arecibo; and Lares—with Judge Cordero Osorio writing: “What this court has to determine is that according to the administrative regulations and circular letters of the Department of Education, there is and has been applied a formula that establishes a just line for the closure without passion and without prejudice to those schools that thus understand merit close.”  

With so many leaving Puerto Rico for the mainland, the issue with regard to education becomes both increasingly vital, while at the same time, increasingly hard to finance—but also difficult to ascertain fiscal equity—or as one of the litigants put it to the court: “The plaintiff in this case has clearly established on this day that there is much more than doubt as to whether the Department of Education is in effect applying this line in a fair and impartial manner.” Judge Osorio responded that “this court appreciates the evidence presented so far that the action of the Department of Education regarding the closure of schools borders on arbitrary, capricious, and disrespectful;” he also ruled that the uncertainty he saw in the testimonies of the case had created “irreparable emotional damage worse than the closing of schools,” as he ordered Puerto Rico Education Secretary Julia Keleher to appear before him a week from today at a hearing wherein Secretary Keleher must present evidence of the procedures and arguments that the Department took into consideration for the closures.  

Meléndez León, the mother who appears as a plaintiff in the case, stated she had resorted to this legal path because the Department of Education had never provided her with concrete explanations with regard to why Laurentino Estrella School in Camuy, which her children attend, had been closed—or, as she put it: “The process that the Department of Education used to select closure schools has never been clarified to the parents: we were never notified.” At the time of the closure, the school had 186 students—of which 62 belonged to Puerto Rico’s Special Education program—and another six were enrolled in the Autism Program. Now, she faces what might be an unequal challenge: one mother versus a huge bureaucracy—where the outcome could have far-reaching impacts. The Education Department, after all, last April proposed the consolidation of some 265 schools throughout the island.

Breaking Up Is Hard to Do.

eBlog, 03/06/17

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

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

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

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

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

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

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eBlog, 12/09/16

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

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

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

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

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

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

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

Democracy & Municipal Insolvency

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eBlog, 12/05/16

Good Morning! In this a.m.’s eBlog, we consider tomorrow’s mayoral recall election in the insolvent municipality of East Cleveland, after which we consider a stern editorial from the Richmond-Times Dispatch about the ongoing challenges to recovering from insolvency in the historic city of Petersburg, Virginia. Finally, with the Obama Administration preparing to vacate the White House by the end of the month, we look at a new report detailing its role in Detroit’s recovery from the nation’s largest chapter 9 municipal bankruptcy in American history.

Democracy & Insolvency. Tomorrow is Election Day in East Cleveland, a small municipality which has been seeking authority from the State of Ohio to file for chapter 9 municipal bankruptcy for nearly a year. This special election is to decide whether Mayor Gary Norton and Council President Thomas Wheeler will keep their jobs or be recalled. The Mayor is campaigning by claiming he has done a good job keeping the struggling suburb afloat, pointing to a big pay-down of debt and money saved by cutting overtime and converting to self-funded health care; he also claims a new Salvation Army Center, with programs for young people and seniors, will be a needed addition. Third, he boasts of the first new shopping space built-in the city in decades. In contrast, those supporting the recall argue he is undermining residents’ confidence in their city by pushing an annexation plan (with Cleveland)—even as the Mayor states the city’s long-range financial picture is unsustainable. Critics claim his lack of oversight of the department has led to misconduct by officers and costly settlements of lawsuits. Mayor Norton says the special election is a waste of money for the cash-strapped city, especially with a scheduled election coming next year. Tomorrow’s special election comes as the status of annexation with the neighboring city of Cleveland is on hold while Cleveland seeks an expert opinion with regard to what the impact would be on the city’s finances and operations.

Inflammatory Municipal Governance? The Richmond-Times Dispatch last Friday, in an editorial, (“Petersburg needs sunshine to restore”) wrote that  Previous Next Petersburg’s financial collapse has inflamed the citizenry: “The city’s response to its budget crisis has not restored trust. The editorial notes that the Virginia American Civil Liberties Union faults Petersburg officials for secrecy, a lack of openness. It cites special meetings called at the last-minute and held not only at inconvenient times but in cramped quarters: “The circumstances discourage public participation. Residents want to know. They have a right to know.” The editorial notes that Petersburg citizens have shown up at meetings with tape over their mouths, wryly noting: “This is not the image the city ought to project.” The Times-Dispatch thus applauded the hiring of the Robert Bobb Group to help Petersburg climb out of its deep fiscal abyss; however, writing: “The manner of the organization’s ascension troubles us, nevertheless. The process was not as open as it ought to have been. Jurisdictions should pursue a degree of openness greater than the law stipulates: Petersburg’s despair has implications for every citizen. Almost every function of government will be affected. Essential services have fallen under siege. Citizen cooperation remains key. Listen to the civic-minded people eager for engagement. Follow the ACLU’s advice. Let the sun shine.”

The White House Role in Detroit’s Recovery from the Nation’s Largest Municipal Bankruptcy. The Obama Administration has detailed in a nearly 60-page report, “Building and Restoring Civic Capacity: The Obama Administration’s Federal-Local Partnership with Detroit.” The report, released over the weekend, writes that a federal and local partnership commenced five years ago which used financial, technical and other support to help the city which emerged two years ago from the nation’s largest municipal bankruptcy. Federal staff was assigned to City Hall to work with community, business, and philanthropic leaders to identify resources to assist in Detroit’s recovery: financial assistance included more than $260 million in federal funds to demolish 6,000 vacant houses and a $25 million grant to improve Detroit’s bus system. HUD also guaranteed construction or rehabilitation of more than 1,400 houses across the city; while technical assistance from the Department of Energy helped install nearly 65,000 street lights.

The Hard Challenges of Fiscal Sustainability

eBlog, 11/29/16

Good Morning! In this a.m.’s eBlog, we consider the ongoing—and evolving–state role in addressing municipal fiscal distress in Atlantic City: what is the role of a state and the impact on fiscal sustainability? Then we turn to the grim fiscal and governance situation in East Cleveland, Ohio—where state un-governance and next week’s looming Mayoral election appear to bode fiscal ills. Then we head south to the challenge of determining whether and how there might be promise in the implementation and unrolling of Congress’ recently enacted PROMESA legislation—the quasi chapter 9 for the U.S. Territory of Puerto Rico.

Not the Moody Blues. Moody’s Investors Service was uncharacteristically unmoody in determining that the state takeover of Atlantic City was a “credit positive” for the city, citing the unlikely threat of immediate default through 2017 as the largest contributing factor in its outlook. The credit positive comes during the first month of Gov. Chris Christie’s appointment of Jeffrey Chiesa to oversee the city: under his appointment, he has wide-ranging fiscal authority—indeed, as Moody’s described it: “While the state has not officially guaranteed Atlantic City’s debt, [the State] intends to prevent any default.” The state takeover comes as the city confronts a $2.3 million payment this week, followed by a $4.8 million debt payment on December 15th—but in the wake of the New Jersey Local Finance Board’s unanimous vote to grant its director, Timothy Cunningham, far-reaching governing powers over the beleaguered city under the authority granted by the state’s Municipal Stabilization and Recovery Act, was the worst-case scenario for the city, which has been fighting a takeover for the last year, even as it barely escaped going broke; Moody’s described Mr. Cunningham’s expressed “willingness to go to the state treasury for assistance if necessary to pay debt service” as a credit positive—or, as Moody’s described it: “While the state has not officially guaranteed Atlantic City’s debt, Director Cunningham has said the state intends to prevent any default.”

Trouble in River City. In the wake of last month’s hefty fine ($114,100) by the Ohio Election Commission of East Cleveland, Ohio Mayor Gary Norton over incomplete, late, and missing fundraising reports—fine nearly quintuple last year’s—with this year’s levied in response to complaints from the Cuyahoga County Board of Elections that the Mayor failed to file a 2015 annual report, turned in his 2014 report late, and has yet to resolve issues with his 2013 reports. In a series of letters, the board of elections asked Mayor Norton to fix a number of discrepancies in his 2013 reports—including incorrect fundraising totals and missing addresses; the board has now also requested proof of mileage, bank fees, phone expenses, and other spending for that year. In response to the reports, the Mayor—and December candidate for re-election, responded: “I am aware of the situation regarding delinquent campaign finance reports…All required reports will be completed and filed. The decision of the elections commission will be appealed. Campaign finances and reporting are completely separate from city finances. No city or public funds are involved.”

It’s not as if the fiscally insolvent city is new at this game: Mayor Norton also faced complaints in the wake of several missing finance reports from years prior to 2013, according to elections commission case summary records. Many of those reports have since been submitted and posted on the county board of elections website. Last year, the Ohio elections commission imposed a $20,000 fine on the Mayor in connection with many of those cases. The problems come at an inopportune time: Mayor Norton faces a recall election next Tuesday.

Is There Promise in PROMESA? At a third session of the PROMESA oversight board, Puerto Rico Gov. Alejandro García Padilla warned the Board he will not cooperate with it to administer a fiscal plan which subjects his constituents to greater sacrifice, but offers no federal financial assistance. The response comes in the wake of last Friday’s warning by Board members that the solution to the U.S. territory’s problems will have to include deep government spending cuts and structural changes. None of the Board members emphasized the importance of paying Puerto Rico’s debt. Indeed, several board members emphasized that substantial federal aid was neither likely, but rather impossible. In the wake of last month’s implicit and at times explicit rejection of the fiscal plan presented by Gov. Alejandro García Padilla last month, PROMESA Board Member Ana Matosantos noted that “deep” restructuring was necessary—adding that additional reforms and spending cuts would also be necessary, warning that federal assistance was unlikely and that without it, there would have to be an additional $16 billion in spending cuts “before you pay a dime of debt service.” Indeed, Board member Andrew Biggs noted that the PROMESA Board will have to put together a recovery package which does not assume a federal bailout; but he also noted that in cases of sovereign debt crises, most attempts to turn the situation around fail, because they fail to examine and address the “big questions.” Thus, he warned: the successful turnarounds question the existence of the big social programs. PROMESA Board Chairman José Carrión III warned that he believed it unlikely Puerto Rico would receive all of the fiscal assistance the Governor was seeking—especially vis-à-vis health care, where the U.S. territory is not treated on a par with states—noting that the board must come up with multiple scenarios, and the Board would have to be bold and use the plan to encourage economic growth.

The PROMESA Board December 15th deadline would seem, as our colleagues at Municipal Market Analytics note, “in peril,” but also raise the specter of the legal authority of the PROMESA Board should a new gubernatorial regime prove unwilling to comply with or carry out mandates from the PROMESA Board. MMA notes, also, the near term impossible straddle between addressing its structural debt whilst making projected debt payments, adding that “an acceptable plan’s likely need for sweeping layoffs, service austerity, and, potentially, pension payout reductions increases the potential for social unrest on the island.”

Finding Hope in Flint. Brian Willingham, for the New York Times last week wrote of his services two decades ago with the Flint Police Department “because I believed I could make a difference,” asking: “How can a city fall so far that we lose sight of the possibility of solutions?”  Noting that wages and benefits in the city have been reduced by more than 25% since 2011—a period during which he was laid off and rehired thrice—he noted the police force today is one-third of its former size—adding that while the national average is three officers for every one thousand citizens, in Flint is half an officer for that number of citizens, writing: “In one of America’s most dangerous cities, the people who secure the city are less secure than they’ve ever been. Yet we continue serving, as we did through the loss of General Motors, through the crack cocaine epidemic and, most recently, through the mass lead poisoning of Flint citizens. The crisis around Flint’s poisoned water points to a larger issue of structural racism and poverty in urban society. How can citizens in Flint trust the police to protect them when they can’t even trust their government to provide them with clean water? This is the kind of question that has placed police officers and African-Americans on a collision course. Police officers are seen as outsiders in urban America. White officers are seen as racist, while black officers like me are seen as traitors to our race.”