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.”

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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.”

Threatened Municipal Insolvencies

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eBlog, 10/14/16

Good Morning! In this a.m.’s eBlog, we consider the threatened insolvency of the small municipality of Wayne, Michigan; then we puff our way West to consider the puffy revenue options confronting San Bernardino voters next month with regard to legalizing marijuana—as the city nears exit from the longest municipal bankruptcy in U.S. history; then we offer an editorial from the Stockton News with regard to next month’s election in post-municipally bankrupt Stockton, before zooming to the small, virtually insolvent municipality of Petersburg, Virginia as it considers spending its way out of insolvency, before—finally—heading northeast to Atlantic City, where Mayor Don Guardian is seeking to stave off municipal bankruptcy through the sale of some nearly 500 abandoned buildings. Wow.

Where Is Batman? Moody’s has lowered the credit rating of Wayne, Michigan, a city of just under 18,000 just west of Detroit in Wayne County, where the median age in the city is under 40, into junk territory: the small city is on the brink of insolvency with the State of Michigan opting not to help.  Moody’s, in its downgrade, noted: “The downgrade of the city’s issuer rating reflects a very stressed financial position given an ongoing structural imbalance with few options to make timely expenditure cuts or revenue enhancements.” The fiscal challenge comes in the wake of the voters’ rejection last August to approve joining the South Macomb Oakland Regional Services Authority, a scheme hatched by Hazel Park and Eastpointe to allow the two communities to circumvent state constitutional limits on property taxes: indeed, had the measure passed, it would have enabled Wayne to more than double its local property taxes. While Michigan state law strictly caps the amount of taxes a single community may levy, it allows two or more communities to create authorities for providing police and fire services, and levy a separate tax. For instance, neighboring Eastpointe and Hazel Park add an extra 14 mills. The rejected tax levy would have imposed an estimated $354 per household on the winter tax bill alone—but might too have raised sufficient revenue to stave off a chapter 9 municipal bankruptcy filing if it had passed. The municipality has been hard hit by falling property values and rising legacy costs; it has been doing cost-cutting, but will have to deal with how much of its budget goes to support benefits for current workers, and especially, retirees. Some have suggested the municipality should consider consolidation with a neighboring community, especially as the city has limited flexibility to raise revenues elsewhere. In early August, it requested a state financial review, but last week the state said the city retains options to address its structural gap such as making further reductions to retiree healthcare coverage and so direct state oversight is not warranted. For its part, Moody’s wrote that, based on the state review, it concluded that the city has sufficient liquidity to cover operations this year, but will fall short next year without operating adjustments. At the beginning of the week, the city council met to discuss selling the city’s recreation center and retiring approximately $2.8 million of bonds sold through the local building authority which are tied to the center. City leaders are also mulling over a fourth attempt at getting voters to pass a levy increase to fix its structural imbalance as well as additional reductions to retiree healthcare benefits: Wayne began charging retirees 30% of their healthcare premiums last month; however, savings from the change have fallen short of the requisite amount needed to offset the current operating gap. The small city’s request for the state financial review followed voters’ rejection in August of the city’s proposal to join a suburban authority and levy a tax to fund fire and rescue services; voters similarly rejected the proposal to join the South Macomb Oakland Regional Services Authority, which was created by the nearby cities of Eastpointe and Hazel Park last year—as well as a millage proposal that would have raised approximately $5 million to help the city’s strained liquidity. The additional revenue would have enabled the city to stabilize its general fund balance to $2.9 million, according to Moody’s. On the cost side, where expenditures have exceeded revenue by roughly $2 million over the past few years, Wayne balanced its books for the current fiscal year by draining other funds, including its internal service fund and a retiree healthcare trust. City budget officials report closing FY2016 with near depletion of the city’s OPEB trust and a $400,000 draw on general operating reserves. The city expects to draw another $1.6 million of general fund balance in fiscal 2017 and estimates likely depletion of fund balance by December 2017.

Puffing Up Revenues? As San Bernardino nears its exit from the longest municipal bankruptcy in U.S. history early next year, the city’s voters are huffing and puffing over a proposed revenue proposal at the ballot next month: Measure N allowing marijuana in the city is projected to raise more than $18 million in net revenue to the city, several times more than either of the competing marijuana measures, according to a study released by the campaign for Measure N: that study, prepared by Whitney Economics on behalf of the committee for Measure O, concluded Measure O would bring between $19.5 and $24.8 million in revenue. In contrast, New ERA calculates Measure N would bring in $18.2 million, Measure O would bring in $2.4 million, and Measure P would bring in $4.8 million, after the costs related to each measure are accounted for. The huffing and puffing and fiscal visions related to possible estimated revenues which might be generated from sales tax, permit fees, and other assessments stipulated in each initiative, as well as job creation potential from retail, manufacturing, and cultivation allowed by each initiative. Indeed, the confusing array of psychedelic revenue options for voters in a city where marijuana is technically prohibited—but where there are currently 22 dispensaries, is certain to toke voters as they enter the polls to opt between three different measures on November’s ballot—each of which would replace the current ban with a different approach to regulation: if more than one of them gets higher (a pun) than 50 percent of the vote, whichever measure has more “yes” votes will become law in the city. The three options for voters:

  • Measure N, submitted by San Bernardino citizen Katharine Redmon, would establish a 5 percent tax on gross receipts and allow at least 20 medical marijuana dispensaries, if at least 20 apply.
  • Measure O, submitted by citizen Vincent Guzman, would establish an application fee of $250 and annual fees of $5 per square foot of canopy for cultivation, $5 per square foot occupied by the business for manufacturing/test, $100 per vehicle used in transportation, $5 per square foot of dispensary and $1 per square foot of canopy for nurseries.
  • Measure P, prepared by the city attorney’s office, was intended by the City Council as a way to maintain more control over marijuana businesses if residents are inclined to allow them. Because of that, state law would allow fees equal to the cost of enforcement.

Gross receipts for dispensaries are based on the maximum dispensaries allowed under the restrictions of each measure—20 under Measure N, 5 under Measure O, and 10 under Measure P, with the demand at each dispensary estimated based on Palm Springs. That would then be combined with the gross receipts tax, with some $2.3 million expected for Measure N, zero for Measures O and P, and sales tax revenue of $930,027, $744,022 and $837,025, respectively. There are similar calculations for cultivation, manufacturing, and distribution. For instance, proposed Measure P allows the most cultivation, with expected output totaling more than 500,000 pounds of product and employing 840 people, according to one study: Measure N compares at 155,000 pounds and 380 employees, while Measure O would be close to 116,000 pounds and 285 employees in cultivation, according to the study. In contrast, Beau Whitney of Whitney Economics in Portland provided the City with a four-page study which criticizes Measure N for exempting cooperatives and nonprofits, which is how existing illegal dispensaries in the city are organized; ergo, he notes, Measure P offers limited revenue potential: “Other proposals put forth by comparison, either have limited amounts of revenue generation or provide protectionist policies and carve outs for special groups.” Both authors also anticipate significant positive indirect economic impact, dismissing critics’ concerns that dispensaries would hurt property values and other aspects of the economy. Marijuana opponent Darren Espiritu, of the San Bernardino Chair of Citizens Against Legalizing Marijuana, said revenue forecasts in Colorado fell short of industry promises—advising that Colorado state officials now expect about $150 million per year in marijuana tax revenue, out of the state’s $10 billion general fund. He adds: “No amount of revenue can replace a child’s life…Marijuana is ending up in the hands of children at an increasingly younger age. Marijuana use has dramatic negative impacts on the growing brain up to the age of 25.”

Hard Choices for a City’s Fiscal Future. Michael Fitzgerald, a columnist for the Stockton Record, yesterday wrote:  “Stockton voters have one major piece of unfinished business left over from the (chapter 9 municipal bankruptcy), one last gotta-do so the city can move forward: ousting Mayor Anthony Silva…Silva is a loose end of the bankruptcy in the sense that he came in through the side door of that extreme and unprecedented event. Were it not for the electorate’s outraged determination to punish incumbents, he never would have been elected. Which is not to say disadvantaged voters who felt ignored by City Hall were not justified in voting for someone who listened. But it has long been clear Silva is an epic mistake…The only two substantial policies Silva championed, the fiscally suicidal Safe Streets crime-fighting plan and a reduction in building fees, were handed to him by developers…Politically, he botched his first six months so badly, denouncing fellow council members, exhorting his supporters to harangue them, he ensured he’d never command a council majority. He marginalized himself:

But then it appears Silva did not understand the office for which he ran. He has been publicly shocked and perturbed by the statutory limitations placed on the mayor’s power.

Ethical lapses followed. Silva promised if elected not to work two jobs. But he did. He promised not to take a mayor’s salary until crime tumbled. But he did. There were more.

What did not follow was policy. It became clear that “The People’s Mayor” had no real ideas for governing and no real interest in the hard work that goes into civic improvements.

When I asked him what his position on growth was — on sprawl vs. infill — he looked at me as if I had spoken to him in Mandarin.

His treatment of the homeless issue is typical. First he did publicity stunts, sleeping in a box overnight as TV cameras rolled. Next, he used a homeless man as a prop at his State of the City address, then left the poor man to become homeless again.

Finally he proposed the city purchase a hotel. His proposal included no realistic idea of cost, funding or affordability. He ignored entirely how the hotel should link to county/private services to transition homeless people into permanent housing

To top it off, he proposed “any person who refuses our services and simply just wishes to live where they want … will (be) escorted to the city line.” Which is illegal. The proposal was DOA.

Then there was Silva’s farfetched “Stockton Proud” agenda. This plan calls for terraforming beaches onto the waterfront, building a space needle “100% funded by private money,” attracting cruise ships, and other ideas so unrealistic it could have been dreamed up by Michael Jackson for Neverland Ranch.

Administratively, Silva is no better. He leaked the name of a city manager hire, sabotaging the process, leading to the hire of next-in-line Kurt Wilson; yet he complains about Wilson, oblivious that his bungling put Wilson in the job.

But it is as a distraction from the serious business of governance where Silva has been a Hall-of-Famer. I doubt anyone will ever surpass him.

It’s not only the things he intended to do, such as his Chicken Little act over adding chloramines to the water (after he voted to do it!); he brought in Erin Brockovich and her alarmist sidekick who frightened the public with wildly irresponsible warnings of brain-eating amoeba.

It’s also his inadvertent, soap-opera string of goofs, scandals, brushes with the law and strange, almost creepy-clown behavior.

I am not going to rehash those. It is tragic, though, that while Sacramento made bold progress under (badly flawed) Mayor Kevin Johnson, and Fresno gained national recognition for its progress under Mayor Ashley Swearingen, Stockton stuck itself with Silva.

Worse, Silva is refusing to cooperate with investigators trying to understand how his stolen gun came to be used to kill a 13-year-old. And he has been indicted on felony and misdemeanor charges related to his alleged participation in an alcohol-fueled strip poker game with teens.

He deserves his day in court.

Hating City Hall is part of Stockton’s civic culture. But if it must be done, it must be done wisely. Hate incompetence. Hate failure to adequately serve the city’s disadvantaged. Above all, hate the charlatans, because they hold the city back.

Spending When a City Has No Money to Spend. The Petersburg City Council has voted 5-1 to spend more than a quarter-million dollars, as the municipality teeters on insolvency, to enter into emergency negotiations with the Robert C. Bobb Group, claiming the purpose was intended “to preserve the interests of the City to maintain the proper functioning of the government,” with the vote coming in the wake of two closed-door sessions. Mr. Bobb is a former Richmond city manager who also served briefly as an emergency financial manager for the Detroit Public Schools—where, under his watch, DPS’s deficit tripled—in no small part because of a series of arrangements with armies of “consultants,” as he sought, under Michigan’s emergency manager law,  to address DPS’s $327 million budget shortfall by closing nearly half of Detroit’s schools and increasing class sizes in the remaining ones to as high as sixty—even as he submitted an AMEX bill with more than $1 million in travel charges, but proposed closing half the district’s schools and increasing class sizes up to 60 children in a classroom and cutting all general bus service—and proposed putting DPS into chapter 9 municipal bankruptcy. Nevertheless, Petersburg Mayor W. Howard Myers noted: “We felt that this is an emergency situation, because of the situation the city is in,” even as he declined to state how much the contract would cost the insolvent municipality—already confronted with the effects of a $12 million shortfall in the current fiscal year’s budget even as it is desperately trying to pay down nearly $19 million in debts identified at the close of the previous fiscal year. For his part, Mr. Bobb said: “Our goal is not to be the permanent solution, but to help stabilize them and help recruit permanent leadership.” It remains unclear what the decision might mean with regard to the municipality’s request for state assistance. Virginia Sen. Rosalyn R. Dance (D-Petersburg) voiced concern about the cost and timing of the proposal, noting: “We just committed to spend some money, and I don’t know how much money we’ve committed to spend…If we have extra money to spend, it should be going to the schools.” There was no public comment period; the Council first took 90 minutes to discuss personnel measures related to the performance of the interim city manager. Afterward, the members broke for discussion of procurement and pending litigation.

Mayor Myers said the city faces several possible lawsuits but declined to elaborate. He said money to fund the Bobb Group’s work will come from savings the city has incurred from not filling open positions. For his part, Mr. Bobb declined to comment on his firm’s fees, citing ongoing negotiations; however, he noted he planned to take an active role in assisting the city, although the day-to-day work will be conducted mostly by other staff members of the Washington, D.C.-based business. Indeed, at the request of Petersburg Commonwealth’s Attorney Cassandra S. Conover, Petersburg Circuit Court Judge Joseph M. Teefey has signed an order directing Chesterfield County Commonwealth’s Attorney William W. Davenport to expand his ongoing probe of the Petersburg Bureau of Police—and, widening the scope, to include “any and all” issues involving the City of Petersburg’s finances: the investigation now will include “allegations regarding financial improprieties of the City of Petersburg which warrant investigating and/or any prosecutions resulting from any charges placed pursuant to said investigation.” Counselor Davenport was appointed last December after the Commonwealth Attorney requested a special prosecutor to look into a case of money alleged to have disappeared from the police evidence room. (The Virginia State Police and the FBI have been assisting with that probe.) Ms. Conover reports she met with representatives of several state and federal agencies last week, including the Virginia State Police, to discuss the status of that investigation as well as questions related to Petersburg’s finances, noting that, as a result of that meeting, she had submitted an order calling for an expansion of the investigation “to include all financial matters/improprieties of the City of Petersburg.” Meanwhile, a team of auditors and other financial experts led by state Secretary of Finance Ric Brown subsequently reported that Petersburg’s system of accounting for revenue and spending had numerous shortcomings, including more than 30 “exit points” for city funds – individuals or departments who or which were allowed to write checks without specific authorization: as a result of the system’s flaws, the state team said, city officials literally did not know exactly how much annual revenue the city had received or how much it had spent until after the end of the fiscal year, when an outside consultant “reconciled” the various departments’ income and spending ledgers.

Tempus Fugit. Atlantic City Mayor Don Guardian yesterday the city would use tax liens, emergency condemnation, or eminent domain proceedings to take control of nearly 500 abandoned buildings and sell them to developers who would either repair or raze them, demarking the city’s latest effort to raise revenues to avert a state takeover. According to Mayor Guardian, in addition to being a fiscal boost, the move could address a longstanding gripe among visitors about the seaside gambling resort: “It has frustrated the community for decades that it seemed almost impossible to do anything about these abandoned properties.” The proposal appears to stem from the Mayor’s efforts this year to successfully enlist six neighborhood associations to walk their communities and come up with a list of properties which appeared to be abandoned—an outreach that has resulted in identifying some 598 properties—albeit, since then, the owners of more than 100 of them have begun repair work on their structures after the city threatened to take possession of them, according to Mayor Guardian. (Atlantic City differentiates between buildings in good shape which are simply currently vacant versus properties in unsafe or uninhabitable condition, many of which have not generated taxes in months or years.) Mayor Guardian said he does not have a target figure in mind in terms of how much revenue the city might bring in by selling abandoned properties, yet notes that every little bit helps as it tries to cobble together a financial plan to stave off a threatened state takeover of its assets and major decision-making powers by next month.

Who’s in Charge of a Municipality’s Future?

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eBlog, 9/29/16

Good Morning! In this a.m.’s eBlog, we consider, the always difficult state-local governance challenges for cities in fiscal stress: first, we look at yesterday’s editorial from the Detroit Free Press raising serious concerns with regard to Michigan’s emergency manager law—a state law which authorizes the state to appoint an emergency law with dictatorial type authority and without accountability to citizens, voters, or taxpayers in a city, county, or public school district. The issue relates to the kinds of challenges we have been following in New Jersey, Connecticut, Virginia, and other states where the hard questions relate to what the role of a state might be for a municipality in severe fiscal distress—especially where such distress might risk municipal fiscal contagion. Then, mayhap appropriately, we journey back to Atlantic City, which is nearing its own state-imposed deadline to avert a state takeover. Finally, we examine the ongoing plight of East Cleveland —a small, poor municipality in some state of negotiation with the adjacent City of Cleveland with regard to the possibility of a merger—while awaiting a response from the State of Ohio with regard to its specific request for authority to file for chapter 9 bankruptcy. It remains unclear if the State of Ohio will ever even notify the city it has received said request, much less act. Thus, in a week, we have watched the States of Virginia, Connecticut, Michigan, and New Jersey struggle with what the role of a state might be—and how the fiscal ills of a city might adversely impact the credit ratings of said state.

Who’s in Charge of a Municipality’s Future? The Detroit Free Press in an editorial this a.m. wrote that, “[F]our years on, it’s hard to argue that Gov. Rick Snyder’s retooled emergency manager law, [Gov.] Snyder’s second revision of Michigan’s long-standing law, is working,” referring to Michigan’s Emergency Manager Law (Act 436), a state law unique to the state of Michigan: one which authorizes authority to the governor to appoint emergency managers with near-absolute power in cash-strapped cities, towns, and school districts; it authorizes such emergency managers to supersede local ordinances, sell city assets, and break union contracts; it leaves local elected officials without real authority. It provides that an Emergency Manager may be appointed by the Local Emergency Financial Assistance Loan Board. In the case of Detroit, it served as the mechanism by which Governor Rick Snyder appointed Kevyn Orr as Detroit’s emergency financial manager. The law, the Local Financial Stability and Choice Act reads: “The financial and operating plan shall provide for all of the following: The payment in full of the scheduled debt service requirement on all bonds and notes, and municipal securities of the local government, contract obligations in anticipation of which bonds, notes, and municipal securities are issued, and all other uncontested legal obligations (See §141.155§11(1)(B)). The editorial went on: “The crux of the problem lies in the limited impact accounting can have on the myriad factors that affect quality of life or efficient service delivery within a city:

“Sure, an emergency manager (in theory) can balance a city or school district’s books. But no amount of budget slashing or service cuts can make a city somewhere people want to live, or a school district the kind of place that offers quality education. In fact, it’s often the reverse: When residents leave, the tax base slims, meaning cities or school districts stretch to provide the requisite level of service with significantly less money. Cuts exacerbate the population decline, which depletes revenue more, which means more service cuts. And so on and so on and so on.

Nowhere is this object lesson in sharper contrast than Flint, where the city — under a success {I suspect the editors meant “excess’} of emergency managers — started pumping drinking water from the Flint River in 2014, pending the start-up of a new regional water system, a cost-saving switch prompted by the city’s ongoing budget woes. Almost immediately, botched water treatment caused bacterial contamination that altered the color, taste and odor of the city’s drinking water, and 18 months later, the state would acknowledge that improper treatment of which had caused lead to leach from aging service lines, contaminating the city’s drinking supply, and exposing nearly 9,000 children under age 6 to the neurotoxin, which can cause behavioral and developmental problems.

Why play games with something as important as drinking water? When the mandate is to cut, cut, cut, everything is on the table.

But it shouldn’t be.

A task force appointed by [Gov.] Snyder to review the Flint water crisis recommended a slate of changes to the state’s emergency manager law, like a mechanism for local appeal of emergency manager decisions, outside review, and other controls that Flint residents, alarmed by the smell, taste and color of their drinking water, could have employed to halt Flint’s water disaster before it reached crisis proportions.

Snyder says he’s waiting for the completion of a legislative report into the task force’s recommendation.

Why?

Snyder took office in 2011 knowing the bill was about to come due for a wave of municipal crises that threatened to cascade across the state.

There was the City of Detroit, where systemic budget troubles had been building for decades; Pontiac, Flint, and Benton Harbor, Allen Park, Ecorse, and Highland Park, where emergency managers were already waging uphill battles with incremental results, or whose substantial financial challenges put them firmly in emergency management’s crosshairs. And Detroit Public Schools, under state control for most of the last decade, with no fix in sight.

Inexplicably, in this climate, [Gov.] Snyder chose to cut state revenue sharing, continuing a trend of bolstering the state’s fiscal health at the expense of its cities to the tune of about $6 billion in cuts to cities over a decade.

Snyder and then-Treasurer Andy Dillon believed that the state’s long-standing emergency manager act was insufficient to truly remedy cities’ and school districts’ fiscal woes. An emergency manager, Snyder and Dillon believed, should have clear authority over operations, not just finances, and have greater power to impact labor agreements. Through two revisions (the first emergency manager law passed in Snyder’s tenure was repealed by voters; its replacement carries a budget appropriation and is thus repeal-proof), Snyder crafted a law that granted his emergency managers the authority to make the broad fixes he believed necessary.

There’s no question that a temporary usurpation of local elected control, as happens during an emergency manager’s appointment, is a serious matter. But Snyder seemed to understand that ensuring the health and well-being of Michigan residents — by ensuring that Michigan cities and school districts could provide the services necessary to create those conditions — was properly a governor’s job. It still is.

In the meantime, there’s promising news out of Lansing: Michigan State University professor Eric Scorsone, long a champion of funding cities properly and sustainably, has been appointed state deputy treasurer for finance. Scorsone has been a strong advocate for municipal governments and school districts, and we hope, deeply, that his appointment indicates that Snyder has come around to a point of view we’ve advanced for years: Fund cities properly, and whether or not to appoint an emergency manager may become a question that never needs answering.

Tempus Fugit? In ancient Rome, the query was ‘Is time running out,’ now an increasingly anxious question for Atlantic City’s leaders, where, having already missed one state-imposed deadline to initiate dissolution of its authority, the state has given the city until Monday to cure the violation. New Jersey Senate President Steve Sweeney (D-Salem) said Atlantic City must make a “realistic plan” to dig out of its fiscal hole; however, he declined to weigh in on the city’s most recent proposal. Noting that “Atlantic City has roughly 30-something days” left, Sen. Sweeney noted: “It’s incumbent upon them to put a realistic plan forward. You know, we’ve been at this for a while, and they really need to put a plan forward that’s going to make sense and work.” With the state-imposed deadline just six days before election day, Sen. Sweeney said he would “reserve judgment” on the city’s proposal to avail itself of its public water utility to purchase its airport, Bader Field, for at least $100 million. His comments came in the wake of the city’s unveiling earlier this week the first of seven parts to its plan in which city officials announced the Municipal Utilities Authority has agreed to purchase as part of an effort to raise revenues for the city, yet retain the water system in public hands, with the proceeds to go toward paying down the city’s roughly $500 million debt. The deadline comes as Moody’s has warned that the city not only risks defaulting on terms of a $73 million state loan agreement, but could also miss a $9.4 million municipal bond interest payment due on November 1. Analyst Douglas Goldmacher noted Atlantic City “does not have sufficient funds to immediately repay the $62 million already received from the state…Furthermore, unless the state continues to disburse additional funds from the bridge loan, or releases the Atlantic City Alliance and investment alternative tax funds owed to the city, it is highly improbable that the city will be able to make its (Nov. 1) $9.4 million balloon payment.” Mr. Goldmacher wrote, however, that the city’s repayment challenges would be addressed if the proposed Bader Field sale goes through—even as he again said the plan raises questions, such as whether the authority can afford to borrow $100 million and whether the state would even approve the plan—a plan to which the New Jersey Department of Community Affairs has yet to comment—perhaps confirming Mr. Goldmacher’s apprehension that: “Atlantic City’s impending technical default is credit negative for it, and indicates a disconnect between the city council, mayor, and state: “The impending default was caused by political gridlock.”

What Kind of City Do the Voters Want? The Cuyahoga County, Ohio Board of Elections and the East Cleveland City Council Clerk’s office this week certified more than 600 petition signatures to force a recall vote of East Cleveland Mayor Gary Norton and City Council President Tom Wheeler, so that the two highest ranking elected officials in this virtually insolvent municipality will face a recall election this fall, albeit not on the November ballot: the election likely will occur on December 6th—appropriately one day before Pearl Harbor Day. The election, however, will not be without cost to the virtually insolvent city: it could cost the city between $25,000 and $30,000—and will be a run-up just 10 months before the next mayoral primary election, even as the city is locked in so far seemingly non-existent merger negotiations with the City of Cleveland and awaiting a non-existent response from the Ohio State Treasurer with regard to its request for authorization to file for chapter 9 municipal bankruptcy. Nevertheless, the citizens of East Cleveland gathered more than twice the requisite number of signatures necessary to force a special recall election, triggering the City Clerk to send a letter to Mayor Norton informing him of the election. Under the East Cleveland charter, if he does not resign, he will face a recall election within 60-90 days. Unsurprisingly, Mayor Norton does not plan to resign. In a phone interview last Saturday, he characterized the election a waste of money in a city that cannot afford it: “East Cleveland will select it’s next mayor 10 months after this needless recall election…This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” Mayor Norton said the money the election will cost will have to be cut from other city services, noting that would include possible cuts in police and fire, because, he added: “There’s little to nothing left to cut in the city.” In East Cleveland, violent crime, on a scale from 1 (low crime) to 100, is 91. Violent crime is composed of four offenses: murder and non-negligent manslaughter, forcible rape, robbery, and aggravated assault. The US average is 41.4. In the city, property crime, on a scale from 1 (low) to 100, is 75. The U.S. average is 43.5. A recall election, if it happens, would be the third for the Mayor.

Mayor Norton’s success rate in overcoming recall votes could change, however, as voters in November—before the next scheduled recall election, will consider an amendment to the city’s charter intended to curtail the ease with which residents can trigger a recall, although it is currently being reviewed by the Board of Elections and has not been finalized for the November ballot. For his part, the beleaguered Mayor Norton has so far refused to say whether he was going to run for re-election next year, and declined to answer why voters should vote to keep him as mayor in December.

What Is a State’s Role in Averting Municipal Fiscal Contagion?

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eBlog, 9/28/16

Good Morning! In this a.m.’s eBlog, we consider, again, the risk of municipal fiscal contagion—and what the critical role of a state might be as the small municipality of Petersburg, Virginia’s fiscal plight appears to threaten neighboring municipalities and utilities: Virginia currently lacks a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion. Nor does the state appear to have any policy to enhance the ability of its cities to fiscally strengthen themselves. Then we try to go to school in Detroit—where the state almost seems intent on micromanaging the city’s public and charter schools so critical to the city’s long-term fiscal future. Then we jet to O’Hare to consider an exceptionally insightful report raising our age-old question with regard to: are there too many municipalities in a region? Since we’re there, we then look at the eroding fiscal plight of Cook County’s largest municipality: Chicago, a city increasingly caught between the fiscal plights of its public schools and public pension liabilities.  From thence we go up the river to Flint, where Congressional action last night might promise some fiscal hope—before, finally, ending this morn’s long journey in East Cleveland—where a weary Mayor continues to await a response from the State of Ohio—making the wait for Godot seem impossibly short—and the non-response from the State increasingly irresponsible.

Where Was Virginia While Petersburg Was Fiscally Collapsing? President Obama yesterday helicoptered into Fort Lee, just 4.3 miles from the fiscally at risk municipality of Petersburg, in a region where Petersburg’s regional partners are wondering whether they will ever be reimbursed for delinquent bills: current regional partners to which the city owes money include the South Central Wastewater Authority, Appomattox River Water Authority, Central Virginia Waste Management, Riverside Regional Jail, Crater Criminal Justice Academy, and Crater Youth Care Commission. Acting City Manager Dironna Moore Belton has apparently advised these authorities to expect a partial payment in October—or as a spokesperson of a law firm yesterday stated: “The City appears committed to meeting its financial obligations for these important and necessary services going forward and to starting to pay down past due amounts dating back to the 2016 fiscal year…We appreciate the plan the city presented; however we have to reserve judgment until we see whether the City follows through on these commitments.” One option, it appears, alluded to by the Acting City Manager would be via a tax anticipation note. Given the municipality’s virtual insolvency, however, such additional borrowing would likely come at a frightful cost.

The municipality is caught in a fiscal void. It appears to have totally botched the rollout of new water meters intended to reduce leakage and facilitate more efficient billing. It appears to be insolvent—and imperiling the fiscal welfare of other municipalities and public utilities in its region. It appears the city has been guilty of charges that when it did collect water bills, it diverted funds toward other activities and failed to remit to the water authority. While it seems the city has paid the Virginia Resources Authority to stave off default, questions have arisen with regard to the role of the Commonwealth of Virginia—one of the majority of states which does not permit municipalities to file for chapter 9 bankruptcy. But questions have also arisen with regard to what role—or lack of a role—the state has played over the last two fiscal years, years in which the city’s auditor has given it a clean signoff on its CAFRs; and GFOA awarded the city its award for financial reporting. There is, of course, also the bedeviling query: if Virginia law does not permit localities to go into municipal bankruptcy, and if Petersburg’s insolvency threatens the fiscal solvency of a public regional utility and, potentially, other regional municipalities, what is the state role and responsibility—a state, after all, which rightly is apprehensive that is its coveted AAA credit rating could be at risk were Petersburg to become insolvent.

In this case, it seems that Petersburg passed the Virginia State Auditor’s scrutiny because (1) it submitted the required documents according to the state’s schedule, regardless of whether or not the numbers were correct; (2) the firm used by the city was probably out of its league. (It appears Petersburg used a firm that specialized in small town audits); (3) the City Council apparently did not focus on material weaknesses identified by the private CPA (nor did the State Auditor). The previous city manager, by design, accident, or level of competence, simply did not put up much of a struggle when the Council would amend the budget in mid-year to increase spending—a task no doubt politically challenging in the wake of the Great Recession—a fiscal slam which, according to the State Auditor’s presentation, devastated the city’s finances, forcing the city in a posture of surviving off cash reserves. (http://sfc.virginia.gov/pdf/committee_meeting_presentations/2016%20Interim/092216_No2b_Mavredes_SFC%20Locality%20Fiscal%20Indicators%20Overview.pdf). Now, in the wake of fiscal failures at both levels of government, the Virginia Senate Finance Committee last week devoted a great deal of time discussing “early warning systems,” or fiscal distress trip wires which would alert a state early on of impending municipal fiscal distress. Currently, in Virginia, no state agency has the responsibility for such an activity. That augurs ill: it means the real question is: is Petersburg an anomaly or the beginning of a trend?

The challenge for the state—because its credit rating could be adversely affected if it fails to act, and Petersburg’s fiscal contagion spreads to its regional neighbors and public utilities, a larger question for the Governor and legislators might be with regard to the state’s strictures in Virginia which bar municipal bankruptcy, bar annexation, prohibit local income taxes, cap local sales tax, and have been increasing state-driven costs for K-12, line-of-duty, water and wastewater, etc.

Who’s Governing a City’ Future? Michigan Attorney General Bill Scheutte yesterday stated the state would close poorly performing Detroit schools by the end of the current academic year if they ranked among the state’s worst in the past three years in an official legal opinion—an opinion contradictory to a third-party legal analysis that Gov. Rick Snyder’s administration had said would prevent the state from forcing closure any Detroit public schools until at least 2019, because they had been transferred to a new debt-free district as part of a financial rescue package legislators approved this year—a state law which empowers the School Reform Office authority to close public schools which perform in the lowest five percent for three consecutive years. Indeed, in his opinion, Attorney General Scheutte wrote that enabling the state’s $617 million district bailout specified Detroit closures should be mandatory unless such closures would result in an unreasonable hardship for students, writing: “The law is clear: Michigan parents and their children do not have to be stuck indefinitely in a failing school…Detroit students and parents deserve accountability and high performing schools. If a child can’t spell opportunity, they won’t have opportunity.” The Attorney General’s opinion came in response to a request by Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) as part of the issue with regard to whether the majority in the state legislature, the City of Detroit, or the Detroit Public Schools ought to be guiding DPS, currently under Emergency Manager retired U.S. Bankruptcy Judge Steven Rhodes would best serve the interest of the city’s children. It appears, at least from the perspective of the state capitol, this will be a decision preempted by the state, with the Governor’s School Reform Office seemingly likely to ultimately decide whether to close any number of struggling schools around the state—a decision his administration has said would likely be made—even as the school year is already underway—“a couple of months” away. The state office last month released a list of 124 schools that performed in the bottom 5 percent last year, on which list more than a third, 47, were Detroit schools.

Nevertheless, the governance authority to so disrupt a city’s public school system is hardly clear: John Walsh, Gov. Snyder’s director of strategic policy, had told The Detroit News that the state could not immediately close any Detroit schools, citing an August 2nd legal memorandum Miller Canfield attorneys sent Detroit school district emergency manager Judge Rhodes, a memorandum which made clear that the transferral of Detroit schools to a new-debt free district under the provisions of the state-enacted legislation had essentially reset the three-year countdown clock allowing the state to close them—a legal position the state attorney general yesterday rejected, writing: a school “need not be operated by the community district for the immediately preceding three school years before it is subject to closure.” Michigan State Rep. Sherry Gay-Dagnogo (D-Detroit) reacted to the state opinion by noting it would not give Detroit’s schools a chance to make serious improvements as part of so-called “fresh start” promised by the legislature as part of the $617 million school reform package enacted last June, noting that she believes the timing of its release—just one week before student count day—is part of an intentional effort to destabilize the district: “We could possibly lose students, because parents are afraid and confused, that’s what this is all about…They want the district to implode…They want to completely remake public education, and implode the district to charter the district. There’s big money in charter schools…This is about business over children.”

Are There Too Many Municipalities? Can We Afford Them All? The Chicago Civic Federation recently released a report, “Unincorporated Cook County: A Profile of Unincorporated Areas in Cook County and Recommendations to Facilitate Incorporation,” which examines unincorporated areas in Cook County—a county with a population larger than that of 29 individual states—and the combined populations of the seven smallest states—a county in which there are some 135 incorporated municipalities partially or wholly within the county, the largest of which is the City of Chicago, home to approximately 54% of the population of the county. Approximately 2.4%, or 126,034, of Cook County’s 5.2 million residents live in unincorporated areas of the County and therefore do not pay taxes to a municipality. According to Civic Federation calculations, Cook County spends approximately $42.9 million annually in expenses related to the delivery of municipal-type services to unincorporated areas, including law enforcement, building and zoning and liquor control. Because the areas only generate $24.0 million toward defraying the cost of these special services, County taxpayers effectively pay an $18.9 million subsidy, even as they pay taxes for their own municipal services. The portion of Cook County which lies outside Chicago’s city limits is divided into 30 townships, which often divide or share governmental services with local municipalities. Thus, this new report builds on the long-term effort by the Federation in the wake of its 2014 comprehensive analysis of all unincorporated areas in Cook County as well as recommendations to assist the County in eliminating unincorporated areas. .In this new report, the Federation looks at the $18.9 million cost to the County of providing municipal-type services in unincorporated areas compared to revenue generated from the unincorporated areas, finding it spent approximately $18.9 million more on unincorporated area services than the total revenue it collected in those areas in FY2014, including nearly $24.0 million in revenues generated from the unincorporated areas of the county compared to $42.9 million in expenses related to the delivery of municipal-type services to the unincorporated areas of the county—or, as the report notes: “In sum, all Cook County taxpayers provide an $18.9 million subsidy to residents in the unincorporated areas. On a per capita basis, the variance between revenues and expenditures is $150, or the difference between $340 per capita in expenditures versus $190 per capita in revenues collected. The report found that in that fiscal year, Cook County’s cost to provide law enforcement, building and zoning, animal control and liquor control services was approximately $42.9 million or $340.49 per resident of the unincorporated areas. The following chart identifies the Cook County agencies that provide services to the unincorporated areas and the costs associated with providing those services. The county’s services to these unincorporated areas are funded through a variety of taxes and fees, including revenues generated from both incorporated and unincorporated taxpayers to fund operations countywide: some revenues are generated or are distributed solely within the unincorporated areas, such as income taxes, building and zoning fees, state sales taxes, wheel taxes (the wheel tax is an annual license fee authorizing the use of any motor vehicle within the unincorporated area of Cook County). The annual rate varies depending on the type of vehicle as well as a vehicle’s class, weight, and number of axles. Receipts from this tax are deposited in the Public Safety Fund. In FY2014 the tax generated an estimated $3.8 million., and business and liquor license fees, but the report found these areas also generated revenues from the Cook County sales and property taxes, which totaled nearly $15.5 million in revenue, noting, however, those taxes are imposed at the same rate in both incorporated and unincorporated areas and are used to fund all county functions. With regard to revenues generated solely within the unincorporated areas of the county, the Federation wrote that the State of Illinois allocates income tax funds to Cook County based on the number of residents in unincorporated areas: if unincorporated areas are annexed to municipalities, then the distribution of funds is correspondingly reduced by the number of inhabitants annexed into municipalities. Thus, in FY2014, Cook County collected approximately $12.0 million in income tax distribution based on the population of residents residing in the unincorporated areas of Cook County. The report determined the Wheel Tax garnered an estimated $3.8 million in FY2014 from the unincorporated areas; $3.7 million from permit and zoning fees (including a contractor’s business registration fee, annual inspection fees, and local public entity and non-profit organization fees (As of December 1, 2014, all organizations are required to pay 100% of standard building, zoning and inspection fees.). The County receives a cut of the Illinois Retailer’s Occupation Tax (a tax on the sale of certain merchandise at the rate of 6.25%. Of the 6.25%, 1.0% of the 6.25% is distributed to Cook County for sales made in the unincorporated areas of the County. In FY2014 this amounted to approximately $2.8 million in revenue. However, if the unincorporated areas of Cook County are annexed by a municipality this revenue would be redirected to the municipalities that annexed the unincorporated areas.) Cook County also receives a fee from cable television providers for the right and franchise to construct and operate cable television systems in unincorporated Cook County (which garnered nearly $1.3 million in revenue in FY2104). Businesses located in unincorporated Cook County pay an annual fee in order to obtain a liquor license that allows for the sale of alcoholic liquor. The minimum required license fee is $3,000 plus additional background check fees and other related liquor license application fees. In FY2014 these fees generated $365,904. Finally, businesses in unincorporated Cook County engaged in general sales, involved in office operations, or not exempt are required to obtain a Cook County general business license—for which a fee of $40 for a two-year license is imposed—enough in FY2014 for the county to count approximately $32,160 in revenue.

Who’s Financing a City’s Future? It almost seems as if the largest municipality within Cook County is caught between its past and its future—here it is accrued public pension liabilities versus its public schools. The city has raised taxes and moved to shore up its debt-ridden pension system—obligated by the Illinois constitution to pay, but under further pressure and facing a potential strike by its teachers, who are seeking greater benefits. The Chicago arithmetic for the public schools, the nation’s third-largest public school district is an equation which counts on the missing variables of state aid and union concessions—neither of which appears to be forthcoming. Indeed, this week, Moody’s, doing its own moody math, cut the Big Shoulder city’s credit rating deeper into junk, citing its “precarious liquidity” and reliance on borrowed money, even as preliminary data demonstrated a continuing enrollment decline drop of almost 14,000 students—a decline that will add fiscal insult to injury and, likely, provoke potential investors to insist upon higher interest rates. According to the Chicago Board of Education, enrollment has eroded from some 414,000 students in 2007 to 396,000 last year: a double whammy, because it not only reduces its funding, but likely also means the Mayor’s goal of drawing younger families to move into the city might not be working. In our report on Chicago, we had noted: “The demographics are recovering from the previous decade which saw an exodus of 200,000. In the decade, the city lost 7.1% of its jobs. Now, revenues are coming back, but the city faces an exceptional challenge in trying to shape its future. With a current debt level of $63,525 per capita, one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Nevertheless, unemployment is coming down (11.3% unemployment, seasonally adjusted) and census data demonstrated the city is returning as a destination for the key demographic group, the 25-29 age group, which grew from 227,000 in 2006 to 274,000 by end of 2011.) Ergo, the steady drop in enrollment could signal a reversal of those once “recovering” demographics. Or, as Moody’s notes, the chronic financial strains may lead investors to demand higher interest rates—rates already unaffordably high with yields of as much as 9 percent, according to Moody’s. Like an olden times Pac-Man, principal and interest rate costs are chewing into CPS’s budget consuming more than 10 percent of this year’s $5.4 billion budget, or as the ever perspicacious Richard Ciccarone of Merritt Research Services in the Windy City put it: “To say that they’re challenged is an understatement…The problems that they’re having poses risks to continued operations and the timely repayment of liabilities.” Moody’s VP in Chicago Rachel Cortez notes: “Because the reserves and the liquidity have weakened steadily over the past few years, there’s less room for uncertainty in the budget: They don’t have any cash left to buffer against revenue or expenditure assumptions that don’t pan out.” And the math threatens to worsen: CPS’ budget for FY2016-17 anticipate the school district will gain concessions from the union, including phasing out CPS’ practice of covering most of teachers’ pension contributions—a phase-out the teachers’ union has already rejected; CPS is also counting on $215 million in aid contingent on Illinois adopting a pension overhaul—the kind of math made virtually impossible under the state’s constitution, r, as Moody’s would put it: an “unrealistic expectations.” Even though lawmakers approved a $250 million property-tax levy for teachers’ pensions, those funds will not be forthcoming until after the end of the fiscal year—and they will barely make a dent in CPS’s $10 billion in unfunded retirement liabilities.

Out Like Flint. The City of Flint will continue to receive its water from the Great Lakes Water Authority for another year, time presumed to be sufficient to construct a newly required stretch of pipeline and allow for testing of water Flint will treat from its new source, the Karegnondi Water Authority (KWA). The decision came as the Senate, in its race to leave Washington, D.C. yesterday, passed legislation to appropriate some $170 million—but funds which would only actually be available and finally acted upon in December when Congress is scheduled to come back from two months’ of recess—after the House of Representatives adopted an amendment to a water projects bill, the Water Resources Development Act, which would authorize—but not appropriate—the funds for communities such as Flint where the president has declared a state of emergency because of contaminants like lead. Meanwhile, the Michigan Strategic Fund, an arm of the Michigan Economic Development Corp., Tuesday approved a loan of up to $3.5 million to help Flint finance the $7.5-million pipeline the EPA is requiring to allow treated KWA water to be tested for six months before it is piped to Flint residents to drink. While the pipeline connecting Flint and Lake Huron is almost completed, the EPA wants an additional 3.5-mile pipeline constructed so that Flint residents can continue to be supplied with drinking water from the GLWA in Detroit while raw KWA water, treated at the Flint Water Treatment Plant, is tested for six months. The Michigan Department of Environmental Quality is expected to pay $4.2 million of the pipeline cost through a grant, with the loan covering the balance of the cost. Even though the funds the Strategic Fund has approved is in the form of a loan, with 2% interest and 15 years of payments beginning in October of 2018, state officials said they were considering various funding sources to repay the loan so cash-strapped Flint will not be on the hook for the money. Time is of the essence; Flint’s emergency contract for Detroit water, which has already been extended, is currently scheduled to end next June 30th.  

Waiting for Godot. Last April 27th, East Cleveland Mayor Gary Norton wrote to Ohio State Tax Commissioner Joseph W. Testa for approval for his city to file chapter 9 bankruptcy: “Given East Cleveland’s decades-long economic decline and precipitous decrease in revenue, the City is hereby requesting your approval of its Petition for Municipal Bankruptcy. Despite the City’s best Efforts, East Cleveland is insolvent pursuant…Based upon Financial Appropriations projections for the years 2016, 2017, 2018 and 2019, the City will be unable to sustain basic Fire, Police, EMS or rubbish collection services. The City has tried to negotiate with its creditors in good faith as required by 11 U.S.C. 109. It has been a somewhat impracticable effort. The City’s Financial Recovery Plan, approved by the City Council, the Financial Commission and the Fiscal Supervisors, while intended to restore the City to fiscal solvency, will have the effect of decimating our safety forces. Hence, our goal to effect a plan that will adjust our debts pursuant to 11 U.S.C. 109 puts us in a catch-22 that is unrealistic. This is particularly true now that petitions for Merger/Annexation with the City of Cleveland have been delayed by court action in the decision of Cuyahoga County Common Pleas Judge Michael Russo, Court Case No. 850236.” Mayor Norton closed his letter: “Thank you for your prompt consideration of this urgent matter.” He is still waiting.