Exiting from State Receivership

April 9, 2018

Good Morning! In this morning’s eBlog, we return to Flint, Michigan, where, in the wake of last week’s release by Gov. Rick Snyder of the city from receivership and state oversight—the city will have to make its own way to full fiscal and physical recovery from the many years’ of state-imposed choices—but recovery too after the former Michigan Revenue Sharing program has ceased, making the physical and fiscal challenge ever so steep.  

Setting the Path for a Strategic Recovery & a Return to Home Rule. After Gov. Rick Snyder, at the end of last week, announced he was releasing the City of Flint from receivership and state oversight, he has now announced that the State of Michigan will stop providing Flint residents with free bottled water when current supplies run out, citing nearly two years of test results showing falling lead levels in city tap water. Indeed, preliminary data from early this calendar year showed 90 percent of high-risk Flint water sites at or below 4 part per billion of lead, according to the Michigan Department of Environmental Quality. Thus, if these results hold through end of June, it would be the fourth consecutive six-month period levels have tested below the federal action level of 15 parts per billion. In the wake of the Governor’s announcement, the state plans to close four remaining water bottle distribution centers when supplies are exhausted—something that could happen within the next week, albeit water filters and cartridges will remain available at Flint City Hall.

In his announcement, the Governor said: “I have said all along that ensuring the quality of the water in Flint and helping the people and the city move forward were a top priority for me and my team…We have worked diligently to restore the water quality and the scientific data now proves the water system is stable and the need for bottled water has ended.”  The Governor did not discuss the state’s role in unbalancing and aggravating Flint’s fiscal misery—one to which the State contributed both through its former imposition of Emergency managers to preempt the city’s elected leaders—and through its elimination of state revenue sharing. By 2014, Flint had lost $54.9 million dollars in state aid—funds which would have been sufficient then to have fully paid off its annual deficit, as well as all $30 million of its municipal bond indebtedness, and still have had over $5 million in surplus

One of the hard questions now will be with regard to the potential impact of assessed property values and tax revenues in a city where those values were so harshly impacted by the fear of poisoned water: property tax assessments are mailed out every March: In 2016, those revenues, $19.7 million, made up about 23% of the city’s $81 million in general revenue. Unsurprisingly, that led to appeals to the Michigan Tax Tribunal for a poverty exemption to property taxes, with residents citing the costs associated with the water problems as one reason. Those lower assessed values added to the challenge to Genesee County to sell tax-foreclosed properties.

Mayor Karen Weaver, who has played a key role in the efforts to replace underground lead service lines at homes across the city, wrote to the Gov. last Friday to advise him that residents had “great anxiety” over the prospect of closing water distribution sites., noting: “As I have stated before and will continue to say, this is not what I want for our city, and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

In response, Gov. Snyder replied that Michigan taxpayers were not legally obligated to fund bottled water or Flint distribution sites after last September; however, “in the spirit of good faith and our continued partnership, the state has continued to provide funding for hundreds of thousands of cases of bottled water for the daily use of residents.” Noting that he had provided the Mayor with Weaver recent water testing data and methodology, he added: “Since Flint’s water system has been and continues to be well within the standards set by the federal government, we will now focus even more of our efforts on continuing with the health, education and economic development assistance needed to help move Flint forward,” adding: “I remain steadfast in that commitment.

Nevertheless, with lead service line replacement set to resume this spring, there remain not just physical and fiscal fears, but also lingering apprehensions that underground work could dislodge lead flakes from existing pipes and again contaminate home tap water. That is, parents are scared—hardly a message which would enhance assessed property values.

Thus, it might seem ironic that Gov. Snyder’s decision to end bottled water service came two days after his administration had, last Wednesday, announced it was releasing Flint from receivership—a receivership under which the fateful, devastating decision to begin drawing drinking water from the Flint River until construction of the new regional Karegnondi Water Authority pipeline to Lake Huron was completed. (The City of Flint has been getting its treated water from the Great Lakes Water Authority since October of 2015. Last November, Flint inked a 30-year agreement to stay on the Detroit area system in November 2017 in the wake of a federal court order mandating the City Council to quit delaying a decision about its permanent water source.)

A Silver Lining? Flint lead levels have dropped below 4 parts per billion so far this year, according to the Michigan environmental department; for the second half of 2017, 90 percent of high-risk sites had tested below 6 ppb. Officials also said the state has conducted “extensive flushing and testing” of unfiltered water at schools, day cares and senior homes in Flint—meaning the updated test results are finding lower levels than the statewide 10 parts per billion which Gov. Snyder would like to enforce statewide. Keith Creagh, Director of the Michigan Department of Natural Resources, noted: “Flint’s water is undoubtedly one of the most monitored systems in the country, and for the last 22 months several types of extensive testing data points have consistently supported that Flint’s water system has stabilized.”

Nevertheless, the action to stop providing bottled water to the beleaguered city led Michigan Senate Minority Leader Jim Ananich (D-Flint) to state: “It’s beyond belief that the Governor expects the folks in Flint to trust the government now, when they lied to our faces about lead in our water just a few years ago…That trust was broken, and families in Flint still don’t feel that the water in their homes is safe to drink.” Similarly, Rep. Sheldon Neeley (D-Flint) stated he was requesting the Governor to continue providing bottled water until the state has successfully addressed the “crisis of confidence” among Flint residents, noting: “From the perspective of Flint residents, it was the same data, personnel and science that failed them. They don’t trust them still.” Rep Neeley added that if the State fails to continue providing services to Flint residents, he would support any legal action the city may take “to compel the state to do its job and continue water service to its citizens.” (The State of Michigan has sent more than $350 million in state funds to Flint since late 2015, in addition to $100 million from the federal government, that has paid for bottled water, water system upgrades, and local health initiatives—with a portion of the funding mandated under a four-year, $97 million settlement reached last year between the state and a coalition which had sued in an attempt to secure safe drinking water. Under the agreement, the state agreed to spend an additional $47 million on top of already budgeted funds to replace lead pipes and provide free bottled water.) Now, an Environmental Department spokeswoman reports she expects the state’s current supply of bottled water will run out within four to seven days.

Mayor Karen Weaver, whose administration is working to replace underground lead service lines at homes across the city, published a letter to Gov. Snyder earlier Friday telling him residents had “great anxiety” over the prospect of closing water distribution sites: “As I have stated before and will continue to say, this is not what I want for our city and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

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The Fiscal & Legal Challenges of Smaller Municipalities

eBlog

March 28, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal, physical, intergovernmental, and legal challenges to Flint, Michigan—as too many parties seek to plead innocent to state actions, which have wreaked such devastating fiscal and physical costs. Then we head east to one of the nation’s oldest municipalities, Bristol, Virginia, which appears to be on the precipice of chapter 9 municipal bankruptcy.

Fiscal Fraud & Unfiscal Federalism? Andy Arena, the FBI Detroit office’s former director, and lead investigator into the City of Flint’s water crisis, this week testified before the Michigan Senate Appropriations Subcommittee on General Government that he has launched a new probe amid allegations of “financial fraud” and “greed” as critical factor behind the fateful decision years ago to switch the city’s water source, stating: “Without getting too far into depth, we believe there was a significant financial fraud that drove this,” adding that the alleged scheme benefited “individuals.” Or, as he testified: “I believe greed drove this.”

His testimony came as Michigan Attorney General Bill Schuette continued the investigation he started in the wake of Gov. Rick Snyder’s declaration, two years ago, of a state of emergency in the wake of the severe and life threatening lead water contamination, as the criminal probe, which has already led to charges against 15 local and state officials—charges resulting in four plea deals and preliminary exams involving six defendants, including state Health and Human Services Director Nick Lyon and Chief Medical Executive Eden Wells continue. Now, the investigation is focusing on the potential motivation behind the decision to switch the City of Flint from the Detroit area water system to the new Karegnondi Water Authority—a decision which, when Flint opted to join the regional authority, had terminated its arrangement with the Detroit water system and opened the fateful portals to drawing water from the Flint River as an interim source, e.g. the dreadful step which resulted in contaminated drinking water and calamitous drops in assessed property values—not to mention grave governing questions with regard to the culpability of state appointed emergency managers preempting local elected leaders. (Within 17 months, the decision, made while the city was run by state-appointed emergency managers, was reversed after outbreaks of Legionnaires’ and increased levels of bacteria, total trihalomethanes and lead were found in water. Five years ago, in March, Flint’s City Council members voted 7-1 to join a new regional provider, rather than remain a customer with the Detroit system—as it had for decades. Three days earlier, Flint Emergency Manager Ed Kurtz had approved the agreement, notwithstanding then-State Treasurer Andy Dillon’s skepticism with regard to whether the new regional authority made financial sense.).

Last week, when Sen. Mike Nofs (R-Battle Creek) asked whether the probe involved local, state, and federal entities, Mr. Arena responded: “It kind of cuts across all lines right now…I don’t know that they were working so much in concert, but the end game was people were trying to make money in different ways.” He reiterated that his FBI team has been heading the Flint criminal investigation for more than two years; however, he testified he was uncertain when it might end, adding: “We’re moving at lightning speed…I can assure everyone here that we are working as quickly as we possibly can: Our bottom line is we want justice for the people of Flint, and we have to do that methodically.” Unsurprisingly, he did not detail what “justice” might mean: would it mean reparations for the fiscally and physically devastated city and its taxpayers?

The case, as we have previously written, commenced after the Governor, five years’ ago, preempted all municipal authority via the appointment of Ed Kurtz as the city’s Emergency Manager, effectively preempting any municipal authority for the brewing fiscal, physical, and health catastrophe; Mr. Kurtz, in this preemptive capacity then signed off on the fateful order in June of 2013 to allow the “upgrading of the Flint Water Plant to ready it to treat water from the Flint River to serve as the primary drinking water source for approximately two years and then converting to KWA delivered lake water,” a source which the city used from April of 2014 until October 2015, when the city was reverted to the Detroit system in the wake of an outbreak of Legionnaires’ cases and evidence of elevated levels of lead in the city’s children—a most ill omen, as it signaled to parents the prohibitive cost of health and safety to continue to reside in the city—and the unlikelihood of any ability to sell their homes at any kind of a reasonable price. Mayhap worse, last October, a federal judge dismissed objections by Flint’s City Council and paved the way for Flint officials to move forward with a long-term contract with the Detroit area Great Lakes Water Authority—a position supported by Mayor Karen Weaver as vital to avert chapter 9 municipal bankruptcy. Thus, Mayor Weaver, Gov. Snyder, and the EPA supported a proposed 30-year agreement with the Great Lakes Water Authority—a position on which the Flint City Council did not agree—leading to a successful suit by the Michigan Department of Environmental Quality to compel approval of the agreement.

Concurrently, in a related trial on these physical and fiscal event, before a Genesee District Court Judge in a trial where the state’s Chief Medical Officer has been charged with crimes related to the Flint water crisis, a researcher, Virginia Tech Professor Marc Edwards, testified before Genesee District Court Judge William Crawford yesterday that Dr. Eden Wells had sought to “get to the truth of the matter,” and that had seen no evidence of Dr. Wells having committed crimes during her preliminary examination on potential charges including involuntary manslaughter.(Prosecutors charge that Dr. Wells, a member of Gov. Snyder’s cabinet, failed to protect the health and welfare of Flint area residents, including victims of Legionnaires’ disease outbreaks in the Flint area while the city used the Flint River as its water source in parts of 2014 and 2015: Dr, Wells is charged with attempting to withhold funding for programs designed to help the victims of the water crisis and with lying to an investigator about material facts related to a Flint investigation by the Michigan Attorney General’s Office.) 

Professor Edwards is among those who believe that Flint’s switch to river water without proper treatment to make it less corrosive triggered both elevated lead and increased Legionella bacteria in large buildings in Flint at the time, adding that he disagreed with the approach taken by the Flint Area Community Health and Environment Partnership, which contracted with the state to find the root cause of the Legionella outbreaks, which officials have reported lead to the deaths of at least a dozen people in Genesee County while the river was in use. Thus, Professor Edwards notes, instead of focusing on the potential for the bacteria in water filters, state fiscal resources would have been put to better use if directed to investigate cases tied to large buildings, particularly hospitals, where his own testing showed very high levels were present. Moreover, in response to the query whether Dr. Wells did anything to discourage his research, Prof. Edwards responded: “To the contrary. She seemed interested, and she encouraged it.”

The Fiscally Desperate State of a Small Municipality. Far to the east of Flint, in one of the nation’s oldest municipalities, Bristol, Virginia, a municipality which, in 1880, had a population of 1,562—a population which gradually grew to 19,042 in 1980, before waning to 16,060 by 2016. The area of what is, today, Bristol, was once inhabited by early Americans, Cherokee Indians, with the name, according to legend, because numerous deer and buffalo met there to feast in the canebrakes; it was subsequently renamed the site Sapling Grove, and then, in 1890, finally settled upon as Bristol. It used to have a fort on a hill overlooking what is now downtown Bristol: it marked an important stopping-off place for notables, including Daniel Boone and George Rogers Clark, as well as hundreds of pioneers, who found Bristol, a former trading post, way station, and stockade, to be a cornerstone to opening up a young nation to the West.  Now, a Virginia Auditor of Public Accounts (APA) new report has found the municipality may require state fiscal assistance to address its significant debt tied to The Falls development and landfill operations—having, at the end of last week, in its fiscal distress monitoring report of local governments, assessed the small city as scoring poorly on a set of financial metrics, including debt overload, cash flow issues, revenue shortfalls, deficit spending, billing issues, and a lack of qualified staff. The small municipality today has a median household income of $27,389. Approximately 13.2% of families and 16.2% of the population fall below federal poverty levels–including 25.8% of those under age 18. The Auditor’s report notes: “During follow-up with the City of Bristol, we observed two primary issues that we concluded are contributing to a situation of fiscal distress at the city: issues specific to the operational sustainability of its solid waste disposal fund and the debt and future revenues related to The Falls commercial development project,” positions which Bristol City Manager Randy Eads noted “exactly” portrayed the city’s financial problems, as opposed to preliminary findings released last year which included some incorrect information. Specific findings found that the city does not have unrestricted reserves to use for a revenue shortfall or unforeseen situations, and that the city is not in the “most desirable” position to meet its fiscal obligations without obtaining additional revenues.

As part of the report, the APA issued written notification to Gov. Ralph Northam, the General Assembly’s money committees, the Secretary of Finance, and city officials detailing these specific issues and recommending that Bristol may warrant further assistance from the state to help assess and stabilize areas of concern—with such potential state assistance including an independent consultant reviewing the viability of landfill operations and developing long-range financial forecasts for revenue—each items sought by the city. Or, as Manager Eads noted: “That’s something we requested from the APA. It’s our understanding there’s $500,000 the state has set aside to help low-scoring localities with some of their financial issues…We requested funds for a detailed financial analysis of the landfill and requested funds for a financial planning firm to help us with a three-, five- and 10-year financial forecast.” Manager Eads reports he plans to meet with Virginia legislators to seek support. Bristol’s solid waste fund has $33.5 million in long-term bond debt; the municipality’s general fund continues to transfer funds to pay bills, according to the report. The report notes that city officials completed a significant refinancing of all short-term debt earlier this year; however, debt remains a challenge: “However, the city’s increasing debt service costs continue to be a concerning factor, as Bristol’s ability to pay the debt service will be contingent upon sufficient future revenues received from The Falls project,” according to the report. The auditor’s office notes the city is entitled to additional sales tax revenues under provision of a state law, but notes “Bristol continues to experience some uncertainty with its long-term revenue stream and future growth after all phases of The Falls project are implemented.”

The Motown Comeback

March 23, 2018

Good Morning! In this morning’s eBlog, we consider the un-decaying of Detroit, as the Motor City takes steps to transform its future from its core out. Then we return to the frigid northern steppes of northern Michigan to assess the ongoing physical, fiscal, and governing challenges in Flint.

Pending City Council approval, Detroit will purchase 142 acres of the historic the historic Michigan State Fairgrounds, property which could become the home of a major employer, a regional transit hub, and a new focal point for the post-chapter 9 city’s vibrant fiscal recovery, with the decision coming after Michigan state officials give the city a green light. The Michigan Land Bank Fast Track Authority Board of Directors approved proposals Wednesday to sell the Detroit property where the Michigan State Fair was once held, as Mayor Mike Duggan, standing in front of the former site of the Michigan State Fair, which closed after more than century in 2009 stated: “Detroiters need jobs. There is no reason we can’t have 1,000 to 2,000 people working here.” Under the proposals, the city will purchase approximately 142 acres of the property for $7 million. Magic Plus plans to buy 16 acres, Detroit officials said the city will lead the redevelopment of the property with input from the community. Josh Burgett, the Michigan Land Bank Fast Track Authority’s director, said: “The historic State Fairgrounds is an important site for residents, the City of Detroit, and the entire region: All parties involved have worked hard to bring redevelopment to the site, and this public/private agreement is marrying two visions for the State Fairgrounds to create jobs and provide commercial destinations for those new employees and current residents.” If and when the City Council approves the proposed purchase, the City of Detroit will take ownership of the land this summer and Magic Plus will take ownership of its land in May. Joel Ferguson, principal of Magic Plus LLC, said his company will work with the city and area residents to determine the best use of the property. A number of uses have been suggested, such as a movie theater and restaurants, and Mr. Ferguson said he has a list of businesses interested in the site, stating: “(Residents) want a number of different stores that would service that immediate area. We don’t know what that will be. We’re working with the city and community, and they’ll highlight what they want us to do.” For his part, Mayor Duggan said he was confident the Council will approve the purchase, under which the city will pay an initial $3.5 million and another $3.5 million when the development is near completion, adding that he has been approached every day by employers who want to return to the city:  “I don’t see us going out for a (request for proposal) for housing or strip malls or anything like that: I see us talking to the major employers, looking at designing the land around regional transit and a major employment center. That’s what we hope to do.”

The purchase is the culmination of legislation Gov. Snyder signed into law nearly six years ago to allow for the transfer of the site to the Michigan Land Bank to be returned to productive use. Since then, the Land Bank has been working with Detroit and Magic Plus LLC to redevelop the site. St the same time, in what could be a related development, the Ford Motor Co. is reported to be pursuing a deal to purchase the abandoned Michigan  Central Station, a beautiful old building just outside of the historic downtown area–a station which has been abandoned and empty for nearly three decades–predating Detroit’s historic chapter 9 municipal bankruptcy. Crain’’s is reporting that the deal between Ford and the current owner, the Moroun family, could be announced as soon as next month–likely paving the way for Ford’s second recent investment in Detroit’s historic Corktown neighborhood, after, three months ago, Ford announced it would put 200 employees in The Factory, a building less than a half a mile from Michigan Central Station. A redeveloped train station could house 1,000 Ford employees. (The automobile company currently houses most of its employees in facilities around the Detroit suburb of Dearborn.) This would mark Ford’s second recent investment in Detroit’s Corktown neighborhood, after, three months ago, the company had announced it would put 200 employees in The Factory, a building less than a half a mile from Michigan Central Station. A redeveloped train station could house 1,000 Ford workers. The deal could profoundly mark a vital step in the Motor City’s remarkable recovery from the largest municipal bankruptcy in U.S. history–especially with the downtown core already experiencing a revival in business and culture–even as, to date, the surrounding neighborhoods have struggled to keep up. Indeed, the news of the redevelopment Corktown has ample room for new housing and businesses and redeveloping Michigan Central Station would throw the neighborhood the attention and money it needs to grow has reignited discussions about the future of Corktown, the consequences of having such a powerful company as an anchor in the community, and, most significantly, what possible bigger shifts are in store for property in the area. A search of available records, using Loveland Technologies mapping service, found that of the 86 properties closest to the old depot, nearly 20% are owned by the City of Detroit. Given the city’s history of working with developers to encourage construction, the surrounding area may undergo a range of infrastructure and aesthetic improvements. In addition to Roosevelt Park, which sits in front of the depot, the city owns four massive plots of land to the west of the train station, 10 small plots on 18th Street and one property on 17th Street. Jed Howbert, of Mayor Duggan’s Jobs and Economy Team, noted: “To state the obvious, we love all corporate investment in the city that creates jobs. So we’d be as enthusiastic about Ford as any other tenant looking at major  investments.” What remains to be fleshed out are how a community benefits agreement would shape any Ford agreement. To date, in the Motor City, only six projects have been subjected to the law — four of them Dan Gilbert initiatives. The end results, according to a new report from WDET, found that “after 12 weeks of community benefits talks with residents across the four projects, Bedrock committed to two community benefits in its agreements with the city. The first: Bedrock would communicate with residents about construction-related activity. And the second: Bedrock would support job training initiatives, something the company has been doing for years.”  Rashida Tlaib, a former Michigan state Representative who also is part of the Equitable Detroit Coalition, hopes that even without public funding, Ford would meet with the community. “I just hope there is an actual sit-down and agreement on whatever future development Ford Motor Co. would like to have there,” said Tlaib, adding that it was difficult to speak about the future as so much of the process has been obscured. “It’s unfortunate a lot of these deals are done behind closed doors and often the role of the city is much more prominent than they’re revealing to all of us,” she said. 

Out like Flint? Environmental Protection Agency Administrator Scott Pruitt said that eradicating lead from drinking water is one of his top priorities three years after the Flint water crisis; however, he reported he was worried Americans are not “sufficiently aware” of the threat: “I really believe that we ought to set a goal as a country that, over the next 10 years, that we ought to work with respect to investments in our infrastructure to eradicate lead in our drinking water…It can be achieved. Some of the mental-acuity levels of our children are being impacted adversely as a result of this.” Administrator Pruitt is concerned that parents and citizens do not understand the threat of lead in drinking water or toys, noting the Administration is “looking at ways we can contribute to that dialogue: I do think that what happened in Flint is something that could happen elsewhere. We just simply need to take steps to do all that we can to address it prospectively and proactively,” adding that the White House proposal to bolster the nation’s infrastructure over the next decade would include investments in aging water infrastructure; however, that federally unfunded plan includes no provisions for replacing the thousands of lead service lines throughout the country–a cost estimated around $40 billion to $45 billion, even as it stresses the need for state and local governments to invest in such upgrades. Administrator Pruitt noted he would “love” to see local governments investing more in water infrastructure: “These water treatment facilities – they have authority to bond out, to raise fees, to invest in corrosion control, the replacement of service lines and the rest…And some of them just aren’t doing it.” The EPA Administrator was silent on the enormous fiscal disparities which so adversely affect fiscally stressed municipalities like Flint with vastly disproportionate levels of poverty. 

More constructively, Gov. Rick Snyder has proposed having water customers across Michigan pay a $5 annual fee to help upgrade aging infrastructure and replace lead pipes in their local communities. His proposal, however, has gained little traction in the Republican-controlled Legislature, while U.S. Rep. Dan Kildee (D-Flint Township) said what Administrator Pruitt has described was not really a plan: “When it comes to Mr. Pruitt, nice words don’t replace pipes. It takes money. What they have proposed is really nothing when it comes to infrastructure,” Rep. Kildee said of the Trump administration proposal. Rep. Kildee added that what would make a meaningful difference would be for EPA to support amending the nation’s Clean Water Act to reduce the acceptable amount of lead in drinking water to 5 parts per billion. (The current federal action limit is 15 parts per billion.) Rep. Kildee noted: “Force federal and state governments to stare this in the face by adopting a level that is science-based that says there is no acceptable level of lead.” EPA has spent a decade trying to update the rule—a rule which Michigan Gov. Rick Snyder called “dumb and dangerous” after the Flint disaster. The state has proposed draft rules to drop the acceptable amount of lead in drinking water to 10 parts per billion by 2024.

Five years ago a Center for American Progress report cited several school districts like Chicago, Philadelphia, Baltimore—not Detroit—as examples of places where mayoral governance of public schools has had some measure of success improving the achievement gap for students. “Governance constitutes a structural barrier to academic and management improvement in too many large urban districts, where turf battles and political squabbles involving school leaders and an array of stakeholders have for too long taken energy and focus away from the core mission of education,” the report stated. Consequently, the report added, “Mayoral accountability aims to address the governing challenges in urban districts by making a single office responsible for the performance the city’s public schools. Citywide priorities such as reducing the achievement gap receive more focused attention.” But the only problem is this belief about mayoral control of schools has not worked well for Detroit. It has done just the opposite since the 1999 state takeover of the schools under former Gov. John Engler, which allowed for the Mayor of Detroit to make some appointments to the school board. Since the state took over governance of the schools, when it was in a surplus, the district had been on a downward spiral with each year returning ballooning deficits under rotating state-appointed emergency managers. The District lost thousands of students to suburban schools as corruption and graft also became a hallmark of a system that took away resources that were meant to educate the city’s kids.

Such history is what informs the resistance to outside involvement with the new Detroit Public Schools Community District which is now under an elected board with Superintendent Nikolai Vitti. His leadership is being received as a breath of fresh air as he implements needed reforms. That is what is now fueling skepticism and reservation about Mayor Mike Duggan’s bus loop initiative to help stem the tide of some 30,000 Detroit students he says attend schools in the suburbs. During his State of the City address, Mayor Duggan cited transportation as critical to connecting both Detroit district and charter school students and ensuring that students succeed in the city. Many believe the Mayor is right that losing students to suburban districts is impacting the district and the urgent need to reverse or tackle this trend. It is also reasonable to expect the Mayor to be supportive of the school district—there is widespread recognition that the city will not be able to succeed fiscally over the long-term without a functioning school system that will act as an incentive to draw families back into the city.

“The district is ready to support the initiative, but we need to review additional information to justify cost,” Superintendent Vitti said in an email response to questions about the Mayor’s plan. “The information is related to knowing how many school age students live near the schools and are not attending DPSCD? What percentage is already using our provided transportation lines that attend the schools? If they are not attending schools, where are they attending?” Under the proposal, it would cost between $90,000-$150,000 to embark on the project involving six Detroit schools, according to Superintendent Vitti. But he said concern about outside interference with the school system is not misplaced: “The district has not been respected by outsiders for decades and children have suffered. This includes policies that have favored charter schools over traditional public schools,” Superintendent Vitti said. “As a district, we need to listen and reflect on the concerns that have been raised. In the end, if we move forward with the initiative, we need to ensure that it is in the best interest of the district.” Superintendent Vitti also said this was not about mayoral control of the schools: “I have no evidence or belief that the Mayor is interested in running schools…I honestly believe the Mayor’s intent is to recruit students back to the city.”

Chris White, a community activist who has watched the district evolve over the years, remains skeptical about anything involving the school district and the Mayor, noting: “I strongly feel the Mayor’s priority should be crime reduction: His responsibility is managing the city, and when you examine the state of Detroit, he definitely has not been responsible.” Mr. White said the district can get back those students they are losing to outside schools by “keeping them safe and making sure the district is a partner to the community. People need stability when it comes to their child’s education.” Superintendent Vitti asserts he is doing just that. And he said the new bus initiative would not take away resources from the district: “As you know, competition with charter schools is not going away and we need to compete. I believe that through a bus loop we can recruit students who live in the area and are attending schools outside of the district and even charter schools…We would only support a one-year pilot before extending to future years. This would be a lot easier if fully funded outside of district resources.”

Fair Investment in the Motor City’s Future? Pending City Council approval, Detroit will purchase 142 acres of the historic Michigan State Fairgrounds—property which could become the home of a major employer, a regional transit hub, and provide amenities to area residents after state officials gave the City of Detroit and Earvin “Magic” Johnson’s development company the go ahead to buy the property. The Michigan Land Bank Fast Track Authority Board of Directors Wednesday approved proposals for the sale of the Detroit property where the Michigan State Fair was once held to the city and Magic Plus LLC. Mayor Mike Duggan noted: “A property of this size should be a major employment center for Detroiters,” speaking in front of the coliseum, which shuttered its doors when the Michigan State Fair ended its 104-year run on the site in 2009. Mayor Duggan said: “Detroiters need jobs. There is no reason we can’t have 1,000 to 2,000 people working here.”

Under the proposals, the City will buy about 142 acres of the property for $7 million. Magic Plus plans to purchase 16 acres: officials said the City will lead the redevelopment of the property with input from the community. Michigan Land Bank Fast Track Authority Director Josh Burgett noted: “The historic State Fairgrounds is an important site for residents, the City of Detroit, and the entire region: All parties involved have worked hard to bring redevelopment to the site, and this public/private agreement is marrying two visions for the State Fairgrounds to create jobs and provide commercial destinations for those new employees and current residents.”

The proposed purchase requires approval by the Detroit City Council—which, provided it is given, would pave the way for the city to take ownership of the land this summer, while Magic Plus will take ownership of its land in May. Joel Ferguson, principal of Magic Plus LLC, said his company will work with the city and area residents to determine the best use of the property, with possibilities including a movie theater and restaurants. Mr. Ferguson reports he has a list of businesses interested in the site, noting: “There’s not going to be any housing from us for sure…(Residents) want a number of different stores that would service that immediate area. We don’t know what that will be. We’re working with the city and community, and they’ll highlight what they want us to do.”

Mayor Duggan reported he was confident the City Council will approve the purchase, under which the city will pay an initial $3.5 million, and another $3.5 million when the development is near completion, adding that he has been approached every day by employers who want to return to the city. He added: “I don’t see us going out for a (request for proposal) for housing or strip malls or anything like that: I see us talking to the major employers, looking at designing the land around regional transit and a major employment center. That’s what we hope to do.”

The development could not only revitalize a key downtown area where I had been informed it was too dangerous to even walk alone outside on the day Detroit filed for chapter 9 municipal bankruptcy, but also, as Councilman Roy McAlister noted, become a metropolitan center due to the site’s proximity to Oakland and Macomb counties, so that, as the Councilmember put it: “We’re also bringing our region together to make sure that we’re prosperous.” The site was the locus for the Michigan State Fair from 1905 until 2009; then, six years ago, Gov. Rick Snyder signed legislation to permit the transfer of the site to the Michigan Land Bank to be returned to productive use. Since then, the Land Bank has been working with Detroit and Magic Plus LLC to redevelop the site.

Getting Back on Track. In a related development in the Motor City, there are reports that the Ford Motor Co. is pursuing a deal to purchase the abandoned Michigan Central Station, a massive, vacant structure located just outside downtown Detroit, which has been empty for about 30 years—an all too ominous emblem of the past decaying Motor City, with Crain’s reporting that the potential between Ford and the current owner, the Moroun family, could be announced as early as next month. If completed, this would mark Ford’s second recent investment in Detroit’s Corktown neighborhood: three months ago, Ford announced it would put 200 employees in The Factory, a building less than a half a mile from Michigan Central Station. A redeveloped train station could house 1,000 Ford workers; currently, Ford houses most of its employees in facilities around the Detroit suburb of Dearborn. Corktown is a neighborhood just outside the downtown core of Detroit–Amtrak last used the station 30 years ago; today it is owned by the Moroun family, which spent more than $8 million on the building, installing more than 1,100 windows and adding a freight elevator. This new development could result in still another remarkable change for downtown Detroit, where the downtown core is already experiencing a revival in business and culture, but where the surrounding neighborhoods have, to date, largely been left out. But, Corktown, with its ample room for new housing and businesses, combined with the redeveloping Michigan Central Station, could well result in pulling the neighborhood to a much brighter future. Such a proposed agreement between Ford and the current owner, the Moroun family, could be announced as soon as next month. It would mark Ford’s second recent investment in Detroit’s Corktown neighborhood, after, three months ago, Ford announced it would put 200 employees in The Factory, a building less than a half a mile from Michigan Central Station. A redeveloped train station could house 1,000 Ford workers. (Ford currently houses most of its employees in facilities around the Detroit suburb of Dearborn.) The possibility of the purchase of the long-vacant Michigan Central Station has reignited discussions about the future of Corktown, the consequences of having such a powerful company as an anchor in the community, and, most significantly, what possible bigger shifts are in store for property in the area. Currently, according to a search of available records, using Loveland Technologies mapping service, found that of the 86 properties closest to the depot, nearly 20%, or about 46 acres, are owned by the City of Detroit. Now, given the city’s history of working with developers to encourage construction, the surrounding area may undergo a range of infrastructure and aesthetic improvements. In addition to Roosevelt Park, which sits in front of the depot, the city owns four massive plots of land to the west of the train station, 10 small plots on 18th Street and one property on 17th Street. The Moroun family, which currently owns the train station, also owns two massive properties east and west of the old depot, and four smaller plots on 17th Street, next to the one owned by the city. Thus, unsurprisingly, Jed Howbert, a member of Mayor Mike Duggan’s Jobs and Economy Team told the Detroit Free Press: “To state the obvious, we love all corporate investment in the city that creates jobs. So we’d be as enthusiastic about Ford as any other tenant looking at major  investments.”

Out like Flint? Environmental Protection Agency Administrator Scott Pruitt this week said that eradicating lead from drinking water is one of his top priorities, three years after the Flint water crisis, adding that he is worried Americans are not “sufficiently aware” of the threat, and adding: “I really believe that we ought to set a goal as a country that, over the next 10 years, that we ought to work with respect to investments in our infrastructure to eradicate lead in our drinking water: It can be achieved. Some of the mental-acuity levels of our children are being impacted adversely as a result of this.” Administrator Pruitt is concerned that parents and citizens do not understand the threat of lead in drinking water or toys, noting the Administration is “looking at ways we can contribute to that dialogue: I do think that what happened in Flint is something that could happen elsewhere. We just simply need to take steps to do all that we can to address it prospectively and proactively,” adding that the White House proposal to bolster the nation’s infrastructure over the next decade would include investments in aging water infrastructure; however, that federally unfunded plan includes no provisions for replacing the thousands of lead service lines throughout the country – a cost estimated around $40 billion to $45 billion, even as it stresses the need for state and local governments to invest in such upgrades. Administrator Pruitt noted he would “love” to see local governments investing more in water infrastructure: “These water treatment facilities – they have authority to bond out, to raise fees, to invest in corrosion control, the replacement of service lines and the rest…And some of them just aren’t doing it.”

Meanwhile, Gov. Rick Snyder has proposed having water customers across Michigan pay a $5 annual fee to help upgrade aging public infrastructure and replace lead pipes in their local communities; however, his plan has, so far, failed to gain much momentum in the Republican-controlled Legislature. U.S. Rep. Dan Kildee (D-Flint Township) noted that what Administrator Pruitt had described was not really a plan. “When it comes to Mr. Pruitt, nice words don’t replace pipes. It takes money. What they have proposed is really nothing when it comes to infrastructure.” Rather, Rep Kildee said would help would be Administration support for his proposed bill to reduce the acceptable amount of lead in drinking water to 5 parts per billion. (The current federal action limit is 15 parts per billion.) The Congressman noted: “Force federal and state governments to stare this in the face by adopting a level that is science-based, that says there is no acceptable level of lead.” EPA has spent a decade trying to update the rule—a rule which Michigan Gov. Rick Snyder has called “dumb and dangerous” in the wake of the Flint disaster. The state has proposed draft rules to drop the acceptable amount of lead in drinking water to 10 parts per billion by 2024.

Exiting from Municipal Bankruptcy

eBlog

March 16, 2018

Good Morning! In this morning’s eBlog, we consider the Motor City’s final steps in its successful exit from chapter 9 municipal bankruptcy; then we worry about lead level threats in Flint, before journeying to the warmer climes of the Caribbean to update the fiscal challenges for Puerto Rico.

Early Departure from Chapter 9. The City of Detroit this week dipped into its budget surplus to devote some $54.4 million to finance paying off the outstanding municipal bonds it had issued as part of its plan of debt adjustment four years ago, with the borrowing then issued by the city to settle debts with municipal bond insurers related to the Motor City’s pension-related debt—here the payments were to finance the remaining principal and interest owed on $88 million in 12-year Financial Recovery, with the city formally moving to pay off $54 million of its 2014 financial recovery bonds. The unexpected payments might make the leprechaun jump to celebrate still another demonstration of improved fiscal health. Here, the payment had the support of the Detroit Financial Review Commission, as well as the Detroit City Council, clearing the way for the city Wednesday to issue a 30-day redemption notice and report it had fully funded an escrow to retire $52.3 million of remaining principal and $2.1 million of accrued interest to fully redeem the 2014C bonds effective April 13th—an action projected to save Detroit’s taxpayers some $11.7 million in interest savings. CFO John Hill noted: “The Mayor and City Council have again shown their commitment to the city’s long-term financial sustainability by taking action to authorize the resolution for the redemption of the entire outstanding principal on the city’s Financial Recovery Bonds, Series 2014C.”  In this case, the C series of unrated, taxable municipal bonds totaled $88.4 million; they carried an interest rate of 5% interest, with the bonds secured by Detroit’s limited tax general obligation pledge and payable from city parking revenues. According to Detroit Deputy Chief Financial Officer John Naglick, approximately $54 million remains outstanding after early maturities amortized and the $15 million sale of a parking garage triggered a mandatory redemption. The C series was part of $1.28 billion of borrowing Detroit closed on in December of  2014 to fund creditor settlements, as well as raise revenues for revitalization efforts, thereby paving the way for its exit from the largest chapter 9 municipal bankruptcy in American history—and mayhap bring the luck of the Irish that the city could exit from direct state oversight within the next few months—especially in the wake of Mayor Mike Duggan recently proposed $2 billion balanced budget—the approval of which could facilitate Detroit’s exit from active state oversight, or. As Mr. Naglick put it: “I expect in April or May we’re going to see the Financial Review Commission vote to end oversight and return self-determination to the city of Detroit.”

The Motor City’s $1 billion general fund, according to the Mayor, continues to be healthy, because the city’s most important source of revenues, its income tax, is producing more revenues. Indeed, the city’s budget maintains more than a 5% reserve, which is projected at $62.3 million. At the same time, the city is continuing to set aside fiscal resources to address higher-than-expected pension payments starting in 2024 when annual payments of at least $143 million begin. Payments of $20 million run through 2019 with no payments then due through 2023 under U.S. Bankruptcy Judge Steven Rhodes’ approved plan of debt adjustment. Detroit’s bond ratings, albeit still deep in junk territory, were upgraded last year, with, just before Christmas, S&P Global Ratings slipping down the chimney to upgrade Detroit’s credit rating to B-plus.

Not in Like Flint. Recent tests of the Michigan City of Flint’s drinking water at elementary schools have found an increase in samples with lead levels above the federal action limit. The Michigan Department of Environmental Quality determined that 28 samples tested last month were above 15 parts per billion of lead. DEQ spokesman George Krisztian reported the increase may be due to changes in testing conditions, such as the decision to collect samples prior to flushing lines. (Samples collected before flushing tend to have higher lead levels because the water has been in contact with the pipes longer.) Thus, according to Mr. Krisztian, the overall results are encouraging, because they meet federal guidelines for lead if treated like samples collected by municipal water systems. Most of the more than 90 Legionnaires’ disease cases during the deadly 2014-15 outbreak in the Flint area were caused by changes in the city’s water supply — and the epidemic may have been more widespread than previously believed, according to two studies published Monday. The risk of acquiring Legionnaires’ disease increased more than six-fold across the Flint water distribution system after the city switched from the Detroit area water system’s Lake Huron source to the Flint River in April 2014, according to a report in the Proceedings of the National Academy of Sciences.

Despite the improvement in lead levels over the last 18 months, federal, state, and local officials have advised city residents to continue using bottled water—as the city continues its costly efforts to extract at least 6.000 lead lines from houses this year and next—with Mayor Karen Weaver reporting that state-funded bottled water should be available to residents until the work is completed; the effort to test the drinking water in the city’s schools has yet to be completed. The Michigan Department of Environmental Quality this week defended its outreach efforts in the city, after the Flint Journal reported on a new report which found that 51% of bottled water users surveyed here said they either had no faucet filter or are not confident they know how to maintain the equipment they do have. Mayor Weaver urges the State of Michigan to continue to finance the distribution of bottled water until the last of the leaded lines are removed.

Even as fears remain about the health of the city’s schoolchildren, the State of Michigan has selected a former emergency manager for two Michigan school districts to serve as interim Superintendent of Flint’s public schools after the school board removed the superintendent and two other senior officials. Thus, Wednesday, Gregory Weatherspoon was unanimously approved for the post by the Flint Board of Education, one day after the Board that Bilal Tawwab, Assistant Superintendent Shawn Merriweather, and the school district’s attorney had been placed on leave. It appears the school district’s roughly 4,500 students, an enrollment that has been falling steadily since 1968, when there were 1000% more students, are still at risk. The lower numbers and ongoing safe drinking water fears augur badly for assessed property values in a city where the population suffered a serious decline from 1970 to 1980, losing nearly 40,000 residents—a loss from which Flint never recovered—and a population which has declined continuously—so much so that an August 2015 WalletHub study revealed that Flint placed dead last, as one of the least healthy real estate markets out of 300 U.S. cities.

Arriba? In Puerto Rico, where about 60% of the U.S. territory’s children live below the federal poverty level, it appears there might be some rising optimism—even amidst growing frustration at the exorbitant costs of the Congressionally-imposed PROMESA process. The optimism comes in the wake of disclosures that Puerto Rico’s earlier estimates of the fiscal and financial impact of Hurricane Maria appear to have been overly pessimistic. The rising optimism appears to be reflected by the rally in Puerto Rico’s municipal bond prices. At the same time, Christian Sobrino, Governor Ricardo Rosselló’s representative before the PROMESA Oversight Board, Wednesday said that the Board’s letter regarding lawyers and advisers high fees in PROMESA Title III cases did “not reflect the truth,” adding he found it “laughable that there are unnecessary expenses on behalf of the government of Puerto Rico:  To start with, the structure of Cofina (the Puerto Rico Sales Tax Financing Corporation) and central government agents was not an invention of Puerto Rico in Title III,” Mr. Sobrino said, referring to the mechanism suggested by the Board to determine whether the Sales and Use tax collection belongs to the corporation which issued the debt or to the central government. He noted that the attorneys and counselors assisting these agents billed, all together, $17 million of the total $ 77.7 million in fees claimed during the first five months of the federal PROMESA law: “These letters reflect imprudence and a ridiculous use of these expressions and do not reflect the truth of what we have done in the government to avoid this. It is out-of-place.”

That led the PROMSEA Board to write to the Congressional leadership to indicate that high expenses for lawyers and advisers fees, participating in that process, are due to the PROMESA—or, as PROMESA Board President José B. Carrión noted: “Historically, the people of Puerto Rico have suffered a problem of wasteful spending, admitting that there has been duplication of efforts in Title III cases.” Representative Sobrino stressed that the government has tried not to duplicate efforts with the Board, but that drawing the fiscal plan and budget, as well as its implementation, are the government’s responsibility, adding that the government agreed that Citibank would act as the leading banker in the Electric Power Authority (PREPA) case, as suggested by the Board, and that only a firm hired by the Board would conduct the audit of the bank accounts. However, Rep. Sobrino stressed that there have been times when the government had to use its lawyers to ensure success in Court, as was recently the case with a claim by the Highway and Transportation Authority bondholders: “We have been forced to hire our lawyers to preserve self-government,” adding that the government intervention prevented that, after Hurricane Maria, Noel Zamot from being appointed as a PREPA de-facto trustee.

Calming the Fiscal Waters

eBlog

January 24, 2017

Good Morning! In today’s Blog, we consider the physical, governance, and fiscal challenges confronted—and overcome, by the City of Flint, Michigan.

Restoring Fiscal Municipal Authority. For the first time in seven years, Flint, Michigan local officials are in control of the city’s daily finances and government decisions after, on Monday, Michigan Treasurer Nick Khouri signed off on a recommendation from Flint’s Receivership Transition Advisory Board (RTAB), the state-appointed board overseeing Flint’s fiscal recovery-to grant Mayor Karen Weaver and the Council greater authority in daily decision-making. Michigan Governor Rick Snyder, seven years ago, preempted local governance and fiscal authority after concurring with a state review panel that there was a “local government financial emergency” in Flint, and that an emergency financial manager should be appointed to oversee the city’s affairs. The Governor ultimately appointed four emergency managers to run the city from 2011 until 2015–two of whom were subsequently charged with criminal wrongdoing related to their roles in the Flint water crisis. In declaring the financial emergency in Flint, state officials said city leaders had failed to fix a structural deficit and criticized city officials for not moving with the degree of urgency required considering the seriousness of the city’s financial problems.

Notwithstanding, the State of Michigan retains authority with regard to certain fiscal and budgetary issues, including approval of the municipality’s budget, requests to issue debt, and collective bargaining agreements. Treasurer Khouri noted:  “Today is an important day for our shared goal of moving Flint forward…Thanks to the progress city leaders have made, this is an appropriate time for the Mayor and City Council to assume greater responsibility for day-to-day operations and finances.” Mayor Weaver noted: “This is an exciting development for the city of Flint…We have been waiting for this for years,” adding the state action will bring the city a step closer to its ultimate goal of home rule through rescinding Michigan’s Emergency Order 20, which mandated that resolutions approved by both Mayor Weaver and the City Council receive the state board’s approval before going into effect.

Mayor Weaver, in the wake of the long saga in which a state-imposed emergency manager had led to a massive physical and fiscal crisis, said she has hopes for the city and state to “officially divorce” by the end of this year, noting that with the appointment of CFO Hughey Newsome last  year, the newly elected City Council, and approval of a 30-year contract with the Great Lakes Water Authority; Flint is both more fiscally and physically solvent: the new water contract is projected to save Flint as much as $9 million by providing a more favorable rate—an important consideration  with GLWA and addresses $7 million in debt service payments the city is currently obligated to pay on bonds issued to finance the Karegnondi Water Authority pipeline under construction.

The city of just over 100,000, with a majority minority population where just under 30 percent of the families have a female head of household, and where 33.9 percent of all households were made up of individuals and just under 10 percent had someone living alone who was 65 years of age or older, finances its budget via a 1 percent income tax on residents and 0.5 percent on non-residents: it has a strong Mayor-council form of government. It has operated under at least four charters, beginning in 1855: its current charter provides for a strong Mayor form of government—albeit one which has instituted the appointment of an Ombudsperson; the City Council is composed of members elected from Flint’s nine wards.

In the wake of ending its water contract with Detroit via a state-appointed emergency manager, its travails—physical and fiscal were triggered: the state appointed  emergency manager shifted to Flint River water as the city awaited completion of a new KWA pipeline—but that emergency manager failed to ensure safe drinking water as part of the switch—a failure which, as we have noted, led to the contamination crisis which poisoned not just the city’s drinking water, but also its fiscal stability—leading to nearly eight years of a state takeover in the wake of Gov. Rick Snyder’s 2011 declaration of a financial emergency within the city.

Even though Gov. Snyder declared an end to Flint’s financial emergency on April 29, 2015, the RTAB, which is appointed by the Governor, had continued to review financial decisions in the city. Discussions with regard to planning the RTAB’s departure from Flint began last August as part of an annual report from the Michigan Treasury Department mandated for Michigan municipalities operating under financial receivership. Thus, Treasurer Khouri’s signature was the final stamp of approval needed to thrust the RTAB unanimous suggestion of January 11th into immediate action, repealing an order mandating that the State of Michigan review all decisions made by the Mayor and Council—and ending a long and traumatic state takeover which caused immense human physical and municipal devastation. It marked the final step from the city’s emergence two years ago in April from the control of a state-imposed emergency manager to home rule order under the guidance of a the state-imposed Board—a board devised with the aim of ensuring a smooth transition by maintaining the measures prescribed upon the emergency manager’s exit. Here, as we have previously noted, the Emergency Manager was appointed by the Governor under Public Act 436 to preempt local elected leadership and to bring long-term financial stability back to the city by addressing any and all issues which had threatened the Flint’s fiscal solvency—but which, instead, first led to greater fiscal stress, and, more critically, to physical harm and danger to Flint’s citizens, thereby jeopardizing the very fiscal help which the state purported to want. Four different individuals served as emergency manager from December 2011 to April 2015: in order, they were Michael K. Brown, Edward J. Kurtz, Darnell Earley, and Gerald Ambrose.

The action repealed Emergency Manager Order No. 20, an order imposed by former Flint Emergency Manager Jerry Ambrose in his final days with the city—an order which mandated resolutions approved by both the Mayor and City Council in order to receive the Advisory Board’s approval, prior to going into effect. as Mayor Weaver put it, the step was a “welcome end to an arranged marriage,” adding: “We are so thankful‒and I’m speaking on behalf of the proud, great city of Flint: the RTAB has been in place for several years now, and one of the things it did represent is that the city was in turmoil and financial distress. And I know over the past two years we have been fiscally responsible… I think it’s absolutely time, and time for the locally elected officials to run the city, and we’ve been anxiously ready to do so….this feels like a welcome way to end an arranged marriage.”

Mayor Weaver noted that the appointment of Hughey Newsome as Flint’s interim chief financial officer, combined with the city’s new Council members and approval of a 30-year contract with the Great Lakes Water Authority, has helped to move Flint in a fiscally and financially solvent direction.

Post-Chapter 9 Elections–and Post Physical & Fiscal Storms

November 6, 2017

Good Morning! In today’s Blog, we consider yesterday’s election results in municipalities we have followed through their fiscal stress or chapter 9 municipal bankruptcy, including: Flint, and Detroit, in its first Mayoral election since emerging from chapter 9, Then we turn to the historic municipality of Petersburg, Virginia—a municipality which avoided chapter 9 thanks to state intervention. Finally, we consider U.S. District Court Judge Laura Swain’s approval yesterday of an urgent motion from the government of Puerto Rico and the Fiscal Oversight Board (JSF) that requires all federal funds to be allocated for the tasks of assistance and recovery in the wake of Hurricane Maria, removing said funds from possible use in restructuring the U.S. territory’s restructuring of its public debt.

Visit the project blog: The Municipal Sustainability Project 

In Like Flint. Flint Mayor Karen Weaver yesterday prevailed over City Council member Scott Kincaid in a recall election involving 18 candidates, retaining the city’s proposed 30-year agreement with the Detroit water system, with Mayor Weaver prevailing by a 53-32 percent margin, according to the unofficial results. The recall had arisen from a controversy related to the Genesee County’s garbage contract: Mayor Weaver had pressed for an emergency trash collection contract with the former Rizzo Environmental Services in Macomb County over City Council opposition. The controversy arose because a former trash provider, Chuck Rizzo, and his father have reached plea deals with federal prosecutors and are expected to plead guilty this month for their roles in a wide-ranging public corruption scandal in Macomb County—a scandal which has, so far, led to criminal charges against 17 persons. The recall also came amid Mayor Weaver’s ongoing struggle with the Flint City Council with regard to the approval of a 30-year agreement with the Detroit area Great Lakes Water Authority—with City Council opposition arising from apprehension about increased water rates—and in response to last month’s decision by U.S. District Court Judge David Lawson taking the small city to task for failing to act on an April agreement supported by Mayor Weaver, the State of Michigan, and EPA which would have Flint remain on the Detroit area water system. Flint had been supposed to switch to the regional Karegnondi Water Authority; however, Mayor Weaver’s administration rejected that option, because updating of the Flint water treatment facility had been projected to cost more than $68 million and to consume more than three years to complete. The Flint Council had disregarded Judge Lawson’s decision, and approved a two-year extension of service with the Great Lakes Water Authority. Thus, while the prior agreement with the Detroit area water authority had lapsed, Mayor Weaver, the State of Michigan, the Great Lakes Authority, and other supporters have revived the agreement. Last week, the Michigan Department of Environmental Quality had filed an emergency motion asking Judge Lawson to approve giving Mayor Weaver the authority to sign the renewed contract by Election Day, because of the inability of the City Council to act—a request from the state which the Judge rejected; however, he has scheduled a hearing on the motion later this month.

Motor City Victory Lap. Detroit Mayor Duggan was re-elected yesterday by more than a 2-1 margin over challenger State Sen. Coleman A. Young II, son of a former Detroit Mayor. In remarks after the decision, Mayor Duggan  noted: “I have been treated with nothing but warmth and kindness from Detroiters in every neighborhood in the city…I hope that this is the year where we put us-versus-them politics behind us forever because we believe in a one Detroit for all of us.” His opponent, in conceding, claimed he had commenced a movement to help the politically dispossessed: “The campaign might be over, but the passion and values are eternal…We are the voice for the voiceless. We are the hope for the hopeless.” Mayor Duggan, who won a write-in primary campaign in 2013 and then defeated Wayne County Sheriff Benny Napoleon in the general election, thus became the Motor City’s first mayor to serve two terms since Dennis Archer in the 1990’s.  In his campaign, the former CEO of the Detroit Medical Center gained prominent endorsements from city labor unions, clergy, and business groups—he overwhelmed his opponent in fundraising: he secured about $2.2 million; whereas Mr. Young raised just under $39,000. Mayor Duggan, in his victory remarks, noted his campaign had focused on spending “time talking about the vision of what we are going to do in the next four years,” adding: “I thought one of the most profound things President Obama ever said was ‘If you have to divide people in order to get elected, you’ll never be able to govern.’”

In his campaign, Mayor Duggan touted public service improvements under his administration in the wake of the nation’s largest-ever municipal bankruptcy, including new streetlights, improved public safety response, and more dependable bus lines. He said he intends to continue work on building a more unified Detroit—focusing now on a series of efforts to fix up neighborhood corridors, roads, and sidewalks—and stating: “There are haves and have-nots in every city in America. We’re building a city here that it doesn’t matter where you start, you have the opportunity to be successful,” adding that he believe the greatest challenge now confronting Motor City residents will be over automobile insurance reform legislation—referring to legislation rejected by the Michigan House last week, but making clear he does not intend to give up: “We were a lot closer this time than we were two years ago, and we have a plan to get it through the next time: It’s going to be one relationship at a time, one vote at a time, but we’ve already had several meetings with both the medical and the legal community, and I think they realize we were three votes away.” 

The Road Out of State Oversight. The re-election comes at a critical time, as the City expects to have its full municipal fiscal authority restored next spring for the first time since it exited the nation’s largest ever chapter 9 municipal bankruptcy three years ago—challenging the city’s appointed and elected leaders with the task of resuming governance after the end of state oversight—and as the Mayor and Council resume authority over budgets and contracts. With two balanced budgets and an audit of a third expected next May, city leaders anticipate Detroit will be released early next year from the strict financial controls required under the city’s approved plan of debt adjustment—a key issue during the just completed campaign, where both the Mayor and his challenger had proposed plans with regard to how they would fiscally guide the recovering city—and as Michigan Governor Rick Snyder expressed optimism about the city’s ability to manage its finances, telling the Detroit News: “They’ve been hitting those milestones, and I hope they continue to hit them—that’s a good thing for all of us.”

Indeed, the Motor City’s credit rating has been upgraded; its employment rate is up; assessed property values are climbing. In its financial update last month, the city noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts, and growth in multifamily home construction. Nonetheless, the road to recovery will remain not just steep, but also pot-holed: it confronts very large future payments for past borrowing and public pension obligations under the plan of debt adjustment—or, as our colleague Lisa Washburn of Municipal Market Analytics noted: “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there…Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Petersburg. In one of the most closely watched municipal elections in Virginia, last night, Gloria Person-Brown, the wife of the current embattled City Treasurer Kevin Brown of Petersburg, was trounced by former City Council member Kenneth Pritchett, with Mr. Pritchett winning by a large margin: he captured more than 70 percent of the vote. In his campaign, stating he had been frustrated by the city’s low credit rating, and by the city’s struggles with collecting revenue and timely payment of bills, Mr. Pritchett vowed he would implement policies and standardize internal controls to improve the office’s operations. Likely, in the wake of a Virginia state fiscal report last September—a report which scrutinized eight specific aspects of city governance and fiscal responsibilities—and contained allegations of theft involving Ms. Person-Brown’s husband, City Treasurer Kevin Brown. Some Council members then had called for his resignation, and even Ms. Person-Brown had distanced herself from her husband’s actions during the election, albeit she did not say he had done anything wrong. Rather she ran on a platform of improving the Treasurer’s services, including instituting more checks and balances, and calling for more accountability.

Stepping in to Help Puerto Rico. U.S. District Court Judge Laura Taylor Swain has approved, with various changes, an urgent motion from the government of Puerto Rico and the PROMESA Fiscal Oversight Board which mandates that all federal funds to be allocated to the country for the tasks of assistance and recovery due to the passage of Hurricane Maria may not be claimed in the process of restructuring the public debt, accepting to the request of the Authority for Financial Supervision and Tax Agency and the JSF during the general hearing held in New York City‒in which it emerged that, in part, the order would restrict the use of disaster assistance funds as a condition of the federal government, so that Puerto Rico can receive assistance: the order will establish that the Federal Emergency Management Agency (FEMA) funds for Puerto Rico following in the wake of Hurricane Maria, as well as funds granted by other federal agencies, will be maintained. Judge Swain granted the order after listening to the arguments of Suzanne Uhland, legal representative of AAFAF, as well as lawyers from municipal insurers and the organized group of General Obligations bondholders (GOs), who underscored the need to incorporate into the order transparency criteria and mechanisms to ensure that some entity such as the JSF has influence in how federal funds granted by the government will be used. Matthew J. Troy, the federal government’s representative in the case, told Judge Swain that to include specific language which would give the Puerto Rican government priority in claiming funds that had been misused by state agencies or public corporations in the Island was indispensable for Puerto Rico to receive funds from the federal government: as part of the order, it would be established that, in the event federal funds were misused, it will be up to the central government to claim these funds from the agency or public corporation which received them from the federal government. Judge Swain has scheduled a follow-up hearing for next Wednesday.

During the hearing, an attorney, Marcia Goldstein, pointed out that it is urgent to know what role if any the Junta de Supervisión y Administración Financiera for Puerto Rico (the JSF) will have with regard to the approval of the contracts for the recovery tasks. The PROMESA law establishes, among other things, that the federal agency has the power to review the contracts granted by the Puerto Rican government or the dependencies subject to the control of the JSF. To date, however, it is uncertain whether the JSF has examined or had influence in the process of hiring dozens of companies which would be responsible for multiple tasks, from infrastructure repair to the audit of federal funds. In an interview with the Puerto Rican El Nuevo Día a little over a week ago, House Speaker Paul Ryan (R-Wis.), in the wake of his visit to Puerto Rico, pointed out that the JSF will have a key role in defining the scope of the aid package that Puerto Rico would need and how such resources would be allocated.

The Human & Fiscal Prices of Insolvency

October 20, 2017

Good Morning! In today’s Blog, we consider the spread of Connecticut’s fiscal blues to its municipalities; then we consider the health and fiscal health challenge to Flint; before, finally, observing the seemingly worsening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. It appears that the City of Hartford would have to restructure its debt to receive the requisite state assistance to keep it out of chapter 9 municipal bankruptcy under the emerging state budget compromise between the Governor and Legislature. Under the terms of the discussions, the State of Connecticut would also guarantee a major refunding of the city’s debt, as well as cover a major share of the city’s debt payments, at least for this fiscal year and next, with House Majority Leader Matt Ritter (D-Hartford) indicating this was part of a bipartisan compromise the legislature recognizes is needed to avert municipal bankruptcy: “This budget gives the city all of the tools it needs to be on a structural path to sustainability…This solution truly is a bipartisan one.” According to the city’s Mayor Luke Bronin, Hartford needs about $40 million annually in new state assistance to avert bankruptcy. The emerging agreement also includes $28 million per year for a new Municipal Accountability Review Board, likely similar to what the Commonwealth of Virginia has used so effectively, to focus on municipalities at risk of fiscal insolvency and to intervene beforehand: approximately $20 million of that $28 million would be earmarked for Hartford. The new state budget would require Hartford to restructure a significant portion of its capital debt, but the state would guarantee this refinancing, an action which—as was the case in Detroit—will help Hartford have access to lower borrowing costs: the agreement also calls for the state to pay $20 million of the city’s annual debt service—at least for this fiscal year and next.

The state actions came as Moody’s Investor Service this week placed ratings of 26 of the state’s municipalities, as well as three of the state’s regional school districts under review for downgrade, citing state aid cuts in the absence of a budget, warning those municipalities and districts face cuts in state funding equal to 100% or more of available fund balance or cash—with those cities most at risk: Hartford (which currently receives 50 percent of its revenues from the state), New Haven, New Britain, West Haven, and Bridgeport. Moody’s was even fiscally moodier, dropping the credit ratings of an additional 25 Connecticut cities and towns, and three other regional school districts, while maintaining the existing negative outlook on the rating of one town. Moody’s list did not, however, include Hartford. The down-gradings come as the state has continued to operate under Executive order in the absence of an approved fiscal budget, now more than a fiscal quarter overdue. Gov. Dannel Malloy, at the beginning of the week, had submitted his fourth FY2018-19 budget to lawmakers, a $41.3 billion spending plan in the wake of his veto last month of the version approved by the legislature, reporting that his most recent fiscal plan would eliminate some revenue proposals, including new taxes on second homes, cell phone surcharges, ridesharing fees, and daily fantasy sports fees—instead, he has proposed an additional $150 million in spending over the biennium, while simplifying the implementor language. According to Moody’s, under the Governor’s new executive order, state aid to local governments will be nearly $1 billion below last year’s level—or, as Moody’s put it: “The current budget impasse highlights the ongoing vulnerability of funding that Connecticut provides to its local governments.” Connecticut traditionally has provided significant funding to its local governments, largely through education cost sharing grants, but also through payments in lieu of taxes and other smaller governmental grants. Connecticut’s GO bond prices have deteriorated with 10-year credit spreads around 80 basis points, well above historical levels, according to Janney Capital Markets Managing Director Alan Schankel: “A state’s fiscal stress tends to flow downstream to local governments, and Connecticut is no exception.” The fiscal irony is that despite the state’s high per capita wealth, the state’s debt, at 9.2% of gross state product, is highest among the states, lagging only behind Illinois.

Not in Like Flint. U.S. District Court Judge David Lawson has ordered Flint’s City Council to choose a long-term water source for the city by Monday after it spent more than three months refusing to make a decision. In his 29-page opinion, he took Flint’s City Council to task for sitting on an April agreement backed by Mayor Karen Weaver, the state and the federal Environmental Protection Agencies that would see the city stay on the Detroit area water system through a new 30-year contract with the Great Lakes Water Authority, writing:. “The failure of leadership, in light of the past crises and manifold warnings related to the Flint water system, is breathtaking.” Judge Lawson’s decision came in response to a suit filed by the Michigan Department of Environmental Quality last June in the wake of the Flint City Council ignoring the state’s deadline for a water supply decision, arguing the delay would “cause an imminent and substantial endangerment to public health in Flint.” The Council, in hearing and filings, had requested more time from the court; however, Judge Lawson wrote that the state had demonstrated potential for “irreparable injury” in Flint and that there was an urgency to act, because the city’s short-term water agreements have expired and the long-term agreement is time sensitive, concluding: “The City Council has not voted on the negotiated agreement, it has not proposed an alternative, and the future of Flint’s fragile water system—its safety, reliability, and financial stability— is in peril…Because of the city’s indecision, the court must issue its ruling.” Judge Lawson’s order likely ensures the City Council will approve the proposed contract with the Great Lakes Authority that it had been resisting though it was negotiated with Mayor Karen Weaver’s approval. The city could choose to risk defying the court order; however, the State of Michigan has warned that tens of millions of dollars in extensive repairs and updates need to be made to the inactive Flint water plant—repairs which would take three and a half years to complete.

The warnings of Wayne State University Professor Nicholas Schroeck with regard to the risk to public health and the financial stability of the water supply system appeared key to persuading Judge Lawson to side with the state and issue a pre-emptive order. The Judge, in early August, had appointed a mediator in an effort to try gain an agreement between the city and the state Dept. of Environmental Quality; however, when the sides were unable to settle, he warned that  extending Flint’s contract with the Detroit area water system beyond 30 days could result in funding problems: “It seems to me that inaction is inviting intervention.” The Weaver administration analyzed various long-term water options for Flint, and the Mayor said Tuesday the Great Lakes agreement “proved to be in the best interest of public health by avoiding another water source switch, which could result in unforeseen issues.” The Michigan DEQ praised Judge Lawson for “recognizing there is no need to wait…and remains committed to working with the City of Flint to implement a plan once a source water determination has been finalized to ensure compliance with the Safe Drinking Water Act.” In its arguments before Judge Lawson, the State of Michigan had warned: “The City Council’s failure to act will result in at least a 55-63% increase in the water rate being charged to Flint residents, create an immediate risk of bankrupting the Flint water fund, will preclude required investment in Flint’s water distribution system, and create another imminent and substantial endangerment to public health in Flint.” That was similar to a statement from a key aide to Gov. Rick Snyder who had warned that stalling the water contract decision was costing the City of Flint an extra $600,000 a month, because it was paying for two sources—Great Lakes, from which it currently gets its treated water, and Karegnondi, from which it contractually would receive water by 2019 to 2020. Under the 30-year agreement with Great Lakes, Flint would no longer have to make payments to Karegnondi.

Unresponsiveness. President Trump last week awarded himself a perfect rating for his response to the hurricane that devastated Puerto Rico: “I would give myself a 10,” he responded when asked by reporters how he would score his efforts, on a one to 10 scale. He told Fox News correspondent Geraldo Rivera that Puerto Rican governments “owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out. You can say goodbye to that.” A comment to which OMB Director Mick Mulvaney noted: “I wouldn’t take it word for word.” Indeed, a week later, Congressional Republicans unveiled a relief plan that would only add to Puerto Rico’s unsustainable debt load. In his meeting this week with Puerto Rico Governor Ricardo Rosselló, who was in Washington to press for federal disaster relief, the President claimed: “We have provided so much, so fast.” Yet, today nearly 80 percent of the island remains without electricity, and almost 30 of the island still does not have access to clean water, according to Puerto Rican government figures.

In contrast with Texas after Hurricane Harvey and Florida after Irma, where thousands of repair workers rushed in to restring power lines, only a few hundred electrical workers from outside Puerto Rico have arrived to help: it was not until last Saturday that the Puerto Rican government said it had the federal funding needed to bring in more workers. That compares to some 5,300 workers from outside the region who converged on coastal Texas in the days after Hurricane Harvey to restore a power loss about a tenth of the size that struck Puerto Rico. Similarly, in Florida, 18,000 outside workers went in after Hurricane Irma knocked out electricity to most of the state last month, according to Florida Power and Light; whereas, in Puerto Rico, the challenge of restoration has fallen on the shoulders of about 900 members of local crews—an outcome industry experts report to be a result of poor planning, a slow response by power officials, and Puerto Rico’s dire fiscal situation—a sharp contrast to the President’s claim that his administration deserved a 10 for its response to the hurricanes which struck Puerto Rico and other parts of the United States.

The U.S. Army Corps of Engineers, charged by FEMA with restoring Puerto Rico’s power, estimated that it needed at least 2,000 additional workers. So far, the Corps has brought only about 200 workers, and most of them were dedicated not to restoring power, but to installing generators at crucial locations. In the wake of major storms, such as Katrina, power companies typically rely on mutual aid agreements to get electricity restored: such outside companies send thousands of workers, and electric companies pay for the service with funds from FEMA. However, providing such assistance to Puerto Rico is not just logistically a greater challenge—but also a discriminatorily greater challenge: the Jones Act—which the President only suspended for ten days—means that the time and cost of shipping comes at a 20% premium.  

The Human Storm. Maria risks accelerating the trend of the last decade of economic decline and depopulation, described as “a slower-moving catastrophe,” which is wreaking a devastating toll: The number of residents had plunged by 11 percent, the economy had shrunk by 15 percent, and the government has become fiscally insolvent. Already ranked among the worst cycles of economic decline and depopulation in postwar American history, the aftermath of Maria threatens an acceleration of residents fleeing en masse: accelerating economic decline and potentially accelerating a vicious cycle. Lyman Stone, an independent migration researcher and economist at the Agriculture Department notes: “We are watching a real live demographic and population collapse on a monumental scale.” At a news conference last week, Gov. Rosselló warned that without significant help, “millions” could leave for the U.S. mainland: You’re not going to get hundreds of thousands of Puerto Ricans moving to the States—you’re going to get millions…You’re going to get millions, creating a devastating demographic shift for us here in Puerto Rico.” Puerto Rico Treasury Secretary Raúl Maldonado has warned, meanwhile, that without more aid, the government could suffer a shutdown by the end of the month.

Today, only about 40 percent of Puerto Ricans in the territory are employed or seeking work—more than 33% below levels on the mainland. The danger, now, is of increased flight—but flight by the young and those with college degrees. After all, with the PROMESA Board charged with fashioning a fiscal plan to pay off more than $70 billion in Puerto Rico’s municipal debt calling for efforts to raise taxes and significant cuts to the government, the Board has predicted continuing shrinkage of the Puerto Rican economy. Thus, there is a real apprehension

As a result, for Washington and Puerto Rican officials planning a recovery, the ongoing exodus poses a multifaceted dilemma. “They’ve got to start from the ground up,” a former U.S. Treasury official said of any new plan for the island. In the short-term, at least, the island is likely to see an economic boost; rebuilding after a hurricane often injects a jolt of spending into local economies. But, according to recent research of 90 years of natural disasters in the United States, published as a National Bureau of Economic Research working paper, major natural disasters also have unfavorable effects: They increase out-migration, lower home prices, and raise poverty rates. Like many on the island, Sergio M. Marxuach, policy director for the Center for a New Economy, a San Juan-based think tank, said a massive federal investment is necessary. “We’re going to need some significant government intervention — essentially a big rescue package, not only to rebuild the economy but get it growing…People are saying, ‘I don’t want my children to grow up in a place where the economy is going to be devastated for the next 10 years.’ If enough people think that way, it’s going to be a self-reinforcing downward spiral.”

In addressing complaints about ongoing struggles on the island, President Trump noted this week that the disaster in Puerto Rico in many ways had begun years ago. Puerto Rico “was in very poor shape before the hurricanes ever hit. Their electrical grid was destroyed before the hurricanes got there. It was in very bad shape, was not working, was in bankruptcy.”

At the Level of a Muncipio. While many have considered the fiscal and physical impact on the U.S. territory of Puerto Rico, fewer have considered the fiscal challenge to Puerto Rico’s municipalities. Consider, for instance, Juncos, one of Puerto Rico’s 78 municipalities: it is located in the eastern central region of the island; it is spread over 9 wards and Juncos Pueblo (the downtown area and the administrative center of the city). The city, one of the oldest in the United States,was founded on the request of Tomas Pizarro on August 2, 1797, having previously been a village which evolved from a small ranch, the Hatillo de los Juncos. Hurricane Maria has changed this municipality forever: more than 1,000 families in Juncos lost it all that unforgettable September 20th, when Hurricane Maria struck. Yet, in a remarkable effort, residents of the La Hormiga sector of Las Piñas neighborhood, in the immediate aftermath of the hurricane, organized to help recover the humble community that is often highlighted by criminal incidents in the area: one of the community leaders of the sector, Wanda Bonilla, highlighted the deed of the trash rescuers: “Thanks to them, they have also relieved the pick up of the rubble.” The city’s community board worked immediately to install a shelter in the neighborhood community center given the circumstances that some 17 families, with between five and seven members each, where the storm tore the roofs off their homes—and most of those homes have single mothers. She noted: “Our president, Ivelisse Esquilín, who also lost everything, is helping us through the Municipality and with other donations.” Juncos Mayor Alfredo Alejandro noted that, in the wake of the storm, crossing arms was not an option for anyone “in the neighborhood” even though many of the 60 families living in the sector experienced the grief of having lost their home: “You have to do it because imagine …right now, look here, I have these pieces of a car to see if I invent a type of small generator to, even be, to turn on a fan.” The Mayor described Maria’s devastation to be of “great proportions:” Out of population of 42,000 people, more than 1,000 lost their homes and a comparable number suffered major damage to their structures; 85% of the city’s residents are still without potable water, while there are few expectations that electricity will soon be restored.