The Art & Commitment of Municipal Fiscal Recovery

eBlog, 04/11/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery of the city of Flint, Michigan, before heading east to one of the smallest municipalities in America, Central Falls, Rhode Island, as it maintains its epic recovery from chapter 9 municipal bankruptcy, before finally turning south to assess recent developments in Puerto Rico. We note the terrible shooting yesterday at North Park Elementary School in San Bernardino; however, as former San Bernardino School Board Member Judi Penman noted, referring to the police department: “It is one of the most organized and well-prepared police departments around, and they are well prepared for this type of situation.” Indeed, even if sadly, the experience the city’s school police department gained from coordinating with the city’s police department in the wake of the December 2, 2015 terrorist attack appeared to enhance the swift and coordinated response—even as calls came in yesterday from the White House and California Gov. Jerry Brown to offer condolences and aid, according to San Bernardino Mayor Carey Davis.

Could this be a Jewel in the Crown on Flint’s Road to Fiscal Recovery? In most instances of severe municipal fiscal distress or bankruptcy, the situation has been endemic to the municipality; however, as we have noted in Jefferson County, the state can be a proximate cause. Certainly that appears to have been the case in Flint, where the Governor’s appointment of an emergency manager proved to be the proverbial straw that broke the camel’s back at an exceptional cost and risk to human health and safety. The fiscal challenge is, as always, what does it take to recover? In the case of Flint, the city’s hopes appear to depend upon the restoration of one of the small city’s iconic jewels: the historic, downtown Capitol Theatre—where the goal is to restore it to its original glory, dating back to 1928, when it opened as a vaudeville house: it was listed on the National Register of Historic Places in 1985, but has been empty now for more than a decade—indeed, not just empty, but rather scheduled to become still another parking lot. Instead, however, the property will undergo a $37 million renovation to become a 1,600-seat movie palace and performance venue, which will provide 28,000 square feet of ground-floor retail and second-floor office space; an additional performance space will be created in the basement for small-scale workshops, experimental theater, and other performances. Jeremy Piper, chairman of the Cultural Center Corp., a Flint lawyer, will manage the new performing arts venue in the cultural center; he will also serve as co-chair of a committee that is raising the last $4 million of the $37 million needed to bring the theater back to life. The goal and hope is that the renovated theater will, as has been the experience in other cities, such as New York City’s Lincoln Center for the Performing Arts, help serve as a foundation for Flint’s fiscal and physical recovery. The new theater is intended to become the focal point of 12,000, 13,000, or 14,000 people coming into downtown Flint for a performance and then going out for dinner—that is, to benefit and revive a downtown economy. Indeed, already, the venture firm SkyPoint is planning to open a large fine-dining restaurant on the ground floor and mezzanine timed to the rejuvenated theater’s reopening—SkyPoint Ventures being the company co-founded by Phil Hagerman, the CEO of Flint-based Diplomat Pharmacy Inc., and his wife, Jocelyn, whose Hagerman Foundation (the author, here, notes his middle name, derived from his great grandfather, is Hagerman) donated $4 million toward the Capitol’s renovation. In 2016, the Flint-based C.S. Mott Foundation announced a grant of $15 million for the Capitol Theatre project as part of $100 million it pledged to the city in the wake of the water crisis. The project also received $5.5 million from the Michigan Strategic Fund.

The ambitious effort comes as Michigan has paid $12 million to outside attorneys for work related to the Flint drinking water crisis, but out of which nearly 30% has gone to pay criminal and civil defense attorneys hired by Gov. Rick Snyder—an amount expected to climb as the lead poisoning of Flint’s drinking water has proven to be devastating for Flint and its children, but enriching for the state’s legal industry: Jeffrey Swartz, an associate professor at Western Michigan University-Cooley Law School, notes: “It’s a lot of money…I can see $10 million to $15 million being eaten up very quickly.” He added, moreover, that the state is still “on your way up the slope” in terms of mounting legal costs. The approved value of outside legal contracts, not all of which has been spent, is at least $16.6 million, adding that the Michigan Legislature may want to appoint a commission to review the appropriateness of all outside legal bills before they are approved for payment: already, Gov. Rick Snyder’s office has spent a combined $3.35 million for outside criminal and civil defense lawyers; the Michigan Department of Environmental Quality has spent $3.65 million; the Department of Health and Human Services has spent $956,000; and the Treasury Department has spent $35,555, according to figures released to the Free Press. In addition, the state has paid $340,000 to reimburse the City of Flint for some of its civil and criminal legal defense costs related to the drinking water crisis, which a task force appointed by Gov. Snyder has said was mainly brought on by mistakes made at the state level. Yet to be equitably addressed are some $1.3 million in Flint legal costs. Michigan Attorney General Bill Schuette, whose investigation is still ongoing, has charged 13 current or former state and municipal officials, including five from the Dept. of Environmental Quality, the Dept. of Health and Human Safety, the City of Flint, and two former state-appointed emergency managers who ran the city and reported to the state’s Treasury Department; no one, however, from Gov. Snyder’s office has been charged.

The Remarkable Recovery of Chocolateville. Central Falls, Rhode Island Mayor James A. Diossa, the remarkable elected leader who has piloted the fiscal recovery of one of the nation’s smallest cities from chapter 9 municipal bankruptcy, this week noted: “Our efforts and dedication to following fiscally sound budgeting practices are clearly paying off, leaving the City in a strong position. I would like to personally thank the Council and Administrative Financial Officer Len Morganis for their efforts in helping to lead the comeback of this great City.” The Mayor’s ebullient comments came in the wake of credit rating agency Standard and Poor’s rating upgrade for one of the nation’s smallest cities from “BB” to “BBB,” with S&P noting: “Central Falls is operating under a much stronger economic and management environment since emerging from bankruptcy in 2012. The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections.”

One of the nation’s smallest municipalities (population of 19,000, city land size of one-square-mile), Central Falls is Rhode Island’s smallest and poorest city—and the site of a George Mason University class project on municipal fiscal distress—and guidebook for municipal leaders. Its post-bankruptcy recovery under Mayor Diossa has demonstrated several years of strong budgetary performance, and has “fully adhered to the established post-bankruptcy plan,” or, as Mayor Diossa put it: “S&P’s latest ratings report is yet another sign of Central Falls’ turnaround from bankruptcy.” Mr. Morganis noted: “The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections,” adding that the credit rating agency’s statement expressed confidence that strong budgetary performance will continue post Rhode Island State oversight. S&P, in its upgrade, credited Mayor Diossa’s commitment to sound and transparent fiscal practices, noting the small city has an adequate management environment with improved financial policies and practices under their Financial Management Assessment (FMA) methodology—and that Central Falls exhibited a strong budgetary performance, with an operating surplus in the general fund and break-even operating results at the total governmental fund level in FY2016. Moreover, S&P reported, the former mill town and manufacturer of scrumptious chocolate bars has strong liquidity, with total government available cash at 28.7% of total governmental fund expenditures and 1.9 times governmental debt service, along with a strong institutional framework score. Similarly, Maureen Gurghigian, Managing Director of Hilltop Securities, noted: “A multi-step upgrade of this magnitude is uncommon: this is a tribute to the hard work of the City’s and the Administrative Finance Officer’s adherence to their plan and excellent relationship with State Government.” The remarkable recovery comes as one of the nation’s smallest cities heads towards a formal exit from chapter 9 municipal bankruptcy at the end of FY2017. S&P, in its upgrade, noted the city is operating under a “much stronger economic and management environment,” in the wake of its 2012 exit from municipal bankruptcy, or, as Mayor Diossa, put it: “Obviously we’ve had a lot of conversations with the rating agencies, and I was hoping we’d get an upgrade of at least one notch…When we got the triple upgrade, first, I was surprised and second, it reaffirmed the work that we’re doing. Our bonds are no longer junk. We’re investment level. It’s like getting good news at a health checkup.”  S&P, in its report, noted several years of sound budgeting and full adherence to a six-year post-bankruptcy plan which state-appointed receiver and former Rhode Island Supreme Court Justice Robert Flanders crafted. The hardest part of that recovery, as Judge Flanders noted to us so many years ago in City Hall,was his swift decision to curtail the city’s pension payments—cuts of as much as 55 percent—a statement he made with obvious emotion, recognizing the human costs. (Central Falls is among the approximately one-quarter of Rhode Island municipalities with locally administered pension plans.) Unsurprisingly, Mayor Diossa, maintains he is “fully committed” to the fiscal discipline first imposed by Judge Flanders, noting the municipality had a general fund surplus of 11% of expenditures in FY2016, and adding: “That reserve fund is very important.” He noted Central Falls also expects a surplus for this fiscal year, adding that the city’s expenses are 3% below budget, and that even as the city has reduced the residential property tax rate for the first time in a decade, even as it has earmarked 107% of its annual required contribution to the pension plan and contributed $100,000 toward its future OPEB liability.

The End of an Era? Mayor Diossa, recounting the era of chapter 9 bankruptcies, noted Pennsylvania’s capital, Harrisburg, in 2011; Jefferson County, Alabama; Stockton, Mammoth Lakes and San Bernardino, California; and Detroit: “I think Central Falls is a microcosm of all of them…I followed Detroit and heard all the discussions. They had the same issues that we had…sky-high costs, not budgeting appropriately,” adding his credit and appreciation—most distinctly from California—of the State of Rhode Island’s longstanding involvement: “The state’s been very involved,” commending Governors Lincoln Chafee and Gina Raimondo. Nevertheless, he warns: fiscal challenges remain; indeed, S&P adds: “The city’s debt and contingent liability profile is very weak…We view the pension and other post-employment benefit [OPEB] liabilities as a credit concern given the very low funded ratio and high fixed costs…They are still a concern with wealth metrics and resources that are probably below average for Rhode Island, so that’s a bit of a disadvantage…That adds more importance to the fact that they achieved an investment-grade rating through what I think is pretty good financial management and getting their house in order.” The city’s location, said Diossa, is another means to trumpet the city.

The Uncertainties of Fiscal Challenges. Natalie Jaresko is the newly named Executive Director of the PROMESA federal control board overseeing Puerto Rico’s finances, who previously served during a critical time in Ukraine’s history from 2014 to 2016 as it faced a deep recession, and about whom PROMESA Board Chair Jose Carrion noted: “Ukraine’s situation three years ago, like Puerto Rico’s today, was near catastrophic, but she worked with stakeholders to bring needed reforms that restored confidence, economic vitality and reinvestment in the country and its citizens. That’s exactly what Puerto Rico needs today;” came as Ms. Jaresko yesterday told the Board that with the tools at its disposal, Puerto Rico urgently needs to reduce the fiscal deficit and restructure the public debt, “all at once,” while acknowledging that the austerity measures may cause “things to get worse before they get better.” Her dire warnings came as the U.S. territory’s recovery prospects for the commonwealth’s general obligation and COFINA bonds continued to weaken, and, in the wake of last week’s moody Moody’s dropping of the Commonwealth’s debt ratings to its lowest rating, C, which equates with a less than 35% recovery on defaulted debt. Or, as our respected colleagues at Municipal Market Analytics put it: “[T]he ranges of potential bondholder outcomes are much wider than those, with a materially deeper low-end. For some (or many) of the commonwealth’s most lightly secured bonds (e.g., GDB, PFC, etc.) recoveries could hypothetically dip into the single digits. Further, any low end becomes more likely the longer Puerto Rico’s restructuring takes to achieve as time:

1) Allows progressively more negative economic data to materialize, forcing all parties to adopt more conservative and sustainable projections for future commonwealth revenues;

2) Allows local stakeholder groups—in particular students and workers—to organize and expand nascent protest efforts, further affecting the political center of gravity on the island;

3) Worsens potential entropy in commonwealth legislative outcomes;

4) Frustrates even pro-bondholder policymakers in the US Congress, which has little interest in, or ability to, re-think PROMESA and/or Federal aid compacts with the commonwealth.”

On the other hand, the longer the restructuring process ultimately takes, the more investable will be the security that the island borrows against in the future (whatever that is). So while the industry in general would likely benefit from a faster resolution that removes Puerto Rico from the headlines, the traditional investors who will consider lending to a “fixed” commonwealth should prefer that all parties take their time. Finally, if bleakly, MMA notes: “In our view, reliable projections of bondholder recovery impossible, and we fail to understand how any rating agency with an expected loss methodology can rate Puerto Rico’s bonds at all…Remember that the Governor’s Fiscal Plan, accepted by the Oversight Board, makes available about a quarter of the debt service to be paid on tax-backed debt through 2027, down from about 35% that was in the prior plan that the Board rejected. As we’ve noted before, the severity of the proposal greatly reduces the likelihood that an agreement will be reached with creditors by May 1 (when the stay on litigation ends), not only increasing the prospect of a Title III restructuring (cram down) un-der PROMESA, but also a host of related creditor litigation against the plan itself and board decisions both large and small. The outcomes of even normal litigation risks are inherently unpredictable, but the prospects here for multi-layered, multi-dimensional lawsuits create a problem several orders of magnitude worse than normal.

The Challenge of Post-Insolvency Governance

Share on Twitter

eBlog, 2/21/17

Good Morning! In this a.m.’s eBlog, we consider the role of citizens when a municipality emerges from municipal bankruptcy—and at how little effort seems to have been taken for such cities to share with each other. Then we take a gamble at the roulette wheels in Atlantic City, where the third branch of government, the judiciary, is weighing in even as candidates for next year’s Mayoral election from the City Council are announcing.  

The Challenge of Emerging from Chapter 9 Municipal Bankruptcy. San Bernardino Neighborhood Association Council President Amelia Lopez recently asked if the city’s emergence from municipal bankruptcy might mark the moment to change the city from the ground up, or, as Ms. Lopez put it: “Coming out of bankruptcy is an opportunity…The city is looking for direction. We’re here to have a say in that direction.” No U.S. city has ever been in bankruptcy for as long as San Bernardino, so the question she is raising might singularly impact the city’s future. Yet it comes at a time when citizen activism has altered: of San Bernardino’s 60 neighborhoods, 19 or 20 are active, compared to 30 a decade ago. But the Neighborhood Association Council plans to send representatives to a national convention of neighborhood associations in March and to try to work more closely with elected San Bernardino leaders. It would be interesting were the Council to try to contact comparable neighborhood organizations in Stockton, Jefferson County, and Detroit to both learn what efforts had worked—and which had failed.

Thinking about Tomorrow: A City’s Post Insolvency & State Takeover Future? Notwithstanding Atlantic City’s current status as a ward of the State of New Jersey, there appears to be strong interest in the city’s future elected leadership—albeit, at least to date, an absence of substantive proposals from aspiring candidates. Atlantic City Councilman Frank Gilliam yesterday officially jumped into the mayor’s race, joining previously announced candidate Edward Lea.  Mr. Gilliam, a Democrat, kicked off his campaign with his slate of council running mates—where he spoke about addressing high taxes, unemployment, foreclosures, and other issues, vowing brighter days would come under new leadership: “The Atlantic City that we see right now will not be the Atlantic City we will see in the future…There will be prosperity. There will be equality. There will be fairness from the bottom to the top.” Councilmember Gilliam has served on the City Council since 2010; now he joins a crowded primary: he will face Council President Marty Small and Fareed Abdullah in the June Democratic primary, with the winner set to take on Republican Mayor Don Guardian next November. Councilman Gilliam’s running mates are incumbent Councilmen Moisse “Mo” Delgado, George Tibbitt, and candidate Jeffree Fauntleroy II, who are all seeking at-large seats. Last Friday, candidate Abdullah, a substitute teacher and former City Council candidate, said would also be running for Mayor—meaning a three-way Democratic primary, with the winner to challenge incumbent Republican Mayor Don Guardian.

Councilman Gilliam last year voted against a number of proposals to address the city’s finances, including measures to seek bids for services, dissolve the city’s water authority and approve the administration’s fiscal recovery plan to avoid a state takeover. In some cases, he cited a lack of information about the proposals, or in the case of the fiscal plan, not enough time to review the information. In announcing his bid, he noted: “People elected me to vote on what I think is best for them, not what my other colleagues think is best for them…When you give an individual a document five hours before a vote, that doesn’t give me the proper opportunity to have my fellow folks aware that I’m making the best-informed decision…For too long Atlantic City’s politics and the leaders of this city have sucked the blood out of our town…The time for new leadership is right now.”

Fire in the Hole. Aspiring to be an elected leader in a municipality where the state has preempted such authority comes as the challenge of governing an insolvent city has become more complex and challenging in the wake of Atlantic City Superior Court Judge Julio Mendez restraining order early this month barring the State of New Jersey from cutting Atlantic City’s firefighter workforce or unilaterally altering any of their contracts as part of its state takeover—a judicial decision which caused Moody’s Investors Services to be decidedly moody, deeming Judge Mendez’s decision a credit negative for the cash-strapped city. Or, as the crack credit rating analyst for Moody’s Douglas Goldmacher last week noted: “These developments signal that any actions the state takes to reduce the city’s work force or abrogate labor contracts will prompt a legal challenge, leading to considerable delays in the Atlantic City recovery process, a credit negative for the city…The success or failure of the state to implement broad expenditure cuts for Atlantic City is of tremendous import to the city’s credit quality.” Mr. Goldmacher noted that negotiations with the firefighters and other unions would typically be handled by city officials; however, the Municipal Stabilization and Recovery Act legislation approved by New Jersey lawmakers last year enables the state to alter outstanding municipal contracts, an authority which has now been rendered uncertain. Mr. Goldmacher noted that the firefighters’ court challenge could pave the way for other unions to challenge staffing cuts—effectively handcuffing both municipal and state efforts. He wrote that current city revenues are “insufficient” for debt service and routine expenditures making budget cuts the most likely avenue for permanent financial improvement: “Leaving aside the question of constitutionality, extensive litigation will delay negotiations…Even if other unions refrain from filing suit, the state’s negotiations will be materially impacted by the ongoing lawsuit, delaying or even preventing cost-cutting efforts.”

What Could Be the State Role in Averting Municipal Fiscal Distress & Bamkruptcy?

Share on Twitter

eBlog, 1/27/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenge in Petersburg, Virginia—and the role of the Commonwealth of Virginia. Because, in our federal system, each state has a different blueprint with regard to whether a municipality is even allowed to file for chapter 9 municipal bankruptcy (only 18), and because there is not necessarily rhyme nor reason with regard to fiscal oversight and response mechanisms—as we have observed so wrenchingly in the forlorn case of East Cleveland—the role of states appears to be constantly evolving. So it is this a.m. that we look to Virginia, where the now insolvent municipality of Petersburg had routinely filed financial information with the Virginia auditor of public accounts—but somehow the accumulating fiscal descent into insolvency never triggered alarm bells.   

Virginia Auditor Martha Mavredes this week, testifying before the House Appropriations Committee, told Chairman S. Chris Jones (R-Suffolk) it was “just hard for us to really get our minds around how that was missed,” telling the committee the state currently has no requirement for municipalities to furnish the kind of comprehensive information that would trigger awareness of insolvency; there appears to be no mechanism for the Commonwealth to step in and help. Indeed, that was the very purpose of Chairman Jones to call for the hearing: he wants to better understand options Virginia might consider to not just create some kind of trip wire, but, mayhap more importantly, to act on provisions which could avert future such municipal insolvencies. Auditor Mavredes indicated to the Committee she is scrambling to scrabble together some kind of tripwire or early warning system that would flag financial problems in Virginia’s municipalities at an earlier stage, telling the committee she is using a system devised by the state of Louisiana to help Virginia identify cities and counties in dire fiscal straits. Thus she plans to create a database of all localities in the commonwealth to rate or score their relative fiscal health. Under what she is proposing, her office will approach cities that show warning signs in order to assess more information. Her real issue, she told the committee, is what fiscal assistance tools might be available—or as she put it: the “piece I can’t solve right now is what kind of assistance might be there” once such problems come to light.” Virginia, like a majority of states, has no provision for the state to step in if a locality goes into default. Indeed, it was the thoughtful step of Virginia’s Finance Secretary Ric Brown, who took the unusual step last year to investigate Petersburg’s finances, which led him to discover the city had some $18 million in unpaid bills, an unbalanced budget, and a fiscal practice of papering over deficits with short-term borrowing—a practice that not only jeopardized the city’s bond rating, but also affected the cost of borrowing for the regional public utility. Secretary Brown stressed the need for training local elected officials about budgeting and best practices, and he suggested a program to allow outside management firms to help get cities on a better fiscal foundation. Interestingly, the Committee might want to avail itself of the pioneering work underway by the irrepressibly insightful Don Boyd of the Rockefeller Institute of Government to assess state responses to municipal fiscal distress, seeking to answer the kinds of thoughtful queries Secretary Brown is asking. In a chart for Rockefeller, we tried our own answer:

Understanding Municipal Fiscal Stress

Assessing State Responses to Growing Municipal Fiscal Distress and Insolvency:

  • The Ostriches (head in the sand): Do Nothings/modified harm: e.g. Illinois
  • Denigrators (Alabama is a prime example: when Jefferson County requested authority to raise its own taxes, the Legislature refused, forcing the county into chapter 9 bankruptcy);
  • Learners (Rhode Island is a very good candidate here—in the wake of Central Falls, the state evolved into a much more constructive partnership;
  • Thinkers (I put Colo. & Minn. here—especially because both seem to recognize potential benefits of tax sharing & innovation in intergovernmental fiscal policy);
  • Preemptors (Michigan, because it provides for the usurpation of any local authority through the appointment of an Emergency Manager); New Jersey seems to be fitting in with that category re: Atlantic City;
  • Substitutors: Pa.: Act 47
  • Maybe Do-Nothings: Ohio, even though it authorizes municipal bankruptcy, appears to have been totally non-responsive the petition by East Cleveland to file—and has appeared to play no role in the so-far dysfunctional discussions between Cleveland and East Cleveland).

Are American Cities at a Financial Brink?

eBlog, 1/13/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and physical challenges to the City of Flint, Michigan in the wake of the disastrous state appointment of an Emergency Manager with the subsequent devastating health and fiscal subsequent crises, before turning to a new report, When Cities Are at the Financial Brink” which would have us understand that the risk of insolvency for large cities is now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” before briefly considering the potential impact on every state, local government, and public school system in the country were Congress to adopt the President-elect’s proposed infrastructure plan; then we consider the challenge of aging: what do longer lifespans of city, county, and state employees augur for state and local public pension obligations and credit ratings?

Not In Like Flint. Residents of the City of Flint received less than a vote of confidence Wednesday about the state of and safety of their long-contaminated drinking water, precipitated in significant part by the appointment of an Emergency Manager by Governor Rick Snyder. Nevertheless, at this week’s town hall, citizens heard from state officials that city water reaching homes continues to improve in terms of proper lead, copper, alkaline, and bacteria levels—seeking to describe Flint as very much like other American cities. The statements, however, appeared to fall far short of bridging the trust gap between Flint residents and the ability to trust their water and those in charge of it appears wide—or, as one Flint resident described it: “I’m hoping for a lot…But I’ve been hoping for three years.” Indeed, residents received less than encouraging words. They were informed that they should, more than 30 months into Flint’s water crisis, continue to use filters at home; that it will take roughly three years for Flint to replace lead water service lines throughout the city; that the funds to finance that replacement have not been secured, and that Flint’s municipal treatment plants needs well over $100 million in upgrades: it appears unlikely the city will be ready to handle water from the new Karegnondi Water Authority until late-2019-early 2020. The state-federal presentation led to a searing statement from one citizen: “I’ve got kids that are sick…My teeth are falling out…You have no solution to this problem.”

Nevertheless, progress is happening: in the last six months of water sampling in Flint, lead readings averaged 12 parts per billion, below the federal action level of 15 ppb, and down from 20 ppb in the first six months of last year. Marc Edwards, a Virginia Tech researcher who helped identify the city’s contamination problems, said: “Levels of bacteria we’re seeing are at dramatically lower levels than we saw a year ago.” However, the physical, fiscal, public trust, and health damage to the citizens of Flint during the year-and-a-half of using the Flint River as prescribed by the state-appointed Emergency Manager has had a two-fold impact: the recovery has been slow and residents have little faith in the safety of the water. Mayor Karen Weaver has sought to spearhead a program of quick pipeline replacement, but that process has been hindered by a lack of funding.

State Intervention in Municipal Bankruptcy. In a new report yesterday, “When Cities Are at the Financial Brink,” Manhattan Institute authors Daniel DiSalvo and Stephen Eide wrote the “risk of insolvency for large cities in now higher than at any point since the federal government first passed a municipal bankruptcy law in the 1930’s,” adding that “states…should intervene at the outset and appoint a receiver before allowing a city or other local government entity to petition for bankruptcy in federal court—and writing, contrary to recent history: “Recent experiences with municipal bankruptcies indicates that when local officials manage the process, they often fail to propose the changes necessary to stabilize their city’s future finances.” Instead, they opine in writing about connections between chapter 9, and the role of the states, there should be what they term “intervention bankruptcy,” which could be an ‘attractive alternative’ to the current Chapter 9. They noted, however, that Congress is unlikely to amend the current municipal bankruptcy chapter 9, adding, moreover, that further empowering federal judges in municipal affairs “is sure to raise federalism concerns.” It might be that they overlook that chapter 9, reflecting the dual sovereignty created by the founding fathers, incorporates that same federalism, so that a municipality may only file for chapter 9 federal bankruptcy if authorized by state law—something only 18 states do—and that in doing so, each state has the prerogative to determine, as we have often noted, the process—so that, as we have also written, there are states which:

  • Precipitate municipal bankruptcy (Alabama);
  • Contribute to municipal insolvency (California);
  • Opt, through enactment of enabling legislation, significant state roles—including the power and authority to appoint emergency managers (Michigan and Rhode Island, for instance);
  • Have authority to preempt local authority and take over a municipality (New Jersey and Atlantic City.).

The authors added: “The recent experience of some bankrupt cities, as well as much legal scholarship casts doubt on the effectiveness of municipal bankruptcy.” It is doubtful the citizens in Stockton, Central Falls, Detroit, Jefferson County, or San Bernardino would agree—albeit, of course, all would have preferred the federal bailouts received in the wake of the Great Recession by Detroit’s automobile manufacturers, and Fannie Mae and Freddie Mac. Similarly, it sees increasingly clear that the State of Michigan was a significant contributor to the near insolvency of Flint—by the very same appointment of an Emergency Manager by the Governor to preempt any local control.

Despite the current chapter 9 waning of cases as San Bernardino awaits U.S. Bankruptcy Judge Meredith Jury’s approval of its exit from the nation’s longest municipal bankruptcy, the two authors noted: “Cities’ debt-levels are near all-time highs. And the risk of municipal insolvency is greater than at any time since the Great Depression.” While municipal debt levels are far better off than the federal government’s, and the post-Great Recession collapse of the housing market has improved significantly, they also wrote that pension debt is increasingly a problem. The two authors cited a 2014 report by Moody’s Investors Service which wrote that rising public pension obligations would challenge post-bankruptcy recoveries in Vallejo and Stockton—perhaps not fully understanding the fine distinctions between state constitutions and laws and how they vary from state to state, thereby—as we noted in the near challenges in the Detroit case between Michigan’s constitution with regard to contracts versus chapter 9. Thus, they claim that “A more promising approach would be for state-appointed receivers to manage municipal bankruptcy plans – subject, of course, to federal court approval.” Congress, of course, as would seem appropriate under our Constitutional system of dual sovereignty, specifically left it to each of the states to determine whether such a state wanted to allow a municipality to even file for municipal bankruptcy (18 do), and, if so, to specifically set out the legal process and authority to do so. The authors, however, wrote that anything was preferable to leaving local officials in charge—mayhap conveniently overlooking the role of the State of Alabama in precipitating Jefferson County’s insolvency.  

American Infrastructure FirstIn his campaign, the President-elect vowed he would transform “America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains with a deficit-neutral plan targeting substantial new infrastructure investments,” a plan the campaign said which would provide maximum flexibility to the states—a plan, “American Infrastructure First” plan composed of $137 billion in federal tax credits which would, however, only be available investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Left unclear is how such a plan would impact the nation’s public infrastructure, the financing of which is, currently, primarily financed by state and local governments through the use of tax-exempt municipal bonds—where the financing is accomplished by means of local or state property, sales, and/or income taxes—and some user fees. According to the Boston Federal Reserve, annual capital spending by state and local governments over the last decade represented about 2.3% of GDP and about 12% of state and local spending: in FY2012 alone, these governments provided more than $331 billion in capital spending. Of that, local governments accounted for nearly two-thirds of those capital investments—accounting for 14.4 percent of all outstanding state and local tax-exempt debt. Indeed, the average real per capita capital expenditure by local governments, over the 2000-2012 time period, according to the Boston Federal Reserve was $724—nearly double state capital spending. Similarly, according to Census data, state governments are responsible for about one-third of state and local capital financing. Under the President-elect’s proposed “American Infrastructure First” plan composed of $137 billion in federal tax credits—such credit would only be available to investors in revenue-producing projects—such as toll roads and airports—meaning the proposed infrastructure plan would not address capital investment in the nation’s public schools, libraries, etc. Similarly, because less than 2 percent of the nation’s 70,000 bridges in need of rebuilding or repairs are tolled, the proposed plan would be of no value to those respective states, local governments, or users. Perhaps, to state and local leaders, more worrisome is that according to a Congressional Budget Office 2015 report, of public infrastructure projects which have relied upon some form of private financing, more than half of the eight which have been open for more than five years have either filed for bankruptcy or been taken over by state or local governments.

Moody Southern Pension Blues. S&P Global Ratings Wednesday lowered Dallas’s credit rating one notch to AA-minus while keeping its outlook negative, with the action following in the wake of Moody’s downgrade last month—with, in each case, the agencies citing increased fiscal risk related to Dallas’ struggling Police and Fire Pension Fund, currently seeking to stem and address from a recent run on the bank from retirees amid efforts to keep the fund from failing, or, as S&P put it: “The downgrade reflects our view that despite the city’s broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, expected continued deterioration in the funded status of the city’s police and fire pension system coupled with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant and negatively affects Dallas’ creditworthiness.” S&P lowered its rating on Dallas’ moral obligation bonds to A-minus from A, retaining a negative outlook, with its analysis noting: “Deterioration over the next two years in the city’s budget flexibility, performance, or liquidity could result in a downgrade…Similarly, uncertainty regarding future fixed cost expenditures could make budgeting and forecasting more difficult…If the city’s debt service, pension, and OPEB carrying charge elevate to a level we view as very high and the city is not successful in implementing an affordable plan to address the large pension liabilities, we could lower the rating multiple notches.” For its part, Fitch Ratings this week reported that a downgrade is likely if the Texas Legislature fails to provide a structural solution to the city’s pension fund problem. The twin ratings calls come in the wake of Dallas Mayor Mike Rawlings report to the Texas Pension Review Board last November that the combined impact of the pension fund and a court case involving back pay for Dallas Police officers could come to $8 billion—mayhap such an obligation that it could force the municipality into chapter 9 municipal bankruptcy, albeit stating that Dallas is not legally responsible for the $4 billion pension liability, even though he said that the city wants to help. The fund has an estimated $6 billion in future liabilities under its current structure. In testimony to the Texas State Pension Review Board, Mayor Rawlings said the pension crisis has made recruitment of police officers more difficult just as the city faces a flood of retirements.

 

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

Share on Twitter

eBlog, 12/09/16

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

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

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

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

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

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

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

The Stark Differences in How Cities May Exit Municipal Bankruptcy, & The Hard Challenges of Municipal Governance in Insolvencies.

eBlog, 12/07/16

Good Morning! In this a.m.’s eBlog, we consider the green light flashed by U.S. Bankruptcy Judge Meredith Jury yesterday, clearing the way for San Bernardino to exit the longest chapter 9 municipal bankruptcy in U.S. history—and in ways profoundly different than Detroit because of the very different state roles and laws with regard to chapter 9 and governance in municipal bankruptcy, and that San Bernardino—like Jefferson County—remained under elected local leadership throughout their respective journeys into and out of municipal bankruptcy. Then we turn to last night’s recall by voters in the small, insolvent municipality of East Cleveland, in the wake of the narrowest of margins—but at an unaffordable cost.

Smooth Sailing Out of Municipal Bankruptcy. In what San Bernardino Mayor Carey Davis yesterday described as a “monumental day…[where] the hard work has paid off,” referring to U.S. Bankruptcy Judge Meredith Jury’s statement yesterday: “We have a lot left to do, but this clears the way for us to do much of that work,” as she yesterday confirmed the City of San Bernardino’s plan of debt adjustment, confirming its path early in the new year to exit from the nation’s longest ever chapter 9 municipal bankruptcy as early as next March. San Bernardino City Attorney Gary Saenz expressed elation at Judge Jury’s green light, noting: “I’m so pleased and excited about where the city is now compared to where we were when we filed bankruptcy and what we were able to accomplish and that we now have a solid foundation upon which to build this city. The confirmation should certainly help the rest of the city and the world recognize that San Bernardino is back.” Even Judge Jury joined in praising the city for its endurance and stamina over the long road, noting that over the four-year span she had observed that had improved not just its finances, but also its governance, pointing to the municipality’s voter-approved new charter and better working relationships among elected officials: “The city came in financial chaos, and it’s leaving in much better shape…I have lived in this region for 40 years…and I’ve always said the city needed help. I’m glad it got it.” Under the city’s now approved plan of adjustment, it will pay the bulk of its creditors far less than they would otherwise be entitled to—in many instances merely one cent for every dollar such a creditor is owed; however, the city’s plan also outlines changes to the structure of the city, some of which, including outsourcing of refuse and fire services, and the passage of a new city charter, have already been implemented. City Attorney Saenz estimated that even though the costs to the city of its filing will be in excess of $20 million, its now approved chapter 9 plan of debt adjustment will save the city’s taxpayers more than $300 million worth of debts that will be officially discharged.

With regard to the record length of time, Judge Jury said the case, which hinged significantly on deals with major creditors, took the right amount of time. Moreover, several of the city’s major creditors in the case concurred in the congratulations, contrasting the city’s process and efforts specifically to Detroit, the nation’s largest-ever chapter 9 municipal bankruptcy, by noting both the significant state role and imposition of an emergency manager in the former—in contrast, the State of California was simply an absent, if not contributor to San Bernardino’s insolvency and consequent chapter 9 filing. Indeed, attorney Vincent J. Marriott, who represented municipal bondholders who held approximately $50 million of the city’s tax-exempt bonds, noted: “Here the city had the challenge of being not only economically viable but politically palatable,” said. “As is appropriate, that took time. I think the result today is really a tribute to all the work and thought that went in from the city.” Further challenging San Bernardino was the inability to gain any concessions on its public pension liabilities—in sharp contrast to the Detroit plan of debt adjustment, which provided for reductions in both Detroit’s public pension and post-retirement benefit obligations after San Bernardino’s attempts to negotiate with the California Public Employees’ Retirement System (CalPERS), therefore forcing the city to negotiate steeper concessions from all its other creditors. (The San Bernardino police union did reach an agreement with the city last year which includes concessions on leave time from before the bankruptcy filing, legal claims related to the imposition, and retiree health care.)

The last hurdle, as we have recounted previously, came after Judge Jury held for the city against efforts by attorneys representing clients injured by the San Bernardino Police—who had argued that the exceptionally low offer demonstrated the city, in its plan of debt adjustment efforts, had not acted “reasonably,” nor “in good faith,” provisions required for the federal court to confirm a municipality’s plan of debt adjustment. In rejecting those debtors’ claims, Judge Jury told their attorney: “I’m not trying to diminish the injuries to your client…But I’m also saying at a human level what the police and others have given back do affect the livelihoods of their families. It’s not a dispassionate institutional creditor.” Finally, Judge Jury concurred in one of the very few areas in the city’s plan of debt adjustment calling for increased spending: for the city’s police department. Judge Jury noted: “Anybody that lives in this area knows that the crime problem in San Bernardino is substantial…They have to get safe for people to want to live there.”

Pearl Harbor Day on East Cleveland. East Cleveland voters yesterday recalled both Mayor Gary Norton Jr. and City Council President Thomas Wheeler in a special election, with the final, unofficial results finding that Mayor Norton lost by a margin of 20 votes (548 to 528), according to the Cuyahoga County Board of Elections website, while City Council President Wheeler lost by an even narrow margin of 18 votes—with the official tally to be released on December 19th. Yesterday’s recall election marked the third time Councilmember Wheeler had been subject to recall: he prevailed exactly one year ago, and then, again, last June—albeit by a mere 51-49 percent margin, and with a turnout of only 7 percent of the city’s registered voters. For the ousted Mayor, the recall marked the first such election. In a statement last night, Mayor Norton noted: “I love the people of East Cleveland, and it has been an honor to have served them.” In the wake of the recall, Council Vice President Brandon King will be sworn in as the new Mayor in three weeks, and the remaining City Council members will have to appoint two leaders to the Council to fill the empty slots: under the Council’s procedures, should the Council find itself unable to agree upon such appointments, Mayor-to-be King will choose who fills those seats, according to Council President Wheeler.

For the small, insolvent municipality of East Cleveland, a city which Ohio Auditor Dave Yost’s office four years ago declared to be in a state of fiscal emergency, and last year stated that municipal bankruptcy or merging with Cleveland were the two most viable options for the suburb, the interim has been like waiting for Godot. Indeed, the small municipality has been awaiting some response from the State of Ohio with regard to its request for authorization to file for chapter 9 municipal bankruptcy, and some response from both the state and City of Cleveland with regard to its proposal to be annexed, the disruptive election carries a fiscal cost: yesterday’s election could cost the city between $25,000 and $30,000. (The city explored filing for chapter 9 municipal bankruptcy in May, but has been stymied by the state, because the Ohio Tax Commissioner’s office said the Council should ask permission from the state, not the Mayor.) Now, in the wake of last night’s results, the outcome could mean what outgoing Council President Wheeler last night described as “dramatic chaos:” “They wanted me out, and it took them three times…Obviously they don’t want the city to move forward; they want to go back to the way things used to be.” In contrast, Devin Branch, who led the effort to recall the city’s elected leaders last night said the people of East Cleveland had spoken, and while voter turnout was low, the majority of the city opposes the current mayor: “Working class people of the City of East Cleveland are soundly against Mayor Norton.” The city explored filing for bankruptcy in May, but hit a roadblock when the Tax Commissioner’s office said council should ask permission from the state, not the mayor. The letter from the commissioner also detailed the plans that the city must have prior to filing for bankruptcy.

What Is the State Role in Municipal Solvency/Recovery?

 

Share on Twitter

eBlog, 11/21/16

Good Morning! In this a.m.’s eBlog, we consider the state role in addressing municipal fiscal distress and bankruptcy: what are the different models—and how are they working? Then we consider one especially dysfunctional model: Ohio, where the City of East Cleveland could find its two Mayoral candidates in municipal jail before the voters go to the polls early next month. From thence, we strike east to consider this month’s elections in Massachusetts on charter schools—examining an issue that goes to the heart not only of state local relations and authority, but also to the potential impact on municipal assessed property values. What may be learned? Finally, we wish readers a Happy Thanksgiving!

What Is the State Role in Municipal Solvency/Recovery? Under our country’s system of dual federalism created by the founding fathers, while federal law authorizes municipalities to file for chapter 9 bankruptcy, a city, county, or school district may only do so if authorized by a state. Today, only 18 of the 50 states provide such authority. Ergo, one of the issues we have sought to consider through this eBlog has been the evolving State role in municipal distress in a field of seeming constant flux. This month, for instance, we experienced the uncertain governance situation in New Jersey in the wake of the state takeover of the City of Atlantic City—a state takeover in which the process and how it will play out could be further impacted by the potential selection by President-elect Trump of New Jersey Governor Chris Christie, who might be a potential Cabinet or other senior advisor to the President-elect.

Actual governance has shifted from local accountability to the state’s Division of Local Government Services—but with the state already having imposed a state emergency manager in the city, what the new state takeover means continues to be uncertain. In Ohio, which authorizes chapter 9 municipal bankruptcy, the City of East Cleveland’s request to do so appears to be on the desk of Rod Serling in the Twilight Zone: there has simply been no response of any kind. Similarly, in California, state policies have clearly contributed to some of the fiscal distress that led Stockton and San Bernardino into chapter 9 municipal bankruptcy, but the state played absolutely no role in helping either Stockton or San Bernardino to emerge. Michigan, a state which has been deeply enmeshed in municipal fiscal distress—albeit not necessarily in a constructive manner—has acted in different ways—going from its imposition of an emergency manager—a process with deadly consequences in Flint, but seemingly key to Detroit’s turnaround. Alabama, by refusing to allow Jefferson County to raise its own taxes, directly aided and abetted the County’s chapter 9 municipal bankruptcy. Rhode Island, on the day of Central Falls’ chapter 9 filing—the very day Providence, the state’s capitol city, was itself poised on the rim of filing, but opted not to—and the state, thanks to the exceptional ingenuity of its then Treasurer (now Governor), created an ingenious model of creating teams of city managers and retired state legislators to act in teams to offer assistance to cities in danger of insolvency—so that there was a team effort before—instead of after such a precipitous event.

Part of what has made this effort to assess what is happening in the arena of severe municipal fiscal challenges and bankruptcy so much more difficult is the surprise that, in the wake of recovery from the Great Recession, one would have assumed severe municipal fiscal distress and insolvency would have dissipated. It has not. What has changed? Why are States not reacting more uniformly? With only 18 states permitting municipal bankruptcy, what state models exist which offer a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion? What is a state’s role in recovery from a chapter 9 municipal bankruptcy? What is a state’s role in addressing increasing fiscal disparities?

Ungoverning in a Fiscal Twilight Zone. In East Cleveland, Ohio, the mall city which is seeking authority from the State of Ohio to file for chapter 9 bankruptcy—a plea to which it remains unclear whether there will ever be a response, and where there have been on and off discussions with adjacent Cleveland about a consolidation of the two municipalities; the city’s election day activities provide a sense of the increasing dysfunctional nature of the small city: it was, after all, on election day this month at Mayfair Elementary School where both candidate Devin Branch and current Mayor Gary Norton were working the polls trying to convince registered voters to go with their respective causes. Mayor Norton was pressing potential voters not to recall him at the city’s upcoming election on December 8th; Devin Branch was going door-to-door to obtain the 550 requisite signatures to ensure the recall would officially be on the ballot. Their respective efforts, however, came up against each other when they encountered each other going after the same person and their battle became an event where they pressed their respective clip boards in front of registered voters—leading to a confrontation so that Mayor Norton decided to order the Chief of Police and a squad of police to arrest Mr. Branch. Moreover, dissatisfied with the police response, Mayor Norton then ordered his personal lawyer, Willa Hemmons, to issue a warrant for the arrest of Mr. Branch. Thus, in an insolvent municipality, several squads of police and detectives were directed to make the arrest of Devin Branch last Thursday. Mr. Branch was arrested and placed in East Cleveland’s jail; last Friday, Judge William Dawson opened the door for his release after posting bond. This morning, Judge Dawson will hear from both men, albeit, what the voters and city’s taxpayers will hear seems unlikely to be enlightening for the city’s fiscal future.

Schooled in Fiscal Solvency? Massachusetts voters this month overwhelmingly rejected a major expansion of charter schools, rejecting Question 2 by nearly a 2-1 margin, in what was perceived as a significant setback for Governor Charlie Baker, who had aggressively campaigned for the referendum, saying it would provide a vital alternative for families trapped in failing urban schools. As proposed, the measure would have allowed for 12 new or expanded charters per year, adding significantly to the existing stock of 78 charters statewide. Had the measure been approved, it would have—as state-imposed charter schools in Detroit are, shifted thousands of dollars in state aid from public to charter schools—shifting as much as an estimated $451 million statewide this year. During the campaign, opponents such as Juan Cofield, president of the New England Area Council of the NAACP, warned that charters were creating a two-tiered system, draining money from the traditional schools that serve the bulk of black and Latino students, telling voters “a dual school system is inherently unequal.” Worcester Mayor Joseph Petty, an opponent, noted: “Here in Worcester we will spend $24.5 million dollars on charter schools in our city…that is money that could be used to hire more teachers, improve our facilities, and invest in our students,” in effect underscoring the reason municipal leaders in the Bay State opposed the measure: their apprehension with regard to the fiscal impact on cities, towns, and school districts when more children attend charter schools. Had the measure been adopted, district schools would have received less money: the money to educate a child would have followed the child: over time, expanding access to charter schools could cost local property taxpayers more, since district schools will need more funding, forcing local elected leaders to either raise property taxes more, or cut public services. Indeed, opponents of charter school expansion claimed, based on state data, that school districts would have lost some $450 million this year to charter school tuition, even after accounting for state reimbursements.

Unsurprisingly, ergo, municipal officials generally opposed expanding charter schools, with the mayors of Springfield, Boston, Chicopee, Holyoke, Northampton, Pittsfield, Westfield, and West Springfield all coming out publicly opposed. Geoff Beckwith, the Executive Director of the Massachusetts Municipal Association, said the current funding system is already difficult for cities and towns to deal with, noting that, for one, the formula transferring money from district to charter schools does not take into account the fact that many of a school’s costs are fixed and do not vary by child, noting that with regard to the fiscal impact on cities, towns and school districts: “You have to a have a classroom, you have to heat the building, you still have principals…It’s extremely hard for communities to actually cut costs…The only thing they can do is cut back on the overall quality of the programming they’re offering the vast majority of kids who stay behind in the regular public school system.” Ergo, he noted: “Until the financing system is fixed, the ballot question providing for the expansion of charter schools would exacerbate and deepen the financial trouble that these local school systems are dealing with…And the communities that are most impacted by charter school expansion are in most cases the most financially challenged communities.” (Unsurprisingly, the Massachusetts Municipal Association board voted unanimously to oppose the ballot question.) Indeed, Moody’s reported the rejection to be a credit positive for the Commonwealth’s urban local governments: “It will allow those cities and towns to maintain current financial operations without having to adjust to increased financial pressure from charter school funding.” According to Moody’s, since the last charter school expansion in 2010, cities such as Boston, Fall River, Lawrence, and Springfield have experienced significant growth in charter school assessments, averaging 83% due to increasing charter school enrollment. To which, Moody’s notes: “So far, the growing cost of charter schools on municipalities has not been a direct credit challenge; rather the effect is more indirect because Massachusetts school districts are integrated within cities and towns with relatively healthy credit profiles.” The agency went on to write: “Education in the commonwealth is a primary budget item within a municipality’s overall budget, which allows city budgets to absorb some of the education financial stress with other municipal sources….This integration is a key distinction from school districts in other states that operate separately from the communities they serve.”