The Potential Consequences of a State Takeover of a Municipality


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eBlog, 2/03/17

Good Morning! In this a.m.’s eBlog, we consider the long-term costs and consequences of state takeovers of a municipality, and of a broken state financial system.

The Fiscal Costs of Incompetence. Michigan taxpayers, including those in Flint, will be paying litigation and legal defense expenses for two former officials implicated in contributing to Flint’s lead-contaminated water crisis. Governor Rick Snyder’s Office confirmed that the Michigan Treasury Department will reimburse the city of Flint for legal and defense fees for former state-imposed Flint Emergency Managers Darnell Earley and Gerald Ambrose—officials appointed by the Governor who have now been charged by Michigan Attorney General Bill Schuette with committing false pretenses and conspiracy to commit false pretenses, 20-year felonies. The duo also face a charge of misconduct in office, a five-year felony, and a one-year misdemeanor count of willful neglect of duty. Gov. Rick Snyder’s spokeswoman notes that state officials do not have any estimates on costs to state taxpayers for their defense—or if there is any ceiling with regard to what state taxpayers will be chipping in.

The Fiscal Costs of a Broken State Financial System. Dan Gilmartin, the Executive Director of the Michigan Municipal League, this week noted that “A lot of people feel as if we’ve turned the corner here in Michigan, you know, we’ve got more people employed, and the big three are doing better, and there’s some good things happening in the tourist economy and all kinds of different areas, so they think things are getting better…they might be getting better for state coffers; but they’re actually getting worse at the local level because of the system that we’re in right now.” Noting that, despite the state’s strong economic recovery, that recovery has not filtered down to its cities—which, in the wake of some $7 billion in state cuts to general revenue sharing since 2002—has left the state’s municipalities confronting an increasingly harder time to finance public infrastructure and public safety. The League’s report also recommends the state help cities come up with more modern health care plans which would allow them to control costs and stay competitive with other employers. Perhaps most intriguing, Mr. Gilmartin recommended that state aid for public infrastructure be allocated on a regional basis, rather than jurisdiction by jurisdiction. Finally, he urged the Michigan legislature to make up for the steep cuts made to revenue sharing in the last 15 years.

Exiting Receivership. The Michigan Department of Treasury has announced that the small municipality of Allen Park—a city of about 28,000 in Wayne County, where the annual per capita income is $27,000 and the estimated median assessed property value is $91,000, is no longer under receivership—meaning the city’s elected leaders have effectively had their authority to govern restored. The small city, which had also been charged in 2014 by the Securities and Exchange Commission with fraud, with the SEC charging public officials as “control persons,” came in the wake of a recommendation from members of the Allen Park Receivership Transition Advisory Board, which was state-appointed in 2014 in the wake of Gov. Rick Snyder’s announcement that the city’s 2012 financial emergency had been resolved after its structural and cumulative deficits had been eliminated. Gov. Snyder had imposed an Emergency Manager from March 2013 to September 2014, the same month in which the Michigan Receivership Transition Advisory Board was appointed. According to the Treasury, Allen Park “has made significant financial and operational progress,” including increasing its general fund balance; passing 10-year public safety and road millages; and saving $1.1 million by tendering 62 percent of Allen Park’s outstanding municipal bonds issued through the Michigan Finance Authority. In addition, the municipality made its required contributions into the pension and retiree healthcare systems, including an additional $500,000 annual payment toward other OPEB liabilities. Allen Park Mayor William Matakas responded: “On behalf of the city, I express my gratitude to the members of the Receivership Transition Advisory Board for their professionalism during Allen Park’s transition from emergency management to local control…I look forward to working with local and state officials to ensure we continue down a path of financial success.” Michigan Treasurer Nick Khouri, in the wake of the release of the municipality under Michigan’s Local Financial Stability and Choice Act, said Allen Park leaders are thus authorized to regain control and proceed with tasks such as approving ordinances, noting: “This is an important day for the residents of Allen Park, the city, and all who worked diligently to move the city back to fiscal stability…The cooperation of state and city officials to problem-solve complex debt issues now provides the community an opportunity to succeed independently. I am pleased to say that the city is released from receivership and look forward to working with our local partners in the future…The cooperation of state and city officials to problem-solve complex debt issues now provides the community an opportunity to succeed independently.” According to Mr. Khouri, since the state intervention, Allen Park has increased the city’s general fund balance in the wake of adopting a 10-year public safety millage and a 10-year road millage; in addition, the city completed a successful tendering of 62% of the outstanding municipal bonds issued via the Michigan Finance Authority used to fund a failed movie studio project for a savings of $1.1 million in 2015. An additional remarketing of the remaining amount was finalized in 2016, saving the city another $900,000. It makes one wonder whether New Jersey Governor Chris Christie might benefit from observing the constructive relationship between the state and Allen Park as a means to help an insolvent city regain its fiscal feet.

Once & Future Cities

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eBlog, 7/29/16

In this morning’s eBlog, we consider the critical, successful first effort by the City of Detroit to issue full faith and credit municipal debt–an effort complicated by the still unsettled fiscal situation of Detroit’s public school system; we examine the next chapter in the Chris Christie saga and Atlantic City’s efforts to avoid a default and /or state takeover. Finally, we consider the governance and leadership challenges that might threaten Detroit’s emergence and return to being the nation’s center of innovation.

Returning to the Municipal Market. As we wrote in anticipation yesterday, Detroit issued its first post-municipal bankruptcy debt in the wake of last month’s unanimous approval by the Detroit City Council of the issuance of up to $660 million of refunding bonds (a tax-exempt issuance projected by the city to save an estimated $37 million and help pave the Motor City’s return to the municipal bond market after emerging from the largest municipal bankruptcy in American history.) The sale encountered strong investor demand—and the successful sale will achieve budget savings that will facilitate the Motor City’s ability to provide budgetary and property tax relief—as well as resources to put aside $30 million from a budget surplus to deal with a possible public pension funding shortfall of nearly $500 million. The success marked, ergo, Detroit’s first post-bankruptcy general obligation/distributable state aid backed bond sale issue, with Detroit CFO John Naglick noting: “We experienced broad and deep investor participation and the savings certainly (significantly) exceeded our expectations.” While the fiscally recovering city paid a penalty on the $615 million issue over comparably rated municipal securities compared to other municipalities and states, the sale benefited from strong demand. CFO Naglick described the successful sale as a vote of confidence in Detroit’s efforts to turn around its finances since emerging from the nation’s largest-ever municipal bankruptcy a year and a half ago. Without a doubt, a key part of the success must be attributed to the indirect state backing of the bonds—or, as fabulous Matt Fabian of Municipal Market Analytics described it: “[The sale] shows that there is a fair bit of faith in the state of Michigan…A program like Michigan’s Distributable State Aid (DSA) is what distressed or crippled governments use to get market access…The city is still relying on the state, and, in no way, is Detroit back. If these bonds had been unenhanced bonds from the city, it would have been a different story.” He added that the successful sale appeared to indicate both a lack of apprehension on the part of investors that Detroit could be driven back into chapter 9 municipal bankruptcy, as well as investor understanding that the city’s full faith and credit is distinct from the severe fiscal challenges to the Detroit Public School system, or, as another analyst noted: “The city is not the school district, and the city has shown that at least in the first bankruptcy that this type of debt has been protected.”

Life Preserver. Claiming he was “tired of this,” New Jersey Governor Chris Christie yesterday approved a $74 million loan to Atlantic City—warning the city’s leaders to accept the loan—and its terms—or face municipal bankruptcy. The terms of the loan, however, are steep: under the state’s terms, if the municipality is unable to pay it back, the state would be authorized to seize critical municipal assets, including Atlantic City’s water utility and its former airport, break union contracts, and assume major decision-making powers from the city’s government for five years. The terms of the loan grants the city until November to come up with a five-year plan to address its fiscal insolvency. The formal announcement of the loan means Atlantic City can avoid default on Monday and make payments on an additional $18.6 million owed in municipal debt service for the rest of this year; the funds will also be critical in enabling Atlantic City to devise a five-year financial plan. As we wrote yesterday, Atlantic City Mayor Don Guardian and City Council President Marty Small have vowed Atlantic City will have a plan to close a $100 million shortfall in next year’s budget in time for the state-imposed Nov. 3rd deadline. If Atlantic City fails to submit a plan by Nov. 3rd, or if the plan is rejected, the state can sell city assets. Indeed, Mayor Guardian yesterday released a statement saying the city will make payroll today, as well as Monday’s debt payment: “We anticipate that the bridge loan agreement with the state will be completed in short order and the funding required by the act will be put in place to cover operational expenses of the city.”

A Challenge to Innovation & Leadership. I noted a truly extraordinary phenomenon yesterday to a class I was teaching to a visiting cohort from China at George Washington University on Innovation, where I spoke of the remarkable movement of the Silicon Valley, this country’s center of innovation for the last quarter century, to Detroit, because of the recognition of the immense changes ahead from the development of self-driving cars. But, unlike the Silicon Valley Partnership, where the high-tech industry, 22 cities and counties, and my old alma mater, Stanford, and San Jose State University devote themselves, annually, to acting (and issuing a report) on the steps most critical to making the region the most vital and compelling location in the globe for innovative CEO’s to locate, the exceptional opportunity for Detroit to become the nation’s center of innovation, once again, could now be jeopardized by the region’s seeming inability to demonstrate governance leadership. There appears to be a growing rift between counties in the region—a governance rift which has undercut plans to place a 20-year transportation millage before Metro Detroit voters in November. The Regional Transit Authority (RTA) board yesterday rejected, on a 5-4 vote, putting a 1.2-mil tax on the November ballot in the wake of opposition from officials from Macomb and Oakland Counties. Their apprehensions related to whether each county would get its fair share of funding if the millage were approved, and if future votes would protect the interest of each county or just a few. The adverse vote now leaves uncertain the fate of critical funding for regional rapid transit, as well as a commuter rail line from Ann Arbor to Detroit, airport shuttle service, a universal fare card system, and other improvements. Paul Hillegonds, Chairman of the RTA’s board, said after the vote: “This board has gone as far as it can go” on the issue and now elected officials have “to figure it out,” even as he questioned whether county leaders have the political will to make necessary decisions so that a millage is not delayed for two to four years.

RTA officials from Macomb and Oakland counties were unified against the millage proposal, but had joined the board in approving the rest of a $4.6 billion regional transit plan; however, under the governance structure statute, placing a measure on the ballot from the RTA requires seven of nine votes: one from each county. Yesterday’s vote, thus, fell two votes short, with both pairs of Macomb and Oakland representatives voting against. Had it been adopted, the 20-year millage would have cost the owner of a $200,000 home about $120 annually. Now the time for the region’s future is short: the region faces an August 16 deadline to have the ballot language certified by county clerks to appear on the November ballot.