Post Chapter 9 Challenges

eBlog, 2/22/17

Good Morning! In this a.m.’s eBlog as we remember the first President of our country,  we consider the accomplishments and challenges ahead for the city recovering from the largest ever municipal bankruptcy; then we visit the historic Civil War city of Petersburg, Virginia—as it struggles on the edge of fiscal and physical insolvency; from thence, we roll the dice to witness a little fiscal Monopoly in the state-taken over City of Atlantic City, before finally succumbing to the Caribbean waters made turbulent by the governance challenges of a federal fiscal takeover of the U.S. territory of Puerto Rico, before considering whether to take a puff of forbidden weed as we assess the governing and fiscal challenges in San Bernardino—a city on the precipice of emerging from the longest municipal bankruptcy in American history.   

State of a Post Chapter 9 City. Pointing to FY2015 and 2016 balanced budgets, Detroit Mayor Mike Duggan, in his fourth State of the City address, pointed to the Motor City’s balanced budgets for FY2015 and 2016 and said the city’s budget will be balanced again at the close of this fiscal year in June—progress he cited which will help the city emerge from state get oversight and back to “self-determination” by 2018. Mayor Duggan cited as priorities: job training, affordable housing, and rebuilding neighborhoods, orating at the nonprofit human rights organization Focus: HOPE on Oakman Boulevard on the city’s northwest side, where residents and others for decades have received critical job training. Mayor Duggan was not just excited about what he called the transformation of city services and finances in a city that exited municipal bankruptcy three years ago, but rather “what comes next,” telling his audience: “We’ve improved the basic services, but if we’re going to fulfill a vision of building a Detroit that includes everybody, then we’ve got to do a whole lot more…You can’t have a recovery that includes everyone if there aren’t jobs available for everyone willing to work.” Ergo, to boost job opportunities, Mayor Duggan announced a new initiative, “Detroit at Work,” which he said would help connect the Motor City’s job seekers with employers, deeming it a portal which would provide a “clear path to jobs.” He also discussed his administration’s program to help city youth secure jobs and the Detroit Skilled Trades Employment Program, a recent partnership with local unions to increase Detroit membership and boost job opportunities.

With regard to neighborhoods, Mayor Duggan touted his Neighborhood Strategic Fund, his initiative to encourage neighborhood development, especially in wake of the exceptional success of Detroit’s new downtown: this fund allocates $30 million from philanthropic organizations toward development, commencing with the engagement of residents in the areas of Livernois/McNicols, West Village, and in southwest Detroit to create revitalized and walkable communities—under the city’s plan to align with the city’s vision for “20-minute neighborhoods” to provide nearby residents with close, walkable access to grocery stores and other amenities—or, as Mayor Duggan noted: “If we can prove that when you invest in these neighborhoods, the neighborhoods start to come back. The first $30 million will only be the beginning. I want everybody to watch…If we prove this works…then we go back for another $30 million and another $30 million as we move across the neighborhoods all through this city.”

In a related issue, the Mayor touted the return of the Department of Public Works’ Street Sweeping Unit, which is preparing to relaunch residential cleanings for the 2017 season, marking the first time in seven years for the program. On the affordable housing front, Mayor Duggan addressed affordable housing, saying that future projects will ensure such housing exists in all parts of the city, referencing a new ordinance, by Councilwoman Mary Sheffield, which seeks to guarantee that 20 percent of the units in new residential projects which receive financial support from the city will be affordable: “We are going to build a city where there is a mix of incomes in every corner and neighborhood and we’re going to be working hard.”

But in his address—no doubt with his re-election lurking somewhere behind his words, Mayor Duggan reflected not just on his successes, but also some missteps, including his administration’s massive federally funded demolition program, now the focus of a federal probe and state and city reviews: that initiative has been successful in the razing of nearly 11,000 abandoned homes since the spring of 2014, but has also triggered federal and state investigations over spiraling costs and bidding practices: an ongoing state review of the program’s billing practices turned up $7.3 million in what the State of Michigan deems “inappropriate” or “inaccurate” costs: the vast majority in connection with a controversial set-price bid pilot in 2014 designed to quickly bring down big bundles of houses—an initiative over which Mayor Duggan has so far rejected the state’s assertion that about $6 million tied to costs of the pilot were inappropriate. Thus, yesterday, he conceded that the federal government’s decision to suspend the demolition program for 60 days beginning last August had been warranted, but noted the city has since overhauled procedures and made improvements to get the program back on track, so that, he said, he is confident the city will raze an additional 10,000 homes in the next two years.

For new initiatives, Mayor Duggan said the Detroit Police Department will hire new officers, and invest in equipment and technology, and he announced the launch of Detroit Health Department’s Sister Friends program, a volunteer program to provide support to pregnant women and their families. On the school front, the Mayor noted what he deemed a “complete alliance” between his office and the new Detroit Public Schools Community District school board, saying the city has joined the Board in its attempt to convince the state’s School Reform Office not to close low-performing schools. (As many as 24 of 119 city schools could potentially be shuttered as soon as this summer.) In a hint of the state-local challenge to come, Mayor Duggan said: “The new school board hasn’t had an opportunity to address the problem…We have 110,000 schoolchildren in this city, which means we need 110,000 seats in quality schools. Closing a school doesn’t add a quality seat. All it does is bounce our children around from place to place. Before you close a school, you need to make sure there’s a better alternative.”

Fiscal & Physical Repair. In a surprising turn of events in Virginia, the Petersburg City Council accepted a motion by Councilman Charlie Cuthbert to postpone the vote on moving forward with the bids for Petersburg’s aging water system, after the Council had been scheduled to vote on whether to move forward with the bids the city had received from Aqua Virginia and Virginia American Water Company to purchase the nearly insolvent city’s water and wastewater system. While the vote, by itself, would not have authorized such a sale, it would have paved the way for formal consideration of such proposals. Under his motion, Councilman Cuthbert outlined a plan to delay the vote, so the Council and the City would have more time to consider options, in part through the formation of a seven person committee, which would be separate from the one the Robert Bobb Group, which is currently overseeing the city in place of the Mayor and Council, has been proposing. Mayhap unsurprisingly, citizens’ reactions to a potential sale has been negative; thus there was approbation when Councilmember Cuthbert’s motion passed—even as it appears many citizen/tax/ratepayers appeared to be hoping for the bids to be scrapped entirely: many had spoken in strong opposition, and there were numerous signs held up in chambers for the Mayor and Council to read: “Listen to us for once, do not sell our water,” or, as one citizen told the elected officials: “We have a choice to make: to make the easy, wrong decision, or the hard, right decision,” as he addressed the Council. The city’s residents and taxpayers appear to want other options to be explored, with many citing reports of Aqua Virginia having trouble with the localities with which it holds contracts.

On the fiscal front, many citizens expressed apprehension that any short-term profit the city would realize by selling its system would be paid back by the citizens in the form of rate-hikes by Aqua Virginia or Virginia American, or as one constituent said: “Never have I seen private industry interested in what the citizens want…They’re going to come in here and raise the rates.” Interim City Manager Tom Tyrell had begun the meeting by giving a presentation outlining the problems with the system. Due to past mismanagement and a lack of investment over decades, the Petersburg water system is in urgent need of upgrades. Tyrell outlined certain deficiencies, such as water pumps that need replacing, and pipes nearly blocked by sediment build up. The water quality has never come into question, but Mr. Tyrell said that the system is very close to needing a complete overhaul: the projected cost needed to get the system completely up to standard is about $97 million. Mr. Tyrell stressed that water rates will need to increase whether or not the city sells the system, going over Petersburg’s water rates, which have been relatively low for many years, ranking near the lowest amongst municipalities across the Commonwealth of Virginia. Even if the rates were to double, he told citizens, the rates still would still not be in the top 15 amongst Virginia localities. The Council had received two unsolicited bids for the system in December, one from Aqua Virginia, a second from the Virginia American Water Company. The Robert Bobb Group recommended to the Council that it move forward to examine the detailed proposals in order to “keep all options open.” The cost of moving forward with the proposals will cost approximately $100,000, which includes the cost of examining each proposal. Thus, the Robert Bobb Group recommended that the Council put together a citizens’ advisory group as an outside adviser group. The council gave no timetable on when they will officially vote to see if the bids will go forward. The people who will make up the seven person committee were not established.

Monopoly Sale. Atlantic City has sold two of its Boardwalk properties and several lots along the Inlet for nearly $6 million, closing on three properties at the end of last week, according to city officials—meaning that a Philadelphia-based developer has gained control of five waterfront properties since 2015. His purchases, he said, reflect his belief in Atlantic City’s revival. Mayor Don Guardian reported the city had received wire transfers for the former Boardwalk volleyball court on New Jersey Avenue ($3.8 million), Garden Pier ($1.5 million) and 12 lots bordered by the Absecon Inlet, Oriental Avenue and Dewey Place ($660,000), according to Atlantic City Planning and Development Director Elizabeth Terenik, all part of a way to raise money for the insolvent municipality – and to spur redevelopment, or, as Ms. Terenik noted: “The effort was part of the Guardian administration’s initiative to leverage underutilized or surplus public lands for economic development and jobs, and to increase the ratable base.” How the new owner intends to develop the properties or use them, however, is unclear—as is the confusing governance issue in a city under state control. The Inlet lots were sold in a city land auction last summer, purchased through an entity called A.C. Main Street Renaissance, according to city officials: the Atlantic City Council approved the auction and voted to name the purchaser, conditional redeveloper of Garden Pier and the volleyball court last year. Unsurprisingly, Council President Marty Small deemed the sales as great news for the city, saying they would bring revenue, jobs, and “new partners to the Inlet area…This instills investor confidence…It lets me know that we made the right decision by going out to auction for land and getting much-needed revenue for the city.”

Paying the Piper. Atlantic City has also announced its intention to issue $72 million in municipal bonds to pay for its tax settlement with the Borgata casino, securing the funds to cover its property tax refunds by borrowing though New Jersey’s Municipal Qualified Bond Act (MQBA), according to Lisa Ryan, a spokeswoman for the New Jersey Department of Community Affairs, which is overseeing the state takeover which took effect last November, with her announcement coming just a week after the state announced it had struck a deal for Atlantic City to pay less than half of the $165 million it owes the Borgata in tax appeals from 2009 to 2015, or, as Ms. Ryan noted: “Qualified bonds will be issued in one or more tranches to achieve the settlement amount…The parties are confident in the City’s ability to access the capital market and raise the necessary amount needed to cover the financing,” albeit adding that the city’s borrowing costs would not be known until the sale. (The Garden State’s MQBA is a state intercept program which diverts a municipality’s qualified state aid to a trustee for debt service payments.) Prior to the New Jersey’s state takeover of Atlantic City, city officials had proposed paying $103 million for a Borgata settlement through MQBA bonding as part of a five-year rescue plan—a plan which the state’s Department of Community Affairs had rejected.

As the state taken over city struggles to adjust, Mayor Don Guardian, in a statement, noted: “I’m glad the state is seeing the wisdom in what we proposed in our fiscal plan back in November…I applaud them for getting the actual amount due upfront lower, even though they have had over two years to do it. It remains to be seen how the other $30 million will be taken care of, but the quicker we can get this issue off the table, the quicker we can move forward tackling the remaining legacy debt.” Atlantic City last utilized New Jersey’s state credit enhancement program in May of 2015 to pay off an emergency $40 million loan and retire $12 million of maturing bond anticipation notes, paying a substantial fiscal penalty for a $41 million taxable full faith and credit general obligation municipal bond sale to address its loan payment with Bank of America Merrill Lynch pricing the bonds to yield at 7.25% in 2028 and 7.75% in 2045. Today, the city, under state control, is seeking to recover from five casino closures since 2014, closures which have bequeathed it with $224 million in outstanding municipal bond debt—debt sufficient according to Moody’s to have saddled the city with some $36.8 million in debt service last year.

Grass Fire? Two separate groups have now filed lawsuits challenging San Bernardino’s Measure O, the initiative citizens approved last November to allow marijuana dispensaries in the city—a measure yet to be implemented by the city—and one which now, according to City Attorney Gary Saenz, will almost surely be further delayed because of the suit. Should Measure O be struck down, the related, quasi-backup Measure N, a second marijuana initiative San Bernardino voters approved last November, but which received fewer votes, would pop up, as it were. The twin suits, one filed by a group of marijuana-related entities, the second by interested property owners in San Bernardino, challenge Measure O on multiple grounds, including the measure’s language determining where dispensaries may operate in the city. One suit charges: “The overlay zones together with the parcel numbers and the location criteria limit the locations within the City of San Bernardino where marijuana businesses may be permitted to only approximately 3 to 5 parcels of land within the entire city, and all of these parcels of land are either owned or controlled by the proponents of Measure O…The locations of these 3 to 5 parcels of land, furthermore, are incompatible for a medical marijuana business by virtue of the locations and surrounding land uses and for this reason are in conflict with the City of San Bernardino General Plan.” Unsurprisingly, Roger Jon Diamond, the attorney for the proponents of Measure O, disputes that number and predicts the challenge will fail, noting that thirteen marijuana dispensaries and related groups that describe themselves as non-profits are operating in San Bernardino or which have invested substantial sums of money in plans to operate in San Bernardino. The soon to be out of chapter 9 municipal bankruptcy city, prior to citizen adoption of Measure O, means, according to Counselor Diamond, that the dispensaries have been operating illegally, or as he put it: “There’s a concept in the law called clean hands: If you don’t have clean hands, you can’t maintain a lawsuit…Here we have people who don’t qualify (to operate a dispensary in their current location), complaining that they would not become legal under the new law. It sounds like sour grapes.”

The second, related suit, filed earlier this month, calculates a somewhat higher (not a pun) number of eligible locations—between three to twelve, but makes the same observation regarding physical location: “We think there is a financial interest in the people who wrote it up,” said Stephen Levine of Milligan, Beswick Levine & Knox: “We don’t think that is fair, because it was so narrowly constricted. Zoning by parcel numbers is a highly unusual practice in California. Let’s include Colorado and Washington State in there, too; they don’t use parcel numbers for this.” (Measure O restricts marijuana businesses to marijuana business overlay districts, which are identified by parcel number, and further prohibits the businesses from being within 600 feet of schools or residentially zoned property.) In this case, Mr. Levine is representing a consortium of property owners calling themselves AMF as well as Wendy McCammack, a business owner and former San Bernardino Councilmember. According to Mr. Levine, the plaintiffs’ interest is in possible changes in assessed property values due to the location of the dispensaries.

Getting High on the City Agenda. The City Council last week, in a closed session, discussed the lawsuit in closed session; however, City Attorney Saenz reported he was unaware aware of the lawsuit and had yet to decide upon a response to either, noting: “We haven’t totally assessed the merits of the lawsuit, nor how we’ll respond.” Nevertheless, the lawsuits’ arguments appear likely to interfere with the city’s process of incorporating Measure O into the development code and beginning to issue permits, or, as Mr. Saenz notes: “It (the AMF lawsuit) very much calls into question the validity of Measure O…Being a city of very limited resources, we don’t want to expend resources on an implementation that’s never going to occur. That would be a waste of resources.” The suits will also complicate governance: last month the city, on its website, and in a letter to interested parties, said it would provide an update in March on when the marijuana measure would be implemented: “City departments are in the process of integrating the provisions of Measure O into the City’s existing Development Code, developing procedures for receiving applications, and identifying provisions that may require interpretation and clarification prior to implementation…The San Bernardino Development Code and Measure O are both complex legal regulatory frameworks and it will require time to properly implement this new law.”

Governance & Challenges. Puerto Rico Gov. Ricardo Rosselló has arrived in Washington, D.C., where he will meet with his colleagues at the National Governors Association and join them at the White House tomorrow; he will also dine with Vice President Mike Pence this week. Last week, in Puerto Rico, he had hosted Chairman Sean Duffy (R-Wisc.), of the House Financial Services Subcommittee on Housing & Insurance, and an author of the Puerto Rico Oversight, Management and Economic Stability Act – in San Juan.  Chairman Duffy told the Governor he is available to amend PROMESA to ensure that the PROMESA oversight board treats Puerto Rico fairly, according to an office press statement. The lunch this week might occasion an interesting discussion in the wake of the Governor’s claim that the PROMESA Oversight Board’s plans for austerity may violate federal law: the Governor’s Chief of Staff, William Villafañe, this week stated: “The Fiscal Supervision Board officials cannot act outside of the law that created the body. If the board were to force the implementation of a fiscal plan that affects people’s essential services, it would be acting contrary to the PROMESA law.” His complaints appear to signify an escalation of tensions between the U.S. territory and the PROMESA Board: Mr. Villafañe added: “The [PROMESA] board is warned that it must act in conformance with the law…The commitment of Governor Ricardo Rosselló is to achieve economies that allow government efficiency, doing more with fewer expenses, without affecting essential services to the people and without laying off public employees.” If anything, Mr. Villafañe added fuel to his fire by criticizing the Board’s new interim executive director, Ramón Ruiz Comas, in the wake of Mr. Ruiz’ radio statement this week that if Gov. Rosselló did not present an acceptable fiscal plan by the end of February, the PROMESA Board would provide its own—and the plan would be deemed the legally, binding plan—in reaction to which, Mr. Villafañe had responded: “To make expressions prejudging a fiscal plan proposal that the board has not yet seen demonstrates on the part of the board improvisation and lack of a collaborative attitude for the benefit of the Puerto Rican people,” adding that “The board must be aware that the federal Congress will supervise the board.” He went on to say that when the Governor presents a fiscal plan, Congress will be aware of the way the board evaluates it.

Mr. Villafañe’s complaints and warnings extend tensions between the board and the U.S. territory: even before the Governor took office in January, a Rosselló official complained that the board was seeking a $2 billion cut in spending. On Feb. 13 the governor rejected the board’s claimed right to review bills before they are submitted to the Puerto Rico legislature. On Jan. 18 the board sent a letter to Gov. Rosselló stating that spending cuts and/or tax raises equaling 44% of the general fund would have to be made in the next 18 months. At its Jan. 28 meeting, board chairman José Carrion, for emphasis, said twice that some governor-proposed changes to the board’s Jan. 18 proposals may be OK, “as long as the ultimate fiscal plan is based on solid savings and revenue projections, a once and done approach, and not simply on hope or predictions that various changes will generate more revenues in the future.”

Driving Out of Municipal Bankruptcy

eBlog, 12/11/16

Good Morning! In this p.m.’s eBlog, we consider the economic resurgence of post-bankrupt Detroit, using human and, increasingly, artificial intelligence to focus on the city’s future. Then we head to East Cleveland, where, in the wake of the narrowest of recalls of both the Mayor and Council President in an insolvent municipality—the question is what (and whether) its fiscal future might be. Then we head to the snowy north, where Michigan House Speaker Kevin Cotter has issued a dire warning of many municipal bankruptcies unless there is a state-local plan to address its seemingly unpayable public pension obligations. Then, we zoom East as the State of New Jersey begins to fill in the blanks with regard to how it is and will be implementing its state takeover of Atlantic City. Finally, we head south to the fiscally beleaguered city of Petersburg to observe both the near-term fiscal actions to address its insolvency and ask what will ensue.

Detroit: a Resurgent Home of Innovation. Detroit, an early home of the automobile (I have a photo of my two grandfathers in the first automobile ever on the Ann Arbor campus of the University of Michigan), and now recovering from the largest chapter 9 bankruptcy in history, is one of the nation’s foremost cities in investing strategically in the future. Using its history with the automobile industry and its web of universities, the city appears to be at the forefront now of connecting artificial intelligence (AI) to the industry—a strategic investment in its future. Spatial Labs Inc., an artificial intelligence (AI) company which was founded in Cincinnati, but which has opted to keep its headquarters in Detroit, is one of 12 startups which was part of the Techstars Mobility accelerator program last summer in Detroit—a startup round of $2 million led by Serra Ventures of Champaign, Ill., and joined by Connectic Ventures of Covington, Ky.; the M25 Group of Chicago; Fulcrum Equity Partners of Atlanta; and Caerus Investment Partners of Chicago. Spatial, last September, had announced a development agreement with Ford Motor Co. at the Techstars Demo Day. As part of its participation in the program, Spatial received $20,000 in equity funding from Techstars and $100,000 from Detroit-based Fontinalis Partners LLC. Spatial CEO Lyden Faust told Crains: “We didn’t expect to move to Detroit, but personally, I’ve loved being here, and there are so many more opportunities here compared to Cincinnati.” The company was offered space at Ford Field by Ted Serbinski, managing director of the Techstars program in Detroit, and received a grant, which Mr. Faust said the company will use to hire several data scientists and ramp up marketing. Spatial’s co-founder and chief technology officer is Will Kiessling, who had been lead engineer and technologist at GE Aviation in Evandale, Ohio, from 2007 to last January—there he was used to managing huge amounts of data during engine development and testing, which he likened as bringing “the same logic to remote test jet engines as it is to remote test cities: Billions of people interact with maps across multiple devices every day. Bringing social context to maps using Spatial’s patent-pending technology will improve map usability in many industries, including travel, real estate and automotive.” With the rise of AI and machine learning and the shift to mobility and location, Spatial is at the intersection of a massive shift in the industry. And Detroit seems to be working hard to be first in the right lane.

Michigan Municipalities on the Brink. Michigan House Speaker Kevin Cotter (R-Mt. Pleasant), in an Op Ed for the Detroit News, wrote:

Many local communities in Michigan are drowning in debt and on the brink of bankruptcy, and yet almost no one is talking about it. Even fewer people are working on a plan to try to fix it…This is unacceptable and could have dire consequences for every Michigan resident. Something needs to be done now, before disaster strikes.

Reforming retirement systems is a controversial topic, but inaction is simply not an option. We recently made some waves by starting the discussion in the Michigan House, and it is my hope that we all continue that conversation into the new year. Debating the problem openly and honestly is an important first step, but we need to go further and find a permanent solution. It is well past time to put people over politics and do the right thing.

For decades, bad deals were made all over the state, handing out generous and unrealistic health care benefits left and right. Those debts are now weighing down our local governments, which is why we don’t have as many police officers on the streets as we could have and why our fire protection is spread thinner than it could be. This isn’t just a problem on a spreadsheet; you and I are still paying for those deals today in very real ways.

Local governments are struggling to make their payments on this debt, and they are falling further behind every year. A few are on the brink of bankruptcy, and many more will be there soon. Municipal bankruptcies mean fewer police, holes in fire coverage, and a busy signal when you dial 911. Imagine what happened in Detroit a few years ago happening in Kalamazoo, Jackson or Midland. Think of it happening in your city.

Bankruptcy also means former employees with retirement benefits could lose them all. Bankruptcy courts end deals like that with no recourse, and retirees are an easy target for them. Local governments, police and firefighter unions and politicians from both parties publicly agreed we need to solve this crisis now to prevent deep and destructive cuts in our cities and to save the retirements our first responders are planning on.

Our plan asked local public employees to contribute just 20 percent toward their own retirement healthcare plan, the same percentage state employees have been contributing for years. That is still far better than what private sector employees receive. We went further and completely eliminated our own coverage in the state Legislature when I took office six years ago, because it was the right thing to do.

That plan didn’t have the support to pass before our current term ends, but having everyone acknowledge the problem together is a great first step. We’ve heard their constructive criticism, but now we need to hear their ideas. Our committees won’t have the chance to hear from the thousands of police recruits and trainee firefighters who were never hired over the years because of busted budgets. Our representatives will never hear from the people who have died because of slow emergency response times due to budget cuts.

Denial is no longer an alternative, but bankruptcy unfortunately is. Our plan was the only plan out there to save our cities, protect critical services and guarantee first responder benefits for life. Now we need a new plan, and a better plan.

State Governance in Municipal Insolvency. In the wake of the Atlantic City’s Municipal Utilities Authority’s Nov. 28 special meeting; in particular, its vote to give outgoing members a $3,000 ‘gift’ in addition to their regular compensation and benefits package, as we have previously noted, Jeff Chiesa, who is heading up the state’s takeover of the boardwalk city has announced New Jersey will use its new power over the municipality to veto the water authority’s decision to give its board members $3,000 gifts, with his spokesperson noting: “The Division of Local Government Services rejects the action taken at the Atlantic City.” The statement from Mr. Chiesa’s office noted: “This action is further evidence of the MUA’s disregard for the ratepayers they serve, and clearly demonstrates the authority does not understand the severity of the city’s financial condition.” Local Government Services Director—along with Mr. Chiesa—made clear they will also review the remainder of the MUA board meeting minutes, making clear the breadth of authority granted to the state under its takeover powers—including the ability to hire or fire employees, sell city assets, or break union contracts. The state power, moreover, reaches farther to the authority to veto the minutes of municipal governmental meetings. 

What’s Next for Governance in an Insolvent Municipality? Recalled East Cleveland Mayor Gary Norton has now provided details of the city’s handover of power in the wake of his narrow loss in last week’s recall election by twenty votes—along with City Council President Thomas Wheeler. The Mayor stated: “Because that election is so close, we will hold off until December 27th and wait the 21 days to ensure East Cleveland that the election results are final, the election results are certified, and the appropriate individuals enter the mayor’s office and leave council or stay on council.” Should a recount find that Council President Wheeler was not, in fact, recalled, he would become Mayor; if he does not and the current results stand, Council Vice President Brandon King will be mayor until next year’s regular mayoral election. Outgoing Mayor Norton said the government’s business will continue without interruption while the mayor’s office and any openings on council are filled. At the press conference, Council Vice President Brandon King was asked about the status of the city proposed merger with Cleveland—a proposal both Mayor Norton and Council President Wheeler had supported. In response, he noted: “I think when you look at that issue, that’s something that is not over and it will continue to be discussed. And I think that’s probably going to be my only comment on that.” To continue, however, the Mayor and Council will have to act: The ordinance appointing commissioners to study annexation expired before the City of Cleveland chose its representatives. Indeed, according to a Cleveland city council spokesperson, the city has not received a new list of merger commissioners, so East Cleveland’s newly constituted Council would have to pass a new ordinance to restart the merger process. East Cleveland has been in fiscal emergency since 2012. 

Back to a City’s Viable & Fiscally Stable Future. Just as once stagecoaches carry Wells Fargo safe boxes were once guarded by tough characters, like Wyatt Earp, armed with sawed-off shotguns loaded with deadly buckshot to fend off attacks from dastardly outlaws; now it appears that Wells Fargo might pay a favor back: it has agreed to provide a loan of some $6.5 million to the small, insolvent municipality of Petersburg, Virginia—a decision arrived at in the wake of steep municipal budget cuts, tax increases, and greater financial vigilance.  Interim City Manager Tom Tyrrell announced that the city was approved for the loan by Wells Fargo—a loan carrying an interest rate of 4.5 percent, but where the repayment of all principal and interest is due by next October. City Manager Tyrell, in a press release, noted: “This is part of the plan to provide short-term financing to allow city functions to continue. It is not an infusion of cash to pay off past obligations…We will pay our past obligations and will announce our program to accomplish those payments as Phase Two of our Fiscal Stability Plan.” The loan comes in the wake of efforts to secure one that commenced last summer after the lender who previously had provided short-term revenue anticipation notes declined to lend the municipality funds. Thus, last September, as we have previously noted, the City Council had adopted a package of budget cuts and tax increases recommended by consulting firm PFM Group as a way to reassure potential lenders that Petersburg was working seriously to remedy its fiscal plight—and, subsequently, hired another consulting firm, the Robert Bobb Group—headed by former Richmond City Manager Robert Bobb, to take over operation of the city government. The Wells Fargo loan will not address the roughly $19 million the city owes in past-due payments left over from its FY2016 fiscal year; however, according to the city: “It does give us enough breathing room to continue to meet our current expenditures…[It is a] short-term loan [that] allows us to pay our current fiscal 2017 expenses while meeting city payroll, current debt financing and emergency first responder services.” Indeed, Mr. Bobb noted: “We are still in a crisis mode, and this is not the time to interpret short-term financing as a long-term accomplishment.” His company noted that its focus for the next few months will remain on maintaining normal municipal operations and delivering essential public services while reinforcing city finances. Next year, the plan is to commence on “Phase Two,” in which the goal will be to begin paying down longer-term debt and past-due bills.

Fiscal Challenges Amid Governance Transitions

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eBlog, 12/06/16

Good Morning! In this a.m.’s eBlog, we consider the ongoing health and fiscal challenges of Flint, Michigan as we await the outcome of today’s mayoral recall election in the insolvent municipality of East Cleveland, after which we attempt to update readers on the porous state of Atlantic City’s municipal utility. Then we seek to escape winter by heading south to Puerto Rico—where the combination of changing administrations in both the U.S. and Puerto Rico leave unclear what the fiscal path forward will be if the U.S. territory is to avoid not just fiscal, but also health care insolvency.

Out like Flint. University of Michigan researchers have more than tripled their estimate of the number of water service lines in the small city of Flint which will need to be replaced, nearly quadrupling the number of lead or galvanized steel lines the city has from 8,000 to 29,100—or more than half service lines leading to 55,000 homes and businesses in Flint, according Mayor Karen Weaver, who notes the updated report makes it important that the city move beyond the use of filters and instead move toward wholesale replacement of water lines: “These findings make it even more imperative that the state and federal government step up to pay for replacing lead-tainted service lines.” The figures are daunting: of the municipality’s 29,100 parcels, 17,500 would need full replacement of service lines, while 11,600 would require partial replacement, according to the researchers. The estimate was mandated by EPA to comply with the requirements of the federal Lead and Copper Rule: because the lead in the city’s water supply exceeded the federal action level of 15 parts per billion, the city is mandated to replace more than 2,000 service lines by next June—a physical and fiscal challenge given that Flint’s records describing the location of lead service lines in Flint have proven to be unreliable, and records for some parcels appear to not even exist, according to city officials—meaning that visual inspections, more time-consuming and expensive route—has served as the city’s only means to obtain an accurate assessment of where lead and galvanized steel service lines were installed. Thus, under Mayor Weaver’s initiative, municipal crews continue to replace service lines in neighborhoods most likely to have lead service lines, and where a significant number of young children or seniors live: the Mayor’s goal is to have service lines replaced at 1,000 homes by the end of this month, although the actual number may be fewer if bad weather occurs—weather with this morning’s chilled rain at temperatures just above freezing augurs ill. To help, the state of Michigan has set aside $25 million to pay for pipe replacements through September of next year—estimated to be sufficient to pay for replacing pipes to about 5,000 homes. In addition, Congress is considering an aid package that would bring tens of millions of dollars to Flint which could be used to repair the city’s damaged water system. If the 29,100 figure proves accurate, replacing the other 28,100 service lines could cost at least $140 million. A key element on this health and fiscal challenge could be yesterday’s agreement between U.S. House and Senate leaders on a bipartisan bill to authorize $170 million for Flint and other cities beleaguered by lead in drinking water, and to provide relief to drought-stricken California. A vote on the water-projects bill could take place this week as Congress wraps up its legislative work for the year.

The Utility & Atlantic City. Atlantic City’s utility water authority board members last week raised rates in an effort to cover an unexpected budget hole—but then topped it off by paying themselves a $3,000 per board member, even as the Municipal Utilities Authority (MUA) board approved the 10 percent rate hike for next year, a 20 percent increase over what had been set at last week’s special meeting to cover lost revenue from a contract change with New Jersey American Water. Under the new plan, residential rates would increase to $50 per quarter from $45 last year; nevertheless, the utility’s rates would still rank near the bottom for the region, according to Atlantic County Utilities Authority data. The MUA’s $14.7 million 2017 budget, down just under 10 percent from last year, is scheduled to be adopted on December 21st, according to an authority news release. The increase would appear unlikely to garner much favor in the insolvent city—especially in the wake of the board’s decision to award themselves $3,000 gifts this December “for their dedicated service,” according to a resolution, notwithstanding that the money was supposed to be a parting gift, not a Christmas gift, according to one board member. Board Vice Chairman Gary Hill yesterday claimed the “December 2016” was an error in the resolution’s language. It appears it has been a tradition that MUA Board members are to receive a cash bonus or gift once they leave the board: the authority’s seven board members make $6,000 salaries and can receive benefits, according to public records. Now, however, the Board’s challenge could be complicated by a different kind of fiscal disruption: American Water, a private company which had been considered a potential buyer of the MUA, which had a $1.7 million contract with the MUA, and was the MUA’s top customer, has recently notified the MUA it no longer needs it to provide water; it turns out that capital improvements to its Atlantic County system have increased its water capacity and “in essence eliminated NJAW’s need to purchase water from the ACMUA,” according to the company letter to the authority; instead, American Water wanted to buy 500,000 gallons of water per day, down from the 1.2 million gallons per day it has recently purchased; however, the lower volume would convert the company from a “bulk purchaser” to a “commercial customer,” meaning it would have to pay a $7 million connection charge, according to the letter, so that, according to the company’s statement: “We cannot justify the additional costs the ACMUA’s proposal would have on the company and its customers, since these significant capital investments eliminate the need for New Jersey American Water to purchase additional water.” Ergo, the contract change and its effect on the MUA budget led to the special board meeting where rates were raised—and bonuses were raised; now MUA and American Water are discussing a potential agreement under which the company would only buy water from the MUA in emergency situations, according to Chairman Hill: the MUA could get just $200,000 under such an arrangement. The fiscal and physical situation is, of course, further complicated from a governance perspective as the city’s public water utility has been at the center of debate between Atlantic City and the State of New Jersey—which has just taken over the city. American Water lobbyist Philip Norcross attended a 2015 meeting with city and state officials in which the MUA was discussed. Mr. Norcross’ brother is South Jersey powerbroker George Norcross. Authority officials questioned the timing of the contract change, hinting it was a strategic move by American Water to get the valuable water works, according to the meeting transcript. “They’re putting pressure on,” said Deputy Executive Director Garth Moyle.

Administration Transitions & Puerto Rico. The new PROMESA law to create a quasi-chapter 9 mechanism for the U.S. territory of Puerto Rico will face signal challenges as the governance of both the U.S. and Puerto Rico are in transition to new administrations. Unsurprisingly, President-elect Trump devoted little time to addressing what his position would be with regard to the implementation and administration of the new law. Thus, while Congress and the Treasury Department have put together both a framework and a Board to assist in Puerto Rico’s recovery; whether and how those might be modified or addressed now will depend upon both the incoming administration in Washington and new Governor in Puerto Rico—where the new head of the Senate’s Health Commission, Ángel Chayanne Martínez Santiago, yesterday urgently requested a meeting with House Speaker Paul Ryan (R-Wisc.) to discuss a possible health emergency declaration because of apprehension that all federal health care funds could expire on the island by this summer, writing that the federal health care assistance affects some 1.6 million U.S. citizens: “We need to declare a health emergency in Puerto Rico immediately. We have no doubt that this is a matter of vital importance—nor can there be any question but that this is a matter of vital importance for Congress and the White House.” The letter warns that, without a doubt, the greatest portion of the territory’s existing Affordable Health Care funds will have been spent before the end of this month, noting: “We are urgently requesting this meeting with Speaker Ryan to set out a strategy to avoid having Puerto Ricans losing all access to health care.”

The situation is further complicated as Puerto Rico is going through its own governance transition. Thus, the U.S. territory’s Governor-elect, Ricardo Rosselló, now must determine not only how to coordinate with the PROMESA board, but also how to address Puerto Rico’s budget, debt, and grave health care situation—and how to seek to work with the new Trump administration after reviewing both the numbers in the Commonwealth’s current 10-year fiscal plan submitted last October by outgoing Gov. García Padilla. A critical issue will be Medicaid—an issue on which the outgoing administration had warned Congress “ultimately will have to address Puerto Rico’s inequitable treatment under Medicaid and its need for economic growth incentives.” The pending proposal by the outgoing Administration of President Obama opined that Congress create Medicaid parity between Puerto Rico and the states, and extend certain tax credits to the Commonwealth: this has now become a more urgent issue as Medicaid funding for Puerto Rico is due to expire near the end of 2017, creating what is called a “Medicaid cliff.” And even that challenge can be expected to be further muddied by potential consideration by the incoming Trump Administration to convert Medicaid’s entitlement status to a block grant program to the states. The risk for Puerto Rico in all this would be if it were to fall between the cracks: should that happen, Puerto Rico’s government, where annual health care expenditures are near $2.4 billion annually, the U.S. territory would either have to raise revenues and find ways to cut expenses while providing consistent levels of care or drastically pare healthcare benefits—benefits already significantly lower than to Americans living in the other 50 states, because Puerto Rico’s Medicaid funding is capped, rather than entitled—meaning that, despite disproportionate health care needs, it receives disproportionately less than any of the 50 states.  

Awkward Transition & Fiscal Death Spiral? Puerto Rico Governor-Elect Ricardo Rosselló this weekend declined outgoing Gov. Alejandro García Padilla’s offer to work on a fiscal plan for the federal PROMESA oversight board. Under the PROMESA law, the U.S. territory’s governor is mandated to submit a five-year plan which itemizes steps to bring about fiscal responsibility, regain access to capital markets, fund essential public services, fund provisions, and achieve a sustainable debt burden. Last October, Gov. Padilla indeed presented a 10 year plan to PROMESA’s Oversight Board which noted that Puerto Rico simply could not afford paying down its debt without federal aid, noting that the government would be still $6 billion short for operating expenses over the next decade absent federal help and without paying any debt service. Last month, the PROMESA Oversight Board members indicated they believed substantial cuts to Puerto Rico government spending beyond those included in the outgoing Governor’s plan were necessary—adding that the Board expected a revised version of the plan from Governor Padilla by next week—a demand with which Governor Padilla said he would not cooperate if it meant revising the plan to include additional austerity, noting the island has had enough austerity, so that further budget cuts would only lead to an “economic death spiral.” Thus, last Friday the Governor Padilla sent a letter to Governor-elect Rosselló to invite him to become part of a joint effort to put together a revised fiscal recovery plan. Gov.-elect Rosselló, however, publicly rejected the outgoing Governor’s offer, responding, at least according to El Vocero’s news website, that Governor Padilla had not released sufficient financial data for the incoming Governor to work with him—leaving the incoming Governor little time or opportunity to offer his own plan—and the PROMESA Board is scheduled to certify (or not) the plan set before it by the end of next month.

TheExceptional Governing Challenges on Roads to Fiscal Recovery

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eBlog, 12/02/16

Good Morning! In this a.m.’s eBlog, we consider the hard role to recovery not just from San Bernardino’s longest-ever municipal bankruptcy, but also the savage terrorist attack a year ago. Then we venture East to observe the evolving state role in New Jersey’s takeover of Atlantic City, where the new designee named by Gov. Chris Christie, Jeffrey Chiesa, yesterday introduced himself to residents and taxpayers, but offered little guidance about exactly how he will usurp the roles of the Mayor and City Council in governing and trying to get the famed boardwalk city out of insolvency and back to fiscal stability. Finally, we look north to the metropolitan Hartford, Connecticut region, where the municipalities in the region are seeking to work out fiscal mechanisms to address Hartford’s potential municipal bankruptcy in order to ensure no disruption of metropolitan water and sewer services—a different, but in this case critical element of a “sharing economy.”  

The Jagged Road to Chapter 9 Recovery. It was one year ago today that terrorists struck in San Bernardino—the city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, marking, then, a day of 14 deaths—with victims caught in the crossfire of gun shots and carnage in the wake of the wanton attack by Syed Rizwan Farook and Tashfeen Malik—and a horror still not over, as it will be another nine months before the trial against Enrique Marquez Jr., who has been charged with buying some of the weapons which were used in the attack, commences in September—months after the beleaguered city anticipates exiting from bankruptcy. Because the shootings took place at a San Bernardino County facility in San Bernardino, the long-term recovery has been further complicated from a governance perspective: many of the shooting survivors are accusing San Bernardino County of cutting off much-needed support for the survivors of the attack, including refusing to approve counseling or antidepressant medication. Others, who were physically wounded are seeking, so far unsuccessfully, to get surgeries and physical therapy covered. The San Bernardino County Board of Supervisors earlier this week convened a closed-door session at which survivors said they felt betrayed and abandoned, left to deal with California’s complicated workers’ compensation program without guidance or help. Their health insurers will not cover their injuries because they occurred in a workplace attack. Congressman Pete Aguilar (D-Ca.), whose district includes San Bernardino, reports that his hometown had been added to a list of cities with which people are familiar for a terrible reason, such as Littleton, Colo., or Newtown, Conn. Nevertheless, he is defiant, insisting “We will not be defined by this tragedy.”

However, murder rates in the city have been climbing: the city of just over 200,000 is grappling with a spike in violent crime, homicides especially: to date, this year, the city has reported 49 killings, already more than last year’s total, which included the terrorist victims—its homicide rate tops that of Chicago, which has become the poster child for big-city violent crime and is on pace for more than 600 killings this year. San Bernardino Police Chief Jarrod Burguan, however, said the crime wave is not unique to the chapter 9 municipality—a currently bankrupt city where empty storefronts and pawn shops have long lined downtown streets. Nevertheless, Brian Levin, a criminal justice professor at California State University, San Bernardino, who studies hate crimes, yesterday noted: “we’re a better community now, even though we’re hurt.” Professor Levin is one who, in the days and weeks which ensued after the mass tragedy, met with faith leaders, law enforcement, and families of the victims—where he discovered a unity of shock and shared pain. Today, he notes: “The attack will always be a part of our history…But here’s the thing: so will the heroics of those police officers and first responders and medical staff, and so will the grace of the families. We’re writing the rest of the history. The bastards lost.” Now the city awaits early next year for emerging not just from the physical tragedy, but also the longest chapter 9 municipal bankruptcy ever.  

Atlantic City Blues.  Jeffrey Chiesa, a former New Jersey Attorney General, U.S. Senator, and, now, Governor Chris Christie’s designee to run the state takeover of Atlantic City, yesterday introduced himself at a City Council meeting and took questions from city taxpayers and residents. He provided, however, in this first public meeting no details on plans to address either the city’s fiscal plight—or its interim governance. He reported the State of New Jersey does not yet have a plan to address the city’s $100 million budget hole, much less to pay down the Atlantic City’s $500 million debt, noting: “It has been two weeks…My plan is to do what I think is necessary to create a structural financial situation that works not for six months, not for a year, but indefinitely so that this place can flourish in a way that it deserves to flourish.” He noted he and his law firm will be paid hourly for their work, albeit he did not report what that hourly rate will be—especially as the state retention agreement remains incomplete, albeit promising: “We’ll make sure that’s available once it’s been finalized.” Related to governance, he noted that—related to his state-granted authority to sell city assets, hire or fire workers or break union contracts, among other powers—he would listen to residents and stakeholders before making major decisions: “What this designation has done is consolidate authority, per the legislation, in the designee to make those decisions…That does not mean that I’m not listening. That does not mean I’m pretending I have all the answers without consulting with other people.” Describing the seaside city as a “jewel” and “truly unique,” he added that he understood concerns about an outsider overseeing the city: “I know that most of you don’t know who I am…All I can do is be judged by my actions and the decision that I make, and I hope you give me time to do that.” He did say that he would have to move swiftly to address immediate issues, likely referring to reaching agreements with casinos to make payments in lieu of property taxes, and then focusing on the city’s expenses—noting: “That timeframe is pretty compressed…So we will take the steps we need to take.”

Fiscally Hard for Hartford. As we have recounted in the fiscally strapped municipality of Petersburg, Virginia, municipal fiscal insolvency cannot occur in a geographic vacuum: whether in Detroit—or as we note above today, in San Bernardino, fiscal insolvency has repercussions for adjacent municipalities. So too in Hartford, the Metropolitan District Commission (MDC) completed its planned $173 million municipal bond sale late last week, temporarily ending the controversy over a $5.5 million reserve fund. Under the provisions, that fund would be paid by seven of the eight MDC municipalities to cover the sewage fee for the second half of 2017 if the City of Hartford is unable to contribute its share, as it has indicated it will be unable to do. Ergo, it means that adjacent Windsor, the first English settlement in the state which abuts Hartford on its northern border, with a population of under 30,000 would contribute over $700,000, with East Hartford contributing about $900,000. The other group members in the metro region, Bloomfield, Newington, Rocky Hill, West Hartford, and Wethersfield, would pay the remaining $900,000, proportionately. One outcome of this watery alliance and experience is that the MDC will, when the state legislature convenes next February, propose two laws to avoid the necessity for a reserve fund in the future, with MDC Chairman William DiBella suggesting that the eight member municipalities be required to set aside as untouchable the percentage of their property taxes the cities and towns already know they will owe to the MDC for sewage services. (Currently, property taxes go into the municipalities’ general funds, and the cities extract the sewage fee when it is due, provided the funds are, in fact, available; however, like water at the tap, that has not always been the experience.) In effect, the consortium is recommending a selves-imposed budgeting municipal mandate, with Chairman DiBella noting: “Every town would have to do it. That way, one town can’t stiff us. You wouldn’t have to go out and borrow money or take charity and hope you get it back.” As the Chairman noted: “We never had a problem like this…Who thought a town would go bankrupt? With the proposed law, if a town were to go bankrupt, the sewage fund would be in a dedicated account and can’t be reached,” or touched in a bankruptcy proceeding. Another potential resolution would be to allow the MDC to borrow money over a long-term for operating expenses. The MDC would then be able to pay Hartford’s $5.5 million bill and look for a city reimbursement in other ways.

There has been increased pressure for a resolution—especially in the wake of municipal bond holders of the MDC, holders who, last week, made clear to the authority they would not buy its municipal bonds if a reserve fund was not put into place. That appeared to be a key incentive for the board’s action earlier this week for the MDC board, including representatives of all eight municipal members, to vote unanimously to adopt the water and sewer service provider’s 2017 budget, which contains the unwelcome “bail-out” fund for Hartford—albeit Chair DiBella said there would be no guarantee the agency could cover a Hartford default or continue operating or pay the bondholders. A key part of the incentive to try to work together relates to potential fiscal contagion: because of concerns over Hartford’s finances and fiscal condition, credit rating agencies have recently downgraded MDC’s bond rating from AA+ to AA, a downgrade expected to cost the agency and its member towns an estimated $500,000 in a higher interest rate for the bonds. The towns, unsurprisingly, are apprehensive the credit rating agencies will now consider changing their credit ratings. In contrast, creating the reserve fund would keep MDC’s credit rating where it is: thus, MDC officials hope that passing the two proposed laws would prompt the credit rating agencies to return its rating to AA+.


State-Local Governance in the Balance or Imbalance: Uncharted New Territory

eBlog, 11/11/16

Good Morning! In this a.m.’s eBlog, we consider the uncertain governance situation in New Jersey in the wake of Wednesday’s yesterday’s granting of authority for a state takeover of the City of Atlantic City—a state takeover which could be further impacted by the potential selection by President-elect Trump, because New Jersey Governor Chris Christie appears to be a potential Cabinet or other senior advisor to the President-elect. As we noted yesterday, actual governance will shift 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.  Then we turn to a very different change of governance—in bankrupt San Bernardino, where the state has played absolutely no role, but where voters Tuesday, by a wide margin, voted to change the city’s charter and move to a city manager form of government, even as the city nears, early next year, emerging from the longest chapter 9 municipal bankruptcy ever. Then we venture to post-chapter 9 Detroit, where voters pored through an exceptionally long list of candidates to elect a new school board—a board confronted with a state-imposed double school system of charter and public schools—and in a city whose school system has been under a state imposed manager, the ever so rhythmic retired U.S. Bankruptcy Judge Steven Rhodes, who oversaw the long judicial process from which Detroit emerged from the largest municipal bankruptcy in U.S. history. Given the critical import of restoring a school system that would bring families back into Detroit—and thereby enhancing assessed property values, the new DPS school board members will have to learn very fast. Finally, we venture to Flint, where, yesterday, a U.S. District court decision could have difficult and costly consequences for the fiscally challenged city.

State Preemption of a Municipality? In the wake of this week’s 5-0 vote by the New Jersey Local Finance Board, Gov. Chris Christie’s administration has been granted the authority to immediately seize control of financially distressed Atlantic City, with the unanimous vote paving the way for a five-year state takeover—a takeover Governor Christie referred to as the best way to keep the city from becoming the first New Jersey municipality since 1938 to go into chapter 9 municipal bankruptcy. The vote came, of course, just prior to the Presidential election of Donald Trump—an election which has many guessing that Governor Christie might abruptly be named as a senior adviser or even member of a new Presidential cabinet—he has been discussed as a potential Attorney General. Thus, even as the state of New Jersey has moved to usurp the authority to assume key functions usually controlled by local elected leaders: renegotiating union contracts, hiring and firing employees, and selling municipal assets, the question is how. The right to wrest governance authority was power included under the Municipal Stabilization and Recovery Act, but exactly how that state takeover will work remains fuzzy. Under the terms of the state preemption, Timothy Cunningham, the Director of the Division of Local Government Services, will assume responsibility during the takeover—in effect not unlike the authority granted under Michigan’s Emergency manager law—except that in Michigan, said emergency manager can—and did in the case of Detroit—assume absolute power. Within the first twenty-four hours, the then Mayor and Council were barred from meeting and preempted from any governance authority.

In New Jersey, however, the State of New Jersey, with only one previous takeover as experience, means, as Mr. Cunningham appears to be the first to admit: he is uncertain what duties or responsibilities would remain with the city’s elected local leaders—describing the decision as moving into “unchartered territory,” as well as an “unbelievable responsibility.” Thus the state takeover, comes at this time of uncertainty in the statehouse, and with the state emergency manager already having been in place in Atlantic City for over a year: what happens next? The ever so insightful Marc Pfeiffer, the Assistant Director of the Bloustein Local Government Research Center at Rutgers University, puts it succinctly: “This is a new process…We’ve never done a process like this before.” While New Jersey has previous experience, as we have written, with a state takeover of Camden, in this instance, as Mr. Pfeiffer notes, the state has granted itself more authority to take direct control in Atlantic City, adding that while more than a decade ago in Camden, the state assigned a chief operating officer to help sort out Camden’s financial problems—a change which resulted in the dissolution of the city’s police department and the transfer of authority to patrol Camden to the county police—and which, today, he notes,means: “Camden is effectively not on the critical list anymore,” adding it is, fiscally, in better shape than either Trenton or Paterson—even as he cautions: “Atlantic City’s fiscal problems are far more critical that those of Trenton or Paterson: The city’s not dead: They haven’t been able to get their expenses under control to live within their circumstances.” Mr. Pfeiffer opines that the state might opt to dissolve Atlantic City’s Municipal Utilities Authority and sell it or enter into a long-term contract with an outside entity for its operation—even as the city’s leadership has countered they would sue to stop such a move.

Who’s in Charge? Again, unlike in Michigan, the state preemption authority is not spelled out with regard to who will be in charge, what will happen to the state’s existing quasi emergency manager who has been in Atlantic City for well over a year, much less what actions it will take and which powers, if any, will remain with city officials. And, as Mr. Pfeiffer notes, there are also legal questions about how the state can execute the major decision-making powers it usurped from the city and gave to Local Government Services Director Timothy Cunningham.

Presumably, Director Cunningham, or his designee, can now sell city assets, hire or fire workers and break union contracts, among other powers, for up to five years as the state tries to fix the city’s finances—all part of a brave new world of distressed municipal finance the state is still trying to work out—even down to questions not just with regard to who will be in charge of the city, but also whether that supervising state official will be based in Trenton or in Atlantic City. Mr. Cunningham has so far declined to comment on whether he would run the city himself or appoint a designee, but said he would consider looking “outside and inside” the division. He noted yesterday: “I do have a very competent staff that has the majority of the municipalities under control while my attention has been on Atlantic City…If a designee was brought on, I don’t know if I have the resources in-house.”

From the city’s perspective, as it seeks to keep its legal options to sue the state open, it remains unclear what authority remains: the New Jersey preemption authority does, however, include a long list of powers the state could use, from suing on behalf of the city to purchasing goods and services. Thus, Council President Marty Small noted: “We have to sit down with the Commissioner and see what powers we still have to continue to represent the people who elected us,” adding that the Commissioner has “all the powers to do everything that was in the (takeover law), and we’re just hoping it isn’t as draconian.” But, as Mr. Cunningham noted, there will remain a role for the Mayor and Council, as he committed to meet with city officials to discuss the powers granted to him under the takeover law, noting: “I think there are still some authorities and actions that will be retained by the executive and legislative branches.”

 “If there was such a plan for the state, we could say ‘They’re planning to implement this power,’” as Michael Darcy, Executive Director of the New Jersey League of Municipalities put it: “It creates a lot of questions.” Mr. Darcy said the League would await to see how the state intervenes in Atlantic City and what the possible statewide implications might mean to the future of state-local relations before deciding to get involved, adding: “We’re not the league of one municipality, we’re the league of all municipalities…We are going to keep a close look at it.” In this unclear and unsettled set of complex governance choices, as Mr. Pfeiffer makes clear, New Jersey’s third branch of government, the courts, could play a role, as the state’s actions may trigger a lawsuit, citing, for example, that if the State of New Jersey were to break city union contracts, such an action could be grounds for litigation.

Bracing for a New Beginning. San Bernardino voters Tuesday voted overwhelmingly to adopt a new city charter to move to a city manager form of governance, reversing rejections of that direction in 2014 and 2010. With more than a 60% margin, they voted for Measure L, which replaces the city’s governing document. The new charter replaces the 111 year old charter—a charter adopted when the city was a small municipality of less than 10,000, with a charter for the 21st century which provides the framework with regard to which positions are elected and which are appointed, the responsibilities of those officials and certain other restrictions. A key change will increase the power of the city manager and shift that day-to-day responsibility away from the elected officials directly—that is, move to a council-manager form of government, the structure for 58 percent of cities with a population over 100,000, or, as Mayor Davis described it during the campaign: “This is how modern governments work, with the mayor and council setting the policy and professionals implementing it,” even as his predecessor, former Mayor Judith Valles had warned that such a change would weaken San Bernardino: “There’s a pecking order among cities, and the cities where the mayor is a strong mayor are able to take leadership.” The new charter eliminates elections for three positions, so that, in future, the Mayor and Council will appoint the city attorney.

Interestingly, during the campaign, former city attorney, James F. Penman, in opposing the measure, had argued that the people will not and should not give up their power to vote, stating: “When he was a Congressman in the House of Representatives, on July 27, 1848, Abraham Lincoln gave a speech in which he said, quote, ‘In leaving the people’s business in their hands, we cannot be wrong’…It’s such a fundamental part of American democracy.” Under the newly adopted charter, San Bernardino will move its election cycle to even-numbered years, the years when state legislators, the governor, and President are up for election, a change with regard to which former San Bernardino Councilwoman Susan Lien Longville had said: “Combining elections will even save San Bernardino taxpayer dollars—money the city can spend on reducing crime, improving parks and libraries, and fixing our roads.” Also, interestingly, the new charter will replace the old charter’s personnel rules—rules which mandated that police and firefighter pay be set as the average of 10 like-sized California cities, rather than by collective bargaining like nearly all other cities. Under the new charter, employee pay will be set through collective bargaining. Similarly, pay for the City Councilmembers, previously set at $600 per year, now will be set by the Mayor and Council after a public hearing, and after hearing from an advisory commission. Any raises will go into effect following the next election after the increase. The new charter also imposes a balanced budget requirement, strict financial controls, and an annual independent audit which must be shared publicly. The now discarded charter read: “The Mayor shall have the books and records of all public departments, pertaining to the finances of the City, experted by a competent person at least once in every year.” Clearly that “experted” part proved out-of-order as the city collapsed in 2012 into what has stretched to the longest municipal bankruptcy in American history with the city’s books crushed in 2012 under a $45.8 million deficit and its books unaudited for years. The newly adopted charter provides that the city’s Water Department and Library Board will remain independent. In the wake of the vote, Mayor Davis said he looked forward to seeing the reaction of U.S. Bankruptcy Judge Meredith Jury, who has been presiding over the city’s chapter petition, noting: “It sends a good message…I think she’ll be overjoyed.”

Learning for a City’s Future. Detroit voters, facing record numbers of candidates (sixty-three!) for its re-constituted public school system, elected newcomers to a majority of the seven public school board seats that were open: among the winners were one former school board member and his wife. Those vying included ten persons who sat on the previous school board, as well as newcomers hailing from backgrounds in business, education, and the ministry. (All seats were at-large.) Of those elected, the top two vote-getters will serve for six years, the next three will serve four-year terms, and the final two will serve for two years. Their unenviable task will be to steer the 45,000-student district following years of severe financial turmoil, poor academic performance, a series of widely criticized state-appointed emergency managers, and the signal disruption by the Michigan Legislature’s creation of a dual school system in Detroit made up of charter and public schools—as part of the controversial and historic $617-million financial restructuring package which divided the  Detroit Public Schools (DPS) in two, creating the new DPSCD: the old of former DPS district now exists only to collect tax revenue to pay down debt. That new legislation also restored power to an elected board, albeit authority subject to the prerogatives of the Detroit Financial Review Commission, which monitors the city’s finances, and now will add oversight of the newly created district to its report card.

The new DPS school board will be able to hire a new superintendent and have policy-making authority; however, it cannot fire the superintendent on its own. How the new schooling system works as the Motor City is emerging from the largest municipal bankruptcy in U.S. history, will, perhaps, be the single most critical determinant pf the city’s long-term post-bankruptcy future. And it will require heavy lifting: the city’s public schools have suffered enrollment losses over 66 percent over the last sixteen years: enrollment has dropped by more than two-thirds since 2000—a combination of the city’s sharp population decline, but also the flood of departures to charter schools and suburban districts: more than 100 schools have closed since 2005. During this period, state-appointed emergency managers have run the district since 2009—and that followed the period from 1999 to 2005, when the system was also under state control. Now, with the board facing a severely impeded school system of charter and public schools mandated by the state, the question is whether this seemingly jerry-rigged patchwork of charter and public schools can recover their reputation sufficiently to lure young families in from the suburbs to create an enhanced municipal tax base for the future.

Out Like Flint? U.S. District Judge David Lawson yesterday ruled that the State of Michigan and the City of Flint must provide home-delivered bottled water to residents if they cannot prove faucet filters are working to remove harmful lead from the drinking water, ordering home delivery of four cases of water per resident each week unless state and city officials can verify each resident has a properly installed and maintained faucet water filter, writing: “The defendants need not deliver water to homes that have properly installed and maintained faucet water filters, as long as the defendants can monitor and verify the effectiveness of the filters,” in his 37-page opinion. Judge Lawson’s preliminary injunction had been pressed for by the Natural Resources Defense Council, the American Civil Liberties Union of Michigan, and Flint residents who had sued Michigan and Flint officials in an effort to try to speed up the slow process of removing lead service lines blamed for contaminating the city’s water. ACLU’s Michigan Legal Director Michael J. Steinberg, in the wake of the decision, noted: “It is an important, but rare, victory for the people of Flint, who have suffered one set back after the next since poison started flowing out their faucets more than two years ago.” Both Flint and Michigan officials had opposed door-to-door water service: they testified that the costly and time-consuming weekly distribution would delay efforts to remove and replace lead and galvanized metal pipes that are leaching toxic metal into the drinking water supply. In his opinion, however, Judge Lawson wrote: “It is in the best interest of everyone to move people out of harm’s way before addressing the source of the harm.” Indeed, it will be costly: the Michigan State Police’s emergency operations division estimated it would cost $9.4 million for weekly delivery of bottled water to the 30,000 to 34,000 occupied homes in Flint. Judge Lawson also ordered state and city officials to file a report by December 16th detailing how they are complying with his order. In his decision, Judge Lawson wrote that the city and state’s water resource sites were insufficient for the daily needs of Flint residents, while the water remains unsafe to drink without lead filters: “The fact that such items are available does not mean that they are reliably accessible or effective in furnishing safe drinking water to every household…Indeed, the endeavor of hunting for water has become a dominant activity in some Flint residents’ daily lives.” The judge also wrote that a safe and reliable water supply “has always been critical to civilization,” as he blamed the city’s water pipe leaching of lead directly on the shoulders of the City of Flint while under control by a state-appointed emergency manager: “It appears beyond dispute that the city of Flint failed to meet its responsibilities under the corrosion control regulations of the Lead and Copper Rule,” adding it “appears that Flint is continuing to violate” rules for monitoring lead levels in Flint’s drinking water system based water sampling protocols not being followed.


Will Tuesday’s Elections Reshape Distressed City’s Futures?

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eBlog, 11/04/16

Good Morning! In this a.m.’s eBlog, we observe the efforts by Atlantic City to respond to and avert a state takeover of the city—a takeover which, if it transpires, would be the second in the state’s history; then we head west to consider the ongoing fate of the former Mayor of Detroit—regarded as bearing mayhap the greatest responsibility for the city’s chapter 9 municipal bankruptcy via his corrupt, criminal behavior in office. With elections coming up; we head farther west to post chapter 9 Stockton’s first elections since its emergence from municipal bankruptcy—in what is proving to be an unenlightening campaign. Finally, we revisit Petersburg, Virginia, where the virtually insolvent city has an election on Tuesday that could reshape the beleaguered city’s fiscal future: who are the candidates; why do they want to serve in such beleaguered fiscal circumstances?  

State Preemption of a Municipality. Seeking to avert a state takeover, Atlantic City late yesterday sent the New Jersey Department of Community Affairs additional information with regard to its fiscal recovery plan, including new details on a plan to raise water rates. In a cover letter, Atlantic City Mayor Don Guardian wrote: “We believe that after further review of this supplemental information, the (DCA) Commissioner will have a better understanding of our Five-Year Recovery Plan, and will be inclined to accept the plan as the most fiscally responsible way forward,” adding, in a statement yesterday: “I ask that the Commissioner thoughtfully and thoroughly review all of the additional supplemental information we provided him today before making a final decision.”

In its 25-page document, the city sought to respond to the criticisms of the state to its report and urge that the city’s proposed plan is the best way to address its fiscal future, writing that a one-time water rate increase of 25 percent would allow its municipal utility, the Municipal Utilities Authority, to afford the debt payments on a purchase of its municipal airport, Bader Field, for a critical $110 million—sufficient to reduce the city’s outstanding debt by over 20%, adding that the final rate design could vary and could focus more on commercial properties—and noting that a specific number was never included in the city’s original report—rather only a reference to “the resulting impact on water ratepayers (that) will be tempered by the currently below-market MUA water rates.” In his adverse response to the city’s proposal, state DCA Commissioner Charles Richman had been critical of the proposed sale, because the MUA would have to borrow to pay for it, potentially putting both the city and the MUA at financial risk if the authority were unable afford the debt service.

In response to some of the DCA’s specific objections, the city noted that while it had not, as the state charged, specifically identified each of the 100 positions it was proposing to eliminate, it had, in fact, specifically identified 86—adding: “The City anticipates that the remaining 14 (or more) will be eliminated as additional competitive contracting initiatives advance and/or through ongoing hiring controls and attrition.” With regard to the state’s charge that the city’s $150 million in borrowing costs to finance a settlement with Borgata Hotel Casino & Spa over tax refunds would be much higher than what the city projected given its junk bond status, the city responded that, in fact, that borrowing, via municipal bonds, would be secured by the state Municipal Qualified Bond Act, e.g. offering the city a better credit rating, and, ergo, the same A3 bond rating as the State of New Jersey: an interest rate of about 4 percent.

However, in a potential blow to the city’s efforts to avert a state takeover, Atlantic City’s main casino workers union sided with the state, with UNITE HERE Local 54 President Bob McDevitt announcing the union supports the state’s decision to reject Atlantic City’s plan, noting: “Although the leadership of the city should be commended for proposing a recovery plan that addressed many of the critical issues facing Atlantic City, I agree that the precarious financial position of the city cannot be satisfactorily improved without substantial state assistance.” It is not clear, of course, just what “assistance” Mr. McDevitt believes would come—as the state has neither offered, nor provided any information whatsoever with regard to what its own plan of a state takeover would entail.

The city, however, appears to have little support in the state legislature. Sen. Jim Whelan (D-Atlantic), a former Mayor of Atlantic City, yesterday said the state’s rejection of the city’s plan was disappointing, but “reflects the failure of city leadership on this issue,” adding: “The city needs to recognize the reality that some painful decisions need to be made, get back to the table with DCA and come up with a real plan…We all share the same goal of doing everything we can to avoid a state takeover.”

Leadership Crime & Restitution. Few people appear to be more responsible for the nation’s largest ever municipal bankruptcy than former Detroit Mayor Kwame Kilpatrick, currently serving a 28-year prison sentence in the wake of a jury conviction in 2013 of public corruption, in which he was also ordered to pay $4.5 million in restitution in the wake thereof. Now, in the wake of a federal appeals court ruling that that amount was “erroneous,” Assistant U.S. Attorney Michael Bullotta noted in a filing yesterday that the restitution’s calculation should have been based more on the city’s losses, “rather than on Kilpatrick’s gain.” Specifically, the court ordered that the convicted, former Mayor’s restitution be based on how much money was lost in illegal water and sewer contracts because of Mr. Kilpatrick’s criminal conduct—so the prosecution recommended cutting his debt by more than half—from $4.5 million to $1.6 million—the amount prosecutors allege Mr. Kilpatrick cost the city by, among other criminal misdeeds, steering sewer contracts to his friend Bobby Ferguson and running pay-to-play schemes for years. The U.S. 6th Circuit Court of Appeals upheld the sentence, but deferred to U.S. District Judge Nancy Edmunds, who presided over the convicted, former Mayor’s six-month trial and sentenced him, to address the appropriate restitution, related to what was described to the federal court as a rigged contract that cost the Detroit Water and Sewer Department more than $1.6 million in losses. (According to the government’s filing, this contract was for water main replacements throughout the City of Detroit, but where the former Mayor managed to instead transfer the funds down a political pipe instead to Mr.  Ferguson: the government asserted that the initial top bid was thwarted because the former Mayor ordered city officials to yank that company’s so called “human rights certification,” which put Mr. Ferguson’s company in a more favorable light, thus enabling him to be awarded the contract—a contract, according to court documents, by which the city ended up paying $1.63 million of taxpayers funds through steering that contract to Mr. Ferguson’s team.

Post Municipal Bankruptcy Direction? Stockton Mayor Anthony Silva, seeking re-election in the first post-chapter 9 election for the city, this week apologized for a Facebook post, since deleted, which revealed addresses for three of his political foes; nevertheless, he claimed Wednesday that opponents, political operatives in the city, had received only “a small taste” of what he endures every day, as he questioned the ethics of the trio, even though all three deny involvement in a secretive political action committee which has recently sent out a mailer trashing the Mayor, City Council candidate Sam Fant, and Lathrop Mayor Sonny Dhaliwal—all just days from Election Day in the tight race between the incumbent and his challenger, City Councilman Michael Tubbs. To give a taste of the uncivil decorum of this heated battle, the Mayor, on Tuesday evening, in a lengthy post on his Facebook page, in part, wrote: “You have always wanted to know who the puppet masters are who have been ruling Stockton for decades. These are the same people who bankrupted this City and now they want City Hall back…The reason that we are still a dangerous City and a City with Gangs, Drug Lords, and a homeless epidemic is because of these Puppet Masters and their ‘hired goons’ who run candidates and then pay them off to look the other way.” Perhaps aware of how his post had gone viral, the incumbent subsequently claimed he was not responsible for the original post on his Facebook page, writing in a text message: “A few campaign volunteers were responding to a series of negative mailers sent out about me. These ‘hit pieces’ were paid for by a Political Action Committee. The individuals identified have been responsible for attacking me the past 4 years. They like to work behind the scenes and hide behind computers as they plot to ruin people’s careers. The online ranting appears to signal not only a rancorous Election Day, but also difficult reconciliation critical to the post-chapter 9 city’s longer term fiscal recovery.

A New Municipal Fiscal Future? Tuesday could ring in not just a new President-elect, but also new leaders across the nation at the local and state level. In the insolvent, historic city of Petersburg, Virginia—currently under its own form of state management, there will be at least two new Councilmembers who will have to join with their colleagues to see if they might be able as a City Council to resume governance of their city: longtime council members Brian A. Moore (Ward 4) and David Ray Coleman (Ward 6) are not seeking reelection; indeed, only one incumbent, Darrin L. Hill of Ward 2, is. The city’s Progress-Index did a valuable service by reaching out to each of the candidates for information about their background and their thoughts on the issues:

  • Darrin L. Hill. Councilmember Hill was the only candidate who did not respond.
  • Marlow A. Jones Sr. Mr. Jones, a Petersburg native and long-time veteran of the Petersburg Fire Department, currently serves as Petersburg’s assistant fire marshal. In response to why he was running, he replied: “It is important that the people see what I see. And I see what they see. This flexibility cannot be accomplished by having a general platform. If there’s to be any platform at all, for me it’s to be accountable, transparent, compassionate, honest and high-spirited, with a mind, heart and spirit of servitude to my city as a whole, not just Ward 2.” He stated: “My goals are to be successful and to bring the spirit of success to ALL people who want success in their life and in their city. My objectives, views and philosophies are simple. The governing body needs to be ‘omnipotent,’ it’s been very ‘impotent’ with its relationship with the people and the businesses of the city.”
  • Charles H. Cuthbert. Mr. Cuthbert, also a Petersburg native, is a partner in the Cuthbert Law Office in Petersburg; he is a graduate of Harvard and the University of Virginia School of Law; he is a member of the bar in Virginia and North Carolina, as well as the U.S. Fourth Circuit Court of Appeals, and the U.S. Supreme Court; he is also a redeveloper of historic properties in Petersburg and has successfully completed a number of residential and commercial projects in the city. He responded he was running because: “Petersburg is in deep financial trouble, and I believe I can help make things better. Plank one of my platform is ‘Fix City Hall’s finances!’ As a lawyer for over 40 years, I can read a contract. As a businessman, I can read a balance sheet. As a native of Petersburg, I am dedicated to Petersburg’s success. As a former chairman of the Petersburg Democratic Committee, I know how to work with others as a team.” He went on to address what he believes is the city’s greatest challenge: “Petersburg’s biggest challenge is to fix City Hall’s finances. Until City Hall’s finances are fixed, our city won’t have the money to do right by our children, our schools, our fire department, our police department, our museums or our city employees. It is essential to obtain, review, and act upon periodic reports of Petersburg’s financial health. For example, we need to know whether the recently enacted increase in the local cigarette tax is bringing in the anticipated revenue. If not, council needs to take action to prevent our city from going deeper into debt. To keep the public in the loop, these reports should be posted online as part of City Council’s agenda.”
  • Patricia A. “Pat” Hines. Ms. Hines is a graduate of Petersburg High School; she studied at Virginia State University and Saint Paul’s College; she earned a bachelor’s degree in business administration and an MA degree in management and leadership from Liberty University. She currently serves as Ward 4’representative on the School Board, to which she was elected in a write-in campaign in 2012. She is an Army veteran; she has worked for more than a quarter century in the human and social services field; and she is an organizational management consultant and serves as president of the nonprofit Petersburg Center for Development. She responded she was running because “The people deserve to have a dedicated voice at the decision-making table. I love my hometown and care about all the people in this community, not just a select few. No one should be left out, everyone brings value to the restoration and rebirth of this community. As such, we must make an effort to include them and change our civic engagement practices. I believe building and developing ‘Human Capital-People’ is just as important (if not more so) than focusing on brick and mortar structures that can crumple around us.” She responded that the challenge is to “restore community trust and rebuild public confidence while establishing fiscal soundness. If elected, I will bring strategic focus, with a new level of engagement geared toward inclusion. We must change how the city operates and this requires more efficiencies to effectively meet not only our debt obligations but also to better serve the needs of our citizens. We can begin with different processes and practices of how the city interacts and communicates with our citizens. Communication, openness and inclusiveness are major factors for consideration and swift implementation.”
  • Annette Smith-Lee. Ms. Smith-Lee is a Petersburg native and graduate of Petersburg High School and Virginia State University; she earned her master’s degree in business administration from Averett University. She currently is a financial management specialist with Defense Logistics Agency Aviation at the Defense Supply Center-Richmond, having previously worked for the Defense General Supply Center and Philip Morris USA. She is running unopposed, noting: “My reasons for running are threefold: to expand employment opportunities, improve the educational system and better the lives of the citizens,” adding: “The biggest challenge facing the city is instability and I plan to address it by conducting an open and transparent government.”

What Happens When a State Takes over a City?

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eBlog, 11/02/16

Good Morning! In this a.m.’s eBlog, we consider the State of New Jersey decision to usurp authority over Atlantic City’s government after rejecting its recovery plan—albeit offering little guidance on when—or exactly how—such a transfer of governing power and authority will proceed. States have different legal means and experiences in taking over municipalities: eighteen provide authority for municipal bankruptcy—which, of course, means thirty-two do not. In New Jersey, there has been a complex interplay with the state naming an emergency manager, a la Michigan; however, that manager seemed to lack either the ability or the authority to play a meaningful role. The state does have previous experience in taking over a city: Camden. Then we journey to Flint to consider some of the governance challenges between the judicial and executive branches of the State of Michigan as they relate to the tragic state actions with such lasting adverse human health and safety for the city and citizens of Flint. Finally, we visit Petersburg, Virginia’s municipal library—where the virtually insolvent city appears to be caught between competing municipal priorities.   

Saving Grace? Gov. Chris Christie’s administration yesterday rejected Atlantic City’s five-year fiscal recovery plan, apparently precipitating a state takeover: Department of Community Affairs Commissioner Charles Richman said the city’s proposal was “not likely to achieve financial stability.” Commissioner Richman noted in his decision that if Atlantic City failed to propose a suitable plan, the state could assume “certain functions, powers, privileges and immunities of the governing body” of Atlantic City. However, the statement was silent with regard to invoking a state takeover—much less how such a takeover would work; the statement noted that the rejection was based on “not only what is in the plan submitted by city that is deficient, but also on what the city does not have in its plan,” with Commissioner Richman noting: “I would have much preferred to leave management of the city’s recovery in the hands of its municipal officials…However, I am constrained by the plan the city has placed before me. The enormous problems confronting the city did not occur overnight. City leadership has had ample time to improve the city’s financial condition, yet has avoided doing so in any meaningful way. The plan is not likely to achieve financial stability for the city.” The Commissioner stated that the city’s plan underestimated debt service over the next five years by approximately $18 million; assumed the city would receive $31 million more in redirected casino investment taxes than is likely; and overstated property tax revenues by $20.5 million. In addition, he faulted the plan for not including tax increases as part of its recovery plan. He added that the city’s proposed $110 million sale of the city-owned Bader Field former airport property to the city’s municipal utilities authority was “structurally flawed.” Commissioner Richman said the plan does not include a proposed balanced 2017 budget which complies with the law, underestimates debt service, failed to accurately estimate revenues, and overestimated property tax revenues, adding that key parts—such as the proposed sale of Bader Field plan—were “speculative in terms of their viability.”

Where’s the Beef? Notwithstanding the announcement, there was no immediate trigger of the takeover for which Governor Christie has long called—and which many city leaders and state lawmakers have fought for months to avoid; rather Tammori Petty, a spokeswoman for the Department of Community Affairs said the next step will be for New Jersey’s Local Finance Board to “consider whether to assume powers of the governing body that may be substantially related to the city’s fiscal condition or financial rehabilitation and recovery;” while Brian Murray, a spokesman for Gov. Christie’s office, said: “We are reviewing the extensive report, along with everyone else, and will not be making any statements at this time.”

For his part, Mayor Don Guardian has vowed to appeal an adverse decision in court; while New Jersey General Assembly Speaker Vincent Prieto stated: “Taxpayers better now beware: State takeovers of school districts have been disastrous. The administration needs to immediately detail whether a takeover would cost taxpayer money and how much. It must also detail whether it will push a property tax hike upon Atlantic City residents that the city’s plan showed was unnecessary.” City Council President Marty Small told the Associated Press the state’s decision was “misinformed, misguided, and biased…The fix was in, and it will be dealt with…This is far from over.” In a joint statement with Mayor Don Guardian, the two said the city is “truly disappointed that the state did not recognize the value of this thoughtful and comprehensive plan.” Mayor Guardian, who has previously warned the city would appeal a takeover in court, noted yesterday that the city is “reviewing all of our options.” In the New Jersey General Assembly, State Assembly Speaker Vincent Prieto, the lawmaker who led the fight in Trenton to stave off a takeover, said the city’s plan “should have been approved,” adding: “I doubt the state can do better…Taxpayers better now beware. State takeovers of school districts have been disastrous.” 

In recent days, local leaders had appeared optimistic the Christie administration would accept their plan. Credit rating agency Moody’s Investors Services, after all, had called the plan “robust and detailed.”

What’s Next? The announced takeover opens the door to unprecedented state authority over Atlantic City’s affairs, including the right to:

  • dissolve agencies,
  • override decisions by elected local leaders, and
  • sell off assets, including land and a water utility coveted by private operators.

Commissioner Richman, however, offered no insights with regard to how the state intends to use that authority, with a spokesperson for the state agency stating that “the next step” will be up to the state Local Finance Board; however, she provided no timetable for a decision. The city’s 120-page package had proposed 100 job cuts, early retirement for some employees, a tax settlement with casinos, and a plan to sell the former Bader Field airport site to the city’s municipal utilities authority for $110 million, among other cost-saving measures.

If Past Is Prologue? The takeover is not the state’s first: fourteen years ago the New Jersey legislature stripped Camden of most of its municipal authority; the state provided $175 million in extra state dollars; however, it appears that state takeover failed to improve the city’s failing infrastructure, schools, or economy. The takeover lasted seven years. It was promised to be a new start for Camden—coming in the wake of very different circumstances than Atlantic City: decades of corruption in City Hall, e.g. a situation much more akin to Detroit under former, convicted, and imprisoned Mayor Kwame Kilpatrick. In the case of Camden, New Jersey imposed a chief operating officer to run Camden and provided some $175 million in special state aid.

Indeed, looking back, Former New Jersey House Speaker Joe Roberts, who helped to write New Jersey’s takeover legislation eight years ago, when asked—in retrospect—whether that $175 million was wisely spent wisely, responded the answer had to be yes to all of them, noting, at the time: “If Camden is going to have any chance of survival long-term, we have to grow the tax base. And that’s only going to occur by building up the downtown and creating an environment where companies can come in and invest in the cities.” Yet, today, Camden’s poverty rate remains near 40 percent, and it still ranks among the most dangerous cities in the U.S. America. Professor Richard Harris of Rutgers, discussing the state’s takeover authority law, has previously noted he did not believe anyone who authored New Jersey’s takeover state statute thought that by putting large state investments in play in Camden that that was going to “flip a switch” so that Camden’s problems were magically going to be fixed; rather, he described the state’s takeover authority as one with more modest goals: to spur private investment while also rebuilding city government, noting, in retrospect: “There’s actually been a significant amount of progress on revitalizing the downtown and the city, but in terms of revitalizing or making more robust government, that you’d have to mark down as not being a success.

But yesterday, in reaction, New Jersey House Speaker Vincent Prieto said: “Taxpayers better now beware: state takeovers of school districts have been disastrous. The administration needs to immediately detail whether a takeover would cost taxpayer money and how much. It must also detail whether it will push a property-tax hike upon Atlantic City residents that the city’s plan showed was unnecessary…Today’s announcement means that a state takeover is still in the cards. That would be a profoundly undemocratic scheme, one that puts corporate interests over people and uses the city’s financial crisis to seize control over its most valuable asset: the municipal water system. Gary Hill, the Executive director of the Metropolitan Business and Citizens Association, said, referring to the Christie administration: “They think they have a better plan, but nobody knows what that is. I can’t wait to hear what it is;” Frank Formica, an Atlantic County freeholder director put it this way: “It’s a shame after 30 years of failed local leadership, five years of failed state oversight, two summits and spending over $2 million in taxpayers’ money for expert reports, the state’s answer is to reject the only plan prepared in 30 years and simply hand over the keys of the city to outside special interests with no plan of its own, no transparency and no leadership.”

Out Like Flint. The State of Michigan has asked the Michigan Court of Appeals to rescind protective orders intended at barring the state Department of Health and Human Services from access to potential evidence and witnesses in future Flint water criminal prosecutions, arguing that such orders violate the Michigan Constitution. The new filing asserts that the protective orders violate the separation of powers clause in Michigan’s Constitution and disrupt an executive agency’s statutory authority to respond to the lead and Legionella public health issues. Special prosecutors, and representatives of McLaren-Flint hospital have argued in their own filings with the Court of Appeals, however, that lifting the protective orders would compromise ongoing criminal investigations tied to the Flint water crisis. But in the state’s filing, the state argued that protective orders aimed at keeping the state Department of Health and Human Services away from potential evidence and witnesses in future Flint water criminal prosecutions would violate the Michigan Constitution, as it asked the court to rescind protective orders issued by Genesee County Circuit Court Judge Geoffrey Neithercut earlier this year—orders that the agency first sought to block in a filing with the court two months ago: the newest DHHS filing warns the protective orders violate the separation of powers clause in Michigan’s Constitution and disrupt an executive agency’s statutory authority to respond to the lead and Legionella public health issues; special prosecutors, and representatives of McLaren-Flint hospital have argued in their own filings with the Court of Appeals that lifting the protective orders would compromise ongoing criminal investigations tied to the Flint water crisis. Three DHHS employees have been charged with criminal wrongdoing related to their actions in Flint; however, the state agency argues it cannot be the subject of a criminal prosecution—and that the “investigation of a handful of its employees cannot be used as a pretense for unconstitutionally stripping a state department of its legislatively assigned responsibilities.” (Michigan is alleging that the hospital has been linked with nearly a dozen healthcare related Legionella deaths from the use of water from the Flint River.).

Misappropriation? The Petersburg (Va.) Circuit Court Law Library committee has filed a lawsuit alleging that funds from the law library have been misappropriated, claiming the amount could be between $100,000 and $200,000. (Funds taken in daily through court fees are deposited into a fund for the law library.)  In the suit, representatives claim that funds being collected specifically for the Law Library are instead being diverted to pay general debt for the City, albeit Commonwealth’s Attorney Cassandra Conover has indicated that, if anything: “I think we know where the monies haven’t gone…it’s for different departments, such as the Commonwealth Attorney, the Sheriff, the Law Library.” Two years ago, the Law Library Fund was around $112,000; it has likely grown since library operational costs are not expensive—indeed, less so since its relocation from the circuit court building into the Petersburg Public Library; however, recently, several big bills have gone unpaid, even as the court has continued to send the city money. There was a $14,000 bill for shelving and more than $1,500 for computer software.