The Steep & Winding Road Out of Municipal Bankruptcy and State Oversight

February 26, 2018

Good Morning! In this morning’s eBlog, we consider the hard road out of chapter 9 municipal bankruptcy and state oversight.

Motor City Races to Earn the Checkered Flag. Detroit Mayor Mike Duggan last Friday presented his proposed annual budget to the City Council, informing Councilmembers that, if approved, his $2 billion budget would be the keystone for formal exit from Michigan state oversight: that is, he advised he believed it would lay the ground work for ending the Financial Review Commission created in the wake of the city’s chapter 9 municipal bankruptcy: “Once we get this budget passed, we have the opportunity to get out from active state oversight…I don’t have enough good things to say about how the administration and Council has worked together.” As we had noted last month, Michigan Treasurer Nick Khouri, the Chair of the state oversight commission, made clear that the trigger to such an exit would be for the city to post its third straight budget surplus—with the Treasurer noting: “I think everyone, including me, has just been impressed with the progress that’s been made in the city of Detroit, both financially and operationally.”

For Detroit to fully emerge from the nation’s largest ever municipal bankruptcy, it must both comply with the provisions of the federal chapter 9 bankruptcy code, which provides that the debtor must file a plan (11 U.S.C. §941); neither creditors nor the U.S. Bankruptcy Court may control the affairs of a municipality indirectly through the mechanism of proposing a plan of adjustment of a municipality’s debts that would in effect determine the municipality’s future tax and/or spending decisions: the standards for plan confirmation in municipal bankruptcy cases are a combination of the statutory requirements of 11 U.S.C. §943(b) and portions of 11 U.S.C. §129. Key confirmation standards provide that the federal bankruptcy court must confirm a plan if the following conditions are met: the plan complies with the provisions of title 11 made applicable by sections 103(e) and 901;the plan complies with the provisions of chapter 9; all amounts to be paid by the debtor or by any person for services or expenses in the case or incident to the plan have been fully disclosed and are reasonable; the debtor is not prohibited by law from taking any action necessary to carry out the plan; except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that on the effective date of the plan, each holder of a claim of a kind specified in section 507(a)(1) will receive on account of such claim cash equal to the allowed amount of such claim; any regulatory or electoral approval necessary under applicable non-bankruptcy law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval; and the plan is in the best interests of creditors and is feasible.

Unlike in a non-municipal corporate bankruptcy (chapter 11), where the requirement that the plan be in the “best interests of creditors,” means in the “best interest of creditors” if creditors would receive as much under the plan as they would if the debtor were liquidated; under chapter 9, because, as one can appreciate, the option of Detroit to sell its streets, ambulances, and other publicly owned municipal assets is simply not an option, in municipal bankruptcy, the “best interests of creditors” test has generally been interpreted to mean that the plan must be better than other alternatives available to the creditors. It is not, in a sense, different from a Solomon’s Choice (Kings 3:16-28): that is, in lieu of the alternative to municipal chapter 9 bankruptcy of permitting each and every creditor to fend for itself, the federal bankruptcy court instead seeks to interpret what is in the “best interests of creditors” as a means to balance a reasonable effort by the municipality against the obligations it has to its retirees, municipal duties, service obligations, and its creditors—albeit, of course, leaving the door open for unhappy parties to object to confirmation, (see, viz. 11 U.S.C. §§ 901(a), 943, 1109, 1128(b)). The statute provides that a city or municipality may exit after a municipal debtor receives a discharge in a chapter 9 case after: (1) confirmation of the plan; (2) deposit by the debtor of any consideration to be distributed under the plan with the disbursing agent appointed by the court; and (3) a determination by the court that securities deposited with the disbursing agent will constitute valid legal obligations of the debtor and that any provision made to pay or secure payment of such obligations is valid. (11 U.S.C. §944(b)). Thus, the discharge is conditioned not only upon confirmation, but also upon deposit of the consideration to be distributed under the plan and a court determination of the validity of securities to be issued. (The Financial Review Commission is responsible for oversight of the City of Detroit and the Detroit Public Schools Community District, pursuant to the Michigan Financial Review Commission Act (Public Act 181 of 2014); it ensures both are meeting statutory requirements, reviews and approves their budgets, and establishes programs and requirements for prudent fiscal management, among other roles and responsibilities.)

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved from its last place ranking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining to 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he added. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the resources allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge, and East English Village; and boosting animal control so it can operate seven days a week.

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said it is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirement.  Councilman Scott Benson said the Mayor presented a “conservative fiscal budget” which allows Detroit to live within its means. The Councilmember said prior to the meeting that he had hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals, “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.

That early checkered flag for the Motor City ought to help salve the city’s reputational wounds in the wake of the KO administered to the city’s bid to host Amazon. Indeed, as Quicken Loans Chairman Dan Gilbert wrote, it was Detroit’s negative reputation, not a lack of talent which knocked it out of the running for an Amazon headquarters, as he tweeted to the 60-plus member bid committee who crafted Detroit’s bid: “We are all disappointed,” referring to the city’s failed bid to make the cut for the top 20 finalists. Nevertheless, Mr. Gilbert urged members not to accept the “conventional belief” that Detroit had fallen short because of its challenges with regional transportation and attracting talent; rather, he wrote, the “elephant in the room” was the nasty reputation associated with the post-bankruptcy city’s 50-plus years of decline: “Old, negative reputations do not die easily. I believe this is the single largest obstacle that we face…Outstanding state-of-the-art videos, well-packaged and eye-catching proposals, complex and generous tax incentives, and highly compelling and improving metrics cannot, nor will not overcome the strong negative connotations that the Detroit brand still needs to conquer.” Regional leaders had been informed that Detroit’s bid had failed to move on because of inadequate mass transit and questionable ability to attract talent.

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved for its last place raking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he said. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the money allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge and East English Village, and boosting animal control so it can operate seven days a week. 

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said Detroit is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirement.  Councilman Scott Benson said the mayor presented a “conservative fiscal budget” that allows Detroit to live within its means, having said, prior to the meeting, that he hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals. “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.

Physical & Fiscal Tempests

September 26, 2017

Good Morning! In today’s Blog, we consider the physical and fiscal threats to Connecticut’s capitol city, and the comparable crime apprehensions which could adversely affect Detroit’s ongoing recovery from the nation’s largest ever municipal bankruptcy, before assessing the equity of the U.S. response to the devastating hurricane in Puerto Rico–and what that might mean to its efforts of physical and fiscal recovery. 

Visit the project blog: The Municipal Sustainability Project 

 

Bleeding Hartford. As the City of Hartford reeled from a violent weekend during which two men were killed just hours apart, city leaders yesterday promised to bring more police to fearful neighborhoods, with Mayor Luke Bronin vowing the police department will continue increased staffing in areas where crime statistics show “a spike in violence or a risk of increased violence.” The Mayor’s vows came, however, at the same time he yesterday warned the holders of the city’s outstanding municipal bonds that Hartford has exhausted its fiscal capacity to levy new or higher taxes‒or to cut its way out of its insolvency: he reiterated that Hartford needs a substantial amount of state funding to avoid a Chapter 9 municipal bankruptcy. In a call with investors, Mayor Bronin detailed the city’s fiscal trauma, as well as its potential chapter 9 considerations—with one person describing the blueprint as relying on the “Detroit timeline as template for success,” referring to Detroit’s initial offer for pennies on the dollar. In this instance, the pre-planned investor call was made in the wake of Assured Guaranty’s public offer to support a refinancing of Hartford’s debt under a new Connecticut state law‒a plan under which the city would realize reduced debt service costs over the next 15 years‒with the remaining costs like a ball and chain extended far into the future, or, as Assured described it: “We believe a consensual agreement among stakeholders offers the city a better path forward than bankruptcy.”

Mayor Bronin, for his part, noted: “I appreciate Assured’s willingness to have constructive discussions…We are interested in long-term solutions that leave the city with a path to sustained solvency and strength.” The statements came as the city is biding time awaiting how much aid it might receive from the state, which itself is struggling, confronting high taxes, falling revenues, $73 billion of pension and debt obligations, and the risk of a greater out-migration of its citizens and businesses, as it is confronted by a $3.5 billion deficit over the next two years, even as its budget is nearly three months overdue. That is, Hartford’s fiscal deterioration has become part of a context of broader credit deterioration in the state—which, in response, appears likely to struggle within a context of worsening local credit quality in Connecticut. Not only is the state likely to make deep cuts to local aid in the current biennium: the state is already assuming that its municipalities will draw down reserves as a result—meaning that the fiscal ripples are likely to adversely the borrowing costs of municipalities throughout the state.

The Dangerous Road to Recovery. The FBI released data yesterday, which found that violent crime in Detroit surged 15.7 percent last year, ranking the city as the nation’s most violent big city, albeit a finding city police officials disputed. Last year, there were 13,705 violent crimes reported—murder, rape, assault, and robbery—more than 10 percent greater than the previous year. Nevertheless, Detroit Police Chief James Craig described the FBI numbers as wrong: he blamed an antiquated software system (CRISNET), which he said caused crimes to be double reported. The system, which was replaced in December, shows a 5 percent reduction in violent crime last year, according to Chief Craig. According to the FBI, Detroit’s rate of 2,047 violent crimes per 100,000 people placed it highest among cities with more than 100,000 residents, higher than St. Louis and Memphis, Tennessee—and seemingly reversing the city’s post chapter 9 implementation of its plan of debt adjustment: violent crime in the Motor City had declined 13% in 2015, making it second in the country behind St. Louis.  According to the FBI report, murders rose in Detroit last year as well: 303 in 2016 from 295 in 2015, up 3 percent, albeit that lagged the national violent crime rate increase, which rose for the second year in a row, up 4.1 percent from last year. Murders in the United States were up by 8.6 percent, according to the FBI data. Thus, notwithstanding the headlines the Windy City, Chicago, has garnered for its rise in murders: 765 in 2016 compared with 478 in 2015, a 60 percent increase, Chicago’s is significantly lower than Detroit’s.

A Double Standard for Puerto Rico? Puerto Rico Gov. Ricardo A. Rosselló yesterday warned the U.S. territory was on the brink of a “humanitarian crisis,” even as U.S. Navy vessels docked in Virginia which could be invaluable in rendering the kinds of critical recovery the federal government provided to communities in Texas and Florida remain docked nearly a week after Hurricane Maria knocked out all of Puerto Rico’s electricity, most of its potable water, and fearful of the collapse of a major dam. The Governor urged Congress to act swiftly to avert a deepening disaster, asking that Puerto Rico be accorded the same treatment as hurricane-ravaged states. Despite the silence from President Trump, the Governor urged Republican leaders in Congress to move swiftly to send more funds, supplies, and relief workers: “Puerto Rico, which is part of the United States, can turn into a humanitarian crisis…To avoid that, recognize that we Puerto Ricans are American citizens; when we speak of a catastrophe, everyone must be treated equally.”

The dire physical situation, moreover, could bode even more dire fiscal consequences: as Gov. Rosselló warned Puerto Ricans are expected to flee in droves to the continental U.S., increasingly leaving behind the old and the poor, aggravating the fiscal hurricane—or, as the Governor put it: “If we want to prevent, for example, a mass exodus, we have to take action. Congress, take note: Take action, permit Puerto Rico to have the necessary resources.”

In the wake of criticism for a lack of public support for Puerto Rico, President Trump yesterday took time from tweeting about the NFL to post a pair of tweets which nevertheless identified the devastating connections between the natural disaster to Puerto Rico’s increasingly desperate fiscal situation, writing that while Florida and Texas were coping well from hurricane damage, “Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble,” adding in a subsequent tweet: “…owed to Wall Street and the banks which, sadly, must be dealt with. Food, water and medical are top priorities—and doing well.” Congressional leaders yesterday claimed they were awaiting assessments of the damage in Puerto Rico, as well as a formal disaster request from the Trump administration, before Congress can act; unfortunately, such a request is not expected until early to mid-October, even as House Appropriations Committee Chairman Rodney Frelinghusyen (R-N.J.) issued a statement noting that Puerto Ricans on the island “are entitled to equal treatment under the law.”

FEMA is currently drawing from the same $15.3 billion appropriation approved this month by Congress in response to Hurricane Harvey, which hit Texas, and Hurricane Irma, which hit Florida and damaged Puerto Rico and the United States Virgin Islands. FEMA Director Brock Long, and Thomas P. Bossert, the President’s Homeland Security adviser, were both in Puerto Rico yesterday to assess the damage, with Director Long asserting that the federal government had 10,000 people “working around the clock” to help Puerto Rico. Puerto Ricans can now file damage claims with FEMA, which has sent teams to 10 municipios to go house to house to collect information and pass it on, according to Gov. Rosselló; nevertheless, more than half the territory is without potable water—100 percent is without electricity. All of Puerto Rico’s wastewater and water treatment plants lack electricity.

Some Democrats want Congress to quickly approve a relief bill, but to, at the same time, temporarily forgive Puerto Rico’s loan repayments and remove a requirement that Puerto Rico contribute into the federal emergency pot. Indeed, the physical and fiscal damage to the U.S. Virgin Islands and Puerto Rico, has meant the halt of all PROMESA-related creditor and debtor considerations: in the wake of the storm, and the diversion of all Puerto Rico governmental focus on saving lives, it is unlikely Puerto Rico will be making interest payments on its debts for the foreseeable future: the restoration of vital public utilities to ensure the provision of water and electricity is a much higher priority: there is access to safe drinking water to only a quarter of Puerto Rico’s residents. In the three decades that National Guard Brigadier General Wendul G. Hagler II has served, he described the situations as “about as large a scale damage as I have ever seen.” 

A related fiscal danger could be an accelerating exodus of more educated and skilled Puerto Ricans, likely in the thousands, to leave for the continental U.S., leaving behind a population in need of far greater vital public services, but a deteriorated tax base—with some estimates that such an exodus could be greater than 10%.  

The Import of Accurate Municipal Revenue Projections in Addressing Municipal Insolvency

eBlog, 1/12/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges to Detroit’s long-term recovery from the nation’s largest chapter 9 municipal bankruptcy, before turning to the small Virginia municipality of Petersburg as it struggles to not just avoid bankruptcy, but rather to right its ship of state—both by its elected and appointed leaders.

Detroit Coming Back. Detroit, as we noted in our original report on the city, is quite different than most U.S. municipalities and, indeed, from other cities in Michigan in that its revenues, from taxes and state-shared revenues are higher than those of any other large Michigan municipality on a per capita basis, in part reflecting its reliance on a significantly broader tax base than most cities in the country: property taxes, income taxes, utility taxes, casino wagering taxes, and state-shared revenues. The property tax accounted for 13.3 percent of Detroit’s revenues in 2012, even though the city had the highest property taxes among big cities in the U.S. But it was the 22 percent decline in those revenues over the decade preceding its collapse into the nation’s largest-ever chapter 9 bankruptcy that appeared to precipitate the state takeover via the appointment by Governor Rick Snyder of an emergency manager to steer the city into—and then out of chapter 9 municipal bankruptcy. The exhaustion of the city’s revenues reflected the overall loss of 15,648 business establishments between 1972 and 2007—that is, even before the massive impact of the Great Recession, or the bankruptcies and subsequent recovery of General Motors and Chrysler and the restructuring of the automotive supplier network—companies bailed out by the federal government, unlike Detroit.

Today, still, despite its lower reliance on property tax revenues, the track of those revenues can reflect the city’s fiscal direction. Indeed, the city’s housing market faces numerous challenges as the city seeks to carve out a path toward less blight, increased housing preservation, and a better functioning residential mortgage market. Zillow reports that median sale prices for metro Detroit homes and condominiums rose 7.2 percent last month compared to the year before: the median home value in Detroit is $37,000, reflecting home values which have gone up even more, by 8.5% over the past year, according to Zillow, which predicts they will rise 4.2% within the next year. At the same time, the percent of Detroit homeowners underwater on their mortgages is 0.4%, some four times higher than Detroit Metro area; the median rent price in Detroit is $750, or about 75% of the Detroit Metro median of $1,050; nevertheless, sale prices across the city have continued to grow, while both the number and share of underwater loans has continued to decline. The average household equity for all Detroit loans reached 29 percent in Q4 2015; the shares of loans in serious delinquency, foreclosure, or REO (property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction) in Detroit are on pace to fall below pre-crisis levels. The data demonstrate a particularly sharp decline in the share of REOs.

However, sales of single family homes in the city in 2015 (about 18,522) dropped about 18% from the previous year, even as Detroit’s median rent stabilized at around $756 a month in December 2015. Unemployment fell again in the early months of last year, and labor force size edged up as well, according to the Detroit Housing Tracker (the Detroit Housing Tracker monitors the latest development in the Detroit housing and community development arena and is updated quarterly: the publication has two sections in which it presents comprehensive market indicators including sales prices and volumes, rental prices, household equity level, delinquencies and foreclosures.) In comparison, in the surrounding four-county area of Oakland, Wayne, Macomb, and Livingston counties, median sale prices jumped from $149,200 in December 2015 to $159,900 in December 2016. According to Realcomp Ltd. II, last month’s figures fall in line with the general trends of 2016: the number of on-market listings in the four-county region last month declined nearly 43 percent year-over-year, from 19,634 to 11,255; however, sales prices in all four of the surrounding counties increased, on average, by 10%.

In Overtime. The city of Petersburg, Virginia added another hefty bill to its payment list after a class-action lawsuit (Thomas Ewers, et al, vs. the City of Petersburg Bureau of Police) between members of the Bureau of Police and the city was settled last week, with the settlement agreement mandating the virtually insolvent municipality to make a payment of $1.35 million in recompense for law enforcement officers’ unpaid overtime. Of that amount, the City of Petersburg will have to pay $800,000, while the Virginia Division of Risk Management will chip in the remaining $550,000. For its part, Petersburg city spokesman Clay Hamner this week reported that that part of Petersburg’s payment is expected to come via a short-term $6.5 million loan secured by Petersburg from Wells Fargo last month; other funds could potentially come from the sale of the city’s municipal water and wastewater assets—especially in the wake of an unsolicited purchase proposal last month by Aqua Virginia, Inc., leading the city to advertise for competing bids. According to the city’s press release, the settlement applies to all current and former law enforcement officers employed between Jan. 11, 2013 and June 24, 2016, by the Bureau of Police at the rank of lieutenant or below who were denied overtime or other wage-related payments. The settlement came as the city’s expensive fiscal turnaround consultants reported the city’s fiscal condition remains, reporting that the fiscal plan Petersburg has been working from since the City Council’s first attempt to strip $12 million from an outsized budget last September no longer reflects its fiscal realities: some elements of those decisions, such as slashing funding for schools, canceling a youth summer program, and boosting trash fees, would provide savings; however, not every plan materialized, according to the consultant’s analysis. Moreover, when combined with the municipality’s past-due payments to companies taken from the current year’s budget for last year’s bills, the consultant’s reported the Council, next week, will likely be forced to take further actions to reduce spending or find other revenues—and will have to include a partial restoration of a 10 percent reduction in municipal worker salaries targeted toward making whole the city’s public safety workers, with Nelsie Birch, Petersburg’s interim finance director, advising: “The reduction of salaries has done significant damage to the city.”

It seems that the employee turnover and overtime costs have soared even as morale plummeted since the austerity measure was implemented: police, firefighters and emergency communications workers would see their pay rates restored this spring if the council approves the consultant’s plan. That would be important: the city’s violent crime rate is nearly 400% higher than the statewide average. On the upside, the consultant reported that of the $18.8 million that state auditors estimated Petersburg owed to vendors as of last July 1, only $6 million to $7 million remains overdue. That might help as, next month, the city is inviting about 400 of its creditors to meet for discussions relating to past-due bills, and inviting interested buyers to consider purchasing city-owned property—with both city employees and the city’s consultants taking inventory: counting cars, combing through old equipment, and tracking every nickel spent for a dime that could be saved. The consultant addressed one key issue of concern: its current inability by its tax assessors and collectors to provide administrators with accurate revenue projections.

At the same time, the consultants expressed apprehension that city council members must learn to demand that expenses not exceed revenues: in the municipality’s FY2016 books, Petersburg had a $9 million structural imbalance in the general fund used to cover the city’s day-to-day operations: the city had $67 million to work with and spent $76 million. Finally, the consultant noted what he believes to be the source of Petersburg’s fiscal crisis: for too many years (dating back to 2009) the city has spent more than it had, propping up shortfalls from a rainy day fund which had long since evaporated. In response, interim City Manager Tom Tyrrell said the Mayor and Councilmembers could meet with officials one-on-one or in pairs to discuss the details ahead of next week’s votes to balance the current year’s budget—with such sessions not triggering Virginia’s Freedom of Information Act. Under the law, an in-person or electronic meeting of three members of a public body constitutes a quorum.

Should States Bear a Greater Fiscal Responsibility to Address Disparities–especially when so many Lives and Futures are at Stake?

 

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eBlog, 9/12/16

In this morning’s eBlog, we consider the massive and cumulative service insolvency in public safety in the bankrupt City of San Bernardino. Even as the City nears its longest road out of bankruptcy of any city ever in U.S. history, the extraordinary absence of any state role to help the city confront its cancer of crime could bode ill for the city’s post-chapter 9 recovery. Then we turn to Michigan and the ongoing issue with regard to what a state’s role ought to be in addressing fiscal disparities. While the State of California appears to be disinterested in any such role; Michigan traditionally has; but, increasingly in recent years, it has eroded such support, with grim fiscal consequences in Flint, Detroit, etc.

Can the City Do it All by Itself? San Bernardino, still healing from last December’s terror attack—the city’s response to which has been praised by the FBI, nevertheless appears today caught between a rock and a hard place: it is experiencing a surge in violence this year unlike any it has faced in decades: with four months left in 2016, there have been 150 shootings and 47 slayings in the city of 216,000 residents, compared to 44 homicides all of last year, including the 14 people killed by terrorists at the Inland Regional Center. San Bernardino is now on track to have more murders than in any year since 1995, when 67 people were killed. There is no explanation why; by the same token, even as the city nears its exit from the longest municipal bankruptcy in American history, the terrible rise in violent crime hardly augurs well for its assessed property values—or for its hopes for attracting economic development. The violence might be adding to other tensions: the killings have disproportionately victimized San Bernardino’s black residents, who account for 14 percent of the population, but nearly half of those killed.  San Bernardino Police Chief Jarrod Burguan says the city has been especially hard hit by state initiatives that reduced some drug and property-related felonies to misdemeanors, leading to shorter sentences for criminals; he did not need to mention the reductions in the city’s public safety budget as it struggled to cobble together its proposed plan of debt adjustment now awaiting final approval for U.S. Bankruptcy Judge Meredith Jury. In 2008, there were more than 340 police officers on the force. Today, there are about 215. The Chief does note, however, “We don’t have the capacity to investigate everything that’s reported in the city.” Others point to the lack of economic opportunities, its years of cuts to diversion programs, and a lack of other basic services — such as working street lights in many neighborhoods—an issue, as readers remember, that both Detroit Emergency Manager Kevyn Orr and Mayor Mike Duggan made immediate and critical priorities—have contributed to this year’s violence. Those reduced fiscal resources have, no doubt, contributed to solve fewer than 40 percent of this year’s homicides.

Unsurprisingly, a new study, commissioned by Southern California law firm Graham Donath, using FBI data and looked at crime rates, police presence, and investment in police departments, as well as community factors, including poverty, education, unemployment, and climate, determined San Bernardino to be the state’s most dangerous city—just ahead of Stockton and Modesto: the study found a high correlation between crime rates and poverty: San Bernardino’s poverty rate exceeds 30 percent, or, as the report notes: “In taking a look at our collected data, no city in the bottom ten of crime rate (that is, has the lowest crime) has a poverty rate higher than 12.9 percent,…But for cities in the top ten, every one has a poverty rate of 14.5 percent or higher, topping out at 30.6 percent in San Bernardino.”

A Lonely Vigil. Understandably, in the wake of the State of California’s rejection of the city’s application for a state grant to help fund Operation Ceasefire, Chief Burguan must wonder whether the city is alone in its battle against killings—or, as he asks: “Who really is that concerned about San Bernardino? Or are people at the state level happy letting San Bernardino drown in this stuff?…We clearly have the most significant crime spike of any place in the state, and all that money went elsewhere.”

Getting to the Heart of Fiscal Disparities—or, What We Have Here Is a Failure to Communicate. Taxpayers for Michigan Constitutional Government, Eastpointe City Manager Steve Duchane Duchane (Eastpointe is a city of about 32,000 in Macomb County), and two other Eastpointe employees have filed suit against the State of Michigan, the Michigan Department of Technology Management and Budget, and the Michigan Office of the Auditor General in the Michigan Court of Appeals. Mr. Duchane says local governments in Michigan have been doing a lot of reacting to revenue sharing cuts through the years, slashing services, and programs impacting municipalities, because they have been receiving fewer state funds. Thus, he is at the forefront of more than a dozen Michigan local governments taking action, joining a nonprofit group which has filed the civil lawsuit for overstating various payments to local governments and causing a more than $1-billion shortfall to municipalities. Ow, the state has until the end of this month to file a response. Kurt Weiss, a spokesman for the Michigan budget office, has released a statement: “The Office of Financial Management within the State Budget Office works hard each year to properly identify expenditures to determine the amount of state spending that goes to the aid of local governments…Those expenditures are in turn submitted to the Office of Auditor General for validation to ensure the calculations are accurate. This is a methodology that has been applied consistently since the passage of Proposal A (Proposal A was a property tax measure adopted in 1994: prior to its adoption, local property taxes were based on a property’s assessed value or an amount equal to 50% of the property’s market value, meaning that property taxes went up and down in close relation to an increase or decrease in property value. With the passage of Proposal A, however, the tax was stabilized.). The State Budget Office will take time to further review the complaint, but it’s important to note that these calculations have been consistently applied over time.” The local governments disagree; they respond the state is violating the Michigan Constitution by overstating spending that is paid to local governments and engaging in an “illegal tax shift.” Their  complaint states that Michigan is including payments from Proposal A revenue and payments to charter schools, county road commissions, and others from the trunk line roads fund and payments to cover the costs of state mandates in its calculations of spending in the form of aid that is paid to local governments: “When these items are subtracted, state spending in the form of aid that is paid to local governments falls significantly below 48.97% of total state spending;” ergo, in violation of the Michigan Constitution, according to the complaint.

This the complainants are seeking these items be removed from the funding formula for aid paid to local governments, and asking the court to order the state to make up the funding shortages, claiming that the loss of billions of dollars in funding has forced local governments to make significant cuts to services and programs to stay solvent. Or, as Mr. Duchane puts it: “State spending continues without control, and the locals have paid the price.” The challengers’ organization here was founded by Mr. Duchane and its president, John Mogk, a law professor at Wayne State University; its members include the cities of Center Line, Eastpointe, Mt. Clemens, New Baltimore, Richmond, Roseville, Utica, and Warren and Clinton Township in Macomb County; Hazel Park in Oakland County; Harper Woods, Southgate and Grosse Pointe Woods in Wayne County; Grosse Pointe Shores, which straddles Wayne and Macomb counties, the city of Auburn in Bay County, the Sugar Law Center for Economic and Social Justice in Detroit, and Wayne City Councilman Tom Porter. In addition, other municipalities may be joining the group, whose attorneys include John Philo, executive and legal director of the Sugar Law Center; Tracy Peters, who specializes in education and the rights of students and parents, and Robert Sedlar, a constitutional law and legal conflict professor at Wayne State University School of Law.

For his part, Mr. Duchane said that while the group does not have data to explain where the more than $13 million in funds promised to Eastpointe to address municipal disparities has instead been used, he can, obviously, report where he believes it should have gone: That kind of money, he notes, would have meant that municipal leaders would not have had to raise taxes—especially in the wake of the Great Recession which brought so many Michigan municipalities to their fiscal knees, particularly because of the mortgage market meltdown that so devastatingly impacted real estate values, the state’s elimination of the personal property tax on businesses, and continued cuts in state revenue sharing. Combined with the state’s Proposal A and Headlee Amendments imposing state mandated limits on property tax growth, he noted Eastpointe and Hazel Park formed a unique taxing authority for 20 years to raise funds for police and fire services in their cities. The small City of Wayne attempted tried to join that authority; however, voters in that city and Eastpointe rejected the effort last month. Now, the City of Wayne, facing insolvency in as early as next year, has asked the state for an emergency financial review and could be facing a state-appointed emergency manager. Indeed, the city’s Mayor, Susan Rowe, last month reported that city officials are set to meet with the Michigan Treasurer later this month to discuss finances that communities are confronting, noting: “We’re just the tip of the iceberg…We’re not the only city in this (financial) situation. It’ll be happening to communities around us soon. We don’t have an expense problem. We have a revenue problem.”

Protecting A City’s Future

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eBlog, 5/27/16

In this morning’s eBlog, we consider the vital role a city has to try to protect its most vulnerable citizens: its children—noting the essential role public safety plays in municipal trust and revenues—ergo, the continued high murder rate, especially of children, in the Motor City continues to present severe governance challenges to the city’s ongoing fiscal recovery. We look at yesterday’s action in Trenton, New Jersey, where—at long last—the legislature has adopted and sent to Gov. Chris Christie legislation to avert Atlantic City’s insolvency next month—albeit we await how the Governor will react—and the next steps as the city enters its most critical months of the year.

Protecting a City’s Children. In our report on Detroit, we had noted that, according to the census, 36 percent of its citizens were below the poverty level, and, the previous year, Detroit had “reported the highest violent crime rate for any U.S. city with a population over 200,000.” Writer Billy Hamilton had called the city “either the ghost of a lost time and place in America, or a resource of enormous potential.” Although Detroit’s crime statistics, like its finances, appear to be headed in the right direction, Forbes last fall noted that the city once again had topped Forbes’ list of America’s Most Dangerous Cities, citing 298 murders and intentional homicides in Detroit in 2014. Even though that was the lowest number in 47 years, according to statistics compiled by the Federal Bureau of Investigation and the Detroit Police Department, it still worked out to a murder rate of 43.5 per 100,000 residents, or approximately ten times the national average. The city’s overall rate of violent crime, including assault and robbery, was 1,989 per 100,000 residents, down from over 2,000 in 2013, but still more than five times the national average, which also has been falling for years. Now Detroit Mayor Mike Duggan, who was elected in 2013 and reclaimed full control over the city’s operations when it emerged from bankruptcy, has been going high-tech, urging businesses to install video cameras to give police a better picture of violent crimes and who’s committing them, noting: “I’m just so tired of every time you get this blurry image where you can’t tell who the person is.” Now, as 2016 nears the halfway point, Detroit’s list of child casualties grows, a problem underscored by two cases this week involving toddlers close to their third birthdays. It brings to eight the number of youths injured or killed by gunfire in Detroit in the past two months. Wayne County Prosecutor Kym Worthy, in announcing charges against two Wednesday, urged gun owners to secure their firearms and keep them unloaded around children. Ms. Worthy said the shootings of youth when they find weapons are “totally…absolutely preventable” and called for more criminal penalties where “negligible” gun ownership is at fault; she called for safety classes and local hospital officials to reach out to pediatricians about programs to educate parents about gun ownership. The flurry of cases involving children, especially, has residents and police upset and angry: Assistant Police Chief Steve Dolunt urged a change from the city’s violent culture, warning: “You gotta have a license to drive a car, but there’s no one to teach you to be a parent,” during a news conference yesterday, adding: “This (violence) is learned behavior.” A 2014 Detroit News investigation found nearly 500 Detroit children have died in homicides since 2000, and now the Detroit News staff writers James Dickson, Candice Williams, Oralandar Brand-Williams, and Mark Hicks note it appears to be continuing unabated. There were 298 murders and intentional homicides in Detroit in 2014, the lowest number in 47 years, according to statistics compiled by the Federal Bureau of Investigation and the Detroit Police Department—grim statistics that work out to a murder rate of 43.5 per 100,000 residents, which is still almost 10 times the national average. The city’s overall rate of violent crime, including assault and robbery, was 1,989 per 100,000 residents, down from over 2,000 in 2013, but still more than five times the national average, which also has been falling for years. Thus, Mayor Mike Duggan, who was elected in 2013 and reclaimed full control over the city’s operations when it emerged from municipal bankruptcy is laser focused on utilizing high-tech, urging city businesses to install video cameras to give police a better picture of violent crimes and who’s committing them. As the Mayor notes: “I’m just so tired of every time you get this blurry image where you can’t tell who the person is.” Mayor Duggan earlier this month announced plans for eight gas stations to install better lighting, high-resolution cameras, and license plate cameras with live feeds to Detroit police.

Life Buoy or Jewel in the Crown? The New Jersey legislature late yesterday passed and sent to Gov. Chris Christie legislation to keep Atlantic City from insolvency: the Assembly and Senate approved the measures by wide margins; Gov. Chris Christie, who earlier supported legislation allowing for an immediate state takeover of the city’s finances, has said the bill gives him the authority he needs, although he stopped short of saying whether he would sign the bill. For his part, Atlantic City Mayor Don Guardian used a Trumpian expression, calling the legislature’s action “huge: We want people to know the shore is open for business.” The bill, if signed into law, would give the city five months to draw up plans to balance its books over the next five years. New Jersey Assembly Speaker Vincent Prieto described the compromise as a signal improvement over an earlier Senate- and Christie-backed bill which would have imposed an immediate state takeover, although state Senate President Steve Sweeney criticized the delay and said he had sought unsuccessfully last summer to encourage the city to reorganize its finances, calling the long delay “very, very unnecessary,” especially since, as he noted: “A very similar offer was made last July, and it was rejected.” Under the legislation, Atlantic City will receive temporary loans of $30 million for the remainder of this year; $30 million to be applied to leftover FY2015 debt, and another $15 million for FY2017. The city also would be able to receive at least $120 million each year from casinos under a payment-in-lieu of taxes bill that would last for 10 years—and casinos would not be allowed to opt out of the PILOT plan, even if state voters authorize casinos in northern New Jersey. The compromise includes provisions to offer early retirement to the city’s workers and retain its collective bargaining rights. Finally, the package retains the Senate provisions to allow a state takeover of Atlantic City’s finances and major decision-making powers in just 150 days, including the right to unilaterally break union contracts, but only after its Community Affairs department determines that the plan Atlantic City comes up with is unworkable. Notably, the city would be barred from appealing such a determination to the courts before the state could take over. This means the city will have just five months in which to plug its more than $80 million budget deficit and prepare a five-year financial plan—or risk state intervention. Speaker Vincent Prieto described the final action as “something that gives them the tools to be able to be successful…This is something that now the administration of Atlantic City can roll up their sleeves with their workforce and I think we’re giving them an opportunity to again be the jewel of New Jersey.”

Both chambers of the legislature also passed a companion bill enabling Atlantic City’s eight remaining casinos to make fixed payments in lieu of property taxes (PILOT) for 10 years. The individual PILOT amount for each casino would be based on its share of total gambling revenue. The additional payments would be used to pay down Atlantic City’s debt through the reallocation of the receipts collected by the Casino Redevelopment Authority from the casino investment alternative tax. The bill differs from a previous version Gov. Christie vetoed last November, which would have directed the city’s casinos to contribute $30 million collectively to the city in 2016. Under the version agreed to yesterday, the program would not commence until next year. To date, all the city’s casinos have made their 2016 tax payments, except the Borgata, which is in litigation with the city over $170 million in tax refunds owed to the casino-hotel. Senate President Sweeney said the city’s recovery plan, at his insistence, could also authorize the use of early retirement programs for city workers to minimize the impact of workforce cuts—and that Atlantic City would be required to make full obligated payments to schools and Atlantic County, noting: “This plan gives Atlantic City the opportunity to do the job itself to prevent bankruptcy and make desperately-needed financial reforms…Along with the reforms, this plan will provide financial resources and the ability to access the financial markets, which is critically important for long-term fiscal health.”

The ever prescient Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, said that the new agreement should give Atlantic City officials sufficient resources to balance the city’s budget with revenue from the rescue package and the PILOT bill, noting the city will also likely seek additional savings from labor contract negotiations, shared services, and selling off city assets such as its former municipal airport, Bader Field, adding, however: “During these next five months the city has some substantial challenges.”

For his part, Gov. Christie said Wednesday night during a radio show that he will quickly decide whether to sign, noting: “All the authority I would need is in there.”